TSG Entertainment Finance is suing The Walt Disney Company and 20th Century Studios after an audit showed they were owed at least $40 million. A lawsuit was filed on August 15th in Los Angeles for breach of contract against the studios.
TSG may be owed significantly more since the $40 million number came from an independent audit of three films, including Best Picture winner “The Shape of Water.” The company claims to have invested more than $3.3 billion into well over a 100 films including “Bohemian Rhapsody,” “Deadpool,” “Dawn of the Planet of the Apes,” “The Martian,” “The Grand Budapest Hotel,” “The Banshees of Inisherin,” and “Avatar: The Way of Water.”
In the lawsuit, attorney John Berlinski points to “Hollywood accounting” as the culprit for these discrepancies. He alleges a “common practice in the industry” is for studios to “cheat” profit participants out of money.
“Disney (and the executives running it) had and continue to have every incentive to do anything and everything they can, including manipulating distribution of the Qualifying Pictures and preventing TSG from liquidating its interests in certain tranches of Qualifying Pictures, to attempt to boost Disney’s share price at the expense of TSG and other profit participants,” Berlinski writes in the complaint.
TSG alleges 20th Century and Disney “have tried to use nearly every trick in the Hollywood Accounting playbook.” The financier began a revenue participation agreement with 20th Century on December 31st, 2012. The deal was TSG would co-finance the production and marketing costs, in exchange for a share of the defined gross receipts. While that contract has been amended nine times since then, the overall agreement remained the same.
Over the years, TSG began to notice a dramatic decrease in the revenue from these investments. So, they launched an independent audit which found their defined gross receipts from Electronic Sell-Through distribution were reduced by at least $54.5 million. The company also claims they were improperly charged $35 million in costs related to the cloud-based service Movies Anywhere.
On top of that, out of the films audited, they found 20th Century failed to credit TSG with revenue. They also claim they were charged “tens of millions in distribution fees” that were not permitted under the terms of their contract.
Using “Avatar: The Way of Water” as an example, TSG claims 20th Century ignored an agreement with FX Networks which calculated license fees tied to domestic box office performance. Instead, the studio “did a secret side deal for a fraction of what the parties had previously agreed was fair value.”
But wait! There’s more!
The suit also alleges TSG was “damaged by changes in distribution windows.” 20th Century had a deal to license films to HBO for the “Pay 1 window” from 2012 to 2022. A deal that was struck for a reported $200 million per year. But when Disney acquired 21st Century Fox, TSG says Disney renegotiated the 20th Century deal with HBO, supposedly in an effort to boost Disney+ and Hulu, and “give up a significant portion of its guaranteed HBO license fees.” All of this shortened the home video window to get projects onto its streamer platforms faster.
“On information and belief, these deviations from the traditional windowing of Fox’s films — in spite of Fox’s express and implied obligations to TSG — were a direct result of Disney’s interference with the RPA in pursuit of its ultimate goal: to prop up its wholly- or majority-owned streaming platforms and the share price of its stock using content from other divisions of the company,” the complaint reads. “Moreover, as Disney’s own CEO, Bob Iger, has admitted, his company pursued this strategy recklessly and with little forethought. For example, during Disney’s August 9, 2023 earnings call—in which Mr. Iger announced Disney+’s second subscription price increase in a year—Mr. Iger admitted with respect to Disney+, ‘We grew this business really fast, really before we even understood what our pricing strategy should be or could be.’” [Fox in this case is being used as shorthand for 20th Century Studios, even though that title is no longer in use.]
The final allegation in the suit claims because of all the aforementioned issues, by 2022, TSG didn’t have enough cash to fund future pictures. This led to the company seeking a “Qualified Picture Slate Repurchase Procedure,” which was included in their agreement. This would allow TSG to request to repurchase a group of five consecutively released films. If TSG and 20th Century could not come to an agreement, TSG could market and sell the films to a third party. Allowing the company to free up some cash on hand to help fund future movies.
Between June 2022 and 2023, TSG inquired about 13 different groups of films that fell under these parameters. According to the complaint, 20th Century blew them off. The lawsuit cites an email from Disney CFO Paul Shurgot as proof of this. “While we don’t agree with your characterization of the agreement, we are open to finding a path forward to resolve this which makes economic sense,” Shurgot wrote. “However, as discussed, we are not open to providing an offer on selected non-consecutive tranches that are among the most profitable tranches released to date, as doing so is counter to the agreement and would undercut our ability to recoup the TSG Additional Contributions.”
TSG argues this e-mail shows Disney interfered in its deal with 20th Century. Due to lack of funds, the company had to take an advance from 20th century to meet its obligations. This included funding movies like “Avatar: The Way of Water.” In doing so, TSG reduced its share of defined gross receipts, as well as triggering a provision that entitles 20th Century to some of their profits.
“Perhaps most egregiously, after TSG informed Fox of its intent to file this action, Fox and Disney capitalized on Fox’s own breaches of the RPA in a bad-faith attempt to whitewash their misconduct,” Berlinski writes in the suit. “On August 11, 2023, Fox sent TSG an e-mail taking the position that, because it had previously issued the Fox Picture Advance, it was entitled to invoke a provision of the RPA that would purportedly allow it to repurchase all released Qualifying Pictures and extinguish TSG’s hundreds of millions of dollars of legal claims.”
We will keep you posted on updates about this lawsuit as they develop.
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