Hercules Powder Co. v. Continental Can Co., 4340

• Decision Date: 07 March 1955
• Docket Number: No. 4340,4340
• Citation: 86 S.E.2d 128,196 Va. 935
• Parties: HERCULES POWDER COMPANY, A DELAWARE CORPORATION v. CONTINENTAL CAN COMPANY, INCORPORATED. Record
• Court: Virginia Supreme Court

Page 128

86 S.E.2d 128

196 Va. 935

HERCULES POWDER COMPANY, A DELAWARE CORPORATION v. CONTINENTAL CAN COMPANY, INCORPORATED.

Record No. 4340.

Supreme Court of Appeals of Virginia

March 7, 1955.

J.R.L. Johnson, Jr.; Hunton, Williams, Gay, Moore & Powell; H. Merrill Pasco and Robert P. Buford, Jr., for the plaintiff in error.

McGuire, Eggleston, Bocock & Woods; William H. King; Bohannan, Bohannan & Kinsey and Wilkie Owen Farr Gallagher & Walton, for the defendant in error.

JUDGE: SMITH

SMITH, J., delivered the opinion of the court.

During World War I, E. I. duPont de Nemours and Company operated in Hopewell a large gun cotton factory and employed almost all of the employable labor in that area. The management of this company appreciated the situation of a community dependent upon one industry and when its factory ceased operations with the war's end it devised a plan for the purpose of making Hopewell a 'Selected, Diversified, Industrial Community.' The Du Pont Chemical Company, hereinafter referred to as Du Pont, was organized by E.I. duPont de Nemours and Company for the purpose of liquidating and disposing of its property in Hopewell. As a result of negotiations with Hummel-Ross Fibre Corporation, hereinafter referred to as Hummel-Ross, Du Pont agreed to the following covenant which was incorporated in a deed conveying a portion of Du Pont's lands in Hopewell to Hummel-Ross, dated March 12, 1921, and duly recorded:

'That the said Chemical Company will not itself engage in the manufacture on any of its property at or near Hopewell owned by it on the date of the aforesaid contract of October 30th, 1920, of chemical or mechanical wood pulp, and that it will not knowingly sell or lease any of its said property to any person, firm or corporation that contemplates the manufacture thereof on any of its said property, and that the said Chemical Company will in all leases, deeds and conveyances executed by it conveying or leasing any of its said property to other than to the said Fibre Company, excepting, however, such leases, deeds and conveyances as are made in furtherance of contracts or under options existing on the date of said contract, incorporate a covenant running with the land restraining any such purchaser or lessee of such land, its or his assigns from carrying on any such business on said premises; * * *.'

Thereafter, through mesne conveyances Hercules Powder Company, hereinafter referred to as Hercules, acquired 389 acres of Du Pont's remaining lands by deeds containing specifically or by reference the following covenant:

'That in further consideration of the conveyance of the within described property, the said grantee hereunder hereby covenants and agrees that it will not conduct, operate or maintain, either directly or indirectly on the aforesaid property, any of the following: * * * Any manufacturing plant, or industry, manufacturing chemical or mechanical wood pulp. * * * and the above described covenants shall bind the said grantee herein, its successors, representatives and assigns, and shall constitute a covenant running with the land.'

In 1936 Hercules obtained permission from Hummel-Ross to operate for a limited time on its Hopewell property a wood consuming pilot plant solely for the purpose of conducting experiments in the manufacture of wood pulp. In the course of the negotiations the following statement was included in a letter from an official of Hercules to Hummel-Ross:

'We definitely are prepared to execute a contract or document that your Legal Counsel deems advisable, whereby you will maintain your rights in the covenant running with our deed which precludes the manufacture of wood pulp on our property.'

The consummated agreement contained the following statement: 'The Hercules Powder Company recognizes that it holds its properties at or near Hopewell, Virginia, subject to a covenant that the said properties shall not be used for the manufacture thereon of chemical or mechanical wood pulp and that this covenant was made for the benefit of Hummel-Ross Fibre Corporation.'

