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CURTAINS FOR TINSELTOWN ACCOUNTING?
Art Buchwald thought it was a funny story. So, apparently, did Paramount Pictures Corp. A California judge ruled last January that the studio used Buchwald's idea when it made its 1988 blockbuster Coming to America. Most trials might have stopped there. But in determining how much money Buchwald and Hollywood producer Alain Bernheim are due, Los Angeles Superior Court Judge Harvey A. Schneider has effectively put Hollywood's often mysterious accounting practices on trial.
On Dec. 23, Schneider ruled that Paramount, a unit of Paramount Communications Inc., had forced Buchwald and Bernheim into an "unconscionable" agreement on fees. The judge threw out the contract the two men had signed with the studio in 1983 for the rights to Buchwald's script, which he called King for a Day. Attorneys for Paramount say they will appeal all aspects of Schneider's decision. But if it stands, the ruling will almost certainly shake Hollywood's decades-old system of giving "net profit" deals to the writers, producers, and actors who make its films. And it could invite a wave of litigation from creative types who think they got a raw deal from the studios on past pictures.
EMPTY-HANDED. Even before Schneider's decision, the year-long trial had cast a spotlight on Hollywood's frequently criticized accounting. While Coming to America generated more than $125 million in revenues for Paramount through late 1989, the studio told Schneider's court that the film posted an $18 million deficit. But that "loss" came after deducting such costs as the interest the studio would have earned if it had banked the film's $58.4 million budget instead of spending it on moviemaking.
Paramount also loaded down the income statement of Coming to America with such items as $3.7 million paid to house star Eddie Murphy's office staff. An additional $1 million was spent on his "entourage"--including a valet, bodyguards, and a personal trainer. Then there's the $256 paid to a local McDonald's. The Buchwald camp contends that's the check Murphy's entourage ran up in one sitting. Paramount says it was the tab for buying Egg McMuffins for the film's extras.
With all the charges, Buchwald and Bernheim, who were entitled to a piece of any net profits, would come away empty-handed under Paramount's accounting. "By skillful manipulation of its rights under the net profit participation agreements, a studio can . . . literally profit by spending more than it takes in," said Max E. Youngstein, a former principal at United Artists Inc., in a deposition on behalf of the Buchwald team.
How skillful Paramount was is the question that Judge Schneider wants answered. He's focusing on seven areas in the contract. Among other things, he wants to know if the studio should have assumed that an interest-bearing investment would have earned 125% of the prime rate and whether overhead charges--set at 15% of the movie's production budget plus 10% of its advertising budget--were excessive.
Paramount contends that such accounting practices are the very foundation on which most Hollywood studios operate and that they are needed to ensure a healthy rate of return in exchange for shouldering the risks of making films that often flop. "If Coming to America bombed, how much money would it have taken out of Buchwald's pocket?" asks Charles P. Diamond, an attorney at O'Melveny & Myers who is representing Paramount. "What the judge seems to want to do is to regulate us like a utility. He doesn't know how much it would have cost us to go to Security Pacific to borrow the money for the film, or what our costs really are." For that matter, few outside the studio know Paramount's cost structure, since it has allowed only the barest glimpse of its books.
NOT STUPID. Some Hollywood execs nervously wonder just how closely Schneider will examine the way studios hand out profit-sharing deals. Buchwald and Bernheim had to settle for a piece of the illusory net profits because they are relatively far down the Tinseltown status chain. Murphy and director John D. Landis, on the other hand, took a combined $11 million out of the film thanks to a so-called gross-participation arrangement with the studio.
Judge Schneider intends to rewrite Paramount's contract with Buchwald and Bernheim, but it will be months before he settles on the final form. Even if his controversial decision is upheld, Hollywood lawyers aren't sure how the studios will react. "Studio people aren't stupid, and they'll do what's necessary to protect their bottom line," says Beverly Hills attorney Robert J. Enders Jr., who negotiates contracts for writers and directors. Enders says that if studios must give creative people a greater piece of the action, they will make up the difference by paying less in up-front salaries.
The Paramount camp insists the status quo won't change. "This decision doesn't have a snowball's chance in hell" of being upheld, says attorney Diamond. Still, few people thought Art Buchwald's case would get as far as it has. For the moment, at least, it is Buchwald who is laughing the loudest.Ronald Grover in Los Angeles