Tuesday, August 4, 2020
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California Supreme Court:
Inducing Cancellation of At-Will Contract Might Be Tortious
Liability Would Exist Only If an Independent Wrong Is Established, Liu Says in Opinion Responding to Query From Ninth Circuit; Says Breach of B&P Code §16600—Reasonably Applied—Can Constitute That Wrong
By a MetNews Staff Writer
A company that induces a business to sever its at-will contractual relations with a third party is not liable in tort in the absence of an independent wrong, the California Supreme Court held yesterday in an opinion in response to a question certified to it by the Ninth U.S. Circuit Court of Appeals.
A violation of Business and Professions Code §16600—which provides that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void”—can constitute that independent wrong, Justice Goodwin Liu said in an opinion for a unanimous court, but cautioned that the statute be applied in conformity with the rule of reason.
The questions posed by the Ninth Circuit arise in connection with litigation brought by Ixchel Pharma, LLC, a Yolo County biotechnology company, against Biogen, Inc., a multinational biotechnology company headquartered in Massachusetts. Biogen entered into a settlement of a patent dispute with Forward Pharma, a Danish biopharmaceutical company, a settlement term being that Forward terminate its business relations with Ixchel.
Under its contract Ixchel, Forward had the power to terminate relations upon giving 60 days notice, which it gave. District Court Judge William B. Shubb of the Eastern District of California on Sept. 12, 2017, dismissed, with prejudice, Ixchel’s claims, and Ixchel appealed.
Two Distinct Torts
In yesterday’s decision, Liu recited that its actions for intentional interference with contractual relations, where the contract is not terminable at the will of either party, it has been held that an independent wrong need not be established, but where the suit is for international interference with prospective advantage, an independent wrong is an element of the tort.
He said that interference with an at-will contract is closer to interference with prospective advantage than to interference with contractual relations, explaining:
“Like parties to a prospective economic relationship, parties to at-will contracts have no legal assurance of future economic 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.”
Chilling Competition
Liu went on to say:
“[A]llowing interference with at-will contract claims without requiring independent wrongfulness risks chilling legitimate business competition….Without an independent wrongfulness requirement, a competitor’s good faith offer that causes a business to withdraw from an at-will contract could trigger liability or at least subject the competitor to costly litigation. In fact, even if a business in an at-will contract solicits offers on its own initiative, a third party that submits an offer could face liability if it knew that acceptance of the offer would cause the soliciting business to withdraw from its existing contract. Allowing disappointed competitors to state claims for interference with at-will contracts without alleging independently wrongful conduct may expose routine and legitimate business competition to litigation.”
The Ninth Circuit also asked:
“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?”
The federal appeals court observed that California’s high court has not “considered whether section 16600 extends beyond the employment setting entirely to contractual restraints on business operations.”
§16600 Does Apply
Liu said the parties are in agreement that §16600 does apply to business contracts, and remarked that they’re right.
“Indeed, California courts have frequently analyzed whether contracts involving business dealings are void under section 16600,” the jurist wrote.
The words of the statute, he observed, suggest “that any part of an agreement restraining a party from engaging in a trade, profession, or business is per se invalid unless certain exceptions apply,” but said that §16600 has not been strictly construed.
“[A] survey of our precedent construing section 16600 and its predecessor statute reveals that we have long applied a reasonableness standard to contractual restraints on business operations and commercial dealings, Liu wrote.
The case is Ixchel Pharma, LLC v. Biogen, Inc., 2020 S.O.S. 3553.
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