CHAPTER 21. CONTRACTS IN RESTRAINT OF TRADE IN AMERICA. S$ 719-722. Confusion of contracts in restraint of trade with combinations to suppress competition. 723, 724. Contracts in restraint of trade classified according to American decisions. 725, 726. A further classification. A. THE EARLIER AMERICAN CASES. 727-729. American law a development of the English law. 730. American cases which follow the earlier English decisions. 732-736. Contracts must be partial, and not general. 737-743. Considerations against contracts in restraint of trade. 744–750. Gradual modification of the early American decisions. B. LATER AMERICAN CASES. 751. Rules laid down by the United States supreme court in 1873. 752. Modification of these rules. 753. Contracts unlimited as to time. 754-758. Contracts unlimited as to territory. 759, 760. Contracts unlimited as to both time and territory. 761. Contracts reasonable as to both time and territory. 762. Later decisions by the supreme court of the United States. 763. Diamond Match Co. v. Roeber. 764. Contract covering seven states for a period of five years void. 765-768. Contracts between grantor and grantee. 769, 770. Contracts between lessor and lessee. 771-773. Contracts between seller and purchaser of a business. 774-776. Contracts between employer and employee. 777. Between owners of patents. 778. Sale of a practice. 779, 780. Trade secrets and inventions. 781. Trade secrets and inventions - Power to restrain agents. 782. Assignability of contract in restraint of trade. 783. Knowledge by third party of restraining contract. 784. Construction of contracts in restraint of trade. 785. The reasonableness of the restraint. 786. Reasonableness a question of law. 787. Protection of obligee as a test of reasonableness. 789. Contracts which are divisible. 790. Liquidated damages and penalty. § 791. Measure of damages. 792. Jurisdiction of court of equity. 793. Power of court of equity to award damages. 794. Contracts affecting quasi-public duty. 795. Statutory provisions covering contracts in restraint of trade. 719. Confusion of contracts in restraint of trade with combinations to suppress competition. Before entering upon any investigation of the law concerning contracts in restraint of trade in the United States, it is important to note the manner in which the courts have confused contracts in restraint of trade with combinations to suppress competition, and this confusion must be constantly borne in mind in weighing the importance and determining the effect of many American cases. The confusion is not altogether peculiar to American decisions, since it made its appearance early in the English cases; but it is in the American cases that the phrase "contracts in restraint of trade" has been used more often to describe indiscriminately not only contracts which fall within the historical and strict definition of contracts in restraint of trade, but also to describe agreements, pools, associations and combinations. of all kinds the object of which is to suppress competition. As has already been intimated, if the field were open to adopt new definitions, an agreement the object of which is to suppress competition might be quite as appropriately described as a contract in restraint of trade, as a bond or contract the object of which is to restrain the party bound from following any trade or occupation; but the field is not open. The law of contracts in restraint of trade dates from the days of Henry V., and had its origin in a contract whereby a party was bound not to follow a certain occupation for a certain period. In the earlier days the laws against monopolies and against forestalling, regrating and engrossing, and the law of conspiracy, were supposed to protect the public against combinations the object of which was to create a monopoly or to control the market to the detriment of the public. As combinations of both labor and capital the objects of which were to control wages, prices, products and competition became more numerous, the courts fell into the habit of holding such combinations illegal for reasons which had no logical relation or connection one with the other; first, because they were conspiracies; second, because in some manner they were controlled by the letter or spirit of the laws against regrating, forestalling and engrossing; third, because they tended to establish monopolies; fourth, because the agreements underlying such combinations were contracts in restraint of trade. A combination the object of which is to advance wages and to control as far as possible the market for labor in a particular trade may or may not be a conspiracy, and if not a conspiracy is entirely legal (always, excepting some arbitrary statutory provision to the contrary); but whether a conspiracy or not, such a combination has absolutely nothing to do with the law concerning forestalling, regrating and engrossing; nor has it anything to do with the law concerning monopolies; nor does it fall within the law concerning contracts in restraint of trade. Likewise, a combination of capital the object of which is to control products and prices and suppress competition may or may not be a conspiracy, and if not a conspiracy is entirely legal (always excepting some arbitrary statutory provision to the contrary); but whether a conspiracy or not, such a combination has nothing to do with the law concerning regrating, forestalling and engrossing; nor has it anything to do with the law concerning monopolies; nor does it fall within the law concerning contracts in restraint of trade. It adds no force to a decision holding a combination illegal to say that the combination is a conspiracy, that it is an attempt to forestall, regrate or engross the market, that it tends to establish a monopoly, that it is in restraint of trade; such a decision is simply a blind groping after reasons for reaching a conclusion that the combination is illegal. The law of conspiracy is entirely distinct from the ancient law concerning