Netflix Gets Greenlight from Appeals Court to Challenge Fox's Employment Contracts

Reed Hastings - Getty - H 2018
Ernesto S. Ruscio/Getty Images for Netflix

Netflix has successfully turned a fight over the poaching of two entertainment executives into an ambitious challenge to Hollywood's longstanding practice of using fixed-term employment contracts. On Friday, a California appeals court affirmed a trial judge's decision to allow the streaming giant to move forward on counterclaims against 20th Century Fox Film Corporation.

The dispute emanates from the defections of Tara Flynn, a former development executive at Fox 21 TV Studios who left for Netflix in September 2016, and Marcos Waltenberg, a former Fox film marketing exec who joined Netflix earlier that year.

Fox sued Netflix alleging a "brazen campaign to unlawfully target, recruit, and poach valuable Fox executives by illegally inducing them to break their employment contracts with Fox to work at Netflix."

Netflix responded with a countersuit alleging those deals were unenforceable. According to the streaming giant, Fox was bullying employees into "take-it-or-leave-it" deals that amounted to "involuntary servitude" and was "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 and Netflix have become real competitors in the past few years. So much so that in the wake of Netflix's emerging dominance in producing its own shows and distributing them to a growing base of subscribers, Rupert Murdoch recently came to the conclusion that he'd exit the production space. His company is now prepared to sell its studio assets (including 20th Century Film) to Disney, which plans its own big subscriber video-on-demand service. Whatever the ambitions, executive talent will remain important in the coming decades, and this case has the potential of upending fixed-term deals across industries and impacting tens of thousands of workers in California — and possibly beyond.

Hoping to avoid this outcome, Fox retained Daniel Petrocelli, the same litigator who recently won the big antitrust trial over the merger between AT&T and Time Warner. And Fox looked to stop Netflix's counterclaims with an anti-SLAPP motion, which permits trial courts to strike at an early stage of the litigation any meritless claims that arise from an opposing party's protected speech or petitioning activity.

Fox argued that its protected activity was the enforcement of its contracts, but the trial judge ruled that the basis of Netflix's cross-complaint was the challenge to Fox's employment practices.

Today, an appeals court agrees.

"In our independent judgment, Netflix's cross-claims do not arise from Fox's prelitigation communications or litigation activity," writes California associate justice Lamar Baker. "Rather, Netflix's claims are predicated on Fox's business practices related to the fixed-term agreements. As alleged in the cross-complaint, those business practices consist of: (1) requiring certain employees to sign employment agreements that bind the employee to work at Fox for a specified number of years, allow Fox to unilaterally extend the term of the agreement, and purport to give Fox the right to obtain an injunction against the employee to prevent him or her from leaving Fox's employ; and (2) selectively consenting to the termination of some, but not all, such agreements, depending in part on whether the employee seeking to depart intends to work for a competitor. Though the cross-complaint does contain allegations regarding prelitigation communications by Fox, those communications do not serve as a basis for Fox's asserted liability and they are incidental to Netflix's claims. Because we conclude Netflix's claims do not arise from protected activity, we affirm the denial of the anti-SLAPP motion."

Here's the full opinion.

Because the appeals court decided that Fox didn't prevail on the first prong of SLAPP analysis — whether the claims arose from protected activity — the appellate justices didn't bother with addressing whether Netflix had a likelihood of prevailing on its cross-claims. Thus, as the case moves forward at the trial court, there's no guidance from Baker about the merits of Netflix's core argument about the illegality of fixed-term employment agreements.

Fox could attempt to get the California Supreme Court interested in making a further review of its unsuccessful argument that enforcement of contracts is really synonymous with protected litigation activity. Meanwhile, the two sides have been engaged in discovery with each other for the past half-year — producing documents and taking depositions — with summary adjudication motions potentially coming sometime in the next year.

Netflix is being represented by a team at Orrick Herrington & Sutcliffe.

"We appreciate the court's careful consideration of the arguments and are pleased to see that the decision fully supports Netflix," a Netflix spokesperson said in a statement to The Hollywood Reporter of the decision. "Fox has prevented Netflix from litigating its challenge to Fox's illegal employment practices, and this decision puts an end to that delay. This is an important case and we are encouraged that it now can move forward."

In Fox's statement to THR about Friday's ruling, a spokesperson said, "As the Court of Appeals' opinion expressly acknowledges, today's ruling has no bearing on the merits of Fox's claim that Netflix has illegally solicited and induced employees to break their fixed-term employment contracts. As Netflix has reluctantly admitted during this litigation, fixed-term employment contracts are enshrined in the California Labor Code, and Fox looks forward to vindicating its position in Court."