Diamond Match Co. v. Roeber — 11 N.Y. St. Rep. 47

Majority

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Diamond Match Co., Resp’t, v. William Roeber, App’lt.^[1]

(Court of Appeals,

Filed October 4, 1887.)

Headnote

1. Contract in restraint of trade—Old rule weakened.

The early doctrine that contracts in general restraint of trade are void without regard to circumstances, has not been abrogated, but it has been much weakened and the foundation upon which it was originally placed has, to a considerable extent, been removed. The tendency is in the direction of relaxing the rigor of the doctrine.

2. Same—Contract unlimited as to time good.

That the contract is practically unlimited as to time is not an objection if the contract is otherwise good.

3 Same—What contracts valid.

The defendant executed a bill of sale to. the Swift and Courtney and Beecher Co., containing a covenant that he should and would not at any time within ninety-nine years, directly or indirectly, engage in the manufacture or sale of friction matches (excepting as agent or employee of said company), within any of the several states of the United States or in the territories, excepting and reserving, however, the right to manufacture and sell friction matches in the state of Nevada and in the territory of Montana. The consideration of the covenant was the purchase, at a very large price, by said company (a Connecticut corporation), of the manufactory in New York city belonging to defendant, in which he had for several years prior to said sale carried on the business of manufacturing friction matches, and of the stock, etc. Held, that the covenant being supported by a good consideration, and constituting a partial and not a general restraint of trade, and being reasonable, was valid and not void. (Cases discussed, modified and distinguished.)

4. Same—Exception—When not colorable merely.

The court cannot say that the exception of Nevada and Montana was colorable merely.

5. Same—Taking of bond for performance of covenant—Jurisdiction of equity.

The defendant, in connection with the covenant, executed a bond for its performance, with a stipulation for liquidated damages. Held, that the taking of a bond in connection with the covenant does not exclude the equitable jurisdiction of the court in a case otherwise cognizable therein,

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and the fact that the damages in the bond are liquidated does not change the rule.

-6. Same—Question of intent.

Held, that it was a question of intention to be deduced from the whole instrument and the circumstances, and if it appeared that the performance of the covenant was intended, and not merely the payment of damages in case of a breach, the covenant will be enforced. Also, held, that in this case the parties intended that the covenant should be performed, and not that the defendant might re-purchase his right to manufacture and sell matches on payment of the amount fixed as liquidated damages.

7. Same—Injunction—Right to.

The defendant was at first employed by the said company, and the plaintiff their assignor, but afterward left its service and became superintendent of a rival match manufacturing company in New Jersey; and he also opened a store in New York for the sale of matches other than those manufactured by the plaintiff. Held, that the equitable jurisdiction of the court to enforce the covenant by injunction was not excluded by the fact that the defendant in connection with the covenant executed said bond.

'8. Same—When contract partial.

A contract which relates to á business extending over the whole country and which restrains the carrying on of the business in the state of New York, but excepts other states from its operation, is a contract for the partial restraint of trade. Ohappel v. Brockway, 21 Wend., 157 , reversed.

•9. Same—When assignable—Assignee can maintain the action.

The obligation (the covenant) ran to the company, “ its successors and assigns." Held, that the plaintiff as successor of the company could maintain the action. That the covenant was in the nature of a property right and was assignable in connection with the sale of the property and business of the assignees.

10. Same—Ultra virbs.

Held, That the defendant could not raise the question that the contract with said company was ultra vires the powers of that corporation. That as he had retained the benefit of the contract he must abide by its terms.

'll. Same—Foreign corporation can bring action.

Held, That the fact that the plaintiff was a foreign corporation was no objection to its maintaining the action.

12. Same—Consent to purchase of similar business—Effect of.

The person whose business was purchased by defendant, was, at the time, selling matches manufactured by the company, under an agreement to deal in them exclusively. Held, that the consent of the company to the purchase by the defendant of said business did not relieve the defendant from his covenant.

Appeal from a judgment of the supreme court, general term, first department, affirming a judgment in favor of the plaintiff recovered on a trial at the New York special term, and also from an order of the general term reversing an order of the special term directing an additional allowance of costs.

Robert Sewell, for app’lt; Noah Davis, for resp’t.

