Liberty Warehouse Company v. Burley Tobacco Growers' Co-Op Marketing Association/Opinion of the Court

The Liberty Warehouse Company, a Kentucky corporation, operates a warehouse at Maysville, in that state, and there receives and sells loose-leaf tobacco for the accounts of growers. The Burley Tobacco Growers' Co-operative Marketing Association, incorporated under the Bingham Co-operative Marketing Act (chapter 1, Acts Ky. 1922), commenced this proceeding against the warehouse company in the Mason county circuit court. It charged the warehouse company with willful violation of the act by selling pledged tobacco, and asked judgment for the prescribed penalty ($500) and attorney's fees.

The Bingham Act (32 sections) authorizes the incorporation of nonprofit co-operative associations for the orderly marketing of agricultural products, and provides only producers may become members and that the corporation may contract only with them for marketing such products. It declares that these contracts shall not be illegal, prescribes penalties for interfering therewith, and further provides that the association shall not be deemed a conspiracy, illegal combination, or monopoly. Three pertinent sections follow:

'Sec. 26. Misdemeanor to Induce Breach of Marketing Contract of Co-operative Association-Spreading False Reports about the Finances or Management Thereof.

'Any person or persons or any corporation whose officers or     employees knowingly induce or attempt to induce any member or      stockholder of an association organized hereunder to breach      his marketing contract with the association, or who      maliciously and knowingly spreads false reports about the      finances or management thereof, shall be guilty of a      misdemeanor and be subject to a fine of not less than one      hundred ($100.00) dollars and not more than one thousand      ($1,000) dollars for each such offense, and shall be liable      to the association aggrieve in a civil suit in the penal sum      of five hundred ($500) dollars for each such offense.

'Sec. 27. Warehousemen Liable for Damage for Encouraging or Permitting Delivery of Products in Violation of Marketing Agreements.

'Any person, firm, or corporation conducting a warehouse     within the state of Kentucky who solicits or persuades or      permits any member of any association organized hereunder to      breach his marketing contract with the association by      accepting or receiving such member's products for sale or for      auction or for display for sale, contrary to the terms of any      marketing agreement of which said person or any member of the      said firm or any active officer or manager of the said      corporation has knowledge or notice, shall be liable to the      association aggrieved in a civil suit in the penal sum of five hundred ($500) dollars for each      such offense; and such association shall be entitled to an      injunction against such warehouseman to prevent further      breaches and a multiplicity of actions thereon. In addition,     said warehouseman shall pay to the association a reasonable      attorney's fee and all costs involved in any such litigation      or proceedings at law.

'This section is enacted in order to prevent a recurrence or     outbreak of violence and to give marketing associations an      adequate remedy in the courts against those who encourage      violations of co-operative contracts.

'Sec. 28. Associations are Not in Restraint of Trade.

'Any association organized hereunder shall be deemed not to     be a conspiracy nor a combination in restraint of trade nor      an illegal monopoly; nor an attempt to lessen competition or      to fix prices arbitrarily or to create a combination or pool      in violation of any law of this state; and the marketing      contracts and agreements between the association and its      members and any agreements authorized in this act shall be      considered not to be illegal nor in restraint of trade nor      contrary to the provisions of any statute enacted against      pooling or combinations.'

The petition (filed Dec. 14, 1923) alleges:

That the association was organized to provide means for orderly marketing of tobacco grown or acquired by members and no others. Identical contracts (the standard form is exhibited) with many growers obligate them to deliver to it all of their tobacco during five years. Tobacco received under these contracts is sold to manufacturers and dealers as market conditions permit and the proceeds less expenses are distributed among the members, according to quality and quantity of their deliveries.

That one Mike Kielman joined the association and executed the standard contract. Notwithstanding this he delivered two thousand pounds of the 1923 crop to the warehouse company and it sold the same, with full knowledge of the circumstances. Before the sale the association notified the warehouse company of Kielman's membership and of his marketing contract, requested it not to sell his tobacco and called attention to the prescribed penalties.

'Plaintiff says that after service of said notice and with     the full knowledge that said tobacco had been sold to this      plaintiff, the defendant knowingly persuaded and permitted      the said Mike Kielman to breach his marketing contract with      the plaintiff association by accepting and receiving the said      member's product for sale and for auction and selling same      contrary to the terms of said marketing agreement, contrary      to the provisions of section 27 of the Bingham Co-operative      Marketing Act.'

