A Stern Warning: Words Do Matter

This was a lesson recently learned the hard way by King of All Media Howard Stern – if you consider losing a $300 million bonus the “hard way”

I think it’s pretty clear that the legal world does not always jibe with the real world (and especially not The Real World: Cancun). Take capitalization for instance. In the real world, it doesn’t mean much. In fact, based on what I’ve seen on Twitter and in hip wedding invitations, I believe the “art” of capitalization has been completely lost by our society (and, of course, neither of our presidential candidates is brave enough to tackle the topic). In the bizarro world of the law, however, capitalization is a detail that can prove to be of paramount importance.
This was a lesson recently learned the hard way by King of All Media Howard Stern – if you consider losing a $300 million bonus the “hard way.”

Stern filed suit against his current employer Sirius XM Radio Inc. claiming that he was unjustly denied certain “performance based” compensation bonuses due under his employment agreement. At issue was the fact that, under his agreement, Stern could receive up to $375 million in bonuses based on the number of Sirius subscribers hitting certain figures. The thinking was that since Stern was going to be the key draw to get subscribers to Sirius, he would reap huge rewards if its subscriber numbers jumped significantly.

In 2008, Sirius won the satellite radio battle and essentially acquired its only competitor, XM Radio. No new entity was formed after this transaction. Stern’s original employer Sirius Satellite Radio, Inc. simply changed its name (to Sirius XM Radio Inc.) and kept XM Satellite Radio Inc. as its subsidiary. In the process, it roughly doubled its subscribers by acquiring all those of XM.

Stern’s argument in his suit was straight forward. The same entity that hired him (albeit with a different name) doubled its subscribers after the merger. Taking into account all these new subscribers, Stern argued that he hit certain performance-based thresholds and, thus, was due an additional $300 million in bonuses.

Of course, if it was that straightforward, I’d probably be spending my time re-watching Game of Thrones episodes instead of slaving away on this blog. As noted above, XM Radio continued to operate after the merger as a separate subsidiary of the parent company. Instead of combining the Sirius and XM services into one, they continued with separate services each having separate groups of subscribers – those receiving the Sirius channels and those receiving the XM channels (which did not include Stern’s channels).

Because of this, Sirius believed that Stern was not justified in getting bonuses based on XM subscribers because anyone who made the decision to choose XM over Sirius to begin with was clearly choosing a non-Stern package; thus, Stern’s popularity had no hand in bringing in such subscribers. In Stern’s eyes, on the other hand, his popularity helped Sirius build a level of success that allowed it to “win” the satellite radio war by acquiring its vanquished foe; without Stern, Sirius never would have had the ability to acquire XM and all of its subscribers.
As with most disputes, both sides have justifiable positions. In the real world, it may be tough to decide which position should prevail. But the second they went to court, we stepped out of the real world and into the legal world, and the soundness of a position takes a backseat when there’s a contract in place.

In a case involving the interpretation of a contract, the words in the agreement are all that matters. The law tries its best to avoid situations in which a judge has to interpret an agreement based on what the two sides are now arguing were their intentions when they signed the agreement (which undoubtedly conflict). Instead, the law tells a judge to put blinders on and focus solely on the language in the agreement and attempt to deduce the intentions from that language. In fact, a judge is precluded from taking into account extrinsic evidence in a contract case unless she determines that the contract is vague on any given issue.

Therefore, the judge in the Stern case couldn’t concern herself with the validity and soundness of each side’s justification for why Stern should or should not have received the bonus; she simply had to look to the language of the agreement to see if it unambiguously addressed the issue. And, at long last, here is where capitalization comes in play.

The vast majority of agreements use “defined terms” which are words or phrases that are specifically ascribed definitions somewhere else in the agreement so you can have a consistent meaning for a concept throughout document. Defined terms are almost always capitalized.
In Stern’s agreement, the section outlining how the bonuses were calculated used the phrase “Sirius subscribers” when describing the subscriber thresholds that had to be met. While the term “Sirius” was defined in the agreement as the company, the phrase “Sirius subscribers” was not defined anywhere (as evidenced by the lower case “s”). This proved to be Stern’s downfall.
Stern argued that because “Sirius” was defined as the parent company, “Sirius subscribers” should mean all subscribers of the company including those of its subsidiaries which, after the merger, would encompass the new XM subscribers. Had the phrase simply been defined as such somewhere in the agreement (giving “subscribers” a prestigious capital “S”), there would have been no suit – Sirius would have had to pay Stern the $300 million in bonuses.

Unfortunately for Stern, it wasn’t defined. Even more unfortunately for Stern, the judge read the agreement and determined that the agreement unambiguously indicated that “Sirius subscribers” could only mean subscribers to the Sirius service, not those subscribed to the XM service, even if both services are now owned by the same company.

The key fact is that the agreement actually had a provision that contemplated a Sirius XM merger. Not only did it promise Stern a special bonus in the event of a merger (a measly $25 million – which Stern received), it specifically referred to the new pool of subscribers as “subscribers of the surviving entity.” This tiny little lowercased phrase may have cost Stern $300 million. The judge stated that it would be contrary to the plain language of the agreement to hold that “Sirius subscribers” was intended to mean all subscribers of the new entity when the agreement used a different phrase (“subscribers of the surviving entity”) when specifically referencing that very issue. Therefore, the judge held that “Sirius subscribers” could only mean those subscribers to the Sirius service.

The lesson learned is – OMG OMG OMG WHY DID I CHOOSE A PROFESSION IN WHICH A FEW LOWERCASED WORDS IN A 27 PAGE AGREEMENT COULD POTENTIALLY COST MY CLIENT HUNDREDS OF MILLIONS OF DOLLARS?!? It’s no wonder I have one of these days every 6 months or so.

For those smart enough to have avoided law school, the other lesson is to keep in mind how important the little details can be in an agreement. You may not have used capital letters in your wedding invite, but if you’re going to sign an agreement, you should be wary of their use or non-use. They’re a great way to make an intention clear and, as Stern has learned, if you intend your agreement to mean something, it better be very clear based solely on the wording of the agreement. Stern may have signed his agreement believing the intention of the parties was that he’d get credit for post-merger subscribers; he may even have evidence of that intention. Unfortunately for him, because a judge determined that his agreement unambiguously stated otherwise (something that could have been solved with a simple capitalized defined term), he failed to collect a $300 million bonus. Worse yet, he can’t even blame Baba Booey.

From Greenberg Glusker’s LawLawLandblog.

About Jesse Saivar (1 Articles)

Jesse Saivar specializes in intellectual property matters specifically related to the entertainment industry, including copyright, trademark, and domain name/website issues, as well as the negotiation and drafting of entertainment industry contracts.