Should Sinclair Management Be Liable to its Shareholders for Putting Politics Over Business?
Why Corporate Law Alone Cannot Provide an Answer

On Friday, October 22, Sinclair Broadcast Group pre-empted an hour of regularly scheduled programming to air what the company described as a "special one-hour news program." The program, "A POW Story: Politics, Pressure and the Media," included footage from "Stolen Honor: Wounds That Never Heal," a documentary that portrays Senator John Kerry's protests against the Vietnam War in a negative light. But it also included some clips from a pro-Kerry documentary and commentary from Kerry supporters.

Though Sinclair has denied it, press reports suggest that its stations--which include affiliates of every major network--were originally going to air "Stolen Honor" in its entirety, without any accompanying pro-Kerry footage. That plan, however, triggered a boycott movement, led by Kerry supporters who objected to the content of Stolen Honor, to Sinclair's failure to air programs equally critical of President Bush, and to the timing of the program. And that movement reportedly caused sponsors to put pressure on Sinclair to revise its programming. Ultimately, "A POW Story," in addition to presenting both pro- and anti-Kerry footage, focused nearly as much attention on the controversy surrounding the program itself as on Kerry's anti-war activities.

Meanwhile, a Sinclair press release denied that the company caved to outside pressure or changed its plans, asserting that it had never formally decided to air all of "Stolen Honor" in the first place. Given the content of the program Sinclair did show, however, the denial is open to question. Was the plan all along to run a program presciently responding to a controversy that did not yet exist at the time the company first decided to run the program?

Whatever the cause of Sinclair's reversal, Sinclair's critics are not satisfied. Sinclair faces legal action or potential legal action on at least four fronts. In this column, I will discuss those suits--and focus, in particular, on how one of them raises interesting and important issues at the intersection of corporate law and the First Amendment.

The Suits--And Threatened Suits--Against Sinclair

First, George Butler, who created "Going Upriver: The Long War of John Kerry," has sued Sinclair for copyright infringement. Butler alleges that Sinclair unlawfully used Butler's photos and film.

Second, Sinclair faces possible sanctions from the Federal Communications Commission (FCC) for violating a federal law. The law restricts the ability of an FCC license-holder to permit use of its station by a candidate for public office without giving opposing candidates equal time.

The wording of the statute, however, does not appear to cover material that is critical of a candidate--as "Stolen Honor" plainly is. And in any event, the statute contains an exception for a "bona fide newscast." Nonetheless, prior to the airing of "A POW Story," FCC Chairman Michael Powell indicated in a letter to Democratic Congressman John Dingell that he would act "expeditiously" on any complaints against Sinclair.

Third, University of Delaware professor Kenneth J. Campbell has sued the makers of "Stolen Honor" (and threatened suit against Sinclair) for libel. The film includes footage and narration suggesting that Campbell had fraudulently misrepresented himself as having seen combat, even though Campbell is in fact a multiply decorated Vietnam veteran.

Finally--and most pertinently, for the purposes of this column­--securities litigator William S. Lerach announced last week that he intends to sue Sinclair on behalf of shareholders who have seen their investment harmed by the "Stolen Honor" controversy. Although the suit will include allegations of insider trading that appear unrelated to that controversy, Lerach also has suggested that Sinclair management's decision to air the program is itself part of the basis for the suit.

The first three legal controversies focus on the content of Sinclair's programming. By contrast, the fourth--Lerach's threatened litigation--appears to be aimed only at the business decision.

Yet, as I explain below, it is impossible to evaluate the question of whether Sinclair violated its fiduciary duty to shareholders as a matter of corporate law, without also evaluating the content of the programming. And for that reason, Lerach's potential lawsuit raises a number of troubling questions.

Did Sinclair Comply with Maryland Corporate Law?

Lerach's potential insider trading case against the Sinclair Broadcast Group will allege a violation of the federal securities laws. In contrast, a claim that Sinclair management improperly decided to air a particular program would allege a breach of fiduciary duty, which is governed by state law. Because Sinclair is a Maryland corporation, here that means Maryland law.

Like the law of other American states, the corporate law of Maryland begins with "the business judgment rule." It states that corporate directors and officers are not liable to shareholders for making a business judgment that, in retrospect, turned out badly. So long as a corporate officer or director acts in good faith, pursuing what he reasonably believes to be the company's best interest, and does not fall below the standard of ordinary care (that is, does not act negligently), he will escape liability. In practice, Maryland law, again like the corporate law of most states, presumes that the decisions of directors and officers of a corporation are reasonable business judgments.

