
    The Wayne-Monroe Telephone Company, Plaintiff, v. The Ontario Telephone Company and The Empire State Telephone and Telegraph Company, Defendants.
    (Supreme Court, Monroe Special Term,
    September, 1908.)
    Contracts — Validity of contracts — Public policy in general — Contract between telephone companies.
    Contracts between public service corporations which involve incidentally a partial restraint in competition are not obnoxious to public policy, if the main object of the agreement is lawful and beneficial to the public and such restraint is only a minor incident and fairly necessary for the accomplishment of the principal object of the agreement.
    Where each of two telephone companies operating in different territory, being desirous of extending its service into the field of the other, agreed to connect their lines by an extension to a certain point and, upon the making of such connection, further agreed that the lines of both companies should be so operated that service should be given from all points located on the lines of one to all points on the lines of the other company, the proportion of tolls to be received by each company for messages passing over the connected lines to be fixed by contract or left to adjustment; that neither party was to compete with the other in the telephone business or take subscribers in territory occupied by exchanges or companies with which the other had contract relations; and that neither party should, by contract with any other person, firm or corporation, impair any of the privileges and advantages acquired by either under said agreement; and where it appears that neither company had a monopoly in the field which it occupied, nor had both a monopoly of long distance business after the connection of their lines so made, the provision against competition is only incidental and contributory to the -attainment of the main object of the agreement, an extension of the business of each party through the connection of their two systems, and such restraint upon competition afforded a reasonable and necessary security for the performance of the obligations of agency assumed by the other, and to protect each against the improper use of the knowledge and instrumentalities placed in the hands of the other by virtue of the contract, and is not condemned by the statutes nor by the common law.
    Such contract does not become void by the purchase of the lines and properties of one of the parties to said agreement by a third telephone company, whose.more extended field of operation may make it an actual rival of the remaining original party to the agreement.
    Demurrer to supplemental complaint.
    Frank E. Young, for plaintiff.
    Elisha B. Powell, for Ontario Telephone Company.
    Underwood, Storke & Seward, for Empire State Telephone and Telegraph Company.
   Sutherland, J.

This action is brought to procure a judgment for the specific performance of a contract made between the plaintiff and the defendant Ontario Telephone Company, April 14, 1904, and for damages for the breach thereof. The complaint states in substance that, at the time the contract was made, the plaintiff was a domestic corporation, engaged in the operation of a telephone system in the county of Wayne, having its principal office at Williamson in that county; and the defendant Ontario Telephone

Company, a similar corporation, was engaged in the operation of a system of telephones in Oswego county, and had its principal office at the city of Oswego. The contract referred to recited the fact that the Wayne-Monroe Company had western connections with Rochester, Buffalo and intermediate points, and desired to extend its service eastward, and that the Ontario Company had connections east and south of Oswego, but desired to extend its service westward; and it was accordingly agreed that the Ontario Company should build a line westward to Fair Haven in Cayuga county, and that the Wayne-Monroe Company should build a similar line eastward to Fair Haven, at which point a connection was to be made between the wires of the two companies; and it was agreed that on the making of such connection the lines of both companies should be so operated that service should be given from all points located on the lines of one to all points on the lines of the other company, and the proportion of the tolls to be received by each company for messages passing over the connected lines was either fixed by the contract or left to be adjusted thereafter. Each party agreed to furnish the other first-class service. The life of the contract was to be for five years, and thereafter until one year’s written notice should be given by either party to the other of its intention to terminate the contract. The eighth and eleventh clauses provide as follows:

"Eighth. First party agrees not to compete with second party in telephone business, nor to compete with, or take subscribers in territory occupied by exchanges or companies with which second party connects or has contract relations, except upon written consent of second party; and second party agrees not to compete with first party in telephone business, nor to compete with, or take subscribers in territory occupied by exchanges or companies with which first party connects or has contract relations, except upon written consent of first party. * * *
" Eleventh. The said parties hereto agree not to enter into any contract with any other person, firm or corporation, whereby any of the privileges and advantages herein acquired by either party may be impaired.”

Immediately on the execution of the contract the plaintiff and the Ontario Company extended their respective lines and formed a connection at Fair Haven, and the plaintiff’s business was materially increased as the result of the through toll service to the eastward which the agreement made it possible for the plaintiff to give to its patrons; hut in July, 1906, the Ontario Company severed its connections at Fair Haven and refused to further carry out the contract. The plaintiff claims that great and irreparable injury is sustained by it through the loss of the traffic arrangement with the Ontario Company, and brought this action for a specific performance of the contract and for damages. When the action came to trial it transpired that, since the commencement of the action, the stock of the Ontario Company had been purchased by the Empire State Telephone and Telegraph Company, and a merger of the Ontario Company with the Empire State Company had been effected, and that the latter company was in possession of the plant of the Ontario Company and was the only corporation which could, in fact, perform the agreement on behalf of the Ontario Company; whereupon an order was made that the Empire State Company he made a party to the action. A supplemental summons and complaint were served and both defendants now demur to the supplemental complaint on the ground that it does not state facts constituting a cause of action, and their contention is that the contract is obnoxious to public policy and contrary to the statutes of the State, being in restraint of trade and tending to create a monopoly, and that, therefore, specific performance should not be decreed nor damages awarded for the breach thereof. Clauses eight and eleven, which have been quoted above, are attacked by counsel for the defendants as illegal in this respect, and it is claimed these clauses cannot be severed from the rest of the contract and that the whole agreement must fall to the ground.

