What about the insistent rumors that the LOTR trilogy will be given the conversion treatment?

According to Variety, “Most of the industry hasn’t addressed the topic of 3-D conversions in public, but that hasn’t stopped rumors from flying. One website shows the entire ‘Lord of the Rings’ trilogy in line for conversion, but New Line insists the company has no current plans for it. Paramount, which would be involved in any ‘Transformers’ or ‘Titanic’ re-release, declined to comment on the possibility.”

The article offers a good rundown of the situation and explains the obstacles to making over older films into 3D versions. It costs a lot, for a start, and the whole business of installing digital projectors (necessary for the new 3D processes) in theaters is going slower than many had hoped. Already there aren’t enough 3D screens to hold the number of films coming out in that format. The wonderful Coraline got forced out of theaters all too soon, and not because it wasn’t making money. The economic turndown isn’t helping the process of installing new equipment.

Whether the new push to innovate 3D will actually work is still up in the air. For now, I doubt there will be any move to issue a 3D version of LOTR.

It’s a multi-year deal for over 200 films and TV series. Among the upcoming films included in the pact are the Harry Potter finale, the two-part Deathly Hallows film. Quite a few older movies are involved as well, including the LOTR trilogy, Rush Hour 2 (both New Line films), and Ocean’s Eleven.

Of course, a film doesn’t have to be part of a franchise to show up in perpetuity on TV and home video of various sorts. I just bring it up as a reminder that LOTR is still an active franchise, however firmly in the past it may seem to many fans.

The LOTR was a gamble (though in the book I argue that it was not as big a gamble as journalists would have us think), but it was not one that New Line took alone. Being an independent producer, it financed a large portion of the budget of LOTR, reportedly 70%, by pre-selling the rights to all three parts to 26 distributors in countries around the world. All this was happening back in 1999 and 2000, when executives from these distributors were being sent scripts and figures about how many copies of LOTR had been sold, and when many of them were being brought to New Zealand to be reassured that their money was safe.

The first time I became aware of these distributors was at the same time when I first really started paying attention to the trilogy—during the Cannes Film Festival of 2001. Before then, I had been somewhat skeptical about the adaptation of Tolkien’s epic novel into a film, even a three-parter. Every now and then I took notice of the casting or other news, but like many long-time fans, I didn’t want my hopes to be raised and dashed.

The screening of a 26-minute preview of the trilogy, including a generous chunk of the Moria battle and flight, left journalists, distributors, cast, and the few fan webmasters lucky enough to be invited wildly enthusiastic. Ain’t It Cool News and TheOneRing.net reported delightedly to the fans, many of whom believed them and became more hopeful. Journalists started portraying LOTR more as an upcoming hit than as a case of New Line getting in over their heads.

Variety ran a story called “Will ‘Lord’ ring New Line’s bell?” It described the screenings and the reactions. Most of all, its author, Adam Dawtrey mentioned those heavily invested distributors, who were seeing actual footage for the first time. After the preview was shown, he reported, “The enthusiastic response from distribs, exhibs and worldwide press to the screening of footage from New Line’s ‘Lord of the Rings’ at Cannes’ Olympia theater means that foreign companies that bet the farm on the three-year franchise now have cause for confidence they’ll recoup their investment—with coin to spare.” He added, “Never before has the global film market taken such a huge collective gamble” (21-27 May 2001, p. 1).

As I recall, that was the first time I clipped a news story on LOTR. Even at long distance, without seeing the preview, I began to get an inkling that the trilogy would be, not just a blockbuster, but an important set of events in film history. I didn’t have any idea at that point that I would ever write a book on the subject, but I was intrigued enough to go on clipping stories and paying more attention. I remained somewhat dubious about whether I would enjoy the film, but the release of The Fellowship of the Ring removed any doubts.

When I finally did decide to write my book, I wanted to cover the franchise as a whole, because the way that so many aspects of it were handled—the internet campaign, the making of the video games, the DVD supplements—seemed so innovative and yet so typical of huge changes taking place in the Hollywood industry. I also wanted to trace the trilogy’s influence as far as I could without waiting years and years to write the book. There were so many great stories to be told, and to me the story of those international distributors who banded together to help finance the trilogy and ended up rich was one of them.

