Under the common law, agreements in restraint of trade, which are regarded as against public policy, are held to be void and unenforceable. The court will not aid any party whose rights are derived from such an agreement. In this sense these agreements are unlawful or illegal. By statute a criminal liability has been imposed in certain cases, especially those involving an element of conspiracy. (See pp. 2, 3.) In former times attempts to control the market in respect to victuals and other necessaries were punished as criminal offenses,1 apparently without regard to whether a conspiracy existed or not.

Section 2. Agreements connected with the sale of a business.

Centuries ago English courts laid down the rule that contracts in restraint of trade could not be enforced. The courts were opposed to upholding any restraint, however limited. Most of the cases which came before the courts in that period involved agreements whereby the vendor of a business agreed not to reengage in the same line of trade. The courts took the view that no one should be allowed to bind himself not to carry on the trade to which he was accustomed or to limit his right to carry it on in his own way. It was believed that such a rule was in the interest of trade.

This view prevailed until early in the eighteenth century when the case of Mitchell v. Reynolds 2 was decided. In that case, after a thorough examination of the earlier decisions, the court held valid the particular agreement that was involved in the case before it. In reaching this result the court said in part:

We are of opinion, that a special consideration being set forth in the condition, which shows it was reasonable for the parties to enter into it, the same is good; and that the true distinction of this case is not between promises and bonds, but between contracts with and without consideration; and that whereever a sufficient consideration appears to make it a proper and a useful contract, and such as cannot be set aside without injury to a fair contractor, it ought to be maintained; but with this constant diversity, viz., where the restraint is general, not to exercise a trade throughout the kingdom, and where it is limited to a particular place; for the former of these must be void, being of no benefit to either party, and only oppressive, as shall be shown by-and-by.

In all restraints of trade, where nothing more appears, the law presumes them bad; but if the circumstances are set forth, that presumption is excluded, and the Court is to judge of those circumstances and determine accordingly; and if upon them it appears to be a just and honest contract, it ought to be maintained.

This decision, that some restraints could be enforced, established an important modification to the earlier rule. The decision recognized the rule as to all general restraints, because it seems to have

164 L. R. A., 659n. Compare, however, Coke's Institutes, chap. 89; Hawkins's Pleas of the Crown, chap. 80, London ed., 1739; and Rex r. Waddington (1801), 1 East, 143. #1 P. Wms., 181 (1711).

been thought that there could be no question that all such restraints were bad. In cases where the restraint was limited to a particular place, however, it was held that the court should determine whether it was just and honest, having regard to the circumstances, and, if so, it should be enforced.

This decision gave rise to some confusion and uncertainty in the use of the term "restraint of trade," which has persisted until the present time. By some the term has been used to include all restraints where any limitation in fact is involved without regard to whether the contract was just and honest or not, while by others it has been used to include only those restraints which are unen forceable. Failure to observe this distinction has caused misapprehension in respect to the legal significance of the term

This confusion has been increased by some lack of uniformity in the decisions themselves. Some courts have apparently felt constrained to follow precedents established under economic conditions that prevailed in earlier years, rather than to regard changes in such conditions as among the "circumstances" referred to in the rule laid down in Mitchell v. Reynolds, as to what should be taken into consideration in determining whether the contract is "just and honest." On the other hand, some courts, especially in England, in following the spirit of this rule, have gone farther in its application and even held some general restraints enforceable, as in the case of the sale of trade secrets and trade of a special character, which, although of wide extent, is confined to a limited number of customers.1

The dictum in Mitchell . Reynolds, that a general restraint not to exercise a trade throughout the kingdom was void, has been attributed to the probability that at the time that case was decided it seemed inconceivable that an agreement to refrain from establishing a business of the same kind anywhere in the kingdom should be necessary to the protection of the good will of any business then existing. In following this dictum it came to be held in England that any restraint whose limits were coterminous with the kingdom should be regarded as void, and the courts continued to apply the limits thus arbitrarily fixed, even in cases where, under more modern conditions, the circumstances might have been held to justify a more liberal interpretation of the rule. The dictum has been followed in a number of American cases which hold that an agreement involving a restraint covering, or substantially covering, an entire State is void. as a general restraint. This was the view taken by the court in Law

1 Jolly, Contracts in Restraint of Trade, p. 19 (3d ed.. London, 1914).

* See Anchor Electric Co. v. Hawkes, 171 Mass., 101 (1898) at p. 105.

* Among these cases may be mentioned Lawrence et al. r. Kidder, 10 Barbour (N. Y.), 641 (1851); Taylor e. Blanchard, 13 Allen (95 Mass.), 370 (1866); and Western Woodenware Association r. Starkey et al., 84 Mich., 76 (1890). In connection with the latter case, see Beal v. Chase et al., 31 Mich., 490 (1875) on p. 33 of this report.

rence v. Kidder, cited in the note. In that case the defendants had covenanted that for five years from the date of the contract they would discontinue the manufacture and sale of palm-leaf beds or mattresses, or materials out of which such beds are made, in all the territory of the State of New York west of the city of Albany, and that they would not sell beds or materials for beds to agents of the plaintiffs in Columbus, Ohio. In an action based on an alleged breach of this contract it was held that the contract was in restraint of trade and void, the restriction embracing too large a territory. In reaching this result the court expressed itself, in part, as follows:

I am of the opinion, independent of authority, that a contract prohibiting to an individual the pursuit of any trade or employment throughout the State of New York, should be regarded as a contract in total restraint of trade within the common law.

