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What makes a good “morals clause”?

Last Wednesday, a jury found that former talk show host Tavis Smiley violated the morals clause in his contract with a broadcaster. The verdict reinforced the notion today that morals clauses can be vital when dealing with a public figure.

Due to a growth in damaging revelations surrounding celebrity misconduct in the #MeToo era, morals clauses have become a staple in the media and entertainment industries. A morals clause is a contractual tool intended to give hiring parties a way out of their agreements if the hired party becomes a liability to their business through their actions or inactions.

Producers hiring talent for their productions, and brand owners looking to secure endorsement deals for their products, have a particular interest in perfecting these now common provisions. So what makes a robust morals clause?

1. What

A morals clause should contain a full and detailed description of what constitutes the type of behaviour that allows the hiring party to terminate or modify the agreement in question. Although it is ideal to cover off a broad scope of activities in these clauses, the devil can be in the lack of details. If the description of behaviours is too broad, it leaves the language open to interpretation and dispute among the parties – this could prolong the contractual relationship in question to the detriment of the hiring party.

2. When

A morals clause should state that the prohibited behaviour may have occurred at any time – i.e., before or during the engagement in question, while rendering services and during personal time. Commonly, morals clauses will address behaviour during the engagement, but neglect to cover off prior activities, which may not be widely known. The nature of the hiring party’s relationship with the hired party will dictate how willing they are to restrict the scope of time covered under a particular morals clause.

3. Where

A morals clause should state that the prohibited behaviour may have occurred in any and all jurisdictions, as applicable. Given the increasing global nature of audiences and markets, it would erode the value of a morals clause if it did not apply to conduct in a foreign jurisdiction, or conduct in a domestic jurisdiction that only affected foreign audiences.

4. Who

A morals clause shouldstate who will be considered when determining whether the hired party has caused harm as a result of their actions or inactions. Hiring parties may not be the only entities requiring protection from the threat of poor public relations due to celebrity misconduct. For example, distributors, brand partners and financial backers may wish to be named amongst those who might suffer damage due to breach of a morals clause.

5. “And then what”

A morals clause should provide clarity on the remedies the hiring party may have, should a hired party breach the morals clause. Remedies may involve termination (with or without a cure period), removal of credit (subject to guild or union requirements), reduction in payment, arbitration/mediation and discipline (more commonly seen for athletes), among other solutions. The key is to consider all actions the hiring party may want to take upon breach and lay out a detailed plan on how such actions will be taken. A defined plan will reduce the likelihood of procedural arguments over how a morals clause may be enforced, should it be necessary.

Many morals clauses will not encompass each of the elements above, depending on the balance of negotiating leverage between the parties and the parties’ overall relationship. Nevertheless, aiming for clarity and comprehensive contingencies in a morals clause will increase any producer or brand owner’s chance at saving time, money and face in the future.

For more information, please contact Caitlin Choi or another member of Dentons’ Media and Entertainment group.

What makes a good “morals clause”?

“Lights, Camera…Take-off”: Legal Considerations When Hiring a Drone Services Operator for Filming

The entertainment industry was one of the first to put drones into use and take advantage of the “better, faster, cheaper” solutions they provide for filming. While the appeal of using the technology is undeniable, hiring a competent drone services operator to film on set is not without its potential pitfalls.

One of the biggest issues for producers is confirming that the drone operator hired has sufficient experience and knowledge to perform the required tasks with expert precision and skill. Transport Canada’s recently enacted regulatory amendments to Part IX of the Canadian Aviation Regulations (the “CARs”) require drone pilots to meet specific knowledge criteria in order to be licensed to fly – a clear step towards “professionalizing” the drone piloting industry. However, flying skill and knowledge of air rules is not all that make a competent drone services operator; they must be attuned to the specific challenges and risks associated with filming on set.

The importance of hiring a competent drone operator is tangible. It directly contributes to more efficient and cost-effective filming. The preparedness and professionalism of a competent operator will also, in many cases, avoid potential accidents that may cause delays in filming or even lawsuits for damage or losses incurred. In the unfortunate situation where an accident occurs, the due diligence steps taken by a production company in hiring reputable and qualified drone operators will assist the production company in defending allegations of negligence made against it.

