Articles Posted in California Law

Golden Gate Bridge California

Author: Jarod Bona

In an earlier article, we discussed Leegin and the controversial issue of resale-price maintenance agreements under the federal antitrust laws. We’ve also written about these agreements here. And these issues often come up when discussing Minimum Advertised Price (MAP) Policies, which you can read about here.

As you might recall, in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet), the US Supreme Court reversed a nearly 100-year-old precedent and held that resale-price maintenance agreements are no longer per se illegal. They are instead subject to the rule of reason.

But what many people don’t consider is that there is another layer of antitrust laws that govern market behavior—state antitrust law. Many years ago during my DLA Piper days, I co-authored an article with Jeffrey Shohet about this topic. In many instances, state antitrust law directly follows federal antitrust law, so state antitrust law doesn’t come into play. (Of course, it will matter for indirect purchaser class actions, but that’s an entirely different topic).

For many states, however, the local antitrust law deviates from federal law—sometimes in important ways. If you are doing business in such a state—and many companies do business nationally, of course—you must understand the content and application of state antitrust law. Two examples of states with unique antitrust laws and precedent are California, with its Cartwright Act, and New York, with its Donnelly Act.

California and the Cartwright Act

This blog post is about California and the Cartwright Act. Although my practice, particularly our antitrust practice, is national, I am located in San Diego, California and concentrate a little extra on California. Bona Law, of course, also has offices in New York office, Minneapolis, and Detroit.

As I’ve mentioned before, the Supreme Court’s decision in Leegin to remove resale-price maintenance from the limited category of per se antitrust violations was quite controversial and created some backlash. There were attempts in Congress to overturn the ruling and many states have reaffirmed that the agreements are still per se illegal under their state antitrust laws, even though federal antitrust law shifted course.

The Supreme Court decided Leegin in 2007. It is 2020, of course. So you’d think by now we would have a good idea whether each state would follow or depart from Leegin with regard to whether to treat resale-price maintenance agreements as per se antitrust violations.

But that is not the case in California, under the Cartwright Act. Indeed, it is an open question.

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Author: Jarod Bona

Competitors battle in the marketplace and sometimes battle in the courts. Bona Law is an antitrust and competition boutique law firm, but most people think of the “competition” part of that description as redundant to the antitrust label. That is not a surprise because outside of the United States, most people refer to antitrust law as competition law.

But I view it differently: Antitrust Law is the literal collection of state and federal antitrust laws, including those involving restraints of trade, monopolies, mergers, criminal antitrust, and others. But Competition Law incorporates a wide range of business torts and statutes that make up the practical reality of competitor and marketplace court battles. These include, for example, the Lanham Act, patent laws, unfair competition statutes, tortious interference and others.

Indeed, you will notice that many antitrust complaints also include one or more additional non-antitrust claims. The players in these disputes can sometimes include consumers, for a class action lawsuit. But, for our purposes, we will primarily discuss business players within competition, either competitors or entities up and down the vertical chain of distribution of products or services. So, a court battle could match up two competitors, or perhaps a wholesale distributor and a retailer, for example.

Our job, as antitrust and competition attorneys, is to help clients solve legal problems involving any type of competition issue.

To that end, let me tell you about an important new competition decision. On August 3, 2020, the California Supreme Court issued its decision in Ixchel Pharma, LLC v. Biogen, Inc. that made law for certain tortious interference claims and for California Business and Professions Code section 16600 (which is mostly associated with prohibitions on certain non-compete agreements in California).

Tortious Interference

Tortious interference divides into two different claims: (1) tortious interference with contract and (2) tortious interference with prospective economic relationship (no contract, but maybe one was on the horizon).

For more detail, we describe the elements of tortious interference in California here.

The law (and California Supreme Court) consider tortious interference with contract as a bigger deal than the other kind of tortious interference—they don’t like the idea of breaking up existing contracts. So, in its wisdom, it requires an additional element for tortious interference that doesn’t involve a contract (the prospective-economic-relationship kind): The act of interference must be independently wrongful in some way. Interference by itself is not sufficient—there must be something else wrong with the interference act besides the interference.

