MOVIES : Hollywood’s Ledger Domain : A judge’s ruling in favor of Art Buchwald may put an end to studio accounting procedures that seem geared to make net profits vanish

‘Fatal Subtraction.” “Honey, I Shrunk the Gross.” “Profit Terminator.”

For years, Hollywood studio accounting practices have spawned some pretty witty lines. Even the filmmakers and actors who waited in vain for their checks to appear in the mail couldn’t help seeing some humor in their predicament. “The studios could publish their books as fiction,” mused one screenwriter who hasn’t seen a dime from his profit share in a hit movie.

But now Hollywood’s creative community--taking a cue from the latest chapter in Art Buchwald’s high-profile suit against Paramount Pictures--appears dead serious about confronting the studios. After first ruling that Paramount stole Buchwald’s story for “Coming to America,” a Superior Court judge on Dec. 21 dealt what may be a fatal blow to widely used practices of determining what share of a movie’s profits a studio will pay out.

Within hours of the ruling, copies of Judge Harvey Schneider’s opinion were flying off copying machines in law offices throughout Hollywood. Among the few producers, screenwriters and directors in town during the sleepy lull of the holidays, dozens placed calls to their attorneys. “This is amazing,” said one prominent entertainment attorney as he paused on Page 19 of the 36-page decision. “It’s like Romania declaring independence. You don’t know what’s going to happen next.”

This week, with most of Hollywood returning from vacations in Aspen and Maui and various fashionable fat farms, the real fireworks are expected to begin as members of the creative community consider legal challenges to their own contracts, while studio lawyers plot defensive strategies. “I expect a lot of lawsuits,” said entertainment attorney Peter Dekom, “especially from lawyers not in the business. Even if the studios win these cases, their legal costs will be huge.”

Negotiations on new contracts also could take on a different hue now that a judge has ruled as “unconscionable” the net-profit provisions that have become standard in most studio contracts. “Net profit (contracts) as we know them today will be dinosaurs,” insisted Buchwald attorney Pierce O’Donnell.

But some attorneys say the ruling could be disastrous for the studios. “This was an erroneous decision by someone who knows nothing about the entertainment business,” said Dekom. “And if carried to its extreme, all the studios will go out of business.”

Dekom contends that the net-profit formulas are designed to “award outrageous success on a modest basis.” The studios can’t afford to share much of their spoils on hit movies, he argued, because they need those profits to cover the costs of all their failures. “People don’t realize how marginal the profit margins of the studios are,” said Dekom, adding that the Hollywood unions representing writers, directors and actors should seek language in their contracts explicitly stating that these net-profit formulas are negotiable.

But others in Hollywood said the ruling was a long overdue one that will simply inject more equity into the bargaining process. “My feeling is that the Buchwald case will make a big, big difference,” said Mel Shavelson, three-time former president of the Writers Guild. “The check is going to be in the mail more often than before.”

Mike Simpson, co-chair of William Morris Agency’s motion-picture department, said that, at worst, the studios will simply stop giving out net-profit participations on top of salaries. At best, he added, the studios will opt for a more straightforward formula that might be pegged, for example, to a movie’s total ticket sales.

“I think the real significance of this case is that it will help level the playing field,” said O’Donnell. “The studios will be forced to bargain more fairly and reasonably. There’s been a raising of consciousness.”

All of this, however, assumes that Schneider’s ruling remains law. “That’s a big if,” said one Paramount attorney. After the ruling, Paramount officials immediately announced plans to appeal.

Buchwald, a Pulitzer Prize-winning humor columnist, together with his producer-partner, Alain Bernheim, originally sued Paramount in November, 1988, for $5 million, claiming that the studio turned their treatment, called “King for a Day,” into the hit Eddie Murphy movie “Coming to America” without paying them the money due under their contract.

The court sided with Buchwald and Bernheim early last year. But getting their money was a different matter. Under a 1983 contract, the pair was owed at least 19% of any net profits resulting from the movie. Although “Coming to America” sold more than $300 million in tickets worldwide and brought more than $150 million in revenues to the studio, Paramount claimed that it had yet to turn a net profit after accounting for such costs as overhead, interest and distribution.

“Coming to America” was far from the only hit movie to fail to turn a net profit because of studio accounting practices. Among others are “Big,” “Rain Man,” “Fatal Attraction” and “Honey, I Shrunk the Kids.” During the trial, Eddie Murphy--echoing the thinking of other Hollywood insiders--called net-profit participations “monkey points” because they are so worthless.

