Tode v. Gross — 40 N.Y. St. Rep. 300

Majority

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Adolph Tode el al., Resp’ts, v. Lena Gross, App’lt.^[1]

(Court of Appeals, Second Division,

Filed October 6, 1891.)

Headnote

1. Covenant—Principal and agent.

Defendant, the owner of a cheese factory, sold it together with the secret of manufacturing certain kinds of cheese to plaintiffs, covenanting for herself, her husband and two others that they would refrain from communicating the secret to others than plaintiffs and would not engage in the business of manufacturing or selling cheese for five years. Held, that the covenant applied with the same force to her agents as to herself and her personal act was not essential to a violation of" the covenant by her, and if she did not prevent her agents from doing the prohibited acts the covenant was broken.

2. Same—Restraint oe trade.

Such a covenant was not in restraint of trade, as it imposed no restriction upon either that was not beneficial to the other, by enhancing the price to the seller or protecting the purchaser.

3. Same—Stipulated damages—Penalty.

The contract stab d that it was made “under the penalty of five thous- and dollars, which is hereby named as stipulated damages.” Held, that the word penalty under the circumstances was not controlling and that the parties intended to liquidate the damages.

Appeal from a judgment of the general term of the supreme court, in the second judicial department, affirming a judgment entered upon the decision of the court after a trial without a jury.

Action for breach of covenant to recover the sum of $5,000 as stipulated damages.

On the 15th of October, 1884, the defendant owned a cheese factory situate in the town of Monroe, Orange county, comprising two parcels of land, with the buildings thereon and a quantity of fixtures, machinery and tools connected therewith. For some ' time prior, with the assistance of her husband, Conrad Gross, her brother-in-law, August Gross, and her father, John Hoffman, she had been engaged in the business of manufacturing cheeses at said ■ factory, known as Fromage de Brie, Fromage d’Isigny and Neufchatel. Such cheeses were made by a secret process, known only to herself and her said agents. On the day last named she entered into a sealed agreement with the plaintiffs whereby she agreed to sell and transfer to them the said factory and all its belongings, together with the “good will, custom, trade-marks and names used in and belonging to the said business,” for the sum of $25,000, to

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be paid and secured March 1, 1885, when possession was to be given. Said instrument contained a covenant on her part that she would “communicate after the first day of March, 1885, or cause to be communicated to” said plaintiffs “by Conrad Gross, John Hoffman and August Gross, or one or other of them, the secret of the manufacture of the cheeses known as Fromage de Brie, Neufchatel and d’Isigny, and the recipe therefor and for each of them, and will instruct or cause to be instructed them and each of them in the manufacture thereof. And that she and the said Conrad Gross, John Hoffman and August Gross, will refrain from communicating the secret recipe and instructions for the manufacture of said cheeses, or either of them, to any and all persons other than the above named parties of the second part (plaintiffs), and will also, after the first day of April, 1885, refrain from engaging in the business of making, manufacturing or vending of said cheeses or either of them, and from the use of the trade-marks or names, or either of them, hereby agreed to be transferred in connection with said cheeses, or either of them, or with any similar product, under the penalty of $5,000, which is hereby named as stipulated damages, to be paid by the party of the first part (defendant), or her heirs, executors, administrators or assigns, in case of a violation by the party of the first part (defendant), of this covenant, of this contract, or any part thereof, within five years from the date hereof.” •

She further covenanted that she, herself, as well as “ said Conrad Gross, John Hoffman and August Gross, during and up to :and until the first day of May, 1885, shall continue and remain in said county of Orange, and from time to time, and at all reasonable times during said period, by herself, or by said Conrad Gross, John Hoffman and August Gross, whenever so requested by the said parties of the second part (plaintiffs), impart to them, or either of them, the secret of making such cheeses, and each of them, and instruct them, and each of them, in the process of manufacturing the same and each of them, as fully as she or the said Conrad Gross, John Hoffman or August Gross, or either of them, are informed concerning the same.”

Both parties appear to have duly kept and performed the agreement, except that, as the trial court found, “ subsequently to the first day of May, 1885, Conrad Gross, the husband of defendant, went to New York city and engaged in the business of selling^[1] foreign and domestic fruits, and all kinds of cheese and sausages, etc.,’ * * * and while so engaged * * * sold and personally delivered from his place of business to one John Wassung three boxes of cheese, marked and named Fromage d’Isigny, and having substantially the same trade-marks thereon as that sold by defendant to plaintiffs, and having stamped thereon the name Fromage d’Isigny, and that said cheese so sold by him to said Wassung was a similar product to that formerly manufactured by defendant.”

Also, that “ said August Gross, the brother-in-law of defendant, subsequent to the first day of May, 1885, engaged in the business of retailing fancy groceries in the city of New York, and in and

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during the fall of 1887, and prior to the commencement of this action, kept for sale, at his place of business in Mew York city, boxes of cheese marked or stamped Fromage d’lsigny.”

The court further found that the cheese so sold by Conrad Gross, under the name of Fromage d’lsigny, as well as that kept for sale by August Gross, marked Fromage d’lsigny, “ was never sold by plaintiffs, nor made'or manufactured by them, or either of them, but that the same was a similar product.”

The court found as conclusions of law that said agreement was a reasonable one, and was founded upon a good and sufficient consideration ; that said sale by Conrad, and said keeping for sale by August Gross, was a direct violation of the covenant in question ; that the restriction imposed was no more than the interests of the parties required, and that it was not in restraint of trade or against public policy.

