Suing the "King of all Media" Posted by: Dale Franks
on Wednesday, March 01, 2006
Well, the first big legal controversy between terrestrial radio and satellite radio has been launched. At the center of the controversy is long-time CBS—and now Sirius—broadcaster Howard Stern.
CBS Radio jolted shock jock Howard Stern and Sirius Satellite Radio Inc. on Tuesday with a $218-million lawsuit that alleged Stern misused the company's airtime in a scheme to boost the payment he received when he moved to Sirius in January.
CBS contends that while it employed Stern, the host spent more than a year hyping his upcoming switch to Sirius and, as a result, improperly enriched himself, "pocketing over $200 million for his personal benefit" by driving up Sirius' subscriber numbers.
I'm amused. I've never liked Howard Stern. I find him offensive and arrogant. I prefer the sophisticated and erudite humor of Opie and Anthony, who broadcast on XM radio, having been kicked off of terrestrial radio for fomenting a couple having sex in a New York City Catholic cathedral on a Holy Day of Obligation. O&A are, like, totally different.
Ok, maybe trying to make nuanced gradations between purveyors of penis-humor isn't all that convincing. But I like O&A, so, there you go.
Anyway, CBS is looking for huge bags of Money from Mr. Stern, his agent, and the Little Doggie Company. And, according to Professor Bainbridge, CBS has a pretty good case.
I'm fascinated by the story, for a couple of reasons.
First, when you have a contract in radio, your employer almost always has the right of first refusal when your contract comes due. As part of that right, any time you mget an offer from a rival company, you are required to disclose the terms of the proposal to your employer, in order to give them the right to match or pass on the proposed deal. In this case, Stern has two allegations to counter.
First, did Mr. Stern disclose the proposal from the Little Doggie Company before he inked the deal? Mr. Stern, in his press conference yesterday, says that the Sirius deal was reported extensively in both CBS radio and television. That's true, but the reportage all occurred after Mr. Stern signed the deal with Sirius. Whether Stern disclosed the terms of the deal to CBS is an issue at controversy. CBS alleges that Stern only informed them of the deal after Mr. Stern had inked it. Mr. Stern, on the other hand, says he told CBS that he would not renew his contract with CBS under any circumstances prior to talks with Sirius.
But, the water gets even murkier. While pretty much everyone reported that Mr. Stern had accepted a 4-year contract worth $400 million in direct compensation, it was revealed yesterday that, in addition to that direct compensation, Mr. Stern was also offer stock options in Sirius worth an additional $200 million or so if he met certain specified Sirius subscription goals. Also included in the stock deal, apparently, were Mr. Stern's agent, and Sirius CEO Mel Karmazin.
In this lies an interesting tale. Mr. Stern was prohibited from mentioning Sirius by name, so it was usually referred to as "Eh-eh-eh" satellite radio. (Mr. Stern was, in fact, suspended for a day for mentioning Sirius by name on at least one occasion.) Still, everyone knew that Mr. Stern had signed a deal with Sirius. And, during his last 14 months on CBS radio—formerly known as Infinity Broadcasting, by the way—Mr. Stern talked constantly about his impending move to satellite radio. CBS alleges,
* That on or about January 9, 2006, Sirius paid over 34 million shares of stock, valued at approximately $220 million, to Stern and his agent because Sirius exceeded by the end of 2005 certain subscriber targets that were set in the Sirius-Stern contract. The complaint alleges that the Sirius-Stern contract provided that Stern was to receive this stock payment in 2010, but it had an acceleration provision that allowed Stern to receive the compensation as early as January 2006 if these subscriber targets were met. All of Stern's actions for which he received this expedited compensation occurred during the time that Stern was under exclusive contract with CBS Radio, when the Sirius payment terms to Stern were kept secret.
* This contract thus provided a compelling incentive for Stern to do all that he could to help Sirius reach the subscriber targets by the end of 2005 so that he could receive his Sirius stock payment as soon as possible while Sirius's stock was extremely valuable. Without the accelerated payment, Stern would risk the decline of the Sirius stock value. By taking action on CBS Radio's airtime in 2004 and 2005, Stern assured himself of immediate access to $200 million in assets that could be readily converted to cash.
No matter what the publicly-available details of his direct compensation from Sirius, CBS alleges that Mr. Stern "fraudulently concealed his interest in hundreds of millions of dollars of Sirius stock while promoting it on the air." In other words, CBS never knew about the stock options, so they had no way to present a counter-offer under the right of first refusal.
So, CBS, in essence, is saying that Mr. Stern appropriated millions of dollars in CBS Radio air time to promote the Little Doggie Company, in order to pump up the stock price, increase Sirius subscriptions, and profit from the stock options thereby. In this context, CBS' lawsuit might be the least of Mr. Stern's problems. An ancillary question is whether the Securities Exchange Commission knew about the stock option deal that included Mr. Stern, his agent, and Mel Karmazin. Considering Mr. Stern's lack of friends in the Federal Government, he'd better hope the SEC doesn't take an interest in this stock options deal. With the FCC, the government agency Mr. Stern is most used to dealing with, you can always argue against their rulings on artistic or First Amendment grounds. The SEC, on the other hand, doesn’t play the argument game. And the SEC is not known for their willingness to overlook minor stock market manipulations.
