William Peter Blatty made about $17 million from the hit movie version of his best selling novel, "The Exorcist." All very well, says Blatty - but it's not enough, not nearly enough.
The author has already spent about $200,000 in bringing a civil suit against Warner Bros., a unit of Warner Communications Inc. and the studio that bankrolled and released the movie. Blatty alleges that Warner Bros. cheated him out of his full profit share on the film through accounting filmflam, including the padding of expenses charged to the picutre. He wants $1.5 million in compensatory damages and $10 million more for punitive damages.
Warner Bros. President Frank Wells vehemently denies that the studio cheated anybody. In fact, he says, Blatty got a "highly advantageous" deal. Neither the studio nor the author seems inclined to compromise, and a rare court airing of key Hollywood business practices seems likely.
The court battle will be closely watched in the entertainment industry because its outcome could have an important impact on the was studios treat their profit participants - the writers, producers, directors and stars who bring the studios ideas and develop them into movies with studio backing in exchange for a cut of the profits. If Blatty wins his case, Hollywood's creative people could increase their slice of the pie at studio expense.
It's big pie. Over the past three years the seven major studios have paid out $831 million in profit participations and TV residual fees to producers, writers, directors and actors. The recipients claim that that is a lot less than they were really entitled to, however.
Hollywood's creative guilds are hopping mad about alleged creative accounting by the studios. Leonard Chasman, executive director of the Writers Guild West, says there is "general disillusionment and cynicism among screenwriters" about profit participation deals because the writer's profit proves illusory. Michael Franklin, executive director of the Directors Guild, complains of "widespread" studio finagling with the figures and says his members are "seriously concerned."
Disputes between Hollywood's creative people and its studios have become so common, in fact, that a mini-industry has established itself in Beverly Hills and New York to deal with them. It comprises accounting firms that specialize in auditing studio books on behalf of profit participants in hopes of finding errors in favor of their clients.
"Every successful movie is audited these days," declares David J. Bloom, a partner with the accounting firm of Berlfein & Co. of Beverly Hills. "There's a good reason: Almost every audit finds signifiant errors by the studios and more than pays for itself." Nathan Cohen, a Hollywood business manager and accountant, adds, "It's the only industry I know where they use two sets of books - one to show the stockholders how well they're doing and the other to show the profit particpants how bad things are."
Studio executives take violent exception to charges of rigged bookkeeping. Ralph Peterson, vice president and treasurer of Warner Bros., says, "We state unequivocally that Warner Bros. - and we believe this to be true of all major studios - applies the highest standards of integrity and fair dealing in making its computations of net profits."
That doesn't mean there are never any mistakes, the studios concede. In the example, well over 100,000 different transactions had to be entered on the books - in short, 100,000 possibilities for error. Indeed, a review of this film's books by Blatty's accountants and the studio disclosed many mistakes. Warner Bros. says it has already corrected $1,140,861 worth of errors and adjustments on the total accounting for the picture.
Though it isn't unusual for lawsuits to be filed by profit participants seeking what they consider their fair share, few of the suits ever reach a courtroom. A quiet out-of-court settlement, with neither party discussing the terms, is the usual outcome. Such settlements cut short recent suits by actors Sean Connery and Michael Caine against Allied Artists Industries Inc. over "The Man Who Would Be King" and by Robert Redford and director Sydney Pollack against Columbia Pictures Industries Inc. over "The Way We Were."
The studios point to the relative infrequency of lawsuits as an indication that squabbles over profit participation aren't as common or as serious as critics say they are. But creative people, along with their accountants, attorneys and guilds, say the real resaon is that actors, writers, directors and producers fear they won't get more work if they make too much trouble. And, they add, an individual usually doesn't have the financial resources to take on a big company that can "string out a lawsuit until doomsday with delays, appeals and other devices," as an official of one guild puts it.
