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California Supreme Court Clarifies Bounds of Legitimate Competition Under Tort and Antitrust Law

National Law Review

September 11, 2020

On August 3, 2020, the California Supreme Court issued its highly anticipated decision in Ixchel Pharma, LLC v. Biogen, Inc., clarifying the bounds of legitimate competition under California tort and antitrust law. The Court’s ruling generally came down in favor of encouraging competition, reducing claims for tortious interference with contract, and decreasing the risk of litigation arising from normal competitive activity. There are two significant takeaways for California businesses from the Ixchel opinion:

The Court toughened the pleading requirements of a claim for tortious interference with an at-will contract, requiring that a plaintiff plead that interference with any at-will contract, even outside the employment context, was independently wrongful, i.e., unlawful over and above its interference with an enforceable contract. The Court reasoned that at-will contracts do not involve the same “cemented economic relationships” as contracts with a definite term. To protect their contracts from interference by third parties, California businesses will be well-advised to require a fixed term, or other concrete milestones that the counter-party is contractually required to perform.
The Court further made clear that California’s ban on covenants not to compete under Business and Professions Code section 16600 extends beyond noncompetition agreements following the termination of employment or the sale of an interest in a business. The Court held, however, that section 16600 does not impose a per se prohibition of contractual restraints on business operations and commercial dealings outside these areas, but rather that such restraints are governed by the “rule of reason,” i.e., “whether the challenged conduct promotes or suppresses competition.” This should reduce the risk of litigation arising from common commercial arrangements such as franchise and exclusive dealing agreements.

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