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Gilbert Holland Montague.

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pair and spare parts, contracts for premiums and
trading-stamps, contracts for dealers' helps, and



Some "Ty ing-Contract" Traps 159

a whole galaxy of contracts for the sale of one line
of goods at a certain price provided other goods
are also purchased. Many manufacturers sell a
piece of machinery or other equipment at a nomi-
nal price, upon condition that the supplies or
material used with the primary purchase shall
be purchased exclusively from them. That was
the situation in the Mimeograph case which was
decided by the Supreme Court, in 1912, before the
Clayton Act was passed. In that case it was
declared to be lawful for a manufacturer to sell a
patented machine on condition that the purchaser
of the machine should use it only with supplies
bought exclusively from him. Some believe,
however, that the passage of the Clayton Act
has gone a long way toward overruling the
decision in the Mimeograph case. Indeed the
Federal Trade Commission is now prosecuting
the very manufacturer whom the Supreme Court
upheld in the Mimeograph case, and in the prosecu-
tion is contending that the very condition which
the Supreme Court there sustained has since been
made unlawful by the passage of the Clayton Act.
Cases under the Clayton Act are not very plenti-
ful up to date, but such as have been decided
are not reassuring so far as they involve "tying-



160 Business Competition

contracts." One extremely suggestive case in-
volved the use of a patented button-setting machine.
The points involved are sufficiently clear from the
decision of the court, in which a condition some-
what similar to that involved in the Mimeograph
case was held to be in violation of the Clayton Act.

" According to the allegations of the bill of
complaint, " said the court, "plaintiff is the owner
of three patents for improvements in button-
setting machines and attachments thereto. It is,
and for several years has been, manufacturing
and leasing or licensing shoe-button-attaching
machines constructed under its patents, and,
in so doing, is and has been engaged in interstate
commerce throughout the United States. Prior
to the enactment of the Clayton Anti-Trust Act,
so-called, in October, 1914, plaintiff's machines
were loaned or leased to users, including the
defendant, on the condition that only its wire
should be used in their operation. Attached to
each machine so loaned or leased was a metal
plate bearing the following inscription :

" 'This machine is the property of the Elliott
Machine Company and is loaned to and accepted
by the user to use wire furnished under the com-
pany's trade-mark only.'



Some "Ty ing-Contract" Traps 161

''No other agreement than that stated upon the
plate was made with defendant or other users.
Plaintiff's wire, the use of which was thus required,
was put up in coils. Each coil contained a sufficient
amount of wire for one thousand operations of the
machine, which was so constructed as to lock
automatically upon the completion of each one
thousand operations. For that reason, a key
with which to unlock the machine was attached
to each coil of wire. The wire and key were
furnished by plaintiff to its customers for about
eighty-five cents per coil, which included both the
price of the wire and the royalty for the use of the
patented machine to fasten one thousand buttons.

"Since October, 1914, plaintiff, believing that
the further continuance and performance of its
former contracts would be a violation of Section 3
of the Clayton Act, has notified the users of its
machine, including defendant, that they will no
longer be required to purchase or use its wire,
and that a royalty of seventy-five cents must be
paid for the use of each machine to make one
thousand operations or to fasten one thousand
shoe buttons. Plaintiff has continued to manu-
facture wire, but sells the same, without the key,
for ten cents per coil, which is a fair price for the



162 Business Competition

wire alone without any royalty for the use of the
machine.

"Defendant has purchased wire from plaintiff's
agents at ten cents per coil and has continued
to use the patented machine, but has refused to pay
the royalty demanded. This suit is brought to
restrain further alleged infringement of plaintiff's
patents and for the usual accounting. Defendant's
motion to dismiss is founded primarily upon the
claim that Section 3 of the Clayton Act is not
retroactive and cannot affect contracts, like the
one here involved, made and entered into before
its enactment. . . .

"The statute does not in terms except from its
operation any agreements, or contracts, past,
present, or future, and, in the absence of such
exception, it is to be presumed that Congress
intended to prohibit not only the making of
future contracts, but also the further performance
of past contracts of the kind specified."

