2. Contracts in Restraint of Trade. 3. Contracts Limiting the Liability of Bailees and Other Persons. Gambling Contracts. 4. SECTION 1.-INTRODUCTION Society, through its legislative and judicial organization, adopts various methods in its endeavor to repress wrong and in its attempt to compel the observance of high principles of personal and business ethics. Sometimes an act may be such an atrocious invasion of personal or property rights that it calls for the imposition of the most severe penalties. In such a case, the law regards the act as criminal, and, in addition to the liability to respond in damages to the person primarily injured thereby, the law prescribes the punishment of the offender by fine or imprisonment. The commission of a tort imposes upon the wrongdoer the duty of making restitution and of paying damages to the person wronged. A breach of contract creates a duty to respond in damages to the injured party and also operates as an excuse to the injured party for his non-performance. The wrong attempted by two or more persons in entering into an illegal contract is sufficiently different from a tort or breach of contract as to call for a somewhat special treatGenerally it cannot be treated as a tort, for there may have been no invasion of the personal or property rights of another. Performance of the illegal contract may, of course, result in the commission of a tort, or of a crime, or both, but the execution of the contract itself will not usually constitute a tort or a crime. The problem that is most frequently presented concerns the right of one of the parties to the illegal contract to hold the other liable for his breach, or to recover what he has parted with in performance of the illegal contract; that is, generally speaking, there can be no recovery for breach of an illegal contract, nor may one of the parties thereto, who has performed, compel restitution of the consideration with which he has parted. However the action may arise, the defendant usually wins, not because of any superior virtue in himself, but because of the general policy of the law not to enforce illegal contracts, nor to attempt to undo what has been done under them. The loss, if any, falls where the acts of the parties themselves place it. Of course, this policy does not prevent the making of illegal contracts. Still the knowledge that the aid of the court cannot be invoked to aid a party who has sustained a loss arising out of the breach of an illegal contract has some tendency to prevent the formation of such contracts. For the more serious kinds of illegal contracts, the law, in addition to its withdrawal of all legal remedies, makes the act of entering into the contract or the performance of it, a criminal offense punishable by fine or imprison ment. The above comment concerns the legal effect of illegal contracts. The question remains: What kinds of contracts are illegal? Transactions of this character are of so varied a nature that a definition is scarcely possible. In the last analysis, the question depends upon the probable effect of the contract upon society. If it be one which is directed against the maintenance of public authority, against public morals, or against the economic welfare of society, the contract may be treated as illegal because of its harmful effects. The circumstances under which a contract will be regarded as illegal, and the legal effects thereof, are illustrated in the following cases. SECTION 2.-CONTRACTS IN RESTRAINT OF TRADE UNITED STATES v. ADDYSTONE PIPE & STEEL CO. et al. This was a proceeding in equity, begun by petition filed by the Attorney General, on behalf of the United States, against six corporations engaged in the manufacture of cast-iron pipe, charging them with a combination and conspiracy in unlawful restraint of interstate commerce in such pipe, in violation of the so-called "Anti-Trust Law," passed by Congress July 2, 1890. The petition prayed that all pipe sold and transported from one state to another, under the combination and conspiracy described therein, be forfeited to the petitioner, and be seized and confiscated in the manner provided by law, and that a decree be entered dissolving the unlawful conspiracy of defendants, and perpetually enjoining them from operating under the same, and from selling said cast-iron pipe in accordance therewith to be transported from one state into another. Judge Clark, who presided in the Circuit Court, dismissed the petition on the merits. TAFT, Circuit Judge. The first section of the act of congress entitled "An act to protect trade and commerce against unlawful restraints. and monopolies," passed July 2, 1890, 26 Stat. 209 (U. S. Comp. St. §§ 8820-8823, 8827-8830), declares illegal "every contract, combination in the form of trust or otherwise or conspiracy in restraint of trade or commerce among the several states or with foreign nations." The second section makes it a misdemeanor for any person to monopolize, or attempt to monopolize, or combine or conspire with others to monopolize, any part of the trade or commerce among the several states. It is certain that, if the contract of association which bound the defendants was void and unenforceable at the common law because in restraint of trade, it is within the inhibition of the statute if the trade it