Story Case

"Walter Drew lived in Indianapolis, Indiana, where he conducted a bakery, having a splendid local reputation as "Drew's Dandy Bakery." In January, 1915, he made a contract of sale with Henry Lord, by which he conveyed to Lord all of his business, including the good will. The contract also contained a clause by which Drew agreed not to engage in the baking business in the state of Indiana, for any other person, or for himself, either under his own name, or some other name. Six months later, Drew engaged in the bakery business in Evansville, Indiana, 200 miles away, operating as the Evansville Bread Company. "When Lord sued him for breach of contract, Drew maintained in defense that the clause of the contract limiting his operation was in restraint of trade, and void. Is this a good defense?

Ruling Court Case. The Maxim Nordenfelt Guns And Ammunition Company Vs. Thorsten Nordenfelt, Volume 1894 Appeal Cases English Reports, Page 535

Nordenfelt had, prior to March, 1886, obtained patents for improvements in quick-firing guns; and prior to that time had conducted among other things, the business of the manufacture of such guns and of ammunition. In March, 1886, he made initial preparations for the incorporation of a company, which was to assume control of his business with its assets and liabilities. Later an agreement was made between him and the company organized, by which the company agreed to purchase the business. Nordenfelt, on his part, agreed to act as managing director for a period of five years. He further agreed that, so long as the Nordenfelt Company continued to transact business, he would never engage in the same kind of business except for the Nordenfelt Company. The agreement for the purchase was duly carried into effect, and the sum of £237,000 in cash and £50,000 in paid up shares were given to Nordenfelt.

Notwithstanding his agreement, Nordenfelt thereafter entered into the same business in competition with the Nordenfelt Company. This was an action by the company to have him restrained from so doing. Nordenfelt claimed that his agreement was not binding, because it was an agreement which unreasonably restrained trade, and, therefore, void.

Lord Watson said: "I think it is now generally conceded that it is to the advantage of the public to allow a trader who has established a lucrative business, to dispose of it to a successor, by whom it may be efficiently carried on. That object could not be accomplished if, upon the score of public policy, the law reserved to the seller an absolute and indefeasible right to start a rival concern the day after he sold. Accordingly, it has been determined judicially that in cases where the purchaser, for his own protection, obtains an obligation restraining the seller from competing with him, within bounds which, having regard to the nature of the business, are reasonable and are limited in respect of space, the obligation is not noxious to public policy, and is, therefore, capable of being enforced."

In view of the fact that the only customers the company could have would be the various governments, the court was of the opinion that the agreement, although unrestricted as to space, was not wider than was necessary for the prohibition of the company. Therefore, the court enjoined Nordenfelt from engaging in similiar business in competition with the company.

Ruling Law. Story Case Answer

Under the Common Law, contracts in restraint of trade included those wherein one person sold his business to another, and agreed not to engage in a like business in competition with the purchaser, and also contracts wherein two or more people in like occupations agree to regulate prices between themselves, or prevent competition among themselves. Both classes of contracts were held illegal and void as against public policy, since they tended to restrain trade, or create a monopoly by limiting competition.

Gradually, the courts attempted to determine the reasonableness of contracts whereby one person agreed to refrain from an occupation similar to the one he sold. It was said that if the seller restricted himself only to the extent of giving his buyer reasonable protection in the prosecution of his new business, the former would be held to his promise. Thus, if a shoemaker agreed to dispose of his trade and not to start a new business in the same locality, the courts would enforce this promise. Should he, however, agree not to conduct his business in any place, this would be held void, on the ground that it restricted trade, and would tend to promote pauperism in limiting the shoemaker in his trade, and, therefore, was against public policy. If the contract was reasonable, it was said to be only a partial restraint of trade, and valid; if the contract was unreasonable in its restriction, it was said to be in general restraint of trade, and, therefore, void.

The Ruling Court Case shows that, even though the promise by the vendor is practically unrestricted as to time and space, if the business is such that it can be operated only on a world wide basis, the agreement will be considered not an unreasonable restraint, and, therefore, valid. The Diamond Match Case, found in Volume 106 New York reports, Page 472, lays down the Common Law rule of this country along the same lines. The Story Case presents a difficult problem. The courts will readily say that it was reasonable for Drew to limit himself from the use of his name in the area through which he had developed a good will as "Drew's Dandy Bakery." However, when he restricted himself not to operate in the baking business in any way in the state of Indiana, this was an unreasonable restriction, and void. Therefore, the court will not hold him liable for starting the Evansville bakery. It is in the light of these cases, interpreting the Common Law, that the Sherman Anti-Trust Act should be considered. That is, the words "restraint of trade" should have an interpretation based on their meaning at Common Law at the time the Sherman Act was promulgated. Therefore, if a given combination or agreement does not in fact, restrain trade, but promotes trade between the states, it should not be invalid under the Sherman Act.