I guess no one saw this one coming! Today the Tolkien Trust, a charity run by the estate of J. R. R. Tolkien, along with his long-time British publisher, HarperCollins, filed a lawsuit in Los Angeles Superior Court. The complaint is that New Line has failed to pay the author’s estate its share of the revenues from the Lord of the Rings film trilogy.

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.