Restraint of trade
The examples and perspective in this article deal primarily with the United Kingdom and do not represent a worldwide view of the subject. (April 2014) |
Contract law |
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Formation |
Defences |
Interpretation |
Dispute resolution |
Rights of third parties |
Breach of contract |
Remedies |
Quasi-contractual obligations |
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Duties of parties |
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Related areas of law |
By jurisdiction |
Other law areas |
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Notes |
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Restraints of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business. It is a precursor of modern competition law. In an old leading case of Mitchel v Reynolds (1711) Lord Smith LC said,[1]
it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion.
A contractual undertaking not to trade is void and unenforceable against the promisor as contrary to the public policy of promoting trade, unless the restraint of trade is reasonable to protect the interest of the purchaser of a business.[2] Restraints of trade can also appear in post-termination restrictive covenants in employment contracts.
History
England and the UK
Restraint of trade in England and the UK was and is defined as a legal contract between a buyer and a seller of a business, or between an employer and employee, that prevents the seller or employee from engaging in a similar business within a specified geographical area and within a specified period. [citation needed] It intends to protect trade secrets or proprietary information but is enforceable only if it is reasonable with reference to the party against whom it is made and if it is not contrary to public policy.
The restraint of trade doctrine is based on the two concepts of prohibiting agreements that run counter to public policy, unless the
To be a valid restraint of trade in the first place, both parties must have provided valuable consideration for their agreement to be enforceable. In Dyer's Case[3] a dyer had given a bond not to exercise his trade in the same town as the plaintiff for six months but the plaintiff had promised nothing in return. On hearing the plaintiff's attempt to enforce this restraint, Hull J exclaimed, "per Dieu, if the plaintiff were here, he should go to prison till he had paid a fine to the King."
The common law evolved with changing business conditions. So in the early 17th century case of Rogers v Parry[4] it was held that a promise by a joiner not to trade from his house for 21 years was enforceable against him since the time and place was certain. It was also held (by Chief Justice Coke) that a man cannot bind himself to not use his trade generally.
This was followed in
United States
In the US, the first significant discussion occurred in the
The 1911 decision of the Supreme Court in
In more recent cases, court continue to base their rulings on the Mitchel framework, but attention has turned to such issues as "necessary to do what?" and "how necessary compared to collateral damage?"
For example, even if a restraint is necessary and ancillary, within the meaning of the Mitchel and Addyston Pipe cases, it may still be an unreasonable restraint of trade if its anticompetitive effects and consequent harm to the public interest outweigh its benefits. Thus, Judge Ginsburg opined in the Polygram case:
If the only way a new product can be profitably introduced is to restrain the legitimate competition of older products, then one must seriously wonder whether consumers are genuinely benefited by the new product.[15]
A related issue is whether, even if a restraint is necessary and ancillary, available means exist to accomplish the desired result which are less harmful. The FTC-DOJ 2000 Guidelines for Collaborations among Competitors say that, in determining whether a restraint is "reasonably necessary," the issue is "whether practical, significantly less restrictive means were reasonably available when the agreement was entered into."[16]
In other cases, questions have been raised as to whether the restraint was necessary and ancillary to accomplishing only something unworthy of recognition, given the resulting harm involved. In one recent case, a court rejected a credit card issuer's attempted justification of a restriction against competitive dealings said to be reasonably necessary to promote "loyalty" and "cohesion."[17] How necessary and necessary to what thus remain controverted issues under the doctrine of Mitchel v. Reynolds.
Restraining workers
Under English law, restraining clauses in employment contracts are enforceable if:[citation needed]
- There is a legitimate interest which needs to be protected. Examples of such interests include business connections and business secrets.
- The restraint is reasonable, i.e. sufficiently protects the interest and goes no further.
Generally, if a restraining clause is found to be unreasonable, then it will be void. In certain circumstances though the court may uphold it either by construing ambiguities or by severance. Severance consists of the application of what is known as the "
Contemporary application
Though the restraint of trade doctrine is still valid, the current use has been limited by modern and economically oriented statutes of competition law in most countries. It remains of considerable importance in the United States as does the Mitchel v Reynolds case.
See also
- History of competition law
- Unfair competition
Notes
- ^ Mitchel v Reynolds (1711) 1 P Wms 181
- ^ Nordenfelt v Maxim, Nordenfelt Guns and Ammunition Co[1894] AC 535
- ^ (1414) 2 Hen. 5, 5 Pl. 26
- ^ Rogers v Parry (1613) 2 Bulstr 136
- ^ Broad v Jolyffe (1620) Cro Jac 596
- ^ Mitchel v. Reynolds, 1 P Wms 181, 24 ER 347 (QB).
- ^ Roussillon v Roussillon (1880) 14 Ch.D. 351
- ^ Mason v The Provident Supply and Clothing Co. [1913] AC 724
- ^ 85 F. 271 (1898), aff'd, 175 U.S. 211 (1899).
- ^ 15 U.S.C. § 1.
- ^ 1 P Wms 181, 24 ER 347 (QB 1711).
- ^ This distinction has been described as "central to modern antitrust." Robert Bork, The Antitrust Paradox 28 (1978). Bork characterizes Judge Taft's opinion in Addyston Pipe "as one of the greatest, if not the greatest, antitrust opinions in the history of the law." 'Id'. at 26.
- ^ See Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 737-39 (1988) (dissenting opinion of Justice Stevens: "Although Judge Taft was writing as a Circuit Judge, his opinion is universally accepted as authoritative.").
- ^ 221 U.S. 1 (1911).
- ^ PolyGram Holding, Inc. v. FTC, 416 F.3d 29, 38 (D.C. Cir. 2005).
- ^ Guidelines § 3.2.
- ^ United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322 (S.D.N.Y. 2001), aff'd, 344 F.3d 229 (2d Cir. 2003).
References
- LCCN 66-70116
External links
- Practical law: Restraint of trade and business secrets