When Business Competition Goes Too Far: Interference With At-Will Contracts

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The American economy’s capitalist features promote the need for healthy business competition.  One of the judiciary’s jobs has been to draw lines as to when that competition goes too far, without stifling legitimate competition. To that end, California has traditionally recognized two economic relations torts: interference with the performance of a contract and interference with a prospective economic relationship/advantage.  One of the key distinctions between the two torts is that conduct interfering with a mere economic relationship must be “independently wrongful” to be actionable, whereas interference with a contract is “a wrong in and of itself.”  In a case called Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130 (2020), the California Supreme Court recently clarified whether interference with “at-will” contracts constitute interference with contract or merely interference with an economic relationship.  The Court determined that interference with an “at-will” contract is more like interference with an economic relationship, and thus requires the interfering conduct to be independently wrongful to be actionable.

Ixchel Case Facts

A biotechnology company, Ixchel Pharma, LLC (“Ixhchel”), entered into an agreement with Forward Pharma (“Forward”) to jointly develop a drug for the treatment of a disorder called Friedreich’s ataxia.  The agreement was an at-will contract, which authorized Forward to terminate the agreement “at any time” so long as it provided notice to Ixchel 60 days in advance.  Ixchel and Forward’s joint efforts were going according to plan until Forward decided to withdraw from the agreement, as was allowed under the terms.

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 a particular ingredient, DMF, found in one of Biogen’s drugs.  As part of the ultimate settlement agreement, Forward agreed to cease production of any products using DMF and to terminate any related contracts, including the agreement with Ixchel.

After Forward terminated its agreement with Ixchel, Ixchel lost its ability to develop the Friedreich’s ataxia treatment and was unable to find another development partner.  Ixchel sued Biogen in federal district court for interference with contract, but its case was dismissed on a motion to dismiss since Biogen’s conduct was not independently wrongful.  On appeal, the Ninth Circuit Court of Appeal requested the California Supreme Court to clarify California law as to at-will contracts.

California Supreme Court Decision

In approaching this case, the California Supreme Court recognized the need to protect business relationships without “chilling legitimate business competition.”  Boiled down to its essence, the Court’s analysis turned on whether a showing of independent wrongfulness was required to state a tort claim for interference with an at-will contract.  The Court teed up the issue by acknowledging, “we have not decided whether interference with an at-will contract more closely resembles interference with contractual relations [(which does not require a showing of independent wrongfulness)] or interference with prospective economic advantage [(which does require a showing of independent wrongfulness)].”

For context, “an 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.”

The California Supreme Court followed the lead of several other states, including New Jersey, Maryland, Virginia, Colorado, and New York, and held that California requires interference with an at-will contract to be independently wrongful to be actionable.  The Court explained that contracts generally result in “a formally cemented economic relationship [that] is deemed worthy of protection from interference by a stranger to the agreement.”  In contrast, “at-will contracts do not involve the same cemented economic relationships as contracts of a definite term.”

Lessons

The Ixchel case provides clarity regarding the protections available to business relationships based on at-will contracts, and further emphasizes the difference between relationships based on contracts of a definite term and any other business relationship.   When approaching any business relationship, it is important to understand these distinctions and to consider the consequences of entering into an at-will contract or a short-term contract, if the hope is for contract renewals or a prolonged relationship.  For example, as in the case of Ixchel, if a business venture will require significant time or resources and is also reliant on a specific business relationship, then it may be important to negotiate a contract that commits the parties for a time period sufficient to complete the venture or at least reach a stage where the venture does not require both parties.  This provides some protection against a third-party luring away your business partner with a better offer or some other incentive, causing the entire venture to fall apart.  In the alternative, parties may also consider negotiating other contract terms that assist in protecting their investment built on an at-will contract relationship, including longer notice provisions before termination, cost reimbursements, and/or representations and warranties that there is no pending claim or lawsuit that might jeopardize the business relationship.

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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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