Sinclair/Tribune Dissolves With $1 Billion Lawsuit; Fate of FCC Proceeding Unclear

Tribune filed a $1 billion breach of contract complaint against Sinclair Broadcast in the wee hours of Thursday morning, and the collapse of their deal could mean the end of the FCC’s administrative law judge proceeding against Sinclair but likely won’t put to rest all the consequences of the agency’s hearing designation order, attorneys and broadcasters said in Thursday interviews.

“There is nothing Sinclair can now do to avoid a protracted and contested administrative process at the FCC,” Tribune said in its complaint in Delaware Chancery Court, filed electronically at 12:05 a.m. EDT. The complaint describes in great detail what Tribune depicts as Sinclair’s contentious negotiations with the FCC and DOJ, including accounts of Sinclair General Counsel Barry Faber daring Antitrust Division Assistant Attorney General Makan Delrahim to take action against the company while refusing to agree to divestitures requested by DOJ. “Sinclair invited litigation over station divestitures, summarizing its position to DOJ in two words: ‘sue me,’” the complaint said.

Sinclair didn’t mislead the FCC or violate the contract with Tribune, a Thursday afternoon news release from Sinclair said. It has “withdrawn with prejudice” applications to acquire Tribune and filed a notice of the withdrawal and a motion to terminate the hearing with the ALJ, it said. Tribune announced Thursday it's withdrawing from the deal, in a release and earnings call.

The HDO and ALJ proceedings “would have resulted in a potentially long and burdensome process” and so isn't in the interest of Tribune’s shareholders, Sinclair CEO Chris Ripley said. He and Tribune CEO Peter Kern both said the deal’s failure was disappointing. “The lawsuit described in Tribune’s public filings today is entirely without merit, and we intend to defend against it vigorously,” Ripley said. By refusing to yield to divestiture requests from DOJ and the FCC, Sinclair violated provisions of the transaction agreement requiring that it make “reasonable best efforts” at a prompt regulatory approval in “a spectacular fashion,” Tribune General Counsel Edward Lazarus said. DOJ and the FCC didn’t comment.

The future of the hearing and ALJ proceeding following the deal’s dissolution is unclear and likely up to FCC Chairman Ajit Pai, said broadcasters and industry attorneys. It’s seen as likely that since the assignment applications are the basis of the hearing, it will now be terminated by either an FCC order or a ruling by the ALJ, attorneys said. If it isn’t terminated, it likely would continue only in a narrow scope: the potential issues of candor raised about Sinclair’s arrangements with divestiture buyers Steven Fader and Cunningham Broadcasting, attorneys said. “Sinclair knew that it was taking a substantial risk by concealing from the FCC material information about its relationships with certain buyers,” the Tribune complaint said. Even if the ALJ proceeding is terminated, the candor issues could live on as an enforcement action, attorneys said. They're also seen as certain to be raised in response to future Sinclair applications or license renewals, possibly triggering another hearing order, said Garvey Schubert broadcast attorney Erwin Krasnow.

To resolve the candor issues, Sinclair would either have to go through a possibly years-long hearing process or reach some sort of consent decree with the FCC, numerous attorneys said. Several industry officials said such a compromise would be unlikely. It would be “politically extremely difficult for the chairman to do that,” said Georgetown Law Institute for Public Representation Senior Counsel Andrew Schwartzman, an opponent of the deal.

Tribune and Sinclair twice attempted to negotiate with the Enforcement Bureau after the HDO was issued and were rejected both times, the complaint said. The most recent settlement overture was Aug. 3, just a week ago, the complaint said. “Both times Sinclair was told in substance that in light of the fact that the matter had been referred to an administrative proceeding, no resolution was possible.”

Sinclair violated its contractual obligation to work toward regulatory approval of the deal by refusing to agree to DOJ requests that it divest stations in 10 overlap markets and ignoring FCC concerns about its divestiture plans, Tribune’s complaint said. “Tribune now seeks, through this action, to recover all losses incurred as a result of Sinclair’s misconduct, including but not limited to approximately $1 billion of lost premium to Tribune’s stockholders and additional damages in an amount to be proven at trial,” the complaint said.