Now, it is evident from this that the court
considered the earlier form of contract a violation
of the Clayton Act in other words, the court
believed that it did "substantially lessen compe-
tition or tend to create a monopoly." This con-
tract-tended to prevent competitors from selling



Some "Ty ing-Contract" Traps 163

any wire to the users of this particular type of
machine not such a terribly serious restraint it
would seem, yet serious enough to be held in
violation of the Clayton Act. And if it substan-
tially lessens competition to make a contract for the
exclusive supply of wire to a particular button-
fastening machine, what shall be said of an agree-
ment to supply a railroad with all the brake-shoes
that are needed for a year? What about an
exclusive contract to manufacture letter-boxes
for Uncle Sam's Post Office? What about the
automobile manufacturer who agrees to make a
certain kind of carburetor "standard equipment"
for the coming year, and thereby shuts out com-
peting carburetor manufacturers? What about
the incandescent lamp manufacturer who con-
tracts to furnish all the lamps needed by a factory,
or an apartment house, or a school building? If
those contracts "substantially lessen competition"
they are illegal, and there's an end of it.



STATE LAWS AGAINST " TYING-CONTRACTS "



As a matter of fact, the Clayton Act does not
stand altogether by itself so far as this particular
prohibition is concerned. A number of States



164 Business Competition

have laws which contain somewhat similar pro-
visions, and these laws have been construed by the
courts at one time or another. Many people
suppose that the courts will construe the Clayton
Act in harmony with these decisions of the State
courts, and it is therefore worth while to indicate
briefly just how drastic those decisions have been.
For example, a case arose, in 1905, under the
Massachusetts law in which the defendant was a
salesman employed by the Continental Tobacco
Company to solicit orders from purchasers. The
evidence tended to show that he sold tobacco to
purchasers at list prices, agreeing to give them a
trade discount of two per cent., and, if the bill
was paid within ten days, a further cash discount
of two per cent., and, if they handled the plug
tobaccos of the Continental Tobacco Company
exclusively that is, handled and dealt in no plug
tobacco made by any manufacturer other than the
Continental Tobacco Company to give them at
the expiration of a stated period a further amount
equal to six per cent, of the amount of their pur-
chases during such period. The trial judge in-
structed the jury as follows:

4 'Upon all the evidence, if you are satisfied that
the defendant, acting for the Continental Tobacco



Some "Ty ing-Contract" Traps 165

Company, offered for"sale to the persorfor concern
named in either count of the indictment the
plug tobacco made by the Continental Tobacco
Company upon more favourable terms if such person
or concern should, not sell or deal in the plug tobacco
of any other person, firm, corporation, or association
of persons, it will be your duty to find the defendant
guilty under any such count."

Upon this instruction the defendant was con-
victed of violating the Massachusetts law. The
Massachusetts Supreme Court, however, held
that this was too broad, and reversed the con-
viction. In a tentative sort of way, the court
intimated that if, "under the guise of giving more
favourable terms to those who were selling his
employer's goods exclusively, the defendant had
made the price to those who sold goods of others
so high, in comparison with that to those who sold
only his employer's goods, as virtually to make it
prohibitive to purchase except by those who sold
his employer's goods, the case would be very
different" (italics added). Thereupon, the un-
fortunate defendant was promptly placed on trial
again; and after a trial conducted this time along
the lines indicated by the Massachusetts Supreme
Court the defendant was again convicted, and



166 Business Competition

upon appeal the Massachusetts Supreme Court
this time sustained the conviction.

Several years later, when the United States
Commissioner of Corporations reported upon the
American Tobacco Company which meantime
had succeeded to the Continental Tobacco Com-
pany's business he found that the company in
deference to this decision had given up the use
of this arrangement in New England territory.
And when the company was dissolved, in 1911, in
the Government suit under the anti-trust act, the
decree enjoined the companies into which it was
divided from "refusing to sell to any jobber any
brand of any tobacco product manufactured by it,
except upon condition that such jobber shall pur-
chase from the vendor some other brand or pro-
duct also manufactured and sold by it; provided,
however, that this prohibition shall not be con-
strued to apply to what are known as 'combi-
nation orders, ' under which some brand or product
may be offered to a jobber or dealer at a reduced
price, on condition that he purchase a given
quantity of some other brand or product."

