California, mecca of the film and media production industries in the U.S., is notorious for outlawing non-compete agreements. It is one of the few states that generally prohibits the unlawful restraint of one’s profession or business, with limited exceptions. (See Cal. Bus. & Prof. Code § 16600 et seq.). Last year’s decision in ITN Flix, LLC v. Hinojosa, 2015 WL 10376624 (C.D. Cal. May 13, 2015), illustrates that courts may strike down such unlawful non-competes, even outside the traditional employer-employee context.
What is this Case About?
In 2004, film producer Gil Medina met actor Danny Trejo, who had worked on several successful films with director Robert Rodriguez (think Sin City and the Spy Kids franchise). Medina approached Trejo with an opportunity to star in a multiple picture action feature film franchise built around a “vigilante character” to be portrayed by Trejo. The following fall, Medina and an independent production company, ITN Flix, LLC produced the film, entitled Vengeance.
Thereafter, Trejo and Medina/ITN Flix (who went on to become the Plaintiffs in the legal case) entered into a “Master License Agreement” (“MLA”) and an “Acting Agreement” (“AA”). The contracts purported to limit Trejo in playing vigilante characters in other films or appearing in films “similar” to Vengeance, and imposed a term of “at least” eight years on these (and other) contractual obligations. The contracts also (ambiguously) paved the way for Medina/ITN Flix to recover as commission part of the proceeds of the commercial exploitation of certain rights.
Vengeance was subsequently released, but only to a few small markets. By 2009, the film still had no significant release date. Even a 2012 collaboration with Steve Wozniak (the co-founder of Apple) and his wife, Janet, whereby the Wozniaks would appear in several new scenes that would be added to the film and also be included in a mobile application game entitled Vengeance: Woz with a Coz, failed to bring commercial success to the ill-fated Vengeance.
The legal trouble began in 2010, when director Rodriguez released a film called Machete, in which Trejo starred as—wait for it—a “vigilante character.” Unlike Vengeance, Machete garnered much acclaim and commercial success. Then, in 2013, director Rodriguez released a sequel to Machete entitled Machete Kills, which was not as successful, but still raked in millions of dollars.
In November 2014, viewing the success of the Machete films as their failure, the Plaintiffs (Medina and ITN Flix) sued Rodriguez, Gloria Hinojosa (talent agent who helped broker Trejo’s appearance in the Machete films) and their affiliated entities for, among other things, intentional interference with contract, violation of the Lanham Act, and unjust enrichment. Plaintiffs argued that Trejo’s appearance in the films without Rodriguez’s and his affiliates’ disclosure of Plaintiffs’ business relationship with Trejo constituted breach of contract, and further argued that Rodriguez and had a “legal and/or contractual duty” to disclose the business relationship between Plaintiffs and Trejo to third-party investors of Machete.
Hinojosa and entities related to her requested dismissal of the entire action in early 2015, followed by Rodriguez’s Motion to Strike Pursuant to California’s Anti-SLAPP statute and Motion to Dismiss the Lanham Act claim.
How California Law Made This Case More Peculiar Than It Already Was
The court first assessed the viability of the motion to dismiss, which alleged that the MLA and AA were so vague so as to be unenforceable, and constituted unlawful restraints of trade in violation of Section 16600 of the California Business and Professions Code. In response, the Plaintiffs argued that the contracts were not vague, and insisted that Utah law governed the contracts, so the “restraint” clause was enforceable. Even if California law applied, Plaintiffs argued that it was “widely recognized” that certain reasonable exclusivity agreements could be enforceable, especially as regards contracts in the entertainment industry. The court did not buy Plaintiffs’ argument in any way, shape, or form.
First, Section 16600 maintains that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extend void.” The court harkened back to the California case Edwards v. Arthur Anderson LLP, which noted that California courts have “consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility,” because the statute is designed to protect “the important legal right of persons to engage in businesses and occupations of their choosing.”
Second, the court highlighted California’s peculiar approach to restraint provisions in contrast to overarching Ninth Circuit law on the topic. California does not adopt the “narrow-restraint exception” to Section 16600, as other courts in the Circuit have adopted. California courts have emphasized the public policy behind disallowing such an exception, and have maintained that the “policy of the state… should not be diluted by judicial fiat.” Instead, the court pointed out, California courts have entirely relegated to the State Legislature the task of altering the reach of Section 16600.
Third, the court analyzed whether the restraint provision would pass muster even in a Utah court. Usually, Utah courts may uphold a covenant not to compete so long as it is reasonable. For such a covenant to be valid and enforceable, it must be supported by consideration, completely free of bad faith dealing during negotiations, and must be necessary to protect the goodwill of the business. Notwithstanding such provisions, the court found that under both California and Utah law, the contracts were unenforceable, primarily because the restraints were not reasonable or narrow, and to the extent they were, any and all restraints are illegal under Section 16600. Further, the court found it “clearly unreasonable” for Plaintiffs to place an almost decade-long restraint on Trejo’s career.
The court also considered whether the provision regarding Plaintiffs’ ability to collect commissions on commercial exploitations of its “licensed rights” (i.e., a license to Trejo’s name and likeness in “vigilante character” films) constituted a restraint on Trejo’s career, and answered affirmatively. Trejo is a particular character actor, not cast in a wide variety of types of films and is “most recognizable for portraying, characters that operate outside the justice system and dispense justice or injustice.” Such an actor, the court concluded, is particularly vulnerable to the type of restraint present in the MLA and AA contracts. Further, the court rejected the assumption that charging a fee or commission is not a “restraint” and saw no reason Plaintiffs should be able to charge Trejo a fee for engaging in conduct (i.e., acting in a particular type of movie as a particular type of character) that they could not otherwise prohibit. As such, the court found the commission provision to be an unlawful restraint on trade under both California and Utah law.
What This Means in Terms of Employee Mobility in California
ITN Flix teaches the importance of taking care to draft contract provisions that limit or purport to limit an individual’s exercise of his business or trade, regardless of the individual’s industry. Such care is needed when drafting agreements with independent contractors as well as with employees at the beginning or end of employment.
ITN Flix also illustrates that California’s general public policy against non-competes is not limited to the traditional employer-employee scenario. Indeed, a divided Ninth Circuit Court of Appeals panel in Golden v. California Emergency Physicians Medical Group recently held that a “no re-hire” provision in a settlement agreement could, under certain circumstances, constitute an unlawful restraint of trade under California law.
Without the backstop of non-compete agreements, California employers can nonetheless employ some best practices to ensure their employees do not share any valuable information with competitors. Such best practices include:
- Robust confidentiality and invention assignment agreements.
- Effective entrance and exit interview protocols.
- Employee education programs that create a culture of confidentiality whereby employees understand the value of protecting company data.
- Effective trade secret protection measures that take into account new technologies and threats, including cyber threats and social media/cloud computer issues.
Please see our recorded webinar on Trade Secret Protection Best Practices: Hiring Competitors’ Employees and Protecting the Company When Competitors Hire Yours for more details.