IXCHEL PHARMA, LLC, Plaintiff and Appellant, v. BIOGEN, INC., Defendant and Respondent.
S256927
IN THE SUPREME COURT OF CALIFORNIA
August 3, 2020
Ninth Circuit 18-15258; Eastern District of California 2:17-cv-00715-WBS-EFB
Justice Liu authored the opinion of the Court, in which Chief Justice Cantil-Sakauye and Justices Chin, Corrigan, Cuellar, Kruger, and Groban concurred.
IXCHEL PHARMA, LLC v. BIOGEN, INC.
S256927
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
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
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
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
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 (
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
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
Ixchel sought review of its tort and UCL claims. After oral argument, the Ninth Circuit certified two questions to this court: (1) “Does
We rephrase and reorder the questions as follows (see
II.
We first address Ixchel‘s claim that Biogen tortiously interfered in Ixchel‘s contract with Forward. Before this court, neither party contests that the Cooperation Agreement is a valid contract that Forward was entitled to terminate at will. Nor is it at issue whether Forward terminated the agreement according to its terms by giving Ixchel notice 60 days prior to termination. The only question before us is whether Ixchel must allege that Biogen committed an independently wrongful act in order to state a claim for tortious interference with contract in light of the fact that the Cooperation Agreement is an at-will contract.
A.
California has traditionally recognized two economic relations torts: interference with the performance of a contract (Imperial Ice Co. v. Rossier (1941) 18 Cal.2d 33, 35 (Imperial Ice)) and interference with a prospective economic relationship (Buckaloo v. Johnson (1975) 14 Cal.3d 815, 822 (Buckaloo)).
“[B]oth of these torts protect the public interest in stable economic relationships . . . .” (Reeves v. Hanlon (2004) 33 Cal.4th 1140, 1152 (Reeves).)
The two torts are related but distinct. Tortious interference with contractual relations requires “(1) the existence of a valid contract between the plaintiff and a third party; (2) the defendant‘s knowledge of that contract; (3) the defendant‘s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.” (Reeves, supra, 33 Cal.4th at p. 1148; see Pacific Gas & Electric Co. v. Bear Stearns & Co. (1990) 50 Cal.3d 1118, 1126 (Pacific Gas).) It is generally not necessary that the defendant‘s conduct be wrongful apart from the interference with the contract itself. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 55 (Quelimane).) This general rule is subject to certain exceptions discussed below.
Tortious interference with prospective economic advantage, on the other hand, does not depend on the existence of a legally binding contract. A plaintiff asserting this tort must show that the defendant knowingly interfered with an “’ “economic relationship between the plaintiff and some third party, [which carries] the probability of future economic benefit to the plaintiff.” ’ ” (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1153 (Korea Supply).)
Before our decision in Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376 (Della Penna), we treated interference with contractual relations and interference with prospective economic advantage as two species of the same tort. (See Buckaloo, supra, 14 Cal.3d at p. 823.) Each tort contained the same elements with the exception that interference with contractual relations required the existence of a binding contract. (Compare id. at p. 827 [elements of interference with prospective economic advantage] with Pacific Gas, supra, 50 Cal.3d at p. 1126 [elements of interference with contractual relations].) The primary difference between the two torts was that the range of acceptable justifications — that is, affirmative defenses — was broader when a defendant interfered with an unconsummated prospective economic relationship. (Pacific Gas, at p. 1126; Environmental Planning & Information Council v. Superior Court (1984) 36 Cal.3d 188, 194 (EPIC); Buckaloo, at p. 828.) “[A] competitor‘s stake in advancing his own economic interest will
That changed in Della Penna, when we “dr[e]w and enforce[d] a sharpened distinction between claims for the tortious disruption of an existing contract and claims that a prospective contractual or economic relationship has been interfered with.” (Della Penna, supra, 11 Cal.4th at p. 392.) We held that a plaintiff seeking to recover damages for interference with prospective economic advantage must plead as an element of the claim that the defendant‘s conduct was “wrongful by some legal measure other than the fact of interference itself.” (Id. at p. 393.) We reasoned that “courts provide a damage remedy against third party conduct intended to disrupt an existing contract precisely because the exchange of promises resulting in such a formally cemented economic relationship is deemed worthy of protection from interference by a stranger to the agreement. Economic relationships short of contractual, however, should stand on a different legal footing as far as the potential for tort liability is reckoned. Because ours is a culture firmly wedded to the social rewards of commercial contests, the law usually takes care to draw lines of legal liability in a way that maximizes areas of competition free of legal penalties.” (Id. at p. 392.) Concerned that the old rule led “to time consuming and expensive lawsuits . . . by a rival, based on conduct that was regarded by the commercial world as both commonplace and appropriate” (id. at p. 384), we found it important to afford “greater solicitude to those relationships that have ripened into agreements, while recognizing that relationships short of that subsist in a zone where the rewards and risks of competition are dominant” (id. at p. 392). Imposing an independent wrongfulness requirement at the pleading stage thus struck a “balance between providing a remedy for predatory economic behavior and keeping legitimate business competition outside litigative bounds.” (Id. at p. 378.)
