Also known as: restraint of trade · restraint on trade · restraints of trade
Written by attorneys — see sources below.
A promise 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 when the restraint is unreasonable because it exceeds what is needed to protect a legitimate interest of the promisee or because the promisee's need is outweighed by hardship to the promisor and injury to the public.
Rosa Ruiz sold her entire book of brokerage clients to Regal Apparel. The agreement barred her for five years from serving any wealth-management client nationwide. When Rosa began working at a local bank, Regal sued to enforce the clause. The court refused enforcement because the nationwide industry-wide ban exceeded what was necessary to protect the goodwill Regal had purchased.
Pinnacle Stadium sued Creek Game in federal court alleging that eligibility rules unreasonably restrained trade and suppressed player salaries. Creek Game answered with a damages counterclaim and demanded a jury trial on all issues. The district court had to decide whether the presence of the legal counterclaim entitled Creek Game to a jury on the restraint-of-trade issues even though the original complaint sought only equitable relief.
Fox West Coast Theatres, Inc. operated a movie theatre in San Bernardino, California and exhibited films under contracts with distributors granting exclusive first-run rights and clearance periods during which no other theatre could show the same pictures. Beacon Theatres, Inc. built a drive-in theatre about 11 miles away and notified Fox that it considered the clearance provisions to be violations of the antitrust laws, threatening treble damage suits against Fox and its distributors. Fox filed a complaint for declaratory relief in the United States District Court for the Southern District of California alleging a controversy under the Sherman Antitrust Act and Clayton Act. The complaint sought a declaration that the clearances were reasonable and not in violation of the antitrust laws together with an injunction preventing Beacon from instituting any antitrust actions against Fox and its distributors arising out of the controversy. Beacon filed an answer denying the threats, a counterclaim against Fox, and a cross-claim against an intervening exhibitor. These pleadings asserted that there was no substantial competition between the theatres, that the clearances were unreasonable, and that a conspiracy existed between Fox and distributors to manipulate contracts so as to restrain trade and monopolize first-run pictures. They sought treble damages. Beacon demanded a jury trial of the factual issues under Federal Rule of Civil Procedure 38(b). The district court directed that the issues raised by Fox's complaint, including the question of competition between the theatres, be tried to the court first under Rules 42(b) and 57 before any jury determination of the antitrust violation charges in the counterclaim and cross-claim. The Court of Appeals for the Ninth Circuit denied Beacon's petition for mandamus to vacate the district court's orders, holding that the trial judge had acted within his discretion. The Supreme Court granted certiorari.
View caseA promise is ancillary when it is made as part of an otherwise valid transaction or relationship such as the sale of a business or the formation of an employment or partnership relation. A promise made after the transaction ends or one that protects no legitimate interest of the promisee is not ancillary and is therefore unreasonable.
A 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 breadth of restricted activity.
No. Even when a noncompete accompanies a legitimate sale of a business or client book, the restraint must still satisfy the reasonableness test. A restriction that reaches far beyond the purchased goodwill in time, geography, or scope remains unenforceable.
Yes. If the unenforceable restraint is not an essential part of the agreed exchange, a court may enforce the balance of the agreement while refusing to enforce only the offending promise.
…The fact issue in the counterclaim is whether the cross-defendants and co-conspirators therein named conspired together in restraint of trade and to monopolize in the manner alleged in the counterclaim. Absent conspiracy, whether or not the distributors licensed a single first run picture to Petitioner’s drive-in, be it in…