Saturday, November 26, 2011

The Whole Hope-y, Change-y Thing Is Not Working Out For Me, You Betcha


Having already written about "The Death of Hope" (http://scarylawyerguy.blogspot.com/2011/10/death-of-hope-pt-2.html), I was reluctant to revisit the question of whether "liberal discontent" with President Obama was warranted or not; however, reporting in places like New York Magazine and Up With Chris Hayes has re-ignited this debate, which goes something like this: liberals and progressives who complain that President Obama has not done enough to advance Democratic causes are crying sour grapes.  Obama, his defenders argue, inherited a tough economy, an intransigent opposition and even with those challenges passed, among other things, landmark health care legislation, a financial reform law, improved access to student loans and credit card reform legislation.  Indeed, these pundits point out that the 111th Congress, notwithstanding lockstep Republican opposition, was the most productive one since LBJ's Great Society.  Moreover, supporters point out that the President still enjoys wide support among Democrats, which proves that Democrats are not dissatisfied with his leadership.

I am not part of the "professional left" as the President's first Press Secretary called those in the mainstream media who carp about Obama's failure to pass truly progressive legislation, but I am most certainly disaffected by his lack of leadership, his failure to leverage the enormous legislative majorities our party held for the first two years of his Presidency and squandering of the good will and desire that Americans of all stripes had for him when he put his hand on the Bible January 20, 2009.

So where did things run aground?  How did a candidate who received more votes than any other in American history, drew crowds to his events unseen in modern times and and whose 365 electoral votes included victories in states that had not gone Democratic in a generation (Indiana and Virginia) turn into an object of derision by those who most passionately supported him?  

On its most general level, the defense of the President boils down to Mario Cuomo's oft-cited observation that you campaign in poetry and govern in prose and that might be true so far as it goes, but the "poetry" that Obama employed as a candidate was particularly heady.  Consider this line from the speech the President gave in early June 2008 in St. Paul the night he clinched the Democratic nomination:

I face [this challenge] with limitless faith in the capacity of the American people, because if we are willing to work for it and fight for it and believe in it then I am absolutely certain that generations from now we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs for the jobless. This was the moment when the rise of the oceans began to slow and our planet began to heal. This was the moment when we ended a war and secured our nation and restored our image as the last, best hope on Earth. This was the moment — this was the time — when we came together to remake this great nation so that it may always reflect our very best selves and our highest ideals."

Oceans slow? Earth heals? Care for the sick and jobs for the jobless?  That's pretty ambitious stuff.  When you opt to use the Bible Abraham Lincoln was sworn in with, you are only ratcheting up the imagery and iconography that much more.  

