Netflix Countersues Fox, Claims Employee Deals Unenforceable

Netflix's Poaching of Fox Employees May Lead to New Law - Illo -H 2016
Illustration By Paul Hoppe

Netflix is certainly looking to make a big impact on employment in the entertainment industry and beyond.

In response to a 21st Century Fox lawsuit that claims Netflix has brazenly poached two executives under contract, the streaming giant on Wednesday filed a cross-complaint that expands the scope of the dispute to Fox's employment force at large, alleging that Fox is bullying employees with "take-it-or-leave-it" deals that amount to "involuntary servitude." Netflix demands a declaration that Fox's fixed-term employment agreements are unenforceable and wants Fox enjoined from using such agreements.

"This action concerns Fox's unlawful and anti-competitive business practices that impair the mobility of its employees and prevent industry competitors like Netflix from competing fairly for skilled employees," states Netflix in its filing in Los Angeles Superior Court. "Through its widespread use of unlawful restrictive fixed-term employment agreements, Fox is facilitating and enforcing a system that restrains employee mobility, depresses compensation levels, and creates unlawful barriers to entry for Netflix and others competing in the film and television production business in violation of California Business and Professions Code Section 16600."

Fox first went to court in September after Netflix poached programming executive Tara Flynn and marketing executive Marcos Waltenberg. Seeking an injunction to prevent contractual interference, Fox alleged that Netflix was aware of employment agreements before inducing the two executives to breach their deals.

The legal action from Fox represented a rare legal strike by a studio in response to executive poaching, but Netflix is no ordinary entertainment company. Its growing stature and distaste of employment contracts has raised eyeballs throughout the industry. Fox put star litigator Daniel Petrocelli at O'Melveny on this one.

Netflix's initial press response to the lawsuit hinted at a coming challenge to enforceability of fixed-term employment contracts, which raised the prospect of setting new legal precedent, but many lawyers paying attention to the lawsuit figured it would be addressed at a later stage in the dispute, perhaps after taking up whether Fox had brought a viable tortious interference claim.

Instead, Netflix and its attorneys at Orrick, Herrington & Sutcliffe are moving ahead full steam on their legal theories.

"California prizes employee mobility and enshrines it in public policy, statute, and case law," states the cross-complaint. "This broad principle of employee mobility is at the heart of our state's innovation and economic prosperity that is the envy of many around the world. Fox's fixed-term employment agreements are contrary to this in both spirit and application and are therefore void under California law."

In its legal papers, Netflix alleges "on information and belief, Fox enforces its fixed-term employment agreements selectively, and mainly when its employees seek to work for a Fox competitor."

Netflix poses itself as such a competitor with a nod to the fact that it is now producing original content like Narcos and Stranger Things and says it intends to continue expanding. As such, Netflix advises the court that it will need to continue to recruit top business talent from the industry and says it is likely that it will be eyeing Fox's employees.

"For many of the employees under Fox's fixed-term employment agreements, in particular those identified in Fox's Complaint, Fox unreasonably pressures these employees into signing the agreements," states the lawsuit. "On information and belief, Fox actually bullies individuals into signing employment contracts, thus putting these employees in a 'take-it-or-leave-it' position."

Netflix further cites as evidence of alleged unreasonableness how Fox reserves the option to extend its fixed-term employment agreements.

The two executives at the heart of the lawsuit are the example given. Flynn began working for Fox in 2013 with a deal that ran for two years. Fox had the option of extending the term for an additional two years. In November 2015, Fox and Flynn amended their agreement for additional compensation with Fox getting the right to have her employed through most of 2019. Flynn, who focused on developing dramas and comedies for cable, was hired by Netflix earlier this year.

Netflix says neither Flynn nor Waltenberg were permitted to negotiate terms upon Fox's exercise of its options.

"Neither Ms. Flynn's nor Mr. Waltenberg's contracts fall into the narrow requirements of personal services agreements, such as those that are used for actors, musicians, and celebrities and tied to a particular creative project," the cross-complaint continues. "In both cases, on information and belief, though Fox had permitted other employees to terminate their employment before the end of their contract terms TCFFC and Fox 21 refused to allow Mr. Waltenberg and Ms. Flynn to terminate their contracts early because both ... announced they intended to accept jobs with Netflix."

The cross-complaint later further alleges that Fox is mischaracterizing the job duties of employees like Flynn and Waltenberg in boilerplate provisions in order to compel them to commit to fixed-term contracts.

"Combined with the threat of injunctive relief to prevent these individuals from leaving Fox and joining Netflix, these agreements not only violate Section 16600, they are anti-competitive and create a form of involuntary servitude among individuals who would ordinarily be at-will employees," alleges Netflix.

On Wednesday night, Twentieth Century Fox and Fox 21 released a statement.

“Netflix is defiantly flouting the law by soliciting and inducing employees to break their written fixed-term employment agreements," said a spokesperson in the statement. "As Netflix expressly acknowledges, California law fully recognizes that fixed-term employment agreements are valid and enforceable. These employment contracts are sought by many employees in the media industry because they guarantee tangible benefits. We look forward to vindicating our rights in Court.”

Oct. 19, 5:45 p.m.: Updated with Fox statement