Our decisions since Della Penna have reaffirmed the distinction between the two torts. (See Quelimane, supra, 19 Cal.4th at pp. 55–56; Korea Supply, supra, 29 Cal.4th at p. 1158.) So, while intentionally interfering with an existing contract is generally “a wrong in and of itself” (Quelimane, at p. 56), intentionally interfering with prospective economic advantage requires pleading that the defendant committed an independently wrongful act (Korea Supply, at p. 1158). “[A]n act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” (Id. at p. 1159.)
With that framework in mind, we consider whether stating a claim for interference with an at-will contract requires pleading an independently wrongful act. We have long recognized that interference with at-will contracts is actionable as an economic tort. (Pacific Gas, supra, 50 Cal.3d at p. 1127 [citing cases]; accord, Truax v. Raich (1915) 239 U.S. 33, 38 [recognizing that the weight of authority considers a third party‘s unjustified interference with an employment-at-will contract actionable].) “[T]he fact that a contract is ‘at the will of the parties, respectively does not make it one at the will of others . . . .‘” (Speegle v. Board of Fire Underwriters of the Pacific (1946) 29 Cal.2d 34, 39 (Speegle).)
But we have not decided whether interference with an at-will contract more closely resembles interference with contractual relations or interference with prospective economic advantage. That is because the distinction was not important for the many decades when the two interference torts contained basically the same elements. Ixchel argues that we settled the question in Pacific Gas, supra, 50 Cal.3d 1118, a case decided five years before Della Penna distinguished the two torts. According to Ixchel, Pacific Gas set “the default rule that, for an intentional interference with contract claim, there is no requirement of an independently wrongful act, even where the alleged misconduct is inducing a party to terminate an at-will contract.” We disagree.
In that case, the Pacific Gas and Electric Company sued Bear Stearns for interfering in the utility‘s contract to purchase hydroelectric power from a water resource agency and for interfering with the utility‘s prospective economic relations. (Pacific Gas, supra, 50 Cal.3d at pp. 1123–1124.) The contract at issue allowed the water resource agency to terminate the agreement at the end of the year in which the agency retired all of its project bonds. Bear Stearns convinced the agency to seek a determination in state court that it could terminate the contract by retiring its project bonds early. (Ibid.) We held that merely inducing a contracting party to seek a judicial determination whether it can terminate a contract according to its terms is not sufficient to state a claim under either economic tort. (Id. at p. 1137Id. at p. 1126Id. at p. 1127)
Critically, we acknowledged that “[m]any cases have treated claims of interference with voidable and terminable contracts as coming within the cause of action for interference with prospective advantage. [Citations.] . . . [I]t may be preferable not to distinguish the two as separate torts [citation]
It was also unnecessary to resolve the question because, as explained, the elements of both torts were largely the same at that time. We had yet to differentiate the two torts in Della Penna by requiring an independent wrongfulness element for interference with prospective economic advantage. There was thus no occasion to address whether interference with an at-will contract required pleading an independently wrongful act since it was not then a requirement for either tort. (Cf. Bed, Bath & Beyond of La Jolla, Inc. v. La Jolla Village Square Venture Partners (1997) 52 Cal.App.4th 867, 880, fn. 9 [cases decided before Della Penna are not relevant to determining whether interference with an unenforceable contract constitutes interference with contractual relations or interference with prospective economic advantage].) So, Pacific Gas did not answer the question now before us.