Having offered this intoxicating brew of "hope and change," to suggest that those who believed that you would bring those things are not entitled to feel disappointment that you did not suggests that you did not buy your own bullshit in the first place.  The idea that universal access to health care would be offered or that Guantanamo Bay would be closed are not things that Berkeley hippies invented, they were things that Obama promised and did not achieve.  In the midst of the financial crisis, Obama was cool and level headed, he spoke of holding bankers accountable for their misdeeds and then promoted people to positions within his Administration who had helped create the mess in the first place.  When it came to aiding struggling homeowners, his leadership has been entirely absent and his fecklessness in the face of an ongoing housing disaster, particularly when so much was done to aid "too big to fail" banks is damning.  As for Bush-era conduct that included condoning torture, destroying interrogation tapes of terrorism suspects and other potential criminality, he essentially punted, releasing some memos but sweeping the rest under the rug as unhelpful to the public discourse, a position doubly damning - first, by not honoring the rule of law, regardless of its outcome and second, by encouraging future Administrations to engage in similar conduct knowing precedent has been set that such actions can be passed off as "policy differences" or the discrepancies of how attorneys of different political stripes view the law.  That Obama was once a constitutional law professor would be ironic if it were not so sad.  
But, defenders say, what did you want Obama to do?  He had a stone wall of Republican opposition to go against and even though he commanded a large majority in the House, by the time Democrats got around to seating their 60th senator in July 2009 (the Minnesota Senate race dragged on through a recount and challenge until Al Franken was finally seated in early July) Republican opposition had hardened and that 60-40 advantage ended just six months later when Scott Brown was elected to the Senate after the passing of Edward Kennedy.  For one thing, he could have used the bully pulpit of the Presidency to cow Republicans who were already blocking his initiatives and appointments.  Instead, he deferred to shady "gangs" of legislators who teed up a ritual that became all too familiar - the "Lucy" maneuver where Republicans would feign cooperation only to pull out of talks when the rubber met the road.  In this way, they were Lucy, the football was compromise and Obama was Charlie Brown, always thinking *this* is the time she won't pull the ball away at the last minute.  
For another, he could have taken a page from the legislative achievements of prior Democratic Presidents as examples to follow. FDR, LBJ and Clinton all swung for the fences with signature achievements that had long-term impacts.  FDR passed a flurry of social programs that provided jobs in a time of need and launched Social Security.  Johnson passed civil rights legislation and Medicare and Clinton got through a tax increase on the wealthy that while he took an enormous political hit on, helped lay the foundation for enormous prosperity, his re-election and 23 million jobs during his 8 years in office.  Obama should have understood that whatever he was going to propose was going to be opposed, but instead of going all out for maximalist goals, he constantly settled for half loaves that were not up to the challenge of the day.  
That Republicans would oppose the President's policies should not have come as a surprise to Obama or his advisers.  Indeed, unlike Bill Clinton, who came to Washington with a group of Arkansan neophytes and Washington hands who had last seen the inside of the Oval Office when the electric typewriter was the word processing machine of choice, Obama had not only been in Washington himself for the prior four years, but had as advisers people who cut their teeth fighting the policy battles of the 1990s against a prior Republican Congress.  Moreover, Obama exacerbated the problem through sloppy vetting of his nominees, which resulted in embarrassing disclosures about unpaid taxes, sidelining former Senator Tom Daschle and making some question why Obama stuck with Tim Geithner when he not only had unpaid taxes but sat at the head of the New York Fed while banks were running amok.
Rahm Emanuel might have preferred bragging about putting "points on the board" but the reality of  key pieces of legislation that did pass the 111th Congress was that they did not come close to fulfilling the promises the President made while campaigning. The argument that the laws Congress passed were the best that could be expected under the circumstances always read to me as an easy pass for a clear failure of leadership.  What Republicans quickly realized is that Obama could be bullied and would fold his position easily.  The health care law he ultimately signed is a perfect example.  Its centerpiece, the individual mandate, was originally a conservative think tank idea that was incorporated into a plan passed in Massachusetts when Mitt Romney was governor.  Not only did Obama hand the insurance companies he had railed against on the campaign trail more than 30 million new customers, he did not even reach the basic standard of "universal" coverage that has long been a cardinal virtue of the Democratic party. According to the CBO, the Affordable Care Act will still leave about 20 million people without coverage.  
Good ideas (or, at a minimum, negotiating positions) that would have lowered the Medicare eligibility age, offered the vaunted "public option" (something candidate Obama promised), expanded the SCHIP program, permitted the re-importation of drugs from abroad (another campaign promise Obama jettisoned) were never seriously supported by Obama, who, trying to do the opposite of what Bill and Hillary Clinton did in 1993, that is, standing at a distance to the legislative "sausage making" instead of presenting a fully-baked plan to Congress, went too far in the opposite direction, serving more as mediator and prodder-in-chief even as his loyal foot soldiers were taking tough votes only to have him cut them off at the knees.  Moreover, Obama never sold his vision for the importance of universal coverage, how it would benefit everyone (lowering costs across the board, improving medical outcomes, moral right as a society to provide health coverage to all) and instead allowed unwieldy legislation to advance that was combed through and picked apart by the right (death panels, health rationing, etc.).  
While there is no question the final bill included good policy, including prohibiting denial of coverage based on pre-existing conditions and allowing kids to stay on their parents' plans until age 26, much of that was originally proposed as the so-called "Patient's Bill of Rights" when Bill Clinton was President.  Given one opportunity in a generation to swing for the fences on this issue, Obama at best, tapped out a single.  Major portions of the legislation do not even take effect until 2014, and even if the Supreme Court does not strike down the individual mandate, if Obama loses re-election, the law is likely to be repealed or scaled back dramatically, making all the effort put into passing it chimerical.  
This was also true in financial regulation and Obama's general attitude toward big banks and Wall Street.  While much of the Tea Party activism that emerged in 2009 is rightly understood as recycled Republican activism wrapped in new clothing, there was (and is) an ambient discontent among ordinary Americans about unfairness as it relates to the aftermath of the financial collapse in 2008.  While the economy limps along and everything from unemployment numbers to poverty in our country are at distressing levels, more than three years after the Lehman crash that precipitated an economic meltdown that helped vault Obama to the Presidency, his actions to support working Americans have been modest at best.  Instead of tackling the issue of home foreclosures, modifying bankruptcy law, granting greater authority for judges to modify loans or deeply investing in both "shovel ready" infrastructure projects and long-term investments in education, research and development and other areas that will be critical to our future, like his immediate predecessor, Obama went for the expedient over the practical, handing out tax cuts to honor a campaign pledge instead of thinking strategically about how to re-structure the economy. 
Tellingly, the American Recovery and Reinvestment Act (the so-called "stimulus bill") contained an enormous amount of tax cutting (something Republicans invariably fail to note even though it should be catnip to them) but in doing so, diverted precious resources from works projects and infrastructure spending that had a far better chance to stabilize the employment rate, which would, in turn, have helped replenish the tax base. While the stimulus did provide money in those areas (and more to states and localities to stave off layoffs), here, Obama should have taken a lesson from Clinton, who went back on a pledge to provide middle-class tax relief after he was elected in favor of deficit reduction.  Instead of clinging to a campaign promise, Obama could have re-calibrated where stimulus would have done the most good.  Instead, he went for the cotton candy of stimulus (tax cuts) and, in the balance, passed legislation that was too small for the problem it was meant to address - the worst of all possible policy outcomes.  
