California Non-Compete and Trade Secret Catch-Up

Non-Competes

California is notorious in the non-compete world for its prohibition and extreme scrutiny of individual non-compete and other types of restrictive covenant agreements. These types of agreements between two businesses, however, have received less attention.

In August, the Supreme Court of California in Ixchel Pharma, LLC v. Biogen, Inc., 470 P.3d 571, 573 (Cal. 2020), examined an agreement between two businesses and found “that a rule of reason applies to determine the validity” of business-to-business non-compete agreements. While some commentary on Ixchel has examined the validity of business-to-business non-compete agreements, the larger focus of the Ixchel case was “whether contractual restraints on business operations or commercial dealings are subject to a reasonableness standard under [California Business and Professions Code] section 16600.” Id. at 581 (emphasis added). It is important to note that the Ixchel court reiterated California’s strong position that agreements not to compete related to the termination of employment are invalid and not subject to a reasonableness test. Id. at 583-584. The Ixchel court adopted the reasonableness standard from the Cartwright Act (California’s antitrust law which generally assesses whether an agreement promotes or suppresses competition) for application to business-to business non-competes and further stated that its decision potentially affects all California contracts “that in some way restrain a contracting party from engaging in a profession, trade, or business.” Id. at 581, 588.

On November 6, 2020, the Court of Appeal for the Fourth District, Division 1, examined the findings set forth in Ixchel in Quidel Corporation v. Superior Court of San Diego County, — Cal. Rptr. 3d — (2020), 2020 WL 6534466 (Cal. App., Nov. 6, 2020). In Quidel, the question before the court was whether section 16600 invalidates all contractual non-compete provisions, even outside the employment context, without regard to reasonableness or whether the restraints might actually advance competition. Id. at *3. Quidel reiterated that the “per se” ban on non-competition agreements is limited to employment agreements, distinguishing the case before it as an exclusive dealing agreement between two sophisticated biotechnology companies rather than a case affecting an individual’s ability to engage in a profession, trade, or business. Id. at *5. The Quidel court, after relying on Ixchel, found that “as long as a [business-to-business] noncompetition provision does not negatively affect the public interests, is designed to protect the parties in their dealings, and does not attempt to establish a monopoly, it may be reasonable and valid.” Id. at *7. Relying on the Ixchel case, the court required the application of the rule of reason from the Cartwright Act. Quidel found the application of such a rule of reason test required additional factual development and vacated the lower court’s grant of summary judgment on the issue.

Taken together, Ixchel and Quidel make it clear that business-to-business noncompetition agreements in California will be enforced if the agreements pass a reasonableness test. Such a test is inherently factual, however, and may limit court decisions summarily assessing and disposing of business non-competition disputes.

Trade Secrets

California businesses seeking to protect their trade secrets in litigation are required to provide a description of the trade secret allegedly stolen, and indeed must identify their trade secrets with “reasonable particularity” at the onset of the litigation. See CCP § 2019.210.

However, a recent Ninth Circuit decision, InteliClear, LLC v. ETC Global Holdings, Inc., 978 F.3d 653 (9th Cir. 2020), has opened the door to arguments that early identification of the trade secret is not required and that, contrary to the California Uniform Trade Secrets Act’s (CUTSA) clear statutory language, plaintiffs are permitted to conduct discovery before the requirement to identify with sufficient particularity is required.

In InteliClear, the plaintiff sued its former licensee, ETC, alleging that ETC had misappropriated its securities tracking database and therefore violated both the federal Defend Trade Secrets Act (DTSA) and CUTSA. Id. at *6. ETC allegedly built its own securities tracking system from elements of InteliClear’s trade secrets. Id. at *5-6. One day into discovery, ETC filed a motion for summary judgment contending that InteliClear failed to identify its trade secret with sufficient particularity, that InteliClear did not show that the InteliClear system was a trade secret, or that ETC had access to InteliClear’s trade secret. Id. at *2. Prior to the completion of discovery, the district court granted ETC’s motion for summary judgment, finding that InteliClear had failed to identify with sufficient particularity which elements of its system were trade secrets. Id. at *7.

The Ninth Circuit disagreed and reversed summary judgment, holding that the plaintiff had sufficiently identified “at least one trade secret with sufficient particularity to create a triable issue” and that the plaintiff need not identify all trade secrets at issue. Id. at *5. The Ninth Circuit explained that it was not fatal to InteliClear’s claim that its “hedging language” left open the possibility that the identification of a trade secret could be expanded or refined through discovery. Id. The Ninth Circuit also found that the lower court had abused its discretion and that the grant of summary judgment was “precipitous, premature and did not fairly permit development of the issues for resolution” or give the plaintiffs any opportunity for discovery as provided under Federal Rule of Civil Procedure 56(d). Id. at *9.

While the Ninth Circuit’s ruling does not change the standard under California state law, it appears to open the door to arguments that early identification of a trade secret is not required and that contrary to the CUTSA’s clear statutory language, a plaintiff may be able to conduct discovery before being required to identify the trade secrets at issue with particularity.