Also known as: restraints of trade · restraint on trade
Written by attorneys · grounded in primary & secondary sources — see below
A promise or agreement whose performance would limit competition in any business or restrict the promisor in the exercise of a gainful occupation. The promise is unenforceable on public policy grounds if the restraint is unreasonable because it exceeds what is needed to protect a legitimate interest or because hardship to the promisor and injury to the public outweigh any benefit.
Rita Russell sold her regional apparel chain to Reliance Insurance. The sale contract barred Rita from working in any apparel, footwear, or accessories business nationwide for three years. Rita later accepted a position at a local boutique. The nationwide scope exceeded what was needed to protect the buyer's goodwill in the purchased stores.
After leaving Apex Manufacturing, engineer Tom Torres signed a standalone promise not to work for any competitor worldwide for five years in exchange for a nominal payment. No sale, employment, or partnership gave Apex a protectable interest. The bare promise limited Tom's gainful occupation without any legitimate justification.
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Partners Lee and Patel dissolved their accounting firm. The dissolution agreement barred Lee from practicing in the same city for ten years. The duration and scope exceeded any need to protect Patel's client relationships acquired during the partnership.
Six months after Quinn resigned from Delta Tech, the company asked her to sign a noncompete covering all software development work in the state. No new consideration or ongoing relationship supported the promise. The restraint restricted Quinn's occupation without protecting any legitimate employer interest.
Seller Vargas transferred her local bakery to Buyer Nash. The contract prohibited Vargas from operating any food business within 200 miles for eight years. The geographic reach and duration exceeded what was needed to protect the bakery's goodwill.
Chemist Soto sold her specialty-adhesives company to Global Materials. The sale contract contained a two-year, 50-mile noncompete covering only adhesives. Soto later sought to void the entire agreement because of the noncompete. The restraint was reasonable and ancillary, so the remainder of the contract remained enforceable.
A promise to refrain from competition is ancillary when it is made as part of a sale of a business, employment relationship, or partnership that gives the promisee a legitimate interest worth protecting. A promise made after the transaction ends or without any such relationship is not ancillary and is automatically unreasonable.
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An ancillary restraint is unreasonable if it is greater than needed to protect the promisee's legitimate interest or if the promisee's need is outweighed by hardship to the promisor and likely injury to the public. Courts examine duration, geographic scope, and the range of restricted activity.
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If the unreasonable restraint is not an essential part of the agreed exchange, a court may enforce the remainder of the contract while refusing to enforce only the offending promise. The court considers whether the parties' performances can be apportioned without creating substantial inequality.
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…in question frequently are interstate transactions. The necessary connection between the interstate transactions and the restraint of trade provided by the minimum-fee schedule is present because, in a practical sense,[^maj-11] title examinations are necessary in real estate transactions to assure a lien on a valid title of the…