The Common Law on Restraint of Trade

Author(s): Theodore C. Bartholomae

Source: The University Journal of Business , Aug., 1923, Vol. 1, No. 4 (Aug., 1923), pp.
451-466
Published by: The University of Chicago Press

Stable URL: https://www.jstor.org/stable/2354631

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 THE COMMON LAW ON RESTRAINT OF
TRADE

The following article upon the subject of monopoly in general

makes no pretence to completeness. It confines itself strictly to
the common law subject of restraint of trade, and altogether
neglects the federal and state statutes pertaining to the subject.
However, the most important topics involved will be studied,
the leading cases reviewed, and the minority opinion presented
when possible. The passage of a considerable body of federal
statutes relating to restraint of trade has not nullified the common
law upon the subject, especially since the Supreme Court of the
United States in Standard Oil Company v. United States, 22I
U.S. I, decided that the term restraint of trade as used in the
Sherman Act should be construed as declaratory of the common
law on the subject.
Strictly speaking, the term restraint of trade applies only
to those agreements not to pursue a particular trade, profession,
or business, while the broader term restraint of competition has
to do with attempts to control the markets.' The terms are
often used interchangeably, sometimes causing confusion.
In this article both invalid and valid agreements imposing a
restraint on either trade or competition will be considered. Most
of these valid agreements are restraints on trade, found in con-
nection with the sale of a business, while the invalid undertakings
are, as a rule, restraints on competition. The rules relating to
the former are fairly well established and will not be considered
at any great length; the broader and more recent doctrine pro-
hibiting all contracts which tend unreasonably to restrict compe-
tition must, however, be considered more at length.

A. VALID AGREEMENTS

i. In connection with the sale of a business-Under the modern

doctrine of reasonableness, agreements entered into in connection
with the sale of a business will be upheld, if in light of all the
I Fisher Flouring Mills v. Swanson, 76 Wash. 649 (I9I3).
45I

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452 THE UNIVERSITY JOURNAL OF BUSINESS

surrounding circumstances, they are reasonably necessary to the

protection of the parties involved and not specially injurious
to the public.' But if unreasonably restrictive or detrimental
to the public interest they are invalid.2 Businesses, however,
are not always sold under an express agreement not to compete
in the same business again on the part of the vendor. In such
cases, the vendor has sometimes reentered into business in
competition with the business sold and the courts have been
called upon to determine what protection the purchaser is entitled
to as against this unwelcome competition. Certain rules have
been laid down in connection with such cases and these will now be
be reviewed somewhat briefly.
Competing with the purchaser after the sale of a business and
its goodwill-As a general rule, the vendor of a business and its
good-will, may, in the absence of an express contract to the
contrary, reenter the same line of business, in the same locality, in
coinpetition with the purchaser. Thus in Williams v. Farrand,
88 Mich. 473 (I89I), it was said, "The right to engage in business
in his own name attaches to the retiring partner, and, unless
expressly so agreed, there is no restraint upon that right."
Even where the good-will is expressly sold, using the definition
of good-will laid down by Lord Eldon in Cruttwell v. Lye, I7 Ves.
335 as "the probability that the old customers will resort to the
old place" (this definition has been sharply criticized in later
decisions), it has been held that this does not prevent the vendor
from competing with the purchaser.3
A somewhat different rule has been laid down in Massa-
chusetts in the case where the good-will of a business has been
sold. This rule has been stated by the Supreme Court of
Massachusetts in Old Corner Book Store v. Upham et al, 194 Ma
TOT (I907) as follows: "In each case where the good-will of
business is sold, and the vendor sets up a competing business it is a
nuestion of fact whether. having regard to the character of the

I'Hubbard v. Miller, 27 Mich. i9 (I873).

2 Walker v. Lawrence, I77 Fed. 363 (I9IO) and Fisher Flouring Mills Co. v.
Swanson, supra.
3 Pearson v. Pearson, 27 Ch. Div. I45.

