United Shoe Machinery Co. v. La Chapelle

Rugg, C. J. This is a suit in equity by which specific perform — 477 — anee of a contract between the plaintiff and the defendant is sought. The plaintiff is a manufacturer, and the defendant an inventor, of shoe machinery. The contract provided, among other matters, for the employment by the plaintiff of the defendant in designing and improving shoe machinery, terminable at the will of either party, with wages at the rate of $20 a week. One paragraph of the contract bound the defendant to assign to the plaintiff any and all inventions, improvements and patents which he should make during the continuance of the contract and for ten years thereafter, and for a like period not to engage in any similar business. The employment under- the contract continued from 1906, with a brief interruption, until 1909, when it ceased. Since then the defendant has taken out a patent for some improvement in shoe machinery which he refuses to assign to the plaintiff, and this suit is to compel such assignment. The cause comes up on exceptions, and hence only limited and narrow questions are presented. The broader issues which would be open on an appeal are not raised. Whether the contract is unconscionable and hence unenforceable, although somewhat argued, falls in this class and is left undecided by this judgment. The point is not made that the plaintiff or its conduct constitutes a monopoly or an engrossing at common law, in furtherance of which the contract in suit was made, and hence that question is left on one side. 1. The defendant offered to show that before the contract was made he had assigned to the plaintiff an invention, and that although he said nothing about it he was by reason of this fact “ intimidated . . . in an equitable sense” when the general manager of the plaintiff presenting the contract told him to “ sign it.” There is nothing to indicate duress, or tho,t the defendant was not a free agent when he made the contract and during the three years of work under it. Whatever may be said as to the illusory character of freedom of contract growing out of economic conditions (Continental Wall Paper Co. v. Voight & Sons Co. 212 U. S. 227, 271), the defendant utterly fails to show that he acted under any element of duress, in its legal sense, or that he suffered any injury by the exclusion of this proffered evidence. Connolly v. Bouck, 98 C. C. A. 184; 174 Fed. Rep. 312. Silliman v. United States, 101 U. S. 465. 2. It was of no consequence whether the inventions assigned by — 478 — the defendant to the plaintiff during the term of his employment were equivalent in value to his wages. It was an implied condition of his contract that, he should do his best. The value of his work to the plaintiff had no bearing upon any issue raised. 3. There are averments that the plaintiff is a monopoly perpetuated by means of conditions in leases of certain patented machines to the effect that the lessees shall use no other machines not manufactured by the plaintiff, and that the plaintiff thus secures to itself a monopoly of all machinery used in the manufacture of footwear which is alleged to be an infraction of the federal antitrust act of July 2, 1890, 26 U. S. Sts. at Large, c. 647. The power to make such leases appears to be within the protection granted by the patents. This is settled by Henry v. A. B. Dick Co. 224 U. S. 1, decided since the argument of this case. See also National Phonograph Co. of Australia v. Menck, [1911] A. C. 336; United Shoe Machinery Co. of Canada v. Brunet, [1909] A. C. 330, 344. Hence these allegations and the evidence offered in support of them drop out of the case. 4. The remaining material matters averred in the answer of the defendant as to alleged violation of the federal anti-trust act are in substance that in 1899 the plaintiff was constituted by the combination of seven or more pre-existing corporations competing with each other in two thirds of the States of the Union, being all the principal shoe machinery manufacturers in the United States, and that by their merger into the single organization of the plaintiff, it acquired monopolistic control of the business of manufacturing, leasing and selling throughout the United States shoe machinery for the manufacture of footwear, and that it obtained the greater part of the valuable inventions of such machinery made before 1899, and that since 1899 it has bought competing corporations to the number of at least thirty for the purpose of diminishing competition, and thus has gained control of ninety per cent of the shoe machinery business; that it