The Ninth Circuit has certified questions to the California Supreme Court in Ixchel Pharma v. Biogen seeking guidance as to: 1) whether section 16600 of the California Business and Professions Code extends to contracts between businesses; and 2) whether pleading an independent wrongful act is necessary to state a claim for intentional interference with a contract outside the at-will employment contract context. The California Supreme Court has agreed to accept the Ninth Circuit's inquiry and the appellate briefing was recently completed. We expect the Supreme Court to have oral argument and likely rule in the summer or fall of 2020. The California Supreme Court's disposition of the novel issues could have sweeping ramifications that ripple through commercial and business industries.
Background
Ixchel Pharma and Forward Pharma are both biotechnology companies in the business of developing pharmaceutical drugs. Ixchel and Forward entered into a collaboration agreement in January 2016 to develop a new drug to treat a neurological disease.
The collaboration agreement outlined each company's responsibilities in developing the new drug, assessing its feasibility in conducting clinical trials, carrying out the clinical trials, and manufacturing and commercializing the drug once approved by the FDA. The agreement also entitled Ixchel to a percentage royalty on sales of the approved product. Forward could terminate the agreement by written notice.
Forward and Biogen, another pharmaceutical company, began negotiating a preexisting intellectual property dispute in late 2016. Ixchel alleges that Forward gave Biogen a copy of their collaboration agreement without Ixchel's consent, that Biogen deemed Ixchel's development work on the new drug a threat to Biogen's own drug used to treat multiple sclerosis, and that Biogen asked Forward to cut off ties with Ixchel as settlement in their IP dispute.
Biogen-Forward negotiations resulted in an executed agreement in January 2017. Biogen agreed to pay $1.25 billion, and Forward agreed to stop working with Ixchel to develop their experimental drug pursuant to a non-compete provision in their settlement. Forward then notified Ixchel it was terminating their collaboration agreement and ceasing all work on the new drug.
Ixchel filed suit against Biogen asserting claims for: (1) tortious interference with a contract; (2) intentional and/or negligent interference with prospective economic advantage; and (3) violations of California's unfair competition law which prohibits "any unlawful, unfair or fraudulent business act or practice," Cal. Bus. & Prof. Code § 17200.
The district court dismissed Ixchel's complaint for failing to state a claim for intentional interference with prospective economic advantage and tortious interference with a contract, citing Ixchel failed to plead that Forward engaged in an independent wrongful act. The district court concluded that the collaboration agreement was an at-will contract, requiring Ixchel to plead a wrongful act. The UCL claim also failed because the complaint failed to allege an actionable unlawful business practice.
Ixchel amended its complaint, pleading Forward violated section 16600 of the California Business and Professions Code by entering into the non-compete agreement with Biogen. By entering into the agreement, Ixchel alleged the agreement wrongfully restrained Forward from engaging in lawful business with Ixchel and was therefore void. Ixchel alleged that Forward committed an independently wrongful act. The district court dismissed the amended complaint on the basis that section 16600 barred non-compete agreements between employer and employee and did not apply to the Forward-Biogen agreement.
Expansion of Section 16600
Section 16600 holds "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 v. Arthur Andersen LLP, 44 Cal. 4th 937, 946-47 (2008). The California Supreme Court expressly rejected the Ninth Circuit's "narrow restraint" exception to section 16600 espoused in Campbell v. Trustees of Leland Stanford Jr. University, 817 F. 2d 499 (9th Cir. 1987). The Ninth Circuit's "narrow restraint" exempted from section 16600's prohibition agreements that barred an individual from "pursuing only a small or limited part of the business or trade profession." Edwards, 44 Cal. 4th at 948.
The Ninth Circuit extended Edwards beyond non-compete agreements between employers and their employees. Golden v. California Emergency Physicians Medical Group, 782 F. 3d 1083, 1092-93 (9th Cir. 2015). The Ninth Circuit took the California Supreme Court's broad articulation of what constitutes a void contract under section 16600 and concluded that it applied to all "contractual restrains on professional practice" between employers and employees." Id. at 1093.
Neither the Ninth Circuit nor the California Supreme Court has addressed whether section 16600 extends beyond the employment setting entirely to contractual restraints on business operations. The terms of section 16600 state it applies to contracts restraining "anyone" from engaging in lawful business of any kind. Cal. Bus. & Prof. Code § 16600. However, the term "anyone" is not defined.
Expansion of Independent Wrong Requirement to At-Will Contracts Outside the Employment Context
Under California law, a claim for intentional interference with contractual relations in the context of an at-will employment contract requires the claimant to prove an independently wrongful act. Reeves v. Hanlon, 33 Cal. 4th 1140, 1152 (2004). This requirement is rooted in public policy supporting a competitor's right to pay more or offer better terms to another's employees, the importance of employee mobility and betterment and its implications in employer competition, and the distinction apparent in the economic relationship between parties to at-will contracts. Id. at 1151. The Reeves court reasoned that while "an ordinary contract is generally deemed worthy of protection from interference by a stranger to the agreement...," in situations where "a party to a contract with the plaintiff is free to terminate the contractual relation when he chooses," then "any interference with [the 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." Id. Thus, a claimant must plead and prove that the defendant engaged in an independently wrongful act prohibited by constitutional, statutory, regulatory, common law, or other determinable legal standard. Id. at 1152-53.
Since Reeves, two California Courts of Appeal districts have suggested that Reeves does not apply outside the employment context. Such refusal was based on public policy considerations of employee freedom of movement and a business's right to compete in the marketplace. Popescu v. Apple Inc., 1 Cal. App. 5th 39, 62 (2016). These policy considerations are "not furthered when a third party interferes with an at-will employment contract for reasons unrelated to hiring an employee away from a competitor, or when the contract at issue is not an employment contract." Redfearn v. Trader Joe's Co., 20 Cal. App. 5th 989, 1004-005 (2018).
The California Supreme Court has not addressed whether Reeves applies outside the at-will employment context. And despite the public policy considerations protecting employees in Reeves, that court also considered the special relationship inherent in at-will contracts that allows any party to terminate the contract when he or she so chooses. Further, the Reeves court did not explicitly limit its rule to the employment context, leaving open the question of its application.
Importance/Takeaways
A broadened interpretation of Edwards would expand section 16600 to bar contracts restraining a business from engaging in lawful business, potentially invalidating contracts like the Forward-Biogen agreement. The expansion may extend to all contracts, including those dealing with joint ventures, leases, distribution agreements, license agreements, and other widely used business agreements that might fall under the purview of a newly broadened section 16600.
Expanding the independently wrong requirement to at-will contracts beyond the employment realm would require Ixchel to plead an independently wrongful act in order to prove its intentional interference with contract claim. On a larger scale, any expansion may add yet another requirement to intentional interference with contract claims, and perhaps to all claims of breach of contract based on at-will contracts.
While both issues are novel, the California Supreme Court's disposition has the potential to re-write the law books and further separate California law from the majority of the nation.
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