Good For the Goose and Gander: Is California’s Ban on Non-Competes Limited to Employment Contracts?

So-called “non-compete” agreements have been banned under California Business and Professions Code section 16600 for many years, predominantly in the employer and employee context. After differing interpretations of Section 16600 arose between state and federal courts in California, in 2008, the California Supreme Court ruled that any contractual restraint on one’s ability to engage in a lawful profession, trade, or business of any kind is invalid—other than the very limited statutory exceptions to Section 16600, even a partial or “narrow” restraint is unlawful. Edwards v. Arthur Andersen LLP, 44 Cal.4th 937, 942 (2008) (“Edwards”).

Edwards addressed Section 16600 as applied in the employment context. Litigants have used Edwards extensively to invalidate contractual restrictions between employer and employee that prohibit employees after their employment ends from competing with or soliciting the customers or employees of their former employer.

But what about non-competition provisions in agreements between two businesses? Does Section 16600 prohibit those provisions?

The text of Section 16600 is not specific to employment contracts: “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.” (Emphasis added.) The issue received attention from three separate courts over the summer of 2019. In July 2019, a panel of three judges from the Ninth Circuit certified the question to the California Supreme Court in Ixchel Pharma v. Biogen, a case arising out of the Eastern District of California, phrasing the issue as follows:

“Does section 16600…void a contract by which a business is restrained from engaging in a lawful trade or business with another business?”[1]

On September 11, 2019, the California Supreme Court granted the Ninth Circuit’s request for certification, so we can likely expect the high court’s opinion at some point over the next year or so.[2]
In a separate case, on August 29, 2019, the California Court of Appeal for the Second Appellate District issued its opinion on the issue as it arose in Quidel Corporation v. Superior Court of San Diego County (Beckman Coulter, Inc.), 39 Cal.App.5th 530 (2019).[3]
The Quidel court analyzed a contract between Biosite Inc., Quidel Corporation’s predecessor-in-interest in the contract, and Beckman Coulter, Inc. The operative agreement prohibited Biosite, and later Quidel, from providing to a company other than Beckman the antibodies used to detect in blood peptides associated with congestive heart failure. Beckman used the Biosite/Quidel technology to create an assay (test) for the detection of the specific peptide markers for congestive heart failure. In exchange, Beckman was required to sell the assays to Biosite/Quidel only. Effectively, the agreement required that the two sides work only with each other for the manufacture and sale of the tests.

Beckman filed suit for declaratory judgment seeking to void the non-compete provision under Section 16600 because it wanted to develop a competing product. The trial court ruled in favor of Beckman, applying Section 16600 to void the non-compete.

Quidel appealed, and the Court of Appeal reversed and remanded. In analyzing the Edwards decision and the policy behind Section 16600, the court found it supported “strict application of section 16600 in the employment context.”[4] The court continued, “California courts have consistently declared [section 16600] an expression of public policy to ensure that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.”[5]

But as applied to the dispute between Quidel and Beckman, the court distinguished between the positions of an average employee and companies like Quidel and Beckman, finding that a contract between “two sophisticated biotechnology companies” is not really what California’s public policy was designed to protect. Rather, said the court, Section 16600 addresses “an individual’s ability to engage in a profession, trade, or business.”[6] Because employee mobility issues were not at issue in Quidel, the court found that Section 16600 should not be strictly applied, as was the case in Edwards, which involved employee mobility issues.[7]

The court then analyzed whether “in-term” (in effect during the term of the agreement) covenants not to compete in exclusive dealing contracts like that present in Quidel are per se invalid under Section 16600. The court concluded that they are not.

Next, rejecting Beckman’s contrary argument, the court found that Section 16600 and the Cartwright Act were not redundant. In attempting to apply Section 16600, the court concluded that the factual record was not sufficiently developed to address whether the non-compete at issue in Quidel tended to restrain trade more than promote it.[8]

Quidel is the most recent published decision on whether Section 16600 applies outside of the employee mobility context.

As of the time of this blog, Ixchel has filed its opening brief, several amicus-related letters have been submitted, and Biogen’s response brief (Answer) is due to be filed on December 19, 2019. Meanwhile, Beckman petitioned the California Supreme Court to review the Court of Appeal’s decision in Quidel v. Superior Court, and the California Supreme Court granted review on November 13, 2019, but deferred any decision in the case pending the Court’s disposition on the Ixchel questions.[9] For the latest on Ixchel at the California Supreme Court, see here for the court’s docket.

Takeaways:

• The California Supreme Court’s eventual opinion in Ixchel remains to be seen, but it appears likely that the court will find Section 16600 can apply to agreements between businesses restricting competition between them.
• The distinction between “in-term” and “post-term” non-competition provisions is likely to factor into the court’s analysis.
• As always, but particularly in light of the issues pending in Ixchel and Quidel, companies doing business in California should carefully consider the necessity for and scope of non-competition provisions in agreements with other businesses. This is particularly so where any such provision extends the period of non-competition beyond the duration of the operative agreement.
• In comparing and contrasting the business-to-business and employer/employee contexts, it is likely that the opinion(s) in Ixchel/Quidel will reinforce the view that restrictive covenants in California employment agreements restraining employee mobility are void under Section 16600 (but for certain limited statutory exceptions).

[1] Ixchel Pharma, LLC v. Biogen, Inc. (9th Cir. 2019) Case No. 18-15258 (certifying questions to the California Supreme Court, Case No. S256927).

[2] Ixchel Pharma v. Biogen Docket

[3] Quidel Corporation v. Superior Court of San Diego County (Beckman Coulter, Inc.), 39 Cal.App.5th 530 (2019) (appeal filed, Quidel Corp. v. S.C. (Beckman Coulter), 451 P.3d 776 (Nov. 13, 2019)).

[4] Id. at p. 539.

[5] Ibid. (quoting Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 Cal.App.4th 853, 859).

[6] Id. at p. 540 (emphasis added).

[7] Ibid.

[8] Id. at pp. 544-45.

[9] Quidel Corp. v. S.C. (Beckman Coulter), 451 P.3d 776 (Nov. 13, 2019). The parties urged the Supreme Court to grant review of the Petition because, according to the parties, the record in Quidel better frames than does Ixchel the issue of whether Section 16600 renders non-compete agreements between businesses void as a matter of law.