Ely Lilly & Co. v. Saunders

Decision Date27 September 1939
Docket Number593.
Citation4 S.E.2d 528,216 N.C. 163
PartiesELY LILLY & CO. v. SAUNDERS.
CourtNorth Carolina Supreme Court

[Copyrighted Material Omitted]

The plaintiff, a manufacturer of pharmaceutical and biological commodities, which it sells and distributes under its own identifying brands, brought this action under Chapter 350 Public Laws of 1937, known as the "North Carolina Fair Trade Act", to restrain the defendant, a retail druggist, from reselling these products at cut rate prices in violation of the statute. The case was heard before Stevens, Jr., J., at March Term, 1939, New Hanover Superior Court, upon an agreed statement of facts, without the intervention of a jury.

The Act under consideration aims at the maintenance of resale prices and purports to protect manufacturers, producers, and the general public against "Injurious And Uneconomic Practices In The Distribution Of Competitive Commodities Bearing A Distinguishing Trade-mark, Brand Or Name". For convenient reference and understanding of its effect, pertinent parts of the statute are reproduced here:

"Sec. 2. No contract relating to the sale or resale of a commodity which bears, or the label or container of which bears, the trade-mark, brand, or name of the producer or distributor of such commodity and which commodity is in free and open competition with commodities of the same general class produced or distributed by others, shall be deemed in violation of any law of the State of North Carolina by reason of any of the following provisions which may be contained in such contract: (a) That the buyer will not resell such commodity at less than the minimum price stipulated by the seller. (b) That the buyer will require of any dealer to whom he may resell such commodity an agreement that he will not, in turn, resell at less than the minimum price stipulated by the seller. (c) That the seller will not sell such commodity: (1) To any wholesaler, unless such wholesaler will agree not to resell the same to any retailer unless the retailer will in turn agree not to resell the same except to consumers for use and at not less than the stipulated minimum price, and such wholesaler will likewise agree not to resell the same to any other wholesaler unless such other wholesaler will make the same agreement with any wholesaler or retailer to whom he may resell; or (2) To any retailer, unless the retailer will agree not to resell the same except to consumers for use and at not less than the stipulated minimum price."

"Sec. 6. Wilfully and knowingly advertising, offering for sale or selling any commodity at less than the price stipulated in any contract entered into pursuant to the provisions of this Act, whether the person so advertising, offering for sale or selling is or is not a party to such contract, is unfair competition and is actionable at the suit of any person damaged thereby."

The defendant insists that this statute is contrary to common law and public policy, as an attempted restraint of trade, and that it is void for unconstitutionality, as contravening Article I, Sections 1, 7, 17, and 31, and Article II, Section 29 of the State Constitution.

It appears from the stipulations that the plaintiff had entered into a substantial number of contracts of the nature designated in the Act with various dealers in the State of North Carolina, under which its products were sold and distributed. The defendant was not a party to any of these contracts, but knew of their existence and purport and the resale prices fixed therein, and, claiming to do so as a matter of right, dealt in and resold products of the plaintiff, bearing its distinguishing brands, at prices lower than those so fixed. These commodities were not acquired under any of the exceptive provisions of the Act set out in section five.

The products put upon the market by plaintiff and sold at retail by defendant, under the conditions above named, are divided, for the purpose of convenient consideration, into three classes:

Class I. Products falling within this class are those which are not protected by any patent but which are marketed by the plaintiff in common with many other manufacturers of pharmaceutical and biological products. In this classification the products produced by plaintiff are sold in North Carolina and throughout the United States in free and open competition with identical or substantially identical commodities produced and distributed by others, and each manufacturer is free to establish and does in fact establish its own selling prices for such commodities.

For example, "Hepicoleum" is a trade-mark which identifies a concentrate of Vitamins "A" and "D" manufactured and sold by the plaintiff. There are eight or more preparations of this character manufactured and sold by various other manufacturers and commonly known to the medical and pharmaceutical professions. They are used where deficiencies of Vitamins A and D are indicated, and a large number of other producers are engaged in marketing concentrates of Vitamins A and D independently of the plaintiff.

