BY:Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, March 27, 1998.)
Two titans in the entertainment industry are embroiled in a struggle concerning the services of a valued employee. In the first round, MTV Networks, which is a division of Viacom International, Inc. (“MTVN”), has succeeded in enjoining Richard Cronin from working for Fox Kids Worldwide, Inc. (“Fox Kids”), until July 1, 1998, and enjoining Fox Kids from employing him through June 30, 1998.1 The decision yields interesting information about business practices in the cable television business.
MTVN is a cable television network which owns TV Land, Nick-at-Nite and Nickelodeon. Cronin, employed by MTVN since 1984, was a party to an employment agreement with that company for the period from July 1, 1995, through June 30, 1998, which designated him as President, Nick-at-Nite’s TV Land, a newly launched cable network specializing in “classic television.” Additionally, since 1987, he was a member of the Nickelodeon executive team and supervised Nick-at-Nite, a sister network to TV Land, specializing in classic situation comedies. The executive team for the various networks reviews operations, budgets and strategic plans for the network.
During the latter part of August, 1997, Haim Saban, Chairman and CEO of Fox Kids Worldwide, Inc., contacted Cronin to explore the possibility of his becoming President and CEO of the Fox Family, Fox Kids Cable Network and the Fox Kids Broadcast Network. (The Fox Family Channel has a scheduled launch date of August 15, 1998, and MTVN views the Fox Group of networks as potential, if not yet actual, competitors.)
Cronin advised Saban that, because he was party to a contract with MTVN through June 30, 1998, he only would consider an offer if his employment were to begin after that date. Negotiations continued through October 17, 1997, when Cronin signed a contract with Fox Kids to be employed starting July 1, 1998. That agreement provides for an annual base salary of over $1,000,000, a signing bonus of $500,000, payable of the first day of employment, and bonuses based upon revenues and Cronin’s achievement of certain goals. Further, the agreement grants Cronin a ten year non-qualified stock option covering an aggregate of 161,637 shares of Class A common stock, which Fox Kids represents reflects no less than one percent of the current voting securities of Fox Kids, diluted for Cronin’s stock option, at an exercise price of $111.37 per share, based upon the then current $1.8 billion valuation of Fox Kids. The option vests in increments over a period of five years.
The agreement further provides: “As we have discussed by offering you a position of employment with Fox Kids commencing on July 1, 1998, we have no intention of interfering with or changing in any way, your relationship with your current employer.”
Cronin’s employment agreement with MTVN contains a non-competition clause which provides: “You agree that during the Non-Compete Period you shall not directly or indirectly engage in or participate as an officer, employee, director, agent of or consultant for any business directly competitive with that of MTVN; provided, however, that nothing herein shall prevent you from investing as less than a one (1 percent) shareholder in the securities of any company listed on a national securities exchange or quoted on an automated quotation system.”
Cronin’s obligations under this paragraph cease if he terminates his employment for “Good Reason” or MTVN terminates his employment without “cause” and he notifies MTVN in writing that he elects to waive his right to receive or to continue to receive payments and benefits specified in the agreement.
MTVN is granted the right to terminate the agreement for “cause” and thereafter have no further obligations thereunder. “Cause” means terminate for, among other things, willful unauthorized disclosure of confidential information or material breach of the agreement. The document provides for a period of ten business days after notice within which to cure a breach.
“Good Reason” means that, other than in connection with a termination of employment for Cause or in connection with permanent disability, the assignment to Cronin by MTVN of duties substantially inconsistent with the duties, responsibilities, title or office of his position, the withdrawal of a material part of his responsibility, titles or offices of his position, the withdrawal of a material part of his responsibilities or the breach by MTVN of any of its material obligations.
Prior to his signing the agreement with Fox Kids, Cronin reported the offer to two MTVN executives. After they unsuccessfully attempted to have Cronin remain in the employ of MTVN, it sent him a letter dated October 13, 1997, which constituted formal notice that Cronin is not permitted, either under his employment agreement or pursuant to his fiduciary obligations as president of Nick-At-Nite’s TV Land, to enter into any other employment agreements prior to the expiration of his then currently existing agreement with MTVN. After Cronin signed the employment agreement with Fox Kids, MTVN sent him a further letter terminating his employment for cause, effective November 5, 1997. The cause asserted was his entering into an agreement of a direct competitor. MTVN offered to pay Cronin severance pay as provided in his contract through June 30, 1998, conditioned on his complying with the terms of that contract and, specifically, refraining from commencing employment with Fox Kids until after June 30, 1998.
Cronin responded by denying that there was anything in his contract barring him from planning his future career at the end of the employment term. He further stated that because of MTVN’s actions in directing him to stop performing his duties and publicly announcing that he was being terminated, he was giving notice that he was terminating his employment at MTVN for “Good Reason.” He also turned down the offer of MTVN to continue paying his base salary through the end of the employment term.
On October 31, 1997, MTVN commenced an action seeking to prevent Cronin from working for Fox Kids until the expiration of the term set forth in his employment agreement. The complaint alleges that Cronin breached a fiduciary duty, breached his contract and used trade secrets without authorization. It also asserts that Fox Kids and Newscorp aided and abetted Cronin’s breach of fiduciary duty and engaged in tortious interference and in unfair competition.
