Honorable Jesse Owens

District Attorney Vernon, Texas

Dear Sir: OpinionNo. O-2792 Be: Restraint of trade;whether contract to quit business and refrain from engaging in same buslness for a period of sixyears, coupledwith agreement not to sell equipment for use in suchbusiness In a county in Texas Isviolative of penal provisions of anti-trust laws.

We have had under considerationyour request for our opinionas towhether a certain contract is in violatlon of Article 1632, Penal Code of Texas. In order to properly appraise the questions involved,we copy the gist of the contract as submittedby you:

"Thiscontract and agreement made and entered into on this the 10th day ofAugust, A.D., 1940,by and betweenWalter Baucum of Hardeman County,Texans party of the first part, and H. W. Thaten of Childress County, Texas, and W. L. Beasley ofHardeman County, Texas, partles of the 2nd part, and for such contractand agreementwltnesseth:

"Forand in considerationof the sum of $700.00 to me, cash In hand paid on this the 10th day of August, 1940 as follows: $350.00by H. W. Thaten,
one of the parties of the 2nd part and $350.00paid by W. L. Beasley, the other party of the 2nd part, the receipt of which Is hereby acknowledged,and confessed, I,Walter Baucum, party of the first part, do hereby assign, convey and sell unto the saidparties of the 2nd part, jointly,all of the patronage and good will of Walter Baucum individually and the Blue Ribbon Bakery of Quanah, Texas, ofwhich the saidWalter Baucum is sole owner, and for said considerationagree and bind Walter Baucum individuallyand the Blue Ribbon Bakery to discontinue the operation of saidbakery andHonorable Jesse Owens, page 2 O-2792

of Walter Baucum individuallyin the bakery business inHardeman County, Texas, on this the 10th day of August, 1940 and further agree that for a period and time of six years from this date, the saidWalter Baucum will not engage in the making, distribution or sale of bread or otherbakery products, either directly or indirectlywithin the territorial limits ofHardeman County,Texas. And for the same consideration agree that saidBlue Ribbon Bakery will be closed to business on this date and that the equipmentand propertyused in connection therewith will not be assigned or transferred to any other person, company, corporation or association of persons to be used in the bakery business eitherdirectly or indirectly inHardeman County, Texas, for a period of six years from this date."

The above contract is signedand acknowledged three parties.

Article 1632, Penal Code, to which you refer,
as follows:

"A 'trust'isa combination of capital, skill
or acts by two ormore uersons, firms, corporations or associations of persons, or either two or more of them for any or all of the followingpurposes:

"1

. To create, orwhich mav tend to create
or carrv out, restrictions in trade or commerce or aids to commerce, or in the preparation of any product for market or transportation,or to create
or carry out restrictions in the free pursuit of any business authorized or permittedby the laws of this State.

"2

. To fix, maintain, increaseor reduce the price of merchandise,produce, or commodities,or the cost of insurance,or of the preparation of any product for market or transportation. by all

reads

“3

. To urevent or lessen competitlon in the manufacture,making transportation, sale or purchase of merchandise,produce or commodities,or the buslness of insurance,or to prevent or lessen competition in aids to commerce, orinthe preparation of any product for market or transportation.Honorable Jesse Owens, page 3 o-2792

“ll

. To fix or maintain any standard or figure whereby the price of any article or commodity of merchandise, produce or commerce,or the cost of transportation,or insurance,or the preparation of any product for market or transportation, shall be in any manner affected, controlled or establishea.

“5

. To make, enter into,maintain, execute
or carry out any contract, obligation or anreement bv which the parties theretobind, or have bound, themselves not to sell,diswose of, transoort or to prepare for market or transnortatLonany article
or commodity or to make any contract of insurance at a price b;low a common standard or figure, or by which they shall agree, Inany manner, to keep the price of such article or commodity, or charge for transportatlonor insurance, or the cost of the preparation of any product formarket or transportation,at a fixed or graded figure, or by which they shall, In any manner, affect or maintain the price of any commodity or article, or the cost of transportationor insurance,or the cost of the preparation of any product for market or transportation,between them or themselves and others, to preclude a free and unrestricted comnetitlonam'dnp; themselves or others in the sale or transwortation of any such article or commodits or business of transporation or insurance, or the preparation of any product formarket or transportation,or by which they shall agree to pool, combine or unite any Interest they may have in connectionwith the sale or purchase of any article or commodity, or charge for transportationor insurance,or charge for the preparation of any product formarket or transportation,whereby itsprice or such charge might be in any manner affected.