But what does it mean for an act to be independently wrongful?

According to the California Supreme Court, “an act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” (p. 9, quoting Korea Supply Co. v. Lockheed Martin Corp, 29 Cal.4th 1134, 1159 (2003)).

A plaintiff need not plead an “independently wrongful act” for a tortious interference with contract, except—for the holding in this new California Supreme Court case (Ixchel).

You can read the decision for the facts, but the question in dispute is whether a plaintiff asserting a claim for tortious interference with contract has to plead an independently wrongful act, if the contract is an at-will contract. An at-will contract is one that either side can terminate at any time, for any or no reason.

The California Supreme Court—in deciding the issue for the first time—acknowledged that a “number of states have adopted” the independent wrongfulness requirement for tortious interference with at-will contracts. (14). And they ultimately agreed with these states.

An at-will contractual relationship is one that has no assurance of future economic relations—because either side may terminate it for any or no reason. That is, neither party has a “legal claim to the continuation of the relationship.” (17). And even though the parties to such a deal may expect it to continue, from the perspective of third parties, “there is no legal basis in either case to expect the continuity of the relationship or to make decisions in reliance on the relationship.” (17).

Just as importantly, the California Supreme Court expressed worry that allowing claims for tortious interference of at-will contracts without an independent wrongfulness requirement would chill legitimate business competition (also a common concern of judges interpreting antitrust laws). The Court didn’t want to create a cause of action for typical aggressive competition.

As a result, the Court held that “to state a claim for interference with an at-will contract by a third party, the plaintiff must allege that the defendant engaged in an independently wrongful act.” (18).

California Business and Professions Code Section 16600

Section 16600: “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.”

This is the famous California law that invalidates most non-compete agreements. Indeed, oftentimes, the most difficult question with these cases is whether California or some other law applies.

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Author: Luis Blanquez

California’s long-standing public policy in favor of employee mobility over an employer’s ability to prohibit any worker from going to work for a competitor is included in California Business & Professions Code Section 16600. So how do employers outside of California try to get around this powerful public policy?

First, employers in states where non-competes are still enforceable have attempted to implement choice-of-law clauses in employment agreements with California employees––requiring disputes between the parties to be governed not by California law, but rather by the law of a state more favorable to the enforcement of non-competes. But, as a general rule, California courts refuse to enforce such clauses. This is because California courts will not apply the law of another state where that law is “contrary to a fundamental public policy of the State of California.” In this case, the fundamental policy is open competition and employment mobility.

Conflict-of-law rules vary from state to state. Most states will not enforce a choice-of-law provision that violates the public policy of a state with a “materially greater interest” in the dispute or where the parties enjoy a “substantial relationship” with such state––i.e. where (i) the employee performs his/her work, (ii) the employee’s residence is, (iii) the contract was negotiated and formed, or (iv) the headquarters of the company is, among other factors.

Second, an employment agreement may also include a forum selection clause. In most cases it’s the employer––who sees one of its key employees leave to work for a competitor––who brings the case in the state court of the choice-of-law clause. When that happens, there is not much an employee can do, unless the case is moved to federal court and then transferred to another state. And even then, unless the case ends up in California federal court, the employee will have to rely on the courts of that other state to apply California choice-of-law principles to find the non-compete provision invalid.

To avoid such a hostile scenario, employees in California try to engage in what is called a “race to the courthouse.” They do so in the hope to effectively void their non-compete agreements under California law, before their former employers outside California enforce the non-compete agreement in a different state. This strategy sometimes works, but not always. For instance, the California Supreme Court has held that while California has a strong public policy against enforcing non-competition agreements, it’s not so strong as to warrant enjoining an employer from seeking relief in another state.

In any event, employers outside California have systematically struggled to enforce non-compete agreements in the past. And now it is even more complicated for them. For agreements entered into after January 1, 2017, California Labor Code Section 925 clarifies that employers may not require employees––who primarily work and reside in California––to agree to forum-selection and choice-of-law clauses that select non-California forums and/or laws, unless such employee is “individually represented by legal counsel in negotiating the terms of an agreement.

