Restraint of Trade

Restraint of trade, defined broadly, is a contractual limitation on business dealings or professional or gainful occupations, and is legal or illegal, ethical or unethical depending on its effect. If the restraint is in the best interests of both the parties and the public, then it is not illegal. Otherwise, if it is an agreement between or combination of businesses intended to eliminate competition, create a monopoly, artificially raise prices, or otherwise adversely affect the free market, then the restraint of trade agreement violates antitrust laws and is probably illegal. A horizontal restraint of trade is one imposed by agreement between competitors at the same level of distribution, such as a cartel in which rivals agree to restrict output and raise prices. A vertical restraint of trade is one imposed by agreement between firms at different levels of distribution, as between manufacturer and retailer [Page 1826]purpose was not to limit competition. The concept was further developed in the U.S. common law such that one line of decisions banned price-fixing agreements and other anticompetitive arrangements when the challenged restraint affected basic necessities. As the 19th century came to a close, however, U.S. courts became more sensitive to unreasonable restraints on competition, positing that where the sole object of both parties to the contract is to restrain competition and enhance or maintain prices, the restraint is unjustified and therefore void.

U.S. courts became more sensitive to unreasonable restraints on competition after the Civil War because rapid industrialization had led to the perceived accumulation of power in the hands of a few robber barons. Public opinion in the United States had always opposed monopolies, because under the original definition, they were despotic powers created by the government. But after the Civil War, large-scale corporate concentration became the norm, and the fiscal power shown by these new trusts led to a widespread perception that so-called private institutions were acquiring coercive power that had formerly been reserved for governments. The result was the passing of the Sherman Antitrust Act in 1890, which made trust agreements in restraint of trade both illegal and criminal. However, this act covered only some abuses of trade. Two other acts were subsequently passed to address other types of anticompetitive behavior. The Clayton Act of 1914 made price discrimination, exclusive dealing contracts, some corporate mergers, and interlocking directorates illegal. The Federal Trade Commission Act created the Federal Trade Commission (the FTC) and made “unfair methods of competition” such as dumping and subsidies illegal. Although they made certain behavior illegal, neither the FTC Act nor the Clayton Act made those behaviors criminal, in contrast with the Sherman Act. The FTC, in addition to investigating unfair trade claims, also prosecutes Sherman Act cases, along with the U.S. Justice Department.