'The association agrees to buy and the grower agrees to sell     and deliver to the association all of the tobacco produced by      or for him or acquired by him as landlord or lessor, during      the years 1922, 1923, 1924, 1925 and 1926. * *  * The      association agrees to resell such tobacco, together with      tobacco of like type, grade and quality delivered by other      growers under similar contracts, at the best prices      obtainable by it under market conditions, and to pay over the      net amount receive therefrom (less freight, insurance and      interest), as payment in full to the grower and growers named      in contracts similar hereto, according to the tobacco      delivered by each of them,' etc.

'Inasmuch as the remedy at law would be inadequate; and     inasmuch as it is now and ever will be impracticable and      extremely difficult to determine the actual damage resulting      to the association should the grower fail so to sell and      deliver all of his tobacco the grower hereby agrees to pay to      the association for all tobacco delivered, consigned or      marketed or withheld by or for him, other than in accordance      with the terms hereof, the sum of five cents per pound as      liquidated damages averaged for all types and grades of tobacco, for the breach of this contract; all      parties agreeing that this contract is one of a series      dependent for its true value upon the adherence of each and      all of the growers to each and all of the said contracts.

'The grower agrees that in the event of a breach or     threatened breach by him of any provision, regarding delivery      of tobacco the association shall be entitled to an injunction      to prevent breach or further breach thereof and to a decree      for specific performance and sale of personal property under      special circumstances and conditions, and that the buyer      cannot go to the open markets and buy tobacco and replace any      which the grower may fail to deliver.'

The warehouse company presented an amended answer and counterclaim in three sections.

The first sets up 'in estoppel and in bar' of the alleged action that the association since January 13, 1922, has been a trust or combination of the capital, skill and acts of divers persons and corporations doing commercial business in Kentucky and between that state and other states and foreign countries 'organized and conducted for the express purpose of unlawfully and contrary to the common law, creating and carrying out restrictions in trade' under the guise of stabilizing prices.

The second asserts that sections 26 and 27, Bingham Act, conflict with the Fourteenth Amendment, abridge defendant's privileges and immunities as a citizen of the United States, deprive it of corporate life, liberty, and property without due process of law and deny it equal protection of the laws.

The third seems to be based upon the Kentucky Declaratory Judgment Law. It advances a counterclaim; also asks the court to determine whether the Bingham Act is valid and for a declaration of rights and duties.

The trial court struck section 3 'from the records' and sustained demurrers to sections 1 and 2. The warehouse company elected to plead no further. Trial by jury was waived, 'the petition being submitted to the court on the law and facts.' Judgment for $500-the prescribed penalty-and $100 attorney's fees went for the association, and was affirmed by the Court of Appeals.

In order to prevail here, the warehouse company must show that enforcement of the challenged judgment would deprive it-not another-of some right arising under the Constitution or laws of the United States properly asserted below. Southern Railway Co. v. King, 217 U.S. 524, 30 S.C.t. 594, 54 L. Ed. 868; Standard Stock Food Co. v. Wright, 225 U.S. 540, 32 S.C.t. 754, 56 L. Ed. 1197; Hendrick v. Maryland, 235 U.S. 610, 621, 35 S.C.t. 140, 59 L. Ed. 385; Jeffrey Mfg. Co. v. Blagg, 235 U.S. 571, 576, 35 S.C.t. 167, 59 L. Ed. 364; Dahnke-Walker Co. v. Bondurant, 257 U.S. 282, 289, 42 S.C.t. 106, 66 L. Ed. 239.

No federal right was impaired by striking section 3 from the amended answer and counterclaim. Proceedings in state courts must conform to the reasonable requirements of local law. Whether they do is primarily for those courts to determine. Here we find no abuse of that power.

'Defendant now makes its application to this court, upon its     counterclaim, in accordance with the provisions of chapter 83      of the Acts of 1922 of the General Assembly of Kentucky,      known as the Declaratory Judgment Law, for the purpose of      securing a declaration of its rights and duties under said      Bingham Co-operative Marketing Act, in relation to the common      law and the state and federal Constitutions, as well as the      Sherman Anti-Trust Law, and for the purpose of having this      court determine whether in the conduct of its business it      will be necessary for it to comply with the provisions of      said Bingham Co-operative Marketing Act, or whether it is      invalid in whole or part, and, if so, in what part.'

