Netflix’s Ups and Downs

By Lorenzo Ricchi

Netflix has been under the spotlight in recent months for two main reasons: its considerable amount of debt and its recent employment-related lawsuits.[1]  Although the two may not seem related, this combination may potentially cause the streaming giant’s stock value to drop under the Efficient Market Hypothesis.[2]  Netflix offered $1.6 billion in notes in October 2017, and another $1.9 billion in April 2018.[3]  Although as of September 30, 2017 it reported a long-term debt of $8.34 billion.  On October 22, 2018 it announced its intention to raise an additional $2 billion in secured bank notes, raising its long term debt to a total of $10 billion.[4]  Funds generated from the past note issuances were used to produce and release original content with the aim of increasing its number of subscribers.[5]  More specifically, it spent about $8 billion on content only in 2018.[6]  On October 16, 2018, however, its SEC filing shows that it has reached 137.1 million subscribers, increasing its stock value and reassuring investors that the slow pace experienced in the previous quarter would not last long.[7]

However, despite the increase in subscribers, the streaming giant is facing a lawsuit in California, the outcome of which may cause further fluctuation of its stock value.[8]  In early October 2018, Viacom, one of Netflix’s largest media network competitors, sued Netflix in the Los Angeles Superior Court alleging tortious interference with contract and unfair competition, seeking a permanent injunction and monetary damages.[9]  In its complaint, Viacom accused Netflix of employee poaching after Netflix allegedly induced one of Viacom’s employees to breach her exclusive employment contract to join Netflix.[10]  “California recognizes a cause of action against non-contracting parties who interfere with the performance of a contract.”[11]

Elements for an intentional interference with contractual relations are (i) the existence of a valid contract between the plaintiff and a third party, (ii) the defendant’s knowledge of the contract, (iii) the defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship, (iv) actual breach or disruption of the contractual relationship, and (v) resulting damage.[12]

Netflix recently announced the hiring of Momita SenGupta, a Viacom veteran employee who had an exclusive contract with Viacom set to end in 2020.[13]  In its lawsuit, Viacom alleges that Netflix did not simply induce Ms. SenGupta to breach her contract, but also disregarded Viacom’s warnings about her contractual obligation and provided her with an attorney to respond to Viacom’s letter.[14]  This is not the first allegation that Netflix faces for unfair hiring practices.  The company is currently defending another lawsuit brought in 2016 by 20th Century Fox Film Corporation over the poaching of two of its executives.[15]  Netflix’s defense is based on the argument that Fox’s, as well as Viacom’s “take-it-or-leave-it” deals, excessively limit and restrain employees in violation of California Business and Professions Code § 16600, under which “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”[16]

Under the Efficient Market Hypothesis (EMH), share prices reflect all publicly available information about the issuer.[17]  Whether the EMH is accurate or not has been under debate for decades, however, it is true that a large majority of times companies face legal troubles and lose in court, their stock takes a hit.[18]  In other words, Netflix’s considerable borrowing in the past twelve months, coupled with the bad publicity it is receiving from the employee-poaching accusations and lawsuits it is defending and the possible large settlement it may have to pay, might negatively affect the value of the company’s stock.

 

[1] See Jill Disis, Netflix Wants to Take Another $2 Billion in Debt, CNN Business (Oct. 22, 2018, 2:20 PM), https://www.cnn.com/2018/10/22/tech/netflix-debt-spending/index.html. See also Eriq Gardner, Viacom Sues Netflix for Employee Poaching, The Hollywood Reporter (Oct. 16, 2018, 11:33 AM), https://www.hollywoodreporter.com/thr-esq/viacom-sues-netflix-employee-poaching-1152721.

[2] See Stephen J. Choi & A.C. Pritchard, Securities Regulation, Cases and Analysis 30 Foundation Press (4th ed. 2015) (“The ECMH posits that the market price of an actively traded security will incorporate information relate to the security.”).

[3] Disis, supra note 1.

[4] Todd Spangler, Netflix Details Procong of $2 Billion in Junk Bonds, Bringing Long-Term Debt Load to Over $10 Billion, Variety (Oct. 23, 2018, 10:39 AM), https://variety.com/2018/digital/news/netflix-details-2-billion-junk-bonds-debt-1202989797/.

[5] See Laharee Chattejee, Netflix to raise $1.5 billion in debt, Reuters (Apr. 23, 2018, 8:00 AM), https://www.reuters.com/article/us-netflix-debt/netflix-to-raise-1-5-billion-in-debt-idUSKBN1HU1KS.

[6] Id.

[7] Netflix, Inc., Current Report (Form 8-K) (Oct. 16, 2018), available at http://d18rn0p25nwr6d.cloudfront.net/CIK-0001065280/9900f47b-b568-4875-82f2-d25cc5ca45ea.pdf.

[8] Viacom International Inc. v. Netflix, Inc., No. 18STCV00496 Bloomberg Law, (Cal. Super. Ct. Oct. 5, 2018).

[9] Eriq Gardner, Viacom Sues Netflixfor Employee Poaching, The Hollywood Reporter (Oct. 16, 2018, 11:33 AM), https://www.hollywoodreporter.com/thr-esq/viacom-sues-netflix-employee-poaching-1152721.

[10] Viacom International Inc. v. Netflix, Inc., at *1 (Cal. Super. Ct. Oct. 5, 2018).

[11] Redfearn v. Trader Joe’s Co., Cal. Rptr. 3d 98, 104 (Cal. App. 2018).

[12] Id.

[13] Sarah Toy, Viacom sues Netflix for Poaching Exec: Report, Market Watch, https://www.marketwatch.com/story/viacom-sues-netflix-for-poaching-exec-report-2018-10-16.

[14] Gardner, supra note 9.

[15] Id.

[16] Cal. Bus. & Prof. Code §16600.

[17] See Stephen J. Choi & A.C. Pritchard, Securities Regulation, Cases and Analysis 30 Foundation Press (4th ed. 2015).

[18] Stephanie D. Dwilson, How Do Lawsuits Affect Stock Prices?, Zacks, https://finance.zacks.com/lawsuits-affect-stock-prices-10130.html (last visited Oct. 24, 2018) (explaining that losing a lawsuit does not automatically lead the company’s stock value to decrease and that the extent to which the stock value may be affected depends on the amount of damages awarded to the plaintiff as well as other circumstances affecting the company at the time).  See also Kimberly S. Watson, Effect of Lawsuits on Stock Price Compared to Product Withdrawal: A Focus on The Consequences of Vioxx’s Adverse Effects (Aug. 2006) (unpublished M.A. thesis, Tex. Tech U.) (“When a company is being sued, this affects the risk associated with that company. With settlements being as exuberant as they are in today’s society, there is a constant risk associated with lawsuits until the verdict, and additionally the award if the jury decides against the company, is settled.”).

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