In the Massachusetts and Michigan cases cited in note 3 on page 27, the respective courts were inclined to hold that a restraint extending throughout the State is void, apparently on the ground that to uphold the restriction would result in driving business from the State and throw certain of its citizens out of employment, or cause their removal from the State. In the Massachusetts case it appeared that the plaintiff had been engaged in the manufacture and sale of shoe cutters at Marlboro, Mass.; that the manufacture could only be carried on by persons instructed in the same; that the business was then confined to the plaintiff and three other parties in other parts of the State; and that the plaintiff was doing a large and profitable business. It further appeared that the plaintiff received the defendant, who was wholly ignorant of the business, into partnership, under an agreement providing that if the partnership were dissolved the defendant should not at any time thereafter carry on the business of manufacturing or selling shoe cutters at any place within the State of Massachusetts. The defendant, after the dissolution of the partnership, engaged in the same business in Boston with a new partner, and traded with and supplied customers of the plaintiff. In holding the contract to be contrary to public policy and void, the court said: A monopoly extending throughout the State may be as really injurious to the people of the State as if it extended throughout the whole country. Whatever may be the extent of the State, the monopoly restricts the citizen from pursuing his business, unless he transfers his residence and his allegiance to some other State or country. Its tendency is to drive business and citizens who are skilled in business from this to other States.

*

In the present contract the court can see nothing beneficial to the public, and are of opinion that it is contrary to the well-established policy of the law, and void.

In the Michigan case referred to, a manufacturing firm in Michigan sold their stock and material to an Illinois corporation engaged in a similar business, and agreed not to engage in the business for

five years in eight specified States, including those in which the parties resided, nor to allow the premises where they had carried on their business to be used for that purpose, without the consent of the corporation. The complainants brought suit for an injunction and an accounting, alleging that some of the defendants had procured the incorporation of a new company, to which the premises in question were indirectly conveyed, and that they had active supervision of said corporation and were engaged in competition with the complainants in the eight States specified in the agreement. From a decree dismissing the bill complainant appealed. In holding the contract void on grounds of public policy, the court expressed its opinion as follows:

The interests of the parties alone are not the sole considerations involved here. It is the duty of the court to see that the public interests are not in any manner jeopardized. * Here a large manufacturing business had been established, and presumably it gave employment to quite a number of people. By the contract these people are thrown out of employment and deprived of a livelihood, and no other of the citizens of Michigan are called in to take their places. The business is no longer to be carried on here, but is removed out of the State. * * * I do not think it needs the citation of authorities to show that contracts of this nature have frequently been condemned by the courts and held void as unreasonable restraints of trade and therefore vold on the ground of public policy.

On the other hand, in the State of New York, restraints covering, or substantially covering, the entire United States, have been upheld as valid. One of these agreements related to the manufacture and sale of matches1 and another to thermometers. In the Diamond Match case the defendant, who was engaged in the manufacture of matches in New York and in their sale throughout the States and Territories, sold his good will, etc., to the Swift & Courtney & Beecher Co., a corporation engaged in the manufacture of matches in Connecticut, Delaware, and Illinois, and in selling its product throughout the country. Defendant covenanted with the purchaser and assigns that he would not engage in the manufacture or sale of matches at any time within 99 years, except in the service of the purchasing company, in any of the States or Territories except Nevada and Montana, and he executed a bond in the penalty of $15,000 as liquidated damages in case of a breach of his covenant. In an action brought by the Diamond Match Co., assignee, to restrain the defendant from engaging in the manufacture or sale of matches in violation of the covenant in the bill of sale, the court held that the question as to what was a general restraint of trade did not depend upon State lines; that they were not the boundaries of trade and commerce; that a restraint was not neces

Diamond Match Co. v. Roeber, 106 N. Y., 473 (1887).

Watertown Thermometer Co. v. Pool et al., 51 Hun, 157 (1889).

sarily general, which embraced an entire State; and that the covenant, being supported by a lawful consideration, constituting a partial and not a general restraint, and being, in view of the circumstances, reasonable, was valid.

It has sometimes been claimed that this decision marked a departure from the common-law rule by holding that even contracts in total restraint of trade should be upheld in order to preserve the greatest possible freedom of contract. The court, however, expressed the opinion that the public interest was not involved, and that the restraint was not total, and held that as the contract did not confer any special or exclusive privilege nor create a monopoly there was little danger that the public would suffer harm from a lack of persons to engage in a profitable industry. It was expressly pointed out that combinations stand on a different footing. The report of this case does not indicate that any question was raised by the parties or the court as to the validity of the contract on the ground that it was a part of the plan in the organization of the Diamond Match Co., which, in a Michigan case subsequently decided, was held to be an unlawful combination formed to effect a monopoly. (See p. 66.)

In the Watertown thermometer case it was alleged by the plaintiff, and admitted by demurrer, that the defendant, Julia Pool, in consideration of $5,000, by a written agreement, under seal, had sold to two persons named therein, 100 shares of the stock of the plaintiff corporation, and assigned to them the trade-mark used on thermometers and storm glasses manufactured by her; that she had authorized the transfer of such trade-mark to the plaintiff, which had its principal place of business at Watertown; and that she had also agreed "not to engage in the manufacture of any thermometers of any kind or description, nor of any storm glasses, at any place within the United States, at any time within a period of 10 years from the date" thereof. It also appeared that for the same consideration the defendant, Herbert Pool, had agreed that he would not in any manner whatever engage in the manufacture of thermometers or storm glasses within said period of 10 years. It was also alleged that all the rights secured by said agreement had been transferred to the plaintiff, and that for its full and proper development the plaintiff's business required, for a considerable period of time, the entire territory embraced under such agreement. It was further alleged that the defendants had violated their agreement by engaging in the same business at Oswego under the name of the Oswego Thermometer Works. The only question raised was as to the validity of the contract. The defendants claimed that it was in general restraint of trade and therefore void, founding this claim on the extent of territory covered by the restrictions. It was held that the restraint, though general, was at the same time coextensive only with the