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 A covenant to the effect that one who has sold his business as barber will pay four hundred dollars in case he engages in competition with the purchaser in two years, is said to be a covenant for liquidated damages.2 A promise to pay five thousand dollars 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;3 to pay two thousand dollars in case of breach of a covenant not to compete;4 or to pay a certain sum in case of breach of an agreement not to disclose a trade secret,5 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.6
15 Nichols v. Haines, 98 Fed. 692, 39 C. C. A. 235.
16Mansur, etc., Implement Co. v Hardware Co., 136 Ala. 597, 33 So. 818; Maneur, etc., Implement Co. v. Willet 10 Okla. 383, 61 Pac. 1066.
1 England. Green v. Price, 13 M. & W. 695.
United States. Fleischman v. Rahm-storf, 226 Fed. 443, 141 C. C. A. 273.
Alabama. 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.) California. Potter v. Ahrens, 110 Cal 674, 43 Pac. 388.
Maine. Augusta Steam Laundry Co. v. Debow, 98 Me. 496, 57 Atl. 845.
New Jersey. Robinson v. Aid Society, 68 N. J. L. 723, 54 Atl. 416.
North Carolina. Bradshaw v. Milli-kin, 173 N. Car. 432, L. R. A. 1917E, 880, 92 S. E. 161. (Sale of barber's business to pay $400 "as liquidated damages and not as a penalty," for breach of covenant not to compete.)
Ohio. Lange v. Werke, 2 O. S. 519.
Pennsylvania. Kelso v. Reid, 145 Pa. St. 606, 27 Am. St. Rep. 716, 23 Atl 323. (Sale of country store and goodwill for $6,000, to pay $1,000 for breach of agreement not to compete.)
Tennessee. Muse v. Swayne, 70 Tenn. (2 Lea) 251, 31 Am. Rep. 607.
Texas. Tobler v. Austin, 22 Tex. Civ. App. 99, 53 S. W. 706.
Vermont. 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 Bradshaw v. Millikin, 173 N. Car. 432, L. R. A. 1917E, 880, 92 S. E. 161.
3 May v. Crawford, 142 Mo. 390, 44 S. W. 260.
4 Fleischman v. Rahmstorf, 226 Fed. 443, 141 C. C. A. 273.
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.7 The fact that the injury arising from a breach of a covenant not to compete will be much greater if such covenant is broken soon after the contract is made than it would be if such covenant were broken shortly before the expiration of the time for which the promisor had agreed not to compete, has been regarded by some courts as establishing the fact that the covenants are of varying degrees of importance and that a breach thereof will result in different amounts of damages; and, accordingly, a covenant for the payment of a fixed sum of money in case of breach has been held to be a covenant for a penalty.8 In some jurisdictions the fact that the same amount is to be paid without regard as to the time in which the breach occurs, has been regarded as indicating that the amount to be paid is a penalty and not liquidated damages.9 A covenant by which one who has sold a mill and agreed not to compete in business for five years, agrees to pay one-half of the purchase price of the mill in case of breach of such covenant, has been held to be a covenant for a penalty in view of the fact that such breach occurred a short time before the expiration of such period.10 A valid covenant by which one person agrees to deal exclusively in the product of another, is from its nature not susceptible of a ready determination of damages in case of breach and accordingly a covenant for the payment of a specified amount in case of breach will be regarded as a covenant for liquidated damages.11 A contract to sell certain property to be used in displaying moving pictures and not to compete in business for a certain period of time, and not to engage as employe in such business for a less period of time, contains covenants of such different degrees of importance that a covenant to pay five hundred dollars as liquidated damages in case of breach is a covenant for a penalty.12
5Bagley v. Peddie, 16 N. Y. 469, 69 Am. Dec. 713; Tode v. Gross, 127 N. Y. 480, 24 Am. St. Rep. 475, 13 L. R A. 652, 28 N. E. 469.
6 Wilkinson v. Colley, 164 Pa. St. 35, 26 L. R. A. 114, 30 Atl. 286.
The use of the term "forfeit" shows that a penalty is intended. Buckhout v. Witwer, 157 Mich. 406, 23 L. R. A. (N.S.) 506, 122 N. W. 184.
7 Radloff v. Haase, 196 111. 365, 63 N. E. 729; Heatwole v. Gorrell, 35 Kan. 692, 12 Pac. 135; Metz v. Clay, 101
Kan. 45, 165 Pac. 809; Perkins v. Lyman, 11 Mass. 76, 6 Am. Dec. 158; Decker v. Pierce, 191 Mich. 64, 157 N. W. 384.
8 Metz v. Clay, 101 Kan. 45, 165 Pac 809.
9 Mount Airy Milling & Grain Co. v. Runkles, 118 Md. 371, L. R. A. 1915E. 373, 84 Atl. 533.
10 Mount Airy Milling & Grain Co. v. Runkles, 118 Md. 371, L. R. A- 1915E, 373, 84 Ati. 533.