HOWARD STERN vs. SIRIUS XM: Starting a Fire in the House

Howard Stern is a major newsmaker with a large footprint and these days he is starting some fires inside the house of Sirius XM satellite radio.

This past March, the humorist and self-styled “king of all media” sued Sirius XM [through his production company, One Twelve Inc,] in a Manhattan court alleging breach of contract against the satellite radio company for unpaid stock awards under their contract. Also, suing Sirius XM is Don Buchwald, the agent for One Twelve, Inc., who is claiming a consultation fee allegedly promised him under the agreement.

And it all comes down to what the agreement said or did not say about what happens if and when the big bucks start rolling in. Stern says the agreement requires Sirius to compensate him in the form of additional company stock every time his presence causes the number of subscribers to Sirius XM to increase over a certain number set in advance throughout the five year period. Sirius XM begs to differ and claims that it has met all its “obligations under the terms of our [the] 2004 agreement with Howard, his agent and production company.” Sirius XM also says it is “surprised and disappointed” by the lawsuit, which means that it has no plans to pony up to Stern and his agent any time soon.

It may seem rather odd that the parties continue to do business together despite the lawsuit, but this shouldn’t be too surprising given that the collaboration has been very lucrative for both parties so far. What’s not to like about smiling to the bank. (In January 2011, Stern got another five years on his contract for an estimated $400 million and Sirius XM is now 20 million subscribers stronger.)

It is interesting that Stern did not raise this issue of the additional stock awards until during the last year of the contract. So, can he now turn around and seek to enforce the right he seemed to have abandoned for years? Or does his silence over those years somehow mean that perhaps he knew he didn’t have the right he is now trying to enforce? Could this be some Monday morning quarter backing to corral more money? Stern claims that he held back out of sympathy for Sirius’ financial situation following its acquisition of rival XM in 2008. Yeah, right! Well, this is obviously a lame explanation in the world of business and it’s a pretty hard sell. As that famous saying goes [in English company law], “charity has no business sitting on the board of directors.” And everyone knows that Stern is a savvy guy.

Aside from Stern, Sirius XM’s actions have been somewhat curious as well. For instance, if they paid the compensation to Stern in the first year or two of the contract (as Stern claims), why did they not pay for the remaining year? Does their initial payment(s) somehow mean that they knew that their agreement with Stern required them to make the payments after all?

And there is the matter of the Sirius/XM merger. Assuming that the agreement in fact requires payment by additional stock awards to Stern, does the number of subscribers include the people coming in from the XM side of the ledger? Or is it limited to just the folks from the old Sirius alone? In talking about compensation based on performance or “rain making,” it may not be easy to just put them all in the same pot, especially if the XM subscribers were brought in simply because of the merger, and not directly because of anything Stern did. Take this loose analogy: If someone promised you $1 million if you have five children in ten years, can you still claim that money on the same footing in ten years if some of the five kids you are presenting happen to be adopted? This may be debatable.

However, one thing is for sure: if Stern is in fact entitled to get what he is claiming, then that particular clause in the agreement was so poorly drafted that it did him no favors at all. He shouldn’t have to go to court in order to receive what should be rightfully his. It all comes back to the old lesson among lawyers that a badly drafted agreement usually hands off an unnecessary lawsuit to the client and would often only help the person who is under obligation to do something for the benefit of the other person. In this case, it would be Sirius XM.

Still, just because Sirius XM may well be ahead on points doesn’t mean it would welcome this kind of publicity, especially coming from a media sensation with a big microphone like Howard Stern [who is notorious for his on air remarks when talking with the callers on his show].So far, he’s kept a surprisingly low profile on the whole thing, but who knows for how long. Also, the lawsuit itself is simply not good for business, to say the least: the day after it was filed, the company’s shares fell of a bit and some analysts downgraded them from Buy to Hold. Translation: these circumstances may be good grounds for Sirius XM to consider settling the case just to put out the in-house fires. And keep the courts out of the company’s business.

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