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Subject Area: Law
Topic: The American Revolution and Constitution

§ 110.: Common law prohibition of combinations in restraint of trade restated.— - Christopher G. Tiedeman, A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1 [1900]

Edition used:

A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint (St. Louis: The F.H. Thomas Law Book Co., 1900). Vol. 1.

Part of: A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, 2 vols.

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§ 110.

Common law prohibition of combinations in restraint of trade restated.—

As it has been fully explained in the two preceding sections, leaving out of consideration the ancient and obsolete English statutes against forestalling, regrating, etc., the common law,—as it comes to us, and as it has been enunciated by the courts in earlier cases, which have been cited in the preceding two sections—in declaring against contracts whose enforcement tended to restrain trade and commerce, limited its prohibition in two ways: First, it did not punish the parties to such contracts for making them, and confined its prohibition to a refusal to enforce the contract which fell under its ban, because such contract was against public policy, in that it tended to restrain trade and competition to the prejudice of the public welfare. Secondly, it did not declare all contracts in restraint of trade to be against public policy; only those which, according to judicial opinion, were in unreasonable restraint of trade, not only permitting but enforcing some contracts, because they were reasonable, although their enforcement did operate to restrain trade and limit competition.1

In the further prosecution of this subject, it will be seen that in both particulars the common law has been changed by modern legislation in the United States. But before proceeding to the exposition of the recent legislation in the United States, I desire to make still more positive the accuracy of my two propositions, in regard to the scope of the common law prohibition of contracts in restraint of trade, by a very full reference to two important recent cases in the English and New York courts.

The first case arose in the English courts.2 A large number of owners of ships, which were employed in carrying freight from the same English ports, entered into an association which brought all the freight business of the members under the regulation of the association; the by-laws of the association to control the number of ships of each member, the division of the cargoes and freights, and the general management of the carrying business of that port. In order to make their control of the business complete, the association offered a rebate of five per cent on all freights to shippers who shipped their goods exclusively on the ships controlled by the association; and prohibited their freight agents, on penalty of removal, from being directly or indirectly interested in securing freight for competing ship-owners. Any member of the association was privileged to withdraw from the combination at any time upon giving the stipulated notice. The association then reduced the rates of freight to such a degree that an independent ship-owner could not, except at a ruinous loss, compete with the associated ship-owners. A virtual monopoly, as described by the Supreme Court of the United States in Munn v. Illinois, was thereby created. The plaintiffs, who were among the ship-owners, who were not members of the association, undertook to compete for the carrying trade of that port, by sending ships there in search of cargoes, but failed because of the overwhelming power of the association. The only difference, but certainly an important one, between the virtual monopoly of the Chicago Elevator Companies which was the subject of regulation in Munn v. Illinois, and the virtual monopoly of these associated ship-owners, was that the combination of elevator owners was charged with the design of extorting exorbitant charges for the storage of grain from the shippers; whereas, the English combination in this case was charged with the conspiracy, by lowering rates of freight to such a degree that an independent ship-owner could not successfully compete with the combination, to stifle all competition, and thus secure a complete monopoly of the carrying business from that port.

The English courts, from the initiatory trial up to the appeal to the House of Lords, denied that the associated ship-owners had been guilty of any conspiracy at the common law, for which they were amenable to the plaintiffs, either criminally or civilly, although the agreements of the associated ship-owners were clearly contracts in restraint of trade, which the courts would have refused to enforce between the members thereof. Full quotations from the opinions of the courts are given in the note below.1

It will be observed that the English court held that in order that a combination of capitalists may make out a case of actionable conspiracy at the common law, they must use unlawful means, such as fraud or other dishonesty, intimidation, molestation or actual malice. It was not sufficient that the inevitable effect of the combination was to drive the plaintiffs out of business, if only the ordinary tactics of commercial warfare were employed.

In the case, arising in the New York courts, the Diamond Match Company had purchased the factory of one Roeber and the good-will of his business, with the agreement that Roeber should not engage, during his natural life, in the business of manufacturing and selling matches in any part of the United States, with the exception of Montana. In a suit, brought by the Diamond Match Company, to compel Roeber to carry out his agreement to abstain from engaging in the same business, anywhere except in Montana; the Court of Appeals held this agreement to be only in reasonable restraint of trade, and was lawful and binding. The court went so far in its opinion as to intimate that the exception of Montana is not essential to the validity of the contract, if the agreement did not include territory which was beyond the sphere of the business transferred in connection with the contract in restraint of trade. The alleged motive of the purchaser of the business to establish a monopoly was held to have no effect upon the validity or invalidity of the agreement that the vendor shall abstain from establishing a rival business.1