Fourteen years later in Reeves, supra, 33 Cal.4th 1140, we resolved part of the question Pacific Gas left open. Reeves held that a plaintiff must plead independent wrongfulness to state a claim for interference with a specific category of at-will contracts: employment contracts. (Reeves, at p. 1145.) That holding was based on two rationales. First, California‘s public policy favoring employment competition supported such a rule. We observed that “it has long been the public policy of our state that ‘[a] former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of . . . his former employer, provided such competition is fairly and legally conducted.’ ” (Id. at p. 1149.) Our previous decisions indicated that “[w]here no unlawful methods are used, public policy generally supports a competitor‘s right to offer more pay or better terms to another‘s employee, so long as the employee is free to leave.” (Id. at p. 1151; see also id. at p. 1145 [observing that the independent wrongfulness requirement “will promote the public policies supporting the right of at-will employees to pursue opportunities for economic betterment and the right of employers to compete for talented workers“].)
Second, we reasoned that “the economic relationship between parties to contracts that are terminable at will is distinguishable from the
Ixchel argues that we should limit Reeves to the employment context. It cites the employment-specific policy concerns animating Reeves as well as appellate decisions that have limited Reeves‘s holding to suits involving a former employer suing a competitor for hiring away a former employee. (See Redfearn v. Trader Joe‘s Co. (2018) 20 Cal.App.5th 989, 1003; Popescu v. Apple Inc. (2016) 1 Cal.App.5th 39, 62.) Biogen contends that the rationale in Reeves applies beyond the employment context to intentional interference with contract whenever a “defendant induces a new partner to terminate an at-will agreement.”
It is true that our holding in Reeves relied partly on reasoning specific to the employment context. But the broader logic underlying that decision is persuasive with respect to other spheres of economic relations. The Restatement‘s rationale on which Reeves relied is not limited to employment relationships. The Restatement explains: “One‘s interest in a contract terminable at will is primarily an interest in future relations between the parties, and he has no legal assurance of them. For this reason, an interference with this interest is closely analogous to interference with prospective contractual relations. [Citation.] If the defendant was a competitor regarding the business involved in the contract, his interference with the contract may be not improper.” (Rest.2d Torts, § 766, com. g; accord, id., § 768, com. i.)
A number of
The purpose of the independent wrongfulness requirement in economic interference torts is to “balance between providing a remedy for predatory economic behavior and keeping legitimate business competition outside litigative bounds.” (Della Penna, supra, 11 Cal.4th at p. 378; see Buckaloo, supra, 14 Cal.3d at p. 828; Imperial Ice, supra, 18 Cal.2d at p. 36.) Where economic relationships have solidified into binding future promises, the stability of the contractual relationship takes precedence over business competition. While “[o]urs is a competitive economy in which business entities vie for economic advantage” (Buckaloo, at p. 828), that competition must at some point result in entities making agreements and exchanging things of value. When parties enter a contract not terminable at will, they cement their bargained-for intentions in accordance with the terms of that contract into the future. The concreteness of this relationship means that contracting parties as well as other entities may structure their decisions, invest resources, and take risks in reliance on it. It is precisely this “exchange of promises resulting in such a formally cemented economic relationship [that courts have] deemed worthy of protection from interference by a stranger to the agreement.” (Della Penna, at p. 392.) “Intentionally inducing or causing a breach of an existing contract is therefore a wrong in and of itself.” (Quelimane, supra, 19 Cal.4th at pp. 55–56.)