—Two questions * are presented: First. Whether the covenant of the defendant, contained in the

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bill of sale executed by him to the Swift and Courtney and Beecher Company, on the 27th day of August, 1880, that he shall and will not at any time or times within ninety-nine years, directly or indirectly engage in the manufacture or sale of friction matches (excepting in the capacity of agent or employee of said The Swift and Courtney and Beecher Company), within any of the several states of the United States of America, or in the territories thereof, or within the District of Columbia, excepting and reserving, however, the right to manufacture and sell friction matches in the state of Nevada and in the territory of Montana, is void as being a covenant in restraint of trade; and, second, as to the right of the plaintiff under the special circumstances, to the equitable remedy by injunction to enforce the performance of the covenant. There is no real controversy as to the essential facts. The consideration of the covenant was the purchase by The Swift and Courtney and Beecher Company, a Connecticut corporation, of the manufactory, No. 528 West Fifteenth street, in the the city of New York, belonging to the defendant, in which he had for several years_ prior to entering into the covenant, carried on the business of manufacturing friction matches, and of the stock and materials on hand, together with the trade, trade-marks and good will of the business, for the aggregate sum (excluding a mortgage of $5,000 on the property, assumed by the company) of $46,724.05, of which $13,000 was the price of the real estate.

By the preliminary agreement of July 27, 1880, $28,000 of the purchase price was to be paid in the stock of The Swift and Courtney and Beecher Company. This was modified when the property was transferred, August 27, 1880, by giving to the defendant the option to receive the $28,000 in the notes of the company or in its stock, the option to be exercised on or before January 1, 1881. The remainder of the purchase price, $18,724.05, was paid down in cash, and subsequently, March 1, 1881, the defendant accepted from the plaintiff, The Diamond Match Company, in full payment of the $28,000, the sum of $8,000 in cash and notes, and $20,000 in the stock of the plaintiff, the plaintiff company having prior to said payment purchased the property of The Swift and Courtney and Beecher Company and become the assignee of the defendant’s covenant.

It is admitted by the pleadings that in August, 1880 (when the covenant in question was made), The Swift and Courtney and Beecher Company carried on the business of manufacturing friction matches in the states of Connecticut, Delaware and Illinois, and of selling the matches which it manufactured in the several states and territories of the United States and

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in the District of Columbia, and the complaint alleges, and the defendant in his answer admits, that he was at the same time also engaged in the manufacture of friction matches in the city of New York and in selling them in the same territory. The proof tends to support the admission in the pleadings. It was shown that the defendant employed traveling salesmen and that his matches were found in the-hands of dealers in ten states. The Swift and Courtney and Beecher Company also sent their matches throughout the country wherever they could find a market. When the bargain was consummated on the 27th of August, 1880, the defendant entered into the employment of The Swift and Courtney and Beecher Company, and remained in its employment until January, 1881, at a salary of $1,500 a year. He then entered into the employment of the plaintiff and remained with it during the year 1881, at a salary of $2,500' a year, and from January 1, 1882, ata salary of $3,600 a year, when a disagreement arising as to the salary he should thereafter receive, the plaintiff declining to pay a salary of more than $2,500 a year, the defendant voluntarily left its service. Subsequently he became superintendent of a rival match manufacturing company in New Jersey at a salary of $5,000, and he also opened a store in New York for the sale of matches other than those manufactured by the plaintiff.

The contention by the defendant that the plaintiff has no equitable remedy to enforce the covenant rests mainly on the fact that contemporaneously with the execution of the covenant of August 27, 1880, the defendant also executed to The Swift and Courtney and Beecher Company a bond in the penalty of $15,000, conditioned to pay that sum to the company as liquidated damages in case of a breach of his covenant.

The defendant for his main defense relies upon the ancient doctrine of the common law, first definitely declared, so far as I can discover, by Chief Justice Parker (Lord Macclesfield) in the leading case of Mitchel v. Reynolds (1 P. Wms., 181), and which has been repeated many times by judges in England and America, that a bond in general restraint of trade is void. There are several decisions in the English courts of an earlier date, in which the question of the validity of contracts restraining the obligor from pursuing his occupation within a particular locality were considered. The cases are chronologically arranged and stated by Mr. Parsons, in his work on Contracts (vol. 2, p. 748, note). The earliest reported case, decided in the time of Henry V., was a suit on a bond given by the defendant, a dyer, not to use his craft within a certain city for the space of half a year. The judge before whom the

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case came, indignantly denounced the plaintiff for procuring such a contract, and turned him out of court. This was followed by cases arising on contracts of a similar character, restraining the obligors from pursuing their trade within a certain place for a certain time, which apparently presented the same question which had been decided in the dyer’s case, but the court sustained the contracts and gave judgment for the plaintiffs; and before the case of Mitchell v. Reynolds, it had become settled that an obligation of this character, limited as to time and space, if reasonable under the circumstance and supported by good consideration, was valid. The case in the Year Books went against all contracts in restraint of trade, whether limited or general. The other cases prior to Mitchel v. Reynolds sustained contracts for a particular restraint, upon special grounds and by inference decided against the validity of general restraint.

