Antitrust Law Daily Rule of reason applies to law invalidating contracts that restrain trade
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Tuesday, August 4, 2020

Rule of reason applies to law invalidating contracts that restrain trade

By Nicole D. Prysby, J.D.

In answering certified question in a dispute between two pharmaceutical companies, the California Supreme Court also held that tortious interference with at-will contracts requires independent wrongfulness.

The 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 and tortious interference with at-will contracts requires independent wrongfulness, the California Supreme Court decided in answering questions certified to it. The questions were certified to the court as part of litigation in which a biotechnology company, Ixchel Pharma, LLC, sued defendant Biogen, Inc. Ixchel had an agreement with Forward Pharma to develop a drug and Forward terminated their at-will agreement pursuant to a settlement with Biogen. Ixchel sued Biogen for tortiously interfering with Ixchel’s contractual and prospective economic relationship with Forward and claimed that Biogen did so in violation of California Business and Professions Code section 16600, the California law voiding most contracts by which anyone is restrained from engaging in a lawful profession, trade, or business. The district court dismissed all of Ixchel’s claims and the Ninth Circuit Court of Appeals certified questions to the California Supreme Court. The court held that because Ixchel alleged that Biogen interfered with its at-will contract, it must allege that Biogen did so through wrongful means. In addition, the validity of the Forward-Biogen contractual provision under section 16600 must be evaluated based under the rule of reason (Ixchel Pharma, LLC v. Biogen, Inc., August 3, 2020, Liu, G.).

Plaintiff Ixchel, a biotechnology company, entered into an agreement with Forward to jointly develop a drug. The drug development went according to plan until Forward decided to withdraw from the agreement, as was allowed by its terms, which permitted termination at any time with 60 days notice. Pursuant to a settlement with another biotechnology company, defendant 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. The district court dismissed the claims. Ixchel sought review and the Ninth Circuit certified two questions to the California Supreme Court: (1) Does section 16600 void a contract by which a business is restrained from engaging in a lawful trade or business with another business?; and (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?

Interference with at-will contract. The court held that stating a claim for interference with an at-will contract requires pleading an independently wrongful act. Interference with an at-will contract more closely resembles interference with prospective economic advantage (which requires an independent harm) than interference with contractual relations (which does not). Like parties to a prospective economic relationship, parties to at-will contracts have no legal assurance of future economic relations. At-will contractual relations are thus not cemented in the way that a contract not terminable at will is, the court reasoned. 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.

Allowing interference with at-will contract claims without requiring independent wrongfulness risks chilling legitimate business competition. 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.

Restraint of trade law. California’s section 16600 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 court found that it needed to address 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.

As to the proper standard to examine the validity of the Forward-Biogen contract, Biogen argued for the rule of reason, under which Ixchel claimed that any contract in restraint of trade is per se void. The court sided with Biogen and held that 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. The court previously declined to interpret section 16600 as categorically invalidating all agreements limiting the freedom to engage in trade. Decisions have strictly interpreting section 16600 to invalidate noncompetition agreements following the termination of employment or sale of interest in a business. But those cases did not call into doubt the applicability of a reasonableness standard to contractual restraints on business operations and commercial dealings, according to the court.

Statutory context further supported the conclusion that a rule of reason applies. Section 16600 appears alongside the Cartwright Act, which also employs broadly worded language to prohibit agreements in restraint of trade. The court previously interpreted the Cartwright Act as requiring a reasonableness standard, and the same standard should be applied to section 16600. Finally, interpreting section 16600 to invalidate all contracts that limit the freedom to engage in commercial dealing could have the unintended consequence of harming competition—for example, by invalidating exclusive dealing arrangements that may have procompetitive effects.

This case is No. S256927.

Attorneys: Christopher D. Banys (Banys, PC) and Anna-Rose Mathieson (California Appellate Law Group) for Ixchel Pharma, LLC. Mark S. Popofsky (Ropes & Gray) and Thomas G. Hungar (Gibson, Dunn & Crutcher) for Biogen, Inc.

Companies: Ixchel Pharma, LLC; Biogen, Inc.

MainStory: TopStory Antitrust GCNNews CaliforniaNews

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