This demurrer cannot he sustained unless it appears from the face of the complaint that the entire contract is void because it unlawfully restrains trade or tends to create a monopoly. In my opinion the complaint does not show the contract to be of such a nature. The original parties to the agreement were not rivals. The complaint shows they were occupying different territory. Neither company withdrew from any portion of its field of operations nor discontinued any service it was rendering to the public. The connection at Fair Haven gave each company an opportunity to enlarge its business, affording to the Oswego Company western connections which it did not have, and the Wayne-Monroe Company eastward and southern connections which it desired but did not possess. The Wayne-Monroe Company was not the only telephone company doing business in its territory; the Oswego Company was not the only telephone company in its original field. Neither company had a monopoly in the field which it occupied, nor had the two companies a monopoly of long distance business after the connection was made. Instead of creating a monopoly a new long distance telephone system was instituted by the connection of these two separated local systems, thereby affording the public the benefit to be derived from competition in long distance business. Viewing the contract as it stood before the intervention of the Empire State Telephone and Telegraph Company it would appear primarily to be not for the purpose of restraining trade, but for its extension and for the public welfare and convenience.

The agreement does restrain each party from becoming a business rival of the other during the life of the contract, but that restraint is only incidental and contributory to the attainment of the main object of the agreement, namely, an extension of the business of each party through the connection of their two systems. Clauses eight and eleven only afford to each the security which is reasonable and necessary for the faithful performance of the obligations of agency assumed by the other, and to protect each against the improper use of the knowledge and instrumentalities placed in the hands of the other by virtue of the contract. Such a partial and minor restraint of trade, remote in application and agreed to in order to bring about an immediate and relatively larger extension of trade in other respects, with an improvement of facilities for the public convenience, is not condemned by the statutes nor by the common law, as now interpreted and applied by the courts.

It will not be profitable to enter upon an extended citation of the authorities upon this subject. It will suffice to refer to the illuminating discussion contained in the opinion of Judge Taft, writing for the Circuit Court of Appeals, in United States v. Addyston Pipe & Steel Co., 85 Fed. Rep. 271, in which the distinction is drawn between contracts in general restraint of trade, with that for the immediate object to be attained; which contracts are void and unenforceable at law and very generally pronounced criminal by statute, and contracts on the other hand which contain covenants for the partial restraint of trade that are ancillary only to the main purpose subserved by the agreement and necessary for the accomplishment and protection of the lawful object sought to be attained, which covenants are everywhere held to be enforceable and not contrary to public policy. Without attempting a complete tabulation of the various kinds of contracts containing covenants in partial restraint of trade, which are held to be lawful, Judge Taft, at page 281, mentions “ agreements (1) by the seller of property or business not to compete with the buyer in such a way as to derogate from the value of the property or business 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,” he says, “ 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 employee of the confidential knowledge acquired in such business.”

It will be readily seen that the same reason, by force of which the law permits partners and principals and agents and other persons sustaining confidential relations to each other to covenant mutually against a competition in business for the protection of the main object of the agreement of partnership or agreement of agency, and to prevent the unjust use by one party of the knowledge acquired by the confidential relation thus established, applies with equal force to the traffic arrangement made between these telephone companies. The connection of their lines was certainly for the public welfare, and it was reasonable for them, under the circumstances, to protect themselves from the injury which would result by the use of the instrumentalities and opportunities afforded by the contract for the promotion of a rivalry in business in a manner which never would have been possible but for the agreement to connect their lines. Indeed, under the conditions presented, it would seem to be incompatible with the agency which each assumed toward the other for the transmission of messages that the agent should establish competing lines and seek customers in the same territory in which the other receives its patronage. The tendency would be not to perform the duties of the agency with as great fidelity if the agent had a selfish end to attain in the undermining of the business of its principal. The covenant not to become a competitor in the field already occupied by the other would seem, therefore, to be a reasonable corollary to the creation of this reciprocal agency, and quite essential to its complete and successful fulfillment.

I am not unmindful that the courts must look with keen scrutiny into contracts between corporations holding franchises from the public, exercising the power of eminent domain and rendering service upon which the public necessarily depends, which tend in any degree to deprive the public of the benefits of competition; but contracts between public service corporations, which involve incidentally a partial restraint in competition, are not obnoxious to pub-

lie policy if the main object of the agreement is lawful and beneficial to the public, and the restraint upon competition imposed is only a minor incident and fairly necessary for the accomplishment of the principal object to be attained. Chicago, St. L. & N. O. R. R. Co. v. Pullman Southern Car Co., 139 U. S. 79.

Common carriers are not deprived of the benefit of such contracts. Oregon Steam Navigation Co. v. Winsor, 87 U. S. 64; Leslie v. Lorillard, 110 N. Y. 519.

The Empire State Company succeeds only to the rights and liabilities of the Ontario Company under the contract. If the contract was good between the parties who entered into it, it cannot become wholly void by the purchase of the lines and properties of one of the parties by a third telephone company whose more extended field of operation may make the third company an actual rival of the remaining original party to the agreement.

Accordingly it is held, in conformity to the views expressed, that the complaint states a cause of action. The demurrer must, therefore, be overruled.

Demurrer overruled.  