Apparently the declaratory judgment statute authorizes plaintiffs only to ask for judgments. It also provides: 'The court may refuse to exercise the power to declare     rights, duties or other legal relations in any case where a      decision under it would not terminate the uncertainty or      controversy which gave rise to the action, or in any case      where the declaration or construction is not necessary or      proper at the time under all the circumstances. Section 6.'

This court has no jurisdiction to review a mere declaratory judgment. Liberty Warehouse Co. v. Grannis, 273 U.S. 70, 47 S.C.t. 282, 71 L. Ed. 541.

Section 1 presents no federal question. It does not mention the Constitution or any statute of the United States, but claims that the association is an unlawful trust or combination under common-law rules. But the present controversy concerns a statute, and a state may freely alter, amend, or abolish the common law within its jurisdiction. Baltimore & Ohio R. R. v. Baugh, 149 U.S. 368, 378, 13 S.C.t. 914, 37 L. Ed. 772.

Section 2 challenges sections 26 and 27 of the Bingham Act, because they offend the Fourteenth Amendment, 'in that said sections and each of them abridges defendant's privileges and immunities as a citizen of the United States and deprives defendant of its corporate life, liberty and property without due process of law and denies to it the equal protection of the laws.' This suggests the only federal questions open for our consideration. The pleadings allege no burden upon interstate commerce amounting to regulation, nor do they property and definitely advance any claim under a federal statute.

A corporation does not possess the privileges and immunities of a citizen of the United States within the meaning of the Constitution. Western Turf Ass'n v. Greenberg, 204 U.S. 359, 363, 27 S.C.t. 384, 51 L. Ed. 520; Selover v. Walsh, 226 U.S. 112, 33 S.C.t. 69, 57 L. Ed. 146. The allegation concerning deprivations of corporate life is unimportant.

Certainly the statute impaired no right of the warehouse company guaranteed by the Fourteenth Amendment, by merely authorizing corporations with membership limited to agriculturists and permitting contracts for purchase and resale of farm products. This also is true of the declaration that such associations shall not be deemed monopolies, combinations or conspiracies in restraint of trade, and that contracts with members shall not be illegal. The state may declare its own policy as to such matters.

Sections 26 and 27 prohibit interference with contracts permitted by local law and not alleged to conflict with federal law. Section 26 declares any person or corporation who knowingly induces a member to break his marketing contract guilty of a misdemeanor and subjects him to a fine; also to suit for the penal sum of $500. Section 27 hits warehousemen who solicit, persuade, or permit a member to break his marketing contract by accepting or receiving pledged products for sale and subjects them to penalties. It was under the latter section that judgment went against the warehouse company.

'There is no statute at present in this state, nor was there     any when the cause of action herein arose, against pools,      trusts, and monopolies.'

Considering this and further declarations in the same opinion, we cannot say that any common-law rule recognized in the state of Kentucky forbade associations or contracts similar to those before us when intended to promote orderly marketing. Undoubtedly the state had power to authorize formation of corporations by farmers for the purpose of dealing in their own products. And there is nothing to show that since the Bingham Act producers may not form voluntary associations and through them make and enforce contracts like those expressly authorized.

Do the provisions of the Bingham Act which afford peculiar protection to marketing contracts with members of the association deprive the warehouse company of equal protection of the laws, or conflict with the due process clause of the Fourteenth Amendment, because without reasonable basis and purely arbitrary? These questions may be fairly said to arise upon the present record.

The statute penalizes all who wittingly solicit, persuade, or induce an association member to break his marketing contract. It does not prescribed more rigorous penalties for warehousemen than for other offenders. Nobody is permitted to do what is denied to warehousemen. There is no substantial basis upon which to invoke the equal protection clause.

Connolly v. Union Sewer Pipe Co., 184 U.S. 540, 22 S.C.t. 431, 46 L. Ed. 679, is much relied upon. But there the circumstances differed radically from those here presented, and always to determine whether equal protection is denied there must be consideration of the peculiar facts. Connolly resisted judgment for the purchase price of pipe upon the ground that the Union Company, the vendor, belonged to a combination or trust forbidden by an Illinois statute. The statute defined a trust, made participation therein criminal, and directed that those who purchased articles from an offending member should not be held liable for the price. Section 9 declared:

'The provisions of this act shall not apply to agricultural     products or live stock while in the hands of the producer or      raiser.' Laws Ill. 1893, p. 184.

This court held that because of the exemption the Union Company was denied the equal protection of the law. It was forbidden to do what others could do with impunity. Here the situation is very different. The questioned statute undertakes to protect sanctioned contracts against any interference-no one could lawfully do what the warehouse company did.