There was more coverage of the distributors in the trade press (Variety, Hollywood Reporter, Screen International) during the time I was researching and writing the book, but most of that didn’t talk about the main questions I had: what impact had LOTR had on these companies and how did the foreign and independent film market as a whole benefit from the trilogy’s success?

Of course The Frodo Franchise was highly dependent on interviews with the filmmakers, the internet gurus, the DVD supplement makers, and so on. To answer these particular questions, I was fortunate enough to have two very different kinds of experts fill me in. One was Jonathan Wolf, the executive vice president of the Independent Film and Television Alliance and the managing director of the American Film Market, the main U.S. venue for sales of independent films, both domestic and foreign. He agreed to speak with me, partly, I think, because I did understand that, despite its enormous budget and income, LOTR was an independent film, and partly because I was approaching it from an angle that had never been covered. There is probably no one who knows more than Jonathan about the international independent film market, and he gave me vital information and opinions I would never have gotten from print sources. Perhaps most importantly, he confirmed my belief that LOTR had come along just as there was a serious slump in the independent film market and had helped to boost it back to normal.

The second interviewee was Mads Nedergaard, at that time an executive with SF Film, the Danish branch of the venerable Swedish company, AB Svenska Filmindustri. (He has since gone on to become the director of the Walt Disney Studios Motion Pictures in Denmark.) He gave me a full account of his firm’s handling of the trilogy and the DVDs, so that I was able to include a case study to demonstrate specifically how LOTR benefited its distributors.

The tale of how these companies, most of them fairly small, played their part to make the trilogy possible and ultimately reaped the reward is a gratifying one. With the companies plowing the money into buying independent films or investing in their production, into bringing art films out on DVD or building art cinemas, film culture as a whole benefited.

When Time Warner recently announced that it was folding New Line into Warner Bros. as a smaller, genre-oriented division, one of the reasons given was the foreign distribution of The Golden Compass. As with LOTR, New Line had pre-sold the foreign rights to finance the film—again on an epic scale. But this time the film did well abroad, where the foreign companies got the income, and badly in the U.S., where New Line released it. Warner Bros., with its own international distribution system, will release future New Line films around the world—or at least it will after New Line’s current contracts with its long-time foreign partners terminate.

It’s a sad ending to the story, since New Line is still a major source of films for many of these distributors, one most of them will miss. The new issue of Screen International (7 March 2008; the online version is subscription only) has an article on where they will turn after the expiration of their contracts. In sketching the background of the situation, author Mike Goodridge points out, “The distribution partners had good years and bad with New Line. None were thrilled with The Long Kiss Goodnight or The Island Of Dr. Moreau but for every flop, there was a Seven or Austin Powers, a Mask or Rush Hour.”

Goodridge goes on to summarize the trilogy’s impact on its international distributors, confirming what I argued in the book: “The success of the three films for the international partners cannot be overestimated. Nor can the fact that they, more than anybody involved, took a huge risk on the trilogy. The risk paid off. The Greens at Entertainment [the U.K. distributor], the Hadidas at Metropolitan [the French distributor] and others genuinely shared in the profits of one of the box-office phenomenons of the last 20 years. It was the international buyers’ dream. Instead of losing money on studio cast-offs, they had a hefty piece of a trilogy which grossed nearly $2bn outside North America.”

Goodridge then describes the success of The Golden Compass outside the U.S. The film had done well after its Japanese premiere at the beginning of March: “Should the film hit $300m [i.e., outside the U.S.]—highly likely in the next few weeks now that Japan has opened—Warner Bros. will be hard-pressed to deny production of a sequel.”

New Line’s disappearance as a source of hit films “brings a dramatic sea change to the complexion of the global business,” according to Goodridge. These independent firms “will be competing for an increasingly small number of tentpole pictures available to them.” He goes on to discuss the situations of several specific distributors and where they might obtain films in the future.

