An actionable wrong is committed by one who maliciously
interferes with a contract between two parties and induces one of
them to break the contract to the injury of the other, and in the
absence of an adequate remedy at law equitable relief will be
granted; but
held, in this case, that plaintiffs were not
entitled to relief as the contract under which they claimed was
invalid.
A system of contracts between manufacturers and wholesale and
retail merchants by which the manufacturers attempt to control not
merely the prices at which its agents may sell its products, but
the prices for all sales by all dealers at wholesale or retail,
whether purchasers or subpurchasers, eliminating all competition
and fixing the amount which the consumer shall pay, amounts to
restraint of trade, and is invalid both at common law and, so far
as it affects interstate commerce, under the Sherman Anti-Trust Act
of July 2, 1890, and so
held as to the contracts involved
in this case.
Such agreements are not excepted from the general rule and
rendered valid because they relate to proprietary medicines
manufactured under a secret process but not under letters patent;
nor is a manufacturer entitled to control prices on all sales of
his own products in restraint of trade.
The rights enjoyed by a patentee are derived from statutory
grant under authority conferred by the Constitution, and are the
reward received in exchange for advantages derived by the public
after the period of protection has expired, and the rights of one
not disclosing his secret process so as to secure a patent are
outside of the policy of the patent laws, and must be determined by
the legal principles applicable to the ownership of such
process.
The protection of an unpatented process of manufacture does not
necessarily apply to the sale of articles manufactured under the
process.
A manufacturer of unpatented proprietary medicines stands on the
same footing as to right to control the sale of his product as the
manufacturers of other articles, and the fact that the article
may
Page 220 U. S. 374
have curative properties does not justify restrictions which are
unlawful as to articles designed for other purposes.
A manufacturer of unpatented articles cannot, by rule or notice,
in absence of statutory right, fix prices for future sales, even
though the restriction be known to purchasers. Whatever rights the
manufacturer may have in that respect must be by agreements that
are lawful.
Although the earlier common law doctrine in regard to restraint
of trade has been substantially modified, the public interest is
still the first consideration; to sustain the restraint, it must be
reasonable as to the public and parties and limited to what is
reasonably necessary, under the circumstances, for the covenantee;
otherwise, restraints are void as against public policy.
Agreements or combinations between dealers, having for their
sole purpose the destruction of competition and fixing of prices,
are injurious to the public interest and void; nor are they saved
by advantages which the participants expect to derive from the
enhanced price to the consumer.
161 F. 803 affirmed.
This is a writ of certiorari to review a judgment of the Circuit
Court of Appeals for the Sixth Circuit which affirmed a judgment of
the circuit court dismissing, on demurrer, the bill of complaint
for want of equity. 164 F. 803.
The complainant, Dr. Miles Medical Company, an Indiana
corporation, is engaged in the manufacture and sale of proprietary
medicines, prepared by means of secret methods and formulas, and
identified by distinctive packages, labels, and trademarks. It has
established an extensive trade throughout the United States and in
certain foreign countries. It has been its practice to sell its
medicines to jobbers and wholesale druggists, who in turn sell to
retail druggists for sale to the consumer. In the case of each
remedy, it has fixed not only the price of its own sales to jobbers
and wholesale dealers, but also the wholesale and retail prices.
The bill alleged that most of its sales were made through retail
druggists, and that the demand for its remedies largely depended
upon their
Page 220 U. S. 375
goodwill and commendation, and their ability to realize a fair
profit; that certain retail establishments, particularly those
known as department stores, had inaugurated a "cut-rate" or
"cut-price" system which had caused "much confusion, trouble, and
damage" to the complainant's business, and "injuriously affected
the reputation" and "depleted the sales" of its remedies; that this
injury resulted "from the fact that the majority of retail
druggists as a rule cannot, or believe that they cannot, realize
sufficient profits" by the sale of the medicines "at the cut-prices
announced by the cut-rate and department stores," and therefore are
"unwilling to, and do not keep" the medicines "in stock," or,
"if kept in stock, do not urge or favor sales thereof, but
endeavor to foist off some similar remedy or substitute, and from
the fact that in the public mind an article advertised or announced
at 'cut' or 'reduced' price from the established price suffers loss
of reputation and becomes of inferior value and demand."
It was further alleged that, for the purpose of protecting "its
trade sales and business" and of conserving "its goodwill and
reputation," the complainant had established a method "of
governing, regulating, and controlling the sale and marketing" of
its remedies, which is thus described in the bill:
"Contracts in writing were required to be executed by all
jobbers and wholesale druggists to whom your orator sold its
aforesaid remedies, medicines, and cures, of the following tenor
and effect:"
"
Consignment Contract -- Wholesale"
"The Dr. Miles Medical Company"
"This agreement made by and between The Dr. Miles Medical
Company, a corporation, of Elkhart, Indiana, hereafter referred to
as the Proprietor, and _____ _____ hereinafter referred to as the
Consignee, witnesseth:"
"That the said Proprietor hereby appoints said Consignee
Page 220 U. S. 376
one of its wholesale distributing agents, and agrees to consign
to such Consignee for sale for the account of said Proprietor such
goods of its manufacture as the Proprietor may deem necessary, the
title thereto and property therein to be and remain in the
Proprietor absolutely until sold under and in accordance with the
provisions hereof, and all unsold goods to be immediately returned
to said Proprietor on demand and the cancellation of this
agreement. Said goods to be invoiced to Consignee at the following
prices:"
"Medicines of which the retail price is $1.00, $8.00 per
dozen."
"Medicines (if any) of which the retail price is 50 cents, $4.00
per dozen."
"Medicines of which the retail price is 25 cents, $2.00 per
dozen."
"Freight on all orders, the invoice price of which amounts to
$100.00 or more, to be prepaid by the Proprietor; otherwise,
freight to be paid by Consignee."
