SHIFTS IN MARKET FORCES AND A TALKSHOW BROUHAHA POINT TO CRITICAL CONTRACT ISSUES INVOLVING EVERYONEFROM STARS TO MID-LEVEL EXECUTIVES.

LEGAL ISSUES

WHEN CONAN O’BRIEN WALKED AWAY from his NBC late-night deal with a cool $32.5 million earlier this year, he gave the entertain-ment industry a big reminder that the contract negotiation process is critical.

You don’t need to be at the pinnacle of the entertainment food chain to feel the effects of the contract process, or how the balance of power can shift. The downturn in the economy has placed new pressures on those negotiating agreements with executives and talent. With many media companies going out of business or reducing their staff and pro-gramming, talent is competing for fewer roles and opportunities.

While the top of the talent sector always seems to get their price and their terms, those in the middle are often pushed to compromise on their deals. In fact, since the writers strike in 2007, many employ-ers are presenting “take it or leave it” approaches to contracts with an unwillingness to move off their one-sided boilerplates.

Regardless of the level of talent or employee concerned, O’Brien’s settlement points to a primary rule: agreements need to be specific and consistent.

According to an article in The Hollywood Reporter published Feb. 9, if O’Brien’s initial agreement hadn’t specified the exact time of his program’s late-night slot, he would likely have been forced to move it to a different time period. Or if he had breached his agreement by leaving, he would have been required to pay damages.

Instead, O’Brien is not only receiving a huge sum of money, but his team gets $12 million. And he departs with few strings attached.

The challenge lies in creating documents that accurately reflect the intentions of parties on both sides of the negotiation table. In the media business – where change is happening at lightening speed, and technology is affecting roles, opportunities, and costs – everyone needs to insure that their documents take the future into account as well as the present.

Anticipating potential issues during a negotiation and papering the deal effectively in an agreement is key.

For example, companies may want and need flexibility due to the possibility of a merger; a reduction in staff, or the subsequent success or failure of a program or series. On the other hand, talent may need security and guarantees because by signing one contract, he or she is likely to give up other career opportunities.

Because the parties may not always agree, it is essential to assign a value to what is most important to each party, and to assess the level of risk, tolerance or flexibility that is needed to make the deal.

On a basic level, every talent agreement should define the role, duties and responsibilities inherent in the position. Is the role local or global? To whom does the talent report and who reports to him or her? Is he or she anchoring one show a day or three, and will the network be able to rerun the show on cable, the Internet or by post-ing it on YouTube?

For an executive, deepest concerns may include the location of her office or the reporting line or authority. And this requires specific-ity in the agreement. For a major star, it could be who her co-star is; the size of her trailer, or who is doing her make-up and hair. In drafting or responding to these agreements, these non-business terms may be material and must be spelled out in explicit detail to avoid ambiguity.

Changing TermsOnce the non-business terms are established, the specific business terms must be clearly articulated in the contract as well. It’s important to define such matters as the requisite performance with clear targets and goals if compensation is attached to the terms. Further, ensuring that sales levels for products (such as DVDs) are stated in the agree-ment is necessary, so that there is no second-guessing by the parties as to what triggers certain payments.

The level of guaranteed payments and the timing of these pay-ments will also change, depending on the leverage of the talent. Of course, the most senior-level executives and some major stars will always have the leverage to negotiate and specify their own terms and

ConanBy WENDI S. LAZAR

Lessons From

Reprinted from the May/June 2010 issue of The Financial Manager magazine

SHIFTS IN MARKET FORCES AND A TALKSHOW BROUHAHA POINT TO CRITICAL CONTRACT ISSUES INVOLVING EVERYONEFROM STARS TO MID-LEVEL EXECUTIVES.

conditions and to receive enhanced compensa-tion and benefit packages accordingly.

However, in the new economy these deals are affected as well. For major talent, the deals are less frequently driven by large upfront sala-ries. Instead, talent is lowering their fees and tak-ing a piece of the gross – the backend. Big stars have risked millions this year as their contracts paid out only when the show was successful.

Similarly, for the high-level executive, the deals are less about upfront cash and stock and more about deferred cash or equity that vests over time and is likely to be based on reaching target performance goals.

For both these groups, the financial rewards will depend on drafting clarity in terms of defining net, gross and ultimately, defining success.

It may become more expensive for talent to prove their worth in this economy, because they may need compensa-tion experts, in addition to lawyers. That ensures that the deal negotiated is the deal papered. Proving your worth is worthless if the agreement is not clear on the factors that will contribute and pay out bonuses, backends and residual payments.

Complicating all of this is the downturn in the economy, which is fostering companies to restructure, refinance and then attempt to redefine these contracts in order to survive.

This is certainly an issue in the television test-pilot business, and the result is that mid-level talent is likely to garner less money in the backend for new television and cable series. When test-pilot season was in full swing this year, companies included non-negotiable language in pilot agreements stating that rerun residuals were included in performers’ prepayment. In other words, they were treated as part of the actor’s regular salary.

This new language could eliminate an actor’s opportunity to make more money if the pilot is a success. Clearly, those representing series actors are under pressure to get decent upfront salaries if the back-end is now non-existent.

Boilerplate Vs. Tailored ContractsUsually a company’s counsel drafts employ-ment or talent agreements, regardless of a person’s relative importance. Some-times, these boilerplate agreements are in the form of an offer letter. If negotiated by the parties and fully executed, they are binding, even if the document states that the employment is “at-will.”

