Netflix's Poaching of Fox Employees Could Set New Legal Precedent

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

"Did we just hire Roger Ailes?" That was a joke flying around Netflix's Beverly Hills offices Sept. 16 when 21st Century Fox filed a surprise lawsuit accusing the company of improperly poaching Fox employees. Many at Netflix were caught off guard by the suit, which blamed the streaming giant for inducing breaches of contract by Tara Flynn, a development executive at Fox 21 TV Studios who left for Netflix in early September, and Marcos Waltenberg, a Fox film marketing exec who defected earlier this year. Netflix, flush with its $40 billion market cap, has been on a hiring spree, and the suit highlights the animosity its growth has engendered at traditional studios and the differences in cultures with Hollywood, where executive contracts are common and outright poaching is rare.

So, can Fox, or any studio, actually stop a rival from enticing employees under contract to defect? The answer is unclear, and as a result, the showdown has caught the attention of employment lawyers throughout California. They say Netflix's potential legal defense, which it foreshadowed in a statement saying, "We do not believe Fox's use of fixed-term employment contracts in this manner is enforceable," could upend similar deals across industries and impact tens of thousands of workers in the state — and possibly beyond. "This is a fascinating case," says employment law expert Dean Harvey at Lieff Cabraser. Adds attorney Ken Sulzer at Constangy Brooks: "This could absolutely be impactful across industries, even outside TV and film production. There are lots of executives with fixed terms, and headhunters call them up every day."

California law generally is hostile to agreements that restrict worker mobility. But that maxim has been interpreted to invalidate noncompete clauses that apply after an employee leaves a company. Cases that address contractual exclusivity are much rarer. The entertainment industry has been impacted more by California's "seven-year rule" for personal services contracts, which dates back to actress Olivia de Havilland's lawsuit in the 1940s against Warner Bros., which repeatedly extended her contract against her wishes.

But this lawsuit raises the possibility that there is an implicit rule in California Business and Professions Code section 16600 (which voids restraints on "engaging in a lawful profession") that bars the lockup of any employee for even one minute. Here, Fox claims Flynn was signed through 2019, while Netflix essentially is arguing that she was free to leave at any time. If Netflix prevails, it could cast doubt on the validity of all employment agreements, or at least lead companies to deter executive exits by building in more punitive financial penalties for those walking away from a contract. "The bottom line is that Fox can recover damages from the employees for breach and from Netflix for inducing a breach, but it probably cannot stop the employees from working for Netflix," says Kate Gold at Drinker Biddle & Reath.

It is notable that Netflix does not sign its top executives to long-term deals. Instead, its content gurus, marketing pros and engineers — all the way up to CEO Reed Hastings — serve on an at-will basis. Even in mobility-happy Silicon Valley, Apple, Google, Intel and Adobe have crossed swords with the U.S. Justice Department for maintaining no-poaching deals with one another (and allegedly with Hollywood animation companies as well).

Traditional studios have been especially protective of executives. In the suit, Fox notes it had options built into contracts to extend the terms of service for an additional two years for both Flynn and Waltenberg. Sources say the two execs at issue merely were the tip of the iceberg and that Fox had become fed up by Netflix hiring away talent. "My gut is this is the gauntlet being thrown down," says Sulzer.

Fox is represented by litigator Daniel Petrocelli, who takes many big cases on behalf of studios and also represents Donald Trump, Jeffrey Skilling and other notables. He may be a legal star, but the eight-page complaint filed in Los Angeles Superior Court was bare-bones and barely addressed whether Netflix knew about the Fox contracts when it allegedly induced a breach. That's in contrast to a more typical interference claim, like the one CAA filed against UTA in April 2015 over the poaching of nearly a dozen agents. CAA made sure to detail how departing agents recruited others during the Sundance Film Festival and communicated with clients in a "lawless midnight raid." (The case is still pending.)

Fox doesn't go this far, perhaps making its interference claim susceptible to a challenge. As the complaint is written, there's even the possibility that Flynn and Waltenberg were the ones to approach Netflix for a job. That would hardly rise to the level of interference. "I would think that Fox would need to state that Netflix did something nefarious — they made misrepresentations about what was happening at Fox, they stole documents at Fox, they did something else unfair or illegal that induced these people to leave," says Sulzer. "More than merely saying to [these employees], 'Hey, we got a great situation here. This is a better gig.' "

If Fox is able to get this lawsuit past the first hurdles, Netflix has the opportunity to set a legal precedent as disruptive as its nascent distribution model. Should it prevail in this case, the home of digital binge-watching may prove executives are really no different than content — that they deserve to be accessed anytime and anyplace.

This story first appeared in the Oct. 14 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.