"Said Consignee agrees to confine the sale of all goods and
products of the said Proprietor strictly to, and to sell only to,
the designated retail agents of said Proprietor as specified in
lists of such retail agents furnished by said Proprietor and
alterable at the will of said Proprietor, and to faithfully and
promptly account and pay to the Proprietor the proceeds of all
sales, after deducting as full compensation for all services,
charges, and disbursements a commission of ten percent of the
invoice value, and a further commission of five percent on the net
amount of each consignment, after deducting the said ten percent
commission on all advances on account remitted within ten days from
date of any consignment, it being agreed between the parties hereto
that such advances shall in no manner affect the title to such
goods, which title shall remain in the Proprietor as if no such
advances had been made; provided that such advances
Page 220 U. S. 377
shall be repaid to said Consignee should the said Proprietor
terminate this agreement and the return of any unsold goods on
which advances have been made. Said Consignee guarantees the
payment for all goods sold under this agreement, and agrees to
render a full account and remit the net proceeds on the first day
of each month of and for the sales of the month preceding. Failure
to make such accounting and remittance within ten days from the
first of each month shall render the whole account payable and
subject to draft, but the proceeds of such draft shall not affect
the title of any unsold goods, which shall remain in the Proprietor
until actually sold, as herein provided."
"It is further agreed that the Consignee shall furnish the
Proprietor from time to time upon demand full statements of the
stock of goods of the Proprietor on hand on any date specified, and
that a failure to furnish such statements within ten days from date
of such demand shall be a sufficient cause for the cancellation of
this agreement, and a demand for the return of the consigned
goods."
"It is further agreed that the Proprietor will cause each retail
package of its goods to be identified by a number, and said
Consignee hereby agrees to furnish the said Proprietor full reports
upon proper cards or blanks furnished by said Proprietor of the
disposition of each dozen or fraction of such goods by means of the
identifying numbers, specifying the names and addresses of the
retail agents to whom such goods have been delivered and the dates
of such delivery, and to send such reports to said Proprietor at
least semimonthly, and at any other time on the request of said
Proprietor."
"It is understood and agreed between the parties hereto that the
commissions herein specified shall not be considered as earned by
said Consignee upon any goods of said Proprietor which shall have
been delivered to dealers not authorized agents of said Proprietor,
as per list of
Page 220 U. S. 378
such agents, or upon any goods whose disposition by said
Consignee shall not have been properly reported as herein provided,
or sold at prices less than the prices authorized, and that said
Consignee shall not credit any such commissions when making
remittances on consignment account provided notice has been given
by said Proprietor that such commissions are unearned, and that, if
such unearned commissions have been deducted by said Consignee in
making advance payments or monthly remittances on account, they
shall be charged back to said Consignee and credited and paid to
said Proprietor. It is understood that violation or nonobservance
of any provision hereof by the Consignee shall make this agreement
terminable and all unsold goods returnable at the option of the
Proprietor."
"It is agreed that the goods of said Proprietor shall be sold by
said Consignee only to the said retail or wholesale agents of said
Proprietor, as per list furnished at not less than the following
prices, to-wit:"
"Medicines of which the retail price is $1.00, $8.00 per
dozen."
"Medicines (if any) of which the retail price is 50 cents, $4.00
per dozen."
"Medicines of which the retail price is 25 cents, $2.00 per
dozen."
"Provided, that said Consignee may allow a cash discount not
exceeding one percent, if paid within ten days from date of
invoice, and that, when sales at one time and at one invoice amount
to $15.00 or more, the said Consignee may allow three percent trade
discount, and if said purchase amounts to $50.00 or more, five
percent trade discount, all without cost to the Proprietor, and if
such $50.00 quantity shall be shipped direct to the retail
purchaser from the laboratory of said Proprietor, on the order from
said wholesale distributing agent, freight will be prepaid by the
Proprietor, but not otherwise. "
Page 220 U. S. 379
"This contract will take effect when the original, duly signed
by the Consignee, has been received and accepted by The Dr. Miles
Medical Company at Elkhart, Indiana."
"Done under our hands _____ A.D.1907."
"Fill in date on above line."
"The DR. MILES MEDICAL COMPANY"
"_____ _____,
Wholesale Dealer"
"Sign your name on above line."
"Original. Return in enclosed envelop."
"And written contracts were required with all retailers of your
orator's said proprietary remedies, medicines, and cures, as
follows:"
"
Retail Agency Contract"
"
The Dr. Miles Medical Company"
"This agreement between The Dr. Miles Medical Company of Elkhart
Indiana, and _____ _____, of _____ _____,"
"Retailer's name on above line. Town. State."
"hereinafter referred to as retail agent, witnesseth:"
"
Appointed Agent"
"The said Dr. Miles Medical Company hereby appoints said retail
dealer as one of the retail distributing agents of its proprietary
medicines, and agrees that said retail agent may purchase the
proprietary medicines manufactured by said Dr. Miles Medical
Company (each retail package of which the said company will cause
to be identified by a number) at the following prices, to-wit:"
"
Wholesale Prices"
"Medicines of which the retail price is $1.00, $8.00 per
dozen."
"Medicines of which the retail price is 50 cents, $4.00 per
dozen."
"Medicines of which the retail price is 25 cents, $2.00 per
dozen."
"
Quantity Discount"
"Provided that, when purchases at one time and on one invoice
amount to $15.00 (or more), wholesale distributing
Page 220 U. S. 380
agents are authorized to allow three percent trade discount; if
such purchase amounts to $50.00 (or more) five percent trade
discount will be allowed, and if such $50.00 quantity be shipped
direct to the purchaser from the laboratory of said Dr. Miles
Medical Company for the account of such wholesale agent, freight
will be prepaid, but not otherwise."
"
Full Price"
"In consideration whereof, said retail agent agrees in no case
to sell or furnish the said proprietary medicines to any person,
firm, or corporation whatsoever at less than the full retail price
as printed on the packages, without reduction for quantity, and
said retail agent further agrees not to sell the said proprietary
medicines at any price to wholesale or retail dealers not
accredited agents of the Dr. Miles Medical Company."
