Texas Standard Oil Co. v. Adoue

The appellants assign as error the action of the court in sustaining the demurrer to their petition upon the ground that the contract sued upon is contrary to public policy and void. The appellants' counsel do not deny that the contract is one in restraint of trade, but contend that it is but partially so, and is limited in its operation to a reasonable protection of the interest of the parties thereto, and therefore not void. We may state in the outset that we do not understand that the provisions of the contract left any of the parties thereto at liberty to purchase cotton seed at any price which they might obtain (as contended by appellants), and to simply render an account of the purchases at the prices fixed by the contract. The prices to be paid for the "cotton seed" were arbitrarily established by the terms of the contract without reference to the market, and were to be changed only by "mutual agreement" of John L. Kane and Samson Heidenheimer. Those established for the purchase of "cotton seed" could not be "increased or diminished except by the mutual agreement in writing of the parties" to the contract. The Howard Oil Company alone was invested with the absolute power of fixing and "from time to time" of altering "theminimum price at which all meal, cake, and lint produced at said four mills shall be sold;" and said mills were expressly prohibited from selling such products at less than the minimum price so established; and the Howard Oil Company was given an optional preference to purchase "all of such meal, cake, and lint." None of these "four mills" belonged to said company, but to the other parties to the agreement. If the object of the contract had been merely to provide in good faith a uniformity of prices among the parties thereto, to avoid unhealthy fluctuations in the market, or if the contract had contemplated a joint and mutual association between the parties for their common benefit in the nature of a partnership and had simply fixed the prices at what they considered the business would bear, instead of a combination between independent manufacturers and dealers for the purpose of at least destroying all competition between themselves, then there might have been nothing in such an arrangement which the courts could denounce as pernicious and forbidden by law. There is no pretense, however, that any partnership was contemplated in this instance; and if there had been, the entire absence of any community of interest in the profits, losses, or capital employed, would have effectually repelled the assumption.

Each party retained, after the contract as before that time, the control of his capital and the operation of his own mills, and did not throw his capital or manufacturing concerns into a common stock. He continued to operate with his own separate means, but surrendered his right of competition and of supplying his mills with raw material at the best prices he might otherwise have obtained in the markets of the State, and consented to submit to rates artificially established. But the contract — rather, I should say, the combination — did not stop at establishing prices merely. It extends far beyond this, and imperatively prohibits one of the parties in particular from "purchasing, handling, or shipping, directly or indirectly, any cotton seed" at many of the most important markets in the State, and binds it to deliver the entire products, "make or yield" from cotton seed, of its mills to the other party to the contract, in consideration of certain net profits guaranteed to it. We do not say that there would have been anything wrong in this last stipulation had it stood alone as an entire contract of purchase and sale of the products of the mills represented by Heidenheimer. But it does not stand alone and evidence merely an intention upon the part of the owners of "the four mills" to obtain in good faith the best prices for their own oils, without aiding or assisting the other party in any unlawful scheme or conspiracy. It forms a part of the general plan, and was plainly, as the contract expresses, superinduced by the other provisions, or "covenants," of the agreement, inserted mainly for the benefit of the Howard Oil Company, and is, therefore, inextricably interwoven in these "covenants." The latter company was allowed to purchase cotton seed at any "station in Texas," except Brenham; but the "four mills," represented by the other parties to the contract, were entirely excluded from the cities of Houston, Waco, Dallas, Palestine, Corsicana, Paris, Austin, Columbus, and Belton — "all in the Stale of Texas." In reference to shipment of seed from Schulenburg, Weimar, or La Grange, the Howard Company could purchase two-thirds, and the four mills "one-third thereof, and no more."

It thus appears that the above artificial regulations of the value or prices of these staple articles of trade, as well as the arbitrary restrictions imposed by the contract upon the right to deal in them in the usual or customary course of legitimate business, were intended to apply to and control, as far as the contracting parties were able to do so, the market in reference to these staples, and the agreement embraces within as operation the chief cities or commercial centers of the State, as well as the cotton producing regions thereof, as we may judicially know. Railway v. State, 72 Tex. 409; 1 Whart. Ev., secs. 329, 339.

There seems to us to be scarcely anything lacking to characterize the combination between the parties in this case, as evidenced by the language and purpose of their agreement, as a complete monopoly except the proof that they were the only parties who were engaged at the specified localities in the manufactures referred to in the contract, at the time it was made. It is not improbable that every cotton oil mill in the State was represented in this combination, or was intended to be brought into it eventually; but as this is not alleged in the petition, we can not presume it. We must admit some limit even to judicial knowledge.

But to render the contract void it is not necessary that it should create if pure monopoly. It would seem that the agreement may be illegal if the natural or necessary consequences of its operation are to prevent competition and create fictitious prices independent of the law of demand and supply, and to such an extent as to injuriously affect the interest of the public, or the interests of any particular class of citizens who may be especially interested, either as producers or consumers, in the articles or staples which are the subject of the restrictions imposed by the contract. Likewise, the agreement may be, in some instances, void because of unreasonable or oppressive restrictions imposed upon even one of the parties to it. According to the authorities, the extent of the restraint, though sometimes difficult to measure, determines the character of the agreement, whether legal or not. Pike v. Thomas, 7 Am. Dec., 741, and note. The authorities are too numerous to even cite all of them. From the multitude we shall make a few selections later on; and now we proceed with the examination of the contract.

