Walt Disney Co. faces labor unrest two fronts. The company reports big losses in the streaming business. And now the Burbank-based giant is being sued by one of its key financial partners.
TSG Entertainment, a film financing company, has accused Disney and its subsidiary 20th Century Studios (earlier 20th Century Fox) for breach of contract and proprietary trading in a lawsuit filed Tuesday in Los Angeles County Superior Court.
In part, the financier’s lawsuit hits Disney for allegedly slashing “Sweetheart” deals to offer TSG-backed films on its own streaming services to boost subscribers while robbing the investor of significant revenue.
Disney did not respond to a request for comment on the lawsuit. A spokesman for the law firm representing TSG declined to discuss the case.
TSG claims to have invested more than $3.3 billion in the studios and funded more than 140 20th-century films, including recent hits like “Avatar: The Way of Water” and “The Banshees of Inisherin” as well various entries in the X -Men and Deadpool franchises.
The financier entered into a revenue-sharing agreement with 20th Century, the lawsuit states. It specified how TSG would receive a portion of the revenues from certain films in return for co-financing production and marketing expenses.
But after TSG found a declining return on its investments, the company hired an independent auditor to examine how 20th Century calculated its share, the lawsuit says — and “what the auditors did when they sampled just three of the more than 140 films in question.” found out”. clear evidence of Hollywood accounting.”
Overall, the audit reportedly indicated that 20th Century underpaid TSG “by at least $40 million.”
The allegations include that 20th Century TSG failed to credit TSG with the revenues required by the agreement and that the studio billed TSG millions of dollars in distribution fees that were not actually allowed under the agreement.
The lawsuit also alleges 20th Century “ownership,” including by licensing films to its cable affiliate FX for less than they were worth. (For example, $4 million was reportedly deducted from the price for Oscar-winning The Shape of Water).
“The derogatory term ‘Hollywood accounting’ refers to the opaque and creative methods major television and film studios often employ to cheat those involved in the profits of a television series or film out of their full contractual shares,” the lawsuit states. And Disney and 20th Century “have tried to use almost every trick in Hollywood accounting strategy to rob her.” [TSG] out of hundreds of millions of dollars.”
TSG also criticizes the timing of its funded films moving from theaters (the “Movie Window”) to distribution channels such as digital rentals, DVD and Blu-ray sales, television broadcasters and streaming platforms, including Disney+ and Hulu.
20th Century Fox had long contracted to license its films to HBO during the TV station deal window.
However, after Disney acquired 20th Century Fox in 2019, the lawsuit continued, the House of Mouse renegotiated the HBO deal — “and [gave] increase a significant portion of its guaranteed HBO royalties” – to also license films to Disney+ and Hulu, its in-house streaming platforms.
This served Disney’s goal of growing its streaming numbers at a time when the company was desperate to compete with Netflix. However, according to the lawsuit, “Fox and HBO renegotiated the Pay 1 issuance deal cost Fox many millions of dollars that would otherwise have been reported to TSG.”
Additionally, the lawsuit alleges, the new deals with Disney+ and Hulu were “sweetheart deals” that undercut the actual value Disney realized.
These and other problems ultimately led to a liquidity crisis that prevented TSG from financing future films covered by the revenue sharing agreement, the lawsuit alleges.
It’s not the first time Disney has faced legal challenges over the role streaming plays in its publishing strategies.
In 2021, Scarlett Johansson – star of many Marvel team films – will sued the company on her release strategy for her standalone feature film, Black Widow, which saw the film release simultaneously in theaters and on Disney+ for viewers willing to pay a fee to watch at home. She claimed she was stripped of box office bonuses as a result of the streaming plan.
As with TSG’s complaint, Johansson said she suffered financial damage because it was essentially a ploy to get more people to pay for the streaming service. Disney, in turn, blamed the move on the COVID-19 pandemic.
Johansson and Disney eventually settled the dispute.