Untitled Texas Attorney General Opinion ( 1940 )

Honorable Jesse Owens
District Attorney
Vernon, Texas
Dear Sir: Opinion No. O-2792
Be: Restraint of trade; whether con-
tract to quit business and re-
frain from engaging in same busl-
ness for a period of six years,
coupled with agreement not to sell
equipment for use in such business
In a county in Texas Is violative
of penal provisions of anti-trust
laws.
We have had under consideration your request for our
opinion as to whether a certain contract is in violatlon of
Article 1632, Penal Code of Texas. In order to properly ap-
praise the questions involved, we copy the gist of the con-
tract as submitted by you:
"This contract and agreement made and entered
into on this the 10th day of August, A.D., 1940,by
and between Walter Baucum of Hardeman County, Texans
party of the first part, and H. W. Thaten of Chil-
dress County, Texas, and W. L. Beasley of Hardeman
County, Texas, partles of the 2nd part, and for such
contract and agreement wltnesseth:
"For and in consideration of the sum of $700.00
to me, cash In hand paid on this the 10th day of
August, 1940 as follows: $350.00 by H. W. Thaten,
one of the parties of the 2nd part and $350.00 paid
by W. L. Beasley, the other party of the 2nd part,
the receipt of which Is hereby acknowledged, and
confessed, I, Walter Baucum, party of the first
part, do hereby assign, convey and sell unto the
said parties of the 2nd part, jointly, all of the
patronage and good will of Walter Baucum indivi-
dually and the Blue Ribbon Bakery of Quanah, Texas,
of which the said Walter Baucum is sole owner,
and for said consideration agree and bind Walter
Baucum individually and the Blue Ribbon Bakery
to discontinue the operation of said bakery and
Honorable Jesse Owens, page 2 O-2792
of Walter Baucum individually in the bakery
business in Hardeman County, Texas, on this the
10th day of August, 1940 and further agree that
for a period and time of six years from this
date, the said Walter Baucum will not engage in
the making, distribution or sale of bread or
other bakery products, either directly or in-
directly within the territorial limits of Harde-
man County, Texas. And for the same consider-
ation agree that said Blue Ribbon Bakery will be
closed to business on this date and that the
equipment and property used in connection there-
with will not be assigned or transferred to any
other person, company, corporation or associa-
tion of persons to be used in the bakery busi-
ness either directly or indirectly in Hardeman
County, Texas, for a period of six years from
this date."
The above contract is signed and acknowledged by all
three parties.
Article 1632, Penal Code, to which you refer, reads
as follows:
"A 'trust' is a combination of capital, skill
or acts by two or more uersons, firms, corpora-
tions or associations of persons, or either two or
more of them for any or all of the following pur-
poses :
"1 . To create, or which mav tend to create
or carrv out, restrictions in trade or commerce or
aids to commerce, or in the preparation of any
product for market or transportation, or to create
or carry out restrictions in the free pursuit of
any business authorized or permitted by the laws
of this State.
"2. To fix, maintain, increase or reduce the
price of merchandise, produce, or commodities, or
the cost of insurance, or of the preparation of any
product for market or transportation.
“3 .To urevent or lessen competitlon in the
manufacture, making transportation, sale or pur-
chase of merchandise, produce or commodities, or
the buslness of insurance, or to prevent or lessen
competition in aids to commerce, orinthe prepara-
tion of any product for market or transportation.
Honorable Jesse Owens, page 3 o-2792
“ll
. To fix or maintain any standard or figure
whereby the price of any article or commodity of
merchandise, produce or commerce, or the cost of
transportation, or insurance, or the preparation
of any product for market or transportation, shall
be in any manner affected, controlled or estab-
lishea.
