California court rules Netflix engaged in unfair competition by inducing employees of Twentieth Century Fox Film Corporation to breach their fixed-term employment contracts, and enjoins Netflix from soliciting or inducing other Fox employees to breach valid fixed-term employment agreements.
Twentieth Century Fox Film Corporation sued Netflix Inc. in September 2016, alleging that the streaming company encouraged two senior Fox executives, Vice President of Promotions Marcos Waltenberg and Vice President of Creative Tara Flynn, to break their fixed-term employment contracts. Fox also sought an injunction preventing what Fox characterized as Netflix’s systemic poaching of film and television executives from Fox. Netflix filed a cross-complaint, charging that Fox’s employment contracts are unconscionable and contrary to public policy, and could therefore not support Fox’s claims against Netflix.
Fox moved for summary judgment in February 2019. After several rounds of briefing, the court decided Fox’s motion on Dec. 10, 2019. It held that Netflix violated California’s statutory unfair competition law, and that Fox was entitled to injunctive relief preventing Netflix from further recruiting Fox executives who are subject to valid fixed-term employment agreements such as those entered into by Waltenberg and Flynn. The court nevertheless denied Fox’s motion regarding Netflix’s claim for inducement of breach of contract, because Netflix had showed a triable issue of fact as to whether Fox suffered any damages. The court also granted Fox’s motion for summary judgment/adjudication on Netflix’s counterclaims, finding Netflix lacked standing to assert them, that the other Fox employees were indispensable parties who had not been joined, and that the court lacked jurisdiction to hear Netflix’s counterclaims.
Fox Demonstrated Inducement to Breach of Contract, but Triable Issues of Fact Remained as to Damages
Under California law, a litigant must prove the following to succeed on an inducement of breach of contract claim: (1) a valid contract between plaintiff and a third party, (2) defendant’s knowledge of this contract, (3) defendant’s intentional acts designed to induce a breach, (4) actual breach, and (5) resulting damage. The court found that while Fox had submitted evidence proving each element of its claim with respect to Waltenberg, Netflix had successfully raised a triable issue of fact as to whether Fox had been damaged by Waltenberg’s breach of his employment contract. Netflix submitted evidence showing that Fox had saved money by promoting a junior team member to Waltenberg’s role, which challenged Fox’s assertion that it had lost millions of dollars in promotional support. As for Flynn, the court held that Fox had failed to submit admissible evidence of actual damages and did not offer any legal support for presuming damages based solely on Flynn’s failure to complete her contract term. In any event, Netflix again presented evidence creating a triable issue of fact as to whether Fox had suffered actual damage, in light of the fact that Fox never replaced Flynn and there was no financial analysis showing a decline in revenues attributable to Flynn’s departure.
With respect to both individuals, the court rejected Netflix’s defense that its actions were justified based on “California’s well-established policy in favor of open competition and employee mobility.” The court explained that a party’s stake in advancing its economic self-interest will not justify the intentional inducement of a contract breach. The court also concluded that Netflix was not justified in inducing the breach of Waltenberg’s and Flynn’s agreements on those grounds.
Netflix Engaged in Unfair Competition in Violation of Business and Professions Code Section 17200, Justifying an Injunction
Fox alleged that Netflix’s hiring of Waltenberg and Flynn violated California’s statutory unfair competition law, codified in Section 17200 of the Business and Professions Code, which proscribes “any unlawful, unfair or fraudulent business act,” and that it was entitled to an injunction against similar conduct by Netflix in the future. Netflix countered that Fox lacked standing to assert this claim, as Fox had not shown that it had been damaged by the contractual breaches. The court held that Netflix had engaged in conduct in violation of Section 17200. Fox’s failure to prove damages was not fatal, as unfair competition plaintiffs must show only some “identifiable trifle of injury” to satisfy the statute’s standing requirements. Fox, the court found, had satisfied this requirement by presenting evidence of (1) out-of-pocket losses, insofar as it was forced to hire a consultant to replace Waltenberg; (2) economic disruption, in that Fox was deprived of its contractual rights when Waltenberg and Flynn went to work before the expiration of their fixed-term employment agreements; and (3) business disruption, insomuch as Fox was compelled to divert resources to counteract the effects of Netflix’s alleged misconduct.
The court found unavailing Netflix’s argument that there were disputed facts as to whether Fox suffered monetary loss. Netflix argued that there was disputed evidence as to whether Fox saved money by Waltenberg’s and Flynn’s breaches, but the court held it would be reasonable to assume that Fox’s business had been disrupted, in light of the high value that Netflix placed on these employees. The court also held that while failure to mitigate might limit the amount of damages that is ultimately recoverable, it does not impact a litigant’s standing to assert a right to recovery in the first place.
The court likewise rejected Netflix’s argument that because there can be no property interest in compelling future work by an individual under the Thirteenth Amendment and California law, the employment contacts at issue were not enforceable property interests. The court reasoned that Fox was not asserting a property interest in Waltenberg and Flynn themselves, but in its contractual rights arising under its employment agreements with them.
Netflix also argued that because the court found triable issues of fact on Fox’s inducement of breach of contract claim, Fox could not establish the predicate acts for its unfair competition claim. This argument likewise failed to dissuade the court, which observed that the cases Netflix relied upon did not involve a situation in which the underlying claim presented triable issues of fact on damages alone, and were thus inapplicable.
