Economic analysis of the right to secondary remuneration

2013/3/14By Shi Bisheng Judge with the IP Division of the Beijing Higher People’s Court, S.J.D.,[Copyright]

Recently, the right to secondary remuneration has been one of the hot topics under discussion for revision in Chinese Copyright Law. In the second draft revision of the Copyright Law (second draft revision), Article 17, Paragraph 3 states that “...The original author, screenwriter, director, lyricist and composer shall have the right to receive a reasonable payment from any other person who uses such audiovisual work.” Article 36, Paragraph 3 provides that “The main performers shall have the right to receive a reasonable payment from any other person who uses such audiovisual work.”
The two clauses above denote more than one subject who is eligible for a “reasonable payment” or the “right to secondary remuneration” (the “right”), which includes the director, the original author, screenwriter, lyricist, composer whereas main performers (hereinafter referred to collectively as “director and others”). This also involves the movie and TV company—the producer—as an interested party.
Directors and others who qualify for the right support the revision, and movie and TV companies oppose it. However, is the right truly advantageous to the director and others, and disadvantageous to producers? The question is open for discussion. Another worthy question is whether the right is beneficial or not to the growth of the movie and TV industry in the current context of China.
I. Will it make the pie larger?
Will the right make a larger pie? The first answer is “No.” Whatever distribution strategy is applied between directors and others on one side and producers on the other side will not influence the market value of an audiovisual work, nor will it change the fee that a user is willing to pay for the work and the sales revenue from the work. The right is only an internal rule to distribute the market income between directors and others and producers, and will not increase the overall income of any given audiovisual work.
As to the second question, whether the right is beneficial to the growth of China’s movie and TV industry, the answer is “Yes.” If the right is more reasonable than the existing distribution rules, it will be more effective in encouraging the parties to create better audiovisual works. Indirectly, this will facilitate the development and make a larger pie for the movie and TV industry.
In other words, in economic terms, the value of the right depends upon whether it will improve the existing distribution rules and benefit the growth of the industry.
II.                 Advantages and disadvantages to directors and others
Under the existing distribution rules, directors and others and producers enter into a contract that defines how the revenue is distributed. The contract may specify a one-time fixed payment to directors and others, or an unfixed amount by arranging a plan to share the revenue. Reportedly, the secondary remuneration agreement was used for Sophie’s Revenge . While directing movies at Huayi Brothers, Feng Xiaogang received a fixed payment for directorship and a share of the box office receipts for his movies. As the executive producer and main actress, Zhang Ziyi agreed to share the ticket sales of her movie.
The one-time fixed payment may eliminate the possibility that directors and others will be paid for a second time if their movies generates an unexpected higher income. Whereas the revenue sharing plan may result in directors and others receiving less than they would have, from a fixed payment agreement, if their movie fails to make a profit. Whichever payment option is applied, generally producers will control the percentage of income that goes to directors and others so that their own share can be guaranteed. In other words, it is unlikely that directors and others will receive any amount higher than they should by opting for a different payment agreement.
For example, assume that the producer expects to get an income of 100 yuan on an audiovisual work, and intends to pay 50 yuan to the director and others. If a fixed payment can be agreed with the director and others, the amount acceptable to the producer would be 50 yuan. If an unfixed amount is agreed through revenue sharing, the percentage of payment acceptable to the producer would be 50%. If 20 yuan has been paid before, the secondary remuneration will not exceed 30% of the total income.
To arrange for a secondary remuneration by sharing the income may be advantageous to producers, they can ask directors and others to share the risks in connection with their movies. It may also be advantageous to directors and others in that they will be able to share any unexpected additional income.
In another example, assume the actual income is 90 yuan rather than the expected 100 yuan. If the fixed payment mode is used, the producer will have to pay 50 yuan to the director and others, with only 40 yuan remaining. In the revenue sharing mode, the producer will have to pay 50% of the 90 yuan, or 45 yuan to the director and others. Once the first payment, 20 yuan for example, is deducted, he will only need to pay 25 yuan in the secondary remuneration. In a third example, assume the actual income is 120 yuan, but not the expected 100 yuan. In the fixed payment mode, the director and others will not be eligible for the additional unexpected income. In the revenue sharing mode, they are eligible and will be paid 60 yuan.
So, for directors and others and for producers, neither the one-time fixed payment mode nor the twotime revenue-sharing mode can be said to be absolutely advantageous or disadvantageous.
Director Li Shaohong, an advocate for the legislation of the right, states that foreign directors can take time off between shooting movies, because they receive a payment for shooting the movie and a secondary remuneration so that their livelihood will not be affected. Chinese directors are like peasants who can only harvest wheat once a year. She believes that the right will enable Chinese directors to go into intensive and meticulous movie making.
This view, however, is questionable. The fundamental issue is that no matter how many times the payment is made, producers will not be paid any higher percentage than they had before. Only if the income from an audiovisual work exceeds the producer’s expectations will the director and others receive a greater amount in the secondary remuneration. If the income meets expectations then the payment remains unchanged, and the directors and others receive the expected royalties. If the market revenue of an audiovisual work is less than expected, the two-time payment mode will lead to a reduced payment for directors and others.