The same balance of interests does not apply to prospective economic relationships. Such relationships are only “probable” (Korea Supply, supra, 29 Cal.4th at p. 1164), and harms resulting from a breach of such relationships are “speculative” (Quelimane, supra, 19 Cal.4th at p. 56). Neither party to such a relationship has a legal claim to continued relations with the other. Because the expectation of future relations is weaker and the interest in maintaining open competition is stronger, “the law usually takes care to draw
Like parties to a prospective economic relationship, parties to at-will contracts have no legal assurance of future economic relations. (See Beckwith v. Dahl (2012) 205 Cal.App.4th 1039, 1053 [at-will contracts provide “only an expectation of future contractual relations“].) An at-will contract may be terminated, by its terms, at the prerogative of a single party, whether it is because that party found a better offer from a competitor, because the party decided not to continue doing business, or for some other reason. And the other party has no legal claim to the continuation of the relationship. The contracting parties presumably bargained for these terms, aware of the risk that the relationship may be terminated at any time. At-will contractual relations are thus not cemented in the way that a contract not terminable at will is. The interest in protecting the contract from interference more closely resembles the interest in protecting prospective economic relationships than the interest in protecting a contractual relationship that, by its terms, is expected to continue on pain of breach.
Indeed, sometimes the only difference between an at-will contract and a prospective economic relationship is the formality of how a contractual relationship is structured. For example, a buyer who regularly renews a one-time contract to purchase goods has a prospective economic relationship with the vendor with respect to future purchases of those goods. (See Shida v. Japan Food Corp. (1967) 251 Cal.App.2d 864, 866 [interference with yearly renewal of contract treated as interference with prospective economic advantage].) But that same buyer would have an at-will contractual relationship if it entered into a single contract with the vendor to provide those goods at regular intervals terminable at the buyer‘s will. In both, the vendor has no legal assurance of the buyer‘s continued purchases.
We recognize that in an at-will contract, the parties’ expectations are of continuity unless one party terminates the contract, whereas the expectations of a continued relationship are more speculative where no contract exists. But from the perspective of third parties, there is no legal basis in either case to expect the continuity of the relationship or to make decisions in reliance on the relationship. We are not convinced that any difference in expectations between the parties requires a different pleading standard between interference with prospective economic advantage and interference with at-will contractual relations.
We therefore hold that to state a claim for interference with an at-will contract by a third party, the plaintiff must allege that the defendant engaged in an independently wrongful act. We disapprove Redfearn v. Trader Joe‘s Co., supra, 20 Cal.App.5th 989 and Popescu v. Apple Inc., supra, 1 Cal.App.5th 39 to the extent they are inconsistent with this opinion.
III.
Ixchel alleges that the wrongful act Biogen committed was including section 2.13 in the Forward-Biogen Agreement in violation of
The Ninth Circuit certified the following question to us: “Does
reasonableness standard under
To provide the Ninth Circuit sufficient guidance to resolve the contentions of the parties and to answer an important question of California law, we address not only whether
Ixchel argues that deciding this question is premature because the case is at the pleading stage and the parties have not had the opportunity to discover facts that would show whether section 2.13 of the Forward-Biogen Agreement was unreasonable. But in deciding whether
A.
As an initial matter, we agree with the parties that
The parties do not contend that any of the exceptions to
The language of
In context,
We must also consider
B.
We turn first to the statute‘s history and our precedent. “Under the common law, . . . contractual restraints on the practice of a profession, business, or trade, were considered valid, as long as they were reasonably imposed.” (Edwards, supra, 44 Cal.4th at p. 945; accord, Wright v. Ryder (1868) 36 Cal. 342, 357 (Wright).) As noted, the Legislature in 1872 adopted Civil Code former section 1673, which provided: “Every contract by which any one is restrained from exercising a lawful profession, trade, or business of any kind, otherwise than is provided by the next two sections, is to that extent void.” The next two sections excepted certain contractual restraints upon the sale of goodwill in a business (Civ. Code, former § 1674) or upon dissolution of a partnership (Civ. Code, former § 1675).
The Code Commissioners’ note stated that Civil Code former section 1673 was enacted in response to certain “modern decisions” that allowed contractual restraints to a “dangerous extent.” (Code commrs., note foll. 1 Ann. Civ.
