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going as this against restraint of trade. And
it does not change the law if the effects of
that agreement may be limited to a certain
extent by the competition of parties out-
side the agreement. It is enough to con-
demn the agreement, if, as between the par-
ties, the restraint is total. The law con-
siders all contracts between competitors to
limit their competition as bad in principle.

The restraint of trade thus is as obnoxious
to a modern court as ever, as Tuscaloosa Ice
Company v. Williams (127 Ala. 110), one
of the latest cases, shows. The complaint



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128 THE CONTROL OF THE MARKET

recited that by the terms of an agreement
between the plaintiff and defendant, the first
party was to pay $873 a year and the second
party was to shut down his ice machine for
five years. The court held the whole con-
tract so clearly bad as to be altogether un-
enforceable, Mr. Justice McClellan saying:
" It tends to injure the public by stifling
competition and creating a monopoly. It
operated not only to put in the power of
the covenantee to arbitrarily fix prices, but
directly and necessarily to create a partial
ice famine, upon which the defendant com-
pany could batten and fatten at its own sweet
will. That a monopoly was created is clear
beyond all dispute. That ends the case
against the validity of the covenant."



VI

Against all real restraint of trade the law
is still set; and often it frustrates the plans
of the conspirators when it is least expected.
Take for an example the lowly case of
Chapin v. Brown Bros. (83 Iowa, 156). The
facts are petty, yet the issue is involved. All
that appears is that by an arrangement be-
tween the storekeepers in a country town it



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CONTRACTS IN RESTRAINT OF TRADE 129

was agreed that all of them should stop buy-
ing butter of the farmers, except one of
them, who should share his profits with them.
This deprived the farmers of the benefit of
the competition of the buyers, as one sees.
Justice Rothrock refused to enforce this con-
tract; he said: " It plainly tends to monopo-
lize the butter trade at Storm Lake, and
destroy competition in that business. It is
not necessary that the enforcement of the
agi:eement would actually create a monopoly
in order to render it invalid, and surely where
all the dealers in a commodity in a certain
locality agree to quit the business, and the
plaintiffs are installed as the only dealers
in that line, the tendency is, for a time at
least, to destroy competition, and leave the
plaintiffs as the only dealers in that species
of property in that locality."

A precious scheme is that disclosed in Mil-
waukee Masons and Builders' Association v.
Niezerowski (95 Wis. 129). This was an
action on a note to which it was pleaded as
making out a defense upon grounds of pub-
lic policy. That the note was given by the
defendant, a builder, to the plaintiff, the
association, in pursuance of its requirements
that every successful bidder for contracts



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130 THE CONTROL OF THE MARKET

in Milwaukee should pay over to the asso-
ciation six per cent, of the contract price.
The showing of such a scheme was enough
for Mr. Justice Pinney: " The combination
in question is contrary to public policy, and
strikes at the interests of those of the public
desiring to build, and between whom and
the association or the members thereof there
exist no contract relations. While all reason-
able stipulations and means to protect labor
or trade are laudable, we must hold that the
means here sought to be employed are such
as the law will not sanction. We must
consider what may be done under such an
agreement, and the result which it will neces-
sarily produce. As already pointed out,
the operation of this combination, under its
private by-laws, is to suppress free and fair
competition in bidding for contracts, and by
delusive and deceptive means members of
the association are enabled to exact from
owners a higher price for buildings than
they would otherwise have to pay."



VII

It will have been noted that in the mod-
ern cases the attempt has been to draw the



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CONTRACTS IN RESTRAINT OF TRADE 131

line between what is unreasonable and what
is reasonable. The time has certainly come
in this discussion to bring forward instances
of what the modern law will permit as rea-
sonable to contrast with the cases of un-
reasonable restraint which have been cited.
It is desirable that men should be free to com-
pete in business; it is desirable also that
contracts relating to business should be en-
forced. There is a conflict of policies here,
and some compromise is the only way out.
As in the case of most legal distinctions it is
only a difference in degree that separates ar-
rangements of the forbidden sort from agree-
ments of the permitted kind. But perhaps
it will make the discussion clearer to define
by catch phrases the two extremes. What,
then, is forbidden is unreasonable restraint —
suppression of competition; while what is per-
mitted is reasonable restriction — regulation
of competition. Phrases these are — ^but they
may serve to fix the limits of the inquiry.

