Ixchel Pharma, LLC v. Biogen, Inc.

IN THE SUPREME COURT OF
CALIFORNIA
IXCHEL PHARMA, LLC,
Plaintiff and Appellant,
v.
BIOGEN, INC.,
Defendant and Respondent.
S256927
Ninth Circuit
18-15258
Eastern District of California
2:17-cv-00715-WBS-EFB
August 3, 2020
Justice Liu authored the opinion of the Court, in which Chief
Justice Cantil-Sakauye and Justices Chin, Corrigan, Cuéllar,
Kruger, and Groban concurred.
IXCHEL PHARMA, LLC v. BIOGEN, INC.
S256927
Opinion of the Court by Liu, J.
This case presents two questions about the bounds of
legitimate business competition under California tort and
antitrust law. Plaintiff Ixchel Pharma, LLC (Ixchel), a
biotechnology company, entered into an agreement with
Forward Pharma (Forward) to jointly develop a drug for the
treatment of a disorder called Friedreich’s ataxia. The drug
development went according to plan until Forward decided to
withdraw from the agreement, as was allowed by its terms.
Pursuant to a settlement with another biotechnology company,
defendant Biogen, Inc. (Biogen), Forward had agreed to
terminate its contract with Ixchel.
Ixchel sued Biogen in federal court for tortiously
interfering with Ixchel’s contractual and prospective economic
relationship with Forward and claimed that Biogen did so in
violation of Business and Professions Code section 16600. On
appeal, the United States Court of Appeals for the Ninth Circuit
asked us to decide (1) whether Biogen’s interference in Ixchel’s
at-will contract with Forward must be independently wrongful
and (2) how Business and Professions Code section 16600
applies to the settlement provision requiring Forward to
terminate its agreement with Ixchel.
We hold that tortious interference with at-will contracts
requires independent wrongfulness and that a rule of reason
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Opinion of the Court by Liu, J.
applies to determine the validity of the settlement provision
under Business and Professions Code section 16600.
I.
Because this case comes to us from the Ninth Circuit at
the motion to dismiss stage, we assume the truth of the facts as
alleged in Ixchel’s operative complaint. (Grisham v. Philip
Morris U.S.A., Inc. (2007) 40 Cal. 4th 623, 629.) Ixchel is a
biotechnology company that develops drugs to treat
mitochondrial disease. Since 2012, it has been developing a
drug containing the active ingredient dimethyl fumarate (DMF)
to treat Friedreich’s ataxia, a neurodegenerative disorder
affecting one in 50,000 Americans.
Because Ixchel did not have the resources to develop the
drug by itself, in 2016 it entered into a Collaboration Agreement
with Forward, a biotechnology company that also develops
drugs containing DMF for the treatment of neurological
diseases. Under the terms of the Collaboration Agreement,
Ixchel agreed to assign certain patent rights it possessed to
Forward. In return, Forward agreed to work with Ixchel to
develop a new drug containing DMF to treat Friedreich’s ataxia.
Forward would investigate the feasibility of conducting clinical
trials for the drug and, if feasible, would conduct those trials and
pay for them. Ixchel would provide assistance with the clinical
trials as necessary. If the clinical trials were successful,
Forward agreed to manage and pay for the manufacturing and
commercialization of the drug with the assistance of Ixchel.
Ixchel was entitled to a percentage of royalties on sales of the
drug and retained certain rights to engage in its own
commercialization of the drug independent of Forward.
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Opinion of the Court by Liu, J.
The Collaboration Agreement authorized Forward to
terminate the agreement “at any time” so long as it provided
notice to Ixchel 60 days in advance. Ixchel was authorized to
terminate the agreement if Forward informed Ixchel that it
would not conduct clinical trials of the new drug or if it would
not or did not timely submit a new drug application for the
developed drug to the Food and Drug Administration. In
October 2016, Forward informed Ixchel that it had confirmed
the feasibility of conducting clinical trials and would proceed to
conduct those trials. Thereafter, Ixchel and Forward began to
develop a plan for a trial study.
At the same time that Forward and Ixchel were working
together, Forward was negotiating with Biogen, another
biotechnology company, to settle a patent dispute related to the
use of DMF for the treatment of multiple sclerosis. One of
Biogen’s drugs, Tecfidera, is used to treat multiple sclerosis and
contains DMF as an active ingredient. Ixchel alleges that
because physicians can prescribe a drug containing DMF to
treat conditions that the drug was not approved to treat, Ixchel’s
drug development poses a competitive threat to Biogen’s
Tecfidera drug.
As a result of negotiations, Forward and Biogen entered
into a settlement and license agreement (Forward-Biogen
Agreement) in which Biogen agreed to pay Forward $1.25 billion
in exchange for a license to certain Forward patents and other
intellectual property. In addition, section 2.13 of the Forward-
Biogen Agreement required Forward to “terminate any and all
existing, and not enter into any new, Contracts or obligations to
Ixchel Pharma LLC . . . and/or any other Person, to the extent
related to the development [by Forward and its affiliate
companies] of any pharmaceutical product having dimethyl
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Opinion of the Court by Liu, J.
fumarate as an [active ingredient] for the treatment of a human
for any indication, including Friedreich’s ataxia.” Because
Forward’s only business is the development of drugs containing
DMF as an active ingredient to treat humans, Ixchel alleges that
the Forward-Biogen Agreement effectively prohibited Forward
from engaging in its entire business or a substantial part of it.
Forward notified Ixchel that because it had entered into
the Forward-Biogen Agreement, it would be terminating the
Collaboration Agreement with Ixchel in 60 days. After Forward
terminated the agreement, Ixchel lost its ability to develop its
Friedreich’s ataxia treatment and has been unable to find
another development partner to do so.
Ixchel filed suit against Biogen in federal district court,
asserting (1) violations of the federal and state antitrust laws
(15 U.S.C. § 1; Bus. & Prof. Code, § 16700 et seq.), (2) tortious
interference with contractual relations, (3) intentional and
negligent interference with prospective economic advantage,
and (4) violations of the unfair competition law (UCL) (Bus. &
Prof. Code, § 17200 et seq.). (All undesignated references are to
the Business and Professions Code.)
The district court granted Biogen’s motion to dismiss with
respect to each of Ixchel’s claims. (Ixchel Pharma, LLC v. Biogen
Inc. (E.D.Cal., Sept. 12, 2017, No. 2:17-cv-00715-WBS-EFB)
2017 WL 4012337.) It determined that Ixchel had failed to state
a claim for interference with prospective economic advantage or
interference with contractual relations because Ixchel did not
plead that Biogen engaged in an independently wrongful act.
(Id. at p. *5.) The district court acknowledged that tortious
interference with contract claims do not generally require
independent wrongfulness, but it held that because the contract
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Opinion of the Court by Liu, J.
at issue was one terminable at will, independent wrongfulness
was required. (Id. at p. *4.) The district court also dismissed
Ixchel’s federal and state antitrust claims for lack of antitrust
standing. (Id. at p. *3.) Finally, because Ixchel’s other claims
had been dismissed, the district court dismissed Ixchel’s UCL
claim for failing to allege an actionable unlawful practice. (Id.
at pp. *5–*6.)
Ixchel then filed a second amended complaint, the
operative complaint in this case, to allege that Biogen had
committed the wrongful act of violating section 16600’s
prohibition against restraints of trade. Ixchel claimed that by
agreeing to section 2.13 of the Forward-Biogen Agreement,
Biogen restrained Forward from engaging in lawful business
with Ixchel and any other entity to develop neurological
treatments containing DMF.
The district court disagreed and again dismissed the
complaint, this time on the grounds that the Forward-Biogen
Agreement must be analyzed under the antitrust rule of reason
and that section 16600 does not apply outside the employment
context. (Ixchel Pharma, LLC v. Biogen Inc. (E.D.Cal., Jan. 25,
2018, No. 2:17-cv-00715-WBS-EFB) 2018 WL 558781, p. *4.)
Ixchel sought review of its tort and UCL claims. After oral
argument, the Ninth Circuit certified two questions to this
court: (1) “Does section 16600 of the California Business and
Professions Code void a contract by which a business is
restrained from engaging in a lawful trade or business with
another business?” (2) “Is a plaintiff required to plead an
independently wrongful act in order to state a claim for
intentional interference with a contract that can be terminated
by a party at any time, or does that requirement apply only to
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Opinion of the Court by Liu, J.
at-will employment contracts?” (Ixchel Pharma, LLC v. Biogen,
Inc. (9th Cir. 2019) 930 F.3d 1031, 1033 (Ixchel).)