Counsel maintain that the Bingham Act takes from the warehouse company the right to carry on business in the usual way by accepting and selling the tobacco of those who voluntarily seek its services and thus unduly abridges its liberty. Undoubtedly the statute does prohibit and penalize action not theretofore so restricted and to that extent interferes with freedom. But this is done to protect certain contracts which the legislature deemed of great importance to the public and peculiarly subject to invasion. We need not determine whether the liberty protected by the Constitution includes the right to induce a breach of contract between others for the aggrandizement of the intermeddler-to violate the nice sense of right which honorable traders ought to observe.

In Minnesota, etc., Marketing Association v. Radke (1925) 163 Minn. 403, 204 N. W. 314, provisions of the Co-operative Marketing Act of Minnesota (Laws 1923, c. 264) substantially like section 27 were declared invalid. The Supreme Court said:

'It seems clear to us that it is beyond the power of the     Legislature to make it a tort to purchase, in the ordinary      course of a legitimate business, from the true owner a      wholesome staple commodity upon which there is no lien and      which is not under any ban or regulation because of inherent      qualities or use. Liberty of contract is assured by both     state and federal Constitutions.'

On the other hand, in Commonwealth v. Hodges (1910) 137 Ky. 233, 125 S. W. 689, the Kentucky Court of Appeals sustained a statute which made it a criminal offense knowingly to purchase a crop pledged to an unincorporated marketing association. The same doctrine is accepted by the opinion below.

It is stated without contradiction that co-operative marketing statutes substantially like the one under review have been enacted by 42 states. Congress has recognized the utility of co-operative association among farmers in the Clayton Act (38 Stat. 731 (15 USCA § 17), the Capper-Volstead Act (42 Stat. 388 (7 USCA §§ 291-292), and the Co-operative Marketing Act of 1926 (44 Stat. 802 (7 USCA §§ 451-457)). These statutes reveal widespread legislative approval of the plan for protection scattered producers and advancing the public interest. Although frequently challenged, we do not find that any court has condemned an essential feature of the plan with the single exception of the Supreme Court of Minnesota in the above-cited case.

'We take judicial knowledge of the history of the country and     of current events, and from that source we know that      conditions at the time of the enactment of the Bingham Act      were such that the agricultural producers was at the mercy of      speculators and others who fixed the price of the selling      producer and *  *  * the final consumer through combinations      and other arrangements, whether valid or invalid, and that by      reason thereof the former obtained a grossly inadequate price      for his products. So much so was that the case that the     intermediate handlers between the producer and the final      consumer injuriously operated upon both classes and fattened      and flourished at their expense. It was and is also a     well-known fact that, without the agricultural producer,      society could not exist, and the oppression brought about in      the manner indicated was driving him from his farm, thereby      creating a condition fully justifying an exception in his      case from any provision of the common law, and likewise      justifying legislative action in the exercise of its police      power.'

The Supreme Court of Alabama declared in Warren v. Alabama Farm Bureau Cotton Association (1925) 213 Ala. 61, 104 So. 264:

'So far as we are advised, no American court has condemned a     co-operative marketing contract of the character of this      complainant association as injurious to the public interest,      or in any way violative of public policy. On the contrary,     such contracts have been everywhere upheld as valid, if not      positively beneficial to the public interest.' In Arkansas Cotton Growers' Co-op. Ass'n v. Brown (1925) 168 Ark. 504, 270 S. W. 946, 1119, the court sustained a Co-operative Marketing Act (Acts 1921, p. 153):

'The statute seems to be in a form which has become standard,     and has been enacted in many of the states, the enactment of      such legislation being manifestly prompted by the universal      urge to promote prosperity in agricultural pursuits. There     has been much discussion of the plan in the decisions of the      courts of the various states where it has been adopted, and      the general view expressed is that the statute should be      liberally construed in order to carry out the design in its      broadest scope.'