A plain illustration of the social advantage
of the reasonable agreement, in ameliorating
competition, is Stovall v. McCutcheon (54
S. W. 969), where the court enforced an
agreement among the merchants in a cer-
tain village to close at 6:30 p, m, on certain



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132 THE CONTROL OF THE MARKET

days at certain seasons. The opinion of Mr.
Justice White was brief, but to the point:
" While it is true that contracts in restraint
of trade are to be carefully scrutinized, and
looked upon with disfavor, all contracts in
restraint of trade are not illegal. The re-
straint here put is but partial, — very incon-
siderable. It is but a few hours, at most,
each day, and for three and one-half months,
during the extremely hot weather. It has
come within the observation of the members
of this court that during this season (May
15th to September) many merchants close
about 6:30 or 7 p. m. This cannot be held
an illegal restraint of trade."

Upon the whole, the courts will go very
far to support, as reasonable, commercial
agreements which they believe to have been
made in good faith, with no id^a to control
the market. An illustration of this tendency
is the leading case of Collins v. Locke (L.
R. 4 A. C. 674). The agreement there in
question was made between four parties then
engaged in carrying on the business of
stevedores in the port of Melbourne for the
purpose of preventing competition. The
principal shipping firms were by the provi-
sions of the agreement divided ijitp four sets.



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CONTRACTS IN RESTRAINT OF TRADE 133

one set being allotted to each party to the
agreement, if he can get them; if not, an
equivalent was to be given; other ships were
to be taken in order of arrival, and no other
party was to interfere. The House of Lords
made a distinction between these two clauses
of the agreement. The division of the work
for the regular firms, if the arrangement
was satisfactory to them, their Lordships
held reasonable. " Each party might in turn
derive benefit from this clause, and one of
the four firms would always get the profit
of the ship stevedored, though the work
might be done by another of them. As re-
gards the merchant, also, he can have his ship
stevedored by the party whom he may re-
quire to do it; at least there is no prohibition
against his having it so done." But the
positive restraint against working for the
occasional ships except in rotation theiir
Lordships held unreasonable. " Such a re-
striction cannot be justified upon any of the
grounds on which partial restraints of trade
have been supported. It is entirely beyond
anything the legitimate interests of the par-
ties required, and is utterly unprofitable and
unnecessary, at least for any purpose that
can be avowed."



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134 THE CONTROL OF THE MARKET

VIII

This distinction between reasonable and
unreasonable restraint of trade goes back
to the leading case of Mitchell v. Reynolds
(1 P, Wms. 181), where far too elaborate
tests were given to determine whether an
agreement should be considered legal or il-
legal, the hopeless attempt being made to
justify all of the previous decisions, ignoring
the fact that the originally absolute rule had
at length been modified so as to permit
business dealings of certain sorts. The actual
decision, however, was clearly sound; and it
has been followed in almost countless cases
of the same sort ever since. It was that a
merchant in selling out his business could
agree not to engage in a similar trade within
a fair distance for a reasonable time. The
policy to make the good- will which a trader has
built up a salable asset overbore to that ex-
tent the general policy against contracts in
restraint of trade. It seems that such ar-
rangements should not be permitted to stand
when they are being used by a monopo-
lizing concern to perpetuate its control of
the market. There are conflicting authorities
on this point, but the law probably is that



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CONTRACTS IN RESTRAINT OF TRADE 135

such contracts are only permitted on grounds
of public policy anyhow; and if they are
being us^d as part of a scheme to monopolize,
they should not be enforced.