“6

. To reuulate, fix or limit the outnut of
anv article or commodltrwhich mav be manufactured, mined, produced or sold, or the amount of insurancewhich may be undertaken or the amount of work that may be done in the preparatlon of any product for market or transportation.

“7

. To abstain from engaging in or continuingbusiness, or from the purchase or sale ofmerchandise,produce or commoditiespartially or en- %irelv within this State, or any nortlon thereof." (Emphasis ours.)Honorable Jesse Owens, page 4 o-27.92

We have underlined all of those portions of the statutewhich appear to be in any wise applicable to your case. Your particular inquiry lawhether paragraph 3 is violated by the contractand attendant'facts. You stress the assertion that Baucum did not in fact sell his business but only agreed to close same and move out of the town of Quanah, Texas. It appears fromyour letter that the State is inposition to prove that pursuant to'the contract,Baucum did close his doors and agreed not to make, distribute
or sell bread or other bakery products InHardeman County, Texas, for a period of six years, and that none of his propertywill be assigned or transferred to any other to be used in the bakery business in the prescribed territory for such period of time.

There have been relatively few casesbefore our appellate courts construing the criminal law provisions of the anti-trust statutes of this State. Although the general language employed In the Revised Civil Statutes is the same as that used in the Penal Code, ana Article 7426,Revised Civil Statutes, is in exactly the same languageas Article 1632, Penal Code, supra, theywere enactedby the Leglslature as separatebills, and the enactmentappearing in the civil code became a part of the statutory law of this state at a subsequenttime. See State v. Standard Oil Co., 130 Tex. 313, 107 S.W. (2d) 550, reversing Civ.App., 82 S.W. (2d) 420. We have been unable to find, nor do we believe exists, any case by the Court of CriminalAppeals deciding the question submittedby you.

It is interestingto note that the provisions of the Penal Code recentlywithstood a most aggressive attack leveled at the constitutionalitythereof. In an able and elaborate opinion Judge Christian of the Commission of the Court of CriminalAppeals upheld the law. See Ex parte Tigner, Cr. App., 132 S.W. (2d) 885. A motion for rehearingwas filed, but was overruled;whereupon, the case was appealed to the Supreme Court of the United States and finally affirmed, Tigner v. State of Texas, 60 s. ct. 879, 84 L. Ed. 756. re. Justice Frankfurterdelivered the opinion of the Supreme Court and specificKay

overruledthe case of Connollyv. Union Sewer Plpe Co., 184 U.S. 540, 46 L. Ed. 679, 22 S. Ct. 431, long relied upon as making the penal provisions of our anti-trust laws inoperative. The latter case may well explain then dearth of criminal cases arising in this state.

In our study of your questionwe have foundmany expressions of the generalprinciples of law applicable to your case. We shallbriefly discuss a few of the various authorities, citing others for your consideration.Honorable Jesse Owens,page 5 O-2792 \

-.

InWilliston on Contracts,Vol. 5, 0 1636, p. 4580, appears the following:

"It is everywhereagreed that in order to be valid a promise imposinga restraint'in trade
or occupationmust be reasonable. The question of reasonableness is for the court, not the jury; and in consideringwhat isreasonable, regard must be paid to (a) the questionwhether the promise iswider than Is necessary for the protection of the convenantee in some legitimate interest covenaAtoLb)a2 e effect of the promise upon the (c) the effect upon the public. If the resiralnt imposed Isgreater than is necessary for the protection of the covenantee, the promise Is necessarily invalid. Onewhose business Is confined to New York is not helpedby the promise of another not to do business in Chicago, and if the promise is enforcedby injunction the promisor is Injured,while the promisee is not correspondinglyhelped. Such a case in the simple form supposedwould not often arise, but very commonly a promise is exactedwhich lnclude3 not only a restriction advantageous to the promisee,but one injurious to the promlsorwithout correspondingbenefit to the promisee. Such
a promise, unless divisible, iswholly Invalid. Even Ifno objection can be taken on this ground, the effectmay conceivablybe so harsh In Its consequenceupon the promisor that enforcement of the promisewill be refused. Finally, even though neither of the foregoing objections exists, the effect of the promise on the public interestmay be such as to make enforcement contrary to public policy. In considering the nature of this last objection, .itmust be recognl?nd at the outset that the purpose of any restrictive agreement Is almost always to lessen comnetltionwith the oromisee, thereby enabling him to do a largerbusiness and on terms more favorable to himself than he coulddo if he had not obtained the oromise inquestion. Thi p p s has been regarded. especially in the &i% *Ln;;a;; Q Yi;p;;a;n;o ",;,:;;;I; ;;$erest Y the restrictive promise is ancillary to some other transaction that Its vallalty has been upheld. Thus, if a dealer shouldpay a competitor to promise to go out of business, or cease to corn--,, nete. the agreementwould be invalid.

