SANDLER PARTNERS LLC v. MASERGY COMMUNICATIONS INC (2021)

United States Court of Appeals, Ninth Circuit.2021-05-28No. No. 20-55346

Summary · law.co

Holding. The court reversed the district court's dismissal of the non-compete provision claim and remanded for further proceedings under a rule-of-reason analysis; the court affirmed the dismissal of trade secret and misrepresentation claims as waived but allowed Sandler to amend its complaint to replead contract-related claims previously dismissed.

Sandler Partners appealed the district court's dismissal of its complaint against Masergy Communications, which included claims based on a non-compete provision in their contract. The district court had ruled the non-compete clause void under California law, relying on prior case law treating non-competes between employers and employees as categorically invalid. However, the California Supreme Court subsequently clarified in Ixchel Pharma that while employment-related non-competes remain per se void, restraints on business-to-business dealings must be tested under a reasonableness standard. Under this rule-of-reason analysis, a business restraint is enforceable if it does not harm competition more than it helps.

The appellate court found the district court's dismissal premature because the facts alleged in Sandler's complaint made it plausible that the non-compete clause could be enforceable under the correct legal framework. The case involves complex factual questions about market definition, competitive impact, and the restraint's purpose and effects that require further development. The court also addressed Sandler's other claims, finding that claims for trade secret theft and misrepresentation were waived because Sandler did not challenge their dismissal, but that Sandler should be permitted to replead contract-related claims dismissed in an earlier order since attempting to replead them would have been futile under the district court's prior ruling.

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Key issues

Whether non-compete provisions between businesses (as opposed to employment contracts) are subject to per se invalidation or rule-of-reason review under California law
Whether the non-compete clause at issue satisfies the reasonableness standard by examining its competitive effects and business justifications
Whether earlier dismissed contract-related claims may be replead when the district court's prior ruling made any timely replea futile

Procedural posture

Sandler Partners appealed the district court's dismissal of its third amended complaint challenging a non-compete provision in its contract with Masergy Communications.

Authorities cited

No cited authorities resolved to law.co cases yet.

Opinion · public domain

MEMORANDUM *

Sandler Partners, LLC appeals the district courts dismissal of its third amended complaint.

The district court erred in holding that the non-compete provision is void per se. California Business and Professions Code § 16600 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.” The district court relied on the California Supreme Courts decision in Edwards v. Arthur Andersen LLP, which held that a non-compete agreement between an employee and his employer was void under Section 16600 regardless of whether it was reasonable. See 44 Cal.4th 937, 81 Cal.Rptr.3d 282, 189 P.3d 285, 290–93 (2008).

However, after the district court issued its decision, the California Supreme Court clarified in Ixchel Pharma, LLC v. Biogen, Inc. that while non-compete agreements upon the termination of employment or the sale of an interest in business are void per se, contractual provisions that restrain businesses from engaging in lawful business with other businesses must be evaluated under the rule of reason. See 266 Cal.Rptr.3d 665, 470 P.3d 571, 581–90 (2020). As the Court explained, businesses routinely enter into contracts that limit their ability to conduct business because “[s]uch arrangements can help businesses leverage complementary capabilities, ensure stability in supply or demand, and protect their research, development, and marketing efforts from being exploited by contractual partners.” Id., 266 Cal.Rptr.3d 665, 470 P.3d at 589. Therefore, a business restraint is invalid only if it “harms competition more than it helps.” Id. 266 Cal.Rptr.3d 665, 470 P.3d at 581 (quoting In re Cipro Cases I & II, 61 Cal.4th 116, 187 Cal.Rptr.3d 632, 348 P.3d 845, 861 (2015)).

In light of Ixchel, the non-compete provision in Sandlers contract with Masergy must be evaluated under the rule of reason. This analysis is heavily factual. To determine whether a business restraint is void, a court must look to its “circumstances, details, and logic” by examining “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.” Id. 266 Cal.Rptr.3d 665, 470 P.3d at 581, 588 (internal quotation marks omitted) (quoting Cipro, 187 Cal.Rptr.3d 632, 348 P.3d at 861–62). In a typical case, this might even require expert testimony on the definition of the relevant market and the extent of the defendants market power. Cipro, 187 Cal.Rptr.3d 632, 348 P.3d at 861. Given the facts alleged in Sandlers complaint, it is at least plausible that the non-compete provision at issue is enforceable under the rule of reason. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The purpose may be to incentivize sales efforts by promising the commissioned salesman commissions even if the seller replaces the salesman with another, which may in appropriate circumstances be permissible under Ixchel. The district courts dismissal was therefore premature, and further factual development is required to determine whether the provision harms competition more than it helps.

Sandler does not challenge the district courts dismissal of its claim for theft of trade secrets or the dismissal of its claims for fraudulent and negligent misrepresentation. These issues are therefore waived. Shivkov v. Artex Risk Sols., Inc., 974 F.3d 1051, 1061 (9th Cir. 2020) (citing Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999)). However, in light of the district courts error, Sandler should be granted leave to amend its complaint and replead the contract-related claims that the district court dismissed in its November 25, 2019 order dismissing the first amended complaint. See United States v. Corinthian Colls., 655 F.3d 984, 995–96 (9th Cir. 2011). These claims were not voluntarily dismissed, because Sandler did not truly have a choice to replead them. See Lacey v. Maricopa Cnty., 693 F.3d 896, 928 (9th Cir. 2012) (en banc); Vien-Phuong Thi Ho v. ReconTrust Co., NA, 858 F.3d 568, 577 (9th Cir. 2017). As Masergy conceded below, once the district court held in its first dismissal order that the non-compete provision was void, any attempt to replead these claims would have been futile. See id.

AFFIRMED in part, REVERSED in part, and REMANDED.