STANDARD FASHION CO. v. MAGRANE HOUSTON CO., 259 F. 793

ANDERSON, Circuit Judge. After the per curiam opinion of June 28, 1918, the plaintiff petitioned for a rehearing. The petition was granted. The plaintiff has orally and on brief elaborately reargued the case. On careful reconsideration we are constrained to adopt the construction of the contract urged by the plaintiff and. made by the court below. .Construing the contract as a whole, we do not think it can fairly be held so ambiguous as, if valid in all its provisions, to warrant the court in refusing the injunction prayed for.

The contract runs for a term of two years from date, and “from term to term thereafter, until this agreement is terminated as hereinafter provided.” The provision for termination is: , “Either party desirous of terminating this agreement must give the other party three months’ notice in writing within thirty days after the expiration of any contract period as above specified, the agency to continue regularly during such three months.” The contract is dated November 25, 1914.

Its first two-year term ran to November 25, 1916; failing the three months’ notice within thirty days thereafter, the contract then ran until November 25, 1918. Then for 30 days there was another opportunity to give the three months’ written notice of termination. And, so on from term to term.

We think the negative covenant (assuming for the moment it and the rest of the contract to be valid) is applicable to the entire life of the contract construed as to duration as we have indicated; that the contract shows a clear intention of the defendant to be bound for successive terms of two years, and for three months after notice of termination. We adopt, therefore, the construction put upon the contract by the court below. We also agree with the District Court that the contract does not establish an agency “properly so termed,” but that it is a contract for sale.

The case is easily distinguishable in this regard from Willcox & Gibbs Co. v. Ewing, 141 U. S. 627, 12 Sup. Ct. 94, 35 L. Ed. 882. Full title passed from the plaintiff to the defendant. The defendant was selling its own goods to its own customers; it was not, under delegated authority, selling plaintiff’s goods to the plaintiff’s customers. See the cases collected and to some degree discussed in Ford Motor Company v. Union Motor Sales Co., 244 Fed. 156, 156 C. C. A. 584; and Ford Motor Company v. Benjamin E. Boone, Inc., 244 Fed. 335, 156 C. C. A. 621; cf.

Mechem on Agency, §§ 44-48, and cases cited; Mechem on Sales, § 41 et seq.; 2 Corpus Juris, pp. 422, 423; John H. Pray & Sons Co. v. Appledore L. & Bldg. Co., 76 N. H. 167, 80 Atl. 337;. Bendix v. Staveo Carridge Co., 174 Ill. App. 589, 595. An agency is not created simply by calling a contract for sales an agency contract.

We may test the question whether the defendant was the plaintiff’s agent engaged in selling the plaintiff’s goods, or a vendee selling its own goods, by querying whether the plaintiff could be held liable in tort for the defendant’s material and false misrepresentations made to a customer — such misrepresentations, for instance, as that patterns sold embodied the latest Paris fashion when in fact they were obsolete. Obviously, if the defendant was the plaintiff’s agent, its misrepresentations, made in the course of the business of the agency, would bind the plaintiff.

We think the plaintiff would be surprised to find this or any other court holding it responsible for such tortious conduct of the defendant with relation to the sale of these patterns. The plaintiff admits that the notice of termination given by the defendant on April 7, 1917, followed by this suit brought on July 25, 1917, must be deemed applicable to the term, of the contract expiring on November 25, 1918, as though given within 30 days after November 25, 1918. The plaintiff consequently admits that its right to an injunction expired on February 25, 1919.

But the plaintiff insists that the fact that relief by injunction has now become inappropriate by reason of lapse of time does not warrant the court in refusing to retain jurisdiction in equity for the purpose of granting any appropriate relief, though it be only for the assessment of damages. Clark v. Wooster, 119 U. S. 322, 7 Sup. Ct. 217, 30 L. Ed. 392; Busch v. Jones, 184 U. S. 598, 22 Sup. Ct. 511, 46 L. Ed. 707; Cartwright v. So. Pacific (D. C.) 206 Fed. 234; Beedle v. Bennett, 122 U. S. 71, 7 Sup. Ct. 1090, 30 L. Ed. 1074; County of Mobile v. Kimball, 102 U. S. 691, 26 L. Ed. 238.

Assuming for the moment that the contract and all the stipulations thereof are valid, the great weight of authority is in favor of the plaintiff’s proposition that it was entitled to an injunction against a breach of the negative covenant. Butterick Publishing Co. v. Fisher, 203 Mass. 122, 89 N. E. 189, 133 Am. St. Rep. 283; Standard Fashion Co. v. Siegel-Cooper Co., 30 App. Div. 564, 52 N. Y. Supp. 433; Id., 157 N. Y. 60, 51 N. E. 408, 43 L. R. A. 854, 68 Am. St. Rep. 749; Butterick Publishing Co. v. Chabot, N. Y. Law Journal, July 21, 1908, affirmed 128 App. Div. 900, 112 N. Y.