has achieved and maintained its monopoly of manufacture and trade and commerce in' this class of manufactures between the several States of the Union by contracting with ninety-five per cent of the inventors of shoe machinery for the entire product of their inventive skill, through contracts similar in form to that with the defendant; and that by these means it has stifled competition, so that it now controls from — 479 — ninety to ninety-five per cent of all the shoe machinery in the United States, and has acquired also a monopoly of inventions relating to shoe machinery, and that the contract in suit was made in furtherance of that monopoly, all in violation of 26 U. S. Sts. at Large, c. 647. The court below ruled that no evidence was admissible under this averment of the answer, and excluded all evidence offered. The defendant’s exceptions to this ruling present the principal question in the case. This main inquiry divides itself into two parts: First, whether the plaintiff is itself an illegal combination in restraint of trade and has monopolized trade and commerce between the several States, and second, whether the contract sought to be enforced is a contract in direct aid of such monopoly. Both these subsidiary questions ultimately must be governed by decisions of the Supreme Court of the United States, for they relate to interstate commerce and the meaning of a federal statute touching that subject. No such decision has been made exactly covering the points presented, but as they are raised it becomes necessary to decide them. It is to be observed that the averment of the answer is positive and direct that the plaintiff has acquired and maintained a monopoly of interstate trade in shoe machinery, and the offer of proof in this regard was co-extensive with the averment. This brings the case within the words of § 2 of the anti-trust act, which subjects to a penalty “Every person who shall monopolize . . . any part of the trade or commerce among the several States.” This section is complementary of § 1 of the same act, which prohibits all contracts and combinations to the end of monopolizing trade and commerce. Standard Oil Co. v. United States, 221 U. S. 1, 59-62. That decision, as we understand it, holds that the test to determine whether or not a given contract or combination is in restraint of interstate trade and commerce is the standard of reason as applied to like contracts or combinations at common law. We are not called upon to apply that rule because this record presents as its hypothesis an existing and absolute monopoly of a branch of interstate commerce founded upon a combination. When an actual monopoly is established in the sense in which that term was used in the law when the statute was enacted, then contract must be closely scrutinized to determine whether it is in furtherance thereof or unreasonable and a violation of the statute. — 480 — The earlier conception of a monopoly was a grant of an exclusive right from the sovereign power. This still defines with accuracy that which an inventor receives under the patent laws. But in a wider sense monopoly denotes a combination, organization or entity so extensive, exclusive and unified, that its tendency is to prevent competition in its comprehensive sense with the consequent power to control prices to the public harm. National Cotton Oil Co. v. Texas, 197 U. S. 115, 129. United States v. American Tobacco Co. 221 U. S. 106. United States v. St. Louis Terminal, 224 U. S. 383. United Shoe Machinery Co. of Canada v. Brunet, [1909] A. C. 330. See cases collected in Cooke on Combinations, § 116. But whatever may be the precise definition of the word monopoly as used in this statute, a business device by which a considerable number of competing corporations are welded into a single corporate entity which controls from ninety to ninety-five per cent of the commerce of the country in a particular branch required for the economical production of a necessity of mankind, is a monopoly. See Dr. Miles Medical Co. v. Park & Sons Co. 220 U. S. 373, 408; United States v. Standard Sanitary Manuf. Co. 191 Fed. Rep. 172. The modern machinery for the manufacture of footwear would seem to be a close approach to a prime necessity. See Central Shade Roller Co. v. Cushman, 143 Mass. 353, 364; Gloucester Isinglass & Glue Co. v. Russia Cement Co. 154 Mass. 92, 94; Gamewell Fire Alarm Telegraph Co. v. Crane, 160 Mass. 50; Taft, J., in United States v. Addyston Pipe & Steel Co. 29 C. C. A. 141; 85 Fed. Rep. 271, 286. It is fairly inferable from the averments of the answer and the . offer of proof that the constituent