Fourteenth Amendment, Section 1:
All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
In examining whether the Due Process Clause allows the regulation of business prices, the Supreme Court, almost from the inception of the Fourteenth Amendment, has devoted itself to the examination of two questions: (1) whether the clause restricted such regulation to certain types of business, and (2) the nature of the regulation allowed as to those businesses.
Types of Businesses that May Be Regulated
For a brief interval following the ratification of the Fourteenth Amendment, the Supreme Court found the Due Process Clause to impose no substantive restraint on the power of states to fix rates chargeable by any industry. Thus, in Munn v. Illinois, 1 the first of the
Granger Cases, maximum charges established by a state for Chicago grain elevator companies were challenged, not as being confiscatory in character, but rather as a regulation beyond the power of any state agency to impose. 2 The Court, in an opinion that was largely dictum, declared that the Due Process Clause did not operate as a safeguard against oppressive rates, and that, if regulation was permissible, the severity of it was within legislative discretion and could be ameliorated only by resort to the polls. Not much time elapsed, however, before the Court effected a complete withdrawal from this position, and by 1890 3 it had fully converted the Due Process Clause into a restriction on the power of state agencies to impose rates that, in a judge’s estimation, were arbitrary or unreasonable. This state of affairs continued for more than fifty years.
Prior to 1934, unless a business was
affected with a public interest, control of its prices, rates, or conditions of service was viewed as an unconstitutional deprivation of liberty and property without due process of law. During the period of its application, however, the phrase,
business affected with a public interest, never acquired any precise meaning, and as a consequence lawyers were never able to identify all those qualities or attributes that invariably distinguished a business so affected from one not so affected. The most coherent effort by the Court was the following classification prepared by Chief Justice Taft: 4
(1) Those [businesses] which are carried on under the authority of a public grant of privileges which either expressly or impliedly imposes the affirmative duty of rendering a public service demanded by any member of the public. Such are the railroads, other common carriers and public utilities. (2) Certain occupations, regarded as exceptional, the public interest attaching to which, recognized from earliest times, has survived the period of arbitrary laws by Parliament or Colonial legislatures for regulating all trades and callings. Such are those of the keepers of inns, cabs and grist mills. (3) Businesses which though not public at their inception may be fairly said to have risen to be such and have become subject in consequence to some government regulation. They have come to hold such a peculiar relation to the public that this is superimposed upon them. In the language of the cases, the owner by devoting his business to the public use, in effect grants the public an interest in that use and subjects himself to public regulation to the extent of that interest although the property continues to belong to its private owner and to be entitled to protection accordingly.
Through application of this formula, the Court sustained state laws regulating charges made by grain elevators, 5 stockyards, 6 and tobacco warehouses, 7 as well as fire insurance rates 8 and commissions paid to fire insurance agents. 9 The Court also voided statutes regulating business not
affected with a public interest, including state statutes fixing the price at which gasoline may be sold, 10 regulating the prices for which ticket brokers may resell theater tickets, 11 and limiting competition in the manufacture and sale of ice through the withholding of licenses to engage in such business. 12
In the 1934 case of Nebbia v. New York, 13 however, the Court finally shelved the concept of
a business affected with a public interest, 14 upholding, by a vote of five-to-four, a depression-induced New York statute fixing fluid milk prices.
Price control, like any other form of regulation, is unconstitutional only if arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt, and hence an unnecessary and unwarranted interference with individual liberty. 15 Conceding that
the dairy industry is not, in the accepted sense of the phrase, a public utility, that is, a business
affected with a public interest, the Court in effect declared that price control is to be viewed merely as an exercise by the government of its police power, and as such is subject only to the restrictions that due process imposes on arbitrary interference with liberty and property.
The due process clause makes no mention of sales or of prices. . . . 16
Having thus concluded that it is no longer the nature of the business that determines the validity of a price regulation, the Court had little difficulty in upholding a state law prescribing the maximum commission that private employment agencies may charge. Rejecting contentions that the need for such protective legislation had not been shown, the Court, in Olsen v. Nebraska ex rel. Western Reference and Bond Ass'n 17 held that differences of opinion as to the wisdom, need, or appropriateness of the legislation
suggest a choice which should be left to the States; and that there was
no necessity for the State to demonstrate before us that evils persist despite the competition between public, charitable, and private employment agencies. 18
Substantive Review of Price Controls
Ironically, private businesses, once they had been found subject to price regulation, seemed to have less protection than public entities. Thus, unlike operators of public utilities who, in return for a government grant of virtually monopolistic privileges must provide continuous service, proprietors of other businesses receive no similar special advantages and accordingly are unrestricted in their right to liquidate and close. Owners of ordinary businesses, therefore, are at liberty to escape the consequences of publicly imposed charges by dissolution, and have been found less in need of protection through judicial review. Thus, case law upholding challenges to price controls deals predominantly with governmentally imposed rates and charges for public utilities.
In 1886, Chief Justice Waite, in the Railroad Commission Cases, 19 warned that the
power to regulate is not a power to destroy, and . . . the State cannot . . . do that which in law amounts to a taking of property for public use without just compensation, or without due process of law. In other words, a confiscatory rate could not be imposed by government on a regulated entity. By treating
due process of law and
just compensation as equivalents, 20 the Court was in effect asserting that the imposition of a rate so low as to damage or diminish private property ceased to be an exercise of a state’s police power and became one of eminent domain. Nevertheless, even this doctrine proved inadequate to satisfy public utilities, as it allowed courts to intervene only to prevent imposition of a confiscatory rate, i.e., a rate so low as to be productive of a loss and to amount to taking of property without just compensation. The utilities sought nothing less than a judicial acknowledgment that courts could review the
reasonableness of legislative rates.
