Fosburgh v. California & Hawaiian Sugar Refining Co.

• Decision Date: 02 July 1923
• Docket Number: 3921.
• Citation: 291 F. 29
• Parties: FOSBURGH v. CALIFORNIA & HAWAIIAN SUGAR REFINING CO. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

291 F. 29

FOSBURGH v. CALIFORNIA & HAWAIIAN SUGAR REFINING CO. et al.

No. 3921.

United States Court of Appeals, Ninth Circuit.

July 2, 1923

This suit was instituted December 1, 1920, by the Continental Candy Corporation against the defendants, appellees herein for the purpose of canceling and having annulled and held for naught two certain contracts, theretofore entered into by and between the candy company and the defendant California and Hawaiian Sugar Refining Company, bearing date, respectively May 14 and May 18, 1920. The candy company having become bankrupt, its trustee, James B. A. Fosburgh, has been substituted as plaintiff.

These contracts are of like tenor, and are for the sale by the sugar company to the candy company, the first of 750 tons and the latter of 500 tons, white Java sugar, at $19.85, net cash, duty paid, landed weights, f.o.b. cars, San Francisco Cal. The second, sixth and seventh conditions of the contracts are as follows:

'(7) Sales of this sugar to manufacturers constitutes their quota of sugar from the California & Hawaiian Sugar Refining Company from delivery date of these Java whites until the end of the year.'

In payment for the sugar, through arrangement and agreement of the parties to the contract, irrevocable letters of credit were issued, in the one case by the First National Bank of Chicago, and in the other by the Great Lakes Trust Company, to the sugar company, authorizing it to value on the bank or company, as the case might be, at sight, for any sum or sums not exceeding the contract value of the sugar sold; it being further stipulated on the part of the First National Bank of Chicago that drafts drawn under its letter of credit might be paid at the counter of the First National Bank of San Francisco, and, on the part of the Great Lakes Trust Company, that such drafts drawn under its letter of credit might be negotiated and paid at the Canton Bank of San Francisco.

Several reasons are assigned by the complaint why recovery should be had by plaintiff, among others, that clauses 6 and 7 of the contracts for the sale of the sugar contravene the anti-trust laws of the United States, and that thereby the contracts themselves are rendered illegal and unenforceable.

Along with the prayer for recovery, injunction was sought, restraining the sugar company from delivering to plaintiff the sugar sold to it, or from drawing on the letters of credit, or from taking payment from the San Francisco banks; also restraining the San Francisco banks from paying the sugar company the price of the sugar during the pendency of the suit.

While the defendants admit the making of the contracts and the issuance of the letters of credit as set forth in the complaint, the sugar company and the San Francisco banks controvert the alleged legal effect of such contracts, and declare their entire validity and plaintiff's liability to pay the stipulated value of the sugar sold.

'(2) Payment.-- Buyer agrees to immediately establish an irrevocable letter of credit through San Francisco bank sufficient to cover the amount of this purchase, same payable on presentation at said bank of invoice and shipping documents by the seller, the California & Hawaiian Sugar Refining Company. In the event of shipping documents being delayed at time of arrival of steamer, the payments are to be made against seller's delivery order.'

'(6) Buyer agrees to use these sugars only for his own manufacturing needs and under no circumstances to resell same.

John S. Partridge and Ira S. Lillick, both of San Francisco, Cal., and Charles Leroy Brown, of Chicago, Ill., for appellant.

Donald Y. Campbell and Garret W. McEnerney, both of San Francisco, Cal., for appellee Sugar Co.

H. U. Brandenstein, of San Francisco, Cal., for appellee Canton Bank.

Cushing & Cushing, of San Francisco, Cal., for appellee First Nat. Bank of San Francisco.

Before GILBERT and HUNT, Circuit Judges, and WOLVERTON, District Judge.

WOLVERTON District Judge (after stating the facts as above).

Motion was presented at the hearing to dismiss the appeal, on the ground that, subsequent to the entry of the decree in the District Court, the sugar company had drawn against the letters of credit for the purchase price of the sugar, and that the draft had been duly honored and paid. As, however, the motion does not seem to be strenuously insisted upon, we waive it, and proceed to a decision upon the merits of the cause.

