Historically, beginning in the early 1400s, courts were hostile to the use and enforcement of CNCs, viewing them as inconsistent with free market forces. A few hundred years later, in the early 1700s, courts started to recognize the procompetitive benefits associated with CNCs; and, consistent with this new view, courts readily ruled that such clauses were lawful so long as they were reasonable. The reasonableness analysis today is best evidenced by three sections of the Restatement (Second) of Contracts, set forth below.
§ 186 Promise in Restraint of Trade
(1) A promise is unenforceable on grounds of public policy if it is unreasonably in restraint of trade.
(2) A promise is in restraint of trade if its performance would limit competition in any business or restrict the promisor in the exercise of a gainful occupation.
§ 187 Non-Ancillary Restraints on Competition
A promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade.
§ 188 Ancillary Restraints on Competition
(1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if
(a) the restraint is greater than is needed to protect the promisee’s legitimate interest, or
(b) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.
(2) Promises imposing restraints that are ancillary to a valid transaction or relationship include the following:
(a) a promise by the seller of a business not to compete with the buyer in such a way as to injure the value of the business sold;
(b) a promise by an employee or other agent not to compete with his employer or other principal;
(c) a promise by a partner not to compete with the partnership.
The Restatement (Second) of the Law of Contracts is the best-known and most cited legal treatise regarding contracts law in the United States. It is consulted by judges, arbitrators, scholars and practicing lawyers, and is highly influential with courts although not necessarily binding on them.