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THE LAW OF COMBINATIONS.
CONTRACTS IN RESTRAINT OF TRADE.
CH. 19. GENERALLY CONSIDERED.
20. CONTRACTS IN RESTRAINT OF TRADE IN ENGLAND.
CONTRACTS IN RESTRAINT OF TRADE - GENERALLY CONSID
$ 657. Contracts in restraint of trade and combinations.
658. The right to contract.
659. Conflicting views regarding fundamental rights. 660-673. Decisions upholding generally the freedom of contract.
674. The right to contract not absolute.
675. Interferences of a positive or negative character.
dom to contract.
688. Contracts in restraint of trade, definition of.
$ 657. Contracts in restraint of trade and combinations. As has been already noted, the law governing contracts in restraint of trade has no direct connection with the law governing combinations. Yet nearly every decision against a combination assigns as one of the reasons for its illegality that it is “in restraint of trade.” This involves a misapprehension and misapplication of the law governing contracts in restraint of trade.
A combination, like an individual or a partnership, may
1 See SS 329–333.
enter into contracts which are invalid because in restraint of trade; and in forming a combination the parties thereto may, and often do, enter into agreements not to embark in the same business. All such contracts are tested by the rules governing contracts in restraint of trade; but the agreement upon which the combination itself is based is in no sense a contract in restraint of trade, unless it directly seeks to prohibit some one from again embarking in business.
Many a decision holding a combination illegal has assigned as one of the reasons that it was in restraint of trade, when, as a matter of fact, there was no agreement in existence tending in the slightest degree to prevent any party to the combination from embarking in either the same or any other business. The phrase "in restraint of trade” has been so indiscriminately and loosely applied that it has almost lost all value, and yet it has a very definite meaning.
It is important to ascertain clearly the law governing contracts in restraint of trade, for two reasons:
First, because the courts indiscriminately hold combinations illegal as in restraint of trade;
Second, because it has been the practice — not so much of late — in forming combinations to take an agreement or a bond from the several parties that they will not, for a time at least, enter into competition with the combination.
Contracts of the nature last suggested are so valuable to a party – whether a combination or not - purchasing a business and good-will that it is important to know just how far they are valid and can be enforced.
It has been frequently held that the good-will of a business is quite as valuable, and quite as much the subject of disposition, as any other property right. The value of the mere plant and stock in trade, or materials on hand, belonging to the business of the successful merchant or manufacturer is often less than the value which attaches to the good-will, and any rule of law which tends to prevent the man who by industry, integrity and intelligence has built up a valuable custom and trade from disposing of the good-will of his business is quite as detrimental to progress and restrictive of liberty as would be a rule of law which should attempt to curtail his right to sell his stock in trade or his manufactured products. Good-will
is property, and as such the owner thereof is entitled to all the protection that the law gives to the owner of tangible property.
In order that the owner of the good-will which attaches to any successful business may realize the full commercial value of that species of intangible property, it is absolutely essential that the law should not only permit him to dispose of his goodwill for such consideration as he can obtain in the open market, but should enforce any obligation which he enters into for the protection of the purchaser, otherwise the man who sells the good will of his business to-day, receiving and making use of the consideration paid therefor, may to-morrow regain possession of that which he has sold, by simply embarking in a competing business in the same locality. It is therefore essential, not simply for the protection of the man who purchases in good faith, but mainly and chiefly to enable the man who has built up a valuable intangible property in the shape of good-will, to dispose of the same for the highest possible price, that the law should not only enforce but encourage all contracts in restraint of trade which simply restrain a vendor of good-will from endeavoring to repossess himself of all or any part of that which he has sold, by embarking again in the same business within the territory covered by the business which he has sold.
Before entering upon an investigation of the development of the law of contracts in restraint of trade, it may not be amiss to speak briefly concerning the right to contract generally.
$ 658. The right to contract. The right to contract is fundamental; it is something more than a constitutional right, and requires no constitutional guaranty for its protection.
While the state has from time immemorial interfered more or less with the right to contract, such interferences have been based upon the hypothesis that they were essential for the protection of either the individual or the public; the abstract right to contract has never been disputed. This right is as essential to the existence of society as is air to the life of the body, and exactly in proportion as the right to contract has been broadly recognized and upheld, to that extent has society prospered.
