Federal Courts and Economic Regulation

The Supreme Court's invocation of substantive due process of law to strike down state legislation stirred great controversy. In the case of state legislation, the Court relied on a substantive interpretation of the due-process clause of the Fourteenth Amendment to calibrate the extent of the states' police powers. The Court also considered the scope of state and congressional regulatory authority under the commerce clause, an issue of special importance given the increasingly interdependent character of the industrial market economy.

The first important federal judicial test of state regulation came in the Slaughterhouse Cases ( 1873). The Republican-controlled legislature of Louisiana in 1869 passed a law giving one major slaughterhouse in New Orleans a virtual monopoly over the slaughtering of all beef, hogs, and other livestock. Unsanitary conditions in the meat preparation industry, not only in New Orleans but also elsewhere in the nation, led the legislature to act using its police powers. Yet the measure had political overtones, because rival Republican and Democratic entrepreneurs were competing to control the lucrative flow of Texas cattle to New Orleans and the subsequent distribution of the processed beef. The Republican legislature awarded its political friends in the Crescent City Live Stock Handling and Slaughterhouse Company the franchise, making the erstwhile Confederate and Democratic butchers conspicuous losers.

The Democratic butchers sued. They had two principal claims, both made under the recently adopted Fourteenth Amendment. First, they charged that the legislation abridged their privileges and immunities (their rights, in simple terms) as citizens of the United States. Second, they claimed that the legislation also violated the due- process clause of the Fourteenth Amendment. Behind these assertions rested assumptions about what Congress had intended when it passed the amendment and the states ratified it. Counsel for the Republican monopoly claimed that not only did Louisiana have sufficient authority under the police power to enact that law but that, in any case, the fundamental rights in controversy remained under the control of the states. Furthermore, they contended that the protections accorded by the due-process clause applied only to blacks, because Congress passed the amendment to protect newly freed slaves. The plaintiff Democrats argued that the due-process clause had created a substantive national right to pursue whatever lawful calling an individual wished, unfettered by state legislative restrictions. The new amendment, they insisted, gave them greater security than had existed before the war, because there was no doubt--the Fourteenth Amendment said as much--that the due-process clause applied to the states.

By the narrow margin of five to four, the Court sustained the Louisiana statute. Justice Samuel Miller, whom President Abraham Lincoln had appointed, wrote for the majority. The Fourteenth Amendment, Miller said, did nothing to change state control

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over fundamental rights included in the privileges and immunities clause. Moreover, the states' regulatory powers were paramount, even if they led to a monopoly. To apply the Fourteenth Amendment in the present case, Miller observed, would "constitute the Court a perpetual censor upon all legislation of the States on the civil rights of their own citizens," and thus interfere with licensing acts, liquor regulation, hours of labor, and child labor laws. ²² The Court "joined the other sectors of the postwar polity in affirming the principle that government might act . . . positively . . . in the realm of economic policy." ²³

Four years later the justices decided another police powers case, and they once again affirmed state economic regulatory authority. Munn v. Illinois ( 1877) involved one of five state laws, so-called Granger laws, which stipulated the amount of money that a grain elevator operator could charge for storing grain and provided penalties if these rates were exceeded. Ira Munn was one of the largest and most unscrupulous elevator operators in Chicago, and he had been found guilty in state court of violating the act. His counsel appealed to the Supreme Court, arguing that the Fourteenth Amendment's due-process clause prohibited such regulation because it interfered with Munn's practice of his vocation.

The Court decided for Illinois by a decisive margin of seven to two. Chief Justice Morrison R. Waite, writing for the majority, ignored the Fourteenth Amendment issue and concentrated instead on the scope of state regulatory authority. Waite applied the "public interest doctrine," which had flourished in antebellum state supreme courts and legislatures, to sustain the Illinois act. "When private property is devoted to a public use," Waite wrote, "it is subject to public regulation." The owner of property "affected with a public interest . . . must submit to be controlled by the public for the common good, to the extent of the interest thus created." If legislatures abused their police powers, Waite insisted that "the people must resort to the polls, not to the courts." ²⁴

Even though Ira Munn lost his case, the Court may well have accepted his major premise: that the Fourteenth Amendment banned certain kinds of state-imposed regulations of private business. The decision left open the possibility that wholly private businesses (those that used property not directly affected with a public interest) would not be subject to regulation by the state. Furthermore, Waite concluded that where the commerce involved was of an interstate character, the commerce clause of the Constitution would override the police powers of the state to regulate even a business affected with a public interest. The responsibility for regulating those businesses belonged to Congress, Waite observed, and not to the state legislatures.

Lawyers with business clients unhappy with state regulation seized on these openings. Their task was facilitated by two developments. First, the Removal Act of 1875 permitted them to remove regulatory cases from generally hostile state courts into the federal courts where they could advance the substantive due-process and commerce clause arguments. Second, the Supreme Court in Santa Clara County v. Southern Pacific R.R. Co. ( 1886) held that a corporation was a person under the meaning of the Fourteenth Amendment.

