Court of Appeals Cites “Rule of Reason” Standard for Evaluation of Non-compete Restrictions in Commercial Agreements

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Last year, the California Supreme Court held in Ixchel Pharma, LLC v. Biogen, Inc., that restraints in contracts between businesses should be evaluated using the same “rule of reason” standard that courts use to analyze antitrust violations under the Cartwright Act. Our previous article analyzing the Ixchel decision can be found here.
 

Recently, in Quidel Corporation v. The Superior Court of San Diego County, the California Court of Appeals for the Fourth District (“Court of Appeals”) applied Ixchel to overturn a decision of the San Diego Superior Court (the “Superior Court”).

Procedural History

The case arises from a dispute over an exclusivity provision contained in a business agreement (the “Agreement”) entered into between two biotechnology companies, Quidel Corporation (“Quidel”) and Beckman Coulter, Inc. (“Beckman”).[1] Under the terms of the Agreement, Beckman became the exclusive developer of a B-type natriuretic peptide (BNP) assay for Quidel. Quidel would use these assays in a specially designed analyzer to help diagnose congestive heart failure. Section 5.2.3 of the Agreement prohibited Beckman from researching or developing its own BNP assay for diagnosing cardiac disease until two years before the expiration of the Agreement.

In November 2017, Beckman sued Quidel in Superior Court requesting a declaratory judgment that Section 5.2.3 of the Agreement was void and unenforceable as a violation of California Business and Professions Code 16600 (“Section 16600”) because it constituted an impermissible non-compete clause. In particular, Beckman argued that Section 5.2.3 limited its ability to develop a competing assay to diagnose cardiac disease, thereby restraining its ability to engage lawful business in violation of Section 16600.

In December 2018, the Superior Court granted Beckman’s motion for partial summary adjudication holding that Section 16600 voids every contract that restrains anyone from engaging in a lawful profession, trade, or business of any kind. Quidel then filed a petition to have the Superior Court’s decision reviewed by the California Supreme Court, which was eventually transferred to the Court of Appeals after the California Supreme Court issued its decision in Ixchel.

The Appeals Court Decision

The Court of Appeals found in favor of Quidel and directed the Superior Court to enter a new order denying Beckman’s motion for summary adjudication. The Court of Appeals explained that the Superior Court’s decision required reversal because it (1) improperly applied Section 16600 to invalidate Section 5.2.3 of the Agreement and (2) failed to evaluate 5.2.3 under the “rule of reason” standard set forth in Ixchel.

The Court of Appeals first noted that the Superior Court improperly applied the California Supreme Court’s 2008 decision in Edwards v. Anderson LLP to conclude that Section 5.2.3 violates Section 16600’s ban on non-compete provisions. The Court of Appeals found that the per se ban on non-compete clauses expressed in Edwards was limited to employment agreements only. Unlike the non-compete clause at issue in Edwards, Section 5.2.3 did not restrict an individual employee’s ability to engage in a profession, trade or business.

Moreover, citing to Ixchel, the Court of Appeals explained that the validity of a provision in a commercial agreement that prevents a business from engaging in lawful trade or business must be evaluated under the “rule of reason” standard. This standard includes assessing whether the provision (1) tends to restrain trade more than promote it; (2) is not necessary “to protect the respective parties in dealing with each other;” or (3) forecloses a substantial share of the line of commerce. The Court of Appeals further recognized that although Section 5.2.3 limits Beckman’s ability to develop a competing assay to diagnose cardiac disease, how this limitation impacts the “rule of reason” factors requires additional factual development.  As a result, the Court of Appeals vacated the Superior Court’s order granting Beckman’s motion for summary judgement.

While it remains to be seen how Superior Court will apply the “rule of reason” to evaluate Section 5.2.3, the Court of Appeals’ holding in this case demonstrates an early adoption of the “rule of reason” standard set forth in Ixchel, which will likely be applied to future cases involving non-compete restrictions in commercial contracts.

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[1] The agreement was originally entered into between Beckman and Biosite, Inc. (“Biosite”) in 2003. However, Quidel became the successor in interest to Biosite and the counter-party to Beckman in the Agreement.

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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