Morehead Sea Food Co. v. Way, 169 N.C. 679 (1915)

Oct. 20, 1915 · Supreme Court of North Carolina

169 N.C. 679

MOREHEAD SEA FOOD COMPANY, Inc. v. B. C. Way, Trading as B. C. WAY & CO.

(Filed 20 October, 1915.)

1. Contracts — Restraint of Trade — Interpretation of Statutes — Common Law.

An incorporation of fish dealers in a seaport town, with provision in tbe bill of sale of each business to the corporation, that the seller will not engage or become in any way interested in the same business in that and an adjoining county, and within a hundred miles from the town, for a period of ten years; and it appearing that the business engaged in by the corporation was at least coextensive with the territory prohibited, and that the transaction did not have the effect of lessening competition, is not prohibited by our statute, chapter 41, section 5, subsecs., Laws of 1913, which excepts from its inhibition persons, firms or corporations selling his or its business and good will to a competitor, and agreeing in writing not to enter the business in competition with the purchaser in a limited territory, as now allowed by the common law.

2. Contracts — Restraint of Trade — Partial Restraint — Reasonable Restrictions.

Under modern conveniences and changed business methods and conditions the common-law doctrine relating to transactions in restraint of trade has been modified and its meaning enlarged, the courts having soon recognized the distinction between contracts in general restraint and those in partial restraint of trade, sustaining the latter if they are not unreasonable.

3. Same — Territory—Competition—Public Policy.

A valid contract in partial restraint of trade, while primarily for the advantage of the purchaser of a business, inures to the benefit of the seller by enhancing the value of the good-will and enabling him to obtain a better price for the sale of his business, the test as to territory being whether the restraint agreed upon is such as to afford a fair protection to the interest of the party in whose favor it is given, and not so large as to interfere with the interest of the public; and such will not be held to be unreasonable when they do not affect the public and go no further than to remove the danger to the purchaser of competition with the seller.

Clark, C. X, dissenting.

Appeal by defendant from Bond, J., at the June Term, 1915, of Carteret.

Action to restrain the defendant from engaging in the business of a fish dealer in Morehead city in violation of an agreement whereby the defendant agreed with, the plaintiff, upon the plaintiff’s purchasing bis business, good will and certain personal property, not to carry on, be concerned in or interested in said business of a fish dealer for a period of ten years, within one hundred miles of Morehead City.

The plaintiff was duly organized on 14 March, 1914, and the defendant, one of the incorporators, was elected a director, vice president and general manager of the plaintiff, and he has continued in these positions up to the commencement of this action.

Prior to 14 March, 1914, the fish business of Morehead City was conducted by seven different firms, composed of eleven individuals. These fish dealers operated boats about the waters of North Carolina, and did a large fish business in North Carolina, South Carolina, Georgia, and in the northern and eastern markets. They were the only fish dealers at Morehead City, except two; but there are now, since the organization .of the plaintiff, as many fish dealers at Morehead City as there were at the time of the organization of the plaintiff.

On 12 March, 1914, all of said eleven fish dealers formed the plaintiff corporation, known as Morehead Sea Food Company, and upon the organization of the company each entered into a contract of sale with the plaintiff, by which he sold his business and good-will as a fish dealer to the plaintiff, and the personal property used in connection with his business, and in each bill of sale there was the following covenant :

“The vendor hereby covenants with the purchaser that they will not directly, indirectly, solely or jointly, as principal, agent, manager or otherwise, be concerned or interested in the same business heretofore carried on as aforesaid by them within the counties of Carteret and Craven, in the State of North Carolina, and within one hundred miles from the town of Morehead City, aforesaid, for ten years from the date hereof, nor permit their names to be used in connection with such business.”

■ Upon the hearing of the motion to dissolve the restraining order theretofore issued, his Honor continued the order to the hearing, and the defendant excepted and appealed.

Julius F. Duncan and Guión & Guión for plaintiff.

Moore. & Dunn for defendant.

AlleN. J.

