Ryah Kavanaugh Relativity Failure Lesson
Eric Charbonneau/Invision for Relativity Studios/AP Images

UPDATED: Relativity Media has filed a lawsuit charging that Netflix breached its agreement to stream the mini-studio’s films and did so much damage that it undermined Relativity’s financial underpinnings — forcing the company to put itself up for sale.

The case filed in Santa Clara County Superior Court charges the streaming giant with breaking its contract with Relativity and committing “trade libel” by suggesting that recent Relativity films should be released on the streaming service before they opened in theaters.

The company founded by entrepreneur Ryan Kavanaugh suggests in its legal pleadings that it has suffered damages “in excess” of $1.5 billion.

“We find this lawsuit baseless and ironic,” a Netflix spokesperson said in a statement. During court hearings into Relativity’s bankruptcy, the streaming company argued that it was Relativity that had violated their contract, by failing to produce the minimum number of films and failing to release movies on the dates promised.

Netflix asked U.S. Bankruptcy Court Judge Michael Wiles for permission to release two films – the comedy “Masterminds” and the horror flick “The Disappointments Room” – prior to their theatrical release. Wiles denied that request, saying that the initial release of the films in theaters was a fundamental underpinning of the agreement between the two companies.

In its new lawsuit, Relativity argues that its 2010 contract with Netflix helped the larger company to re-create itself from a DVD-by-mail company into a service that streams films to customers via the Internet.

“In choosing Netflix as its pay television or SVOD partner, Relativity single-handedly converted Netflix from a DVD mail-order company into a pay television business,” the lawsuit contends.

Once it was more established in the streaming business, Netflix decided that it didn’t like the terms of the early agreement with Relativity and tried to renegotiate, according to the lawsuit, filed by the firm of Browne George Ross.

Relativity had received $100 million to $300 million a year under the arrangement, but the doubts raised by Netflix caused others in the industry to wonder whether the mini-studio would continue to get paid, the lawsuit contends. “This misrepresentation of the License Agreement caused investors to question Relativity’s ability to make money,” the suit says, “and caused Relativity to stop making films and cease all fund raising efforts.”

Once it saw that it could not amend its contract with Relativity, Netflix set about trying to destroy the mini-studio to make the agreement go away, the lawsuit contends. “Netflix’s strategy has been successful,” the lawsuit contends. “Relativity has been forced to be put up for sale.”

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