"
Violation"
"It is further agreed between the parties hereto that the giving
of any article of value, or the making of any concession by means
of trading stamps, cash register coupons, or otherwise, for the
purpose of reducing the price above agreed upon, shall be
considered a violation of this agreement, and further it is agreed
between the parties hereto that the Dr. Miles Medical Company will
sustain damage in the sum of twenty-five dollars ($25.00) for each
violation of any provision of this agreement, it being otherwise
impossible to fix the measure of damage."
"This contract will take effect when a duplicate thereof, duly
signed by the retail agent, has been received and approved by The
Dr. Miles Company at its office at Elkhart, Indiana."
"Done under our hands _____, A.D.1907."
"Fill in date on above line."
"THE DR. MILES MEDICAL COMPANY"
"_____ _____,
Retail Dealer"
"Sign your name on above line in ink. "
Page 220 U. S. 381
"To Retail Dealer:"
"Paste printed label, giving name and address, that your name
may be correctly listed."
"Duplicate. Keep for reference."
As an aid to the maintenance of the prices thus fixed, the
company devised a system for tracing and identifying, through
serial numbers and cards, each wholesale and retail package of its
products.
It was alleged that all wholesale and retail druggists, "and all
dealers in proprietary medicines," had been given full opportunity,
without discrimination, to sign contracts in the form stated, and
that such contracts were in force between the complainant "and over
four hundred jobbers and wholesalers and twenty-five thousand
retail dealers in proprietary medicines in the United States."
The defendant is a Kentucky corporation conducting a wholesale
drug business. The bill alleged that the defendant had formerly
dealt with the complainant, and had full knowledge of all the facts
relating to the trade in its medicines; that it had been requested,
and refused, to enter into the wholesale contract required by the
complainant; that in the City of Cincinnati, Ohio, where the
defendant conducted a wholesale drug store, there were a large
number of wholesale and retail druggists who had made contracts of
the sort described, with the complainant, and kept its medicines on
sale pursuant to the agreed terms and conditions. It was charged
that the defendant,
"in combination and conspiracy with a number of wholesale and
retail dealers in drugs and proprietary medicines, who have not
entered into said wholesale and retail contracts"
required by the complainant's system, and solely for the purpose
of selling the remedies to dealers "to be advertised, sold, and
marketed at cut rates," and "to thus attract and secure custom and
patronage for other merchandise, and not for the purpose of making
or receiving a direct money profit" from the
Page 220 U. S. 382
sales of the remedies, had unlawfully and fraudulently procured
them from the complainant's "wholesale and retail agents" by
means
"of false and fraudulent representations and statements, and by
surreptitious and dishonest methods, and by persuading and
inducing, directly and indirectly,"
a violation of their contracts.
It is further charged that the defendant, having procured the
remedies in this manner, had advertised and sold them at less than
the jobbing and retail prices established by the complainant, and
that, for the purpose of concealing the source of supply, the
identifying serial numbers, which had been stamped upon the labels
and cartons, had been obliterated by the defendant or by those
acting in collusion with the defendant, and the labels and cartons
had been mutilated, thus rendering the list of ailments and
directions for use illegible, and that the remedies in this
condition were sold both to the wholesale and retail dealers, and
ultimately to buyers for use at cut rates.
The bill prayed for an injunction restraining the defendant from
inducing or attempting to induce any party to any of the said
"wholesale or retail agency contracts" to "violate or break the
same, or to sell or deliver to the defendant, or to any person for
it," the complainant's remedies; from procuring or attempting to
procure in any way any of these remedies from wholesale or retail
dealers who had executed the contracts; from advertising, selling,
or offering for sale the remedies obtained by any of the described
means at less "than the established retail price thereof," or to
dealers who had not entered into contract with the complainant;
from in any way obliterating, mutilating, removing, or covering up
the labels and cartons upon the bottles containing the remedies,
and from making sales without such labels and cartons, and the
letter press and numerals thereon, being intact. There was also a
prayer for an accounting.
Page 220 U. S. 394
MR. JUSTICE HUGHES, after making the above statement, delivered
the opinion of the Court.
The complainant, a manufacturer of proprietary medicines which
are prepared in accordance with secret formulas, presents by its
bill a system, carefully devised, by which it seeks to maintain
certain prices fixed by it for all the sales of its products, both
at wholesale and retail. Its purpose is to establish minimum prices
at which sales shall be made by its vendees and by all subsequent
purchasers who traffic in its remedies. Its plan is thus to govern
directly the entire trade in the medicines it manufactures,
embracing interstate commerce as well as commerce within the state
respectively. To accomplish this result, it has adopted two forms
of restrictive agreements limiting trade in the articles to those
who become parties to one or the other. The one sort of contract,
known as "
Consignment Contract -- Wholesale," has been
made with over four hundred jobbers and wholesale dealers, and the
other described as "
Retail Agency Contract," with
twenty-five thousand retail dealers in the United States.
The defendant is a wholesale drug concern which has refused to
enter into the required contract, and is charged with procuring
medicines for sale at "cut prices" by inducing those who have made
the contracts to violate the restrictions. The complainant invokes
the established doctrine that an actionable wrong is committed by
one who maliciously interferes with a contract between two parties,
and induces one of them to break that contract, to the injury of
the other, and that, in the absence of an adequate
Page 220 U. S. 395
remedy at law, equitable relief will be granted.
Angle v.
Chicago, St. Paul, Minneapolis & Omaha Railway Co.,
151 U. S. 1;
Bitterman v. Louisville & Nashville Railroad Co.,
207 U. S. 205.
The principal question is as to the validity of the restrictive
agreements.