Was New Line ultimately a victim of the trilogy’s success? Goodridge quotes San Fu Maltha, the Dutch distributor of the LOTR:

It’s a natural process that happens all the time. Big major companies, if their specialist arm is becoming too commercial, too successful, will fold it in again when they have a reason to.

It was quite clear from the moment of The Lord of the Rings that [the folding in of new Line at Warner Bros.] would be the price of success.

Perhaps Maltha is right, though neither he nor anyone else went on record predicting such a thing when the trilogy was earning so much around the world. New Line enjoyed some hits after the trilogy ended, but the past three years have been slim, culminating with the American failure of the film that was supposed to launch another big fantasy franchise. One could only speculate as to whether, if New Line had continued to turn out successful films in the interim after the trilogy, Time Warner would have felt the need to cut it down to size.

I like to think that the distributors who invested in LOTR and who are soon to lose New Line as a steady supplier will at least continue to feel the trilogy’s lasting effects. Some of them are perhaps still in business because they released it. Even cast loose from their steady supplier, some may be able to afford to bid against other firms for the rights to major films because their prosperity has lingered.

Mads described to me the genuine excitement that people in his company felt at being able to handle the trilogy. Not only was it the largest film they had ever released, but some of them were Tolkien fans. For its distributors, as for many of the filmmakers and other people touched by it, it was a “once in a lifetime” experience that has all too quickly faded into the past.

May they continue to prosper.

Most of the online reports on this news appear to derive from a news conference or press release from the Tolkien trust, quoting Steven Maier, the U.K. lawyer handling the matter, and Bonnie Eskenazi, the American counsel who filed the suit. (Two basic versions of the story were put out by the Associated Press and Marketwire.) The reports differ in their details, however, with some reporters updating to add information. I’ll pull together what I’ve so far been able to find out so far.

The basics

The suit alleges that New Line was contractually bound to pay the estate 7.5% of the film’s worldwide gross receipts of nearly $6 billion but has not done so. As a result, the estate is demanding $150 million in compensatory damages, an unspecified amount for punitive damages, and the ability to take back the film-production rights for The Hobbit.

Eskenazi is quoted as saying, “New Line has brought new meaning to the phrase ‘creative accounting.’ I cannot imagine how on earth New Line will argue to a jury that these films could gross literally billions of dollars, and yet the creator’s heirs, who are entitled to a share of gross receipts, don’t get a penny.”

Maier said, “The Tolkien trustees do not file lawsuits lightly, and have tried unsuccessfully to resolve their claims out of court. But in this case, New Line has left them no option at all. New Line has not paid the plaintiffs even one penny of its contractual share of gross receipts despite the billions of dollars of gross revenue generated by these wildly successful motion pictures. To make matters worse, to date New Line has even prevented the plaintiffs from auditing the last two films of the series. The trustees are very aggrieved by New Line’s arrogance.”

The reporting of this story tends to confuse some of the terms. Maier claims that the estate is owed a percentage of gross receipts. Gross receipts are the total amount of money that comes back to a company in exchange for its products. Expenses of various sorts are then deducted, with the remainder being the profit. Some of the reports mention gross profit, which the Maier quotation suggests is not the basis on which the Tolkien Trust is claiming its share.

Despite mentioning the figure of $6 billion, however, the trust is presumably not claiming 7.5% of that (which would be a whopping $450 million!). Theaters showing the films and stores selling the DVDs and products would naturally keep a portion. Since Rings was financed to a considerable extent through the pre-sales of distribution rights to firms around the world, those distributors would also keep a considerable share.

Culling more information

Yahoo!’s account, written by Josh Grossberg, reports that the lawsuit says that despite the contractual obligation of 7.5%, the Tolkien Trust “has only received an upfront payment of $62,500.” How this fits in with the claim that not a penny has been paid is unclear. I have not seen that figure mentioned elsewhere.

Edvard Pettersson’s report on Bloomberg.com has been updated to specify the name and case number of the lawsuit: “Christopher Reuel Tolkien v. New Line Cinema Corp., BC385294.” Christopher Tolkien, one of the author’s sons, is presumably named because, according to Pettersson, he and three other family members are the trustees of the Tolkien Trust.