competing companies out of which the plaintiff was formed each owned valuable patents for machines used in the making of footwear. Therefore the further question arises whether a combination among several patentees of competing devices is within the inhibition of the statute. There is no decision by the United States Supreme Court covering this point, although there is an intimation in Bement v. National Harrow Co. 186 U. S. 70, 94, 95, to the effect that such a combination may be illegal under certain circumstances. The holder of a patent is given an absolute monopoly of the invention covered thereby, not affected in any degree by the Sherman anti-trust act. He may refuse to use it, or may use it in part only, or grant — 481 — its use to others upon conditions, and he may prevent all others from infringing in any way upon the rights thus secured to him. Continental Paper Bag Co. v. Eastern Paper Bag Co. 210 U. S. 405. But he is given no immunity from general laws governing the rest of the community and not directly affecting his patent rights. He holds the thing patented subject to general police regulations. There is nothing inherent in his patent or in the nature of his peculiar privileges, which enables him to be free from general laws enacted for the common good. This is plain respecting articles dangerous to life, health or safety. Patterson v. Kentucky, 97 U. S. 501. Webber v. Virginia, 103 U. S. 344, 348. Allen v. Riley, 203 U. S. 347. The recent decision of Henry v. A. B. Dick Co. 224 U. S. 1, has emphasized the principle that a patentee may annex such conditions as he chooses to the use of the invention. It is the purpose of the patent laws to encourage the exercise of inventive genius by securing to the inventor for a limited period the exclusive control of his discovery. This is a distinct monopoly. The Dick case holds, though by a divided court, that conditions which are directed to the building up of other business than that protected by the patent may stand under its sheltering monopoly. But no question of combination under the Sherman anti-trust act was involved in that case. It is urged by the plaintiff in substance that this aspect of the case is concluded in its favor by Bement v. National Harrow Co. 186 U. S. 70. But we do not so understand that judgment. That was an action to recover liquidated damages for breach of several contracts in relation to the manufacture and sale of patented implements. There was no finding by the referee, on whose report the decision was founded, that the plaintiff had become an illegal monopoly by reason of a combination of different persons owning distinct patents. Whatever allegations in the answer looked in that direction were not supported by the finding of the referee. In its last analysis it relates to conditions attached to the sale of patented articles. The extent of this decision is, as stated at page 91 and quoted with approval in 224 U. S. 30: "The very object of these [patent] laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use — 482 — or sell the article, will be upheld by the courts. The fact that the conditions in the contracts keep up the monopoly or fix prices does not render them illegal.” See National Phonograph Co. of Australia v. Menck, [1911] A. C. 336. The case at bar in this aspect does not deal with conditions annexed to the use of inventions protected by letters patent. It goes a step further and touches a more fundamental consideration. A combination of persons, competing in the market under sundry patents, for the purpose of ending the competition and acquiring thereby complete mastery of a branch of interstate commerce is the gravamen of the defense. Bement v. National Harrow Co. 186 U. S. 70, and Henry v. A. B. Dick Co. 224 U. S. 1, do not affect this question. The monopoly protected by the patent goes no further than the invention and contractual obligations attached to it. It does not protect other commercial ventures attempted by the owner, even though indirectly or remotely they may relate to the invention. It may be said that inasmuch as the patentee may annex any condition to the sale of his invention, he may subject the user of it to a series of obligations as to other kindred or disconnected articles so extended in number and so comprehensive in scope as to gain an absolute monopoly the size of which would be measured only by the necessity or taste of mankind in the use of particular inventions and the commercial power of the holder of the patent. Whatever else may be said of such a monopoly, it nevertheless would be true that it would be built on the patent