Netflix Takes Aim at the Legality of Viacom's Executive Contracts

Viacom HQ Sign - H 2013
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Viacom HQ Sign - H 2013

Netflix has now returned fire at a Viacom lawsuit alleging the streaming giant induced an executive to break an employment agreement. In new court papers, Netflix asserts that Viacom's interference claims fail because the contract that television production exec Momita Sengupta once signed with the parent company of Comedy Central and MTV violates California law and is unenforceable.

The fact that Netflix is challenging the legality of fixed-term employment deals isn't particularly surprising given that it is the same stance that Netflix has taken in an ongoing legal war against Fox over the defection of a couple of its executives. But there are notable differences between the two cases that make the Viacom fight a must-watch in its own right. Might this legal war, for instance, impact the business of talent agencies? Read on.

In both cases, Netflix raises California Business and Professions Code Section 16600, which voids contracts that restrain anyone from engaging in a lawful profession.

Netflix argues that Fox's fixed-term contracts are de facto non-competes and should be held as violating 16600.

As for Viacom's contracts, by contrast, or at least the one signed by Sengupta, Netflix points out that there is a provision that is explicitly a non-compete.

Sengupta's term of service for Viacom under her deal runs from April 2017 until April 2020. Viacom could terminate her with or without cause before 2020. Nevertheless, in a section of Sengupta's deal entitled "Non-Competition," she is barred during this same time period regardless of whether she is still working with Viacom from "directly or indirectly engag[ing]" in activity with "any business competitive with any business of Viacom."

This provision added that Sengupta may continue to pursue other employment opportunities provided she didn't utilize confidential information.

"While this provision ostensibly permits Ms. Sengupta to work for a competitor during the Non-Competition Period, in truth, she could not do so if, in Viacom's view, that new job with a competitor could somehow inherently require her to use Confidential Information," writes Netflix's attorney, Karen Johnson-McKewan, adding that what's confidential is defined broadly and not just limited to trade secrets but also to "any information relating to Viacom."

Netflix also takes issue with how Viacom has reserved the right to enjoin Sengupta's employment with a competitor and claw back vested benefits if she went to work with a competitor. The streamer argues this severely restricts her mobility. Additionally, Netflix contends that the objectionable non-compete provision can't be severed from the rest of the contract.

There's also a second argument for the illegality of Viacom's executive contract. 

Sengupta began work at Viacom in 2002. She signed a series of amendments and new employment agreements that kept her aboard for 16 years.

Netflix tells the Los Angeles judge that when these agreements are treated in combination, that violates the part of the California labor code that limits personal service contracts to seven years.

The seven-year rule is famous in Hollywood after actress Olivia de Havilland challenged how Warner Bros. repeatedly extended her contract back in the 1940s.  It was her victory at a California appeals court that helped bring down the old studio system.

The seven-year rule is typically applied to talent, but in the past decade, there's been some arbitration involving talent agents that have raised the issue of a limitation on the seven-year rule.

For instance, about a decade ago, an agent named Ed Limato, who represented Denzel Washington and Steve Martin, defected from ICM to William Morris. Limato asserted he was no different than De Havilland while ICM took the position that every time there is a renegotiation on an employment agreement, that resets the clock.

ICM lost, but arbitration doesn't create case law, and now CAA and UTA are in the midst of their own arbitration over the flight of several agents in the comedy business. CAA has argued that there is nothing in California law that renders the last contract in a series of contracts unenforceable just because there were prior term contracts. A few years ago, the arbitrator in the case issued a tentative decision rejecting UTA's seven-year rule defense before pulling back. The parties are now waiting for a ruling from the arbitrator after hearings earlier this year. 

Interestingly, and maybe not entirely coincidentally, Anthony Oncidi is the Proskauer attorney representing both CAA in the UTA case and Viacom in the Netflix case.

Insofar as CAA-UTA not establishing any legal precedent in whatever decision is made, the same may not be said about what looks to be coming in Viacom-Netflix.

Viacom responds to Netflix's new court papers: "We continue to believe the employment contracts we use are valid under California law, and that other companies may not induce employees to break them. We think Netflix should be required to play by the same rules as every other company doing business in California, and we are taking the steps necessary to ensure they do. Nothing in their response changes that view."