MANHATTAN (CN) - Howard Stern's production company and agent sued Sirius XM Radio for breach of contract, claiming that after Sirius bought out XM, its main competitor in satellite radio, it refused to pay Stern the performance-based bonuses it promised him.
Stern's production company, One Twelve, and his agent Don Buchwald sued Sirius XM in New York County Court.
Stern - who took sex, frat-boy jokes, comedy and outrageous interviews to the top of the radio ratings in New York and 46 other major radio markets before joining Sirius - signed a 5-year, $500 million contract with the company in October 2004, when it had less than 1 million subscribers.
The 57-year-old Roosevelt, N.Y. native began his Sirius show in January 2006. Two years later, Sirius merged with XM Satellite Radio, which had aggressively courted Stern before he joined Sirius.
Stern claims One Twelve was to be paid "a series of escalating stock awards if Sirius exceeded its subscriber estimates in any year of Stern's contract by 2 million or more subscribers. It also promised to pay Buchwald a consulting fee equal to 10 percent of any compensation paid to One Twelve.
"Sirius set the subscriber targets high with the idea that if Stem delivered, Sirius would more than recoup its investment in Stem. Stem delivered beyond expectations," the complaint states.
"Throughout the five years of his contract, Stern brought record numbers of new subscribers to Sirius and helped Sirius retain them. Sirius exceeded its internal subscriber estimates by a large margin in every year of Stern's contract."
But after an initial payment of 34.4 million shares in early 2006 and another payment in 2007, Stern says, the company failed to make additional payments.
Stern says Sirius induced him to sign with it by agreeing "to pay One Twelve performance-based compensation in the form of escalating stock awards. One Twelve would receive these awards if Stern himself attracted a certain number of new subscribers to Sirius or if the total number of Sirius subscribers in any given year exceeded Sirius's internal estimates for that year, regardless of whether those subscribers were traceable to Stern."
He adds: "The subscriber targets were set high enough so that if they were reached, Sirius would not only be able, but happy to pay the performance-based stock awards to One Twelve. No subscribers were excluded from the subscriber county, and there were no restrictions on how subscribers would be counted. Nor were there any restrictions on how subscribers could come to Sirius. They could come because of Stern's efforts or they could have nothing to do with Stern. They could also come as a result of a merger or an acquisition.
"Indeed, throughout the contract negotiations, Buchwald and Stern raised the possibility that Sirius and XM might merge, bringing both company's subscribers together under one entity. The parties added a separate provision to Stern's contract to account for the possibility of a merger and permit the broadcast of the Howard Stern Show to the combined subscribers of the surviving entity. Yet, even though the parties were discussing the possibility of a merger in this separate context, Sirius did not seek to exclude from its subscriber targets any additional subscribers that might come to Sirius as a result of such a merger or acquisition."
Stern claims that he and Buchwald initially refrained from demanding the unpaid stock options, because of Sirius' precarious financial health during the early years of the deal. In fact, the year it signed Stern, Sirius had a year-end deficit of $1.9 billion, according to the complaint.
It wasn't until Sirius avoided bankruptcy by securing funding from a third party, Liberty Media, that Stern and Buchwald's representatives asked about the performance-based compensation the two say they are owed for 2008 and 2009.
"In response, [Andrew] Moss [Sirius vice president for finance] alleged that no such compensation was due," the complaint states.
Today, Sirius XM claims more than 20.2 million subscribers, and in December, after much public handwringing over his future, Stern signed a new 5-year deal reportedly worth another $400 million.
But the issue of the undelivered stock payments evidently still rankled.
"When Sirius needed Stern, it promised him a share in any success that the company achieved," the complaint states. "But Now that Sirius has conquered its chief competitor and acquired more than 20 million subscribers, it has reneged on its commitment to Stern, unilaterally deciding that it has paid him enough."
Though no details of Stern's new deal have been released, reports in The New York Times, New York Daily News and elsewhere suggest the terms were for $80 million a year in cash, with no stock for meeting incentive goals.
Since filing the lawsuit, Stern, who transcended radio by writing two best-selling books and starring in a successful Hollywood adaption of one of them, has dealt with the subject of the litigation gingerly.
In response to a caller Wednesday morning, Stern said, "It's true that I am suing Sirius."
He added: "I have never, ever gotten on the air and discussed my financial situation ... I'm an honest guy who believes in fairness. I believe that I've been dealt with unfairly."
Sirius XM said in a statement that it has abided by the terms of the 2004 deal.
"Sirius XM just signed a contract through 2015 with Howard Stern, and he is a valued part of our company," the statement said. "We were thus surprised and disappointed by the subsequent legal action initiated by his production company and agent. We have met all of our obligations under the terms of our 2004 agreement with Howard, his agent and production company."
One Twelve and Buchwald seek damages to be determined at trial on two claims of breach of contract.
They are represented by Seth Rothman with Hughes Hubbard & Reed.
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