On August 29, 2019, the California Court of Appeal, Fourth Appellate District, in the case of Quidel Corporation v. The Superior Court of San Diego County/Beckman Coulter, Inc., 2019 Cal. App. LEXIS 815, Cal. Ct. Appeal Case No. D075217 (Aug. 29, 2019), issued a writ instructing the trial court to vacate its order granting summary adjudication that a non-compete provision in an exclusive dealing was a per se violation of section 16600 of the California Business and Professions Code prohibiting restraints of trade.
Section 16600 provides that “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” There are statutory exceptions in sections 16601, 16602 and 16602.5 for noncompete provisions relating to sales of businesses, dissolutions of partnerships or dissociations of a partner from a partnership, and a dissolution of a limited liability company or a termination of a member’s interest in a limited liability company.
The lower court issued an order granting summary adjudication that the exclusivity provision was an invalid restraint of trade, relying on the California Supreme Court decision in Edwards v. Arthur Andersen LLP that ruled “Noncompetition agreements are invalid under section 16600 in California even if narrowly drawn, unless they fall within the applicable statutory exceptions of sections 16601, 16602, or 16602.5.”
The appellate court determined that the Edwards case holds that non-compete agreements in employment contracts are per se invalid. However, California’s strong public policy in employee mobility and the right of an employee to pursue any lawful employment do not apply to exclusive dealing arrangements between two sophisticated businesses. It, therefore, vacated the lower court’s order. The appellate court decided that, outside the employment context, a rule of reason would apply in determining the validity of noncompete clauses. Thus, in-term covenants not to compete in exclusive dealing agreements, unlike post-employment noncompete, are not per se invalid.
The factors to be considered are:
- Whether such provisions negatively impact the public interests intending to restrain rather than promote trade; and
- Are designed to protect the parties in their dealings and do not attempt to establish a monopoly or foreclose a substantial share of a line of commerce.
Whether the Fourth Appellate District properly distinguished application of non-compete provision in exclusive business dealing arrangements from post-employment non-compete agreements that were at issue in Edwards will likely depend on whether and when the California Supreme Court weighs in on these issues. In the interim, it is essential to assure your legal counsel take into consideration the uncertain state of the law when drafting a non-compete provision that may be applied in California.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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