Netflix Ordered to Pay Relativity More Than $800,000 in Attorney's Fees

Ryan Kavanaugh -Getty-H 2016
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Ryan Kavanaugh's company prevailed in a dispute over the movies 'Masterminds' and 'The Disappointments Room' that arose during last year's bankruptcy hearing.

Netflix has been ordered by a federal judge to pay Relativity more than $800,000 in attorney’s fees and expenses in the wake of the legal battle that Ryan Kavanaugh’s embattled company waged with the streaming service throughout most of the past year.

Michael Wiles, the U.S. bankruptcy judge who oversaw Relativity’s Chapter 11 bankruptcy last year, ordered Netflix to pay $795,733 in attorney’s fees and another $22,815 in litigation expenses to Relativity, which was represented by the firm of Jones Day, but he didn’t award any fees or expenses to Kavanaugh, who was personally represented by Skadden, Arps, Slate, Meagher & Flom.

The litigation between the two companies arose while Relativity was going through bankruptcy proceedings, and grew out of a lucrative licensing agreement Relativity signed with Netflix in 2010. During the course of the bankruptcy process, the licensing fees for the unreleased movies Masterminds and The Disappointments Room were assigned to Relativity and its secured creditors.

But as the release dates of the two films were repeatedly postponed, Netflix, which had opposed the Relativity restructuring, claimed the right to make payments in June and then to begin to air the movies on its service without waiting for their theatrical release. But two judges ruled against Netflix on that issue.

Citing the licensing agreement, Relativity argued since it was the prevailing party in the litigation, it was entitled to reasonable costs and expenses, amounting to more than $800,000, and the court agreed. Kavanaugh claimed as Relativity CEO he was also part of the litigation and asked for another $427,728 in fees and $17,775 in expenses, but that claim was denied.

Masterminds, a heist comedy starring Zach Galifianakis and Kristen Wiig, ultimately opened Sept. 30 of last year and grossed just $17.4 million domestically. The Disappointments Room, a horror pic starring Kate Beckinsale, bowed Sept. 9 and took in just $2.4 million domestically.

In court filings, Relativity had projected both films would earn about $200 million in lifetime revenue, and had brought a motion to compel Netflix into a "routine date extension,” warning the judge of the “disastrous effect" of permitting Netflix to stream them earlier. According to Relativity, its reorganization was being threatened, and Netflix had ignored the import of the judge's earlier findings as well as industry custom that required Netflix to promptly enter into date extension amendments upon the request of its lenders. 

As far as Netflix was concerned, after making $3.7 million minimum guarantee payments for each film, the contract allowed it to stream them at defined “start dates.” The streamer had argued that the bankruptcy judge doesn't even have jurisdiction to rule due to an arbitration provision in the contracts. But Netflix’s argument was rejected.

Relativity subsequently filed a $1.5 billion lawsuit against Netflix in Santa Clara Superior Court in October, alleging breach of contract and trade libel. Moving quickly, Netflix responded with a motion to strike Relativity’s complaint. Late last month, Judge Theodore Zayner tossed out two of the three claims in the lawsuit, but said Relativity can proceed with its breach of contract claim.