vol 4.05 business law

8/3/2019 Vol 4.05 Business Law

1/126

The National Law Library

Volume Four

Business Law

by

Nathan IsaacsProfessor of Business Law

Graduate School of Business AdministrationHarvard University

Originally published in 1939, byP. F. Collier & Son Corporation

Republished inThe United States Of America


2/1262 Suspicions News Magazine www.suspicions.info

NationalLawLibrary

Volume4BusinessLaw

Itdoesnotrequireamajoritytoprevail,but

ratheranirate,tirelessminoritykeento

setbrushfiresinpeoplesminds.

SamuelAdams

Introduction

Business Law is not in the Anglo-Americansystem a clearly separable layer of law. It is madeup of any and all propositions from every part

of the constitutions, statutes and decisionstowhich must be added administrative orders anddecrees and legally recognizable customsthatmay be pertinent to any business situation. Andas the term business itself is rather expansive,we may start with the assumption that no propo-sition in the law books can be dogmatically ruledout of the scope of business law. For conve-nience, however, we may recognize at once cer-tain divisions of the law as more or less likely tobe involved in the everyday pursuits connectedwith earning a livelihood. We may thus set asideas beyond the scope of this volume the wholeof public law (Vol. III), of criminal law (Vol. II), offamily law (Vol. VI, Part II), of property law (Vol.V), and even much of torts and contracts (Vol.VI, Part I). There remains a good deal of the lawof contracts, particularly the contracts of buyerand seller, of employer and employee, of bor-rower and lender, of insurer and insured, of car-rier and passenger or shipper, of the parties tonegotiable paper and of the members of a busi-ness organization. There remains, too, a greatdeal that is not simply contractual in the senseof being based on consent, but, rather, is dic-

tated by authority, about the conditions of themarket, about credit, about business organiza-tion.

Many of these matters are covered by sepa-rate commercial codes in countries where thelaw is codified. Hence on the continent of Eu-rope the courts, courses, books and periodicalsdevoted to Commercial Law have artificialboundaries within which prominent places areoccupied by the law of Negotiable Instruments,Partnership and Corporations, and a great dealof ingenuity is developed in distinguishing be-tween the transactions and persons that fall

within the purview of the commercial code andthose which are to be judged by the generalcode.

It is no mere accident that the Anglo-Ameri-can system insists that all persons are governedby one law, whether they be merchants or not.That matter was fought out in England in theseventeenth century. Prior to that time the KingsCourts had taken little notice of the disputes ofmerchants. They were handled in petty specialcourts, such as the Court of the Fairs. In the

SUSPICIONSNEWS MAGAZINE

Anno Domini 2002

National Law Library Vol. 4

Creator, Proprietor &Christian Publisher

Alfred Adask

http://www.suspicions.info

POB 540786 Dallas, Texas 75354-0786

The United States of America


3/126

www.suspicions.com Suspicions News Magazine

early seventeenth century Lord Coke, Chief Jus-tice of the Kings Bench, by his decisions, hiswriting; and his political activity, succeeded inreducing these petty courts to insignificance andin transferring their jurisdiction to the KingsCourts, and reducing their laws to recogniz-able customs. As late as 1622 Gerard Malynesinforms us that these customs apply only to

merchants. A gentleman cannot be a party tocommercial paper. But before the end of thecentury the courts are telling us that whoeversigns such paper becomes ad hoca trader.1 Be-tween these two views lie several generationsduring which Englishmen are superseding for-eigners as merchants. So the Courts Merchantare suppressed, but the law merchant becomespart of the law of the land for everybody, andmerchants are subject to the fused law of whichtheir old customs are but a part.

This rule of one law for all was quite accept-able in the eighteenth century, particularly onthis side of the Atlantic where it fitted well notonly with political prejudices but also with so-cial and economic facts. In pioneer life,

When Adam dolve, and Eve span,Who was then the gentleman?

Likewise, who was the artisan, who thetrader, who the farmer and who the professionalman? Obviously, the division of persons intosuch classes for legal purposes would not havecorresponded to the facts of life. So the doc-

trine of the equality of all men was written intoour fundamental law. Our constitutions havecondemned as class legislation all attempts todeal with one occupation in a special way un-less they showed the clearest justification or,better still, were phrased in generalizationswhich negatived discrimination even while theysingled out instances on the basis of a recog-nizable principle.

Still, subtle influences were at work in thenineteenth century to develop in our law a newdifferentiation between traders and the generalpublic and among traders themselves. These in-

fluences operated principally through readingimplications into contracts. The person regularlyengaged in a business was understood to havemade certain representations to the public asto his skill. It was one thing for a charwoman tosew a dress inside out, and quite another for aprofessional dressmaker to do so.2 It is onething for an iceman, who genially agrees to takeyour trunk to the railroad station, to mishandleit, and quite another for the regular express-man to do so.3 In recent years the difference

between the professional and the amateur inbusiness has been emphasized by statutesstatutes requiring licenses and sometimes ex-aminations before one can hang out a shingle;statutes pertaining to particular businesses, inspite of their general terminology; statutes sin-gling out particular businesses (in spite of theconstitutional prejudice in favor of generality),

either on the score of police power or the statesright to regulate public utilities and other busi-nesses affected with a public interest, or becauseof a peculiar opportunity of the state to bargainthrough its power to withhold or give condition-ally a charter or franchise or other privilege. Itis thus possible today, once more to speak notonly of a law of business in a narrow sense, butalso of the law of special businesses such asbanking, public utilities, stock brokerage, realestate brokerage, retailing, chain stores, adver-tising, insurance, or even peddling, plumbingor conducting a beauty parlor.

The scope of our present study is, of course,broader. We include the activities of the marketplace, the factory, the bank, the exchange, theoffice, the directors room, the stockholdersmeeting, and we even look into the court andthe public administrative office when these arethe situs of business transactions. Our order ofprocedure will deviate somewhat from that usu-ally pursued in books on business law. Insteadof enumerating what the law provides in the wayof rules, standards, principles and institutionsand leaving their application to business needs

to be dealt with as an afterthoughtthus be-ginning with an answer and seeking appropri-ate questionswe shall proceed to ask what arethe requirements of business and then turn tothe law to see what it has to offer for their satis-faction. This is, of course, the order of proce-dure in life, when the business man brings hisproblem to the lawyer.4

1 Witherley v. Sarsfield, Court of Kings Bench,

1689. 1 Shower 125; Carthew 82. (L.B.P., p. 46.)

2 Lincoln v. Gay, 164 Mass. 537(1895).

3 Hardin v. Grant, 54S.W.2d 189 (1932).

4 For note on abbreviations, see Volume I. In

this volume the additional abbreviation LB.P.

refers to the authors Law in Business Problems,



NationalLawLibrary

Volume4BusinessLaw

Contents

2 Introduction

7 I. Business Postulates & the Law

1. Law, a Development of Civilization2. Conditioning Forces3. Limitations upon Law for Business Ends4. Enumeration of Business Ends of Law5. Development of Ends of Law6. Business Postulates of Today

(1) Facilitation of Transactions(2) Fair Market Conditions(3) Security of Acquisitions(4) Effective Enforcement and Peace

12 II. The Law of the MarketI. Dishonest Marketing

1. Misrepresentation of Goods2. Breach of Warranty3. Reforms in Laws to Prevent Dishonesty

II. Monopolistic Practices1. Development of Anti-monopolistic Laws2. Innovations in Anti-trust Laws

(1) Contracts in Restraint of Trade(2) Prevention of Monopolistic Practices(3) Rule of Reason in Interpretation of Laws(4) Support by Evidence(5) Unfair Method of Competition

3. Anti-competitive Legislation4. Extension of Unfair Competition

to Special Cases

(1) General Aspects ofUnfair Competition Recognized by Law

(2) Trade Symbols(a) Selling or Licensing of Trade Symbols(b) Preservation of Trade Names(c) Registration of Trade Names(d) Boundaries of Articles

Covered by Trade Symbols(e) Similarity of Trade Symbols(f) Absence of a Technical Trade-mark

(3) Names of Patented Articles(a) Expiration of Patent(b) Similarity of Manufacturers Names

III. Licensing to Prevent Incompetence

or Irresponsibility

20 III. Market Facilities

I. The Use of Contracts1. Development of the Law of Contracts

2. Freedom of Contract3. In Absence of Agreement to Contrary4. Advantages of Standardized Contracts5. Disadvantages of Standardized Contracts

II. Uniform Sales Law1. Standardized Contract

of the Uniform Sales Act2. Special Stipulations

in Individual Contracts of Sale3. Implied Warranties

(1) Absence of Provision for the Middleman(2) Warranties Applicable

to Consumer-Purchaser(3) Use of Trade Name and Warranty

4. Rules Vesting Title in the Buyer5. Deviations from the Sales Act

Special Sales AgreementsIII. Specially Regulated Contracts

1. Substantive Law of Insurance(1) Contracts Overweighted

against the Consumer(2) Weeding Out of Irresponsible

Insurance Companies2. Public Utilities

(1) Making of Rates(a) Fairness of Particular Rates(b) Remuneration to the Investors

(2) Factors Which Constitute a Proper Rate Base

26 IV.Security of Transactions

1. Insecurity of Transactions after Completion(1) Illegal Selling of Anothers Property(2) Caveat Emptor(3) Limitation on Rights and Powers

of Owner over Innocent Possessor2. Principles of the Law of Transactions

(1) Negotiability of Instrumentsand Its Extensions

(2) Agency and Its Extensions(3) Transfer to Innocent Purchaser of

Voidable Title or One Having Incumbrance

(4) Recording of Documents(5) Presumption of Regularity

of Acts in Business


5/126


31 V. Business Property

1. Business Property Defined2. Protection of Business Property

(1) Trade-marks and Trade Names(2) Existing Contracts(3) Protection of Goodwill

(a) Definition of Goodwill(b) Agreements in the Sale

of a Business or Practice(c) Agreement Not to Compete(d) Protection of Goodwill

from Agent or Employee(e) Protection from the Middleman; Refills

(4) Intangibles As Business Assets(a) Recognition by Law(b) Situs for Taxation of Intangibles(c) Valuation of Intangibles

35 VI. CreditI. Ordinary Enforcement Machinery

1. Procedural Law and Business2. Action in Court

(1) Steps in Procedure(2) Pleading(3) The Jury(4) Evidence

(a) Three Principles(b)The Principles of Competency .

