Greatest Error: Was The Hobbit One Film or Three?

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One of the greatest errors in contract history arose when Miramax sold the movie rights to The Hobbit to New Line Cinema. Here’s the story which, in honor of the trilogy fashioned from Tolkien’s fantasy work, is one in an installment of three posts on lessons lawyers and business people alike can learn from such debacles: yesterday I addressed whether the 9/11 attacks on the World Trade Center one occurrence or two for purposes of applicable insurance contracts? (see here for the answer) and tomorrow I will ask: when Sirius radio acquired another satellite radio service, was it obliged to pay Howard Stern $300 million because by doubling its subscriber base or not? Each story has inherent interest, a bit of drama, and useful lessons for contract drafting. These three stories will be in the upcoming second edition of my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter.

The Hobbit: One Film or Three?

In 1998, the film company Miramax sold New Line Cinema the film rights to J.R.R. Tolkien’s four books: The Hobbit: Or There and Back Again (“The Hobbit”) and The Lord of the Rings Trilogy: The Fellowship of the Ring, The Two Towers and The Return of the King. Miramax had spent $10 million developing screen adaptations of Tolkien’s classic fantasy works, which required considerable technological dexterity to produce. In exchange for the film rights, New Line paid $11.7 million and promised to pay royalties equal to five percent of the gross receipts of the “first motion picture” based on each book, excluding any “remakes.”

More technically, under a “Quitclaim Agreement,” New Line agreed to pay Miramax “Contingent Consideration,” defined as five percent of gross receipts, for “Original Pictures.” The Quitclaim Agreement defined “Original Pictures” to mean “the first motion picture . . . based in whole or in part” upon The Hobbit Book and each of the three books in The Lord of the Rings Trilogy and “excluding remakes.” The Quitclaim Agreement further provided that a motion picture constituted a film based on The Hobbit book if “the main story line of the book is substantially the same as the main story line of the movie, certain of the book’s events and characters are featured in the movie, or the title or subtitle of the movie contains the words ‘The Hobbit’ or ‘Hobbit’.”

Between 2001 and 2003, New Line released three Original Pictures based in whole or in part on each of the three books in The Lord of the Rings Trilogy. Pursuant to the Quitclaim Agreement, New Line paid Miramax total Contingent Consideration exceeding $90 million in connection with those three movies. In 2012, New Line released a new film based on The Hobbit book, called The Hobbit: An Unexpected Journey, as the first of another trilogy. It acknowledged an obligation to pay Miramax royalties on that film—and had paid $25 million—but not on the second or third in the planned series. Miramax objected, saying it was entitled to royalties on all three Hobbit-based movies.

Miramax contended that New Line was really making only one Hobbit movie, albeit in three installments. Unlike The Lord of the Rings Trilogy, with each film based on one book from that trilogy, New Line arbitrarily split the one Hobbit book into three installments, Miramax said. Miramax analogized this approach to a “long form television drama.” It stressed that “the three-part motion picture collectively tells the entire story of The Hobbit, with each installment telling only part of the story and the final installment, which bears the name of Tolkien’s book The Hobbit: Or There and Back Again, completing the telling of Tolkien’s story.” It observed that New Line had shot The Hobbit as a single motion picture and treated it as a single film for internal projections and budgeting.

New Line anchored its argument more specifically in the defined terms of the Quitclaim Agreement. It portrayed The Hobbit film as an Original Picture, as defined there, for any or all of these three separate reasons: (i) the motion picture tells substantially the same story as The Hobbit book; (ii) Bilbo Baggins is the lead character, and (iii) the motion picture has the word “Hobbit” in its title. Because The Hobbit: An Unexpected Journey is the first motion picture based “in whole or in part” on The Hobbit Book, it is the one and only Original Picture based on The Hobbit book as set forth in the Quitclaim Agreement. New Line argued that, “as a matter of basic contract interpretation and logic, there can be only one ‘first motion picture’ based on The Hobbit Book.” It said that picture—The Hobbit: An Unexpected Journey—was produced, released, and paid for. Ensuing films in the trilogy were outside the scope of the Quitclaim Agreement.

Just ahead of New Line’s release of the second Hobbit film, counsel for Miramax wrote to counsel for New Line outlining a request for additional royalties on gross receipts from it and the third film. When New Line balked, Miramax sued. New Line invoked the Quitclaim Agreement’s provision calling for all such contract disputes under it to be resolved by private arbitration. The arbitrator reportedly sided with New Line, apparently concluding that the first film means the first film and not the first installment of a three-part film. Whereas Miramax portrayed the case as about “greed and ingratitude” New Line’s corporate spokesperson laughed at Miramax, saying it had simply made “one of the great blunders in film history.” It may be one of the great blunders in contract history as well.

Lawrence Cunningham is a professor at George Washington University whose forthcoming books include the second edition of Contracts in the Real World: Stories of Popular Contracts and Why They Matter, which includes this story and fifty more.

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