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Howard Stern is the self proclaimed King of All Media. The radio icon has been entertaining audiences for decades and still has another five years left with the satellite radio provider. Despite these facts, Stern and Sirius XM (NASDAQ:SIRI) are currently embroiled in a lawsuit that has the potential of being valued in the hundreds of millions.

It was just a couple of months ago that Stern, along with his agent Don Buchwald, filed a lawsuit against Sirius XM for alleged failure to pay contracted bonuses. Sirius XM responded with a filing seeking summary judgment and since then the suit has remained fairly quiet ... until now.

On June 28th, Howard Stern and his agent filed several exhibits in the suit that now show the world and investors the argument that Stern and his agent have. It would appear that these two sides are polar opposites when it comes to the interpretation of the contract and that this suit will not likely fade away quietly.

In his affidavit in opposition to Sirius XM's motion for summary judgment Stern made the following statements, some of which investors will want to be aware of:

"I do not understand how the company can brag to the world that it has over 20 million subscribers and then turn around and tell me that only half of them count"

...

"If I was going to join Sirius, however, it was very important to me that I not simply be an employee who cashed a paycheck every two weeks. I was watching Infinity prosper because of my hard work and the popularity of my show and while I was paid well, it seemed to me that the money coming into Infinity was going to the company's investors and its management, rather than to the talent who were actually doing the work."

...

"Shortly after I signed with Sirius and the announcement was made, Sirius's executives greeted me as a partner in the company. The company was gathered together in the lobby and people hailed me as the company's savior. I told the gathering that the best was still to come, that we were going to bring in listeners and that we would turn the company around. I told them that not only would we beat XM, but that we would be so successful that we would acquire XM."

...

"When we were negotiating the Agreement, it was clear to everyone that the stock award was based on all of the company's subscribers. Sirius did not ask us to exclude any subscribers from these awards."

...

"When Sirius needed me to help save it, the company promised to pay me if the company exceeded its subscriber targets by at least 2 million subscribers. Now that the company has done that and more, it is refusing to pay me what it owes. I understand that Sirius is now saying that it does not have to pay because half of its subscribers came in through the acquisition of XM, rather than through the company's own internal growth. This makes no sense to me. We never discussed or agreed to any such distinction. Our Agreement is clear — the stock awards are based upon the total number of subscribers that the company has at the end of any given year. When we were negotiating the agreement, Don raised with Sirius the possibility that Sirius and XM might combine. Sirius never said that if that happened, it would not count the new subscribers for purposes of the stock awards."

Howard Stern's agent, Don Buchwald also issued an affidavit.

While Stern's own words seem damning, it is some of the other court filings that show that this will not be an open and shut case. This will likely have the street beginning to hedge on whether Sirius XM has substantial exposure relative to the Stern Suit. The attorneys for both sides are highly qualified and should this case go to trial the battle could be epic.

"SUMMARY JUDGMENT SHOULD BE DENIED BECAUSE DEFENDANT READS AN EXCEPTION INTO THE PARTIES' AGREEMENT THAT SIMPLY IS NOT THERE."

"SUMMARY JUDGMENT SHOULD BE DENIED BECAUSE DEFENDANT'S MOTION RAISES DISPUTED ISSUES OF MATERIAL FACT AND HIGHLIGHTS THE NEED FOR DISCLOSURE."

One paragraph in the contract between Stern and Sirius will be difficult for Sirius XM to defend. It states, "In the event Sirius merges with XM Satellite Radio, Sirius shall pay you a fee of (number redacted now, but was $20 million) whereupon the HS Programs may be broadcast to all subscribers of the surviving company."

In this case, the surviving company was not identified as Sirius or XM. One prong of the Sirius XM argument is that the surviving entity was XM Satellite Radio, not Sirius. This is born out in the merger language. On many points, Sirius XM has some weight in their insistence that there are places where Sirius is named as the trigger for bonuses, but the paragraph above references simply the surviving company and further states that the Howard Stern Program could be broadcast to ALL subscribers.

Another interesting argument made by the Stern side is the development and marketing of an interoperable radio and a "Sirius Everything Plus XM Everything" package that went along with the radio. Sterns side argues that the very existence of such a device and package lumps the subscribers of both platforms together. This is not the first time interoperable radios have been an issue for Sirius XM. The subject was oft discussed during the merger and was an original requirement placed on Sirius and XM when the satellite radio licenses were issued.

What is crystal clear is that this contract dispute will likely result in substantial legal wrangling and while a settlement may ultimately be reached, it will still be quite expensive. It will take time for all of this to pan out, but in my mind, given the stances of each side, this will be a cloud overhanging this stock. Most likely the motion for summary judgment filed by Sirius XM will be denied. That is expected. Even Sirius XM CEO Mel Karmazin stated at the annual meeting that courts tend to rule in favor of giving people their "day in court."

While negotiations between the parties may already be happening, the fact that the suit got to this point means that the sides are not close to an agreement and that the money involved is substantial. If the Stern suit becomes the focus of the investment community, it could set up some frustrating times for investors even if the company is reporting great numbers. If Stern wins, the impact will be substantial.

Source: Howard Stern Suit Could Affect Sirius XM Stock