But the fact, that the common law did not punish, either criminally or civilly, those who enter into combinations for the prevention of competition, does not necessarily indicate any constitutional objection to statutory changes of the law, whereby criminal or civil remedies are provided for preventing the formation of monopolistic combinations. If the restrictions upon competition and trade is against public policy, and may for that reason be declared illegal, so that the courts may lawfully refuse to the parties to a contract in restraint of trade the right to enforce such a contract or agreement by judicial process; there can be no serious question concerning the power of the State to make such restrictions upon trade and combinations in restraint of trade criminal misdemeanors, or to give to parties suffering from them civil actions for damages, if in the estimation of the legislature the public welfare should require it. The power to declare an act unlawful being admitted, the choice of remedies for its prevention is wholly within the discretion of the legislative power.1

[1]See § 108 for cases and fuller exposition of the common law in this matter.

[2]Mogul Steamship Co. v. McGregor, 21 Q. B. D. 544; s. c. 23 Q. B. D. 598.

[1]Lord Coleridge said: “But it is said that the motive of these acts was to ruin the plaintiffs, and that such a motive, it has been held, will render the combination itself wrongful and malicious, and that if damage has resulted to the plaintiffs an action will lie. I concede that if the premises are established the conclusion follows. It is too late to dispute, if I desired it, as I do not, that a wrongful and malicious combination to ruin a man in his trade may be ground for such an action as this. Was then this combination such? The answer in this question has given me much trouble, and I confess to the weakness of having long doubted and hesitated before I could make up my mind. There can be no doubt that the defendants were determined, if they could, to exclude the plaintiffs from this trade. Strong expressions were drawn from some of them in cross-examination, and the telegrams and letters showed the importance they attached to the matter, their resolute purpose to exclude the plaintiffs if they could, and to do so without any consideration for the results to the plaintiffs, if they were successfully excluded. This, I think, is made out, and I think no more is made out than this. Is this enough? It must be remembered that all trade is and must be in a sense selfish; trade not being infinite, nay, the trade of a particular place or district being possibly very limited, what one man gains another loses. In the hand-to-hand war of commerce, as in the conflicts of public life, whether at the bar, in parliament, in medicine, in engineering (I give examples only) men fight on without much thought of others, except a desire to excel or to defeat them. Very lofty minds, like Sir Philip Sidney, with his cup of water, will not stoop to take an advantage, if they think another wants it more. Our age, in spite of high authority to the contrary, is not without its Sir Philip Sidneys; but these are counsels of perfection which it would be silly indeed to make the measure of the rough business of the world as pursued by ordinary men of business. The line is in words difficult to draw, but I cannot see that these defendants have in fact passed the line which separates the reasonable and legitimate selfishness of traders from wrong and malice. In 1884 they admitted the plaintiffs to their conference; in 1885 they excluded them, and they were determined, no doubt, if they could, to make the exclusion complete and effective, not from any personal malice or ill-will to the plaintiffs as individuals, but because they were determined if they could to keep the trade to themselves; and if they permitted persons in the position of the plaintiffs to come in and share it, they thought, and honestly, and, as it turns out, correctly thought, that for a time at least there would be an end of their gains.”

Judge Bowen—on appeal in Queen’s Bench Division: “The defendants, we are told by plaintiffs’ counsel, might lawfully lower rates, provided they did not lower them beyond a ‘fair freight,’ whatever that may mean. But where is it established that there is any such restriction upon commerce? And what is to be the definition of a ‘fair freight?’ It is said that it ought to be a normal rate of freight, such as is reasonably remunerative to the shipowner. But over what period of time is the average of this reasonable remunerativeness to be calculated? All commercial men with capital are acquainted with the ordinary expedient of sowing one year a crop of apparently unfruitful prices, in order, by driving competition away, to reap a fuller harvest of profit in the future; and until the present argument at the bar it may be doubted whether ship-owners or merchants were ever deemed to be bound by law to conform to some imaginary ‘normal’ standard of freights or prices, or that law courts had a right to say to them in respect of their competitive tariffs, ‘Thus far shalt thou go and no further.’ To attempt to limit English competition in this way would probably be as hopeless an endeavor as the experiment of King Canute. But on ordinary principles of law no such fetter on freedom of trade can, in my opinion, be warranted. A man is bound not to use his property so as to infringe upon another’s rights. Sic utere tuo ut alienum non laedas. If engaged in actions which may involve danger to others, he ought, speaking generally, to take reasonable care to avoid endangering them. But there is surely no doctrine of law which compels him to use his property in a way that judges and juries may consider reasonable. See Chasemore v. Richards. If there is no such fetter upon the use of property known to the English law, why should there be any such a fetter upon trade?