Even so, the President's failure to defend the ARRA, which non-partisan analysts have suggested saved or created millions of jobs (http://scarylawyerguy.blogspot.com/2011/11/i-found-jobs-mr-speaker.html) has allowed his opponents to mischaracterize it and in the process, made the passage of needed additional stimulus spending almost impossible.  Part of this may have been naiveté on the President's part, he seems to assume that the media will act as neutral arbiters of political discourse when their role in modern day politics is to inflame it.  Rare is the journalist who challenges the talking points put forward by either party on cable news or pushes aggressively against mistruths spoken in the name of political gain.  
When Obama was faced with the choice between allowing all of the so-called Bush tax cuts to expire, as they were scheduled to do based on legislation drafted by the very Republicans who were now pushing for their extension, or extending them in full, Obama caved.  In the aftermath of this defeat, Obama argued that he could not let taxes rise on the 98 percent he wanted to protect from increases because Republicans would not allow taxes to rise on the wealthiest 2 percent of households.  Again, that might be true so far as it goes, but he never considered other alternatives.  For example, he could have called the Republicans' bluff and, if the tax cuts did in fact expire, would have allowed him to come forward with a new plan that provided more targeted tax cuts while also reminding Americans that a new debate was necessitated because Republicans would not allow taxes to rise on people who had disproportionately benefited from tax policy not just in the past decade, but the last 30 years.  Had Republicans caved, Obama would have scored a strong policy win while also showing that he could not be pushed around.
Unfortunately, the tax cut showdown foreshadowed the debt ceiling debate that took place a few months later.  Here again, Republicans were able to extract enormous concessions from the President in exchange for "agreeing" to raise the debt ceiling, something that had been done routinely dozens of times in the past and without putting the full faith and credit of the United States in jeopardy (the country's credit rating was downgraded by one ratings agency after the imbroglio).  That the American people ended up taking a dim view of both parties was of no matter to Republicans because dragging Obama's ratings down increases the likelihood that he will not get re-elected and even if he is, Congressional districts are now drawn so narrowly that Republicans will gladly risk running in a poisoned political atmosphere without fear of losing their House majority and at worst, retaining their ability to filibuster anything in the Senate.  
Of course, Republicans also get bad behavior rewarded on petty and small things from blowing Obama's swearing-in by Chief Justice Roberts to having a sitting member of Congress call the President a liar during a Joint Session of Congress.  It's little wonder that Speaker Boehner not only did not take a call from the President when the debt ceiling negotiation they undertook fell apart, but then bragged about the snub.  Obama's diminished statute is connected directly to his failure to assert himself as President, not just to confirm his "relevancy" as Bill Clinton did after the Republicans took over Congress in 1994, but affirmatively through the articulation of policies that go beyond tax cuts and reach to the core of what is needed in America today.  
While these slights and squabbles would be mitigated if Obama was achieving the change he promised to bring, what has happened instead is that economic policy has become perverted by the very policies Obama championed.  For example, because Obama would not push for things like direct employment (public works) or additional infrastructure spending, he went for more tax cut stimulus, lowering the payroll tax deduction from 6.2 percent to 4.2 percent.  While this might have provided some benefit in the short run, it did two things that in the long run are likely to be quite damaging: first, it drained billions of dollars from the Social Security Trust Fund by reducing its collections by 20 percent and accelerating the Trust Fund's inability to pay out fully to recipients; second, once a tax is cut, raising it to its pre-cut level is next to impossible, thereby exacerbating the short-term problem over the long run.  Not only that, but Obama is now proposing to cut the payroll tax again, by another percentage point for workers, and, for the first time, for businesses as well.  It would be a cruel irony if a Democratic president expedited a crisis in the very program that was the cornerstone of the New Deal, but sadly, that is where we are headed.  
Moreover, he has become doctrinaire in refusing to allow tax cuts to expire for households earning less than $250,000.  While that might be convenient policy, the reality is that very few people in America (2 percent of married couples) make that much money and in foreclosing raising taxes at that level, he is not only raising our long-term debt projection, but restricting our tax base.  Again, had Obama simply allowed all the Bush tax cuts to expire, he could have reframed a tax policy proposal that looked at modifying rates, or re-orienting the line below which he was unwilling to raise taxes in a thoughtful way instead of relying on the framework left over by President Bush.  While he might have taken a short-term hit politically, he could have re-grouped around sound tax policy and then campaigned for it in a thoughtful way, something that is now impossible because all that Congress (and the public) will focus on is extending (again at the end of 2012) the Bush-era tax cuts.  
Finally, he has put what were once sacred cows of Democratic orthodoxy "on the table" for future negotiation, including raising the Medicare age, modifying the way in which Social Security benefits are calculated and instituting pay freezes for federal workers (which has already occurred).  Conversely, the purported compromises Republicans were willing to make on taxes did not go nearly as deep and indeed, were couched in the vague language of "expanding the tax base" by lowering marginal rates at the expense of jettisoning certain exemptions for high-income earners.  Moreover, alternative budget ideas, like one advanced by the House Progressive Caucus (http://cpc.grijalva.house.gov/index.cfm?sectionid=70) are not given consideration even though that particular proposal achieves greater long-term deficit reduction than either the President's plan or the one passed by House Republicans and championed by Congressman Paul Ryan.  
The consequence of these policy and political missteps is that President Obama is probably a slight underdog for re-election.  The hope and change he promised has long ago been kicked to the curb in the name of attempting to win small victories at the margins like (yet more) tax incentives, this time for businesses to hire veterans and a possible extension of unemployment benefits.  Meanwhile, slow but steady private sector growth is being tempered by a rash of layoffs at the state and local level and Obama has no credibility or cache to drive his "American Jobs Act" through a Congress that long ago recognized that it will pay no political price for giving Obama the metaphorical finger.  
Interestingly, it was during the debt ceiling debate that Obama,in a moment of frustration, accidentally hit on what I wish he would not only remember, but use to motivate his Presidency.  During a press conference to announce that his talks with Boehner had collapsed, he made the following observation:
The difference was that we didn’t put all the burden on the people who are least able to protect themselves, who don’t have lobbyists in this town, who don’t have lawyers working on the tax code for them -- working stiffs out there, ordinary folks who are struggling every day. And they know they’re getting a raw deal, and they’re mad at everybody about it. They’re mad at Democrats and they’re mad at Republicans, because they know somehow, no matter how hard they work, they don’t seem to be able to keep up. And what they’re looking for is somebody who’s willing to look out for them. That’s all they’re looking for.
And for us not to be keeping those folks in mind every single day when we’re up here, for us to be more worried about what some funder says, or some talk radio show host says, or what some columnist says, or what pledge we signed back when we were trying to run, or worrying about having a primary fight -- for us to be thinking in those terms instead of thinking about those folks is inexcusable.
I remember watching that press conference and thinking where has THIS guy been?  What Obama framed perfectly in those remarks is exactly what he should have been fighting for, politically, rhetorically and publicly, from the day he was sworn in.  Fortunately, the election is still nearly a year away, but in order to reignite the passion that fueled his initial run for President, he will need to articulate a clear and compelling message of what he is going to do to improve the lives of the people who worked so tirelessly on his behalf.  Otherwise, he will be remembered as a failed politician who did little more than give inspiring speeches while allowing his political enemies to transform him from a beacon of hope into a second Jimmy Carter. 

