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Restraint of Trade

RESTRAINT OF TRADE

RESTRAINT OF TRADE refers to activity that obstructs, limits, or eliminates market competition. Restraints may affect particular occupations, industries, or commercial transactions. Though it carries a presumption of illegality, a restraint of trade may be legal or illegal, depending on its effect and intention. Restraints are prohibited by the first section of the Sherman Antitrust Act of 1890 (Title 15 of the United States Code), the main source of American antitrust law, which forbids "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations." The state attorneys general, under the direction of the federal Attorney General, have primary enforcement duties.

Restraint of trade takes a multitude of forms, ranging from private activity (e.g., contracts between two parties) to government regulation (e.g., licensing requirements or quotas). Common practices include noncompetition clauses, exclusive dealing arrangements, and price discrimination. Employers restrain trade by restricting the activity of their employees (e.g., through agreements controlling future dealings); employees restrain trade by disrupting the activity of their employers (e.g., through strikes and boycotts). As the above examples suggest, restraint of trade occurs regularly, even in a free market system. It is often difficult to distinguish between ordinary business transactions and trade-restricting agreements. It is not surprising, then, that both the definition of "restraint of trade" and what constitutes illegal action have been fluid, reflecting, among other things, economic conditions, legal and political attitudes, and industry preferences.

Restraint of trade was prohibited under English common law as early as the fifteenth century (the first known opinion, in the Dyer's Case, was issued in 1414). Courts, as a general rule, would not validate contracts restricting commercial capacity, even when all parties consented to the arrangement. These decisions promoted competition, but they were not only (or primarily) justified as free trade measures. Opinions refer to the importance of individual rights (particularly the right to labor) and the draining effect inactivity has on the community. Judges readily connected the public good to the full functioning of individuals; as stated in the case of the Tailors of Ipswich (1614), "the law abhors idleness, the mother of all evil … especially in young men, who ought … to learn useful sciences and trades which are profitable to the commonwealth."

English judges became more tolerant of voluntary restraints in the early eighteenth century. "Partial" restraints (i.e., agreements not restrictive in primary effect) were deemed enforceable, as were restraints that conformed to a flexible standard of reasonableness, that is, agreements that were self-contained, or limited in duration, or harmless to the public (the "rule of reason" was first stated in Mitchel v. Reynolds, 1711). Some historians stress the leniency of the common law during the eighteenth and nineteenth centuries, suggesting that new theories of laissez faire discouraged oversight of business. Others suggest that restraints were only tolerated in a narrow set of cases. It is clear, at least, that a conflict existed between flexible and rigid applications, reflecting the inherent tension between the right to freely contract and the right to freely trade.

The law of trade restraints, like the rest of common law, was incorporated by American states. Not surprisingly, American courts also developed competing interpretations. Irregulaties between states and leniency in particular states (as well as the inability of states to control interstate trade) contributed to the passage of the Sherman Antitrust Act, which was described in 1889 by its chief sponsor, Senator John Sherman, as setting forth "the rule of the common law" in federal statute (20 Congressional Record 1167). It may be noted, though, that the absolute prohibition in Section 1 of the Act against restraints went considerably beyond the common law; further, the Act's criminal penalties and enforcement mechanisms are foreign to the English tradition.

The Sherman Antitrust Act's strict terms are under-standable in the late nineteenth-century context. Congressmen responded to ferocious opposition to trusts and "big business" by consumers, farmers, and small businesses. It was not long, however, before politicians, judges, and regulators demonstrated a willingness to moderate its meaning. President Theodore Roosevelt, for example, distinguished early in his administration between good and bad trusts, and showed little interest in discouraging the former. During the 1920s, Secretary of Commerce Herbert Hoover encouraged businessmen to conform to "codes of ethics" intended to eliminate unnecessary and ruinous competition.

It was ultimately federal courts, however, that shaped the law's meaning. The main task of the Supreme Court during the "formative period" of the Sherman Antitrust Act—1890 to 1911—was deciding which restraints "among the several States" are justifiable; support was brief, and weak, for absolute prohibition. Rules distinguishing acceptable from unacceptable restraints—the per se illegality rule, the rule of reason—were developed during this period, early evidence of the justices' willingness to make law, as well as interpret it, when considering commercial behavior. As antitrust law developed during the twentieth century, judges demonstrated an increasing tendency to assess specific market effects and the particulars of the public interest. While the Supreme Court categorically prohibited certain types of horizontal and vertical agreements, it generally adopted a tolerant, rule-of-reason analysis when considering trade restraints. It should be noted, however, that wide latitude in this area was not universally accepted: in the early twenty-first century attorneys general became increasingly aggressive in their antitrust enforcement activities.

BIBLIOGRAPHY

Gellhorn, Ernest, and Kovacic, William E. Antitrust Law and Economics in a Nutshell. 4th ed. St. Paul, Minn.: West, 1994.

Hovenkamp, Herbert. Enterprise and American Law, 1836–1937. Cambridge, Mass.: Harvard University Press, 1991.

Kinter, Earl W. Federal Antitrust Law: A Treatise on the Antitrust Laws of the United States. Volume 1: Economic Theory, Common Law, and an Introduction to the Sherman Act. Cincinnati, Ohio: Anderson, 1980.

Jones, Eliot. The Trust Problem in the United States. New York: Macmillan, 1921.

Shaffer, Butler D. In Restraint of Trade: the Business Campaign against Competition, 1918–1938. Lewisburg, PA: Bucknell University Press, 1997.

Kimberly A.Hendrickson

See alsoAntitrust Laws ; Fair-Trade Laws ; Government Regulation of Business .

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Restraint of Trade

RESTRAINT OF TRADE

Contracts or combinations that tend, or are designed, to eliminate or stifle competition, create amonopoly, artificially maintain prices, or otherwise hamper or obstruct the course of trade as it would be carried on if it were left to the control of natural economic forces.

As used in the sherman anti-trust act (15 U.S.C.A. § 1 et seq.), unreasonable restraints of trade are illegal per se and interfere with free competition in business and commercial transactions. Such restraint tends to restrict production, affect prices, or otherwise control the market to the detriment of purchasers or consumers of goods and services. A restraint of trade that is ordinarily reasonable can be rendered unreasonable if it is accompanied by a specific intent to achieve the equivalent of a forbidden restraint.

cross-references

Antitrust Law; Combination in Restraint of Trade.

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"Restraint of Trade." West's Encyclopedia of American Law. . Retrieved August 20, 2017 from Encyclopedia.com: http://www.encyclopedia.com/law/encyclopedias-almanacs-transcripts-and-maps/restraint-trade