The case of Mitchel v. Reynolds was a case of partial restraint and the contract was sustained. It is worthy of notice that in most, if not all the English cases which assert the doctrine that all contracts in general restraint of trade are void, were cases where the contract before the court was limited or partial. The same is generally true of the American cases. The principal cases in this state are of that character, and in all of them the particular contract before the court was sustained. Nobles v. Bates, 7 Cow., 307 ; Chappel v. Brockway, 21 Wend., 157 ; Dunlop v. Gregory, 10 N. Y., 241 .

In Alger v. Thacher ( 19 Pick., 51 ), the case was one of general restraint, and the court construing the rule as inflexible that all contracts in general restraint of trade are void, gave judgment for the defendant.

In Mitchel v. Reynolds the court, in assigning the reason for the distinction between a contract for the general restraint of trade, and one limited to a particular place, says, “for the former of these must be void, being of no benefit to either party and only expressive,” and later on, “because in a great many instances they can be of no use to the obligee, which holds in all cases of general restraint throughout England, for what does it signify to a tradesman in London what another does in Newcastle, and surely it would be unreasonable to fix a certain loss on one side without any benefit to the other.”

He refers to other reasons, viz.: The mischief which may arise (1) to the party by the loss by the obligor of his livelihood and the substance of his family; and (2) to the public by depriving it of a useful member, and by enabling corporations to gain control of the trade of the kingdom. It is quite obvious that some of these reasons are much less

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forcible now than when Mitchel v. Reynolds was decided. Steam and electricity have, for the purposes 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 Ch. Div., L. R., 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 Timbal 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

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difficult inquiry. It is clear that public policy and the interests of society favor the utmost freedom of contracts within the law. and require that business transactions should not be trammeled 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 being 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. Combinations between producers, to limit production and to enhance prices, are or may be unlawful, but they stand on a different footing.

We cite some of the cases snowing the tendency of recent judicial opinion on the general subject (Whittaker v. Howe, 3 Beav., 383; Jones v. Lees, 7 Hurl. & N., 189; Rousillon v. Rousillon, supra; Leather Co. v. Lorsont, 9 Eq. Cas., L. R., 345; Collins v. Locke, 4 Ap. Cas., L. R., 674; Oregon

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Steam Co. v. Winsor, 20 Wall, 64 ; Morse v. Morse, 103 Mass., 73 ). In Whittaker v. Howe a contract made by a solicitor, not to practice as a solicitor “in any part of. Great Britain,” was held valid. In Rousillon v. Rousillon a general contract not to engage in the sale of champagne, without limit as to space, was enforced as being under the circumstances a reasonable contract. In Jones v. Lees a covenant by the defendant, a licensee under a patent, that he would not during the license make or sell any slubbing machines without the invention of the plaintiff applied to them, was held valid. Bramwell, J., said: “It is objected that the restraint extends to all England, but so does the privilege.” In Oregon Steam Co. v. Winsor the court enforced a covenant by the defendant, made on the purchase of a steamship that it should not be run or employed in freight and passenger business upon any waters in the state of California for the period of ten years.

In the present state of the authorities we think it cannot be said that the early doctrine that contracts in general restraint of trade are void, without regard to circumstances, has been abrogated. But it is manifest that it has been much weakened, and that the foundation, upon which it was originally placed, has to a considerable extent, by the change of circumstances, been removed. The covenant in the present case is partial, and not general. It is practically unlimited as to time, but this, under the authorities, is not an objection, if the contract is otherwise good. Ward v. Byrne, 5 Mees. & W., 548; Mumford v. Gething, 7 C. B. (N. S.), 317. It is limited as to space since it excepts the state of Nevada and the territory of Montana from its operation, and, therefore, is a partial and not a general restraint, unless, as claimed by the defendant, the fact that the covenant applies to the whole state of New York, constitutes a general restraint within the authorities.

In Chappel v. Brockway (supra), Bronson, J., in stating the general doctrine as to contracts in restraint of trade, remarked, that “ contracts which go to the total restraint of trade, as that a man will not pursue his occupation anywhere in the state, are void.” The contract under consideration in that case was one by which the defendant agreed not to run or be interested in a line of packet boats on the canal between Rochester and Buffalo. The attention of the court was not called to the point whether a contract was partial, which related to a business extending over the whole country, and which restrained the carrying on of business in the state of New York, but excepted other states from its operation. The remark relied upon was obiter, and in reason cannot be considered a decision upon the point suggested. We are of the opinion that the conten