restrains was interstate. Contracts that were in unreasonable restraint of trade at common law were not unlawful in the sense of being criminal, or giving rise to a civil action for damages in favor of one prejudicially affected thereby, but were simply void, and were not enforced by the courts. * * *The effect of the act of 1890 is to render such contracts unlawful in an affirmative or positive sense, and punishable as a misdemeanor, and to create a right of civil action for damages in favor of those injured thereby, and a civil remedy by injunction in favor of both private persons and the public against the execution of such contracts and the maintenance of such trade restraints. * * * From early times it was the policy of Englishmen to encourage trade in England, and to discourage those voluntary restraints which tradesmen were often induced to impose on themselves by contract. Courts recognized this public policy by refusing to enforce stipulations of this character. * * The reasons were stated * in Alger v. Thacher, 19 Pick. (Mass.) 51, 54, 31 Am. Dec. 119, in which the Supreme Judicial Court of Massachusetts said: "The unreasonableness of contracts in restraint of trade and business is very apparent from several obvious considerations: (1) Such contracts injure the parties making them, because they diminish their means of procuring livelihoods and a competency for their families. They tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions, and they expose such persons to imposition and oppression. (2) They tend to deprive the public of the services of men in the employments and capacities in which they may be most useful to the community as well as themselves. (3) They discourage industry and enterprise, and diminish the products of ingenuity and skill. (4) They prevent competition and enhance prices. (5) They expose the public to all the evils of monopoly; and this especially is applicable to wealthy companies and large corporations, who have the means, unless restrained by the law, to exclude rivalry, monopolize business, and engross the market. Against evils like these, wise laws protect individuals and the public by declaring all such contracts void." The changed conditions under which men have ceased to be so entirely dependent for a livelihood on pursuing one trade, have rendered the first and second considerations stated above less important to the community than they were in the seventeenth and eighteenth centuries, but the disposition to use every means to reduce competition and create monopolies has grown so much of late that the fourth and fifth considerations mentioned in Alger v. Thacher have certainly lost nothing in weight in the present day, if we may judge from the statute here under consideration and similar legislation by the states. * * * For the reasons given, then, covenants in partial restraint of trade are generally upheld as valid when they are agreements (1) by the seller of property or business not to compete with the buyer in such a way as to derogate from the value of the property or business sold; (2) by a retiring partner not to compete with the firm; (3) by a partner pending the partnership not to do anything to interfere, by competition or otherwise, with the business of the firm; (4) by the buyer of property not to use the same in competition with the business retained by the seller; and (5) by an assistant, servant, or agent not to compete with his master or employer after the expiration of his time of service. Before such agreements are upheld, however, the court must find that the restraints attempted thereby are reasonably necessary (1, 2, and 3) to the enjoyment by the buyer of the property, good will, or interest in the partnership bought; or (4) to the legitimate ends of the existing partnership; or (5) to the prevention of possible injury to the business of the seller from use by the buyer of the thing sold; or (6) to protection from the danger of loss to the employer's business caused by the unjust use on the part of the employé of the confidential knowledge acquired in such business. * * * It would be stating it too strongly to say that these five classes of covenants in restraint of trade include all of those upheld as valid at the common law; but it would certainly seem to follow from the tests laid down for determining the validity of such an agreement that no conventional restraint of trade can be enforced unless the covenant embodying it is merely ancillary to the main purpose of a lawful contract, and necessary to protect the covenantee in the enjoyment of the legitimate fruits of the contract, or to protect him from the dangers of an unjust use of those fruits of the contract, or to protect him from the dangers of an unjust use of those fruits by the other party. Much has been said in regard to the relaxing of the original strictness of the common law in declaring contracts in restraint of trade void as conditions of civilization and public policy have changed, and the argument drawn therefrom is that the law now recognizes that competition may be so ruinous as to injure the public, and, therefore, that contracts made with a view to check such ruinous competition and regulate prices, though in restraint of trade, and having no other purpose, will be upheld. We think this conclusion is