TCS Daily


What Howard Stern Did Wrong

By Stephen Bainbridge - March 1, 2006 12:00 AM

CBS is suing Howard Stern for breach of contract and misappropriation. According to CBS Radio Inc.:

"Howard Stern repeatedly and willfully breached his written contract with CBS Radio over the last 22 months of that contract, misappropriated millions of dollars worth of CBS Radio airtime for his own financial benefit, and fraudulently concealed his interest in hundreds of millions of dollars of Sirius stock while promoting it on the air.

"That on or about January 9, 2006, Sirius paid over 34 million shares of stock, valued at approximately $220 million, to Stern and his agent because Sirius exceeded by the end of 2005 certain subscriber targets that were set in the Sirius-Stern contract. The complaint alleges that the Sirius-Stern contract provided that Stern was to receive this stock payment in 2010, but it had an acceleration provision that allowed Stern to receive the compensation as early as January 2006 if these subscriber targets were met. All of Stern's actions for which he received this expedited compensation occurred during the time that Stern was under exclusive contract with CBS Radio, when the Sirius payment terms to Stern were kept secret.

"This contract thus provided a compelling incentive for Stern to do all that he could to help Sirius reach the subscriber targets by the end of 2005 so that he could receive his Sirius stock payment as soon as possible while Sirius's stock was extremely valuable. Without the accelerated payment, Stern would risk the decline of the Sirius stock value. By taking action on CBS Radio's airtime in 2004 and 2005, Stern assured himself of immediate access to $200 million in assets that could be readily converted to cash.

"By engaging in continuous promotion of Sirius on CBS Radio airtime without any payment by Sirius to CBS for these advertisements and by pocketing over $200 million dollars for his personal benefit, Stern misappropriated millions of dollars worth of CBS Radio airtime for his own financial benefit and the financial benefit of Don Buchwald, his agent, and Sirius in contravention of repeated directives by CBS Radio."

Without having seen Stern's contract, I can't speak to the breach of contract claims. The misappropriation and fraud claims, however, raise basic and generic issues of an agent's fiduciary duties. Under those principles, it looks like CBS has a very strong case.

As the Washington Post reported last fall, Howard Stern's audience had cratered during the last few months of his terrestrial radio broadcast show, which many observers attributed to Stern's incessant on-air "railing against alleged censorship by" CBS radio and his incessant promotion of his upcoming "move to satellite radio" on Sirius. He even held a public event at which he gave away free Sirius radios and promoted satellite radio as the "future."

Analytically, the initial issue is whether Stern is an agent of CBS. According to the American Law Institute's Restatement (Second) of Agency:

"An agency relationship exists if you have a manifestation of consent by one person (the principal) that another person (the agent) act (a) on the principal's behalf; and (b) subject to the principal's control; and (2) the agent's consent to so act."

The employment contract between Stern and CBS for him would suffice to demonstrate the requisite consents.

As an agent, Stern was entitled to begin preparing to compete with CBS. The Restatement (Second) of Agency provides that an agent can make arrangements to compete with his principal even before the termination of the agency, but that he cannot properly use confidential information peculiar to his employer's business and acquired therein.

"Thus, before the end of his employment, he can properly purchase a rival business and upon termination of employment immediately compete. He is not, however, entitled to solicit customers for such rival business before the end of his employment nor can he properly do other similar acts in direct competition with the employer's business." (Emphasis supplied.)

Because promoting Sirius on the air and at his website almost certainly will be deemed an effort to solicit customers, Stern is in a clear breach of fiduciary duty.

In addition, Stern's show includes a number of side-kicks, whom he has solicited to follow him to the new show on Sirius. Again, Restatement (Second) of Agency is relevant:

"The limits of proper conduct with reference to securing the services of fellow employees are not well marked. An employee is subject to liability if, before or after leaving the employment, he causes fellow employees to break their contracts with the employer. On the other hand, it is normally permissible for employees of a firm, or for some of its partners, to agree among themselves while still employed, that they will engage in competition with the firm at the end of the period specified in their employment contracts. However, a court may find that it is a breach of duty for a number of the key officers or employees to agree to leave their employment simultaneously and without giving the employer an opportunity to hire and train replacements."