Two questions are presented by the appeal:

1. Is the. agreement entered into between the plaintiff and the defendant a violation of the statute of this State enacted to prevent illegal trusts and combinations in restraint of trade?

2. If not, is the agreement unlawful under the common law?

Tbe first question is answered by tbe statute (chapter 41, section 5, subsection F, Public Laws of 1913), wherein it is provided, “That nothing herein shall be construed to prevent a person, firm or corporation from selling his or its business and good will to a competitor, and agreeing in writing not to enter the business in competition with the purchaser in a limited territory, as is now allowed under the common law.”

The contract under consideration comes within the class described in the statute, and is authorized by it, unless condemned by the common law. "We must then examine the principles of the common law applicable to contracts of this character.

In the early cases contracts in restraint of trade were very generally held to be void, as against public policy, upon the ground that they tended to lessen the opportunities of the party restrained to earn a livelihood and to deprive the community of the benefit of competition. 6 Euling Case Law, 785. The distinction was, however, soon recognized between contracts in general restraint of trade, which were held invalid, and those in partial restraint of trade, which were sustained, if not unreasonable.

The changes that have taken place in the methods of doing business, and the increased opportunities for communication, and the enlarged facilities for transportation have also materially modified the views of the courts as to what is an unreasonable restraint upon trade. Many new industries, unknown to the ancient common law, have been developed, which makes it easier for one engaged in business to seek other employment when he has contracted to give up his old business, and this has reduced the hardship of such a contract upon the individual, and the danger to the community has been greatly reduced because of the increased opportunities to deal with distant communities.

The good-will of a business was soon regarded as an important and valuable interest, which the law would recognize and protect (20 Cyc., 1276), and while there is authority for the position that the sale of the good will of a business by implication will prevent the seller from prosecuting the same business in competition with the purchaser, the weight of authority seems to be that the purchaser can only protect himself fully by a written agreement upon the part of the seller to refrain from entering into the same business.

“Good faith requires of a party, who has sold the good will of a business, that he shall do nothing which tends to deprive the purchaser of its benefits and 'advantages. Upon a sale of the good-will of a business, without more, the vendor is not precluded from setting up a precisely similar business in the vicinity. Upon the authorities it is settled that, if the purchaser wishes to prevent this step from being taken, he must see to it that provisions to that effect are inserted in tbe written contract.” 20 Cyc., 1279.

This stipulation while primarily for the benefit of the purchaser, inures to the advantage of the seller by enhancing the value of the good-will, and while “public policy requires that every man shall be at liberty to work for himself, and shall not be at liberty to deprive himself or the State of his labor, skill, or talent by any contract that he enters into, on the other hand, public policy requires that when a man has, by skill, or by any other means, obtained something which he wants to sell, he should be at liberty to sell it in the most advantageous way in the market; and, in order to enable him to' sell it advantageously in the market, it is necessary that he should be able to preclude himself from entering into competition with the purchaser. In such a case the same public policy that enables him to do this does not restrain him from alienating that which he wants to alienate, and, therefore, enables him to enter into any stipulation which, in the judgment of the court, is not unreasonable, having regard to the subject-matter of the contract.” 6 Ruling Case Law, 793.

There was also a tendency in the early cases to establish as the standard for determining the reasonableness of the contract, the duration of the contract as to time and the extent of the territory in which it was to operate; but under changed conditions, and in the effort to make the good-will a valuable asset, these tests have been abandoned, and the true test now generally applied is whether the restraint is such as to afford a fair protection to the interests of the party in whose favor it is given, and not so large as to interfere with the interests of the public. 16 A. and E. Anno. Cases, 254.

As said in Southworth v. Davison, 106 Minn., 110, “The rule, broadly stated, seems to be that no contract of this kind is void as being in restraint of trade when it operates simply to prevent a party from engaging or competing in the same business. Leslie v. Lorillard, 110 N. Y., 519.” In other words, the good-will of a business being recognized as intangible property, which the owner may sell, and it being for the benefit of the seller that it should be sold for its full value, and it being necessary for the protection of the purchaser that the seller should not, after the sale, enter into competition with him, contracts restraining the seller from engaging in the same business are upheld, and they are not unreasonable if they go no further than to remove the danger to the purchaser of competition with the seller.

