Since January 22nd, when Paramount Pictures announced their plan to offer virtual print fees directly to exhibitors, the news has been a frequent topic of conversation throughout the exhibition community.  It didn’t take long before a copy of the agreement began circulating through the industry, in large part thanks to the National Association of Theatre Owners.  With this year’s ShoWest less than a month away there is no better time to review the agreement in detail.

For those who have not seen a copy of the agreement, which is in draft form, it can be viewed on this post and downloaded here.  The first thing to take note of is that the document isn’t the size of a phonebook.  While many integrators VPF agreements can be upwards of 100 pages long, Paramount’s direct-to-exhibitor VPF is only 21 pages.  And just because the document is a draft of the agreement an exhibitor will ultimately sign doesn’t mean it’s going to expand.  After all, it’s not as if Paramount will be entering a brand new relationship with a highly leveraged third party.  The studio is entering an agreement with the same exhibitors they’ve been doing  business with for decades.

The agreement has 24 sections, one schedule and two exhibits.  Keeping in mind that I am not a lawyer, nor do I pretend to be, I’ll review each section pointing out some of the more pertinent bits and what they might mean for an exhibitor.  Some of the sections are standard boilerplate and will not be covered in as much detail.

The first few paragraphs of the agreement make up the usual preamble outlining the involved parties and their ongoing business concerns.  This is followed by:

Section 1 – Definitions
Almost every contract or legal agreement has a section that serves as a glossary that puts meaning behind some of the non-common words or phrases within the document.  Some contracts put this information in an exhibit at the end of the document, others put it right up front.  Paramount chose the latter and prefaces their agreement with all the meanings for acronyms along the lines of “DCI” and phrases such as “Booking Confirmation”, “Digital System” and “Wide Release”.  It actually makes a pretty good dictionary for digital cinema terms.

Pay close attention to the definitions for “Quality Failure” and “Security Failure” as they come up numerous times in the agreement, specifically in regards to when a VPF will not be paid if either occurs.  Per the agreement a Quality Failure is:

. . . .the malfunction of a Projection System resulting in two (2) or more consecutive missed exhibitions of a Digital Title.

Whereas a Security Failure is a breakdown of the DCI specified elements of a digital system or digital network that protect encrypted content from unauthorized copying and duplication such that the encryption is removed.  Put another way, if you’re equipment doesn’t meet the DCI spec and a film is pirated or copied so that it can be played back on non-DCI compliant devices, then you have a Security Failure.

Section 2 – Term
This two sentence section sets the period of time for which the agreement will be in effect.  What’s interesting here is the “Effective Date” has been left blank so it can be filled in with an agreed upon date, however an end date of February 28, 2019 has been typed in.  What Paramount may be telegraphing to exhibitors here is that they have no intent to pay VPFs past that date.

Section 3 – Installations
This is one of the most important sections of the entire contract.  It lays out precisely how long an exhibitor has to install digital cinema equipment in their theatres from the date the VPF agreement is signed.  Per the Section 3. (a) an exhibitor must install:

. . .at least fifty percent (50%) of the number of screens in each Exhibitor’s Complex(es), as listed on Exhibit “B”, no later than six (6) months from the Effective Date of this Agreement.

If an exhibitor doesn’t meet this deadline then Paramount is not obligated to provide 2D digital titles.  The timeline for a complete conversion of an exhibitor’s complexes is discussed in Section 3. (b):

Exhibitor shall install one hundred percent (100%) of the screens in each Ehxibitor’s Complex(es), as listed on Exhibit “B”, within three (3) years from the Effective Date of this Agreement.

Like the previous deadline, Paramount is not obligated to provide 2D titles to an exhibitor if they fail to meet the deadline.  In fact, if the exhibitor fails to install digital cinema equipment in the time specified, Paramount reserves the right to terminate the contract.  One of the more eye brow raising clauses here is Section 3. (c) which says an exhibitor only needs to install one 3D screen in each complex.  One would think Paramount should request more than one screen so that 3D releases could play simultaneously, or at the very least a 3D film could be moved between screens two or three weeks after release.

Section 4 – DCI Spec Compliance
Given all the work the studios put into the DCI Spec this section is practically mandatory.  While one might be tempted to skim over this section, believing they’ve previously heard all the DCI demands, there are some important pieces to each of the clauses.  For instance, an exhibitor may install equipment that is non-DCI compliant if the technology is not available on the market.  They than have six months to upgrade their equipment to meet the DCI Spec once the technology is commercially available.

