JD-About-Town Jonathan Handel shares here some very interesting insights into the NBC/Leno/O’Brien slap fight. For the international reader, Jay Leno and Conan O’Brien are two big talk show hosts here in the USA, ostensibly “trapped” in a web of intrigue (others may suggest a quagmire of confused corporate fumbling) surrounding their futures as talk show hosts on that particular network. NBC, one of the USA’s top television networks, brusquely replaced Mr. Leno, former host of the renowned “Tonight Show”, with Conan O’Brien, in an effort to appeal to the prized younger demographic. They secured the demographic, but lost overall viewership. Meanwhile, the consolation prize offered to Mr. Leno, in the form of a prime time talk show, also failed in the ratings (again, some may prefer “was not given enough of a chance”). The Network affiliates revolted, and NBC – just as brusquely – announced an odd reshuffle that led to the current (and apparently soon to be resolved) standoff. For more details, read on!:
That sweet walkaway payday for Conan O’Brien might not be as rich as it sounds. Media such as Variety are reporting that NBC is likely to pay Conan $30 to $40 million to settle out his contract, with a deal to be reached shortly. But what none of the media appear to be mentioning is the two magic words of employment contract settlements: mitigation and offset. Depending on how those terms are deployed, the hit to NBC could be much less than the numbers imply – particularly if Conan scores a deal with Fox for a new show to start in September, as many observers expect.
Here’s how it works. First, as background, the NBC payments are likely to be made over the period of time remaining in his contract – at least, that’s what customary. Conan’s attorneys, agents and manager would probably press for some acceleration though, unless the tax consequences of doing so would be adverse.
In any case, mitigation is the concept that the terminated employee, i.e., Conan, has an obligation to seek other employment. If he fails to do so, the payments from NBC could stop. To protect against this, Conan’s representatives will seek, and may get, a “no mitigation” clause. In that case, the payments would keep coming even if Conan decides to sit on the beach for the next 2-1/2 years (reportedly the remaining term of his contract), though he’s unlikely to want to damage his personal brand name by simply disappearing.
At the very least, though, Conan’s team will argue for no mitigation from now until a new Conan show could feasibly be launched, which is generally assumed to be September, i.e., the beginning of the fall TV season. They’d also probably seek a guarantee that there would be no mitigation if Conan is offered and refuses a show of lesser stature, or one at a lower salary than he was receiving at NBC, or one that reaches too small a percentage of households in the country. In other words, under such contract terms, Conan would be able to refuse a “demotion” without violating a duty to mitigate.
Now on to offset. This is the concept that whatever the employee earns at his or her new job, if any, would be offset against the settlement payments owed by the old employer. This would apply only for the remainder of the old contract. For instance, suppose the agreed NBC termination payment (“liquidated damages,” in legal terminology) is $40 million, and suppose Fox pays Conan $30 million over the next 2-1/2 years. In that case, the $30 million could be offset against the $40 million, and NBC would only have to pay $10 million.
Naturally, Conan’s representatives will seek a “no offset” clause. This would be a hard-fought point, however. NBC would argue that Conan would be getting a windfall and, even worse, that he’ll be cashing those checks while competing against NBC itself. That’s like biting the hand that feeds you, but knowing you’ll get fed regardless.
Here again, there’s a compromise available: Conan and NBC might agree that his salary from the new show would be only partially applicable (i.e., partially offsetable) against the NBC liquidated damages payments. For instance, if 50% of his Fox salary (if he does a Fox deal) were applicable, then $15 million (in the above example) would be applied against the $40 million, reducing NBC’s obligation to $25 million.
On a different note, it wouldn’t surprise me if NBC seeks a non-disparagement clause from Conan. Paying him liquidated damages while he’s getting paid by Fox to bash NBC in his monologue might be too much for the NBC suits to accept.
Of course, this is all speculation. No one’s seen the existing contract, let alone the settlement agreement, since there is no settlement yet (and it’s not clear to me whether NBC would be required to file a redacted copy with the SEC). But it’s easy to see how mitigation and offset amount to a win-win. Those provisions could allow Conan’s people to leak big impressive figures, yet reduce the bite for NBC.
Whether that would be enough to keep heads from rolling at NBC is another subject. If the Comcast deal goes through, under which the cable operator would acquire a majority stake in NBC Universal from corporate parent GE, then I’d expect some hasty departures. Someone might get the ax even if the deal isn’t consummated. (The antitrust division of the Justice Department recently announced they will be reviewing the deal.) Ironically, terminating the responsible executives would probably require NBC to make more contract settlement payments.
Moving Jay Leno to 10:00 p.m. was an understandable experiment. It seemingly kept both Leno and O’Brien in the family, and lower ratings were acceptable to the network, since production costs for five nights a week of a talk show are a lot less than for five nights of scripted dramas.
Unfortunately, it looks like the downside wasn’t evaluated as thoroughly: Leno’s lower ratings at 10:00 meant diminished ratings for 11:00 p.m. local station newscasts, an unacceptable price for network affiliates, for whom the newscasts are a cash cow. Moving Leno back to late night gave NBC one host too many: Leno, O’Brien, Jimmy Fallon and Carson Daly. That’s four hosts for three chairs, and when the music stopped, O’Brien was out. Now, for NBC, it appears time to pay the piper.
Jonathan Handel is Of Counsel at TroyGould and practices digital media, entertainment and technology law. He is an adjunct professor at the UCLA School of Law, and his op-ed pieces have appeared in the Los Angeles Times, the Daily Journal, and the Los Angeles Business Journal. Visit his site at jhandel.com.