Clear Your Mind: Episode II – The Art of Negotiation

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Continuing the countdown to Episode IX, this week sports and media lawyer and lifelong Star Wars fan, John Devine, looks at what the saga can teach us about the negotiation process, pre-contract terms and the retention of rights.

“You must unlearn, what you have learned.” Yoda, Episode V: The Empire Strikes Back

 

As Yoda alludes, taking a step back to reflect on a fresh approach to whatever set of circumstances you are facing can often be the right way to proceed. Just because it is the conventional way of carrying on business does not necessarily mean it is right for you or your specific venture.

To illustrate, the core terms of the project for the original Star Wars (now Episode IV:A New Hope) were first set out in a short nine-page deal memo between the film’s distributor, 20th Century Fox, and creator, George Lucas’s company, Lucasfilm Ltd.

Lucas was to be paid $50,000 to write, $50,000 to produce and $100,000 to direct[1]. While these may seem like more than decent numbers for the mid-1970s, they should be viewed in the context of Lucas’s previous film, the hugely successful American Graffiti, which grossed over $100M from a modest budget of just over $1M and was, at the time, one of the top ten money-makers of all time[2].

See the bigger picture

Lucas was hot property so could have demanded higher upfront fees, particularly having written four scripts in pre-production and been paid for only one. Rather than argue about whether he should be paid for the re-writes, he took a different tactic with advice from his lawyers, the law firm of Pollock, Rigrod and Bloom.

The firm had helped Lucas to incorporate Lucasfilm Ltd and he had been working with Fox on Star Wars to agree the terms of the short form memo, which had initially been drawn up by Lucas’s production lawyer, Tom Pollock, in September 1974. By the end of 1975 it needed to be turned into a long form production-distribution contract.

Pre-contract documents can take many forms and often go by various names, such as deal sheets, heads of terms, letters of intent and memoranda of understanding. These can be binding in whole, in part or not at all, depending on the deal.

If binding in part only, each clause should ideally make this explicitly clear, with binding provisions typically relating to exclusivity, confidentiality and legal jurisdiction – the latter of which is important at an early stage if the deal is cross-borders.

These documents are often short form agreements which set out the core terms of the deal. They will get you so far but often, by their very nature, cannot deal comprehensively with the permutations and intricacies of each issue. As we will see, a long form contract is where the deal can be shaped to give you the best advantage.

Know your bargaining position

Tactically, Lucas decided to leave the initial figures of the ‘deal memo’ intact, since his key focus was twofold; firstly, securing the sequels for his company to make itself, his way, and, secondly, sweeping up any and all ancillary rights, including merchandising. Both issues had been addressed broadly in the deal memo, so it was now a case of finalising the terms.

In any negotiation, it’s important to recognise the respective bargaining strength of the parties and, while you may be presented with a standard form contract to consider, sometimes pushing back can be an appropriate stance to take.

Frustrated by Fox’s unresponsive approach to getting the contract documents in place, Lucas determined he would concede nothing.

A standard form template contract will typically be weighted in favour of the party which drafted it, so it’s important to have these checked so that you can ultimately decide what to do from an informed position before proceeding.

When Fox eventually got back round to raising the issue of the long form production agreement, Lucas said: “Fox had been working on the assumption that we would accept their standard form contract, while we had been working on the assumption that we would not accept anything. We said ‘this point isn’t right, and we don’t want this…’ and they were shocked because nobody had ever done that before”[3].

Prepare for all contingencies

As time drew closer to the production, the need to finalise the long form terms became increasingly pressing. The comments below from Lucas and his advisers are a fascinating and particularly telling insight into the working relationship between the astute creator and the professionals seeking to protect his interests.

Lucas said: “The longer it took, the tougher we got, because the more they dillydallied, the more our stock went up – and the more it looked like we could make the film somewhere else if we really had to. We were willing to take it from them. It was at least two years after we got the deal memo that they finally drew up a contract”[4].

Lucas’s production lawyer, Tom Pollock, said: “You have to prepare for contingencies that may never happen. What happens if the movie goes $4M over budget and Fox decides they want to take it over? You’ve got to fight that out now otherwise you will have no rights later. What if they want to take it away from George and re-cut it? What are our rights? Everything is negotiated out, every possible contingency”[5].

Lucas’s agent, Jeff Berg added: “There was an open area in the deal that was always ambiguous that had to do with the notions of sequels and publishing and merchandising and soundtrack; areas that were important to George since he knew the life of Star Wars would exist beyond the making of the first theatrical motion picture. So those were additional points that continued to be negotiated throughout the complete development phase of the project”[6].

Secure the rights you want

Fox was still bankrolling the production, but Lucas managed to walk away with the sequel rights and merchandising, so he could produce, amongst a host of other things, comics (with Marvel to build up interest in the characters and back story to the film prior to release), t-shirts and, of course, toys.