No scheme to control the market should
be allowed to hide itself behind the doctrine
of the reasonable character of an ancillary
agreement, as it was attempted to do in
Arnot V. Pittston and Elmira Coal Co. (68
N. Y. 558). This was an arrangement be-
tween Pennsylvania operators and New York
dealers by which it was agreed that no coal
should be sold in the Elmira market except
under the provisions of the contract through
the dealers, the operators undertaking that
no other coal should come north of the state
line during the continuance of the agreement.
Later the parties fell out, but the court dis-
missed them all, Mr. Justice Rapallo say-
ing: "Every producer or vendor of coal or
other commodity has the right to use all
legitimate efforts to obtain the best price
for the article in which he deals. But when
he endeavors to artificially enhance prices
by suppressing or keeping out of the market
the product of others, and to accomplish that
purpose by means of contracts binding them
to withhold their supply, such arrangements



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136 THE CONTROL OF THE MARKET

are even more mischievous than combinations
not to sell under an agreed price. Combi-
nations of that character have been held to be
against public policy and illegal. If they
should be sustained, the prices of articles of
pure necessity, such as coal, flour, and other
indispensable commodities, might be arti-
ficially raised to a ruinous extent far exceed-
ing any naturally resulting from the pro-
portion between supply and demand.''

IX

One of the most important applications of
this distinction between what is reasonable
and what is unreasonable remains for discus-
sion — the " factor's agreement " so called.
A common case is Clark v. Frank (17 Mo.
App, 602), where Mr. Justice Thompson
said, in passing: "We see no force in the
argument that the agreement not to sell the
goods at less than the trade price was void as
being in restraint of trade, so far as it related
to goods which might be purchased of other
dealers. If it were void, that fact would not
help the defendants, for the plaintiff merely
chose to say that he would allow certain
drawbacks upon the performance of a certain
condition."



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CONTRACTS IN RESTRAINT OF TRADE 137

Another instance of the factor's agreement
of equal importance is Houck & Co. v.
Wright (77 Miss. 476). The facts here
also presented an ordinary business arrange-
ment, whereby the manufacturers of a certain
piano made an exclusive agency contract with
a certain dealer. It was urged in the case
cited that this arrangement, excluding as it
did other persons from getting a right to sell
this piano in this territory, tainted all the
surrounding transactions with restraint of
trade. Biit Mr. Justice Terral was clear
that this was not at all so. " The arrange-
ment between Vose & Sons and Houck &
Co., is entirely legal. It does not operate to
suppress competition, nor to regulate the
production or sale of any commodity. As
said by counsel of appellant, its purpose is
to facilitate and advance the sale of pianos.
It is Vose & Sons regulating their own busi-
ness, endeavoring thereby to sell as many
pianos as possible, and on the best terms for
themselves and their customers."



All of these cases show that, by a well-
devised contract, power is often obtained to
control even the modem market, wide as it



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138 THE CONTROL OF THE MARKET

is. It is the recognition of this possibility
that makes the law against the conspiracy to
control the market so thoroughgoing. Any
scheme to monopolize is thererore illegal,
whatevjer may be its outward seeming.
Even the exceptions which have been made
to the sweeping policy against all restraint
of trade cannot be claimed by those who have
a scheme to monopolize on foot. In the case
of the sale of a plant to a trust the conve-
nants not to compete cannot be enforced.
And in the case of a trust the factor's agree-
ment should not be enforced. Upon this
whole matter, however, the operation of the
common law, as has been seen, is negative.
It denies enforcement to all such arrange-
ments; but it can do little if all within the
combination are well satisfied. To be sure,
it is the common fate of pools that when some
of its members can resist the advanced price
no longer they will sell out, knowing that
their fellow members in the pool will be
without legal redress. But some pools are so
successful in getting big profits for all con-
cerned, or their members are so loyal, that no
one breaks away, and prices stay up. Then
the public needs affirmative law for its pro-
tection; and this is the explanation of these



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CONTRACTS IN RESTRAINT OF TRADE 139

modern statutes, discussed in a later chapter,
giving to the prosecuting officers power to
initiate proceedings to compel the dissolution
of such combinations.



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NOTE

Other important cases in addition to those discussed
in the text-book holding an unreasonable agreement unen^
forceable are: Leighton v. Wales, 3 M. & W. 54i5
(1838); Oliver v. Gilmore, 52 Fed. 562 (1892); Santa
Clara Lumber Co. v. Hayes, 76 Cal. 387 (1888); Craft
V. McConoughy, 79 111. 346 (1875); Anderson v. Jett,
89 Ky. 375 (1889); Cohen v. Envelope Co., 166 N. Y.
292 (1901) ; Barataria Canning Co. v. Joulian, 80 Miss.
555 (1902); Central Ohio Salt Co. v. Guthrie, 35 Oh.
St. 666 (1880); Morris Run Coal Co. v. Barclay Coal
Co., 68 Pa. St. 173 (1871) ; Fairbank v. Leary, 40 Wis.
637 (1876). But see — Perkins v. Lyman, 9 Mass. 523
(1813); Manchester & L. R. R. v. Concord R. R., 66
N. H. 100 (1889).