Wednesday, November 23, 2011

Breaking Down Stern v. SiriusXM

Fans of The Howard Stern Show are well aware that Howard sued his employer, SiriusXM, earlier this year alleging breach of contract.  Stern has gone on several epic rants about the grave injustice that has been perpetrated against him by Sirius in its failure to pay him performance bonuses he thinks he is entitled to.  Thanks to the Internet, the filings in that lawsuit, One Twelve, Inc., et al. v. SiriusXM Radio Inc. are available through the State of New York's Court Website:

This post looks at the legal arguments of both sides and predicts the likely outcome of the lawsuit.

Although the financial stakes in the case are quite high, the legal question posed by this lawsuit is narrow.  The parties disagree about a single term in the original deal struck between Stern and Sirius back in 2004.  The October 1, 2004 agreement (“Agreement”) Howard Stern and his agent, Don Buchwald, signed, provided a number of different forms of compensation for Howard[1]:

(1) a signing bonus;
(2) a regular salary paid out in bi-weekly installments during the course of the contract;
(3) a bonus stock compensation clause that would be triggered if Sirius either acquired (a) 1 million "Howard Stern generated[2]" subscribers or (b) the total number of subscribers to Sirius exceeded an internal target (more on that below) set by Sirius in any year by more than 1 million subscribers;
(4) a performance-based stock compensation clause that would be triggered if Sirius either acquired (a) 2 million "Howard Stern generated" new subscribers or (b) the total number of subscribers to Sirius exceeded an internal target set by Sirius (the “Sirius Internal Estimate[3]” or “SIE”) in any year by more than 2 million subscribers.  This clause had several ladder triggers, so that additional stock would be awarded if the "Howard Stern generated” subscribers or total number of Sirius subscribers exceeded the internal target by 4, 6, 8, or 10 million (each level triggered an additional stock award) at the end of any year;
(5) a percentage of advertising revenue, in the form of a lump sum cash payment each year, beginning after Sirius acquired 2 million new subscribers after the announcement date;
(6) a percentage of subscription revenue, in the form of a lump sum cash payment each year, beginning after Sirius acquired 2 million new subscribers, of which, 1 million were "Howard Stern generated," after the announcement date;
(7) a percentage of the revenue from a premium channel (which was never created); and
(8) a lump sum payment of $25 million in the event Sirius and XM Radio, Sirius’s lone competitor in the satellite radio market, merged[4].

In addition, Sirius paid to construct a studio for the show, agreed to provide a lump sum figure beginning in 2006 for The Howard Stern Show related marketing and publicity, allowed Howard to retain the rights to his show, agreed to provide private jet service, "deluxe accommodations," meals and limo service for Stern and his agent when traveling for "Sirius-related" activities, and to pay for full-time limo service for Stern "in the New York area." Finally, Stern was given a budget to pay for production costs of the show, a four-day work week and 10 weeks of vacation[5].

Pretty sweet deal, huh?  Of the eight ways Howard got paid under this contract, the only one he and the company are arguing about is the performance-based stock compensation.  That clause states:

"Performance Based Stock Compensation.  You shall receive a performance based stock award of [REDACTED] if this Agreement remains in effect and, on or before December 31, 2010, either (i) Sirius has acquired a total of 2,000,000 or more HS-[Howard Stern] Generated Subscribers; or (ii) the total number of Sirius subscribers at the end of any calendar year exceeds the 'Siri Internal Estimate' year-end target set forth on Exhibit A for such year by more than 2,000,000 subscribers."

As noted, the contract has escalator clauses that are verbatim to the above where the "HS-Generated" subscribers or total number of Sirius subscribers exceeds the SIE at year-end by 4 million, 6 million, 8 million or 10 million. 

So let's look at this legal squabble.  Both parties agree that the clause was triggered in 2006, when the total number of Sirius subscribers on December 31, 2006 was 6,024,555, or more than 2 million above the internal estimate the parties had agreed to, 3,707,000.  Indeed, even though the parties agreed to redact all financial information related to the contract, a quick Google search (apparently, the lawyers in this case don't realize that just because you black something out does not mean it cannot be found) confirms that Howard and his agent received 22.1 million shares[6] of Sirius's common stock on or around January 10, 2007 based on meeting the performance-based clause.  This roughly $83 million windfall was on top of nearly $200 million (based on 34.4 million shares) Stern collected thanks to meeting the bonus stock compensation clause before the show even aired.  The difference in the value had to do with Sirius's stock price, which was lower when the performance-based compensation was paid in early 2007 than when the bonus payment was made in early 2006.

It is after the January 2007 performance-based bonus was paid that the sides diverge.  About a month after doling out those 22 million plus shares of stock, Sirius announced that it was acquiring XM Radio.  Although regulatory delays slowed final approval, the Federal Communications Commission signed off on the merger in mid-2008, which was formalized on July 28, 2008.  The merged company had more than 18.5 million subscribers the day it was formed and, by year's end, eclipsed 19 million subscribers.  The total subscriber numbers for the merged company dropped slightly the following year to close to 18.8 million but rebounded by the end of 2010 to pass 20 million.

Stern, through his agent, sought to enforce the performance-based compensation clause at various times in 2009 and 2010, arguing that the benchmarks set in the Agreement had been triggered based on the total number of subscribers to the merged company. According to the Plaintiffs, Sirius rejected this argument and refused to discuss the matter[7].  Having been rebuffed by Sirius, (Stern) and Buchwald filed a lawsuit in the Supreme Court of New York[8] alleging that Sirius breached its contract to them by failing to pay out on the performance-based compensation clause[9].  According to the lawsuit, once Sirius acquired XM, XM’s subscribers became Sirius subscribers, thus triggering the escalator clauses in the Agreement[10]. According to Stern and Buchwald, the contract did not define "Sirius subscribers" as subscribers to the Sirius *service* but rather, to Sirius, *the company[11].* Under their interpretation, subscribers should count, without regard for whether they pay money for the Sirius service or XM service (which are different), because once the two became one, everyone was paying money to what was now a single entity.  It follows, according to them, that when the XM subscribers covered by the merged company are added to the Sirius subscribers, the escalator clauses up to 10 million were triggered in 2008[12] and the escalators up to 8 million were triggered in 2009[13] and 2010[14].

After answering the complaint, Sirius filed a motion for summary judgment, a common litigation tactic often used in one of two instances: (1) for nuisance cases and (2) where one side, in a financially advantageous position, wants to ‘bleed’ the other side by forcing them into costly motion practice at the beginning of the case.  I know, in theory, SJ motions are beneficial and help unclog our court system by removing spurious cases and no doubt there is some merit to the Sirius argument, but in reality, a corporation is almost always going to be in a better financial position to litigate than a private complainant.  If it gets lucky and the court grants the motion, the case goes away.  If the motion is denied, it can either appeal the ruling (adding legal fees) or launch a lengthy discovery process that includes document production, depositions and (potentially) pre-trial motion practice, all of which serve its interest in not having to pay and, potentially, making the case so financially burdensome for the Plaintiffs that they look to settle for pennies on the dollar[15]. 

Summary judgment essentially says to a court that even when every factual inference is accepted in favor of the non-moving party (in this case One Twelve and Buchwald), the court must, as a matter of law, rule in favor of the moving party (in this case Sirius).  In other words, Sirius is saying to the Court that even if everything Howard and Don are saying is true, there is no legal basis for their case and it must be dismissed.  Summary judgment is a high bar, and in support of its motion, Sirius is relying on the argument that the terms of the Agreement are clear, making appropriate a determination on motion for summary judgment that Stern and Buchwald’s claim is without merit and furthermore, that there are no genuine factual matters in dispute such that advancing the case past the summary judgment stage is necessary[16]. 