RESTRICTIVE COVENANTS

Usually the way employers try to restrict their workers from going to work for a competitor is by including in the employment contract a so-called “restrictive covenant.”

A restrictive covenant is an agreement between an employer and employee that limits an employee’s ability to compete after leaving the employer. The most common and restrictive type of agreement is a non-compete agreement. It prohibits the employee from offering its services within the agreement’s geographic scope for a period of time after leaving the employer. Other types of restrictive covenants may also limit an employee’s ability to solicit the employer’s customers or employees for a period of time.

They are, unquestionably, restraints on trade. But are they unreasonable restraints on trade? In many states outside California that is the issue—if they are reasonable, a court will enforce them. And what does reasonable mean? Again, it depends. But typically, like other restraints on trade, they must usually be narrowly tailored to serve their purpose. They should contain “reasonable” limitations as to time, geographic area, and scope of activity. The laws, of course, vary from state to state. But as a practical matter, most judges are skeptical. Some courts will actually rewrite the agreements to make them reasonable.

Is My Restrictive Covenant Legal Under California Law?

In California, however, the law does not allow employers to enforce a restrictive covenant against their former employees, particularly when it takes the form of a non-compete agreement.

NON-COMPETE CLAUSES

These clauses usually have two primary purposes.

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Author: Jarod Bona

As an antitrust lawyer, I find it interesting to see the inner workings of different types of markets—how people and companies buy and sell things. And the entertainment industry is one of the more fascinating ones.

The entertainment industry includes an interesting mix of concentrated players at various levels of production and distribution, often vertically integrated. Streaming services like Netflix have brought on changes that the coronavirus pandemic will likely accelerate.

Indeed, the federal government is even ending the old Paramount Antitrust Consent Decree, which governed the motion-picture industry for decades. You can read about that from our attorney, Steven Madoff, who was a top-level lawyer for Paramount for years, and an expert (literally) in the entertainment and media industry.

If the entertainment market or Hollywood itself interests you, there is a federal antitrust case in the Central District of California that you should follow: William Morris Endeavor Entertainment, LLC. v. Writers Guild of America, West, Inc.

This is a lawsuit by the major Hollywood agencies against the Writers’ unions, along with a counterclaim by the Writers’ union against the agencies. Labor unions, of course, create some unique antitrust issues, which you can read about here.

On April 27, 2020, the Court granted in part and denied in part a motion to dismiss by the agencies.

What I found interesting about this case, among other items, is that it attacks a practice developed by Michael Ovitz and his Creative Artists Agency firm called “packaging.”

Before I dig into packaging, I have to recommend that you read Michael Ovitz’s autobiography: Who is Michael Ovitz? In his book, he is open about his successes and excesses. If you are building a professional services firm, like I am, you will particularly appreciate riding along as Michael Ovitz builds a talent agency that changes the way business is done in Hollywood. You hear some “inside baseball” about Hollywood and learn how to build a business from scratch, all at once. Indeed, you learn how to change an industry. Seriously, it’s a good read.

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Back to “Packaging.” Instead of letting the studios take the lead in building movie or television projects and hiring the writers, actors, and directors that the agencies represented, the agencies would create their own project proposals for the studios. Not surprisingly, in doing so, they would “package” together a group of people, in different roles and positions, that they represent.

As part of the cost of this packaging service, the talent agencies would receive a fee from the studio. Before packaging, talent agencies were compensated by commissions as a percentage of their clients’ compensation.

The writer unions asserted that these packaging services harmed both writers and the guilds themselves and created conflict of interests for the agencies between their writer-clients and the production studios.

The complaint also alleged that the talent agencies price-fix the fees for these packages and exchange competitive sensitive information with each other about their packaging fee practices.

I won’t get into all the details here—my purpose is merely to whet your appetite to follow the case—but the writer guilds took certain actions that the talent agencies didn’t like, who then took their own actions, and eventually they all sued each other, leaving a California federal judge to sort it out.

