Ixchel Pharma, LLC v. Biogen, Inc.: Opening the Door to Non-Compete Agreements Between Businesses in California

In a recent decision, Ixchel Pharma, LLC v. Biogen, Inc.,[1] the Supreme Court of California opened the door for some restrictive covenants between commercial enterprises, but it left alone California law generally prohibiting post-employment restrictive covenants with employees.

Ixchel presented two questions about the bounds of legitimate business competition under California tort and antitrust law:

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 California Business and Professions Code section 16600 voids a contract by which a business is restrained from engaging in a lawful trade or business with another business?

The Supreme Court of California held that:

1. For one company to tortiously interfere with an at-will contract between two other companies, the company’s act must be independently wrongful.
2. The proper standard to determine whether contractual restraints on business dealings are void, under Business and Professions Code section 1660, is the Rule of Reason.

“An act is independently wrongful, as an element of tortious interference with prospective economic advantage, if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.”

“The Rule of Reason … asks whether an agreement harms competition more than it helps by considering the facts peculiar to the business in which the restraint is applied, the nature of the restraint and its effects, and the history of the restraint and the reasons for its adoption.”

Two pharmaceutical companies, Forward Pharma and Biogen, Inc., entered into a settlement agreement. As part of the agreement, Forward agreed to implement its at-will contractual right to terminate a drug development agreement with a third pharmaceutical company, Ixchel Pharma.

As a result, Ixchel sued Biogen in California federal court. Ixchel asserted that Biogen tortiously interfered with Ixchel’s and Forward’s contractual relationship, and that Biogen’s agreement with Forward was an unenforceable noncompetition agreement under California Business and Professions Code section 16600. The 9th Circuit Court of Appeals certified these questions to the Supreme Court of California.

A claim for tortious interference with contractual relations includes intentional acts designed to induce a breach or disruption of a contractual relationship and actual breach or disruption of the contractual relationship. But the Ixchel court made clear that such a claim will not stand where the contract is freely terminable at the will of the parties to it. Instead, the...