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TSG sues Disney over Fox film deals

The financier says Disney used creative accounting tactics and "sweetheart deals" to deprive the investment firm of revenue from around 140 movies.

The financier says Disney used creative accounting tactics and "sweetheart deals" to deprive the investment firm of revenue from around 140 movies.

The Alameda Avenue entrance to the Walt Disney Studios in Burbank, California as it appeared in 2016.
The Alameda Avenue entrance to the Walt Disney Studios in Burbank, California as it appeared in 2016. (Photo by Cool Ceasar via Wikimedia Commons, Graphic edited by The Desk)

A financier of live action films is suing the Walt Disney Company for alleged breach of contract involving movie deals for 21st Century Fox.

The lawsuit, filed this week by TSG Entertainment, alleges Disney made favorable deals for itself that allowed it to incorporate certain film content into Disney Plus and Hulu while depriving TSG of its share of revenue.

The complaint alleges Disney withheld hundreds of millions of dollars from TSG after the latter bankrolled more than 140 films — including “Bohemian Rhapsody,” “Avatar: The Way of Water,” “Deadpool” and “Hidden Figures.”

The films in question were distributed by 21st Century Fox, a film studio once owned by present-day Fox Corporation that was acquired by Disney in 2019. Fox Corporation is not named as a defendant in the lawsuit, but some of the allegations made by TSG happened when Fox owned the film studio.

TSG said its original financing agreement with Fox happened around late 2012, and was amended a total of nine times throughout the year. As part of the deal, TSG agreed to bankroll certain feature-length films, and Fox agreed to cut TSG in on a portion of the “defined gross receipts” after distributing the movies to theaters, on Blu-Ray and DVD and through television deals.

TSG said it relied on Fox to appropriately account for the defined gross receipts related to the films it financially supported, and the company credits Fox with doing so for years “to the best of its ability” in a way that benefitted both parties.

But, as time went on, TSG began to notice its portion of the defined gross receipts was starting to dwindle. TSG hired an independent auditor to look over Fox’s books, to make sure the company was in compliance with the terms of its amended deal, the company says in its lawsuit.

According to TSG, the audit turned up “clear evidence of Hollywood Accounting,” using a pejorative term that it defined as “opaque and creative methods frequently employed by major television and film studios to cheat those who share in the profits of a television series or film out of their full contracted-for shares.”

“The auditors also 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, who generally share only in the revenues received by the studio, excluding the revenues received directly by these licensee exhibitors,” the complaint reads. The practice went on, even though TSG’s deal with Fox precluded it from cutting such “sweetheart deals,” the company says.

Among other things, Fox was supposed to avoid licensing films bankrolled by TSG in a way that showed favoritism toward its own distribution products — which, at one point, included the Fox broadcast network and cable channel FX.

But, according to TSG, the audit revealed Fox — and, later Disney — ignored the terms of the original and amended deals intended to prevent such favoritism. It cited a licensing agreement that saw “Avatar: The Shape of Water” distributed on cable TV by FX, which TSG said earned the company “a fraction of what the parties had previous agreed was fair value.” Disney acquired FX as part of its purchase of certain Fox assets in 2017.

TSG said the FX deal was just one part of the problem. For years, films bankrolled by TSG and distributed by Fox would be licensed to HBO after they ran in theaters. TSG valued the deal at $200 million per year over the course of several years, with the original HBO agreement set to lapse in 2022.

But after Disney acquired Fox film and TV assets, the company reportedly began distributing TSG-funded movies through its own streaming services, Hulu and Disney Plus, to the detriment of the original deal with HBO, TSG alleges. The strategy involved a requirement that 21st Century Fox renegotiate its deal with HBO — which, apparently, involved leaving an unspecified amount of money on the table — in exchange for Disney securing the rights to distribute movies on Hulu and Disney Plus, at a substantial savings to the company.

But that savings meant TSG didn’t earn as much money from the films once they hit streaming services, because Disney didn’t charge itself anywhere near what HBO agreed to pay under the original agreement with 21st Century Fox, TSG alleges.

TSG said the entire situation ultimately meant it had less money to invest in other 21st Century Fox films, because Disney was allegedly depriving the company of its fair share. “But for this lack of liquidity, TSG would have fully invested in additional Fox films and reaped the full financial benefits associated with maximizing its investments in [the movies],” the company said.

The loss associated with this so-called “Hollywood Accounting” amounts to hundreds of millions of dollars in revenue, TSG claims. Representatives from Disney have not commented on the merits of the lawsuit. The case was first reported by the Wall Street Journal on Tuesday.

The case is at least the second involving a major financier of motion pictures and a media company tasked with distribution responsibilities, one that centers primarily around how streaming services are cutting into investor profits.

In February, Village Roadshow filed a similar lawsuit against Warner Bros Discovery (WBD), arguing that the company’s decision to put a sequel film of the blockbuster franchise “The Matrix” on its HBO Max streaming service simultaneously with the movie’s run in theaters reduced its ability to earn a return on that investment.

While streaming services are gaining in popularity among American movie and TV fans, theatrical releases still generate the most cash for those who have financial stakes in them.

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About the Author:

Matthew Keys

Matthew Keys is the publisher of The Desk and reports on the business and policy matters involving the broadcast television, streaming video and radio industries. He previously worked for Thomson Reuters, Disney-ABC, Tribune Broadcasting and McNaughton Newspapers. Matthew is based in Northern California, has won numerous awards in the field of journalism, and is a member of IRE (Investigative Reporters and Editors).