Contract Issues in the Conan-NBC Affair
Note: This piece first appeared on the website "Concurring Opinions" as two blog postings. It is printed in the Nota Bene with Professor Cunningham's permission.
Thanks to Conan O'Brien, NBC and Fox, the country is being entertained in contract law, in a case raising some fundamental and fun issues. To resolve them requires reading the Conan-NBC contract and learning facts about its negotiation, performance and current impasse. But some main issues can be identified by making some basic suppositions.
Conan, a rising talk show host, and NBC, a major television network, entered into a contract providing that Conan would, starting six years hence, host The Tonight Show, a 60-year old program NBC always launched at 11:30 or 11:35 p.m., right after local television news.
The two performed under that contract, beginning seven months ago, but now NBC has determined that the show should be aired at 12:05 a.m., with a different talk show, hosted by The Tonight Show's previous host, Jay Leno, aired during the previous half hour. Conan objects. A competing network, Fox, expresses interest in having Conan host a competing show. What are the main issues? Who seems to have the better position?
Time Slot. NBC has publicly stated that the contract is silent concerning whether The Tonight Show must air at 11:30/35 p.m. Assuming that is true, it is unsurprising, though for two reasons that pose conflicting implications. On the one hand, it could be that such operational decisions must be left with the network to enable overall management of programming. That construction of silence as to time slot could give NBC the right to make this decision without breaching.
On the other hand, it could be that such contractual silence simply reflects what everyone knows: for 60 years, The Tonight Show always aired just after the local news. So there was no need to say anything in the contract about the starting time. That construction could mean the time slot shift would be a breach of contract. Even so, or if NBC's contractual silence assertion is false, and the contract expressly contemplates the 11:35 slot, NBC could seek other contractual grounds to make the switch.
Good Faith. NBC's rights to switch times could be governed by more general contract terms, express or implied. Performance under many contracts involves such intricate matters that it is cost-prohibitive to elaborate all rights and duties in all states of the world. As a result, many contain general promises of both parties to use reasonable, best or good faith efforts in performance. Even absent such clauses, it is standard contract law, originating in parallel exclusive dealing contracts, for law to imply such an obligation. Notably, Conan would be subject to corollary duties.
Application. Such good faith or reasonable efforts standards are Protean, deliberately broad, vague and open-textured. They depend on context and here the standard will invite contending positions. Conan credibly can argue that NBC has only allowed the show the traditional time slot for seven months and that it takes more time than that for a new host of such a venerable show to promote and sustain it.
Conan may seek to prove that NBC's decision was motivated more by its interests in the ratings of other shows, including Leno's rescheduled show, than Conan's. Conan credibly can contend that the timing shift threatens serious damage to The Tonight Show as a franchise and Conan's concomitant contractual position.
These allegations may be difficult to rebut, though NBC could credibly counter in a few ways. Foremost, it is equally in NBC's as in Conan's interest to maintain the franchise value of The Tonight Show, so assertions about time shift damage may not be persuasive. Moreover, Conan's own good faith obligation may require some flexibility on his part, including performing the show at hours NBC elects, so long as these are reasonable.
More pernicious NBC decisions, like airing at 2 am or only on alternate nights, could appear to comply with technical contract terms but abrogate the contract's spirit, a bad-faith practice called pervishing in the book publishing industry. That would be a breach but it could be difficult to sustain such a characterization in this context.
Mitigation. Supposing NBC is in breach of contract, either based on a time clause or good faith obligation, it may yet credibly assert that it is taking steps to reduce resulting damages, by offering Conan the alternative arrangement of a later time slot. If so, this implicates contract law's mitigation principle and influences the relative stakes and power between NBC and Conan.
In general, aggrieved contract parties cannot recover damages that they could avoid with reasonable diligence. That sometimes means their damages are reduced by amounts that they could obtain through substitute performance. But in employment cases like this, the doctrine is applied with some scrutiny.