Here are some key questions to consider before hiring a drone services operator to assist with filming on a production set:

  1. Do they have the right drone for the job?

There is no “one size fits all drone”. Drones have different take off mechanisms, greater levels of versatility, and can carry different payloads, making some more suited than others for filming in the specific conditions required by the production company. Speak to your intended operator about what equipment they recommend to complete the job to get a sense of whether they are exercising their professional judgment to determine what meets the production company’s needs rather than simply trying to make their existing drone fit for the job.

2. Do they have standard operating procedures and emergency procedures?

A drone operator that has in place standard operating procedures (“SOPs”) for dealing with the many variables applicable to operations are generally more trustworthy. Further, emergency procedures in place ought to give the production company similar confidence that the operator “expects the unexpected” and has an action plan in place to keep the crew, actors, production equipment and any bystanders safe from harm. While the CARs do not currently require drone operators to have SOPs or a safety management system in place, competent operators will have already turned their minds to this.

3. Do they have insurance?

While holding liability insurance is no longer a regulatory requirement in Canada, there is good reason to require the drone services operator you hire to hold insurance. In aviation, accidents happen and the litigation arising from an accident can be costly and time-intensive. Many qualified drone services operators continue to hold liability insurance (and other forms of insurance) for their operations. Ensure the intended operator holds insurance, and seek to have the production company added as an additional insured to the policy.

4. Will they enter into a written agreement for their services?

The hallmark of a professional operator is one who regularly uses written agreements in their dealings with their customers. Key aspects of any agreement from drone services specify that the operator will be responsible for complying with all applicable laws (including the CARs, the Aeronautics Act, municipal bylaws, and provincial trespass to property acts), detail of the scope of the work and the deliverable, and include copyright provisions, hold harmless clauses in favour of the production company, and data collection and protection process provisions.

If you wish to discuss this post or its possible implications for your business, please contact Kathryn McCulloch at Dentons.

“Lights, Camera…Take-off”: Legal Considerations When Hiring a Drone Services Operator for Filming

Shopping Agreements: The Pros and Cons as Compared to Option Agreements

The long road to bringing a piece of intellectual property (IP) to the screen often begins, from a legal point of view, with securing rights to develop and produce the material. Traditionally, the owner of a script, format or other piece of IP and a producer enter into an option agreement, whereby the producer pays an initial option fee for the exclusive right to purchase the property within a specified period of time. That window is intended to give the opportunity to the producer to get the project off the ground.

“Shopping agreements” (sometimes referred to as “producer attachment agreements”) are increasingly used as alternatives to option agreements. They are often regarded as convenient substitutes as they typically require less time and expense to negotiate. Though shopping agreements are functionally similar to option agreements, writers and producers shouldn’t be misled by the notion that they’re equivalent in all aspects. A central function of a contract is to allocate risk between the parties. Shopping agreements and option agreements, by their nature, involve different configurations of risks and their suitability depends on the interests of the parties, the material being sought and other circumstances of the transaction. Whether to structure the deal in the form of a shopping agreement or option agreement should be carefully considered with an eye to some of the factors discussed below.

What is a shopping agreement?

A shopping agreement is an agreement between the owner of IP and a producer. Under a shopping agreement, the producer obtains the right from the owner to “shop” the property for a defined period of time to studios, networks, distributors, financiers and other potential buyers or backers. In doing so, the owner typically does not receive any payment from the producer for the right to shop the property. Rather, the owner benefits from a producer using their network, track record and sales experience in pitching the property.

During the term of the shopping agreement, the producer obtains the right – and is generally contractually obligated – to pitch the property to prospective buyers or financiers with the aim of getting it through the development and production pipeline. If the producer is successful and a buyer or financier expresses interest in the property, a shopping agreement allows the owner and producer to each negotiate and enter into separate agreements concerning the project with the interested party. The owner will negotiate the sale of rights to the property, while the producer will negotiate its attachment to the project.

Compensation

For a producer, a shopping agreement is an attractive approach to attach themselves to the project at no cost, whereas under an option agreement, a producer must make an initial outlay to acquire the option right. In this regard, the producer eschews the risk of making an upfront investment in IP that they ultimately may not be successful in selling or producing. By the same token, without any upfront compensation received by the producer, the producer arguably has no “skin in the game”. They may be less invested in setting up the project and may focus their energies elsewhere, having no financial investment at stake.