The opinion in Anchor Electric Co. v. Hawkes, 171 Mass., 101, contains a learned and instructive discussion of the question. In that case the business managers of three corporations agreed to form a new corporation, of which they were to be the officers and directors. Each corporation was to sell its assets and good-will to tbe new corporation, and as a part of tbe contract of sale eacb corporation represented by tbe managers agreed that it would not in any way interfere witb or compete witb tbe business of tbe new corporation for a period of five years.

Tbe contract was sustained, and, among other things, tbe Court said: “Whenever one sells a business, witb its good-will, it is for bis benefit, as well as for tbe benefit of tbe purchaser,, that be should be able to increase tbe value of that which be sells by a contract not to set up a new business in competition witb tbe old. Tbe right to make reasonable contracts of this kind in connection witb tbe sale of tbe good-will of a business is well established. But tbe particular provisions which are reasonably necessary for tbe protection of tbe good-will of many kinds of business are very different now from those required in tbe days of Queen Elizabeth. Then tbe courts bad occasion to inquire whether a limitation upon tbe right to engage in tbe same business as that sold was unreasonable because it included a town instead of a single parish, or extended a distance of ten miles instead of five. Now tbe House of Lords in England has held, by a unanimous decision in a recent case, that such a limitation which covered tbe whole world was not unreasonable. Because in early times it seemed inconceivable that an agreement to refrain from establishing a business of tbe same kind anywhere in tbe kingdom should be necessary to tbe protection of tbe goodwill of any existing business, it was laid down as an arbitrary rule that agreements so comprehensive in their terms were void. Thus tbe distinction between a general restraint of trade and a partial restraint of trade grew up. Contracts applying to any territory less than tbe whole kingdom were considered in reference to their reasonableness, having regard to tbe purpose for which tbe contract was made. By tbe unanimous decision of tbe House of Lords, in tbe case of Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. (1894), App. Gas., 535, affirming tbe unanimous judgment of tbe Court of Appeals in (1893) 1 Ob., 630, it is now held in England that a covenant unrestricted as to space, not to engage in a particular kind of business for twenty-five years, made in connection witb tbe sale of tbe property of a manufacturing establishment, is valid, if, having regard to tbe nature of tbe business and tbe limited number of its customers, it is not wider.than is necessary for tbe protection of tbe covenantee, nor injurious to tbe public interests of tbe country, as were found to be tbe facts in that case.”

Our Court has announced tbe same principle in Cowan v. Fairbrother, 118 N. C., 412; Kramer v. Old, 119 N. C., 1; and in Shute v. Heath, 131 N. C., 282.