We rephrase and reorder the questions as follows (see Cal.
Rules of Court, rule 8.548(f)(5)): (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?
The questions are related; the alleged violation of section 16600
is the independently wrongful act in Ixchel’s contractual
interference claim.
II.
We first address Ixchel’s claim that Biogen tortiously
interfered in Ixchel’s contract with Forward. Before this court,
neither party contests that the Cooperation Agreement is a valid
contract that Forward was entitled to terminate at will. Nor is
it at issue whether Forward terminated the agreement
according to its terms by giving Ixchel notice 60 days prior to
termination. The only question before us is whether Ixchel must
allege that Biogen committed an independently wrongful act in
order to state a claim for tortious interference with contract in
light of the fact that the Cooperation Agreement is an at-will
contract.
A.
California has traditionally recognized two economic
relations torts: interference with the performance of a contract
(Imperial Ice Co. v. Rossier (1941) 18 Cal. 2d 33, 35 (Imperial
Ice)) and interference with a prospective economic relationship
(Buckaloo v. Johnson (1975) 14 Cal. 3d 815, 822 (Buckaloo)).
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“[B]oth of these torts protect the public interest in stable
economic relationships . . . .” (Reeves v. Hanlon (2004) 33
Cal. 4th 1140, 1152 (Reeves).)
The two torts are related but distinct. Tortious
interference with contractual relations requires “(1) the
existence of a valid contract between the plaintiff and a third
party; (2) the defendant’s knowledge of that contract; (3) the
defendant’s intentional acts designed to induce a breach or
disruption of the contractual relationship; (4) actual breach or
disruption of the contractual relationship; and (5) resulting
damage.” (Reeves, supra, 33 Cal.4th at p. 1148; see Pacific Gas
& Electric Co. v. Bear Stearns & Co. (1990) 50 Cal. 3d 1118, 1126
(Pacific Gas).) It is generally not necessary that the defendant’s
conduct be wrongful apart from the interference with the
contract itself. (Quelimane Co. v. Stewart Title Guaranty Co.
(1998) 19 Cal. 4th 26, 55 (Quelimane).) This general rule is
subject to certain exceptions discussed below.
Tortious interference with prospective economic
advantage, on the other hand, does not depend on the existence
of a legally binding contract. A plaintiff asserting this tort must
show that the defendant knowingly interfered with an
“ ‘ “economic relationship between the plaintiff and some third
party, [which carries] the probability of future economic benefit
to the plaintiff.” ’ ” (Korea Supply Co. v. Lockheed Martin Corp.
(2003) 29 Cal. 4th 1134, 1153 (Korea Supply).)
Before our decision in Della Penna v. Toyota Motor Sales,
U.S.A., Inc. (1995) 11 Cal. 4th 376 (Della Penna), we treated
interference with contractual relations and interference with
prospective economic advantage as two species of the same tort.
(See Buckaloo, supra, 14 Cal.3d at p. 823.) Each tort contained
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the same elements with the exception that interference with
contractual relations required the existence of a binding
contract. (Compare id. at p. 827 [elements of interference with
prospective economic advantage] with Pacific Gas, supra, 50
Cal.3d at p. 1126 [elements of interference with contractual
relations].) The primary difference between the two torts was
that the range of acceptable justifications — that is, affirmative
defenses — was broader when a defendant interfered with an
unconsummated prospective economic relationship. (Pacific
Gas, at p. 1126; Environmental Planning & Information Council
v. Superior Court (1984) 36 Cal. 3d 188, 194 (EPIC); Buckaloo, at
p. 828.) “[A] competitor’s stake in advancing his own economic
interest will not justify the intentional inducement of a contract
breach [citation], whereas such interests will suffice where
contractual relations are merely contemplated or potential.”
(EPIC, at p. 194.)
That changed in Della Penna, when we “dr[e]w and
enforce[d] a sharpened distinction between claims for the
tortious disruption of an existing contract and claims that a
prospective contractual or economic relationship has been
interfered with.” (Della Penna, supra, 11 Cal.4th at p. 392.) We
held that a plaintiff seeking to recover damages for interference
with prospective economic advantage must plead as an element
of the claim that the defendant’s conduct was “wrongful by some
legal measure other than the fact of interference itself.” (Id. at
p. 393.) We reasoned that “courts provide a damage remedy
against third party conduct intended to disrupt an existing
contract precisely because the exchange of promises resulting in
such a formally cemented economic relationship is deemed
worthy of protection from interference by a stranger to the
agreement. Economic relationships short of contractual,
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Opinion of the Court by Liu, J.
however, should stand on a different legal footing as far as the
potential for tort liability is reckoned. Because ours is a culture
firmly wedded to the social rewards of commercial contests, the
law usually takes care to draw lines of legal liability in a way
that maximizes areas of competition free of legal penalties.” (Id.
at p. 392.) Concerned that the old rule led “to time consuming
and expensive lawsuits . . . by a rival, based on conduct that was
regarded by the commercial world as both commonplace and
appropriate” (id. at p. 384), we found it important to afford
“greater solicitude to those relationships that have ripened into
agreements, while recognizing that relationships short of that
subsist in a zone where the rewards and risks of competition are
dominant” (id. at p. 392). Imposing an independent
wrongfulness requirement at the pleading stage thus struck a
“balance between providing a remedy for predatory economic
behavior and keeping legitimate business competition outside
litigative bounds.” (Id. at p. 378.)
Our decisions since Della Penna have reaffirmed the
distinction between the two torts. (See Quelimane, supra, 19
Cal.4th at pp. 55–56; Korea Supply, supra, 29 Cal.4th at
p. 1158.) So, while intentionally interfering with an existing
contract is generally “a wrong in and of itself” (Quelimane, at
p. 56), intentionally interfering with prospective economic
advantage requires pleading that the defendant committed an
independently wrongful act (Korea Supply, at p. 1158). “[A]n act
is independently wrongful if it is unlawful, that is, if it is
proscribed by some constitutional, statutory, regulatory,
common law, or other determinable legal standard.” (Id. at
p. 1159.)
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B.
With that framework in mind, we consider whether
stating a claim for interference with an at-will contract requires
pleading an independently wrongful act. We have long
recognized that interference with at-will contracts is actionable
as an economic tort. (Pacific Gas, supra, 50 Cal.3d at p. 1127
[citing cases]; accord, Truax v. Raich (1915) 239 U.S. 33, 38
[recognizing that the weight of authority considers a third
party’s unjustified interference with an employment-at-will
contract actionable].) “[T]he fact that a contract is ‘at the will of
the parties, respectively does not make it one at the will of
others . . . .’ ” (Speegle v. Board of Fire Underwriters of the
Pacific (1946) 29 Cal. 2d 34, 39 (Speegle).)
But we have not decided whether interference with an at-
will contract more closely resembles interference with
contractual relations or interference with prospective economic
advantage. That is because the distinction was not important
for the many decades when the two interference torts contained
basically the same elements. Ixchel argues that we settled the
question in Pacific Gas, supra, 50 Cal. 3d 1118, a case decided
five years before Della Penna distinguished the two torts.
According to Ixchel, Pacific Gas set “the default rule that, for an
intentional interference with contract claim, there is no
requirement of an independently wrongful act, even where the
alleged misconduct is inducing a party to terminate an at-will
contract.” We disagree.
In that case, the Pacific Gas and Electric Company sued
Bear Stearns for interfering in the utility’s contract to purchase
hydroelectric power from a water resource agency and for
interfering with the utility’s prospective economic relations.
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Opinion of the Court by Liu, J.
(Pacific Gas, supra, 50 Cal.3d at pp. 1123–1124.) The contract
at issue allowed the water resource agency to terminate the
agreement at the end of the year in which the agency retired all
of its project bonds. Bear Stearns convinced the agency to seek
a determination in state court that it could terminate the
contract by retiring its project bonds early. (Ibid.) We held that
merely inducing a contracting party to seek a judicial
determination whether it can terminate a contract according to
its terms is not sufficient to state a claim under either economic
tort. (Id. at p. 1137.) We outlined the elements of a contract
interference claim for the first time and did not require that the
interference be independently wrongful. (Id. at p. 1126.)
Separately, we explained that interference with an at-will
contract has long been actionable. (Id. at p. 1127.)