Sirius's argument, as you would expect, is that "Sirius subscribers" were understood to be subscribers to the Sirius radio service that was exclusively airing The Howard Stern Show and not to a cumulative number of subscribers the merged satellite company had.  Its briefs outline a number of points, beginning with a common argument of plain construction, the dictionary definition of a word, here, “subscribers” defined as “one that subscribes, as in ‘one that signs something (as a letter, document, agreement)[17].’” Under this meaning, Defendant argues, at the time of the Agreement, the only person who would qualify as a “subscriber” would be one who received the Sirius service, not XM[18].

Further, Defendant points to the SIE, which also included subscriber estimates produced by analysts in 2004 who tracked the company but notably, according to Sirius, did not include estimates of growth for XM, its competitor.  This absence, according to Sirius, shows that the parties did not contemplate the impact of a potential merger on the triggering of the performance-based compensation clause[19].

Turning to the merger provision, Defendant asserts that the lump sum payment to Stern under this section is the sole form of compensation he is due based on the joining of the two companies.  Sirius cites the use of the term “all subscribers of the surviving company” in the merger clause as proof that in the Agreement, the parties intentionally used language in that specific sub-section to refer to hypothetical post-merger subscribers and had they wanted to, would have used the same language in regards to the performance-based compensation clause.  Moreover, Defendant notes before and after the parties signed the Agreement, and (according to Sirius) more importantly, before and after the merger, Sirius and XM were two separate companies[20].  Sirius also points out that the merger provision would have been superfluous under Plaintiffs’ reading because there would have been no reason to pay a lump sum amount to Stern when the performance-based compensation would trigger a far greater payout and that consent would not be needed to broadcast Stern’s show to XM subscribers if they were now all “Sirius subscribers[21].” 

Sirius also points out that the SIE was based on internal growth numbers produced in 2004, well before anyone contemplated the possibility of a merger and therefore, represent models for predicted “organic” growth of Sirius through its own marketing and expansion efforts, not those that would include simply adding its competitor’s listeners to a lump sum total in the event the two merged[22].  Sirius points out that XM subscriber numbers were not included in the internal projections, which, in its view, support its argument that the parties viewed Sirius subscribers as those of the service and not the company. 

Finally, Sirius argues that if the Court accepts the idea that XM subscribers should be counted, it would lead to an absurd reading of the contract, specifically, that hypothetically, had the companies merged the day after the Agreement was signed, all of the performance-based triggers would have been met, something the contract could not have intended to happen[23].

In opposition to Sirius’s SJ motion, Plaintiffs argue that the contract is not plain on its face but rather, “is subject to at least two reasonable interpretations or the parties’ intent must be gleaned from disputed extrinsic evidence[24].”  For the purposes of avoiding dismissal on summary judgment, this point is critical.  As noted above, if the contract is clear, (i.e., that XM subscribers do not count toward the performance-based incentive), there is no case, and it will be dismissed.  Secondly, Plaintiffs argue that there are material facts in dispute that require disclosure (discovery).  In other words, the facts are in dispute and need to be fleshed out through the reciprocal exchange of information by the parties.

With regard to the first point, and Buchwald made several arguments[25].  First, they claimed that reference to “Sirius” in the contract is to the company, Sirius Satellite Radio, Inc., not the radio service it provides. Further, Sirius, in other places such as its “terms and conditions” document for subscribers, uses the term “radio service,” showing it knows how to distinguish between the company and the service it provides.  It follows therefore, that Sirius is able to write contracts that reference the service versus the company, and, having not made that distinction here, the contract language should cover subscribers to the company, not to the service.

Second, Plaintiffs say that the XM Merger clause shows that the parties contemplated the possibility of a merger and that in the event it happened; the clause refers to subscribers as ones of the “surviving company,” which is most logically read as meaning all subscribers to whichever company remained.  Also, Plaintiffs refute Defendant’s claim that the merger bonus was the only form of compensation due Stern, but rather, was a separate award negotiated as part of the overall package.  Finally, the Plaintiffs point to a number of public statements by the company that speak of the total number of subscribers to SiriusXM without qualifying that total in any way.  That is, Sirius, in public, and in its filings with the government, refers to the company singularly, not as two separate entities with two different subscriber bases.

Third, Plaintiffs hammered on the narrative theme of the initial negotiation.  In Stern’s affidavit, he reflects on the time period in 2004 as one where he was ambivalent about continuing to work after his contract expired at the end of 2005 because “[I] was keeping a grueling schedule, waking up at so that I could be on the air by 6 a.m., and I was very often on the air for more than five hours daily[26].” He was unwilling to sign with Sirius unless he was made a partner in the endeavor and that the terms of his agreement were structured in such a way that as the company expanded and profited from that growth, so did he[27]. In this way, Stern and Buchwald frame the performance-based compensation as part of the larger narrative – Sirius would have never survived without Howard, Howard’s signing with Sirius first made it competitive with XM and then financially strong enough to acquire it – and therefore, the performance-based compensation is properly framed as not only a reward for a job well done, but consistent with the overall tenor of the pre-agreement negotiation wherein Stern and Buchwald wanted contract terms that enriched them if Stern’s presence on Sirius accrued to the company’s benefit[28]. 

As to the question of whether there are disputes about the facts in the case, Plaintiffs made two points[29]. First, the parties have a dispute over whether “Sirius Subscribers” was a term intended to be limited to subscribers to the Sirius service or was meant to include all subscribers to any service offered by the company (including XM).  Plaintiffs submitted affidavits from Stern and Buchwald confirming their view that the term was not so limited and point to the fact that Sirius did not provide an affidavit from any Sirius employee directly involved in the initial negotiations to counter that assertion[30].  Second, that discovery is needed to confirm Sirius’s claim that after the merger, XM and Sirius were “wholly separate” entities until the integration of XM was completed in early 2011.  Plaintiffs also seek discovery to elucidate the “negotiation, drafting, execution and interpretation of the Agreement; Sirius’s acquisition of XM, including the way in which the acquisition was structured and its effect on the parties’ Agreement; and how Sirius counted its ‘subscribers’ both before and after the XM acquisition.[31]” Lastly, even without that discovery, Plaintiffs point to the fact that many of the companies’ operations were integrated before 2011, such as human resources, investor relations, general management and others, that there was significant programming overlap between the companies and that a “Best of” Sirius service was offered to XM subscribers who, for an additional fee, were able to receive the Stern Show[32].  This, they argue, points to the company’s view of itself as a single entity even before the formal integration, something it should not be able to pick and choose when it serves its needs.

