This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
Contracts for the sale of good will, which contain a covenant in reasonable restraint of trade, often provide for the amount of damage to be paid in case of the breach of such covenant. Such damages are very difficult to prove, and accordingly such provisions have been treated as liquidated damages.1 So a promise to pay $5,000 as liquidated damages in case of a breach of a clause forbidding the buyer to advertise the sale of certain lines of goods reserved by the seller ;2 or to pay a certain sum in case of breach of an agreement not to disclose a trade-secret,3 have each been held to be agreements for liquidated damages. Even in such jurisdictions a clause binding the promisor "in the penal sum of four hundred dollars," not to practice medicine in a certain locality, is held to be prima facie a contract for a penalty.4 On the other hand, there may be breaches of a covenant in reasonable restraint of trade of very different degrees of importance, causing very different amounts of damage. Some courts have therefore held that a provision for the payment of a fixed sum in case of any breach of a covenant in restraint of trade, is a provision for a penalty.5
10 Nichols v. Haines, 98 Fed. 692; 39 C. C. A. 235.
11 Mansur, etc., Implement Co. v. Hardware Co., 136 Ala. 597; 33 So. 818; Mansur, etc.. Implement Co. v. Willet, 10 Okla. 383; 61 Pac. 1066.
1 Green v. Price, 13 M. & W. 695; McCurry v. Gibson, 108 Ala. 451; 54 Am. St. Rep. 177; 18 So. 806. (Sale of practice of medicine - to pay $200 in case of breach of covenant not to engage in practice.) Potter v. Ahrens, 110 Cal. 674; 43 Pac. 388; Augusta Steam Laundry Co. v. Debow, 98 Me. 496; 57 Atl. 845; Robinson v. Aid Society. 68 N. J. L. 723; 54 Atl. 416; Kelso v. Reid, 145 Pa. St. 606; 27 Am. St.
Rep. 716; 23 Atl. 323. (Sale of country store and good-will for $6,000, to pay $1,000 for breach of agreement not to compete.) Muse v. Swayne, 2 Lea (Tenn.) 251; 31 Am. Rep. 607; Tobler v. Austin, 22 Tex. Civ. App. 99; 53 S. W. 706; Borley v. McDonald, 69 Vt. 309; 38 Atl. 60. (Employee to pay $500 if he competes with his employer for one year after his employment ends.)
2 May v. Crawford, 142 Mo. 390; 44 S. W. 260.
3 Tode v. Gross, 127 N. Y. 480; 24 Am. St. Rep. 475; 13 L. R. A. 652; 28 N. E. 469; Bagley v. Ped-die, 16 N. Y. 469; 69 Am. Dec. 713.