Relativity wins Second Circuit appeal against Netflix

Client(s) Relativity Media, LLC

Jones Day successfully brought Relativity Media, LLC and many of its affiliates through a Chapter 11 proceeding in bankruptcy and confirmed its plan of reorganization. On August 16, 2017, the U.S. Court of Appeals for the Second Circuit affirmed an order and injunction by the Bankruptcy Court that granted Relativity's subsequent motion to enforce the plan against Netflix, Inc. and denied Netflix's motion to compel arbitration of the underlying dispute.

Relativity is a Hollywood movie studio. As part of the confirmation process, the Bankruptcy Court, Judge Michael Wiles, overruled an objection by Netflix to Relativity's assumption of a licensing agreement between Netflix and Relativity. The agreement provides for Netflix to pay licensing fees to Relativity for the right to exhibit on Netflix's streaming service certain films produced or acquired by Relativity. In April 2016, shortly after confirmation of the plan of reorganization by the Bankruptcy Court, Netflix took the position that it was not contractually obligated to delay the dates that it would begin streaming two of Relativity's post-bankruptcy-slate films, Masterminds and The Disappointments Room, in order to accommodate delayed theatrical release dates for the films.

Jones Day argued that this not only contradicted a position Netflix had taken during the plan confirmation process concerning the license agreement, but also violated a provision in the agreement requiring Netflix's cooperation with certain requests by Relativity and its lenders and would have seriously diminished the revenue streams from these films, as contemplated by the plan, available to Relativity and several of its creditors. Relativity and its CEO Ryan Kavanaugh, as a co-proponent of the plan, brought a motion in the Bankruptcy Court to enforce the plan against Netflix and to enjoin Netflix from streaming the two films prior to their theatrical releases. After a three-day, expedited trial in May 2016, the Bankruptcy Court ruled in favor of Relativity on multiple, alternative grounds; found Netflix had acted in bad faith in this contractual dispute; and held that Netflix's positions amounted to an improper collateral attack on the plan. The Bankruptcy Court also denied Netflix's motion to compel arbitration of the dispute, ruling that the Bankruptcy Court had the authority and obligation to adjudicate Relativity's motion and to enforce the plan confirmation order.

Netflix appealed the Bankruptcy Court's order and injunction to the U.S. District Court for the Southern District of New York. Judge Preska denied Netflix's motion for an emergency stay of the Bankruptcy Court's order and injunction and later affirmed the Bankruptcy Court in all respects, ruling in a decision issued from the bench immediately after oral argument.

Netflix then made a second appeal to the U.S. Court of Appeals for the Second Circuit. Oral argument was held on August 16, 2017. Six days later, the Second Circuit affirmed the District Court's decision by Summary Order. The Second Circuit agreed with Relativity that the Bankruptcy Court had "core" bankruptcy jurisdiction over Relativity's motion to enforce the plan, ruled that the Bankruptcy Court properly exercised its discretion in denying Netflix's motion to compel arbitration, and agreed with Relativity on the merits of its arguments that, pursuant to the parties' licensing agreement, Netflix was contractually obligated to delay its own streaming dates to accommodate later theatrical release dates for the films at issue.

Netflix Inc. v. Relativity Media LLC, No. 16-3282 (2d Cir.)