Preliminarily there are opposing contentions as to the
construction of the agreements, or at least, of that made with
jobbers and wholesale dealers. The complainant insists that the
"consignment contract" contemplates a true consignment for sale for
account of the complainant, and that those who make sales under it
are the complainant's agents, and not its vendees. The court below
did not so construe the agreement, and considered it an effort
"to disguise the wholesale dealers in the mask of agency, upon
the theory that in that character one link in the system for the
suppression of the 'cut rate' business might be regarded as
valid,"
and that, under this agreement "the jobber must be regarded as
the general owner, and engaged in selling for himself, and not as a
mere agent of another." 164 F. 805.
There are certain allegations in the bill which do not accord
with the complainant's argument. Thus, it is alleged that it "has
been and is the uniform custom" of the complainant
"to sell said medicines, remedies, and cures to jobbers and
wholesale druggists, who in turn sell and dispose of the same to
retail druggists for sale and distribution to the ultimate
purchaser or consumer."
And in setting forth the form of the agreement in question it is
alleged that it was "required to be executed by all jobbers and
wholesale druggists to whom your orator sold its aforesaid
remedies, medicines, and cures." It is further stated that, as a
means of maintaining "said list of prices," cards bearing serial
identifying numbers are placed in each package of remedies "sold to
jobbers and wholesale druggists." But it is also alleged in the
bill that, under the provisions
Page 220 U. S. 396
of the contract the title to the medicines remained in the
complainant "until actual sale in good faith to retail dealers, as
therein provided."
Turning to the agreement itself, we find that it purports to
appoint the party with whom it is made one of the complainant's
"wholesale distributing agents," and it is agreed that the
complainant, as proprietor, shall consign to the agent "for sale
for the account of said proprietor" such goods as it may deem
necessary,
"the title thereto to remain in the proprietor absolutely until
sold under and in accordance with the provisions hereof, and all
unsold goods to be immediately returned to said proprietor on
demand and the cancellation of this agreement."
The goods are to be invoiced to the Consignee at stated prices,
which are the same as the minimum prices at which the Consignee is
allowed to sell. It is also agreed that the consignee shall
"faithfully and promptly account and pay to the proprietor the
proceeds of all sales, after deducting as full compensation . . . a
commission of ten percent of the invoice value, and a further
commission of five percent on the net amount of each consignment
after deducting the said ten percent commission on all advances on
account remitted within ten days from the date of any
consignment,"
such advances, however, not to affect the title to the goods,
and to be repaid should the agreement be terminated and unsold
goods, on which advances had been made, be returned. The consignee
guarantees payment for all goods sold, and promises "to render a
full account and remit the net proceeds on the first day of each
month of and for the sales of the month preceding."
The consignee agrees
"to sell only to the designated retail agents of said
proprietor, as specified in lists of such retail agents furnished
by said proprietor, and alterable at the will of said
proprietor."
A further provision permits sales "only to the said retail or
wholesale agents
Page 220 U. S. 397
of said proprietor, as per list furnished." No time is fixed for
the duration of the agreement.
It is urged that the additional commission of five percent is to
induce, through the guise of "advances," payment for the goods
before sales are made, and that unsold goods are to be returned
only on the complainant's demand and the cancellation of the
agreement. But the consignee is not bound to make these "advances,"
and it is distinctly provided that he shall not acquire title by
making them. It is also said that the consignee may sell at prices
higher than those listed, but he is bound by the agreement to
account for "the proceeds of all sales," less the stipulated
commissions. Nor is the provision as to the time for accounting and
remittance of net proceeds to be regarded as inconsistent with
agency, in the absence of a showing that, in the actual
transactions and accounts, the consignee was treated as selling on
his own behalf and paying as purchaser.
If, however, we consider the "consignment contract" as one which
in legal effect provides for consignments of goods to be sold by an
agent for his principal's account, and that the tenor of the
agreement, as set forth, must be taken to override the inconsistent
general allegations to which we have referred, this alone would not
be sufficient to support the bill.
The bill charges that the defendant has unlawfully and
fraudulently procured the proprietary medicines from the
complainant's "wholesale and retail agents" in violation of their
contracts. But it does not allege that the goods procured by the
defendant from "wholesale agents" were goods consigned to the
latter for sale. The description "wholesale agent" refers to those
who have signed the "consignment contract." This contract, however,
permits one "wholesale agent" to sell to another "wholesale agent."
For all that appears, the goods procured by the defendant may have
been purchased by the defendant's
Page 220 U. S. 398
vendors from other wholesale agents. The bill avers that, prior
to the introduction of the described system, the defendant, a
wholesale house, had dealt in the remedies, and had purchased them
from the complainant and from "wholesale druggists and jobbers."
There is nothing in the bill which is inconsistent with such an
actual course of dealing, permitted by the agreement itself, with
respect to the wholesale dealers who have signed it. But the goods
which one wholesale agent purchased from another wholesale agent
would not be held for sale as consigned goods belonging to the
complainant, and to be accounted for as such, and their sale by the
wholesale dealer, who had acquired title, would be made for his own
account, and not for that of the complainant. The allegations of
the bill and the plain purpose of the system of contracts do not
permit the conclusion that it was intended that wholesale dealers
purchasing goods in this way should be free to sell to anyone at
any price. Evidently it was not contemplated that the restrictions
of the system should be escaped in such a simple manner. But if the
restrictions of the "consignment contract" as to prices and vendees
are to be deemed to apply to the sale of goods which one wholesale
dealer has purchased from another, it is evident that the validity
of the restrictions in this aspect must be supported on some other
ground than that such sale is made by the wholesale dealer as the
agent of the complainant. The case presented by the bill cannot
properly be regarded as one for inducing breach of trust by an
agent.
The other form of contract adopted by the complainant, while
described as a "retail agency contract," is clearly an agreement
looking to sale, and not to agency. The so-called "retail agents"
are not agents at all, either of the complainant or of its
consignees, but are contemplated purchasers who buy to sell again
-- that is, retail dealers. It is agreed that they may purchase the
medicines manufactured
Page 220 U. S. 399
by the complainant at stated prices. There follows this
stipulation:
"In consideration whereof said retail agent agrees in no case to
sell or furnish the said proprietary medicines to any person, firm,
or corporation whatsoever at less than the full retail price as
printed on the packages, without reduction for quantity, and said
retail agent further agrees not to sell the said proprietary
medicines at any price to wholesale or retail dealers not
accredited agents of the Dr. Miles Medical Company."