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 RESTRAINT OF TRADE 453

business sold and that set up, the new business does or does not
derogate from the grant made by that sale." This has been
affirmed in later decisions.'
As stated above, it is the rule in states other than Massa-
chusetts that the vendor may, in the absence of an express con-
tract to the contrary, reenter the field in competition with the
vendee, but there is an exception to this rule in the sale of the prac-
tice of a professional man. In these cases it seems that the good-
will involved is inseparable from the personality of the vendor
and to allow him to compete with the practice sold would be to
take back that which he has sold and leave the purchaser nothing.
So it has been held in the case of the sale of a dental practice,
Foss v. Roby, I9 Mass. 292 (I907), where it was said that "the
personal qualities of integrity, professional skill, and ability attach
to and follow the person and not the place." This has been
affirmed in the case of a physician.2
With the exceptions already noted, the vendor may set up a
similar business in the same community, but the courts will, by
weight of authority, enjoin him from soliciting the patronage of
customers of the old business. It was so held in Von Bremen v.
MacMonnies et al, 200 N.Y. 4I (I9I0), and the Supreme Court
of Illinois also has held that the vendor of a business of manu-
facturing soft drinks should be restrained, on reentering the
business in competition with the purchaser, from soliciting the
trade of those who patronized the business at the time of its sale.3
There are also decisions which hold to the contrary,4 but they
seem to be in the minority.
Apprenticeship agreements-Agreements entered into in con-
nection with apprentices may be briefly mentioned here. It is
socially desirable that masters be allowed to teach apprentices.
In paying for such services, it is easiest for the apprentice to give
his services and a covenant not to comDete with his master when

x Marshall Engine Co. v. New Marshall Engine Co. et al, 203 Mass. 410 (I909).
2Beatty v. Coble, I42 Ind. 329.
3 Ranft v. Reimers, 200 II. 386 (I902).

4 Williams v. Farrand, supra; Cottredl v. Babcock Printing Press Co., 54 Conn.

122 (i886).

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454 THIE UNIVERSITY JOURNAL OF BUSINESS

he has completed his term of training. Otherwise the apprentice

would have to pay a high cash price and would probably receive
poor instruction. Hence, agreements entered into between
master and apprentice by which the latter covenants not to
compete with the former after his course of training is completed,
have been held valid, provided the restriction is not broader than
that of the master's business."
2. Exclusive contracts of sale and purchase-Contracts for
exclusive dealing are uniformly upheld at common law, unless
they are unreasonably restrictive, and the same tests are used
to determine their validity as are applied to other contracts in
restraint of trade. Contracts of this kind affording a fair pro-
tection to the parties concerned and not detrimental to public
interest, are valid and enforcible. This is because the chief
effect of these contracts is to promote the trade of the parties
thereto, and only incidentally to restrict competition.
Contracts to buy or deal exclusively in the goods of one person-
The weight of authority appears to hold that contracts by which
one person agrees to buy exclusively from, or to deal only in the
goods of another, are valid at common law. In accord with
the earlier American cases so holding,2 the Supreme Court of
Oklahoma recently held that the agreement of a dealer to
purchase his entire supply of wall paper from a certain wholesaler
was valid, and that the latter could recover for the goods sold
pursuant to the contract.3 In that case the court laid down
the following rule for determining the validity of such contracts:
An agreement of a retailer to buy a particular line of goods exclusively
from a certain manufacturer thereof, for a limited period of time, and con-
fined to a particular locality, in consideration of other covenants therein of
mutual advantage to the parties, and when otherwise unobjectionable under
the law, is not invalid because it is in restraint of trade.4

Similarly, contracts to sell exclusively to one person are up-

held. For examnle. where one of the Darties to a contract. in
I Hitckcock v. Coker, 6 A. and E. 438 (I837).
2 Palmer v. Stebbins et al, 3 Pick. i88 (I825).
3 Ripy and Son v. Art Wall Paper Mills, 4I Okla. 20 (I9I3).
4 See also: Standard Faskion Co. v. Siegel-Cooper Co., I57 N.Y. 6o (I898);
Soulthern Fire Brick and Clay Co. v. Garden City Sand Co., 223 Ill. 6I6 (I906).