and not on a combination. The basic charge against the present plaintiff is the manner and means by which its monopoly has been established, namely, the combination. Conditions and combinations are different in kind. They are distinctly separate commercial agencies. They are distinguishable not in degree but in substance. Conditions annexed by the patentee to the enjoyment of an invention are legal even though resulting in an extended monopoly. Combinations among patentees resulting in an extended monopoly are illegal. Protection by patent is established by Congress. It is not a constitutional guaranty, but depends wholly on the statutes. An act of Congress directed against evils which were assumed to arise from the monopolistic combination of those engaged in interstate commerce comes from the same source and carries the same obligation of enforcement as do the patent laws. No word or — 483 — phrase in the Sherman anti-trust act reveals an intent to exempt the owners of patents from its sweeping provisions against monopolistic combination. We are unable to perceive any underlying reason for supposing that by implication growing out of economic or business conditions such an exemption was intended. There appears to be no inherent natural distinction between owners of patents and owners of oil which would justify the application of the statute to one and not to the other. The conclusion seems to follow that the comprehensive condemnation of the act against every person who monopolizes interstate commerce by combination with others includes holders of patents as well as others. The great weight of authority supports this view, although there are decisions to the contrary.* It appearing by the allegations of the answer and the evidence offered under them that the plaintiff exercises a monopoly of the interstate trade, which is not protected against the provisions of the Sherman anti-trust act by the federal patent laws, it is not necessary to pursue further the inquiry as to its unlawful character. See United States v. Winslow, 195 Fed. Rep. 578; Strout v. United Shoe Machinery Co. 195 Fed. Rep. 313. It remains to determine whether the contract, the specific performance of which is sought, is in direct aid of the illegal combination amounting to monopoly of trade or commerce among the several States, contrary to the federal statute. Of course not — 484 — every contract of an illegal monopoly is void. Such a monopoly is not an outlaw. The principle established touching monopolies conducting interstate commerce in contravention of the Sherman anti-trust act is that their contracts which do not have a direct and immediate effect upon interstate commerce are binding and enforceable. United States v. E. C. Knight Co. 156 U. S. 1, 17. United States v. Joint Traffic Association, 171 U. S. 505, 568. Anderson v. United States, 171 U. S. 604, 615. Connolly v. Union Sewer Pipe Co. 184 U. S. 540. Diamond Glue Co. v. United States Glue Co. 187 U. S. 611, 616. Montague v. Lowry, 193 U. S. 38, 48. Field v. Barber Asphalt Paving Co. 194 U. S. 618, 623. Engel v. O’Malley, 219 U. S. 128, 139. See Union Pacific Coal Co. v. United States, 97 C. C. A. 578; 173 Fed. Rep. 737; Whitwell v. Continental Tobacco Co. 60 C. C. A. 290, 296; 125 Fed. Rep. 454; Arkansas Brokerage Co. v. Dunn & Powell, 97 C. C. A. 454; 173 Fed. Rep. 899; Virtue v. Creamery Package Manuf. Co. 102 C. C. A. 413; 179 Fed. Rep. 115. It was said in Hopkins v. United States, 171 U. S. 578, at 592, respecting contracts alleged to be in aid of an unlawful monopoly of interstate trade and commerce: "There must be some direct and immediate effect upon interstate commerce in order to come within the act. .'. . Many agreements suggest themselves which relate only to facilities furnished commerce, or else touch it only in an indirect way, while possibly enhancing the cost of transacting the business, and which at the same time we would not think of as agreements in restraint of interstate trade or commerce. They are agreements which in their effect operate in furtherance and in aid of commerce by providing for it facilities, conveniences, privileges or services, but which do not directly relate to charges for its transportation, nor to any other form of interstate commerce. To hold all such agreements void would in our judgment improperly extend the act to matters which are not of an interstate commercial nature.” The contract which incidentally, collaterally or remotely affects interstate commerce, although indirectly in furtherance of and advantageous to interstate commerce, is not within the scope of the act.. It