Appeal

The California Supreme Court Clarifies Section 16600 as Applied to Business Contracts and Holds That an Independently Wrongful Act Is Necessary to Prove Interference With At-Will Contracts

The most powerful tool capable of invalidating competitive restraints under California law is Business and Professions Code section 16600.  That statute states that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  California courts have historically used that statute to void non-compete and non-solicit provisions in agreements between employees and employers or buyers and sellers of a business.

The question presented to the California Supreme Court in Ixchel Pharma, LLC v. Biogen, Inc., was whether section 16600 voids restraints on business operations and commercial dealings between businesses in the same manner that it voids restraints on competition following the termination of employment or the sale of a business. The Court held that section 16600 does indeed apply to contractual restraints on businesses, but not in the same way as it applies to employment or sale-of-business agreements.  Instead, contractual restraints on business operations and commercial dealings between businesses should be evaluated using the same “rule of reason” standard that courts use to analyze alleged antitrust violations under the Cartwright Act.  In so holding, the Court harmonized section 16600’s application to commercial agreements with long-standing antitrust laws.

In a separate part of its opinion, the Court also held that a claim for tortious interference with an at-will business contract (i.e., one that can be terminated at any time) requires pleading and proving an independently wrongful act.  This brings the standard for interference with an at-will business contract more in line with a cause of action for tortious interference with prospective economic relations.

Case Background.  TSW initially reported on this case in August 2019, when the Ninth Circuit certified these issues to the California Supreme Court for consideration. The case arises from a unique set of circumstances in which the plaintiff (Ixchel) challenges a contractual restraint on business contained in a contract between the defendant (Biogen) and a third party (Forward).

The facts of this case are described in TSW’s earlier post.  As a brief recap, Plaintiff Ixchel filed a claim against Defendant Biogen alleging, among other things, interference with contract.  Ixchel alleged that it had a “collaboration agreement” with Forward to jointly develop a new drug.  That collaboration agreement stated that it could be terminated at any time by either party, i.e., it was essentially an “at-will” contract.  Ixchel further alleged that Biogen subsequently convinced Forward to enter into a separate agreement with Biogen in which Forward agreed to (1) terminate the collaboration agreement with Ixchel—which it had a right to do—and (2) refrain from entering into any other contracts for the development of the drug.

At the district court level, the court dismissed Ixchel’s interference with contract claim, holding that interference with an at-will contract required pleading an independently wrongful act.  Ixchel argued that the non-compete provision in Biogen’s contract with Forward violated section 16600 and, thus, constituted an independently wrongful act.  The court rejected this argument, finding that section 16600 did not apply to business agreements outside the employment context.

After the district court dismissed Ixchel’s claims, it appealed, and the Ninth Circuit certified two questions to the California Supreme Court:  (1) Is a plaintiff required to plead an independently wrongful act in order to state a claim for tortious interference with a contract that is terminable at will? (2) 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?

Tortious Interference with At-Will Contracts.  In answering the first question, the Court held that interference with an at-will contract requires more than interference with other contracts and, specifically, requires pleading and proving that the defendant engaged in an independently wrongful act.  The Court explained that a cause of action for tortious interference with contractual relations generally does not require the defendant’s conduct to be independently wrongful “apart from the interference with the contract itself.”  It noted, however, that in Reeves v. Hanlon, it held that interference with at-will employment contracts should require independent wrongfulness because (a) California public policy favors employee rights to compete with former employers, and (b) “at-will contracts do not involve the same ‘cemented economic relationship[s]’ as contracts of a definite term” since there is no legal assurance of future relations.

In its holding, the Court declined to limit Reeves to the employment context, reasoning that the “broader logic underlying [Reeves] is persuasive with respect to other spheres of economic relations” and that because parties to at-will contracts—like parties to a prospective economic relationship—have “no legal assurance of future economic relations,” the same interests are implicated even though parties to at-will contracts may have more concrete “expectations of a continued relationship.”  It therefore held that stating a cause of action for interference with an at-will contract requires an independently wrongful act, just like a cause of action for interference with prospective economic advantage.