So where does all of this legal back and forth lead us and what is the likely outcome of the case? In the short-term, the court will, at some point, hear oral argument on Sirius’s SJ motion[33] and issue a ruling.  If Sirius prevails, the case is over unless Stern and Buchwald decide to appeal, in which case, the appeal would not be on the merits of the lawsuit, but rather, whether dismissing it at the summary judgment stage was appropriate.  This would not foreclose a settlement because it is possible the appellate court would reverse the trial court, but any offer from Sirius with a granted summary judgment motion in its back pocket would probably be very modest. 

In my view, the more likely short-term scenario is that the court denies the summary judgment motion and allows the case to continue.  I do not think, having read the briefs submitted to court, that it will find, as a matter of law, that the contract term in question is clear on its face and that both parties understood it to mean only those persons who subscribed to Sirius, the service, not Sirius, the company.  I say this for several reasons.  First, and tellingly to me, is a passing line in Sirius’s Memorandum in Support of its Motion for Summary Judgment: “Although ‘Sirius’ is a defined term, the words ‘Sirius subscribers’ are not expressly defined[34].”  If you are conceding at the outset that the term in question was not expressly defined, in my view, you are basically conceding that there are likely to be, at least at the summary judgment stage, two colorable definitions of that term such that your motion is going to get denied.  You are also acknowledging that the contract was not “clear and unambiguous on its face[35]” if you are resorting to dictionary definitions, nuanced arguments about internal estimates and spinning hypotheticals about day after agreement mergers.

Second, the Plaintiffs will undoubtedly focus on the nature of the 2004 negotiation, Sirius’s comparatively weak market position viz a viz XM Radio at the time and the fact that incentives were placed in the contract as both recognition of Stern’s potential drawing power and a way to encourage promotion of the service.  In that way, Plaintiffs will gain support for their view that the language of the contract was not plain and that the parties have a dispute about the material fact at issue – namely, the definition of who each understood to be a “subscriber” for the purposes of the Agreement[36].  Moreover, Plaintiffs could also point to their own hypothetical (not mentioned in their papers) of a situation where XM would have folded or went bankrupt – if Sirius had acquired listeners in that way, would anyone dispute that they could count as “subscribers” for the purpose of the Agreement?  Finally, while I think a court will understand that Sirius relied on Stern’s drawing power to generate subscriptions, the incentives in the contract were not solely based on Stern’s ability to generate new subscribers.  Sirius negotiated a weaker deal because they had other marketing schemes (primarily directed at new car buyers) that might have goosed their overall subscription numbers without Stern’s direct influence. 

In Sirius’s favor, there is a point to be made that the insertion of a “merger clause” and lump sum payout suggests that the parties were aware of the possibility of a merger (although the vague language of the clause does not indicate that it would necessarily be Sirius buying XM necessarily) and that the significantly larger performance-based compensation clause would obviate the need for a lump sum payout if subscribers to another service were intended to be counted for the purposes of this contract.  Further, had the merger gone the other way, that is, XM had acquired Sirius, and the merged company termed “XM Radio, Inc.” based on Stern’s reading of the Agreement, he would have no case because all the Sirius subscribers would be XM Radio subscribers.

Sirius could also turn Stern’s arrogance against him by showing that the performance-based compensation was a product of Stern’s expectation that his move to Sirius would spike subscriptions and therefore, subscribers should be understood to include people who were attracted to Sirius by Stern.  Sirius would argue that the intent of the parties was to count people who would have access to the exclusive content Sirius was offering – specifically, The Howard Stern Show, which was not available anywhere else and therefore, only those subscribers who had access to Stern’s show were intended to be counted.  Indeed, both parties would likely agree that the point of hiring Stern was so that Sirius, which was lagging well behind XM, could become more competitive with it.  But in arguing for its weakness, Sirius might move to strength by pointing out that when XM subscribers were offered an enhanced package of Sirius programming, only 9 percent of their listeners chose to purchase it. 

Of course, this discussion just points to the general weakness in Sirius’s SJ motion.  Namely, that the term “Sirius subscribers” is not plain on its face and therefore, a court cannot rule, as a matter of law, that the clause was not triggered by the merger with XM. It does not, however, mean that the ultimate outcome of the case will be unfavorable to Sirius.  Denial of Sirius’s motion would simply allow the case to move forward and discovery to begin. Discovery would be particularly illuminating because the notes, memos, emails and recollections of the parties involved in the negotiation are largely absent from the pleadings and even where present, are unsubstantiated representations that beg to be challenged by contemporaneous information that discovery was created to produce[37].  A denial of the summary judgment motion will not be fatal to Sirius or a full triumph for Stern and Buchwald, but it will alter the litigation calculus each considers when deciding how they want the case to proceed. 

The dirty little secret of the court system, both criminal and civil, is that it barely functions even though the overwhelming majority (the figure is between 90 and 95 percent) of all cases in both parts of the system settle before trial.  This is because litigation is time consuming, labor intensive and, when cases do go to trial, completely take over a court’s docket from anywhere from a few hours to many months. In the civil context, there is a strong incentive to settle largely because cases are rarely so open and shut that you are confident enough in your position to take the matter to trial.  What lawyers (and their clients) must measure is not only the strengths and weaknesses of their legal arguments, but the more amorphous “litigation risk” that lingers in the background of any case.  Litigation risk could include fear of disclosure of embarrassing (but not legally damaging) information, the costs associated with litigating a case, the tax on corporate resources (not just financial but human), the potential downside risk to an adverse judgment versus the cost of a reasonable settlement and, where publicly traded corporations are involved, the potential threat to share price, institutional shareholder desire for avoiding protracted legal matters and stories in the press when the case bubbles up to the surface in the form of publicly available court filings or appearances. 

