US SUPREME COURT DECISIONS

An actionable wrong is committed by one who maliciously interferes with a contract between two parties and induces one of them to break the contract to the injury of the other, and in the absence of an adequate remedy at law equitable relief will be granted; but held, in this case, that plaintiffs were not entitled to relief as the contract under which they claimed was invalid.

A system of contracts between manufacturers and wholesale and retail merchants by which the manufacturers attempt to control not merely the prices at which its agents may sell its products, but the prices for all sales by all dealers at wholesale or retail, whether purchasers or subpurchasers, eliminating all competition and fixing the amount which the consumer shall pay, amounts to restraint of trade, and is invalid both at common law and, so far as it affects interstate commerce, under the Sherman Anti-Trust Act of July 2, 1890, and so held as to the contracts involved in this case.

Such agreements are not excepted from the general rule and rendered valid because they relate to proprietary medicines manufactured under a secret process but not under letters patent; nor is a manufacturer entitled to control prices on all sales of his own products in restraint of trade.

The rights enjoyed by a patentee are derived from statutory grant under authority conferred by the Constitution, and are the reward received in exchange for advantages derived by the public after the period of protection has expired, and the rights of one not disclosing his secret process so as to secure a patent are outside of the policy of the patent laws, and must be determined by the legal principles applicable to the ownership of such process.

The protection of an unpatented process of manufacture does not necessarily apply to the sale of articles manufactured under the process.

A manufacturer of unpatented proprietary medicines stands on the same footing as to right to control the sale of his product as the manufacturers of other articles, and the fact that the article may chanrobles.com-red

Page 220 U. S. 374

have curative properties does not justify restrictions which are unlawful as to articles designed for other purposes.

A manufacturer of unpatented articles cannot, by rule or notice, in absence of statutory right, fix prices for future sales, even though the restriction be known to purchasers. Whatever rights the manufacturer may have in that respect must be by agreements that are lawful.

Although the earlier common law doctrine in regard to restraint of trade has been substantially modified, the public interest is still the first consideration; to sustain the restraint, it must be reasonable as to the public and parties and limited to what is reasonably necessary, under the circumstances, for the covenantee; otherwise, restraints are void as against public policy.

Agreements or combinations between dealers, having for their sole purpose the destruction of competition and fixing of prices, are injurious to the public interest and void; nor are they saved by advantages which the participants expect to derive from the enhanced price to the consumer.

161 F.8d 3 affirmed.

This is a writ of certiorari to review a judgment of the Circuit Court of Appeals for the Sixth Circuit which affirmed a judgment of the circuit court dismissing, on demurrer, the bill of complaint for want of equity. 164 F.8d 3.

The complainant, Dr. Miles Medical Company, an Indiana corporation, is engaged in the manufacture and sale of proprietary medicines, prepared by means of secret methods and formulas, and identified by distinctive packages, labels, and trademarks. It has established an extensive trade throughout the United States and in certain foreign countries. It has been its practice to sell its medicines to jobbers and wholesale druggists, who in turn sell to retail druggists for sale to the consumer. In the case of each remedy, it has fixed not only the price of its own sales to jobbers and wholesale dealers, but also the wholesale and retail prices. The bill alleged that most of its sales were made through retail druggists, and that the demand for its remedies largely depended upon their chanrobles.com-red

Page 220 U. S. 375

goodwill and commendation, and their ability to realize a fair profit; that certain retail establishments, particularly those known as department stores, had inaugurated a "cut-rate" or "cut-price" system which had caused "much confusion, trouble, and damage" to the complainant's business, and "injuriously affected the reputation" and "depleted the sales" of its remedies; that this injury resulted "from the fact that the majority of retail druggists as a rule cannot, or believe that they cannot, realize sufficient profits" by the sale of the medicines "at the cut-prices announced by the cut-rate and department stores," and therefore are "unwilling to, and do not keep" the medicines "in stock," or,

"if kept in stock, do not urge or favor sales thereof, but endeavor to foist off some similar remedy or substitute, and from the fact that in the public mind an article advertised or announced at 'cut' or 'reduced' price from the established price suffers loss of reputation and becomes of inferior value and demand."

