AMC Networks Inc. is facing Dish Network Corp. in a $2.4 billion trial over a failed programming deal that may also determine whether the satellite network's viewers will get to see AMC shows such as "Mad Men."
AMC's former owner, Cablevision Systems Corp., sued Dish in 2008, claiming it wrongfully terminated a 15-year contract involving a now-defunct high-definition TV programming service called Voom. While the trial in state court in New York will decide only breach-of-contract claims, Dish's decision to drop all of AMC's channels in July shadows the case. Jury selection is scheduled to begin tomorrow.
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Dish, whose 14 million satellite TV subscribers accounted for 13 percent of AMC's subscriber base, said it dropped AMC's four networks because the shows didn't deliver the ratings to justify their price. AMC claims the move was due to its lawsuit.
"We've been off the platform for a couple of months now, and we think we're off because of litigation and not because of anything related to what our prices are for programming," AMC Chief Executive Officer Joshua Sapan said during an investor conference in Manhattan on Sept. 12.
The decision by Dish, the third-biggest U.S. pay-TV company after Comcast Corp. and DirecTV, to drop AMC may be a bargaining ploy to win an out-of-court settlement of the lawsuit and avoid paying damages.
"Both sides have a lot of motivation to settle," Aditi Bagchi, a professor of law at Fordham Law School, said in a phone interview. "Maybe they will renegotiate the terms on which Dish will carry AMC's channels."
Bagchi, who teaches contract law, said the "scale of the damages is astronomical" and may be difficult to prove in court.
"The question is what the settlement price will be," Vijay Jayant, an analyst with ISI Group in New York, said in an interview. He estimated that New York-based AMC's earnings before interest, taxes, depreciation and amortization will fall 25 percent to 30 percent as a result of Dish dropping the networks.
Bob Toevs, a spokesman for Englewood, Colorado-based Dish, said in an interview that Dish's decision to drop AMC was "an entirely separate matter" from the lawsuit.
"The channels were essentially a handful of popular shows," Toevs said. "For us, the equation didn't work."
AMC programs "Mad Men," "Breaking Bad" and "The Walking Dead" are nominated for Emmy Awards, which will be handed out on Sept. 23. AMC spokeswoman Georgia Juvelis, citing ratings agency Nielsen Media Research, said "The Walking Dead" was the highest-rated scripted cable show among Dish subscribers. AMC's channels include AMC, IFC, the Sundance channel and WE tv.
Joseph Clayton, Dish's chief executive officer, said on Sept. 13 that the company has no plans to bring back AMC anytime soon.
Cablevision began Voom to bolster its HD programming in anticipation of the government-mandated switch to high- definition service to U.S. homes.
Dish, trying to gain a competitive advantage over DirecTV, struck the 15-year deal in 2005 to carry Voom and took a 20 percent stake in it.
The trial will revolve around the Voom contract and whether Cablevision spent enough money on the service after Dish agreed to carry the programming.
Dish said in court filings it terminated the contract because Cablevision didn't spend the required $100 million a year on programming as required. AMC and Cablevision argued in their filings that an audit found Voom spent almost $103 million in 2006. That sum included corporate overhead expenses of at least $12 million, while the contract required the money to be spent on programming, according to Dish.
The legal issue boils down to a dispute over the meaning of what constitutes spending "on the service," as described in the contract.
"Dish may have had buyer's remorse and was looking for a pretext to get out," Bagchi said. "But AMC could have been in effect using Dish to subsidize other programming."
Cablevision said in court filings the issue of the annual investment in Voom was really Dish's way of getting out of a contract that it found too expensive. The agreement required Dish to pay Rainbow Media, now known as AMC Networks, $3.25 a month for each HD subscriber in the first year of the deal, with 5 percent annual increases.
In negotiations leading up to the lawsuit, Dish said it would keep Voom only if it were moved to a less popular tier of channels on its system, which would have reduced the amount Dish paid, according to court filings. Voom refused, saying that would violate the contract. Dish said it would drop Voom as of Feb. 1, 2008, and Voom sued.
In May 2008, Dish took Voom off the air and in December of that year, Cablevision announced it was shutting the service down.
During the trial, jurors, under a ruling by State Supreme Court Justice Richard Lowe, can be told about the destruction of evidence by Dish.
While gathering evidence in the case, Voom claimed that Dish hadn't made available some executives' e-mails before and after the suit was filed. Dish said most of those e-mails had been automatically deleted.
Lowe ruled that Dish should have begun saving e-mails, in a so-called litigation hold, as early as June 2007, when it notified Voom it might terminate the contract. Lowe said Dish should have known a lawsuit was likely. A state appeals court upheld Lowe's decision to sanction Dish by describing the e-mail destruction in jury instructions.
The judge told the lawyers in court today that he "might fine-tune" how he conveys the matter to the jury, after showing the attorneys proposed language yesterday. The document hasn't been made public.
Charles Kerr, a lawyer for Dish, told the judge, "We feel it needs to be modified." Lowe said Kerr could submit proposed changes.
"It will have some effect on the jury," Bagchi said. "If the judge makes it clear that Dish behaved in bad faith, it makes more credible the other side's narrative of the case."
The judge said today he won't allow certain testimony from a Dish expert witness to be presented to the jury. The witness was expected to testify that 16 percent of Voom's spending on the service shouldn't be counted because it was related to investment outside the U.S.
"The percentage he offers is totally arbitrary and there's no basis for it," Lowe said in court. "I'm not going to permit him to testify with regard to this."
Lowe was also expected to rule on AMC's motion to exclude some other evidence that Dish wants to present to jurors. That includes viewer measurement data on Voom and subscriber comments about it. AMC said in court filings that such testimony would be irrelevant and would be designed to denigrate Voom's shows. It would also confuse jurors, AMC said.
Last year Cablevision, based in Bethpage, New York, spun off AMC Networks as a separate publicly owned company. A judgment in AMC's favor would result in the damages being split by AMC and Cablevision.
AMC's chairman is Cablevision founder Charles Dolan, who is expected to testify, along with his son, Cablevision CEO James Dolan. The Dolans are the controlling shareholders in AMC.
Dish's witnesses are set to include its chairman and founder, Charles Ergen.
"You never say never about a future relationship with AMC," Ergen said in August during an earnings conference. "But I think that when we take something down and say we're going to take it down, that's what we intend to do."
AMC is running advertisements on local broadcast networks in large U.S. markets that show the Dish logo with a line through it, alerting potential Dish subscribers that AMC programming isn't available.
The case is Voom HD Holdings LLC v. EchoStar Satellite LLC, 600292/2008, Supreme Court of the State of New York (Manhattan).