Blatty, however, has plenty of money and determination. "I am not going to settle on the courthouse steps," he vows. "I would love to catch a reform-minded judge who agreed with my position and who would punish them severely. Not to be too cynical about it, this would probably have the refreshing effect of stopping this thievery for about three to five years. After that, they'll start all over again."
Like so many other filmdom squabbles, Blatty's suit centers on the movie industry definition of what comprises net profit on a movie; Warner Bros,' definition covers eight pages of opsque logalese. But generally speaking, until a picture recovers its production, promotion, distribution, and overhead costs and fees, for accounting purposes it is a loser and the "profit participants" don't get a nickel.
Blatty's original agreement with Warner Bros. gave him an initial payment of $500,000, made him the producer of the film as well as the screenwriter and assigned him 39 percent of the net profit. (He later yielded a 4 percent interest to his director, William Friedkin.) Net profit, the contract said, would occur for participants when the following conditions were met:
Gross receipts to the studio cover the production cost of the film plus a 15 percent surcharge for general support of the studio's production facilities.
Warner Bros.' advertising and promotion costs for the picture were paid, plus a 10 percent overhead fee for general support fo the studio ad and promotion department.
The studio took out its fee for distributing the movie, amounting to 30 percent of the gross receipts in the U.S. and more elsewhere.
Under such a contract, which is fairly typical, it is to the studio's advantage to charge as many expense items to the picture as it can. Blatty claims Warner Bros. went overboard in doing just that.
For one thing, "The Exorcist" was charged with $161,000 for payments to attorneys in civil antitrust cases involving two other movie companies and the Motion Picture Association of America, the industry trade group. Warner Bros. claims the contract includes allowable expenses for "dues and assessments of the MPAA and other associations." Blattty contends that the payments, besides being totally unrelated to his film, weren't dues and assessments because not all members of the MPAA contributed to them.
The studio also charged the film with $81,957 in Italian taxes on gross receipts, but Italy doesn't have such a tax. Warner replies that Italy is currently involved in a dispute with American movie concerns and could impose such a tax at any time, leading movie companies here to create reserves for that contingency.
Blatty is particularly incensed by another reserve, this for $133,366. It's for attorneys' fees incurred in any lawsuits that are brought against the studio in connection with "The Exorcist" - including his own. "How can they withhold money from me to fight my own lawsuit?" demands the author. Peterson of Warner Bros. says that the reserve will be eliminated when legal action is concluded and that Blatty won't wind up paying the studio freight for his own suit.
The author also wonders why his picture should be billed $16,000 for what he calls "sending Warner Bros. executives and their wives and sweethearts to resorts." The item was for expenses for trips to two conventions of theater owners, and Warner Bros. said that according to the contract such expenses are chargeable to the pictures being promoted at such meetings.
"The Exorcist" was also charged with another $26,000 for travel and entertainment expenses of studio and executives, a cost Blatty claims should have been included in the 10 percent ad overhead fee. Not so, says Warner Bros, claiming these were out-of-pocket expenses to stimulate press and exhibitor interest to stimulate press and exhibitor interest in the film. The contract, the studio claims, allows these items to be billed as direct costs.
Warner Bros. has agreed to adjust some items previously billed to the movie. These include a $452 tab run up by a studio executive at the swank Mauna Kea Hotel in Hawait; a $446 contribution to the 92nd St. Young Men's Hebrew Association in New York to "support an educational series on filmmaking" and a $556 party tab for a post-Academy Award bash at Chasen's, a Los Angeles restaurant.
The studio is hanging tough, however, on an alleged overcharge of $81,171 for cost of workmen's compensation insurance for employes on "The Exorcist." Complaints about overcharges on fringe benefits appear in most movie audits. In this case, Peterson of Warner Bros. says the formula used by the studio was "fair and equitable and based on actual payroll cost."
Warner Bros. also is resisting adjustment to a claimed overcharge of $37,987 on items purchased for the movie - including a huge refrigeration unit, a $6,000 oil painting, an antique rug and chandeliers.
