STATE REGULATION OF CORPORATE PROFITS.

Constitutional law-State regulation of corporate profits-Effect of different grants.

1. At common law a public carrier is under the restriction that its charges be reasonable, and that it do not abuse its powers. This applies also to telegraph and kindred corporations.

2. When the legislative grant is silent on the subject of charges, the right of the state to restrict them is unquestionable.

3. When the grant gives the power to the corporation to fix charges in general terms and prescribes no maximum, the right of the state to restrict charges is now settled on the ground that, in conferring upon the corporation the right to charge for the services rendered without expressly abdicating its power of control, the state must be presumed to have reserved it.

4.

When the grant is subject to a maximum limit, nothing which observes the limit can be deemed abuse.

5. Corporate profits may be rightfully considered in determining the reasonableness of charges.

6. Whenever the power to amend or repeal at will has been reserved, the control of the state must be deemed practically absolute, and the corporators have only an estate at will in their franchises. But in the case of the repeal of corporate franchises, the corporators retain their property, and radical changes or repeals must be made with reference to the fundamental rules of right and justice.

7. The Dartmouth College case, 4 Wheat., held to be applicable in its full extent only to eleemosynary corporations.

[Comments by Judge Cooley, in the North American Review, on recent decisions in the

U. S. Supreme Court.]

At the time when the Federal Constitution was adopted, municipal government in America was a very simple affair, and was managed with ease and economy through local officers, who provided for the making and repairing of roads, looked after disorderly characters, abated local nuisances, and levied rates for the few and simple public needs. When the growing population of a particular locality appeared to need larger powers of local government, the legislature granted them, but they often involved little more than the holding of fairs as a means of building up local trade, the institution of a local court for the trial of petty cases, a few simple precautions against fires, the employment of watchmen, provision for the streets, and authority to levy taxes under very narrow restrictions to meet the corporate expenses for these purposes. State government was more complicated, but it was vastly less so than it has since become.

Changes, the most of which have taken place within fifty years, have made everything different. The railroad has come,

for good and for evil, and has displaced not only the old stagecoach, but to a large extent also the use for trade and travel of the common roads. The state and its municipalities provide the common highway and keep it in repair, and it seems therefore to be within their authority, if not their duty, now that the railway has become the chief convenience of travel and transportation, to provide that also. The use of coal gas has become common for illuminating purposes, and the proper police of all urban communities requires that the authorities should provide it, or something equivalent or better, for public streets and places. The telegraph and the telephone are to some extent superseding the post-office, and are quite as much a public necessity. The advance in sanitary science makes us acquainted with the dangers of imperfect city sewerage, and of impure water, and we are compelled to abandon the town pump, and to bring from a distance an abundant supply of pure water for domestic and public use. We also see the necessity of giving to the city population the opportunity of breathing pure air in parks which are shaded with trees and refreshed with fountains. Here are

important public wants, every one of which is expensive, and must be provided for, if at all, at a cost of taxation which to our frugal ancestors would have seemed almost like confiscation.

When a public need is thus discovered or felt, the first question often is, whether it shall be met by the government directly, and at its own expense, or whether the franchise of providing for it shall be conferred upon individuals, with the privilege of making it a source of profit. The former is the method which apparently is most consistent with republican institutions, for it grants no favors, and does not complicate individual with governmental affairs. But in practice it is found subject to very serious objections. We know what some of these are, for they have been confronting us for many years, and subjecting us. sometimes to disaster and disgrace. The cost leads to great debts, and these are commonly great calamities. The management of railways, lighting works, the telegraph, or the telephone is a business, requiring in those who take it up not only a scientific preparation and training, but also the same attention, care, prudence, economy, and circumspection which in any private

business are the requisites of success. Whether in the hands of a municipality such a business will be subjected to the proper management must depend, directly or remotely, upon the annual elections. These, when honestly conducted, with exclusive regard to the proper municipal issues, are by no means certain to bring to the front men of business energy and capacity, and when they do, are not sure to put them in the places most suited to their abilities. But when municipal elections are, as now, conducted upon national issues, with which they have no concern whatever, we may take it for granted that the majority of those who seek and obtain the offices will not be men distinguished for their business qualities, or who have been found successful in the management of their own affairs. The public works of states and cities are, therefore, likely to fall into the hands of those who will not manage them with skill or with high business capacity. But what is worse is, that, so long as the practice continues of making municipal offices and places the spoils of party warfare, it must be expected, and will certainly happen, that the dominant party or its local leaders will manage from the control of public works to derive profits for themselves at the expense of the community. There seems, therefore, to be strong, if not controlling, reasons, whenever the supply of a public convenience can assume the form of a private and continuous business, for permitting it to take that form, and for granting to individuals the necessary franchise for the purpose.