Nor did this court‘s decisions interpreting Civil Code former section 1673 adopt a per se rule invalidating all contracts that limit business dealings. Our cases initially offered little clarity on the appropriate standard to evaluate agreements restraining trade. In our first reasoned opinion interpreting the statute, we invalidated an agreement between manufacturers of dynamite to fix prices and limit output. (Vulcan Powder, supra, 96 Cal. at pp. 514–515.) We noted that the common law rule of reason “led to much perplexing legislation” and had been replaced by Civil Code former section 1673, but we did not explain what standard the new statute imposed. (Vulcan Powder, at p. 513.) We simply said that the agreement at issue was “clearly in restraint of trade and against public policy; and this conclusion is too obvious to need argument, authorities, or elucidation.” (Id. at p. 515.) Our reasoning did not explain whether we found the agreement per se invalid or invalid by some other standard. (See also Schwalm v. Holmes (1875) 49 Cal. 665, 669 [holding that exclusive sales contract was “not illegal, as being in restraint of trade” in two-sentence disposition without further analysis].)
Over time, however, two discernible categories of holdings emerged in our case law: Agreements not to compete after the termination of employment or the sale of interest in a business were invalid without regard to their reasonableness. And agreements limiting commercial dealings and business operations were generally invalid if they were unreasonable.
As to agreements not to compete after termination of employment or the sale of interest in a business, an early case was Merchants’ Ad-Sign Co. v. Sterling (1899) 124 Cal. 429 (Merchants’ Ad-Sign), which
Likewise, in Chamberlain v. Augustine (1916) 172 Cal. 285 (Chamberlain), we invalidated an agreement imposing a financial penalty for competition, which was included as part of the sale of stock in a foundry company. (Id. at p. 288.) The $5,000 penalty was a sufficient deterrent to competition to constitute a restraint of trade under Civil Code former section 1673. Pointing to “the very language of [former] section 1673,” we determined that “[t]he statute makes no exception in favor of contracts only in partial restraint of trade.” (Chamberlain, at pp. 288, 289; accord, Gregory v. Spieker (1895) 110 Cal. 150, 154 [agreement not to compete in a particular county as part of the sale of a liquor business “transgressed the statute“].)
It is true that these decisions spoke in broad terms, suggesting that restraints on trade in all contexts were void per se. (See Merchants’ Ad-Sign, supra, 124 Cal. at p. 434 [“[t]he language of the code is unmistakable“]; Chamberlain, supra, 172 Cal. at pp. 288–289 [“the very language of [former] section 1673 . . . makes no exception in favor of contracts only in partial restraint of trade“].) But “[i]t is axiomatic that an unnecessarily broad holding is ‘informed and limited by the fact[s]’ of the case in which it is articulated.” (Covenant Care, Inc. v. Superior Court (2004) 32 Cal.4th 771, 790, fn. 11; see People v. Mendoza (2000) 23 Cal.4th 896, 915 [” ‘we must view with caution seemingly categorical directives not essential to earlier decisions’ “].) The contracts at issue in these cases involved agreements not to compete upon terminating employment or selling a business, and we understand their holdings to be informed and limited by the factual context presented.
By contrast, we did not interpret Civil Code former section 1673 so literally with regard to contractual restraints on business operations and commercial dealings. We generally declared agreements in this context valid if the restraints they imposed were reasonable. In Grogan v. Chaffee (1909) 156 Cal. 611 (Grogan), we upheld a contract between a manufacturer and purchaser of olive oil requiring the purchaser to resell the
Similarly, in Associated Oil Co. v. Myers (1933) 217 Cal. 297 (Associated Oil), we upheld a contract between the lessor of an automobile service station and a lessee of the station, which included an agreement that the lessor would only sell the lessee‘s petroleum products. Citing the reasonableness standard in Grogan, we concluded that the lessee “had the right to decline to sell any but its own product upon the leased property. We can see nothing unreasonable in requiring the [lessor] to do the same thing. The public interest is not involved and competition is not stifled. In no way does the agreement attempt to limit production or fix the price of the commodity involved.” (Associated Oil, at p. 306.)