Section 16600 as Applied to Business Contracts.  In answering the second question, the Court started by observing that the parties did not appear to dispute that section 16600 applies to “business contracts” or that none of the statutory exceptions to section 16600 (e.g., sale of a business or dissolution of a partnership or LLC) applied to the facts of the case.  Rather, the true dispute was about the standard a court should apply when analyzing a contractual restraint on business operations and commercial dealings between businesses.

After examining the legislative and judicial history surrounding section 16600 and its Civil Code predecessor, the Court distinguished two categories of agreements that may contain restraints on trade:  (1) contractual restraints in employment or sale of business agreements, and (2) contractual restraints on business operations and commercial dealings between businesses.  With respect to the latter, the Court held that section 16600 should be read in accordance with the Cartwright Act to incorporate the same “rule of reason” that applies in an antitrust analysis.  Accordingly, courts evaluating such business restraints under section 16600 must ask whether the restraint “promotes or suppresses competition” considering the “circumstances, details, and logic of a restraint.”  With respect to the former category of agreements (employment and sale-of-business), the Court reaffirmed its decision in Edwards and other existing opinions that do not apply a reasonableness standard and instead strictly construe section 16600 in the employment or sale-of-business context to void any restriction on an individual’s ability to engage in a lawful profession, trade, or business if that restriction does not otherwise meet a recognized exception.

If trade secrets misappropriation claims can be brought by non-owners, what should companies do to manage risk?

Last week, we examined the recent Third Circuit decision in Advanced Fluid Systems, which held that a trade secrets plaintiff did not need to be an owner or a licensee of the alleged trade secrets to bring a state law misappropriation claim under Pennsylvania’s UTSA—all that was required was that the plaintiff had “lawful possession” of the trade secrets. In so holding, the Third Circuit added to the weight of the Fourth Circuit’s similar analysis of Maryland’s UTSA in DTM Research, L.L.C. v. AT&T Corp., 245 F.3d 327 (4th Cir. 2001).

READ MORE

Are State Governments Immune From Suit For Misappropriation Of Trade Secrets?

You are a state-government contractor. You respond to an RFP issued by a state-government entity. In your bid proposal, you submit documents that contain your trade secrets. You do not get the contract, but you later learn that the state-government entity gave your trade secret information to your direct competitor who did get the contract. Do you have any options under federal or state trade secret laws to sue the state? READ MORE

Third Circuit: Spying on Former Employee’s Social Media Account Does Not Constitute “Unclean Hands” to Bar Trade Secret Misappropriation Claim

Consider this: a former employee has just left his or her employer and may have taken trade secrets to a competitor.  Can the employer log in to that former employee’s personal social media account to search for potentially incriminating evidence?  For most employers, the answer may be “no,” as doing so may be unlawful or at a minimum, may constitute “unclean hands” (a doctrine barring equitable relief when the party seeking the relief has committed misconduct related to the claims at issue) possibly jeopardizing the employer’s trade secret misappropriation (and other claims) against the former employee. READ MORE

Trade Secret Sparks Beer Brawl in the Ninth Circuit: When is Your Word Enough?

On September 13, the Ninth Circuit heard oral arguments on an issue of first impression in Anheuser-Busch Cos. v. James Clark, No. 17-15591 (9th Cir. 2015).

Anheuser-Busch filed a complaint in the Eastern District of California against former employee James Clark, alleging that he violated California’s Uniform Trade Secrets Act (CUTSA) by unlawfully disseminating a document containing its beer recipe for use in a separate class action suit. To support its allegations, the company submitted a declaration stating that the leaked document contained “confidential information related to Plaintiffs’ brewing processes, including but not limited to, information regarding a variety of analytical characteristics for each of [Plaintiffs’] products.” READ MORE

Federal Circuit Illuminates Right to Disgorgement as Remedy for Trade Secret Misappropriation

