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 Front Page arrow Titles (by Subject) arrow § 97.: Later cases on regulating prices and charges—Regulations must be reasonable—What is a reasonable regulation, a judicial question.— - A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1

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Subject Area: Law
Topic: The American Revolution and Constitution

§ 97.: Later cases on regulating prices and charges—Regulations must be reasonable—What is a reasonable regulation, a judicial question.— - Christopher G. Tiedeman, A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1 [1900]

Edition used:

A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint (St. Louis: The F.H. Thomas Law Book Co., 1900). Vol. 1.

Part of: A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, 2 vols.

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§ 97.

Later cases on regulating prices and charges—Regulations must be reasonable—What is a reasonable regulation, a judicial question.—

The principle, enunciated in the case of Munn v. Illinois, by the Supreme Court of the United States, has been confirmed by a number of later cases, in the same court, and in other State courts.1

If the doctrine of Munn v. Illinois and of the Granger cases, relating to legislative regulation of railroad rates, had been left unlimited in its operation, the fear of Justice Field in his dissenting opinion2 that under the judgment of the court in that case “all property and all business are held at the mercy of a majority of its legislature,” would have been more than realized. Yielding to the demands of popular sentiment, the legislatures and railroad commissions have in a number of cases placed the maximum charges for freight and passengers so low that it was impossible for the railroads affected thereby to conduct their business with any reasonable profit on the capital invested. To have permitted these regulations to stand as lawful exercises of the police power would have been a justification of the confiscation of property under the guise of a police regulation for the prevention of extortion. A virtual confiscation like that is clearly beyond the police power.1 The contention for reasonable regulations of rates and charges led to the enunciation by the courts of the rule that no such regulation would be constitutional, if it prevented the railroad or other business from earning a reasonable profit on the capital invested, and that whether such a regulation was unreasonable, and hence unconstitutional, was a judicial and not a legislative question. This litigation culminated in, and was finally settled, in accordance with the principle just stated, by the Nebraska freight rate decision of the Supreme Court of the United States.2

In this case the Supreme Court of the United States pronounced the Nebraska freight rate law to be unconstitutional, in that it established maximum rates which were so low, that the railroads affected thereby could not with any reasonable profit carry on the intrastate business, which alone fell within the operation of the State regulation.

In giving judgment for the court Mr. Justice Harlan said, inter alia:—

“Undoubtedly that question [just compensation] could be more easily determined by a commission composed of persons whose special skill, observation and experience qualifies them to so handle great problems of transportation as to do justice to the public as well as to those whose money has been used to construct and maintain highways for the convenience and benefit of the people. But despite the difficulties that confessedly attend the proper solution of such questions, the court cannot shrink from the duty to determine whether it be true, as alleged, that the Nebraska statute invades or destroys rights secured by the supreme law of the land. No one, we take it, will contend that a State enactment is in harmony with that law simply because the legislature of the State has declared such to be the case; for that would make the State legislature the final judge of the validity of its enactment, although the Constitution of the United States and the laws made in pursuance thereof are the supreme law of the land, anything in the constitution or laws of any State to the contrary notwithstanding.

“The idea that any legislature, State or Federal, can conclusively determine for the people and for the courts that what it enacts in the form of law, or what it authorizes its agents to do, is consistent with the fundamental law, is in opposition to the theory of our institutions. The duty rests upon all courts, Federal and State, when their jurisdiction is properly invoked, to see to it that no right should by the supreme law of the land be impaired or destroyed by legislation. * * *

“In our judgment, it must be held that the reasonableness or unreasonableness of rate prescribed by a State for the transportation of persons and property wholly within its limits must be determined without reference to the interstate business done by the carrier, or to the profits derived from it. The State cannot justify unreasonably low rate for domestic transportation, considered alone, upon the ground that the carrier is earning large profits on its interstate business. So far as rates of transportation are concerned, domestic business should not be made to bear the losses on interstate business nor the latter the losses on domestic business. It is only rates for the transportation of persons and property between points within the State, that the State can prescribe; and when it undertakes to prescribe rates not to be exceeded by the carrier, it must do so with reference exclusively to what is just and reasonable, as between the carrier and the public, in respect of domestic business. The argument that a railroad line is an entity; that its income goes into, and its expenses are provided out of, a common fund; and that its capitalization is on its entire line, within and without the State, can have no application where the State is without authority over rates on the entire line and can only deal with local rates, and make such regulations as are necessary to give just compensation on local business.

“If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization; and the apparent value of the property and franchises used by the corporation, as represented by its stocks, bonds and obligations, is not alone to be considered when determining the rates that may be reasonably charged. What was said in Covington & Lexington Tpk. Road Co. v. Sandford, 164 U. S. 578, is pertinent to the question under consideration. It was there observed: ‘It cannot be said that a corporation is entitled, as of right, and without reference to the interests of the public, to realize a given per cent. upon its capital stock, when the question arises whether the legislature has exceeded its constitutional power in prescribing rates to be charged by a corporation controlling a public highway, stockholders are not the only persons whose rights or interests are to be considered. The rights of the public are not to be ignored. It is alleged here that the rates prescribed are unreasonable and unjust to the company and its stockholders. But that involves an inquiry as to what is reasonable and just for the public. * * * The public cannot properly be subjected to unreasonable rates in order that stockholders may earn dividends. The legislature has the authority, in every case, where its power has not been restrained by contract, to proceed upon the ground that the public may not rightfully be required to submit to unreasonable exactions for the use of a public highway established and maintained under legislative authority. * * * The utmost that any corporation, operating a public highway, can rightfully demand at the hands of the legislature, when exerting its general powers, is that it receives what, under all the circumstances, is such compensation for the use of its property as will be just, both to itself and to the public.”