Critically, we acknowledged that “[m]any cases have
treated claims of interference with voidable and terminable
contracts as coming within the cause of action for interference
with prospective advantage. [Citations.] . . . [I]t may be
preferable not to distinguish the two as separate torts [citation]
but we need not resolve that point here, in view of our conclusion
that the activity complained of is not included within either
tort.” (Pacific Gas, supra, 50 Cal.3d at p. 1128, fn. 4.) Thus,
contrary to Ixchel’s argument, Pacific Gas expressly reserved
the question of whether interference with an at-will contract
should be treated as a claim of interference with contractual
relations or as a claim of interference with prospective economic
advantage. Because the alleged misconduct in that case did not
constitute interference with any economic relationship,
contractual or otherwise, it was unnecessary to resolve the
question.
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It was also unnecessary to resolve the question because,
as explained, the elements of both torts were largely the same
at that time. We had yet to differentiate the two torts in Della
Penna by requiring an independent wrongfulness element for
interference with prospective economic advantage. There was
thus no occasion to address whether interference with an at-will
contract required pleading an independently wrongful act since
it was not then a requirement for either tort. (Cf. Bed, Bath &
Beyond of La Jolla, Inc. v. La Jolla Village Square Venture
Partners (1997) 52 Cal. App. 4th 867, 880, fn. 9 [cases decided
before Della Penna are not relevant to determining whether
interference with an unenforceable contract constitutes
interference with contractual relations or interference with
prospective economic advantage].) So, Pacific Gas did not
answer the question now before us.
Fourteen years later in Reeves, supra, 33 Cal. 4th 1140, we
resolved part of the question Pacific Gas left open. Reeves held
that a plaintiff must plead independent wrongfulness to state a
claim for interference with a specific category of at-will
contracts: employment contracts. (Reeves, at p. 1145.) That
holding was based on two rationales. First, California’s public
policy favoring employment competition supported such a rule.
We observed that “it has long been the public policy of our state
that ‘[a] former employee has the right to engage in a
competitive business for himself and to enter into competition
with his former employer, even for the business of . . . his former
employer, provided such competition is fairly and legally
conducted.’ ” (Id. at p. 1149.) Our previous decisions indicated
that “[w]here no unlawful methods are used, public policy
generally supports a competitor’s right to offer more pay or
better terms to another’s employee, so long as the employee is
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Opinion of the Court by Liu, J.
free to leave.” (Id. at p. 1151; see also id. at p. 1145 [observing
that the independent wrongfulness requirement “will promote
the public policies supporting the right of at-will employees to
pursue opportunities for economic betterment and the right of
employers to compete for talented workers”].)
Second, we reasoned that “the economic relationship
between parties to contracts that are terminable at will is
distinguishable from the relationship between parties to other
legally binding contracts.” (Reeves, supra, 33 Cal.4th at
p. 1151.) We explained that interference with other legally
binding contracts, such as contracts of a definite term, is tortious
“ ‘because the exchange of promises resulting in such a formally
cemented economic relationship is deemed worthy of protection
from interference by a stranger to the agreement.’ ” (Ibid.,
quoting Della Penna, supra, 11 Cal.4th at p. 392.) But at-will
contracts do not involve the same “cemented economic
relationship[s]” as contracts of a definite term. (Della Penna, at
p. 392.) Quoting the Restatement Second of Torts, we explained
that “ ‘any interference with [an at-will contract] that induces
its termination is primarily an interference with the future
relation between the parties, and the plaintiff has no legal
assurance of them. As for the future hopes he has no legal right
but only an expectancy; and when the contract is terminated by
the choice of [a contracting party] there is no breach of it. The
competitor is therefore free, for his own competitive advantage,
to obtain the future benefits for himself by causing the
termination. Thus, he may offer better contract terms, as by
offering an employee of the plaintiff more money to work for him
or by offering a seller higher prices for goods, and he may make
use of persuasion or other suitable means, all without liability.’ ”
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(Reeves, at pp. 1151–1152, first bracketed insertion added,
quoting Rest.2d Torts, § 768, com. i.)
Ixchel argues that we should limit Reeves to the
employment context. It cites the employment-specific policy
concerns animating Reeves as well as appellate decisions that
have limited Reeves’s holding to suits involving a former
employer suing a competitor for hiring away a former employee.
(See Redfearn v. Trader Joe’s Co. (2018) 20 Cal. App. 5th 989,
1003; Popescu v. Apple Inc. (2016) 1 Cal. App. 5th 39, 62.) Biogen
contends that the rationale in Reeves applies beyond the
employment context to intentional interference with contract
whenever a “defendant induces a new partner to terminate an
at-will agreement.”
It is true that our holding in Reeves relied partly on
reasoning specific to the employment context. But the broader
logic underlying that decision is persuasive with respect to other
spheres of economic relations. The Restatement’s rationale on
which Reeves relied is not limited to employment relationships.
The Restatement explains: “One’s interest in a contract
terminable at will is primarily an interest in future relations
between the parties, and he has no legal assurance of them. For
this reason, an interference with this interest is closely
analogous to interference with prospective contractual
relations. [Citation.] If the defendant was a competitor
regarding the business involved in the contract, his interference
with the contract may be not improper.” (Rest.2d Torts, § 766,
com. g; accord, id., § 768, com. i.)
A number of states have adopted this section of the
Restatement to require proof of independent wrongfulness in a
claim for interference with at-will contractual relations. (See
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Nostrame v. Santiago (2013) 213 N.J. 109, 121; Macklin v.
Robert Logan Associates (1994) 334 Md. 287, 304; Duggin v.
Adams (1987) 234 Va. 221, 226–227; Memorial Gardens, Inc. v.
Olympian Sales & Management Consultants, Inc. (Colo. 1984)
690 P.2d 207, 211; Guard-Life Corp. v. S. Parker Hardware Mfg.
Corp. (1980) 50 N.Y.2d 183, 191.) We have often aligned the
elements of both economic relations torts with the Restatement
(see Korea Supply, supra, 29 Cal.4th at p. 1156 [intentional
interference with contract does not contain a specific intent
requirement]; Quelimane, supra, 19 Cal.4th at p. 56
[interference with prospective economic advantage does not
contain a specific intent requirement]; Della Penna, supra, 11
Cal.4th at p. 378 [interference with prospective economic
advantage requires proof of a “ ‘wrongful act’ ”]), and we find the
Restatement persuasive here as well.
The purpose of the independent wrongfulness
requirement in economic interference torts is to “balance
between providing a remedy for predatory economic behavior
and keeping legitimate business competition outside litigative
bounds.” (Della Penna, supra, 11 Cal.4th at p. 378; see
Buckaloo, supra, 14 Cal.3d at p. 828; Imperial Ice, supra, 18
Cal.2d at p. 36.) Where economic relationships have solidified
into binding future promises, the stability of the contractual
relationship takes precedence over business competition. While
“[o]urs is a competitive economy in which business entities vie
for economic advantage” (Buckaloo, at p. 828), that competition
must at some point result in entities making agreements and
exchanging things of value. When parties enter a contract not
terminable at will, they cement their bargained-for intentions in
accordance with the terms of that contract into the future. The
concreteness of this relationship means that contracting parties
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as well as other entities may structure their decisions, invest
resources, and take risks in reliance on it. It is precisely this
“exchange of promises resulting in such a formally cemented
economic relationship [that courts have] deemed worthy of
protection from interference by a stranger to the agreement.”
(Della Penna, at p. 392.) “Intentionally inducing or causing a
breach of an existing contract is therefore a wrong in and of
itself.” (Quelimane, supra, 19 Cal.4th at pp. 55–56.)
The same balance of interests does not apply to
prospective economic relationships. Such relationships are only
“probable” (Korea Supply, supra, 29 Cal.4th at p. 1164), and
harms resulting from a breach of such relationships are
“speculative” (Quelimane, supra, 19 Cal.4th at p. 56). Neither
party to such a relationship has a legal claim to continued
relations with the other. Because the expectation of future
relations is weaker and the interest in maintaining open
competition is stronger, “the law usually takes care to draw lines
of legal liability in a way that maximizes areas of competition
free of legal penalties.” (Della Penna, supra, 11 Cal.4th at
p. 392.) In circumstances where parties have no legal assurance
of future relations, “the rewards and risks of competition are
dominant.” (Ibid.)
