Morehead Sea Food Co. v. Way

169 N.C. 679

• Court: Supreme Court of North Carolina
• Decided: October 20, 1915
• Status: Published

Opinions

AlleN. J.

Two questions are presented by the appeal:

1. Is the. agreement entered into between the plaintiff and the defendant a violation of the statute of this State enacted to prevent illegal trusts and combinations in restraint of trade?

2. If not, is the agreement unlawful under the common law?

Tbe first question is answered by tbe statute (chapter 41, section 5, subsection F, Public Laws of 1913), wherein it is provided, “That nothing herein shall be construed to prevent a person, firm or corporation from selling his or its business and good will to a competitor, and agreeing in writing not to enter the business in competition with the purchaser in a limited territory, as is now allowed under the common law.”

The contract under consideration comes within the class described in the statute, and is authorized by it, unless condemned by the common law. "We must then examine the principles of the common law applicable to contracts of this character.

In the early cases contracts in restraint of trade were very generally held to be void, as against public policy, upon the ground that they tended to lessen the opportunities of the party restrained to earn a livelihood and to deprive the community of the benefit of competition. 6 Euling Case Law, 785. The distinction was, however, soon recognized between contracts in general restraint of trade, which were held invalid, and those in partial restraint of trade, which were sustained, if not unreasonable.

The changes that have taken place in the methods of doing business, and the increased opportunities for communication, and the enlarged facilities for transportation have also materially modified the views of the courts as to what is an unreasonable restraint upon trade. Many new industries, unknown to the ancient common law, have been developed, which makes it easier for one engaged in business to seek other employment when he has contracted to give up his old business, and this has reduced the hardship of such a contract upon the individual, and the danger to the community has been greatly reduced because of the increased opportunities to deal with distant communities.

The good-will of a business was soon regarded as an important and valuable interest, which the law would recognize and protect (20 Cyc., 1276), and while there is authority for the position that the sale of the good will of a business by implication will prevent the seller from prosecuting the same business in competition with the purchaser, the weight of authority seems to be that the purchaser can only protect himself fully by a written agreement upon the part of the seller to refrain from entering into the same business.

“Good faith requires of a party, who has sold the good will of a business, that he shall do nothing which tends to deprive the purchaser of its benefits and 'advantages. Upon a sale of the good-will of a business, without more, the vendor is not precluded from setting up a precisely similar business in the vicinity. Upon the authorities it is settled that, if the purchaser wishes to prevent this step from being taken, he must see to it that provisions to that effect are inserted in tbe written contract.” 20 Cyc., 1279.

This stipulation while primarily for the benefit of the purchaser, inures to the advantage of the seller by enhancing the value of the good-will, and while “public policy requires that every man shall be at liberty to work for himself, and shall not be at liberty to deprive himself or the State of his labor, skill, or talent by any contract that he enters into, on the other hand, public policy requires that when a man has, by skill, or by any other means, obtained something which he wants to sell, he should be at liberty to sell it in the most advantageous way in the market; and, in order to enable him to' sell it advantageously in the market, it is necessary that he should be able to preclude himself from entering into competition with the purchaser. In such a case the same public policy that enables him to do this does not restrain him from alienating that which he wants to alienate, and, therefore, enables him to enter into any stipulation which, in the judgment of the court, is not unreasonable, having regard to the subject-matter of the contract.” 6 Ruling Case Law, 793.

There was also a tendency in the early cases to establish as the standard for determining the reasonableness of the contract, the duration of the contract as to time and the extent of the territory in which it was to operate; but under changed conditions, and in the effort to make the good-will a valuable asset, these tests have been abandoned, and the true test now generally applied is whether the restraint is such as to afford a fair protection to the interests of the party in whose favor it is given, and not so large as to interfere with the interests of the public. 16 A. and E. Anno. Cases, 254.

As said in Southworth v. Davison, 106 Minn., 110, “The rule, broadly stated, seems to be that no contract of this kind is void as being in restraint of trade when it operates simply to prevent a party from engaging or competing in the same business. Leslie v. Lorillard, 110 N. Y., 519.” In other words, the good-will of a business being recognized as intangible property, which the owner may sell, and it being for the benefit of the seller that it should be sold for its full value, and it being necessary for the protection of the purchaser that the seller should not, after the sale, enter into competition with him, contracts restraining the seller from engaging in the same business are upheld, and they are not unreasonable if they go no further than to remove the danger to the purchaser of competition with the seller.

The opinion in Anchor Electric Co. v. Hawkes, 171 Mass., 101, contains a learned and instructive discussion of the question. In that case the business managers of three corporations agreed to form a new corporation, of which they were to be the officers and directors. Each corporation was to sell its assets and good-will to tbe new corporation, and as a part of tbe contract of sale eacb corporation represented by tbe managers agreed that it would not in any way interfere witb or compete witb tbe business of tbe new corporation for a period of five years.

