Independent producers usually utilize the services of members of various guilds and unions in the entertainment industry such as the Screen Actors Guild (SAG), the Writers Guild of America (WGA) and the Directors Guild of America (DGA) by becoming signatories to a union’s collective bargaining agreement.

Under the guild agreements, the guild members are entitled to receive residual payments for certain exploitations of the work such as a motion picture feature in which the members’ services are used (e.g., the sale of videocassette versions or the transmission on cable systems of a motion picture initially produced for theatrical release). A producer which is a signatory to a guild agreement is obligated to pay these residuals and to cause any entity to which it sells, transfers or assigns rights to exploit the work to assume and be bound by the producer’s obligation to make residual payments and to sign an assumption agreement committing it to do so. Ordinarily, the assumption agreement is expressly for the benefit of the applicable guild as representative of the talent whose services are included in the production.

Many distributors object to signing such assumption agreements, often providing a range of reasons for not signing such agreements from claiming that they do not have sufficient resources for calculating and paying such residuals to just plain refusal as part of their standard operating procedure.

This scenario forces the producers into a dilemma of whether the producers should sign the distribution agreement even if a distributor refuses to sign the assumption agreement (which is contrary to the union’s rules) or forsake distribution of their films, thereby precluding the films from entering the marketplace and the films’ investors from having an opportunity to recoup their investments and perhaps even make a profit.

Recognizing the economic inequities in the independent film marketplace, guilds and independent producers state that distributors have abused their bargaining power over independent producers by refusing to assume the responsibility to pay residuals to the guilds.

The actors’, writers’, and directors’ unions raised this issue before congressional committees.  The United States Congress recognized this inequity, and it sought to remedy the problem through legislation in connection with the 1998 Digital Millennium Copyright Act (“DMCA”).  Under this legislation, regardless of whether the distributors sign the guild’s assumption agreements, distributors are subject to the obligation to pay residuals if the distributor should have known that the motion picture was produced under a union contract.

in Section 406 of the “Miscellaneous Provisions” portion of the DMCA, talent guilds have been provided with a  mechanism to protect the residual payments to which their members are entitled. Under guild agreements, members are entitled to receive residual payments for certain exploitations of the work in which their services are used .A producer which is signatory to a guild agreement is obligated to pay these residuals and to cause any entity to which it sells, transfers or assigns rights to exploit the work to assume and be bound by the producer’s obligation to make residual payments and to sign an assumption agreement committing it to do so.

At times a production company without assets or soon to discontinue business would transfer one or more rights under copyright to a non-union entity, which would not sign the assumption agreement.

This legislation is intended to address this situation. It provides that, in the case of a transfer of copyright ownership in a motion picture that is produced subject to one or more collective bargaining agreements, the transfer document (i.e., distribution agreement) is deemed to include the applicable assumption agreement whether it is so stated in the distribution agreement. Therefore, a distribution company is subject to the obligation under each such assumption agreement to make residual payments. Some distributors claim that this legislation does not apply to them since the distributor do not receive any transfer of ownership in the film’s copyright but merely a license of certain rights in the motion picture. However, the term “transfer of copyright ownership” is defined under this legislation as that term is defined in the Copyright Act: “an assignment, mortgage, exclusive license or other conveyance, alienation or hypothecation of a copyright or of any of the exclusive rights comprised in a copyright.”  The term “motion picture” includes television programs and other audiovisual works. Therefore, these distributors’ arguments are not supported by the wording in the law itself. .

In addition, the law specifically states that a distributor has the obligation to pay residuals if: (a) the distributor knows or has reason to know when entering into an agreement that a collective bargaining agreement was or will be applicable to the motion picture. The legislation further states  the ways in additional to actual knowledge by which a transferee such as a distributor would have reason to know of the existence and applicability of a collective bargaining agreement. A distributor will be deemed to have such knowledge if the rights in a motion picture is recorded in the U.S. Copyright Office (or if there is publication at an on-line site available to the public operated by a guild of information that identifies the motion picture as subject to a collective bargaining agreement if the site permits commercially reasonable verification of the date on which the information was available for access).

In enacting this legislation, Congress also was concerned that banks and others providing financing for motion pictures should not be made subject to the assumption obligations required by Section 406 merely because they obtain a security interest in a motion picture. Because Section 101 of the Copyright Act defines “transfer of copyright ownership” to include a mortgage or hypothecation of any exclusive copyright right, this could be an unintended result of the provision. Accordingly, Section 406 provides that the obligation to pay residuals also is not imposed on copyright transfers that consist solely of a mortgage, hypothecation or other security interest by or under the authority of the secured party. Further, it does not apply to subsequent transferees to which the copyright may be sold by a secured party.

Distributors and producers have employed various strategies to address the dilemma between non-distribution of a film, on one hand, and non-compliance with guild rules and the denial of residual payments to a union’s members, on the other hand. Some distributors have adopted the tactic of not signing a guild’s Distributor’s Assumption Agreement and unwillingly paying the residuals to the guilds and thereby complying with the federal legislation and recouping such residuals as an expense prior to a payment to a producer. If there are insufficient revenues generated from a film to pay the residuals, distributors then turn around and seek repayment or indemnification from the guild signatory producers even if the repayment may have to come out of producers’ pockets. Distributors and signatory producers can avoid this scenario by having the distributors establish a reasonable reserve for residual payments which would be paid to the unions.   In the absence of a distributor establishing a reserve, a distributor can increase or “gross up” the amount of monies paid to a producer so the producer could pay the residuals to the guilds with such increase being deemed a recoupable expenses by the distributor.  These are possible solutions although a guild will have difficulties in dealing with the fact a distributor has not signed a Distributor’s Assumption Agreement; however, these measures permit the union’s members to receive their residuals. A producer’s and distributor’s inability or unwillingness to address this issue at the beginning of the negotiation process can lead to a strong possibility that the distributor will pay most or all of the monies towards the repayment of expenses incurred in connection with a motion picture and the payment of an advance or other monies to a producer (of which some or all of that monies may be used to permit a producer to complete delivery of a film to a distributor), resulting in a lack of future revenue generated by the Picture which makes such recoupable expenses for residuals very difficult  or impossible to implement.

A producer can begin to avoid this residuals dilemma by working with a distributor to address this issue at the beginning of their relationship; otherwise, a signatory producer can get into trouble with the union which could affect a producer’s ownership in the motion picture as well as union members not receiving their residuals.