Corporations and the Supreme Court

Description: Group of people receiving a government charter permitting activities (primarily business) with certain of the rights and responsibilities of an individual.

Significance: From the 1880s until the 1930s, many Supreme Court decisions struck down government efforts to regulate business corporations. After 1936, however, the Court accepted most assertions of federal authority and became more involved in monitoring details.

Business corporations developed in the early United States, mainly in banking and finance. In McCulloch v. Maryland (1819), the Supreme Court upheld the federal government’s power to charter the second Bank of the United States. This ruling opened the way for the federal government to create the national banking system (1863), the federal reserve banks (1913), and the Federal Deposit Insurance Corporation (1933).

In Bank of Augusta v. Earle (1839), the Court ruled that a corporation chartered in one state was free to operate in another state unless the latter prohibited it. This was immensely valuable in promoting competition and the mobility of capital. In Santa Clara County v. Southern Pacific Railway Co. (1886), the Court affirmed that corporations, as well as people, were protected by the due process and equal protection provisions of the Fourteenth Amendment.

Defining Regulatory Scope

From 1866 to 1875, Congress adopted a series of Civil Rights acts designed to prevent discrimination against African Americans. Although these did not apply to employment, they potentially limited the opportunities for corporations to discriminate in matters relating to property and contract. However, a series of Supreme Court cases beginning in 1876 (including the Civil Rights Cases, 1883) denied federal jurisdiction over discrimination by private persons.

The coming of the railroads in the middle of the nineteenth century provided the first major opportunity for use of the corporate form outside of financial business. The inherent monopolistic nature of most railroads soon led to state experiments with rate regulation. In 1877, the Court upheld the authority of states to impose such regulations in Munn v. Illinois. However, in Wabash, St. Louis, and Pacific Railway Co. v. Illinois (1886), the Court forbade states to set rates for interstate shipments. This case helped persuade Congress to create the Interstate Commerce Commission to regulate rail rates in 1887.

By 1890, corporations had extended into many industries. Allegations of monopolistic practices against such firms as Standard Oil led to the adoption in 1890 of the Sherman Antitrust Act. The Court affirmed that collusion among separate firms was illegal in United States v. Trans-Missouri Freight Association (1897) and that the Sherman Antitrust Act could be used to block a corporate merger in Northern Securities Co. v. United States (1904). In two landmark cases in 1911, Standard Oil and American Tobacco corporations were broken up.

State regulation of rates charged by public utilities such as water, gas, and electricity suppliers also led to appeals to the Court. In Smyth v. Ames (1898), the court held that regulation could not deprive a company of a “fair return on the fair value” of its property used to serve the public.

Freedom of Contract

The early twentieth century brought extensive experimentation with protective labor legislation directed primarily against corporate employers. Until the 1930s, the Court was generally unsympathetic. In Lochner v. New York (1905), the Court struck down an 1897 New York statute limiting weekly work hours for employees. The Court held the law infringed the freedom of contract between worker and employer. Similar reasoning was used in 1923 to throw out a federal law setting minimum wages for women and children in the District of Columbia in Adkins v. Children’s Hospital. The Court also struck down a 1916 federal law to curb child labor in Hammer v. Dagenhart (1918).

The Supreme Court’s anti-interventionist position brought it into conflict with the efforts of President Franklin D. Roosevelt to deal with the economic depression of the 1930s. The National Industrial Recovery Act (NIRA) of 1933 authorized corporations and other business firms to form “codes of fair competition” collusive arrangements that might reduce output or increase prices to which all firms would have to adhere. The Court held that the program was unconstitutional in Schechter Poultry Corp. v. United States (1935). The Court also struck down the Agricultural Adjustment Act of 1933, the Railway Retirement Act of 1934, and the Guffy Coal Act of 1935, all of which had a powerful potential impact on corporations. The outraged Roosevelt sought legislation to increase the membership of the Court.

However, the Court then shifted to a permissive stance toward interventionist programs. It upheld the first federal minimum-wage law (1935) and the National Labor Relations Act of 1935 (also known as the Wagner Act) and revised agricultural and coal regulatory programs and laws regulating securities, exchanges, and holding companies. All these significantly restricted or mandated corporation actions.

Monitoring Details

In the 1960s, new federal economic interventions further restricted the discretionary management of business corporations. The Civil Rights Acts of 1964 and 1968 outlawed discrimination in employment, public accommodation, and housing. The Court upheld their constitutionality, repudiating the rulings of 1883, but sometimes had to rule on their applications. Therefore, in Los Angeles v. Manhart (1978), the Court ruled it was illegal to require women to pay more into an employer’s pension fund than males, even though women’s life expectancy was longer. It also decided, in Faragher v. City of Boca Raton (1998), that damage claims for sexual harassment could be upheld against employers even for conduct of which they were not aware and which was against company policy.

In Youngstown Sheet and Tube Co. v. Sawyer (1952), the Court struck down President Harry S Truman’s seizure of steel industry plants because of a labor dispute. In this case, the issue was one of proper government procedure. The Court also protected the right of corporations to influence public opinion in First National Bank of Boston v. Bellotti (1978). Numerous decisions on details have arisen out of the just compensation clause of the Fifth Amendment, including Penn Central Transportation Co. v. City of New York (1978) and Keystone Bituminous Coal Association v. DeBenedictis (1987).

Bibliography

Varat, Jonathan D., et al. Constitutional Law: Cases and Materials. 16th ed. Foundation Press, 1921.

Galub, Arthur L. The Burger Court, 1968-1984. Vol. 9 in The Supreme Court in American Life. Associated Faculty Press, 1986.

Miller, Arthur Selwyn. The Supreme Court and American Capitalism. 2nd print ed. Free Press, 1972.

Pollman, Elizabeth. “The Supreme Court and the Pro-Business Paradox.” Harvard Law Review, vol. 135, no. 1, Nov. 2021, harvardlawreview.org/print/vol-135/the-supreme-court-and-the-pro-business-paradox/. Accessed 13 Apr. 2023.