If a trade restriction clause has been included for the first time in the terms of a settlement agreement or if this agreement is used to reinforce the existing provisions of the employment contract, the employer must ensure that it complies with the relevant legal requirements. Indeed, various structural rules must be followed to ensure that a settlement agreement is legally valid and enforceable, including the fact that the agreement must be in writing and that the employee must have been informed by a competent independent consultant of the terms and effects of the proposed agreement. If an employee is subject to a trade restriction clause after dismissal, they should always seek professional legal advice. In some cases, the scope or duration of the clause may be considered too broad to be considered enforceable. If an interim clause is found to be inappropriate, it is generally null and void. In certain circumstances, however, the court may confirm them either by interpreting the ambiguities or by separating them. Severance pay consists of the application of the “blue pencil test”; If individual words that make the clause excessively broad can be struck out and the clause still has a grammatical meaning without changing the nature of the obligations, then the courts may be willing to separate the illegal aspects of the clause and apply the rest. Some trade restrictions are legitimate and reasonable. For a restriction to be reasonable and valid, it must serve a legitimate interest and must not be contrary to the public interest. In the United States, the first significant discussion took place in the Notice of the Sixth Circuit by Chief Justice (later President of the United States and even later Chief Justice of the Supreme Court) William Howard Taft in United States v. Addyston Pipe & Steel Co.[9] Justice Taft explained the Sherman Antitrust Act of 1890[10] as a legal codification of the English common law doctrine of restricting trade, as explained in cases such as Mitchel v. Reynolds. [11] The Court drew a distinction between outright restrictions on trade and those that served the legitimate main purpose of a legitimate contract and are reasonably necessary to achieve that objective.
[12] An example of the latter would be a non-compete obligation related to the rental or sale of a bakery, as in Mitchel. Such a contract should be examined according to a “rule of reason”, which means that it should be considered legitimate if it is “necessary and incidental”. An example of the pure and simple nature of the restriction would be the price-fixing and bid allocation agreements at issue in Addyston. Taft said that “we do not believe there is a question of reasonableness open to the courts for such a contract.” The Supreme Court upheld the verdict. Over the next century, Justice Taft`s opinion in the Addyston Pipe case remained fundamental to antitrust analysis. [13] Trade restrictions in England and the United Kingdom were and are defined as a valid contract between a buyer and seller of a business, or between an employer and an employee, that prevents the seller or employee from carrying on a similar business in a given geographic area and within a certain period of time. [ref. needed] It is intended to protect trade secrets or protected information, but is enforceable only if it is appropriate with respect to the party against whom it is directed and if it is not contrary to public policy. The restriction of trade is not a tort per se, but a legal doctrine (based on common law) that refers to a relatively wide and fluid range of torts. Tort interference is, for example, a type of tort in which a party interferes with a contract or business relationship.
The party directly affected by the disruption may claim damages limited to the specific transaction by asserting a claim for unlawful interference. However, the plaintiff may also bring an action for trade restraint if it can prove that the interference has impeded its wider commercial activities. For example, if the disruption of a contract damages the company`s reputation, it can lead to a trade restriction claim. There is no right or wrong answer when it comes to formulating trade restrictions, as each scenario is fact-specific. This means that it all depends on the post-termination activities the employer wants to limit and the type of interest they want to protect, as well as the nature of the business and the employee`s role in it. However, it is important to note that not all trade restrictions are illegal. Non-compete obligations, for example, are legal, appropriate and enforceable. Non-compete clauses, which are included in employment contracts and stipulate that an employee cannot compete with the employer`s business, are also acceptable as long as the reason for the non-competition is reasonable. The doctrine of restricting trade is rooted in English common law and codified in U.S. law (including the Clayton Act and the Federal Trade Commission Act) and various state antitrust laws.
While federal laws (Sherman Antitrust Act) and some state laws treat trade restrictions and other antitrust acts as crimes, parties who suffer losses as a result of such actions can seek financial recovery in civil court. This article focuses on civil actions for economic losses resulting from illegal trade restrictions. However, caution is always required here too, where an action for injunctive and/or damages in the High Court can often involve all sorts of probative and legal obstacles, particularly when the scope of a commercial restraint clause is put to the test. Given the potential effort and investment involved in filing a claim for this type of employee breach of contract, expert advice from an employment law specialist should always be sought. For example, even if a restraint within the meaning of Mitchel and Addyston Pipe, supra, is necessary and incidental, it may nevertheless constitute an unreasonable restriction on trade if its anti-competitive effects and the resulting harm to the public interest outweigh its benefits. As Justice Ginsburg said in Polygram: However, because the contractual statute of limitations had long since expired, the decision to formally reinstate the Supreme Court`s injunction represented something of a Pyrrhic victory for Egon Zehnder – a scenario that could have been so easily avoided if the trade restriction clause had been narrowed in the first place. Similarly, employers should not become complacent now when introducing trade restraint clauses and expect the courts to apply all reasonable parties and separate all offending parties. This means that post-termination restrictions must be carefully tailored from the outset to the specific employment scenario.
To be legally enforceable, the employer must demonstrate not only that the commercial restraint clause is necessary to protect a legitimate commercial interest, but also that the protection sought is adequate and proportionate.key nor is it necessary to protect that interest. This means that if the restrictions contained in the trade restriction clause are too broad, they could be considered unreasonable trade restrictions.