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Netflix Heads to Court: How Fox’s Poaching Trial Could Reshape Hollywood

An upcoming courtroom battle between Netflix and Fox could completely upend the traditional practice of locking in employees through long-term contracts — is the entertainment world ready to embrace the gig economy?

Quitting a job is always a big decision, but few resignations have the potential to impact an entire industry as deeply as the one handed in by Tara Flynn on Aug. 17, 2016.

In the six years leading up to that day, Flynn worked at Fox 21, a subsidiary of 21st Century Fox, where she ran point as a creative executive on some of the studio’s most lauded television shows, including Showtime’s Homeland and FX’s The Americans. Although she achieved great successes during her tenure, a few things irked her. For instance, back in 2012, she was offered her first promotion, but Fox proposed only a $75,000 annual salary, which she knew to be lower than what was paid to the two men who had previously occupied the position. Later, she was asked to train other executives who also were making more than she was. She says that when she attempted to discuss the terms of her contract with Fox 21 president Bert Salke, who recruited her from ABC back in 2010 (and is married to Jennifer Salke, now the head of Amazon Studios), her boss became “bullying and extremely hostile,” according to a declaration she filed in court. Nonetheless, Flynn signed her contracts and extensions — including a four-year deal in 2015 that would have provided $225,000 this year — until fate intervened. Put another way, a certain company taking Hollywood by storm came calling.

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On the day Flynn quit, Salke told her that Fox wouldn’t let her out of her contract. Flynn was insistent: She wasn’t asking permission. Salke wanted to know where she was heading. Flynn answered, “Netflix.” She had accepted an offer to become a director in the streamer’s originals department. Salke wasn’t happy. According to Flynn, he responded, “Netflix is public enemy number one.”

After Flynn gave her notice of resignation, Fox’s lawyer fired off a cease and desist letter to Netflix general counsel David Hyman, warning against “an unlawful campaign to target and poach valuable Fox employees and solicit them to break their contracts.” When the streamer didn’t back down, Fox sued on Sept. 16, 2016. Netflix responded with a counterclaim that through Fox’s use of restrictive fixed-term employment agreements, Fox was enforcing an illegal system that restrained employee mobility, depressed compensation for workers and created impermissible barriers of entry for competitors in the film and television business.

Flynn will likely get to tell her story in May to a Los Angeles jury at a trial that has far-reaching implications for the entertainment world. After years of Netflix disrupting Hollywood business models — upending everything from theatrical film distribution to TV viewing habits to the Oscars — the Flynn lawsuit threatens a disruption of its own, with the potential to impact everything from hiring practices to the viability of contracts and employee mobility. It’s a legal tug- of-war that will be one of the most closely watched courtroom showdowns in years.

“I do see this case as significant,” says Lauren Leyden, a partner at Akin Gump’s labor and employment practice. “We are in a time of change in the entertainment industry in terms of how consumers consume content. It opens the door to the accompanying question of how companies retain creative talent.”

Flynn isn’t alone in the case. Former Fox executive Marcos Waltenberg, who specializes in marketing films and television shows in Latin America, says he asked Fox for a raise and green card sponsorship in 2012 only to hear a response — which, according to his own declaration in the case, was along the lines of “the company has no obligation to sponsor your green card” — that he interpreted to be a threat to have him deported. He withdrew his request for a raise and worked for another three years at Fox until Netflix started heavily recruiting him.

Waltenberg finally left Fox in early 2016 after several months of conversations with higher-ups who he says repeatedly warned him that Netflix was a tough place to work. At one point, he adds, the president of international marketing at 20th Century Fox Film told him, “We are never going to let you out of your contract; Netflix is coming after everyone in this floor.”

When it comes to the battle between Fox and Netflix, there are two tales to tell. One is about freedom — Flynn’s decision to leave Fox for Netflix, where contracts spell out that employees can come and go at will, and the word “poaching” is banned around its offices. The flip side is about security — the rise of the so-called “gig economy,” where jobs are temporary and at-will employees or independent contractors can be fired at any time. Signing a lengthy deal has traditionally meant knowing that, except in a case of misconduct, an employee can count on a paycheck arriving. What Fox will argue to a jury is that Netflix aims to destroy the sanctity of a contract and the ability of employees to feel a sense of job security.

That jury also will have to consider this: Flynn didn’t just leave — she was targeted.

Netflix kept a spreadsheet that identified key executives at other companies and the duration of their unexpired contracts. Flynn was on it. When Netflix approached her, the company not only offered to double her salary but also suggested it would provide a lawyer to aid her exit as well as indemnification in case Fox took her to arbitration. Fox asserts that Netflix knows its actions were out of bounds. In court papers, Fox points to how Netflix conducted secret communications with Flynn and other prospective employees through personal email accounts.