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 RESTRAINT OF TRADE 455

consideration of a covenant by another to purchase a given

amount of peppermint oil from him, agreed not to sell such oil
to anyone else, the court held the agreement to be only in partial
restraint of trade and therefore valid.,
While contracts between individuals or private corporations
for exclusive dealing or patronage are very generally upheld, a
different rule is sometimes adopted in the case of such contracts
entered into with public service corporations, and to contracts
between such corporations for exclusive dealing with each other.
Thus, where a hotel proprietor allowed a telephone company to
install telephones in the hotel, and gave the company the exclu-
sive right to do so, the agreement was held invalid.2
It is also clear that contracts binding public service companies
to serve one person exclusively, since the contract is opposed to
the fundamental obligations of such companies to serve all
impartially, are clearly invalid.3
Contracts for exclusive agency or for exclusive territory-
Contracts by which a manufacturer agrees to do business in a
certain territory exclusively through one dealer have been upheld
by numerous decisions. Thus, in a case where a manufacturer
violated his agreement with a dealer to whom he had given the
exclusive right to handle his goods in a town by immediately
selling the same class of goods to two other dealers in the same
town, the court held the agreement valid and refused to allow
the manufacturer to recover the contract price of the goods sold.4
Contracts by which a dealer binds himself to sell only the
goods of a particular manufacturer in a certain territory have
also been upheld.5
Contracts for rebates in consideration of exclusive dealing-
A form of contract often employed for the purpose of inducing
exclusive patronage is one whereby one party offers the other a

r Van Marter v. Babcock, 23 Barb. 633 (I857).

2 Central New York Telephone and Telegraph Co. v. Averill, i99 N.Y. I28 (igio).
3Sammons v. Kearney Power and Iirrgation Co., 77 Nebr. 580 (Igo6).
4 Keith v. Herchberg Optical Co., 48 Ark. I38 (i886). Also Pacific Factor Co. v.
Adler, go Cal. II0 (I89I).
s Newell v. Meyendorjf, 9 Mont. 254 (1890).

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456 THE UNIVERSITY JOURNAL OF BUSINESS

rebate on the purchase price of the goods if at the end of a

certain period he shall not have sold or dealt in the goods of
another. The dealer is not obligated to handle the goods of the
manufacturer exclusively, but if he does so he is entitled to the
rebate. Sometimes no rebate is offered, but rather the manu-
facturer, particularly when he occupies a strong position in the
industry, will refuse to deal with those handling the goods of
another. These agreements are generally upheld at common
law.' It has also been held that a refusal to deal except on restric-
tive terms is valid, and competitors injured thereby cannot
recover damages.2

B. INVALID AGREEM1ENTS

i. Agreements among competitors to suppress com

Competitors sometimes enter into agreements between them-
selves by which they covenant not to compete with each other in
order to secure larger profits. The agreement may be a mere
informal understanding or it may be written. The restraint
may take the form of limiting output, controlling supplies, fixing
prices, dividing territory, etc. The courts have generally held
such agreements invalid on the ground that by concentrating the
control of a market in the hands of certain parties to the exclusion
of others, prices may be arbitrarily advanced, quality deteri-
orated, etc., to the detriment of the public. It is proposed to
consider, briefly, the chief forms which these restraints take,
and the validity of each.
By division of territory or business-A restraint on competition
by an agreement to divide territory has been held invalid in a
number of cases. For example, an agreement by which one gas
company was given the exclusive right to supply a certain section
in the city of Charleston and the other company the right to
supply the remainer, each agreeing not to invade the other's
territory nor to permit others to do so, was held invalid. The
contract also provided that earnings were to be divided in a cer-

INational Distilling Co. v. Cream City Importing Co., 86 Wis. 352 (I893);
Corn Products Refining Co. v. Oriental Candy Co., i68 Ill. App. 585 (I9I2).
2Roseneau v. Empire Circuit Co., I3i N.Y. App. Div. 429 (1909).