Pettersson also gives a few more details about the lawsuit’s allegations. The $6 billion figure mentioned in earlier reports includes not just the box-office take (which was a bit under $3 billion) but $3 billion from DVD sales, television, and other ‘ancillary’ revenue.” The accusations include breach of contract and fraud. “They claim in the suit that New Line has included among the production costs the share of the movies’ profits it paid to Miramax. The plaintiffs also claim that New Line bases their share of DVD sales on only 20 percent of the actual sales.”

According to Variety’s story on the lawsuit, it specifies that the 7.5% share arises from the original 1969 adaptation agreement made between United Artists and Allen & Unwin (the publisher that eventually evolved through mergers into HarperCollins). The adaptation rights subsequently moved to Saul Zaentz, then Miramax, and finally to New Line. (I sketch the history of these deals in Chapter 1 of The Frodo Franchise.) Variety also reports that, “The suit enumerates several areas of contention: underreporting homevideo revenue; $100 million payments to Zaentz and Miramax are treated as costs of the film; destruction of documents; and a refusal to allow any audit on the second and third films of the trilogy.”

Deceit or disagreement?

Some of the news stories point to the fact that both Peter Jackson and Zaentz have successfully sued New Line over payments based on their percentage participations in Rings’s income.

On the face of it, at least, the cases are not parallel. New Line paid Jackson and Zaentz, and indeed Disney and Harvey and Bob Weinstein considerable sums of money. Not everything they were owed, to be sure, as the lawsuits just mentioned showed, but still a portion of it. In the case of Tolkien’s heirs, they have paid either nothing or a mere pittance. Why the difference?

One inference might be that New Line doesn’t believe that it is in fact contractually obliged to pay. That original agreement that Tolkien agreed to back in 1969 was a notoriously difficult document. His editor at Allen & Unwin, Rayner Unwin, wrote in his memoirs, “A negotiation of nearly two years’ duration [i.e., 1967-69] that was eventually consummated in a fifty-page contract, the complexities and uncertainties of which have dogged the publishers and the author’s estate ever since.” Those memoirs were published in 1999, ironically, the year in which Jackson’s trilogy was in pre-production and early principal photography. Perhaps those complexities and uncertainties underlie the current dispute.

On the other hand, if New Line doesn’t believe that Tolkien’s estate has any claim on a portion of the film’s income, I don’t see why they would allow access to the financial records for The Fellowship of the Ring.

The confusion between gross receipts and gross profits in the reports may hint that instead the difference is that New Line believes that the 7.5% would be of gross profit, a considerably smaller figure than if it came from gross receipts. Zaentz and Miramax (i.e., Disney and the Weinstein brothers) and reportedly Peter Jackson had percentages of the gross receipts. And film companies are notoriously adept at finding ways to keep films from ever showing a profit and having to pay out percentages.

With luck, more information will soon come out, and we will learn more about the nature of the lawsuit and each side’s claims.

I’m afraid that for fans, the news can only be bad, at least in the short run. Even if the Tolkien Trust does not get to take the adaptation rights for The Hobbit back from New Line, this lawsuit, coming just as Time Warner is pondering what to do about downsizing New Line, puts the project on a very shaky footing indeed and will almost certainly mean yet another delay.

Briefly, the news is that the first court action in the case has been taken. A judge has fined New Line $125,000 for failing to produce certain documents and ordered it to come up with them and to pay for an independent search through their digital files (emails, etc.).

There has been amazingly little reaction to this news across the internet. A few fan sites and forums have commented, but only briefly. I suspect this is because most people have little basis for interpreting what the decision means. Some hail the ruling as a step in the right direction as far as the question of whether Jackson will direct The Hobbit is concerned. Progress at last. Others are frustrated because they assume it means that New Line is even less likely to offer him the job.

From right, New Line co-president Michael Lynne, Peter Jackson, and co-president Bob Shaye in happier days

I’m going to try and clarify the implications of the ruling by giving some background information about the case. As always, I have been told nothing by the people involved on either side. All the information I use below is available on the internet.