It will be noticed that the "retail agents" are not forbidden to
sell either to wholesale or retail dealers if these are "accredited
agents" of the complainant -- that is, if the dealers have signed
either of the two contracts the complainant requires. But the
restriction is intended to apply whether the retail dealers have
bought the goods from those who held under consignment or from
other dealers, wholesale or retail, who had purchased them. And in
which way the "retail agents" who supplied the medicines to the
defendant had bought them is not shown.
The bill asserts complainant's "right to maintain and preserve
the aforesaid system and method of contracts and sales adopted and
established by it." It is, as we have seen, a system of
interlocking restrictions by which the complainant seeks to control
not merely the prices at which its agents may sell its products,
but the prices for all sales by all dealers at wholesale or retail,
whether purchasers or subpurchasers, and thus to fix the amount
which the consumer shall pay, eliminating all competition. The
essential features of such a system are thus described by MR.
JUSTICE LURTON (then circuit judge), in the opinion of the circuit
court of appeals in the case of
John D. Park & Sons Co. v.
Hartman, 153 F. 24:
"The contracting wholesalers or jobbers covenant that they will
sell to no one who does not come with complainant's license to buy,
and that they will not sell
Page 220 U. S. 400
below a minimum price dictated by complainant. Next, all
competition between retailers is destroyed, for each such retailer
can obtain his supply only by signing one of the uniform contracts
prepared for retailers, whereby he covenants not to sell to anyone
who proposes to sell again unless the buyer is authorized in
writing by the complainant, and not to sell at less than a standard
price named in the agreement. Thus, all room for competition
between retailers, who supply the public, is made impossible. If
these contracts leave any room at any point of the line for the
usual play of competition between the dealers in the product
marketed by complainant, it is not discoverable. Thus, a
combination between the manufacturer, the wholesalers, and the
retailers to maintain prices and stifle competition has been
brought about."
That these agreements restrain trade is obvious. That, having
been made, as the bill alleges, with "most of the jobbers and
wholesale druggists and a majority of the retail druggists of the
country," and having for their purpose the control of the entire
trade, they relate directly to interstate as well as intrastate
trade, and operate to restrain trade or commerce among the several
states, is also clear.
Addyston Pipe & Steel Co. v. United
States, 175 U. S. 211;
E. Bement & Sons v. National Harrow Co., 186 U.
S. 92;
W. W. Montague & Co. v. Lowry,
193 U. S. 38;
Swift & Co. v. United States, 196 U.
S. 375.
But it is insisted that the restrictions are not invalid either
at common law or under the Act of Congress of July 2, 1890, c. 647,
26 Stat. 209, upon the following grounds, which may be taken to
embrace the fundamental contentions for the complainant: (1) that
the restrictions are valid because they relate to proprietary
medicines manufactured under a secret process, and (2) that, apart
from this, a manufacturer is entitled to control the prices on all
sales of his own products.
First. The first inquiry is whether there is any
distinction,
Page 220 U. S. 401
with respect to such restrictions as are here presented, between
the case of an article manufactured by the owner of a secret
process and that of one produced under ordinary conditions. The
complainant urges an analogy to right secured by letters patent.
E. Bement & Sons v. National Harrow Co., 186 U. S.
70. In the case cited, there were licenses for the
manufacture and sale of articles covered by letters patent, with
stipulations as to the prices at which the licensee should sell.
The Court said, referring to the Act of July 2, 1890 (p.
186 U. S.
92):
"But that statute clearly does not refer to that kind of a
restraint of interstate commerce which may arise from reasonable
and legal conditions imposed upon the assignee or licensee of a
patent by the owner thereof, restricting the terms upon which the
article may be used and the price to be demanded therefor. Such a
construction of the act we have no doubt was never contemplated by
its framers."
But whatever rights the patentee may enjoy are derived from
statutory grant under the authority conferred by the Constitution.
This grant is based upon public considerations. The purpose of the
patent law is to stimulate invention by protecting inventors for a
fixed time in the advantages that may be derived from exclusive
manufacture, use, and sale. As was said by Chief Justice Marshall
in
Grant v. Raymond, 6 Pet. pp.
31 U. S.
241-243:
"It is the reward stipulated for the advantages derived by the
public for the exertions of the individual, and is intended as a
stimulus to those exertions. . . . The public yields nothing which
it has not agreed to yield; it receives all which it has contracted
to receive. The full benefit of the discovery, after its enjoyment
by the discoverer for fourteen years, is preserved, and for his
exclusive enjoyment of it during that time the public faith is
pledged. . . . The great object and intention of the act is to
secure to the public the advantages to be derived from the
discoveries of individuals, and the means it employs are the
compensation
Page 220 U. S. 402
made to those individuals for the time and labor devoted to
these discoveries, by the exclusive right to make, use, and sell
the things discovered for a limited time."
The complainant has no statutory grant. So far as appears, there
are no letters patent relating to the remedies in question. The
complainant has not seen fit to make the disclosure required by the
statute, and thus to secure the privileges it confers. Its case
lies outside the policies of the patent law, and the extent of the
right which that law secures is not here involved or
determined.
The complainant relies upon the ownership of its secret process
and its rights are to be determined accordingly. Anyone may use it
who fairly, by analysis and experiment, discovers it. But the
complainant is entitled to be protected against invasion of its
rights in the process by fraud or by breach of trust or contract.
Tabor v. Hoffman, 118 N.Y. 36;
Chadwick v.
Covell, 151 Mass.190. The secret process may be the subject of
confidential communication and of sale or license to use with
restrictions as to territory and prices.
Fowle v. Park,
131 U. S. 88. A
similar principle obtains with respect to the confidential
communication of quotations collected by a board of trade.