must appear that the effect of such a contract is direct and substantial. The contract between the plaintiff and the defendant did not relate primarily to interstate commerce. It was for labor and skill alone. It had nothing to do with the transportation of — 485 — goods. But taking the averments of the answer and the proffered, evidence to be true, as we are bound to do on this record, it was made by one who had a monopoly of one branch of trade; it was one of many similar contracts with individuals enough to constitute a practical monopoly of skill in that department; it was a necessary link in a chain of contracts essential to the maintenance and preservation of monopoly in interstate trade which had been established by the plaintiff. Such a case is within the principle announced in Continental Wall Paper Co. v. Voight & Sons Co. 212 U. S. 227, 261, that the plaintiff comes into a court of equity for aid in enforcing a contract which according to the allegation and offer of proof was intended to be and was in fact an essential part of an illegal scheme. The words of the court in Swift & Co. v. United States, 196 U. S. 375, at 396, are applicable: “The scheme as a whole seems to us to be within reach of the law. The constituent elements, as we have stated them, are enough to give to the scheme a body and, for all that we can say, to accomplish it. Moreover, whatever we may think of them separately when we take them up as distinct charges, they are alleged sufficiently as elements of the scheme. It is suggested that the several acts charged are lawful and that intent can make no difference. But they are bound together as the parts of a single plan. The plan may make the parts unlawful. Aikens v. Wisconsin, 195 U. S. 194, 206.” The provision of the contract here sought to be enforced that for ten years after its termination every invention shall be assigned to the plaintiff savors of restraint of trade. It projects itself so far beyond the period of actual employment and payment of wages that it appears plainly to be in aid of the unlawful combination. It would choke the inventive capacity of the defendant for a period so long after his employment ceased that his usefulness to himself or to any competitor would be extinguished in most instances. When this contract is multiplied by substantially all like inventors in the country, its character as aiding the combination is too clear to require further discussion. A single contract for the employment in labor of one person is far away from interstate commerce. But when it is alleged that it is one among others with ninety-five per cent of all those skilled in a particular manufacture, and that that kind of manufacture is controlled by a combination formed of many pre — 486 — viously competing persons which monopolizes all or substantially all interstate commerce of that kind, the single contract for labor loses its individual aspect in the larger relation it bears to the monopoly in interstate commerce. As a single incident it may be harmless. As an integral part of an unlawful scheme for monopolizing commerce between the States which cannot be perpetuated successfully without contracts of similar tenor with all practising a like craft, it partakes of the illegality of the scheme. Exceptions sustained. Footnotes [*] National Harrow Co. v. Quick, 67 Fed. Rep. 130. National Harrow Co. v. Hench, 76 Fed. Rep. 667; S. C. 27 C. C. A. 349; 83 Fed. Rep. 36. National Harrow Co. v. Hench, 84 Fed. Rep. 226. United States v. Addyston Pipe & Steel Co. 29 C. C. A. 141, 160; 85 Fed. Rep. 271, 291. Bobbs-Merrill Co. v. Straus, 139 Fed. Rep. 155. Indiana Manuf. Co. v. J. I. Case Threshing Machine Co. 148 Fed. Rep. 21, 28. Blount Manuf. Co. v. Yale & Towne Manuf. Co. 166 Fed. Rep. 555. Pacific Factor Co. v. Adler, 90 Cal. 110. Vulcan Powder Co. v. Hercules Powder Co. 96 Cal. 510. Craft v. McConoughy, 79 Ill. 346. Gamewell Fire Alarm Telegraph Co. v. Crane, 160 Mass. 50. See Richardson v. Buhl, 77 Mich. 632, 638; Detroit Salt Co. v. National Salt Co. 134 Mich. 103; Arnot v. Pittston & Elmira Coal Co. 68 N. Y. 558; Cummings v. Union Blue Stone Co. 164 N. Y. 401; Cohen v. Berlin & Jones Envelope Co. 166 N. Y. 292, 299. Contra: United States Consolidated Seeded Raisin Co. v. Griffin & Skelley Co. 61 C. C. A. 334; 126 Fed. Rep. 364. Rubber Tire Wheel Co. v. Milwaukee Rubber Works Co. 83 C. C. A. 336; 154 Fed. Rep. 358. Indiana Manuf. Co. v. J. I. Case Threshing Machine Co. 83 C. C. A. 343; 154 Fed. Rep. 365. See Davis v. A. Booth & Co. 65 C. C. A. 269; 131 Fed. Rep. 31, 37; Trenton Potteries Co. v. Oliphant, 13 Dick. 507, 524.