Though not mentioned by their name or acronym, the importance of Facility List Messages (FLMs) to help with the delivery of keys is discussed.  There is a penalty should an exhibitor fail to send the proper information about their install base in a timely manner:

It is vital that Exhibitor provide detailed information to the digital distribution entity designated by Distributor about the Digital Systems that are installed which should include, but not limited to, digital trust certificates, manufacturer, model, serial number, firmware version, watermarking system, and 3D system (if installed).  In the event a key fails because Exhibitor failed to provide current information (e.g., a “server swap”), Distributor will charge a fee of one hundred dollars ($100.00) for each and every time Distributor is not informed.

Section 4 also contains a clause pointing to “Schedule 1” of the agreement which defines the capabilities of installed projection and  digital systems.  It requires one Library Management Server (LMS) per complex to act not only as a Theatre Management System (TMS) and content repository but also allow for the full automation of content receipts.  There is no exception for smaller complexes which have only one or two screens and may not have a need for a full blown LMS or TMS.

But even if they don’t need it, at least an exhibitor will own their equipment.  Unlike an integrators VPF deal, a clause in this section provides for the full ownership of the equipment to remain with the exhibitor at all times.  Finally, this section contains a statement, which all projector manufacturers will no doubt take note of, forbidding the deployment of any projector after December 31, 2009 that does not meet FIPS “Level 3” certification standards.  (Projector manufacturers are already well aware of this deadline and are working towards meeting it).

Section 5 – Changes To The DCI Spec
The title of this section says it all; if there are changes to the spec then both parties will negotiate in good faith as to whether upgrades will be made to installed equipment and if so, who pays for it.  Small exhibitors without an IT department may have trouble complying with some of the language at the end of the section without help from an integrator or third party to track and perform upgrades:

. . .Exhibitor will implement (a) any software upgrade to any DCI Component required by any amendment or modification to the DCI Spec that are made available to Exhibitor at no cost and (b) any upgrade required by any amendment or modification to the DCI Spec to the extent the combined costs of any such upgrades do not exceed $100.00 per Digital System in any single Contract Year.

Section 6 – Distributor’s Obligations Regarding Digital Releases
Like with traditional 35mm, just because an exhibitor installs digital equipment doesn’t mean they are guaranteed to get every film the studio releases, or so states this section of Paramount’s VPF agreement:

Exhibitor acknowledges that the decision of whether to license any particular Film to any particular Complex or Screen lies entirely within Distributor’s unilateral discretion.  Distributor licenses its motion pictures on a picture-by- picture, theatre-by-theatre basis.  Nothing contained in this Agreement obligates Distributor to license motion pictures to a specific theatre even if the theatre possesses a fully operational Projection System.

This last sentence is meant to avoid any claims of “block booking” or the practice of not letting an exhibitor book a future film if they don’t book a current, possibly smaller title.  Paramount also protects itself by explaining that digital prints may not be available in certain cases, such as when they don’t control the distribution rights, when they acquire a film made by a third party which did not provide digital assets, when they distribute a film on fewer than 500 screens in the first four weeks of release or when they are prevented from distributing a digital title due to a “star talent agreement”.  This last instance was learned first hand by Paramount when Steven Spielberg threatened he wouldn’t let “Indiana Jones and the Kingdom of the Crystal Skull” be screened digitally.

The first mention of Quality Failure comes in this section.  In an effort to maintain playdates on equipment that has malfunctioned, Paramount  is allowed to supply a film print at their own discretion.

Section 7 – Distributor’s Obligation Regarding Virtual Print Fees and Watermarking License Fees
As important sections go, this one ranks right up there with installations as it lays out precisely when an exhibitor will receive a VPF.  The language can get rather tricky and seem like double speak at times, but upon close inspection is actually quite simple.  Paramount will pay a VPF or weekly print fee (WPF) for every screen that one of their films is booked on, but will not pay a fee for:

• trailers
• short films less than 15 minutes
• moveovers
• interlocks on a screen not booked by Paramount
• re-releases within the first six months of release
• second run releases, promotional screenings or screenings during non-peak hours (such as children’s shows)
• private or non-commercial screenings where no admission is collected

Section 7. (b)(i) really underscores the necessity for an exhibitor to convert 100% of their screens to digital.  Should an exhibitor decide to move a digital title to an auditorium that can only screen film and a new 35mm print needs to be created, then Paramount will receive a VPF/WPF credit, negating what it paid for the original booking.  However, if a used 35mm print can be shipped no credit will be owed.  Another instance where Paramount will receive a credit is if a new 35mm print has to be struck due to a Quality Failure of digital cinema equipment.  If such a failure occurs 3 weeks after the national release date of a film, then Paramount will only pay 50% of the VPF/WPF.

The last paragraph of this section almost seems as if it could have gone in Sections 4 or 5 which deal with the DCI spec.  It mandates the use of watermarking technology from Thomson or Philips.

Section 8 – Record Keeping and Audits
The rules set forth in this section are somewhat similar to the ones exhibitors follow today when dealing with film.  In the case of digital, the exhibitor is required to maintain all their records for seven years up to 12 months after the agreement ends.  Paramount has the right to have an independent auditor look over an exhibitor’s books at their own expense.  If an exhibitor wants to dispute any VPF/WPF payment they have 60 days to do so.

Section 9 – Liability
This section is included partly to protect both the exhibitor and Paramount in specific instances of Quality Failure and Security Failure.  The Exhibitor is protected from being held responsible for faulty digital cinema equipment, provided they aren’t negligent with maintenance.  Should negligence be the cause of a Quality Failure during the run of a digital title than the exhibitor will be required to pay Paramount a VPF/WPF credit.

One of the important clauses in this section has to do with piracy.  If the exhibitor has notified Paramount of a Security Failure on specific digital equipment and Paramount decides to playback a digital title on that equipment anyway, the exhibitor will not be liable for any piracy that occurs.

Section 10 – Excluded Costs
Just to be clear exactly what financial obligations Paramount is taking on with the agreement  they put in this section to explain what they will and will not pay for.  Here’s what they are on the hook for:

Distributor is responsible for any and all costs of digital content preparation and distribution, including any and all costs relating to producing, encoding, encrypting, packaging, watermarking (other than watermarking which is part of the DCI Spec) and marketing Digital Titles.  Distributor is also responsible for costs of Key generation, key delivery and key management.

It’s unclear if Paramount means they will not only be responsible for costs associated with key management on their own end but also the exhibitor’s, though that’s highly unlikely.  When it comes to digital cinema, Paramount is not paying for anything other than the equipment itself through the VPF/WPF.  This includes such costs as installation and training.

Seciton 11 – Non-Exclusivity/Non-Interference
Though only one sentence, this section is noteworthy because it allows both parties to enter digital cinema deals with other companies.  For an exhibitor, this means they will be able to sign on with an integrator at a later date should they wish.  (More on that in Section 15).

Section 12 – Press Release
This is the usual muzzle clause which prevents either side from discussing specific deal points with the press.  The only reason we are able to write about the contract here is because it is in draft form.  Rest assured, we’ll never be reporting the nitty-gritty bits of a specific VPF agreement an exhibitor might sign with Paramount.

Section 13 – Most Favored Terms
Along with Section 3 on Installation and Section 7 on Virtual Print Fees, this section is extremely important.  Boiling all the language down to its core, it means if an exhibitor signs an agreement for a lower VPF with another company then Paramount must be notified and the studio reserves the right to lower its own VPF to the new amount.  Section 13. (a) e says it all:

If during the Term of this Agreement, Exhibitor grants any third party the Term for any other Film, under a comparable program with respect to other digital agreements, Exhibitor will entity a lower VPF or WPF during extend the option to offer such better and/or lower terms and conditions to Distributor.  Such option shall be at Distributor’s sole discretion.

And don’t even think about failing to notify Paramount of a deal with lower VPFs, for should they find out about it there are hefty penalties to pay.  The agreement even goes so far as to provide an equation for how to calculate such a penalty:

Double the monetary difference between Paramount’s VPF/WPF and the lower VPF/WPF and then mulitply by that figure by the number of VPFs or WPFs Paramount paid from the effective date of the lower VPF/WPF deal.

As if that wasn’t enough incentive to be straight with them, should Paramount levy such a penalty on an exhibitor the studio won’t pay any VPF or WPF until it is paid in full.  The only exception to the most favored nations clause comes in Section 13. (c) for any film that is exhibited in less than 50 theatres in North America at any one time.  This is squarely aimed at deals an exhibitor may cut for smaller films or with independent distributors.