But to grant such a franchise is to give a special privilege which presumably has pecuniary value. It is therefore to prefer some citizens, who are made the recipients of the grant, over citizens in general; and though this is unavoidable, it is in a sense invidious. In many cases, also, the privilege from its nature must be exclusive; and we are to have persons carrying on a business as a public agency, with the public as a customer, but without the competition which, in the case of ordinary business, is supposed to be the sole protection against extortionate demands. We thus have the odious features of monopoly, as the result of a grant of a public privilege; and this will be obnoxious in proportion to the opportunity it gives for unjust exactions, and to the neglect on the part of the state to provide against them.

But suppose the state, when granting the privilege, makes no provision against an extortionate use of it for the purposes of private gain, is it powerless to do so afterward? No question. more important than this has hitherto demanded the attention of the country. If the state may grant irrepealable and unchangeable franchises of all sorts, we may find, after a few years of foolish or corrupt rule, that it has bartered away a large part of its ability to be useful to the people, and that, instead of existing for the equal and common good of all, it has built up privileged classes to whom the functions of government have been granted or pledged. It would be easy to imagine a state of things that might become intolerable.

When the force, effect, or binding nature of a public grant,. and especially of a corporate grant, is in question, we turn spontaneously to the Dartmouth College case for the light and the law that must guide and govern us. That case has tended to fix in the public mind the impression that whatever can be obtained in the form of a legislative grant has a property character affixed to it, which entitles it to common protection with the earnings of industry and the legitimate accumulations of capital, and that it also has something of the sacredness supposed to inhere in public compacts and treaties, and must be specially guarded for that reason. The decision has been extolled beyond measure for its pre-eminent wisdom and beneficence; and it has been assumed that, without it, the protection of contracts would have been impossible, and especially that the prodigious results of corporate organization, which has done so much to enrich and improve the country, could never have been attained. But if the Dartmouth College case brought blessings, it also created alarm; the corporations protected by it acquired a greatness, wealth, and power which the political instincts of the people made them distrust and fear; and in recent constitution making, they have given distinct expression to the belief that a legislature with authority to tamper with corporate powers is less to be feared than at legislature with authority to grant irrepealable franchises and privileges. The revised State Constitutions of recent date have therefore taken from the legislative department the power to grant corporate charters, except subject to the unalterable con

dition, as a part of the contrrct, that the charter may be altered. or repealed in the legislative discretion; and that condition, in the case of nearly all recent corporations, is a part of the law of their being. It has been imposed under the influence of a fear that, without it, not only were corporations likely to become too powerful for effectual control, but also that the state was in danger of stripping itself for their benefit of essential powers.

There are still some charters, however, that, having been granted without the condition, are not subject to repeal or amendment at the legislative will; there are also important franchises in the hands of unincorporated persons. And in examining the state power to regulate charges, it seems necessary to consider it, first, as it would exist at the common law; second, under charters not repealable or amendable; and third, under charters which are subject to legislative control.

First. Of the corporations serving public ends, the most important are railways. These are chartered that they may establish the business of carrying for hire the property and the persons of those who may desire that service. This is a business well known to the common law, and has long been recognized as having a semi-public character, which made it an exception to private business in general. The law permitted persons to assume the character of common carriers only upon certain conditions, one of which was that they should carry impartially for all persons. Another condition was that they should carry property at reasonable rates;* and, in the absence of special bargain, the law, when necessary, undertook to determine what might be reasonable rates under the circumstances. But, subject to these and a few other conditions, any one might offer his services as a public carrier; he needed no state permission for the purpose. And no doubt he might build a railroad and operate it in his business if he could purchase for his track a right of way, but he would operate it under the same common law conditions which other public carriers must observe. He would therefore be under the restriction that his charges should be reasonable.

* Harris v. Packwood, 3 Taunton, 264; Oppenheim v. Russell, 3 Bos. & Pul. 42; Ashmole . Wainwright, 2 Q. B. 837; Fitchburg R. Co. v. Gage, 12 Gray, 395; McDuffee v. Railroad Co. 52 N. H. 430; Johnston v. Railroad Co. 16 Fla. 623; Holford v. Adams, 2 Duer, 471; Streeter Railroad Co. 45 Wis. 383.