Like parties to a prospective economic relationship,
parties to at-will contracts have no legal assurance of future
economic relations. (See Beckwith v. Dahl (2012) 205
Cal. App. 4th 1039, 1053 [at-will contracts provide “only an
expectation of future contractual relations”].) An at-will
contract may be terminated, by its terms, at the prerogative of
a single party, whether it is because that party found a better
offer from a competitor, because the party decided not to
continue doing business, or for some other reason. And the other
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party has no legal claim to the continuation of the relationship.
The contracting parties presumably bargained for these terms,
aware of the risk that the relationship may be terminated at any
time. At-will contractual relations are thus not cemented in the
way that a contract not terminable at will is. 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.
Indeed, sometimes the only difference between an at-will
contract and a prospective economic relationship is the formality
of how a contractual relationship is structured. For example, a
buyer who regularly renews a one-time contract to purchase
goods has a prospective economic relationship with the vendor
with respect to future purchases of those goods. (See Shida v.
Japan Food Corp. (1967) 251 Cal. App. 2d 864, 866 [interference
with yearly renewal of contract treated as interference with
prospective economic advantage].) But that same buyer would
have an at-will contractual relationship if it entered into a single
contract with the vendor to provide those goods at regular
intervals terminable at the buyer’s will. In both, the vendor has
no legal assurance of the buyer’s continued purchases.
We recognize that in an at-will contract, the parties’
expectations are of continuity unless one party terminates the
contract, whereas the expectations of a continued relationship
are more speculative where no contract exists. But from the
perspective of third parties, there is no legal basis in either case
to expect the continuity of the relationship or to make decisions
in reliance on the relationship. We are not convinced that any
difference in expectations between the parties requires a
different pleading standard between interference with
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Opinion of the Court by Liu, J.
prospective economic advantage and interference with at-will
contractual relations.
Finally, allowing interference with at-will contract claims
without requiring independent wrongfulness risks chilling
legitimate business competition. An actionable claim for
interference with contractual relations does not require that the
defendant have the specific intent to interfere with a contract.
A plaintiff states a claim so long as it alleges that the defendant
knew interference was “ ‘certain or substantially certain to occur
as a result of [defendant’s] action.’ ” (Quelimane, supra, 19
Cal.4th at p. 56.) Without an independent wrongfulness
requirement, a competitor’s good faith offer that causes a
business to withdraw from an at-will contract could trigger
liability or at least subject the competitor to costly litigation. In
fact, even if a business in an at-will contract solicits offers on its
own initiative, a third party that submits an offer could face
liability if it knew that acceptance of the offer would cause the
soliciting business to withdraw from its existing contract.
Allowing disappointed competitors to state claims for
interference with at-will contracts without alleging
independently wrongful conduct may expose routine and
legitimate business competition to litigation.
We therefore hold that to state a claim for interference
with an at-will contract by a third party, the plaintiff must
allege that the defendant engaged in an independently wrongful
act. We disapprove Redfearn v. Trader Joe’s Co., supra, 20
Cal. App. 5th 989 and Popescu v. Apple Inc., supra, 1 Cal. App. 5th
39 to the extent they are inconsistent with this opinion.
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III.
Ixchel alleges that the wrongful act Biogen committed was
including section 2.13 in the Forward-Biogen Agreement in
violation of Business and Professions Code section 16600.
Section 2.13 of the Forward-Biogen Agreement required
Forward to terminate its Collaboration Agreement with Ixchel
and barred Forward from engaging in business with any other
entity to develop neurological treatments containing DMF.
Ixchel claims that this contractual provision is an unlawful
restraint of trade in violation of 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 Ninth Circuit certified the following question to us:
“Does section 16600 of the California Business and Professions
Code void a contract by which a business is restrained from
engaging in a lawful trade or business with another business?”
(Ixchel, supra, 930 F.3d at p. 1033.) That question appears to
ask this court to decide whether section 16600 applies to
contracts in the business context. The Ninth Circuit suggested
that “the California Supreme Court . . . [has not] considered
whether section 16600 extends beyond the employment setting
entirely to contractual restraints on business operations.”
(Ixchel, at p. 1036.)
Ixchel asks us to decide that question only. But the
primary dispute between Ixchel and Biogen in the Ninth Circuit
was not whether section 16600 applies to business contracts. At
oral argument in the Ninth Circuit, Biogen acknowledged that
it does. Instead, the dispute was whether contractual restraints
on business operations or commercial dealings are subject to a
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Opinion of the Court by Liu, J.
reasonableness standard under section 16600. Moreover, the
proper standard governing alleged restraints of trade under
section 16600 presents an important question of California law,
potentially affecting all contracts in California that in some way
restrain a contracting party from engaging in a profession,
trade, or business.
To provide the Ninth Circuit sufficient guidance to resolve
the contentions of the parties and to answer an important
question of California law, we address not only whether section
16600 applies to contracts in the business context (the parties
agree that it does) but also the proper standard — in particular,
whether a rule of reason applies — to evaluate whether
restraints on trade in business contracts are void under section
16600. (See Cal. Rules of Court, rule 8.548(f)(5); Verdugo v.
Target Corp. (2014) 59 Cal. 4th 312, 317, fn. 1 [restating certified
question “to conform to the facts at issue in the underlying
action”].)
Ixchel argues that deciding this question is premature
because the case is at the pleading stage and the parties have
not had the opportunity to discover facts that would show
whether section 2.13 of the Forward-Biogen Agreement was
unreasonable. But in deciding whether section 16600 includes
a reasonableness requirement in the context of business
contracts, we are deciding a pure question of law. The question
at this stage is whether Ixchel must plead and prove
unreasonableness, not whether it has actually done so. Whether
the parties have put forth facts demonstrating
unreasonableness is immaterial to the antecedent question of
whether a reasonableness requirement applies here.
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Opinion of the Court by Liu, J.
A.
As an initial matter, we agree with the parties that section
16600 applies to business contracts. The chapter of the Business
and Professions Code containing section 16600 excepts from
section 16600’s coverage certain noncompetition agreements
upon the sale of goodwill or of ownership interest in a business
(§ 16601) and upon the dissolution or dissociation from a
partnership (§ 16602) or limited liability corporation
(§ 16602.5). If section 16600 did not apply to business contracts,
these exceptions would be unnecessary. Indeed, California
courts have frequently analyzed whether contracts involving
business dealings are void under section 16600. (See, e.g.,
Centeno v. Roseville Community Hospital (1979) 107 Cal. App. 3d
62, 68 (Centeno); Dayton Time Lock Service, Inc. v. Silent
Watchman Corp. (1975) 52 Cal. App. 3d 1, 6 (Dayton Time Lock);
Great Western Distillery Products v. John A. Wathen Distillery
Co. (1937) 10 Cal. 2d 442, 445–446 (Great Western Distillery)
[applying Civ. Code, former § 1673, the predecessor statute to
Bus. & Prof. Code, § 16600]; Getz Bros. & Co. v. Federal Salt Co.
(1905) 147 Cal. 115, 118–119 (Getz Brothers) [same].)
The parties do not contend that any of the exceptions to
section 16600 apply here. Instead, they disagree on the
applicable standard to examine the validity of section 2.13 of the
Forward-Biogen Agreement under section 16600. Biogen
argues that the rule of reason used to analyze antitrust
violations under the Cartwright Act (§ 16700 et seq.) should also
govern restraints on business dealings under section 16600.
That inquiry 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
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Opinion of the Court by Liu, J.
reasons for its adoption.’ ” (In re Cipro Cases I & II (2015) 61
Cal. 4th 116, 146 (Cipro).) Ixchel counters that section 16600 is
not subject to a reasonableness standard; it urges the court to
extend Edwards v. Arthur Andersen LLP (2008) 44 Cal. 4th 937
(Edwards) and hold that any contract in restraint of trade is per
se void.
The language of section 16600 is broad on its face: “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.” 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. But in reading statutes,
we consider the text in the context of “the statutory framework
as a whole in order to determine its scope and purpose.”
(Coalition of Concerned Communities, Inc. v. City of Los Angeles
(2004) 34 Cal. 4th 733, 737.) And we must consider the statute
in light of precedent construing it. (See Coker v. JPMorgan
Chase Bank, N.A. (2016) 62 Cal. 4th 667, 676.)
In context, section 16600 is best read not to render void
per se all contractual restraints on business dealings, but rather
to subject such restraints to a rule of reason. Section 16600 was
initially enacted in 1872 as section 1673 of the Civil Code using
substantively identical language. (Civ. Code, former § 1673,
repealed by Stats. 1941, ch. 526, § 2, p. 1847 and enacted as
Bus. & Prof. Code, § 16600 by Stats. 1941, ch. 526, § 1, p. 1834.)