A shopping agreement may, however, be more favourable for an owner in the event that the property gains heat and stirs up interest after it is shopped around. Without a pre-negotiated purchase price attached to the property, as in the case of an option agreement, an owner under a shopping agreement is free to negotiate a purchase price directly with the buyer and to benefit from the upside, including any bidding war that might arise. Yet, the inverse also applies. For example, a screenwriter might enter into a shopping agreement for a well-written script with commercial potential, yet a movie with a similar premise is released shortly thereafter and becomes a box office bomb. Film and television trends being fickle as they are, the script may suddenly become dead in the water with no interested buyers due to the risk of repeating the same failure. The owner would miss out on any proceeds they would have otherwise received if they had entered into an option agreement.

Term

The term of a shopping agreement is typically shorter than an option agreement – 6 to 12 months as opposed to 12 to 18 months under an option agreement – since the producer is essentially receiving a free opportunity to shop the IP. If the shopping agreement is exclusive – shopping agreements can be both exclusive and non-exclusive – the owner has an even greater incentive to keep the term short so that the rights to shop are not tied up with only one producer.

A shopping agreement will usually contain a clause that protects the producer from a situation where the agreement expires while the producer is in the midst of negotiating with an eventual buyer, leading to a deal over the property with the owner but with no benefit accruing to the producer due to the expiry of the agreement. Such a clause would automatically extend the term for a period during which the producer is in meaningful negotiations with a prospective buyer. The owner may insist on a cap to that extended period so that it is not excessively prolonged.

A producer should also be mindful of the scenario in which the producer does the leg work in pitching the IP to a buyer, but the owner then strikes a deal with that same buyer only after the shopping agreement has expired. Language may be added that precludes the owner for a specified period following the expiry of the agreement from completing a deal with any buyer that the producer had previously submitted the IP to, unless the producer is also attached. Such a clause is often caveated that a deal may be reached without the producer’s attachment if the property was substantially changed since it was last pitched. If significant revisions were made to the IP or influential talent becomes attached to the project after the expiry of the agreement, the project’s marketability might improve and justify why a deal was reached only after the producer’s departure.

Ownership rights to property

Unlike an option agreement, a shopping agreement confers no rights to the producer on the property itself. In this regard, a shopping agreement is fundamentally an agreement for services, rather than an agreement for the purchase of property rights. Without any rights attaching to the property, a shopping agreement is arguably easier to breach by the owner and therefore accords less protection to the producer. An owner could go behind the producer’s back and sell the rights to another party. The producer would have no recourse but to make a claim for a breach of contract. Conversely, under an option agreement, the producer has acquired an interest in the property which reverts back to the owner only after the expiry of the option. If the owner wants to sell or option off the same interest in the property, another buyer would expect representations and warranties from the owner that the interest to be acquired is legally unencumbered and that no other person holds any contingent ownership rights in the property.

Under a shopping agreement, an owner typically has more control over the property and over any eventual sale to a buyer than under an option agreement. A shopping agreement will typically give the owner a right to approve whether to move forward with a particular buyer. An option agreement generally does not impose such a restriction on the producer to close a deal. In addition, the owner may insist that they or one of their representatives are in attendance at a pitch meeting or that they are notified of any pitch meeting.

Conclusion

As surveyed above, there are drawbacks and benefits to both shopping agreements and option agreements for each of the parties. There is no universal answer as to which type of agreement is preferable. While a shopping agreement often appears attractive due to its simplicity and the parties’ desire just to “get something in writing”, it can lead to significant and unforeseen disadvantages for an owner or producer down the road if due consideration is not given to the differences between the agreements.

Shopping Agreements: The Pros and Cons as Compared to Option Agreements

Ontario Passes Protecting Child Performers Act

On April 30, 2015, Ontario passed Bill 17, entitled the Protecting Child Performers Act; on May 5, 2015, Bill 17 received Royal Assent, and so, by its terms, the Act will come into force in February 2016 (nine months from Royal Assent). As set out in Section 2 of the Act, its purpose is to “promote the best interests, protection and well being of child performers”. The text of the legislation as passed can be accessed here. The Act changes in critical ways the obligations of Ontario employers of children in the entertainment industries.

