Netflix Delays Planned Streaming Due to Relativity Films' Restructuring - Fordham Intellectual Property, Media & Entertainment Law Journal
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Netflix Delays Planned Streaming Due to Relativity Films’ Restructuring

Netflix Delays Planned Streaming Due to Relativity Films’ Restructuring

The U.S. Bankruptcy Court has once again ruled against Netflix in the ongoing legal battle between Netflix the streaming giant and Relativity Media the struggling movie studio delaying an ensuing demise.

Last summer, Relativity filed for bankruptcy, carrying more than $1 billion in debt. As a result of its restructuring, Relativity has cut its initial debt down to about $314 million. In February, Netflix attempted to void its contract with Relativity. Netflix argued that the approved restructuring plan violated the contract between the entertainment companies, because Relativity would not deliver enough films to satisfy its prior arrangement. Netflix’s attorney further stated that “[t]his plan of reorganization is built almost entirely on the back of the Netflix contract[.]”

Yet the court disagreed with Netflix, holding that Relativity made a “good faith” effort to deliver the movies to Netflix and that the reduction in the number of films does not “wipe[ ] anything out of the contract[.]” Even though Netflix’s original licensing deal with Relativity would have cost Netflix $283 million, Netflix has certain contractual protections that allow Netflix to avoid payments for films that Relatvity failed to deliver.

Recently, the court delivered another defeat to Netflix in its fight to stream “Masterminds,” a comedy starring Zach Galifianakis and Kristen Wiig, and “The Disappointments Room,” a horror film starring Kate Beckinsale, before their respective theatrical releases. Even though the parties never intended for the films to stream before their respective theatrical releases, the contract provided for a schedule for Relativity to deliver the films on defined “start dates”. Netflix has maintained that they have “an immediate need” for new, original content, because the summer presents a noticeable gap between expired content from Epix and incoming films from Disney. Undoubtedly, the desired Relativity films would be popular, due to the star power and high production value of the movies.

The court held that allowing Netflix to stream these films early “would threaten the bankruptcy process . . . with devastating consequences to the plan and distributions” to creditors. The approved reorganization plan called for the films to be released in theaters in September and December, respectively, and later released abroad and on streaming services. In the past, films that streamed simultaneously with box-office releases have under performed at the box office. For example, Beasts of No Nation “generated $100,000 in the theater” according to Box Office Mojo. Netflix’s VP of Content Acquisition Robert Roy has even acknowledged that Netflix has never streamed a major film ahead of its theatrical release, yet argued that “the distribution landscape is changing[,]” implying that anything is possible.

Furthermore, Relativity argues that the contract also had a requirement that the films have theatrical releases in order to be considered a part of the licensing deal between the two companies. Yet Netflix counters this proposition by stating that the release requirement acted as a quality control measure. In response, the court stated that it thought Netflix was threatening to release the films in order to gain leverage in the dispute over Relativity’s reorganization. Under the current contract, Netflix is stuck with an obligation to buy as many as 15 films a year from Relativity. Analysts have remarked that Netflix appears to have recently focused on getting out of payment obligations, so it is not unreasonable to speculate that Netflix’s demands may be in “bad faith.”

However, Netflix did pay a $7.4 million minimum guarantee to put the Relativity films online at the agreed upon dates. Netflix plans to appeal the bankruptcy decision. Netflix maintains the position that Relativity’s bankruptcy process has stripped Netflix of a contractual benefit without providing proper protections and rights.

In the meantime, Netflix lost an appeal to end the Relativity Distribution deal. Furthermore, Relativity insinuated that they will eventually sue Netflix for acting in “bad faith,” possibly seeking over $1 billion in damages.

Anthony Zangrillo

Anthony Zangrillo is a third year student at Fordham University School of Law and the Online Editor of the Fordham Intellectual Property, Media & Entertainment Law Journal. He will be joining the Capital Markets group at Weil, Gotshal & Manges LLP after graduation. While an undergraduate student at NYU, he founded the Motion Picture Club. (http://www.motionpictureclubs.com). You can find him on Twitter at @FordhamIPLJ.