. . . . . (Emphasisours.)Honorable Jesse Ownes, page 6 O-2792

The underscoredportion of the above quotation is copiously annotated, and among the cases listed in support of the text Is the case of Potomac Fire Insurance Co. v. State, (Tex.Civ.App.) 18 S. W. (2d) 929.

From Ruling Case Law,we quote as follows:

"Fromthe tests laid down for determining the validity of such an agreement, It seems to follow that no conventionalrestraint of trade
can be enforced,unless the covenant embodying It ismerely ancillary to the main purpose of awful contract, and necessary to orotect the covenantee In the en.ioyment of the legitimate fruits of the contract, or to protect him from the dangers of an unjust use of those fruits by the otherparty. This statementof the rule implies that the contractmust be one inwhich there is a main purpose, to which the covenant In restraint of trade ismerely ancillary.

. .' (6 R. C. L. 1 195, p. 790, Emphasis ours.)

From Corpus Jurls,we quote the following:

"Thecovenant or contract by which the restraint is imposedmust be incidentalto and in support of another contract or a saleby which the covenantee acquires some interest in the business needingprotection. Contractswhich have for their ob.iect merelv the removal of a rival and comoetitor ina business are unlawful under all circumstances.

. 420, P. 477. Emphasis ours:)' '' (13C.J., I

The latest offeringby the samepublishers, Corpus

Juris Secundum, adheres to the rule announced In CorpusJuris:

"Thevalidity of an agreement inrestraint of trade is according to the trend of authority to be tested by itsreasonablenesswith respect to the protection of the covenanteeand the public interest involved,and in all cases it 1s essential that the restrictive covenant be incidental to another lawful contract or sale involving some interestreouiring the protection of the restraint. Although itmay In some cases continue after the sale of such interest.

. . . "Restrainingcontractmust be ancillary. The covenant or contractby which the restraint. .

Honorable Jesse Owens, page 7 Q-2792

is imposedmust be Incidental to and in support of another lawful contract or sale by which the covenanteeacauires some Interest needing oro- - _ tection. As fs stated in 1 250 infra, contract;! which have for their objectmerely the removal of a rival and comnetitor in a business are unlawfulunder all circumstances.

. . ." (17 C.J.S., I 246, p. 627. Emphasis ours.)

Itwould serve no useful purpose to list here the many cases from other jurisdictionscited by the above authorities. These do not rest upon any eonstructlon of our statutes,but appear to be convlnclng statements,showing the status of the common law. We shall proceed to discuss
zome of the Texas case3 arlzing from civil actlons.

In the case of Comer v. Burton-Lingo Co., 24 Tex. Clv. App. 251, 58 S. W. 969, an owner of a lumber business,
on the sale thereof to three firms engaged in the same buslness, agreed not to re-enter suchbusiness in the city of Cleburne, for a period of ten years. The vendor resumed the lumber business in Cleburnewithin the perlod embraced in the contract. The suit sought to restrain him from contlnulng such business and for damages. The answer of defendant charged that plaintiff firms, being the only dealers in such business In such place, combined to buy suchbusiness and good will to prevent competitlon,and to controlprices. The court said if the plaintiffs entered Into a comblnatlon of their acts and capital to buy, and did buy the stock In trade and good will of the defendant, and,if the purpose of the combinationwas to create or carry out restrictions in trade or in the free pursuit of business, or to prevent competition, itwas prohibitedby the anti-trust law.We quote from the opinion of the court:

"Theanti-trust law does not apply to the sale of a business and the goodwill thereof, accompanied by an obligation on the part of the seller not to resume business for a limited tlme at a specifiedplace,where the purchaser Is a singleperson or firm. Gates v. Hooper (Tex.Sup.) 2; ;. ;. $9; Erwin v. Hayden (Tex. Civ.App.)

Does It apply to a combination of two & more dealers to buy the stock and good ~I.11 of an oppositiondealer for one of the purposes prohibitedby the statute? The combinationprohi: blted by the law in forcewhen the contract before us was entered intowas the union or association of the capital, skill, or acts of two or more persons, firms, OP corporations for the purpose of. .

