Alert
Alert
By Roxane A. Polidora, Jacob R. Sorensen, Lee Brand, Stacie O. Kinser
08.17.20
The Ixchel Pharma, LLC v. Biogen, Inc. case stems from a settlement agreement between two pharmaceutical companies, Biogen, Inc. and Forward Pharma, pursuant to which Forward agreed to exercise its contractual right to terminate a drug development agreement with a third pharmaceutical company, Ixchel Pharma, LLC. Ixchel then sued Biogen in California federal court asserting: 1) tortious interference with Ixchel’s contractual relationship with Forward; and 2) that Biogen’s agreement with Forward was an unenforceable non-compete agreement under California Business and Professions Code section 16600.1 The district court dismissed Ixchel’s complaint, Ixchel appealed, and the Ninth Circuit certified two questions, which the California Supreme Court framed as follows: “(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?"
After concluding that a claim for tortious interference with at-will contracts does in fact require independent wrongfulness, the court turned to the application of section 16600 to contracts between two commercial entities. The Ninth Circuit had actually posed the more limited question of whether the statute applies at all to contracts in the business context or, rather, is limited to employment agreements. The California Supreme Court pointed out, however, that “the primary dispute between Ixchel and Biogen in the Ninth Circuit was not whether section 16600 applies to business contracts”—they agreed it did—but instead “whether contractual restraints on business operations or commercial dealings are subject to a reasonableness standard under section 16600.” The California Supreme Court quickly agreed with the parties that the statute applies to business contracts and moved on to the reframed question of how to apply section 16600 in this context. Addressing the conflicting standards advanced by the parties, the Ixchel court agreed with Biogen that the statute is best read to apply the same rule of reason2 used to analyze antitrust violations under the Cartwright Act (section 16700 et seq.) and rejected Ixchel’s argument that any contract in restraint of trade is per se void.
Examining the legislative history, broader statutory context, and precedent surrounding section 16600, the California Supreme Court identified distinct lines of authority depending on whether a contract arises in the employment or commercial context. Specifically, while California courts have “generally invalidated agreements not to compete upon the termination of employment or upon the sale of interest in a business without inquiring into their reasonableness,” they have “invalidat[ed] other contractual restraints on businesses operations and commercial dealings only if such restraints were unreasonable.” Affirming this division, the Ixchel court declined to “disturb the holding in ... decisions strictly interpreting section 16600 to invalidate noncompetition agreements,” but made clear that “those cases do not call into doubt the applicability of a reasonableness standard” to commercial contracts.
Finally, the California Supreme Court noted that it was “mindful of the consequences of strictly interpreting the language of section 16600 to invalidate all contracts that limit the freedom to engage in commercial dealing.” Identifying various common and legitimate business arrangements such as partnerships, exclusive dealing agreements, franchise rules, and output contracts, the court “decline[d] to construe section 16600 to call such arrangements into question simply because they restrain trade in some way.” Rather, the court identified a multitude of ways in which “contractual limitations on the freedom to engage in commercial dealings can promote competition,” observing that such limitations can help:
The California Supreme Court did not reach the ultimate question of whether the settlement agreement at issue is invalid under the rule of reason because Ixchel was on appeal at the pleading stage. Nevertheless, the ruling should generally provide commercial entities confidence to continue entering into traditional contracts involving reasonable restraints on business dealings.
1 Section 16600 reads: “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.”
2 As explained in Ixchel, the rule of reason “asks whether an agreement harms competition more than it helps by considering the facts peculiar to the business in which the restraint is applied, the nature of the restraint and its effects, and the history of the restraint and the reasons for its adoption.”