Also known as: unreasonable restraints of trade · unreasonably restrain trade · unreasonably restraining trade · restraint of trade
Written by attorneys — see sources below.
A promise to refrain from competition that is ancillary to a valid transaction or relationship but is greater than needed to protect the promisee's legitimate interest or imposes hardship on the promisor that outweighs that interest and likely injures the public.
Usman Uddin withdrew from United Bank after several years as a financial analyst. His withdrawal agreement barred him for three years from any role in lending, investing, or advising anywhere in North America. United Bank claimed the clause protected confidential deal pipelines. A court found the continent-wide ban reached far beyond direct competitors and imposed undue hardship on Uddin while limiting investor choice.
Ulysses Usher and a rival manufacturer signed a side agreement in which each promised not to solicit the other's customers. No sale of business or employment relationship supported the promises. A court held the bare restraint on competition was not ancillary to any valid transaction and therefore unenforceable as an unreasonable restraint of trade.
In 1984 the divestiture of AT&T's local telephone business created seven regional service monopolies known as Regional Bell Operating Companies or Incumbent Local Exchange Carriers. More than a decade later Congress enacted the Telecommunications Act of 1996 which restructured local telephone markets and imposed duties on the ILECs to facilitate entry by competitive local exchange carriers through resale of services at wholesale rates, leasing of unbundled network elements, or interconnection of facilities. William Twombly and Lawrence Marcus filed suit in the United States District Court for the Southern District of New York on behalf of a putative class of all subscribers of local telephone and high-speed internet services from February 8, 1996 to the present. They named as defendants four consolidated ILECs: BellSouth Corporation, Qwest Communications International Inc., SBC Communications Inc., and Verizon Communications Inc. The complaint alleged that these ILECs conspired to restrain trade by engaging in parallel conduct to inhibit CLECs, including unfair agreements for network access, inferior connections, overcharging, and billing practices designed to sabotage CLEC customer relations. The complaint further alleged that the ILECs agreed not to compete against one another in their respective territories. This agreement was inferred from their common failure to pursue business opportunities in contiguous markets and from a statement by Qwest CEO Richard Notebaert that competing in another ILEC's territory might be a good way to turn a quick dollar but that does not make it right. The complaint asserted that in light of the absence of meaningful competition among the ILECs and their parallel course of conduct the defendants had entered into a contract combination or conspiracy to prevent competitive entry and to allocate customers and markets. The district court dismissed the complaint for failure to state a claim. It concluded that the alleged parallel behavior was fully explained by each ILEC's independent interest in defending its own territory and that the complaint did not allege facts suggesting the decision to refrain from competing elsewhere was contrary to the ILECs' apparent economic interests. The Court of Appeals for the Second Circuit reversed, holding that plus factors need not be pleaded and that allegations of parallel conduct suffice if they leave open the possibility of collusion. The Supreme Court granted certiorari to address the proper standard for pleading an antitrust conspiracy through allegations of parallel conduct.
View caseUgo Uberti sold his small theater to a chain but later challenged a five-year ban on operating any venue within one hundred miles. The chain argued the clause protected goodwill from the sale. The court found the geographic reach exceeded the protected interest and imposed undue hardship, rendering the promise an unreasonable restraint of trade.
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 court first confirms the restraint is ancillary to a valid relationship such as employment or partnership withdrawal. It then asks whether the restraint exceeds what is needed to protect the promisee's legitimate interests or whether any need is outweighed by hardship to the promisor and likely public injury.
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No. Ancillary status is necessary but not sufficient. The restraint must still satisfy the reasonableness test. A clause that sweeps beyond legitimate interests remains unenforceable even if tied to employment.
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A restriction is unreasonable when it bars the promisor from an entire profession or region larger than necessary to protect the promisee's specific interests, such as confidential information or customer goodwill.
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Even if a restraint protects a legitimate interest, it is unreasonable if the resulting hardship to the promisor and reduction in competition or consumer choice outweigh that interest.
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…through allegations of parallel conduct, and now reverse. II A Because § 1 of the Sherman Act "does not prohibit [all] unreasonable restraints of trade . . . but only restraints effected by a contract, combination, or conspiracy," Copperweld Corp. v. Independence Tube Corp. , 467 U.S. 752 (1984), "the crucial question" is whether the…