To the extent Stern induces the sidekicks to break their own employment contracts, there clearly would be a problem. In addition, courts are much less forgiving of employee solicitation when the solicitor has a supervisory role vis-à-vis those who are solicited. On the whole, however, this strikes me as a much less clear cut case than the problem of soliciting customers of terrestrial radio to shift to satellite.

On that latter issue, however, the question may be: why did CBS wait so long? My guess is that they didn't want to offend Stern's fans, but once so many of those fans followed Stern to Sirius and Stern's terrestrial radio replacements bombed, CBS no longer had anything to lose.

Stephen Bainbridge teaches law at UCLA and is a TCS columnist.

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13 Comments

Doesn't a contract exclude agency theory?

The piece is interesting. Thank you. But I'm shocked to hear the suggestion that CBS, which is a party to contract with Stern, may be heard to claim that its contractual rights are supplemented by the law of agency.

When parties negoiate terms of a contract, do they not exclude certain terms by inference? That is, if a contract features only clauses A, B, and C, then I would assume propositions X, Y, and Z have been excluded by omission, and neither party is bound to comply with propositions X, Y, and Z.

My thinking is that if CBS wanted to ensure that Stern would not promote competing business ventures, then the contract should have so stated. To the extent that the contract does not so state, I would suggest CBS should be sent packing.

Am I missing something? Is it already established that a contracting party may supplement its rights with all those pertaining to the law of agency?

cBS has no legs to stand on.
From Howard himself: http://www.marksfriggin.com/news.htm#wed

"Howard said he's not sure that Les comprehends what he says to him. Les was telling him that he has damages now because his radio division isn't making money. Howard said that isn't his fault, he just left the company. If the company doesn't make money after he leaves, it's not his fault."
"Howard asked how they could let him go on David Letterman's show and 60 Minutes to promote SIRIUS and then sue him for promoting it on his radio show. He also asked how Les and Joel could come on his old radio show, wish him luck and tell him that they bought SIRIUS radios so they could listen to the show, and then sue. It doesn't make any sense.
Howard said that Les never came to him and offered to do some things to help keep him on terrestrial radio. They didn't fight the FCC fines or even Clear Channel after they fired him from their 6 radio stations."

Fiduciary Duty vs. Protecting the Brand
I understand the concept of Stern's fiduciary duty, but could not the argument be made that CBS did not take steps to protect its (Howard Stern) brand? Two quotes, if true stand out:

1) Stern was suspended for one day because he talked about his new Sirius show "too much." This implies that he was allowed to talk about his show to some degree. (via Wikipedia)

Also, according to a Forbes article: "Stern said CBS officials knew of his plans to leave for Sirius and also condoned his references to satellite radio on the air and did nothing to stop him when he spoke about it on his show."

2) According to a Reuters report: He [Stern] said he asked Moonves why he did not pull him off the air. "Les said, 'I knew I could sue you later."

The remark suggests that Moonves/CBS was benefiting from the controversy, as people would keep tuning in to see what Howard next about CBS. It's a shtick that Letterman uses to good effect.

It could be argued that Moonves was protecting his brand by allowing Stern to rant on, but then that precludes the basis for a lawsuit, which implies that damages were incurred to the suing party.

No? Or are these concepts totally unrelated?

22 months too late
At anytime CBS could have sent Howard Stern a 'Cease and Desist' letter during the 22 months this occured. But because CBS let the "harm" persist for so long without complaint, it would be reasonable to conclude (from Howard Stern's point of view) that such talk was within contractual boundaries. So it seems to me that CBS is only interested in escaping their financial obligation.

No Subject
"According to a Reuters report: He [Stern] said he asked Moonves why he did not pull him off the air. "Les said, 'I knew I could sue you later."


So, that could be harassment and entrapment, right?