While boilerplates are easy to access and provide con-sistent rules and policies for the company, they can also be treacherous if they are overly broad or over-ly inclusive, in that they may not address the spe-

In most executive agreements, the employer wants the grounds for termination to be as broad as possible, and the talent wants it to be just as narrow.

cific role of the talent or the obligations of that role. Such boilerplates may also result in the company giving up valu-able rights because their contract terms are outdated. For example, if companies have not redefined new-technology terms, they may be giving up certain electron-ic or digital rights. Also, if the company has a non-compete that applies to all its employees but has not been structured to address individual talent competition or solicitation, the document may be found unenforceable in certain states when other factors are present.

At the same time, boilerplate agreements that do not capture the specific and individu-

al reason for an early termination of an agree-ment, or that allow for competition if certain trigger events take place, may be costly for tal-ent when they look for and attempt to secure new opportunities after leaving the position.

Individually drafted agreements give both parties an enhanced opportunity to exam-ine and understand their relationship with-out a preconceived form to inhibit or govern it. Understanding how and why the parties agreed to contract in the first place – and on what the consideration for the specific deal was based – can be worth the time and effort to document.

Once basic terms and business terms are agreed upon and both parties have signifi-cantly invested in the process, it is time to engage in a more aggressive negotiation over the legal issues that likely remain. Whether this is done by an attorney, a talent agent or an executive, there are important legal provi-sions that must be considered and will affect both parties’ rights during employment and often after it ends.

From an executive’s perspective, the essen-tial legal terms worth fighting for concern the grounds for termination; how termina-tion effects compensation and severance, and what, if any, restrictions there are on future employment. As we saw with O’Brien, the issues that trigger talents’ departure and the restrictions that could limit their ability to work are paramount. For the company, bind-ing the talent for as long as they are needed but reducing any liability if they are not, will create the tension in drafting these terms.

Terms for DepartureIn most executive agreements, the employer wants the grounds for termination to be as broad as possible, and the talent wants it to be just as narrow. Fixed-term agreements usually provide for early termination under circumstances such as death, disability and “for cause.” Agreements more favorable to the talent also provide for voluntary termination by the talent for “good reason.”

A “for cause” definition for termination should present a high threshold of wrong-doing before an employer can terminate tal-ent, because the consequences of doing so may be severe and have a major impact on the right to salary, benefits, severance, vesting

of options and other equity compensation or profit participation.

These definitions usually state that a con-viction, misrepresentation, fraud, embezzle-ment and other breaches of the relationship constitute “cause.” An executive agreement should have objective qualifiers such as will-ful misrepresentation or material breaches before “cause” can be triggered.

An ability to resign for “good reason” gen-erally means that if an employer drastically changes the material terms of the employ-ment relationship, or there is a change in control of the company, an executive can vol-untarily resign claiming “good reason,” and will still be eligible to receive severance.

These provisions are important, particular-ly in the media industry where mergers and acquisition can drastically change the posi-tion, duties and even the location of a job.

In O’Brien’s case, “good reason” may have been defined as a move to a different timeslot, other than the 11:35. For a senior-level executive, it could be a different report-ing line or that financing for the company fell through. Whatever the reason, if drafted with precision, it will cause an early depar-ture by the talent; legally trigger certain ben-efits, and could eliminate certain obligations such as a non-compete.

Severance payments or separation pay usu-ally include compensation and certain health benefits, and are paid following termination in either a lump-sum amount, or as contin-uation of salary for a number of weeks or months. Many companies have separate sev-

erance plans that are formulaic and provide payments under certain situations.

Severance can also be negotiated by an attorney in the employment agreement and be controlling, even if a company’s plan would pay out less cash and benefits at termination.

Non-Compete RestrictionsNon-competition provisions often appear in talent and executive agreements, stock forfeiture plans, severance agreements and non-disclosure and proprietary information documents. While volumes could be writ-ten about these restrictions, it is important to note that each state has its own laws about what kinds of restrictions are reasonable and

enforceable, and this will be a consideration before signing an agreement.

Often, the amount of severance is tied to a period of non-competition or non-solici-tation in order to provide “consideration” in exchange for not working for a competitor of the company or network and not poaching company staff. Again, this is an area where the definitions of client, program, account and business can completely alter the obligation and the protection.

In the media industry, on-air talent and senior executives are also privy to company secrets and marketing strategies. As a result, they are subject to restrictions on which net-works they can appear on or be hired by, if and when they leave the job.

Many states will only enforce these pro-visions if there is adequate compensation in exchange for the restriction. However, because the industry is fast-paced and constantly changing, an executive should consider wheth-er being out of the business for even a minimal amount of paid time will negatively affect his or her chance for a position in the future and agree to language that is relatively limited.

In the end, making sure an experienced attor-ney who understands the deal and who has properly translated and crafted what is intended by the parties will help to eliminate uncertainty and tribulations in the future and result in a stronger and more balanced contract.

Wendi S. Lazar is a partner at the New York law firm Outten & Golden. She can be contacted at (212) 245-1000 X9811 or wsl@outtengolden.com.

LEGAL ISSUES

Boilerplate agreements are easy to access and provide consistent rules and policies, but they can be treacherous if they are overly broad or overly inclusive