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Mar 20 2012

Penalty Provisions in Reality TV Contracts – Fair or Unenforceable?

In 1968, visionary pop artist Andy Warhol proclaimed in a catalog promoting an art show of his in Sweden that “In the future, everyone will be world-famous for 15 minutes.” Reality TV has certainly proven the truth of his claim. Having worked with individuals and production companies in the reality TV field, one of the FAQs is the enforceability of a clause punishing a TV participant for revealing facts about the show before they are aired. These contract sections normally place a high penalty or “liquidated damages” amount for a breach of confidentiality. Sometimes, the penalties reach in the $2Million – $5 Million range. So here’s a brief analysis on whether these will stand up in court in case you get approached for your 15 minutes of fame (or infamy).

In general an agreement, made in advance of an actual breach, fixing the damages for a breach is not enforceable as a contract and does not affect the damages recoverable for the breach, unless:

(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and
(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.

The reasoning behind this rule is simple – if you break a contract, the penalties should be whatever damage your breach caused, not some pre-determined number. Now, if the damages are hard to assess, then it may be fair to set a figure beforehand (#2, above), provided however, that you don’t go crazy and set some ridiculous amount that has no basis in reality (#1, above). Cases throughout just about every jurisdiction in the country, (including NY and California where most of these contracts are executed and whose law generally applies) establish that civil law is not supposed to be punitive – criminal law punishes. Civil law on the other hand is meant to make parties whole, that is replace their loss, not give a windfall or a bonus or extract a penalty. Liquidated damages do serve the public interest in reducing expenses of litigation, and, so long as the amount of the liquidated damages compensates the plaintiff rather than punishing the defendant, such clauses are enforceable, but a multi-million dollar penalty clause is not likely to be one of the enforceable scenarios.

One of the factors that courts look at in assessing if the amount set in the contract is fair or constitutes a penalty is whether the contract is a “contract of adhesion” or is an “arms-length transaction.” A contract of adhesion is a legal term for a document that is created by one side of a deal, which is a “take it or leave it” proposal where the party with all the leverage (money, power, influence, whatever) does not let the other side have any input in the contract language. An arms length transaction is the legal term where each side negotiates with the other and while they may not be of equal power or influence, they at least have some say in what ends up in the contract. So courts generally like to look to see if these terms were negotiated or just thrust upon one side without discussion. These TV contracts are closer to contracts of adhesion than arms-length transactions so courts will scrutinize them very closely for fairness to the party that did not get to put their two cents in.

The TV industry will argue that it is difficult to assess how much damage is caused by leaking of “spoilers” and that therefore these contractual provisions should be upheld. While that is likely true, that factor will have to be weighed against the second factor and it is hard to imagine that revealing a fact or two will be worth millions in damage. This also can be a pesky area for TV networks as rabid fans of these shows don’t seem to mind spoiler information and flock to these websites. (See my comments about the Reality Steve website in my last blog post). What if the breaching party could prove that their leak of information actually increased viewership or positive attention to the program? I think a court would very likely view that in favor of the breaching party. In all, I think TV stations and production companies would have a very hard time about enforcing these provisions particularly if the participants are not well paid.

Now before Snooki or any other of the seven dwarves takes this article as license to go off breaking their confidentiality agreements bear in mind that while $5 Million may be excessive, $500,000 may not be and who wants to owe that much? You will also likely be dragged into court in NY and California no matter where you are from (venue provisions are much more enforceable than liquidated damages clauses) and have to hire a lawyer and have expense after expense. So think twice (and maybe even three times) before you go off and blab about who did what to whom or who gets rose or who gets voted off an island or whatever. Just because the large penalty may not be enforceable doesn’t mean you can break an agreement without serious and significant consequences.

2 comments

  1. Charlotte Leming

    Thank you for your interest in reality steve lawsuit Your legal expertise is quite impressive. I am sure this is only helping his case.

    1. Oscar Michelen

      Thanks. I see it as another example of a large entity using the court system to overstate a claim in an effort to stop someone they are not happy with or to “send a message.” While I do not claim to know all the facts, from what I have read, it seems the plaintiffs may have problems proving damages as result of the alleged conduct and that they may not have enough evidence to prove what they are claiming.

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