Contract Law Issues in the Conan-NBC Affair

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.

UPDATE: For further analysis of the issues, see my supplemental post here.  For analysis after the case was resolved, as well as similar accounts of other contracts cases in the news, see my book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter (2012), available here.  Especially useful for 1L Contracts!

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16 Responses

  1. 1L says:

    Great issue spotter

  2. One wrinkle – covenants not to compete are absolutely forbidden in California. The exceptions are narrow and I don’t think this contract falls into them. As long as a competing show is shot there, NBC would likely have no recourse.

  3. Nate Oman says:

    Michael: I’m not so sure on the California issue. It seems to me that it would depend on three issues. First, where was the case litigated (this would matter for purposes of conflicts law). Second, what law governed the contract. Third, whether the California public policy was so strong as to override ordinary conflicts principles. IOW, suppose that the case is litigated in California, but California conflicts law instructs the court to apply NY law to the contract, and NY law allows covenants not to compete. Would the California policy against covenants not to compete over ride the ordinary conflicts analysis here?

  4. beachrat says:

    Re: Mitigation and different/inferior – I don’t think the time slot is the single factual difference or inferiority. NBC is planning to replace the “immediately following the news” time slot with the “very similar show led by the *previous* host of the 60-year franchise” time slot. It’s difficult to imagine NBC asserting with a straight face that if that had been the original offer, Conan would have taken the original contract.

    Would there be no consideration for the 6 years that Conan put himself in limbo on the expectation that the understood and as-originally instituted conditions of the contract would be honored?

    Re: non-compete clauses, note that local Fox affiliates air their news at 10:00. Arguing that a Conan show at 10:30 or 11 would compete with a new Leno show at 11:35 would seem unavoidably to support the argument that Conan’s Tonight show at 12:05 would be competing with the new Leno show (different/inferior offer), and also the argument that the relevant understanding of time slot is the “immediately following the news” slot, not the “specifically 11:35 pm” slot.

    Thanks for the overview and discussion.

  5. Nate: In my experience litigating these things (and following the cases), I would say yes, CA policy will override conflicts of law issues. I can’t see any CA court enforcing a non-compete injunction in CA. I’m aware of no case doing so (I could totally be wrong on that, so someone who knows otherwise should let us know), and one would think that we would have seen such a ruling by now if courts were willing to do so – there are plenty of out of state high-tech employees with non-competes.

  6. Lawrence Cunningham says:

    Re Michael-Nate: California’s competition policy is strong but its courts also value comity strongly so the place of litigation may be pivotal. Compare Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App. 4th 881 (1998) (denying effect to Maryland choice of law provision to evaluate covenant) with Advanced Bionics Corp. v. Medtronic, Inc., Cal. 4th 697 (2002) (refusing to enjoin threatened proceedings in Minnesota to enforce Minnesota choice of law provision and related covenant).

    [Thanks for the great comments.]

  7. A.J. Sutter says:

    Pervishing — really? I wish I’d learned that word decades ago. Could you please expand on meaning and etymology (e.g., does it come from a proper name, from “perverted”, etc.?), and if possible provide some real examples? A Google search wasn’t helpful for this usage, and Yahoo told me “we have included peevish results.”

  8. Anon says:

    Conan’s biggest risk is that a jury would agree with NBC and the general public that he failed to provide anything resembling funny material. He wasn’t funny when I was in law school and he’s even less funny 15 years later as a middle aged guy trying to act like a goofy kid. My assumption is that he succeeded in his former time slot because his viewers were frequently in altered states of consciousness. At 11:35, some viewers are actually awake and sober. He’s just horrifyingly weak at what he does.

  9. Lawrence –

    I agree with the importance of comity – the Medtronic case was big news at the time. But even if the Court lets the case go to judgment, barring competing work in other states (the right outcome), that doesn’t mean that a California court will enforce an injunction or levy based on the out of state judgment. I’m not aware of a case where that happened, though I would love to know if it has.

  10. Ken Rhodes says:

    Michael wrote >>One wrinkle – covenants not to compete are absolutely forbidden in California. The exceptions are narrow and I don’t think this contract falls into them. As long as a competing show is shot there, NBC would likely have no recourse.>>

    Michael, this puzzles me. Presumably, NBC was represented in their negotiation with Conan by some pretty experienced legal talent. Why, then, would they have put an unenforcable clause in his contract? My intuition tells me there’s something about the type of work, the type of contract, and the type of compensation, that makes it an exception to the general rule.

  11. Tom Joo says:

    Great post, Larry.
    WRT to the noncompete clause, it’s not clear that there is one in the contract, although the Fox guy quoted in the NYT article seems to imply there is one. But how would he know?

    In any case, the 9th Cir seems to apply the CA statute (Bus & Prof Code s16600) more loosely than CA courts seem to:

    Although the California statute does not except “reasonable” restraints of trade, it “only makes illegal those restraints which preclude one from engaging in a lawful profession, trade, or business.” …[The 9th Cir has] “required the plaintiff to prove that the contract ‘completely restrained’ him from pursuing his profession.”
    -IBM v. Bajorek, 191 F.3d 1033 (9th Cir 1999)

    Maybe Conan has a clause preventing him from doing a similar, directly competing show, but this wouldn’t necessarily “completely restrain him from pursuing his profession.” (indeed, what is his “profession”?)

  12. Sid DeLong says:

    Re: Mitigation. In his book, “Framing Contracts”, Victor Goldberg has argued forcefully that contracts such as Maclaine’s are “pay-or-play” agreements in which the salary figure is not awarded as compensation for breach but as the exercise price of an option to rescind. No mitigation is required nor will other earnings diminish the actor’s entitlement to the money. I don’t know what Conan’s contract provides, but the “different or inferior” standard may be irrelevant to his claim if it is a contract of that sort.

    Re Inducement: Although the ostensible claim in Texaco Pennzoil was Texaco’s inducement, two features made it a unusual case: Getty’s agent sought out Texaco and solicited the offer on Getty’s behalf, and Getty obtained an indemnification agreement from Texaco before it assented to the bid. The jury trial seemed more about the breach than the inducement, but Texaco was on the hook either way. So it might matter who entreated whom in this deal.

  13. TJ says:

    Michael’s point is really interesting. Has anyone seen a copy of the Conan-NBC contract? Presumably, since the Tonight Show is based in California, there is a strong case for applying California law to it under normal conflicts principles, but the contract itself might have chosen some other law. And even a choice of law clause, I would think that it would be hard to enforce the non-compete clause. Otherwise, you would have plenty of out-of-state companies enforcing non-compete provisions against their California employees, and you just don’t see that happening.

  14. Nancy Kim says:

    Great post! BTW, the “narrow constraints” exception that Tom refers to, and which the 9th Circuit followed, was expressly disapproved by a CA appellate court in 2006 (Edwards II v. Arthur Andersen, 142 Cal. App. 4th). The 2006 case seems to limit noncompetition clauses to situations where trade secrets are involved or to statutory exceptions, such as sales of businessness or partnerships. I’m inclined to think that if there is non-compete language, it is of the sort that is limited to the duration of the employment and not post-employment. I wonder, however, if NBC could have Conan agree to a post-employment non-compete as part of the settlement or make certain payments contingent upon his employment status (just as damages for breach of employment K by the employer are offset by new employment wages earned during the term of the K).

  15. Mark says:

    Anon wrote: “He wasn’t funny when I was in law school”

    Ipso facto

  16. Tom Joo – Nancy Kim is right – Bajorek is disavowed in state law, and the 9th Cir. would presumably follow it.

    Ken Rhodes – NBC would put such a provision in for two reasons: 1. Conan was in NY when the deal was made, and 2. even if he wasn’t why not, maybe it will fly, it’s boilerplate anyway.