Fox and Disney Headed for Major Win Against Netflix in Poaching Battle

A Los Angeles Superior Court judge rejects Netflix's view that Fox's employment contracts are tainted with illegality.
Barbara Davidson/Getty Images

In the past decade, Netflix has become a powerhouse in the content industry. The company has transformed itself from a DVD-mailer service to a $156 billion corporate giant that creates popular shows such as Stranger Things and Orange Is the New Black and streams this content to an ever-growing audience around the world. Now, however, Netflix may be in for a reckoning.

On Wednesday, a Los Angeles Superior Court became the scene of a consequential fight between 20th Century Fox Film and Netflix. In reality, thanks to Rupert Murdoch selling studio assets, this legal battle pits Netflix against Disney, which is priming its own streaming service for launch later this year.

Back in 2016, Fox filed suit against Netflix for recruiting production executive Tara Flynn (who worked on prestigious shows including Showtime's Homeland and FX's The Americans) and marketing executive  Marcos Waltenberg (who primarily was responsible for activity in Latin America). Fox alleged that Netflix induced these executives to break their contracts to join Netflix.

Netflix, in response, brought counterclaims alleging these employment contracts were tainted with illegality, that they were disguised non-competes in violation of California law, that they contained impermissible injunction relief provisions to the detriment of Fox's competition and that the "take-it-or-leave-it" contracts for Fox's workforce should also be voided because when successive agreements are added together, the results flouted California's limitation on personal service contracts beyond seven years.

In short, the future of employment in the entertainment industry was on the line. Moreover, the future of employment throughout the state of California was at stake. 

It now appears as though Fox is headed for a huge victory that could chill executive poaching.

According to a tentative decision from L.A. Superior Court Judge Marc Gross, Fox has proven that Netflix caused Flynn and Waltenberg to breach their contracts. He cites evidence showing how Netflix engaged in intentional acts to disrupt the employment relationships and how Netflix was aware of what it was doing.

Fox can't get the full victory just yet on its tortious interference claim because Gross doesn't see admissible evidence showing damages from the flight of the executives. Moreover, the judge is impressed by Netflix's evidence that Fox may have saved money after the executives departed by hiring less expensive employees. 

During the hearing, Fox attorney Daniel Petrocelli made it clear he finds that idea absurd. "If they literally seize all of our employees," he posited, "is the argument going to be that we saved an enormous amount of money?"

That said, Fox was only seeking $1 in damages. More important for the company was to send a message to Netflix that recruitment of its executives would not be tolerated.

An even larger victory for Fox comes in respect to Netflix's counterclaims.

Netflix wanted a judicial declaration that Fox's enforcement of fixed-term employment agreements for all of its employees was unlawful.

The judge responds that the injunctive relief provisions of Fox's deals with employees don't violate the relevant legal code "because the provisions appear to apply while the employees are still employed and do not, in fact restrain anyone, and, even assuming, arguendo, the injunctive relief provisions in the Fixed-Term Employment Agreements violate Business & Professions Code §16600 and/or are void for any other reasons, the Fixed-Term Employment Agreements are still valid as to the remaining lawful terms."

And as for the seven-year rule, made famous when Olivia de Havilland was allowed to break her contract with Warner Bros in the 1940s, the judge is favoring Fox's position here, too.

"This court does not believe the overall legislative intent behind Labor Code §2855(a) would be served by the blanket ruling Netflix seeks, one that would prohibit all employees under contract in any business or context from engaging in continuous employment with the same employer for more than seven years," states the tentative order. "Netflix is, in effect, asking this court to look solely to the length of each employee’s tenure with Fox as determinative. However, Netflix, in making this argument, does not address the difference between the length of time someone has worked for a company and the term of any specific employment contract."

In fact, the judge goes even further, adopting Fox's view about the sanctity and worth of contracts.

"Netflix’s position ignores the benefits to the employee of having continuous employment if the employee so chooses," continues the judge. "This may provide financial security and provide an employee assurance that he or she will be able to continue to meet their obligations (mortgage, car payment, school tuition, etc.)....) Labor Code §2855 merely ensures a choice must be available to employees at least every seven years to ensure they have the freedom and opportunity to choose to enter into employment agreements."

Adopting the tentative, the judge rejects Netflix's attempt at declaratory relief and grants a motion for judgment on the pleadings to Fox on the counterclaims. Netflix will be allowed to amend these counterclaims to attempt to cure deficiencies, but some subjects will be over but for future appeal.

Moreover, Netflix attempted in its own summary judgment motion to stop Fox's claim of unfair competition to preclude any possibility of an injunction that would prevent Netflix from soliciting, recruiting, and inducing Fox employees to leave. Such efforts appear unsuccessful with the judge seeing a "critical distinction between an injunction directed at Fox employees ... and an injunction directed at third party, Netflix, to prevent tortious inducement of breach of contract."

Notes Gross, "In the latter situation, Fox employees are free to leave to work elsewhere."

During the hearing, Netflix attorney Karen Johnson-McKewan tried to change his mind, arguing that if an employee can't be barred from leaving a company shouldn't be barred from hiring. “There is no daylight between an injunction that prevents Netflix from contacting, communication with, recruiting or hiring people and an injunction that prevents an employee from going somewhere else,” she argued.

Petrocelli countered by emphasizing that the company doesn't want to prevent people who have already been poached from getting hired by a competitor, and argued that Netflix, like any other law abiding citizen, can't induce the breach of an employment contract. “We’re seeking to stop Netflix from committing torts and they are very audacious about it," he said. "In fact, their cross-complaint says they will continue to do it unless they are restrained.”

Ultimately, Gross wasn't swayed from the tentative, but did allow further briefing on whether losing an employee qualifies as proof of damage. A trial is scheduled for January, although the parties will have to assess Wednesday's development in deciding how to move forward. The ruling, if it stands, figures to boost the confidence of Viacom, which has a similar suit pending against Netflix, and perhaps other studios maybe contemplating legal action, too.

Ashley Cullins contributed to this report.