Ixchel Pharma, LLC v. Biogen, Inc.
Not provided in text (2020)
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Rule of Law:
Tortious interference with at-will contracts requires proof of an independently wrongful act, and contractual restraints on business operations or commercial dealings, when challenged under Business and Professions Code section 16600, are subject to a rule of reason, not a per se invalidity rule.
Facts:
- Ixchel Pharma, LLC (Ixchel), a biotechnology company, had been developing a drug containing dimethyl fumarate (DMF) to treat Friedreich’s ataxia since 2012.
- In 2016, Ixchel entered into a Collaboration Agreement with Forward Pharma (Forward), another biotechnology company, to jointly develop a new DMF-containing drug, with Ixchel assigning patent rights to Forward and Forward agreeing to manage development, trials, manufacturing, and commercialization, with Ixchel receiving royalties.
- The Collaboration Agreement permitted Forward to terminate the agreement at any time by providing 60 days’ notice to Ixchel.
- In October 2016, Forward confirmed the feasibility of clinical trials and began developing a trial study plan with Ixchel.
- Forward was simultaneously negotiating with Biogen, Inc. (Biogen), another biotechnology company, to settle a patent dispute related to Biogen’s multiple sclerosis drug Tecfidera, which also contains DMF.
- Forward and Biogen reached a settlement and license agreement (Forward-Biogen Agreement) where Biogen paid Forward $1.25 billion in exchange for certain patents and intellectual property.
- Section 2.13 of the Forward-Biogen Agreement required Forward to terminate its Collaboration Agreement with Ixchel and refrain from entering into any new contracts related to the development of DMF-containing pharmaceutical products for any human indication.
- Forward subsequently notified Ixchel of its termination of the Collaboration Agreement due to the Forward-Biogen Agreement, leading to Ixchel losing its ability to develop its Friedreich’s ataxia treatment and being unable to find another development partner.
Procedural Posture:
- Ixchel filed suit against Biogen in federal district court, asserting violations of federal and state antitrust laws, tortious interference with contractual relations, intentional and negligent interference with prospective economic advantage, and violations of the unfair competition law (UCL).
- The district court granted Biogen’s motion to dismiss, determining that Ixchel had failed to state a claim for interference with prospective economic advantage or contractual relations because it did not plead an independently wrongful act.
- The district court also dismissed Ixchel’s federal and state antitrust claims for lack of antitrust standing and the UCL claim for failing to allege an actionable unlawful practice.
- Ixchel then filed a second amended complaint, alleging that Biogen had committed the wrongful act of violating Business and Professions Code section 16600 by including the restraint-of-trade provision in the Forward-Biogen Agreement.
- The district court again dismissed the complaint, ruling that the Forward-Biogen Agreement must be analyzed under the antitrust rule of reason and that section 16600 does not apply outside the employment context.
- Ixchel sought review of its tort and UCL claims in the United States Court of Appeals for the Ninth Circuit.
- After oral argument, the Ninth Circuit certified two questions of California law to the California Supreme Court.
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Issue:
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. What is the proper standard to determine whether Business and Professions Code section 16600 voids a contract by which a business is restrained from engaging in a lawful trade or business with another business?
Opinions:
Majority - Justice Liu
Yes, a plaintiff is required to plead an independently wrongful act in order to state a claim for tortious interference with an at-will contract. The court reasoned that its prior decision in Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) established a distinction between interference with existing contracts (generally no independent wrongfulness required) and interference with prospective economic advantage (requires independent wrongfulness). Following Reeves v. Hanlon (2004), which applied this requirement to at-will employment contracts, the court extended the independent wrongfulness standard to all at-will contracts. It emphasized that at-will contracts, like prospective economic relationships, provide no legal assurance of future relations, making them fundamentally different from fixed-term contracts. The court cited the Restatement Second of Torts, which treats interference with at-will contracts as analogous to interference with prospective economic relations. Imposing an independent wrongfulness requirement balances protection against predatory behavior with the promotion of legitimate business competition, preventing liability for mere good-faith competitive offers. The court disapproved of contrary appellate decisions. A rule of reason applies to determine whether Business and Professions Code section 16600 voids a contract by which a business is restrained from engaging in a lawful trade or business with another business. The court acknowledged that section 16600 applies to business contracts, citing statutory exceptions and historical court interpretations. However, it rejected Ixchel's argument for a per se invalidity rule, clarifying that the statute's predecessor (Civil Code former § 1673) was historically interpreted with a reasonableness standard for contractual restraints on business operations and commercial dealings, distinct from the stricter rule applied to post-employment noncompetition agreements. The court reviewed cases like Grogan v. Chaffee (1909) and Great Western Distillery Products v. John A. Wathen Distillery Co. (1937) to show that restraints were upheld if reasonable and designed to promote business, rather than stifle competition or create monopolies. The court further harmonized section 16600 with the Cartwright Act, California's antitrust statute, which also uses a rule of reason for restraints of trade. A per se rule, the court explained, would inadvertently invalidate many common and procompetitive business arrangements such as exclusive dealing and partnership agreements, which involve legitimate commercial restraints.
Analysis:
This landmark decision from the California Supreme Court significantly redefines the scope of tortious interference claims and the application of Business and Professions Code section 16600. By extending the 'independent wrongfulness' requirement to all at-will contracts, the court has narrowed the potential for litigation arising from legitimate competitive actions that cause the termination of such agreements. Simultaneously, the clarification that a 'rule of reason' applies to non-employment restraints under Section 16600 provides crucial certainty for businesses engaging in commercial dealings like exclusive contracts and partnerships. This dual clarification promotes robust business competition in California by shielding many routine commercial activities from legal challenge, while still allowing recourse for truly unlawful or anticompetitive conduct. The ruling aligns California law more closely with the Restatement of Torts and federal antitrust principles, likely impacting a wide array of business contracts and competitive strategies.
