§ 218. Combination of oleomargarine producers. In 1891 a number of competing concerns, engaged in the manufacture of oleomargarine, entered into a preliminary agreement for the formation of a combination by organizing a corporation under the laws of the state of Kentucky which would take over their respective plants, assets and good will. In this preliminary agreement each covenanted not to engage directly or indirectly in any business of the same character for a period of five years. Pursuant to the agreement a corporation was duly organized, and the plants, assets and good will of the various parties transferred thereto, each party taking in payment therefor stock in the new corporation. One of the parties sold out his stock at a price in excess of its value, and immediately engaged in the oleomargarine business in competition with the new corporation. On a bill for an injunction to restrain the violation of the preliminary agreement it was urged: That the agreement was void as a combination to raise the price of a necessary and useful commodity in trade, and to stifle competition. of being a corporation. Their business is one that may be conducted by private individuals. They are simply the owners of a certain species of property which, in its natural state, is of no use to mankind, and which, after it has been manufactured and made fit for use, can hardly be classed as a necessity. The law forbidding forestalling the market does not, in my judgment, apply to the purchase of such property. By the law of the land these owners have the right to exercise their own judgment as to when, if ever, and how they will spend their money in preparing their property for market and rendering it fit for use by mankind. Now, I am unable to find any foundation, either in law or in morals, for the notion that the public have the right to have these private owners of this sort of property continue to do business in competition with each other. No doubt the public has reasonable ground to entertain the hope and expectation that its individual members will gener ally, in their several struggles to acquire the means of comfortable existence, compete with each other. But such expectation is based entirely upon the exercise of the free will and choice of the individual, and not upon any legal or moral duty to compete, and can never, from the nature of things, become a matter of right on the part of the public against the individual. In fact the essential quality of that series of acts or course of conduct which we call competition is that it shall be the result of the free choice of the individual and not of any legal or moral obligation or duty. That one of the purposes of the agreement was to form a corporation under the laws of Kentucky in violation of the laws of Rhode Island. That the agreement being in restraint of trade it is illegal and its enforcement would be unreasonable.1 In passing upon these various objections the court said: "Undoubtedly there may be combinations so destructive of the right of the people to buy and to sell and to pursue their business freely that they must be declared to be void upon the ground of public policy. In such cases the injury to the public is the controlling consideration. But it does not follow that every combination in trade, even though such combination may have the effect to diminish the number of competitors in business, is therefore illegal. Such a rule would produce greater public injury than that which it would seek to cure. It would be impracticable. It would forbid partnerships and sales by those engaged in a common business. It would cut off consolidations to secure the advantages of united capital and economy of administration. It would prevent all restrictions and exclusive privileges, and hamper the familiar conduct of commerce in many ways. There may be many such arrangements which will be beneficial to the parties and not injurious to the public. Monopolies are liable to be oppressive, and hence are deemed to be hostile to the public good. But combinations for a mutual advantage which do not amount to a monopoly, but leave the field of competition open to others, are neither within the reason nor the operation of the rule." § 219. Where three or four companies engaged in the manufacture of oleomargarine in New England agree to unite, but the field is left open not only to the remaining outside company, but also to competition from companies in other parts of the country, and to the formation of new companies, the agreement amounts to neither a monopoly nor such an approach to monopoly as to be illegal, although the principal object of the agreement is to stop the sharp competition existing between the three companies. And such a combination is one of common occurrence, and is not illegal on the ground of reducing competition.2 1 Oakdale Mfg. Co. et al. v. Garst (1894), 18 R. L. 484, 28 Atl. R. 973. 2 Oakdale Manuf. Co. et al. v. Garst, supra. § 220. It is not a violation of the laws of public policy of the state of Rhode Island for citizens of that state to incorporate under the laws of another state for the purpose of carrying on business in Rhode Island, providing the corporation pursues a lawful business and violates neither law nor public policy of the state; although the fact that citizens of one state incorporate under the looser or more liberal laws of another state may excite curiosity, if not suspicion, as to the motives and good faith of the corporation.1 § 221. As regards the reasonableness of the five-year period of restraint, the agreement is to be construed in the light of the circumstances and conditions under which it was made, and where it appears that the contracting parties were all capable business men knowing well what they were about, and that the restrictive clause was mutually beneficial, and that each party was to gain the same advantage from it as the others, and that considering the nature and extent of the business and the limited period of time, the restriction was not oppressive, a party who has derived his advantage from the agreement as a whole, including the restrictive clause, and has sold out the stock he received at a value materially higher by 1 Oakdale Manuf. Co. et al. v. Garst, supra. "With reference to the third ground of defense it does not appear that the agreement in any way violates the laws or policy of this state, and if it did, the defendant, being a party to it, could not set it up. Chafee v. Sprague Manuf. Co., 14 R. I. 168. The mere fact that the complainant corporation is created under the laws of the state of Kentucky is not sufficient to warrant a dismissal of this case, for foreign corporations have frequently been recognized as suitors in this court. Windham