It is impossible to imagine man as living apart from social relations, and the theory that man possesses any natural rights higher than or in any manner distinguished from the rights resulting from social relations is the pernicious doctrine of a visionary philosophy. The very term “right” implies the existence of some party who owes a duty corresponding to the right; and whatever the relations that exist between two individuals, whether the tie be the slightest conceivable or of an intimate character, the rights enjoyed by each, and the implied duties resulting therefrom, are essentially of a social character. The physical development of man from birth on is of such a character as to necessitate more or less dependence upon others. Were it possible to conceive of a man living so entirely apart from all fellow beings as to have no contact whatsoever with them, it would be superfluous to speak of the rights of such an individual, since the term “right” implies limitations, and no right is without its restrictions.
The right to contract is embraced in those inalienable rights enumerated in the Declaration of Independence, namely, life, liberty and the pursuit of happiness. Beyond this enumeration it was not thought necessary to afford any additional guaranties either in the Declaration of Independence or in the Constitution. The constitutional provision that no state shall pass any law impairing the obligation of contracts, simply indicates the estimation in which contracts were held by the makers of the constitution; it does not purport to extend, limit or in any manner affect the right to contract. It is hardly conceivable that the right to contract should be made a matter of debate in these latter days of the nineteenth century, and yet any extended investigation of the decisions relating to contracts in restraint of trade inevitably leads to the impression that the right to contract is not one of the inalienable rights referred to in the Declaration of Independence, but is rather a right enjoyed by grace of courts and legislatures.?
1 In Andrews v. Russell (1845), 7 (or natural) rights of individuals may Blackf. 474, the court said: “There be resolved into the right of personal are certain absolute rights, and the security, the right of personal libright of property is among them, erty, and the right to acquire and which in all free governments must enjoy property." Kent's Com. 1. In of necessity be protected from legis Arrowsmith v. Burlington (1848), 4 lative interference, irrespective of McLean, 489, 497, it is said: “A freeconstitutional checks and guards.” man may buy and sell at his pleasure. Chancellor Kent says: “The absolute This right is not of society, but from
$ 659. Conflicting views regarding fundamental rights.Regarding rights of such a fundamental character that they are presumed to be recognized by all men irrespective of constitutional guaranties, two conflicting views are perceptible in American decisions and among writers on American law. In the latter days of the last century the notion prevailed very generally that men possessed certain fundamental rights which were superior to laws and constitutional guaranties, and which the courts were bound to respect, even as against both laws and adverse constitutional interpretations. In the earlier days of this republic it was quite common to refer to fundamental principles of personal liberty and to the spirit and scope of state constitutions wherever the guaranty sought was not found in the literal wording of the constitutions. A South Carolina court in 1789 said: “It is clear that statutes passed against the plain and obvious principles of common right and common reason are absolutely null and void so far as they are calculated to operate against those principles. . . . We are bound to give such a construction to the act of 1789 as will be consistent with justice and the doctrine of natural reason, though contrary to the strict letter of the law.”
The supreme court of the United States has frequently referred to the controlling influence of certain fundamental notions of right, and held that such fundamental notions limit the powers of legislatures, even though there are no express restraints in the constitutions. Chief Justice Marshall has said that “there are certain great principles of justice whose authority is so universally acknowledged that it ought not to be entirely disregarded.”3 Again he has said: “It may well be doubted whether the nature of society and of government does not prescribe some limits to the legislative power.” Another justice of the supreme court of the United States said in an early day: “I did not hesitate to declare that a state does not possess the power of revoking its own grants, but I do say on nature. He never gave it up. It No. 44. For an interesting discussion would be amusing to see a man hunt- of this matter see Editorial Notes 33 ing through our law books for au- Am. Law Reg. & Rev., p. 971. thority to buy or sell, or make a 2 Ham v. McClaws, 1 Bay, 93. bargain." To the same effect, Lord 3 In Fletcher V. Peck (1810), 6 Coke, in 2 Inst., pt. I, ch. 29, p. 47. Cranch, 87.
1 See Madison in The Federalist,