Restraint of Trade: Definition & Example

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

While all may be fair in love and war, that's not the case in business. In this lesson, you'll learn about how the law prohibits certain activity that is deemed anti-competitive. We'll use real estate practice as an example to illustrate the concept.

Restraint of Trade Defined

Zoey is the managing broker of one of a few major real estate brokerage firms in town. In fact, Zoey's firm is one of six that handle nearly all of the real estate sales in her midsize city. This means that Zoey's firm interacts quite a bit with the other major players in town, because when her firm represents one party to a transaction, a competing firm represents the other party. In interacting with the other firms, Zoey needs to be very mindful not to undertake any joint activity that would be an unlawful restraint of trade.

Restraint of trade generally refers to activities, including a contract or agreement between businesses, that tends to create an anti-competitive market. If a market is not competitive, people will not get the best quality products and services at the best price. The key to understanding illegal restraint of trade is to understand that it's about cooperating with another to make the business environment uncompetitive or using your individual market power to unfairly compete.

Illegal Conduct

The Sherman Antitrust Act is an important federal law that helps ensure there is fair and healthy competition. The Sherman Antitrust Act generally prohibits any type of agreement that is intended to restrain trade leading to an anti-competitive market environment. A prime example is an agreement for price fixing, which is when several firms agree to set a fixed price for their goods and services rather than letting the competitive market set the price. For example, Zoey and the other big firms in town would be engaging in price-fixing if they agreed to set a standard commission rate for their services. This means that a consumer would be forced to accept the fixed rate rather than having brokers competing for business by offering more competitive commission rates.

Likewise, Zoey's firm and the other big dogs in town can't agree to carve up the market into exclusive territories where each broker gets a territory in which the others agree not to compete. This unlawful practice is sometimes referred to as market allocation or customer allocation. In this situation, people in each territory would have no choice but to accept the price and quality of the services offered by the broker or go without the service all together.

If Zoey's brokerage firm and one or more other brokerage firms agree not to show properties offered by a small and upcoming competitor in an effort to remove the firm from the market, it's probably violating antitrust law. Such conduct is known as a group boycott. Keep in mind that it's the intent that matters here; Zoey's firm has a right not do business with others for legitimate reasons, such as an unethical firm that may expose Zoey's clients to undue risks.

The Sherman Antitrust Act also prohibits the formation of monopolies where one business pretty much owns the market. This can lead to high prices for low-quality goods and services. For example, if there's only one real estate brokerage firm in the market, then that firm will be able to set its commission at will and not worry about providing quality service because there's no one competing with it.

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