It is urged, however, on the part of the plaintiffs, that even if the acts complained of would not be wrongful had they been committed by a single individual, they become actionable when they are the result of concerted action among several. In other words, the plaintiffs, it is contended, have been injured by an illegal conspiracy. Of the general proposition, that certain kinds of conduct not criminal in any one individual may become criminal if done by combination among several, there can be no doubt. The distinction is based on sound reason, for a combination may make oppressive or dangerous that which, if it proceeded only from a single person, would be otherwise, and the very fact of the combination may show that the object is simply to do harm, and not to exercise one’s own just rights.”

“In the application of this undoubted principle it is necessary to be very careful not to press the doctrine of illegal conspiracy beyond that which is necessary for the protection of individuals or of the public; and it may be observed in passing that as a rule it is the damage wrongfully done, and not the conspiracy, that is the gist of actions on the case for conspiracy. See Skinner v. Gunton; Hutchins v. Hutchins. But what is the definition of an illegal combination? It is an agreement by one or more to do an unlawful act, or to do a lawful act by unlawful means. O’Connell v. The Queen; Reg. v. Parnell; and the question to be solved is whether there has been any such agreement here. Have the defendants combined to do an unlawful act? Have they combined to do a lawful act by unlawful means? A moment’s consideration will be sufficient to show that this new inquiry only drives us back to the circle of definitions and legal propositions which I have already traversed in the previous part of this judgment. The unlawful act agreed to, if any, between the defendants must have been the intentional doing of some act to the detriment of the plaintiffs’ business without just cause or excuse. Whether there was any such justification or excuse for the defendants is the old question over again, which, so far as regards an individual trader, has been already solved. The only deferentia that can exist must arise, if at all, out of the fact that the acts done are the joint acts of several capitalists, and not of one capitalist only. The next point is whether the means adopted were unlawful. The means adopted were competition carried to a bitter end. Whether such means are unlawful is in like manner nothing but the old discussion which I have gone through, and which is now revived under a second head of inquiry, except so far as a combination of capitalists differentiates the case of acts jointly done by them from similar acts done by a single man of capital. But I find it impossible myself to acquiesce in the view that the English law places any such restriction on the combination of capital as would be involved in the recognition of such a distinction. If so, one rich capitalist may innocently carry competition to a length which would become unlawful in the case of a syndicate with a joint capital no larger than his own, and one individual merchant may lawfully do that which a firm or a partnership may not. What limits, on such a theory, would be imposed by law on the competitive action of a joint-stock company limited, is a problem which might well puzzle a casuist. The truth is that the combination of capital for purposes of trade and competition is a very different thing from such a combination of several persons against one, with a view to harm him, as falls under the head of an indictable conspiracy. There is no just cause or excuse in the latter class of cases. There is such a just cause or excuse in the former. There are cases in which the very fact of a combination is evidence of a design to do that which is hurtful without just cause—is evidence—to use a technical expression—of malice. But it is perfectly legitimate, as it seems to me, to combine capital for all the mere purposes of trade for which capital may, apart from combination, be legitimately used in trade. To limit combinations of capital, when used for purposes of competition, in the manner proposed by the argument of the plaintiffs, would, in the present day, be impossible—would be only another method of attempting to set boundaries to the tides. Legal puzzles which might well distract a theorist may easily be conceived of imaginary conflicts between the selfishness of a group of individuals, and the obvious well-being of other members of the community.”

* * * * * * * * * * * * * *

“Lastly, we are asked to hold the defendants’ Conference or association illegal, as being in restraint of trade. The term ‘illegal’ here is a misleading one. Contracts, as they are called in restraint of trade, are not in my opinion illegal in any sense, except that the law will not enforce them. It does not prohibit the making of such contracts; it merely declines after they have been made to recognize their validity. The law considers the disadvantage so imposed upon the contract a sufficient shelter to the public. The language of Crompton, J., in Hilton v. Eckersley, is, I think, not to be supported. No action at common law will lie or ever has lain against any individual or individuals for entering into a contract merely because it is in restraint of trade. Lord Eldon’s equity decision in Cousins v. Smith is not very intelligible, even if it be not open to the somewhat personal criticism passed on it by Lord Campbell in his Lives of the Chancellors. If indeed it could be plainly proved that the mere formation of ‘conferences,’ ‘trusts,’ or ‘associations’ such as these were always necessarily injurious to the public—a view which involves, perhaps, the disputable assumption that in a country of free trade, and one which is not under the iron regime of statutory monopolies, such confederations can ever be really successful—and if the evil of them were not sufficiently dealt with by the common law rule, which held such agreements to be void as distinct from holding them to be criminal, there might be some reason for thinking that the common law ought to discover within its arsenal of sound common-sense principles some further remedy commensurate with the mischief. Neither of these assumptions is, to my mind, at all evident, nor is it the province of judges to mould and stretch the law of conspiracy in order to keep pace with the calculations of political economy. If peaceable and honest combinations of capital for purposes of trade competition are to be struck at, it must, I think, be by legislation, for I do not see that they are under the ban of the common law.