Tbe Court said, in the first of these cases, speaking of tbe seller and the purchaser: “The one sells bis prospective patronage and the other buys the right to compete with all others for it, and to- be protected against competition from his vendor. The law intends that the one shall have the lawful authority to dispose of his right to compete, but restricts his power of disposition territorially, so as to make it only coextensive with the right to protection on the part of the purchaser. To the extent that the contract covers territory from which the vendor has derived and will probably , in future derive no profit or patronage, it needlessly deprives the public of the benefit of open competition in useful business, and of the services of him who sells without any possible advantage to his successor. When the reason upon which a law is founded ceases, the rule itself ceases to operate. The older cases in which the courts attempted to fix arbitrarily geographical bounds beyond which a contract to forbear from competition would not be enforced have given way to the more rational idea of making every case dependent upon the surrounding circumstances, showing the extent, as to time and territory, of the protection needed. . . . Where the nature of the business was such that complete protection would not be otherwise afforded, the restraint upon the right to compete has been held good in one or more cases where it applied to a State or to a boundary including several States,” and in the second: “The courts in later years have disregarded the old roles by which it was sometimes attempted arbitrarily to fix by measurement the geographical area over which a contract in partial restraint of trade might be made to extend, and to prescribe a limit of time beyond which it could not be made to operate. The modern doctrine is founded upon the basic principle that one who, by his skill and industry, builds up a business, acquires a property at least in the good-will of his patrons, which is the product of his own efforts (Cowan v. Fairbrother, 118 N. C., 406), and has the fundamental right 'to dispose of the fruits of his own labor, subject only to such restrictions as are imposed for the protection of society, either by express enactments of law or by public policy. (Hughes v. Hodges, 102 N. C., 239; Bruce v. Strickland, 81 N. C., 267.) But the property that one thus creates by skill, or talent and industry, is not marketable unless the owner is at liberty to sell his right of competition to the full extent of the field from which he derives his profits, and for a reasonable length of time. . . . The test of the reasonableness of the territorial limit covered by such contracts is involved in the question whether the area described in the contract is greater than it is necessary to make it in order to protect the purchaser from competition in his efforts to hold and to get the full benefits of the business or right of competition bought by him,” and in the third: “Contracts in partial restraint of trade can be made and enforced of common right. This Court said, in Kramer v. Old, 119 N. C., 1: ‘The modern doctrine is founded upon tbe basic principle that one who, by bis skill and industry, builds up a business, acquires a property at least in tbe good-will of bis patrons, wbicb is tbe product of bis own efforts, and bas tbe fundamental right to dispose of tbe fruit of bis own labor, subject only to such restrictions as are imposed for tbe protection of society, either by express enactment of law or by public policy.’ An indefinite restriction as to duration will not make such contract void. Kramer v. Old, supra. But there must be a definite limitation as to space; and tbe reasonableness of such limitation will depend upon tbe nature of tbe business and good-will sold. A contract, for instance, for a valid consideration not to engage in tbe manufacture of firearms in general use would be allowed to cover a larger extent of territory than would a contract not to engage in tbe manufacture of timber or tbe ginning of cotton. And tbe test of that reasonableness is whether tbe space or territory is greater than is necessary to enable tbe assignee to protect himself from competition on tbe part of tbe assignor, and thereby to get tbe benefit of what be bas bought.”

Applying these principles, we are of opinion that tbe contract is not illegal, as it is limited as to time, ten years, and it is not coextensive with tbe territory in wbicb tbe defendant could enter into competition with tbe plaintiff, as tbe territory embraced in tbe contract is one hundred miles from Morehead City, and tbe field of competition extends to South Carolina, Georgia, and tbe northern and eastern markets.

It also appears that tbe plaintiff bas not attempted to 'prevent others from engaging in tbe same business and that tbe public bas not been deprived of tbe benefit of competition, as there are as many persons doing business as fish dealers in Morehead City now as at tbe time of tbe organization of tbe plaintiff company.

Affirmed.

CiAEK, C. J.,

dissenting: Pi’ior to 12 March, 1914, tbe fish business at Morehead was conducted by I different firms, consisting of 11 individuals. They operated boats in all tbe waters of North Carolina and comprised all tbe fish dealers at Morehead (except two small dealers), and conducted 90 per cent or more of tbe fish business at that point, and did a large fish business, not only 'in Noxlb Carolina, but in South Carolina, Georgia, and in tbe northern and eastern markets. These dealers bought in competition with each other from tbe fishermen operating boats at various places, covering practically tbe entire fishing area of eastern Carolina, packing and shipping tbe product to various markets of tbe country.

The radius of 100 miles named in tbe contract, tbe validity of wbicb is in question, made a circumference beginning beyond Southport in tbs southwest to Nag’s Head to the north, and reaching inland to Rocky Mount, taking in Wilson, Goldsboro, Clinton and Wilmington, besides 100 miles out to sea, covering also Albemarle and Pamlico and other sounds and rivers flowing into them.

