This post was co-written by Mathew Alderson (my law firm’s lead China entertainment lawyer) and Tyler Cohen.  Tyler is fluent in Chinese and he worked with Mathew on China film matters this past summer before beginning law school at the University of Toronto.

Three factors are driving international interest in Sino-foreign movie co-productions: (1) China has the world’s second largest box office, (2) official co-productions are outside China’s quota for foreign films, and (3) co-productions are entitled to a higher share of box office than quota films.

The problem is that box office is about the only source of distribution income in China and getting paid your fair share is difficult. It is difficult whether you are a domestic Chinese producer or whether you are a Hollywood producer. This difficulty is a reality that must be confronted in production investment agreements for all films that will have Chinese elements or will require Chinese production investment. It must also be confronted when accounting occurs under collection agent management agreements for Sino-foreign co-productions that do well, or appear to do well, in cinemas here. We have several clients having to deal with this latter issue at present and they are not very happy with the situation.

A dispute currently underway between a Chinese production company and China Film Group indicates just how difficult getting funds due from box office receipts can be. This case is significant for a number of reasons. Most importantly, it demonstrates that Chinese companies too are experiencing difficulties in getting “their” money out of China film co-productions. Moreover, the very fact that a Chinese court accepted a case against a China State Owned Entity (SOE) indicates that the authorities here regard the issue of box office revenue sharing as important and want it sorted out.

Let’s look at that case.

At the outset, we should make it clear that litigation against China Film Group would normally not be considered a great move if you want to work in this town again. We should also make clear that we are not taking anyone’s side on this case, nor are we involved in it in any way.  And again, this is a China company versus China company dispute.

United Film Investment is suing China Film Group for what United Film alleges to be multiple violations of contract, including what it calls “severe falsification” of box office receipts, for the co-produced film “My Own Swordsman.” Publicly available numbers put the total box office take at roughly 220 million RMB (USD$35 million), though some reports place the total closer to 300 million RMB (USD$47.5 million). United Film alleges it repeatedly requested financial statements from China Film Group, who remained “evasive.” United Film Chairman Mr Hao Yaning stated that it has received only 5 million RMB ($800,000) from China Film Group thus far under an agreement entitling them to 30% of box office totals. United Film is currently suing for 100 million RMB ($16,000 million) in unpaid box office totals, plus interest. Anonymous industry insiders cited by one source claim that the actual amount due to United is far less, but another source asserts that even under the least favorable calculations, United is due more than four times what they allege to have received.

United alleges that China Film Group reported only one month’s receipts out of 90 days total screenings and that the total “promotional fees” China Film Group claims to have paid are inflated and include inappropriate items. United also has suggested that China Film Group did not perform all of the promotional work required of it and that it may not have invested as much money as required.

In response to the suit and numerous public statements by Hao Yaning, China Film Group lawyers released the following statement:

Before the courts have determined the relevant facts and passed judgment, United Film Investment has repeatedly publicized remarks on CFGC not giving the sufficient percentage to United Film as well as other [arguments] inconsistent with the facts. This has led to a serious misleading of the public, and has severely harmed the legal(/legitimate) rights and  interests of CFGC. CFGC [thus] retains the right to investigate legal liability on the part of United Film for severe infringement of CFGC’s reputation.

This warning may also be seen as applying to foreign studios. And given the central role China Film Group plays in distributing foreign films in China, it reinforces the idea that public airing of grievances may have unwanted effects.

Perhaps further complicating the situation is that China Film Group is in the process of doing an IPO for a subsidiary company. Industry insiders note that the current dispute may impact the IPO, especially if the court rules for United Film.

Foreign film companies involved in China co-productions are watching this case with interest and we will report back when warranted. No matter what, this case highlights the difficulties in getting money out of China’s box office.

For more on China co-productions and the China movie business, check out the following: