Why Emmis Lost 'Big Boy'
June 2, 2015
Further Lessons in The Tricky World Of Tying Down Oversized Personalities
I have written before about the need to be especially careful when crafting non-compete agreements, especially when it comes to talent. See: Non-Competes: Look This Way Before You Cross The Street, Covenants Not-to-Compete and Covenants Not-to-Compete II Now comes a new case with new perspectives on old tricks.
The Broadcaster's Point-of-View
When a broadcaster invests big dollars to promote a personality -- billboards, spot promotions, personal appearances -- it seems only fair that that at least part of the value created should be protectable. Indeed, key to the success of many stations is the successful promotion of on-air talent. Once established, station owners believe they need to protect against misappropriation of their "personality" investment by other stations in the market who might try to "steal" the talent with higher salaries, or other benefits. Competitors can afford to pay higher salaries because they save the capital required to build the personality recognition in the first place.
Broadcasters normally seek to prevent such unfair competitive practices by signing key personality employees to a covenant not to compete should they resign their positions or be fired for cause. However, covenants not to compete have never been popular in the law. Principles of equity and public policy generally favor a person's ability to earn a living and require that such covenants be drawn narrowly, confined only to terms considered by courts to be the most reasonable and as favorable as possible to employees.
So, resourceful broadcasters and their lawyers have sometimes looked to other devices to secure protection. For example, a post-employment consultancy, supported by separate consideration. Here, the employee agrees to continue on after employment as a consultant for a limited time without the public profile and exposure that was built on "company time." That arrangement, which meets most court and legislature objections to employee non-compete provisions, at least provides a period during which the new, replacement air personality can build audience acceptance while reducing the value that accrues to a competitor from an immediate shift of the talent over to their station.
Another device sometimes used is the simple "Right of First Refusal." In the employment agreement, both parties agree that at the end of its term, or at any other time that the employee may lawfully end the employment, the employer has the right to match any other offer received from a competitor, and thereby renew the agreement for a further period upon matched terms.
Emmis vs. Big Boy Alexander
And this brings us to the celebrated case of Emmis Radio vs. Kurt "Big Boy" Alexander in the Los Angeles Superior Court. After building a major hip-hop presence in the Los Angeles market at the Emmis station, iHeartMedia sought to lure Alexander over to its KHHT and Emmis claimed Alexander's acceptance of the offer to be in violation of his personal services contract with Emmis.
Let's look at the way the court set up the case (quoting liberally from the complaint.)
Kurt "Big Boy" Alexander is a widely celebrated, well-known radio personality who since 1994 has hosted a radio show on Emmis' KPWR, Power 106, Los Angeles ("Power 106"), a hip-hop radio station launched in 1986 by Rick Cummings for Emmis. Cummings got Alexander his first job as a radio host at Power 106, where he has spent his entire career as an Emmis employee. Alexander's morning show has been the centerpiece of Power 106 for more than 15 years, and became critically important to the Power 106 brand.
Benefiting from Emmis' promotion and his own talent, Big Boy Alexander is now a "unique, unusual, extraordinary, and irreplaceable media personality, whose morning talk and music show, 'Big Boy's Neighborhood,' is well known throughout the Los Angeles area." Emmis stated that it would suffer immediate, substantial, irreparable and non-quantifiable harm if Alexander is employed by a direct competitor, including a loss in advertising revenue and reputational harm to its brand and competitive position in the Los Angeles radio market. In addition, Big Boy's sudden departure would not provide Emmis with sufficient time to develop, promote and market a new replacement morning show, causing further irreparable harm.
To guard against this exact situation, Emmis and Big Boy entered into an employment agreement providing Emmis a "right of first refusal" to match any other radio company offer with a "substantially similar" offer. If "substantially similar" to the competitor's offer, Alexander specifically agreed to enter a new employment agreement with and stay with Emmis.
The Agreement also provided that for a period of 12 months, Alexander could not solicit any Emmis employee. In fact, Emmis first learned of Alexander's breach when Emmis employees who had worked with him on his Emmis radio program submitted their termination notices to join him at iHeart.
Alexander then informed Emmis that he had received a term sheet from iHeart. Emmis expressly agreed to match it. Notably, one of the terms was that Alexander was to be paid a percentage based on "net commissionable revenue." This term led to disagreement over its definition and Alexander opted to treat Emmis' offer, based on its valuation, as a rejection of the terms.
The court approved Emmis' conclusion that Alexander did not honor the Agreement. Emmis requested either Alexander or iHeart provide it with their definition of "net commisionable revenue" and any information Emmis could consider in its match to the offer. Instead of offering that information, Alexander announced that he would not honor the Agreement and would move to iHeart to immediately launch a new format competing with Emmis.
The iHeart Offer
From the court record, we learn that in the last month of Alexander's employment agreement term, his manager met with iHeart to discuss the move. iHeart has the largest reach of any group owner in the country with 245 million monthly listeners and with the "cluster strength" of eight Los Angeles radio stations, including four in the top nine with more than $22 million in annual net revenues. iHeart's national digital music streaming service has a large sales force that dedicates 60 sales employees to Los Angeles alone.
iHeart offered a $3.5 million base salary and an opportunity to share its profits. iHeart expressed "confidence" that Alexander would receive more than his $3.5 million salary. iHeart also offered in the revenue sharing pool a digital media channel and a role in iHeart's nationally televised tent-pole events, a development fund for television and video promotions, and $1 million in cross-company promotional campaigns.
The iHeart Disclosure to Emmis
A one-page term sheet with a bullet-pointed list of elements was provided to Emmis. It stated that Alexander would receive a $3.5 million base "as a minimum guarantee against 16% of all net commissionable revenues of the radio station." The term sheet had two conditions: (a) that iHeart and Alexander enter into a long-form employment agreement, and (b) Emmis' right to match.
The 16% Net Revenue Provision
Emmis performed an analysis of iHeart's offer and concluded that there was no reasonable way that Alexander could receive more than $3.5 million in annual compensation. To do so, KHHT's net revenue require growth that could not be achieved under current market conditions within three years after a format change. Thus, Emmis concluded the 16% commissionable revenues provision in the iHeart term sheet was an illusory "poison pill" that lacked a reasonable probability of additional compensation to Alexander.
Emmis' Purported Match
Emmis did agree to match the iHeart offer. However, Emmis could not offer the 16% revenue share, because that percentage of Power 106's net revenue would be substantially more generous than iHeart's offer. Alexander responded that Emmis' offer was not substantially similar, that iHeart's revenue sharing offer had real value and he could help iHeart's hip-hop station generate revenue, supported by iHeart's team and advertising strength. The Alexander team also believed that a custom channel on iHeart's digital platform would be substantially better than a channel on Emmis' platform because iHeart has millions of users and that iHeart's Los Angeles cluster promotions and nationally-televised tent-pole events offered more than Emmis could provide with its "local focus."
The iHeart Agreement
The actual iHeart agreement was not exactly a dream come true for Big Boy Alexander. If his show "failed," then iHeart can terminate Alexander without cause. Alexander would still receive his guaranteed base salary and any revenue share and could seek employment elsewhere, but he would not receive the promotional benefits in the iHeart Contract.
The iHeart Contract also includes a "Pay or Play" provision, similar to the post-employment consultancy idea described above. At its sole discretion, iHeart's can "bench" Alexander for up to three months, taking him off the air while preventing him from gaining employment at another radio station and terminating his promotional spending and other benefits. So, while he would continue to receive his $3.5 million base salary and technically retain the right to receive a 16% revenue share, it would have no value. Effectively, then, as Emmis pointed out, Alexander could be removed from the air and capped at exactly $3.5 million. Emmis' offer, on the other hand, contained no provision for termination without cause.
The Expert Opinions
Both sides presented experts on the potential for Alexander to actually achieve a revenue participation above his base salary. The court accepted Emmis' expert's conclusion that it would be hard to imagine that iHeart would achieve the level of gross revenue necessary for Alexander's salary to exceed $3.5 million.
So in the end, it appears that the court bought Emmis' arguments. Based on this reasoning it would seem nearly a slam dunk that Emmis get the injunction. But in the end, the matching offer comparison did not turn out to be the deciding factor. In the end, the court wrestled itself back to the basic principle of public policy that favors a person's ability to earn a living and to prevent requiring an employee to work against his will. Here is how the court got there.
Injunctive Relief and Damages
Emmis sought to enjoin Alexander from going to work for iHeart and to accept its offer. However the court found that injunctive relief cannot be used to compel the specific performance of personal services. Rather, the appropriate remedy is money damages. Moreover, it also hung its conclusion on the fact that Alexander's employment agreement had expired and Emmis was seeking to compel acceptance of its equivalent offer though the injunction.
Recognizing that an employer is generally allowed to obtain a "negative injunction" to restrain an employee from breaching a personal service contract where the services are of a "special, unique, unusual, extraordinary, or intellectual character," it found it to be undisputed that Alexander is such a performer who provides services to Emmis of a special and unique character and of peculiar value. However, it concluded that since the Emmis employment term had expired and it may be able to obtain damages for its loss, it could not obtain a negative injunction against Alexander because it does not have an existing contract with him.
With an expired employment agreement, Emmis had to rely on the right of first refusal to match iHeart's offer with "substantially similar" terms. Emmis purported to match iHeart's offer. However, the court concluded that obtaining a negative injunction to restrain a breach of an employment agreement was different than compelling specific performance of a personal services contract. Without an existing contract, it would not grant the relief even assuming that (1) Emmis had properly matched iHeart's offer and (2) Alexander breached his expired employment agreement by refusing to enter into a new employment agreement under the right of first refusal. Accordingly, Emmis may only recover money damages.
Emmis then argued that its right of first refusal is equivalent to an option for performance, that where an artist's performance is concerned, the law allows options to be specifically enforced, and consequently, the employee can be enjoined from working for another employer. However, the court found a significant legal difference between an option and a right of first refusal. A right of first refusal gives the holder a right to the exclusion of a third party, which is in essence a right of preemption, which in turn does not carry the power to compel an unwilling party to enter into a new personal services contract. Since Emmis had only a right of first refusal and not an option, Emmis could not compel Alexander to enter into a new contract. Rather, Emmis could only obtain damages from Alexander and iHeart for breach of the right of first refusal. Without a current contract, Emmis cannot obtain a negative injunction preventing Alexander from breaching the contract by entering into a new contract with iHeart.
The court also sought to balance the equities to determine the harm in granting the negative injunction. Alexander argued that an injunction preventing him from working for iHeart would deprive him of his livelihood on an ongoing basis. By itself, Alexander's harm was deemed insufficient to overcome the harm to Emmis. That alone is typical in a performer situation. In the court's opinion, however, the scale tipped against Emmis when the harm to iHeart was added to the picture, given that it had changed its station format to hip-hop in reliance on the Alexander deal.
Adequacy of a Remedy at Law
While there was conflicting testimony on the ability of Emmis to calculate its loss from Alexander's defection, it did, in fact, project its lost revenue. So, the court held that Emmis had not met the burden to demonstrate that damages would not be an adequate remedy. While it also sided with Emmis that no reasonable person would place a significant value on the revenue participation provision, it concluded that a reasonable person could still conclude that the prospect of promoting himself iHeart's larger national stage and Emmis' purported match were was not substantially similar.
Where We Are or Aren't!
In the end, Emmis' preliminary injunction was denied. But the case goes on. The court has scheduled a Case Management Conference for July 30th and more pleadings are due. Based on the ruling for the preliminary injunction, we are clearly left with the principle that it is difficult and tricky to protect an investment in a personality, but we're not done yet. This is one we will all want to follow!
This column is provided for general information purposes only and should not be relied upon as legal advice pertaining to any specific factual situation. Legal decisions should be made only after proper consultation with a legal professional of your choosing.