3. Slow Legal Procedure(1) Advantages and Disadvantages

(2) Cumbersome Machineryfor Collecting Judgments(a) Exemptions(b) Bankruptcy

4. To Make Obligations Secure(1) Contractual Modification

of Procedural Law(2) Resort to Arbitration

40 VII. Credit (Continued)

II. Devices for Safeguarding and Facilitating Credit1. Fundamental Ideas in Safeguarding Credit

2. Credit from the Business Point of View(1) Personal Security

(a) Guaranty(b) Suretyship(c) Endorsement

or Other Signing of Commercial Paper(d) Indemnity and Del Credere Agency

(2) Real Security(a) Possessory Holds(b) Title Holds(c) Real Estate Mortgages(d) Chattel Mortgage(e) Lease with Privilege of Purchase(f) Trust Receipt

(g) Mechanics Lien3. Negotiable Instruments

(1) Promissory Notes(2) Checks

50 VIII. OrganizationI. Desiderata

1. Motives of Unification2. Motives of isolation3. Endurance of a Business Organization . .4. Methods of Organization5. Problems of Organization

61 IX.Organization (Continued)II. The Historic Legal Materials

1. Devices Used in Organization(1) Agency(2) Contract(3) Partnership(4) Corporation(5) Trusteeship

2. Modification of Organization Devices .3. Inter-unital Organizations4. Business Mans versus

Lawyers Organization



NationalLawLibrary

Volume4BusinessLaw

65 X. Organization (Continued)III. Substantive Law

1. Formation of the Relations(1) Agency(2) Partnership(3) Business Trust

(4) Corporation2. The External Relations

(1) Responsibility in Agency(a) Liability of Principal in Contract(b) Masters Liability in Tort(c) Distinction between

Principals Liability and Masters(d) Undisclosed Principal

(2) Liability in Partnership(3) Liability of a Business Trust(4) Liability of a Corporation

3. The Internal Relations(1) Simple Contract(2) Principal and Agent

(3) Partnership(4) Business Trust(5) Corporation

4. Readjustment and Dissolution(1) Contractual Method

of Reorganization and Dissolution(2) Dissolution of Corporations(3) Dissolution of Partnerships(4) Dissolution of Trusts(5) Terminative or Conditional Contract(6) Irrevocable Agency of Partnership .(7) Termination by Law(8) Bases for Planning Termination .(9) Federal Bankruptcy Law

(10) The Equities

77 XI. Frontiers of Business Law1. Development of Business Law2. Future Trend of Law Development

(1) Established Codes of Business Law .(2) Nation-wide Similarity

of Business Legislation

(a) Statutory Waves .(b) Federal Legislation(c) Federal Influences

on State Legislation(d) Federal Courts and the Common Law

3. Time Element and Business LawI. Labor Law

1. National Labor Relations Board2. Collective Bargaining

II. Administrative Regulations in Business.1. Development of Government Regulation .2. Interpretation of Business Regulation

by GovernmentIII. The Future of Corporations

1. Blind Spots in Corporate Structure2. Divergence between Corporate Fiction

and Business Fact3. Substitutes for Incorporation4. Federal Incorporation and Licensing

Appendix - Principal Uniform Laws

Affecting Business Transactions

85 Negotiable Instruments Law

99 Uniform Partnership Act

108 Uniform Limited Partnership Act

113 Uniform Sales Act


7/126


1. Law,a Development of Civilization

As we go about our dailybusiness we take a great deal forgranted. If we had to look behindevery tree, figuratively or literally,for a lurking Indian, we couldhardly do the work of the modemworld. We assume a high degreeof safety; we assume a high de-gree of human trustworthiness;we assume that those about uswill act in a reasonable and fairly

predictable manner; and the vastmajority of these assumptionsare well founded. At least, we arenot often disappointed.

If we analyze these expecta-tions or postulates on whichmodern business is based, wefind very readily that they aresimple only to the simpleminded. We discover that theydiffer not only in different timesand places and among differentraces of men, but that they are

by no means all equally safe as-sumptions nor are they foundedon identical or even similarbases. In fact, the explanation ofeven the simplest and most ob-vious of these assumptions,upon analysis, becomes a hope-lessly complex problem of thesocial and natural sciences. Wetake it for granted, for example,that a man can expose his wares

in a shop with reasonable safety,and although we occasionallyread of holdups showing the dan-ger of such an assumption, wego on making it. Why? Is it be-cause of our faith in the habitsof mankind, or in the workingsof the legal system, or some doc-trine of chance, or because of ourown recklessness, or a combina-tion of all of these? The questionbecomes infinitely more compli-cated if, for such elementary hu-

man interests as security fromholdups, we substitute the vastnetwork of relations that we callthe credit system, which is an-other of the postulates of modembusiness.

Without going far into theanalysis of the basis of any oneof these expectations, we mayventure two propositions: first,that the legal system of any giventime or place contributes heavilyto the fulfillment of our expecta-

tions; and second, that the legalsystem is by no means alone inthis function. The first of thesepropositions is, of course, gen-erally taken for granted. It is ourpurpose here not to prove it, butto find out just how the lawcomes to the aid of the businessworld. The second proposition,however, is very generally over-looked. Legal specialists talk oc-

casionally as if the sole deterrentfrom crime in the world todaywere criminal law.1 Little won-der, then, that the layman looksto the law to accomplish single-handed the greatest of wonders,and in turn criticizes the law forits failure to do that which hegratuitously assumes, in the firstplace, it can do. When anythinggoes wrong he says: Thereought to be a law against this orthat. He expects a legislative fiat

to make men moral, to make mensober, to make men efficient. Wemust, therefore, emphasize thelimits of effective legal action.2

When it actually was necessaryto look behind every tree for apossible Indian, the best code inthe world could not have doneaway with that necessity anymore than we can today put anend to war by such a simple de-vice as declaring it unlawful. Yetwith the aid of law and a hun-

dred other elements we have suc-ceeded in reaching a measure ofinternal peace and we may hopeto achieve a corresponding mea-sure of world peace eventually.The point is that law does notand cannot work alone. The de-velopment of law is but a phaseof the development of civiliza-tion. And when we speak of thepart played by law in the satisfy-

Chapter I

Business Postulates& the Law



NationalLawLibrary

Volume4BusinessLaw

ing of the postulates of business,we must bear in mind that it doesnot satisfy those postulatessingle-handed or exclusively. Itis neither without allies nor with-out rivals.

2. Conditioning Forces

Nor is it without condition-ing forces. Just as the businessactivities of the world take forgranted certain conditions, in-cluding the cooperation of thelaw, the law itself has certainpostulates. The current legal sys-tem assumes, for example, thatpeople take a certain amount ofinitiative in turning the wheelsof justice and, on the other hand,that they will restrain themselves

just so much from interferingwith this machinery. The systemmust break down completelyand does occasionally even inthis countrynot only where ini-tiative is lacking because of in-difference or fear, but also wheremasked mobs, or the parties toa feud, or even willful juriestake justice into their ownhands. The law, furthermore, pre-supposes a certain degree ofability to understand the lawit

has been found futile at severalstages of history to transfer ahighly developed code to a crudepeople. A law that penalized ly-ing to the very limit would hardlywork in a community of con-firmed liars. Our primary con-cern, however, is not with whata system of law must take forgrantedthough we cannot ig-nore the bearing of this questionon the laws limitationsbutwith what business expects and

demands from the law.

3. Limitations upon Lawfor Business Ends

Furthermore, we must recog-nize that other aspects of ourlife, besides the business aspect,make demands upon the law. Inthe main, these demands are for-tunately not only consistent withbut identical with the demands

of the business world. Peace, fairand honest dealings, and the en-forcement of obligations, for ex-ample, might be demanded inthe name of society, organizedon its political side, just asreadily as by that same societythought of as a business unit.

There are, of course, differencesof emphasis, occasional differ-ences in the limitations set, andeven rare contradictions. Thus,business if left to itself mightnever have invented homesteadexemptions as a limitation to en-forcement laws. It is conceivable,but not quite probable, that theenforcement of debts by meansof imprisonment might havebeen abolished by the businessworld as unprofitable in the longrun, without the aid of thehumanitarian considerationsthat were perhaps uppermost inthe actual abolition of imprison-ment for debt. So far, however,as we find conflicting demandsmade upon the law in the nameof human interests other thanbusiness, we shall have to takethem into consideration as limi-tations upon the use of law forbusiness ends.

