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In the American Tobacco case, the court said, quoting from the Joint Traffic Association case," that the act of congress must have a reasonable construction or else there would scarcely be an agreement or contract between business men that could not be said to have, directly or remotely, some bearing on interstate commerce which possibly would restrain it. The court said further, "applying the rule of reason to the construction of the statute which was held in the Standard Oil case, that as the words restraint of trade at common law and in the law of this country at the time of the adoption of the Anti-Trust Act only embraced acts or contracts or agreements or combinations which operated to the prejudice of the public interest by unduly restricting competition, or unduly obstructing the due course of trade, or which either because of their inherent nature and effect, or because of the evident purpose, etc., injuriously restrained trade,-that the words so used in the statute were designed to have and did have but a like significance. It was therefore pointed out that the statute did not forbid or restrain the power to make normal and usual contracts, or to further trade by resorting to all normal methods by agreements or otherwise to accomplish such purpose.

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§ 78. Direct and incidental restraint of trade. The application of the light of reason to the determination of whether a contract or combination is in restraint of trade in interstate commerce, does not mean any more than it did at common law, that such determination is left to any arbitrary discretion of the courts, or to any paternal discrimination between good and bad trusts. On the contrary, it has been uniformly held that there is a clear and sharp line of distinction between the restraints which are direct and those which are incidental to the exercise of a lawful contract. Thus while the act has been construed to include combinations where the direct, immediate and intended effect is for the suppression of competition in interstate business, it does not include agreements and regulations, which are nothing more than

1 221 U. S. 106, 55 L. Ed. (1911).

2 171 U. S. 505, 43 L. Ed. 259 (1898).

Addyston Pipe & Steel Co. v.

United States, 175 U. S. 211 (1899), 44 L. Ed. 139; Montague v. Lowry, 193 U. S. 38 (1904), 48 L. Ed. 608.

charges for local facilities provided for the transaction of commerce and which only incidentally affect interstate commerce.1 It is not restraint of trade of itself that is made illegal by the statute, as that may be the incidental effect of a valid agreement or contract; but it is the making of the contract which is or is intended to be directly in restraint of trade.2

The distinction is illustrated in the cases cited. In the Addyston Pipe case, there was a contract agreement for the restraint of trade. In the Stock Yards case, there was a restraint of trade resulting indirectly from the exercise by the defendants of their lawful rights in business associations. The former was therefore obnoxious to the act, while the latter was not. In the Standard Oil and Tobacco cases, there was a finding that upon the facts in evidence that there was a direct combination for the purpose of crushing competition and monopolizing the market.

The distinction between direct and incidental restraint of trade was very lucidly shown by Judge Taft, then on the circuit bench, in the opinion of the court of appeals in the sixth circuit in the Addyston Pipe & Steel Company case, in this: In holding that the contract in question was violative of the act and was also unenforcible at common law, and he laid down the rule that no contractual restraint of trade was enforcible at common law, unless it was merely ancillary to some lawful contract involving some such relation as vendor and vendee, partnership, employer and employe, and necessary to protect the covenantee in the enjoyment of the legitimate fruits of the contract, or to protect him from the damages of unjust acts by the other parties. The main purpose of the

1 Hopkins v. United States, 171 U. S. 578, 43 L. Ed. 290 (1898); Anderson v. United States, 171 U. S. 604 (1898), 43 L. Ed. 300.

2 In the opinion of AttorneyGeneral Griggs to the Interstate Com. Com. of December 30, 1899, (Reports of Commission for 1899, page 16), it is said that the consultation of the representatives of interstate railroads in committee concerning the changes in classi

fication, and subsequent independent action by the railroad companies in the adoption of a new classification recommended by the committee, where there is no evidence that any railroad company acted under compulsion of a combination, does not show a combination or conspiracy within the meaning of the act.

2 29 C. C. A. 141, 85 Fed. 271 (1898).

contracts suggests the measure of the protection needed and furnishes a sufficiently uniform standard for determining the reasonableness and validity of the restraint. But where the object of both parties in making the contract is merely to restrain competition and enhance and maintain prices, the contract is void and unreasonable, and where made in interstate commerce is violative of the act of 1890.1

The suggestion, therefore, that the construction of the act in the Standard Oil and Tobacco cases means the emasculation of the act and its subjection to the arbitrary discretion of the courts, seems clearly unfounded. Whether the act only enforced the common law as to undue restraint of trade, or laid down a new rule, that all restraints of trade in interstate commerce were prohibited, under either construction the courts would be compelled to determine in each case, whether the combination in question involved a direct or an incidental interference with interstate commerce. In view of the fact that the adjudged cases show that the courts have been compelled to give the act a reasonable construction, as was said in the Joint Traffic case, it would seem that the distinction between the earlier and the later construction of the act is academic rather than practical.2