It was further alleged that, for the purpose of protecting "its trade sales and business" and of conserving "its goodwill and reputation," the complainant had established a method "of governing, regulating, and controlling the sale and marketing" of its remedies, which is thus described in the bill:

"Contracts in writing were required to be executed by all jobbers and wholesale druggists to whom your orator sold its aforesaid remedies, medicines, and cures, of the following tenor and effect:"

"Consignment Contract -- Wholesale"

"The Dr. Miles Medical Company"

"This agreement made by and between The Dr. Miles Medical Company, a corporation, of Elkhart, Indiana, hereafter referred to as the Proprietor, and _____ _____ hereinafter referred to as the Consignee, witnesseth:"

"That the said Proprietor hereby appoints said Consignee

Page 220 U. S. 376

one of its wholesale distributing agents, and agrees to consign to such Consignee for sale for the account of said Proprietor such goods of its manufacture as the Proprietor may deem necessary, the title thereto and property therein to be and remain in the Proprietor absolutely until sold under and in accordance with the provisions hereof, and all unsold goods to be immediately returned to said Proprietor on demand and the cancellation of this agreement. Said goods to be invoiced to Consignee at the following prices:"

"Medicines of which the retail price is $1.00, $8.00 per dozen."

"Medicines (if any) of which the retail price is 50 cents, $4.00 per dozen."

"Medicines of which the retail price is 25 cents, $2.00 per dozen."

"Freight on all orders, the invoice price of which amounts to $100.00 or more, to be prepaid by the Proprietor; otherwise, freight to be paid by Consignee."

"Said Consignee agrees to confine the sale of all goods and products of the said Proprietor strictly to, and to sell only to, the designated retail agents of said Proprietor as specified in lists of such retail agents furnished by said Proprietor and alterable at the will of said Proprietor, and to faithfully and promptly account and pay to the Proprietor the proceeds of all sales, after deducting as full compensation for all services, charges, and disbursements a commission of ten percent of the invoice value, and a further commission of five percent on the net amount of each consignment, after deducting the said ten percent commission on all advances on account remitted within ten days from date of any consignment, it being agreed between the parties hereto that such advances shall in no manner affect the title to such goods, which title shall remain in the Proprietor as if no such advances had been made; provided that such advances

Page 220 U. S. 377

shall be repaid to said Consignee should the said Proprietor terminate this agreement and the return of any unsold goods on which advances have been made. Said Consignee guarantees the payment for all goods sold under this agreement, and agrees to render a full account and remit the net proceeds on the first day of each month of and for the sales of the month preceding. Failure to make such accounting and remittance within ten days from the first of each month shall render the whole account payable and subject to draft, but the proceeds of such draft shall not affect the title of any unsold goods, which shall remain in the Proprietor until actually sold, as herein provided."

"It is further agreed that the Consignee shall furnish the Proprietor from time to time upon demand full statements of the stock of goods of the Proprietor on hand on any date specified, and that a failure to furnish such statements within ten days from date of such demand shall be a sufficient cause for the cancellation of this agreement, and a demand for the return of the consigned goods."

"It is further agreed that the Proprietor will cause each retail package of its goods to be identified by a number, and said Consignee hereby agrees to furnish the said Proprietor full reports upon proper cards or blanks furnished by said Proprietor of the disposition of each dozen or fraction of such goods by means of the identifying numbers, specifying the names and addresses of the retail agents to whom such goods have been delivered and the dates of such delivery, and to send such reports to said Proprietor at least semimonthly, and at any other time on the request of said Proprietor."

