Pleading Tortious Interference Claims in California After Ixchel

Editor's note: Authored by Amanda Main and Tijana Brien, this article was originally published in Law360.

Last August, after certification from the US Court of Appeals for the Ninth Circuit, the California Supreme Court settled several open questions of law in Ixchel Pharma v. Biogen.

First, the court held that a plaintiff asserting a tortious interference claim involving an at-will contract must plead an independently wrongful act.[1] In doing so, in the court all but merged the elements of a tortious interference with contractual relations claim and an intentional interference with prospective advantage claim for at-will agreements.

Second, the court confirmed that Section 16600 of the California Business and Professions Code applied to restraints on trade in business agreements outside of the employment context.[2] However, it ruled that such restraints were not per se void, but instead subject to a rule of reason analysis assessing:

whether an agreement harms competition more than it helps by considering the facts peculiar to the business in which the restraint is applied, the nature of the restraint and its effects, and the history of the restraint and the reasons for its adoption.[3]

As discussed further below, the court's decision will have a lasting impact on the viability of such claims as well as on how parties structure their contractual relationships going forward.

The Court's Holdings in Ixchel Pharma v. Biogen

First, in holding that a plaintiff bringing a tortious interference with contractual relations claim involving an at-will contract must plead an independently wrongful act to state a claim, the California Supreme Court balanced the "risk [of] chilling legitimate business competition" and protecting contractual relationships.[4]

The court previously held in the 2004 Reeves v. Hanlon decision that a plaintiff must plead independent wrongfulness to state a claim for interference with a specific category of at-will contracts: employment contracts.[5]

The Ixchel court noted that the broader logic underlying Reeves was "persuasive with respect to other spheres of economic relations" and thus expanded its holding to all at-will agreements.[6] The court reasoned that at-will contracts do not involve the same cemented economic relationships as contracts of a definite term and thus are not worthy of the same protection from interference by a stranger to the agreement.[7]

As the court pointed out, this expansion is consistent with the Restatement of Torts, which states that "[o]ne's interest in a contract terminable at will is primarily an interest in future relations between the parties, and he has no legal assurance of them."[8] The Restatement's view has been adopted by a number of states, including New Jersey, Colorado, Virginia and New York.[9]

When it comes to at-will agreements, the court essentially merged the elements of a tortious interference with contractual relations claim and an intentional interference with prospective advantage claim.[10] Traditionally, intentional interference with an existing contract was a wrong in and of itself, while a plaintiff claiming interference with prospective economic advantage was required to allege the defendant committed an independently wrongful act.[11]

The court stated:

The purpose of the independent wrongfulness requirement in economic interference torts is to balance between providing a remedy for predatory economic behavior and keeping legitimate business competition outside litigative bounds.[12]

When parties enter into a contract that is not terminable at will, the contracting parties may structure their decisions, invest resources and take risks in reliance on the agreement.[13]

But in the context of an at-will contract, the interest in protecting the at-will contract from interference "more closely resembles the interest in protecting prospective economic relationships" because any interest in future relations is speculative.[14] Since a party to an at-will agreement is free to terminate the agreement, it does not stand to reason that a third party should be liable for its termination absent some other wrongful conduct.

The court explained that ruling otherwise could prevent a "competitor's good faith offer that causes a business to withdraw from an at-will contract" and even trigger liability for third parties when "a business in an at-will contract solicits offers on its own initiative."[15]

Second, aside from its holding on the tortious interference claim, the California Supreme Court confirmed that California Business and Professions Code Section 16600 applies to business contracts and that a rule of reason analysis determines whether contractual restraints on trade in such agreements are void.[16]

The key inquiry under a rule of reason analysis is:

whether an agreement harms competition more than it helps by considering the facts peculiar to the business in which the restraint is applied, the nature of the restraint and its effects, and the history of the restraint and the reasons for its adoption.[17]

Notably, the court's ruling does not create an exception to agreements not to compete after termination of employment or in connection with the sale of an interest in a business, which have long been held to be invalid.[18]

The Landscape After Ixchel

Given the recency of Ixchel's ruling, very few decisions have faced its holding on tortious interference claims. However, at least one California appellate court decision has already affirmed the dismissal of a tortious interference claim on that basis.

In the December 2020 Coast Hematology-Oncology Associates Medical Group Inc. v. Long Beach Memorial Medical Center decision, the Court of Appeals for the Second District of California cited approvingly the "special rule governing at-will contracts requir[ing] the plaintiff to demonstrate the defendant interfered with its at-will relationships 'through wrongful means.'"[19]

In affirming the dismissal of a tortious interference claim, the court commented that the conduct in question "was robust competition between [the plaintiff] and [the defendant], not underhanded skullduggery."[20]

Going forward, plaintiffs will have a difficult time prevailing on a tortious interference claim where an at-will contract is at issue, unless they can point to an act that is "proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard."[21]

The California Supreme Court's ruling may cause fewer plaintiffs to assert such claims or may increase the chances of success of a motion to dismiss such claims because a claim for tortious interference of an at-will contract will rise and fall with a plaintiff's ability to plead, and ultimately prove, an independently wrongful act.

Notably, the court did not address what constitutes an at-will agreement in the business context. Parties may get creative arguing about what does or does not constitute an at-will agreement in order to avail themselves of a more or less stringent pleading standard for tortious interference claims.

