Feb 12

Restraints of Trade

Restraints of Trade

Restraints of trade are one of the areas of the law where everyday notions of “fairness” seem to have a lot more to do with the outcome than careful interpretations of complex rules, exceptions to rules, and case precedents.

First, there must be an agreed restraint in writing otherwise ‘no restraint’ is the default position.

There is a legal and public policy principle that a person should be able to perform their trade or profession to earn a living.  However, a person may agree (i.e. contract) to be restrained and, of course, it happens all the time in employment agreements, contractor agreements and sale of business agreements.  Then the restraint will be enforceable despite the public policy principle provided the restraint is no more restrictive than is reasonable and necessary to protect the legitimate business interests of the person with the benefit of the restraint, having regard to the circumstances of the parties.

Second, to be enforceable, a restraint clause must find the right balance between protecting a person’s ability to earn a living and protecting another person’s ability to conduct business without unfair competition from someone with an “inside” advantage.  A restraint is void if it is even a little too restrictive so often cascading clauses are used (multiple interpretations).  If the most restrictive interpretation is void then the next one might be okay, and so on until there is an enforceable interpretation.  The cascading clause also takes advantage of the fact that the person with the benefit of the restraint (with usually “deeper pockets”) can threaten action and the restrained person must usually succumb to a more restrictive interpretation or risk litigation he/she can ill-afford.

This “Goldilocks” assessment: trying to find a restraint point not too restrictive, but just restrictive enough to protect legitimate business interests, depends so much on the circumstances of each case that until and unless the lawyer becomes as familiar with the factual background as the client, the client is often better able to predict the outcome.

For this reason, it is more useful to look at opposing extremes and let an individual “go with their gut” than to look at tipping-point examples.

At one end of the continuum is a sale of business contract where a buyer pays $1million for the goodwill of a business in a niche market where the good reputation established by the seller in the brand name is a deciding factor in the continuing profitability of the business.  In this example, the court will be a lot more willing to protect the interests of the buyer that has paid $1million to the seller with the expectation that the business should generate profits based on reputation.  In this example, a nation-wide contractual restraint for a number of years is potentially enforceable.  At the other end of the continuum, a person flipping burgers in a fast food chain on minimum wages is unlikely to have a restraint enforced against them, no matter how well worded it is.

The most common case – an employee or contractor in a profession given direct access to clients of a business, with opportunity to develop rapport with those clients, with no lump-sum premium paid for a restraint and a remuneration package at or about market value – sit somewhere in between, but closer to the burger flipper than the business seller.  In this circumstance, a generic restraint (prohibiting work in a field of expertise within a geographic area for a period of time) is likely to be enforceable only for a limited time and/or distance.

On the other hand, a client specific restraint (prohibiting contact with clients the person encountered during the engagement) is likely to be enforced for a year or more because it is more closely connected to protecting the goodwill of the business aiming to enforce it.

In assessing restraints, confidentiality clauses and clauses assigning the benefit of intellectual property rights should also be considered.  These can have a similarly restrictive effect without risk of being void on public policy grounds.

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