Commitments And Contingencies
|12 Months Ended
Dec. 31, 2017
|Commitments and Contingencies
|Commitments And Contingencies
(17) Commitments and Contingencies
In connection with agreements for the sale of assets by the Company or its subsidiaries, the Company may retain liabilities that relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Company generally indemnifies the purchaser in the event that a third party asserts a claim against the purchaser that relates to a liability retained by the Company. These types of indemnification obligations may extend for a number of years. The Company is unable to estimate the maximum potential liability for these types of indemnification obligations as the sale agreements may not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.
The Atlanta Braves and certain of their players and coaches have entered into long-term employment contracts whereby such individuals’ compensation is guaranteed. Amounts due under guaranteed contracts as of December 31, 2017 aggregated $234 million, which is payable as follows: $121 million in 2018, $45 million in 2019, $32 million in 2020, $34 million in 2021, $2 million in 2022 and none thereafter. In addition to the foregoing amounts, certain players and coaches may earn incentive compensation under the terms of their employment contracts.
The Company leases business offices, has entered into satellite transponder lease agreements and uses certain equipment under lease arrangements. These leases provide for minimum lease payments, additional operating expense charges, leasehold improvements and rent escalations, and certain leases have options to renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term, including reasonably assured renewal periods.
Rental expense under such agreements amounted to $58 million, $52 million and $53 million for the years ended December 31, 2017, 2016 and 2015, respectively.
A summary of future minimum lease payments under cancelable and noncancelable operating leases, as of December 31, 2017 follows (amounts in millions):
It is expected that in the normal course of business, leases that expire generally will be renewed or replaced by leases on other properties; thus, it is anticipated that future lease commitments will not be less than the amount shown for 2017.
Braves Holdings provided funding for the new stadium and the land during the initial construction period, until the initial reimbursement by the Authority in September 2015, at which time the land was conveyed to the Authority. Braves Holdings was deemed the owner (for accounting purposes) of the stadium during the construction period and costs were classified as construction in progress (“CIP”), within the Property and equipment, net line item. Costs of the project were captured in CIP along with a corresponding financing obligation, reported in other liabilities, for amounts funded by the Authority. At the end of the construction period in March 2017, the Company performed an analysis and determined that due to Braves Holdings’ continuing involvement with the property as a result of the purchase option at the end of the lease term, the stadium did not qualify for sale-leaseback accounting treatment. Accordingly, Braves Holdings applied the financing method of accounting whereby Braves Holdings began making license payments and amortizing the financing obligation to the Authority using the effective interest rate method over a 30 year term. The stadium was reclassified from CIP and placed into service on March 31, 2017. Also at this time, Braves Holdings began depreciating the stadium over a 45 year estimated useful life.
Programming and content
SIRIUS XM has entered into various programming agreements under which SIRIUS XM’s obligations include fixed payments, advertising commitments and revenue sharing arrangements. Amounts due under such agreements are payable as follows: $331 million in 2018, $306 million in 2019, $259 million in 2020, $175 million in 2021 and $52 million in 2022. Future revenue sharing costs are dependent upon many factors and are difficult to estimate; therefore, they are not included in the amounts above.
The Company has contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. We record a liability when we believe that it is both probable that a liability will be incurred and the amount of loss can be reasonably estimated. We evaluate developments in legal matters that could affect the amount of the liability accrual and make adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount of a loss or potential loss. We may be unable to reasonably estimate the reasonably possible loss or range of loss for a particular legal contingency for various reasons, including, among others, because: (i) the damages sought are indeterminate; (ii) the proceedings are in the relative early stages; (iii) there is uncertainty as to the outcome of pending proceedings (including motions and appeals); (iv) there is uncertainty as to the likelihood of settlement and the outcome of any negotiations with respect thereto; (v) there remain significant factual issues to be determined or resolved; (vi) the relevant law is unsettled; or (vii) the proceedings involve novel or untested legal theories. In such instances, there may be considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements.
In connection with a commercial transaction that closed during 2002 among Liberty, Vivendi Universal S.A. (“Vivendi”) and the former USA Holdings, Inc., Liberty brought suit against Vivendi and Universal Studios, Inc. in the United States District Court for the Southern District of New York, alleging, among other things, breach of contract and fraud by Vivendi. On June 25, 2012, a jury awarded Liberty damages in the amount of €765 million, plus prejudgment interest, in connection with a finding of breach of contract and fraud by the defendants. On January 17, 2013, the court entered judgment in favor of Liberty in the amount of approximately €945 million, including prejudgment interest. The parties negotiated a stay of the execution of the judgment during the pendency of the appeal. Vivendi filed notice of its appeal of the judgment to the United States Court of Appeals for the Second Circuit. During the first quarter of 2016, Liberty entered into a settlement with Vivendi which resulted in a $775 million payment to settle all claims related to the dispute described above. Following the payment of a contingency fee to our legal counsel, as well as amounts payable to Liberty Global plc, an additional plaintiff in the action, Liberty recognized a net pre-tax gain on the legal settlement of approximately $511 million. This settlement resulted in a dismissal of all appeals and mutual releases of the parties.