Honorable Jesse Owens,page 8 O-2792

doing either of the things denounced by the statute. If the combination is consummated, and itspurpose is unlawful, then it 13 lmmaterial as towhether It Is reasonable from
a business standpoint, or as to how Itwill affect the public. The object of the statute
was to prohibitany combinationhaving for its purpo3e the dofng of either of.the things specified,withoutregard to the lntentlon of the parties, or of the immediate effect of the comblnatlon on trade and commerce,az the power arising from such combinationwas believed to be dangerous to public interests. Therefore the legislaturedid not attempt to regulate such combinations,but prohibited them entlrelg.

. . . ..'I

Crandallv. Scott, Tex. Clv.App., 1.61S.W. 925, L3 a cazewherein plaintiff and two other concerns,who conducted moving picture shows InAmarillo made an agreement by which the others gave notes to plaintiff In considerationof his ceasing business and agreeing that no showhouse except the two operatedby the makers of such notes should open ln Amarillo before a certain time; that If a theater of a certain standard should open within the time and operate for six months, all of the notes maturing after the opening of the
new show shouldbe void, and that If a showhouse should open and run for less than such perlod, the notes shouldbe void for the time itwas conducted. Holding that therewas sucha "combination"In restraint of trade as violated the antltrust law, the court refused to sanction the contract,declaring itwholly void, notwithstandinga seriousquestion as to failure of defendants' pleadings to properly attack its validity, the opinion reciting that the contract's illegality
was apparent from the record. The case of Comer v. BurtonLingo, supra,was citedwith approval.

The court held the very language contained in the first and seventhnumbered paragraphs of what is now Article 1632, Penal Code, was violated by theconblnatlon entering Into the purported contract.

In Smith V. Kouslakls, Tex. Clv.App., 172 S.W. 586, plaintiff entered Intoan agreementwith defendants that for
a valuable considerationdefendant3would not operate, or permit lessees to operatea lunch stand upon certainpremises for a period of two years. A written memorandumwaz executed by the parties. Thereafter the premiseswere sublet for a lunch stand. This occasionedthe suit for an lnjunctlon;which
waz granted by the lower court. The court of Civil Appeals. 1.

.

Honorable Jesse Owens, page 9 O-2792

reversed the case, a majority of the court holding the purnorted contractvoid, because inviolation of the first and seventhnumbered paragraphs of Article 7796, Revised Civil Statutes, 1911. This article isfinthe identicallanguage of our presentArticle 1632, Penal Code, supra. The third justicedoubted the applicability of the anti-trust statute, but concurred in the result because of the common law~rule limiting such agreements to covenantsancillary to a lawful contract such as mentioned in the quotations fromWilliston, Ruling Case Law, Corpus Juriz, etc., hereinbefore set outby
us.

We next consider the caze ofRobinson v, Levepmann, Tex

.Civ.App., 175 S. W. 160,writ of error refused, 185 S.W. xv. Robinson's firm and two otherswere engaged in the busfness of sellingpaints,wallpaper, oils and varnishes In the city of Corsicana,Texas. Robinson's flrm sold Its stock of merchandise to the two competitors,with agreement that the sellerswould not engage In suchbusiness in such city so long as the buyerswere engaged therein. Robinson left Corsicana for a time, but returned and resumed the zame character of business he had theretofore followed and Ln competitionwith said partFes to the alleged contract. Suit was for damages and an injunctionrestraining Robinson from carrying
on the business. The court held the contract illegal and void, as indicatinga combination in contravention of language in the civil statutes, the zame as used inwhat is now numbered peragrsphs 1, 3 and 7 of Article 1632, Penal Code. See p. 162 of the opinion, 175 S. W. 160, supra.

We recognize the seeminglyanomolous situationcreated by the language of the statuteas interpretedand construed by our courts as shownby the excerpt already quoted herein from Comer v. Burton-Lingo Co. and the other cases supra. Neverthe less, it appears that the decisions in civil suits
are conclusive that the anti-trust law does not apply to the sale of a business and the goodwill thereof, accompaniedby
an obligation on the part of the sellernot to resume business for a limited time at a specifiedplace,where the purchaser is a singleperson or firm;whereas, Itdoes apply to awbination of two or more dealers when such combination is for
one of the purposes enumeratedand prohibitedby the statute. See Comer v. Burton-Lingo Co., supra; Langever v. United Advertising Corporation,Tex. Civ. App., 258 S.W. 856; Malakoff Gin Co. v. Rlddlesperger, Tex. Civ.App., 133 S.W. 519; Ibid, Supreme Court, 192 S.W. 530; Linen Service Corporationv. Qres, Tex. Civ.App., 128 S.W. (26) 850; State v. Racine Sattley Co., Tex. Clv.App., 134 S.W. 400, and many others grouped I.n

