As Netflix evolved from a streaming platform to a producer of original films and series, it needed to hire executives with experience developing and marketing original programming. To find such talent, Netflix looked to the ranks of studios like Twentieth Century Fox. When two Fox executives left to work for Netflix in 2016, Fox sued Netflix, claiming it poached employees whose contract terms had not yet expired. But according to Netflix, Fox’s employment contracts illegally hinder employee mobility, amounting to involuntary servitude. Scheduled for hearings on motion for summary judgment this May in California state court, Twentieth Century Fox Film Corp. v. Netflix, Inc. raises questions about restraints on trade in Hollywood and, particularly, contract terms that purport to allow employers to seek injunctions to prevent employees from working for competitors.
Fox alleged that Netflix poached marketing executive Marcos Waltenberg and development executive Tara Flynn, inducing them to breach their contracts and engaging in unfair competition. Both Fox and Netflix have raised several claims. Relevant here is Fox’s claim that Netflix engaged in unfair competition in violation of California statutory law by intentionally interfering with Fox’s employment contracts. Fox wants an injunction against Netflix from further interference with those contracts. But Netflix argues that because Fox could not possibly obtain an injunction against its employees themselves, it may not pursue one against Netflix to achieve the same result.
Thus, resolution of the issue comes down to whether Fox could seek to enjoin its executives from working for competitors during their contract terms (though Fox has not actually sought injunctions against Waltenberg and Flynn). The “personal service” law, California Labor Code § 2855(a), governs this issue, stating that
[a]ny contract, otherwise valid, to perform or render service of a special, unique, unusual, extraordinary, or intellectual character, which gives it peculiar value and the loss of which cannot be reasonably or adequately compensated in damages in an action at law, may nevertheless be enforced against the person contracting to render the service, for a term not to exceed seven years from the commencement of service under it (emphasis added).
This provision allows employers to seek injunctions that would prohibit employees from working elsewhere for terms of up to seven years, but only when those employees perform services of a “special, unique, unusual, extraordinary, or intellectual character” (hereinafter “unique services”). Accordingly, Fox included the following term in its executive employment contracts, excerpted in relevant part:
The services to be furnished by you hereunder and the rights and privileges granted to the Company by you are of a special, unique, unusual, extraordinary, and intellectual character which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in any action at law, and a breach by you of any of the provisions contained herein will cause the Company irreparable injury and damage. You expressly agree that the Company shall be entitled to seek injunctive and other equitable relief to prevent a breach of this Agreement by you.
Fox apparently contemplated that it could ask a court to enjoin its executives from leaving to work somewhere else before their contracts expire. But whether or not studio executives actually perform “unique services” remains an open question.
The history of the personal service law illustrates the stakes of categorizing employees as unique-service providers. In the 1930s and 40s, “Gone with the Wind” actress Olivia de Havilland had a seven-year contract to act in Warner Brothers films. De Havilland grew unhappy when the studio repeatedly cast her as “arm candy” for male stars who made more money than she did. Rather than accept these roles, de Havilland took suspensions without pay and worked for other studios. But just when she thought her contract with Warner Brothers had lapsed—seven calendar years after it had begun—Warner Brothers sought twenty-five more weeks of service from her to make up for the suspension periods. The California appellate court ruled for de Havilland, limiting personal service contracts to seven calendar years, rather than requiring seven years of actual service. De Haviland [sic] v. Warner Bros. Pictures, 153 P.2d 983 (1944). While de Havilland’s classification as a unique-service provider was not at issue, her case shows how classifying employees as unique-service providers, while it cannot bind employees to employers forever, can bind them to employers for a long time—seven calendar years.
Since the 1940s, California courts have granted injunctions against employees who perform unique services, as long as their contracts don’t exceed seven years. In Lemat Corp. v. Barry, 275 Cal. App. 2d 671 (1969), California’s Court of Appeal upheld a one-year injunction prohibiting Barry from playing professional basketball for any team besides the Warriors. Barry had signed with another team while still under a one-year contract with the Warriors. The trial court found that because of “the special, unique, unusual and extraordinary character of Barry’s services,” the Warriors’ loss of his performance for a year “could not be adequately compensated for in money.” The appellate court upheld an injunction against Barry for the one-year term of the contract (by the time of judgment, that year had lapsed).
While at least Waltenberg’s and Flynn’s contract terms did not exceed seven years, “unique services” seems an odd characterization of studio executives’ work. The Lemat court stated that the rationale behind allowing injunctions against unique-service providers “is that the employer has contracted for the exclusive right to display the ‘star’ for a given period. That no other entrepreneur may display the particular star during the period contracted for is part of the right for which the employer has bargained and has compensated the star.” A studio executive is not analogous to, say, a star actor or basketball player. Netflix itself has made this distinction in its own hiring practices. It has a fixed-term contract with Shonda Rhimes, considering her an extraordinary talent whom it could compel to perform; Rhimes has exceptional star power as the creator of successful television shows like “Grey’s Anatomy” and “Scandal.” Executives carry less star power. At least as of 2016, Netflix executives were at-will.
If Netflix is correct here, Fox would not necessarily lose. Netflix’s objection to the unique services clause is just one point of argument. As Fox argued in its motion for summary judgment, the court might sever the unique services clause and enforce the remainders of the employment contracts.
Still, Fox v. Netflix brings to light the issues that can arise when employers try to give themselves the opportunity to seek injunctions against their employees. In theory, an injunction could prevent an employee from obtaining other employment for seven years—quite a long time. And Flynn has one thing in common with de Havilland: according to The Hollywood Reporter, at least at times during her employment at Fox, she earned less than did two men who had previously had her job. Multi-year contracts that prevent women executives from taking new jobs on threat of court injunction may perpetuate the gender wage gap by effectively binding those executives to lower-paying jobs for long periods of time. However it plays out, Fox v. Netflix could have serious implications for Hollywood executives.