Key Takeaways

  • Restraint of trade includes agreements or actions that unfairly restrict competition, limit free trade, or hinder business operations.
  • Common forms of trade restraint include non-compete clauses, price fixing, monopolistic behaviors, and interference with contracts.
  • U.S. antitrust laws like the Sherman Act and the Clayton Act regulate trade restraints to protect public interests.
  • Courts evaluate the legality of trade restraints based on their reasonableness and public impact, often using the "rule of reason" test.
  • Specific scenarios like employment non-competes and business exclusivity agreements are evaluated for fairness and necessity.
  • Remedies for unlawful restraint of trade include injunctions, damages, and penalties.

What is restraint of trade? Restraint of trade is a type of economic injury that involves meddling with someone else's ability to conduct business freely. It is any activity that limits sales, trade, and transportation of interstate commerce or otherwise severely affects interstate commerce.

What to Know About Restraint of Trade

As part of the antitrust law, restraint of trade covers a broad range of activities, including:

  • Creating a monopoly
  • Coercing someone to stop doing business
  • Forcing someone to change their business so it isn't as competitive
  • Fixing prices to drive out other businesses or competitors
  • Using non-compete clauses or other contract provisions to prevent someone from conducting business
  • Negatively affecting someone's ability to conduct business freely
  • Interfering with a business agreement or contract

Overall, restraint of trade is any activity that prevents someone from doing normal business without restraints.

Although laws and other federal, state, and local regulations may create obstacles for business owners, individuals are not allowed to restrain each other's business activities. Anyone who does lose business due to someone else restraining their activities may have a tort case against the person or company whose behavior economically injured them.

The concept of restraint of trade was established in English common law under the Clayton Act, the Federal Trade Commission Act, and numerous antitrust laws. The federal Sherman Antitrust Act of 1890 makes it illegal to participate in unreasonable economic restraints. In fact, some state laws consider restraint of trade to be a crime, and any party that participates in the restraint can be sued in civil court.

The Sherman Antitrust Act specifically includes a section on restraint of trade and declares it illegal. The act also affects other trade restraints, including non-compete clauses, particularly if they are used to fix prices or drive out other businesses.

It's important to note, however, that not all trade restraints are illegal. Non-competition agreements, for instance, are legal, reasonable, and enforceable. Non-compete clauses, which appear in employment contracts and state that an employee cannot compete with the employer's business, are also acceptable as long as the reason for not competing is reasonable.

To qualify as reasonable, a non-compete clause must:

  • Be limited to a certain place, type of work, or amount of time
  • Protect a legitimate interest, such as a company's business connections or trade secrets

For example, if an engineer has worked at a company for a decade and decides to leave to start his own business, the non-compete clause in his employment contract may prevent him from working for anyone in the industry, including himself, for a certain length of time or in a certain geographical area. Doing so would cause competition against his previous employer. If the clause is too broad, however, it may not be enforced, and he can work for himself in the same town.

Key Types of Restraint of Trade

Restraint of trade can manifest in various forms, each with distinct legal implications. Key types include:

  • Non-Compete Agreements: These restrict employees or business sellers from entering into competition within a specific geographical area or timeframe. While generally legal, they must balance business interests with individual freedoms.
  • Exclusive Dealing Agreements: Contracts where a buyer agrees to purchase exclusively from a seller can limit market competition if applied excessively.
  • Price Fixing: When competitors agree to fix prices, it harms consumers by eliminating competition, leading to potential antitrust violations.
  • Market Division: Agreements between businesses to allocate customers or territories stifle competition and violate antitrust laws.
  • Tying Arrangements: Forcing customers to buy an additional product or service along with a desired product is often scrutinized under competition law.

Courts analyze these practices using the "rule of reason," assessing their effects on competition and consumer welfare.

Restraints of Trade and Business Torts

A business tort is when someone unlawfully intentionally causes another party to sustain an economic loss. Business torts do not stem from economic losses related to emotional distress, personal injury, or damaged property, but rather involve an intangible loss such as

  • Interfering with a contract
  • Fixing prices
  • Damaging a company's reputation
  • Preventing a company from operating on the market
  • Causing a company to lose customers
  • Restraining trade in other ways

While restraint of trade is not a tort in its own right, it is a legal doctrine based on common law that relates to a range of torts.

For instances, one type of business tort is tortious interference, which involves a party interfering with a business relationship or contract. The party impacted by the interference is allowed to seek legal damages via a tortious interference claim.

Legal Standards and Frameworks for Restraints

Legal frameworks governing restraints of trade often involve complex analysis under antitrust laws. The Sherman Act broadly prohibits agreements that unreasonably restrain trade. Courts apply two primary tests:

  1. Per Se Illegality: Practices like price fixing and market allocation are inherently illegal without requiring further investigation into their impact.
  2. Rule of Reason: This approach evaluates whether the restraint has legitimate purposes that outweigh its anticompetitive effects.

Other relevant laws include:

  • Clayton Act: Targets specific practices such as tying arrangements and exclusive dealings that lessen competition.
  • Federal Trade Commission Act: Prohibits unfair trade practices, including deceptive behaviors.

Businesses must carefully structure agreements to ensure compliance with these laws.

Reasonable Restraint of Trade

Some restraints of trade are legitimate and reasonable. For a restraint to be reasonable and valid, it must serve some kind of legitimate interest and not go against public interest.

For example, a manufacturer must come to an agreement with distributors so they can serve their defined territories. This situation is not a restraint of trade because it doesn't go against public interest and serves a legitimate interest. Another example involves non-competition agreements where an employee agrees not to compete with their employer.

Judicial Remedies and Enforcement

When a restraint of trade is found unlawful, several remedies are available to aggrieved parties:

  • Injunctions: Courts may issue orders preventing further violations of trade restraints.
  • Damages: Victims can recover monetary damages for economic harm caused by the restraint.
  • Penalties: Government agencies can impose fines or sanctions against violators, particularly in antitrust cases.

Businesses facing allegations should seek legal counsel to defend their practices or negotiate settlements. Individuals or entities harmed by such restraints are encouraged to document evidence thoroughly and pursue legal action.

FAQ Section

1. What is the Sherman Antitrust Act?The Sherman Antitrust Act is a federal law that prohibits unreasonable restraints of trade, such as price fixing and monopolistic practices, to maintain market competition.

2. Are non-compete agreements always enforceable?No, non-compete agreements must be reasonable in scope, duration, and geography and should serve a legitimate business interest to be enforceable.

3. How can businesses ensure compliance with antitrust laws?Businesses can ensure compliance by consulting legal experts, reviewing contracts for fairness, and avoiding practices like price fixing or market allocation.

4. What is the "rule of reason"?The rule of reason is a legal standard used to assess whether a trade restraint's pro-competitive benefits outweigh its anticompetitive effects.

5. Can individuals sue for restraint of trade?Yes, individuals or businesses harmed by unlawful trade restraints can file lawsuits seeking damages or injunctions.

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