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California Appellate Court Declines to Extend the Holding in Edwards v. Arthur Anderson LLP

California Appellate Court Declines to Extend the Holding in Edwards v. Arthur Andersen LLP Invalidating Noncompete Provisions in the Employment Context to an Exclusive Dealing Business Arrangement

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), granted the petition of Quidel Corporation and issued a writ instructing the trial court to vacate its order granting summary adjudication that a noncompete provision in an exclusive dealing contract between Quidel and Beckman Coulter was a per se violation of section 16600 of the California Business and Professions Code prohibiting restraints of trade.

The legal dispute grew out of an exclusivity clause in the parties’ contract restricting Beckman, until two years before the contract’s expiration, from researching or developing an assay for use in the diagnosis of cardiac diseases that measures or detects the presence or absence of a B-type natriuretic peptide (BNP) in a person’s blood. (Other provisions in the contract required Beckman to offer and sell the BNP assay exclusively to Quidel’s predecessor in interest, and the predecessor in interest was prohibited from using any entity other than Beckman to manufacture for it a diagnostic BNP assay for use.) Beckman brought a lawsuit asserting that it suffered damages due to the exclusivity provision and seeking a declaration that the provision was void under section 16600 of the Business and Professions Code.

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 (2008) 44 Cal. 4th 937. In Edwards, the court concluded that “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.”

In vacating the lower court’s order, the appellate court determined that the Edwards case holds that noncompete 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. The appellate court then analyzed a number of cases outside of the employment context (though all decided before Edwards) and concluded that a rule of reason would apply in determining the validity of noncompete clauses. (The court also found that in-term covenants not to compete in exclusive dealing agreements, unlike post-employment noncompete provisions at issue in Edwards, are not per se invalid.) The factors to be considered are whether such provisions negatively impact the public interests in tending to restrain rather than promote trade, 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. Since the factual record in the case was not sufficiently developed at this stage of the proceedings, Beckman could not demonstrate that there were no triable issues of material fact in analyzing the foregoing factors. Accordingly, the court issued a writ instructing the lower court to vacate its order granting summary adjudication that the exclusivity provision was a per se violation of section 16600 of the Business and Professions Code.

Whether the distinctions from Edwards drawn in the Quidel opinion prove to be legally durable will likely depend on whether and when the California Supreme Court weighs in on these issues.

 This e-Bulletin was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP. Mr. Ross is a member of the Corporations Committee of the Business Law Section of the California Lawyers Association.

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