In the remaining decades of the nineteenth century the justices became increasingly innovative in their approach to the due-process and commerce clauses, often borrowing liberally from the briefs of attorneys who argued against state regulation. In one sense, the Court turned more conservative: the decisions that followed Munn had

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the distributive consequence of favoring capital. But the direction of the Court after Munn can also be understood as an affirmation of individual rights over special privilege conferred by the states. In both instances, the justices carved out for themselves an ever-widening role in formulating public policy and in exercising a monopoly over interpretation of the Constitution.

The Court's actions were so far-reaching that Congress was forced to act. The crucial case was Wabash, St. Louis, and Pacific Railway Co. v. Illinois ( 1886). The justices had previously held that the states, through their police powers, could exercise jurisdiction over interstate commerce in the absence of congressional legislation. State regulation had considerable support in a federal system that continued, even amidst explosive economic growth, to cherish local control. In Wabash, however, the Court severely curtailed state regulation, finding that even when a state regulated commerce (e.g., railroads) that operated within its boundaries, it might still indirectly affect some interstate commerce. The states, according to Justice Miller speaking for the Court, had attempted to do what the Constitution explicitly prohibited, that is, to regulate interstate commerce. The decision was so sweeping that the following year, Congress, which had been wrangling over the issue for a decade, created the Interstate Commerce Commission (ICC).

The Court accepted the constitutionality of the ICC but steadily sliced away at its powers. The justices by the beginning of the twentieth century had held that the ICC lacked power over determining rates and restricted its investigatory powers. Justice John Marshall Harlan, who was often critical of the work of his colleagues, observed in 1897 that the Court had gone "far to make the Commission a useless body for all practical purposes." ²⁵ Between then and 1906, the agency won only one major case out of sixteen before the high bench. When Progressives, in the Elkins Act ( 1903) and the Hepburn Act ( 1906), strengthened the power of the ICC to set maximum freight rates, the Court retreated, and the ICC, while still somewhat hamstrung in its authority, entered a period of considerably greater activity.

The justices also invoked due-process arguments to curb state regulatory agencies. The turning point was Chicago, Milwaukee and St. Paul Railway Co. v. Minnesota ( 1890). The state of Minnesota adopted legislation establishing a railroad and warehouse commission, with power to determine the maximum a railroad could charge for hauling freight within the state. The railroad had no choice but to charge the rate established by the commission and the railroad had no opportunity to appeal the matter to a court if it disagreed with the rate finding. The case reached the Court at a time of great labor and farmer unrest, and conservative elements charged that the Minnesota legislation fostered "socialism."

The Court struck down the law by a vote of six to three. The justices' decision was in some ways unexpected, because they had previously sustained state legislation that permitted administrative bodies to determine what constituted a reasonable rate. The lawyers for the railroads, however, appealed to the Court not only on the basis of the due-process clause of the Fourteenth Amendment but also on the grounds that only courts could make a determination of reasonableness and that the new state administrative agencies were usurping judicial authority. The argument persuaded the justices, who may have felt that--given the social upheaval of the times--they had a special duty to protect property, albeit the property rights of railroads.

Justice Samuel Blatchford, a former New York railroad lawyer, spoke for the

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Court. "The question of the reasonableness of a rate," he wrote, "is eminently a question for judicial investigation, requiring due process of law for its determination. If the company is deprived of the power of charging rates for the use of its property, and such deprivation takes place in the absence of an investigation by judicial machinery, it is deprived of the lawful use of its property, and thus, in substance and effect, of the property itself, without due process of law." ²⁶ Blatchford's decision was not a strict invocation of substantive due process, but rather an appeal to the traditional procedural safeguards attached to public expropriations of private property. Still, it cleared the ground for the Court's subsequent affirmation of that doctrine. Blatchford's opinion also exhibited the broadened scope of judicial review, in which the Court not only inquired into the constitutionality of a measure (did it square with the letter of the Constitution) but also measured the effect of legislation. In this case, the Court judged the worth of a statute based on whether the user of property, a railroad, was receiving a reasonable return.

The Court's transformation of the due-process clause of the Fourteenth Amendment was completed in Allgeyer v. Louisiana ( 1897), the first case in which the justices relied fully on a substantive interpretation of due process to strike down a state law. This case involved a statute that prohibited residents of the state from doing business with a New York life insurance company. Louisiana was effectively blocking the transaction of interstate business activity, something that the Supreme Court had consistently championed since before the Civil War. The justices invalidated the Louisiana law, however, on substantive due-process grounds. The distributional effect of the decision was hardly to protect the rich from the poor, because the measure opened to citizens of the state the opportunity to engage an effective competitor to insurance companies within the state.

Date: 2015-01-29; view: 748