“5 . To make, enter into, maintain, execute
or carry out any contract, obligation or anreement
bv which the parties thereto bind, or have bound,
themselves not to sell, diswose of, transoort or
to prepare for market or transnortatLon any article
or commodity or to make any contract of insurance
at a price b;low a common standard or figure, or
by which they shall agree, In any manner, to keep
the price of such article or commodity, or charge
for transportatlon or insurance, or the cost of
the preparation of any product for market or trans-
portation, at a fixed or graded figure, or by which
they shall, In any manner, affect or maintain the
price of any commodity or article, or the cost of
transportation or insurance, or the cost of the
preparation of any product for market or transpor-
tation, between them or themselves and others, to
preclude a free and unrestricted comnetitlon am'dnp;
themselves or others in the sale or transwortation
of any such article or commodits or business of
transporation or insurance, or the preparation
of any product for market or transportation, or
by which they shall agree to pool, combine or unite
any Interest they may have in connection with the
sale or purchase of any article or commodity, or
charge for transportation or insurance, or charge
for the preparation of any product for market or
transportation, whereby its price or such charge
might be in any manner affected.
“6 . To reuulate, fix or limit the outnut of
anv article or commodltr which mav be manufactur-
ed, mined, produced or sold, or the amount of in-
surance which may be undertaken or the amount of
work that may be done in the preparatlon of any
product for market or transportation.
“7 . To abstain from engaging in or continu-
ing business, or from the purchase or sale of mer-
chandise, produce or commodities partially or en-
%irelv within this State, or any nortlon thereof."
(Emphasis ours.)
Honorable Jesse Owens, page 4 o-27.92
We have underlined all of those portions of the
statute which appear to be in any wise applicable to your
case. Your particular inquiry la whether paragraph 3 is
violated by the contract and attendant'facts. You stress
the assertion that Baucum did not in fact sell his business
but only agreed to close same and move out of the town of
Quanah, Texas. It appears from your letter that the State
is in position to prove that pursuant to'the contract, Bau-
cum did close his doors and agreed not to make, distribute
or sell bread or other bakery products In Hardeman County,
Texas, for a period of six years, and that none of his
property will be assigned or transferred to any other to be
used in the bakery business in the prescribed territory for
such period of time.
There have been relatively few cases before our ap-
pellate courts construing the criminal law provisions of the
anti-trust statutes of this State. Although the general
language employed In the Revised Civil Statutes is the same
as that used in the Penal Code, ana Article 7426, Revised
Civil Statutes, is in exactly the same language as Article
1632, Penal Code, supra, they were enacted by the Leglsla-
ture as separate bills, and the enactment appearing in the
civil code became a part of the statutory law of this state
at a subsequent time. See State v. Standard Oil Co., 130 Tex.
313, 107 S.W. (2d) 550, reversing Civ. App., 82 S.W. (2d) 420.
We have been unable to find, nor do we believe exists, any
case by the Court of Criminal Appeals deciding the question
submitted by you.
It is interesting to note that the provisions of
the Penal Code recently withstood a most aggressive attack
leveled at the constitutionality thereof. In an able and
elaborate opinion Judge Christian of the Commission of the
Court of Criminal Appeals upheld the law. See Ex parte Tigner,
Cr. App., 132 S.W. (2d) 885. A motion for rehearing was
filed, but was overruled; whereupon, the case was appealed to
the Supreme Court of the United States and finally affirmed,
Tigner v. State of Texas, 60 s. ct. 879, 84 L. Ed. 756. re.
Justice Frankfurter delivered the opinion of the Supreme Court
and specificKay
overruled the case of Connolly v. Union Sewer
Plpe Co., 184 U.S. 540, 46 L. Ed. 679, 22 S. Ct. 431, long
relied upon as making the penal provisions of our anti-trust
laws inoperative. The latter case may well explain then
dearth of criminal cases arising in this state.
In our study of your question we have found many ex-
pressions of the general principles of law applicable to your
case. We shall briefly discuss a few of the various authorities,
citing others for your consideration.
Honorable Jesse Owens, page 5 O-2792
\
-.
