At the most basic level, "restraint of trade" is any activity that prevents another party from conducting business as they normally would without such a restraint. For instance, two businesses agreeing to fix prices in order to put another competitor out of business is an illegal restraint of trade. Other examples include creating a monopoly, coercing another party to stop competing with your business, or unlawfully interfering with a business deal (see Tortious Interference). However, not all restraints of trade are unlawful, including non-competition agreements with employees in states where such agreements -- if considered reasonable -- are enforceable.
The doctrine of restraint of trade is rooted in English common law and codified under U.S. statutes (specifically, the Clayton Act and the Federal Trade Commission Act) and various state antitrust laws. While federal (Sherman Antitrust Act) and some state laws treat restraint of trade and other antitrust acts as a crime, parties that suffer losses from such actions may seek monetary recovery in civil court. This article focuses on civil lawsuits for economic losses resulting from unlawful restraint of trade.
Business Torts and Restraint of Trade
Intentional acts in which one party unlawfully causes another party some degree of economic loss are referred to as "business torts" (or "economic torts" in the broader sense). These types of torts do not arise from financial losses related to personal injury, emotional distress, or damaged property. Instead, business torts involve an intangible financial loss from some other cause of action, such as a conspiracy to fix prices, interfere with a contract, or otherwise restrain trade. The types of intangible losses that result from business torts include a loss of customers, inability to operate in the market, or damage to your organization's reputation.
Restraint of trade is not a tort in and of itself, but rather a legal doctrine (based on common law) that relates to a relatively broad and fluid range of torts. For example, tortious interference is a type of business tort in which one party interferes with a contract or business relationship. The party directly impacted by the interference may seek damages limited to the specific transaction by filing a tortious interference claim. However, the plaintiff may also file a restraint of trade claim if they are able to prove that the interference hindered their ability to conduct business in a broader sense. If the interference of a contract damaged the company's reputation, for instance, then it may give rise to a restraint of trade claim.
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 it, but the subtext of the conversation may be construed as a conspiracy to fix prices if that is ultimately the result of this conversation. Thus, a third competitor who is driven out of business by the resulting price-fixing may file a restraint of trade claim.
Is It a Reasonable Restraint of Trade?
Some restraints of trade are, in fact, legitimate and upheld by the courts if they are considered "reasonable." In order to be considered reasonable, and thus valid, a restraint of trade must serve a legitimate interest, be limited to that particular interest, and not contrary to the public interest. For example, manufacturers often work out agreements with distributors to serve specifically defined territories. While it technically is a restraint of trade, it serves a legitimate interest and is not contrary to the public interest.
In addition, non-competition agreements, in which an employee signs a contract agreeing not to compete directly against the employer for a certain amount of time after termination, are legal in some states as long as they protect a legitimate interest and are reasonably limited in scope. For instance, the employer may have a legitimate interest in protecting business connections, while the non-competition agreement will need to be limited in duration, location (such as proximity to the company), and type of work. While a non-competition agreement certainly restricts trade, courts in many states consider it reasonable in the protection of proprietary information.
Get Professional Legal Help with a Restraint of Trade Claim
You and your team worked hard to get to where you are, so don't let someone else's unlawful actions sink your business. If you have suffered losses as the result of another party's restraint of trade, you may want to explore your legal options. Contact a business and commercial law attorney in your state to learn more.