Some of our cases invalidating contractual restraints in the business context did not expressly apply a reasonableness standard. (See Morey v. Paladini (1922) 187 Cal. 727 (Morey); Pacific Wharf & Storage Co. v. Standard Am. Dredging Co. (1920) 184 Cal. 21 (Pacific Wharf); Getz Brothers, supra, 147 Cal. 115; Vulcan Powder, supra, 96 Cal. 510.) But these decisions did not invalidate contractual provisions merely because they restrained trade in some way. Instead, we examined the purpose of the contracts at issue, much as we would do in a reasonableness inquiry, and we found the contracts to be invalid when their purpose was to restrain trade by creating a monopoly, restricting supply, or fixing prices. (See Cipro, supra, 61 Cal.4th at p. 146 [recounting that the rule of reason asks ” ‘whether the challenged conduct promotes or suppresses competition’ “].)
In Morey, for example, we invalidated an agreement requiring a vendor to sell lobsters exclusively to a purchaser in a certain geographic area. (Morey, supra, 187 Cal. at pp. 732, 736.) We emphasized that the overall purpose of the agreement was to “secure to [the purchaser], so far as possible, a monopoly of the lobster business in the selected territory.” (Id. at p. 738; see id. at p. 736 [contract had “the purpose of putting it into the power of the [purchaser] to control the lobster market“]; id. at p. 737 [contract “intended to effect a virtual monopoly of the lobster trade“].) Our reasoning was more
Our other decisions in the business context followed similar logic. (See Endicott v. Rosenthal (1932) 216 Cal. 721, 725 (Endicott) [invalidating an agreement between clothes dyeing businesses to form an association that set industry-wide prices and prevented its members from soliciting each other‘s customers because “the two main purposes for which this association was formed were to increase prices and eliminate competition“]; Getz Brothers, supra, 147 Cal. at p. 119 [invalidating a contract by two companies to exclusively buy and sell salt from each other and to discourage salt shipments by third parties because it had a “direct and primary purpose” to restrain trade]; Santa Clara Val. M. & L. Co. v. Hayes (1888) 76 Cal. 387, 392 [invalidating exclusive dealing agreement with an “object and view to suppress the supply and enhance the price of lumber in four counties of the state“]; but see Pacific Wharf, supra, 184 Cal. at p. 23 [invalidating agreement forbidding seller of harbor dredge to compete in the dredging business because “[t]he language of [Civil Code former section 1673] is clear and unambiguous“].)
Our last decision to interpret Civil Code former section 1673 in the context of business dealings made clear that a rule of reason applies in this context. In Great Western Distillery, supra, 10 Cal.2d 442, we upheld a contract in which a buyer agreed to purchase whiskey exclusively from a distillery in exchange for being the sole merchant of that whiskey in California. We summarized the law as follows: ” ‘Statutes are interpreted in the light of reason and common sense, and it may be stated as a general rule that courts will not hold to be in restraint of trade a contract between individuals, the main purpose and effect of which are to promote and increase business in the line affected, merely because its operations might possibly in some theoretical way incidentally and indirectly restrict trade in such line.’ ” (Id. at p. 446.) Reviewing the cases upholding and invalidating contractual agreements, we explained that this general rule was consistent with each of them. (Id. at pp. 447–449, citing Associated Oil, supra, 217 Cal. at p. 304, Grogan, supra, 156 Cal. at p. 615, Morey, supra, 187 Cal. 727, Endicott, supra, 216 Cal. 721.) Applying this rule to the agreement at issue, we upheld the agreement because it “disclose[d] merely an intent to provide for the promotion of the business of the defendant” and had the effect of “develop[ing] a market for the sale of the commodity within the limited territory.” (Great Western Distillery, at pp. 449, 450.)
Thus, like previous decisions evaluating business contracts, Great Western Distillery rejected a literal reading of Civil Code former section 1673 in favor of a rule of reasonableness: Contracts with the purpose and effect of
To summarize, our decisions interpreting Civil Code former section 1673, the predecessor to Business and Professions Code section 16600, gradually evolved to evaluate contractual restraints on business operations and commercial dealings based on a reasonableness standard. In this respect, Civil Code former section 1673 did not depart from the common law rule. (See Centeno, supra, 107 Cal.App.3d at p. 68 [observing in a case involving an exclusive medical services contract that “section 16600 is basically a codification of the common law relating to contracts in restraint of trade“].) But we often interpreted the statute more strictly when it came to agreements not to compete after the termination of employment or the sale of interest in a business. Thus, instead of adopting a per se rule that all contractual limitations on the freedom to engage in commercial dealings are invalid, our precedent interpreting Civil Code former section 1673 was more nuanced.
