Mitchel v. Reynolds case brief
England, Parker, C.J., 1711 (agreements in restraint of trade)
Parties, Statement of Case: Creation of the “Rule of Reason”. Ancillary restraints are permitted under this analysis.
Facts: Defendant assigned his bakehouse in St. Andrews Holborn parish to plaintiff. A condition in the bond stated that the amount due under the bond would be void if defendant didn't exercise his trade as baker in the parish for five years, or if he did so and paid plaintiff fifty pounds within three days of proof that he had.
Procedural History & Outcome: Plaintiff sued, claiming that defendant had exercised his trade as baker and therefore plaintiff could collect the amount due under the bond. Defendant demurred, arguing that the contract was a restraint of trade and therefore void.
Issue: Was the agreement between plaintiff and defendant a restraint on trade that could not be enforced?
Holding: The court held that for particular restraints, a "Rule of Reason" must be applied; in this case, the restraint was reasonable and was based on a contract with valid consideration, so it was enforceable.
Reasoning: The court said that all general restraints on trade are void, and particular restraints (dealing with a specific person and place) are void if they are not for valid consideration. However, for consideration, a person can give over his trade to another. The court made a series of observations on restraints of trade:
1) Obtaining sole exercise of a trade in England is a monopoly and therefore against public policy.
2) When sole exercise is limited to specific places and people, it's not a monopoly.
3) Some restraints under #2 are by custom, and therefore not presumptively unlawful.
4) A person may lawfully part with his trade for consideration.
5) Breaching such an agreement to give up trade creates a cause of action for the other party.
6) When the law allows a restraint of trade, it can be enforced with a penalty.
7) One may not contract to not use his trade at all (as opposed to in certain places & times).
8) Particular restraints are not valid without "just reason and consideration."
The court went on to say that a contract that simply restricts trade without any further reason is presumptively void, but where there is a reasonable and useful purpose to the restraint, the presumption will be overcome.
The claim in this case was for a debt upon a bond; the bond secured the promise of the lessor of the bakery that he will not compete with the lessee during the term of the lease.
The critical distinction between this case and the Dyer's Case is that here, the agreement is ancillary (to the lease) rather than being a naked agreement not to compete. The latter are not valid, while ancillary restraints will be lawful if they fall within the Rule of Reason. In other words, an ancillary restraint on trade is not per se lawful, but it will be lawful if there are valid reasons for it beyond just a benefit to both parties.
In this case, since the agreement not to compete was exactly proportional to the term of the lease, it was legitimate, while if it had been longer, it might not have had that presumption. The lease of the bakery itself was a rational and beneficial action, and since the transaction would not have occurred without the ancillary restraint on trade, it was not unlawful.