4. Enumerationof Business Ends of Law

What, then, are these busi-ness ends? Or, to resume the for-mal question with which we be-gan, what does the businessworld demand or more or lessthoughtlessly expect of the lawtoday? It has been demonstratedwith abundant learning by DeanPound that the end of law,viewed both practically and theo-

retically, has been developingthroughout the course of legalhistory.3 The earliest end dis-cernible was a mere attempt tokeep the peace. In later states weencounter first the maintenanceof an actual status quoand laterthe struggle for some ideal setof relations known as equity or

justice or natural fights. Todaywe are stressing a fourth type of

end, and emphasis is shifted tothe satisfaction of human wantsand particularly to the opportu-nity for development.

It must be remembered, how-ever, that in all of these develop-ments the earlier ends of the lawhave by no means been aban-

doned as the later ones haveemerged. The maintenance ofpeace, the security of acquisi-tions, the approximation of whatappears to society for the timebeing as natural justice or fair-ness, stand side by side todaywith the insuring of human op-portunities for development andadvancement. If we would restatethese general ends of the lawmore narrowly in terms of whatthe business world seeks, weshould still have to enumerate asmajor ends: (1) peace and effec-tive enforcement; (2) security ofacquisitions; (3) fair conditionsin the market, and, in additionto these, (4) the facilitation oftransactions. Of course, themeaning of all the older termshas developed very materially astime has gone on. The peace ofthe Anglo-Saxon world, such asit was, would not suffice for the

needs of the modern businessworld. Neither would the enforce-ment machinery of the MiddleAges. The kinds of acquisitionsthat may be deemed the subjectof legal protection have multi-plied and are changing even to-day. Some of the most importantdevelopments of the law of re-cent years are concerned withthe growing concept offair con-ditions in the market. But in themain, it is true that the principal

accomplishment of the last halfcentury in the realm of businesslaw has been the development offacilities and positive opportuni-ties for the specific transactionsthat constitute business.

5. Developmentof Ends of Law

All these accomplishments ofthe law are so thoroughly and


9/126


readily taken for granted that itis somewhat difficult for us torealize that, in the Anglo-Ameri-can system of law, one need goback only a few hundred yearsto reach a period in which thekings courts were not interestedin the private disputes of citizens

so long as they did not affect thekings revenue or the kingspeace. Of course, the allusion tothe kings revenue and the kingspeace as the formal basis for tak-ing jurisdiction over private dis-putes and enforcing privateclaims was for a long time a merepretense, a fiction of the law. Butthe fact that such a fiction hadto be used at the beginning ofmodem times should remind usthat, what we take for grantedtoday when we expect this orthat of the law, was by no meanstaken for granted at all stages inour legal history; that it is by nomeans taken for granted in allparts of the world today, at leastin the same way; and that wecannot be sure that we havereached the limit of possible de-mands to be made upon law inthe furnishing of aids for the con-duct of business. We are, in other

words, dealing with a situationthat is constantly developing,constantly being experimentedwith, and not at all with a preor-dained system of natural law.

6. Business Postulatesof Today

For the purpose of fittingthese postulates into the pictureof business as it is conductedtoday, we might pursue the op-posite order to that of their his-

torical development and con-sider some characteristics of theneed today for (1) facilitation oftransactions, (2) fair market con-ditions, (3) security of acquisi-tions, and (4) effective enforce-ment and peace.

(1) FACILITATION OF TRANS-ACTIONS. Typical of the trans-actionsfor which we expect the

law to furnish ready frameworksare those transactions that haveto do with the organization of thebusiness world. Business needsnot merely schemes for summa-rizing the relations existing be-tween people within a particularbusiness enterprisesuch as

agency, partnership, corpora-tion, or Massachusetts trustbut also those devices that bringtogether cooperating parts of abusiness, however separatedthey may at first sight seem.There is every gradation betweenthe hand-to-mouth buyingof rawmaterials by one plant from an-other, through more comprehen-sive contracts for seasons andthrough leases, to the completecontrol or even ownership of theplant furnishing the raw materi-als. Likewise, on the distributingside, a vast variety of relationsmay exist between the produc-ers and those engaged in thevarious steps of marketing. Forall of these relations the law iscalled upon to furnish a fittingframework and under the pres-sure of American life the law is

just as likely to be called uponfor mass production of frame-

works of a more or less standard-ized nature as our factories areto give mass production of stan-dardized machinery. Businesspresents numerous novel prob-lems oforganization calling formost ingenious massing of tra-ditional devices. Thus, where liv-ing conditions in a great city pro-duce vast buildings in which itbecomes desirable to sell indi-vidual apartments to families,the organization of the business

side of the scheme may involveincorporation with more or lesscomplicated adjustment of ratiosof control, ownership, return,and risks which may not corre-spond exactly to the amount ofinvestment. It may involve fur-ther peculiar types of leases ordeeds or mortgages. The financ-ing may involve mortgages andtrusteeship and the issuance of

bonds or trust certificates incombinations that had neverbeen thought of before.

The credit devices of themodern world must also respondvery delicately to peculiar needsin particular situations. There isa constant problem, for example,

to strike a balance somewherebetween the safety of the loanand the freedom of the businessto which the loan is made frominterference. In a general way,where real security is used themore possessory a credit deviceis the simpler and safer it seems,but at the same time the morelikely it is to interfere with theuse of things in the ordinarycourse of business. The vast se-ries of new problems connectedwith the financing of installmentsales, of which the most promi-nent example, of course, hasbeen automobile financing, willillustrate the type of call that ismade upon the law for new ma-chinery or for new combinationsof the old machinery of credit.4

There is, of course, a vastvariety of more or less typicaltransactions that make up thebulk of everyday business. The

type of framework furnished forthem is perhaps best illustratedin our statutes standardizingcontracts of sale, the contractsinvolved in negotiable instru-ments, insurance contracts, em-ployment contracts, and manyothers, by stipulating what thedetails shall be either in the ab-sence of contrary stipulation orany agreement to the contrarynotwithstanding.5 New varietiesof transactions are constantly

emerging for which new types ofcontracts are required. Thus,with the coming of new modesof transportation, whether weturn to the period of the intro-duction of the steam railroad orthat of the motor bus or that ofaviation, new types ofreceiptsand agreements, with newapportionments of risks, becomerecognized as standard in the



NationalLawLibrary

Volume4BusinessLaw

law. In general, the tendency ofbusiness is to require devices forthe facilitationandconstantlyfor the greater facilitationof awidening circle of business ac-tivities. And the law responds,sometimes through the ingenu-ity of the lawyers in adapting and

combining the old legal devices,but occasionally also, with theaid of legislation, by the creationof new devices.

(2) FAIR MARKET CONDI-TIONS. The market conditionsthat the business world demandsof the law have undergone a com-plete transformation since thedays of Lord Coke. The pictureof the buyerbefore the eyes ofthe law has ceased to be that ofa very cautious, designing sortof person well able to take careof himself. On the contrary, ev-ery effort is made by means ofthe licensing of dealers andmanufacturers, by means of theregistration and inspection ofproducts, by blue sky laws, byimposing penalties for mis-branding, adulteration, andfraudulent advertising, by safe-guarding competition and con-

demning unfair methods of do-ing business, to make the mar-ket safe for purchasers. Let uscontrast the conditions in oldersystems of law that looked ratherto the protection of the seller. InRoman law, for example, theredeveloped the idea that a sellercould repudiate an extremelybad bargain though there was nocorresponding provision for adisillusioned buyer.6 Such lawwas, of course, appropriate in a

comparatively non-commercialsociety where the selling ofgoods outside of the ordinarycourse of business was a sign ofdistress on the part of the moreor less unwilling and unfortunateowner. The buyer was lookedupon as a wealthy person takingadvantage of the distress of hisneighbor, much as if he werelending him money for usury.

This picture has changed com-pletely. The buyer representstoday the average member ofsociety, while the seller is lookedupon as the party better able totake care of himself. The devel-opment of the modern point ofview in recent times is illustrated

in the development of the law ofimplied warranties of quality7 orof title8 and the disappearanceto that extent ofcaveat emptor.

The particular details as towhich the public puts a buyerunder its protection are, ofcourse, constantly changing.Today the danger is from mis-branding, false advertising, inad-equately described securities.Yesterday the emphasis wasrather on the danger of lack ofskill in professional men, me-chanics, and others who havebeen subjected to licensing laws.Tomorrow the dangers may bedifferent and the emphasis maybe shifted to prevent the abuseof high-powered salesmanshipaccompanied by intriguinginstallment devices.

(3) SECURITY OF ACQUISI-TIONS. The idea of security of

acquisitions is, of course, one ofthe most important and best de-veloped in the law. It not only fillsthe pages discussing real andpersonal property, but it is themotive behind much of the crimi-nal law, the tort law, the familylaw and the constitutional law ofthis country. In fact, the law isfrequently taunted with thecharge of setting propertyrights above human rights.What is really meant is the set-

ting out more clearly of rights intangible things than rights thatseem to have less and less to dowith tangible things. Medievallaw was so limited in its propertyconcepts that it could not con-ceive of transferring such in-cor-poreal rights as the power of ap-pointment to a church officewithout some such act as hand-ing over the knob of the church

door. But as time has gone on,the law has progressively over-come this dread of intangiblesand within the field of businesshas accorded the treatment for-merly reserved for rights inphysical things to such newtypes of property as goodwill,

patents, trade-marks, tradename, copyright, going-concernvalue, business reputation, inter-est in existing contracts, expect-ancies of various kinds and free-dom of action. In addition, it hascurtailed the principle of prop-erty protection as formerly un-derstood by developing anothertype of interest, namely, the in-terest in security of transactions.We shall find many instances inwhich a bona fide purchaser act-ing in the ordinary course ofbusiness has his new acquisitionprotected in preference to theolder owner who, though equallyinnocent of wrong, has failed totake the necessary steps to warnstrangers of the nature of hisclaim. The varieties of businessinterests calling for protectionsare infinite.