In Williston on Contracts, Vol. 5, 0 1636, p. 4580,
appears the following:
"It is everywhere agreed that in order to
be valid a promise imposing a restraint'in trade
or occupation must be reasonable. The question
of reasonableness is for the court, not the jury;
and in considering what is reasonable, regard
must be paid to (a) the question whether the
promise is wider than Is necessary for the pro-
tection of the convenantee in some legitimate in-
terest e effect of the promise upon the
covenaAtoLb)a2 (c) the effect upon the public.
If the resiralnt imposed Is greater than is nec-
essary for the protection of the covenantee, the
promise Is necessarily invalid. One whose busi-
ness Is confined to New York is not helped by
the promise of another not to do business in
Chicago, and if the promise is enforced by in-
junction the promisor is Injured, while the pro-
misee is not correspondingly helped. Such a case
in the simple form supposed would not often arise,
but very commonly a promise is exacted which ln-
clude3 not only a restriction advantageous to the
promisee, but one injurious to the promlsor with-
out corresponding benefit to the promisee. Such
a promise, unless divisible, is wholly Invalid.
Even If no objection can be taken on this ground,
the effect may conceivably be so harsh In Its
consequence upon the promisor that enforcement
of the promise will be refused. Finally, even
though neither of the foregoing objections
exists, the effect of the promise on the public
interest may be such as to make enforcement con-
trary to public policy. In considering the
nature of this last objection, .it must be recog-
nl?nd at the outset that the purpose of any
restrictive agreement Is almost always to lessen
comnetltion with the oromisee, thereby enabling
him to do a larger business and on terms more
favorable to himself than he could do if he had
not obtained the oromise in question. Thi p
p s has been regarded. especially in the &i%
*Ln;;a;; i;p;;a;n;o ",;,:;;;I; ;;$erest
Q Y Y the
restrictive promise is ancillary to some other
transaction that Its vallalty has been upheld.
Thus, if a dealer should pay a competitor to
promise to go out of business, or cease to corn--,,
nete. the agreement would be invalid. . . . . .
(Emphasis ours.)
Honorable Jesse Ownes, page 6 O-2792
The underscored portion of the above quotation is
copiously annotated, and among the cases listed in support
of the text Is the case of Potomac Fire Insurance Co. v.
State, (Tex. Civ. App.) 18 S. W. (2d) 929.
From Ruling Case Law, we quote as follows:
"From the tests laid down for determining
the validity of such an agreement, It seems to
follow that no conventional restraint of trade
can be enforced, unless the covenant embodying
It is merely ancillary to the main purpose of
awful contract, and necessary to orotect the
covenantee In the en.ioymentof the legitimate
fruits of the contract, or to protect him from
the dangers of an unjust use of those fruits by
the other party. This statement of the rule
implies that the contract must be one in which
there is a main purpose, to which the covenant
In restraint of trade is merely ancillary. . .'
(6 Rawle C. L. 1 195, p. 790, Emphasis ours.)
From Corpus Jurls, we quote the following:
"The covenant or contract by which the res-
traint is imposed must be incidental to and in
support of another contract or a sale by which
the covenantee acquires some interest in the
business needing protection. Contracts which
have for their ob.iectmerelv the removal of a
rival and comoetitor in a business are unlawful
under all circumstances. . ' (13 C.J., I
420, P. 477. Emphasis ours:)' '
The latest offering by the same publishers, Corpus
Juris Secundum, adheres to the rule announced In Corpus Juris:
"The validity of an agreement in restraint
of trade is according to the trend of authority
to be tested by its reasonableness with respect
to the protection of the covenantee and the
public interest involved, and in all cases it
1s essential that the restrictive covenant be
incidental to another lawful contract or sale
involving some interest reouiring the protection
of the restraint. Although it may In some cases
continue after the sale of such interest. . . .
"Restraining contract must be ancillary.
