Restraint on business: Overview, definition, and example
What is a restraint on business?
A restraint on business refers to a restriction or limitation placed on an individual or organization that prevents them from engaging in certain business activities, typically to protect the interests of a party such as an employer or business partner. These restrictions can include clauses in contracts or agreements, often found in non-compete, non-solicitation, or confidentiality agreements. The purpose of a restraint on business is to prevent unfair competition, protect intellectual property, maintain customer relationships, or safeguard trade secrets. While these restraints are legal, they must be reasonable in terms of time, geography, and scope to be enforceable.
Why is a restraint on business important?
A restraint on business is important because it helps protect businesses from the potential harm caused by former employees or partners who might use proprietary information, skills, or customer relationships to compete directly with the business. For example, employers may use non-compete clauses to prevent key employees from leaving the company and starting a competing business immediately after departure. Similarly, a business might impose a restraint to prevent the poaching of clients or employees, protecting its market position and confidential information. These provisions help maintain a level of fairness in competitive business environments.
Understanding restraint on business through an example
For example, a senior executive at a tech company might leave the company and start their own competing business. To prevent the executive from immediately using the company’s confidential knowledge or competing directly, the company includes a non-compete clause in their contract that restricts the executive from working for a competitor or starting a competing business within a certain geographical area for a set period of time (e.g., 1 year, within 50 miles of the company's offices). This restraint on business is intended to protect the company’s intellectual property, proprietary processes, and client base.
In another example, a business owner may agree to sell their business but may include a restraint on business clause in the sales agreement that prohibits the seller from starting a similar business within the same industry in the same location for a period of five years. This prevents the seller from directly competing with the business after the sale, protecting the buyer’s investment in the business.
An example of a restraint on business clause
Here’s how a restraint on business clause might appear in an employment agreement:
“The Employee agrees that for a period of [X] years following the termination of employment, they will not, within a [specified geographic area], engage in or be employed by any business that directly competes with the Company’s primary business operations. The Employee further agrees not to solicit any of the Company’s clients or employees during this period.”
Conclusion
A restraint on business is a legal mechanism used to protect businesses from unfair competition and the potential misuse of confidential information or relationships by former employees, business partners, or others. It can take various forms, including non-compete, non-solicitation, and confidentiality clauses, and helps to maintain the integrity and competitiveness of a business. However, for these restraints to be enforceable, they must be reasonable in scope, duration, and geography, ensuring that they do not unfairly limit an individual’s ability to earn a living.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.