Effect of the Act

The particulars are set out below, but the “big picture” summary of the Act is that it extends to all child performers in a wide range of entertainment activities the types of working condition protections which have historically been associated with the collective agreements of performers’ unions and guilds, such as ACTRA. It is impossible to avoid the minimum protections afforded by the Act, but where an employment contract, collective agreement or other statute applies directly to a matter addressed by the Act and the provision in the employment contract, collective agreement or other statute provides “a greater right or protection to a child performer, the provision in the employment contract, collective agreement or other [statute] applies” and thus “trumps” the application of the Act. In short, a child performer can contract for better protection than that provided by the Act, but cannot contract for worse protections.

Scope of Application

To begin, we need to determine the scope of the Act’s application. At its core, the Act governs the relationships between employers, parents and “child performers”. Failure by an employer to comply with the Act can result in liability under the Employment Standards Act. The following criteria must be present for the Act to apply:

  • the “child performer” must be under 18 years of age;
  • the child performer must be receiving “monetary compensation” (i.e., the Act does not apply when the child performer is not being paid, or is being compensated by means other than monetary payments); and
  • the child performer must be performing work or supplying services in the “entertainment industry”
    • “entertainment industry” means either (i) the “live entertainment industry”, which means the “performing arts industry that provides live entertainment in theatre, dance, music, opera or circus” or (ii) the “recorded entertainment industry”, which means “the industry of producing visual or audio-visual recorded entertainment that is intended to be replayed in cinemas, on the Internet, on the radio, as part of a television broadcast, or on a VCR or DVD player or a similar device, and includes the industry of producing commercials”

We can see at this point that there are some ambiguities about the precise scope of the Act’s reach – namely, it is unclear the extent to which it applies to what we might colloquially refer to as the “music industry”. From the definition of “recorded entertainment industry”, it does not appear that the Act covers the rendering of performing services where what is being produced is an audio-only sound recording – but that’s not entirely certain, since the definition does include recorded entertainment that is intended to be replayed “on the radio”. Using the example of a “boy band” made up of members under the age of 18, it seems the Act would not apply to their in-studio recording work, but would apply to their live concert performances. (The Act has some other drafting oddities – is it really necessary to refer to “VCRs”?)

General Engagement Rules

The Act imposes three different sets of obligations on employers: (1) obligations which apply to all engagements of child performers, irrespective of which aspect of the entertainment industries they are providing service sin; (2) obligations which apply only to engagements in the “recorded entertainment industry”; and (3) obligations which apply only to engagements in the “live entertainment industry”. The following obligations apply to all engagements of child performers:

  • Contracts Must be in Writing. All engagements of child performers must be pursuant to a written contract. [Section 5]
  • Pre-Contract Meeting and Ongoing Disclosure. Before entering into a contract with a child performer, an employer must meet with with the child’s parent or guardian (the child performer is entitled to be present at and participate in such meeting) and disclose the following information: (a) a general description of the role the child performer will play; (b) the location and hours of rehearsals and performances; (c) any health or safety hazards to which the child performer may be exposed during rehearsals or performances, and the precautions that will be taken to prevent injury to the child performer; (d) any special skills the child performer is expected to perform that require a level of physical proficiency or other skill superior to that of an average child; and (e) any special effects to which the child performer may be exposed. If any of the items disclosed at the pre-contract meeting change, the employer must notify the parent/guardian of the change, and the employer is prohibited from implementing any proposed change unless the parent/guardian has agreed to in writing to the change. [Section 4]
  • Script Disclosure. A copy of the portion of any script relating to the child performer’s services must be provided to the parent/guardian prior to the commencement of production.
  • Travel. If a child performer is younger than 16, the parent, guardian or “authorized chaperone” (who must be over 18 and have written authorization from the parent/guardian) must accompany the performer to and from the workplace. If a child performer is obliged to be “away from home overnight”, a parent/guardian (but not an authorized chaperone) must accompany the child “at all times”, and the employer must pay for all “daily expenses and the costs of travel and accommodation” up to maximums to be set out in the Act’s regulation. [Section 6]
  • Tutoring. An employer must “provide time in the work schedule for a child performer who is of compulsory school age to receive tutoring”. Details of the elements required in the tutoring will be set forth in the Act’s regulation. [Section 7]
  • Income Protection. Where a child performer earns more than $2,000 on a production or project, the employer must deposit 25% of the child performer’s earnings into trust (to be held until the child turns 18). Details of the trust arrangements will be set out in the Act’s regulation. The foregoing will not apply in situations where the child performer is a union member, and the union’s collective agreement requires that funds be deposited into trust. [Section 8]
  • Health and Safety Training. Employers are required to provide training for each child performer (in a manner “appropriate to the child performer’s developmental stage”) and their parent/guardian/chaperone with respect to the following matters: emergency procedures; restricted areas; safe waiting areas; the location of washrooms, make-up areas and “other areas relevant to the child performer’s work”; and “the procedure for identifying and reporting unsafe working conditions”. [Section 23]
  • Right to Refuse Work. For purposes of subsections 43(3)-(10) of the Occupational Health and Safety Act (which permits workers to refuse to work in unsafe conditions), where a child performer is under 14 years of age, their parent/guardian/chaperone is given authority to make decisions for them. [Section 24]
  • Healthy Food. When employers provide food to child performers, they must provide them with “healthy snacks and meals … as close to the child performer’s regular snack and meal times as possible”, and must ensure that any food provided “meets the child performer’s needs in respect of food allergies and special dietary requirements”. [Section 25]