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 RESTRAINT OF TRADE 457

tain proportion., The court held that the contract was void as
against public policy, as it tended to stifle competition and
create a monopoly. This viewpoint has been upheld by the
United States Supreme Court.2
Agreements to pool earnings-Agreements entered into between
competitors by which they agree to pool their earnings and divide
the total among themselves in certain proportions are held
invalid, generally, at common law. Thus, an agreement to
divide earnings secured from competitive tariff between certain
points on two parallel railroad lines has been held invalid.3
Limiting output-Competition is sometimes suppressed by
one manufacturer agreeing, for a consideration, to cease manu-
facturing a certain product, allowing the other party or parties to
the contract to monopolize the trade in a product, or secure a
preponderant position in the industry. In Oliver v. Gilmore, 52
Fed. 562 (I892), the plaintiff contracted with the five defendants
not to operate his plant for five years in the manufacture of
certain hinges, the obligees agreeing to pay him 32 per cent of
their receipts from the sale of these hinges. The court held the
agreement invalid as "an incumbrance on the freedom of indi-
vidual action, necessary to the public good."
Trade associations have at times attempted to control prices
by limiting output as, for instance, the attempt by the Yellow Pine
Manufacturers' Association to curtail output by agreement and
concerted action.4 Such attempts by associations have also been
adjudged illegal under the Sherman Act.
Price fixing-Competing concerns have often resorted to
association in order to restrict competition among themselves.
One method employed has been to limit output, as mentioned
above. More often, though, their activities have been bent
toward fixing prices which their members should charge. Cases
involving such restraints are usually judged by their effect upon
the nublic.
I Charleston Gas Co. v. Kanawha Gas Co., 58 W.Va. 22 (I905).
2 United States v. Addyston Pipe and Steel Co., I75 U.S. 2II.
3 Texas and Pacific Railway Co. v. Southern Pacific Railway Co., 41 La. Ann.
970 (I889).
4 State v. Arkantsas Lumber Co. et al, I69 S.W. I45 (19I4).

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458 THE UNIVERSITY JOURNAL OF BUSINESS

More v. Bennett, I40 Ill. 69 (I892) was a case in which the

parties to the suit were members of the Chicago Law Stenog-
raphers' Association, the constitution and by-laws of which
stated that a schedule of rates was to be drawn up and observed by
all members; that members should not underbid each other but
might do so against outsiders; that members violating the
agreement should be subject to fine. The action was based upon
a violation of these by-laws. The court held that the association
was formed to control the prices charged by its members by
restraining all competition between them, and so was void as
against public policy.
The court in Emery v. Ohio Candle Co., 47 Ohio St. 320
(I890), held illegal an attempt by the Candle Manufacturers'
Association to raise prices, as charged by its members, and to
limit output. These results were actually attained, but the
court refused to aid the plaintiff, who had joined the association
and had later withdrawn, to recover its share of the profits under
its contract with the association. In De Witt Wire-Cloth Co. v.
New Jersey Wire-Cloth Co., I4 N.Y. Supp. 277 (I89I), five
concerns engaged in the manufacture of wire-cloth entered into
an agreement whereby, for the avowed purpose of regulating the
price of their product, they formed themselves into an association,
agreed not to sell below stipulated prices, and subjected them-
selves to a very heavy penalty for violation of this agreement.
Such a clear case of restraint was, of course, held illegal. There
are many other decisions to the same effect.
Employing a common marketing agency-Competitors some-
times resort to the employment of a common marketing agency
in order to restrict competition and thereby control production
and prices. The members usually remain independent concerns
except in respect to the particular matters for which the agency is
employed.
Several agreements of this kind have been entered into
in connection with coal mining. In the case of Morris Run
Coal Co. v. Barclay Coal Co., 68 Pa. St. 173 (I87I), five corpora-
tions entered into an agreement by which they divided two coal
fields among themselves, the coal mined to be delivered to a

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 RESTRAINT OF TRADE 459

common marketing agency, and each cor

proportion as directed. An agent was to
was to be sold in any other way. The cou
void as against a state statute and public policy. A somewhat
similar case was involved in Pocahontas Coke Co. v. Powhatan
Coal and Coke Co., 56 S.E. 264 (I906).
An agreement among producers to employ a common market-
ing agency was involved in Central Ohio Salt Co.. v. Guthrie, 35
Ohio St. 666 (i88o). Practically all the manufacturers of salt
in a large salt-producing territory organized the plaintiff com-
pany for the express purpose of regulating prices and fixing qual-
ity. As soon as packed in barrels the salt produced became the
property of the company. The court refused to aid the company
in forcing a member to deliver salt to it in conformity with the
agreement.
The courts have also held illegal agreements among competing
buyers by which competition among them in the purchase of
certain commodities was eliminated. In Chapin v. Brown, 83 Ia.
I56 (I89i), all the grocerymen in Storm Lake, Iowa, agreed
to abandon the business of buying butter to an exclusive agent
who was to performn this function for them. The court held that
the agreement plainly destroyed all competition in the purchase
of butter and might work a hardship on the farmers who custom-
arily sold their dairy products in the town.
In People v. Milk Exchange, I45 N.Y. 267 (I895), it was held
unlawful for all the milk dealers and commission men in New
York City to organize and fix the standard or market price at
which milk should be purchased by its members. This was an
action by the attorney-general to dissolve the corporation and
vacate its charter. The court held the corporation inimical
to trade and so unlawful.
It has been held lawful in some cases, however, to employ a
common marketing agency. In Burley Tobacco Society v.
Gillespy, 5I Ind. App. 583 (I9I2), a combination formed to
markpt a certain crop and to secure fair prices therefor was held
vali'd by the court because of the absence of anything to show
that more than a fair price for the product was sought. There