The one-time fixed payment mode, which cannot generate a more-than-expected income, guarantees a fixed amount for directors and others. The two-time revenue-sharing mode, which cannot guarantee a fixed income, provides the opportunity for directors and others to share any additional unexpected income. However, there is also the risk of receiving a reduced income should the work generate less revenue than expected.
Reportedly, the revenue-sharing mode was contracted in the recent box office miracle Love Is Not Blind. Because it was a low-cost movie, Director Teng Huatao suggested to Wen Zhang (the main actor) that he should give up any fixed payment, but instead to agree to sharing the possible income of the movie. The photographer and the executive producer also agreed to revenue sharing. The movie was an unexpected success and they received a share of the greater unforeseen revenue. Despite this, there must be examples where someone who received lower income as a result of revenue sharing.
As long as the contract is made through negotiation on a voluntary and equal basis, any payment mode shall be the result of the parties bargaining for their own interests, which should be deemed as a fair balance between the two.
III.It should not be forced by law
The revenue-sharing mode, as is contained in the right, has an additional advantage. It is somewhat like shareholding by employees. In one way, it can effectively encourage directors and others eligible for a secondary remuneration to make the best possible works at the lowest possible cost. The higher the income an audiovisual work generates, the higher the shared revenue the director and others will receive. This will create a positive stimulus for good quality audiovisual works with high market value. However, even without the direct motivation of the right, the indirect stimulus and benefits from a highly successful audiovisual work will still encourage directors and others to strive to produce the best possible works.
When competition and freedom of contract are well protected in the market, the negotiation between directors and others and the producers will finally reach a reasonable result. The balance of interests will be achieved automatically. When the parties reach a contractual balance of interests without interference, their freedom should not be forcibly restrained by law. If, as some believe, there are some factors that create inequality in the balance of interests between directors and others and producers, those factors should be eliminated to facilitate free competition in the market. One can never wish to regain the balance by legislating for the right.
Legislators cannot decide for others how much they should be paid for as a secondary remuneration. As long as no criteria are provided for in law, producers will not allow directors, screenwriters, lyricists and composers to require payments repeatedly; otherwise, the production cost will be greatly increased. A reasonable producer must protect his own interests by specifying a relatively lower amount as a secondary remuneration. The director and others will not receive an amount more than they are entitled too.
Any voluntary clause in the Copyright Law that directors and others can opt to be paid with two payments or with a single fixed payment will be meaningless and unnecessary, because even without such provision, directors and others are still able to negotiation payment clauses in their contracts. Any compulsory law that enforces producers to pay directors and others using the two payments model will create a restriction on the freedom of contract for producers, as well as directors and others.
As indicated, the percentage of the income that producers are willing to pay to directors and others will not be changed with different terms of payment. When it is uncertain whether the revenue will or will not exceed the expected amount, any legal interference will not always benefit directors and others. On the contrary, if made compulsory, the right will restrain any director or others who do not want to take the risk and intend to opt for a fixed payment. It will force them to share the business risks associated with the work.
Moreover, recovering the market income of audiovisual works takes a long period. If the right is made compulsory, producers will have to extend the term of payment. Reportedly, in China, over 500 movies are made a year and most of them cannot generate profit directly through ticket sales. Any compulsory provision on the right will result in producers reducing the amount of the first payment to directors and others. This will extend the term over which directors and others receive payment.
In addition, due to difficulties in enforcement, such compulsory provision will see more disputes arise. Currently, the Chinese movie market is not well regulated and “box-office stealing” is not unusual. Some producers even make false accounting of their ticket sales. In this situation, once the right becomes compulsory, the interests of directors and others will be affected by box office receipts which may lead to more disputes. Moreover, as directors and others are many and as the copyright in audiovisual works is often transferred, it will be almost impossible to accurately distribute the secondary remuneration to each and every of its intended recipient without the aid of a trade association. Now in China, trade associations have not attained dominance and their management level and executive capacity are yet to improve. The difficulty of enforcing the right will also lead to more disputes.
To sum up, neither the one-time fixed payment mode nor the two-time revenue-sharing mode will change the percentage of the income that producers are willing to pay to directors and others.
For directors and others, the right is advantageous in that they will be paid more if the income generated by their works is higher than what producers predicted. It is also disadvantageous in that they will be paid less if the income from their works is lower than the expected amount.
Thus, the right may not always benefit directors and others. Also, as it can be provided for in a contract with respect to payment terms, to make it a voluntary clause will be insignificant in law. Also, if made compulsory, the right will restrict the option of directors and others for their way of payment, and lead to more disputes and higher costs of enforcement due to lack of a mature system to support it.
Therefore, because of the freedom of contract, it is unnecessary and unsuitable to legislate for the right in Copyright Law.
(Translated by Ren Qingtao)

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