Recorded Entertainment Industry

The following obligations apply to engagements of child performers in the “recorded entertainment industry”:

  • Minimum Age. No child performer who is younger than 15 days can be engaged to provide services. [Section 10]
  • Hours of Work. The Act imposes strict limitations on the number of hours that child performers can work, which are different for different age groups: performers under two years can only work a maximum of four hours a day, while those over two years can only work a maximum of eight hours in a day. Overtime is permitted only if the child performer is a union member and the child is paid overtime rates. An employer must provide at least 48 hours notice if the child performer’s start time is after 7pm. [Section 11]
  • Turnaround Time. Child performers are entitled to a minimum of 12 consecutive hours “free from work” each day and 48 consecutive hours “free from work” each week. [Section 11]
  • Limits on Time in Front of Recording Device. The Act contains very detailed limits on how much time a child performer can spend being filmed/recorded before receiving a break (and how long such break period must last), based on the age of the performer. [Section 12]
  • Parental Accompaniment. Child performers who are under 16 years of age must be accompanied in the workplace by a parent/guardian or “authorized chaperone” (who cannot be the child’s tutor or agent), who is “accessible to the child performer at all times”. [Section 14]
  • Child Performers’ Coordinator. The employer must designate one person at the workplace as a child performers’ coordinator who is “responsible for co-ordinating matters related to the welfare, safety and comfort of child performers”. If there are more than six child performers in the workplace, the coordinator cannot also be the tutor. [Section 15]

Live Entertainment Industry

The following obligations apply to engagements of child performers in the “live entertainment industry”:

  • Minimum Age. No child performer who is younger than two-and-a-half years can be engaged to provide services. [Section 17]
  • Hours of Work. The Act imposes strict limitations on the number of hours that child performers can work, which are different depending on which “phase” the services are rendered in (the “rehearsal phase” or the “performance phase”) and depending on the age of the child performer. No overtime is permitted in either phase. [Section 18]
  • Turnaround Time. Child performers are entitled to a minimum of 12 consecutive hours “free from work” each day and 36 consecutive hours “free from work” each week. [Section 18]
  • Breaks. No employer shall require or permit a child performer to work for longer than two consecutive hours without a break of at least 10 minutes. During the rehearsal phase, the employer shall give the child performer an eating period of at least 90 minutes and shall schedule eating periods so that the child performer does not work more than four consecutive hours without an eating period. [Section 19]
  • Option for Chaperone. Unlike the situation in the recorded entertainment industry (which requires parental accompaniment for performers under 16 years of age during working hours), parents/guardians of child performers older than two-and-a-half years of age in the live entertainment industry may designate a chaperone to “be available to the child performer while the child performer is at the workplace”. Thus, for child performers in the live entertainment industry there is no obligation that they be accompanied by a parent/guardian/chaperone. [Section 20]
  • Child Attendants. The employer is obliged to designate a “child attendant” who is “responsible for monitoring the child performers at the workplace while the child performers are not rehearsing or performing”. The “child attendant” must be at least 18 years of age, not otherwise employed on the production, not the child’s tutor and must possess a clean criminal (as defined in the Act’s regulations). The number of child attendants required to be engaged is determined by a formula which is based on the age of the youngest child performer: where the youngest performer is under six years of age, there must be one attendant for every six children; where the youngest performer is between six and ten years of age, there must be one attendant for every ten children; and where the youngest performer is ten years of age or older, there must be one attendant for every fifteen children. [Section 21]
  • Clean Criminal Record. Section 22 of the Act requires that “prescribed individuals” (to be defined in the Act’s regulations) who “may be required to be alone with child performers” must have a “clean criminal record” (to be defined the Act’s regulations). The Act is silent on why this requirement applies only to the live entertainment industry but not to the recorded entertainment industry.