Accordingly, it would not be sufficient for Lerach's suit to allege that Sinclair management made a bad judgment in choosing to air "A POW Story," or in giving the initial impression that it intended to air all of "Stolen Honor." The suit would have to allege, instead, that the decision was not really a business decision at all, but a political one.

And that does indeed seem to be the nature of the complaint. There are a number of possible theories of liability--including the "waste" of corporate assets, "self-dealing," and a more general breach of the duty of loyalty to the corporation--that could find their way into a lawsuit. But at the end of the day, they all amount to more or less the same thing: namely, that Sinclair's management put their own personal political views ahead of the business interests of the company.

Lerach's theory will probably be that knowing, or at least having reason to know, that showing even part of "Stolen Honor" would harm the Sinclair stations with advertisers, and thus diminish the value of Sinclair stock, management decided to show it anyway. On this view, management took an asset that belonged to the shareholders and used it to serve their own political interests.

The First Amendment Complication: Not Simply a Corporate Law Case

But ordinary corporate law is not sufficient to determine liability here, because Sinclair is in the news business (among other businesses).

Suppose, hypothetically, that Sinclair's news department had produced a high-quality, timely documentary that was nonetheless unpopular in many communities in which Sinclair owns stations. Imagine, for example, that, after the election, a Sinclair documentary included disturbing revelations about U.S. treatment of Iraqi prisoners. Protesters who believe that airing the documentary will undermine the U.S. war effort, organize a boycott of Sinclair advertising, causing the company to lose revenue. Nonetheless, Sinclair management decides that the documentary is newsworthy and airs it on most of its stations.

Surely we would not want to say that the management of a news organization should be held liable to shareholders under such circumstances. On the contrary, wouldn't we want to commend management for upholding journalistic standards rather than caving to the pressure of the market?

Two Possible Ways to Address the First Amendment Concern

If so, the question then becomes one of figuring out how corporate law can adequately accommodate the concern for journalistic standards. Two possible options suggest themselves.

One answer focuses on the long term. Over the long run, a news organization that develops a reputation for hard-hitting, honest reporting will have credibility with viewers, and thus will be able to deliver those viewers to advertisers. Perhaps in an era when "fair and balanced" is a euphemism for "right-wing" journalism, this view is naÏve. But as a matter of corporate law, it probably provides a sufficient business justification for airing a newsworthy, albeit controversial, program, even if it hurts the company's share value in the short term. A decision in the long-term, but not the short-term, best interest of the company is certainly a business judgment.

A second answer focuses on fair warning. If I purchase stock in Coca-Cola, I expect the company simply to try to maximize the profits from sales of its beverages. But if I purchase stock in a news organization, I am on notice that the organization will make decisions based on journalistic standards, even when those decisions conflict with the organization's business interests.

If I think that a company's practice of separating its news and business departments reduces the rate of return I am likely to receive from my investment, I can simply purchase stock in a different kind of company. Conversely, by choosing to buy stock in a news company, I accept the risk that journalistic decisions will sometimes hurt business value.

There's No Escaping the Substance of the Sinclair Program

How do these principles apply in the Sinclair case? That depends on how one views the substance of its program.

First suppose, as Sinclair management contends, that they made a reasonable journalistic decision rather than a political one. Then, under these principles, management should not be held liable for the financial fallout of its decision. It would be unwise and dangerous to establish a precedent that allows directors or officers of a news organization to be held financially accountable for airing arguably newsworthy but controversial programming.

But now suppose, instead, that Lerach can establish that the decision to air "A POW Story," or the seeming initial decision to air all of "Stolen Honor," was such a departure from the standards of reasonable journalists that it can only be explained as a political rather than a journalistic judgment. In that event, under these principles, recovery should be allowed.

But even here, there are complications. Much of what Fox News or, for that matter, Air America Radio, broadcasts, can plausibly be described as "political" rather than, or perhaps in addition to, "journalistic." Investors who put their money in such a company nonetheless know that fact going in. (To be sure, Air America Radio is not publicly traded, but News Corporation, the parent of Fox News, is.) If appealing to people of a particular political persuasion is part of a company's business model, investors shouldn't be heard to complain when the company does just that.

Styling the Suit As Fraud May Avoid A First Amendment Violation

In some sense, then, Lerach's proposed lawsuit must allege a species of false advertising, or bait and switch. Purporting to be a kind of holding company for local television stations, the allegation would go, Sinclair lured investors into unwittingly backing a very different kind of company.

If the gist of the suit is phrased in this way, permitting it to go forward would not pose a significant threat to the freedom of the press. After all, the First Amendment has long recognized the legitimate government interest in preventing and punishing fraud.