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Thoms v. Sutherland

September 28, 1931


Appeal from the District Court of the United States for the District of New Jersey; John Boyd Avis, Judge.

Author: Woolley

Before BUFFINGTON, WOOLLEY, and THOMPSON, Circuit Judges.

WOOLLEY, Circuit Judge.

Two concerns, one domestic and the other foreign, divided between themselves trade territory in North America and Europe for the exclusive sale of certain products and by the same contract provided for the sale of the business of one concern to the other in certain countries. The transaction called for an issue of stock whose validity depends on the validity of the contract. The validity of the contract turns on two principles of law -- recognized by all parties -- one, that where the purpose of a contract is unreasonably to restrain trade, and other covenants, though valid in themselves, are but incidental to that purpose, the contract is void; the other, that where the purpose of a contract is the sale of a business, and a restrictive covenant as to territory is but ancillary to that legitimate purpose and necessary for the protection of property rights which pass from one to another, the contract is valid. The case, therefore, will be decided according as it may fall within one or the other of these principles. The facts will appear in the summary of the litigation and of the pleadings, which we find necessary to make at some length in order that the case and the grounds for our decision may be understood.

Eastman Kodak Company, a New Jersey corporation was engaged in manufacturing and selling, among other things, Collodion photographic printing-out paper, hereafter called "Collodion papers," mainly, if not entirely, in North America. Vereinigte Fabriken Photographischer Papiere of Dresden, a German corporation, hereafter called the "Dresden Company," together with several companies which it controlled, hereafter called the "associated concerns," was engaged in a similar business mainly in Great Britain and continental Europe. Whether the American and German companies were competitors in this or other lines in these or other countries does not appear. Nor does it appear that together they had a monopoly of the product.

The Dresden Company, for itself and its associated concerns, entered into a contract with the Eastman Company whereby it agreed, among other things, that it would not manufacture, deal in, or sell Collodion papers in North America, Great Britain, France, Spain and Portugal, and the Eastman Company agreed that it would not make and sell the product in any other country of Europe. In consideration for the surrender of the four European countries by the Dresden Company and their acquisition as exclusive trade territory by the Eastman Company, and for other considerations, the latter issued to the former 2,845 shares of its stock of the par value of $100, subsequently converted into 28,450 shares without nominal or par value. The number of shares was based on the Dresden Company's business profits earned on the product in question in those countries for the previous year.

That was in 1903. The Eastman Company paid dividends on this stock to the Dresden Company without any question until, the war being on, the Alien Property Custodian seized the shares under the Trading with the Enemy Act as property of an alien enemy and demanded cancellation of the old certificates and the issuance of new ones in his name. The Eastman Company resisted this demand on the ground, asserted for the first time, that the shares did not exist in law because, as it claimed, they were issued for an illegal consideration. To coerce the delivery of the shares, the Alien Property Custodian brought suit against the Eastman Company in the District Court of the United States for the Western District of New York, which court, later sustained by the Circuit Court of Appeals for the Second Circuit, ordered the cancellation of the certificates of the enemy owner and the issuance of new certificates to the Alien Property Custodian. In re Sutherland (D.C.) 21 F.2d 667; Id. (C.C.A.) 23 F.2d 595. The Eastman Company, complying with this decree, issued new certificates to the Alien Property Custodian and paid him dividends on the stock until October 1925, but since then has paid him nothing. The Alien Property Custodian then brought this suit at law in the District Court of the United States for the District of New Jersey to recover $853,500 of back dividends declared between July, 1925 and April, 1929 on the shares captured from the German owner. The Eastman Company filed an answer in the form of an equitable defense alleging that the shares were void ab initio in that they were issued for a consideration which, because involving restraint of trade, was illegal under federal law and were not issued for property as required by the state law of New Jersey, and asking that they be declared null and void and be decreed to be cancelled on its books and records, without offering, however, to re-establish the status quo ante. In the meantime, Charles M. Thoms, a stockholder of the Eastman Company, filed a bill in the Court of Chancery of New Jersey alleging as his cause of action the same matters which the Eastman Company in the action at law had by its answer set up as an equitable defense. Thoms' equity suit and the Eastman Company's equitable defense differ only in that one is employed on attack and the other in defense, each using the same weapons and each seeking the same relief, with the difference that in Thoms' suit he prays that the Custodian's action at law be enjoined and asserts, in substance, that because of his ignorance of what had been going on for a quarter of a century, he is not subject to the doctrine of laches, which, doubtless, he apprehended, might be invoked against the Eastman Company. After the removal of Thoms' suit from the state court to the District Court, the equitable defense in the action at law was transferred to the equity side of that court and was heard together with Thoms' equity action. The learned trial court, construing the agreement of 1903, considered the questions there, and now here, involved, whether the stock was issued for a consideration illegal (a) at common law, or (b) under the Sherman Anti-Trust Law (15 USCA § 1 et seq.); whether the stock in question was issued for "property" within the authorization of sections 48 and 49 of the New Jersey Corporation Act (2 Comp.St. 1910, p. 1630); and whether the complainant Thoms or the defendant Eastman Company is estopped because of laches to assert their respective positions. There is no question of fraud in the case.

