Royalties and Participation Protection

💡 Plain English Explanation

The Royalties and Participation Protection clause safeguards the financial backend of entertainment: revenue shares, residual payments, profit participation formulas, and the complex accounting that determines who gets paid what. These arrangements are among the most sensitive and contentious aspects of entertainment deals.

"Net profits" definitions and participation formulas are legendary in Hollywood for their complexity and controversy. When these terms leak, they affect negotiations across the industry and can spark disputes between participants who discover others received better terms. This clause ensures that the intricate financial architecture of entertainment deals remains confidential.

This clause typically addresses:

• 1
  What participation terms are covered? Gross and net definitions, profit participation percentages, breakeven calculations, and waterfall structures.
• 2
  How are residual arrangements protected? Guild residuals, supplemental markets payments, and reuse fees across media windows.
• 3
  What accounting information is confidential? Participation statements, revenue reports, deduction schedules, and audit findings.

⚠ Why This Clause Matters

For Studios and Producers: Participation structures are carefully calibrated financial instruments. A producer who discovers a writer received a better net definition will demand renegotiation. Leaked participation formulas become industry benchmarks that constrain future deals. Confidentiality preserves flexibility in structuring arrangements.

For Talent and Profit Participants: Your participation terms reflect your negotiating leverage and market position. Protecting this information prevents others from using your deal as a ceiling or floor in their own negotiations. It also preserves your ability to truthfully claim uncertainty about comparables.

For Financiers and Investors: Understanding the participation stack is essential for investment decisions. But revealing waterfall structures and priority positions could affect other participants' willingness to participate in future projects. This clause balances transparency for due diligence against broader confidentiality needs.

📄 Clause Versions

"Royalty and Participation Information" means non-public information concerning revenue sharing, profit participation, residuals, and related financial arrangements, including but not limited to:

(a) Participation Terms: Profit participation percentages, gross participation points, net profit definitions, adjusted gross definitions, and any formulas or calculations used to determine contingent compensation;

(b) Waterfall Structures: Priority of payments, recoupment positions, corridors, ceilings, floors, and the relative positions of various participants in the revenue distribution;

(c) Residual Arrangements: Residual rates, supplemental markets formulas, new media compensation, foreign levies allocation, and any arrangements for payments beyond initial compensation;

(d) Accounting Information: Participation statements, revenue reports, gross receipts data, deduction schedules, overhead charges, distribution fees, and any financial reporting provided to participants;

(e) Definitions and Formulas: Definitions of gross receipts, net profits, breakeven, rolling breakeven, and any customized definitions in participation agreements; and

(f) Audit Information: Audit findings, settlement amounts, accounting disputes, and any information obtained through participation audits.

Royalty and Participation Information shall remain confidential regardless of whether such information appears on participation statements or other regular accountings. The Receiving Party may disclose such information to its accountants, auditors, and legal counsel for the purpose of verifying or enforcing participation rights, provided such persons are bound by professional confidentiality obligations.

"Royalty and Participation Information" means any and all information, in any form, concerning revenue sharing, profit participation, residuals, royalties, contingent compensation, and financial accounting related to entertainment projects, disclosed by or on behalf of the Disclosing Party or to which the Receiving Party gains access, including without limitation:

(a) All Participation Terms and Structures: Including gross participation points, adjusted gross participation, net profit participation, backend points, first-dollar gross, modified gross, and any hybrid or customized participation definitions; participation percentages and tiers; accelerators, reducers, and adjustments; and any formulas governing contingent compensation;

(b) All Waterfall and Priority Information: Including complete waterfall structures, recoupment positions and priorities, pari passu arrangements, subordination agreements, corridors, ceilings, floors, breakpoints, and the relative positions of all participants in revenue distribution;

(c) All Residual and Continuing Payment Information: Including residual rates and formulas, supplemental markets compensation, new media and streaming residuals, foreign levy allocations, reuse fees, sequel bonuses, spin-off compensation, and any arrangements for ongoing payments;

(d) All Financial Accounting Information: Including participation statements, quarterly and annual accountings, gross receipts reports, expense reports, overhead allocations, distribution fee structures, interest charges, cross-collateralization arrangements, and any financial data provided to participants;

(e) All Definition Documentation: Including the specific definitions of gross receipts, adjusted gross receipts, net profits, net proceeds, breakeven, actual breakeven, rolling breakeven, production costs, distribution expenses, and all other defined terms in participation agreements;

(f) All Audit and Dispute Information: Including audit reports, audit findings, error rates, settlement discussions, settlement amounts, arbitration proceedings, and any information obtained through verification processes; and

(g) All Comparison and Benchmark Information: Including most-favored-nation triggers, participation comparisons, and any analysis of relative participation positions.

All participation-related information shall be held in the strictest confidence. The Receiving Party acknowledges that Royalty and Participation Information is highly sensitive and that disclosure could cause immediate competitive harm and disrupt ongoing and future negotiations. The Receiving Party shall not disclose such information to any third party, including other profit participants in the same project, without prior written consent.

"Royalty and Participation Information" means only that specific participation, residual, and financial accounting information that:

(a) Is provided in writing and specifically designated as "Confidential Financial Information" or with a substantially similar legend; or

(b) Consists of specific numerical participation percentages, specific revenue figures from participation statements, or specific audit findings, and is expressly identified as confidential at the time of disclosure.

Royalty and Participation Information may include specific participation percentages and specific revenue figures from accountings, but only to the extent such information is specifically designated in accordance with this section.

For the avoidance of doubt, the following shall NOT constitute Royalty and Participation Information regardless of any designation:

(i) General participation structures and deal types that are standard in the entertainment industry (e.g., the existence of gross vs. net participation);

(ii) General ranges of participation terms for comparable talent or projects, without reference to specific deals;

(iii) Guild-mandated residual rates and formulas that are publicly available through guild publications;

(iv) The fact that a party has profit participation in a project, without disclosure of specific terms;

(v) Information concerning the Receiving Party's own participation terms that the Receiving Party may share with its representatives, accountants, and legal counsel;

(vi) General accounting practices, standard overhead rates, and typical distribution fee ranges; and

(vii) Information necessary for the Receiving Party to evaluate its participation position, including the right to discuss general deal structures with advisors.

The Receiving Party may discuss general industry participation practices and structures without restriction. Nothing herein shall limit the Receiving Party's audit rights or ability to share information with qualified auditors for the purpose of verifying participation accountings.

💬 Key Considerations

• ✓
  Preserve audit rights explicitly. Participation confidentiality must not prevent legitimate verification. Ensure the clause carves out the right to share information with qualified auditors.
• ✓
  Address MFN implications. Most-favored-nation clauses create unique disclosure challenges. Consider how confidentiality interacts with MFN verification requirements.
• ✓
  Consider guild reporting requirements. SAG-AFTRA, WGA, and DGA have reporting and audit rights. Ensure confidentiality permits required guild communications.
• ✓
  Distinguish participation terms from payment amounts. Specific revenue figures may require stricter protection than general participation structures. Consider tiered confidentiality.
• ✓
  Address successor and assign issues. When rights transfer, participation information may need to flow. Clarify how confidentiality obligations transfer in acquisition scenarios.