In a famous potentially analogous case, from 1970, the actress Shirley McClain was entitled to full contract damages, not mitigated, when a movie studio breached her contract and offered a much worse alternative. The original contract promised her the lead in a musical, Bloomer Girl, to be shot in LA, and gave her director and screenplay approvals. The studio breached that contract and offered her instead the lead in a dramatic western, Big Country, to be shot in Australia and lacking actress approval rights.
The Supreme Court of California, recognizing the mitigation or avoidable loss doctrine, nevertheless limited it to alternative offers the breaching party affirmatively proves are "comparable or substantially similar," which it took to mean neither "different nor inferior." It held, over a vigorous dissent, that the Big Country alternative was both different and inferior to the Bloomer Girl deal. So McClain won full contract damages, unreduced by that alternative.
In our case, Conan would emphasize how the Tonight Show is a unique franchise, one with a 60-year history at 11:35, right after the local news. Even a slightly later airing is both different and inferior so NBC, if in breach, owes him full contract damages. NBC would contend the difference is not so consequential and is the only thing that distinguishes the two deals.
A fact-intensive and judgment-laden disputation arises. The burden of proof would be on NBC. But the fact of the offer, and the single factual difference, gives incrementally greater power in the current high stakes discussions to NBC, not Conan.
Third Parties. Two third parties may be directly affected by the unfolding facts. Their legal interests warrant consideration too. In each case, the broad issue concerns laws that limit the rights of strangers to contracts to interfere with them.
First, and of high significance, the competing network, Fox, expresses interest in taking Conan on board if his contractual obligations with NBC can be lawfully eliminated. If Fox, aware of the Conan-NBC contract, intentionally acts in ways calculated to induce Conan to breach that contract, it would expose itself to liability for tortious interference with contract. This is potentially dangerous territory. In another famous case, from 1987, Pennzoil won a multi-billion dollar judgment against Texaco for the latter's interfering with the former's contract to buy part of Getty Oil. This too is a factor weighing in favor of NBC, not Conan, and certainly not Fox.
Second, and of lesser consequence, NBC's proposal to move The Tonight Show to 12:05 also means that the show currently occupying that slot, Late Night (hosted by Jimmy Fallon, Conan's successor), is moved back another half hour as well. Conan could credibly be concerned that his participation in facilitating that shift could interfere with contractual relations between NBC and Fallon. This may be somewhat far-fetched, but is non-trivial, and adds incremental power to Conan's negotiating position, at least.
Covenant Not to Compete? A final issue concerning any Conan interest in alternative employment other than with NBC concerns whether their contract contains any limitation on his rights to compete with The Tonight Show or NBC after their contract ends. Such covenants not to compete are fairly common in high-stakes personal services contracts like this and, so long as reasonably bounded in terms of time, geographic scope and activity, would be enforced. Again, an incremental power point goes to NBC and against Conan.
Overall. Subject to seeing the contract and learning more facts, the net balance of contract law power appears, at least incrementally if not decisively, to favor NBC over Conan. This may explain why Conan is going to great lengths to influence the public in his favor on this dispute and why NBC is being remarkably quiet in public.
Hat Tip: Mollie Bren Hailey, my current Contracts student at GW Law School.
Disclosure: Conan's brother was a student at Cardozo Law School when I taught there years ago.
My post on the Conan-NBC contract affair generated excellent comments, several gracious private emails, many cross-postings, including in the Washington Post, Conglomerate and Contracts Prof blog and, above all, lively discussion in my Contracts class. In light of lively discussions in my Contracts class, a few supplements follow.
Time Slot: Parol Evidence Rule. Concerning the contract's asserted silence as to The Tonight Show's time slot, I noted how silence could mean either NBC retained time slot discretion or how expression was unnecessary because The Tonight Show always aired at 11:30.
But a fundamental issue is what evidence a court would entertain to choose between such constructions. This raises a branch of the parol evidence rule, a complex doctrine barring the admission of certain kinds of evidence in the face of a complete and final written agreement.