Netflix, whose legal charge is being led by Karen Johnson-McKewan at Orrick, isn’t just fighting Fox. In October, Viacom sued the streamer over the successful recruitment of production exec Momita Sengupta. It’s probably only a matter of time until other studios — Warner Bros., Universal, DreamWorks Animation, Lionsgate, all on the receiving end of subpoenas in Fox v. Netflix — file their own complaints against Netflix for interfering with contracts.

Daniel Petrocelli represents Fox in the lawsuit after a career that has spanned the O.J. Simpson civil case, the Trump University fraud case and, most recently, the AT&T-Time Warner merger. He considers this lawsuit to be the most consequential. “Netflix’s position boils down to the idea that they know better and that people should not have the right to choose how they wish to be employed,” he says. “They boast about having an elite workforce, and they entice you to join their Dream Team, but once there, the dream can turn into a nightmare because they can cut you at any time. You have few, if any, rights.”

Perhaps what’s most shocking about Fox v. Netflix is that a legal fight of this nature hasn’t occurred earlier. After all, the laws that provide the grist for courtroom discussion date back decades — and even longer. Nearly all the statutes that underpin Netflix’s challenge to fixed-term employment agreements are derivations of a rule the California State Legislature enacted in 1872 to generally prohibit noncompetition agreements. That’s not to say there haven’t been important prior legal battles.

Long before Flynn told Fox that she was accepting a job at Netflix, an opera mezzo-soprano named Johanna Wagner had a deal to exclusively sing at Her Majesty’s Theatre in London. The owner of the rival Covent Garden Theatre offered her more money to switch opera houses. A British court wouldn’t allow it. The year was 1852, and news of this case traveled far and wide, including to the U.S., which was in the midst of a national debate about slavery, soon a Civil War and, in the aftermath, the 13th Amendment to the Constitution that would ban involuntary servitude. In California, contracts restraining anyone from engaging in a lawful profession, trade or business of any kind were deemed void. But while injunctions like the one that prevented Wagner from singing wherever she pleased were frowned upon, state lawmakers decided in the late 19th century to create exceptions for those whose services were of a “special, unique, unusual, extraordinary, or intellectual character.”

The attempt to balance one’s economic freedom with the benefits of contractual certitude would continue in courts and legislatures. What of those “special” individuals whose services really are irreplaceable? Well, in 1937, just before a World War would send many of the willing and able to foreign lands with employers hungry to lock down whomever remained, California lawmakers decided to limit any personal service contracts, even for those who were famous, to just seven years. A few years later, this resulted in the end of the old studio system in Hollywood when Gone With the Wind actress Olivia de Havilland prevailed in a court battle with Warner Bros. over the way her employer at the time kept extending her contract upon suspensions for her refusal to take roles.

De Havilland won her freedom, but what about others? In the world of sports, professional basketball great Rick Barry in the mid-1960s attempted to leave his NBA team, the San Francisco Warriors, for an ABA team, the Oakland Oaks, only to face a lawsuit and then an injunction that forced him to sit out a season. A California court found that because the Warriors had primarily built their style of play and public image around Barry, and the special, unique, unusual and extraordinary character of Barry’s services, the loss to the Warriors of his services could not be adequately compensated.

On the other hand, at around this same time, another California court held that comedian Redd Foxx was not making enough money from the recording company distributing his albums to subject him to an injunction that would have barred him from taking his services elsewhere. That would amount to economic coercion, it was ruled. Later, in the 1980s, a series of cases in the music world explored recording artists including Olivia Newton-John and Teena Marie who wished to escape onerous contracts the same way that de Havilland and Foxx had. The judge in the Teena Marie case looked at the history all the way back to that 19th century opera singer and found that injunctions preventing new employment were more for “prima donnas” than “spear carriers,” giving the hopeful pop star her freedom. Although the California legislature would soon react by letting record companies sue to recover the “lost profits” of uncompleted albums under deals, many musicians continue to exploit California labor law to either secure their liberty or at least boost their leverage in renegotiating contracts. Take Kanye West, who, in late January, filed suits against record and publishing companies, citing the seven-year limit on deals that he signed earlier this century.

Speaking of Ye, who in at least one way, isn’t too different than Flynn: What about contracts that get re-upped repeatedly? Does a contract renewal reset the seven-year clock? Not according to one California judge, who in 2001 voided an exclusive promotional and management deal between championship boxer Oscar de la Hoya and Top Rank Inc. Then again, in 2015, CAA filed suit over talent agents who defected to UTA. The defendants argued that agreements binding agents to CAA for periods longer than seven consecutive years were unenforceable. In turn, CAA took the position that these agents could have left its ranks at various points before they each renewed for a new contract term. JAMS arbitrator Richard Chernick (who just so happens to have played discovery referee in the Fox-Netflix dispute) issued a tentative decision in favor of CAA, but that never became final, and earlier this year, the case was settled, leaving some larger issues unresolved.