As readers can see, the Act imposes a raft of obligations on those who engage child performers in the live and recorded entertainment industries. While there is some overlap with existing union/guild requirements, there are also new statutory obligations which go beyond what might otherwise be required under an applicable collective agreement. Those engaging child performers must therefore take the time to familiarize themselves with the Act and determine what additional steps, if any, they must take to be in compliance.

Ontario Passes Protecting Child Performers Act

I Want What She’s Getting – “Favored Nations” Clauses in Entertainment Contracts

The “favored nations” or “most favored nations” or “MFN” concept/clause, while not omnipresent in entertainment contracts, certainly gets its fair share of use. This post will explore the purpose and operation of FN and MFN (there is a (slight) difference!). (A note on spelling: Canadian usage prefers “favoured”, but in order to maximize our appearance in search results, this post will use the American spelling of “favored”.)

Background

Favored nations clauses are relatively simple to describe: they are a contractual commitment that no other relevant party will receive “better” (or more advantageous) terms from the party making the commitment. In the entertainment industries, they appear most often in three contexts: in music licensing arrangements; in film/TV/theatre actor deals; and in investment agreements (e.g., where an investor is providing funds for an entertainment project). The music licensing context provides perhaps the most straight-forward illustration of how a favored nations clause operates. Imagine a producer wants to license a song for use in their movie – to keep things simple, we will assume a single publisher owns all publishing rights in the composition and a single record company owns all rights in the sound recording. The license agreements that the producer enters into with the publisher and the record company will almost certainly contain a favored nations clause, which will look something like this (taken from an actual sync license!):

“no co-publisher of the Composition and no master recording owner of the Composition shall receive proportionately more favorable remuneration of any kind including, but not limited to, the Fee.  In the event that you pay our co-publisher and/or the master recording owner of the Composition a higher pro-rata fee than the Fee paid to us hereunder, you shall pay to us the difference between such higher pro-rata fee and that Fee paid to us”

In other words, if you’re paying the publisher $5,000, you can’t pay the record company $7,500 – or you can, but then you have to pay the publisher another $2,500 so that they get equal treatment. Of course, FN/MFN clauses can be much simpler (“on terms no less favorable than those accorded to any other [actor/investor]”) or much more complicated (as we’ll see below).

Favored nations clauses are particularly useful when dealing with relatively large groups of counterparties who are similarly situated – which is why they are employed so often in the actor and investor contexts. For example, when a producer is dealing with a group of actors each of whom have approximately equal screentime and bargaining power, or with investors who are all providing roughly the same amount of funds at the same time in order to finance a production. The favored nations clause offers the advantages of efficiency and protection from structural negotiating disadvantages such as lack of complete information and disparities in bargaining power. For the actor/investor, because they don’t have full knowledge of the deal terms that other actors/investors are obtaining in their negotiations with the producer, the favored nations clause offers the comfort of knowing they are being treated at least as good as (or no worse than) their peers. For the producer, offering a favored nations commitment means that they don’t have to maintain multiple sets of negotiations over the same terms (e.g., the definition of “net profits”), but rather can simply negotiate with the best-placed counterparty and then apply the agreed-upon term to all parties.