This branch concerns whether a writing contains ambiguities that cannot be resolved without resort to evidence to aid its interpretation or construction. In some contexts, courts, appreciating that words have many uses rather than stable meanings, grant wide latitude in admitting explanatory evidence, perhaps especially amid contractual silence. In others, appreciating facing busy workloads and taking a pragmatic approach to contractual expression, it is prudent to adopt the "plain meaning rule," disallowing evidence offered to explain contract terms, sometimes even as to omitted terms.
In Conan's favor, because not requiring the admission of evidence but an assertion of logic and canons of contract interpretation, one could observe that if the parties intended for NBC to have time-slot discretion, the contract easily could have been written to say so. Contractual silence therefore warrants construing it to deny NBC that discretion. (Taking the plain meaning rule literally, if The Tonight Show airs at 12:05 am, it is not a show tonight but one this morning!)
NBC, in contrast, would benefit only by persuading a judge that this case warrants admiting evidence about the meaning of silence. If successful, it could adduce evidence showing that such time slot commitments appear in other network-host contracts, including with Jay Leno and David Letterman, according to reports widely available on the Internet. If so, silence here would support construing the contract to mean that no time slot commitment was intended and NBC retains discretion over that issue. On the parol evidence issue, then, advantage: Conan.
Third Parties. In addition to noted risks facing Fox for interfering with the NBC-Conan contract and Conan for interfering with the NBC-Jimmy Fallon contract, Jay Leno is another potentially relevant third party. He and his advisors must take care to avoid action that could expose him to liability for interfering with the Conan-NBC contract. Given Leno's reported role in this affair, this is another advantage to Conan.
Covenant Not to Compete. The most extensive discussion in comments to my post concerned the issue of any covenant not to compete the NBC-Conan contract may contain (or that any settlement agreement between them might include). Two additional points are worthwhile, each with opposing implications for relative NBC-Conan bargaining power.
In NBC's favor, even if such a covenant would be unenforceable under California law, that law does not prohibit covenants that restrict a person's right to poach employees and other assets when departing an employment. If some of Conan's team on the show, including his sidekick and band leader, are NBC employees, such a clause could impair Conan's right to bring them with him to any competing program. Point for NBC.
On the other hand, aiding Conan, contract law generally provides that it is a constructive condition to one contract party's duties that the other is not in breach. Subject to some qualifications generally designed to protect an exchange upon breach, if NBC is in material breach of contract, then Conan's duties would be excused, including any arising under any otherwise enforceable covenant not to compete. Net gain for Conan.
Liquidated Damages. Reports around the Internet say the contract contains a clause obliging NBC to pay Conan a stipulated sum, reportedly in the $40 million range, if it breaches. If NBC is in breach, this attempt to liquidate damages for breach may be enforceable if actual damages are difficult to ascertain and the stipulated amount reasonable in relation to forecast or actual damages. To avoid overcompensating aggrieved parites, contract law provides that, if damages are ascertainable or the stipulated amount is designed to be punitive, to punish breach, they are unenforceable.
It is difficult without seeing the contract, particularly its economic terms, to say much about this clause, whether it is intended to be compensatory or punitive. Worth noting, however, is how some devoted fans of Conan, rooting for him to claim the award, repeatedly and emphatically call it a penalty. Though words like that do not determine legal interpretation of a clause, calling this one a penalty would not help but jeopardize Conan's chances of recovering it.
Overall. Ongoing discussions between NBC and Conan illustrate the notion of bargaining in the shadow of the law, working out arrangements in light of known or probable legal claims and consequences. Non-legal forces of course are at work. Conan's legal position, still incrementally weaker to me despite the foregoing, may play a role in his decision to communicate directly to the public. But his public relations gambit may also be deftly designed for other reasons. It paints NBC, and Jay Leno, as the bad guys, and portrays himselt as the guy in the white hat, a subtle bid to disaffect viewers from NBC, and Leno, a sort of blackmail, though not illegal.
Hat Tips: To my wonderful Contracts students at GW Law School.
