Director of Lord of the Rings says he is still owed $100m

It is a court case that could be almost as epic as its subject, the Lord of the Rings. The film director Peter Jackson is suing the company which distributed the fantasy trilogy, claiming that he has been underpaid by $100m (£54m).

Jackson, a Hollywood favourite who is now working on a remake of the 1933 classic King Kong, is thought to have been paid about $200m so far by New Line Cinema, a subsidiary of Time Warner, which financed and distributed the films.

But his demand for another payout has movie moguls particularly worried.

The case is based on a claim that he lost out because New Line gave several distribution deals on highly lucrative spin-offs such as DVDs and books to companies within the Time Warner empire. If New Line had opened up the process to competition, Jackson claims, the total revenues from Lord of the Rings merchandise would have been much higher, and his share could have been as high as $100m.

The practice that New Line is accused of - known as "vertical integration" - is common among the conglomerates which control many of the movie studios. If the court rules in Jackson's favour, many other directors and actors will be tempted to consult their lawyers.

The Oscar-winning Rings trilogy - starring Elijah Wood, Viggo Mortensen, Orlando Bloom, Ian McKellen, Liv Tyler and a host of others - was one of the film world's most unlikely blockbusters. Taking a dense fantasy story by the British author J R R Tolkien, Jackson turned the series into huge hits. The three films are among the 20 highest grossing made.

They were made for a total of $281m, with much of the filming taking place in Jackson's native New Zealand. Jackson and his team tried to keep costs down by making the three films in quick succession, but the lavish and complex adaptation of the 1950s classic was still among the most expensive movie projects ever undertaken.

But for Time Warner the films have come to seem a bargain. The series made more than $4bn in sales. New Line itself pocketed about $1bn after various payments to those with a stake in the movie. A spokesman for New Line said: "Some of the sub-licensing deals were with Time Warner companies, but not most of them. Even those deals that were [with Time Warner], they were negotiated as arms-length transactions." A lawyer working for the company told The New York Times, which reported the legal dispute yesterday: "Peter Jackson is an incredible film-maker who did the impossible on Lord of the Rings. But there's a certain piggishness involved here. New Line already gave him enough money to rebuild Baghdad, but it's still not enough for him."

That is not a view accepted by all. Some blame the complicated way that artists get paid for disputes such as this. In the past, studios used the relatively simple method of paying the directors, actors and other participants a cut of profits that a film makes.

Now a much more complicated formula is used which bases payments on gross revenues. According to critics, the system encourages studios to strike deals within their own company to do all of the merchandising and other off-shoot work from a major film.

Yet this opens them up to the legal charges of "self-dealing" and "pre-emptive bidding", which is at the heart of Jackson's case.

To pursue the argument that these practices are against the law, Jackson has hired one of the West Coast's best-known media lawyers: Stanton - known as Larry - Stein, of the Santa Monica-based firm Alschuler Grossman Stein and Kahan.

It is not the first time that Time Warner, whose wide-ranging assets include the CNN news channel and the AOL internet provider, has been accused of stinting on payments to its stars. The New York-based company's film studio, Warner Brothers, fell foul of the British actors in the Harry Potter series.

Zoe Wanamaker, who played the broomstick-wielding games mistress Madame Hooch, complained the pay had been "terrible" and said the film-makers were "notoriously mean".

Wanamaker said she had received less from the American company than the BBC paid her to appear in Gormenghast, BBC2's adaptation of Mervyn Peake's gothic trilogy.

Meanwhile, those close to Jackson's case believe the two sides will probably reach an out-of-court settlement. Such an outcome would probably suit Time Warner, which is unlikely to want to put its most senior executives on the stand to defend its business practices.

It might also suit Jackson, who is busy with the $150m modern version of King Kong for Universal Pictures. Whichever way the Lord of the Rings case goes, he can console himself with the $20m advance that Universal is paying him.