Questions about contracts in restraint of trade must be judged
according to the circumstances on which they arise and in
subservience to the general rule that there must be no injury to
the public by its being deprived of the restricted party's industry
and that the party himself must not be precluded from pursuing his
occupation and thus prevented from supporting himself and his
family. Accordingly, where A., engaged in navigating waters of
California alone, sold in 1864 a steamer to B., engaged in
navigating a particular river (the Columbia River) of Oregon and
Washington Territories (regions to the north of California),
subject to a stipulation that he, B., would not employ it or suffer
it to be employed for ten years from the date of the sale in any
waters of California, and B., three years afterwards,
i.e., in 1867, sold the same steamer to C., engaged in
navigating Puget's Sound (water in the extreme northwest corner of
Washington Territory and remote from all the other waters
described), subject to a stipulation that she should not be run or
employed upon any of the routes of travel, or the rivers, bays, or
waters of the State of California or the Columbia River and its
tributaries, for the period of ten years from May 1, 1867,
held that the contract was not void as in restraint of
trade.
Held further -- the contract in the second case having
been for ten years from the date of it, and therefore far three
years after the first contract
Page 87 U. S. 65
had expired -- that it was so divisible in regard to the
California portion that it could stand for the seven years for
which B. was bound to protect it, though it was void as to the
remaining three, and accordingly that B. could sue for a breach of
it occurring within the first seven years of it -- that is to say,
occurring within the time that he was to protect A.
The
Oregon Steam Navigation Company sued Winsor in one
of the courts of the Territory of Washington to recover $75,000 as
stipulated damages for the breach of a certain agreement between
the parties. The complaint set forth the following facts:
That in 1864, the
California Steam Navigation Company
being engaged in steam and other transportation on the several
routes of travel on the rivers, bays, and waters of the state of
California, sold to the plaintiff, the said Oregon Steam
Navigation Company (being a company engaged in the like business on
the Columbia River and its branches, in
Oregon and
Washington [
Footnote 1]),
the steamer
New World for $75,000, subject to a
stipulation, amongst other things, that the latter company should
not run or employ, or suffer to be run or employed, the said
steamer upon any of the routes of travel, rivers, bays, or waters
of the State of California, for the period of ten years from the
1st day of May, 1864; that on the 18th day of February, 1867, the
Oregon company sold the same steamer to Winsor and others for the
sum of $75,000, subject to a stipulation and covenant that she
should not be run or employed upon any of the routes of travel, or
the rivers, bays, or waters of the State of
California, or
the Columbia River and its tributaries, for the period of ten years
from the 1st day of May, 1867, and that for a breach of said
covenant the vendees should pay $75,000 as actual liquidated
damages. The complaint further averred that at the time of the
second sale of the steamer and up to the commencement of the suit,
the California Steam Navigation Company were engaged with numerous
steam and other vessels in navigating the waters of the State of
California, and that the Oregon
Page 87 U. S. 66
company, the plaintiffs, were likewise engaged in the navigation
of the Columbia River and its branches, and that at the time of
said sale to the defendants, the latter were engaged in navigating
the waters of Puget Sound, [
Footnote 2] and were in nowise engaged in the navigation
of the waters of Oregon or California or of any of the waters
described in the stipulation. The breach complained of was that the
steamer had been engaged from the 1st of November, 1868, to the
commencement of the suit, in the transportation of passengers and
freight from the City of San Francisco to Vallejo, in the State of
California, being a route of travel on the waters of the State of
California embraced in the stipulation and covenant.
The complaint was demurred to, and the demurrer was sustained
and the action dismissed. The plaintiff brought a writ of error to
the supreme court of the territory, which affirmed the judgment,
and that judgment was now here on the present writ of error.
The sufficiency of the complaint was, of course, the matter
brought up, and the case turned mainly upon the question whether
the covenant entered into by the defendants whereby they agreed
"not to run or employ, or suffer to be run or employed, the said
steamboat
New World upon any of the routes of travel, or
the rivers, bays, or waters of the State of California or the
Columbia River and its tributaries for the period of ten years from
the first day of May, 1867,"
&c., was valid. The objection urged against it was that it
was a contract in restraint of trade, and as such contrary to
public policy.
MR. JUSTICE BRADLEY delivered the opinion of the Court.
It is a well settled rule of law that an agreement in general
restraint of trade is illegal and void, but an agreement
Page 87 U. S. 67
which operates merely in partial restraint of trade is good
provided it be not unreasonable and there be a consideration to
support it. [
Footnote 3] In
order that it may not be unreasonable, the restraint imposed must
not be larger than is required for the necessary protection of the
party with whom the contract is made. [
Footnote 4] A contract, even on good consideration, not to
use a trade anywhere in England is held void in that country as
being too general a restraint of trade, but a contract not to use a
trade at a particular place, if it be founded on a good
consideration, and made for a proper and useful purpose, is valid.