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460 THE UNIVERSITY JOURNAL OF BUSINESS

are many similar organizations in existence now, especiall

the fruit growing and dairy products industries, and wh
conduct themselves in such a way as to benefit their memb
not injure the public there is no reason why they should
be held valid. They are but a step in the evolution of our m
ing machinery.
It is thus seen that, in general, all agreements entered i
competitors by which they agree to suppress competition'
themselves in order to raise prices or secure some other en
mental to public interest, are invalid at common law. If,
however, the agreement is reasonable between the parties and
the end sought is a legitimate one, the agreement will be held
valid if the public is not thereby injured.
2. Particular combinations-Because the courts have generally
held that direct agreements among competitors to restrain
competition between themselves in order that they may make
greater profits or in some way operate to the detriment of
public interest are invalid at. common law, combinations of
competing interests in some form or other has often been
resorted to. It was hoped that the courts would look with
more favor upon combinations than they had upon direct
agreements, and it seems that there was some ground for
this feeling, as found in a dictum of the court in People v. Nortk
River Sugar Refining Co., I2I N.Y. 624 (I889). These hopes
were not realized, however. In general, the courts have taken
no more favorable view of combinations than they have of direct
agreements to restrain trade and competition.- The same
evils are present in both.
It is proposed to consider here the chief forms which these
combinations have taken and the views of the courts upon the
same.
Partnership and pool-The commonest type of combination
has been that of the pool of some sort or other, in which the
participants agree to suppress the competition between them-
selves to some extent without surrendering altogether their
right to conduct their own business. Though formed in the
brass industry as early as I853 and in the cordage industry in

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 RESTRAINT OF TRADE 46I

i86i, pools were of little importance until the expansion of busi-

ness after the Civil War when competition became keener.
To check this competition, pools were formed. They have been
numerous ever since. The following types of pools may be dis-
tinguished: (i) the speculative pool, formed for speculative
purposes, as the French Copper Syndicate of I887; (2) the regula-
tion of the output pool, as the cotton bagging pool of i888;
(3) division of the field pool, as that involved in the Addyston
Pipe and Steel Co. case; (4) the selling agency pool, Central
Ohio Salt Co. v. Guthrie, supra; (5) the patent pool, as that
formed by the General Electric Company.
At common law, pools were negatively illegal, i.e., they were
merely unenforceable. Such a slight restraint upon their forma-
tion tended to lead to their adoption. Though rather easily
formed and possessing many advantages, pools have their weak-
nesses; chief among them was the difficulty of keeping the pool
intact, for though it was to the interest of the pool as a whole
to keep production down, yet it was to the interest of each
member to increase his production as much as possible.'
License or lease-Similarly, any device or arrangement by way
of license or lease whereby competition is suppressed, is illegal,
by common law as well as by statute. Thus, in Tuscaloosa Ice
Co. v. Williams, I27 Ala. IIO (I899), the plaintiff leased his ice
plant to the defendant for a certain period for a consideration.
The lessee then closed the plant of his former competitor and
monopolized the ice business of the town. The court held the
business was not transferred but destroyed and refused to enforce
the agreement.2
Trust agreements-The trust is an ancient device by which the
legal ownership and management of property can be put in the
hands of one person (trustee) while the beneficial interest remains
in another person (cestui que trust). Because direct agreements to
restrain competition were usually held illegal, competitors then

I Pools are involved in the cases of Getz v. Federal Salt Co., I47 Cal. II5 (I905);
India Bagging Association v. Kock and Co., I4 La. Ann. i68 (I859); Morris Run
Coal Co. v. Barday Coal Co., supra.
2 Clark v. Needham, I25 Mich. 84, and Oliver v. Gilmore, supra.

