What is Restraint of Trade: Everything You Need to Know
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. 3 min read
Updated July 10, 2020:
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.
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.
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.
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