Program Format Clawback -- Reversionary Interests in Programming

How Far Can You Go In A Non-Compete Agreement?

In these days of radio broadcasting by cluster, some owners find they have more stations than they need and wouldn't mind "thinning the heard." There are buyers for these stations and we may begin to see some more deals. When the seller is staying in the market, however, there is often a fear that the buyer may use the station to compete with the seller, and so some sellers have tried to put restrictions in the sales agreement, sort of like a negative covenant in real estate. "Yes you now own the land, but you cannot use it for an industrial purpose."

To prevent the sold station from biting back after the sale, sellers seek a negative covenant to control the format choice of the station buyers and prevent them from using a particular format in the market. There are more altruistic reasons for such provisions as well, and sometimes the seller wants to assure that a format stays on the station after he's gone. Perhaps it's time to retire but the seller doesn't want the community to lose a unique format he developed for that community. It may be a unique News/Talk format the seller has devoted a career to building in the community. Examples have also included a special approach to music such as maintaining a Classical, Jazz or Easy Lstening outpost. Or, it can be a seller who seeks to protect a remaining station's format by insisting on a separate non-compete agreement to prevent the buyer from competing for the audience demographic of those remaining stations. The question communications lawyers get is, "Can they do that?"

The answer is no.

Controlling the programming of a station after its sale would constitute an unauthorized transfer of control -a major violation of FCC rules. While the seller might be able to obtain money damages for a designated format shift, creating a noncompetition agreement that prevents the current licensee from implementing its own judgment as to the best programming for the community has been ruled contrary to FCC rules and policy.

In the 2008 case, Mid Atlantic Network, Inc. and Centennial Licensing II, LLC. the FCC considered such a non-compete agreement and concluded it could not stand under its rules. The case was somewhat unusual, because instead of simply preventing the seller from engaging in the radio business in the market for a limited period of time, the agreement prohibited the seller, directly or through a business entity, from operating a radio station in the same metro area for five years only if the station utilized a "format substantially similar" to that used by the purchased station.

Subsequently, the seller did return to the market by purchasing another station and sought to program it with a News/Talk format deemed by his former buyer to be substantially similar to the format covered by the non-competition agreement. The buyer then obtained an injunction against the use of that format for so long as the former seller was directly or indirectly involved in the new station. The Commission expressed its "strong disapprobation" to the parties for having agreed to the format non-compete terms and for failing to point it out in the assignment application, saying:

"Although there is no general Commission proscription on the scope of non-compete covenants, such agreements cannot interfere with licensee control over the basic operating policies of the station, i.e., programming, personnel and finances. The licensee must retain 'the ultimate responsibility for selecting programming material and establishing programming policies ... and ... this responsibility cannot be unduly fettered by contractual arrangements restricting the licensee in its free exercise of his independent judgments."

It held that a provision restricting a licensee from a "format substantially similar" to that used by another unquestionably restricts a licensee's ability to control station programming, "including its flexibility to address the needs and interests of its local communities, to react to changing audience taste and preferences, and to respond to other competitors in the market and to select its programming accordingly," and constituted both an unauthorized transfer and assumption of control.

This column is provided for general information purposes only and should not be relied upon as legal advice pertaining to any specific factual situation. Legal decisions should be made only after proper consultation with a legal professional of your choosing.