County Bank v. Kendall, 7 R. I. 77; Howe Machine Co. v. York, 11 R. I. 388; Boston & Colorado Smelting Co. v. Smith, 13 R. L 27; Singer Manuf. Co. v. King, 14 R. I. 511. They are also recognized as doing business here by comity. Peirce v. Crompton, 13 R. L. 312. While the fact that citi zens of Rhode Island go to Kentucky for an act of incorporation is one that naturally excites curiosity, if not suspicion, as to the motives and good faith of the concern, yet so long as it pursues a lawful business and violates no law of this state, we do not see how we can refuse to recognize it. True, the advantages of yearly statements and liability of stockholders given to creditors under our statutes are wanting; but that is a matter for those who deal with the corporation to consider. We can hardly deny the right of a foreign corporation to do business in this state, upon considerations of public policy, when our own statutes (Pub. Laws, cap. 1200) expressly provide for corporations formed in this state for carrying on business out of the state." reason of the restrictive clause in the agreement, will not be permitted to repudiate the restriction and resume business in competition with the combination.' 1 Oakdale Mfg. Co. et al. v. Garst, supra. "The fourth ground of defense involves the reasonableness of the restrictive covenant. The test of reasonableness is the test of validity in contracts of this kind. The test is to be applied according to the circumstances of the contract, and is not to be arbitrarily limited by boundaries of time and space. There has been much discussion upon this subject, which need not be repeated. The law has advanced, pari passu, with social progress to a point of practical unanimity. The rule, now generally received, has been recognized in this state, that contracts in restraint of trade are not necessarily void by reason of universality of time (French v. Parker, 16 R. I. 219), nor of space (Herreshoff v. Boutineau, 17 R. I. 3); but they depend upon the reasonableness of the restrictions under the conditions of each case. The diversity of these conditions produces an apparent diversity of decision, and yet it will be found upon examination that most of the cases really turn upon the reasonableness of the restriction. For example, in Wiley v. Baumgardner, 97 Ind. 66, cited by the respondent, sale was made of a dry-goods store, with the vendor's agreement not to engage in the dry-goods business for five years, and in Herreshoff v. Boutineau the agreement was not to teach within this state. In these cases the subjects of the contracts were of a purely local character and outside restraint was unreasonable. On the other hand, in Watertown Thermometer Co. v. Pool, 51 Hun, 157, where the business was extensive, restraint within the entire territory of the United States, and in Tode v. Gross, 127 N. Y. 480, unlim ited restraint as to territory, were sustained. The contract is to be determined by its subject-matter and the conditions under which it was made; by considerations of extensiveness or localism, of protection to interests sold and paid for, of mere deprivation of public rights for private gain, of proper advantage on one side or useless oppression on the other. In this case the contracting parties were all capable business men. They knew what they were about. The clause objected to was mutually beneficial and equally restrictive. The respondent was to gain as much advantage from it as any of the others, so long as he remained in the company, and in case of sale it would enhance the value of his stock. And this it did; for when he sold his stock he received for it more than double what he testified the property was worth. Having received this large price for his stock, he now seeks to destroy its value upon the ground that the original agreement was unreasonable. The circumstances show that it was not unreasonable. The parties contemplated an extensive business, with a special effort to develop an export trade. No limitations of foreign countries could be made in advance, for the company was to seek its markets. In this country it might need to set branches in different parts for the sale or manufacture or exportation of its products. Time was needed to ascertain what could be done and where, and so the term of five years was agreed upon, within which the company should be free to seek its field of operation. To allow the respondent now to overthrow that agreement would be grossly inequitable. We think the § 222. Combination of glue makers.- An agreement between manufacturers of glue for the double purpose of compromising certain litigation respecting the infringement of a patent, and also for the purpose of suppressing competition and regulating prices, is not illegal; the court holding that the product is neither a prime necessity of life nor a staple commodity. The agreement will be enforced notwithstanding that the patent is subsequently found to be invalid, and the agreement is renewed for the sole purpose of suppressing competition and controlling prices.1 223. Combination of makers of envelopes.-The business of the manufacture of envelopes being demoralized through excessive competition, certain manufacturers entered into an agreement with one of their competitors, by which the former agreed to purchase from the latter, at prices to be fixed from time to time by the former, a stated quantity of envelopes per day, amounting to the full capacity of the factory of the latter; and the latter agreed that during the continuance of the agreement he would not sell envelopes to other parties at a lower price. It is apparent that the very object of this agreement was to fix the price of envelopes by removing competition. It appeared as a matter of fact that nineteen other envelope companies scattered throughout the country were not parties to the agreement and remained in competition with the combination. It was urged that the contract was not enforceable, as it was entered into for the purpose of stifling competition, enhancing prices and restraining production.2 complainants are entitled to the re- either that was not beneficial to the lief prayed for." So in Tode v. Gross, 127 N. Y. 480, 28 N. E. R. 469, the defendants had sold their business of making cheese by secret process under a general restriction not to engage in the business for five years, with reference to which it is said: "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 on 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 restriction under consideration, however, was not unlimited as to time.” 1 Gloucester Isinglass & Glue Co. v. Russia Cement Co. (1891), 154 Mass. 92, 27 N. E. R. 1005. 2 Cohen v. Berlin & Jones Envelope Co. et al. (1899), 56 N. Y. Supp. 588. |