Board of Trade v. Christie Grain & Stock Co.,
198 U. S. 236.
Here, however, the question concerns not the process of
manufacture, but the manufactured product -- an article of
commerce. The complainant has not communicated its process in
trust, or under contract, or executed a license for the use of the
process with restrictions as to the manufacturer and sale by the
licensee to whom the communication is made. The complainant has
retained its secret, which apparently it believes to be
undiscoverable. Whether its remedies are sold or unsold, whether
the restrictions as to future sales are valid or invalid, the
complainant's secret remains intact. That the complainant may
rightfully object
Page 220 U. S. 403
to attempts to discover it by fraudulent means, or to a breach
of trust or contract relating to the process, does not require the
conclusion that it is entitled to establish restrictions with
respect to future sales by those who purchase its manufactured
product. It is said that the remedies "embody" the secret. It would
be more correct to say that they are manufactured according to the
secret process, and do not constitute a communication of it. It is
also urged that, as the process is secret, no one else can
manufacture the article. But this argument rests on monopoly of
production, and not on the secrecy of the process or the particular
fact that may confer that monopoly. It implies that if, for any
reason, monopoly of production exists, it carries with it the right
to control the entire trade of the produced article, and to prevent
any competition that otherwise might arise between wholesale and
retail dealers. The principle would not be limited to secret
processes, but would extend to goods manufactured by anyone who
secured control of the source of supply of a necessary raw material
or ingredient. But because there is monopoly of production, it
certainly cannot be said that there is no public interest in
maintaining freedom of trade with respect to future sales after the
article has been placed on the market and the producer has parted
with his title. Moreover, every manufacturer, before sale, controls
the articles he makes. With respect to these, he has the rights of
ownership, and his dominion does not depend upon whether the
process of manufacture is known or unknown, or upon any special
advantage he may possess by reason of location, materials, or
efficiency. The fact that the market may not be supplied with the
particular article unless he produces it is a practical consequence
which does not enlarge his right of property in what he does
produce.
If a manufacturer, in the absence of statutory privilege, has
the control over the sales of the manufactured article
Page 220 U. S. 404
for which the complainant here contends, it is not because the
process of manufacture is kept secret. In this respect, the maker
of so-called proprietary medicines, unpatented, stands on no
different footing from that of other manufacturers. The fact that
the article is represented to be curative in its properties does
not justify a restriction of trade which would be unlawful as to
compositions designed for other purposes.
Second. We come, then, to the second question --
whether the complainant, irrespective of the secrecy of its
process, is entitled to maintain the restrictions by virtue of the
fact that they relate to products of its own manufacture.
The basis of the argument appears to be that, as the
manufacturer may make and sell, or not, as he chooses, he may affix
conditions as to the use of the article or as to the prices at
which purchasers may dispose of it. The propriety of the restraint
is sought to be derived from the liberty of the producer.
But because a manufacturer is not bound to make or sell, it does
not follow in case of sales actually made he may impose upon
purchasers every sort of restriction. Thus, a general restraint
upon alienation is ordinarily invalid.
"The right of alienation is one of the essential incidents of a
right of general property in movables, and restraints upon
alienation have been generally regarded as obnoxious to public
policy, which is best subserved by great freedom of traffic in such
things as pass from hand to hand. General restraint in the
alienation of articles, things, chattels, except when a very
special kind of property is involved, such as a slave or an
heirloom, have been generally held void. 'If a man,' says Lord
Coke, in Coke on Littleton, section 360,"
"be possessed . . . of a horse or of any other chattel, real or
personal, and give or sell his whole interest or property therein,
upon condition that the donee or vendee shall not alien the same,
the same is void, because the whole interest and property is out of
him, so as he hath
Page 220 U. S. 405
no possibility of a reverter, and it is against trade and
traffic and bargaining and contracting between man and man."
John D. Park & Sons Co. v. Hartman, 153 F. 24.
See also Gray on Restraints on Alienation of Property, §§
27, 28.
Nor can the manufacturer by rule and notice, in the absence of
contract or statutory right, even though the restriction be known
to purchasers, fix prices for future sales. It has been held by
this Court that no such privilege exists under the copyright
statutes, although the owner of the copyright has the sole right to
vend copies of the copyrighted production.
Bobbs-Merrill Co. v.
Straus, 210 U. S. 339.
There, the Court said (p.
210 U. S.
351):
"The owner of the copyright in this case did sell copies of the
book in quantities and at a price satisfactory to it. It has
exercised the right to vend. What the complainant contends for
embraces not only the right to sell the copies, but to qualify the
title of a future purchaser by the reservation of the right to have
the remedies of the statute against an infringer because of the
printed notice of its purpose so to do unless the purchaser sells
at a price fixed in the notice. To add to the right of exclusive
sale the authority to control all future retail sales, by a notice
that such sales must be made at a fixed sum, would give a right not
included in the terms of the statute, and, in our view, extend its
operation, by construction, beyond its meaning, when interpreted
with a view to ascertaining the legislative intent in its
enactment."
It will hardly be contended with respect to such a matter that
the manufacturer of an article of commerce not protected by any
statutory grant is in any better case.
See Taddy & Co. v.
Sterious & Co. (1904), 1 Ch. 354;
McGruther v.
Pitcher (1904), 2 Ch. 306;
Garst v. Hall & L.
Co., 179 Mass. 588. Whatever right the manufacturer may have
to project his control beyond his own sales must depend not upon an
inherent power incident to production and original ownership, but
upon agreement.
Page 220 U. S. 406
With respect to contracts in restraint of trade, the earlier
doctrine of the common law has been substantially modified in
adaptation to modern conditions. But the public interest is still
the first consideration. To sustain the restraint, it must be found
to be reasonable both with respect to the public and to the
parties, and that it is limited to what is fairly necessary, in the
circumstances of the particular case, for the protection of the
covenantee. Otherwise restraints of trade are void as against
public policy. As was said by this Court in
Gibbs v.