Moreover, not only did Mr. Stern allegedly violate his own contract with CBS, he encouraged other CBS employees (Robin Quivers, et al.) to break their contracts with CBS, too. Since they all went to the Little Doggie Company with Mr. Stern, that's another front on the battle, too.
Amusingly, Howard Stern apparently met with Les Moonves, the chief CBS big shot, and asked him why, if CBS thought Mr. Stern was such a millstone about their neck, they allowed him to keep broadcasting over the final 14 months of his contract. According to Mr. Stern, Mr. Moonves replied, "Because I always knew we could sue you later."
Funny ? Yeah, frivolous lawsuits are HYSTERICAL!!!!
Almost every commentary I’ve heard sees this lawsuit as completely lacking merit. The approach Bainbridge takes is a very circuitous route indeed. CBS had every opportunity to stop Stern from talking about Sirius, and in fact he followed their directions to a tee. If they had told him not to talk about Sirius at all, that what he would have done.
Furthermore, the advertising for the show in it’s last 14 months was sold out and CBS made record revenues until the day he left. In other words, there are no damages.
I don’t believe Stern breached his fiduciary responsibilities, either. He does a radio show, on which he talks about his life. That has been his MO for 30 years. CBS knew this and actually encouraged it in order to improve ratings. What’s more, CBS actively promoted Stern’s move to Sirius by booking him on Letterman and 60 Minutes to talk about it - all in a move to increase ratings and therefore advertising revenue.
CBS had 14 months to prepare for Stern’s departure. The fact that they completely botched the job and their ratings are in the toilet is their own fault.
I don’t think the suit is frivolous. They, CBS, is looking to have its cake and eat it too. Meaning they got the advertisement revenue and now they are bitter about Howard’s deal and David Lee Roth bombing. CBS is going to have a problem showing that they mitigated their damages throughout. They ran tons of ads and only suspended Ho-Ho-Howie for one day when he was discussing "eh-eh-eh" too much. If they were concerned about Howie’s discussions of his pending move they should have hit him with cease and desist orders or bought him out of his deal and moved on. They were their own worst enemies in this matter. Howie isn’t fault free. Depending upon the details of his contract with Infinity/CBS he may be found to have breached it. Further, his role in taking the rest of the staff with him will be investigated along with the SEC checking the terms of the stock arrangement for the target subscriptions. Regardless this matter will be submitted to mediation and or arbitration at some point and a monetary resolution will be worked out. Both sides have too much too lose by dragging this in front of a jury. GRRRRRRRR!!!!!!
I honestly don’t think CBS has a leg to stand on. First of all CBS is suing Howard over him gaining 200 million dollars in stock. They can’t sue him over his gain in revenue. They can sue him for only loss of revenue incurred to CBS. In fact this leads into another point. If CBS had a problem with stern saying eh-eh-eh, then why didn’t they hit the dump button? They chopped up everything and anything else that Stern had to say on the air. They had all the power to dump his promotions. I’ll tell you why they didn’t. Because his move to Sirius, and all the hype that went along with it gained revenues for CBS. Secondly, not only did CBS make profits off of Stern they sent him on shows like 60 minutes and the like to bump up their ratings and revenues. The bottom line is CBS has been holding off on suing Howard to see how many listeners they kept and see if suing howard would cause them to loose more listeners. Now that the ratings are out and in the open they have no listeners left to offend so they are going to try and sure. I’m sure through arbitration, CBS will get a little money out of Stern, but I really hope he fights this one! I wouldn’t pay them money grubbers a dime.
Show is a trainwreck ? Absolutely. That’s why he’s been at it for 30 years and been #1 in every market he’s broadcast in. And of course Sirius would throw a half billion dollars at a train wreck.
CBS officials were not only allowing him to discuss sirius, they encouraged it and then benefitted from it. Stern mediate and give CBS a dime ? Don’t count on it. Not in this lifetime anyway.
Opie and Anthony a reference ? Are you kidding ? The guys that claim they’re going to sick their "army" on Stern ? Good one. Did they ever get anyone to pay the extra 2 dollars at XM to listen to them ?
Howard is "Starbucks" to O and A’s corner coffee stand. Not as big, not as successful, but more appealing in many ways. I listened to Stern for years before getting hooked on O and A when they arrived at XM. Much less bragging, much more discussion about the world around us...slightly more intelligent conversation. Howard is still an often compelling listen, but O and A, I think, have the more entertaining show...and the gap will widen now that Howie will be bogged down talking about the lawsuit...
Stern was always best combined with NPR in the mornings. When one wasn’t interesting the other could be. O & A on the other hand don’t do a thing for me and their obsession with Stern is really irritating.
There’s a reason Bainbridge teaches and doesn’t practice law. He seems to have forgotten the duty to mitigate damages by the fiduciary, something they had 14 months to do. He’s written an article strictly from a plaintiff’s POV without even anticipating the defendant’s potential arguments. No wonder so many law professer’s get eaten up in courtrooms by veteran litigators.
Nearly every corporate litigator (those who are actually in the legal trenches as opposed to law professors) seems to think it’s a losing proposition by CBS.