“We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stocks, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case. We do not say that there may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience. On the other hand, what the public is entitled to demand is that no more be exacted from it for the use of a public highway then the services rendered by it are reasonably worth.”

But in every case, in which the reasonableness of a police regulation of rates and charges is the ground for attacking its constitutionality, it would seem natural to hold that the burden is on the carrier, elevator company, or other person, who is affected by the regulation, to prove that the maximum rate is unreasonable. This would be only a special application of the general rule of constitutional interpretation and construction, that a court will hold to the presumption in favor of the constitutionality of a legislative act, unless it has been forced to declare it unconstitutional by the removal of every reasonable doubt. Certainly, it is not unconstitutional for the legislature to declare the establishment by the legislature of a maximum rate to be prima facie evidence of its reasonableness.1

But while reasonable regulations of rates and charges can be enforced against corporations in general notwithstanding the Dartmouth College Case,1 they cannot be made to apply to corporations, which are operating under charters, in which the rates of compensation for the services of the corporations to the public are expressly fixed. The stipulation in the charter of the rate of compensation constitutes a part of the contract between the State and corporation, which cannot be abridged or altered by subsequent legislation,2 unless the power to amend the charter is expressly reserved; and then the subsequent regulation of charges by such corporations must be valid, as an amendment of the charter.3

Individuals may also have rights, which may, on the other hand, interfere with the legislative authorization to a corporation to make charges for its services. This proposition was laid down as law, in a case, where the legislature authorized a turnpike company to exact toll from the citizens of a town, who were exempted from paying toll by the charter of the company. The act, authorizing the collection of toll of these citizens, was held to be an unconstitutional interference with their vested rights.4

[1]See In re Annan, 50 Hun, 413; People v. Budd, 117 N. Y. 1 (see Justice Peckham’s dissenting opinion to the contrary, and approving of the position taken in the text of the preceding section); Budd v. People, 143 U. S. 517; Peeple v. Walsh, 143 U. S. 517; Brass v. State of North Dakota, 153 U. S. 391 (see dissenting opinions); State v. Brass, 2 N. D. 482; Cotting v. Kansas City Stock Yards Co., 79 Fed. 679 (principle applied to stock yards); Higginson v. Kansas City Stock Yards Co., 79 Fed. 679. In Frisbie v. United States, 157 U. S. 160, an act of Congress was sustained, which prohibited pension agents and attorneys from charging more than ten dollars for their services in procuring a pension.

[2]Munn v. Illinois, 94 U. S. 136.

[1]See Dillon v. Erie Ry. Co., 19 Misc. Rep. 116; 43 N. Y. S. 320.

[2]Smyth v. Ames, 169 U. S. 466; Smyth v. Higginson, 169 U. S. 466. See other cases in support of this rule of limitation. Clyde v. Richmond & D. Ry. Co., 57 Fed. 436; Huidekoper v. Duncan, 57 Fed. 436; City of Richmond v. So. Bell Telephone & Telegraph Co., 85 Fed. 19; Covington & L. Turnpike Co. v. Sandford, 164 U. S. 578; Mercantile Trust Co. v. Texas & Pac. Ry. Co., 51 Fed. 529; Same v. St. Louis S. W. Ry. Co. of Texas, Id.; Same v. Tyler S. E. Ry. Co. of Texas, Id.; Farmers’ Loan & Trust Co. v. Gulf, C. & S. F. Ry. Co., Id.; Same v. International & G. N. R. Co., Id.; Cotting v. Kansas City Stock Yards Co., 79 Fed. 679; Higginson v. Kansas City Stock Yards Co., 79 Fed. 679; Milwaukee Electric Ry. & Light Co. v. City of Milwaukee, 87 Fed. 577; Central Trust Co. of New York v. City of Milwaukee, 87 Fed. 577; Beardsley v. N. Y., Lake Erie & W. Ry. Co., 17 Misc. Rep. (N. Y.) 256; 40 N. Y. S. 1077; San Diego Water Co. v. City of San Diego, 118 Cal. 556; San Joaquin & King’s River Canal & Irrigation Co. v. Stanislaus County, 90 Fed. 516. In Smyth v. Ames, 169 U. S. 466, the opinion filed in the prior hearing was qualified by the statement of the court that the decision went no farther than to pronounce the rates of the Nebraska statute to be unreasonably low as an entirety, and that it is not to be construed as forbidding the State Commission to reduce rates on specific articles below the rates which were being charged when the decision was rendered.

[1]Chicago B. & Q. Ry. Co. v. Jones, 149 Ill. 361.

[1]See Tiedeman’s Unwritten Constitution of the United States, p. 54 et seq., and post, Chapter XV.

[2]Railway Co v. Smith, 128 U. S. 174; Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U. S. 339; Regan v. Trust Co., 154 U. S. 362.

[3]Central Trust Co. v. Citizens’ Street Ry. Co., 82 Fed. 1. See City of Indianapolis v. Navin, 151 Ind. 139, in which the Supreme Court of Indiana held that the express stipulation in the general law of incorporation of the right of street railways to fix their rates of fare did not prevent the subsequent reduction and regulation of rates of fare by a general law, even though that law was not enacted as an amendment of the charter. In the case, supra, of Central Trust Co. v. Citizens’ Street Ry. Co., the same regulation of the rates of fare of the Indianapolis street railways was held to be unconstitutional, in that the regulation was not an amendment to the charter, and that to be such an amendment, it would have to be made to apply to all street railways which had been incorporated under the general law of incorporation, which contained the stipulation that the railways shall have the right to fix their rates of fare.

[4]Louisville & T. Turnpike Co. v. Boss (Ky.), 44 S. W. 981.