In its decision concerning the preliminary injunction, the Court notes that the dispute centers on plaintiff’s claim that it terminated Cronin’s employment for cause and, thus, is entitled to require Cronin not to compete until the end of the term of his employment agreement versus defendants’ assertion that Cronin was not terminated for cause and that plaintiff’s actions gave him sufficient reason to resign.
The testimony at the hearing showed that Cronin is a uniquely talented executive who played a key role in launching TV Land and in developing strategies which lead to making Nick-at-Nite the top rated cable network in its time period. He also was a key player in setting goals and devising strategies for the network which included, among other things, methods of dealing with competitors and suggestions for seizing opportunities before competitors, expressly including Fox Kids, take advantage of them. There was further testimony that Cronin had access to confidential information and detailed knowledge of MTVN’s budget process.
Further, Cronin in some respects was the “public face” of MTVN, who represented the network at many public functions and acted as “master of ceremonies” at presentations at which the network presented its plans and hopes for the coming season to advertisers and media buyers.
Finding this testimony to be credible, the Court indicates that Cronin qualifies as a unique employee who is in possession of confidential information and, therefore, subject to a restrictive covenant which may otherwise be enforceable.
In addressing the issue of whether Cronin was properly terminated for cause, Cronin and Fox Kids argue that nothing in Cronin’s contract prevents him from planning for his future after the expiration of the term. Although the contract provides for continued payment to Cronin after his term of employment in the event that MTVN chose not to renew the contract, they contend that Cronin was entitled to make future plans before the expiration of the employment term to ensure against his being unemployed in the event that he chose not to continue to work for MTVN.
The Court notes that although it is true that the contract does not expressly state that Cronin may not enter into an employment agreement with another company during the term of his employment, it does state that he must not engage in any other business activity during its term which is in conflict with the duties and obligations under his contract. In this regard, Cronin acknowledges that it would have been difficult, if not impossible, for him not to be involved in certain sensitive issues. The most obvious involve strategy concerning competition relating to Fox Kids and the Family Channel. By Cronin’s own admission, there would be areas of his MTVN job in which he no longer would be able to function effectively. He also acknowledges that the announcement which he signed with Fox Kids would amount to an endorsement of that network, which is prohibited by his contract. (Cronin’s claim that he had an understanding that his signing would not be announced was denied by Saban.)
The Court focuses on the problem of divided loyalties created once Cronin signed a contract with Fox Kids which fixed the valuation of his future stock options. It would be in Cronin’s interest to have Fox Kids succeed in order to increase the value of his options. This creates “an unavoidable conflict of interest … Cronin can not be expected to complete his employment term with MTVN, perform his required duties under his MTVN agreement and ignore his interest in Fox Kids.”
The Court also rejects Cronin’s argument that the termination for cause was invalid because MTVN failed to give him written notice prior to terminating his employment setting forth the exact nature of the alleged breach and ten days within which to cure same. When MTVN informed Cronin that signing an employment agreement with another company constitutes a breach of his then existing agreement, it was advising him that to avoid a breach he must not sign.
Once Cronin signed the Fox Kids agreement there was, in effect, no way to cure the breach and, therefore, MTVN was unable to advise him as to how to do so.
Further, if the Court were to conclude that MTVN’s termination of Cronin was ineffective for failure to advise him how to cure the breach within ten days, MTVN would be unable to terminate him for any reason that was not susceptible to cure. This result clearly is not within the intent of the parties.
The Court accepts the testimony on behalf of MTVN that once Cronin entered into his employment agreement with Fox Kids, he no longer could be trusted to perform his duties at MTVN or act as a credible spokesman for TV Land or Nick-at-Nite. Accordingly, Cronin was properly terminated for cause and the injunctive relief provided for in the employment agreement is available.
Cronin argues that it would cause him irreparable injury to be forced to remain outside the industry until June 30, 1998. However, this argument must be balanced against the contractual right of MTVN not to have Cronin compete and the potential injury to MTVN in having Cronin working for Fox Kids during this period.
At the hearing, MTVN demonstrated that the “up fronts” for adult programming which are crucial to obtaining advertising for the upcoming television season take place in April through June. Contracting with advertisers during this period is critical to the success of MTVN for the coming season. Having been publicly associated with MTVN and an integral entity in the preparation and presentation of the “up fronts,” Cronin’s representing a competitor at this critical time is potentially detrimental to MTVN and outweighs his frustration at not being “part of things.” This is especially true because Cronin is still scheduled to begin working for Fox Kids on July 1, 1998. Furthermore, under his agreement with Fox Kids, Cronin is being paid not only his base salary during this period, but also a $400,000 bonus in February, even if he is not working. Thus, there is no financial hardship to Cronin.
Accordingly, the Court finds that maintaining a preliminary injunction through June 30, 1998, is reasonable because that is the time period for which the parties contracted, it is during that time that the “up fronts” take place, it will allow MTVN to recover from Cronin’s unexpected early departure and will prevent him from assisting a competitor during the term of the contract.
There still remains to be determined the issues contained in the complaint filed by MTVN. The decisions which are rendered concerning those issues may yield more information about business aspects of the cable television business and the law concerning executive employment agreements.
1 MTV Networks v. Fox Kids Worldwide, Inc., New York Law Journal, February 6, 1998 (New York Supreme Court, February 5, 1998).