(4) EFFECTIVE ENFORCEMENT

AND PEACE. What has been saidhere at some length regardingthe modern development of theold concept of security of acqui-sitions applies, mutatis mutan-dis, to the still older postulate ofpeace. This concept has grownto include a great deal more thanthe official ending of disputes.The machinery of enforcementincludes not only litigation butalso arbitration and conciliation,various preventive devices for

anticipating both, and an in-creasing quantity of contractualcontrol over adjective law.9 Thekind and degree of peace that areessential for commercial pros-perity at this age are, of course,vastly different from that whichenabled savage tribes to estab-lish trading posts to which theywould alternately bring theirgoods and from which each


11/126


would recede a safe distancewhile the other was present. Butit also differs in smaller measurefrom the condition of commer-cial peace that was consideredadequate in the pioneer days ofthis country, when horse tradersdid not feel thoroughly equipped

for their business transactionsunless adequately armed. Nor isthe industrial peace of the earlydays of unionism in this country,when strikes were notoriouslylikely to be accompanied by vio-lence, a fair picture of the busi-ness needs of these days ofkeener competition, greater pub-licity, and more intense interestin industrial disputes on the partof the legislature.

Perhaps the nature of the in-dustrial and commercial peace oftoday may best be illustrated byreference to the exaltation ofdue course to the level of amajor principle by which trans-actions are to be judged. It is notonly, as already indicated, thatthat which is done in due courseis made to stand. The converse

is equally true. It is on this basisthat a deviation from the simple,ordinary course of businesscomes to be condemned by thelaw. Thus, there was until re-cently nothing unlawful about apreferential payment of a debt byan insolvent. Business con-

demned the practice and now theNational Bankruptcy Act incor-porates the business mans pointof view. There was nothing ille-gal until recently in a trades-mans act of selling goods out-side of the ordinary course ofbusiness. The business concep-tion of due course has, however,in spite of considerable resis-tance, been written into the bulksales laws of many jurisdictions.Many acts that are coming to berecognized as unfair methods ofcompetition are, in the finalanalysis, condemned becausethey are contrary to the ordinaryestablished course of doingthingsbreaches of the peace asthe modern business world for-mulates its requirements of com-mercial peace.

1Cf.Train, The Prisoner at the

Bar, 1907, Chapter 1.

2 Cf.Pound, The Limits of

Effective Legal Action, 22 Pa. Bar

Assn Rep. 221 (1916), A. B. A. J.

55 (1916); 27 Internat. J. of Ethics

150 (1916).

3 Compare the chapter

entitled The End of Law in

Pound, Outline of the Course in

Jurisprudence, 3d ed., 1920, 40-

55, giving full references, and c. 2,

in Pound, An Introduction to the

Philosophy ofLaw,1922, repro-

ducing the articles in 27 Harv. L.

Rev. 195, 605 (1914), and 30 ibid.

201 (1917).

4 8 Corn. L. Q. 199, 210

(1923).

5 27 Yale L. J. 34 (1917).

6 Girard, Manuel Elementaire

de Droit Romain, 6th ed., 1918,

552.

7 Williston,Contracts, 2d ed.,

1936, IV, Sec. 983.

8 Ibid.,Sec. 976.

9 Isaacs, Contractual Control

Over Adjective Law, W. Va. L. Q. 1

(1922); same, Recent Develop-

ments, 83 U. of Pa. LawRev. 177

(1934).



NationalLawLibrary

Volume4BusinessLaw

Chapter II

I. DISHONEST MARKETING

1. Misrepresentationsof Goods

When the President of theUnited States made the now fa-mous pronouncement, This pro-posal adds to the ancient doc-trine ofcaveat emptor, the fur-

ther doctrine, let the seller alsobeware,1 was he setting a newforce in motion or was he simplytaking his place in a long line oflegal reformers bent on makingthe market safe for the buyer? Toanswer this question it is neces-sary only to enumerate the prin-ciples to which the overreachedbuyer could resort before theNew Deal was written into thestatute books. In the first place,if the misrepresentation from

which he suffered amounted tofraud- that is, if it was a misrepre-sentation of past or present fact,made knowingly or with recklessdisregard of truth or falsity, un-der conditions where it tendedto mislead and did mislead thevictim to his hurt the lawpounced down heavily upon theseller. He could in all probabilitybe prosecuted for one of the

crimes of which fraud is an in-gredient: false labeling, falseadvertising, obtaining goodsunder false pretense, larceny bytrick, and so on. Again, he couldbe sued for damages by the de-frauded party and probablyforced to pay smart money. Thecontract itself could be set aside

and, under appropriate decreesof a court of equity, the partiesrestored to status quo. Or thecontract could be ignored as anullity if that practice best servedthe needs of the victim. Finally,the defrauder might find himselfface to face with the summaryprocedure of some arm of pre-ventive justice: a licensing com-mission ready to suspend histrading license, an aroused in-spector ready to impound or de-

stroy or brand his goods, a pub-licity bureau ready to announcehis iniquity to the world.

2. Breach of WarrantyEven if the misrepresentation

did not technically amount tofraud, the lying vendor would notget off with impunity. Though hemay have innocently believed hisown lie, he may have been guilty

of a breach of an express war-ranty. An express warranty isdefined in the Uniform Sales Actas any affirmation of fact or anypromise by the seller relating tothe goods... if the natural ten-dency of such affirmation orpromise is to induce the buyerto purchase the goods.2 There

are also implied warrantieswhere nothing is said. The con-sequences of a breach of war-ranty, which is more easilyproved in practice than is fraud,are, excepting for the penaltiesand quasi-penalties, the same asthose of fraud. The disappointedbuyer may keep the goods andsue for damages, or call the bar-gain off, or take other steps torestore the statusquo. Obviouslythe law did not allow so much

lying as the old by-word sug-gested.

3. Reforms in Laws toPrevent Dishonesty

Nevertheless, there were andare possibilities of unpunisheddishonesty in the market place,some of which can be more ef-fectively coped with as time goeson. The reforms of the last gen-

The Law

of the Market


13/126


eration may be cited to indicatethe current tendencies. The mostoutstanding of these are: First,a readier assumption by courtsand juries that lies tend to mis-lead and do mislead. Second, ahost of statutes on phases offraud covering such subjects as

false labeling and advertising;the plain marking of substitutes,imitations, artificial coloring orflavoring, the country of originof goods; the publishing of theessential facts pertaining to se-curities offered for sale; pre-sumptions and burdens of proofin certain cases, and a tighten-ing of procedure and a stiffen-ing of penalties in others. Third,the intensive development ofpreventive measures againstfraud, including licensing of per-sons, inspection of products,publicity, and the extra-judicialadministrative machinery thatgoes with preventive justice.

To illustrate all of these ten-dencies we need only considerthe recent history ofpatent medi-cine advertising. One need notbe very old to remember whenthe patent medicine man madeunlimited claims for his concoc-

tions of alcohol, herbs and fla-voring matter. No one was ex-pected to take him literally,whether he barked about hiselixir from the tail of his circuswagon or printed startling pic-tures labeled Before Taking andAfter Taking in the advertisingcolumns of the rural magazine.Hence, two essential elements offraud were missing: the tendencyto mislead and the actual mis-leading. The exaggerations were

glossed over as dealers puffing.Today the vendor of patent medi-cines has to contend with a Fed-eral Pure Foods and Drugs Act,quite likely to be strengthened,a Federal Trade Commission,fraud orders of the Post OfficeDepartment, the scrutiny of theradio licensing authorities, thestate advertising laws, and directresponsibility, criminal and civil,

for what he says or otherwiserepresents to be true under fraudand warranty laws that take himat his word. In addition, there arenumerous laws altogether pre-venting the sale of harmfuldrugs, or at least putting danger-ous ones subject to the require-

ment of a physicians prescrip-tion. There are, furthermore,standards of purity establishedby authority, a comprehensiveUnited States Pharmacopoeia.

It would be a mistake, how-ever, to attribute all this changeto the internal workings of thelaw. The impetus has come frommany sources, including educa-tional campaigns conducted bymedical associations, magazinepublishers, Better Business Bu-reaus, government departments.The important point for our con-sideration is that the law of themarket has been able to respondto the demand for a higher stan-dard of honesty and has poten-tialities within it for still higherstandards, as society becomesready for them. The fraud for-mula must remain elastic.

What has been said of theprevention of misrepresentation

applies with little change to theprevention of other undesirableconditions and practices in themarket: monopolistic conditions,unfair competition, incompe-tence, lack of responsibility, andin general one-sidedness or aloading of factors against thebuyer. Still, each of these tasksof the law has its own interest-ing peculiarities as well as his-toric accidents meriting separateattention.