A harder case, that well illustrates the unex-
pectedness of the "tying-con tract" trap, and the
mischief that it causes wherever it obtrudes itself,



Some " Tying-Contract " Traps 167

arose, in 1914, under the Texas law. There the
parties entered into the following agreement :

"DALLAS, TEXAS, Oct. 30, 1912. ,
"This contract and agreement, this day entered
into by D. M. Jones, acting for the Texas Ice and
Cold Storage Co., hereinafter called first party,
and H. C. Wood, hereinafter called second party,
all of Dallas, Texas, witnesseth: That the first
party agrees to sell the second party as much as
six tons, or what his trade may demand, of ice per
day, and as much more as the first party is able to
supply, without conflicting with other arrange-
ments, and the second party agrees to make all his
purchases from the first party during the term of
this contract, provided the first party is able to
furnish same as above indicated. The price to
be paid for all purchases during the term of this
contract, which is one year beginning October
30, 1912, is three dollars ($3.00) per ton on plat-
form, located at 2225 Cedar Springs St., of first
party, unless the general market price of ice in the
city of Dallas goes below said price, then in that
event, during such time, the first party agrees
to meet such price so long as first party operates
their plant. [Here follow numerous provisions



i68 Business Competition

relating to what shall be done in case of closing
appellee's factory, the quality of ice to be fur-
nished by appellee, and certain other mutual and
reciprocal duties of both parties unnecessary to
detail.] Witness our hands in duplicate,

"H. C. WOOD,

"Texas Ice and Cold Storage Co."

Now study that contract carefully, and ask
yourself whether you have not often entered
into just such contracts as that! See the fairness
of it : Wood' gets six tons of ice a day for a year
at a flat price, and, to the extent of the Ice Com-
pany's ability, gets all his ice for a season at the
same price, and at the same time is absolutely
protected against a decline in the market, for if
the price goes down he pays only the market price ;
and for all this Wood is never obligated to take
more than six tons of ice a day.

The court, however, with the Texas law before
it, fastened upon the tell-tale phrases "what his
trade may demand" and "agrees to make all his
purchases . . . during the term of this contract,"
and refused to enforce the contract in a suit
between the parties, and held the contract void
on the ground that it " comes precisely within



Some "Tying-Con tract" Traps 169

the statutory definition of the acts denounced
thereby, since the declared purpose of the contract
is to prevent the appellant from buying ice from
any other person, firm, corporation, or association"
(italics added).

CONFLICTING DECISIONS AND HARD CASES

Manufacturers of dress patterns have had
varying vicissitudes in their encounters with
various anti-trust laws dealing with "tying-con-
tracts." In Massachusetts the Supreme Court
held, in 1909, that the Massachusetts law, under
which the salesman of the Continental Tobacco
Company was convicted as already described,
did not invalidate a contract between the manu-
facturer and a dealer by which the dealer bought
dress patterns from the manufacturer and retailed
them in his store, although the contract expressly
required the dealer "not to sell or permit to be
sold on the premises . . . during the term of this
contract any other make of patterns. " This
same manufacturer also had a similar contract
sustained, in 1910, by the Wisconsin Supreme
Court in the face of the anti-trust act of that State,
although the court there rested its decision on the
narrow ground that the patterns were patented.



170 Business Competition

In Texas, however, a similar contract was held,
in 1916, to be in violation of the Texas law.

The trading-stamp people, whose business is
vexed by unsympathetic legislation in a number of
States, have also had experience with the "tying-
contract" bogey. A trading-stamp concern oper-
ating in Massachusetts issued trading-stamps and
books to dealers upon condition that the dealers
should not use trading-stamps issued by any
other concern. Under the Massachusetts law,
with which we have become familiar, the Supreme
Court held, in 1915, that this arrangement was
illegal. Some years before, in Texas, another
concern doing a trading-stamp business succeeded
in slipping through the meshes of the Texas law
on the ground that the Texas law related only to
articles of merchandise, produce, or commodities,
and that trading-stamps were none of these things
but only "aids to commerce " ! But this ingenious
view was not favoured by the Massachusetts
court.

