By Jade Chounlamountry, Esq. | Legally reviewed by Aviana Cooper, Esq. | Last reviewed October 03, 2023
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As a small-business owner, you may have heard the term "restraint of trade." But what does it mean? How does it impact your business?
The idea of "restraint of trade" comes from English common law. It is incorporated into U.S. laws, including the Clayton Act and other federal antitrust laws. Some federal laws, such as the Sherman Antitrust Act, treat restraint of trade as a crime, but people who suffer losses because of such actions can also sue for money in civil court.
This article will discuss lawsuits for economic losses due to illegal restraint of trade.
"Restraint of trade" refers to any action or agreement restricting free market competition. These restraints can come in various forms. The most common forms are restraint clauses in agreements, particularly employment agreements. These clauses are also known as restrictive covenants.
The primary goal of restraint of trade is to protect a company's interests. Still, it can sometimes hinder the competitive landscape, potentially affecting small businesses disproportionately.
The party harmed by the interference may seek damages, especially when these restrictive clauses are included in employment agreements. The damages are limited to the specific transaction by filing a tortious interference claim. But if the plaintiff can show the interference messed with their overall business, such as damaging their reputation, they can also file a restraint of trade claim under state laws.
Some acts that give rise to a restraint of trade claim may seem entirely legal. For instance, two competing business owners discussing their pricing plans over a round of golf are exercising their freedom of speech. They may not come out and say they're using that information to reconsider their pricing. Still, the subtext of the conversation may be construed as a conspiracy to fix prices if that is ultimately the result of the conversation. Thus, a third competitor driven out of business by the resulting price-fixing may file a restraint of trade claim.
Non-compete clauses are often found in employment contracts and business sales agreements. They stop employees or business owners from starting a similar business in a geographical area and for a length of time.
Non-competition agreements serve the same purpose, except they are the whole agreement. They can protect a former employer's secrets and information. Non-compete agreements can also restrict people's career and business options, often for a specified period of time. This is particularly an issue for specialized fields.
It's important to note that the following four states have banned these types of agreements and clauses entirely:
Non-competes will not be enforced in these jurisdictions.
Non-solicitation clauses prevent one party from seeking or enticing another party's clients, customers, or employees. These clauses protect a company's business interests and relationships by prohibiting individuals or entities from poaching critical assets or personnel.
Non-solicitation clauses are common in industries where client and employee relationships are crucial, like professional services and technology. They help keep business relationships stable, fair, and honest. At the same time, they protect against problems like unfair competition and retaining talented employees.
Cascading clauses are commonly seen in employment contracts. They're like a series of non-compete rules that kick in one after the other as an employee moves up in their career at the company. This means the restrictions on working elsewhere after leaving the company can last for a longer time.
Exclusive supplier agreements are between a supplier and a buyer. They give the buyer the exclusive right to buy products or services from that supplier. These agreements can ensure a steady supply and consistent quality. They can also hinder small businesses from exploring better or more affordable alternatives. Being locked into an exclusive supplier agreement may restrict a business's ability to negotiate better terms or adapt to market changes.
Non-disclosure agreements (NDAs) can protect confidential information and trade secrets. Companies can use them to stifle competition. Some companies may use overly restrictive NDAs that prevent former employees or business partners from using general knowledge and skills gained during their previous employment or association.
Some restraints of trade are, in fact, legitimate and upheld by the courts if they are considered "reasonable." Reasonableness and enforceability are determined on a case-by-case basis. A restraint of trade must serve a legitimate business interest, be limited to that particular interest, and not be contrary to public policy.
For example, non-competition clauses and agreements will have limitations on:
Manufacturers often work out agreements with a restraint of trade clause. While it technically is a restraint of trade, it serves a legitimate interest. It is not contrary to the public interest.
You and your team worked hard to get where you are, so don't let someone else's unlawful actions sink your business. If you have suffered losses due to another party's restraint of trade, you should explore your legal options. Contact a business and commercial law attorney in your state to learn more. They can provide valuable legal advice about restraint of trade in your specific type of business. An attorney can help you navigate employment law and the dynamics of bargaining power in your industry.
Understanding and protecting your rights in the face of potential poaching and post-employment restraints is essential for safeguarding your business interests and ensuring fair market competition.
Contact a qualified business attorney to help you navigate your business's legal and regulatory landscape.
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