Relativity's $1.5 Billion Lawsuit Offers Rare Peek at Netflix License Agreement

Ryan Kavanaugh Cover Splash Without Text - H 2015

Relativity boasts in a lawsuit of making Netflix the streaming giant it is today. By the same token, a complaint filed in Santa Clara Superior Court this week bemoans how Netflix allegedly attempted to undercut its relationship with the company that produced The Fighter, Limitless, Immortals and many less successful films.

Having just emerged from Chapter 11 bankruptcy after selling its television division and reducing its debt load by about $630 million, Relativity is now seeking vengeance on Netflix, which unsuccessfully tried to throw a wrench into Relativity's reorganization by insisting it had the right to stream Masterminds, a comedy starring Zach Galifianakis, and The Disappointments Room, a horror film that features Kate Beckinsale, ahead of their theatrical release. Although two judges rejected Netflix's gambit, Relativity isn't satisfied.

The film company headed by Ryan Kavanaugh now demands in excess of $1.5 billion from Netflix over an alleged breach of contract and trade libel, but it's not the mammoth damages being sought that makes the case worth following. Instead, it's the allegation that Netflix tarnished Relativity's reputation by spreading false statements to press outlets, producers and talent agencies, including Ari Emanuel at William Morris Endeavor. The prospect of incredible depositions might only be secondary to the appearance of a full, unredacted copy of the Netflix-Relativity agreement. Not even the thousands of pages in the bankruptcy case produced such a closely guarded document.

"This action's underlying drama — a twist on Frankenstein in which a once-benign creature turns on its maker — begins with the story of Relativity enabling a foothold in the entertainment industry to a then-upstart DVD mail-order business called Netflix," opens the complaint.

As Relativity frames the story of Hollywood love gone awry, it was the first major studio to allow Netflix to stream films when other studios were shunting the company.

"Netflix was desperate for an 'in,' and Relativity was the answer," continues the complaint. "Relativity allowed Netflix to enter the pay television business — now known as the Streaming Video on Demand ('SVOD') business — by choosing Netflix as its pay television partner instead of HBO, Showtime or Starz."

Of course, Relativity didn't do this purely out of its generous heart. Instead, the Kavanaugh company extracted a heavy price. How much Netflix paid for Relativity films is spelled out in a "rate card," tied to the box-office performance of Relativity's movies. For each film, Netflix paid a minimum of $3.7 million up to a maximum of $20 million, depending on the theatrical success.

Relativity estimates that from 2010 to 2013, approximately 85 percent of Netflix's new films were Relativity's, until DreamWorks, Disney and other big studios made their own Netflix licensing pacts, which according to the plaintiff, didn't compare to Relativity's "superior terms."

As early as 2013, Netflix attempted a renegotiation, according to the complaint. Why? The quality of the films? The fact that Netflix had more studio support by then? Regrets over the hundreds of millions spent?

Regardless of the answers, Relativity implies it was no longer needed by Netflix, and there's nothing like love lost and distrust to make a relationship tense.

"When Relativity rejected Netflix's demands, Netflix inappropriately sought to spurn the License Agreement," states the complaint. "In order to evade the License Agreement, Netflix repeatedly challenged Relativity's ability to theatrically release its films, including representing to third persons there were doubts as to Relativity's ability to finance their release. Netflix continued this course of conduct for at least 18 months. Ultimately, Netflix asserted that it had the right to start streaming Relativity's films before their theatrical release."

Relativity ultimately alleges that Netflix attempted to put it out of business by a smear campaign that would cause theatrical chains to withhold exhibition and investors not to put up money for Relativity films.

"Netflix's strategy has been successful," states the lawsuit. "Relativity has been forced to be put up for sale. In October 2016, Relativity began fielding offers."

The lawsuit leaves plenty of unanswered questions.

For instance, Relativity bases its breach of contract claim on a licensing provision that requires Netflix to enter into "all agreements reasonably requested by Relativity," but can a litigated interpretation of the contract — even in "bad faith," as a bankruptcy judge suggested — rise to a breach? There's no allegation that Netflix actually streamed Masterminds and The Disappointments Room as the SVOD company once demanded. (Relativity also asserts a breach of the implied covenant of good faith and fair dealing.) 

Relativity also charges Netflix with trade libel over statements made about the ability to theatrically release films, the ability to implement a plan of reorganization and a "flawed" business model. The plaintiff doesn't identify who said what where, and there's certain the possibility that such objectionable statements could be deemed as opinions or reflecting what was put forward in court. Relativity also contends only on information and belief that Netflix knew or should have known statements were untrue. Finally, Relativity asserts it has been damaged, though besides nodding to the fact that the company is now up for sale, doesn't offer much factual support.

Perhaps that will come later, if the case proceeds past the starter's gun and doesn't move to arbitration. (In bankruptcy court, Netflix appeared to assert grounds for arbitrating disputes over the licensing deal.)

In the meantime, here's a copy of the complaint filed on behalf of Relativity by attorneys at Browne George Ross. The attached exhibits include the full Netflix-Relativity agreement, which go into such subjects as content protection, promotion and reporting obligations.

A Netflix spokesperson responds, "We find this lawsuit baseless and ironic."