“In the result, I agree with Lord Coleridge, C. J., and differ, with regret, from the Master of the Rolls. The substance of my view is this, that competition, however severe and egotistical, if unattended by circumstances of dishonesty, intimidation, molestation, or such illegalities as I have above referred to, gives rise to no cause of action at common law. I myself should deem it to be a misfortune if we were to attempt to prescribe to the business world how honest and peaceable trade was to be carried on in a case where no such illegal elements as I have mentioned exist, or were to adopt some standard of judicial ‘reasonableness,’ or of ‘normal’ prices, or ‘fair freights,’ to which commercial adventurers, otherwise innocent, were bound to conform.”

Judge Frye: “We have then to inquire whether mere competition, directed by one man against another, is ever unlawful. It was argued that the plaintiffs have a legal right to carry on their trade, and that to deprive them of that right by any means is a wrong. But the right of the plaintiffs to trade is not an absolute but a qualified right—a right conditioned by the like right in the defendants and all Her Majesty’s subjects, and a right therefore to trade subject to competition. Now, I know no limits to the right of competition in the defendants—I mean, no limits in law. I am not speaking of morals or good manners. To draw a line between fair and unfair competition, between what is reasonable and unreasonable, passes the power of the courts. Competition exists when two or more persons seek to possess or to enjoy the same thing; it follows that the success of one must be the failure of another, and no principle of law enables us to interfere with or to moderate that success or that failure so long as it is due to mere competition. I say mere competition, for I do not doubt that it is unlawful and actionable for one man to interfere with another’s trade by fraud or misrepresentation, or by molesting his customers, or those who would be his customers, whether by physical obstruction or moral intimidation.”

Lord Halsbury, in the House of Lords:—

“The learned counsel who argued the case for the appellants with their usual force and ability, were pressed from time to time by some of your Lordships to point out what act of unlawful obstruction, violence, molestation or interference was proved against the associated body of traders, and, as I have said, the only wrongful thing upon which the learned counsel could place their fingers was the competition which I have already dealt with. Intimidation, violence, molestation, or the procuring of people to break their contracts, are all of them unlawful acts; and I entertain no doubt that a combination to procure people to do such acts is a conspiracy and unlawful.

“The sending up of ships to Hankow, which in itself and to the knowledge of the associated traders, would be unprofitable, but was done for the purpose of influencing other traders against coming there and so encouraging a ruinous competition is the one fact which appears to be pointed to as out of the ordinary course of trade. My Lords, after all, what can be meant by ‘out of the ordinary course of trade?’ I should rather think, as a fact, that it is very commonly within the ordinary course of trade so to compete for a time as to render trade unprofitable to your rival in order that when you have got rid of him you may appropriate the profits of the entire trade to yourself.

“I entirely adopt and make my own what was said by Lord Justice Bowen in the court below: ‘All commercial men with capital are acquainted with the ordinary expedient of sowing one year a crop of apparently unfruitful prices, in order by driving competition away to reap a fuller harvest of profit in the future; and until the present argument at the bar it may be doubted whether ship-owners or merchants were ever deemed to be bound by law to conform to some imaginary ‘normal’ standard of freights or prices, or that law courts had a right to say to them in respect of their competitive tariffs, ‘Thus far shalt thou go, and no further.’

“Excluding all I have excluded upon my view of the facts, it is very difficult indeed to formulate the proposition. What is the wrong done? What legal right is interfered with? What coercion of the mind, or will or of the person is effected? All are free to trade upon what terms they will, and nothing has been done except in rival trading which can be supposed to interfere with the appellants’ interests.”