Class II. Products falling within this class are those which are marketed exclusively by the plaintiff under patents owned or controlled by the plaintiff or under which plaintiff has been granted an exclusive license. Products in this class are not in competition with identical products produced by other manufacturers. They are, however, sold in North Carolina and throughout the United States in free and open competition with comparable products produced by other manufacturers, and each of said manufacturers is free to establish and does in fact establish its own selling prices for such products.

As an example, from the agreed facts, "Amytal" is a trade-mark which identifies iso-amyl ethyl barbituric acid manufactured and sold by the plaintiff exclusively under a patent owned by it. It is one of fifteen or twenty commercially available compounds derived from barbituric acid known to the trade as barbituric acid derivatives. They are sedatives and hypnotics and are sold by all the producers for the same therapeutical purposes.

Class III. Products falling within this class are those which are marketed by a restricted number of manufacturers pursuant to the terms of patent licensing agreements. The products of any given manufacturer which fall in this class are sold in North Carolina and throughout the United States in competition with the identical product or products sold by other licensed manufacturers. In some instances, products in this classification are also in competition with unpatented products which are represented, advertised, and sold for the same conditions, indications, and purposes as the patented products are advertised, represented, and sold.

Other stipulations relate to the damage to plaintiff's business either accrued or likely to accrue because of the alleged unlawful practices of defendant and their threatened continuance.

The trial judge did not give consideration to the application of the statute to the several classes of commodities thus described but declared the law to be unconstitutional and void, and declined to enjoin the defendant from the cut rate practices declared therein to be unlawful. From this, the plaintiff appealed.

Carr, James & LeGrand, of Wilmington, Walton M. Wheeler, Jr., of Indianapolis, Ind., and J. C. B. Ehringhaus and Charles Aycock Poe, both of Raleigh, for appellant.

Kellum & Humphrey, of Wilmington, for appellee.

SEAWELL Justice.

The endeavor to secure favorable recognition by the courts of agreements looking to the maintenance of resale prices, unaided by positive legislative enactment, may be said to have culminated in Dr. Miles Medical Co. v. John D. Park Sons & Co., 220 U.S. 373, 31 S.Ct. 376, 385, 55 L.Ed. 502, in so far, at least, as federal action was concerned. In that case such contracts were held to be invalid at common law and under the Sherman Anti-Trust Act, 15 U.S.C.A. §§ 1-7, 15 note.

The opinion in that case has been criticized for its want of reality in approach-- in not making a sufficient analysis of economic conditions involved in the factual situation presented, in which it was thought there might be found some basis for exception to the legal categories applied. Harvard Law Review, Vol. 49, p. 811; Kale's "Contracts and Combinations in Restraint of Trade", Chap. 4; "The Maintenance of Uniform Resale Prices", 64 U. of Pa. L. R., 22. In this connection see dissenting opinion of Justice Holmes.

If the transfer included no more than a mere commodity, involving nothing in which the seller had any further property or interest, the doctrinal aspects of voluntary sale might be satisfied in the expression of the court: "The complainant having sold its product at prices satisfactory to itself, the public is entitled to whatever advantage may be derived from competition in the subsequent traffic". But the fact is that the producer, along with the commodities sold, must, perforce, permit the use of the good will of his business and his brand, and also their abuse, if the law can go with him no further. He is under the compulsion to sell under inadequate protection or withdraw from the market altogether. This good will is as much property as is coal or pig-iron or wheat, subject to audit, appraisal, taxation, purchase and sale, and is the most valuable asset of many businesses. But, unlike the tangibles mentioned it is vulnerable to assault through the brand which symbolizes it, since it is built up principally through reputation and may be destroyed by its loss.

But the Dr. Miles Medical Co. case dealt only with contract and did not discourage legislative action in reaching the desired result. Such statutes have been enacted in most of the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT