Mitigation ‘Round About Midnight?

That sweet walkaway payday for Conan O’Brien might not be as rich as it sounds. Media such as Variety are reporting that NBC is likely to pay Conan $30 to $40 million to settle out his contract, with a deal to be reached shortly. But what few of the media appear to be mentioning is the two magic words of employment contract settlements: mitigation and offset. Depending on how those terms are deployed, the hit to NBC could be much less than the numbers imply – particularly if Conan scores a deal with Fox for a new show to start in September, as many observers expect.

Here’s how it works. First, as background, the NBC payments are likely to be made over the period of time remaining in his contract – at least, that’s what customary. Conan’s attorneys, agents and manager would probably press for some acceleration though, unless the tax consequences of doing so would be adverse.

In any case, mitigation is the concept that the terminated employee, i.e., Conan, has an obligation to seek other employment. If he fails to do so, the payments from NBC could stop. To protect against this, Conan’s representatives will seek, and may get, a “no mitigation” clause. In that case, the payments would keep coming even if Conan decides to sit on the beach for the next 2-1/2 years (reportedly the remaining term of his contract), though he’s unlikely to want to damage his personal brand name by simply disappearing.

At the very least, though, Conan’s team will argue for no mitigation from now until a new Conan show could feasibly be launched, which is generally assumed to be September, i.e., the beginning of the fall TV season. They’d also probably seek a guarantee that there would be no mitigation if Conan is offered and refuses a show of lesser stature, or one at a lower salary than he was receiving at NBC, or one that reaches too small a percentage of households in the country. In other words, under such contract terms, Conan would be able to refuse a “demotion” without violating a duty to mitigate.

Now on to offset. This is the concept that whatever the employee earns at his or her new job, if any, would be offset against the settlement payments owed by the old employer. This would apply only for the remainder of the old contract. For instance, suppose the agreed NBC termination payment (“liquidated damages,” in legal terminology) is $40 million, and suppose Fox pays Conan $30 million over the next 2-1/2 years. In that case, the $30 million could be offset against the $40 million, and NBC would only have to pay $10 million.

Naturally, Conan’s representatives will seek a “no offset” clause. This would be a hard-fought point, however. NBC would argue that Conan would be getting a windfall and, even worse, that he’ll be cashing those checks while competing against NBC itself. That’s like biting the hand that feeds you, but knowing you’ll get fed regardless.

Here again, there’s a compromise available: Conan and NBC might agree that his salary from the new show would be only partially applicable (i.e., partially offsetable) against the NBC liquidated damages payments. For instance, if 50% of his Fox salary (if he does a Fox deal) were applicable, then $15 million (in the above example) would be applied against the $40 million, reducing NBC’s obligation to $25 million.

On a different note, it wouldn’t surprise me if NBC seeks a non-disparagement clause from Conan. Paying him liquidated damages while he’s getting paid by Fox to bash NBC in his monologue might be too much for the NBC suits to accept.

Of course, this is all speculation. No one’s seen the existing contract, let alone the settlement agreement, since there is no settlement yet (and it’s not clear to me whether NBC would be required to file a redacted copy with the SEC). But it’s easy to see how mitigation and offset amount to a win-win. Those provisions could allow Conan’s people to leak big impressive figures, yet reduce the bite for NBC.

Whether that would be enough to keep heads from rolling at NBC is another subject. If the Comcast deal goes through, under which the cable operator would acquire a majority stake in NBC Universal from corporate parent GE, then I’d expect some hasty departures. Someone might get the ax even if the deal isn’t consummated. (The antitrust division of the Justice Department recently announced they will be reviewing the deal.) Ironically, terminating the responsible executives would probably require NBC to make more contract settlement payments.

Moving Jay Leno to 10:00 p.m. was an understandable experiment. It seemingly kept both Leno and O’Brien in the family, and lower ratings were acceptable to the network, since production costs for five nights a week of a talk show are a lot less than for five nights of scripted dramas.

Unfortunately, it looks like the downside wasn’t evaluated as thoroughly: Leno’s lower ratings at 10:00 meant diminished ratings for 11:00 p.m. local station newscasts, an unacceptable price for network affiliates, for whom the newscasts are a cash cow. Moving Leno back to late night gave NBC one host too many: Leno, O’Brien, Jimmy Fallon and Carson Daly. That’s four hosts for three chairs, and when the music stopped, O’Brien was out. Now, for NBC, it appears time to pay the piper.

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Leno’s All Charged Up

The wheels of Writers Guild justice grind slowly, it seems. Flashback to January 2007—almost 14 months ago—when Hollywood was in the middle of a long writers strike, rather than an even longer screen actors stalemate. Comedian Jay Leno, after having been off the air for weeks, came back on, this time minus his writers.

That reappearance gave the WGA strike a highly visible supporter, as Jay’s first returning monologue was a recital in favor of the strike. But it also created a problem, because Leno, himself a WGA member, was penning his own material. The WGA said at the time that that was a violation of guild strike rules. Leno and his network, NBC, denied that the strike rules applied to performers writing their own material. The legal analysis is a bit complicated, but I concluded at the time that Jay was probably in violation.

Eventually the strike ended, and we all moved on to other things, such as SAG strife and bank failures. La affaire Leno disappeared into the maw of the WGA. Meanwhile, ironically, Jay made Hollywood labor news again in December, when it was announced that his show was moving to primetime, displacing five hours of scripted primetime programming per week and causing a commensurate loss of acting jobs that upset SAG.

The Writers Guild, in turns out, hadn’t forgotten Jay, or forgiven him either. Why it took 14 months is unclear, but yesterday, reports the LA Times, Leno was called in front of a WGA trial committee to assess whether he had broken the strike rules. The case is a political hot potato, because it pits the power of a Hollywood guild against the even greater power of one of its prominent members. If found guilty, penalties could include a reprimand, a fine or even expulsion from the union (this last seems unlikely). No word, however, on how long that determination might take, or on what appeal procedures might be available.

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Leno Strips Down

A day or two ago, NBC officially decided to dump its 10 p.m. dramas five nights a week and slot a new Jay Leno show in their place. That marks the first time ever (or, at least, in a long time) that a variety talk show has occupied a network primetime slot. (Running a show every day is called “stripping” it.)

As I told LA’s KNBC-TV Channel 4 on Monday night, the deal is a twofer for the network. They get to keep Leno in the family, rather than see him defect to a rival when Conan O’Brien takes over the Tonight Show next year. In addition, it allows the troubled network—number 4 in the primetime ratings overall—to shed five hours of scripted primetime. That saves the net a lot of money, since a week of Leno shows, even with his no doubt lucrative contract, are less expensive to produce than five hours of scripted content. It also lets the net sidestep the effects of labor unrest, since no scripted dramas means little exposure to a writers strike (such as occurred for part of the last 12 months) or a SAG strike (an unfortunate possibility for next year).

“Little exposure” is not no exposure, of course. The writers strike meant the talk shows had no writers to pen their hosts’ opening monologues. It also meant that movie and TV stars, in solidarity with the writers, generally refused to appear on the talkers, driving down their ratings. Another boycott might occur next year if SAG strikes too, although it’s far from certain, since some significant A-listers have come out strongly against a strike and might defy their union and appear on the shows.

Network scripted programming in general has been giving way to unscripted fare. Indeed, network television and cable seem to be exchanging their DNA, blurring the distinctions in the sort of content carried by each. A key reason is that scripted production on network television is subject to higher union minimums and residuals formulas than cable, particularly basic cable. It’s also significant that cable is not subject to FCC regulation (whose reach extends only to terrestrial broadcast television), allowing for edgier fare.

As a result of these factors, plus a desire on the part of cable networks to differentiate themselves from each other, some scripted programming has moved to pay cable (HBO and Showtime) and, more recently, to basic cable (such as FX and AMC) as well. In turn, low-cost nonscripted fare, which in the guise of documentary-type programming has always been a staple of cable, has now migrated to network television in the form of reality TV and game shows, a development accelerated by the 2007-2008 writers’ strike. Now Leno has barged in as well, diversifying the menu of non-scripted network primetime programming. This is likely to accelerate the migration of scripted programming to cable.

These changes mean less work available for SAG and Writers Guild members in particular. In addition, the new cable work that takes up some of the slack is lower-paying, in terms of both upfront fees and residuals. The unions aren’t happy with this, but there’s little they can do. Only AFTRA benefits to any extent, since some of the reality shows are under AFTRA jurisdiction (i.e., the hosts or celebrity judges may be AFTRA members).

Add to all this the competition that all television faces from the Internet, especially YouTube, and it’s tough times for TV. Broadcast audiences are aging and advertisers are falling away due to the recession and, to some extent, the Internet. Observers agree that the business won’t be the same five years from now, but no one’s quite sure what it will look like. Leno’s stripping, but the networks themselves may be losing their shirts.

Jay’s Probably Not Okay

Jay Leno’s writing his own monologues, even though he’s a WGA member. The WGA says that that violates the strike rules. NBC, Jay’s network, says the strike rules as applied contradict the Guild agreement with the studios and networks, and that the rules are therefore invalid.

Who’s right? My analysis suggests that the Guild is, though the law is complex and not free from doubt – and it’s not clear that the Guild should do anything about it even if it’s right. Here’s the scoop.

The Strike Rules

The strike rules say that WGA members can’t perform writing services for struck companies. See Strike Rule 1. Leno is writing, he’s a WGA member, and NBC is a struck company. Therefore, it seems, he’s violating the rules – if the rules are valid.

The Guild Agreement

But are those rules valid? That’s where it gets tricky.

The Guild agreement says that writing one’s own monologue is not covered by the Guild Agreement. See App. A, Art. 1.A.5.d, p. 413. The WGA says this exception only applies to non-WGA members, thus giving Jay no shelter, since he’s a Guild member. However, the plain language of the exception does not contain this carveout; the language says it applies to a “person,” not a “non-Guild member.”

So, the WGA’s interpretation appears wrong, unless they can show evidence to the contrary, such as bargaining history (discussions during past negotiations, for instance). I asked the Guild to explain their position; they said they’d do so, but they didn’t, despite multiple emails, a phone call and a page to the Guild spokesman.

The Rule Against Unilateral Changes

What this means is that the strike rules do appear to contradict the Guild agreement. So is NBC right? Not necessarily. Remember, the agreement expired Oct. 31. In the business world, an expired agreement is generally a dead letter, unless it specifies that certain provisions survive expiration (such as confidentiality language).

However, in collective bargaining, expired union agreements still have force. This is because both the union and management have a legally-imposed obligation to bargain in good faith. See 29 U.S.C. sec. 8(a)(5), (b)(3). Thus, they shouldn’t unilaterally change provisions of the union agreement even after expiration; they should discuss the matter, i.e., bargain in good faith. The leading case on this issue is NLRB v. Katz, 369 U.S. 736 (1962). (NBC supplied me with a list of others, as well.)

But – the obligation to bargain in good faith only applies to so-called mandatory subjects of bargaining, which means wages, hours and other terms and conditions of employment. See 29 U.S.C. sec. 8(d). Therefore, the prohibition against unilateral modification of the union agreement generally only applies to mandatory subjects, because the prohibition in based on the obligation to bargain, and the obligation is limited to mandatory subjects. See 1 John E. Higgins, Jr., The Developing Labor Law, sec. 13.II.A, at 773-75 (2006).

And, the issue of writing one’s own monologues does not seem to be a mandatory subject, although there may be some doubt here. Cf. 2 Peter Lareau, Nat’l Labor Relns. Act: Law and Prac., sec. 13.04[3], pp. 13-62.2 et sq. (2007). But, in any case, the rule against unilateral changes applies only where the change is “material, substantial and significant.” See Lareau, v. 2, sec. 12.02[2], p. 12-8 at n.17.1. This certainly doesn’t seem to apply to writing one’s own monologues, as contrasted with the broad scope of the Guild agreement (indeed, the whole subject of late-night shows is shoved in an Appendix at the back of the Guild agreement).

In any case, NBC disagrees, and says that the prohibition against unilateral changes applies to permissive (non-mandatory) subjects as well as mandatory ones. However, conspicuously, they wouldn’t explain why or offer cases on point. Now, one of the cases they cited to me on another issue does, arguably, support their position; it prohibits unilateral changes based on agreement of the parties, and doesn’t discuss the permissive nature of the matter that was changed. See Communications Workers Local 1170 (Rochester Telephone), 194 NLRB 872, 875 (1972), enf’d, 474 F.2d 778 (2d Cir. 1972). Also, I found at least one other case that does enforce a non-mandatory provision, but this was done because it was a provision that seemed specifically intended to survive expiration of the agreement. See UAW v. Yard-Man, 716F.2d 1476, 1482 6th Cir. 1983); 1 Higgins, sec. 13.II.A, at 775 n.75.

Most cases, though - including cases more recent than Rochester Telephone – appear to limit the prohibition to mandatory subjects. See 1 Higgins, sec. 13.II.A, at 773-75 (citing cases). If this is the rule – which is not a certainty - it means that the Guild can impose strike rules that contradict the Guild agreement. And that means that Leno is prohibited from writing his own monologues.

In summary, the strike rules probably contradict the Guild agreement, but the Guild appears to have the right to unilaterally change the expired agreement in this way, since writing one’s own monologue does not seem to be a mandatory subject or specifically intended to survive expiration of the agreement, and is a minor matter in the context of the agreement as a whole.

Should the Guild Impose Discipline on Leno?

For violating the strike rules (if such is the conclusion), the Guild can, apparently, fine Leno or even expel him from the union. The latter would be ridiculous. Even fining him seems ill-advised, because the violation is minor and unusual (writing jokes to be delivered by oneself is pretty specialized).

Also, Leno’s a supporter of the strike, and his first monologue was even a criticism of the companies and in support of the Guild. In addition, he went above and beyond the call of duty by paying the salaries of his non-writing staff while the show was off the air, a move the Guild applauded.

On the other hand, Leno does appear to be violating the rules, and it’s hard to set one standard for him and another, higher standard for everybody else. Still, does the Guild really want the PR backlash, especially in the face of the unclear nature of the law? It’s a hard call.

Disclaimer

I’m not a labor lawyer, and this article is based on about 12 hours of solo research, not the weeks of multi-lawyer research by labor lawyers necessary to produce a fully fleshed-out legal brief (which could run to 25-35 pages or more). In any case, this article is for informational purposes only, and is not intended as legal advice; if you need to know the answers, to the extent determinable, hire a labor lawyer. Also, this article expresses my own opinion, not that of the law firm with which I’m affiliated or its clients.

This article first appeared on the Huffington Post on January 7, 2008.