The learned trial judge dismissed the equitable defense of the Eastman Company in the law action and then, being back on the law side of the court, entered summary judgment in favor of the plaintiff. Also for the same reasons, he dismissed Thoms' bill in equity. Thereupon both losing parties took these appeals which were heard at the same time and will be disposed of in one opinion.

What we shall say will apply equally to both actions, except when expressly distinguished. We shall, for convenience, address discussion to the Eastman case.

The contract between the Eastman Company and the Dresden Company was produced by the plaintiff on the defendant's prayer for oyer. Thereafter it became not only the center of the case but practically all of the case, for the remaining averments of the answer are, in the main, conclusions drawn from the contract itself. As there is no evidence of the proposed or practical effect of the contract, we shall, following the parties, endeavor to find from the contract -- within its four corners -- its purpose and legal effect. That this may be done in several ways with different results is evidenced by the work of the several distinguished counsel. It all depends on how one reads the instrument, whether stressing certain covenants and passing others lightly, or reading each covenant in relation to every other covenant and thus arriving at a legal valuation of the whole instrument. Merrill-Ruckgaber Co. v. United States, 241 U.S. 387, 392, 36 S. Ct. 662, 60 L. Ed. 1058; 2 Williston on Contracts, § 618.

The contract has twelve paragraphs. With only the first three and the eleventh is the Eastman Company impressed. These, it says, constitute a contract in restraint of trade and therefore contain an illegal consideration for the stock, which was void then and is void now. All else is incidental.

The first and eleventh paragraphs provide that during the continuance of the agreement, which shall run for one hundred years, the Dresden Company and its associated concerns shall not manufacture, deal in or sell Collodion papers in North America, Great Britain, France, Spain and Portugal, and the Eastman Company shall not manufacture, deal in or sell the same products in any country of Europe except Great Britain, France, Spain and Portugal, with mutual covenants against disclosing trade secrets and processes to anyone in the territory of the other.

Had the contract stopped there, it certainly would look like a gentlemen's agreement to divide the world into non-competitive areas, and would be bad. But even the Eastman Company, while insisting this was the purpose and effect of the contract, admits that this is not all of it, for the Dresden Company exacted, and the Eastman Company promised, something more than peaceful trade occupation of the territory reserved in return for the territory surrendered. It demanded something in place of the profits it had previously made in that territory. Therefore the contract next provides that the profits which the Dresden Company had made in its business of manufacturing and selling Collodion papers in Great Britain, France, Spain and Portugal should be ascertained by designated chartered accountants on an agreed basis of cost. And then -- finally, as the Eastman Company reads the contract -- the parties agreed by paragraph 3 that:

"As the consideration for the covenant on the part of the associated concerns hereinbefore contained, the Eastman Company shall and will, within thirty days after a Certificate in writing of the said Accountants as to the total amount of such profits for Great Britain (and later for France, Spain and Portugal) shall have been received by the Eastman Company, allot and issue to the Dresden Company fully paid up Common Shares of the Eastman Company of $100 each to such an amount which shall at ...

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