In 1947 Continental Can Company, Incorporated, hereinafter referred to as Continental Can, acquired the Hopewell property of Hummel-Ross and in 1951 instituted a substantial capital improvement program by which it was committed to the expenditure of between $22,000,000 and $25,000,000. On this property Continental Can manufactures kraft paper and kraft board from wood pulp which it makes from pine pulpwood. Hercules maintains on its property at Hopewell a plant which refines cotton linters into chemical cellulose, known as chemical cotton, for use by the chemical industry. As the result of experimental work Hercules developed a method by which it can manufacture chemical cellulose from pulpwood and proposes to build a mill for that purpose on its Hopewell property. In 1952 Hercules opened negotiations with Continental Can in an attempt to eliminate the restriction prohibiting the use of its land for the manufacture of chemical or mechanical wood pulp. It appears from these negotiations that Continental Can had no objection to Hercules using gum and other soft hardwoods if Hercules would agree not to use pine; but because of the possibility that at some future time technological developments might make pine more desirable than the presently preferred gum and other soft hardwoods, Hercules refused to proceed with its proposed mill. It was this controversy which precipitated this action for a declaratory judgment under Code, § 8-578, et seq.

As the result of a pretrial conference the issue in the case was defined and limited by the trial court's order of October 26, 1953, 'to the determination of the legal effect * * * of the restrictions relating to the manufacture of chemical or mechanical wood pulp imposed in the deed of March 12, 1921, by Du Pont Chemical Company to Hummel-Ross Fibre Corporation, as repeated in the deeds comprising the plaintiff's [Hercules'] chain of title. ' Interrogatories and answers thereto were filed by both parties, depositions of two witnesses residing in other jurisdictions were taken and a stipulation as to certain facts was filed. The trial court heard the evidence without a jury and held that the restriction was valid and enforceable by Continental Can and was binding upon the real property of Hercules. The case has come to this court on a writ of error granted Hercules.

The ultimate question presented is whether the trial court erred when it held that the covenant was valid and enforceable by Continental Can against Hercules. The latter challenges the judgment on the ground that the restriction is invalid under the Virginia common law, the Virginia Antitrust Act and the Sherman Act.

While the courts have manifested some disfavor of covenants restricting the use of property, they have generally sustained them where reasonable, not contrary to public policy, not in restraint of trade and not for the purpose of creating a monopoly. Where the restraint is general it is void. Tardy v. Creasy, 81 Va. 553. But where the covenant only partially restricts trade, competition and commerce, it is valid and enforceable, provided (a) it is reasonable between the parties and (b) is not injurious to the public by reason of its effect upon trade. Merriman v. Cover, 104 Va. 428, 51 S.E. 817; Oliver v. Hewitt, 191 Va. 163, 60 S.E. (2d) 1; Carneal v. Kendig, 196 Va. 605, 85 S.E. (2d) 235.

The reasonableness of a restraint on the use of property 'is to be determined by considering whether it is such only as to afford a fair protection to the interest of the party in favor of whom it is given, and not so large as to interfere with the interest of the public. ' Merriman v. Cover, supra, 104 Va., at page 436.

Hence, in determining the validity of the restriction here we must examine its purpose and actual operation under the circumstances and conditions existing when it was imposed as well as at present. Hercules contends that when in 1921 the restriction was imposed there was such a vast quantity of forest lands on which pine pulpwood was growing and could be expected to grow, that there was no necessity for this restriction as a means of protecting Hummel-Ross' supply of raw material.

Pulpwood being an essential raw material of a pulp and paper mill, the business contemplated, Hummel-Ross investigated the available supply and the competition from similar mills in the area before deciding to settle in Hopewell. Although the forests of Virginia were well stocked with pulpwood at that time, the inability to transport it any great distance created a supply problem just as real as if the forests were inadequately stocked. But thereafter as the locality's economy expanded and roads were built, the demand for wood pulp increased and the number of mills operating in Virginia increased from seven in 1921 to eleven in 1952. During this period pine pulpwood production soared from 29,870 cords per year to 830,000 cords per year. Thus competition in the procurement of pulpwood grew as the demand for pulpwood increased, and it will be even greater when Continental Can completes its present capital expansion, for which it has already expended $14,500,000. In 1952 Continental Can's participation in Virginia wood pulp production was 18%, and it obtained approximately 86% of its wood by rail and the remaining 14% by truck from nearby areas.

There is a sharp conflict in the evidence as to the supply of pine pulpwood available to Continental Can, and much evidence including many exhibits was introduced on this issue. Mr. George W. Dean, State Forester of Virginia, testified that the pine situation was 'acute', and that on the basis of the latest survey of Virginia forests conducted in 1952 by the United States and Virginia Forest Services, the drain, or decrease in the Virginia pine, exceeded the growth of pine since 1940 by 16%. ¹ On the other hand, Doctor Charles Carpenter, a professional...