Client Alert: The Watchmen Case – Risky Business

Buying Rights from a Middleman can be Risky Business

By Ezra Doner

When you start production of a $100 million film, you want to own the rights to produce the film, not just have a good argument that you do. But as Warner Brothers’ highly anticipated The Watchmen heads to theaters, an argument is all they have. Worse, the party Warner Brothers is arguing with is the formidable Twentieth Century Fox—and Warner Brothers has already lost the first round of their courtroom battle.

Could Warner Brothers have avoided this fight? Yes—but only if they had been willing to change the way movie studios usually do business. In this Alert, we show you why this case just might make that happen.

Typical Studio Practice

Under typical motion picture practice, there was nothing unusual about Warner Brothers acquiring rights from producer Larry Gordon as a middleman, instead of directly from Fox. After all, Gordon appeared to own the rights to the project. Moreover, beneath the veneer of Hollywood’s small town civility, even favors are rarely done for free, and a guiding principle is, don’t ask another studio for something you don’t absolutely need, unless you’re willing to give that studio something they may not strictly deserve.

After Warner Brothers’ experience with The Watchmen, however, that principle may change, as Warner Brothers’ decision not to deal with Fox at the outset has put much at stake. Had Warner Brothers approached Fox at the diligence stage, the ownership dispute would have surfaced earlier, and could have been resolved with less risk for Warner Brothers and leverage for Fox.

Who Owns What

The Watchmen started life in 1986 as a 12 issue comic book and award-winning graphic novel. Fox acquired motion picture rights to the graphic novel that same year, but the essential elements for a film—budget, director, script, stars, and so on—didn’t come together. In 1991, Fox gave a “quitclaim” (that is, a transfer) of key rights in the project to   Largo Entertainment (an abbreviation of “LARry GOrdon”), while retaining the right to distribute The Watchmen, if Largo produced the film.

Gordon and his partners in Largo subsequently went their separate ways, and Largo, in wind-down mode, transferred its rights in the project to Gordon personally. Fox and Gordon continued to try to get the film off the ground, but in 1994, after hitting another dead end, Fox gave Gordon a perpetual “turnaround” in the project.

A “turnaround,” like a “quitclaim,” is a type of rights transfer document specific to the film industry. In a “turnaround,” the transferring studio, which owns the underlying story, retains the right to reclaim its business role in the project if there is a change in the project’s essential elements. To actually acquire a project under a turnaround, a film producer such as Gordon must strictly comply with the turnaround’s terms, including repayment of the transferring studio’s sunk costs before essential elements change.

The Lawsuit

For 12 years following the 1994 turnaround, a number of studios flirted with The Watchmen project but never quite made it to the altar. Finally, in 2006, essential elements—including a star director—came together, and Warner Brothers acquired Gordon’s rights and financed the picture. At the time, Warner Brothers, however, may have been unaware of the 1994 turnaround agreement.

In February 2008, Fox sued Warner Brothers in Federal District Court in Los Angeles, asserting breach of contract and copyright infringement. Fox’s claims included that since changed elements had not been submitted to Fox, and project costs had not been repaid, Fox continued to own exclusive rights to distribute The Watchmen.

In denying Warner Brothers’ motion to dismiss, the court refused—at this stage—to acknowledge Warner Brothers’ title. Judge Gary Allen Fess wrote:

[N]othing on the face of the complaint or the documents supplied to the Court establishes that [Larry] Gordon, the claimed source of Warner Brothers’ interest in “Watchmen,” ever acquired any rights in “Watchmen” [emphasis added]. Thus, Warner Brothers’ arguments, if they are to succeed at all, will need to find support beyond the face of the complaint and the applicable agreements.

The case is now scheduled for trial in January 2009, just two months before the picture’s planned theatrical release.

Lessons Learned

It is still possible that Warner Brothers will prevail, but regardless of the outcome, this case may change the way studios do business with each other. Because if (i) you’ve spent $100 million to produce a project for which you lacked key documents, (ii) you’re unable to prove your ownership via a preliminary motion, and (iii) you have to submit to discovery and a trial to prove your rights, one might say that you have already lost.

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