ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Tuesday, December 7, 2021

Netflix Tries to Hire Fox Employees For (a lot) More Money But California Court Says No.

California is generally known as a state that takes a dim view of restrictive employment contracts so I was surprised to learn that a three-judge panel of the California Second District Court of Appeals recently upheld a trial court order enjoining Netflix from soliciting Fox employees.

There were two particularly striking facts about the case.  First, the employees that Netflix approached  had fixed term written employment agreements.  The term of these agreements was initially two years, but gave Fox a “unilateral option” to extend the contracts for additional two-year terms.  They also allowed Fox to pursue equitable relief, including an injunction, to prevent breach.

The second notable fact was that the Fox employees were paid substantially below market salaries -- approximately in the 25th percentile for their positions.  That’s an “F” grade for salary, Fox! No wonder they wanted to leave.

It sounded as though Fox used some rather un-employee friendly practices, including the inclusion of a “no-shop” clause that prohibited employees from seeking new employment more than 90 days before their Fox employment agreement expired.  Fox also told its employees that they could “work for Fox (and no one else) through the term of their agreements” and sent employees and prospective employers cease and desist letters.  Fox, by contrast, had a contract payout policy where it could terminate employees prior to the end of their fixed term employment agreements.  The company also exercised their bargaining power  and “frequently offered employees new fixed-term agreements while they had significant time remaining on their existing contracts” and “made raises and promotions contingent on signing a fixed-term agreement.”  According to Netflix, “at least 127 Fox employees had entered into sequential fixed-term contracts that, together, provided an employment term that was longer than seven years.” 

Fox sued Netflix alleging unfair competition and tortious interference with contracts and sought compensatory and punitive damages and a permanent injunction.  Netflix responded that Fox’s fixed term agreements were void as against public policy and that they were unconscionable.

The court sided with Fox, finding that “the undisputed evidence” showed that it intentionally interfered with the agreements of the Fox employees and that the

“undisputed evidence also showed that both employees’ salaries from Fox were below market, at least for most of the years of the employees’ employment with Fox, and that Netflix specifically targeted both of them, offering to double their salary and to defend and indemnify them against any claims brought by Fox.”

In other words, Netflix tried to hire Fox's underpaid employees by offering fair compensation but the court wouldn't let them. 

To all this, I say - Are you kidding me, California Second District Court of Appeals?  

Hopefully, Netflix will appeal.  Better still, maybe the state legislature will pass a law prohibiting some of Fox’s nasty employment practices, such as the no-shop for 90 days provision.

Law 360 has a summary here and the court’s opinion here.

https://lawprofessors.typepad.com/contractsprof_blog/2021/12/netflix-wants-to-hire-fox-employees-for-a-lot-more-money-and-better-contract-terms-but-california-co.html

Current Affairs, Labor Contracts, True Contracts | Permalink

Comments

I’m glad comments are functioning again! Coincidentally, Dorf on Law has just disabled its comments for the foreseeable future—but deliberately, because posts on abortion were bringing out the RW crazies. So, I think this blog is going to be my mainstay going forward. Not that I have any plans to spam everyone with lengthy polemics, so don’t worry!

Anyway, I do want to get to the substance of this case, but one procedural issue before I do. The Law360 direct link to the opinion doesn’t work. You need to be a subscriber—which I’m not—to access any content on Law360, whether it’s an article or the underlying opinion discussed in the article. So direct linking to opinions won’t serve to circumvent that requirement. Below is a free link to the original opinion PDF from the CA courts website that nonsubscriber folks like me can use instead.

https://www.courts.ca.gov/opinions/nonpub/B304022.PDF

Now, at long last, the substance! I agree with your identification of the two “striking” facts. But, I also wondered why, if this opinion is so egregious, it was issued unanimously, and moreover in affirmation of the trial court. So, in total at this point, 4 separate judges agree on the outcome.

I thought it might have something to do with the roles of the employees in question, and it seems like that’s right. On a hunch, I searched the opinion for the term “executive” and sure enough, it turned up at the start of the “Contracting Practices” analysis on page 26, which, among other things, addressed the “no shop” provision you highlighted as one of Fox’s “nasty” practices. The relevant quote containing that term is as follows:

“[T]he evidence showed that both Waltenberg and Flynn were sophisticated business executives who negotiated their fixed-term employment agreements with Fox at arm’s length.”

For me, at least, that’s a really important fact—the employees being executives, and sophisticated ones at that. I suspect it mattered to the court too, because it was cited right at the start of the analysis. Had the employees been low-level grunts instead, then I could see the court taking a much different view of things.

By the way, it appears that at least one of the employees, Marcos Waltenberg, did end up at Netflix after all. This article from back in the spring notes that he was there for “five years” until departing for the Xbox group at Microsoft. So, he seems to be doing just fine. And that’s kind of the point, right? These kinds of “sophisticated business executives” can fend perfectly well for themselves and don’t need the courts getting involved.