I’m not going into a lot of detail specifically on the developments in the negotiations over The Hobbit. I’ve been covering those since October 2 of last year. If you read the series of essays in the Hobbit film category in chronological order (i.e., bottom to top), you’ll get a pretty thorough history of the various public statements made by those involved and what they imply for the chances that Jackson will direct. Nothing that has happened subsequently has changed or challenged what I’ve said up to now. Here I’ll stick to the lawsuit.

Why did PJ sue NL?

When I wrote about the suit on January 13, the full text of the complaint was online. Unfortunately it has been taken down, and the link I gave there now leads only to an article describing the suit. It offers a brief summary of the complaint’s allegations:

Wingnut claims that defendants failed to (a) properly account, calculate and pay to Wingnut its share of the profits derived from the distribution and exploitation of the Film; (b) license, market and exploit the Film subject to reasonable business judgment exercised in good faith; (c) negotiate certain sales and licenses on an arm’s length non-discriminatory and customary basis in good faith, and (d) properly allocate license fees paid with respect to packages of defendants’ film properties that include the Film. It also alleged breach of various provisions of the Agreement.

“The Film” in question is The Lord of the Rings: The Fellowship of the Ring.

As I have pointed out, lawsuits by filmmakers against studios over secret or dubious accounting practices are not uncommon.

I mentioned that Saul Zaentz (owner of Tolkien related trademarks and the person who sold the production rights for Rings to Miramax) had sued New Line in July of 2005. His allegation was fairly straightforward. His contract gave him 5% of gross international receipts for Rings. He claimed the payment given him was calculated on the net receipts. He was, he said, owed $20 million. New Line soon settled out of court for an undisclosed amount.

Jackson’s allegations against New Line are far more complicated. I’m no lawyer, but as I understand it, clauses (b) and (c) and possibly (d) indicate that this is partly what is called a “vertical integration” lawsuit. Essentially this means that within big media conglomerates, one company may sell merchandising licenses, distribution rights, and various other contracts cheaply to another company within the same conglomerate rather than putting them up for sale to the highest bidder. The price being lower, less money goes to those who are getting percentages as royalties or residuals.

Such cases have been brought before. One of the most famous came in August, 1999, when David Duchovny filed a lawsuit against 20^th Century Fox. He claimed that his share of the profits from The X-Files had been unfairly low because “by licensing reruns of the series to appear on Fox’s broadcast and cable networks for less money than it could have fetched on the open market.”

X-Files fans will probably remember the case, since as the suit dragged on, there was the possibility that Duchovny would not appear in the 2000-2001 season of the program. Fox settled the suit out of court in May of 2000, and the actor was able to be in about half the episodes in that season. He had sued for $25 million and settled for Fox’s offer of $20 million. (See here for a summary of the situation.) His lawyer in the case was Stanton “Larry” Stein, head of Dreier Stein & Kahan LLP’s entertainment and media department. Stein specializes in such “vertical integration” cases. He’s one of the top—if not the top—specialist in them, with an impressive record of successes. (For a profile of Stein and further information on “vertical integration” cases, see here.)

Larry Stein is also Jackson’s lawyer in his lawsuit against New Line. Those fans who picture Jackson as the little guy risking being crushed by the Hollywood system can take comfort. His legal team is on a par with New Line’s.

New Line’s defense is not being handled by its own small in-house legal staff. Instead another big firm specializing in entertainment law is doing the job. Robert Schwartz, of O’Melveny & Myers, heads the team for the Jackson case—and headed the one on the Zaentz case mentioned above. O’Melveny & Myers typically defend big entertainment companies like Sony and Warner Bros.

Why the fine?

The $125,000 fine against New Line involves the first court decision in the case. The LA Times article gives the most detailed and vivid description of the ruling:

In an often angry ruling dated Sept. 18, U.S. Magistrate Judge Stephen J. Hillman found that New Line may have destroyed (or failed to prevent the destruction of) documents and failed to search diligently for documents and e-mails it was required by the court to produce. Hillman recounts any number of examples where the studio’s searches were not meaningful or “haphazard.” He was particularly critical of how New Line treated e-mails related to the film and its accounting.