Supp. 1123; Butterick Publishing Co. v. Rose, 141 Wis. 533, 124 N. W. 647; Peerless Pattern Co. v. Gauntlett Dry Goods Co., 171 Mich. 158, 136 N. W. 1113, 42 L. R. A. (N. S.) 843. We think, therefore, that the plaintiff’s contention that it is now entitled to a decision from this court either affirming or reversing the decision of the District Court must prevail.

The plaintiff insists, and rightly, that the gist of the case is whether the Clayton Act Oct. 15, 1914, c. 323, 38 Stat. 730, invalidates its contract, in whole or any part, and that the fact that its right to an injunction has expired pendente lite does not relieve the court from the duty of determining the issues admittedly alive and involving substantial rights at the time of the argument of the appeal in this court. Does

section 3 of the Clayton Act (Comp. St. § 8835c) invalidate the negative covenant in this contract? We think it does, and that the decision of the District Court in that regard must be affirmed. The mere fact that Congress enacted the Clayton Act after numerous courts had held similar or analogous restrictions not obnoxious to the Sherman Act July 2, 1890, c. 647, 26 Stat. 209 (Comp. St. §'§ 8820-8823, 8827-8830), or invalid at common law, or under state antitrust statutes, grounds an inference that the Regislature intended in the light of actual experience, to change the law. Butterick Pub. Co. v.

Fisher, 203 Mass. 122, 89 N. E. 189, 133 Am. St. Rep. 283; Brown v. Rounsavell, 78 Ill. 589; Southern Fire Brick & Clay Co. v. Garden City Sand Co., 223 Ill. 616, 79 N. E. 313, 7 Ann. Cas. 50; Heimbuecher v. Goff, Horner & Co., 119 Ill. App. 373; Ferris v. American Brewing Co., 155 Ind. 539, 58 N. E. 701, 52 L. R. A. 305; J. W. Ripy & Son v. Art Wall Paper Mills, 41 Okl. 20, 136 Pac. 1080, 51 L. R. A. (N. S.) 33; In re Greene (C. C.) 52 Fed. 104; Mogul Steamship Co. v. McGregor, 1892 A. C. 25; Whitwell v. Continental Tobacco Co., 125 Fed. 454, 60 C. C. A. 290, 64 L. R. A. 689; Peerless Pattern Co. v.

Gauntlett Dry Goods Co., 171 Mich. 158, 136 N. W. 1113, 42 L. R. A. (N. S.) 843; Sullivan v. Rime, 35 S. D. 75, 150 N. W. 556; Standard Fashion Co. v. Siegel-Cooper Co., 30 App. Div. 564, 52 N. Y. Supp. 433; Id., 157 N. Y. 60, 51 N. E. 408, 43 L. R. A. 854, 68 Am. St. Rep. 749; Butterick Publishing Co. v. Chabot, N. Y. Law Journal, July 21, 1908, affirmed 128 App. Div. 900, 112 N. Y. Supp. 1123; Butterick Publishing Co. v. Rose, 141 Wis. 533, 124 N. W. 647. There is no answer to the suggestion of Judge Trieber in U. S. v. United Shoe Machinery Co. (D.

C.) 234 Fed. 127, 150, that the “presumption is, not that Congress intended that the construction of the Sherman Act should control, but, on the contrary, that it should not control.” And again quoting from Judge Trieber: “Evidently Congress was not satisfied to only prohibit actual lessening of competition, or monopolizing, but to make it unlawful for any person to do these acts, which may put it in his power to do so.” The very title of this act is significant — “An act to supplement existing laws against unlawful restraints and monopolies, and for other purposes.” In the report of the Senate Committee on Judiciary upon this bill is the following statement of the legislative purpose: “Broadly stated, the bill, in its treatment of unlawful restraints and monopolies, seeks to prohibit and make unlawful certain trade practices which, as a rule, singly and in themselves, are not covered by the act of July 2, 1890, or other existing anti-trust acts, and thus, by making these practices illegal, to arrest the creation of trusts, conspiracies, and monopolies in their incipiency and before consummation.

Among other of these trade practices which are denounced and made unlawful may be mentioned discrimination in' prices for the purpose of wrongfully injuring or destroying the business of competitors; exclusive and tying contracts; - holding companies; and interlocking directorates.” In the report of the House Committee there is also instructive language concerning

section 3: “Let us therefore consider what this

section really accomplishes. It prohibits the exclusive or ‘tying’ contract made between the manufacturer and the dealer by purchase or lease, whereby the latter agrees, as a condition of his contract, not to use or deal in the commodities of the competitor or rival of the seller or lessor.