* * * * * * * * * * *

Lord Bramwell: “Where is such a contention to stop? Suppose the case put in the argument: In a small town there are two shops, sufficient for the wants of the neighborhood, making only a reasonable profit. They are threatened with a third. The two shopkeepers agree to warn the intending shopkeeper that if he comes they will lower prices, and can afford it longer than he. Have they committed an indictable offense? Remember the conspiracy is the offense, and they have conspired. If he, being warned, does not set up his shop, has he a cause of action? He might prove damages. He might show that from his skill he would have beaten one or both of the others. See in this case the judgment of Lord Esher, that the plaintiffs might recover for ‘damages at large for future years.’ Would a ship-owner who had intended to send his ship to Shanghai, but desisted owing to the defendant’s agreement, and on being told by them they would deal with him as they had with the plaintiff, be entitled to maintain an action against the defendants! Why not? If yes, why not every ship-owner who could say he had a ship fit for the trade, but was deterred from using it?

[1]Diamond Match Co. v. Roeber, 106 New York, 481, the court said: “Steam and electricity have, for the purpose of trade and commerce, almost annihilated distance, and the whole world is now a mart for the distribution of the products of industry. The great diffusion of wealth and the restless activity of mankind striving to better their condition has greatly enlarged the field of human enterprise and created a vast number of new industries, which give scope to ingenuity and employment for capital and labor. The laws no longer favor the granting of exclusive privileges, and to a great extent business corporations are practically partnerships and may be organized by any persons who desire to unite their capital or skill in business, leaving a free field to all others who desire for the same or similar purposes to clothe themselves with a corporate character. The tendency of recent adjudications is marked in the direction of relaxing the rigor of the doctrine that all contracts in general restraint of trade are void, irrespective of special circumstances. Indeed, it has of late been denied that a hard and fast rule of that kind has ever been the law of England (Rousillon v. Rousillon, 14 L. R., Ch. Div. 351). The law has, for centuries, permitted contracts in partial restraint of trade, when reasonable; and in Horner v. Graves (7 Bing. 735), Chief Justice Tindal considered a true test to be “whether the restraint is such only as to afford a fair protection to the interests of the party in favor of whom it is given, and not so large as to interfere with the interests of the public.” When the restraint is general, but at the same time is co-extensive only with the interest to be protected and with the benefit meant to be conferred, there seems to be no good reason why, as between the parties, the contract is not as reasonable as when the interest is partial and there is a corresponding partial restraint. And is there any real public interest which necessarily condemns the one and not the other? It is an encouragement to industry and to enterprise in building up a trade, that a man shall be allowed to sell the good-will of the business and the fruits of his industry upon the best terms he can obtain. If his business extends over a continent, does public policy forbid his accompanying the sale with a stipulation for restraint co-extensive with the business which he sells? If such a contract is permitted, is the seller any more likely to become a burden on the public than a man who, having built up a local trade only, sells it, binding himself not to carry it on in the locality? Are the opportunities for employment and for the exercise of useful talents so shut up and hemmed in that the public is likely to lose a useful member of society in the one case and not in the other? Indeed, what public policy requires is often a vague and difficult inquiry. It is clear that public policy and the interests of society favor the utmost freedom of contract, within the law, and require that business transactions should not be trammelled by unnecessary restrictions. ‘If,’ said Sir George Jessel, in Printing Company v. Sampson (19 Eq. Cas., L. R. 462) ‘there is one thing more than any other which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that contracts when entered into freely and voluntarily, shall be held good and shall be enforced by courts of justice.’ It has sometimes been suggested that the doctrine that contracts in general restraint of trade are void, is founded in part upon the policy of preventing monopolies, which are opposed to the liberty of the subject, and the granting of which by the king under claim of royal prerogative led to conflicts memorable in English history. But covenants of the character of the one now in question operate simply to prevent the covenantor from engaging in the business which he sells, so as to protect the purchaser in the enjoyment of what he has purchased. To the extent that the contract prevents the vendor from carrying on the particular trade, it deprives the community of any benefit it might derive from his entering into competition. But the business is open to all others, and there is little danger that the public will suffer harm from lack of persons to engage in a profitable industry. Such contracts do not create monopolies. They confer no special or exclusive privilege. If contracts in general restraint of trade, where the trade is general, are void as tending to monopolies, contracts in partial restraint where the trade is local, are subject to the same objection, because they deprive the local community of the services of the covenantor in the particular trade or calling, and prevent his becoming a competitor with the covenantee. We are not aware of any rule of law which makes the motive of the covenantee the test of the validity of such a contract. On the contrary we suppose a party may legally purchase the trade and business of another for the very purpose of preventing competition, and the validity of the contract, if supported by a consideration, will depend upon its reasonableness as between the parties.”

[1]See post, § 112, for the discussion and explanation of modern antitrust and anti-monopolistic laws.