June 16, 2014 12:34pm PT by Eriq Gardner
DirecTV Can't Drop Ovation TV, Reelz After Losing Court Ruling (Exclusive)
Ovation TV and Reelz, two struggling TV networks, have gotten a huge boost in Minnesota federal court. Because of a ruling on Thursday concerning a 15-year-old merger agreement, the two networks are virtually guaranteed placement on DirecTV's platform.
The genesis of the dispute — which has been under wraps until late last week — dates back to the late 20th century, during the race to launch satellites into space. At the time, it wasn't apparent that DirecTV would become the leading satellite TV service, so successful that AT&T now wants to acquire it for $48 billion. Besides competing with the predecessor to Dish Network, DirecTV was also battling United States Satellite Broadcasting (USSB), owned by Stanley Hubbard, who had exclusive carriage deals with HBO and Showtime.
DirecTV took care of this in 1999 by merging with USSB in a somewhat unique marriage. Along with $1.3 billion, Hubbard also secured a long-term programming agreement to ensure that his family would be in the satellite TV business for "generations." The parties agreed that Hubbard would have a distribution right on up to three channels, but the exact deal was somewhat ambiguous.
During negotiations, Hubbard proposed the right should last in "perpetuity" while DirecTV wanted the right to be limited to seven years. Drafts of the agreement suggest the dealmakers began talking about rights granted "on an ongoing basis," but in the end, DirecTV and Hubbard didn't specify an exact expiration date.
Hubbard, though, did secure the right to distribute programming on three channels "owned and controlled" by the Hubbard family and their "lineal descendants."
Channel No. 1 was the All News Channel, which Hubbard Broadcasting Inc. (HBI) launched in 1989 as a competitor to CNN. But it died soon after the merger.
To fill slots two and three, HBI launched ReelzChannel, whose slogan is "Hollywood Happens Here," and Ovation TV, which is heavy on arts programming like the competition series The Fashion Fund.
In 2013, seven years after Reelz and Ovation launched, the networks were up for a contract renewal. Hubbard's company says it made numerous proposals to DirecTV, which allegedly wasn't interested in renewing the contract. Instead, it claimed that the old programming agreement with Hubbard was "no longer valid." On the verge of having its networks dropped last September, Hubbard filed a lawsuit.
There are many issues in this case, but the one that U.S. District Judge Donovan Frank first addressed in Thursday's summary judgment ruling is the "nature, force and effect" of the 1999 preferred programming agreement. Judge Frank concludes that Hubbard has a "continuous right that lasts for as long as" the networks continue to meet the criteria of being owned and controlled by the Hubbard family. In his opinion (read here), he points to the "plain language" of the contract as well as the extrinsic evidence relating to the circumstances surrounding the merger negotiations.
"[T]here is evidence that during the merger negotiations, HBI indicated that it would not agree to a merger without a guarantee that the HBI family could remain in the satellite television business for the long term," writes the judge.
"Notably, the PPA does not contain a calendar term limit on HBI's distribution rights," the judge later adds. "Instead, it provides HBI with a right to distribute three networks on DIRECTV's platform as long as the networks meet the Hubbard Channel Programming Criteria. Accordingly, the Court declines to read the affiliation agreements so as to impose a time limitation on HBI’s right to distribute under the PPA."
As a result of the decision, it appears that DirecTV can't unilaterally drop Reelz and Ovation without negotiating in good faith commercially reasonable terms and conditions that are similar to comparable networks. DirecTV is also facing a claim of not honoring its obligation to negotiate in good faith, but that will be addressed next by the judge.
In response to the ruling, DirecTV tells The Hollywood Reporter, "We are disappointed and disagree with the Court's decision, but we will continue to negotiate in good faith, as we always have, for carriage of the two channels at issue. We are also assessing our appellate options to address the ruling's errors."