Restraint of trade is technically any action that inhibits the ability of another to engage in business practices they would normally be able to. Restraint of trade doesn’t refer to actions that block illegal business activity. In some cases, restraint of trade is allowed because it is considered reasonable, but often restraint on someone else’s business can lead to business torts and litigation.
To understand the difference between reasonable restraint of trade and restraint that could lead to litigation, lets look at two scenarios. First, consider a hypothetical situation in which three businesses make and sell widgets in a small town. If two of those businesses collude to fix prices or take other actions to make it impossible for the third business to succeed, the third business might have a basis for a tort or litigation claim. The two businesses taking the restraint action might even have overstepped legal bounds.
In a different scenario, a manufacturer works with distributors throughout the country. To organize the distribution chain and ensure that each distributor can be successful, the manufacturer creates boundaries and regions for which each distributor is responsible. The distributor of region A isn’t allowed to make business arrangements with resellers in region B; this is a common supply chain dynamic, but it’s also a restraint on trade. This type of restraint might be considered reasonable.
To be considered reasonable, a restraint on trade has to be limited in nature and part of a legitimate interest. In the supply chain example above, the restraint is made in a legitimate interest to ensure all distributors can succeed and that the entire process is organized and efficient. It’s also limited to the specific products and manufacturer, and it’s likely in such scenarios that the agreements would be limited by time too. As contracts expire, other distributors might have a chance to bid on the process. If you’re dealing with a restraint of trade issue, talk to your business law professional about whether the activities are reasonable or might be the basis for litigation.
Source: FindLaw, “Restraint of Trade,” accessed Feb. 17, 2017