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Subject Area: Law
Topic: The American Revolution and Constitution

§ 212.: Laws regulating rates and charges of corporations.— - 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. 2 [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. 2.

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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§ 212.

Laws regulating rates and charges of corporations.—

The right of the legislature, to regulate the rates and charges of a corporation, has frequently been the subject of litigation in the courts of this country. The establishment of extensive and rich corporations, which are often enabled by their combined capital and by the possession of special franchises to make a practical monopoly of the business in which they are engaged, and consequently to demand of those, who are compelled by circumstances to have business dealings with the corporations, extortionate and unequal charges, is deemed to be a full and complete justification of the regulation of prices and charges in such cases. For these reasons, there is a general popular demand for legislative regulation of the rates and charges of the corporations.

The general power of the government to regulate prices has already been fully explained,2 and the constitutional limitations discussed. It will not be necessary to repeat here what has been stated there. It was ascertained by a study of the cases that where the government, by the grant of a more or less exclusive franchise, increases the economic powers of a person or persons, so as to create a monopoly against those to whom the franchise, is denied it had the power to regulate the charges of such person or persons, so that the public may obtain that reasonable enjoyment of the benefits arising out of the monopoly, which indeed was the consideration or inducement of the grant of the franchise.3 The Supreme Court of the United States has even gone further in the recognition of the legislative power to regulate prices, and asserted that, when circumstances make of a particular business “a virtual monopoly,” the legislature may prevent extortion by the regulation of prices.1 But in order to justify the legislative regulation of the charges of corporations, it will not be necessary to go to the length of this decision. In the first place, if the power to repeal or amend the charter is reserved to the State, no question can arise; for in the exercise of the power to amend, the legislature may require, as a condition of the continuance of the corporate existence, the observance of whatever police regulation it may see fit to establish, in the same manner, and to the same extent, that it may impose conditions of every sort and kind, in the original grant of the charter. When the power to amend or repeal is not reserved, the question becomes important, whether the corporation may be subjected to this regulation. In regard to police regulations generally, we have seen2 that the corporation occupies no vantage ground above the individual; that both corporations and natural persons may be subjected to the same regulations under like circumstances; and that the institution of new and more burdensome regulations, after the creation of the corporation, does not constitute any infringement of the corporate rights, provided no attempt is made, under the guise of police regulation, to destroy or impair any of the substantial rights of the corporation. It is, therefore, not difficult, under the principles explained and set forth in a previous section,3 to justify the regulation of the rates and charges of railroads, turnpikes, telegraph and telephone companies, and other corporations, to which the government has granted some special franchise—to each of the corporations named is given the right to appropriate land in the exercise of the right of eminent domain, without which it would be almost impossible to construct their lines or road—for the grant of the franchise made these corporations legal monopolies, as against the public, and consequently they became subject to police regulation, in order to protect the public from extortion. It has been generally held, with only one or two exceptions, that the legislature may regulate the charges of corporations of this kind,1 and change those regulations at will, unless a contract to maintain a stated rate of charge has been made with the corporation.2

But if a State law or railroad commission has established a maximum rate of charge, it has been held that special legislation, establishing a specific price for mileage tickets, will be in excess of the police power of the State.1

In Railway Co. v. Smith,2 Justice Peckham characterized such a statute, “as an abitrary enactment in favor of the persons spoken of (those who were able and willing to buy a mileage ticket) who, in the legislative judgment, should be carried at less expense than the other members of the community.”

But, as has been very fully explained in a preceding section,3 the power is now controlled by the judicial requirement, that the regulation of the rates and charges must be reasonable in the stipulation of the maximum.

Whether corporations, which receive no franchise or privilege from the government, may be subjected to State regulation of their charges in the conduct of their business,—for example, a corporation engaged in the flour milling or cotton manufacturing business—depends upon other grounds. Under the principle, established in Munn v. Illinois,4 such a regulation may be easily justified, where the business under peculiar circumstances has become a virtual monopoly. So, also, may a corporation of this kind be subjected to such a regulation, because the very creation of the corporation, which constitutes an authority for the compact combination of the capital of many persons in one business, may be considered a special franchise, increasing the power of those who compose the corporation, over the property and the necessities of others. There has been no need for the regulations of the charges of such corporations, and consequently we have few adjudications upon the subject.5

It has been stated, as the generally accepted doctrine, that the State cannot make a valid contract in limitation of the exercise of its police power.1 But a disposition is displayed by the authorities to make of the power to regulate the charges of corporations an exception to this general rule, by denying to the logislature the power to regulate such charges by subsequent laws, where the power to do so is denied by the charter, or where the lawful charges are stipulated in the charter. Chief Justice Waite, of the Supreme Court of the United States, expressed the opinion of the court on this point in the following language:—