It will be seen that the Howard Company was given almost an unrestricted field to obtain the raw material for its mills, and the exclusive right to control, free from the competition of the owners of the; "four mills" (who had no doubt up to that time been its rivals) not only the sales and ruling prices of the products of its own mills (which are not disturbed in this respect), but also "the entire yield" of the mills of the other parties to the contract. It was thus enabled by the confederation of all of the parties to dictate at will the prices at which the public must buy (if at all) the oils or other products of any of the mills. If both of the parties had entered a market open to both under the contract, in order to purchase the raw materials they could not have competed, for no competition was contemplated, and all freedom of action in this particular was forestalled by arbitrary regulations of the prices to be paid, which must be observed. In the markets assigned to each, they are confronted by the same barrier, and the party can not buy at all if the market price at that point happens to be greater than the contract price; or if the price prevailing there should even be below the contract price, still the party could not avail himself of this advantage without first obtaining, if he could, the consent of the other parties. In other words, neither the parties nor the producers of the raw material are to have the benefit of but one price, which has been definitely fixed in advance. These things, as it seems to us, are well calculated to affect the interests of the public detrimentally, and would doubtless have been deemed by the parties as injurious to their own interests had they been contemplating a lawful enterprise. These restrictions, however, were instituted in this instance not for the purpose of legitimate profits nor to afford only a fair protection to all of the parties, but as suitable means for preventing all competition. If not, then it would have clearly been to the advantage of the Howard Oil Company, in view of its obligations to the "four mills," that the raw materials should be bought by all of the parties to the contract at the lowest figures. This company had bound itself to pay or bear the cost of the seed as well as the expenses of working the same by the four mills," etc.

We recur now to the law of the case. We can scarcely conceive how mere territorial limits can be the controlling test in all instances of the legality of the restraints imposed upon the ordinary course of trade. This criterion may do very well when applied to the occupation or profession of one man or even a few individuals; for neither their labor, industry, business, nor services may be so necessary to the public as not to be dispensed with without inconvenience or injury. It appears to us, however, that the case is very different in regard to trade or commerce in those articles of prime necessity or even of very frequent use among a large number of people in any given locality. Does any one doubt that a combination of a number of the most extensive dealers in flour, meat, or oils, etc., in one great city, to sell those commodities at only one price or not at all within the limits of that city, would affect the interests of the public, and, perhaps, also some of the individual dealers, much more extensively and disastrously than a similar agreement extended to a much greater area of country but in which only a very few people reside or require such articles? It would seem that the injurious effects upon the public interests would be in proportion to the number of people affected by the restrictions, though we are not unaware that this position has not been deemed tenable by some of the authorities in cases where the right to exercise a trade or profession within a particular district or locality has been restricted by contract. Mallon v. May, 11 M. W., 653; but see11 Ind. 70; 1 Smith Lead. Cases, 183; 929 Am. Dec., 751. We think that territory can not be the sole test, though in the present instance the contract embraces such extensive territory and such a number of localities as to bring it even within that rule. In determining the reasonableness of the restraint the effect upon the interest of the public is a better test.

In the case of the Morris Coal Company v. Barclay Coal Company, 68 Pennsylvania State, 185, the Supreme Court of Pennsylvania quote with approval the following language of Tindal, Chief Justice, in Horner v. Graves, 7 Bingham, 743: "We do not see how a better test case could be applied to the question whether reasonable or not than by considering whether the restraint is such only as to afford a fair protection as to the interest of the party in favor of whom it is given and notso large as to interfere with the interests of the public. Whatsoever restraint is larger than the necessary protection of the party can be of no benefit to either; it can only be oppressive; and if oppressive, it is in the eyes of the law unreasonable. What is injurious to the public interest is void on the ground of public policy."

The court also recognizes the doctrine that the "public interest is superior to private interest," and that even as to "contracts for the limited restraint of trade, the courts start with the presumption that they are illegal unless shown to have been upon adequate consideration and upon circumstances both reasonable and useful." The court furthermore said, that "testing the present contracts by these principles, the restrictions laid upon the production and price of coal can not be sanctioned as reasonable, in view of their intimate relation to the public interests. The field of operation is too wide and the influence too general. The effects produced on the public interests lead to the consideration of another feature of great weight in determining the illegality of the contract, to-wit, the combination resorted to by the five companies. Singly, each might have suspended deliveries and sales of coal to suit its own interests, and might have raised the price, even though that might have been detrimental to the public interest. There is certain freedom which must be allowed to every one in the management of his own affairs. When competition is left free, individual error or folly will generally find a correction in the conduct of others." We approve of these observations, butdo not sanction a combination of individuals to stifle competition. The court then proceeds, in the next place, to discuss, at length the extent and scope of the combination, and denounces it as a conspiracy intended to control the coal markets of the country by stifling competition, and therefore void.

