In California, it depends.
California is notorious in the non-compete world for its virtual prohibition and scrutiny of individual non-compete and other types of restrictive covenant agreements, such as non-circumvention and non-solicitation agreement.
But what about when the agreement is between two commercial entities?
Rule of Reason
In August 2020, 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.
California courts have generally invalidated agreements not to compete upon the termination of employment or upon the sale of interest in a business without inquiring into their reasonableness, they have invalidated other contractual restraints on businesses operations and commercial dealings only if such restraints were unreasonable.
Retraining commercial trade in some way is not necessarily illegitimate in California. In fact, that court identified a multitude of ways in which contractual limitations on the freedom to engage in commercial dealings can promote competition, including, but not limited to, ensuring that marketing efforts are not exploited by contractual partners.
California’s “per se” ban on non-competition agreements is generally limited to employment agreements. 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.
This case should be of interest to networks, lead aggregators, publishers, lead generators and general counsel. Contact an affiliate and performance marketing attorney if you are interested in the implications of the Ixchel decision, or for assistance with professionally drafted affiliate agreements, ad network agreements and other performance marketing agreements.
Takeaway: Commercial entities should strive to ensure that contracts with restraints on business dealings are objectively reasonable and otherwise satisfy applicable legal standards, including, without limitation, whether the agreement harms competition more than it helps by considering the facts peculiar to the business in which the restraint is applied, the nature of the restraint and its effects, and the history of the restraint and the reasons for its adoption.
Richard B. Newman is FTC TRO and asset freeze counsel at Hinch Newman LLP.
Informational purposes only. Not legal advice. May be considered attorney advertising.