Our decisions interpreting Civil Code former section 1673 thus
inform the interpretation of section 16600. (See People v.
Bonnetta (2009) 46 Cal. 4th 143, 151 [“[W]hen a statute has been
construed by the courts and the Legislature thereafter reenacts
the statute without changing the interpreted language, a
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IXCHEL PHARMA, LLC v. BIOGEN, INC.
Opinion of the Court by Liu, J.
presumption is raised that the Legislature was aware of and has
acquiesced in that construction.”].) And Civil Code former
section 1673 was enacted against the backdrop of well-
established common law prohibitions against restraints of
trade. (See Vulcan Powder Co. v. Hercules Powder Co. (1892) 96
Cal. 510, 513 (Vulcan Powder).) As explained below, this court
has interpreted section 16600 and its Civil Code predecessor on
numerous occasions, and we have declined to categorically
invalidate all agreements limiting the freedom to engage in
trade. Over time, our case law has 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, while invalidating other contractual
restraints on businesses operations and commercial dealings
only if such restraints were unreasonable.
We must also consider section 16600’s “language in its
‘broader statutory context’ and, where possible, harmonize that
language with related provisions by interpreting them in a
consistent fashion.” (ZB, N.A. v. Superior Court (2019) 8 Cal. 5th
175, 189 (ZB).) Section 16600 sits alongside another antitrust
statute, the Cartwright Act (§ 16700 et seq.), which we have
construed to permit reasonable restraints of trade. (Cipro,
supra, 61 Cal.4th at p. 137.) This statutory context further
supports the conclusion that a rule of reason applies to
contractual restraints on business operations and commercial
dealings under section 16600.
B.
We turn first to the statute’s history and our precedent.
“Under the common law, . . . contractual restraints on the
practice of a profession, business, or trade, were considered
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Opinion of the Court by Liu, J.
valid, as long as they were reasonably imposed.” (Edwards,
supra, 44 Cal.4th at p. 945; accord, Wright v. Ryder (1868) 36
Cal. 342, 357 (Wright).) As noted, the Legislature in 1872
adopted Civil Code former section 1673, which provided: “Every
contract by which any one is restrained from exercising a lawful
profession, trade, or business of any kind, otherwise than is
provided by the next two sections, is to that extent void.” The
next two sections excepted certain contractual restraints upon
the sale of goodwill in a business (Civ. Code, former § 1674) or
upon dissolution of a partnership (Civ. Code, former § 1675).
The Code Commissioners’ note stated that Civil Code
former section 1673 was enacted in response to certain “modern
decisions” that allowed contractual restraints to a “dangerous
extent.” (Code commrs., note foll. 1 Ann. Civ. Code, § 1673 (1st
ed. 1872, Haymond & Burch, commrs.-annotators) p. 502
(Commissioners’ Note).) Specifically, it disapproved of two cases
upholding agreements not to compete in the operation of boats.
(Id. at pp. 502–503, citing Dunlop v. Gregory (1851) 10 N.Y. 241,
California Steam Nav. Co. v. Wright (1856) 6 Cal. 258.) But the
Commissioners’ Note did not go so far as to say that Civil Code
former section 1673 categorically replaced the common law
standard of reasonableness with a per se rule. In fact, the note
stated that the statute’s limitation on contractual restraints was
consistent with two decisions adopting the common law
reasonableness standard. (Commissioners’ Note, at p. 503,
citing Wright, supra, 36 Cal. 342, More v. Bonnet (1870) 40 Cal.
251 (More).) And one of those decisions expressly upheld a
noncompetition agreement “because the limits [were] not
unreasonable.” (More, at p. 254.) Thus, the Commissioners’
Note suggests that Civil Code former section 1673, in
prohibiting agreements that restrained trade to a “dangerous
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Opinion of the Court by Liu, J.
extent,” was not intended to invalidate all restraints on trade.
(Commissioners’ Note, at p. 502; see People v. Chun (2009) 45
Cal. 4th 1172, 1187 [Commissioners’ notes are “entitled to
substantial weight”].)
Nor did this court’s decisions interpreting Civil Code
former section 1673 adopt a per se rule invalidating all contracts
that limit business dealings. Our cases initially offered little
clarity on the appropriate standard to evaluate agreements
restraining trade. In our first reasoned opinion interpreting the
statute, we invalidated an agreement between manufacturers of
dynamite to fix prices and limit output. (Vulcan Powder, supra,
96 Cal. at pp. 514–515.) We noted that the common law rule of
reason “led to much perplexing legislation” and had been
replaced by Civil Code former section 1673, but we did not
explain what standard the new statute imposed. (Vulcan
Powder, at p. 513.) We simply said that the agreement at issue
was “clearly in restraint of trade and against public policy; and
this conclusion is too obvious to need argument, authorities, or
elucidation.” (Id. at p. 515.) Our reasoning did not explain
whether we found the agreement per se invalid or invalid by
some other standard. (See also Schwalm v. Holmes (1875) 49
Cal. 665, 669 [holding that exclusive sales contract was “not
illegal, as being in restraint of trade” in two-sentence disposition
without further analysis].)
Over time, however, two discernible categories of holdings
emerged in our case law: Agreements not to compete after the
termination of employment or the sale of interest in a business
were invalid without regard to their reasonableness. And
agreements limiting commercial dealings and business
operations were generally invalid if they were unreasonable.
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Opinion of the Court by Liu, J.
As to agreements not to compete after termination of
employment or the sale of interest in a business, an early case
was Merchants’ Ad-Sign Co. v. Sterling (1899) 124 Cal. 429
(Merchants’ Ad-Sign), which invalidated an agreement not to
compete as part of the sale of stock in an advertising company.
(Id. at p. 434.) Our reasoning in that case rested on the plain
language of the statute, and we did not examine whether the
restraint was reasonable. We emphasized that “[t]he language
of the code is unmistakable” and rejected the applicability of
cases adopting a more “liberal construction” of the statute.
(Ibid.) Because the noncompetition agreement prevented one
party from engaging in the business of bill posting after he sold
his interest in the advertising business to the other party, it
violated the plain language of Civil Code former section 1673
and was therefore void. (Merchants Ad-Sign, at p. 434.)
Likewise, in Chamberlain v. Augustine (1916) 172 Cal. 285
(Chamberlain), we invalidated an agreement imposing a
financial penalty for competition, which was included as part of
the sale of stock in a foundry company. (Id. at p. 288.) The
$5,000 penalty was a sufficient deterrent to competition to
constitute a restraint of trade under Civil Code former section
1673. Pointing to “the very language of [former] section 1673,”
we determined that “[t]he statute makes no exception in favor
of contracts only in partial restraint of trade.” (Chamberlain, at
pp. 288, 289; accord, Gregory v. Spieker (1895) 110 Cal. 150, 154
[agreement not to compete in a particular county as part of the
sale of a liquor business “transgressed the statute”].)
It is true that these decisions spoke in broad terms,
suggesting that restraints on trade in all contexts were void per
se. (See Merchants’ Ad-Sign, supra, 124 Cal. at p. 434 [“[t]he
language of the code is unmistakable”]; Chamberlain, supra,
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Opinion of the Court by Liu, J.
172 Cal. at pp. 288–289 [“the very language of [former] section
1673 . . . makes no exception in favor of contracts only in partial
restraint of trade”].) But “[i]t is axiomatic that an unnecessarily
broad holding is ‘informed and limited by the fact[s]’ of the case in
which it is articulated.” (Covenant Care, Inc. v. Superior Court
(2004) 32 Cal. 4th 771, 790, fn. 11; see People v. Mendoza (2000) 23
Cal. 4th 896, 915 [“ ‘we must view with caution seemingly
categorical directives not essential to earlier decisions’ ”].) The
contracts at issue in these cases involved agreements not to
compete upon terminating employment or selling a business,
and we understand their holdings to be informed and limited by
the factual context presented.
By contrast, we did not interpret Civil Code former section
1673 so literally with regard to contractual restraints on
business operations and commercial dealings. We generally
declared agreements in this context valid if the restraints they
imposed were reasonable. In Grogan v. Chaffee (1909) 156 Cal.
