Competing with Non-Competes in a Commercial Setting: An Expensive Proposition
In California, covenants not to compete are frowned upon in the employment setting. Business and Professions Code section 16660 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.” Injunctions are frequently granted prohibiting their enforcement.
Not so in commercial relationships, especially if the non-compete arises in a negotiated contract formed between two sophisticated companies. In Quidel Corporation v. Superior Court (Beckman Coulter) (2020) 271 Cal.Rptr.3d 237, an appellate court considered the scope of this statute in a commercial setting. Quidel and Beckman entered into a written agreement. Under that contract, Beckman manufactured the BNP assay for Quidel using proprietary materials that Quidel provided, including antibodies Quidel had developed. In exchange, Quidel purchased all of its requirements of the BNP assay from Beckman, and Quidel was prohibited from engaging other manufacturers to provide the BNP assay. In reciprocity, Beckman was required to sell the BNP assay exclusively to Quidel.
Further, Beckman was prohibited from researching or developing an assay that detects the presence or absence of the BNP proteins or markers until two years after the agreement expired. Some years after the contract was signed, Beckman planned to launch a new platform and wanted to develop a competing assay product. Beckman sued Quidel, contending that the prohibition on research was a non-compete clause and void under Business and Professions Code section 16660. The trial court granted Beckman summary adjudication, finding the prohibition on research violated Business and Professions Code section 16660.
In a writ proceeding, the appellate court first noted that in California non-competition clauses outside the employment context have been held valid. However, the appellate court observed there was a competing factor – California’s Cartwright Act, prohibiting monopolistic business practices. Ultimately, the appellate court reversed the summary adjudication because it determined there needed to be a more fully developed factual record on whether the non-compete provision was reasonable or not. Quidel suggested the restraint was reasonable and narrow, because Beckman could develop other interchangeable assays. “However, whether these limitations tend to restrain trade more than promote it remains unclear and requires a factual analysis.”
The key take-away from Quidel is that while non-competes are usually found invalid in employment relationships, they are common in commercial settings. They must be analyzed to determine if they serve reasonable and lawful business purposes. Discovery and a fully-developed factual record, even possibly expert testimony, will be needed for a court to decide this issue. This is an expensive proposition. Challenging a non-compete clause in a commercial setting should only be undertaken only when the financial stakes warrant it.
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