The Leno Deal…Be Careful What You Wish For!

What a web we weave….even when we don’t try to deceive!

What a mess NBC has created for themselves.  Now let me start by stating that I am not privy to the actual contracts between NBC and their affiliates, Jay Leno, Conan O’Brien, or Jimmy Fallon.  But there is a lot of speculation about the current situation and there are lessons for every business owner when it comes to contracts with key employees.

First let me discuss the situation.  NBC decided to move Jay Leno to a 10pm EST show and essentially promote Conan to “The Tonight” show at 11:30pm EST.   I think Jimmy Fallon is an extremely funny individual and I mean no disrespect but for the purposes of this lesson I am going to ignore him.

The problem is that NBC’s affiliates felt the result of that decision in lowering ratings for their late night news casts.  Those lower ratings led them to threaten NBC with preempting the “Jay Leno Show” for their own programming leading into the nightly news.

Even though NBC was making money on the “Jay Leno Show,” due to lower production costs, the affiliates were losing money and if they dropped the show it would destroy NBC’s profits from the show.  At this point, it appears NBC has given in and canceled the “Jay Leno Show.”   The latest reports indicate that NBC has presented a proposal to the three hosts.  That proposal calls for Leno to host a show from 11:35pm EST-12:05pm EST, O’Brien to host “The Tonight Show” from 12:05pm EST- 1:05pm EST, and Fallon to host his show from 1:05pm EST-2:05pm EST.

Second, let me discuss the mess.  Each of the affiliates have contracts with NBC.  Each of the hosts have contracts with NBC.  Now the scope of the mess depends upon the terms of each individual contract, and as I stated before, I have absolutely no knowledge of the actual terms of those contracts so my discussion is pure conjecture at this point.  But based upon the statements and actions of NBC I am going to speculate on the contents of those contracts because I believe there are some lessons for every business owner to learn.

Lesson #1: The terms of the contracts with the hosts do not meet the terms of the contracts with the affiliates.

Initially I wanted to title this lesson, “The terms of the contracts with the affiliates contradict the terms of the contracts with the hosts.”  But that isn’t quite accurate.  What I am getting at is that the company failed to consider the effects of a breach of contract.  Perhaps more importantly, NBC failed to consider the collateral effects of a breach on other contracts.  Remember, this situation started because NBC thought it could move Leno’s “Tonight Show” ratings to the 10pm EST time slot.  NBC failed to account for the possibility that those rating would not move with the show when it contracted with Leno, O’Brien, and Fallon.  While most people automatically think of a breach of contract in legal terms, the fact is that it can be a business decision.  NBC forgot that fact and now it is paying the penalty.

Lesson #2: Firing an employee with a contract can be expensive.

I don’t know but I am speculating there is one helluva penalty in Conan O’Brien’s contract with NBC.  There are a few reasons this seems obvious to me.  Leno was the King of Late Night when he left.  If NBC wanted him to return to that position it is as simple as snapping their fingers, unless significant money is involved.  Based upon the reports I have seen, NBC has presented a proposal to all three hosts for their consideration so they aren’t snapping their fingers.  This means that if O’Brien does not accept their offer, the terms of his contract govern.  Thus, NBC would not have made the effort of this offer unless they were concerned about the terms of his contract.  Also, O’Brien moved himself and his family across the country when this opportunity presented itself.  He would have done himself an injustice if he did not negotiation terms that provided security for that opportunity given his sacrifice.  The lesson for business owners is to be careful what you contract for because contracts are binding obligations and they can limit the decisions you can make.  NBC finds itself in the position of, in essence, needing the approval of one employee to bring back another employee responsible for creating a #1 rated show.

Lesson #3: Take advantage of the opportunity to maximize or limit your damages.

So what if NBC is found to have breached it’s contract with O’Brien?  What is the extent of the company’s liability?

Generally, contract damages are limited to actual damages and the party suffering those damages has a duty to mitigate them.  In this case, O’Brien has a duty to make a reasonable attempt to find another “similar” job.  He could sue NBC for breach of contract whether he finds another job or not, but the extent of NBC’s exposure depends upon the results of his search.  If O’Brien finds a job, then his recovery is limited to the difference between the amount he received at the new job and the amount he was to receive under the terms of the contract.

If O’Brien is unsuccessful in finding a new job and makes reasonable efforts to mitigate his damages, then he would be entitled to recover the entire amount he is due under the contract.

However, each party has the ability to limit its liability or maximize the opposing party’s liability at the time they contract.  You often see this in “buy-out” terms with college football coaches.  The Mike Leach case is a recent example.  He was due a certain amount per year, but if he was terminated prior to the end of his contract the school was only liable to him for a portion of that amount unless he was fired “for cause,” in which case the school owed him nothing.   That case presents some other issues (“for cause” is a subject all its own) so it isn’t a perfect example, but you get the idea.  An employer and an employee, and for that matter a business and its client, have the opportunity to  maximize or limit their liabilities when drafting a contract.

David B. Willis

David B. Willis

Bryan Willis is a Tyler lawyer providing legal services across Texas in the areas of business law, litigation, probate, and estate planning.
David B. Willis

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