611 (Grogan), we upheld a contract between a manufacturer and
purchaser of olive oil requiring the purchaser to resell the
product at a certain price. We interpreted Civil Code former
section 1673 to contain a reasonableness requirement: “It is not
every limitation on absolute freedom of dealing that is
prohibited. . . . ‘The question is whether, under the particular
circumstances of the case, and the nature of the particular
contract involved in it, the contract is, or is not,
unreasonable.’ . . . [I]t must be taken to be settled that the
sections of the Civil Code, [former] sections 1673, 1674, 1675,
relating to contracts in restraint of trade are to be construed in
the light of these principles.” (Grogan, at p. 615.) The
agreement, we concluded, was a reasonable restraint because its
purpose was not to create a monopoly but to “secur[e] the
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Opinion of the Court by Liu, J.
legitimate benefits of the reputation which [the manufacturer’s]
product may have attained.” (Id. at p. 614.)
Similarly, in Associated Oil Co. v. Myers (1933) 217 Cal.
297 (Associated Oil), we upheld a contract between the lessor of
an automobile service station and a lessee of the station, which
included an agreement that the lessor would only sell the
lessee’s petroleum products. Citing the reasonableness
standard in Grogan, we concluded that the lessee “had the right
to decline to sell any but its own product upon the leased
property. We can see nothing unreasonable in requiring the
[lessor] to do the same thing. The public interest is not involved
and competition is not stifled. In no way does the agreement
attempt to limit production or fix the price of the commodity
involved.” (Associated Oil, at p. 306.)
Some of our cases invalidating contractual restraints in
the business context did not expressly apply a reasonableness
standard. (See Morey v. Paladini (1922) 187 Cal. 727 (Morey);
Pacific Wharf & Storage Co. v. Standard Am. Dredging Co.
(1920) 184 Cal. 21 (Pacific Wharf); Getz Brothers, supra, 147 Cal.
115; Vulcan Powder, supra, 96 Cal. 510.) But these decisions
did not invalidate contractual provisions merely because they
restrained trade in some way. Instead, we examined the
purpose of the contracts at issue, much as we would do in a
reasonableness inquiry, and we found the contracts to be invalid
when their purpose was to restrain trade by creating a
monopoly, restricting supply, or fixing prices. (See Cipro, supra,
61 Cal.4th at p. 146 [recounting that the rule of reason asks
“ ‘whether the challenged conduct promotes or suppresses
competition’ ”].)
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In Morey, for example, we invalidated an agreement
requiring a vendor to sell lobsters exclusively to a purchaser in
a certain geographic area. (Morey, supra, 187 Cal. at pp. 732,
736.) We emphasized that the overall purpose of the agreement
was to “secure to [the purchaser], so far as possible, a monopoly
of the lobster business in the selected territory.” (Id. at p. 738;
see id. at p. 736 [contract had “the purpose of putting it into the
power of the [purchaser] to control the lobster market”]; id. at
p. 737 [contract “intended to effect a virtual monopoly of the
lobster trade”].) Our reasoning was more concerned with the
potential monopoly effect of the agreement than with whether
its terms limited trade per se.
Our other decisions in the business context followed
similar logic. (See Endicott v. Rosenthal (1932) 216 Cal. 721,
725 (Endicott) [invalidating an agreement between clothes
dyeing businesses to form an association that set industry-wide
prices and prevented its members from soliciting each other’s
customers because “the two main purposes for which this
association was formed were to increase prices and eliminate
competition”]; Getz Brothers, supra, 147 Cal. at p. 119
[invalidating a contract by two companies to exclusively buy and
sell salt from each other and to discourage salt shipments by
third parties because it had a “direct and primary purpose” to
restrain trade]; Santa Clara Val. M. & L. Co. v. Hayes (1888) 76
Cal. 387, 392 [invalidating exclusive dealing agreement with an
“object and view to suppress the supply and enhance the price
of lumber in four counties of the state”]; but see Pacific Wharf,
supra, 184 Cal. at p. 23 [invalidating agreement forbidding
seller of harbor dredge to compete in the dredging business
because “[t]he language of [Civil Code former section 1673] is
clear and unambiguous”].)
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Our last decision to interpret Civil Code former section
1673 in the context of business dealings made clear that a rule
of reason applies in this context. In Great Western Distillery,
supra, 10 Cal. 2d 442, we upheld a contract in which a buyer
agreed to purchase whiskey exclusively from a distillery in
exchange for being the sole merchant of that whiskey in
California. We summarized the law as follows: “ ‘Statutes are
interpreted in the light of reason and common sense, and it may
be stated as a general rule that courts will not hold to be in
restraint of trade a contract between individuals, the main
purpose and effect of which are to promote and increase business
in the line affected, merely because its operations might possibly
in some theoretical way incidentally and indirectly restrict trade
in such line.’ ” (Id. at p. 446.) Reviewing the cases upholding
and invalidating contractual agreements, we explained that this
general rule was consistent with each of them. (Id. at pp. 447–
449, citing Associated Oil, supra, 217 Cal. at p. 304, Grogan,
supra, 156 Cal. at p. 615, Morey, supra, 187 Cal. 727, Endicott,
supra, 216 Cal. 721.) Applying this rule to the agreement at
issue, we upheld the agreement because it “disclose[d] merely
an intent to provide for the promotion of the business of the
defendant” and had the effect of “develop[ing] a market for the
sale of the commodity within the limited territory.” (Great
Western Distillery, at pp. 449, 450.)
Thus, like previous decisions evaluating business
contracts, Great Western Distillery rejected a literal reading of
Civil Code former section 1673 in favor of a rule of
reasonableness: Contracts with the purpose and effect of
promoting trade and competition are valid even if their terms
incidentally restrain commercial freedom in some way. After
Great Western Distillery, the “trend of authorities [was] to
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Opinion of the Court by Liu, J.
construe such statutes as [former] section 1673 of the Civil Code,
and contracts between individuals intended to promote rather
than to restrict a particular business, ‘[i]n the light of reason
and common sense’ so as to uphold reasonable limited
restrictions.” (Keating v. Preston (1940) 42 Cal. App. 2d 110, 123,
quoting Great Western Distillery, supra, 10 Cal.2d at p. 446.)
To summarize, our decisions interpreting Civil Code
former section 1673, the predecessor to Business and
Professions Code section 16600, gradually evolved to evaluate
contractual restraints on business operations and commercial
dealings based on a reasonableness standard. In this respect,
Civil Code former section 1673 did not depart from the common
law rule. (See Centeno, supra, 107 Cal.App.3d at p. 68
[observing in a case involving an exclusive medical services
contract that “[s]ection 16600 is basically a codification of the
common law relating to contracts in restraint of trade”].) But
we often interpreted the statute more strictly when it came to
agreements not to compete after the termination of employment
or the sale of interest in a business. Thus, instead of adopting a
per se rule that all contractual limitations on the freedom to
engage in commercial dealings are invalid, our precedent
interpreting Civil Code former section 1673 was more nuanced.
In 1941, the Legislature repealed Civil Code former
section 1673 and reenacted it as Business and Professions Code
section 16600 using substantively identical language.
(Stats. 1941, ch. 526, § 1, p. 1834.) In doing so, the Legislature
is presumed to have incorporated this court’s construction of
Civil Code former section 1673 into section 16600. (People v.
Bonnetta, supra, 46 Cal.4th at p. 151.) Since then, this court has
had occasion to construe section 16600 only in relation to
contracts restraining competition after the termination of
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Opinion of the Court by Liu, J.
employment or the sale of interest in a business. (See Edwards,
supra, 44 Cal.4th at p. 950 [termination of employment];
Swenson v. File (1970) 3 Cal. 3d 389, 395 (Swenson) [termination
of partnership]; Muggill v. Reuben H. Donnelley Corp. (1965) 62
Cal. 2d 239, 242–243 (Muggill) [termination of employment];
Martinez v. Martinez (1953) 41 Cal. 2d 704, 706 (Martinez) [sale
of business].) These cases have followed our earlier decisions by
strictly construing the prohibition on restraint of trade in such
contexts.
In Muggill, we invalidated a noncompetition agreement
between a retiree and his former employer when the former
employer ceased pension payments after the employee went to
work for a competitor. (Muggill, supra, 62 Cal.2d at p. 240.) We
said that the “settled interpretation” of section 16600 created an
unambiguous rule: “This section invalidates provisions in
employment contracts prohibiting an employee from working for
a competitor after completion of his employment . . . .” (Muggill,
at pp. 243, 242). Comparing the facts to those in Chamberlain,
a pre-reenactment decision involving the sale of business stock
by a former employee, we stated that “[s]imilarly, in this case,
the provision forfeiting plaintiff’s pension rights if he works for
a competitor restrains him from engaging in a lawful business
and is therefore void.” (Id. at p. 243.)