As I mentioned above, the Court issued a motion to dismiss ruling, which allowed some claims, while dismissing others. I am not going to go into the details, but I will point out one interesting aspect of the ruling: The Court dismissed the federal antitrust price-fixing claims for lack of standing because the injured parties didn’t participate in the market that was competitively harmed. But the Court allowed a price-fixing claim under the same facts to go forward under the California antitrust statute—the Cartwright Act—because this statute doesn’t have the more restrictive definition of antitrust standing that the federal antitrust laws have.

For antitrust attorneys, this is particularly interesting because in most cases in which a plaintiff includes both federal and state antitrust claims, they rise and fall together. Here, the California antitrust claims (under the Cartwright Act) survived while the federal ones fell.

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Author: Jarod Bona

It depends. But probably not. Outside of California, courts may enforce these non-compete agreements arising out of an employment contract. Of course, most courts, no matter what the law and state, view them skeptically. In California, however, the policy against these agreements is particularly strong.

A restrictive covenant is often part of an employment agreement that restricts the employee’s actions after leaving employment. They typically prohibit the employee from competing in particular markets for a period of time after leaving the employer, but may also keep the employee from soliciting the company’s customers or even employees after leaving.

They are, unquestionably, restraints on trade. But are they unreasonable restraints on trade? In many states that is the issue—if they are reasonable, a court will enforce them. What does reasonable mean? Again, it depends. But typically, like other restraints on trade, they must usually be narrowly tailored to serve their purpose. They should contain “reasonable” limitations as to time, geographic area, and scope of activity.

The laws, of course, vary from state to state. But as a practical matter, most judges are skeptical. Some courts will actually rewrite the agreements to make them reasonable.

The purpose of these restraints is to offer protection to an employer that must necessarily share trade secrets and sensitive customer or financial information with their employees. The concern is that this information is so sensitive and easily exploited by a competitor that the employer needs the restrictive covenant to keep an employee from leaving and benefiting from the information as a competitor. It also reduces the likelihood of free-riding on training.

Despite these benefits, California law and courts take a hard stand against certain restrictive covenants. The California Supreme Court in Edwards v. Arthur Anderson LLP explained, for example, that “judges assessing the validity of restrictive covenants should determine only whether the covenant restrains a party’s ability to compete and, if so, whether one of the statutory exceptions to Section 16600 applies.” (exceptions include the sale of goodwill or corporate stock of a business).

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Most of The Antitrust Attorney Blog entries focus on antitrust and competition law, which I suppose isn’t a surprise. But that hides the fact that I am a business litigator as well. While many of my matters relate to antitrust, some of them don’t.

So I thought this award would present a good opportunity for me to remind you that although I really enjoy antitrust, I can also help you with straight-up business disputes. This includes everything from basic breaches of contract to complex global disputes spanning several jurisdictions. It also includes, of course, appellate attorney work, which I write about from time-to-time.

In fact, my antitrust background gives me a leg-up in business and corporate litigation because I have spent years studying markets: I understand how companies compete in a market, which helps me to quickly grasp how an industry or company functions. This experience improves my ability to incorporate business considerations into my descriptions of various options for the client throughout the litigation process.

Many lawyers look at litigation as a game, to win at all costs, instead of understanding that litigation is just one of several tools to use—offensively or defensively—to develop a competitor’s position in the marketplace. It is important at every decision point to recognize that—unlike the litigator that probably works with a bunch of other competitive litigators that stress winning above all else—the client cares about the result relative to the cost.

Indeed, having my own business has further focused my sensitivity to the client’s perspective. I think I understand the client’s need to find someone that (1) they trust; (2) will pursue their goals, with the overall context of the business in mind; (3) will do great work. That may sound like the typical gobbledygook from a lawyer, but I think most businesses that have had to hire litigators will tell you that those three points are everything.

I started Bona Law PC in March 2014 and it is now August. Time flies. So far so good. I’ve been quite busy and I love the work. Even though people told me that I couldn’t do antitrust outside of a big firm, I have done a lot of antitrust. In fact, we are filing an Amicus Brief to the US Supreme Court this week in an antitrust case.

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