Substantially but one question is presented for consideration, which is whether, by reason of the presence of clauses 6 and 7, the contracts contravene the anti-trust laws of the United States, and are thereby rendered void and unenforceable. The act known as the Sherman Anti-Trust Act (26 Stat. 209 (Comp. St. Sec. 8820 et seq.)) contains the embodiment of the law upon the subject of unlawful restraint of trade and monopolies. By the first section the Congress denounces every contract, combination in the form of a trust or otherwise, or conspiracy in restraint of trade or commerce, and by the second monopolies, or any attempt to monopolize any part of the trade or commerce among the several states or with foreign nations.

The second section has been construed by the Supreme Court as 'intended to supplement the first and to make sure that by no possible guise could the public policy embodied in the first section be frustrated or evaded. ' Standard Oil Co. v. United States, 221 U.S. 1, 60, 31 Sup.Ct. 502, 516 (55 L.Ed. 619, 34 L.R.A. (N.S.) 834, Ann. Cas. 1912D, 734). Thus harmonized, the Supreme Court further declares that 'it becomes obvious that the criteria to be resorted to in any given case, for the purpose of ascertaining whether violations of the section have been committed, is the rule of reason guided by the established law and by the plain duty to enforce the prohibitions of the act and thus the public policy which its restrictions were obviously enacted to subserve,' and that 'freedom to contract was the essence of freedom from undue restraint on the right to contract,' and again that 'it is obvious that judgment must in every case be called into play in order to determine whether a particular act is embraced within the statutory classes, and whether, if the act is within such classes, its nature or effect causes it to be a restraint of trade within the intendment of the act. ' Thus was applied the rule of reason as a criterion by which to determine whether, in any given case, there had been a violation of the anti-trust statute, and it was reaffirmed in United States v. American Tobacco Co., 221 U.S. 106, 180, 31 Sup.Ct. 632, 55 L.Ed. 663.

This means that, unless the contracts or engagements are, within themselves and upon their face, inherently violative of the act, the inquiry must be extended to the circumstances and conditions under which the contracts were formulated and entered into, including the relationship of the parties, and their relation to the subject-matter dealt with, and its relation to the general public. As was said in Nash v. United States, 229 U.S. 373, 376, 33 Sup.Ct. 780, 781 (57 L.Ed. 1232):

'Those cases (Standard Oil and Tobacco) may be taken to have established that only such contracts and combinations are within the act as, by reason of intent or the inherent nature of the contemplated acts, prejudice the public interests by unduly restricting competition or unduly obstructing the course of trade.'

That the contracts are not inherently illegal, because of clause 6, so as to bring them within the elementary rule that courts will not exert their powers to enforce illegal contracts or to compel wrongdoing, is determined by Wilder Mfg. Co. v. Corn Products Co., 236 U.S. 165, 172, 173, 35 Sup.Ct. 398, 400 (59 L.Ed. 520, Ann. Cas. 1916A, 118), wherein it was held that similar language was not to be so construed; the court declaring:

'But we can see no ground whatever for holding that the contract of sale was illegal because of these conditions.'

The Wilson Act, as amended (U.S. Comp. Stat. Sec. 8831) is not more comprehensive in its scope than the Sherman Act, and serves only to make the law more specific in its application, as it relates to foreign commerce.

Let us turn now to the facts relating to the conditions present, and the probable reasons and motives that induced the entering into the contracts in suit. War conditions respecting food regulations were still prevailing. Although the Armistice had been declared, there had been no final declaration of peace between this country and Germany. Conditions were still such that food regulations were essential to insure a proper and fair distribution of certain food products, including sugar. Under and in pursuance of the Lever Act (40 Stat. 276), known as the Food Control Act (Comp. St. 1918, Comp. St. Ann. Supp. 1919, Sec. 3115 1/8e, et seq.), and the proclamation of the President duly authorized thereto, the United States Food Administration was created, and a Food Administrator appointed. Later, namely, on November 21, 1919, the President, by proclamation (41 Stat. 1774), transferred all the powers and authority theretofore vested in the Food Administrator, in so far as they applied to food products other than wheat and wheat products, to the Attorney General of the United States, who was authorized and enjoined to direct and carry into effect the provisions of said act and the powers of authority therein given to the President. So that the Attorney General, in so far as it related to the enforcement of food regulation and distribution, save as to wheat products, superseded the Food Administrator, and thenceforth proceeded to the exercise of his appropriate powers.

Among other things, all persons engaged in the importation manufacture,...