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Dish Network takes ESPN to trial over licensing deal

The sign in the lobby of the corporate headquarters of Dish Network is seen in the Denver suburb of Englewood, Colorado April 6, 2011. REUTE
The sign in the lobby of the corporate headquarters of Dish Network is seen in the Denver suburb of Englewood, Colorado April 6, 2011. REUTE

By Nate Raymond and Liana B. Baker

NEW YORK (Reuters) - Dish Network Corp went to trial against ESPN Inc on Monday over claims the sports programmer owes it more than $152 million after breaching a contract by offering better deals to rival distributors.

The lawsuit in U.S. District Court in Manhattan pits the No. 2 U.S. satellite company against the sports affiliate of media group Walt Disney Co.

Adding another wrinkle, the distribution deal at issue is set to expire this year, meaning the case might potentially impact talks for a future contract. Dish, controlled by billionaire founder Charlie Ergen, commonly uses lawsuits to gain leverage in these types of negotiations, analysts said.

With more than $8 billion a year in fees and ad sales, according to research firm SNL Kagan, ESPN reigns as the giant of the sports network market.

In 2012, it charged cable and satellite companies an average of $5.15 per subscriber per month, which makes it the most expensive channel, according to SNL Kagan. The research firm said ESPN Classic, a channel central to the lawsuit, charged programmers a separate fee of 19 cents per month.

Dish and its larger satellite rival DirecTV have been vocal about rising sports programming fees and how the cost is passed on to consumers.

The lawsuit that went to trial before a jury on Monday centers on terms ESPN negotiated with Dish and its competitors to distribute channels, including ESPN Classic, which shows game reruns, and ESPN Deportes, a Spanish language channel.

In the lawsuit, filed in August 2009, Dish accused ESPN of breaching a clause in their 2005 agreement that required the sports programmer to offer the same terms as it did to competitors.

But ESPN made a "calculated decision" not to offer the more favorable conditions, Barry Ostrager, a lawyer for Dish at Simpson Thacher & Bartlett, told jurors.

ESPN gave lower rates for ESPN Deportes, its Spanish language channel, to Time Warner Cable Inc in 2007 and Verizon Communications Inc in 2008. Not being offered those rates caused $18.9 million in damages to Dish, Ostrager said.

Dish lawyers also contend ESPN allowed Comcast Corp in 2006 to reduce the distribution of ESPN Classic. Not being offered the same deal cost Dish $78.9 million since it was not able to reduce distribution and the fees it paid per subscriber.

Had Dish known about the 2006 offer to Comcast, it would never have agreed to a deal it made in 2009 to reduce distribution of ESPN Classic in exchange for expanding distribution of ESPNU, which caused another $52 million in damages.

"That circumstance put Dish at a very substantial competitive disadvantage," Ostrager said.

But Diane Sullivan, a lawyer for ESPN at Weil, Gotshal & Manges, said Dish was trying to "cherry pick" good terms from rivals' deals without taking on the additional obligations they imposed.

"The evidence is going to show Dish doesn't want a fair deal, it wants a better deal than all the other distributors," she said.

Dish is not the only distributor with a contract clause requiring equal treatment, known as a most favored nation clause, Sullivan said. She added ESPN has a "rigorous" compliance program to ensure it follows the terms of those clauses.

This is the second time in two years the companies have gone to trial over their carriage agreement.

In the earlier lawsuit, filed in 2008 in New York state court, Dish accused ESPN and several Disney subsidiaries of not providing certain high-definition channel feeds, including ESPN News and Disney Channel.

A jury found for ESPN and Disney in 2011 and said they were entitled to keep $56 million in fees. Dish is appealing.

A state judge separately found Dish owed ESPN and Disney $66 million in interest as the result of late payments under the licensing agreements, a ruling upheld on appeal.

The case is Dish Network LLC v. ESPN Inc., et al., U.S. District Court, Southern District of New York, 09-06875.

(Reporting By Nate Raymond in New York. Additional reporting by Liana Baker. Editing by Andre Grenon)

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