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462 THE UNIVERSITY JOURNAL OF BUSINESS

resorted to this legal device and used it in an illegal way.

device was first used in I879 in the -formation of the Stand
Oil Company, the stocks of some thirty separate companies b
turned over to three trustees to hold for the depositors' bene
The trustees then issued trust certificates to depositors of st
With the stock in their hands these three trustees could vot
as they pleased and thus control each company in which
held a majority of the stock. The courts have held that the
procuring of a monopoly by a trust agreement is contrary to law
and against public policy.
The first great trust case was decided in People v. North
River Sugar Refining Company, supra, a quo warranto proceeding
to vacate the charter of the defendant corporation. Some
twenty-three sugar-refining companies in I887 had formed the
sugar trust and obtained control of about go per cent of the
production of the United States. It was held that by the
entrance of the defendant corporation into the Sugar Refineries
Co., or the sugar trust, it had vacated its charter.
This decision was followed by another of great importance,
State of Ohio v. Standard Oil Company, 49 Ohio St. I37 (I892).
Here the Standard Oil trust was held ultra vires, contrary to
public policy, and void.'
Holding company-The trustee device having failed, resort
was next had to the holding company. In its simple form it is a
company which owns the stocks of the companies whose property
and business are under its control. Most holding companies,
however, own and operate directly a part of the-property and
business under their control. The New Jersey laws permitting
the formation of such companies were passed in i888 and I893
while the trust form was being condemned in New York in i888.
One corporation cannot, in the absence of express legislative
authority, acquire and hold stock in another corporation, or
surrender control of its own affairs to another. Such acts are

I Similar decisions were reached in State v. Nebraska Disltiilng Co., 29 Neb. 700
(i8go),. whiskey trust case; in Gould v. Head, 38 Fed. 886 (I889), the cattle
trust case; and others.

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 RESTRAINT OF TRADE 463

ultra vires and against public policy.' Since no corporation

could hold the stock of another, a holding company could not be
organized except by a specific grant of legislative authority.
The device had not been used earlier because no legislature had
yet passed a law permitting such a form of organization. New
Jersey led the way in I889 and other states soon followed. By
these laws one corporation could hold the stock of another and
exercise all the rights of ownership. The new organization was
but a revised form of the old trust and from the point of view of
legal principle was just as unlawful.
This was the view held by the court in Distilling and Cattle
Feeding Co. v. People, I56 Ill. 448 (I895). This company was
the old distillers and cattle feeders' trust, as mentioned above,
and it had come into Illinois and organized as a holding company,
later securing a practical monopoly of the distilling business of
the country. The court held that it was as illegal as the
former trust and as much opposed to public policy as the
other. The defendant was deprived of its franchise. This
decision was followed in Harding v. American Glucose Com-
pany, I82 Ill. 55I (I899). But not until the decisions of the
United States Supreme Court in the Northern Securities and
Standard Oil cases were rendered was the legality of the holding
company finally decided.
Consolidating corporation-By the weight, of authority, it
appears to be illegal to bring about monopoly by the use of a
consolidating corporation to acquire existing competing con-
cerns by the outright purchase of their property.2 Such an
act is ultra vires unless permitted by the state legislature, and
the unanimous assent of the stockholders is necessary unless the

I Franklin Bank of Cincinnati v. Commercial Bank of Cincinnati, 36 Ohio St.

350 (i88I); Central Railroad Co. v. Collins, 40 Ga. 582 (I869).
2 "Consolidation takes place where two or more existing corporations are con-
solidated into a single corporation, and the existence of the uniting corporations is
terminated and the consolidated company succeeds in a general way to the rights
and franchises and acquires the property and assumes the obligations and liabilities
of all the constituent companies." Thompson, Law of Private Corporations, sec.
6503.

