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Understanding 'restraint of trade' issues in business

Are restraints of trade legal?

It depends a lot on the circumstances. A restraint of trade is anything that interferes with the right of an individual to do business as he or she sees fit.

Sometimes restraint of trade is not only legal but necessary to protect both consumers and small business professionals -- otherwise, larger companies with a bigger hold on the market could collaborate to fix prices and drive their competitors out of business. (That's generally how various antitrust laws came into being -- and they are government-sanctioned forms of restraint of trade.)

There are other ways that restraint of trade can be a reasonable business necessity -- and still end up the subject of a lawsuit when parties disagree over just how reasonable that necessity really is or whether or not there was ever an agreement that would limit one party's right to do business freely.

For example, imagine that you live in a small town where there's a pizza place known just as "Bosco's Pizza." It's owned by a man whose name is, unsurprisingly, Mr. Bosco. When Mr. Bosco decides to retire, he offers to sell you the business along with the recipe that he uses for his sauce and his dough -- something that he's kept a trade secret for decades.

It's a profitable business, and you're delighted with the offer. You buy the business, down to the last oven, and Mr. Bosco turns over the recipe and retires.

A year later, Mr. Bosco decides that retirement doesn't suit him, so he opens a second pizzeria across town and calls it "Bosco's Old-Style Pizza." He begins selling the exact same pizza that you are selling -- but many customers think that his sign means that he's using the original recipe and you are not -- so they go to his place instead. Your investment begins to wither but he won't consider changing the new pizzeria's name.

That's exactly the sort of situation that can end up in court as a judge is asked to sort out whether or not your request that he change the name of his pizzeria is a reasonable use of restraint of trade. Non-compete clauses, which might also come into play in a situation like this, are also restraint of trade issues.

If unfair competition is destroying your business, an attorney who is experienced in business law can provide more information on what your options are.

Source: FindLaw, "Restraint of Trade," accessed June 16, 2017

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