In this case, the first question Stern and Buchwald will look at is the likelihood of success on the merits and the possibility that taking the case to trial and losing will mean not only incurring enormous legal fees, but having nothing to show for those efforts.  To me, this case is 50/50 at best.  On the one hand, Plaintiffs are right that the term “Sirius subscribers” was not limited and could be read to include subscribers of another service who merged with Sirius but did not receive the Sirius service.  On the other hand, there was a merger clause in the contract that paid Stern a handsome fee in the event a merger happened and the overall tenor of the negotiation in 2004 did not contemplate a merger but rather, focused on structuring a contract so that if Sirius grew its business based on accumulating listeners who bought the product to listen to Stern he too would profit from that growth.  Stern and Buchwald will have the burden of proof (preponderance of the evidence, i.e., more likely than not) that, without knowing what smoking gun might pop up in discovery, is iffy at best. 

Taking into account that uncertainty, and Buchwald’s primary non-legal litigation risks are likely to be monetary and publicity related.  While Howard is a very wealthy man and Buchwald runs a successful talent agency, their funds are not unlimited, even if they have insurance coverage or some other form of money to assist in offsetting their costs.  The small army of lawyers, paraprofessionals and assistants that must be mobilized during discovery costs a lot of money and, at some point, there may be a cost/benefit loss to them by continuing to litigate[38].  Further, both Stern and Buchwald would be obvious deponents, the transcripts of which would likely be available if the case went to trial.  Such public airing of dirty laundry is anathema to Stern, who is notoriously private, and Buchwald, who also keeps a very low profile. 

When you combine these two, settlement, from Plaintiffs’ perspective, seems the more prudent course.  As small businesses with limited resources, it will not be in either Stern’s or Buchwald’s financial interest to litigate a mediocre case to completion.  Moreover, the discovery phase could produce embarrassment to them and result in public disclosure of information they prefer remain private.  Finally, while their case may not be a slam dunk, if it survives summary judgment, it will put them in a position to negotiate a settlement that at least allows each to recoup some of what they think is owed to them.

With regard to Sirius, its downside financial risk is largely unknown because the terms of what Sirius agreed to pay Stern if the higher subscriber numbers were achieved are redacted; however, we do know that upon reaching the 2 million subscriber threshold, Stern was rewarded with 20 million shares of stock.  It is fair to assume that additional awards, which were predicated on reaching harder, not easier, subscriber targets, would be no less than what was awarded previously, and could, quite possibly, be greater.  Fortunately for Sirius, their stock price is far lower than it was when the contract was negotiated in 2004.  Currently, Sirius trades at less than $2 a share and even then, the value of the stock is diluted as compared to 2004 because XM shareholders were given 4.6 shares of Sirius stock in exchange for 1 share of XM stock when the companies merged.  This fact notwithstanding, triggering multiple 20 million share escalator clauses would still be an enormous financial burden to Sirius, even more so if the higher escalator clauses require Sirius to pay out more than the 20 million shares given to Stern at the 2 million subscriber level.  Even with a stock trading at less than $2 a share, if the incentive clauses are consistent, Sirius’s financial exposure could reach well over $100 million.

A potential $100 million hit is significant enough that settlement would also be in Sirius’s interest.  Compounding that fact is that a 50/50 case does not speak particularly well of Sirius’s chances of success either.  This is particularly true because little if anything is known (or has been disclosed) about the negotiation in 2004.  As noted, none of the corporate personnel involved in negotiating with Buchwald filed affidavits in the case, they will in all likelihood be deposed and their non-privileged notes, memos, emails and other information produced.  There may very well be a smoking gun that affirms Sirius’s position that XM subscribers were specifically excluded from any future count of Sirius subscribers, but if so, such a document would have already been produced to support its case, leaving two other options – either no such documents exist (in which case the lawsuit will boil down to one judge’s interpretation of the Agreement’s language based on the recollections of the parties and the relevant case law) or documents exist that are unfavorable to Sirius (something that is also unlikely if only because with knowledge of such documents, Sirius would have engaged in more meaningful settlement discussions with Stern and Buchwald before the lawsuit was filed).

While there’s no question Sirius is in a stronger financial position to fight this lawsuit, its deep pocket must be balanced against the possibility that the Plaintiffs will prevail at trial and collect an enormous financial windfall (not to mention potential legal fees on top of it).  In the cost/benefit analysis that any publicly traded company involved in litigation must make, I doubt Sirius will want to take the case to trial.  Settlement, while unpleasant, is a more prudent outcome.

But let’s assume the case does go to trial.  Who will prevail?  The short answer is, I don’t know.  In my own view, I think there is merit to the argument that the parties did not contemplate XM subscribers being folded into Sirius, although the fact that XM was a wholly-owned corporation even post-merger seems narrow and too legalistic.  Further, I think Stern and Buchwald inadvertently played into a weak hand by focusing on the great benefit Sirius achieved by hiring Stern.  To my mind, this speaks to the nature of the agreement as being one focused on generating subscriptions based on Howard’s presence on Sirius’s service, not as an employee of the company.  If the negotiation is looked at in this way, the fact that 8 million XM subscribers were merged into Sirius but opted against purchasing an additional “Best of” that gave them a qualified “Sirius subscription” would militate against Stern’s reading of his contract.  Had Sirius and XM merged their programming, that is, all subscribers to XM received Sirius programming (including Howard), I think he would have a stronger case, but essentially, Sirius acquired a huge number of subscribers to another service who now had the same corporate parent.   

This is not to say that a judge will rule in Sirius’s favor.  It is also possible that a judge might look at the plain language of the contract and say that there were no limitations on the acquisition of “Sirius subscribers.”  A judge may think it is appropriate to include any person who pays a fee to a subsidiary of Sirius and that the fact that Sirius’s subscriber number spiked so dramatically between late 2004 and the end of 2006 indicates that Stern did in fact drive sales and contribute to the acquisition of XM.  Moreover, a judge may decide that it was not Stern’s responsibility to make his program available to XM subscribers, so he should not be punished because Sirius chose to charge an additional $4 a month fee to XM subscribers who wanted the “Best of” package when they could have provided his show at no extra cost. 

