In what may seem to be a surprising series of events, given the state's infamous hostility to restrictive covenants, a California appellate panel recently affirmed a Los Angeles Superior Court judgment effectively enjoining Netflix from soliciting certain employees subject to specific fixed-term employment agreements with Fox. More specifically, the panel-applying reasoning similar to the California Supreme Court's in Ixchel Pharma, LLC v. Biogen, Inc.-upheld the trial court's granting of summary adjudication in favor of Twentieth Century Fox Film Corporation and Fox 21, Inc. (collectively, "Fox") on their claim under Business and Professions Code sections 17200, et seq. against Netflix Inc. ("Netflix") and corresponding injunction in an unpublished but closely followed decision.

In affirming the judgment, the panel expressly rejected Netflix's contention that the injunction, which prohibits Netflix, "individually . and/or in concert with others," from "solicit[ing] employees who are subject to [f]ixed-[t]erm [e]mployment [a]greements with [Fox] or induc[ing] such employees to breach their valid [f]ixed-[t]erm [e]mployment [a]greements with [Fox]," constituted "an invalid restraint on employee mobility" under California public policy, Business and Professions Code section 16600, and other statutes concerning personal services contracts. The panel acknowledged each of these arguments and underlying public policy concerns, but ultimately found that they were not supported by the facts at hand, particularly in light of countervailing policies "favoring the stability and predictability of fixed-term employment relationships." The panel also observed that the injunction had been carefully limited, and narrowly drawn by the trial court to curb wrongful conduct by Netflix without impeding the ability of individual employees to independently seek out new employment.

Background

Fox originally filed suit in 2016, after Netflix hired two of its executives, Marcos Waltenberg and Tara Flynn. In its complaint, Fox asserted three causes of action against Netflix, for tortious interference with Waltenberg's fixed-term employment agreement, tortious interference with Flynn's fixed-term employment agreement, and unfair competition in violation of Business and Professions Code sections 17200, et seq. Netflix asserted in its answer that the agreements were unenforceable under California law and filed a cross-complaint for unfair competition, seeking declaratory relief and an injunction enjoining Fox from using fixed-term employment agreements against its employees. Both parties filed motions for summary judgment/adjudication. In November 2019, the trial court granted Fox's motion as to its unfair competition claim, and thereafter, enjoined Netflix from interfering with Fox's fixed-term employment agreements.

The Appeal

On appeal from the order granting in part Fox's motion for summary adjudication, the panel carefully recounted the facts relevant to Fox's unfair competition claim, reviewing the agreements at issue, the record as to the negotiations thereof, Fox's general practices involving fixed-term employment agreements, and Netflix's (pre- and post-suit) recruitment of Fox employees.

The panel first rejected Netflix's procedural argument that the injunction was improper because a triable issue remained as to damages, observing that it is the fact of damage, not its extent, that matters for purposes of establishing a right to relief under the UCL's unlawful prong. The court found that the undisputed evidence of Netflix's conduct showed an unlawful practice-"namely, intentional interference with the fixed-term agreements of both Waltenberg and Flynn, as well as continuing interference with the fixed-term agreements of more than a dozen other Fox employees . and that Netflix specifically targeted [employees whose salaries at Fox were "below market"]." Later in its opinion, the panel bolstered this analysis by pointing to the "extraordinarily broad" power afforded to courts fashioning remedies under the UCL. See Bus. & Prof. Code § 17203 ("The court may make such orders or judgments . as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition . or as may be necessary to restore to any person in interest any money or property . which may have been acquired by means of such unfair competition.").

The panel then moved onto an analysis of Netflix's unenforceability arguments based on public policy, Business and Professions Code section 16600, and other statutes concerning personal services contracts, including Labor Code section 2855. The court separated these issues into two main questions: (1) whether the challenged provisions were themselves, under the laws cited, unenforceable, and (2) whether Fox's contracting practices generally violated these statutes and/or public policy, rendering the provisions unenforceable. The court swiftly dismissed Netflix's suggestion that fixed-term provisions restrict employee mobility and therefore violate public policy as a matter of course, referencing the benefits of fixed-term contracts as recognized by the supreme court in Ixchel. The court also declined to invalidate the other provisions raised by Netflix as violative of public policy (the unilateral option, enforcement-by-injunction, nonsolicitation, and confidentiality provisions), finding that even if that were the case, the provisions could be severed from the agreement, leaving the defined term intact.