28 Tex.Digest, 220-222.. .

Honorable Jesse Owens., page 10 O-2792

An interestingand lnformatlvediscussion of the entire subject of Texas anti-trust legislationand court decisions construing Itmay be found In the Texas Law Review. 3 Tex. Law Review 335, 4 ibid. 129, 15 ibid. 293. The author of~the last treatise cited declares that "the cases lnvolvlng convenantsnot to compete are decided entirely In accordancewith 'commonlaw prlnclples." Rev. 301, fromwhich we quote: See note, 15 Tex. Law

!f.'

. . .That Is, they are upheld If lncldent to the sale of a business or a contract of employment Ifreasonably limited in time and space

.......The fact that the early cases made uze .ofa tortured construction of theword 'comb~ina- .tlon', in the statute in order to reach this rev. Hooper, 81 Tex. 159, 16 S.W. 744 of cymm, Immaterial in this conThe Texas Supreme Court case ofGates v. Hooper is Incorrectlycited by ProfessorNutting, the correct reference being 90 Tex.:563, 39 S.W. 1079. The volumes indicated show the re.portofWelsh v. Morris, a similar case. Nevertheless, Gates v.Hooper Is treated as the leading case by many courts and textwriters for the principle that there can be no "combination" unless two ormore unite or associate "capital, ,skillor acts" for one of the prohibitedpurposes,and that a restriction imposedby a singlevendee is to be treated az lawful and therefore enforceableby the equitablearm of the law, despite the anti-trust statutes. Reference to Sheppard's SouthwesternReporter Citations show the caze to have been listed as authority in no less than 44 civil cases to and including the pronouncement inHouston Credit Sales Co. v. English, Tex. Civ. App., 139 S.W. (2d) 163. No effort on the part of any court to overruleGates v. Hooper has been found, thoughwe have made exhaustive search.

So Itmay be confidently stated that as seen through the eyes of the civil courts of this State, assuming the facts .submittedby you as proven, from a "combination" I.e., that the contractresulted of Thaten and Beasley, az that term has been judiciallydefined, the samewould be consideredvoid and unenforceable, condemnedby Article 7426,Revised Civil Statutes.

Would the Court of CriminalAppeals follow the civil courts, and upon a sufficientquantum of proof of such combination, affirm a convlction?

It isnot the prerogative of this department to antl-Honorable Jesse Owena, page 11 0-2792

clpate or forecast such oontlngenoy. Wedo not wish to appear so preoumptlous as to draw any Inference that we are attempting In the sllghtest degree to Invade the field reserved exclusively for the Court of Criminal Appeals. Weare cognizant of the provisions of Article 4399-i Revlaed Clvll Statutes, however ; that the Attorney General shall advlse the several dlstrlct attorneys in the prosecution and defense of .a11 actions In the dlstrlot or inferior courts, whenever requested and when, as In the Instant case, the’attorney has Investigated the questIon and submitted a brief.

In this oonneotlon, we point out. the fact that while nelther the Supreme Court and the various Courts of Civil Appeals on the one hand, nor the Court of Criminal Appeals la In any manner subordinate one to the other, It appears that respect will always be glven to the decision of the court which glves the flrst Interpretation to language of a statute of such nature that It might be properly construed by, either court. See 11 Tex. Jur. 853, 3104; Redmanv. State, 67 Tex. Cr. R. 374, 149 3. w. 670; Rx parte Mussett, 72 Tex. Cr. ,R. 487, 162 a.,W. 846; Losalng v. Hughes, Tex. Clv. App., 244 S.W. 556, 561.

Wetherefore respectfully advlse you that It Is our opinion that a prosecution will lie for a VlolatlOn of Artlcle 1632, Penal Code, supra, assuming the proof avallable to sustain the facts as stated in your letter and acoompanglng brief.
You are correct In your reference to the punishment upon oonviotlon; Artlole 1.635, Penal Code, would control and
a violator of Article 1632 might be confined In the penltentiary for not less than two nor more than ten years. Yours very truly
ATTORNEY

OENERAL

OFTEXAS

BWlQO :wa By s/Benjamin Woodall Benjamin Woodall

Assistant

APPROVED

OCT25, 1949 a/Gerald C. Mann ATTORNEY

GENERAL

OFT]pxAS Approved Oplnlon Committee By s/&WBChairman