On that same note, yes, the employees were being paid in about the 25th percentile (although apparently Fox disputed that factual point for one employee). But again, these are fairly high-level executives, so even the 25th percentile isn’t exactly slave wages. Take Waltenberg for example. His salary wasn’t stated in the opinion, but it does note that “Fox hired Hugo Domenech to finish the outstanding work Waltenberg left behind, paying him £21,690.41 for work performed between February 5, 2016, and March 18, 2016.” If you take the amount the replacement was paid for just 43 days of work, annualize it, and convert to USD at 2016 rates, then—assuming my math checks out—you arrive at $267,148.52/year. Sure, that kind of salary won’t get you recognized by Robin Leach (putting aside that he’s been dead 3+ years), but it’s not exactly chump change either. In any case, by definition, the salary for pretty much every job follows some kind of distribution, so it’s hardly surprising that some people will fall in the lower end of it, just like some fall at the higher end.

Two small points in closing. One, your post mentioned Netflix’s unconscionability defense in passing. I just want to clarify that unconscionability was not at issue in the appeal. Two, you say “[h]opefully, Netflix will appeal.” Putting aside that, for the reasons above, I don’t think Netflix’s case is so compelling, I also note this opinion is unpublished. That means it does not meet the standard for “establish[ing] new rules of law, involv[ing] a legal issue of continuing public interest, or criticiz[ing] existing law,” and thus is unlikely to “satisfy the primary ground for [CA] Supreme Court review.” (And here’s an interesting statistic: “Only 9% of the Court of Appeal’s total majority opinions statewide are now published[.]”)

https://www.sfbar.org/blog/unpublished-opinions-in-california-state-courts-the-devalued-appellate-decisions/

OK, so this did end up being quite lengthy. But at least it wasn’t a polemic. So no breach of comment! Yay!

Posted by: kotodama | Dec 8, 2021 2:39:04 PM

Speaking of links, here is the missing citation for what happened to Waltenberg—

https://gamerant.com/netflix-marcos-waltenberg-xbox-global-partnerships/

Posted by: kotodama | Dec 8, 2021 4:38:46 PM

Thanks for the comment, Kotodama. I think (although I could be wrong) that this was Fox's standard employment contract, not just reserved for high level employees. The terms seem - as even the court acknowledges - to tip over into the "against public policy" zone, especially since we are talking about CA and it's strong interest in worker mobility. If we are talking about "high level employees" (and I'm not convinced they all were), the 90 day no-shop provision is even more of a restriction since the higher up you are, the longer the hiring process takes. I still think Netflix has a stronger argument and I still think this 3 judge panel and the lower court was wrong (judges have been wrong before, but then again, so have I). But reasonable minds may differ and this is the kind of blog that welcomes them, as long as they are intelligent and respectful, as your comment was.

Posted by: Nancy | Dec 8, 2021 5:34:41 PM

Thanks for the response!

Well, if the contract was indeed standard, then I agree that changes things. To me, an agreement "negotiated ... at arm's length" as the opinion stated is a little different. But maybe I'm not fully understanding the circumstances. If this kind of contract is common at Fox, then I wonder how often such terms show up at other similar companies too.

As to the propriety of each discrete contract provision, I confess to being more focused on the analysis of Fox's overall contracting practices (Section 2.b in the opinion) than the dispute over the discrete terms. I will need to study the analysis of the latter in more detail for sure.

Flynn I'm not sure about, but Waltenberg does seem like a fairly high-level employee to me. It says he joined Fox in 2003, so he's been in the business total at least ~18 years, and must have achieved a decent amount of seniority at this point. And his comings and goings appear to merit discussion in industry publications, which I take as a sign of being somewhat important. Of course, Netflix was also sufficiently invested in securing his services (admittedly, not just his; this involves other individuals too) to litigate to a first and potentially second appeal over more than 5 years, using very skilled—and pricey—counsel. But it's certainly open to debate and clearly he's not in the C-suite or anything that high up. Again, if these were indeed more rank-and-file employees that would change things for me too.

Speaking of Waltenberg's industry tenure, that reminds of an interesting fact I meant to highlight. The opinion notes that he first entered into the allegedly problematic agreement in 2014, so almost 11 years into his time at Fox. I am just very curious about what—if anything—happened in 2014 to prompt Fox to seek this agreement when it apparently wasn't needed for the first decade plus. Maybe the answer is they observed or were anticipating something on Netflix's side, although it seems the first Netflix written offer at least didn't happen until almost a year later in 2015.

As you say, Netflix may very well keep pursuing this case and foment interest at the CA SC—certainly their savvy counsel at Orrick doesn't need advice on legal strategy from rando blog commenters like me. You also mention "CA and its strong interest in worker mobility." I would just say on that point, Netflix has nonlegal (i.e., not involving litigation) avenues open to it too. It's a big, powerful company, with particular sway in CA, so even if it doesn't prevail in court, it could try lobbying and influencing the CA legislature to change the outcome by statute. Of course, Fox is big and powerful too.

In the end, although I'm generally a proponent of worker mobility too, and I usually like to see Fox/Rupert Murdoch take a hit (ironically Disney bought Fox while this litigation was ongoing), I'm just not feeling it on this one for some reason. It sort of comes across as first world problems. You might then ask why I bother to comment on business disputes, but sometimes I get a stronger sense of the equities than here. Maybe the court's rhetoric about "sophisticated business executives" just hit a nerve with me.

Posted by: kotodama | Dec 8, 2021 8:55:59 PM