Hollywood Back In Court: How Have Spinal Tap Creators Earned Only $81 In Merch Sales?

Hollywood has had a long tradition of avoiding paying royalties by claiming movies are "not profitable" as the result of an accounting loophole. This has resulted in a number of lawsuits over the years including, most recently, one by Harry Shearer of the classic film This is Spinal Tap.

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By Mike Masnick of Techdirt

We've discussed the amazing bullshit known as Hollywood Accounting many times here on Techdirt. This is the trick whereby big Hollywood studios basically get out of paying anyone royalties by claiming movies (including big, mega-famous ones) are not profitable. The most simple version of this trick is that the big studio sets up an independent corporation to represent "the film." It then "sells" services to that corporation, which it owns, at exorbitant prices. So, for example, it will charge a "marketing and distribution fee," which may actually be many multiples of the film's actual budget. No cash changes hands here. It's just a paper transaction, but because of those "fees" any money made from the film remains with the big Hollywood studio, and is not passed on to anyone who has "participation" in the net profits from the film.

Things can get more complex than that, but that's a basic version of the scam. This has come out a lot in the past few years, thanks to a series of lawsuits. It's how we know that a Harry Potter film that brought in basically a billion dollars in revenue still declared a $167 million "loss". It's why one of the highest grossing films ever, Return of the Jedi, still claims to be in the red, when it comes to paying out residuals. That's a film that's made $33 billion (with a b). Not profitable, under Hollywood accounting. Another film whose books were opened up in a lawsuit was Goodfellas, where Warner Bros. was not only accused of charging $40 million in interest on the $30 million cost of production, but also of hiding over $100 million in revenue.

In another bizarre case from a few years ago, two subsidiaries of Vivendi went after each other over Hollywood accounting — with StudioCanal suing Universal for pulling such an accounting trick on a bunch of famous movies. Universal hit back by claiming it actually overpaid StudioCanal.

Those companies have all come up in a new lawsuit, filed by the well known actor/singer/voice-actor Harry Shearer over the iconic and classic movie This is Spinal Tap. Shearer claims that various Vivendi subsidiaries, including both StudioCanal and Universal played various Hollywood accounting games to screw him and his Spinal Tap co-creators (Chris Guest, Michael McKean and Rob Reiner) out of millions of dollars. The complaint is pretty short and straightforward. The headline grabbing numbers that everyone's picking up on are these:

… according to Vivendi, the four creators’ share of total worldwide merchandising income between 1984 and 2006 was $81 (eighty-one) dollars. Between 1989 and 2006 total income from music sales was $98 (ninety-eight) dollars. Over the past two years, Vivendi has failed to provide accounting statements at all.

Obviously, that's just merchandising and music royalties. But… still. Shearer claims that Vivendi played some Hollywood accounting tricks via various subsidiaries, including bundling various unsuccessful films with Spinal Tap to basically hide the profits from the film.

Those profit participation statements, Plaintiff has recently discovered, reflect anti-competitive and unfair business practices in their cross-collateralization of revenues between different Vivendi subsidiaries; unfairly bundle and cross-collateralized unsuccessful films in the Embassy catalogue with TIST; were not delivered to other creators; and fraudulently underreported the revenues owed to Plaintiff and other members of STP. Over the last two years, Vivendi and Canal have failed to account at all on TIST revenues.

Unfortunately, while there are hints and allegations about all of this, the full details are not revealed… yet. If the case continues, they may eventually come out.

There are a few other interesting tidbits in the lawsuit. Shearer, Guest and McKean created the Tap characters and many of the songs many years before the movie. But apparently one of the studios trademarked the name and has tried to block Shearer from using Spinal Tap or his character's name Derrick Smalls, unless he pays them for a license. Shearer argues that the studios have abandoned the trademarks, because they didn't oppose a brewery from registering "Spinal Tap" for a beer product (that's not quite how trademark abandonment works, so this seems pretty weak). Either way, Shearer wants the court to give a declaratory judgment of non-infringement.

The other interesting tidbit is that the complaint twice mentions that Shearer is filing for copyright assignment termination on the songs and the film itself. We've written many times about termination rights in copyright as well. These are the rights (which cannot be contracted away) that allow the original creators to reclaim any copyrights that they have assigned to others after 35 years. The recording industry has been freaking out about this over the past few years, and now it looks like Hollywood may need to wake up to the issue as well. It's not entirely clear why it's even relevant to this lawsuit, but it is a potentially big deal. Shearer (and, I assume, the other Tap creators) may soon be able to take back the copyright on the film and the music themselves.

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