II. MONOPOLISTICPRACTICES.

1. Developmentof Anti-monopolistic Laws

The laws against monopolyare very old. In the Middle Agesthere were laws against fore-stalling, engrossing and regrat-

ing, not to mention several sub-varieties, the gist of which wasinterference with the opportuni-ties of the citizens of a town toget their needs provided for intheir regular market. The injuryresulting to one citizen fromanothers simple trick of buying

up the days supply of foodstuffson its way to town was a palpableone, to be combated regardlessof any theory of the function ofcompetition in society.3 Actually,medieval society did not rely oncompetition to set the right priceon all its goods and services. Itdid not hesitate to name a justprice and a fair wage by decree.When we turn, however, to thelate nineteenth century revival ofinterest in anti-monopoly laws,we find a society permeated withthe notion that competition is initself good, the very life of trade,and on the whole perhaps ad-equate for its effective regulationprovided that artificial interfer-ence with its workings is not tol-erated. It is no part of the func-tion of the law to propound or tocorrect economic theories, but itmust serve as the vehiclethrough which a society tries to

put its theory into practice.Since the Sherman Anti-TrustAct was passed in 1890 there hasbeen an increasing tendency tosupplement its workings by reli-ance on regulation, includingprice fixing, notably but not ex-clusively in the fields of railroadand public utility law. In the Na-tional Industrial Recovery Act of1933, held unconstitutional onother grounds,4 there was evena suspension of the workings of

the anti-trust laws in favor ofdetailed regulation calculated toassure the public of the fair treat-ment that was the, primary ob-

jective of the anti-trust laws. Witha changing economic philoso-phy, or at least a changing de-gree of faith in the efficacy ofcompetition, we may expectmore experimental legislation inthe direction of regulation. The



NationalLawLibrary

Volume4BusinessLaw

whole agitation for a plannedeconomy is based on this loss offaith in the efficacy of com-petition as a planning force, afaith which in the nineteenth cen-tury was rationalized by parallel-ing it with the theory of evolu-tion.

2. Innovationsin Anti-trust Laws

Remembering, then, that theSherman Act speaks in terms of1890, let us examine its innova-tions.

(1) CONTRACTS IN RE-STRAINT OF TRADE. Contractsin restraint of trade were voidaccording to common law.Whether combinations in re-straint of trade effected other-wise than by contractfor ex-ample, by means of trusteeshipwere void was debatable, but wemay assume that even withoutthe aid of statute the law wouldhave reached them. Just how se-rious the restraint had to be inorder to be obnoxious to the lawwas debated anew with each casethat reached the courts. Here,too, we may assume a rule of rea-

son would have developed with-out the aid of a statute. But todeclare an arrangement void isto use only one of the sanctionsof the law. It does not subject theperpetrators to a penalty, it doesnot lay them open to an actionfor damages at the instance ofthose whom they have hurt, itdoes not provide for undoingwhat they have done. These sanc-tions were provided by theSherman Act.

(2) PREVENTION OF MO-NOPOLISTIC PRACTICES. It wasnot until 1914 that the modernapproach ofprevention was ap-plied in the Federal anti-trustlaws. In that year not only did theClayton Act attempt to nip evilin the bud by prohibiting prac-tices found likely to contributeto the upbuilding of monopolies,

but the Federal Trade Commis-sion Act provided for the watch-fulness of a commission withwide discretion to preserve theproper workings of the competi-tive system.

(3) RULE OF REASON IN IN-

TERPRETATION OF LAWS. The in-terpretation of the Federal anti-trust act and of the state actsmodeled after it has led to a se-ries of important Supreme Courtdecisions that go beyond themere verbal logic of ordinarystatutory interpretation. Theyhave worked out the principlethat it is the substance and notthe form that counts in determin-ing whether a particular combi-nation is illegal. Furthermore,they have established the rule ofreason, which, stripped of itsverbiage, merely means that byno means every contract whichrestrains trade or limits compe-tition is obnoxious (for in a mea-sure every contract does so), andthat the only standard which thecourt can read into the statutewithout arbitrariness is the gen-eral standard of reasonableness.

(4) SUPPORT BY EVIDENCE.In reviewing the findings of theFederal Trade Commission thecourt has generally felt unable toquestion its finding of fact be-cause of the peculiar wording ofthe statute which provides thatsuch findings shall stand if sup-ported by evidence. Had it saidthe evidence, the court mighthave been called upon to weighthe evidence itself, but, as it is,the only question before the

court is whether there was anyevidence to support the finding.It would be a sorry case indeedif there were none at all.

The significance of this limi-tation on the courts is frequentlyoverlooked by law writers as wellas laymen in interpreting deci-sions under the Federal TradeCommission Act. Thus, in thefamous Beech-Nut case,5 which

involved the systematic attemptof a manufacturer to thwart pricecutters (the very aim that is nowupheld by the Miller-Tydings Act6

and similar legislation in most ofour states7), the court had beforeit the finding of the Commissionthat the manufacturer was guilty

of participating in some kind ofa conspiracy in restraint of trade,and there was little for the courtto do with that question of factofficially settled.

(5) UNFAIR METHOD OFCOMPETITION. Partly as a resultof this control given to the Com-mission, but in part at least withthe encouragement of the court,the term unfair method of com-petition, the subject of the pro-hibition of the important fifthsection of the Act, has come tobe looked upon rather paradoxi-cally as the equivalent of undueinterference with competition. Inother words, a clause which, bynecessary implication, recog-nizes the possibility that theremay be bad competition as wellas good, becomes submerged inthe philosophy which upholdscompetition for its own sake. In

the Beech-Nut case, already al-luded to, Mr. Justice Holmes is avoice crying in the wildernesswhen he says that the practicescomplained of are neither unfairnor competitive. Thus, thephrase becomes a blanket au-thority for enumerating objec-tionable practicesobjection-able principally because theytend to foster monopoly and be-cause they involve fraud uponthe publicand put them under

an administrative ban.It was partly owing to this

confusion of terms and the tradepractice conferences that grewout of it, that the unfortunateNational Industrial Recovery Actproposed Codes of Fair Compe-tition and that the term waspromptly understood by admin-istrators and business men asmeaning codes prescribing and


15/126


proscribing practices with littleor no thought of competition.Even the Supreme Court in theSchechter case8 expresseddoubt, in the face of such practi-cal interpretation, whether themeaning of the phrase had anylogical connection with the

meanings of the words that com-posed it. Finally, to remove alldoubt, the language has beenamended in the Federal TradeCommission Act so as to includeany unfair method of competi-tion or unfair or deceptive act orpractice in commerce.9 At thesame time, the scope of the acthas been broadened so as to in-clude a good deal of false adver-tising regardless of whether in-

jury to a competitor or even theexistence of a competitor can beshown. The new version of theAct, therefore, transcends thelimits of an anti-monopoly law.

3. Anti-competitiveLegislation

Whether because of a changeof economic philosophy or be-cause of the purely empirical dis-covery of harms flowing from un-restrained competition, there

have been engrafted on the anti-monopolistic acts certain anti-competitive clauses generallydisguised for political reasons asanti-trust laws. Such disguise ispossible because the competi-tors whose activities are curtailedare presumably large competi-tors on the way to becomingmonopolies. Most noteworthy ofthese are the Robinson-Patmanamendment10 to the Clayton Act,and the fair practice acts culmi-

nating in the Miller-Tydingslaw.11 The former tends to pro-hibit the large retailer from uti-lizing some of his bargainingpower in buying; the latter, toprohibit him from using his ad-vantages in underselling hissmall competitor in certain pro-tected classes of goods. Bothtypes are at this stage limitedexperiments calling for much

administrative implementing,judicial interpretation, the watch-ing of loopholes and by-passesopen to aggressive competitors,and legislative amendment. Thenew state and Federal laws re-quiring employers to submit tocollective bargaining with em-

ployees12are also, so far as theygo, anti-competitive in their in-tent. Whatever social benefitsmay be sought by anti-competi-tive legislationand there aremany- no law can save us frompaying for these benefitsthrough higher prices and a sac-rifice of the advantages claimedfor intensive competition whentrust-busting was the order ofthe day.

4. Extension of UnfairCompetition to Special Cases

Unfair competition, in spiteof the incidental and cavaliertreatment of it as part of the anti-trust laws of the country, has asignificance outside of thoselaws. It is linked up with trade-marks and trade names. In fact,we may conveniently think of theterm as embracing infringe-ments of trade-marks, trade

names, copyrights, patents, andother exclusive rights; palmingoff goods as those of an-other;and any other conduct that tendswithout legal justification to hurtthe business of a competitor. Anofficial enumeration would havethe negative value of suggestingheretofore unimagined tricks,allowing to each, as to the com-mon-law dog, at least one bite.The basis on which the aggrievedcompetitor or customer or the

government or a commissionmay institute a complaint or seekredress will differ widely in theabove cases which do not belongin any single legal category, how-ever much they resemble eachother in effect, and howevermuch the courts and the law-makers may desire to excludethat effect from the market place.To treat of all of them might get

us into such diverse pockets ofthe law, as libel, in the casewhere one undertaker slyly senthis competitors cards to thefamilies of sick persons, and cor-poration law, where deception iscarried out with the aid of awholly owned subsidiary which

parades as an independent cor-poration.