[
Footnote 5] Of course, a
contract not to exercise a trade generally would be obnoxious to
the rule, and would be void.
The application of the rule is more difficult than a clear
understanding of it. In this country especially, where state lines
interpose such a slight barrier to social and business intercourse,
it is often difficult to decide whether a contract not to exercise
a trade in a particular state is, or is not, within the rule. It
has generally been held to be so, on the ground that it would
compel a man thus bound to transfer his residence and allegiance to
another state in order to pursue his avocation. [
Footnote 6]
But this mode of applying the rule must be received with some
caution. This country is substantially one country, especially in
all matters of trade and business, and it is manifest that case may
arise in which it would involve too narrow a view of the subject to
condemn as invalid a contract not to carry on a particular business
within a particular state. Suppose the case of two persons
associated in business as partners, and engaged in a manufacture by
which they supply the country with a certain article, but the
process of manufacture is a secret, and they agree to separate, and
one of the terms of their separation is that one of the parties
shall not sell the manufactured article in Massachusetts,
Page 87 U. S. 68
where the other resides and carries on business, and that the
latter shall not sell the article in New York, where his associate
is to reside and carry on business. Can there be any doubt that
such an agreement would be valid and binding? Cases must be judged
according to their circumstances, and can only be rightly judged
when the reason and grounds of the rule are carefully
considered.
There are two principal grounds on which the doctrine is founded
that a contract in restraint of trade is void as against public
policy. One is the injury to the public by being deprived of the
restricted party's industry; the other is the injury to the party
himself by being precluded from pursuing this occupation and thus
being prevented from supporting himself and his family. It is
evident that both these evils occur when the contract is general
not to pursue one's trade at all, or not to pursue it in the entire
realm or country. The country suffers the loss in both cases, and
the party is deprived of his occupation or is obliged to expatriate
himself in order to follow it. A contract that is open to such gave
objection is clearly against public policy. But if neither of these
evils ensues and if the contract is founded on a valid
consideration and a reasonable ground of benefit to the other
party, it is free from objection and may be enforced.
In accordance with these principles, it is well settled that a
stipulation by a vendee of any trade, business, or establishment
that the vendor shall not exercise the same trade or business or
erect a similar establishment within a reasonable distance, so as
not to interfere with the value of the trade, business, or thing
purchased, is reasonable and valid. In like manner, a stipulation
by the vendor of an article to be used in a business or trade in
which he is himself engaged, that it shall not be used within a
reasonable region or distance, so as not to interfere with his said
business or trade, is also valid and binding. The point of
difficulty in these cases is to determine what is a reasonable
distance within which the prohibitory stipulation may lawfully have
effect. And it is obvious at first glance that this must depend
Page 87 U. S. 69
upon the circumstances of the particular case, although, from
the uncertain character of the subject, much latitude must be
allowed to the judgment and discretion of the parties. It is clear
that a stipulation that another shall not pursue his trade or
employment at such a distance from the business of the person to be
protected as that it could not possibly affect or injure him would
be unreasonable and absurd. On the other hand, a stipulation is
unobjectionable and binding which imposes the restraint to only
such an extent of territory as may be necessary for the protection
of the party making the stipulation, provided it does not violate
the two indispensable conditions that the other party be not
prevented from pursuing his calling and that the country be not
deprived of the benefit of his exertions.
To apply these principles to the case before us, the California
Steam Navigation Company, being engaged in the business of
transportation on the rivers, bays, and waters of California, was
willing to sell one of their steamers to the Oregon Steam
Navigation Company, which was engaged in a similar business on the
Columbia River and its tributaries, provided the latter company
would agree that the steamer should not be used in the California
waters for the period of ten years from the first day of May, 1864.