Other important cases not discussed in the text hold-
ing a reasonable agreement enforceable are: Wickens
V. Evans, 3 Y. & J. 318 (1829); Nordenfelt v. Maxim
& Nordenfelt Co. (1894), A. C. 535; Bowling v. Taylor,
40 Fed- 404 (1889); Grogan v. Chaffee, 156 Cal. 611
(1909); Herriman v. Menzies, 115 Cal. 16 (1896);
Willson V. Morse, 117 Iowa, 581 (1902); Central Shade
Roller Co. v. Cushman, 143 Mass. 353 (1887); National
Benefit Co. v. Union Hospital Co., 45 Minn. 272
(1891); Houck & Co. v. Wright, 77 Miss. 476 (1899);
Presbury v, Fisher, 18 Mo. 50 (1853); Bancroft v.
Union Embossing Co., 72 N. H. 402 (1903); Diamond
Match Co. V. Roeber, 106 N. Y. 473 (1887). But see-
Lawrence V. Kidder, 10 Barb. 641 (1851); Lufkin Rule
Co. V. Fringeli, 57 Oh. St. 596 (1898).



141



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CHAPTER VII

MODERN FORMS OF COMBINATIONS



Notwithstanding all the law against
agreements in restraint of trade which has
just been recited, the present generation has
seen in the rise of the trusts the greatest
movement toward consolidation which is
recorded in economic history. But this con-
solidation was not accomplished without a
reckoning with the law. In the face of this
adverse law the ingenuity of attorneys, act-
ing for clients who wished to bring about a
community of interests, has been taxed to the
utmost; and at best their schemes have proved
only temporary expedients. In this era of
consolidation there has been a change of base
at least four times during this brief period:
First, the pool — a direct agreement between
the corporations concerned for their joint
operation to a certain extent; second, the
trust — an indirect arrangement between the

142



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MODERN FORMS OF COMBINATIONS 143

shareholders to control the action of their
corporations; third, the holding corporation
— a central company to hold the shares of the
constituent companies; and fourth, the single
corporation, which buys the properties of the
combining corporations outright. Despite
the many cases relating to these four typical
forms of intercorporate relationship, the
problem is still, to a large extent, unsolved
as to how various corporations may be con-
centrated under one control.



II

It is hardly fair to the legal profession to
say that it entertained a real expectation for
the success of any simple form of pooling
arrangement during the last two decades.
In the face of so much express authority
against combinations in restraint of trade,
clients must have been advised that to form
pools was to run for luck. Perhaps every
member would live up to his agreement; but
there was no remedy at law if anyone did
not. Perhaps the proceeds of the pooling
would be fairly divided; but the court would
not order an accounting. And experience
showed again and again that, without legal



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144 THE CONTROL OF THE MARKET

obligation, there were always members in any
such pool treacherous enough to break with
it. Moreover, there was the corporation
law to reckon with, as well as the combina-
tion law. It has always been held to be
against the policy of the corporation law for
corporations to surrender their independence
by entering a pool. Although the conse-
quences of this were not quite so dire as in
the case of illegal combinations, still no
corporation could be held to any agreement
of this sort.

The leading case on the general principle
against the combination of corporations in a
partnership or any other association is Whit-
tenton Mills v. Upton (10 Gray 582). In
that case the court — Thomas, J. — ^held that,
as a matter of law, a corporation could, under
no circumstances, beneficial to it or detri-
mental to it, and for no purpose, legal or
illegal, be a member of a partnership. " The
effect of all our statutes, the settled policy
of our Legislatiu'e, for the regulation of
manufacturing corporations is that the cor-
poration is to manage its affairs separately
and exclusively, certain powers to be exer-
cised by the stockholders, and others by offi-
cers who are the servants of the corporation



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MODERN FORMS OF COMBINATIONS 146

and act in its name and behalf. And the
formation of a contract, or the entering into
a relation, by which the corporation or the
officers of its appointment should be divested
of that power, or by which its franchise
should be vested in a partner with equal
power to direct and control its business, is
entirely inconsistent with that policy."