Other cases in State courts could be cited to
show that the construction of some of these laws
leaves very little margin to the maker of a "tying-
contract." How closely the United States courts
in interpreting the Clayton Act will follow the



Some "Ty ing-Contract" Traps 171

lead of the^ State courts in interpreting the State
statutes is, of course, problematical, but cautious
lawyers have already begun to advise that it is not
safe to rely too confidently upon the saving grace
of the clauses "substantially lessen competition,"
and "tend to create a monopoly.'* Certainly the
nonchalance of some of the United States courts
in disposing of these clauses in some of the cases
of " tying-contracts " arising under the Clayton
Act is disquieting enough to warrant great caution.
In the Button-setting case we have already seen
that the contract was declared to be void under
this law without so much as a reference to these
clauses. In the Shoe Machinery case, in 1915,
the court, in advance of trial and, indeed, before
the papers in the case had been served on the
defendants, granted at the Government's request
a temporary injunction, enjoining the defendants
from enforcing the essential provisions of thou-
sands of leases covering millions of dollars worth
of shoe machinery in the factories of hundreds
of shoe manufacturers scattered throughout the
United States, simply upon the allegation of the
Government that those leases contained provisions
that were forbidden by the Clayton Act; and
several days later, also in advance of trial and at



172 Business Competition

the Government's request, the court continued this
injunction for the duration of the suit without
so much as a syllable of discussion as to whether
the clauses "substantially lessen competition"
and " tend to create a monopoly" had any bearing
on the question! True, the Government decided
not to contest the appeal from this injunction,
and the Circuit Court of Appeals vacated it and
sent the suit before another trial judge for future
proceedings; but what significance, if any, these
clauses really have was not illumined by any of
these rulings.

See how another court, in 1916, disposed of
these clauses in another case involving a patent
license: A company owning patents covering
moving-picture projecting-machines licensed a
manufacturer to make and sell these machines
with the restriction that they be used solely for
exhibiting film containing patented inventions
controlled by the owner of the projecting-machine
patents. This manufacturer went ahead, and
made and sold these projecting-machines in ac-
cordance with his agreement with the company
owning the patents, and attached to each project-
ing-machine a plate containing this license re-
striction. Then the patent on the film expired;



Some "Tying-Contract" Traps 173

but the manufacturer went on just the same, mak-
ing the projecting-machines and selling them with
this license restriction, and in course of business
one of them was bought and leased to a moving-
picture exhibitor. Then the Clayton Act was
passed. Sometime afterward, the company own-
ing the patents covering the projecting-machines
discovered that the moving-picture exhibitor
was exhibiting film of a rival manufacturer upon
that projecting-machine. Thereupon it sued the
exhibitor for an injunction to stop him from
breaking this license restriction. Now, of course,
that license restriction was in violation of the
Clayton Act, unless the fact that the projecting-
machine had been bought and leased before the
passage of the law made a difference, or unless
the court believed that it did not "substantially
lessen competition or tend to create a monopoly
in any line of commerce. " The court promptly
decided that' the date of the purchase- and lease
of the projecting-machine would not save the
license restriction, and then took up the other
point in the case.

"The testimony shows," said the court, "that
the complainant has a monopoly under its patents
of projecting-machines so that if no films not



174 Business Competition

manufactured by complainant can be used upon
these machines, the complainant will obtain an
absolute monopoly of the film business in spite
of the fact that its patent on films has expired.
If the prohibitions of the Clayton Act mean any-
thing at all this case falls within them and the
restrictions as to use of films other than, com-
plainant's with the projecting machines are
therefore void."



DRASTIC RESULTS OF "TYING- CONTRACT"
PROHIBITION



Where does this leave us? Consider the situ-
ation of a sewing-machine manufacturer, who
leases his patented sewing-machine to garment-
makers under a restriction forbidding them to use
the sewing-machines with needles other than
those furnished by the sewing-machine manu-
facturer. Special needles, manufactured only
by the sewing-machine manufacturer, are neces-
sary, let us assume, for the satisfactory running of
the machine. Ordinary needles, such as can be
purchased in the market at a cheaper price, not
only impair the satisfactory running of the sewing-
machine, but actually damage the machine itself.



