California Supreme Court Applies "Rule of Reason" To Section 16600 Claim

Allen Matkins
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Allen Matkins

Section 16600 of the California Business & Professions Code provides that except for certain statutory exceptions "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void".  In Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 189 P.3d 285, 81 Cal. Rptr. 3d 282 (2008), the California Supreme Court held that Section 16600 rejected the common law "rule of reasonableness" and seemingly held that all contracts (other than those excepted by statute) restraining trade were invalid per se, regardless of their reasonableness.

Yesterday, the California Supreme Court backed off of this absolutist position by holding that a rule of reasonableness applies to contractual restraints on business operations and commercial dealings.  Ixchel Pharma LLC v. Biogen, Inc., Cal. S. Ct. Case No. S256927 (Aug. 3, 2020).  The case arose after two pharmaceutical companies entered into a settlement agreement that required one of the parties to agree to terminate any and all existing contracts with the plaintiff, another pharmaceutical company, and not enter into any new contracts with the plaintiff.  The plaintiff argued that Edwards conclusively held that Section 16600 invalidates all restraints on trade for all contracts, no matter how reasonable.  In adopting a rule of reason, the Court did not overrule Edwards but limited its application to noncompetition agreements following the termination of employment or sales of interests in a business.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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