Los Angels, Calif. (August 11, 2020) - On August 3, 2020, the Supreme Court of California (the Court) ruled that in order to state a claim for interference with an at-will contract, the plaintiff must allege that the defendant engaged in an independently wrongful act. Ixchel Pharma, LLC v. Biogen, Inc., 2020 Cal. LEXIS 4876, *1. In that same opinion, which was in response to a certification by the Ninth Circuit Court of Appeals, the Court also ruled that a rule of reason applies to determine the validity of a contractual provision by which a business is restrained from engaging in a lawful trade or business with another business. Id. By these rulings, the Court distinguished employment relationships from general business contracts and clarified that there are limits to some of California's laws prohibiting interference and disallowing trade restrictions between businesses.
Facts and Rulings
The ruling arose from a dispute between the plaintiff biotech company Ixchel Pharma (Ixchel) and the biotech defendant Biogen, Inc. (Biogen). Ixchel had entered into an agreement with a third party, Forward Pharma (Forward) to develop a drug for the treatment of a disorder called Fredreich's ataxia. While the contract was in effect, Biogen and Forward were in the midst of a patent dispute, which they subsequently settled.
Under the settlement terms, defendant Biogen required Forward to terminate its contract with the plaintiff Ixchel. Under its terms, the co-development agreement between Ixchel and Biogen was terminable at will. However, asserting that the settlement terms unlawfully interfered with its existing contract with Forward, Ixchel sued Biogen in federal court asserting (among other things) claims for tortious interference with contractual relations and violation of California Business and Professions Code section 16600, which provides: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." The federal court dismissed Biogen's claims and the matter was appealed to the Ninth Circuit.
On appeal, the Ninth Circuit certified two questions of California law for referral to the California Supreme Court, which the Court accepted. The two questions posed were articulated as: "(1) Is a plaintiff required to plead an independently wrongful act in order to state a claim for tortious interference with a contract that is terminable at will? (2) What is the proper standard to determine whether section 16600 voids a contract by which a business is restrained from engaging in a lawful trade or business with another business?" Id. at 2020 Cal. LEXIS 4876, *8.
The Standard For Pleading Interference With an At-Will Contract
Analyzing the first question, the Court determined that, "[l]ike parties to a prospective economic relationship, parties to at-will contracts have no legal assurance of future economic relations." Id. at *22 . "The interest in protecting the contract from interference more closely resembles the interest in protecting prospective economic relationships than the interest in protecting a contractual relationship that, by its terms, is expected to continue on pain of breach."
The Court thus ruled that, similar to a claim for interference with a prospective relationship, to plead a claim for interference with a contractual relationship that is terminable at will, the plaintiff "must allege that the defendant engaged in an independently wrongful act." Id. at *25. That is, the plaintiff must allege that the defendant engaged in some wrongful activity apart from the act of interference itself.
Rule of Reason Is Applied to Sec. 16600 In the Context of Business Contracts
On the second question, the California Supreme Court agreed with the parties that Business and Professions Code section 16600 applies to business contacts (and not just employment agreements). Id. at *27. The Court noted that the language of section 16600 is broad on its face, providing that "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Id. at *29. "Read in isolation, the text suggests that any part of an agreement restraining a party from engaging in a trade, profession, or business is per se invalid unless certain exceptions apply." Id. However, the Court determined that the section must not be read in isolation, but in the context of the statutory framework in which the section was enacted.
The Court then analyzed the legislative history of section 16600 and its predecessor, former Civil Code section 1673, and the long line of cases interpreting them. The Court also noted that section 16600 exists alongside the Cartwright Act (Bus. and Prof. Code § 16700 et. seq.), California's antitrust statute, to which the courts have "taken direction from common law in establishing a reasonableness standard for determining whether an agreement violates" the Act. Id. at *47.
In its analysis of the case law, the Court found that there is a distinction between the way section 16600 has been applied to employment contracts and contracts between businesses. The Court stated, "a survey of our precedent construing section 16600 and its predecessor statute reveals that we have long applied a reasonableness standard to contractual restraints on business operations and commercial dealings." As such, the Court concluded that "a rule of reason applies to determine the validity of a contractual provision by which a business is restrained from engaging in a lawful trade or business with another business."
The Court noted that this conclusion corresponds with commercial realities in which many businesses justifiably enter into arrangements with one another which may be considered restraints on trade, such as exclusive dealing agreements, franchise agreements, and other such arrangements. The Court concluded that, despite it broad language, section 16600 was not intended to make all such arrangements illegal.
Takeaway
In application to the case at hand, the California Supreme Court ruled that because Ixchel alleges that Biogen interfered with its at-will contract, it must allege that Biogen did so through wrongful means. It also held that the settlement agreement at issue in the case was a restraint of trade covered by section 16600 because it prevented Forward from collaborating with Ixchel or any other partner in the development certain treatments, and that its validity "must therefore be evaluated based on a rule of reason." Ixchel Pharma, LLC v. Biogen, Inc., 2020 Cal. LEXIS 4876, *52.
In practice, this ruling confirms that claims for interference with at-will contracts are to be treated the same as a claim for interference with a prospective economic advantage, and that section 16600 does not invalidate all commercial arrangements that may restrain the freedom to conduct lawful business, despite its broad language.
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