In so far as a definite formulation of this distinction between direct and incidental restraint of trade can be made, in view of the infinite complexity of business associations and transactions, it may be said that a business contract, directly affecting interstate commerce, which would be unenforcible at common law as in restraint of trade and therefore against public policy, whatever the subject, would be violative of the Anti-Trust Act and subject to its penalties. On the other

1 In this Addyston Pipe case there was an allotment of territory comprising a large part of the United States among a number of companies engaged in the manufacture of iron pipe; and in that territory competition was eliminated through the allotment of territory, and through a system of pretended bids, giving the appearance of active competition at public let tings, when there was none.

2 See cases wherein act has been construed and applied. Infra. part II, §. As to enforcement of criminal provision of act, see supra, § 455 et seq. See also address of Hon. William B. Hornblower of New York, before Am. Bar Ass'n, 1911, containing a clear and exhaustive analysis of these decisions of the supreme court.

hand a business contract relating to interstate commerce, whatever its subject, which would be valid and enforcible at common law as imposing only a reasonable restraint, and as ancillary to a valid contract or valid business purpose, would not be violative of the Federal Act.

§ 79. Suppression of competition must be substantial to be a "restraint of trade."-Not only must the suppression of competition be direct, and not merely incidental to a lawful contract, but it must be substantial in character, and must be a direct and immediate effect of the transaction complained of, in order to constitute a restraint of trade or combination or conspiracy condemned by the act. This principle was illustrated in the so-called Union Pacific and Southern Pacific merger case, wherein the government claimed that the purchase of the Union Pacific Railroad of some forty-six per cent. of the stock of the Southern Pacific was an unlawful combination in restraint of trade violative of the Anti-Trust Act. The circuit judges of the eighth circuit in an opinion by Judge Adams said that the direct competitive business of the Union Pacific and Southern Pacific was too insignificant to sustain the charge and that the proof showed that the immediate and actuating intent of the Union Pacific Company in requiring the control of the operation of the Southern Pacific was to secure the permanent working and reliable combination at Ogden over the existing road of the Southern Pacific to the Pacific coast for its through traffic.

2

The court said, the suppression of competition in this infinitesimal small proportion of the business of both companies was not a substantial or natural consequence and did not amount to a direct or substantial restraint of interstate or international commerce.

The principle thus declared, that interference with interstate commerce must be substantial, was declared by the supreme court in the Packet Company Case. The court said

1 See opinion of circuit judges of Third circuit, June, 1911, applying the Standard Oil and Tobacco decisions in Powder Trust case, 188 Fed. 127. See infra, § 448.

2 United States v. Union Pacific

R. R. et al., 188 Fed. 102 (June, 1911), Justices Sanborn and Vandeventer concurring, Hook, J., dissenting.

3 Cincinnati, etc., Packet Co. v. Bay, 200 U. S. 179, 50 L. Ed. 428 (1906).

that the interference, if any, with interstate commerce contemplated by a contract for the sale of certain river craft which permitted a suspension of payment of installments of the purchase price in case of serious competition in the freight and passenger traffic over a route between two named Ohio ports on the Ohio river, and required the vendors to withdraw from such competition for five years, was too insignificant to render the contract invalid under the Anti-Trust Act. The court said it will accomplish no public purpose but simply would provide a loophole of escape for persons inclined to elude performance of their undertakings, if the sale of a business and temporary withdrawal of the seller necessary in order to give the sale effect, were declared illegal in every case wherein a nice scrutiny would discover that the covenant possibly might reach beyond the state line.

80. The modern law of restraint of trade. The modern law of restraint of trade has materially modified the earlier doctrines of the common law in its adaptation to modern conditions. The world has grown distinctly smaller through the forces of steam and electricity, and the earlier doctrines of the common law have been modified accordingly. The validity of a contract, therefore, under the rules of the English as well as the American courts, is to test the validity of a contract by its reasonableness in view of all the circumstances of the case, irrespective of any arbitrary rule as to time or place. Thus it was said by the supreme court,1 that the public interest is still the first consideration. To sustain a restraint, said the court, 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. In an earlier case it was said that the decision in Mitchell v. Reynolds, 1 P. Wms. 181, is the foundation rule in relation to the invalidity of contracts in restraint of trade; but it was made under a condition of things and a state of society different from those which now

1 Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373, 55 L. Ed. (1911).

2 Gibbs v. Consolidated Gas Co., 130 U. S. 396, 32 L. Ed. 979 (1889).

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