(1) GENERAL ASPECTS OFUNFAIR COMPETITION RECOG-NIZED BY LAW. For our purposes,it will be better at this point toconfine ourselves to those gen-eral aspects of unfair competi-tion which the law recognizes,regardless of the means used,and add a few comments on thepeculiarities of some of the moreimportant situations. In general,the law envisages unfair compe-tition through the eye of the cus-tomer or the public, except inthose cases where an exclusiveright has crystallized into a kindof property for the competitor,as in true trade-mark, copyright,or patent. Unless the public isdeceived or a specially protectedright is involved, it is quite pos-sible to annoy or even hurt a

competitor without violating anylaw. Thus, my competitor maycopy with impunity my originalplan for selling goods on credit,or my clever design for a gar-ment, or my well-planned win-dow display, or my combinationoffer, so long as he does notthereby mislead anyone intothinking that his customer isdealing with me. Some of theseacts in competition appear quiteunfair to the business man. He

has coined the phrase designpiracy. He legislated against itin the NRA days and he has co-operated with trade associationsand the Fashion OriginatorsGuild of America to put it down.13

We may look forward to moreeffective protection of ideas inthe future, but the law of unfaircompetition as such still bearsthe marks of its original aim- the



NationalLawLibrary

Volume4BusinessLaw

protection of the interest of thepublic.

(2) TRADE SYMBOLS. (a) Sell-ing or Licensing of Trade Sym-bols to Others. Another conse-quence of looking at this branchof law through the eyes of the

public is manifest in the rule thata trade-mark or trade name can-not be sold or licensed out ingross. That is to say, even if Ihave created, popularized andconsequently own such a nameas Ivory applied to soap or RedCross to mattresses, I cannotauthorize you to use the nameon similar products of yours withwhich I have no connection. Fa-miliarity with the practice of li-censing by patentees, or the au-thorization to reprint given bycopyright owners, has frequentlymisled business men into thetrap of licensing others to usetheir trade symbols. But a tradesymbol is nothing but a short-hand way of telling the public ofyour connection with the goods,and if you are not connected withthem, your licensing another touse the symbol is merely autho-rizing him to tell a lie, and this

the law will not countenance. Just what connection mustone have with the goods to makean arrangement for the use of histrade symbol on them proper?The answer depends on anotherquestion, a shifting question ofbusiness fact: What does thetrade symbol say to the ordinarymember of the public? A gen-eration ago the judges were quiteready with an approximate an-swer to this business question.

They said that a trade symbolindicated origin or ownership ofgoods. Today a more careful an-swer is called for. There are, forexample, legitimate dealersmarks or even brokers marks, aswell as manufacturers, and theymay speak of care in selection,willingness to warrant, unifor-mity of grade, or the possessionof some quality suggested by the

name or by an acquired mean-ing of the name under the forceof usage and advertising. Oncewe determine precisely what thesymbol says, we are able to an-swer our original question:whether the proper facts arethere to justify a license or a

transfer of the right to use aname.

(b) Preservation of TradeNames. The preservation of tradenames as ones own propertypresents a serious and at timesan insuperable problem. Appar-ently one may lose his exclusiveright to such invented words asescalator, listerine, vaseline, tab-loid, mulsified, aspirin, andkodak, not merely by abandon-ment but through no fault of hisown, if the public actually appro-priates the word and makes itmean a class of articles regard-less of who makes them.14

(c) Registration of TradeNames. Registration of tradenames under state and Federalstatutes does not, in general,bestow rights. It merely makesclear the proof of the facts on

which rights are based, and itgives notice to the world of thesefacts from the date of registra-tion. Such notice may, however,itself have the effect of a factwhen we ask what territory ispreempted by a particular use ofa name. In the absence of regis-tration, it is possible to have thesame name developed simulta-neously in several parts of thecountry or even in several citiesin a single state. As a business

expands territorially, it becomesnecessary at times to drawboundary lines around the terri-tory belonging to each user.15

But after a state registration, itis difficult to hold a new user inanother part of the state, or af-ter a national registration, a newuser elsewhere in the nation,entirely without blame.

(d) Boundaries of ArticlesCovered by Trade Symbols. Aneven more difficult problem con-cerns the boundaries around ar-ticles covered by a trade symbol.Again, the publics view is thetest. Is the public likely to bemisled by the use of the word

Philco, well known in the radiobusiness, on safety razors?16 Wemust keep in mind that this is abusiness question and that theanswer is likely to change asmanufacturing and marketinghabits change. Courts have, it istrue, attempted to list classes ofarticles such as foods, clothing,and machinery, to help them insolving this problem, but suchclasses are at best approximateand subject to change. And af-ter they are made, the specificquestions are as fact-ridden asever: are chewing gum and to-bacco in the same sub-class; aresilk stockings and silk under-wear; are shoes and hats?

(e) Similarity of Trade Sym-bols. Looking at trade symbolsthrough the public eye forces usto regard the offense of infringe-ment as complete when there is

similarity though not identity. Iftwo boxes of cigars look enoughalike to be mistaken for eachother when not seen together, itis idle to bring experts to testifythat the types used in the printedmatter are of different fonts, orthe colors are distributed differ-ently or the names spelled differ-ently. The question is not whetheran expert, setting the two boxesdown together in good light witha ruler and magnifying glass, can

distinguish the counterfeit fromthe genuine; it is, rather, whetherthe transient cigar buyer in thesmoky atmosphere of the dimlylighted shop is likely to overlookthe difference.

(f) Absence of a TechnicalTrade-mark. Furthermore, thepublic can be deceived in theabsence of a true technical trade-


17/126


mark or trade name, and the lawshould protect it. It has longbeen laid down that one cannotmake a trade name out of a de-scriptive or geographic term, andthere are other limitations some-times expressed by saying, Youcannot appropriate any part of

the dictionary and exclude oth-ers from using it. Nor can youappropriate a color or number orordinary style of package as yourown. And yet the law will notpermit another to steal yourgood-will by deliberately pre-tending to the public that hisproduct is yours just becauseyou have neglected to perfect atechnical trademark or tradename for yourself. Of course, youhave a more difficult case if youmust prove unfair competitionwithout infringement of a tradesymbol. You will have to showlonger usage in order to convincethe court that color of wrappingor combination of ordinary de-scriptive and geographic wordshas come to mark a product asyours. But it can be done, andthe possibility is the basis of aharvest of legal cases every year.

(3) NAMES OF PATENTED AR-TICLES. The names of patentedarticles are in a different legalclass. An article worthy of apatent must be something new,and it is entitled to a new name.The patentee gives it that name.When the patent expires, thewhole world has the right tomake the article and to call it byits name. Nice questions mayarise as to whether the name ofthe patented article includes the

patentees name. Can anyonemake a Singer Sewing Machineand sell it under that name? Or aStillson wrench? Obviously it maybe wise, during the life of apatent, to popularize not only theofficial name but a trade nameor mark, as well, that can pre-serve for you such goodwill asyou have earned, for the timewhen the patent itself expires.

(a) Expiration of Patent. Acurious instance of the com-bination of the principles of thelast two paragraphs is found inthe Shredded Wheat case.17 Atthe expiration of the patent in1912, presumably anyone couldhave made the product and

called it Shredded Wheat. Butapparently no one did, and in thecourse of fifteen years the ques-tion arose whether beginning atscratch on the date of the ex-piration of the patent, the manu-facturers had succeeded in put-ting into the words a secondarymeaning. The Supreme Courtrecognized the possibility, butheld that it had not taken place.

(b) Similarity of Manufactur-ers Names. The most difficultcase of all arises where onewishes to use his own name fora product that has previouslybeen introduced by an-other ofthe same name. Obviously thereare three conflicting interests tobe adjusted. The prevailing inter-est is again that seen throughthe eye of the public. One ownshis name, but he has no moreright to use it to injure the pub-

lic than he has to use his crow-bar for such a purpose. Injunc-tions are frequently granted toprevent such misuse of onesown name. They should, how-ever, be no broader than neces-sary to effectuate this properend. Thus, it may be sufficientto demand a slight difference inthe set-up of the name, or a no-tice differentiating the producerof goods or the owner of a storefrom an established business

bearing the same name; or it maybe necessary to demand a com-plete cessation of the use of thename. The courts will sometimesfeel their way. In the case wherea grocer named W. H. Baker lenthis name to a chocolate bardressed up to imitate the barlong sold by Walter Baker &Com-pany, the court found it neces-sary, because of his persistence

in what seemed a deliberate at-tempt to benefit by the good-willof the old established house, tobroaden the injunction until itbecame unconditional.18 Thefirst comer in such matters obvi-ously has some advantages overlater comers, because his inter-

est happens to coincide with thatof the public.

III. LICENSING TO PREVENTINCOMPETENCE ORIRRESPONSIBILITY

To rid the market of incom-petence, inefficiency, and ir-responsibility, the chief resort ofmodem law is to licensing. Weare so accustomed to the require-ment of licenses for all kinds ofactivity from owning a dog todriving an automobile, and par-ticularly for the privilege of en-gaging in business or followingprofessions, that it is hard to re-alize how recent a developmentwe are dealing with here. As lateas 1883 Mr. Justice Field of theSupreme Court of the UnitedStates declared that it was thedistinctive right of every Ameri-

can citizen to carry on the ordi-nary businesses of life withoutlet or hindrance.19 Even while hewas speaking, a developmentwas under way to require the li-censing of physicians and law-yers, pharmacists and dentists.Soon the humbler callings ofplumber and sewer tapper wereincluded. By the end of the cen-tury, hundreds of cases had beendecided in the highest courts ofthe several states and in the Su-

preme Court of the United States,upholding attempts to subjectpractically every known industryto the licensing power of thestate or its agencies. Many ofthese licenses are perfunctory.They are really petty privilegetaxes. Others are based on care-ful examinations, character stud-ies and records. The potentialcontrol of the market by the gov-



NationalLawLibrary

Volume4BusinessLaw

ernment, which is inherent in thelicense system, still lies ahead ofus. In the National Industrial Re-covery Act, national licensing forall businesses was prescribed asan extreme measure.

The licensing power, how-ever, does not in theory go so far

as to authorize a state or nationalplanned economy. That issue wasfought out in the case of NewState Ice Company v.Liebmann.20

The State of Oklahoma had pro-vided that no license be given toany ice company unless it hadfirst procured from designatedauthorities a certificate of pub-lic convenience and necessity.Such certificates have in the pastbeen required as conditions pre-cedent to establishing new pub-lic utility enterprises, banks anda few other types of businesscharged with a public interest.The Supreme Court held (Mr. Jus-tice Brandeis dissenting) that inthe case of such an ordinary busi-ness as the manufacture of ice itwas not for the state to say howmany competing units were de-sirable. It is true, of course, thatlicensing is sometimes pervertedinto a means of keeping down

competition in an industry orprofession. Those who are in,easily persuade themselves thatstandards ought to be raised fornewcomers. Nevertheless, if thisis the avowed motive of licens-ing, it is unconstitutional. If anofficially planned market be-comes a desideratum, we musteither amend the Constitution orresort to such subterfuges aspurchasing compliance, after themanner of the Agricultural

Adjustment Act,21 which washeld unconstitutional on othergrounds, and of the BituminousCoal Act of 1937.22

1 From President Roosevelts

message to Congress on Mar. 29,

1933, recommending legislation

for Federal supervision of traffic in

investment securities in interstate

commerce.

2 Sec. 12 of the Uniform Sales

Act, p. 297.

3 E.A. Adler, Monopolizing at

Common Law and under Section

Two of the Sherman Act, 31

Harvard Law Review246.

4 The provisions of the Live

Poultry Code, approved under the

Act, were held invalid because

adopted pursuant to an unconsti-

tutional delegation of legislative

power to the President; the Act

was also held unconstitutional as

an attempt to regulate intrastate

commerce. A. L. A. Schechter

Poultry Corp. v. United States, 295

US. 495 (1935).

5 Federal Trade Commission v.

Beech-Nut Packing Co., 257 U.S.

441 (1922).

6 P. L No. 314, 75th Congress,

1st Sess. (Aug. 1937) Title VIII,

which amends Sec. 1 of the anti-trust laws, legalizes interstate

price contracts and makes it

possible for manufacturers in the

43 states where intrastate price

contracts are valid to set up an

interstate system of price fixing.

7 In all states except Alabama,

Delaware, Missouri, Texas, and

Vermont.

8 See supra, note 4.

9 Amendment of March 21,

1938, 52 Stat. 111; U. S. Code,

Title 15, Sec. 45.

10Amendment of June 19,

1936, 49 Stat. 1526, 1528; 15

U.S.C., Secs. 13, 13a.

11 See supra, notes 6 and 7.

12 Federal National Labor

Relations Act of 1935 (49 Stat.

449, 29 U.S.C. Sec. 151 et seq.)

was followed in 1937 by the

passage of similar legislation in

Massachusetts, New York, Pennsyl-

vania, Utah, and Wisconsin. On

April 12, 1937, the constitutional-

ity of the Federal act was upheld,in five sweeping decisions, not

only as it applied to interstate

commerce, but also as it applied

to manufacturing or production

where interstate commerce is

merely affected.

13 This co-operation was held

not to show monopoly in the case

of Wm. Filenes Sons Co. v.

Fashion Originators Guild of

America, 90 F. 2d 556 (1937).

14 Another example involved

the right to sole use of the word

cellophane. DuPont Cellophane

Co. v. Waxed Products Co., 85 F.

2d 75 (1936).

15 Courts have said that

registration under the federal

enactment projects the territorial-

ity of the trade-mark to the

boundaries of the United States.

However, in a recent SupremeCourt decisionU. S. Printing &

Lithograph Co. v. Griggs Cooper &

Co., U. 5. 156(1929)it was

stated that federal registration of

a trade-mark did not extend its

territoriality to the extremities of

federal jurisdiction but that such

territoriality was still to be de-

termined by common law prin-

ciples. Cf. General Bronze Corpo-

ration v. Schmelling, 208 Wis. 565

(1932).

16 In Philadelphia Storage

Battery Co. v. Mindlin, 296 N.Y.S.

176 (1937), the manufacturer of

Philco radio sets was given

injunctive relief against the use of

its trade-mark on this non-

competing product.


19/126


17 Kellogg Co., v. National

Biscuit Co., Nov. 14, 1938.

18 Walter Baker & Co., Ltd., v.

Baker, 77 Fed. 181 (1896); Walter

Baker & Co., Ltd., v. Sanders, 80

Fed. 889 (1897); Walter Baker &

Co., Ltd., v. Baker, 89 Fed. 673

(1898); Walter Baker & Co., Ltd., v.Baker, 87 Fed. 209 (1898); Baker

v. Slack. 130 Fed. 514 (1904). See

also L.B.P., p. 70.

19 Butchers Union Company

v. Crescent City Company, 111 US.

746, L.B.P. p. 40.

20285U.S. 262 (1932), L.B.P.,

p. 42.

21 The Agricultural Adjust-

ment Act was held invalid because

invading reserved states rights, in

United States v. Butler et al, 297

US. 1 (1936).

22 In Carter v. Carter Coal Co.

et al., 298 U.S. 238 (1936), the

Bituminous Coal Conservation Act

of 1935 was held unconstitutional

on grounds avoided in the Bitumi-

nous Coal Act of 1937 (P.L. No. 48,

75th Congress, 1st Sess.), which

provides for price fixing and acode of fair competition in Inter-

state Commerce.



NationalLawLibrary

Volume4BusinessLaw

Chapter III

Market Facilities

I. THE USE OF CONTRACTS

For the successful conduct ofbusiness it is not enough to po-lice the market-place and rid itof the dangers discussed in thelast chapter. It is necessary alsoto provide reasonable facilitiesfor its work, and among thesenot the least important are fa-

cilitating laws. The greatest partof this service is rendered by thelaw of Contracts, legally rec-ognized and enforceable agree-ments. Contracts are involved inevery sale of goods or lands, orother valuables such as securi-ties or goodwill, in every lease,in every extension of credit, inevery act of employment, in ar-ranging for such services as thecarriage of goods and passen-gers, in using the communica-

tion facilities furnished by themails or the telephone and tele-graph companiesin fact, wher-ever money is used, and in sometransactions even where it is notused. A study of contracts wouldthus overlap, besides market fa-cilities, a great many other partsof our study, such as Credit andOrganization in business, andsome domestic and property ar-

rangements scattered throughother volumes of this work. Ageneral treatment of the prin-ciples of contract law is accord-ingly presented elsewhere (Vol-ume VI). At this stage we are con-cerned, rather, with some spe-cific contracts in common use inbusiness than with principlescommon to all contracts.

1. Developmentof the Law of Contracts

It appears, then, that thewarp and woof of modem busi-ness is contractual. It was notalways so. We can picture placesin the old world where the exter-nal appearances of life have notchanged materially since the lateMiddle Ages. The man we nowsee working in the field is com-pletely enmeshed in contracts.

He is a tenant by virtue of a con-tract, or is employed by contract.In turn, he employs others in thesame way. He sells his produceby contracts and acquires whathe needs in like manner. Yet hisancestor, who did the same kindof work and lived a similar life,was scarcely touched by contractlaw. He was born into a statusunder the feudal system, and by

reason of that status had certainrights and duties in his relationsto those above him and thoseassociated with him or below himin the social-economic-politicalstructure of his time to which wehave given the name feudalism.If we ask why and how this greatchange has come about, we shallfind the answer in a whole litera-

ture, the nucleus of which will befound in a famous sentencepenned by Sir Henry Maine in1861: The movement of theprogressive societies has hith-erto been a movement from Sta-tus to Contract.1 Nineteenthcentury writers attributed a gooddeal of significance to this for-mula. They saw freedom in thecontract principle which said thatno man (in the absence of fault)should be held to owe duties to

his fellow men unless he hadvoluntarily undertaken them.The statustheory of duties sug-gested serfdom or slavery, whichhad been abolished in Great Brit-ain and its possessions earlier inthe century and was soon to dis-appear in America and Russiaand throughout the civilizedworld.


21/126


2. Freedom of ContractIn this country the doctrine

grew to be a dogma of con-stitutional law, though it is notwritten into the Constitution ofthe United States: the dogma offreedom of contract. Under it, atthe end of the nineteenth cen-

tury and in the first years of thetwentieth century, a good manylegislative efforts to dictate theterms of contracts werethwarted. Not only were statuteswith reference to the labor con-tract thrown out unless clearlywithin the police power of thestate, but price regulation andthe exclusion of unfair terms intypes of contracts that had cometo be one-sided were deemedimpossible. The only exceptionof importance was that publicutilities (including carriers) weresubject to such control as tomake them duty bound not onlyto contract with all members ofthe public without discrimina-tion, but to treat them all fairly,and the authorities were begin-ning to interpret this to meanthat the rates and other termscould be fixed by legislative orproperly authorized adminis-

trative action.

3. In Absence ofAgreement to Contrary

A practical compromise waspossible about the turn of thecentury, when the theory of free-dom of contract was at its height.However chary a legislature hadto be in using the phrase anycontract to the contrary notwith-standing, it could readily say inthe absence of any agreement or

contract to the contrary, and laydown the whole or the essentialpart of a standardized contractto fit any given situation. It wasin this way that the State of NewYork, after an important study ofinsurance companies, wrote intoits statute books a series of stan-dard insurance policies whichwere to cover all cases in thisabsence of written agreements to

the contrary. Only a few provi-sions were put beyond the con-trol of the parties, and these werepresumably justified under thepolice power- that somewhatvague power of the states to pro-tect public health, safety andmorals. Many other states fol-

lowed the example of New York.Eventually, standardized insur-ance policies took the place ofthe widely varying, somewhattreacherous, one-sided docu-ments that had become a scan-dal under the regime of freedomof contract.

4. Advantages ofStandardized Contracts

As other contracts have beenstandardized and still more arebeing standardized in the samewaynotably, bills of lading,warehouse receipts, sales ofgoods, sales of securities, realestate transactions, and bank-ingit will be worth our while toconsider the workings of the lawsto standardize insurance agree-ments. In the first place, theelimination of specialized phras-ing has greatly decreased litiga-tion over the meaning of terms.

All of the standard phrases havebeen judicially defined. The pro-visions are reasonably two-sided.It is possible to buy insurancequickly and, at least in ordinarycases, without expensive expertadvice including legal advice.Furthermore, it is possible tocover parts of the same hazardin different companies withoutsowing a wind and reaping awhirlwind of confusion. It is pos-sible to master, once for all, the

essentials of each type of con-tract, as it was impossible tocarry in mind a clear picture ofwhat each individualized con-tract covered or failed to coverin the past. The companies ben-efit almost as much as their cus-tomers. Whatever competitionthey maintain, they are notforced to weigh in the balancenon-comparable clauses. So a

great deal of sales resistance hasdisappeared. Peculiar insurancecontracts are still possible tomeet peculiar situations, but theadvantages of the standardizedpolicies are such that they havecome to prevail almost as gener-ally as they would had the legis-

lature been empowered to sayany contract to the contrary not-withstanding, and had it beenso minded.

5. Disadvantages ofStandardized Contracts

The advantages of standard-izing contracts are not unlikethose of standardizing machin-ery, and the government mayplay a similar part in both pro-cesses. There are, on the otherhand, the same kinds of disad-vantages. The standard gauge ofmachine or cut of clothing thatserves the average case bestmay not serve any actual caseso well as the made-to-measurearticle would. So, we shall see,the standardized contract ofsale fits many modern situationsrather poorly. Furthermore,standardization makes changeto meet new conditions rather

difficult. The standard gauge ofrailroad tracks is said to bebased, in the last analysis, onthe strength of a horse. No mat-ter how powerful engines can bemade in the foreseeable future,it is difficult to see a change inthis gauge as long as trains runon tracks. In like manner, a stan-dardized contract for any givenpurpose, whether it be insur-ance, banking, or the sale ofclothing, is likely to resist ad-

justment to the changing needsof a dynamic society. We shallfind ample illustrations in themost important standard con-tract of the market, that estab-lished in the Uniform Sales Act,or in the common law of Salesof the last century which it faith-fully codifies.



NationalLawLibrary

Volume4BusinessLaw

II. UNIFORM SALES LAW

1. Standardized Contract ofthe Uniform Sales Act

A sale may be defined, for ourpurposes, as the transfer of own-ership of goods for a consider-ation called a price. So defined-

other definitions are also pos-sibleit is not a contract; it ismerely a step in the performanceof a contract of sale. The contractmay call for an immediate per-formance or a future perfor-mance. It is also possible that,for one reason or another, suchas delay in completing thegoods, the performance takesplace after the time agreed upon.We are for the moment con-cerned with the contract ratherthan with the nature of owner-ship and its legal consequences.There are, or may be, other de-tails in the performance of theseller than a recognition of thething as yours and no longer his,from a given moment. He mustat least surrender possession,and probably also the title orindicia of ownership, and he maybe bound by the contract topackage, condition, transport,

set up, or service the thing sold;he may be bound to defend yourclaim to it against all comers oronly certain comers; he may bebound to make good certain orall defects and pay damages forlosses resulting from defects, ortake the goods back or standbehind them in other ways. Hemay have bound himself to giveup possession without beingpaid and wait a stated time forhis money. He may have agreed

to insure the goods, to makeproper arrangements on yourbehalf with a carrier for theirtransportation. He may havebound himself to keep spareparts on hand and to supplythem to you at reasonable rates;likewise, to carry in stockimprovements and gadgets thatmay be added, from time to time,to the article sold by the manu-

facturer. He may have agreed totake the article back under cer-tain conditions and pay back orallow in trade parts of the priceaccording to a schedule. Perhapshe has agreed not to sell goodsof the same pattern to your com-petitors. It is, of course, im-

possible to exhaust the list ofauxiliary promises that may bemade by a seller in connectionwith his promise to transfer thetitle and possession of his goods.

Similar promises can be madeby the buyer in addition to theprimary undertaking to pay forthe goods. Though it is not likelythat a great many of the stipula-tions enumerated above exist to-gether in any ordinary contract,it is even more unlikely that, inthe ordinary course of business,we shall come across a sale inwhich none of them accompanythe transfer of title. Hence, it isbetter, for purposes of analysis,to follow the English version ofthe Sales of Goods Act, which rec-ognizes a Contract of Sale in ev-ery case, than the American ver-sion, which speaks of a Contractfor the Sale of Goods if the trans-fer of ownership is postponed,

and a Sale (with no allusion to anycontract) if the transfer of owner-ship is immediate.

2. Special Stipulations inIndividual Contracts of Sale

If all of the terms of everycontract of sale had to be men-tioned, to say nothing of a re-quirement of writing, the ordi-nary haberdashers clerk couldperhaps, with the aid of a law-yer, sell a single collar or tie in a

day, and at the end of the day hewould be completely exhausted.With standardization, he blandlywraps up package after packagewhile chatting about theweather, and lets the law dictatethe terms as to what may andwhat may not be expected of thegoods. But on what principledoes the existing Sales Law makeits selection among all the pos-

sible contracts that the partiescould conceivably make werethey minded to write specialstipulations?

To answer this question wemust bear in mind the type ofsale that was most common inEngland while this law was in its

formative stage, a century ago,rather than the type of sale withwhich we are today familiar in thelarge stores m urban centers.Thus, the sale presumed is acash-and-carry transaction; it is,in the absence of the proof of acontrary intent, the task of thebuyer to pick up the goods asthey are at the sellers place ofbusiness or home or whereverthey may be, and carry themaway. From this presumptionarose the complicated result thatthe carrier is generally to be con-sidered the agent of the buyeringetting the goods, rather than ofthe seller in carrying them.Hence, claims against the rail-road company are normally madeby the consignee; hence, also,the goods in the hands of thecarrier, even if they are beingsent C.O.D., are looked upon asalready in the possession of the

buyer. And since liens are basedon possession, it is too late toenforce a lien, strictly speaking,if the goods are in transit, eventhough at that stage it is discov-ered that the buyer is insolvent.For this reason there has grownup a very technical doctrine ofstoppage in transitu, to restorethe goods to a position in whicha lien or its equivalent can oncemore be asserted by the seller.Furthermore, as there is no pre-

sumption that credit is to be ex-tended, the seller is entitled tohold the goods until there is atender of payment, in the ab-sence of specifications to thecontrary. Out of this notiongrows the vendors lien.

3. Implied Warranties(1) ABSENCE OF PROVISION

FOR THE MIDDLEMAN. Another


23/126


feature of the type of sale con-templated which reflects the pastrather than the present is theabsence of provision for themiddleman. Practically all of thewarranties recited as impliedassume that the only buyer con-templated is a consumer, and the

sellers are dealt with as growersor manufacturers, whether theybe growers or manufacturers ornot.2 Warranties do not run withthe goodsthat is to say, evenif branded goods are boughtfrom a middleman who obviouslyhas nothing to do with theirpreparation, the buyer must lookto him for any warranties, and hein turn may or may not have re-course to the manufacturer. Thelaw has, it is true, done some-thing to meet this condition, butnot within the Sales Act nor un-der the heading of warranties.The disappointed buyer maymake his claim against the neg-ligent manufacturer, if at all, onlyon the ground that it was a tortto send poisonous or otherwisedangerous goods out into theworld without proper warnings.

(2) WARRANTIES APPLI-

CABLE TO CONSUMER-PUR-CHASER. An examination of thedetails of the implied warrantieswill bear out the picture of(a)theconsumer-purchaser dealingwith a manufacturing dealer,rather than (b)of a dealer-pur-chaser or manufacturing-pur-chaser. The first implied warrantyis that, where there is reliance onthe judgment of the seller thatthe goods are fit for the buyerspurpose, there is an implied war-

ranty that the goods are fit forsuch a purpose. Another war-ranty is that, when one buysgoods from a dealer the goodsare of merchantable qualityandmerchantable, though it mightoriginally have meant fit to beresold, has, since the Sales Actwas adopted, been pretty defi-nitely inte