forestalling, regrating and engrossing; the law of monopolies is entirely distinct from the law concerning contracts in restraint of trade;-in short, the law concerning each of these subjects is entirely distinct both in its origin and development from the law concerning each of the others. A combination may amount to a conspiracy, and it may tend to gain such control of the market as to secure practically a monopoly, and it may be supported by one or more contracts in restraint of trade; but the agreement which is the basis of the association or combination is not in any sense a contract in restraint of trade; the parties to the combination may bind themselves not to follow any competing trade or occupation, and these several agreements, whether made separately or inserted as part of the agreement upon which the combination is based, fall within the law concerning contracts in restraint of trade, and are to be enforced or declared void according to the rules governing such contracts; but the validity of the agreement constituting the combination is not to be determined by the validity of these incidental or collateral agreements, though, of course, the incidental or collateral agreements in restraint of trade entered into by the several parties interested in the combination may fall with the principal agreement, if that is invalid for other reasons. § 720. It would not be necessary to dwell upon the confusion which exists between contracts in restraint of trade and combinations were it not that the decisions already reviewed at length under "Combinations of Labor" and "Combinations of Capital," both legal and illegal, show that the courts are hopelessly adrift and assign the most incongruous reasons for conclusions that may be entirely just. This confusion is more conspicuously apparent in both state and federal legislation against trusts and combinations, as will be seen when this legislation is passed in review. For the present it will suffice for purposes of illustration to refer to a well-considered case in which the federal courts passed upon a contract whereby a number of companies engaged in the manufacture of iron pipe in different states entered into an association to suppress competition and control, so far as practicable, prices, bids and contracts for pipe, and held such combination unlawful, assigning as one of the reasons for the conclusion that it was a contract in restraint of trade within the act of congress of July 2, 1890.1 The circuit court of appeals, in the opinion by Judge Taft, entered into an exhaustive consideration of the origin and development of the law of contracts in restraint of trade, and arrived at these conclusions: "Covenants in partial restraint of trade are generally upheld as valid when they are agreements 1 United States v. Addyston Pipe & Steel Co. (1898), 85 Fed. R. 271; Id. (1899), 175 U. S. 211, 20 Sup. Ct. R. 96. (1) by the seller of property or business not to compete with the buyer in such a way as to derogate from the value of the property or business sold; (2) by a retiring partner not to compete with the firm; (3) by a partner pending the partnership not to do anything to interfere, by competition or otherwise, with the business of the firm; (4) by the buyer of property not to use the same in competition with the business retained by the seller; and (5) by an assistant, servant or agent not to compete with his master or employer after the expiration of his time of service. Before such agreements are upheld, however, the court must find that the restraints attempted thereby are reasonably necessary (1, 2 and 3) to the enjoyment by the buyer of the property, good-will or interest in the partnership bought; or (4) to the legitimate ends of the existing partnership; or (5) to the prevention of possible injury to the business of the seller from use by the buyer of the thing sold; or (6) to protection from the danger of loss to the employer's business caused by the unjust use on the part of the employee of the confidential knowledge acquired in such business.1" 1 United States v. Addyston Pipe & Steel Co. (1898), 85 Fed. R. 271. "Under the first class come the cases of Mitchell v. Reynolds (1711), 1 P. Wms. 181; Fowle v. Parke (1889), 131 U. S. 88, 9 Sup. Ct. 658; Nordenfelt v. Maxim-Nordenfelt Co. (1894), App. Cas. 535; Rousillon v. Rousillon (1879), 14 Ch. Div. 351; Leather Cloth Co. v. Lorsont (1869), L. R. 9 Eq. 345; White taker v. Howe (1841), 3 Beav. 383; Diamond Match Co. v. Roeber (1887), 106 N. Y. 473, 13 N. E. R. 419; Tode v. Gross (1891), 127 N. Y. 480, 28 N. E. R. 469: Beal v. Chase et al. (1875), 31 Mich. 490; Hubbard v. Miller et al. (1873), 27 Mich. 15; National Ben. Co. v. Union Hospital Co. (1891), 45 Minn. 272, 47 N. W. R. 808; Whitney v. Slayton (1855), 40 Me. 224; Pierce v. Fuller (1811), 8 Mass. 223; Richards v. American Desk Seating Co. (1894), 87 Wis. 503, 58 N. W. R. 787. In the second class are Tallis v. Tallis (1853), 1 El. & Bl. 391, and Lange v. Werk (1853), 2 Ohio St. 519. In the third class are Troy Laundry Machinery Co. v. Dolph (1891), 138 U. S. 617, 11 Sup. Ct. 412; Id. (1886), 28 Fed. R. 553, and Matthews v. Associated Press of State of N. Y. et al. (1893), 136 N. Y. 333, 32 N. E. R. 981. In the fourth class are American Strawboard Co. v. Haldeman Paper Co. (1897), 83 Fed. R. 619, and Hitchcock v. Anthony (1897), id. 779- both decisions of this court; Navigation Co. v. Winsor (1873), 20 Wall. 64; Dunlop v. Gregory (1851), 10 N. Y. 241; Hodge et al. v. Sloan (1887), 107 N. Y. 244, 17 N. E. R. 335. While in the fifth class are the cases of Homer v. Ashford et al. (1825), 3 Bing. 322; Horner v. Graves (1831), 7 Bing. 735; Hitchcock v. Coker (1837), 6 Adol. & E. 438; Ward v. Byrne (1839), 5 Mees. & W. 547; Dubowski & Sons v. Goldstein (1896), 1 Q. B. 478; Perls v. Saalfeld (1892), 2 Ch. 149; Taylor v. Blanchard (1866), 13 Allen, 370; Keeler v. Taylor (1866), 53 Pa. St. 467; Herreshoff v. Boutineau (1890), 17 R. L. 3, 19 Atl. R. 712.” |