Ninth Circuit Indicates Restrictive Covenants In Collaborative Business-to-Business Agreements Can Escape Per Se Liability

• Published date: 07 September 2021
• Subject Matter: Anti-trust/Competition Law, Food, Drugs, Healthcare, Life Sciences, Antitrust, EU Competition
• Law Firm: Littler Mendelson
• Author: Mark A. Romeo and Vahe Mesropyan

Few experts in the field of unfair competition law would disagree that the 2018 decision in AMN Healthcare, Inc. v. Aya Healthcare Services, Inc.,¹ was a game changer in California, overturning what was then approximately 30 years' worth of jurisprudence upholding the enforceability of employee non-solicitation covenants in the Golden State. Moreover, while the decision was viewed by some as limited to its own facts (precluding the enforcement of non-solicitation covenants within the recruiting industry where it is someone's job to solicit people for work), that viewpoint was quickly dashed with several federal court decisions, beginning with Barker v. Insight Global,² which followed the AMN Healthcare decision in concluding an employee non-solicitation covenant is a partial restraint on trade under California law,³ and that the holding of AMN Healthcare should not be limited to the recruitment context.⁴

The holding of AMN Healthcare has also had further trickle-down effects, confusing businesses whose entire purpose is to provide temporary workers and/or experts to their clients who otherwise would have not been able to hire such talent on their own and/or could not afford to do so on a longer-term basis. Moreover, the problem is not limited to the business of providing talent. The problem also applies to businesses that, for example, may be evaluating a business to acquire, and thus want exposure to the target's talent to evaluate whether the talent justifies paying multi-millions of dollars to acquire that business. In those circumstances, companies often enter into non-disclosure agreements (or NDAs) that contain, among other things, a non-solicitation covenant that would prevent the parties to the potential transaction from soliciting the talent of the other party.

While businesses looking for support to uphold these seemingly logical limitations on protecting their talent had to dig deep to find support, the law has not been the model of clarity in this context. For example, in 1983, the California Court of Appeal decided Webb v. West Side District Hospital.⁵ There, the court considered whether a non-solicitation covenant between a staffing agency providing doctors to hospitals was "reasonable" where the hospital's solicitation of the doctors was not per se banned but subject to the payment of a fee if, in fact, the hospital did solicit the staffing agency's medical talent that had been placed with the hospital client. Although the Webb court upheld the enforceability of the non-solicitation covenants in the business-to-business context, it was called into question in VL Systems, Inc. v. Unisen, Inc.⁶ That case arose from a challenge of an employee non-solicitation/no-hire provision between two businesses arising from a computer consulting contract. The contract prohibited the client from hiring VL Systems' employees for 12 months after the contract ended. The court found that the provision was unenforceable, but based this decision on the fact that the provision was overly broad, and expressly took no position on whether a more narrowly drawn and limited provision would survive scrutiny.⁷

Finally, the California Supreme Court's analysis in Edwards v. Arthur Andersen LLP⁸ did not, according to some, provide businesses the clarity they could rely on in structuring business agreements with others who came into contact with their talent. But, the Webb court's "reasonableness" analysis seemed to be inconsistent with Edwards. Indeed, under Edwards, all that must be shown is that the restriction has the effect of restraining the individual from pursuing a lawful business, trade or profession. While the factual situation underlying Edwards was not a business-to-business dispute, the application of a reasonableness standard appeared to be dead where there is a contractual provision that arguably has the effect of inhibiting employee mobility.

After Edwards and following AMN Healthcare and its progeny, the landscape around the enforcement of non-solicitation covenants appeared to be heavily skewed towards unenforceability. Then, just over one year ago, the California Supreme Court issued another potential game-changing opinion in Ixchel Pharma, LLC v. Biogen, Inc.⁹ There, Forward Pharma ("Forward") had entered into a "collaboration contract" with Ixchel Pharma, LLC ("Ixchel"), allowing Ixchel to develop a drug for the treatment of a disorder known as Freidreich's ataxia. However, Forward had been in litigation with a third party, Biogen, Inc., ("Biogen") over claims of patent infringement, and to settle the patent dispute, Forward and Biogen entered into a settlement and license agreement that required Forward to terminate existing, and to not enter into any new, agreements with Ixchel for the development of any product using a particular drug for the treatment of a human condition, including Friedreich's ataxia. This resulted in Forward terminating its agreement with Ixchel and Ixchel suing Biogen for antitrust violations and tortious interference with the contract...