That’s why Hollywood’s most influential actors--and a handful of successful directors--seek a percentage of the gross instead. That is, they earn a chunk of the studio’s revenues on a film before studio overhead and distribution costs are subtracted.

But most actors, writers and directors don’t have that kind of leverage in their negotiations with studios. So they settle for complicated net-profit participation formulas--which run from 18 to 25 pages long--in addition to their salaries. Over the years, the studios have come up with increasingly complex ways of whittling down the pot of net profits. “This is a business of fantasy,” complains Shavelson, “but most of the fantasy takes place in the bookkeeping department.”

In his Dec. 21 ruling, Judge Schneider pointed to seven specific provisions of Paramount’s net-profit formula that he found unconscionable. For example, Paramount made a 15% charge for studio overhead and another 15% for Eddie Murphy Productions’ overhead. “In effect, this results in charging overhead on overhead,” Schneider wrote. The judge also criticized the level of advertising overhead and various interest-rate costs that were subtracted from Paramount’s revenues to determine net profits.

Paramount criticized the decision as going “far beyond existing law in permitting Buchwald and Bernheim to unilaterally rewrite their contracts to suit themselves.” Studio officials contend that the judge intervened to grant the pair a better contract, even though they were free to negotiate those terms in 1983 through their agents at William Morris.

The story would end at Paramount’s gates if it wasn’t for the fact that, as the judge noted, these same net-profit formulas are widely used by other studios. “Indeed, there is evidence in the record that Paramount’s net-profit formula is standard in the industry,” he wrote.

Schneider also concluded that Buchwald and Bernheim were forced to enter into a “contract of adhesion.” That is, during the negotiations Paramount enjoyed superior bargaining power and handed the pair a contract that was not really negotiable. On the net-profit provisions, Paramount basically said take it or leave it, the judge wrote. (Talent agents confirm that they rarely try to revise these formulas in contract negotiations, but the term “contract of adhesion” is usually reserved for things like the language on the back of your valet parking ticket. Hollywood attorneys were stunned that the judge applied the concept to the Buchwald-Bernheim contract.)

O’Donnell considers the “contract of adhesion” aspect of the decision possibly the most important. “The judge said that when you don’t have clout, there is a disparity in bargaining power and the court will scrutinize (those contracts) very carefully,” O’Donnell said.

With his twin victories so far in the Buchwald case, the 43-year-old O’Donnell has become a hero of sorts to Hollywood’s creative community but the nemesis of Paramount and its attorneys, who at one point accused him of feeding misinformation to the press and at another of doing a disservice to his clients. During the trial, O’Donnell proved nearly as colorful as his client, throwing out one-liners at every turn. (It was O’Donnell, not Buchwald, who came up with “Fatal Subtraction” and “Honey, I Shrunk the Gross.”)

“I was essentially the straight man, but Art would allow me an occasional one-liner,” says O’Donnell. “I do use humor as a tool in the courtroom. With humor, you could point out the absurdity of the situation.”

O’Donnell is a Jesuit-trained, former “Nader’s Raider” with law degrees from both Yale and Georgetown universities who unsuccessfully ran for Congress (a moderate Democrat from Pasadena) in 1980. He first met Buchwald back in 1975, when he was training under the flamboyant defense attorney Edward Bennett Williams, a close friend of the columnist.

Now a litigator with Kaye, Scholer, Fierman, Hays & Handler, O’Donnell has been involved in a number of high-profile cases: He represented the City of Los Angeles in a recent suit preventing the construction of a state prison in East Los Angeles; he was involved in the recent settlement that turned over Guess jeans to its original creators after a lengthy legal battle, and he represented NBC in the ‘Rockford Files” lawsuit that ended when Universal Television paid settlements to both the network and actor James Garner.

O’Donnell estimates that he received 150 calls from Hollywood writers seeking legal counsel after he won the first phase of the Buchwald case early this year. He didn’t take any of those cases. His phone is ringing again, but for the most part he is not encouraging to his callers. “People don’t realize that this case took a year of painstaking research and a million-dollar-plus legal bill” that Buchwald was willing to foot, O’Donnell says.

That doesn’t mean, though, that O’Donnell won’t be back in court with another studio after this judge concludes the Buchwald case in the next couple of months by determining exactly how much money Paramount must pay out. He insists the studio method of accounting for videocassette revenues is vulnerable to legal challenges. And if studio lawyers respond to the Dec. 21 ruling in the Buchwald case by trying to “play cute” and simply add a disclaimer to the net-profit provisions of their contract, O’Donnell warns, “they’re inviting years of litigation.”