Tbe contract was sustained, and, among other things, tbe Court said: “Whenever one sells a business, witb its good-will, it is for bis benefit, as well as for tbe benefit of tbe purchaser,, that be should be able to increase tbe value of that which be sells by a contract not to set up a new business in competition witb tbe old. Tbe right to make reasonable contracts of this kind in connection witb tbe sale of tbe good-will of a business is well established. But tbe particular provisions which are reasonably necessary for tbe protection of tbe good-will of many kinds of business are very different now from those required in tbe days of Queen Elizabeth. Then tbe courts bad occasion to inquire whether a limitation upon tbe right to engage in tbe same business as that sold was unreasonable because it included a town instead of a single parish, or extended a distance of ten miles instead of five. Now tbe House of Lords in England has held, by a unanimous decision in a recent case, that such a limitation which covered tbe whole world was not unreasonable. Because in early times it seemed inconceivable that an agreement to refrain from establishing a business of tbe same kind anywhere in tbe kingdom should be necessary to tbe protection of tbe goodwill of any existing business, it was laid down as an arbitrary rule that agreements so comprehensive in their terms were void. Thus tbe distinction between a general restraint of trade and a partial restraint of trade grew up. Contracts applying to any territory less than tbe whole kingdom were considered in reference to their reasonableness, having regard to tbe purpose for which tbe contract was made. By tbe unanimous decision of tbe House of Lords, in tbe case of Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. (1894), App. Gas., 535, affirming tbe unanimous judgment of tbe Court of Appeals in (1893) 1 Ob., 630, it is now held in England that a covenant unrestricted as to space, not to engage in a particular kind of business for twenty-five years, made in connection witb tbe sale of tbe property of a manufacturing establishment, is valid, if, having regard to tbe nature of tbe business and tbe limited number of its customers, it is not wider.than is necessary for tbe protection of tbe covenantee, nor injurious to tbe public interests of tbe country, as were found to be tbe facts in that case.”

Our Court has announced tbe same principle in Cowan v. Fairbrother, 118 N. C., 412; Kramer v. Old, 119 N. C., 1; and in Shute v. Heath, 131 N. C., 282.

Tbe Court said, in the first of these cases, speaking of tbe seller and the purchaser: “The one sells bis prospective patronage and the other buys the right to compete with all others for it, and to- be protected against competition from his vendor. The law intends that the one shall have the lawful authority to dispose of his right to compete, but restricts his power of disposition territorially, so as to make it only coextensive with the right to protection on the part of the purchaser. To the extent that the contract covers territory from which the vendor has derived and will probably , in future derive no profit or patronage, it needlessly deprives the public of the benefit of open competition in useful business, and of the services of him who sells without any possible advantage to his successor. When the reason upon which a law is founded ceases, the rule itself ceases to operate. The older cases in which the courts attempted to fix arbitrarily geographical bounds beyond which a contract to forbear from competition would not be enforced have given way to the more rational idea of making every case dependent upon the surrounding circumstances, showing the extent, as to time and territory, of the protection needed. . . . Where the nature of the business was such that complete protection would not be otherwise afforded, the restraint upon the right to compete has been held good in one or more cases where it applied to a State or to a boundary including several States,” and in the second: “The courts in later years have disregarded the old roles by which it was sometimes attempted arbitrarily to fix by measurement the geographical area over which a contract in partial restraint of trade might be made to extend, and to prescribe a limit of time beyond which it could not be made to operate. The modern doctrine is founded upon the basic principle that one who, by his skill and industry, builds up a business, acquires a property at least in the good-will of his patrons, which is the product of his own efforts (Cowan v. Fairbrother, 118 N. C., 406), and has the fundamental right 'to dispose of the fruits of his own labor, subject only to such restrictions as are imposed for the protection of society, either by express enactments of law or by public policy. (Hughes v. Hodges, 102 N. C., 239; Bruce v. Strickland, 81 N. C., 267.) But the property that one thus creates by skill, or talent and industry, is not marketable unless the owner is at liberty to sell his right of competition to the full extent of the field from which he derives his profits, and for a reasonable length of time. . . . The test of the reasonableness of the territorial limit covered by such contracts is involved in the question whether the area described in the contract is greater than it is necessary to make it in order to protect the purchaser from competition in his efforts to hold and to get the full benefits of the business or right of competition bought by him,” and in the third: “Contracts in partial restraint of trade can be made and enforced of common right. This Court said, in Kramer v. Old, 119 N. C., 1: ‘The modern doctrine is founded upon tbe basic principle that one who, by bis skill and industry, builds up a business, acquires a property at least in tbe good-will of bis patrons, wbicb is tbe product of bis own efforts, and bas tbe fundamental right to dispose of tbe fruit of bis own labor, subject only to such restrictions as are imposed for tbe protection of society, either by express enactment of law or by public policy.’ An indefinite restriction as to duration will not make such contract void. Kramer v. Old, supra. But there must be a definite limitation as to space; and tbe reasonableness of such limitation will depend upon tbe nature of tbe business and good-will sold. A contract, for instance, for a valid consideration not to engage in tbe manufacture of firearms in general use would be allowed to cover a larger extent of territory than would a contract not to engage in tbe manufacture of timber or tbe ginning of cotton. And tbe test of that reasonableness is whether tbe space or territory is greater than is necessary to enable tbe assignee to protect himself from competition on tbe part of tbe assignor, and thereby to get tbe benefit of what be bas bought.”

Applying these principles, we are of opinion that tbe contract is not illegal, as it is limited as to time, ten years, and it is not coextensive with tbe territory in wbicb tbe defendant could enter into competition with tbe plaintiff, as tbe territory embraced in tbe contract is one hundred miles from Morehead City, and tbe field of competition extends to South Carolina, Georgia, and tbe northern and eastern markets.

It also appears that tbe plaintiff bas not attempted to 'prevent others from engaging in tbe same business and that tbe public bas not been deprived of tbe benefit of competition, as there are as many persons doing business as fish dealers in Morehead City now as at tbe time of tbe organization of tbe plaintiff company.

Affirmed.