Disney is being accused of hindering a deal between 20th Century Studios and TSG Entertainment Finance in an effort to boost Disney+ and Hulu subscriptions, stock prices and executive compensation. In a new lawsuit, TSG Entertainment Finance says an independent audit of three films including best picture winner The Shape of Water revealed it’s owed more than $40 million — after all is said and done, the company suspects the total will be in the hundreds of millions — and the cash shortfall has caused it to take a worse position in its investment in Avatar: The Way of Water.
TSG on Tuesday sued 20th Century Studios for breach of contract and Disney for inducing that breach. The financier says it has invested more than $3.3 billion into well over 100 films, which also include Bohemian Rhapsody, Deadpool, Dawn of the Planet of the Apes, The Martian, The Grand Budapest Hotel and The Banshees of Inisherin.
In a blistering intro, TSG’s attorney John Berlinski opened with discussing “Hollywood Accounting” and arguing that it’s now a common practice employed by studios to “cheat” profit participants out of money.
“Disney (and the executives running it) had and continue to have every incentive to do anything and everything they can, including manipulating distribution of the Qualifying Pictures and preventing TSG from liquidating its interests in certain tranches of Qualifying Pictures, to attempt to boost Disney’s share price at the expense of TSG and other profit participants,” writes Berlinski in the complaint.
Berlinski — who led Scarlett Johansson’s fight against Disney over her payment on Black Widow after it was given a simultaneous release on Disney+ and the stars of Bones in their profit participation dispute with Fox — described this as a “chilling example” of the practice.
TSG says 20th and Disney “have tried to use nearly every trick in the Hollywood Accounting playbook” to short them hundreds of millions of dollars. Their initial revenue participation agreement dates back to Dec. 31, 2012. Under the deal, which has been amended nine times since then according to the complaint, TSG would co-finance the production and marketing costs in exchange for a share of the defined gross receipts.
Over the years, the money TSG received from its investments “decreased dramatically” and the company launched an independent audit to investigate the financial records. Based on what the auditors found in their sample, they estimate that TSG’s defined gross receipts were reduced by at least $54.5 million from Electronic Sell-Through distribution and it was improperly charged $35 million in costs related to Movies Anywhere.
According to the complaint, those auditors sampled three films and found 20th failed to credit TSG with revenue, charged tens of millions in distribution fees not permitted under their deal, deducted expenses not related to the pictures in their slate and “uncovered rampant ‘self-dealing,’ the practice by which a studio enters into ‘sweetheart’ deals with its licensee affiliates to artificially minimize the profit payments to stakeholders like TSG.”
With The Wat of Water, for example, TSG alleges that 20th ignored a standing agreement with FX Networks that calculated license fees tied to domestic box office performance and “did a secret side deal for a fraction of what the parties had previously agreed was fair value.”
TSG also says it’s been damaged by changes in distribution windows.
According to the complaint, 20th had agreed to license films to HBO for the “Pay 1 window” from 2012 – 2022 for a reported $200 million per year. That changed in 2019 when Disney acquired 21st Century Fox. TSG believes Disney made 20th renegotiate its deal with HBO to boost Disney+ and Hulu and “give up a significant portion of its guaranteed HBO license fees” in order to do so — and that it shortened its home video window to get things up on its streamers faster.
“On information and belief, these deviations from the traditional windowing of Fox’s films — in spite of Fox’s express and implied obligations to TSG — were a direct result of Disney’s interference with the RPA in pursuit of its ultimate goal: to prop up its wholly- or majority-owned streaming platforms and the share price of its stock using content from other divisions of the company,” writes Berlinski in the complaint. “Moreover, as Disney’s own CEO, Bob Iger, has admitted, his company pursued this strategy recklessly and with little forethought. For example, during Disney’s August 9, 2023 earnings call—in which Mr. Iger announced Disney+’s second subscription price increase in a year—Mr. Iger admitted with respect to Disney+, ‘We grew this business really fast, really before we even understood what our pricing strategy should be or could be.’” (The complaint uses shorthand for 20th throughout by naming it as “Fox,” although Disney has since retired that moniker for 20th Century Studios.)
Because of all of this, TSG alleges, by 2022 it didn’t have the cash it needed to fund future pictures. So, it started exploring the “Qualified Picture Slate Repurchase Procedure” that was included in their agreement, which allowed TSG to request a repurchase of a group of five consecutively-released films. If TSG and 20th couldn’t come to a deal on a repurchase price, TSG could then market and sell the tranche of pictures to a third party to free up cash to fund future films.
From June 2022 through June 2023, TSG inquired about thirteen different tranches of films, according to the complaint, but says 20th wasn’t interested. Citing an email from Disney CFO Paul Shurgot as proof, TSG argues that Disney is interfering in its deal with 20th. Shurgot wrote: “While we don’t agree with your characterization of the agreement, we are open to finding a path forward to resolve this which makes economic sense. However, as discussed, we are not open to providing an offer on selected non-consecutive tranches that are among the most profitable tranches released to date, as doing so is counter to the agreement and would undercut our ability to recoup the TSG Additional Contributions.”
With no cash on hand, TSG says it had to take an advance from 20th to meet its funding obligations on films including Avatar: The Way of Water, which reduces its share of defined gross receipts and triggers a provision that entitles 20th to some of its profits.
“Perhaps most egregiously, after TSG informed Fox of its intent to file this action, Fox and Disney capitalized on Fox’s own breaches of the RPA in a bad-faith attempt to whitewash their misconduct,” writes Berlinski. “On August 11, 2023, Fox sent TSG an e-mail taking the position that, because it had previously issued the Fox Picture Advance, it was entitled to invoke a provision of the RPA that would purportedly allow it to repurchase all released Qualifying Pictures and extinguish TSG’s hundreds of millions of dollars of legal claims.”
Disney has not yet commented on the suit.