It is designed merely to prevent this unfair trade practice now so common throughout the country, and which is generally regarded by every one who has given the subject any serious consideration as unjust to the local dealer and to the community and as monopolistic in its effects.” “What is the motive and purpose of the manufacturer in making or entering into such exclusive contract? It is undoubtedly his purpose to drive out competition and to establish a monopoly in the sale of his commodities m that particular community or locality.

His contract by its express terms completely shuts out competition in the business of the local dealer with whom he makes it. The dealer bound by this exclusive contract not to handle the goods, wares, and merchandise of another becomes the ally of the manufacturer in his effort and purpose to drive out competition in the locality or community in which such commodities are sold. This is done by means of extensive advertising, and let it be borne in mind also that this advertising is added in the price of the commodities and paid for by the consumer.

If by the combined efforts of the manufacturer and the local dealer and the glowing and overdrawn and oftentimes falso advertisements competitors are compelled to retire from the field, a monopoly in the particular community or locality is the invariable result In this connection it is important to state that to-day in every village and locality where there is only a single store, and this exclusivo or ‘tying' contract is entered into between the manufacturer and the local dealer concerning any commodity, the exclusive or ‘tying’ contract gives both the manufacturer and the local dealer a complete monopoly of that particular commodity in the locality or community.

That the effect of such a system is detrimental to the consumers and to the general public cannot be questioned for a moment. “The public is compelled to pay a higher price, and local customers are put to the inconvenience of securing many commodities in their communities or through mail-order houses that cannot he procured at their local stores. The price is raised as an inducement. This is the local effect.

Where the concern making those contracts is already great and powerful, * * * me exclusive or ‘tying’ contract made with local dealers becomes one of the greatest agencies and instrumentalities of monopoly ever devised by the brain of man.

It completely shuts out competitors, not only from trade in which they are already engaged, hut from the opportunities to build up trade in any community whore these great and powerful combinations are .operating under this system and practice. * * * When we consider contracts of sales made under this system, the result to the consumer, the general public, and the local dealer and his business, is even worse than under the lease system.” For present purposes the fact that this

section was amended in conference before final enactment we regard as of little or no significance. The reports of the two committees illuminate the evils and dangers in the trade situation with which Congress was undertaking to deal. As frequently happens, debate and conference modified the legislators’ views as to the best method of dealing with the evils aimed at. But we find no abandonment of the main purpose expressed in these committee reports. Restrictions of this sort that may substantially lessen competition or tend to create a monopoly are condemned as strongly in the final as in the original draft.

Competition, actual or potential, was the object of the Congressional solicitude. But we do not think it necessary to resort to the reports of the congressional committee or to debates in Congress in order to reach a confident conclusion as to the application of this statute to the contract between the plaintiff and defendant.

Section 3 (Comp.

St. § 8835c) reads as follows: “It shall he unlawful Cor any person engaged in commerce, in the course of such commerce, to lease or make a sale or contract for sale of goods, wares, merchandise, machinery, supplies or other commodities, whether patented or unpatented, for use, consumption or resale within the United States or any territory thereof or the District of Columbia or any insular possession or other place under the jurisdiction of the United States, or fix a price charged therefor, or discount from, or rebate upon, such price, on the condiiion, agreement or understanding that the lessee or purchaser thereof shall not use or deal in the goods, wares, merchandise, machinery, supplies or other commodities of a competitor or competitors of the lessor or seller, where the effect or such lease, sale or contract for sale or such condition, agreement or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce.” The contract now before the court provides in the plainest possible language that the purchaser shall not “sell or permit to fie sold * * * on its premises * * * any other make or pattern, and not to sell Standard patterns except at label prices.” In effect the plaintiff admits that the only way of escape from the condemnation of the statute is for the court to hold that this negative covenant may not “substantially lessen competition or tend to create a monopoly.” No such finding.can be made.

Observe at the outset that the condemnation of the statute runs, “where the effect of” such negative covenant “may be to substantially lessen competition of tend to create a monopoly.” The language is “may be,” not “is” or “will be.” In order to condemn the negative covenant, it is not necessary that the court should find that it will lessen competition or will tend to create a monopoly; it' is enough to find that it may lessen competition or may tend to create a monopoly. On this record we are constrained to find that this restriction may substantially lessen competition and may tend to create a monopoly.

It already appears that, out of some 52,000 pattern agencies in this country, the plaintiff or a holding company controlling it and two other pattern companies control approximately two-fifths. The restriction of each merchant to one pattern manufacturer must in hundreds, perhaps in thousands, of small communities amount to giving such single pattern manufacturer a monopoly of the business in such community.