A Digression on Terminology

Earlier I mentioned a slight distinction between “favored nations” and “most favored nations” – though the distinction is not always drawn, it’s useful to highlight it; while the two terms can be (and often are) used interchangeably, they can also be used to contrast quite different situations. “Most favored nations” (or MFN) is best used to describe the treatment given to a particular individual – it is a form of protection accorded to a single counterparty, to assure them that no similarly-situated counterparty is getting a better deal than they are. “Favored nations” is best used to describe the treatment given to a group of people – it is a form of protection accorded to a set of counterparties. To illustrate: it is entirely possible/acceptable to have only one person on a production get the benefit of a “most favored nations”/MFN clause (e.g., your highest paid actor); it makes better sense to use “favored nations” when you’re describing everyone within a particular group (e.g., all of your actors are being given “favored nations” protection with respect to on-set perquisites). That being said, for the balance of this post and in order to avoid clunky repetition, I’ll use “favored nations” to cover both situations.

Two Kinds of Scope

When drafting favored nations clauses, “scope” is important – but scope in this context has two different connotations: scope as it relates to which terms of the contract the favored nations protection applies to, and scope as it relates to the class of peers or comparators against whom the favored nations protection will be measured. I’ll address both connotations in turn.

Scope re Terms

It is critical for the parties in a favored nations arrangement to specify which terms of the contract are affected by the favored nations protection. There will inevitably be tension here: the party benefiting from the favored nations protection will want to cast the scope of it as widely as possible, while the party granting the favored nations protection will want its scope to be as narrow as possible. Here is a partial list indicating how many potential aspects of an actor’s deal could be subject to favored nations protection:

  • the amount of the actor’s fixed fee for services
  • the timing of the payment of the actor’s fee
  • on-set perqs (e.g., size of dressing room, amenities in dressing room)
  • off-set perqs (e.g., invitations and travel to premieres)
  • travel arrangements (e.g., business class airfare vs economy class)
  • accommodations (e.g., size, location and amenities of hotel lodgings)
  • presence, thresholds and quantum of box office bonuses
  • presence, quantum and definition of “net profits”
  • participation in ancillary revenue streams (e.g., merchandising)
  • on-screen and paid ad credits (e.g., size, placement, prominence, duration, etc.)

As the foregoing should serve to illustrate, an open-ended commitment to “favored nations” protection can be the starting point for an awful lot of headaches down the road if the scope of its application is not spelled out. Similarly, saying something as generic as “compensation” or “credit” is subject to favored nations protection is a recipe for potential disputes.

Scope re Comparables

Consideration must also be given to which contracts will serve as the standard against which the favored nations commitment is measured. For example, is the actor being given favored nations protection as compared to all other actors on the project, or as compared to all other “above-the-line” participants on the project (e.g., what if the director gets a better definition of “net profits”) or some other sub-set of individuals? Producers may want to create different pools of comparatives so as to ensure that they don’t inadvertently accord benefits which should be reserved for a particular class of counterparties – maybe the actors playing the roles of the two lead characters have star wattage an order of magnitude brighter than anyone else on the project and so their treatment needs to be carved out of everyone else’s favored nations clause. Or, when dealing with investors, there are five investors in a film who are each investing $50,000, and then another three investors who are each investing $250,000 – the producer may want to accord each investor favored nations protection only vis-a-vis the other investors at their tier of investment.

Enforcement

Enforcing favored nations clauses is notoriously difficult: the same informational disadvantage which leads parties to want favored nations protection in the first place means that they have difficulty ever knowing whether their entitlement to protection has been triggered by someone getting a better deal. Contract provisions might also be subject to confidentiality obligations, meaning that counterparties are restricted from sharing the terms of their deal with each other (though the ability to share such information for “policing” purposes might be carved out of the confidentiality obligation). In cases where a collection account is used, examination of the entitlements of the various parties may reveal discrepancies which indicate a breach. In some circumstances, it may be that the only way to reveal the breach of a favored nations clause is to undertake an audit of the books and records of the production company, or via disclosure in the course of a lawsuit.

Conclusion

Whether favored nations provisions should be included in one or more contracts on a project will be a function of a variety of considerations: bargaining power, legal budget, number of counterparties, etc. The favored nations clause can be a useful device for both parties to a contract, though it comes weighted with risks – which can be ameliorated by careful drafting.

I Want What She’s Getting – “Favored Nations” Clauses in Entertainment Contracts