For example, on Feb. 22, the Court of Appeals for the Second District of California was asked in Yang v. Hsiao to decide whether Ixchel's holding extended to "attorney contingent fee agreements because the client can terminate the agreement for any reason at any time."[22]

The court stated that it was an "open question whether an independent wrongful act is required for interference with an attorney's contingent fee agreement" after Ixchel and declined to rule either way, holding that whether or not it was required, defendant's act was a "sufficient independent wrongful act."[23] It will be interesting to see how lower courts grapple with other arguments.

Further, apart from its impact on litigation, Ixchel's holding should serve as a warning to parties investing significant resources into at-will contractual relationships. If the contract requires one party to expend considerable money or resources or take significant risks, or is otherwise imperative to its business, agreeing to a term that allows the other party to terminate the agreement at will may not be advisable and may even invite third parties to interfere with such a contract so long as their interference is not independently wrongful.

As to the court's ruling regarding Section 16600, it remains to be seen whether it will increase litigation over noncompete restrictions in business agreements as parties argue over their reasonableness. In the 2020 case Quidel Corp. v. Superior Court of San Diego County, the Court of Appeals for the Fourth District of California was ordered to reconsider its prior ruling in light of Ixchel.[24]

There, the trial court had granted summary adjudication in favor of the defendant, holding that a provision in a collaboration agreement between two life sciences companies, which prevented the defendant from developing a competing assay, was an invalid restraint on trade.[25]

The Court of Appeals concluded that assessing whether the provision was an invalid restraint on trade required factual development into several questions, including "whether [the] limitations tend to restrain trade more than promote it," "whether prohibiting development of [the competing] assay is necessary to protect parties in their dealings," and "whether the Agreement forecloses a substantial share of the line of commerce."[26]

Because those facts had not yet been developed, the appellate court reversed the trial court's grant of summary adjudication.[27] Quidel's holding suggests that, given the highly factual nature of the reasonableness inquiry, claims may be more likely to make it past the pleading stage.

On the other hand, following the California Supreme Court's decision in Ixchel, the Ninth Circuit affirmed the district court's dismissal of Ixchel's claims, finding that the contractual provision at issue did not violate Section 16600 under a rule of reason analysis.[28]

Businesses regularly employ arrangements that limit the parties' freedom to engage in commerce with third parties, including license agreements, franchise agreements, distribution agreements and other contracts.

As the Ixchel court acknowledged, such arrangements "can help businesses leverage complementary capabilities, ensure stability in supply or demand, and protect their research, development, and marketing efforts from being exploited by contractual partners."[29] This can have pro-competitive effects by allowing businesses to plan for the future.

While it may come as a relief to many businesses that restrictive covenants relating to competition and trade are not per se void under California law, the rule of reason analysis leaves open much uncertainty as it is left to the discretion of judges and juries to engage in a fact-intensive analysis to determine whether the agreement harms competition more than it helps.

For guidance, courts will likely look to case law applying the rule of reason analysis for antitrust claims under the Cartwright Act. Agreements whose purpose is to restrain trade by creating a monopoly, restricting supply or fixing prices may be problematic.

When entering into agreements containing restrictive covenants on trade, businesses must take into consideration the overall impact to competition and ensure that any such restraints promote competition more than they harm competition, as guided by case law in the antitrust context.

[1] Ixchel Pharma, LLC v. Biogen, Inc., 9 Cal. 5th 1130, 1148 (2020).

[2] Id. at 1149.

[3] Id. at 1150 (internal quotations omitted).

[4] Id. at 1148 (involving alleged interference with at-will Collaboration Agreement that allowed party to terminate "at any time" with 60 days' notice where party entered into separate settlement agreement with a third party that required it to terminate the Collaboration Agreement).

[5] Reeves, 33 Cal. 4th 1140, 1145 (2004).

[6] Ixchel, 9 Cal. 5th at 1145.

[7] Id.

[8] Id. at 1145 (quoting Rest.2d Torts § 766, com. g); see also Rest.2d Torts § 768 ("[o]ne who intentionally causes a third person . . . not to continue an existing contract terminable at will does not interfere improperly with the other's relation if . . . the actor does not employ wrongful means").

[9] Ixchel, 9 Cal. 5th at 1146.

[10] Id. at 1147.

[11] Id. at 1142.

[12] Id. at 1146 (internal quotations omitted).

[13] Id.

[14] Id. at 1147.

[15] Id. at 1148.

[16] Id. at 1149–50.

[17] Id. at 1150 (internal quotations omitted).

[18] Id. at 1156.

[19] 272 Cal. Rptr. 3d 715, 730 (Cal. App. Ct. 2020).

[20] Id. at 731.

[21] Ixchel, 9 Cal. 5th at 1137, 1142.

[22] Yang v. Hsiao et al., 2021 WL 671215, at *4 (Cal. App. Ct. Feb. 22, 2021).

[23] Id.

[24] Quidel Corp. v. Superior Court of San Diego Cty, 271 Cal. Rptr. 3d 238, 240 (Cal. App. Ct. 2020).

[25] Id. at 241.

[26] Id. at 249-50.

[27] Id.

[28] Ixchel Pharma, LLC v. Biogen, Inc., 821 F. App'x 897, 898 (9th Cir. 2020).

[29] Ixchel, 9 Cal. 5th at 1160–61.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.