This stipulation was necessary to protect the former company from
interference with its own business. It had no tendency to destroy
the usefulness of the steamer, and did not deprive the country of
any industrial agency. The transaction merely transferred the
steamer from the employment of one company to that of another
situated and doing business in another state. It involved no
transfer of residence or allegiance on the part of the vendee in
order to pursue its employment, nor any cessation or diminution of
its business whatever. The presumption is that the arrangement was
mutually beneficial to both companies and that it promoted the
general interests of commerce on the Pacific coast. Again, the
Oregon company were afterwards willing to dispose of the same
steamer to the defendants, who were engaged in the like business of
transportation in the waters of
Page 87 U. S. 70
Puget Sound, Washington Territory, provided that the latter
would agree that the steamer should not be run or employed upon any
of the routes of travel or rivers, bays, or waters of California or
the Columbia River and its tributaries for the period of ten years
from the first day of May, 1867. This stipulation excluded the
steamer from the territory covered by the former stipulation
exacted by the California company and also from the territory
occupied by the Oregon company itself. The latter portion of the
stipulation stands on the same ground and reason as did the first
stipulation between the California and Oregon companies. The former
portion was necessary in order that the Oregon company might
faithfully keep its covenant with the California company. It is
true that the stipulation in question covers a period of time which
extends three years beyond the period for which the Oregon company
is bound to the California company. The latter would expire on the
first of May, 1874, and the stipulation in question extends to the
first of May, 1877. This extra period of three years in reference
to the waters of California is not necessary to the protection of
the Oregon company. That company is under no obligation with regard
to those three years. But the suit is brought and the breach is
alleged for a portion of time during which the Oregon company is
bound to protect the California company from the interference of
said steamer. And the question arises whether the contract is so
divisible in relation to the California portion that it can stand
for the seven years for which the Oregon company is bound, though
it be void as to the remaining three years. We think it is so
divisible. It is laid down by Chitty as the result of the cases,
and his authorities support the statement,
"that agreements in restraint of trade, whether under seal or
not, are divisible, and accordingly it has been held that when such
an agreement contains a stipulation which is capable of being
construed divisibly, and one part thereof is void as being in
restraint of trade, whilst the other is not, the court will give
effect to the latter and will not hold the agreement to be void
altogether."
The cases cited in support of this proposition
Page 87 U. S. 71
are
Chesman v. Nainby, [
Footnote 7]
Wood v. Benson, [
Footnote 8]
Mallan v. May, [
Footnote 9]
Price v. Green,
[
Footnote 10]
Nicholls
v. Stretton. [
Footnote
11] In
Price v. Green, the contract was not to
exercise the trade of a perfumer in London or within six hundred
miles thereof, and it was held divisible and good for London only.
This case was carried through all the courts. In
Nicholls v.
Stretton, the stipulation was that an attorney's apprentice,
who was to serve five years, should not, after his term expired, be
concerned as attorney for any persons who had, previous to the
expiration of said apprenticeship, been a client of the attorney
with whom the contract was made or who should at any time
thereafter become his client. It was strenuously and fully argued
that whilst the contract might have been good as to past clients,
it was certainly not good as to future ones, and, being an entire
contract, the whole was bad. But the court followed the previous
decision of the Exchequer Chamber in
Price v. Green, held
the contract divisible, and sustained the action. We see no reason
why this principle should not be followed in the present case. The
line of division between the period which is properly covered by
the restriction and that which is not so is clearly defined and
easily drawn. It is subject to no confusion or uncertainty, and the
court can have no difficulty in applying it.
Regarding this objection, therefore, as removed, the covenant
made by the defendant seems to stand on the same ground as that
made by the plaintiffs with the California company. The same
observations may be made with reference to it. The public was not
injured by being deprived of any of the business enterprise of the
country. The vendees did not incapacitate themselves from carrying
on business just as they had previously done, and in the same
locality. Their business was rather facilitated by the arrangement.
Finally, the stipulation, it will be presumed, was founded on a
valuable consideration in its influence upon the price paid for the
steamer; its object and purpose was
Page 87 U. S. 72
simply to protect the vendors, and if we except the three years
before considered in its relation to California, its restraining
effect extended no farther than was necessary for their
protection.
We are unable, therefore, to see anything in the contract, so
far as it is now in question, which militates against public
policy.
There are no other points adverted to which demand the serious
consideration of the court.
Judgment reversed and the case remanded to be proceeded in
according to law.
Dissenting, JUSTICES CLIFFORD, SWAYNE, and DAVIS.
[
Footnote 1]
These territories are immediately north of California.
[
Footnote 2]
This bay is the northwest extremity of Washington Territory, and
at quite a distance from all parts of the Columbia River.
[
Footnote 3]
Chitty on Contracts 576, 8th American edition.
[
Footnote 4]
Ib.; Tindal, C.J., in
Horner v. Graves, 7
Bingham 743.
[
Footnote 5]
2 Williams' Saunders 156, note 1.
[
Footnote 6]
Taylor v. Blanchard, 13 Allen 375;
Dunlop v.
Gregory, 6 Selden 241.
[
Footnote 7]
2 Strange 739.
[
Footnote 8]
2 Crompton & Jervis 94.
[
Footnote 9]
11 Meeson & Welsby 653.
[
Footnote 10]
16
id. 346.
[
Footnote 11]
10 Q.B. 346.