The covenant or contract by which the restraint
. .
Honorable Jesse Owens, page 7 Q-2792
is imposed must be Incidental to and in support
of another lawful contract or sale by which the
covenantee acauires some Interest needing
- oro-
_
tection. As fs stated in 1 250 infra, contract;!
which have for their object merely the removal
of a rival and comnetitor in a business are un-
lawful under all circumstances. . . ." (17
C.J.S., I 246, p. 627. Emphasis ours.)
It would serve no useful purpose to list here the
many cases from other jurisdictions cited by the above au-
thorities. These do not rest upon any eonstructlon of our
statutes, but appear to be convlnclng statements, showing
the status of the common law. We shall proceed to discuss
zome of the Texas case3 arlzing from civil actlons.
In the case of Comer v. Burton-Lingo Co., 24 Tex.
Clv. App. 251, 58 S.W. 969, an owner of a lumber business,
on the sale thereof to three firms engaged in the same busl-
ness, agreed not to re-enter such business in the city of
Cleburne, for a period of ten years. The vendor resumed the
lumber business in Cleburne within the perlod embraced in
the contract. The suit sought to restrain him from contlnu-
lng such business and for damages. The answer of defendant
charged that plaintiff firms, being the only dealers in such
business In such place, combined to buy such business and
good will to prevent competitlon, and to control prices.
The court said if the plaintiffs entered Into a comblnatlon
of their acts and capital to buy, and did buy the stock In
trade and good will of the defendant, and,if the purpose
of the combination was to create or carry out restrictions
in trade or in the free pursuit of business, or to prevent
competition, it was prohibited by the anti-trust law. We
quote from the opinion of the court:
"The anti-trust law does not apply to the sale
of a business and the good will thereof, ac-
companied by an obligation on the part of the
seller not to resume business for a limited tlme
at a specified place, where the purchaser Is a
single person or firm. Gates v. Hooper (Tex. Sup.)
2; ;. ;. $9; Erwin v. Hayden (Tex. Civ. App.)
Does It apply to a combination of
two & more dealers to buy the stock and good ~I.11
of an opposition dealer for one of the purposes
prohibited by the statute? The combination prohi:
blted by the law in force when the contract be-
fore us was entered into was the union or associa-
tion of the capital, skill, or acts of two or more
persons, firms, OP corporations for the purpose of
. .
Honorable Jesse Owens, page 8 O-2792
doing either of the things denounced by the
statute. If the combination is consummated,
and its purpose is unlawful, then it 13 lm-
material as to whether It Is reasonable from
a business standpoint, or as to how It will
affect the public. The object of the statute
was to prohibit any combination having for its
purpo3e the dofng of either of.the things
specified, withoutregard to the lntentlon of
the parties, or of the immediate effect of the
comblnatlon on trade and commerce, az the power
arising from such combination was believed to
be dangerous to public interests. Therefore
the legislature did not attempt to regulate
such combinations, but prohibited them entlre-
lg. . . . ..'I
Crandall v. Scott, Tex. Clv. App., 1.61 S.W. 925, L3 a
caze wherein plaintiff and two other concerns, who conducted
moving picture shows In Amarillo made an agreement by which
the others gave notes to plaintiff In consideration of his
ceasing business and agreeing that no showhouse except the
two operated by the makers of such notes should open ln
Amarillo before a certain time; that If a theater of a cer-
tain standard should open within the time and operate for six
months, all of the notes maturing after the opening of the
new show should be void, and that If a showhouse should open
and run for less than such perlod, the notes should be void
for the time it was conducted. Holding that there was such a
"combination" In restraint of trade as violated the antl-
trust law, the court refused to sanction the contract, declar-
ing it wholly void, notwithstanding a serious question as to
failure of defendants' pleadings to properly attack its
validity, the opinion reciting that the contract's illegality
was apparent from the record. The case of Comer v. Burton-
Lingo, supra, was cited with approval.