On balance, and particularly because Stern and Buchwald carry the burden of proof in the case, I think it more likely than not that they would not prevail at trial.  I simply do not think, in light of the initial negotiation, the existence of the merger fee, the other financial enrichment Stern received under the contract (which is undisputed by either party) and the vagueness of the language regarding the performance-based compensation, that their interpretation of the contract meets the preponderance standard.  Further, the uncertainty of taking the case to trial for both sides militates against either one pushing in that direction.  I expect the case to settle, terms not disclosed, shortly after the denial of Sirius’s summary judgment motion. 

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[1]   Under the terms of the Agreement, Buchwald receives a “consulting fee” for all compensation paid to Stern.  Although the fee is redacted, ¶F of Sirius’s answer indicates the fee is 10% (One Twelve received $25 million when Sirius and XM merged and Buchwald received $2.5 million.)  See, SiriusXM Answer at 3.
[2]   The Howard-Stern generated subscribers were defined as individuals who signed up for Sirius in a way directly attributable to marketing done by Stern (e.g., by promotion code, 800-number, etc.).  See, Letter Agreement at 2. In the lawsuit neither nor SiriusXM suggest that “HS-Generated” subscriptions triggered either the bonus clause or the performance-based compensation clause.
[3]   The SIEs were as follows: 2004: 1,084,000; 2005: 2,256,000; 2006: 3,707,000 2007: 5,291,000; 2008: 7,192,000; 2009: 9,264,600; 2010: 12,112,400.
[4]   See, Answer at 3.  In subsequent court filings, all financial terms related to Stern and Buchwald are redacted.
[5]   See, Letter Agreement dated October 1, 2004 to One Twelve, Inc. at 7-9. If you're doing the math at home, 4 shows a week for 42 weeks is 168 work days a year, less official holidays.  Nice work if you can get it.
[6]   If the Buchwald consulting fee is the same for the performance-based compensation as it is for the XM Merger fee (10 percent), it suggests Stern received 20 million shares and Buchwald 2 million shares.
[7]   Affidavit of Don Buchwald in Opposition to Defendant’s Motion for Summary Judgment at 13.
[8]   In the state court system in New York, the trial court level is referred to as the Supreme Court.
[9]    See generally, Summons at 19-21.
[10]   Id. at 19.
[11]   See, Plaintiffs’ Brief in Opposition to Defendant’s Motion for Summary Judgment at 12.
[12]    SIE: 7,192,000/Total Number of Sirius/XM Subscribers: 19,003,856.
[13]   SIE: 9,284,600/Total Number of Sirius/XM Subscribers: 18,772,758.
[14]   SIE: 12,112,400/Total Number of Sirius/XM Subscribers: 20,190,964.
[15]   Yes, this is the state of our legal system.  No, I have no good answers about how to fix it.
[16]   As Sirius notes, where the question before the court is the construction of an “unambiguous written contract, the dispute ‘is one of law, and therefore appropriately determined on a motion for summary judgment.’” Memorandum of Law in Support of Motion for Summary Judgment at 10, citing Benjamin Elec. Eng’g Works, Inc. v. Rampart Construction Associates, 173 A.D.2d 370, 379 (1st Dep’t 1991)(internal citation omitted).
[17]   Id. at 13.
[18]   Ibid.
[19]   Id. at 15-16.
[20]   The merger was set up in such a way that XM merged with a subsidiary of Sirius but was “a separate corporation wholly owned by Sirius.” See, Affidavit of Thomas D. Berry ¶6.  It was not until January 12, 2011 (after the end date of the initial Agreement) that “XM Satellite Radio Inc. was rolled up into Sirius.” Ibid.
[21]   Reply Memorandum in Support of Motion for Summary Judgment at 6-7. 
[22]   Memorandum of Law in Support of Motion for Summary Judgment at 3.
[23]    Reply Memorandum in Support of Motion for Summary Judgment at 3-4 (“[I]t would be illogical to conclude that the parties – having agreed to Performance-Based Compensation provisions … intended that all XM subscribers be counted for Performance Based Compensation upon a merger without making an adjustment to the Siri Internal Estimates to factor in the projected number of XM subscribers over the term of the Agreement.”)
[24]   Plaintiffs’ Brief in Opposition at 10, citing Dermot Co. v. 200 Haven Co., 41 A.D.3d (1st
Dep’t 2007
).
[25]   Id. at 12-20.
[26]   Affidavit of Howard A. Stern in Opposition to Motion for Summary Judgment at 2. Listeners to Stern’s Sirius show are all too familiar with this lament, although Stern should be far better rested now that he only works 3 days a week and is off the air no later than , and usually earlier, each day. 
[27]   See, e.g., Stern Affidavit at ¶¶7-10.
[28]   Plaintiffs’ filings are littered with encomiums to Stern’s radio success and quotes from Sirius executives, analysts and media reports about the overwhelming success of Stern’s move to Sirius.  See e.g., Summons at 3-4, 12-15, Affidavit of Don Buchwald in Opposition to Motion of Summary Judgment at 2 (“… Stern was the biggest star on radio.”)
[29]   Plaintiffs Brief in Opposition to Motion for Summary Judgment at 20-25.
[30]   Both Stern and Buchwald submitted affidavits in opposition to Sirius’s summary judgment motion and both contain statements reflecting their understanding that no limitation was being placed on the method in which Sirius subscribers were acquired.  See generally, Stern Affidavit at ¶¶18-19, Buchwald Affidavit at ¶¶23-24.
[31]   Id. at 24.
[32]   According to Sirius, roughly 1 million XM subscribers purchased a “Best of” subscription, leaving more than 91 percent of XM subscribers without access to Stern. Memorandum of Law in Support of Motion for Summary Judgment at 8.
[33]   As of this writing, nothing on the Court’s website indicates that the matter has been docketed for oral argument.
[34]   Defendant’s Memorandum of Law in Support at 13.
[35]   Id. at 10, citing IDT Corp. v. Tyco Group, S.A.R.L., 13 N.Y.3d 209, 214 (2009)(internal quotation marks and citations omitted).
[36]   Plaintiffs’ argument is bolstered in this way by the absence of an affidavit from any Sirius executive directly involved in the 2004 negotiation.
[37]   See fn. 30 supra.
[38]   It is possible that the law firm representing Stern and Buchwald is working on contingency, but I doubt it.