Denison Mattress Factory v. Spring-Air Company

• Decision Date: 31 October 1962
• Docket Number: No. 18774.,18774.
• Parties: DENISON MATTRESS FACTORY, Appellant, v. The SPRING-AIR COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

308 F.2d 403 (1962)

DENISON MATTRESS FACTORY, Appellant, v. The SPRING-AIR COMPANY, Appellee.

No. 18774.

United States Court of Appeals Fifth Circuit.

September 6, 1962.

Rehearing Denied October 31, 1962.

COPYRIGHT MATERIAL OMITTED

Joe A. Keith, Sherman, Tex., for appellant.

James E. Henderson, Sherman, Tex., Charles L. Stewart, Jr., Chicago, Ill., for appellee.

Before JONES, BROWN and GEWIN, Circuit Judges.

GEWIN, Circuit Judge.

The Spring-Air Company, an Illinois Corporation, Plaintiff-Appellee, recovered judgment against Denison Mattress Factory, a Texas Partnership, Defendant-Appellant, under the terms of a contract executed by the parties on December 20, 1954, designated as "Spring-Air Products Related Companies Agreement". The recovery was allowed for various advertising assessments and fixed fee assessments claimed by Spring-Air under the contract including assessments made pursuant to the By-Laws at annual meetings of the Spring-Air group.

The defense asserted by Denison is to the effect that the contract is illegal, void and unenforceable because the same violates the antitrust laws of the United States, the State of Texas, or both.

The facts may be summarized briefly as follows: Spring-Air was organized with capital of $88,560.00 and has offices in a furniture display space located in the Furniture Mart in Chicago. It is composed of a group of 34 small bedding manufacturers who attempt to compete with large national bedding manufacturers by making Spring-Air products of uniform nature and quality; and by advertising such products in national magazines. Spring-Air designs uniform specifications for the Spring-Air line of bedding products which are then manufactured by the 34 stockholder companies in their respective factories, and funds for national advertising are contributed by the 34 stockholders. Denison voluntarily joined the Spring-Air group on the date of the contract in 1954. It also manufactures certain bedding products under its private brand names, which it has done since 1900, including the period 1954-1958 while the contract in question was in effect. Denison's "private-brand" business amounted to some figure in the neighborhood of one and a half million to three million dollars per year, many times the amount done in the Spring-Air line, and this phase of its business was not materially affected in any manner by the contract involved. Denison bought materials for its private-brand products wherever it desired, manufactured and sold such products wherever it wished in Texas, Oklahoma, Mexico, Arkansas and Louisiana.

In October 1957, Denison attempted to withdraw from the group and terminate its contract without paying what it owed to Spring-Air. Each member (manufacturer) owned 216 shares of stock in Spring-Air of the par value of $10.00 per share. Denison had the right to surrender its stock and receive a credit on its account in the amount of $2,160.00. This suit originated on July 24, 1958, when Spring-Air sued Denison for the amount claimed under the contract. Spring-Air owns a number of trademarks for mattresses and box springs, all of which are registered in the United States Patent Office pursuant to provisions of Title 15 U.S.C.A. §§ 1051-1127. It licenses the use of these trademarks throughout the United States. The relationship between Spring-Air and Denison is that of licensor and licensee.

In its defense, Denison asserts that the contract is obnoxious to the Federal Antitrust Statutes and Antitrust Laws of the State of Texas. The chief contentions of Denison and the contractual provisions involved may be grouped as follows:

1. Division of trade territory.¹

2. Restrictions relating to the purchase of materials.²

3. Price fixing.³

4. Restrictions on the manufacture and sale of competing products; and the use of Spring-Air's specifications and products.⁴

5. Restraints on sale or use of products or materials upon termination of the contract.⁵

The trial court heard the testimony of Denison's active partners and sales personnel; the Executive Vice-President of Spring-Air; and the General Manager of the Houston licensee of Spring-Air, and in its findings of fact and conclusions of law decided that the defenses were not supported by the evidence and accordingly entered judgment in favor of Spring-Air.

Contracts in restraint of trade at common law were not criminal in nature nor did they give rise to a civil action by one aggrieved thereby, but were simply void and unenforceable. The effect of the Sherman Antitrust Act was to make these contracts in restraint of trade, which were void at common law, unlawful in a positive sense and created a civil action for damages in favor of the injured party.

All covenants in restraint of trade are not invalid. In United States v. Addyston Pipe & Steel Co., 6 Cir., 85 F. 271, (1898), it was said:

"Covenants in partial restraint of trade are generally upheld as valid when they are agreements (1) by the seller of property of business not to compete with the buyer in such a way as to derogate from the value of the property or business to be 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 by the other party."

Tri-Continental Fin. Corp v. Tropical M. Enterprises, 5 Cir., 265 F.2d 619 (1959), held a restrictive covenant prohibiting the purchaser of a vessel from operating the vessel for a period of ten years between ports in Georgia, Florida, Mississippi, Alabama and Louisiana as a car ferry, train ferry, etc. or service between such ports or places for transportation of passengers, cargo, etc. was reasonable in time, territory and extent and hence did not violate the antitrust laws. Other ancillary restraints have been upheld against antitrust attack. Cole Motor Car Co. v. Hurst, 5 Cir., 228 F. 280 (1916). In Cole, a contract between manufacturer and dealer in motor cars, giving the dealer exclusive territory and limiting him thereto were held not to restrain trade or competition in violation of federal or state antitrust laws. A manufacturer of syrup used in beverages and furnished only to its licensed bottlers, refused to sell to others than its licensed bottlers, or to allow others to use its trademark, was held not a violation of either the Sherman Act or the Clayton Act. Coca-Cola Co. v. J. G. Butler & Sons (E.D.Ark.) 229 F. 224 (1916). A contract by which the manufacturer of a soft drink concentrate, sold under a copyrighted name, designated a soft drink bottler as exclusive bottler and distributor in a designated area, was held not to be a "monopoly" prohibited by the Sherman Antitrust Act. Brosious v. Pepsi-Cola Co., 3 Cir., 155 F.2d 99 (1946).

In Bascomb Launder Corp. v. Telecoin Corp., 2 Cir., 204 F.2d 331 (1953), cert. den., 345 U.S. 994, 73 S.Ct. 1133, 97 L. Ed. 140 (1953), certain franchise agreements prevented store operators from purchasing Bendix coin-operated washing machines unless they accepted the restrictions of franchise agreements from Telecoin. The contract whereby Bendix designated Telecoin as its exclusive distributor of such washing machines to "route" and "store" operators was upheld by the Court. The Court of Appeals for the Second Circuit referred to the case of United States v. Bausch & Lomb Optical Co. (D.C.) 45 F.Supp. 387 as follows:

"There a manufacturer agreed to sell one of its products to no one other than a single distributor. Judge Rifkind * * * said, that the Sherman Act was not violated, because the manufacturer had no monopoly of the product, and the `restraint of trade\' was (a) ancillary to a main purpose — a source of supply to the distributor — and (b) fairly protective of that distributor\'s interests but not so large as to interfere with the interests of the public.

"The contract in the instant case was therefore not unlawful in and of itself. The plaintiffs could win only if they proved (1) that Bendix had a monopoly in fact of the product it sold to Telecoin and 1 or (2) the exclusive arrangement, as carried out, was without a reasonable economic basis and merely served as an instrument for unduly restraining trade."

The cases are not numerous which have held covenants in partial restraint of trade lawful, but the cases do point out that courts are prone to look at the primary purpose of a contract to determine its validity. If the primary purpose, however disguised, is to stifle competitors and create a monopoly, then the agreement...