Judgment was ordered for the plaintiffs for the sum of $5,000„ as stipulated damages.

John Fennel, for app’lt; Henry A. Bacon, for resp’ts.

The business carried on by defendant was founded on a secret process known only to herself and her agents. She had the right to continue the business and by keeping her secret to enjoy its benefits to any practicable extent She also had the right to sell the business, including as an essential part thereof the secret process, and in order to place the purchasers in the same position that she occupied, to promise to divulge the secret to them alone and to keep it from every one else. In no other way could she sell what she had and get what it was worth. Having the right to make this promise she also had the right to make it good to her vendees and to protect them by covenants with proper safeguards against the consequences of any violation. Such a contract simply left matters substantially as they were before the sale, except that the seller of the secret had agreed that she would not destroy its value after she had received full value for it. The covenant was not in general restraint of trade, but was a reasonable measure of mutual protection to the parties, as it enabled the one to sell at the highest price and the other to get what they paid for. It imposed no restriction upon either that was not beneficial to the other, by enhancing the price to the seller, or protecting the purchaser. Recent cases make it very clear that such an agreement is not opposed to public policy, even if the restriction was unlimited as to both time and territory. The Diamond Match Co. v. Roeber, 106 N. Y., 473 ; 11 N. Y. State Rep., 47; Hodge v. Sloan, 107 N. Y., 244 ; 11 N. Y. State Rep.,, 770; Leslie v. Lorillard, 110 N. Y., 519 , 534; 18 N. Y. State Rep., 520 ; Water-town Thermometer Co. v. Pool, 51 Hun, 157 ; 20 N. Y. State Rep., 592. The restriction under consideration, however, was not unlimited as to time.

The chief reliance of the defendant in this court, where the point seems to have been raised for the first time, is that the covenant, so far as stipulated damages are concerned, is confined to the personal acts of Mrs. Gross and does not embrace the acts of her

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agents. A careful reading of the agreement, however, in the light of the circumstances surrounding the parties when it was made, shows that no such result was intended. What was the object of the covenant ? It was to keep secret, at all hazards, the process upon which the success of the business depended. On no other basis could the plaintiffs safely buy or the defendant sell for what her property was worth.

Who had the power to keep the process secret ? Clearly the defendant, if any one, as she had confided it to no one except her trusted agents, who were nearly related to her by blood or marriage. But could she covenant against the acts of those over whom she had no control ? She had the right to so covenant, by assuming the risk of their actions, and unless she had done so, presumptively, she could not have sold her factory for so large a sum. It was safer for her to sell it with such a covenant than it was for the plaintiffs to buy without it. She could exercise some power over her own husband, and her father and her husband’s brother, all of whom had been associated with her in carrying on the business and whose actions in certain other respects she assumed to control for a limited time, whereas the plaintiffs were powerless, unless they had her promise to keep the process secret at the peril of paying heavily if she did not. It is not surprising, therefore, to find that the restrictive part of the covenant applies with the same force to her agents that it does to herself, for she undertakes that neither she nor they will disclose the secret, or engage in making or selling either kind of cheese, or use the trade-marks or names connected with the business. We do not think that a personal act of the defendant is essential to a violation of this covenant by her, for if she permits, or even does not prevent her agents from doing the prohibited acts, the promise is broken. While it is her exclusive covenant, it relates to the action of others, and if they do what she agreed that they would not do, it is a breach by her, although not her own act. She violated her agreement, not by selling herself, but by not preventing others from selling. This construction of the restrictive part of the covenant would hardly be open to question, were it not that in the same sentence occurs the reparative or compensatory part designed to make the plaintiffs whole if the defendent either could not or did not keep her agreement. While this provides that any violation involves the penalty of $5,000, it adds “which .sum is hereby named as stipulate damages to be paid ” by the defendant in case of a violation bv her of the covenant in question.

What kind of violation is thus referred to ? The defendant says a personal violation by her only, but we think, for the reasons already given, that the spirit of the agreement includes both a violation by her own act and by the act of those whom she did not prevent from selling, although she had agreed that they would not sell. As no one not a party to a contract can violate it, every act of defendant’s former agents contrary to her covenant was a violation thereof by her, whether she knew of it or assented to it or not. Whenever that was done which she agreed should not

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be done, it was a breach of covenant by her, even if the act was contrary to her wishes and in spite of her efforts to prevent it. Her covenant was against a certain act by any one of four persons, including herself. Two of those persons separately did the act which she had agreed that neither of them should do, and thus there was a violation of the covenant by her the same as if she had done the act in person.

The argument of the learned counsel for the defendant that the contract fixed a sum to.be paid in case of a violation by the defendant, but not in case of a violation “ by the other parties,” while plausible, is unsound, for there were no “otherparties” who-could break the covenant She was the sole covenantor, and unless she kept the covenant, she broke it, and she did not keep it.

As the actual damages for a breach of the covenant would necessarily be “ wholly uncertain and incapable of being ascertained, except by conjecture,” we think that the parties intended to liquidate them when they provided that the sum named should be “ as stipulated damages.” The use of the word penalty under the circumstances is not controlling. Baghy v. Peddie, 16 N. Y., 469 ; Dakin v. Williams, 17 Wend., 448 ; aff’d 22 id., 201; Wooster v. Kisch, 26 Hun, 61 .

As .there is no other question that requires discussion, the judgment should be affirmed, with costs.

All concur, except Brown, J., not sitting.