A Serious Loss for Howard Stern

| April 15, 2013

By Steven J.J. Weisman
TALKERS
Legal Editor

sternhowardBOSTON — Sometimes it is, as Mel Brooks commented in his movie “The History of the World, Part One,” good to be the king.  But other times it is not.  Howard Stern, the self-proclaimed (and not too far off) “King of All Media” took a hit last week when the dismissal of his lawsuit against Sirius XM Radio, Inc. in which he sought more than $300 million in stock awards was upheld by the Appellate Division of the New York Supreme Court.

sirius radioxm radio_logoIn order to understand Stern’s lawsuit, which he filed in 2011, it is important to review the history of Stern’s relationship with Sirius.  Satellite radio was in its infancy in 2004 when Stern signed with Sirius after being courted by both Sirius and its then sole satellite radio competitor XM Satellite Radio.  In the year prior to Stern joining Sirius, its subscribers numbered less than 700,000 while XM had 2.5 million subscribers.   Upon the announcement in October of 2004 that Stern would be broadcasting on Sirius beginning in 2006, Sirius’ stock went up a whopping 15%.  After a year of trumpeting his journey to Sirius radio, Howard Stern had his initial broadcast on Sirius in January of 2006.  By this time the number of subscribers to Sirius had risen to well over 3 million.

The bidding war between XM and Sirius for the services of Howard Stern had been extremely competitive with Stern able to leverage a five year contract out of Sirius estimated to have been worth as much as $500 million in cash and stock.  A major provision of Stern’s 2004 contract with Sirius was a bonus provision by which Sirius would make substantial stock payments to Stern if Sirius exceeded its subscriber estimates in any year by more than two million subscribers.  Following the first year of the contract, Sirius paid the stock bonus payment to Stern’s production company based upon its estimates of subscribers at 3,707,000 and the number of actual subscribers by the end of 2006 reaching more than 6 million.

Sirius-XM LogoDespite the success in the numbers of subscribers, the viability of satellite radio as a business was seriously in doubt.  In 2008, after approval by the United States Justice Department and the FCC and despite stiff opposition from those in terrestrial radio, a merger of Sirius Satellite Radio and XM Radio was approved and consummated.  Suddenly the number of subscribers to the new entity, Sirius XM Radio Inc. rose dramatically to 18.5 million subscribers and therein lays the crux of Stern’s dispute with Sirius. Stern alleged that the new subscribers attained through the merger of the companies should have been counted toward the bonus provisions of his contract while Sirius denied this contention.  Prior to the merger, Sirius’ subscribers numbered 8.3 million.  After the merger this number leaped to 18.5 million subscribers.

Despite this apparent success, the satellite business model was still far from viable and by the end of 2008 Sirius was seriously considering declaring bankruptcy following the drop of its stock in value to as low as 12 cents per share in 2008.  According to Stern’s complaint, he decided not to demand payment of bonuses owed him at that time due to the financial precariousness of the company and not wanting to jeopardize the company’s ability to obtain the necessary financing to remain in existence.  By 2010, Liberty Media came to the financial rescue of Sirius and the company stabilized.

According to Stern’s lawsuit, Stern’s agent in March of 2010 asked Sirius’ General Counsel, Patrick Donnelly why the bonuses had not been paid for 2008 and 2009.  Donnelly reportedly told Stern’s agent that it was the position of Sirius that the XM subscribers were not to be considered in the determination of the number of Sirius subscriptions for purposes of Stern’s contract’s bonus provisions.  Despite this rather substantial disagreement, in December of 2010 Stern and Sirius signed a new five year contract that did not deal with the bonuses alleged to be due from the previous contract.

The original disputed contract itself did not specifically define the term “Sirius subscriber” and this was the crux of the dispute.  Stern’s lawyers argued that once Sirius and XM merged, the total of their subscribers should be counted in determining the number of Sirius subscribers for purposes of triggering performance bonuses.  Sirius, not surprisingly, disagreed and said that the contract was clear that a Sirius subscriber only referred to people who actually subscribed to the Sirius Service.

Unable to resolve their differences, Stern sued in 2011.  Judge Barbara Kapnick, who made the initial ruling in this case, concluded that the language of the contract was clear and did not require subscribers to the new Sirius XM Radio Inc. company to be counted in determining the Sirius subscribers for purposes of determining Stern’s stock bonus payments.  She specifically noted that “Even after the merger, original Sirius Radio subscribers had radio systems specific to Sirius Radio and received, generally, only Sirius Radio programming; likewise, original XM Radio subscribers had radio systems, specific to XM Radio and received only XM Radio programming on their Sirius Radio service, and vice versa.  According to Sirius XM, ‘The Howard Stern Show’ could only be heard by about 1 million XM subscribers who specifically subscribed to the ‘Best of” Sirius package.”  On a personal note, as a Sirius subscriber and Howard Stern listener myself, I still do not receive XM shows as part of my Sirius subscription.

Also in Sirius XM’s favor was the provision of the contract that provided for a specific bonus to be paid to Stern in the event of a merger of Sirius with XM.  This bonus of $25 million was promptly paid to Stern following the merger.  In addition, in that clause of Stern’s contract, subscribers to the merged company are referred to as “all subscribers of the surviving company” rather than “Sirius subscribers” indicating that they were not to be considered identical for purposes of the contract.

Judge Kapnick noted in her opinion, “Here, while it may be true that Stern … hoped and expected to reap the benefits from any significant growth that Sirius experienced after they entered into the Agreement, that subjective expectation cannot suffice to override the clear, unambiguous language of the Agreement.”

Ultimately, Judge Kapnick concluded that the language of the contract was clear.  Only subscribers to Sirius were to be counted in determining bonuses while a separate bonus would be awarded to Stern in the event of a merger.  The appeals court only needed a single paragraph to unanimously affirm Judge Kapnick’s dismissal of the case, saying, “The plaintiffs are not entitled to additional performance-based compensation under the unambiguous agreement between plaintiffs and defendant’s predecessor, Sirius Satellite Radio, Inc.  Looking solely to the plain language used by the parties within the four corners of the agreement, the disputed term, ‘Sirius subscribers,’ by which plaintiffs’ performance- based compensation was measured, did not include subscribers to XM Radio, a wholly owned subsidiary which defendant, acquired by merger, even though the merger had been anticipated within the agreement.”

So it turns out that even kings have bad days, however, at the end of the day they are still kings and they are still wealthy.

tbugk

Steven J.J. Weisman, a practicing attorney, is a senior partner in the talent management firm Harrison Strategies, LLC. He is also legal editor for TALKERS magazine and publisher of the website www.scamicide.com. He can be e-mailed at: stevenjjweisman@aol.com. Steven J.J. Weisman is available as a guest to discuss the subjects of identity theft and scams. Meet Steven J.J. Weisman at Talkers New York 2013 on Thursday, June 6.

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Category: Features, Legal