In Manchester Dairy System, Inc., v. Hayward (1926) 132 A. 12, the Supreme Court of New Hampshire said:

'Co-operative marketing agreements, containing the essential     features of the contract here considered, have been      recognized in many of our states as a legitimate means of      protecting its members against oppression, of avoiding the      waste incident to the dumping of produce upon the market with      the consequent wide fluctuations in prices and of securing to      the producer a larger share of the price paid by the consumer      for his products. Associations of the character here exist in     practically all of our states and deal in nearly every form      of agricultural product. From year to year the co-operative     idea in marketing has been assuming wider scope and greater      economic importance. Public approval of such co-operative     organizations is evidenced by the adoption of enabling      legislation in more than two-thirds of the states including      our own. * *  * Such legislation has received liberal      construction by the courts. Minn. Wheat Growers' Ass'n v.     Huggins (162 Minn. 471) 203 N. W. 420 et seq. * *  * No      sufficient ground appears from the record for holding that      the contract here under consideration is contrary to public      policy.' Tobacco Growers' Co-op. Ass'n v. Jones, 185 N. C. 265, 117 S. E. 174, 33 A. L. R. 231;

'In view of the necessity of protecting those engaged in     raising tobacco against the combination of those who buy the      raw product at their own figures and sell it to the public at      prices also fixed by themselves, this movements has been      organized. By a careful examination of all the provisions of     the act under which the association is acting, it will be      seen that every precaution has been taken to insure that it      will not be used for private gain, and can operate only for      the protection of the producers.'

Northern Wisconsin Co-operative Tobacco Pool v. Bekkedal, 182 Wis. 571, 197 N. W. 936:

'The reasons for promoting such legislation are generally     understood. It sprang from a general, if not well-nigh     universal, belief that the present system of marketing is      expensive and wasteful, and results in an unconscionable      spread between what is paid the producer and that charged the      consumer. It was for the purpose of encouraging efforts to     bring about more direct marketing methods, thus benefiting      both producer and consumer, and thereby promoting the general      interest and the public welfare, that the legislation was      enacted.'

The purpose of the penalty clause (section 27) was pointed out by the Supreme Court of Tennessee in Dark Tobacco Growers' Co-op. Ass'n v. Dunn (1924) 150 Tenn. 614, 266 S. W. 308:

'The complainant could not do business without tobacco. When     it contracts to sell, it must fill its contracts with tobacco      delivered by its members. It cannot replace defendant's     tobacco by purchasing upon the open market. Its charter     prohibits it from so doing. For each pound of tobacco which     is not delivered to the association by a member, there is a      pro rata increase in the operating costs of the association;      and that increase cannot be estimated in terms of money with      definite exactness. For every deflection of one member, there     is a certain amount of dissatisfaction engendered among other members; indeed,      other members are encouraged not to deliver their tobacco,      and the normal increase of the association's members is      prevented. All of these things result in damage, but the     amount of damage cannot possibly be computed.'

Other pertinent cases are assembled in margin.

The opinion generally accepted-and upon reasonable grounds, we think-is that the co-operative marketing statutes promote the common interest. The provisions for protecting the fundamental contracts against interference by outsiders are essential to the plan. This court has recognized as permissible some discrimination intended to encourage agriculture. American Sugar Refining Co. v. Louisiana, 179 U.S. 89, 95, 21 S.C.t. 43, 45 L. Ed. 102; Cox v. Texas, 202 U.S. 446, 26 S.C.t. 671, 50 L. Ed. 1099. And in many cases it has affirmed the general power of the states, so to legislate as to meet a definitely threatened evil. International Harvester Co. v. Missouri, 234 U.S. 199, 34 S.C.t. 859, 58 L. Ed. 1276, 52 L. R. A. (N. S.) 525; Jones v. Union Guano Co., 264 U.S. 171, 44 S.C.t. 280, 68 L. Ed. 623. Viewing all the circumstances, it is impossible for us to say that the Legislature of Kentucky could not treat marketing contracts between the association and its members as of a separate class, provide against probable interference therewith, and to that extent limit the sometime action of warehousemen.

The liberty of contract guaranteed by the Constitution is freedom from arbitrary restraint-not immunity from reasonable regulation to safeguard the public interest. The question is whether the restrictions of the statute have reasonable relation to a proper purpose. Miller v. Wilson, 236 U.S. 373, 380, 35 S.C.t. 342, 59 L. Ed. 628, L. R. A. 1915F, 829; Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61, 78, 31 S.C.t. 337, 55 L. Ed. 369, Ann. Cas. 1912C, 160. A provision for a penalty to be received by the aggrieved party as punishment for the violation of a statute does not invalidate it. St. Louis, Iron Mountain & Southern Ry. Co. v. Dicksey Williams, 251 U.S. 63, 66, 40 S.C.t. 71, 64 L. Ed. 139.

Affirmed.