The court held the very language contained in the first
and seventh numbered paragraphs of what is now Article 1632,
Penal Code, was violated by theconblnatlon entering Into the
purported contract.
In Smith V. Kouslakls, Tex. Clv. App., 172 S.W. 586,
plaintiff entered Into an agreement with defendants that for
a valuable consideration defendant3 would not operate, or
permit lessees to operate a lunch stand upon certain premises
for a period of two years. A written memorandum waz executed
by the parties. Thereafter the premises were sublet for a
lunch stand. This occasioned the suit for an lnjunctlon; which
waz granted by the lower court. The court of Civil Appeals
. 1. .
Honorable Jesse Owens, page 9 O-2792
reversed the case, a majority of the court holding the pur-
norted contract void, because in violation of the first and
seventh numbered paragraphs of Article 7796, Revised Civil
Statutes, 1911. This article is fin the identical language
of our present Article 1632, Penal Code, supra. The third
justice doubted the applicability of the anti-trust statute,
but concurred in the result because of the common law~rule
limiting such agreements to covenants ancillary to a lawful
contract such as mentioned in the quotations from Williston,
Ruling Case Law, Corpus Juriz, etc., hereinbefore set out by
us.
We next consider the caze of Robinson v, Levepmann,
Tex . Civ. App., 175 S.W. 160, writ of error refused, 185
S.W. xv. Robinson's firm and two others were engaged in the
busfness of selling paints, wallpaper, oils and varnishes In
the city of Corsicana, Texas. Robinson's flrm sold Its stock
of merchandise to the two competitors, with agreement that
the sellers would not engage In such business in such city so
long as the buyers were engaged therein. Robinson left
Corsicana for a time, but returned and resumed the zame charac-
ter of business he had theretofore followed and Ln competi-
tion with said partFes to the alleged contract. Suit was for
damages and an injunction restraining Robinson from carrying
on the business. The court held the contract illegal and
void, as indicating a combination in contravention of language
in the civil statutes, the zame as used in what is now num-
bered peragrsphs 1, 3 and 7 of Article 1632, Penal Code. See
p. 162 of the opinion, 175 S.W. 160, supra.
We recognize the seemingly anomolous situation created
by the language of the statute as interpreted and construed
by our courts as shown by the excerpt already quoted herein
from Comer v. Burton-Lingo Co. and the other cases supra.
Neverthe less, it appears that the decisions in civil suits
are conclusive that the anti-trust law does not apply to the
sale of a business and the good will thereof, accompanied by
an obligation on the part of the seller not to resume business
for a limited time at a specified place, where the purchaser
is a single person or firm; whereas, It does apply to a w-
bination of two or more dealers when such combination is for
one of the purposes enumerated and prohibited by the statute.
See Comer v. Burton-Lingo Co., supra; Langever v. United
Advertising Corporation, Tex. Civ. App., 258 S.W. 856; Malakoff
Gin Co. v. Rlddlesperger, Tex. Civ. App., 133 S.W. 519; Ibid,
Supreme Court, 192 S.W. 530; Linen Service Corporation v.
Qres, Tex. Civ. App., 128 S.W. (26) 850; State v. Racine
Sattley Co., Tex. Clv. App., 134 S.W. 400, and many others
grouped I.n28 Tex. Digest, 220-222.
. .
Honorable Jesse Owens.,page 10 O-2792
An interesting and lnformatlve discussion of the en-
tire subject of Texas anti-trust legislation and court deci-
sions construing It may be found In the Texas Law Review.
3 Tex. Law Review 335, 4 ibid. 129, 15 ibid. 293. The au-
thor of~the last treatise cited declares that "the cases ln-
volvlng convenants not to compete are decided entirely In ac-
cordance with 'commonlaw prlnclples." See note, 15 Tex. Law
Rev. 301, from which we quote:
!f
..'
