## Facts

- A phonograph importer/distributor operated a controlled distribution system for phonographs and records through wholesale traders.
- Wholesalers signed agreements not to resell the goods to dealers placed on a “suspended list.”
- A dealer was placed on the suspended list and was not authorized to obtain goods under the distribution scheme.
- The suspended dealer used agents who misrepresented their identities as independent purchasers to buy goods from contracted wholesalers.
- The wholesalers sold to the agents while unaware they were supplying the suspended dealer, believing they were complying with their contractual restrictions.
- The importer alleged intentional interference with its contractual relations and sought an injunction and damages for loss of sales and loss of control over its distribution system.
- The trial court entered judgment for the defendants, reasoning that damages were not sufficiently proved and that the wholesalers did not knowingly breach because they were deceived.

## Issues

1. Whether a third party commits an actionable wrong by fraudulently procuring sales that defeat another’s distribution contracts, even if the contracting sellers are innocently deceived.
2. Whether liability for interference requires that the contracting party knowingly and intentionally breach, or whether the third party’s knowledge and intent suffice.
3. Whether a distribution scheme using refusal-to-deal and a suspended list is unlawful as an improper restraint on trade such that courts should deny relief.

## Decision

- The Court of Appeal reversed in substance and granted relief against the suspended dealer’s scheme.
- The court held the suspended dealer’s conduct was actionable interference with the importer’s contractual and business arrangements.
- The wholesalers’ lack of knowledge (due to deception) did not bar liability because the wrong was the defendant’s intentional, fraudulent circumvention of the contractual system.
- The court treated the importer’s selective distribution and refusal-to-supply policy as lawful, and therefore protectable, absent an independently unlawful combination or restraint.
- Injunctive relief was available to prevent continued interference; quantification of damages was not treated as a prerequisite where ongoing interference threatened the distribution system.

## Legal Principles

- A person who knows of another’s contractual arrangements and intentionally defeats them through fraud may be liable for interference, even if the contracting party is deceived and does not knowingly breach.
- The relevant intent is the interferer’s deliberate purpose to subvert the contractual regime; the contracting party’s innocence does not immunize the interferer.
- A supplier may generally choose its customers and may contract with wholesalers to withhold supply from specified dealers; such selective distribution is not, without more, unlawful.
- Equity may restrain continued, intentional interference with contractual and business rights where the conduct undermines control of distribution and goodwill.

## Conclusion

The Court of Appeal recognized liability where a suspended dealer used deception to obtain goods contrary to a lawful selective distribution scheme, holding that intentional, fraudulent circumvention of distribution contracts is actionable even when wholesalers are innocently misled, and that injunctive relief may issue to protect the contractual system.


Nat'l Phonograph Co. v. Edison-Bell Consol. Phonograph Co., [1908] 1 Ch. 335 (C.A.)