Some "Ty ing-Contract" Traps 175

Garment-makers are notoriously defective in
mechanical intelligence, and irresponsible so far
as financial liability goes, and withal appallingly
parsimonious; which combination of traits insures
that, without some such condition in the lease,
none of those garment-makers would use the
proper needles, and all the machines in which the
manufacturer's capital is invested would soon
come back to him ruined, and the loss would be
entirely his. Every consideration of business
sense, therefore, would seem to support the pro-
priety of this condition. But where does it stand
under the Clayton Act?

There is the law: "It shall be unlawful . . .
to lease . . . machinery . . . whether patented
or unpatented ... on the condition, agreement,
or understanding that the lessee . . . shall not
use . . . supplies or other commodities of a com-
petitor or competitors of the lessor . . . where
the effect of such lease ... or such condition,
agreement, or understanding may be to substan-
tially lessen competition or tend to create mo-
nopoly in any line of commerce."

Obviously, the makers of all those inferior
needles are "competitors" of the sewing-machine
manufacturer, so far as the needle business is



176 Business Competition

concerned. And obviously the sewing-machine is
leased on the condition that their needles which
are " supplies or other commodities" of a com-
petitor of the lessor shall not be used on that
sewing-machine. Since that is the only way the gar-
ment-maker would ever think of using any needles
anyway, isn't there a violation of the Clayton Act
right there? And isn't the sewing-machine manu-
facturer shut out from taking this natural means of
insuring the preservation and satisfactory opera-
tion of all his leased sewing-machines? He cer-
tainly is, unless the courts can work out some
meaning for "substantially lessen competition"
and "tend to create a monopoly" that will save his
lease.

Look a little further, and see how far these
prohibitions of the Clayton Act carry. That
sewing-machine lease also provides as a condition
of the use of the machine that no repair parts or
spare parts shall be used upon the machine except
those furnished by the sewing-machine manu-
facturer. Who can dispute the reasonableness
of this provision by which the sewing-machine
manufacturer seeks to safeguard his investment
in his leased machines? Turn back to the law,
however. Isn't a repair part a "supply"? Isn't



Some * Crying-Contract Traps 177

a spare part a "commodity " ? If it isn't a part of
the sewing-machine that is covered by the sewing-
machine manufacturer's patents, any pattern-
maker can lawfully duplicate it, or make and sell
something purporting to answer the same purpose.
This pattern-maker, so far as the repair and spare
part business goes, is clearly a "competitor" of
the sewing-machine manufacturer. So doesn't it
follow that this provision, also, violates the Clay-
ton Act, unless the courts can work out some
meaning for "substantially lessen competition"
and "tend to create a monopoly" that will save
this provision of the lease?

If the courts would only follow Judge Hough's
view expressed, in 1915, in the Cream of Wheat
case, and decide that "there is nothing in the
Clayton Act to compel or induce courts to hold
that the trade restraint referred to by this statute
differs in kind, quality, or degree from that now
held to be meant by the Sherman Act, " there would
be no difficulty. For however competition in the
needle and the repair and spare part business may
be affected by those provisions in the sewing-
machine lease whether competition be lessened
"substantially" or insubstantially there is abun-
dant authority for the view that those provisions



1 78 Business Competition

would not be held to constitute a restraint of trade
within the meaning of the Sherman Act. But
the Government takes the view, and in the Shoe
Machinery case under the Clayton Act it is now
contending with all its might, that the Clayton Act
sets up a stricter standard, and forbids a much less
restraint of competition, than does the Sherman
Act, and in support of that view the Government
claims to derive great encouragement from the
decisions in the Button-setting and the Projecting-
machine case.

Now it is hardly consistent that the Govern-
ment should institute proceedings against any
manufacturer on the ground that he is in the habit
of making "tying-contracts" with his customers.
For, as I have pointed out, the Government is
itself a party to such contracts in connection with
almost everything it buys for its own use. " Ty-


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Online LibraryGilbert Holland MontagueBusiness competition and the law; everyday trade conditions affected by the anti-trust laws → online text (page 9 of 17)