"It is understood and agreed between the parties hereto that the commissions herein specified shall not be considered as earned by said Consignee upon any goods of said Proprietor which shall have been delivered to dealers not authorized agents of said Proprietor, as per list of

Page 220 U. S. 378

such agents, or upon any goods whose disposition by said Consignee shall not have been properly reported as herein provided, or sold at prices less than the prices authorized, and that said Consignee shall not credit any such commissions when making remittances on consignment account provided notice has been given by said Proprietor that such commissions are unearned, and that, if such unearned commissions have been deducted by said Consignee in making advance payments or monthly remittances on account, they shall be charged back to said Consignee and credited and paid to said Proprietor. It is understood that violation or nonobservance of any provision hereof by the Consignee shall make this agreement terminable and all unsold goods returnable at the option of the Proprietor."

"It is agreed that the goods of said Proprietor shall be sold by said Consignee only to the said retail or wholesale agents of said Proprietor, as per list furnished at not less than the following prices, to-wit:"

"Medicines of which the retail price is $1.00, $8.00 per dozen."

"Medicines (if any) of which the retail price is 50 cents, $4.00 per dozen."

"Medicines of which the retail price is 25 cents, $2.00 per dozen."

"Provided, that said Consignee may allow a cash discount not exceeding one percent, if paid within ten days from date of invoice, and that, when sales at one time and at one invoice amount to $15.00 or more, the said Consignee may allow three percent trade discount, and if said purchase amounts to $50.00 or more, five percent trade discount, all without cost to the Proprietor, and if such $50.00 quantity shall be shipped direct to the retail purchaser from the laboratory of said Proprietor, on the order from said wholesale distributing agent, freight will be prepaid by the Proprietor, but not otherwise. "

Page 220 U. S. 379

"This contract will take effect when the original, duly signed by the Consignee, has been received and accepted by The Dr. Miles Medical Company at Elkhart, Indiana."

"Done under our hands _____ A.D.1907."

"Fill in date on above line."

"The DR. MILES MEDICAL COMPANY"

"_____ _____, Wholesale Dealer"

"Sign your name on above line."

"Original. Return in enclosed envelop."

"And written contracts were required with all retailers of your orator's said proprietary remedies, medicines, and cures, as follows:"

"Retail Agency Contract"

"The Dr. Miles Medical Company"

"This agreement between The Dr. Miles Medical Company of Elkhart Indiana, and _____ _____, of _____ _____,"

"Retailer's name on above line. Town. State."

"hereinafter referred to as retail agent, witnesseth:"

"Appointed Agent"

"The said Dr. Miles Medical Company hereby appoints said retail dealer as one of the retail distributing agents of its proprietary medicines, and agrees that said retail agent may purchase the proprietary medicines manufactured by said Dr. Miles Medical Company (each retail package of which the said company will cause to be identified by a number) at the following prices, to-wit:"

"Wholesale Prices"

"Medicines of which the retail price is $1.00, $8.00 per dozen."

"Medicines of which the retail price is 50 cents, $4.00 per dozen."

"Medicines of which the retail price is 25 cents, $2.00 per dozen."

"Quantity Discount"

"Provided that, when purchases at one time and on one invoice amount to $15.00 (or more), wholesale distributing

Page 220 U. S. 380

agents are authorized to allow three percent trade discount; if such purchase amounts to $50.00 (or more) five percent trade discount will be allowed, and if such $50.00 quantity be shipped direct to the purchaser from the laboratory of said Dr. Miles Medical Company for the account of such wholesale agent, freight will be prepaid, but not otherwise."

"Full Price"

"In consideration whereof, said retail agent agrees in no case to sell or furnish the said proprietary medicines to any person, firm, or corporation whatsoever at less than the full retail price as printed on the packages, without reduction for quantity, and said retail agent further agrees not to sell the said proprietary medicines at any price to wholesale or retail dealers not accredited agents of the Dr. Miles Medical Company."