The Federal Circuit recently issued an opinion, Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc., that addressed several interesting issues impacting the calculation of damages in trade secret actions.  Perhaps the Court of Appeals’ ruling of greatest consequence involved its determination that there is no Seventh Amendment right to a jury decision on disgorgement of profits – a remedy also often commonly described as “unjust enrichment.”  The Federal Circuit instead ruled that the calculation of disgorgement damages is for the trial court to decide after making findings of fact and conclusions of law.  If the decision is extended by other federal courts, it could have wide-reaching implications for claims under the Defend Trade Secrets Act, which allows for unjust enrichment damages as a remedy for misappropriation of trade secrets. READ MORE

New York Court Takes Saved Cost Damages off the Table

Plaintiffs in New York state trade secret actions face a new limitation on their damages claims, according to a May 3, 2018 decision from the state’s Court of Appeals.  The 4-3 opinion settles a split in New York state case law.  Going forward, compensatory damages for trade secrets misappropriation are limited to the amount actually lost by the plaintiff, and cannot extend to the “hypothetical” amount saved by the alleged infringer on research or development. READ MORE

Law360 Publishes Mike Weil Expert Analysis on Trade Secrets and Anonymous Speech Online

Earlier this month, the California Supreme Court heard oral arguments in Hassel v. Bird, a case we’ve discussed previously because it involves critical issues related to anonymous online speech and trade secrets protection. As promised, we’ll have more coverage once the court renders its decision.

In the meantime, take a look at this recent Law360 Expert Analysis (subscription required). In it, TSW co-editor-in-chief Mike Weil reports that the arguments in Hassel took place before a “hot bench” and provides an in-depth analysis of the case law in this area.

California Supreme Court Will Hear Arguments This Week in Defamation Case With Implications for Online Publishers, Trade Secrets Owners

On Tuesday, April 3, the California Supreme Court will hear arguments in Hassel v. Bird.  Case No. S235968.  While seemingly a defamation case, it has direct implications on trade secrets owners and the rights of internet publishers.

In that case, a lawyer, Dawn Hassell, sued her former client, Ava Bird, for defamation in California state court because of a negative Yelp review.  247 Cal. App. 4th 1336 (2016).  Bird never responded to the lawsuit, so the trial court entered a default judgment in Hassell’s favor. The court ordered Bird and Yelp to remove her the reviews, even though Yelp was not a party to the lawsuit.  Yelp appealed on numerous grounds, including that (1) the court denied Yelp due process because Yelp wasn’t a party; (2) the order was an improper prior restraint; and (3) Yelp had immunity under the Communications Decency Act.  The court of appeal rejected all of these arguments.

This fight between the rights of internet publishers and those allegedly aggrieved by third parties who post information or statements on the publishers’ websites is an ongoing battle.  While often fought in the defamation space, many of these disputes involve trade secrets owners who claim others, including former employees, posted trade secrets on an internet publisher’s site.  See, e.g., Glassdoor, Inc. v. Superior Court, 9 Cal. App. 5th 623 (2017).  The Hassell case will have direct impact on this ongoing battle.  If upheld, it will create a potential roadmap for trade secrets owners to take down offending content published on the internet.  For the internet publishers, it creates a serious headache because it allows plaintiffs to sidestep the publisher’s right to defend against an injunction.

Trade Secrets Watch will monitor the oral argument and report back.

Defining Trade Secrets: Texas Supreme Court May Soon Decide How Particular Trade Secrets Owners Must Be in Court

In every trade secrets case, the plaintiff faces the same fundamental dilemma:  In order to enforce their rights in court, they must identify (at least to some degree) the trade secrets at issue. Although California has adopted a reasonable particularity requirement by statute, how much detail plaintiffs must provide when identifying their trade secrets in litigation continues to vary state-by-state.  The answer is no clearer under federal law, as the Defend Trade Secrets Act is silent as to this issue.

Notwithstanding, the level of particularity required is an ongoing issue that courts continue to grapple with.  For example, Texas’s highest court may weigh in for the first time on the degree of specificity plaintiffs must provide when identifying trade secrets allegedly misappropriated under the Texas Uniform Trade Secrets Act (TUTSA). READ MORE