Although as late as 1888 the Court doubted that it possessed the requisite power to challenge this doctrine, 21 it finally acceded to the wishes of the utilities in 1890 in Chicago, M. & St. P. Railway v. Minnesota. 22 In this case, the Court ruled that
[t]he question of the reasonableness of a rate . . . , involving as it does the element of reasonableness both as regards the company and as regards the public, 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 reasonable 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. . . .
Although the Court made a last-ditch attempt to limit the ruling of Chicago, M. & St. P. Railway v. Minnesota to rates fixed by a commission as opposed to rates imposed by a legislature, 23 the Court in Reagan v. Farmers' Loan & Trust Co. 24 finally removed all lingering doubts over the scope of judicial intervention. In Reagan, the Court declared that,
if a carrier . . . attempted to charge a shipper an unreasonable sum, the Court, in accordance with common law principles, would pass on the reasonableness of its rates, and has
jurisdiction . . . to award the shipper any amount exacted . . . in excess of a reasonable rate . . . . The province of the courts is not changed, nor the limit of judicial inquiry altered, because the legislature instead of the carrier prescribes the rates. 25 Reiterating virtually the same principle in Smyth v. Ames, 26 the Court not only obliterated the distinction between confiscatory and unreasonable rates but contributed the additional observation that the requirements of due process are not met unless a court further determines whether the rate permits the utility to earn a fair return on a fair valuation of its investment.
Early Limitations on Review
Even while reviewing the reasonableness of rates, the Court recognized some limits on judicial review. As early as 1894, the Court asserted that
[t]he courts are not authorized to revise or change the body of rates imposed by a legislature or a commission; they do not determine whether one rate is preferable to another, or what under all circumstances would be fair and reasonable as between the carriers and the shippers; they do not engage in any mere administrative work; but still there can be no doubt of their power and duty to inquire whether a body of rates . . . is unjust and unreasonable, . . . and if found so to be, to restrain its operation. 27 One can also infer from these early holdings a distinction between unreviewable fact questions that relate only to the wisdom or expediency of a rate order, and reviewable factual determinations that bear on a commission’s power to act. 28
Further, the Court placed various obstacles in the path of the complaining litigant. Thus, not only must a person challenging a rate assume the burden of proof, 29 but he must present a case of
manifest constitutional invalidity. 30 And, if, notwithstanding this effort, the question of confiscation remains in doubt, no relief will be granted. 31 Moreover, even the Court was inclined to withhold judgment on the application of a rate until its practical effect could be surmised. 32
In the course of time this distinction solidified. Thus, the Court initially adopted the position that it would not disturb findings of fact insofar as such findings were supported by substantial evidence. For instance, in San Diego Land Company v. National City, 33 the Court declared that
the courts cannot, after [a legislative body] has fairly and fully investigated and acted, by fixing what it believes to be reasonable rates, step in and say its action shall be set aside and nullified because the courts, upon a similar investigation, have come to a different conclusion as to the reasonableness of the rates fixed. . . . [J]udicial interference should never occur unless the case presents, clearly and beyond all doubt, such a flagrant attack upon the rights of property under the guise of regulations as to compel the court to say that the rates prescribed will necessarily have the effect to deny just compensation for private property taken for the public use. And, later, in a similar case, 34 the Court expressed even more clearly its reluctance to reexamine ordinary factual determinations, writing,
we do not feel bound to reexamine and weigh all the evidence . . . or to proceed according to our independent opinion as to what were proper rates. It is enough if we cannot say that it was impossible for a fair-minded board to come to the result which was reached. 35
These standards of review were, however, abruptly rejected by the Court in Ohio Valley Water Co. v. Ben Avon Borough 36 as being no longer sufficient to satisfy the requirements of due process, ushering in a long period during which courts substantively evaluated the reasonableness of rate settings. The U.S. Supreme Court in Ben Avon concluded that the Pennsylvania
Supreme Court interpreted the statute as withholding from the courts power to determine the question of confiscation according to their own independent judgment . . . . 37 Largely on the strength of this interpretation of the applicable state statute, the Court held that, when the order of a legislature, or of a commission, prescribing a schedule of maximum future rates is challenged as confiscatory,
the State must provide a fair opportunity for submitting that issue to a judicial tribunal for determination upon its own independent judgment as to both law and facts; otherwise the order is void because in conflict with the due process clause, Fourteenth Amendment. 38
History of the Valuation Question
For almost fifty years the Court wandered through a maze of conflicting formulas and factors for valuing public service corporation property, including
fair value, 39
reproduction cost, 40
prudent investment, 41
going concern value and good will, 43
salvage value, 44 and
past losses and gains, 45 only to emerge from this maze in 1944 at a point not very far removed from Munn v. Illinois and its deference to rate-making authorities. 46 By holding in FPC v. Natural Gas Pipeline Co. 47 that
[t]he Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas, and in FPC v. Hope Natural Gas Co. 48 that
it is the result reached not the method employed which is controlling, . . . [that] [i]t is not the theory but the impact of the rate order which counts, [and that] [i]f the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end, the Court, in effect, abdicated from the position assumed in the Ben Avon case. 49 Without surrendering the judicial power to declare rates unconstitutional on the basis of a substantive deprivation of due process, 50 the Court announced that it would not overturn a result it deemed to be just simply because
the method employed [by a commission] to reach that result may contain infirmities. . . . [A] Commission’s order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order . . . carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. 51
In dispensing with the necessity of observing the old formulas for rate computation, the Court did not articulate any substitute guidance for ascertaining whether a so-called end result is unreasonable. It did intimate that rate-making
involves a balancing of the investor and consumer interests, which does not, however,
'insure that the business shall produce net revenues.' . . . From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock. . . . By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. 52