Ixchel Pharma, LLC v. Biogen, Inc.

9 Cal.5th 1130

470 P.3d 571

266 Cal.Rptr.3d 665

IXCHEL PHARMA, LLC, Plaintiff and Appellant,

v.BIOGEN, INC., Defendant and Respondent.

S256927

Supreme Court of California.

August 3, 2020

Banys, Christopher D. Banys, Palo Alto, and Richard C. Lin for Plaintiff and Appellant.

California Appellate Law Group, Anna-Rose Mathieson, Greg Wolff, San Francisco; 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, San Francisco, for Defendant and Respondent.

Gibson, Dunn & Crutcher, Thomas G. Hungar, Rachel S. Brass, Caeli A. Higney, San Francisco; 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, Los Angeles, for Amici Scholars as Amici Curiae.

Horvitz & Levy, Robert H. Wright, Jeremy B. Rosen, Burbank; Charis Lex and Sean P. Gates for Quidel Corporation as Amicus Curiae.

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 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, 54 Cal.Rptr.3d 735, 151 P.3d 1151.) 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.

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 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 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 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...