Lucas’s lawyer Jake Bloom handled negotiations with Fox: “They had a historic way of merchandising films and it was hard for them to understand our client’s position. We weren’t interested in a buck – we were interested in preserving whatever rights we could and making merchandising deals, if the upfront money justified the deal. We weren’t interested in making a blanket across-the-board merchandising deal, because we felt that if the picture was successful we would be selling out – and in the long run it would cost our client a fortune.”

With a few ‘deal-breakers’ still on the table (most notably chain of title and legal fees), Lucas recalled: “About three weeks before we were going to shoot, I gave Fox an ultimatum. I said, ‘I’m not going to shoot this picture until all these outstanding points are agreed upon’. Because once I’d started the picture, they would’ve had me. Once you start shooting, you don’t have any more leverage.”[7]

While commercial pressures can often encroach on the time for commencement of any project, it is always advisable to refrain from (if a supplier) delivering services or (if a customer) allowing a supplier onto your premises to deliver services until the terms are agreed formally.

If matters do not proceed smoothly, the inevitable dispute in the absence of settled terms will ultimately be more costly and problematic to manage.

The final total budget was set at $8.29M; which eventually overran by around $3M. Fox withheld $15,000 of Lucas’s director’s fee in the first instance due to the production overspend, but he ultimately recovered exponentially on the investment of his time and effort thanks to the foresight shown by Lucas and his advisers.

Their astute approach helped to retain the rights that were important to Lucas, both in terms of completing the arc of his story and giving him the creative freedom he wanted to achieve it.

Key lessons learned

  1. Pick your battles

Identify from the outset what is most important to you before entering any negotiations. For Lucas, this was fundamentally the ability to get the other two movies made exactly how he wanted, without third party influence.

It’s hard to imagine a studio agreeing to the risk of including a twist as monumental as the closing scenes of The Empire Strikes Back, but that was, in its creator’s view, the plot which served the story best. Sole control over final cut was essential. He was also happy to sweep up any and all of the ancillary rights which, at the time, the studio was not precious about; largely on the basis that, until then, they had yielded small returns to any rights holder.

  1. Fix a time for agreeing terms

Depending on which side of the deal you are on, be careful not to rely on pre-contract heads of terms for too long. Consider specifying a fixed time period in the heads by which the parties will negotiate in good faith to settle the terms of the long form agreement.

Move to this as soon as the likelihood of the project proceeding increases. The longer you wait, the more difficult it may be to dictate the terms, which may, of course, in some cases, be entirely tactical!

  1. Negotiate with professional advice

Consider whether contracting on a standard form contract is appropriate for your deal. Can terms be negotiated? If so, take professional advice to address your key priorities and, as Pollock pointed out presciently, what happens in the event of contingencies arising? If not, take advice to ensure you are in a suitably informed position before proceeding.

  1. Settle terms before proceeding

Don’t deliver or receive goods and/or services without first having settled terms. While the impasse may be used to focus the parties’ respective efforts on agreeing the final form of agreement, as Lucas demonstrated, it ultimately leaves both parties exposed to unnecessary risk and litigation costs if you proceed without settled terms and a subsequent dispute cannot be resolved.

Merchandising proved decisive

Star Wars merchandising ultimately allowed Lucas to gain his independence from the studio system and build a group of companies with defined purposes, including Industrial Light & Magic (special effects), Skywalker Sound, THX 1138 (digital surround sound) and Lucas Arts (gaming). These subsidiaries could pioneer the development of technology and the necessary facilities to take his personal vision forward without outside influence.

The merchandise, particularly the first 12 original 3 ¾ inch Kenner figures, are now much sought after collectors’ items; so if you happen to still have an original vinyl cape Jawa or telescopic lightsaber Darth Vader gathering dust in your loft, you could be in for a good Christmas!

The final word on merchandising has to go to Carrie Fisher (Princess Leia): “We signed our likeness away, so now every time I look in the mirror, I have to pay George a couple of bucks.”[8]

For more information or advice, please contact John Devine on 0191 211 7905 or email [email protected] and to read more episodes click here.

Note: Star Wars®™ and all related character names are copyright © and the exclusive property and trademarks of Lucasfilm Entertainment Company Ltd. LLC, which are referenced here only for the purposes of the illustration of legal concepts in general terms only. Muckle LLP is no way affiliated to nor associated or connected with Lucasfilm Entertainment Company Ltd. LLC, Lucasfilm Ltd.™ or LFL Ltd.™ or any of their respective film(s) or franchise(s). This document and its contents are not endorsed by LucasFilm Ltd.™ or any of its affiliates.
[1] Empire of Dreams documentary film, Lucasfilm Ltd, 2004
[2] The Making of Star Wars, J. W. Rinzler, p121, Del Rey Books
[3] The Making of Star Wars, J. W. Rinzler, p124, Del Rey Books
[4] The Making of Star Wars, J. W. Rinzler, p121, Del Rey Books
[5] The Making of Star Wars, J. W. Rinzler, p124, Del Rey Books
[6] The Making of Star Wars, J. W. Rinzler, p124, Del Rey Books
[7] The Making of Star Wars, J. W. Rinzler, p135, Del Rey Books
[8] Empire of Dreams documentary film, Lucasfilm Ltd, 2004