In August 2013, SoundExchange, Inc. (“SoundExchange”) filed a complaint in the United States District Court for the District of Columbia (“SoundExchange I”) alleging that SIRIUS XM underpaid royalties for statutory licenses in violation of the regulations established by the Copyright Royalty Board (“CRB”) for the 2007-2012 period. SoundExchange principally alleges that SIRIUS XM improperly reduced its gross revenue subject to royalties by improperly deducting revenue attributable to pre-1972 recordings and Premier package revenue that is not “separately charged” as required by the regulations. SIRIUS XM believes that it properly applied the gross revenue exclusions contained in the regulations established by the CRB. SoundExchange is seeking compensatory damages of not less than $50 million and up to $100 million or more, payment of late fees and interest, and attorneys’ fees and costs.
In August 2014, the United States District Court for the District of Columbia in response to SIRIUS XM’s motion to dismiss the complaint, stayed the case on the grounds that the case properly should be pursued in the first instance before the CRB rather than the District Court. In its opinion, the District Court concluded that the gross revenue exclusions in the regulations established by the CRB for the 2007-2012 period were ambiguous and did not, on their face, make clear whether SIRIUS XM’s royalty calculation approaches were permissible under the regulations. In December 2014, SoundExchange filed a petition with the CRB requesting an order interpreting the applicable regulations.
On September 11, 2017, the CRB issued a ruling concluding that SIRIUS XM correctly interpreted the revenue exclusions applicable to pre-1972 recordings. Given the limitations on its jurisdiction, the CRB deferred to further proceedings in the District Court the question of whether SIRIUS XM properly applied those pre-1972 revenue exclusions when calculating its royalty payments. The Judges also concluded that SIRIUS XM improperly claimed a revenue exclusion based on its Premier package upcharge, because, in the Judges’ view, the portion of the package that contained programming that did not include sound recordings was not offered for a “separate charge.”
SIRIUS XM has filed a notice of appeal of this ruling to the United States Court of Appeals for the District of Columbia Circuit. SIRIUS XM expects that the ruling by the CRB in this matter will be transmitted back to the District Court for further proceedings, such as adjudication of claims relating to damages and defenses, although those proceedings may be delayed pending the appeal of the Judges’ interpretative decision. SIRIUS XM believes it has substantial defenses to those SoundExchange claims that can be asserted, including in proceedings in the District Court, and will continue to defend this action vigorously.
This matter is captioned SoundExchange, Inc. v. Sirius XM Radio, Inc., No. 13-cv-1290-RJL (D.D.C.); the Copyright Royalty Board referral was adjudicated under the caption Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, United States Copyright Royalty Board, No. 2006-1 CRB DSTRA. Information concerning SoundExchange I is publicly available in filings under the docket numbers.
On December 12, 2017, SoundExchange filed a second action against SIRIUS XM under the Copyright Act in the United States District Court for the District of Columbia (“SoundExchange II”). This action includes claims that SoundExchange has also attempted to add to the SoundExchange I litigation through a proposed amended complaint. SoundExchange alleges that SIRIUS XM has systematically underpaid it for SIRIUS XM’s statutory license by impermissibly understating SIRIUS XM’s gross revenue, as defined in the applicable regulations and, in certain cases, understating the compensable performances of recordings on SIRIUS XM’s internet radio service. Specifically, the complaint in SoundExchange II alleges that: from at least 2013 through the present, SIRIUS XM improperly excluded from gross revenue a portion of SIRIUS XM’s revenue received from its Premier and All Access packages attributable to premium channels; at least between 2010 and 2012, SIRIUS XM improperly excluded late fees received from subscribers from the calculation of gross revenue; at least between 2010 and 2012, SIRIUS XM improperly excluded certain credits, adjustments and bad debt for which the underlying revenue had never been included in the first instance; at least between 2010 and 2012, SIRIUS XM improperly deducted from gross revenue certain transaction fees and other expenses—for instance, credit card processing fees, collection fees and sales and use taxes—that are not permitted by the CRB regulations; at least between 2010 and 2012, SIRIUS XM improperly deducted amounts attributable to performances of recordings claimed to be directly licensed on both SIRIUS XM’s satellite radio and internet radio services, even though they were not; at least between 2010 and 2012, SIRIUS XM improperly excluded from royalty calculations performances of recordings less than thirty seconds long under the provisions of the CRB regulations and the Webcaster Settlement Agreement; from 2010 through 2012, SIRIUS XM excluded from royalty calculations performances of songs on its internet radio services that SIRIUS XM claimed it was unable to identify; SIRIUS XM owes associated late fees for the previously identified underpayments under the applicable CRB regulations; and SIRIUS XM has underpaid SoundExchange by an amount exceeding 10% of the royalty payment and SIRIUS XM is therefore obligated to pay the reasonable costs of an audit. SIRIUS XM believes that it properly applied in all material respects the regulations established by the CRB. SoundExchange is seeking compensatory damages in an amount to be determined at trial from the alleged underpayments, unspecified late fees and penalties pursuant to the CRB’s regulations and the Webcaster Settlement Agreement and costs, including reasonable attorney fees and expenses.