Even in the larger cities, to limit to a single pattern maker the pattern business of dealers most resorted to by customers whose purchases tend to give fashions their vogue, may tend to facilitate further combinations ; so that the plaintiff, or some other aggressive concern, instead of controlling two-fifths, will shortly have almost, if not quite, all the pattern business.

We must consider this restriction in the light of the facts peculiar to the business to which the restraint is applied, to the conditions already achieved under such restraint, as well as the nature of the restraint and its effect, actual or probable. Viewing it thus, in the light of the surrounding circumstances, we are constrained to agree with the District Court that the negative covenant in this contract may lessen competition, or may tend to create a monopoly, or both, and is therefore obnoxious to the Clayton Act. See Chicago Board of Trade v. United States, 246 U. S. 231, 238, 38 Sup. Ct. 242, 62 L.

Ed. 683. To avoid possible misconception of this opinion, we add that we do not overlook that the contract in question also contains a stipulation to maintain resale prices. The validity of this provision is not raised by the pleadings, nor has it been discussed by counsel. Whether under the circumstances of this case such resale price stipulation is invalid, we do not decide. Bauer v. O’Donnell, 229 U. S. 1, 33 Sup. Ct. 616, 57 L. Ed. 1041, 50 L. R. A. (N. S.) 1185, Ann. Cas. 1915A, 150; Dr. Miles Medical Co. v. Park & Sons Co., 220 U. S. 373, 31 Sup. Ct. 376, 55 L. Ed. 502; Ford Motor Co. v.

Union Motor Sales Co., 244 Fed. 156, 156 C. C. A. 584; Strauss v. Victor Talking Machine Co., 243 U. S. 490, 37 Sup. Ct. 412, 61 L. Ed. 866, L. R. A. 1917E, 1196, Ann. Cas. 1918A, 955; Motion Picture Co. v. Universal Film Co., 243 U. S. 502, 37 Sup. Ct. 416, 61 L. Ed. 871, L. R. A. 1917E, 1187, Ann. Cas. 1918A, 959; United States v. Kellogg Toasted Corn Flake Co. (D. C.) 222 Fed. 725, 728, Ann. Cas. 1916A, 78; Boston Store v. American Graphophone Co., 246 U. S. 8, 38 Sup. Ct. 257, 62 L. Ed. 551, Ann. Cas. 1918C, 447.

Our decision that the negative covenant cannot be enforced is enough to dispose of this case as a suit in equity. The pleadings do not raise, and we have not undertaken to consider and determine, the question of what rights, if any, the plaintiff may have, in some other, action, to recover either for goods sold and delivered, or for damages for breach of the contract. Whether the invalid negative covenant and the resale price stipulation, either or both, taint the whole contract, and all sales made in the course of the business contemplated by such contract, we do not decide. See Continental Wall Paper Co. v.

Voight, 212 U. S. 227, 29 Sup. Ct. 280, 53 L. Ed. 486; Connolly v. Union Sewer Pipe Co., 184 U. S. 540, 22 Sup. Ct. 431, 46 L. Ed. 679; Wilder v. Corn Products Co., 236 U. S. 169, 35 Sup. Ct. 398, 59 L. Ed. 520, Ann. Cas. 1916A, 118; McMullen v. Hoffman, 174 U. S. 639, 19 Sup. Ct. 839, 43 L. Ed. 1117; Roselle v. Beckemeir, 134 Mo. 380, 35 S. W. 1132; Fishell v. Gray, 60 N. J. Law, 5, 37 Atl. 606; Rosenbaum v. U. S. Credit Co., 65 N. J. Law, 255, 48 Atl. 237, 53 L. R. A. 449; King v. King, 63 Ohio St. 363, 59 N. E. 111, 52 L. R. A. 157, 81 Am. St.

Rep. 635; 1 Parsons on Contracts (9th Ed.) p. 496; Wald’s Pollock on Contracts, p. 484, and cases and notes; Pullman Car Co. v. Transportation Co., 171 U. S. 138, 151, 18 Sup. Ct. 808, 43 L. Ed. 108; Harriman v. Northern Securities Co., 197 U. S. 244, 25 Sup. Ct. 493, 49 L. Ed. 739; Bone v. Ekless, 5 H. & N. 924; Thomas v. Richmond, 12 Wall. 349, 356, 20 L. Ed. 453; Boylston Bottling Co. v. O’Neil, 231 Mass. 498, 121 N. E. 411, a decision by the Massachusetts Supreme Judicial Court on January 2, 1919. The decree of the District Court is affirmed, with costs.