Netflix Facing Potential Injunction Against Recruiting Rival's Executives

Disney's Fox unit appears to be coming out ahead in a big lawsuit focused on the poaching of executives under contract.
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Netflix is headed towards a big loss on the employment front. On Monday, a Los Angeles Superior Court judge indicated he was inclined to grant a Disney subsidiary's demand that the streaming giant be prevented from recruiting and soliciting executives under contract.

The summary judgment hearing was the latest in 20th Century Fox Film v. Netflix, which began after the streamer poached production executive Tara Flynn and marketing executive Marcos Waltenberg. Fox's studio division — which Rupert Murdoch sold to Disney for $71 billion — claimed tortious interference and unfair competition. Netflix responded by alleging that Fox's contracts were a form of involuntary servitude incompatible with California statutes and public policy. 

In this battle pitting contractual certitude against economic freedom, Fox nearly prevailed at a summary judgment hearing in June when L.A. Superior Court Judge Marc Gross found most of Netflix's arguments to be unavailing.

A tentative issued in advance of Monday's hearing for the follow-up round largely doesn't depart from such analysis. The judge continues to find fault in Netflix's claims that the contracts in dispute are disguised non-competes that further violate California's limitation on personal service contracts beyond seven years. Additionally, Gross rejects the notion that these contracts are "unconscionable" in the way they allegedly bully employees to commit to one employer.

But the judge now is leaning towards granting summary judgment in favor of Fox on its claim of unfair competition.

"The court finds Fox is entitled to injunctive relief," states the tentative. "There can be no dispute that Netflix will likely interfere with Fox’s valid Fixed-Term Employment Agreements in the future if the misconduct is not enjoined."

During the hearing, Fox lawyer Daniel Petrocelli argued that Netflix "just went through our contract to try to find things that they could pick apart and complain about in order to get to their ultimate view," which he said was to "obliterate fixed-term contracts." 

Continued Petrocelli, "A deal is a deal, and there's nothing different about employment contracts. The idea that an employee can breach a contract without consequences is absurd."

"It won't just be Netflix who sees this injunction," argued Netflix attorney Karen Johnson-McKewan, acknowledging tech companies like Apple, Google and Amazon that have entered Hollywood in recent years. "It'll be all those new entrants in this market who understand that entertainment industry employees cannot leave their jobs, cannot get new jobs, cannot better themselves in an industry that is rapidly evolving, even as we speak."

It's not a complete winner for Fox.

Although Fox submitted convincing evidence that Netflix induced the contract breaches by Waltenberg and Flynn, the judge wasn't ready to grant summary judgment on those claims. That's because Gross continued to see triable issues pertaining to the damages that Fox alleges suffering as a result of the flight of their executives. Netflix submitted its own evidence that Fox may have saved time and money by replacing Waltenberg and Flynn.

"Fox has not been harmed," noted Johnson-McKewan. "Fox was OK with some of those people leaving. They weren't OK with everybody leaving." 

Fox's "request for $1 in damages does not save the motion for summary judgment/adjudication because, as discussed above, there is a triable issue of material fact as to whether Plaintiffs suffered any resulting damages, which cannot be determined via the instant motion," continues the tentative.

At the conclusion of the hearing, Gross took the matter under submission rather than adopting the tentative. However, given that the judge delivered a rather lengthy written analysis and hardly made any comments at the hearing that would signal a departure in reasoning, Fox appears primed to score its injunction. Disney, which just launched its own streaming competitor, will become the beneficiary of the ruling.

As for the prospects of a trial, currently scheduled for January, it's unlikely that Fox will have much interest in pursuing a trial with little money on the line. Instead, it appears possible that Fox may drop the tortious interference claims. Should that happen, both sides may get the opportunity to present Netflix's policy arguments to a California appeals court for further review. 

"As Judge Gross wrote, Fox failed to prove it was hurt in any way when two executives decided to exercise their right to go to Netflix," a Netflix spokesman said in a statement issued after the hearing. "Fox's illegal contracts force employees to remain trapped in jobs they no longer wish to do and at salaries far below market rate. We will continue to fight to make sure that people who work in the entertainment industry have the same rights as virtually every other Californian and can make their own choices about where they work."