“This company, in the transaction of its business, has the same rights and is subject to the same control as private individuals under the same circumstances. It must carry when called upon to do so, and can charge only a reasonable sum for the carriage. In the absence of any legislative regulation upon the subject, the courts must decide for it, as they do for private persons when controversies arise, what is reasonable. But when the legislature steps in and prescribes a maximum of charge, it operates upon this corporation the same as it does upon individuals engaged in a similar business. It was within the power of the company to call upon the legislature to fix permanently this limit and make it a part of the charter, and, if it was refused, to abstain from building the road and establishing the contemplated business. If that had been done the charter might have presented a contract against future legislative interference. But it was not and the company invested its capital, relying upon the good faith of the people and the wisdom and impartiality of the legislators for protection against wrong under the form of legislative regulation.”2

Where the charter or the general laws, under which the corporation has been incorporated, expressly stipulate what shall be the rate of charges which the corporation might make for its services;1 or the exclusive power to fix its own rates is expressly given to the corporation,2 there can be very little doubt that a binding contract has been thereby made by the State with the corporation, which, under the decisions already cited, would debar any future regulation of the charges of the corporation. But is a contract, which so operates as a bartering away of the police power of the State, to be inferred from a mere general authorization that the corporation may fix its own rates? All corporate charters, and general laws of incorporation, contain a statement of the general powers of the corporation, which does not amount to a contract that these powers are not subject to any future police regulation; and it would seem to be reasonable to distinguish the cases, in which there is an express stipulation that the corporation shall have the “exclusive” right to fix its own charges, from those cases, in which there is only a general authorization to determine upon the rates of prices and charges. In the latter cases, it would seem to be sound to hold that there was not such a positive contract, as would preclude the future police regulation of the rates of charges. It has been so held in two cases.1

But where the charter of incorporation is taken subject to the reserved power to amend or repeal, the reserved power of amendment and repeal applies to this contract, that the corporation shall fix its own rates, as well as to any other rights and powers which might have been conferred by the charter.2

It has been recently held by the United States Circuit Court that, where corporations have been formed under a general incorporation law, which grants to the corporation the power to fix its own rates, no law will be a constitutional repeal of this authority which is limited in its application to the corporations of a limited locality, which have been formed thereunder. To be an effective and valid repeal of the law, it must apply to all corporations of the class throughout the State.3 The facts of this case were these: The general law of the State of Indiana for the incorporation of street railways throughout the State, gave by express provision to the railways incorporated thereunder the right to determine its rates of fare, but the power to amend or repeal any part of the law was expressly reserved. Subsequently, the legislature undertook to reduce the fares on street railways in cities of the first class, in which there was only one city, Indianapolis, to three cents. The Supreme Court of the State sustained the subsequent statute, holding that it was not a special act, in violation of the constitutional prohibition of special laws.1 But the United States Circuit Court held the statute to be unconstitutional on the ground, as stated above, that, since the statutory contract for exemption of the street railways from the regulations of its rates of fares was applicable to all the street railways throughout the State, the contract cannot be abrogated by any law which has a narrower application.

But, even when there is no contract in the way of the exercise by the legislature of the power to regulate the prices and charges of corporations, there is always the one unvarying limitation, that the rates which may be fixed by the legislature must not be so low, that the reasonable profits of the corporate business will be taken away. Where such a practical confiscation of the profits results from the legislative regulation of the rates of charges, the courts will unhesitatingly declare the regulation to be void and unconstitutional, as an interference with vested rights.2

Similar principles induced the Supreme Court of Kentucky to hold an act of the legislature unconstitutional, which authorized a turnpike company to charge toll of the citizens of a town, from which they were exempted by a provision of the charter of the turnpike company. This abrogation of the privilege of exemption of these citizens from the payment of the toll, was held to be unjustifiable as an exercise of the police power.3

[2]See ante, §§ 96, 97.

[3]See ante, § 96.

[1]Waite, Ch. J., in Munn v. Illinois, 94 U. S. 113. See the criticism of this decision in § 96.

[2]See ante, § 209.

[3]§ 96.

[1]Railroads—Chicago, etc., R. R. v. Iowa, 94 U. S. 115; Peck v. Chicago, etc., R. R., 94 U. S. 164, 176; Union Pacific Ry. v. U. S., 99 U. S. 700; Cin., H. & D. R. R. Co. v. Cole, 29 Ohio, 125; Iron R. R. Co. v. Lawrence Furnace Co., 29 Ohio St. 208; Chicago & Alton R. R. Co. v. People ex rel. Koerner, 67 Ill. 11 (16 Am. Rep. 599); Ruggles v. People, 91 Ill. 256; Illinois Cent. R. R. Co. v. People, 95 Ill. 313; Blake v. Winona etc., R. R. Co., 19 Minn. 418 (18 Am. Rep. 345); s. c. 94 U. S. 180; Mobile & M. R. R. Co. v. Steiner, 61 Ala. 559; Chicago B. & Q. Ry. Co. v. Jones, 149 Ill. 361; Southern Pac. Ry. Co. v. Bd. of R. R. Commissioners, 78 Fed. 236; Smith v. Lake Shore & M. S. Ry. Co., 114 Mich. 460; Campbell v. Chicago, M. & St. P. Ry. Co., 86 Iowa, 587; State v. Southern Pac. Ry. Co., 23 Oreg. 424. Contra, Atty.-Gen. v. Chicago, etc., R. R. Co., 35 Wis. 425; Philadelphia, etc., R. R. Co. v. Bowers, 4 Houst. 506. Gas and water companies—Spring Valley Waterworks v. Schottler, 110 U. S. 347; State v. Columbus Gaslight, etc., Co., 34 Ohio St. 216 (32 Am. Rep. 390). Rogers’ Park Water Co. v. Fergus, 178 Ill. 571, where it was held that the power to regulate the water rates was a continuing one, so that the rates may be changed from time to time, at the will of the legislative power. Ferry companies—Parker v. Metropolitan R. R. Co., 109 Mass. 507. Telephone Companies—Hockett v. State, 105 Ind. 599. Bridge companies—Commonwealth v. Covington & C. Bridge Co. (Ky.), 21 S. W. 1042; Covington & C. Bridge Co. v. Commonwealth (Ky.), 22 S. W. 851. Turnpike roads—Covington & L. Turnpike Co. v. Sandford, 164 U. S. 578; Winchester & L. Turnpike Road Co. v. Croxton, 98 Ky. 739; Louisville & T. Turnpike Road Co. v. Boss (Ky.), 44 S. W. 981. A booming company—Proprietors of Machias Boom v. Sullivan, 85 Me. 343.