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464 TIE UNIVERSITY JOURNAL OF BUSINESS

charter gives the corporation power to so consolidate or unless it

does so under a general law. The consolidating company is
then an operating unit while the holding company is not. The
consolidation became more popular than the holding company;
the American Tobacco Company (I890), the Continental Tobacco
Company (I898), the American Sugar Refining Company (I89I),
the National Starch Manufacturing Company (I890), the United
States Leather Company (I893), the American Malting Company
(I897) and many others were organized within a few years.
The consolidation, though a legal device, is illegal if used to
secure an unlawful object. There were some earlier decisions
adverse to it, as National Lead Co. v. Grote Paint Store Co.,
8o Mo. App. 247 (I899), but it was not until the Standard Oil
and American Tobacco cases were decided in the United States
Supreme Court that its validity was finally approved.
Trade association-Though not strictly a form of combination,
trade associations have in practice succeeded in reconciling com-
peting interests and restraining competition thereby. Probably
the great majority of such associations are formed for legitimate
purposes and have done much good, but a few have been organ-
ized for the carrying out of illegal acts.
The case involving the attempt by the Yellow Pine Manu-
facturers' Association to control prices by limiting output has
been mentioned. Similar attempts to regulate prices have been
made by other associations, as the Chicago Law Stenographers'
Association involved in More v. Bennet, supra, and the attempt
to fix the price of wire-cloth by the formation of an-association, as
related previously.
Similarly, associations have been formed to prevent competi-
tors from getting supplies. The court held such an object illegal
in Bailey v. Association of Master Plumbers, I03 Tenn. 99 (I899).
The attempt of members of a laundrymen's association to injure
the business of a competitor by spreading false rumors because
of her refusal to observe the rules of the association was declared
illegral in Doremus v. Ilenessy, 62 Ill. App. 39I (i896).'
I See also Boutwell v. Marr, 7I Vt. I (I899); Martell v. White, I85 Mass. 255
(I904); Purington v. Hinchliff, 2I9 Ill. I59 (1905).

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 RESTRAINT OF TRADE 465

Gentlemen's agreement-Legal difficulties discouraged the

making of written agreements to restrain trade and competition,
hence, consolidation was resorted to. But the decision of the
United States Supreme Court in the Northern Securities case
(I904) tended also to discourage this form of agreement. Appar-
ently the next thing to be tried was a looser form of restraint
in construing which the courts would have difficulty in declaring
any specific thing illegal. The gentlemen's agreement, or system
of co-operation, as it came to be known later, was resorted to.
As its name implies, it is but an agreement between individuals,
evidenced by no formal papers and no penalties provided for
violation, such being deemed as unnecessary between gentlemen.
The object, of course, was to secure concert of action in respect
to prices, output, etc.
Such agreements have been most common in the steel
industry, and the Gary dinners are notorious. Such agreements
are also employed to some extent in the anthracite industry.
In general, they have seldom proved successful because of the
ungentlemanly conduct of some member in refusing to carry
out the agreement.
Merger-Practically speaking, the merger and the consolida-
tion are one and the same thing. Technically though, a merger
exists where one or more of the constituent companies remains in
being, absorbing or merging in itself other companies. The
consolidation leaves none of the constituent companies in
existence, for they pass out of being when they have turned over
their assets and business to the new or consolidating corporation.
The law applying to consolidations applies also to mergers.
The American Tobacco Co., which had existed as a holding
company prior to the Northern Securities decision in I904,
reorganized as a merger after that date; the International
Harvester Company and the American Glucose Company
were also formed as mergers. The courts subsequently declared
all these forms of combination illegal, in the American Tobacco
Co. case, 22I U.S. io6 (I91I); in IlHarding v. American Glucose
Co., supra; and in a dictum of the court in lnternational

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466 THE UNIVERSITY JOURNAL OF BUSINESS

Harvester Co. of America v. State of Missouri, 237 Mo. 369

(I9I4).
C. CONCLUSION

We thus see that no matter what form of organizat

be resorted to, be it consolidation, pool, trust, holding
or what not, whether formal or informal, loose or strict,
will look beyond the device employed to see what its r
is, and judge it accordingly. Even though the means e
are legal, the attempt will be declared unlawful if the
is not legitimate. This is but the result of the applica
doctrine of reasonableness to all such restraints of trade. If
reasonable and not harmful to the public, they are valid; other-
wise they are invalid and will not be enforced by the courts.
THEODORE C. BARTHOLOMAE
UNIVERSITY OF CHICAGO

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