While Hollywood is littered with contract disputes that involve stars, what about employees in the middle-management ranks and beyond? It’s a question that is becoming ever more paramount because in the gig economy, tech disrupters like Uber, Airbnb and, yes, Netflix are pulling free-market strings by encouraging an increasingly mobile workforce of millennials to see flexibility and opportunity as things to be treasured over the benefits that come with a more traditional job. 

“Why is this happening now?” asks Leyden. “It’s because we’ve gotten there, not just legally but also because of the way people work.”

For the last 18 months, Fox and Netflix have been preparing behind the scenes in anticipation of the coming trial. As the litigation plays out, Netflix has continued to aggressively recruit Fox employees — moves that have dragged news of other poached individuals, including production coordinator Michael Posey and PR specialist Natalie Bjelajac, into the case. And it’s not just Fox. Netflix has been arming itself left and right with talent drawn from other studios. In December, for example, the streamer hired former ABC Entertainment president Channing Dungey as its new vp original content.

In the midst of all this, Fox has investigated ways to paint the streamer as being hypocritical on the employment front. To achieve this, Fox’s attorneys aimed to obtain Netflix’s own employment agreements. Just as Fox was filing suit over Flynn’s departure, for instance, Netflix made a splashy deal reported to be worth $150 million with superproducer Shonda Rhimes (Grey’s Anatomy, Scandal). Fox soon attempted to obtain Rhimes’ Netflix pact only to be told by an arbitrator that it wasn’t really relevant because, contrary to media reports, her deal wasn’t exclusive. Rhimes was free to produce shows for other companies over the next five years.

Fox had had better luck obtaining employment agreements between Netflix and its most senior executives including chief executive Reed Hastings, chief content officer Ted Sarandos and general counsel David Hyman. Although Netflix attempted to highlight to the arbitrator that its own executives were contractually empowered to leave at any time, Fox successfully argued that Netflix’s reported use of compensation structures (i.e., incentives and penalties) resulted in employees “thinking twice” about leaving Netflix. In other words, it could be argued that Netflix’s contracting practices have the same practical effect as fixed-term agreements.

In a culture memo, Netflix tells prospective employees, “There are no compensation handoffs (vesting) requiring you to stay in order to get money,” though the equivalent of 5 percent of the employee’s salary is allocated to a stock option plan.

This is all something that could come up at trial. 

Before any trial commences, the judge in Fox v. Netflix may decide certain questions as a matter of law.

Are fixed-term contracts just disguised, unconscionable noncompetes? Can Fox really stop Netflix from further soliciting Fox employees? Might no reasonable factfinder accept Netflix’s recruitment actions as anything other than tortious interference? Los Angeles Superior Court Judge Lawrence Cho could decide that the answers don’t require a jury to resolve.

But it’s unlikely that Cho will decide every issue on summary judgment, and with the parties dug in with seemingly very little incentive to settle, a trial could get underway to explore possible triable issues ranging from whether creative executives are “special, unique, unusual, extraordinary, or [of] intellectual character” (as stated in the boilerplate of Fox employment agreements) to Fox’s bargaining power in relation to whether its workforce really has choice when contract renewals are brought their way.

If Fox wins, the victory would really belong to Disney, which is in the midst of a huge merger wherein the Mouse House will absorb Flynn’s former employer and 21st Century Fox’s other studio assets. Given that Disney is about to launch its own streaming platform that will go head-to-head with Netflix, a Fox victory could allow Disney to lock execs into long-term contracts, thus stemming the tide of a migration to Netflix, as has happened recently with the defections of Tendo Nagenda, Disney’s former vp original film, and Christie Fleischer, former head of global consumer products. Netflix could also be hit with an injunction against any further attempts to recruit executives from rival companies.

A Netflix win, on the other hand, would amount to an earthquake inviting future legal aftershocks. Want to turn a sports fan’s head? Tell them that if Netflix prevails, a decent argument can be made that NBA superstar Anthony Davis can sign with the Los Angeles Lakers right now. After all, what Netflix aims to achieve is no less than employee freedom writ large, and while some may point to sports league bylaws and collective bargaining agreements (not to mention that old Rick Barry case most have forgotten) as preventing what might seem like an apocalypse, those restrictions could be susceptible to challenge, too. As a taste of what might come, in September, a California court ruled that the NCAA’s suspension of USC assistant football coach Todd McNair for recruiting violations constituted an illegal restraint on someone engaging in a lawful profession under California law. Yes, this is the very same law that provides Netflix’s argument for voiding Fox’s employment agreements.

It has now been 150 years since the Civil War, but the great debate over the nation’s workers is hardly settled. Flynn and Waltenberg assert they had no real choice but to sign contracts Fox put before them, and as Netflix told the judge in its attempt to secure their freedom, these agreements “are anti-competitive and create a form of involuntary servitude among individuals who would ordinarily be at-will employees.”

A version of this story first appeared in the Feb. 27 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.