Meaning
Common law doctrines that invalidate contractual terms restricting a person’s right to carry on their trade or profession protect economic freedom and market competition. Under the doctrine of restraint of trade, any clause that unreasonably limits an individual’s ability to work or conduct business is unenforceable unless it serves a legitimate interest. This doctrine is frequently applied to employment contracts, sale of business agreements, and distribution deals, ensuring that the labor market remains dynamic and competitive.
Reasonableness Test
Courts assess the geographical scope, duration, and activities covered by the restrictive covenant to ensure they are not excessive. A finding of restraint of trade occurs when the restriction goes beyond what is necessary to protect the employer’s trade secrets or customer base. If the restriction is too broad, the court will strike it down entirely.
Public Policy
Society benefits when individuals are free to use their skills and contribute to the economy without artificial limitations. The rule against restraint of trade exists to prevent monopolies and encourage active competition in the marketplace. This principle ensures that businesses cannot use legal contracts to suppress market forces and limit consumer choice.
Litigation Defense
Defendants use this doctrine to escape overly restrictive employment or partnership agreements when moving to new ventures. The cost of defending a poorly drafted clause involves having the entire non-compete covenant declared void by the court. Drafting focused, narrow clauses ensures that the protection remains enforceable while respecting the employee’s right to work.
