On the 5th of March 2013, the New York Times reported that Martha Stewart had appeared before the New York State Supreme Court because of a dispute that sought to determine the issue of retailers enjoying the liberty to sell Martha’s merchandise, which included sheets, clothes, and other domestic stock. These proceedings took place pursuant to a lawsuit instituted by Macy’s, the plaintiff, in 2012 against J. C. Penney and Martha Stewart Living Omnimedia. The gravamen of the action by the plaintiff centered on the allegation that Martha contracted to sell the same merchandise to J.C Penney that she did Macy’s. Macy’s started retailing in the products belonging to Martha Stewart in 2007 until J.C Penney’s was contracted.
The instant action displays a matter that properly falls under the non-competitive or restrictive covenant aspects of the law of contract.1 It basically involves the inclusion of a clause in a contract entered into between parties not to compete. The non-competing clause ensures that a party in the contract does not contract to institute other business or profession that is fundamentally in competition with the instant one, unless with the express consent of the other party.
Despite the clause being included in the larger contract of trade or profession, it is taken to be a separate contract on its own standing, with the requirements of consideration, offer, acceptance, and legality being required by such a clause.2 The fundamental rationale that guides the creation of these clauses is that it may be prejudicial to a trader if his former trading partner begins working for a competitor.
This may lead him to enjoy a competitive advantage by taking advantage of the confidential information he got from his previous employment in his new employment. In the instant case, it appears unclear whether there had been an express clause in the contract between the plaintiff and Martha Stewart whether the latter could trade in the same business with a different trading partner. However, it should be understood that such a restriction can only be invoked where an express clause exists to affirm its existence.3
Generally, these restrictive covenants may legally be found to be sound and valid, even where they restrict a trader from ever working in the same trade again with a competitor. Under common law, the clause lacked validity as a public policy doctrine.4 Under the contemporary court decisions, however, the courts will only allow the operation of the clause if it is convinced that the same is necessary for the protection of a trader in his business. As a matter of fact, the current jurisprudence in the American law proves that the courts will be willing to sanctify and enforce a non-competition clause, where the same is restricted to a particular geographical location and bears a reasonable limitation of time.
In other words, the courts will rarely enforce a restrictive covenant in trade in the US, where the same relates to a limitless geographical area of application and does not contain a time limit within which it is to be enforced.5 In the case of Paramount Termite Control Co. v. Rector, 380 S.E.2d 922, a restraint of trade agreement had been entered into by parties to a trade in which employees were restrained from working in a wide range of counties within the states they had operated. The court found this to be an irrational restraint of trade. However, the decision was overturned, with the Court of Appeal ruling that the restriction had been rational, time-constrained, and geographically definite.
Several ethical theories may be applied in an attempt to analyze the finding that the court should decide on this matter. Under the utilitarian ethical approach, the greatest good for the greatest number of people is taken to be the real driver of the validity and soundness of the actions of human beings. In other words, this ethical theory propounds that the action that leads a majority of the world’s inhabitants to pleasure and benefit is to be regarded as morally right, while that which does not may be regarded as morally wrong in this regard.
In regard to the instant case, the theory would look at the benefit that is to be enjoyed as a result of the success of the action, vis-à-vis that which may be enjoyed if the case is to be dismissed. It may be argued that the restrictive clause brings about more good to a greater number of the citizenry, as it promotes fairness in trade, which translates to better and fairer livelihoods for a majority of the people. On the other hand, it may be argued that restriction of trade actually inhibits the liberties of the people, thereby barring them from living up to their utmost best.6
Another theory is the consequentialist theory, which suggests that the effects of the conduct of a person are the right and valid determination as to whether the conduct is right or wrong. Hence, from the consequentialists’ argument, an act is only deemed to be morally right if its consequences turn out to be good, regardless of the means through which the consequence was arrived at. In connection to the instant case, this theory may be applied to unearth the real consequence that may become, in case the suit wins the day or vice versa. Therefore, it may be argued that allowing the suit by Macy’s may lead to an unreasonable restriction of the liberties of the people to exercise their economic freedoms and result in economic impoverishment. On the other hand, it may be argued that a restriction of trade could increase economic discipline amongst the people and curb instances of unfair play in the economic field.7
However, the finding of the court ought to resonate with the evidence presented before the court, as well as the law. If the agreement that was entered into between Macy’s and Martha Stewart expressly provided that trade in the particular items sold by Martha was to be restricted to Macy’s, then the court’s hands are tied, and the ruling can only be in favor of the validity of such an agreement relying on the authority of Paramount Termite Control Co. v. Rector (supra).8 The same may apply, where the same relates to a geographically confined zone of application, as well as a defined timeline. Going by ethical standards, too, the restrictive clause can only be determined as valid. The consequentialist and utilitarian approaches above both point to the fact that the agreement’s effect is positive, as it is meant to curb cases of unfair trade.
Bibliography
Blanchard, D. Lindsey. “Charitable Nonprofits’ Use of Noncompetition Agreements: Having the Best of Both Worlds.” U of St. Thomas Legal Studies Research Paper, no. 13-06 (2013). 1-33.
Engle, Eric. “The Globalization of Antitrust and Competition Law.” Currents: International Trade Law Journal 21, no. 3 (2012): 1-22.
Fox, M. Eleanor, and Trebilcock J. Michael (Eds.). The Design of Competition Law Institutions: Global Norms, Local Choices. Oxford: Oxford University Press, 2012.
Jin, Yuqin. “Comparative Lectures on Competition and IP.” Journal of Intellectual Property Law & Practice 7, no. 7 (2012): 538-539.
McGee, W. Robert. “Analyzing Insider Trading from the Perspectives of Utilitarian Ethics and Rights Theory.” Journal of Business Ethics 91, no. 1 (2010): 65-82.
Potmore, W. Douglas. Commonsense Consequentialism: Wherein Morality Meets Rationality. Oxford: Oxford University Press, 2011.
Footnotes
- Yuqin, Jin, “Comparative Lectures on Competition and IP,” Journal of Intellectual Property Law & Practice 7, no. 7 (2012): 540
- Eleanor, M. Fox, and Trebilcock J. Michael (Eds.), The Design of Competition Law Institutions: Global Norms, Local Choices (Oxford: Oxford University Press, 2012), p. 45
- Lindsey, D. Blanchard, “Charitable Nonprofits’ Use of Noncompetition Agreements: Having the Best of Both Worlds,” U of St. Thomas Legal Studies Research Paper no. 13-06 (2013), p. 23
- Yuqin, Jin, “Comparative Lectures on Competition and IP,” Journal of Intellectual Property Law & Practice 7, no. 7 (2012): 542
- Lindsey, D. Blanchard, “Charitable Nonprofits’ Use of Noncompetition Agreements: Having the Best of Both Worlds,” U of St. Thomas Legal Studies Research Paper no. 13-06 (2013), p. 23
- Robert, W. McGee, “Analyzing Insider Trading from the Perspectives of Utilitarian Ethics and Rights Theory,” Journal of Business Ethics 91, no. 1 (2010): 68.
- Douglas, W. Portmore, Commonsense Consequentialism: Wherein Morality Meets Rationality (Oxford: Oxford University Press, 2011), p. 23.
- Eric, Engle, “The Globalization of Antitrust and Competition Law,” Currents: International Trade Law Journal 21, no. 3 (2012): 12