The long period that the agreement was under review is because Sinclair pushed back on regulator requests, Tribune said. Tribune itself threatened Sinclair with lawsuits multiple times starting back in February to get it to comply with regulator requests, the complaint said. Deputy Assistant Attorney General Andrew Finch told Sinclair and Tribune the approval process “would be done” if Sinclair would agree to divest in the 10 markets, the complaint said. The deal required Sinclair to agree to divesting in the 10 overlap markets if needed for regulatory approval, the Tribune complaint said. In letters filed with the complaint, Ripley and Faber both said they disagree with Tribune’s interpretation.

According to the complaint, Sinclair repeatedly refused to divest all the stations requested by DOJ, threatened litigation, and admonished Delrahim for not being more like Pai. “It was so refreshing to see the FCC, under Ajit Pai’s leadership, undertake a fundamental reform of its media ownership rules to relax regulations,” a letter from Sinclair to DOJ said. Sinclair “expected that the Division, under your leadership, would likewise see the need to re-evaluate how it reviews TV station mergers. ... We have been surprised, therefore, by the extent to which the Division has thus far appeared unwilling to recognize how completely the world has changed,” according to the complaint. Sinclair also told Delrahim he was “more regulatory than anyone before you, under any other president for 21 years.” DOJ’s divestiture requests and the FCC’s objections to Sinclair’s proposals to use divestiture trusts aren’t out of character for either agency and would have been expected, a broadcaster told us.

FCC staff repeatedly warned Sinclair that proposals to use a divestiture trust rather than naming specific divestitures and to divest stations to companies connected to Sinclair wouldn’t be accepted, the complaint said. “Yet Sinclair ignored these clear warnings -- as it had time and again when admonished by DOJ, the FCC, and Tribune,” the complaint said.

The FCC didn't know the extent of the connections between Sinclair and divestees Fader and Cunningham until petitioners against the deal revealed them, the complaint said. Sinclair “had failed to disclose in its applications to the Commission certain material facts, including the full extent of [Sinclair Executive Chairman David] Smith’s business relationship with Fader, Sinclair’s guarantee of Cunningham’s debt, the sale in early 2018 of Cunningham’s voting shares to a close Sinclair associate, and the suspiciously cheap option to buy those shares given to members of Smith’s family,” the complaint said.

Opponents of the deal widely praised the FCC’s role in ending it. “Chairman Pai and his colleagues did right by the American people and the entire broadcast industry by putting the brakes on this merger,” said Georgetown Law Institute for Technology Law & Policy Fellow Gigi Sohn. “The FCC did the right thing by flagging this deal for review, and we think the ultimate outcome is a victory for consumers,” said Jonathan Schwantes, senior policy counsel for Consumers Union.

“To avoid another potentially contentious merger transaction involving other companies in the future, we urge the Commission to complete its review of the network ownership limitation and set a new standard,” said Newsmax CEO Chis Ruddy. The deal “would have resulted in numerous public interest harms,” ITTA President Genny Morelli said. “The demise of this deal presents an opportunity to embark on a new path, an opportunity that will be squandered if these stations were to be simply served up to other giant conglomerates,” said Free Press CEO Craig Aaron. “Good riddance to a really bad deal,” said former FCC Chairman Michael Copps, now with Common Cause.

Tribune's Kern said without the merger Tribune can focus on improving its business, and it has a strong broadcast portfolio it may look to “enhance.” The “regulatory environment” of broadcast doesn’t appear “unwelcoming” after the FCC’s rejection of the deal, Kern said. “What transpired was not the function of an unwelcoming regulatory environment but more how this transaction was prosecuted by our merger partner,” Kern said. After announcing it filed to withdraw the deal, Sinclair issued a second news release declaring a $1 billion repurchase of stock. The share price fell to $25.70 after Tribune’s earnings call but rose after the repurchase announcement, to $27.80 by market close, a 2.6 percent gain for the day. Tribune closed 2.9 percent higher at $34.60. “We strongly believe in the long term outlook of our Company and disagree with the market’s current discounted view on our share price,” Ripley said.