This contract of 12 March, 1914, created a “combine” of all the fish dealers above mentioned, each of whom entered into an agreement that they would not “directly, indirectly, solely or jointly, as principal, agent, manager or otherwise be concerned or interested in the same business heretofore carried on as aforesaid by them, within the counties of Carteret and Craven, in the State of North Carolina, and within 100 miles from the town of Morehead aforesaid, for 10 years from the date hereof, nor permit their names to be used in connection with such business.” This simply created a “Fish Trust,” and is as much a violation of the State and Federal Antitrust Law as the American Tobacco Company, the Standard Oil Trust, or any of the other great trusts which have been dissolved by the decisions of the United States Supreme Court. The object, of course, is exactly the same, i. e., to put down the price of fish when sold by the fishermen, and to put up the price when selling to the consumers, and make profits by the familiar process of destroying competition.

There is no analogy between this proceeding and the ordinary one of selling one’s good-will in a local business, as a dentist, physician, or editor, and protecting the conveyance of the good-will by agreeing not to compete for a limited time and in a limited territory — both of which limitations must be reasonable. This is not an agreement that is reasonable, either in the extent of the territory or the duration of time, nor has it the feature of such contracts, when valid, that the vendor will not enter into competition with the vendee. Here the competitors all combine and create a monopoly in the vendors.

The defendant, one of the firm of Way Bros. & Co., having no knowledge of any other business, having been engaged in the same all of his life, was forced, in order to earn a livelihood, to engage in business as a fish dealer in Morehead, and was handling from 50 to 70 boxes of fish per day, and was buying fish from fishermen in the waters of eastern Carolina and at Morehead, in competition with the plaintiff, when the latter resorted to the court of equity to restrain him. The defendant was not conducting the business in the name of Way Bros. & Co., who had entered the combine, and if he was he was not subject to an injunction in repudiating an illegal contract, whose formation was indictable under the “antitrust” statute, but was doing business under the firm name of B. C. Way & Co. As soon as he entered the business in competition with the “combine” the price of fish to the fishermen advanced at once from one to three cents per pound, while at other points within the 100-mile radius, where tbe defendant could not compete for lack of funds, tbe price was kept down. Tbe injunction was sued out by tbe plaintiff to prevent open competition in tbe market, to preserve which tbe antitrust statute was passed.

Tbe contract under which tbe plaintiffs ask for this equitable relief is void: (1) because against public policy, (2) because tbe area attempted to be embraced therein is unreasonable, (3) because such contract creates a virtual monopoly of tbe fish business, over nearly tbe whole sea front of this State, in tbe bands of tbe plaintiff company, and prevents competition both in buying- and selling fish. It takes from tbe fishermen reasonable returns in tbe sale of their “catch” by reason of tbe lack of competition and enhances tbe price to consumers for tbe same reason.

Tbe covenant on its face shows no consideration except compensation for tbe personal property put into tbe “combine,” against which stock was issued. There was no consideration named for tbe agreement not to compete. Indeed, tbe true consideration was tbe monopoly of tbe business, which is illegal under tbe statute and makes tbe whole contract void.

Even if this combine could be likened to tbe cases where a doctor or a dentist sells bis business and good-will, and in order to guarantee such conveyance of the “good-will” stipulates that be will not practice within a certain territory within a certain time, this contract would be unreasonable by reason of tbe great space covered by a radius of 100 miles in every direction and ten years duration.

But in truth there can be no analogy between cases where one man sells bis personal business to another with a reasonable stipulation to preserve tbe good-will of tbe business and this instance where practically all tbe dealers in a prime article of necessity, fish, oysters and tbe like, at tbe chief center of that industry enter into a combination whose evident intent and necessary effect is to create a monopoly for tbe purpose of reducing (as has been shown was the case here) tbe selling price of fish in tbe bands of those who catch them and to raise tbe selling price to tbe consumer.

There are affidavits in this record by more than 100 fishermen that tbe plaintiffs’ combination, locally known as tbe “Fish Trust,” has affected competition and tbe price. Naturally this would be so, and it is bard to realize any other motive for its formation than to make larger profits for tbe company as a middleman by reason of tbe destruction of competition. It is true that there is no express agreement to fix prices, as in S. v. Craft, 168 N. C., 208. Neither was there such express agreement 'in tbe combination and the absorption of rival companies which were held illegal and ordered to be dissolved in tbe Standard Oil case, 221 U. S., 1, and American Tobacco Co. case, ib., 106.