When, therefore, corporations sign agree-
ments to carry on their business in common,
the scheme is always held illegal. This is
sufficiently shown by the case of Mallory v.
Hanaur Oil Works (86 Tenn. 598). This
was a " combination syndicate," arranged be-
tween four corporations engaged in manu-
facturing cottonseed oil at Memphis. The
contracting mills agreed to select a commit-
tee, composed of representatives from each
corporation, and to turn over to this com-
mittee the properties and machinery of each
mill, to be managed and operated by this
committee, through officers, agents, and em-
ployees selected by them, for the common
benefit, the profits and losses of such opera-
tions to be shared in proportions agreed
upon. In declaring this arrangement illegal
Mr. Justice Liu'ton said: "The decided
weight of authority is that a corporation has



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146 THE CONTROL OF THE MARKET

not the power to enter a partnership, either
with other corporations or with individuals.
It is unnecessary to consider this contract as
constituting a mere traffic arrangement; for
the conclusion already announced that it was
an effort to form a partnership, determines
that in its scope and effect it sought to accom-
plish much more than would be understood
by the phrase traffic arrangement."



Ill

Emery v. Candle Company (47 Oh. St.
320) is a typical form of pooling agreement.
An association was shown in that case which
included ninety-five per cent, of the manu-
facturers of candles in the United States.
The members of the association surrendered
their freedom of action only to this extent,
that they were required to pay into the
treasury two and one-half cents per pound
on every pound of candles disposed of on
their own account. Whether they sold any
candles or not, they received a share in the
profits of the pool. This plan was thus self-
acting; it was to the interest of each member
to remain idle when the price was low, to
operate only if the price were high. The



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MODERN FORMS OF COMBINATIONS 147

expected result followed; the production of
candles decreased, the price of candles in-
creased during the whole existence of the
association. The court pronounced the ar-
rangement bad altogether: "We are of the
opinion that the suit cannot be maintained,
for the reason that the objects of the associa-
tion were contrary to public policy and in
no way to be aided by the courts. No re-
covery can be had except by giving effect to
the terms of the agreement. The action is
in substance a suit against the association to
recover a sum due the plaintiff under the
terms on which the association was formed.
Its suit is to recover its portion of the ill-
gotten gains."

The principal rule against restraint of
trade thus remains practically unaffected by
any further modifications than those which
have been mentioned. Nester v. Continental
Brewing Company (161 Pa. St. 473) is
representative of the class of cases in ques-
tion. The bill set forth that a Brewers'
Association of Philadelphia had been formed
under articles of agreement in writing by
forty-five brewers of Philadelphia, individ-
uals, firms, and corporations. By the prin-
cipal section of the agreement each member



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148 THE CONTROL OF THE MARKET

of the association agreed not to sell any beer
to any new trade, or to any customer of any
brewer that belonged to the association, A
summary from the opinion of Mr, Justice
Sterrett follows: " The test question in every
case like the present is whether or not a
contract in restraint of trade exists which is
injurious to the public interests; if injiu'ious,
it is void as against public policy. Courts
will not stop to inquire as to the degree of
injury inflicted. It is enough to know that
the natural tendency of such contracts is in-
jurious. So if the natural tendency of such
contracts is to injuriously affect public in-
terests, the form and declared purpose are
immaterial. Courts will not lend their aid
in illegal transactions no matter how dis-
guised."

It is to be noted again that when a com-
bination in restraint of trade is once proved
to be such, outlawry is declared. It can
bring no suit against those in it; neither can
they sue it. The courts will have nothing
to do with association or associates. This is
the penalty, that the loss must lie where it
falls; and this policy is, in itself, often one
of the strongest of deterrents. Thus any
member of the association may withdraw



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MODERN FORMS OF COMBINATIONS 149

whenever it suits his interest to do so, a re-
sult that minimizes the harm that such a
combination may effect. For experience
shows that the result is that competition still
goes on siureptitiously, despite the agree-
ment, since every active member is strength-


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