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Court of Appeal:
‘Reasonable’ Noncompetition Clauses Outside of Employment Contracts Are Enforceable
By Sandra Hong, Staff Writer
A noncompletion provision outside of an employment context is not invalidated by California Business & Professions Code §16600 so long as it does not constitute an unreasonable restraint on trade, Div. One of the Fourth District Court of Appeal held Friday.
The opinion by Acting Presiding Justice Richard D. Huffman grants a petition for a writ of mandate sought by Quidel Corporation, a San Diego medical device company and a maker of rapid-testing coronavirus testing kits. It is seeking to enforce a noncompetition provision in a licensing agreement with Beckman Coulter, a manufacturer of biomedical testing products based in Brea.
Huffman’s opinion directs that an order by San Diego Superior Court Judge Gregory W. Pollack granting a motion for summary adjudication in favor of Beckman be vacated and that a new order be entered denying the motion.
“[A]s long as a noncompetition provision does not negatively affect the public interests, is designed to protect the parties in their dealings, and does not attempt to establish a monopoly, it may be reasonable and valid,” he wrote in his opinion, joined by Justices Joan Irion and Patricia Guerrero.
The panel originally granted Quidel’s petition for a writ in December 2018 but was directed by the California Supreme Court to vacate its opinion and reconsider the matter in light of Ixchel Pharma, LLC v. Biogen, Inc., a state high court opinion issued on Aug. 3.
In that case, the court held, in an opinion by Justice Goodwin Liu, 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 16600
Huffman concluded that Pollack erred in finding the noncompetition provision in Quidel’s licensing agreement with Beckman to be an invalid restraint on trade in violation of §16600, which states:
“Except as provided in this chapter, every contract by which anyone is restrained from engaging in lawful profession, trade, or business of any kind is to that extent void.”
Quidel and Beckman executed a licensing agreement in 2003 under which Beckman manufactures a testing assay using proprietary material from Quidel. The testing assay can be used to diagnose congestive heart failure based on blood samples.
In exchange, Quidel purchases the testing assay from Beckman and is prohibited from engaging other manufacturers to create the same assay.
The agreement also requires Beckman to sell the assay exclusively to Quidel. Section 5.2.3 of the agreement prohibits Beckman from researching or developing an assay for the same function up to two years before the agreement expires. The provision does not prohibit research or development of assays for other uses.
Edwards v. Arthur Andersen
Beckman argued §5.2.3 was invalid under §16600 based on the state high court’s 2008 opinion in Edwards v. Arthur Andersen, which held that a noncompetition agreement in an employment contract is void as a matter of law as an unlawful restraint on trade.
Huffman sided with Quidel’s argument that the Edwards’ holding is specific to an employment context and addresses covenants not to compete after the termination of employment.
He observed:
“[T]he clause at issue in the matter before us presents a different context, challenging a provision in an exclusive dealing agreement between two sophisticated biotechnology companies. Here, no individual person’s ability to seek employment is impacted by the challenged portion of the Agreement. Simply put, this matter falls outside the confines of Edwards because it does not address an individual’s ability to engage in a profession, trade, or business.”
Beckman’s Motion
Huffman said while section 5.2.3. undoubtedly limits Beckman’s ability to develop a competing assay, it was unproven that it restrained trade more than promoted it, that it was necessary to protect the parties’ interests, or that it shut down “a substantial share of the line of commerce.”
Since the provision was not, on its face, invalid, “we conclude such factual development is relevant and necessary here,” Huffman said.
The case is Quidel Corp. v. Superior Court, 2020 S.O.S. 5334.
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