Even when we have upheld portions of noncompetition
agreements under statutory exceptions to section 16600, we
have recognized that any portion of the agreement restraining
competition not within an exception is per se invalid. For
example, we said in Swenson that a noncompetition agreement
between a former partner of an accounting firm and his firm
would fall outside the section 16602 exception and thus be
invalid “[o]n its face” if “it forb[ade him] from serving former
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partnership clients without regard to territorial limits.”
(Swenson, supra, 3 Cal.3d at p. 395; see § 16602, subd. (a) [“Any
partner may, upon [dissolution or disassociation from the
partnership], agree that he or she will not carry on a similar
business within a specified geographic area where the
partnership business has been transacted, so long as any other
member of the partnership . . . carries on a like business
therein.”]; see also Martinez, supra, 41 Cal.2d at p. 706 [trial
court “properly limited the duration of the covenant [not to
compete] by providing that it should continue so long as plaintiff
. . . should carry on a like business in San Diego County, that
being the period permitted by sections 16600 and 16601 of the
Business and Professions Code”].)
Our most recent section 16600 decision broke no new
ground in holding that a noncompetition agreement between a
tax manager and his employer was per se invalid. (Edwards,
supra, 44 Cal.4th at p. 955.) The plaintiff in Edwards signed an
agreement with his employer Arthur Andersen, which
prohibited him from working for or soliciting certain clients of
the firm for limited periods following his termination of
employment. (Id. at p. 942.) When HSBC acquired Arthur
Andersen, it offered to employ Edwards on the condition that he
sign a “ ‘Termination of Non-compete Agreement,’ ” which would
effect a general release of claims against Arthur Andersen and,
in turn, induce Arthur Andersen to release Edwards from the
noncompetition agreement he had previously signed. (Id. at
p. 943.) When Edwards refused to sign the termination of
noncompete agreement, Arthur Andersen fired him, and HSBC
withdrew its offer to employ him. (Ibid.) Edwards sued Arthur
Andersen for interference with prospective economic advantage,
claiming that the interference was wrongful because the
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Opinion of the Court by Liu, J.
underlying noncompetition agreement he signed was invalid
under section 16600. (Edwards, at p. 944.)
We agreed, holding that “an employer cannot by contract
restrain a former employee from engaging in his or her
profession, trade, or business unless the agreement falls within
one of the exceptions to the rule.” (Edwards, supra, 44 Cal.4th
at pp. 946–947.) We said that section 16600 and its predecessor
statute had rejected the common law “ ‘rule of reasonableness’ ”
for a “legislative policy in favor of open competition and
employee mobility.” (Edwards, at pp. 945, 946.) Stressing the
statute’s plain meaning, we rejected the argument that section
16600 only voids restraints that entirely prohibit an employee
from engaging in a profession and not less restrictive limitations
that are reasonable. (Edwards, at pp. 946–947.) Similarly, we
rejected the Ninth Circuit’s “narrow restraint” construction of
section 16600, which excepted agreements limiting only a
narrow part of a party’s business, trade, or profession.
(Edwards, at pp. 948–950.)
Ixchel argues that Edwards conclusively held that section
16600 invalidates all restraints on trade for all contracts, no
matter how reasonable. It relies on our conclusion that
“[s]ection 16600 is unambiguous, and if the Legislature intended
the statute to apply only to restraints that were unreasonable
or overbroad, it could have included language to that effect.”
(Edwards, supra, 44 Cal.4th at p. 950.) But Ixchel reads too
much into Edwards. “It is axiomatic that language in a judicial
opinion is to be understood in accordance with the facts and
issues before the court.” (Chevron U.S.A., Inc. v. Workers’ Comp.
Appeals Bd. (1999) 19 Cal. 4th 1182, 1195.) The plaintiff in
Edwards sought to invalidate a noncompetition clause in his
employment agreement, and we “limited our review” to whether
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IXCHEL PHARMA, LLC v. BIOGEN, INC.
Opinion of the Court by Liu, J.
“Business and Professions Code section 16600 prohibit[s]
employee noncompetition agreements . . . .” (Edwards, at
p. 941, fn. omitted.) We held that “section 16600 prohibits
employee noncompetition agreements unless the agreement
falls within a statutory exception . . . .” (Id. at p. 942.) The
question of whether noncompetition agreements outside the
employment context are per se invalid was not presented in
Edwards.
Moreover, the rationale in Edwards focused on policy
considerations specific to employment mobility and competition:
“The law protects Californians and ensures ‘that every citizen
shall retain the right to pursue any lawful employment and
enterprise of their choice.’ [Citation.] It protects ‘the important
legal right of persons to engage in businesses and occupations of
their choosing.’ ” (Edwards, supra, 44 Cal.4th at p. 946; see ibid.
[the statute “evinces a settled legislative policy in favor of open
competition and employee mobility”].) And we cited cases
exclusively from the employment context in our reasoning. (Id.
at pp. 945–948, citing Bosley Medical Group v. Abramson (1984)
161 Cal. App. 3d 284, D’sa v. Playhut, Inc. (2000) 85 Cal. App. 4th
927, Muggill, supra, 62 Cal. 2d 239, Chamberlain, supra, 172
Cal. 285, Armendariz v. Foundation Health Psychcare Services,
Inc. (2000) 24 Cal. 4th 83, South Bay Radiology Medical
Associates v. Asher (1990) 220 Cal. App. 3d 1074, and Vacco
Industries, Inc. v. Van Den Berg (1992) 5 Cal. App. 4th 34.)
Finally, the holding and language in Edwards simply
confirmed our long line of decisions interpreting section 16600
strictly in the context of noncompetition agreements following
the termination of employment or the sale of interest in a
business. Nothing about Edwards indicates a departure from
that precedent to also invalidate reasonable contractual
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IXCHEL PHARMA, LLC v. BIOGEN, INC.
Opinion of the Court by Liu, J.
limitations on business operations and commercial dealings.
Nor did Edwards address our substantial body of law permitting
such reasonable limitations.
In sum, 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. We do not disturb the
holding in Edwards and other decisions strictly interpreting
section 16600 to invalidate noncompetition agreements
following the termination of employment or sale of interest in a
business. But those cases do not call into doubt the applicability
of a reasonableness standard to contractual restraints on
business operations and commercial dealings.
C.
We also consider section 16600 in its broader statutory
context and seek to harmonize its language with related
provisions. (ZB, supra, 8 Cal.5th at p. 189.) Section 16600
appears alongside the Cartwright Act (§ 16700 et seq.), which
also employs broadly worded language to prohibit agreements
in restraint of trade. Section 16722 provides: “Any contract or
agreement in violation of this chapter is absolutely void and is
not enforceable at law or in equity.” And section 16726 provides:
“Except as provided in this chapter, every trust is unlawful,
against public policy and void.” But we have not interpreted
these provisions in a sweeping fashion. “Though the Cartwright
Act is written in absolute terms, in practice not every agreement
within the four corners of its prohibitions has been deemed
illegal.” (Cipro, supra, 61 Cal.4th at p. 136.) The provisions of
the Cartwright Act “draw upon the common law prohibition
against restraints of trade.” (Cipro, at p. 136; accord, Speegle,
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IXCHEL PHARMA, LLC v. BIOGEN, INC.
Opinion of the Court by Liu, J.
supra, 29 Cal.2d at p. 44.) Accordingly, this court has taken
direction from the common law in establishing a reasonableness
standard for determining whether an agreement violates the
Cartwright Act. (Cipro, at pp. 137, 146.) That standard asks
whether an agreement “ ‘promotes or suppresses competition’ ”
by considering the “ ‘circumstances, details, and logic of a
restraint.’ ” (Id. at pp. 146, 147.)
Similarly, Civil Code former section 1673 was enacted
against the backdrop of a common law standard prohibiting
unreasonable restraints of trade. Our interpretation of that
statute and section 16600 did not depart from the common law
reasonableness standard for contractual restraints on business
operations and commercial dealings. Section 16600 should
therefore be read in accordance with the Cartwright Act to
incorporate the same rule of reason in such cases. Indeed, we
have occasionally relied on antitrust decisions when
interpreting Civil Code former section 1673 (see Great Western
Distillery, supra, 10 Cal.2d at pp. 448–449, citing United States
v. American Tobacco Co. (1911) 221 U.S. 106, 179), and Courts
of Appeal have evaluated section 16600 and antitrust claims
together under a reasonableness standard (see Dayton Time
Lock, supra, 52 Cal.App.3d at p. 6; Lafortune v. Ebie (1972) 26
Cal. App. 3d 72, 74–75).
