Disney, Fox Used 'Hollywood Accounting' Tricks to Rob TSG of Millions, Alleges Suit

TSG has helped finance more than 140 Fox films since the parties struck their revenue participation agreement (RPA) in December 2021, said the complaint. TSG, “in good faith,” invested $3.3 billion with the defendants, it noted. The RPA, which was amended nine times, says TSG will co-finance with Fox production and marketing costs for certain Fox films, identified as “qualifying pictures,” for which TSG would receive a share of the defined gross receipts, said the complaint. The defined gross receipts would be Fox’s revenue from distributing the qualifying pictures minus certain “contractually agreed upon” distribution fees and expenses, it said.

The nature of the arrangement places TSG “at the mercy of Fox” to distribute and account appropriately for the defined gross receipts of qualifying pictures consistent with the terms of the RPA, said the complaint. For years, TSG relied on Fox to do so to the best of its abilities, which was theoretically in the best interest of both parties, it said. As years went by, TSG’s return on its investments in Fox films “decreased dramatically,” it said, leading the company to hire an auditing firm to examine Fox’s records to determine whether it was calculating defined gross receipts in compliance with the RPA terms.

Auditors found in sampling three of the 140-plus films “clear evidence of Hollywood Accounting,” which TSG defined as “the 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.” Fox (1) failed to credit TSG with revenue that its records showed “should have been included in defined gross receipts"; (2) charged TSG “tens of millions of dollars” in distribution fees that the RPA doesn’t allow; and (3) deducted from TSG’s defined gross receipts “tens of millions of dollars of purported ‘distribution expenses’” that had nothing to do with the distribution of the qualifying pictures, it said.

Auditors also discovered “rampant ‘self-dealing,’” which TSG described as a “sweetheart” arrangement in which a studio 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 RPA includes several provisions that protect TSG from self-dealing, the complaint said, but auditors found examples of “blatant self-dealing” in connection with Fox’s licensing of films to its affiliated FX Networks cable network, it said. Fox and FX had a “secret side deal for a fraction of what the parties had previously agreed was fair value” for The Shape of Water, it said.

TSG noted Disney’s restructuring of film distribution windows to benefit its streaming services, referencing public reports from November 2021 saying Fox convinced HBO to waive its exclusivity and allow Disney+ and Hulu to show films concurrently with HBO’s Pay 1 window. The move was beneficial to Disney, its shareholders and senior executives, but it “came at a great cost to TSG because such valuable waivers in the entertainment business do not come for free,” the complaint said. On information and belief, the “renegotiation of the Fox/HBO Pay 1 output deal cost Fox many millions of dollars that otherwise would have been reported to TSG as Defined Gross Receipts,” it said.

Subsequent renegotiations of deals that deviated from the traditional windowing of Fox’s films “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,” the complaint said.

By 2022, the strategies had “deprived TSG of the cash it needed” to fund future qualifying pictures, it said. From June 2022 to June 2023, TSG attempted to exercise its right to request that Fox make an offer for repurchase of TSG’s interests in 13 tranches of five qualifying pictures, but Fox refused, leaving TSG “unable to generate sufficient liquidity to fully fund certain new Qualifying Pictures, including Avatar: The Way of Water,” it said.

After TSG notified Fox of its intent to assert its rights legally, Fox and Disney informed TSG they planned to invoke a provision of the RPA that they claimed would force TSG to resell all qualifying pictures to Fox “at less than their true value and require TSG to waive all of its existing claims against Fox,” the complaint said.

TSG claims breach of contract and breach of implied covenant against Fox, intentional interference with contractual relations against Disney and inducing breach of contract against Disney. The plaintiff requests monetary and punitive damages, pre-judgment interest and attorneys’ fees and costs, the complaint said.