Also known as:restraint of trade · restraint on trade
Written by attorneys · grounded in primary & secondary sources — see below
A promise whose performance limits competition in any business or restricts the promisor in the exercise of a gainful occupation is in restraint of trade. Such a promise is unenforceable on grounds of public policy if it is unreasonably in restraint of trade. A promise to refrain from competition that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if the restraint 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.
Sources & Authorities· 10 sources
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Restatements
Hornbooks
Study Supplements
How it applies
Common Examples
2
Noncompete After Medical Practice Sale
Rowan Russell sold her cardiology practice to Radiant Technologies. The sale agreement included her promise not to practice medicine within a 100-mile radius for five years. Two years later, with few cardiologists available in the rural area, she joined a neighboring clinic. Radiant Technologies sued to enforce the clause. A court refused enforcement because the restraint exceeded what was needed to protect purchased goodwill and imposed undue hardship on Russell while harming public access to care.
Nationwide Client Restriction After Book Sale
Raphael Rivera sold his entire book of brokerage clients to Riverfront Developments. The buyout agreement barred him for five years from soliciting or serving any clients in the wealth management industry nationwide. One year later he began working as a wealth manager at a local bank. Riverfront Developments sued to enforce the restriction. A court declined enforcement because the restraint was broader than necessary to protect the buyer's interest in the acquired client relationships.
Common questions
Frequently Asked
4
When is a noncompetition covenant ancillary to a business sale enforceable?+
A noncompetition covenant ancillary to a business sale is enforceable only if the restraint is reasonable. Reasonableness requires that the restraint be no greater than needed to protect the buyer's legitimate interest in purchased goodwill. Even if that test is met, the restraint remains unenforceable if the buyer's need is outweighed by hardship to the seller or likely injury to the public.
Supporting sources
What makes a restraint of trade unreasonable under the Restatement test?+
A restraint is unreasonable if it is greater than needed to protect the promisee's legitimate interest. It is also unreasonable if the promisee's need is outweighed by hardship to the promisor and likely injury to the public. These inquiries apply only after the restraint is shown to be ancillary to a valid transaction or relationship.
Supporting sources
Does every promise not to compete qualify as a restraint of trade?+
A promise is in restraint of trade if its performance would limit competition in any business or restrict the promisor in the exercise of a gainful occupation. A promise that is not ancillary to a valid transaction or relationship is necessarily unreasonable and unenforceable on public policy grounds.
Supporting sources
How does public policy derived from legislation interact with restraints of trade?+
Courts may derive public policy against enforcement from legislation relevant to a policy or from the need to protect some aspect of the public welfare. Restraint of trade is listed among the judicial policies that can render a promise unenforceable on public policy grounds.
Supporting sources
Civil ProcedurePretrial procedures · Discovery (including e-discovery), disclosure, and sanctionsUBEFoundational