"Violation"

"It is further agreed between the parties hereto that the giving of any article of value, or the making of any concession by means of trading stamps, cash register coupons, or otherwise, for the purpose of reducing the price above agreed upon, shall be considered a violation of this agreement, and further it is agreed between the parties hereto that the Dr. Miles Medical Company will sustain damage in the sum of twenty-five dollars ($25.00) for each violation of any provision of this agreement, it being otherwise impossible to fix the measure of damage."

"This contract will take effect when a duplicate thereof, duly signed by the retail agent, has been received and approved by The Dr. Miles Company at its office at Elkhart, Indiana."

"Done under our hands _____, A.D.1907."

"Fill in date on above line."

"THE DR. MILES MEDICAL COMPANY"

"_____ _____, Retail Dealer"

"Sign your name on above line in ink. "

Page 220 U. S. 381

"To Retail Dealer:"

"Paste printed label, giving name and address, that your name may be correctly listed."

"Duplicate. Keep for reference."

As an aid to the maintenance of the prices thus fixed, the company devised a system for tracing and identifying, through serial numbers and cards, each wholesale and retail package of its products.

It was alleged that all wholesale and retail druggists, "and all dealers in proprietary medicines," had been given full opportunity, without discrimination, to sign contracts in the form stated, and that such contracts were in force between the complainant "and over four hundred jobbers and wholesalers and twenty-five thousand retail dealers in proprietary medicines in the United States."

The defendant is a Kentucky corporation conducting a wholesale drug business. The bill alleged that the defendant had formerly dealt with the complainant, and had full knowledge of all the facts relating to the trade in its medicines; that it had been requested, and refused, to enter into the wholesale contract required by the complainant; that in the City of Cincinnati, Ohio, where the defendant conducted a wholesale drug store, there were a large number of wholesale and retail druggists who had made contracts of the sort described, with the complainant, and kept its medicines on sale pursuant to the agreed terms and conditions. It was charged that the defendant,

"in combination and conspiracy with a number of wholesale and retail dealers in drugs and proprietary medicines, who have not entered into said wholesale and retail contracts"

required by the complainant's system, and solely for the purpose of selling the remedies to dealers "to be advertised, sold, and marketed at cut rates," and "to thus attract and secure custom and patronage for other merchandise, and not for the purpose of making or receiving a direct money profit" from the chanrobles.com-red

Page 220 U. S. 382

sales of the remedies, had unlawfully and fraudulently procured them from the complainant's "wholesale and retail agents" by means

"of false and fraudulent representations and statements, and by surreptitious and dishonest methods, and by persuading and inducing, directly and indirectly,"

a violation of their contracts.

It is further charged that the defendant, having procured the remedies in this manner, had advertised and sold them at less than the jobbing and retail prices established by the complainant, and that, for the purpose of concealing the source of supply, the identifying serial numbers, which had been stamped upon the labels and cartons, had been obliterated by the defendant or by those acting in collusion with the defendant, and the labels and cartons had been mutilated, thus rendering the list of ailments and directions for use illegible, and that the remedies in this condition were sold both to the wholesale and retail dealers, and ultimately to buyers for use at cut rates.

The bill prayed for an injunction restraining the defendant from inducing or attempting to induce any party to any of the said "wholesale or retail agency contracts" to "violate or break the same, or to sell or deliver to the defendant, or to any person for it," the complainant's remedies; from procuring or attempting to procure in any way any of these remedies from wholesale or retail dealers who had executed the contracts; from advertising, selling, or offering for sale the remedies obtained by any of the described means at less "than the established retail price thereof," or to dealers who had not entered into contract with the complainant; from in any way obliterating, mutilating, removing, or covering up the labels and cartons upon the bottles containing the remedies, and from making sales without such labels and cartons, and the letter press and numerals thereon, being intact. There was also a prayer for an accounting. chanrobles.com-red

Page 220 U. S. 394