In December of 1993, Payless Film Licensing Corp. ("Payless"), a California corporation, entered into two separate licensing agreements based on the American Film Marketing Association ("AFMA") Standard Form Multiple Rights Licensing Agreement with Good Guy Film Co. ("Good Guy"), a Canadian corporation, for two motion pictures for the German speaking territories (i.e. Germany, Switzerland, Austria, German speaking Belgium, and Liechtenstein). The first picture was an action, star driven A Title ("A Title") film and the other a specialty, critically acclaimed arthouse B Title ("B Title") film. Payless, along with Good Guy signed two (2) separate long form AFMA Multiple Rights Licensing Agreements and Payless paid Good Guy a twenty percent down payment to secure each deal with the balance of the minimum guarantee due under each contract payable on delivery of each picture.

Good Guy delivered B Title to Payless' designated laboratory in Germany and demanded payment for the outstanding portion of the minimum guarantee due to Good Guy in February of 1994. Payless' laboratory delayed approval of the delivery materials for over a month. Evidently, Payless instructed its designated lab to delay the approval and delivery process as long as possible as Payless was experiencing cash flow problems.. Good Guy was forced to send one of its own delivery personnel to the laboratory in Germany to supervise each and every step of the approval and delivery process, in order to obtain final approval of the delivery items sent from Good Guy to the German laboratory. Finally, after an approximate two month delay and great expense to Good Guy the laboratory had no choice but to approve the delivery materials as technically acceptable.

At this point, Payless had no alternative but to issue a check for the balance of the monies due to Good Guy for B Title. Payless nevertheless indicated that the Chairman of the company was experiencing extreme financial difficulties and at this point in time it was not in the position to pay the balance of the minimum guarantee due with respect to B Title. Payless therefore issued a check to Good Guy which was post dated. It was then in mid April of 1994 and the most important film market of the year, which takes place at the Cannes Film Festival in France was rapidly approaching, with a starting date of May 9, 1994.

As the Cannes Film Festival grew closer, Good Guy became more concerned about Payless' ability to make good on the payment, not only for B Title, but also the much larger payment due for A Title, which was then finished and ready for delivery. Good Guy offered to tender delivery of A Title to Payless, but in light of the problems that Good Guy had with the approval of the delivery materials at Payless' designated laboratory in Germany on B Title, Good Guy submitted the delivery materials to a different, independent laboratory in Germany and advised Payless that the materials were available for inspection and delivery at the other laboratory and demanded payment of the minimum guarantee due on A Title. In addition, Good Guy advised Payless that the Cannes Film Festival was approaching and indicated that Good Guy would make A title available for sale at Cannes to other German distributors if Payless did not tender the minimum guarantee due on A Title immediately.

Shortly thereafter Payless issued a stop payment on the post dated check that it had tendered for the minimum guarantee due on B Title and refused to tender the payment due on A Title, demanding that the materials be shipped to its designated laboratory in Germany among other demands. During this time, Good Guy conducted a credit investigation of Payless' credit standing and learned that Payless had defaulted on other payments due other companies and was, if not already bankrupt, very close to bankruptcy. Furthermore, in one of the face to face meetings between Good Guy and Payless, Payless' Chairman indicated that Payless was probably going to be discontinued shortly and a new company was about to be formed with the same principals running the company and conducting the same business as Payless - licensing films for resale in Germany. As far as Good Guy was aware, Payless would soon be out of business.

At this point in time it was late in April 1994 and Good Guy which had its own cash flow problems was very concerned that it did not have adequate assurances that Payless would perform its obligations under the A Title and B Title agreements, and could not afford to lose the opportunity to sell A Title and B Title at the most important film market of the year, the Cannes Film Festival. Good Guy again demanded in writing payment of each the minimum guarantees due with respect to A Title and B Title. When the minimum guarantees were not forthcoming from Payless, Good Guy then already screening A title at Cannes issued a simple termination letter directly from Cannes by fax terminating each of the agreements with Payless.

The Cannes screenings went well and Good Guy had 5 offers for the German rights to A Title. Good Guy proceeded to license A Title to a third party German distributor at the Cannes Film Festival and Payless immediately proceed to file an American Film Marketing Association arbitration claim against Good Guy for breaching the A Title agreement and improperly licensing A Title to a third party in Germany. Moreover, Payless moved to immediately register the actual title of A Title in Germany as its sole property. Under the German title registration system, Good Guy's third party German licensee was unable to exploit A Title in Germany free and clear of any liens, claims, encumbrances, or other interference from Payless.

Good Guy, a Canadian corporation, was now stuck in an arbitration in Los Angeles concerning a breach of the A Title agreement, as well as in litigation in Germany concerning the improper registration of A Title under the German Title Registration procedures. Good Guy ultimately had to abandon the German litigation as it became too costly and Good Guy was unable to convince the German court in temporary restraining order filing that the termination of the A Title Agreement was appropriate under California law.

Although the original and very astute crafters of the American Film Marketing Association Multiple Rights Licensing Agreement had seemingly thought of almost every situation that could arise in an international rights licensing situation, unfortunately in this situation the facts did not fall squarely within the provisions of the AFMA Multiple Rights Licensing Agreement. Although the facts and circumstances surrounding each agreement is different, it is suggested here that two additional clauses certainly would have been helpful in this particular fact situation.

1. A section similar to Uniform Commercial Code (UCC) section 2-609 (adequate assurance of performance) would certainly have been helpful in this situation.

2. An additional clause concerning a breach of one agreement being deemed a breach of a second agreement where the two parties are the same and the only difference between the two agreements is that there is a different picture and a different purchase price.

Unfortunately, in our particular fact situation, although Good Guy argued that UCC section 2-609 (adequate assurance of performance) would be appropriate grounds for termination of the agreement, the arbitrator found that UCC section 2-609 only applied to "goods" and not motion pictures, video cassettes, video masters, interpositives, internegatives, film stock, and the other intangible rights which are licensed in a motion picture licensing agreement. Additionally, the arbitrator found that although Payless had clearly breached the agreement under the B Title license agreement, that breach could not be construed as a breach of the A Title license agreement. The arbitrator held in favor of Payless for Good Guy's breach of the A Title licensing agreement and Good Guy was not allowed to go forward with its third party German licensing agreement and had to pay substantial damages to Payless.

The following is some suggested language that could be included in AFMA Multiple Rights Licensing Agreements to protect against this type of problem in the future. The language on the first provision is essentially taken from Uniform Commercial Code section 2-609 with some modifications and adjustments for the motion picture industry. The language makes it clear that the basic standards set forth in UCC 2-609 apply to the international licensing of motion pictures under the AFMA agreement. The following are the 2 suggested provisions:

I. THE RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE.

A. This agreement imposes an obligation on Licensor and Distributor that the other party's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party, the other party may, in writing, demand adequate assurance of due performance, and until such party receives such assurance may, suspend any performance for which such party has not already received the agreed return.

B. Between the Licensor and Distributor, the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to reasonable commercial standards within the motion picture industry.

C. Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance.

D. After receipt of a justified demand, the failure to provide within a reasonable time (not exceeding ten calendar days) such assurance of due performance as is adequate under reasonable commercial standards in the motion picture industry (i.e. tender or escrow of payment, or tender of technically satisfactory delivery) shall be deemed a repudiation of the agreement, and the agreement shall be deemed terminated.

E. The aggrieved party shall be entitled to pursue all of its legal and equitable rights and remedies in connection with such termination. In the event that the aggrieved party is the Licensor, all right, title, and interest in and to the Picture shall automatically revert to Licensor. In the event that the aggrieved party is the Distributor, all sums theretofore furnished to Licensor shall immediately be returned to Distributor.

II. A MATERIAL BREACH OF THIS AGREEMENT SHALL ALSO BE DEEMED A MATERIAL BREACH OF OTHER EXECUTORY AGREEMENTS BETWEEN LICENSOR AND DISTRIBUTOR.

If either Licensor or Distributor materially breaches this Agreement, the aggrieved party shall also have the right to deem such material breach a material breach of any other executory agreement between Licensor and Distributor, in which event the aggrieved party shall, with respect to this Agreement and any such other Agreement have available to it all of its rights, remedies, and defenses available to it at law or in equity in accordance to the terms of this Agreement, including without limitation the right to rescind, terminate, or suspend its performance under one or any of such agreements.

The foregoing are basic contractual provisions, and I'm sure the scholars can add to, subtract from, criticize, or otherwise improve the language. I welcome the American Film Marketing Association and other attorneys and practitioners involved in the international licensing of motion pictures to consider these or similar clauses in the drafting of future agreements, either in connection the AFMA's Standard Multiple Rights Licensing Agreements or in individual agreements between parties.

I hope this specific example has been helpful and illustrative of some of the problems that do arise in the international licensing of motion pictures. If you have any questions or comments please contact me your convenience.