‘Avatar: The Way of Water’ financier accuses Disney of self-dealing in new lawsuit

Walt Disney Co. is facing labor agitation on two fronts. It’s posting big losses from its streaming businesses. And now the Burbank-based behemoth is getting sued by one of its major financial partners.

TSG Entertainment, a film-financing firm, has accused Disney and its subsidiary 20th Century Studios (formerly 20th Century Fox) of breach of contract and self-dealing in a lawsuit filed Tuesday in Los Angeles County Superior Court.

In part, the financier’s lawsuit hits Disney for allegedly cutting “sweetheart” deals to put TSG-backed movies on its own streaming services to boost subscriber numbers, while depriving the investor of substantial revenue.

Disney did not respond to a request for comment on the suit. A spokesperson for the law firm representing TSG declined to discuss the case.

TSG says it has invested more than $3.3 billion with the studios and financed more than 140 of 20th Century’s films, including recent hits such as “Avatar: The Way of Water” and “The Banshees of Inisherin” as well as various entries in the X-Men and Deadpool franchises.

The financier had a revenue participation agreement with 20th Century, the lawsuit says, laying out how TSG would get a portion of certain films’ revenue in exchange for co-financing production and marketing-related expenditures.

But after TSG noticed a declining return on its investments, the firm hired an independent auditor to look into how 20th Century was calculating its share, the suit says — and “what the auditors found in sampling just three of the 140+ films at issue was clear evidence of Hollywood Accounting.”

In total, the audit reportedly suggested that 20th Century underpaid TSG “by at least $40 million.”

Among the allegations are that 20th Century didn’t credit TSG with revenue called for by their agreement, and that the studio charged TSG millions of dollars for distribution fees not actually permitted under that agreement.

The lawsuit also accuses 20th Century of “self-dealing,” including by licensing films to its cable affiliate FX for less than they were worth. (For instance, $4 million was allegedly knocked off the price for Academy Award winner “The Shape of Water”).

“The pejorative term ‘Hollywood Accounting’ refers to 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,” the lawsuit said. And Disney and 20th Century “have tried to use nearly every trick in the Hollywood Accounting playbook to deprive [TSG] out of hundreds of millions of dollars.”

TSG also takes issue with the timeline on which the films it financed moved from movie theaters (the “theatrical window”) to distribution channels such as digital rentals, DVD and Blu-Ray sales, TV networks and streaming platforms, including Disney+ and Hulu.

20th Century Fox long had a deal to license its movies to HBO during the window set aside for television network deals.

However, after Disney acquired 20th Century Fox in 2019, the suit continues, the House of Mouse renegotiated the HBO deal — “and [gave] up a significant portion of its guaranteed HBO license fees” — in order to also license movies to Disney+ and Hulu, its in-house streaming platforms.

This served Disney’s goal of juicing its streaming numbers at a time when the firm was desperate to compete with Netflix. But, the lawsuit claims, “the renegotiation of the Fox/HBO Pay 1 output deal cost Fox many millions of dollars that otherwise would have been reported to TSG.”

What‘s more, the suit says, the new agreements with Disney+ and Hulu were “‘sweetheart’ deals” that undersold how much value Disney was actually getting.

These and other issues, the suit claims, ultimately led to a liquidity crisis that prevented TSG from funding future films covered by its revenue participation agreement.

It’s not the first time that Disney has faced legal challenges over the role streaming plays in its release strategies.

In 2021, Scarlett Johansson — star of many a Marvel team-up movie — sued the company over its release strategy for her standalone feature “Black Widow,” which saw the film come out in theaters and on Disney+ simultaneously for viewers willing to pay a fee to watch at home. She claimed the streaming plan deprived her of box office bonuses.

As with TSG’s complaint, Johansson said she took a financial hit for what was essentially a ploy to incentivize more people to pay for the streaming service. Disney, for its part, blamed the move on the COVID-19 pandemic.

Johansson and Disney eventually settled the dispute.