Section 14 – Partial or Complete Termination for Quality/Reliability Failures
If the exhibitor experiences a Quality Failure on a digital system or projection system more than three times after the first six months of being deployed or if an exhibitor does not fix equipment that goes down within seven business days, then Paramount has the right to terminate the agreement for that system only, not for all installations in all complexes.  Simple, yet very important if you don’t want Paramount threatening to pull the plug every time a server goes down.  As is customary in such clauses, there is an exception made for force majeure events.

Section 15 – Termination/Other Remedies
This section details three additional events that allow Paramount to terminate the contract:

• If the exhibitor files for Chapter ll bankruptcy projection.
• If the exhibitor does not pay any monies owed within 45 days of being notified of delinquency.
• If the exhibitor signs up with a digital cinema integrator.

This last statement gives an exhibitor the freedom to sign with an integrator that Paramount has a standing VPF deal with when and if they chose to.  However there is a huge catch that integrators can’t be too happy about; the exhibitor (and presumably the integrator) must pay Paramount back for 100% of the VPFs/WPFs paid to date.  If a mid-size exhibitor is three years into their deal with Paramount that could be huge chunk of change to come up with all at once.

Section 16 – Indemnification
The bane of any business person trying to close a deal is the indemnification section as lawyers love to tweak and toil with its boilerplate language up until a signature pen touches an executable hard copy.  The indemnification section in the Paramount VPF is the standard “you don’t drag us down, we don’t drag you down” variety.  There is nothing all that special about it, though don’t be shocked if your lawyer finds something within it to complain about.

Section 17 – Warranties
Like the Indemnification section above, this section is almost always included in such contracts to represent certain facts which have no doubt been stated earlier in the document in some other fashion.  In the case of the Paramount’s VPF deal, the exhibitor agrees that all their digital cinema equipment will meet the DCI Spec and that they will use best practices when installing their systems.  Paramount guarantees that it will not knowingly give an exhibitor a computer virus, that the digital titles will be free from errors and that they will use best practices to provide digital titles to the exhibitor.  They also acknowledge an understanding that an exhibitor has to work within the limits of certain manufacturer warranties when repairing or upgrading equipment and software.

Sections 18 – 24
At this point, almost as if Paramount’s lawyers knew everyone would be tired of ferreting out all the important information, the agreement falls into the usual pattern of obligatory sections filled with the standard legal speak that comes at the end of a contract.  Section 18 deals with assignment, Section 19 with Force Majeure, Section 20 focuses on the relationship between both parities, Section 21 gives instructions for how to deal with any additional documents and Section 22 provides mailing addresses for any notices being sent to either party.

Two additional items worth pointing out in the main body of the agreement come in Section 23 (Sales Tax) and Section 24 (Miscellaneous).  Paramount will not pay the sales tax on any equipment purchased when calculating the amount to be reimbursed.  With digital systems costing upwards of USD $80,000 that could mean the exhibitor is stuck paying as much as USD $4,800 per installation should the tax rate average 6%.  Combined with any down payment they must make on installations, an exhibitor may have to fork over a huge amount of capital to convert a circuit with upwards of 100 screens.

The noteworthy bits in Section 24 have to do with choice of law and jurisdiction.  The entire agreement will be governed under California law and any disputes that arise will be settled in a Los Angeles courtroom.

Exhibit “A” – VPFs/WPFs
Most who get their hands on a copy of the Paramount VPF agreement will more than likely flip straight to this page which highlights the actual amount of the VPF Paramount is willing to pay.  Before diving directly into the financials however, it is necessary to understand that Paramount will be splitting theatres into two groups; “Category A” theatres are those that play films upon their national release and “Category B” theatres are those that play films several weeks after their national release.  Category A theatres will receive VPFs, while Category B theatres will be paid WPFs.  The amounts are as follows:

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Paramount will not pay a VPF for any title in excess of the aggregate film rental an exhibitor would pay for any title.  Translated, this means if Paramount only makes USD $500 in film rental off of a 3D digital title in a specific complex, they aren’t going to pay USD $825 to the exhibitor.  Instead, they will pay USD $500.  Likewise, Paramount will not pay a WPF that is more than the weekly film rental of a given digital title in a Category B theatre.  In other words, if Paramount is owed USD $200 in film rental for a given 2D title in a given week, then they are not going to pay the USD $242 WPF, but only USD $200.

Other than Exhibit B, which is meant to list out a theatre owner’s complexes, that’s the end of Paramount’s VPF agreement.  It should be reiterated that this is only a draft of the agreement and it may change over time.  If you have any questions, comments or corrections about anything that’s been reviewed in this post, please feel free to leave a comment below.