In 1941, the Legislature repealed Civil Code former section 1673 and reenacted it as
In Muggill, we invalidated a noncompetition agreement between a retiree and his former employer when the former employer ceased pension payments after the employee went to work for a competitor. (Muggill, supra, 62 Cal.2d at p. 240.) We said that the “settled interpretation” of
Even when we have upheld portions of noncompetition agreements under statutory exceptions to
Our most recent
Ixchel argues that Edwards conclusively held that
Moreover, the rationale in Edwards focused on policy considerations specific to employment mobility and competition: “The law protects Californians and ensures ‘that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.’ [Citation.] It protects ‘the important legal right of persons to engage in businesses and occupations of their choosing.’ ” (Edwards, supra, 44 Cal.4th at p. 946; see ibid. [the statute “evinces a settled legislative policy in favor of open competition and employee mobility“].) And we cited cases exclusively from the employment context in our reasoning. (Id. at pp. 945–948, citing Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, D‘sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, Muggill, supra, 62 Cal.2d 239, Chamberlain, supra, 172 Cal. 285, Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, South Bay Radiology Medical Associates v. Asher (1990) 220 Cal.App.3d 1074, and Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34.)
Finally, the holding and language in Edwards simply confirmed our long line of decisions interpreting
In sum, a survey of our precedent construing
C.
We also consider
Amicus curiae Beckman Coulter, Inc. argues that Cianci v. Superior Court (1985) 40 Cal.3d 903 (Cianci) rejected the use of the Cartwright Act as an aid to construing
D.
Finally, we are mindful of the consequences of strictly interpreting the language of
These arrangements can have procompetitive effects since they “enable long-term planning on the basis of known costs,” “give protection against price fluctuations, and — of particular advantage to a newcomer to the field to whom it is important to know what capital expenditures are justified — offer the possibility of a predictable market.” (Standard Oil Co. of California v. United States (1949) 337 U.S. 293, 306–307; see also Sterling Merchandising, Inc. v. Nestlé, S.A. (1st Cir. 2011) 656 F.3d 112, 123 [“exclusive dealing agreements ‘can achieve legitimate economic benefits (reduced cost, stable long-term supply, predictable prices)’ “].) Exclusive dealing arrangements also “may provide an incentive for the marketing of new products and a guarantee of quality-control distribution.” (Dayton Time Lock, supra, 52 Cal.App.3d at p. 6; accord, Fisherman‘s Wharf Bay Cruise Corp. v. Superior Court of San Francisco (2003) 114 Cal.App.4th 309, 335.) For example, exclusive dealing arrangements are “often a part of a franchise agreement or a distributorship contract.” (UAS Management, Inc. v. Mater Misericordiae Hospital (2008) 169 Cal.App.4th 357, 365.) In exchange for the right to sell the franchisor‘s products, franchisees often agree to purchase from a particular supplier or operate in a particular geographic area. (See, e.g., Dayton Time Lock, at pp. 4–5 [describing franchise agreement].) We decline to construe
Ixchel and amicus curiae Beckman Coulter, Inc. argue that these dire consequences are exaggerated because
exclusive dealing restrain parties from “engaging in a lawful . . . business.” (
CONCLUSION
We hold that tortious interference with at-will contracts requires independent wrongfulness. Because Ixchel alleges that Biogen interfered with its at-will contract, it must allege that Biogen did so through wrongful means.
We also hold that a rule of reason applies to determine the validity of a contractual provision by which a business is restrained from engaging in a lawful trade or business with another business. Section 2.13 of the Biogen-Forward Agreement is such a restraint because it prevents Forward from collaborating with Ixchel or any other partner in the development of treatments containing the active ingredient DMF. Its validity under
LIU, J.
We Concur:
CANTIL-SAKAUYE, C. J.
CHIN, J.
CORRIGAN, J.
CUÉLLAR, J.
KRUGER, J.
GROBAN, J.