[2]Rogers Park Water Co. v. Fergus, 178 Ill. 571.

[1]Lake Shore & M. S. Ry. Co. v. Smith, 173 U. S. 684; reversing Smith v. Lake Shore & M. S. Ry. Co., 114 Mich. 460; Beardsley v. N. Y. L. E. & W. Ry. Co. (N. Y. 1900), 56 N. E. 488; reversing s. c. 44 N. Y. S. 175.

[2]173 U. S. 684.

[3]§ 97.

[4]94 U. S. 131.

[5]See ante, §§ 96, 97, where the few cases which the authorities had been able to find are fully discussed. See, also, Deposit Bk. v. Daviess County (Ky.), 39 S. W. 1030.

[1]See ante, § 210.

[2]Ch. J. Waite in Chicago, etc. R. R. Co. v. Iowa, 94 U. S. 155. See, also, Spring Valley Waterworks v. Schottler, 110 U. S. 347; Hamilton v. Keith, 5 Bush, 458; Illinois Cent. R. R. Co. v. People, 95 Ill. 113; Sloan v. Pacific R. R. Co., 61 Mo. 24 (21 Am. Rep. 397); Farmers’ Loan, etc., v. Stone et al., U. S. C. C. Miss., 18 Cent. L. J. 472; Georgia R. R. and Banking Co. v. Smith, 128 U. S. 174; Reagan v. Farmers’ Loan and Trust Co., 154 U. S. 362; Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U. S. 339; Covington & L. Turnpike Road Co., v. Sandford, 164 U. S. 574; City of Danville v. Danville Water Co., 178 Ill. 299; Pingree v. Michigan Cent. R. R. Co. (Mich.), 76 N. W. 635; New Orleans Gas Co. v. Louisiana Light, etc., Co., 115 U. S. 650; Santa Ana Water Co. v. Town of San Buenaventura, 56 Fed. 339.

[1]As in City of Danville v. Danville Water Co., 178 Ill. 299; Pingree v. Michigan Central R. R. Co. (Mich.), 76 N. W. 635. In the last case, the railroad was given the power to fix its own rates “subject only” to a stipulated maximum rate for passengers.

[2]As in Santa Ana Water Co. v. Town of San Buenaventura, 56 Fed. 339.

[1]State v. Southern Pac. Ry. Co., 23 Oreg. 424; Commonwealth v. Covington & C. Bridge Co. (Ky.), 21 S. W. 1042; Commonwealth v. Covington & C. El. Ry. & Bridge & Transfer Co. (Ky.), 21 S. W. 1042; Covington & C. Bridge Co. v. Commonwealth (Ky.), 22 S. W. 851.

[2]Beardsley v. New York L. E. & W. Ry. Co., 15 App. Div. 251; 44 N. Y. S. 175; City of Indianapolis v. Navin, 151 Ind. 139; Columbus Ins. & Banking Co. v. First Nat. Bank, 73 Miss. 96; Sweetzer v. First Nat. Bank, 73 Miss. 96. In the last two cases, the authorization in the charters of the banks, of the power to charge any rate of interest which they may determine, was held to be subject to repeal by subsequent legislation.

[3]Central Trust Co. v. Citizens St. Ry. Co., 82 Fed. 1.

[1]City of Indianapolis v. Navin, 151 Ind. 139.

[2]Cleveland Gaslight & Coke Co. v. City of Cleveland, 71 Fed. 610; Milwaukee Electric Ry. & Light Co. v. City of Milwaukee, 87 Fed. 577; Central Trust Co. of N. Y. v. City of Milwaukee, 87 Fed. 577; San Joaquin & King’s River & Canal Irrigation Co. v. Stanislaus County, 90 Fed. 516; Ball v. Rutland Ry. Co., 93 Fed. 573. See, also, ante, § 97, in which this principle is fully explained, in connection with the general discussion of the subject of the regulation of prices and charges.

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