Consolidated Gas. Co., 130 U. S.
409:
"The decision in
Mitchel v. Reynolds, 1 P. Wms. 181,
s.c., 1 Smith's Leading Cases, 7th Eng. ed. 407, 8th Am.
ed. 756, is the foundation of the rule in relation to the
invalidity of contracts in restraint of trade; but as it was made
under a condition of things and a state of society different from
those which now prevail, the rule laid down is not regarded as
inflexible, and has been considerably modified. Public welfare is
first considered, and if it be not involved, and the restraint upon
one party is not greater than protection to the other party
requires, the contract may be sustained. The question is whether,
under the particular circumstances of the case and the nature of
the particular contract involved in it, the contract is, or is not,
unreasonable.
Rousillon v. Rousillon, 14 Ch.Div. 351;
Leather Cloth Co. v. Lorsont, 9 Eq. 345."
"The true view at the present time," said Lord Macnaghten in
Nordenfelt v. Maxim-Nordenfelt &c. Co., 1904, A.C. p.
565,
"I think, is this: the public have an interest in every person's
carrying on his trade freely: so has the individual. All
interference with individual liberty of action in trading, and all
restraints of trade of themselves, if there is nothing more, are
contrary to public policy, and therefore void. That is the general
rule. But there are exceptions: restraints of trade and
interference with individual liberty of action may be justified by
the special
Page 220 U. S. 407
circumstances of a particular case. It is a sufficient
justification, and indeed it is the only justification, if the
restriction is reasonable -- reasonable, that is, in reference to
the interests of the parties concerned, and reasonable in reference
to the interests of the public, so framed and so guarded as to
afford adequate protection to the party in whose favor it is
imposed, while at the same time it is in no way injurious to the
public."
The present case is not analogous to that of a sale of goodwill,
or of an interest in a business, or of the grant of a right to use
a process of manufacture. The complainant has not parted with any
interest in its business or instrumentalities of production. It has
conferred no right by virtue of which purchasers of its products
may compete with it. It retains complete control over the business
in which it is engaged, manufacturing what it pleases and fixing
such prices for its own sales as it may desire. Nor are we dealing
with a single transaction, conceivably unrelated to the public
interest. The agreements are designed to maintain prices after the
complainant has parted with the title to the articles, and to
prevent competition among those who trade in them.
The bill asserts the importance of a standard retail price, and
alleges generally that confusion and damage have resulted from
sales at less than the prices fixed. But the advantage of
established retail prices primarily concerns the dealers. The
enlarged profits which would result from adherence to the
established rates would go to them, and not to the complainant. It
is through the inability of the favored dealers to realize these
profits, on account of the described competition, that the
complainant works out its alleged injury. If there be an advantage
to the manufacturer in the maintenance of fixed retail prices, the
question remains whether it is one which he is entitled to secure
by agreements restricting the freedom of trade on the part of
dealers who own what they
Page 220 U. S. 408
sell. As to this, the complainant can fare no better with its
plan of identical contracts than could the dealers themselves if
they formed a combination and endeavored to establish the same
restrictions, and thus to achieve the same result, by agreement
with each other. If the immediate advantage they would thus obtain
would not be sufficient to sustain such a direct agreement, the
asserted ulterior benefit to the complainant cannot be regarded as
sufficient to support its system.
But agreements or combinations between dealers, having for their
sole purpose the destruction of competition and the fixing of
prices, are injurious to the public interest and void. They are not
saved by the advantages which the participants expect to derive
from the enhanced price to the consumer.
People v.
Sheldon, 139 N.Y. 251;
Judd v. Harrington, 139 N.Y.
105;
People v. Milk Exchange, 145 N.Y. 267;
United
States v. Addyston Pipe & Steel Co., 85 F. 271,
on
appeal, 175 U. S. 175 U.S.
211;
Montague & Co. v. Lowry, 193 U. S.
38;
Chapin v. Brown, 83 Ia. 156;
Craft v.
McConoughy, 79 Ill. 346;
W. H. Hill Co. v. Gray &
Worcester, 127 N.W. 803.
The complainant's plan falls within the principle which condemns
contracts of this class. It in effect creates a combination for the
prohibited purposes. No distinction can properly be made by reason
of the particular character of the commodity in question. It is not
entitled to special privilege or immunity. It is an article of
commerce, and the rules concerning the freedom of trade must be
held to apply to it. Nor does the fact that the margin of freedom
is reduced by the control of production make the protection of what
remains in such a case a negligible matter. And where commodities
have passed into the channels of trade and are owned by dealers,
the validity of agreements to prevent competition and to maintain
prices is not to be determined by the circumstance whether they
were produced by several manufacturers or by one,
Page 220 U. S. 409
or whether they were previously owned by one or by many. The
complainant having sold its product at prices satisfactory to
itself, the public is entitled to whatever advantage may be derived
from competition in the subsequent traffic.
The questions involved were carefully considered and the
decisions reviewed by Judge Lurton in delivering the opinion of the
circuit court of appeals in
John D. Park & Sons Co. v.
Hartman, supra, and, in following that case, it was concluded
below that the restrictions sought to be enforced by the bill were
invalid both at common law and under the Act of Congress of July 2,
1890. We think that the court was right.
The allegations of the bill as to the labels and cartons used by
the complainant are evidently incidental to the main charge as to
the procurement of violation of the restrictions as to prices and
vendees contained in the agreement, and failing as to this, no case
is made for relief with respect to the trademarks, which are not
shown to have been infringed.
Judgment affirmed.
MR. JUSTICE LURTON took no part in the consideration and
decision of this case.