What CBS did wrong...


Contrary to what the Washington Post may have wrote, Stern's rating did not "crater" during the past few months. They remained pretty much what they have been at for the past several years despite several stations pulling him off the air months before he actually left. The fact that his ratings remained steady is even more impressive when considering the amount of censorship CBS (and to be fair, the FCC)imposed on him during those past few months and the fact that they were running 22 minutes of spots per hour during his four hour show.

Bottom line: when you a hire a Howard Stern, you expect to get a guy who speaks his mind. That is what the guy does. If CBS really felt that Stern was using their air to sell Sirius radios, then why didn't they shut him up months earlier? Because they wanted and in retrospect, needed the ad dollars he was generating for the company, as they knew that the second he left, revenues would go right into the toilet.

CBS must have had many, many opportunities to try and keep Stern. For whatever reason, they chose not to, probably believing that ultimately he had no where else to go and CBS would be in a stronger negotiating position with him. Clearly they were wrong about that. They undervalued his importance to the company's bottom line and this suit seems like nothing more than an attempt to make up for the financial short falls that his departure has created. After all, it's much easier to sue someone than to develop talent that makes the kind of money Stern did for CBS.

One more correction: To date, only a small percentage of Stern's audience has moved with him to Sirius. That may well change now that CBS has thrust him back into the limelight where he can garner untold amounts of free PR and lure even more people away from terrestial radio. Smart thinking, CBS.

Bainbridge Knows Nothing About Howard Stern And This Story Proves It
Bainbridge, this thing you wrote stinks. You clearly know nothing about Howard Stern, much less have listened to his show or followed MarksFriggin.com over the past few years. Your story is so poorly researched that you should be ashamed of yourself for bothering to offer an opinion about the situation.

The best you can do is say you haven't seen Stern's contract and then you quote that lie about Stern's ratings from the Washington Post, yet you still side with CBS and Les Moonves.

Les Moonves is a moron who forced CBS to show his friend Bryant Gumball's mug all over the place even though Gumball was a proven LOSER at ratings and everybody hated him. Gumball was hated on that morning show. Gumball was forced into hosting that first final Survivor instead of Jeff Probst. Who do you think was behind all of that? Les Moonves.

Viacom and CBS never stood behind Stern. They wouldn't fight the FCC. They'd censor Stern's show when he'd say "Doodie" but Oprah can go on and on about people ejaculating in women's faces. Stern made CBS and Viacom zillions of dollars and now they've lost their meal ticket and replaced Stern with a bunch of losers who will be gone in 6 months (David Lee Roth, Adam Carolla, etc).

You may be a big hotshot law professor, but you blew it on this one. My money is on Howard Stern. Moonves is a LOSER who is merely trying to CYA because he doesn't have any talent at picking talent. Moonves is the Peter Principle at the zenith.

Follow the Money or, in this case, the Remedy
Dear Professor:

Your time would be better spent in reviewing the new draft of the Restatement of Restitution which shows that breach of contract can sometimes lead to the remedy of unjust enrichment.

CBS is looking at the big bucks: the value that Stern secured from Sirius and the enhanced value that Sirius realized from Stern's efforts. CBS's damages would be difficult to prove and will not nearly approximately the increased values that Stern and CBS realized.

Yes CBS would shore up its case by proving a breach of fiduciary duty to establish liability for both Stern and for Sirius with Stern as Sirius's agent. But the deliberate and profiteering breach of contract may be enought to establish unjust enrichment.

The award of unjust enrichment for breach of ocntract is still very controversial even though the new draft of the Restatement of Restitution provides for such a claim.

The fun part of all of this is that this case will dredge up two big cases from the past about breach of contract and breach of fiduciary duty and the remedy of unjust enrichment: the American case of US v. Snepp ( Supreme Court in 1980) and the British case of the Crown v. Blake which was argued in the House of Lords in 2000 or 2001. In both cases, the Supreme Court and the House of Lords held for unjust enrichment.

It will be very unfair to apply these precedents becausse of the large and unusual prejudicial factors that probably lead to those holdings. Blake was the worst and most deadly traitor in the history of the British Intelligence Community and Snepp was a loyal American who chose to deliberately break his contract with the CIA to allow them to review any books before publication.

Estoppel will be key defense as you and others point out.


Best Regards


George Roach

Dallas, Texas

CBS suffered no damages. CBS also set Howard up.
CBS and Howard had numerous meetings about the satellite issue. They mutually agreed that it would be a good thing to talk about, but not to mention the brand name Sirius.

Howard followed these terms.

What is occuring now is sour grapes from Howard's arch-enemy Les Moonves along with corporate yes-***** Joel Hollander and some evil CBS lawyers with the mentality of Inspector Javert on crystal meth.

mitigating damages
CBS and Mooves had a duty to mitigate any damages. CBS had a duty to fire Stern if was damaging their brand. Mooves also has a fiduciary duty to CBS and its stockholders.

Stern also says CBS had editorial control over content. If true, and they chose not to exercise that control, they're back on the hook. Does CBS or Mooves really want to try a "so what if we're bad managers" case?

CBS v. Stern
The professor states: "Without having seen Stern's contract, I can't speak to the breach of contract claims. The misappropriation and fraud claims, however, raise basic and generic issues of an agent's fiduciary duties. Under those principles, it looks like CBS has a very strong case."

Which means "Without having reviewed the facts or even Stern's side of the argument..." I will provide you with my speculation.....

Nice job, professor....

Stern could be in big trouble
The 43-page complaint charges:

Howard Stern repeatedly and willfully breached his written contract with CBS Radio over the last 22 months of that contract, misappropriated millions of dollars worth of CBS Radio airtime for his own financial benefit, and fraudulently concealed his interest in hundreds of millions of dollars of Sirius stock while promoting it on the air.

CBS is alleging that Stern breached sometime in March 2004, 8 months prior to Stern making the Sirius announcement. Will CBS be able to claim and then prove that Stern engaged in behavior that was detrimental to CBS during this 22 month period. CBS is claiming that while Stern was under exclusive contract to CBS he breached his fiduciary duty to CBS by endlessly promoting a new venture. In short, he used CBS airwaves for his self benefit to promote his new venture with Sirius

POINT: CBS, all they will have to do is play the tapes. And the "they said I could do it" defense will not fly since contractually Stern controlled all show content


That on or about January 9, 2006, Sirius paid over 34 million shares of stock, valued at approximately $220 million, to Stern and his agent because Sirius exceeded by the end of 2005 certain subscriber targets that were set in the Sirius-Stern contract. The complaint alleges that the Sirius-Stern contract provided that Stern was to receive this stock payment in 2010, but it had an acceleration provision that allowed Stern to receive the compensation as early as January 2006 if these subscriber targets were met. All of Stern's actions for which he received this expedited compensation occurred during the time that Stern was under exclusive contract with CBS Radio, when the Sirius payment terms to Stern were kept secret.

CBS has a strong point here. Stern got paid early by Sirius because he promoted his new Sirius show/Venture on his CBS shows while he was under exclusive contract to CBS. And Sterns CBS/Infinity contract contains a clause that Stern had a duty to notify CBS of this provision in his new contract. If Stern failed to notify CBS as they claim, he can not claim that everyone knew. SEC filings and news reports do not absolve stern of his contractual obligations.

POINT: CBS, stern did it, they have the tapes to proves it

This contract thus provided a compelling incentive for Stern to do all that he could to help Sirius reach the subscriber targets by the end of 2005 so that he could receive his Sirius stock payment as soon as possible while Sirius's stock was extremely valuable. Without the accelerated payment, Stern would risk the decline of the Sirius stock value. By taking action on CBS Radio's airtime in 2004 and 2005, Stern assured himself of immediate access to $200 million in assets that could be readily converted to cash.

CBS has a strong point here. Stern got paid early because he promoted his new sirius show while he was under exclusive contract to CBS.

POINT: CBS, stern did it, they have the tapes to proves it

By engaging in continuous promotion of Sirius on CBS Radio airtime without any payment by Sirius to CBS for these advertisements and by pocketing over $200 million dollars for his personal benefit, Stern misappropriated millions of dollars worth of CBS Radio airtime for his own financial benefit and the financial benefit of Don Buchwald, his agent, and Sirius in contravention of repeated directives by CBS Radio.

Stern had an ironclad contract where he controlled all show content and it is rumored that it contained an early termination clause/payment. CBS will make the point that if they had taken Stern off the air they then would have then been in breach of contract to stern. If CBS breached the Stern contract it would have been incurred immediate financial harm and damage to CBS. CBS taking Stern off the air would have caused an immediate loss of ad revenues, and CBS would have then been liable for payment of the remainder of Stern's contract and possible penalties for early termination. So despite Stern's assertion that CBS could have taken him off the air at anytime for talking about Sirius, CBS really couldn't do that without creating a breach of contract and financial damages on their part.

POINT: CBS

That Stern also breached his contractual obligation to inform CBS Radio of plans that might have a bearing on his future. Under the Agreement, Stern had the obligation to give CBS Radio the first opportunity to discuss participation in radio projects that are conceived during the term of the Agreement, even if the concept or project was launched or implemented after the term. Stern ignored that responsibility, and negotiated and concluded his agreement with Sirius in secret.

If Stern's contract with CBS/Infininty contains this clause as CBS/Infinity claims then Stern is in serious risk here. It will be in black and white with no gray area. IF the Judge reads the contract and rules that Stern failed to notify CBS/Infinity of a new project undertaken while was still under exclusive contract to CBS/Infinity he will lose. It has also been written that Stern's CBS contract contained a right of first refusal clause for CBS. If that is true then Stern's out of the blue announcement in October 2004 clearly violated this clause

Point: CBS

To this day, Stern continues to breach his contract by refusing to return property that belongs to CBS Radio -- the recordings of his CBS radio program that, under his Agreement with CBS Radio, belong to the company.

If Stern has sole possession of Property owned by CBS (his tapes) he will be forced to hand them over, or pay to CBS whatever price they ask for them. Stern only owns the intelectual content, he has acknowledged on air that he does not own the tapes.

POINT: CBS, all CBS has to do is prove Stern has the tapes.


The suit further charges that Sirius intentionally interfered with and procured Stern's breach of the Agreement. Sirius knew that Stern had a contractual obligation to maximize the prospects for the success of the CBS Radio program and to comply with his duty of good faith. Sirius intentionally induced and caused Stern to breach these contractual provisions by offering to accelerate Stern's payment of millions of dollars in stock options to promote Sirius on CBS airwaves and by concealing Stern's stock interest from CBS Radio.

The complaint in this lawsuit was filed in the Supreme Court of the State of New York, County of New York

No Subject
"Stern controlled all show content" Wrong. Tom Chiasano and "Dead Air Dave" controlled a Dump Button that took out any content they (CBS) did not want on the air. They regularly dumped satellite discussions and referred to satellite as "Eh EH eh" POINT 2 and 3 also falls under this.


Subscribers: Most of the new subscriptions came after Stern was already off the air. Les and Joel also congratulated Stern on his move, and claimed to have bought and subscribed to Sirius themselves! And, why did CBS book Stern on many of their talk shows to discuss THIS VERY THING?

Property of STERN: He recreated many of his old songs and bits after leaving CBS. The tapes, or carts, are still in CBS's hands, and hias old shows are still in CBS's hands. They are deceptive here. This will also go into a case of intellectual property, as well, depending on the contracts. Stern also took the carts and recorded them onto CD's, which CBS allowed Stern to keep and take. That discussion, with General Manager Tom Chiasano, is also on tape.

the entire industry is lookign at CBS Radio and LAUGHING. If I was someone who wanted to do any business with CBS, I would think twice after this debacle.

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