Netflix’s Hollywood raids face new obstacles after court ruling

For Fox studio executives Tara Flynn and Marcos Waltenberg, jumping to Hollywood newcomer Netflix in 2016 was a rare opportunity to double their salaries. As an inducement, Netflix offered to shield them from any legal backlash for walking out on their employment contracts.

The streaming giant approached 14 other Fox employees under contract with a similar lure. But on Tuesday, a Los Angeles County Superior Court judge issued an injunction barring Netflix from poaching rival Fox executives under contract, or inducing them to breach their fixed-term agreements.

The decision represents a significant win for Fox in a legal fight that has highlighted a growing arms race for talent in Hollywood — and Netflix’s aggressive tactics for courting executive talent to meet its growing needs.

Although Netflix could appeal the decision, for now it is expected to stem executive poaching in entertainment and could hinder the Los Gatos, Calif., company’s ability to build experienced management teams, industry experts said.

“It was a complete loss for Netflix,” said entertainment industry attorney Schuyler Moore, a partner at Greenberg Glusker. The decision “will stop them in their tracks.”

Daniel Petrocelli, an attorney for Fox, said the court’s decision “brings to an end years of unlawful practices by Netflix. The ruling not only condemns Netflix’s deliberate violations of the law but just as importantly reaffirms and protects the rights and choices of employees.”

But a source close to Netflix said the company will probably file an appeal.

“Fox’s illegal contracts force employees to remain trapped in jobs they no longer wish to do and at salaries far below market rate,” a Netflix spokesperson said in a statement. “We will continue to fight to make sure that people who work in the entertainment industry have the same rights as virtually every other Californian and can make their own choices about where they work.”

The company’s hiring efforts haven’t been hampered in New York and other states with strict rules of engagement around fixed-term contracts, the spokesperson said.

By upholding the validity of Fox’s fixed-term employment contracts, the court has provided a potential reprieve for studios fearful of losing more executives to a rival growing bigger by the day.

Devin McRae, a partner at law firm Early Sullivan Wright Gizer & McRae, said the ruling was a “huge blow” to Netflix’s legal strategy. “Netflix was trying to accomplish something that was far reaching and it didn’t,” McRae said.

Netflix’s spending in TV and film content has outpaced the industry. It’s expected to spend as much as $15 billion on original and licensed movies and TV shows in 2019. Employment grew to 7,100 jobs as of 2018, up from 3,700 in 2015, the company said. The streaming giant has more movies contending for Oscars than any other studio. On Monday it dominated the Golden Globe nominations with 34 nods for its movies, including “Marriage Story” and “The Irishman.”

“The fact that Netflix spends billions on content means they need people to work on it,” said Neal Lenarsky, a recruiter in media and entertainment. “The pressure to get these deals done is tremendous.”

In the last few years, as the movies-by-mail to streaming giant moved to siphon top executives from their posts at Hollywood studios, Fox and Viacom pressed the panic button and sued to stop it. The first case, brought by Fox, dates to 2016 when it sued Netflix for its “brazen campaign to unlawfully target, recruit and poach valuable” executives. At the heart of Fox’s case was the claim it was illegal for a company to interfere in the contracts of another.

According to Fox’s court filings, Netflix hired eight people under contract with the studio, which Netflix did not dispute in court.

Netflix argued Fox’s employment agreements were unlawful and unenforceable, creating a “form of involuntary servitude” that violated the state’s labor code by exceeding seven years, according to court filings. In California, employment contracts cannot exceed seven years.

Other studios have also battled Netflix. Paramount Pictures owner Viacom, which recently combined with CBS, also sued Netflix, in October 2018. “For some reason, Netflix thinks it’s not bound by the same rules that apply to everyone else, as it continues to blatantly disregard well-established California law,” Viacom stated in its complaint. Viacom declined to comment.

Netflix recruited Viacom executive vice president Momita SenGupta two years before her contract was due to expire. Viacom said it would suffer “irreparable harm” if Netflix was allowed to continue “raiding” its workforce. The case is pending and no trial date has been set. Netflix declined to comment on that case.

The lawsuits reflect the pressure both new and old Hollywood players face in keeping valued executives during a boom for content.

“Incumbent media companies are feeling the pressure,” said William Simon of recruitment firm Korn Ferry. “These new entrants are coming in with much more generous compensation packages, sometimes letting employees pick their mix of stock and cash in compensation. “

Unlike other industries, where at-will employment is more common, fixed-term contracts are popular in the entertainment industry. They offer executives comfort that if an employer wants to lay them off, they have to continue paying their salary for the rest of the contract term.

Ultimately, Superior Court Judge Marc Gross ruled Tuesday that Fox’s contracts are legal and that companies cannot induce executives to break their contracts. Employees can walk out on their contracts as long as no other company is involved in that decision.

Netflix has been not only a popular destination for executives but also a haven for Oscar-winning filmmakers. Being talent-friendly has helped differentiate it from other companies launching streaming rivals, said Tim Bajarin, president of San Jose market research firm Creative Strategies.

“It’s really a war for talent,” Bajarin said. “That’s why any of these companies are semi-willing to deal with the legal issues because ultimately it’s the creative talent that gives you what fundamentally becomes the hits.”

Unlike many of its traditional media competitors, Netflix pays top market for talent and can offer share options linked to the typically faster-growing technology industry. It also allows employees to choose the amount of their compensation that is stock-based.

“What tech companies do, they take more of a carrot approach,” said William Herochik, whose law firm represents executives in employment negotiations and was an expert witness for Netflix in the Fox lawsuit. While tech companies incentivize employees to stay with long-term stock or cash awards, “the entertainment industry uses more of a stick approach,” Herochik said. ”We are going to sign you up right now and if you potentially leave during that term there will be negative consequences.”