"Whatsoever a man may lawfully forbear, that he may oblige himself against, except where a third person is wronged or thepublic is prejudiced by it." Metc. on Con., 232. This language was adopted by the Supreme Court of Ohio in Craw ford v. Wicks, 18 Ohio State, 203, which involved the construction of a contract in restraint of trade. We refer to this decision as bearing upon those provisions in the contract in hand which prohibits the parties from purchasing cotton seed in the specified localities, etc.

In the case of Arnot v. Elmira Coal Company, 68 New York, 566, the court uses the following lauguage: "If an absolute purchase had been made by the defendant of the Butler Coal Company of any specified quantity of coal, or even ofall the coal which the Butler Company could produce, that contract would have been legal, notwithstanding that the object of the, purchaser was to secure a monopoly and that the vendor knew it. He had a right to disclose of his goods; and under certain limitations a vendor may recover for their price, notwithstanding that he knows that the vendee intends an improper use of them, so long as he does nothing to aid in such improper use, or in the illegal plan of the purchaser. But — and this is a very important distinction — if the vendor does anything beyond making the sale to aid the illegal scheme of the vendee, he renders himself particeps criminis, and can not recover for the price," etc. Elsewhere in the opinion it is said: "Every producer or vendor of coal or other commodity has the right to use all legitimate efforts to obtain the best price for the articles in which he deals. But when he endeavors to artificially enhance prices by suppressing or keeping out of the market the products of others, and to accomplish that purpose by means of contracts binding them to withhold their supply, such arrangements are even more pernicious than combinations not to sell under an agreed price. Combinations of that character have been held to be against public policy and illegal. If they should be sustained, the prices of articles of pure necessity, such as coal, flour, or other indispensable commodities, might be artificially raised to a ruinous extent, far exceeding any naturally resulting from the proportion between supply and demand."

We have already shown that the agreement under consideration does not evidence simply a contract made in good faith for the sale by the owners of the "four mills" to the Howard Oil Company of the products of their mills. In the case of the India Bagging Company v. Kock, 14 Louisiana Annual, 168, it was held that an agreement between eight commercial firms in the city of New Orleans, whereby they bound themselves for the period of three months not to sell India bagging except with the consent of a majority of them, was void. The decision seems to have been based, front the authorities cited, upon the principles of both the civil and common law. The court said: "The agreement between the parties was palpably and unequivocally a combination in restraint of trade, and to enhance the price in the market of an article of primary necessity to cotton planters. Such combinations are contrary to public order and can not be enforced in a court of justice."

Nowhere, perhaps, is the duty of the courts in reference to contracts of the character we are considering, as well as the present state of the common law (in the absence of statute), even under "the modern doctrine," better defined than in the opinion of the Supreme Court of Michigan in Raymond v. Leavett (cited by Wharton, infra, p. 612), from which we cull the following: "We do not feel called upon to regard so much of the common law to be obsolete as treats these combinations as unlawful, whether they should now be held punishable ascrimes or not. * * * There may be difficulties in determining conduct as in violation of public policy where it has not before been covered by statutes as precedents. But in the case before us the conduct of the parties comes within the undisputed censure of the law of the land, and we can not sustain the transaction without doing so on the ground that such dealings are so manifestly sanctioned by usage and public approval that it would be absurd to suppose that the Legislature, if attention were called to them, would not legalize them. We do not think public opinion has become so thoroughly demoralized, and until the law is changed we shall decline enforcing such contracts. If parties see fit to invest money in such ventures, they must get it back by other than legal measures."

The attention of our own Legislature seems to have been "called" to the subject; but instead of "legalizing" such combinations or conspiracies in restraint of trade, the Legislature has denounced them as felonies, thus manifesting the public sentiment in this State. This was done, however, subsequently to the execution of the contract in hand. Space forbids us to make any more extracts from the opinions to be found in the adjudicated cases. We are of the opinion that the contract under consideration, and which was entered into by independent dealers and manufacturers in the same line of business, as already stated, imposed or attempted to impose unreasonable and too extensive restrictions upon trade and the freedom of the parties thereto, and was consequently contrary to public policy and void. We think that its manifest purpose and natural tendency were to prevent competition in too many localities, and to reduce the price of the raw materials upon the one hand as they might choose, and upon the other to enhance that of the manufactured products by artificial means, to the disadvantage and detriment of the public. 1 Whart. Con., see. 442, and notes; Callaghan v. Donnolly, 45 Cal. 152; Salt Co. v. Guthrie, 35 Ohio St. 666; Sampson v. Shaw, 101 Mass. 145; Wright v. Ryder, 36 Cal. 342, 361; Hooker v. Vandewater, 47 Am. Dec., 258; Craft v. McConoughy, 79 Ill. 346; Leonard v. Poole, 114 N.Y. 371 (based on statute). See also, for a collation of the authorities, note to Angier v. Webber, 92 Am. Dec., 751. Our present statute against trusts and combinations of every character in restraint of trade, etc., was not in force when the contract now before us was executed, and is not, therefore, applicable to the question. Acts 1889, p. 141.

We think that the judgment should be affirmed.

Affirmed.

Adopted March 9, 1892.