MR. JUSTICE HOLMES, dissenting:
This is a bill to restrain the defendant from inducing, by
corruption and fraud, agents of the plaintiff and purchasers from
it to break their contracts not to sell its goods below a certain
price. There are two contracts concerned. The first is that of the
jobber or wholesale agent to whom the plaintiff consigns its goods,
and I will say a few words about that, although it is not this
branch of the case that induces me to speak. That they are agents,
and not buyers, I understand to be conceded, and I do not see how
it
Page 220 U. S. 410
can be denied. We have nothing before us but the form and the
alleged effect of the written instrument, and they both are express
that the title to the goods is to remain in the plaintiff until
actual sale as permitted by the contract. So far as this contract
limits the authority of the agents as agents, I do not understand
its validity to be disputed. But it is construed also to permit the
purchase of medicine by consignees from other consignees, and to
make the specification of prices applicable to goods so purchased
as well as to goods consigned. Hence, when the bill alleges that
the defendant has obtained medicine from these agents by inducing
them to break their contracts, the allegation does not require
proof of breach of trust by an agent, but would be satisfied by
proving a breach of promise in respect of goods that the consignee
had bought and owned. This reasoning would have been conclusive in
the days of Saunders if the construction of the contract is right,
as I suppose that it is. But the contract as to goods purchased is
at least in the background and obscure; it is not the main
undertaking that the instrument is intended to express. I should
have thought that the bill ought to be read as charging the
defendant with inducing a breach of the ordinary duty of consignees
as such (
Swift & Co. v. United States, 196 U.
S. 375,
196 U. S.
395), and therefore as entitling the plaintiff to relief
(
Angle v. Chicago, St. Paul, Minneapolis & Omaha Ry.
Co., 151 U. S. 1).
The second contract is that of the retail agents, so called,
being really the first purchasers, fixing the price below which
they will not sell to the public. There is no attempt to attach a
contract or condition to the goods, as in
Bobbs-Merrill Co. v.
Straus, 210 U. S. 339, or
in any way to restrict dealings with them after they leave the
hands of the retail men. The sale to the retailers is made by the
plaintiff, and the only question is whether the law forbids a
purchaser to contract with his vendor that he will not sell
Page 220 U. S. 411
below a certain price. This is the important question in this
case. I suppose that, in the case of a single object, such as a
painting or a statute, the right of the artist to make such a
stipulation hardly would be denied. In other words, I suppose that
the reason why the contract is held bad is that it is part of a
scheme embracing other similar contracts, each of which applies to
a number of similar things, with the object of fixing a general
market price. This reason seems to me inadequate in the case before
the Court. In the first place, by a slight change in the form of
the contract, the plaintiff can accomplish the result in a way that
would be beyond successful attack. If it should make the retail
dealers also agents in law as well as in name, and retain the title
until the goods left their hands, cannot conceive that even the
present enthusiasm for regulating the prices to be charged by other
people would deny that the owner was acting within his rights. It
seems to me that this consideration by itself ought to give us
pause.
But I go farther. There is no statute covering the case; there
is no body of precedent that, by ineluctable logic, requires the
conclusion to which the Court has come. The conclusion is reached
by extending a certain conception of public policy to a new sphere.
On such matters, we are in perilous country. I think that at least
it is safe to say that the most enlightened judicial policy is to
let people manage their own business in their own way, unless the
ground for interference is very clear. What, then, is the ground
upon which we interfere in the present case? Of course, it is not
the interest of the producer. No one, I judge, cares for that. It
hardly can be the interest of subordinate vendors, as there seems
to be no particular reason for preferring them to the originator
and first vendor of the product. Perhaps it may be assumed to be
the interest of the consumers and the public. On that point, I
confess that I am in a minority as to larger issues than
Page 220 U. S. 412
are concerned here. I think that we greatly exaggerate the value
and importance to the public of competition in the production or
distribution of an article (here it is only distribution) as fixing
a fair price. What really fixes that is the competition of
conflicting desires. We, none of us, can have as much as we want of
all the things that we want. Therefore, we have to choose. As soon
as the price of something that we want goes above the point at
which we are willing to give up other things to have that, we cease
to buy it and buy something else. Of course, I am speaking of
things that we can get along without. There may be necessaries that
sooner or later must be dealt with like short rations in a
shipwreck, but they are not Dr. Miles' medicines. With regard to
things like the latter, it seems to me that the point of most
profitable returns marks the equilibrium of social desires, and
determines the fair price in the only sense in which I can find
meaning in those words. The Dr. Miles Medical Company knows better
than we do what will enable it to do the best business. We must
assume its retail price to be reasonable, for it is so alleged and
the case is here on demurrer, so I see nothing to warrant my
assuming that the public will not be served best by the company's
being allowed to carry out its plan. I cannot believe that, in the
long run, the public will profit by this Court's permitting knaves
to cut reasonable prices for some ulterior purpose of their own,
and thus to impair, if not to destroy, the production and sale of
articles which it is assumed to be desirable that the public should
be able to get.
The conduct of the defendant falls within a general prohibition
of the law. It is fraudulent, and has no merits of its own to
recommend it to the favor of the court. An injunction against a
defendant's dealing in nontransferable round-trip reduced-rate
tickets has been granted to a railroad company upon the general
principles of the law protecting contracts, and the demoralization
of rates has
Page 220 U. S. 413
been referred as a special circumstance in addition to the
general grounds.
Bitterman v. Louisville & Nashville R.
Co., 207 U. S. 205,
207 U. S.
222-224. The general and special considerations equally
apply here, and we ought not to disregard them unless the evil
effect of the contract is very plain. The analogy relied upon to
establish that evil effect is that of combinations in restraint of
trade. I believe that we have some superstitions on that head, as I
have said; but those combinations are entered into with intent to
exclude others from a business naturally open to them, and we
unhappily have become familiar with the methods by which they are
carried out. I venture to say that there is no likeness between
them and this case (
Jayne v. Loder, 149 F. 21, 27), and I
think that my view prevails in England (
Elliman, Sons & Co.
v. Carrington & Son [1901], 2 Ch. 275).
See Garst v.
Harris, 177 Mass. 72;
Garst v. Charles, 187 Mass.
144. I think also that the importance of the question and the
popularity of what I deem mistaken notions makes it my duty to
express my view in this dissent.