unwarranted by the authorities when all of them are considered. It is true that certain rules for determining whether a covenant in restraint of trade ancillary to the main purpose of a contract was reasonably adapted and limited to the necessary protection of a party in the carrying out of such purpose have been somewhat modified by modern authorities. * *Recently the limitation that the restraint could not be general or unlimited as to space has been modified in some cases by holding that, if the protection necessary to the covenantee reasonably requires a covenant unrestricted as to space, it will be upheld as valid. * * * We have no doubt that the association of the defendants, however reasonable the prices they fixed, however great the competition they had to encounter, and however great the necessity for curbing themselves by joint agreement from committing financial suicide by illadvised competition, was void at common law, because in restraint of trade, and tending to a monopoly. But the facts of the case do not require us to go as far as this, for they show that the attempted justification of this association on the grounds stated is without foundation. The defendants, being manufacturers and vendors of cast-iron pipe, entered into a combination to raise the prices for pipe for all the states west and south of New York, Pennsylvania, and Virginia, constituting considerably more than three-quarters of the territory of the United States, and significantly called by the associates "pay territory." Their joint annual output was 220,000 tons. The total capacity of all the other cast-iron pipe manufacturers in the pay territory was 170,500 tons. Of this, 45,000 tons was the capacity of mills in Texas, Colorado, and Oregon, so far removed from that part of the pay territory where the demand was considerable that necessary freight rates excluded them from the possibility of competing, and 12,000 tons was the possible annual capacity of a mill at St. Louis, which was practically under the same management as that of one of the defendants' mills. Of the remainder of the mills in pay territory and outside of the combination, one was at Columbus, Ohio, two in Northern Ohio, and one in Michigan. Their aggregate possible annual capacity was about one-half the usual annual output of the defendants' mills. They were, it will be observed, at the extreme northern end of the pay territory, while the defendants' mills at Cincinnati, Louisville, Chattanooga, and South Pittsburgh, and Anniston, and Bessemer, were grouped much nearer to the center of the pay territory. The freight upon cast-iron pipe amounts to a considerable percentage of the price at which manufacturers can deliver it at any great distance from the place of manufacture. Within the margin of the freight per ton which Eastern manufacturers would have to pay to deliver pipe in pay territory, the defendants, by controlling twothirds of the output in pay territory, were practically able to fix prices. The competition of the Ohio and Michigan mills, of course, somewhat affected their power in this respect in the northern part of the pay territory; but, the further south the place of delivery was to be, the more complete the monopoly over the trade which the defendants were able to exercise, within the limit already described. Much evidence is adduced upon affidavit to prove that defendants had no power arbitrarily to fix prices, and that they were always obliged to meet competition. To the extent that they could not impose prices. on the public in excess of the cost price of pipe with freight from the Atlantic seaboard added, this is true; but, within that limit, they could fix prices as they chose. The most cogent evidence that they had this power is the fact, everywhere apparent in the record, that they exercised it. * * *The defendants were, by their combination, therefore able to deprive the public in a large territory of the advantages otherwise accruing to them from the proximity of defendants' pipe factories, and, by keeping prices just low enough to prevent competition by Eastern manufacturers, to compel the public to pay an increase over what the price would have been, if fixed by competition between defendants, nearly equal to the advantage in freight rates enjoyed by their committee, and by allowing the highest bidder at the secret "auction pool" to become the lowest bidder of them at the public letting. Now, the restraint thus imposed on themselves was only partial. It did not cover the United States. There was not a complete monopoly. It was tempered by the fear of competition, and it affected only a part of the price. But this certainly does not take the contract of association out of the annulling effect of the rule against monopolies. * * * It has been earnestly pressed upon us that the prices at which the cast-iron pipe was sold in pay territory were reasonable. A great many affidavits of purchasers of pipe in pay territory, all drawn by the same hand or from the same model, are produced, in which the affiants say that, in their opinion, the prices at which pipe has been sold by defendants have been reasonable. We do not think the issue an important one, because, as already stated, we do not think that at common law there is any question of reasonableness open to the courts |