Since Warner still has these in its possession, Blatty argues, they shouldn't be charged to the movie. Peterson says that the author will get his share when the items are sold, and adds disgustedly, "We can't sell or rent that huge refrigeration unit, or even give it away. All it does is take up space and collects dust." Blatty can have the unit, he says, or sell it himself if he can.
The author and his accountants are also protesting other alleged abuses, including improper calculation of interest charges, inaccurate calculation of foreign-exchange rates; unfair allocation of excess shipping and handling charges, and misclassification of certain expenses to production costs instead of distribution costs. Warner Bros. replies that these and other allegations are based on erroneous information and assumptions or represent the opinions of Blatty's accountants - who were, after all, hired to find errors on their client's behalf.
The biggest bone of contention, however, lies in an unusual special agreement that Blatty arrived at with Warner Bros. when production problems on "The Exorcist" began to push the production cost to an eventual $10.4 million from the $4 million originally budgeted.
Not knowing that the movie would be a smash - it has yielded $125 million in film rentals and is the biggest grosser in the studio's history - author began to fear that the swollen production costs would erase his chances of getting into profit at all. So he negotiated a new way of computing his profit participation.
He says he was able to get the revised agreements because he threatened a lawsuit against the studio alleging that he was producer in name only, had no real control over the rising costs, and would be penalized unfairly. Wells, the Warner Bros. president, says the studio acceded to the new agreements because Blatty threatened to bring out a Broadway state version of "The Exocist" at around the same time the movie would be released.
Whatever the reason, a deal was made ostensibly protecting Blatty. It stipulated that if the movie didn't reach a break-even point before gross receipts to the studio totaled $19,250,000, that figure would be considered an "artificial breakeven" and Blatty would begin to share in profits and be protected against the impact of production and advertising costs beyond that point. If the film did cover its costs before $19,250,000 was taken in, however, the original agreement would be in force.
According to Blatty's accountant, Bennett L. Bennett L. Newman of Solomon & Finger, Warner Bros. made sure that the movie would break even before $19,250,000 by reversing its usual accounting procedures. It accelerated income by logging it on the books when billings were made instead of waiting, as it ordinarily did, for the cash to actually come in. And it minimized immediate expense by charging as costs only those distribution expenses actually paid out instead of all those incurred, as it usually did. The result: At one point the studio could claim, using these accounting measures, that the picture had indeed broken even - although some of the "income" on the ooks hadn't cme in and all expenses actually incurred hadn't been listed as charges.
This, Blatty charges, prevented him from participating in the revised agreement, under which he would have been spared his share of about $3 million in additional advertising costs the studio would have had to absorb. Under the old agreement, he had to pay a proportionate share of them equaling about $1 million. He wants it back.
Wells, the Warner Bros. president, said that the agreement on an artificial break-even was the first and only time Warner has ever negotiated such a clause, and he adds: "It necessarily requires a different method of determining costs up to that point. The method we used followed what logically would have to apply, given that definition of net profits."
Blatty's suit is one of three actions that have been brought against Warner Bros. over participation in "The Exorcist." Director Friedkin sued, but the studio settled with him out of court. Writer-producer Paul Monash, who received $2.1 million from a 5-percent share of profit for screen rights, says he is entitled to more. His case is pending.
Monash is challenging a typical studio condition in profit participations, the "double add-on penalty clause." If a movie runs over its production budget, as "The Exorcist" did, studios commonly reserve the right to assess a cost item to it amounting to double the difference between the budgeted and actual cost, thus penalizing profit participants. The idea is to encourage the producers, directors and others to keep cost in bounds. Monash claims that since he had nothing to do with making the movie, he shouldn't be so penalized. Peterson of Warner Bros. says Monash is merely complaining that "he shouldn't have made the agreement that he did in fact make." Blatty didn't have such a penalty clause in his contract.