This matter is titled SoundExchange, Inc. v. Sirius XM Radio, Inc., No. 17-cv-02666-RJL (D.D.C.). Information concerning SoundExchange II is publicly available in filings under the docket number. As of December 31, 2017, SIRIUS XM concluded that a loss, in excess of its recorded liabilities, was considered remote in connection with SoundExchange I or SoundExchange II. The assumptions underlying SIRIUS XM’s conclusions may change from time to time and the actual loss may vary from the amounts recorded.
In June 2015, SIRIUS XM settled (the “Capitol Settlement”) a separate suit brought by Capitol Records LLC (“Capitol Records”), Sony Music Entertainment, UMG Recordings, Inc., Warner Music Group Corp. and ABKCO Music & Records, Inc. relating to SIRIUS XM’s use and public performance of pre-1972 recordings for $210 million, which was paid during July 2015. The settling record companies claim to own, control or otherwise have the right to settle with respect to approximately 85% of the pre-1972 recordings SIRIUS XM has historically played. SIRIUS XM has also entered into certain direct licenses with other owners of pre-1972 recordings, which in many cases include releases of any claims associated with its use of pre-1972 recordings.
SIRIUS XM recognized $108 million during June 2015 for the portion of the $210 million Capitol Settlement related to SIRIUS XM’s use of pre-1972 sound recordings for the periods prior to the Capitol Settlement during June 2015. The $108 million expense is included in the Revenue share and royalties line item in the accompanying consolidated financial statements for the year ended December 31, 2015 but has been excluded from Adjusted OIBDA for the corresponding period as this expense was not incurred as a part of the Company’s normal operations for the period, and this lump sum amount does not relate to the on-going performance of the business. SIRIUS XM recognized approximately $43 million, $40 million and $19 million to Revenue share and royalties within the consolidated statement of operations with respect to the Capitol Settlement subsequent to the settlement date related to SIRIUS XM’s use of pre-1972 sound recordings during the years ended December 31, 2017, 2016 and 2015, respectively, and is included as a component of Adjusted OIBDA.
Additionally, during the fourth quarters of 2017 and 2016, SIRIUS XM recorded $45 million and $46 million, respectively, related to music royalty legal settlements and reserves. The expenses are included in the Revenue share and royalties line item in the accompanying consolidated financial statements for the years ended December 31, 2017 and 2016, respectively, but have been excluded from Adjusted OIBDA for the corresponding periods as these expense were not incurred as a part of the Company’s normal operations for the periods, and these lump sum amounts do not relate to the on-going performance of the business.
On March 13, 2017, Thomas Buchanan, individually and on behalf of all others similarly situated, filed a class action complaint against SIRIUS XM in the United States District Court for the Northern District of Texas, Dallas Division. The plaintiff in this action alleges that SIRIUS XM violated the Telephone Consumer Protection Act of 1991 (the “TCPA”) by, among other things, making telephone solicitations to persons on the National Do-Not-Call registry, a database established to allow consumers to exclude themselves from telemarketing calls unless they consent to receive the calls in a signed, written agreement, and making calls to consumers in violation of SIRIUS XM’s internal Do-Not-Call registry. The plaintiff is seeking various forms of relief, including statutory damages of $500 for each violation of the TCPA or, in the alternative, treble damages of up to $1,500 for each knowing and willful violation of the TCPA and a permanent injunction prohibiting SIRIUS XM from making, or having made, any calls to land lines that are listed on the National Do-Not-Call registry or SIRIUS XM’s internal Do-Not-Call registry. SIRIUS XM believes it has substantial defenses to the claims asserted in this action, and intends to defend this action vigorously.