. . That Is, they are upheld If lncldent
to the sale of a business or a contract of em-
ployment If reasonably limited in time and space
....... The fact that the early cases made uze
.of a tortured construction of the word 'comb~ina-
.tlon',in the statute in order to reach this re-
v. Hooper, 81 Tex. 159, 16 S.W. 744
of cymm, Immaterial in this con-
The Texas Supreme Court case of Gates v. Hooper is
Incorrectly cited by Professor Nutting, the correct reference
being 90 Tex.:563, 39 S.W. 1079. The volumes indicated show
the re.portof Welsh v. Morris, a similar case. Nevertheless,
Gates v. Hooper Is treated as the leading case by many courts
and text writers for the principle that there can be no "com-
bination" unless two or more unite or associate "capital,
,skill or acts" for one of the prohibited purposes, and that a
restriction imposed by a single vendee is to be treated az
lawful and therefore enforceable by the equitable arm of the
law, despite the anti-trust statutes. Reference to Sheppard's
Southwestern Reporter Citations show the caze to have been
listed as authority in no less than 44 civil cases to and in-
cluding the pronouncement in Houston Credit Sales Co. v.
English, Tex. Civ. App., 139 S.W. (2d) 163. No effort on the
part of any court to overrule Gates v. Hooper has been found,
though we have made exhaustive search.
So It may be confidently stated that as seen through
the eyes of the civil courts of this State, assuming the facts
.submitted by you as proven, I.e., that the contract resulted
from a "combination" of Thaten and Beasley, az that term has
been judicially defined, the same would be considered void
and unenforceable, condemned by Article 7426, Revised Civil
Statutes.
Would the Court of Criminal Appeals follow the civil
courts, and upon a sufficient quantum of proof of such combi-
nation, affirm a convlction?
It is not the prerogative of this department to antl-
Honorable Jesse Owena, page 11 0 -2792
clpate or forecast such oontlngenoy. We do not wish to ap-
pear so preoumptlous as to draw any Inference that we are
attempting In the sllghtest degree to Invade the field re-
served exclusively for the Court of Criminal Appeals. We are
cognizant of the provisions of Article 4399-i Revlaed Clvll
Statutes, however ; that the Attorney General shall advlse
the several dlstrlct attorneys in the prosecution and defense
of .a11 actions In the dlstrlot or inferior courts, whenever
requested and when, as In the Instant case, the’attorney has
Investigated the questIon and submitted a brief.
In this oonneotlon, we point out. the fact that while
nelther the Supreme Court and the various Courts of Civil
Appeals on the one hand, nor the Court of Criminal Appeals la
In any manner subordinate one to the other, It appears that
respect will always be glven to the decision of the court
which glves the flrst Interpretation to language of a statute
of such nature that It might be properly construed by, either
court. See 11 Tex. Jur. 853, 3104; Redman v. State, 67 Tex.
Cr. R. 374, 149 3. w. 670; Rx parte Mussett, 72 Tex. Cr. ,R.
487, 162 a.,W. 846; Losalng v. Hughes, Tex. Clv. App., 244
S.W. 556, 561.
We therefore respectfully advlse you that It Is our
opinion that a prosecution will lie for a VlolatlOn of Artl-
cle 1632, Penal Code, supra, assuming the proof avallable to
sustain the facts as stated in your letter and acoompanglng
brief.
You are correct In your reference to the punishment
upon oonviotlon; Artlole 1.635, Penal Code, would control and
a violator of Article 1632 might be confined In the penlten-
tiary for not less than two nor more than ten years.
Yours very truly
ATTORNEY
OENERALOF TEXAS
By s/Benjamin Woodall
Benjamin Woodall
BWlQO:wa Assistant
APPROVEDOCT 25, 1949
a/Gerald C. Mann
ATTORNEY GENERALOF T]pxAS
Approved Oplnlon Committee By s/&WB Chairman