The court concluded Fox had shown entitlement to summary adjudication of its unfair competition claim and, further, that Fox was entitled to injunctive relief. The court noted that during the course of the litigation, Netflix had successfully acquired 15 employees from Fox, after soliciting a total of 17, and that Netflix was likely to continue to solicit employees with fixed-term contracts, without making a proper determination as to whether an individual employee’s contract violates public policy or is unconscionable. Accordingly, the court enjoined Netflix from soliciting employees with “valid” fixed-term employment agreements such as those of Waltenberg and Flynn.
Fox’s Employment Contracts Did Not Violate Public Policy and Were Not Unconscionable
The court next addressed Netflix’s affirmative defenses that the Waltenberg and Flynn agreements are unenforceable as contrary to public policy and because they are unconscionable.
Fox’s Employment Contracts Did Not Violate Public Policy
The court turned first to provisions in the employment agreements that provided for injunctive relief against an employee “to prevent a breach of the agreement.” The court reasoned that this restriction did not limit employees’ ability to seek or obtain employment after their employment with Fox had concluded, and thus did not violate the prohibition against post-employment covenants not to compete found in Business and Professions Code Section 16600. First, the court observed that Fox’s contracts did not prevent future employment or prevent Waltenberg or Flynn from practicing their profession. Nor did the contracts give Fox an unfettered right to terminate the employees without a legitimate basis. Second, the court held that Section 16600 was limited to post-employment restrictions on competition, and thus did not prohibit the contractual restrictions placed on Fox’s current employees. Third, the court found no obligation to include a resignation provision in fixed-term contracts, so as to provide a means by which employees could unilaterally terminate these contracts. Lastly, the court found that even if the injunctive relief provision of Fox’s employment contracts were void as to public policy, it was severable from the remaining contract; rejecting Netflix’s arguments that the provision created an in terrorem effect that would discourage employees from terminating their contracts. Moreover, the court noted, Fox had never actually sought to enjoin any employees from breaching their agreements, nor prevented them from working for another employer.
Turning to the employment agreements’ unilateral option granting Fox the right to extend the term of employment, the court found these provisions lawful. It noted that California law permits the use of such options in employment contracts under certain circumstances. The court likewise found “no-shop” provisions (prohibiting an employee from seeking alternative employment more than 90 days before the expiration of the contract term) included in some of Fox’s employment contracts were lawful, noting that Netflix had not cited any cases to the contrary, and that neither Waltenberg’s nor Flynn’s agreement included this provision. Netflix also failed to show that the non-solicitation provisions in some Fox employment agreements were unlawful because, the court reasoned, Section 16600 does not prohibit limitations on an employee’s conduct while employed. Similarly, the court found nothing offensive in the agreements’ confidentiality provisions, which it read as prohibiting employees from sharing only Fox’s confidential and trade secret information, not an employee’s general knowledge.
The court also held that the Waltenberg and Flynn agreements did not violate Labor Code Section 2855(a), which prohibits personal service contracts that last more than seven years, as neither Waltenberg’s nor Flynn’s agreement included a term that exceeded seven years. Waltenberg had entered an agreement in 2014 that provided for a two-year term, with a two-year unilateral option, thus a four-year term in total. Flynn’s agreement had been substantially amended in 2015, and provided for a two-year term followed by a two-year unilateral option, also amounting to a four-year period.
The Fox Employment Contracts Before the Court Were Not Unconscionable
The court rejected Netflix’s affirmative defense that Fox’s employment agreements with Waltenberg and Flynn were unconscionable. First, the court noted that unilateral options were common in the entertainment industry, and while industry custom was not dispositive in and of itself, it is relevant to a court’s independent determination. Second, while some provisions in Fox’s fixed-term agreements with Waltenberg and Flynn may not necessarily be enforceable, none of those provisions were so unfair or oppressive as to “shock the conscience” and render the agreements as a whole substantively unconscionable. In the absence of substantive unconscionability, the court was not obligated to address Netflix’s claims of procedural unconscionability, but found that even it were to do so, Netflix did not submit sufficient admissible evidence to create a triable issue of fact.
Netflix’s Cross-Complaint Seeking a Declaration That All of Fox’s Fixed-Term Employment Agreements Were Unenforceable Failed
Finally, the court addressed Netflix’s counterclaims, noting that they sought to render all of Fox’s fixed-term employment agreements unenforceable, as well as an order preventing Fox from enforcing those agreements to prohibit employment with other companies, such as Netflix. The court held that because the affected Fox employees were not party to the case, and Netflix was not a signatory to any of those agreements, Netflix’s claims must fail.
Under California statutory law, a person who is indispensable to a litigation must be joined to the litigation, and if they cannot be, the court must consider whether a case should be permitted to proceed or should be dismissed without prejudice. Citing precedent that “a person is indispensable when his or her rights must necessarily be affected by the judgment,” the court found that the Fox employees whose agreements would be rendered unenforceable under Netflix’s claims were indispensable parties to the action. Without their joinder, the court “lacked jurisdiction to adjudicate their rights.”
The court also held that Netflix, as a non-signatory to the fixed-term employment agreements, lacked standing to seek declaratory relief with respect to a contract to which it was not a party. In light of the fact that Netflix was in the position of asserting the substantive rights of third parties—i.e., Fox employees working under fixed-term contracts—Netflix lacked standing.
Last, the court held that there was no “actual controversy” as to Fox’s enforcement of fixed-term agreements with employees who were not party to the lawsuit.
Accordingly, the court granted Fox’s motion for summary judgment on Netflix’s cross-complaint, or in the alternative, for appeal purposes only, Fox’s motion for adjudication on Netflix’s declaratory relief and violation of Business and Professional Code Section 17200 causes of action was granted.
Summary prepared By Tal Dickstein and Erin Smith Dennis