Amicus curiae Beckman Coulter, Inc. argues that Cianci
v. Superior Court (1985) 40 Cal. 3d 903 (Cianci) rejected the use
of the Cartwright Act as an aid to construing section 16600.
Cianci held that the Cartwright Act applied to the medical
profession. In doing so, we overturned a previous decision that
reasoned that because section 16600 includes the word
“profession” in its scope, the absence of the same word in the
Cartwright Act implied that it was not intended to apply to
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IXCHEL PHARMA, LLC v. BIOGEN, INC.
Opinion of the Court by Liu, J.
professions. (Cianci, at pp. 921–922, citing Willis v. Santa Ana
etc. Hospital Assn. (1962) 58 Cal. 2d 806, 809.) We concluded
that because section 16600 and the Cartwright Act were enacted
separately and only later consolidated in the Business and
Professions Code, “ ‘a finding of legislative intent to exclude the
professions from the Cartwright Act, based upon nothing more
than language differences between the two code sections,
exceeds the limits of plausible inference.’ ” (Cianci, at p. 922.)
But Cianci’s focus on a specific textual difference between the
two statutes does not cast doubt on the broader point here: The
similarities between the two statutes stretch beyond their
language. They share a statutory purpose and doctrinal
heritage in common law prohibitions on restraints of trade.
They should therefore be interpreted together.
D.
Finally, we are 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. “Every agreement concerning trade . . . restrains.”
(Chicago Board of Trade v. United States (1918) 246 U.S. 231,
238.) In certain circumstances, contractual limitations on the
freedom to engage in commercial dealings can promote
competition. Businesses engaged in commerce routinely employ
legitimate partnership and exclusive dealing arrangements,
which limit the parties’ freedom to engage in commerce with
third parties. Such arrangements can help businesses leverage
complementary capabilities, ensure stability in supply or
demand, and protect their research, development, and
marketing efforts from being exploited by contractual partners.
38
IXCHEL PHARMA, LLC v. BIOGEN, INC.
Opinion of the Court by Liu, J.
These arrangements can have procompetitive effects since
they “enable long-term planning on the basis of known costs,”
“give protection against price fluctuations, and — of particular
advantage to a newcomer to the field to whom it is important to
know what capital expenditures are justified — offer the
possibility of a predictable market.” (Standard Oil Co. of
California v. United States (1949) 337 U.S. 293, 306–307; see
also Sterling Merchandising, Inc. v. Nestle, S.A. (1st Cir. 2011)
656 F.3d 112, 123 [“exclusive dealing agreements ‘can achieve
legitimate economic benefits (reduced cost, stable long-term
supply, predictable prices)’ ”].) Exclusive dealing arrangements
also “may provide an incentive for the marketing of new
products and a guarantee of quality-control distribution.”
(Dayton Time Lock, supra, 52 Cal.App.3d at p. 6; accord,
Fisherman’s Wharf Bay Cruise Corp. v. Superior Court of San
Francisco (2003) 114 Cal. App. 4th 309, 335.) For example,
exclusive dealing arrangements are “often a part of a franchise
agreement or a distributorship contract.” (UAS Management,
Inc. v. Mater Misericordiae Hospital (2008) 169 Cal. App. 4th 357,
365.) In exchange for the right to sell the franchisor’s products,
franchisees often agree to purchase from a particular supplier
or operate in a particular geographic area. (See, e.g., Dayton
Time Lock, at pp. 4–5 [describing franchise agreement].) We
decline to construe section 16600 to call such arrangements into
question simply because they restrain trade in some way.
Ixchel and amicus curiae Beckman Coulter, Inc. argue
that these dire consequences are exaggerated because section
16600 only voids agreements that restrain a party from
“engaging in a lawful . . . business” and not all contractual
restraints on business activity do so. (Italics added.) But they
do not explain where the line is to be drawn. Many forms of
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IXCHEL PHARMA, LLC v. BIOGEN, INC.
Opinion of the Court by Liu, J.
exclusive dealing restrain parties from “engaging in a lawful . . .
business.” (§ 16600.) Franchise agreements often prohibit the
franchisee from selling a third party’s products; requirements
and output contracts restrain buyers and sellers respectively
from doing business with third parties. In Great Western
Distillery, we upheld a contract in which a business agreed to
purchase whiskey exclusively from another whiskey distillery in
exchange for being the sole merchant of that whiskey in
California. (Great Western Distillery, supra, 10 Cal.2d at
pp. 445–446.) Under the agreement, the purchaser was
restrained from engaging in the business of buying whiskey
from a third party, and the whiskey distiller was restrained
from doing any business with other potential whiskey buyers.
Our opinion applied a reasonableness standard in determining
whether the agreement ran afoul of Civil Code former section
1673. (Great Western Distillery, at pp. 445–446.) Similarly
here, the Forward-Biogen Agreement restrained Forward from
engaging in business with Ixchel or another third party to
develop drugs containing the active ingredient DMF. Ixchel
fails to meaningfully differentiate Great Western Distillery from
this case with respect to the applicability of a reasonableness
standard.
CONCLUSION
We hold that tortious interference with at-will contracts
requires independent wrongfulness. Because Ixchel alleges that
Biogen interfered with its at-will contract, it must allege that
Biogen did so through wrongful means.
We also hold 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
40
IXCHEL PHARMA, LLC v. BIOGEN, INC.
Opinion of the Court by Liu, J.
another business. Section 2.13 of the Biogen-Forward
Agreement is such a restraint because it prevents Forward from
collaborating with Ixchel or any other partner in the
development of treatments containing the active ingredient
DMF. Its validity under section 16600 must therefore be
evaluated based on a rule of reason. We express no view on the
validity of the agreement at issue.
LIU, J.
We Concur:
CANTIL-SAKAUYE, C. J.
CHIN, J.
CORRIGAN, J.
CUÉLLAR, J.
KRUGER, J.
GROBAN, J.
41
See next page for addresses and telephone numbers for counsel who argued in Supreme Court.
Name of Opinion Ixchel Pharma, LLC v. Biogen, Inc.
__________________________________________________________________________________
Unpublished Opinion
Original Appeal
Original Proceeding XXX on request pursuant to rule 8.548, Cal. Rules of Court
Review Granted
Rehearing Granted
__________________________________________________________________________________
Opinion No. S256927
Date Filed: August 3, 2020
__________________________________________________________________________________
Court:
County:
Judge:
__________________________________________________________________________________
Counsel:
Banys, Christopher D. Banys and Richard C. Lin for Plaintiff and Appellant.
California Appellate Law Group, Anna-Rose Mathieson, Greg Wolff; Behmer & Blackford, Timothy S.
Blackford; Williams & Connolly, John E. Schmidtlein and Carl R. Metz for Beckman Coulter, Inc., as
Amicus Curiae on behalf of Plaintiff and Appellant.
Ropes & Gray, Mark S. Popofsky, Rocky Chiu-Feng Tsai; Greines, Martin, Stein & Richland and Laurie J.
Hepler for Defendant and Respondent.
Gibson, Dunn & Crutcher, Thomas G. Hungar, Rachel S. Brass, Caeli A. Higney; LevatoLaw and Ronald
C. Cohen for California Chamber of Commerce and California Business Roundtable as Amici Curiae on
behalf of Defendant and Respondent.
Lowenstein & Weatherwax and Kenneth J. Weatherwax for Amici Scholars as Amici Curiae.
Horvitz & Levy, Robert H. Wright, Jeremy B. Rosen; Charis Lex and Sean P. Gates for Quidel Corporation
as Amicus Curiae.
Counsel who argued in Supreme Court (not intended for publication with opinion):
Christopher D. Banys
Banys, P.C.
567 Marsh Street
San Luis Obispo, CA 93401
(650) 308-8505
Carl R. Metz
Williams & Connolly LLP
725 Twelfth Street, N.W.
Washington, D.C. 20005
(202) 434-5000
Laurie J. Hepler
Greines, Martin, Stein & Richland LLP
50 California Street, Suite 1500
San Francisco, CA 94111
(415) 315-1774