“No witness can say with any degree of certainty what individuals searched their own e-mail files or how any of those searches were conducted,” the magistrate wrote. Furthermore, he wrote, “New Line did not suspend the automatic deletion of e-mails and other electronic documents as part of a litigation hold; instead, to this day, e-mails continue to be purged from every employee’s in-box every thirty days.”

Convinced New Line has not and will not scour its electronic records appropriately, Hillman instructed the studio to retain and pay for an outside document retrieval vendor within three weeks. He also said some New Line witnesses may face further depositions to discuss new documents that should have been produced earlier but weren’t.

The $125,000 in sanctions is intended to reimburse Jackson’s attorneys some of their costs in pursuing the documents. In July 2006, Hillman ordered New Line to produce sales and licensing documents the studio had argued were confidential and proprietary.

Most “vertical integration” and indeed other types of lawsuits brought against Hollywood companies are settled out of court, like the Zaentz and Duchovny ones. The reasons Judge Hillman gave for imposing the fine don’t bode well for New Line coming out on top if they do fight the case out in court. (The fact that the judge was “often angry” doesn’t, either.) And even if they eventually won, obviously details on the kinds of practices the judge lambastes would come out in public.

By the way, the practices described in this ruling would seem to refute any accusations from New Line officials and fans that in bringing his lawsuit Jackson was just being greedy. However much money he has already been paid, if the accounting was wrong and he is legitimately owed more, he should have it.

As I argued in an earlier entry, Jackson and partner Fran Walsh spent a lot of their own money to build up the facilities in Wellington where the trilogy was made. (I don’t know how much, but it was certainly multiple tens of millions of dollars, not including the ongoing overhead and employee costs.) Those facilities achieved an epic film for perhaps half what it would have cost if made in the U.S. Now Jackson has to keep his companies, with their hundreds of employees, in business. They’re doing well now, but a downturn in the film business in New Zealand could someday make keeping those companies functioning very, very expensive. With commitments of that kind, it’s no wonder that Jackson wants whatever he is owed.

Now what?

My best guess is that Judge Hillman’s ruling will be the move that finally breaks the logjam. Sooner or later New Line will settle out of court with Jackson. (What they do about the comparable amounts of money presumably owed on The Two Towers and The Return of the King is another matter, but it’s hard to believe that New Line would want another lawsuit or two.)

Would resentment make New Line cross Jackson permanently off the list of prospective directors for The Hobbit? I find it hard to believe. Fox didn’t fire Duchovny when they paid him the bulk of what he sued them for. They put him back to work. Indeed, the long-rumored X-Files film sequel is currently said to be going ahead after Fox settled a suit brought by its director, Chris Carter! That’s how things work in Hollywood.

This is business, and the firm’s executives know full well that Jackson’s name on The Hobbit would virtually guarantee its success. Another director might come up with a film that made nearly as much, but why take a chance? Where the bottom line is concerned, Hollywood companies can’t afford to hold resentments. Besides, MGM is co-producing the film and has said publicly that they want Jackson for it.

I’ve been predicting all along that there was a good chance that Jackson would end up directing (or at least producing) The Hobbit. I don’t see any reason to change my opinion. I’m just glad some progress has been made.

[Added September 24: Variety has run a story on the fine imposed on New Line, but the author discusses the case almost entirely in terms of it's implications for the current negotiations between the Writers' Guild of America and the Alliance of Motion Picture & Television Producers. No mention of The Hobbit.]

It continues, “A judge has fined New Line, the film trilogy’s financial backer, $125,000 ($NZ169,000) for failing to turn over court-ordered documents in the case.”

New Line has also been given three weeks to produce relevant audits of its files.

Up to now there had been no public announcement of what damages Jackson is seeking, but now his lawyers have told the New York Times that New Line may owe him as much as $100 million.

As more information about this decision emerges, I’ll try to sort out the implications.