Similarly, the court found there was "nothing in the record" to suggest that Fox's practices, especially with regard to Waltenberg and Flynn, constituted or implicated an unlawful restraint on employee mobility. The panel specifically cited evidence showing that "both Waltenberg and Flynn were sophisticated business executives who negotiated their fixed-term employment agreements with Fox at arm's length." Even assuming that Fox had conditioned promotions, salary increases, or bonuses on the employees' willingness to agree to new fixed-term contracts, the court stated that "such conduct would be consistent with a desire to continue the stability and predictability of the parties' economic relationship."

Finally, the panel rejected Netflix's proffered justification defense to Fox's claims of interference, asserting that it was "promoting [Waltenberg's and Flynn's] interests in mobility in the job market," noting that the objective of Netflix's intentional interference "was to obtain [the Fox employees'] services and, in the process, gain a competitive advantage over Fox and other production companies." See Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130, 1141-42 (2020) ("[A] competitor's stake in advancing his own economic interest will not justify the intentional inducement of a contract breach . whereas such interests will suffice where contractual relations are merely contemplated or potential.") (citations omitted). The court further emphasized that "by voluntarily agreeing to abide by the fixed term of their agreements, Waltenberg and Flynn gave up their respective rights to move freely within that market, at least temporarily, in favor of the economic stability and predictability that their contracts provided," a commitment that, in turn, "gave rise to a legitimate expectancy in Fox that warranted protection under established public policy." "Thus," the court concluded, Netflix's interference "could not be justified as promoting an interest or right that the targeted employees had voluntarily relinquished" let alone against the "social interest in protecting Fox's legitimate expectancy." That social interest, according to the panel, "outweighs any arguable competitive interest that could have been advanced by Netflix's interference."

Takeaways

As in Ixchel, the court in Twentieth Century Fox Film Corp. v. Netflix, Inc. reiterates that where competitive restrictions are concerned, countervailing considerations do matter; Section 16600 does not give businesses free reign to compete unfairly, by poaching employees or other means-at least with regard to fixed-term employees.

In the wake of the Great Resignation, when retaining talent has become more difficult than ever and "stability and predictability" have become increasingly attractive, businesses may want to reevaluate the relative merits and risks of fixed-term vs. other arrangements, particularly for high-level employees.1  The Fox decision serves as a reminder that businesses should be vigilant, in terms of revisiting and drafting employee agreements, and during the hiring process, taking care when onboarding individuals who may be subject to fixed-term contracts.

Importantly, courts will continue to analyze issues surrounding the enforcement of competitive restrictions on a case-by-case basis, subject to a number of highly specific factors. Here, for instance, issues presented in Fox's complaint, and in Netflix's appeal, were carefully contained to business-to-business interaction and unfair competition. As a general matter, courts are much more willing to scrutinize the conduct of employers than employees, particularly with regard to their competitors.2

Footnotes

1 At-will arrangements offer significantly more flexibility for both parties, but that flexibility comes at the expense of security, and there is much less recourse available for interference. While employees in fixed-term arrangements also remain free to quit, fixed term provisions can provide some greater assurances.

2 This can be seen in both the trial court's injunction, which was explicitly limited to valid fixed-term agreements-i.e., leaving unanswered whether Netflix might solicit employees subject to fixed-term agreements containing provisions other than those upheld in this case-and in the appellate court's analysis, which repeatedly emphasized Netflix's conduct over that of the individual employees. As specifically noted by the panel, the injunction "enjoins future predatory business practices by a competitor, but without compelling the affected employees to perform for the full term of their existing agreements. . The injunction does not restrain Fox employees from leaving Fox at any time, even during the fixed term of their agreement . the injunction restrains only Netflix . [and] Netflix thus remains free to solicit lawfully Fox's at-will employees and to hire Fox fixed-term employees at the end of their contract term. Netflix can also hire Fox employees during the fixed term, if the employee initiates the contact . without inducement or other act of interference by Netflix." In addition, it may have been easier for both courts to enforce the fixed-term agreements in this case, where the employees involved were "sophisticated executives" in the entertainment industry, and where Netflix had not only targeted them, but also allegedly continued in its conduct after Fox filed suit.

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