California Court Deals Blow to Employee Mobility
California employers and executives might view fixed term employment agreements in a new light following a California appellate court’s unpublished decision suggesting employers do not violate California’s long-established policy promoting employee mobility when they enter into these types of agreements. The court’s ruling affirmed a lower court’s order enjoining Netflix from soliciting employees who had fixed-term employment agreements with Twentieth Century Fox Film Corp. and Fox 21, Inc. (“Fox”). But before opting to use fixed term contracts, it is important to consider the unique facts of this case, the rulings that stem from it, and its practical impact.
Fox entered into fixed-term employment contracts with certain of its employees, which required Fox to employ them for several years. Fox admitted that it used fixed-term contracts to control employees and maintain leverage but argued the contracts created stability and predictability in the parties’ economic relationship for the contract’s term.
The contracts contained other provisions that helped Fox exercise control over the relationship. For example, the contracts provided Fox with the unilateral option to renew each agreement for additional years, and allowed Fox to seek an injunction to stop the employees from breaching their agreements. Many contracts also had employee non-solicit provisions and “no shop” provisions that prevented the employees from seeking or negotiating new employment more than 90 days before their contracts with Fox expired. Further, the contracts only permitted Fox to terminate the agreement before the end of the term; employees could not prematurely terminate their contracts. As part of their control efforts, Fox often sought to offer new fixed terms well before the expiration of the existing term and would condition promotions and raises on the employee’s acceptance.
Netflix – aware of Fox’s agreements – still went ahead and made employment offers to several employees, including two employees at issue in this lawsuit. Netflix offered to double each of their salaries, which were already below market.
The Lower Court Decisions
The lower court had earlier granted Fox summary adjudication on its unfair competition claim and issued a permanent injunction that: “Netflix shall not solicit employees who are subject to valid fixed-term employment agreements with Fox or induce such employees to breach their valid fixed-term employment agreements with Fox.” (Emphasis in original).
The lower court also granted Fox summary judgment on Netflix’s affirmative defenses. It found that, even if individual terms were unlawful or void, the provisions – including the “no shop” provision, the non-solicitation provision, the injunctive relief provisions, and the unilateral option to extend the contract term by Fox – were severable. Netflix appealed.
The Appellate Decision
The appellate court’s unpublished ruling affirmed the trial court’s ruling. Among its rulings:
- Fixed-term contracts are valid in California. The court affirmed the unremarkable proposition that employers may utilize fixed-term agreements in California and it cited to California Labor Code sections 2855, 2922, 2924, and 2925 in support. It noted that parties often use these contracts to ensure stability and predictability in the employment relationships.
- Valid fixed-term contracts will be enforced, even if they contain other provisions that are traditionally viewed as unreasonable restraints on employee mobility (such as unilateral option renewals, injunctive relief and non-solicitation provisions). The court reiterated that the core purpose of fixed term contracts is ensuring stability and predictability. The enforceability of provisions like the unilateral option renewals, injunctive relief and non-solicitation provisions has no impact on that purpose. Therefore, to the extent such provisions violated public policy, the offending provision(s) could be severed from the contract without frustrating the core purpose, leaving the balance of the contract to be enforced. Notably, the appellate court avoided a discussion of the validity of the “no shop” provision by finding that neither employee’s contract was subject to such a provision but, even if they were, the provision could be severed.
- Actions taken by an employer to protect the stability and predictability of a valid fixed-term contract negotiated between it and a sophisticated employee may be upheld. Under the facts presented here, and again relying on the contract’s core purpose of stability and predictability, the court determined Fox’s practices of insisting on renewing agreements well before the expiration of the existing agreement and conditioning promotions or raises on executing new agreements were merely “consistent with a desire to continue the stability and predictability of the parties’ economic relationship.” And, Fox’s threats to sue employees upon learning of their imminent departure constituted, in the court’s view, an exercise of Fox’s “legitimate interests in vindicating otherwise valid contract rights.”
- Intentionally inducing a breach or causing a breach of a fixed term contract is “wrong in and of itself.” The court emphasized the importance of upholding validly negotiated contracts upon which the parties may have relied, expended resources, and took risks. As a result, the court would not condone the actions of third parties, like Netflix here, who disrupt the stability and predictability of a fixed term contract.
- Soliciting an employee to breach his or her agreement for the alleged purpose of protecting employee mobility was not a valid legal action in this case. Netflix asserted a justification defense – that its actions were justified to protect employee’ interest in mobility in the job market. The court disagreed. It found that Netflix’s motivation was entirely competitive and fell short when balanced against Fox’s “legitimate expectancy of stable and predictable economic relationships.”
Practical Tips for Employers and Employees
This case is not legal precedent unless and until the decision is published. But the case does provide some important learning points regarding fixed-term contracts:
- First, while obvious – the contract must be a fixed term, which means it is for a specific time period during which the individual is employed; this cuts both ways as it also requires the employer to keep (and pay) the individual for a certain period of time, which runs counter to the usual at-will employment practice in California and elsewhere. Fixed term contracts may be attractive to fill highly-specialized positions where continuity is critical (such as a chief executive role, or when you invest a significant amount of capital into a person (e.g. training and expenditure of other resources, introductions to important clients, etc.)). But, keep in mind that there are often other ways to protect your business short of executing a fixed term agreement and utilizing an at-will relationship instead.
- Second, ensure that your fixed term contract will be considered “valid.” The lower court used (and even emphasized) that term in its injunction, and the appellate court noted that Netflix was free to solicit employees who had contracts with invalid contractual terms. But the appellate court stopped there – declining to explain its views on validity. Always consult counsel when drafting such agreements to ensure that its terms will be viewed as enforceable.
- Do not take steps to induce an employee subject to one of these contracts to accept an offer, or otherwise take affirmative steps to interfere with a fixed term contract, and consider waiting until the contract’s term expires before effectuating a hire. If you learn that one of your recruits is bound by a fixed term contract with their current employer, consult with your employment counsel before taking further action.
Some Final Thoughts
There were several unanswered questions in this case that raise important concerns.
- There was no discussion of how the contracts here seemed to create one-sided indentured servitude for as long as Fox wished to employ each individual where the price for refusing to perform could be a breach of contract claim coupled with a money damages payout to the employer. Also missing from the discussion was an acknowledgment that, under certain circumstances, California law permits employees to terminate their contracts regardless of the contract’s provisions.
- The appellate court summarily dismissed the claims raised that the Fox contracts violated California’s non-compete ban by emphasizing that this section only constrained post-employment practices. In so doing, it dodged a decision on whether Fox’s practices, in effect, weaponized the Labor Code fixed term contract provisions to effectuate an end-run around California’s well-accepted employee mobility principles.
Finally, remember that, in addition to being an unpublished decision, the ruling was limited to the facts of this case. Parties in a different dispute could have a different result, especially when the employee is unsophisticated and has limited bargaining power and/or the employer takes steps to limit the employee’s ability to leave without bargaining for anything of real value in return. Nevertheless, we expect further challenges to this decision, either by the parties in this case or in future cases in light of California’s longtime public policy favoring employee mobility.