In Cowan v. Fairbrother, 118 N. C., 407, relied upon by tbe plaintiff, there was an agreement not to publish a competing paper in this State for ten years. In its very nature this could not seriously affect the public, because there is free opportunity to establish newspapers, which are largely the product of the individual ability of the editors. But the fish business is a necessity to the public and the sale by the fisherman of their product in a competitive market is the right of the more than 1,000 men whom this record shows are engaged in this State in catching fish for market.

In Wooten v. Harris, 153 N. C., 46, it was held that wh,ile a merchant could sell his good-will in that business and could protect the conveyance thereof by agreeing not to again engage in such business in that town or “near enough thereto to interfere with the vendee’s business,” yet an agreement might be invalid “if it was shown that this was one of many similar contracts tending to engross or monopolize any given business, or the sale of any article within the territory named.”

The General Assembly of 1913, ch. 41, intended to make more strenuous, and not less so, the laws against illegal trusts. The second proviso in subsection F, sec. 5, of that chapter, “Provided, further, that nothing herein shall be construed to prevent a person, firm or corporation from selling his or its business and good-will to a competitor and agreeing in ■writing not to enter business in competition with the purchaser in a limited territory as is now allowed under the common law,” applies only to a bona fide sale of the “good-will” to the competitor, when the vendor goes out of the business himself. It permits in such cases protection of the good-will by permitting the vendor to agree not to compete within reasonable limits and within reasonable time. It has no ajiplication to a “combine” like this where the vendor goes into the combination or where the extent of territory and length of time are unreasonable. The territory here covered embraces practically nearly the entire territory in which fish can be taken in the waters of this State, including Albe-marle and Pamlico sounds, the Cape Fear, Neuse and Tar rivers, and the lower part of Roanoke and Chowan rivers — in short, almost the entire water front of North Carolina and the rivers, streams and sounds that flow to the east.

Was it ever heard of that a stockholder in a railroad company, or other enterprise affecting the public generally, could contract that he would not take part in building another railroad, or sharing in the promotion of another enterprise of public interest? Aside from being in violation of the antitrust statute, such contract would be contrary to public policy, which encourages not only competition, but the promotion of public enterprises such as increasing the supply of food. Certainly a court of equity would not give its aid to the enforcement of such contracts.

It is not objectionable that many men sbonld join tbeir capital to create a large corporation. That may be, indeed, desirable by making possible tbe reduction of expenses and furnishing accommodation to tbe public at a lesser rate. What is objectionable is binding its members not to take any part in other similar enterprises, which will be for the public benefit, thus reducing competition, when the public interest requires the increase of facilities in furnishing food or other public benefits.

A large number of people are interested in catching fish as a livelihood, and a very much larger proportion of them are dependent, more or less, upon fish ancL oysters for food. A great combination like this, that strikes at those who catch fish and take oysters as a means of livelihood and at those who consume them, is in its nature even more deleterious, if possible, to the public interest than the great Tobacco Trust, which dealt with an article of luxury, and not of food.

The antitrust law of 1913, ch. 41, was passed to give not less, but more effective protection to the public. The proviso therein, permitting a person to sell his business and good-will to another, cannot be construed to destroy the entire act. Succeeding-the proviso to which such great effect is attributed, and in the same section, is this further proviso: "Provided, such agreement shall not violate the principles of the common law against trusts and shall not violate the provisions of this act.”

A great lawyer in England once said, as quoted by Macaulay, that he “could drive a coach and six through any act of Parliament.” Certainly the entire fishing fleet of North Carolina should not be sailed through this act because an incidental provision therein' permits a man to sell the “good-will” of his business and to secure its conveyance by agreeing to abstain from exercising that business fon a reasonable time and within rea-' sonable limits. It ought not to be construed to permit such a “combination” as is here provided for of the entire fish and oyster. industry of North Carolina by the middlemen who buy the product from the fishermen and resell it to the public.