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tian of the defendant is not sound in principle and should not be sustained. The boundaries of the states are not those of trade and commerce, and business is restrained within no such limit. The country as a whole is that of which we are citizens, and our duty and allegiance are due both to the state and nation. Nor is it true as a general rule, that a business established here cannot extend beyond the state or that it may not be successfully established outside of the state. There are trades and employments which from their nature are localized, but this is not true of manufacturing industries in general. We are unwilhng to say that the doctrine as to what is a general restraint of trade, depends upon state hues, and we cannot say that the exception of Nevada and Montana was colorable merely. The rule itself is arbitrary, and we are not disposed to put such a construction upon this contract as will make it a contract in general restraint of trade, when upon its face it is only partial. The case of Oregon Steam Co. v. Winsor (supra) supports the view that a restraint is not necessarily general which embraces an entire state.

In this case the defendant entered into the covenant as a consideration in part of the purchase of his property by The Swift and Courtney and Beecher Company, presumably because he considered it for his advantage to make the sale. He realized a large sum in money, and on the completion of the transaction became interested as a stockholder in the very business which he had sold. We are of -opinion that the covenant being supported by a good consideration, and constituting a partial and not a general restraint, and being, in view of the circumstances disclosed, reasonable, is valid and not void

In respect to the second general question raised, we are of opinion that the equitable jurisdiction of the court to enforce the covenant by injunction, was not excluded by the fact that the defendant in connection with the covenant, executed a bond for its performance, with a stipulation for liquidated damages. It is, of course, competent for parties to a covenant, to agree that a fixed sum shall be paid in case of a breach by the party in default, and that this should be the exclusive remedy. The intention in that case would be manifest that the payment of the penalty should be the price of non-performance and to be accepted by the covenantee in the lieu of performance. Phœnix Ins. Co. v. Continental Ins. Co., 87 N. Y., 405 . But the taking of a bond in connection with a covenant does not exclude the jurisdiction of equity in a case otherwise cognizable therein, and the fact that the damages in the bond are liquidated, does not change the rule.

It is a question of intention, to be deduced from the

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whole instrument and the circumstances, and if it appear that the performance of the covenant was intended, and not merely the_ payment of damages in case of a breach, the covenant will be enforced. It was said in Long v. Bowring (33 Beav, 585). which was an action in equity for the specific performance of a covenant, with claim for liquidated damages, “all that is settled by this claim is that if they bring an action for damages, the amount to be recovered is 1,000 pounds, neither more nor less.” There can be no doubt upon the circumstances in this case that the parties intended that the covenant should be performed, and not that the defendant might at his option repurchase his right to manufacture and sell matches on payment of $15,000, the liquidated damages.

The right to relief by injunction in similar contracts is established 'by numerous cases. Phœnix Ins. Co. v. Continental Ins. Co., supra; Long v. Bowring, supra; Howard v. Woodward, 10 Jur. [N. S.], 1123; Coles v. Sims, 5 DeG., McN. & G., 1; Avery v. Langford, Kay, 663; Whittaker v. Howe, supra; Hubbard v. Miller, 27 Mich., 15 .

There are some subordinate questions which will be-briefly noted.

First. The plaintiff, as successor of The Swift and Courtney and Beecher Company, and as assignee of the covenant, can maintain the action. The obligation runs to-The Swift and Courtney and Beecher Company, “its successors and assigns.” The covenant was in the nature of a. property right and was assignable, at least it was assignable-in connection with a sale of the property and business of the assignees. Hedge v. Lowe, 47 Iowa, 137 , and cases cited.

Second. The defendant is not in a position which entitles-him to raise the question that the contract with The Swift and Courtney and Beecher Company was ultra vires the powers of that corporation. He has retained the benefit of the contract and must abide by its terms. Whitney Arms Co. v Barlow, 68 N. Y., 34 .

Third. The fact that the plaintiff is a foreign corporation is no objection to its maintaining the action. It would be-repugnant to the policy of our legislation and a violation of the rules of comity to grant or withhold relief in our courts-upon such a discrimination. Merrick v. Van Santvoord, 34 N. Y., 208 ; Hibernia Nat. Bank v. Lacombe, 84 id., 367; Code Civ. Pro., § 1779.

Fourth. The consent of The Swift and Courtney and Beecher Company to the purchase by the defendant of the-business of Bruggemann did not relieve the defendant from his covenant. That transaction was in no way inconsistent, therewith. Bruggemann was selling matches manufac

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tured by the company, under an agreement to deal in them exclusively.

There are some questions on exceptions to the admission and exclusion of evidence. None of them, we think, present any question requiring a reversal of the judgment.

We think there is no error disclosed by the record, and the judgment should therefore be affirmed.

All concur except Peckham, J., dissenting.