Freedom of contract and the Supreme Court

Description: Also known as “liberty of contract,” the doctrine that individual persons and business firms should be free to enter into contracts without undue interference from government.

Significance: From 1897 to 1937, a probusiness Supreme Court used the freedom of contract doctrine to overturn numerous economic regulations designed to protect the interests of workers and the general public.

The Supreme Court recognized that the Fifth Amendment’s due process clause protected some substantive rights to property and liberty as early as Scott v. Sandford (1857). The drafters of the Fourteenth Amendment, among other goals, wanted to protect the liberty and equality of African Americans to enter into legally binding contracts involving property and employment. With the growth of state regulations in the late nineteenth century, therefore, it was not surprising that proponents of laissez-faire capitalism seized on the Fourteenth Amendment’s due process clause as a means of promoting substantive liberties in matters of business and economics. Justice Stephen J. Field and jurist Thomas M. Cooley were among the most influential proponents of this substantive due process approach, which was soon accepted by several state courts.

After debating the concept on numerous occasions, a majority of the Court finally accepted the idea that the Fourteenth Amendment protected a substantive freedom of contract in Allgeyer v. Louisiana (1897). In this case, the Court invalidated a Louisiana law that made it illegal for residents of the state to enter into insurance contracts by mail with out-of-state companies. Writing for the majority, Justice Rufus W. Peckham declared that U.S. citizens enjoyed the freedom to make contracts relevant to the pursuit of their economic interests.

The Lochner Era

Through the four decades following Allgeyer, the Court looked on freedom of contract as a normative ideal and required states to assume a high burden for proving that any restraint on the liberty was justified on the basis of accepted police powers, such as protecting the public’s safety, health, or morality. The most prominent cases usually involved legislation regulating terms of employment, such as maximum working hours and minimum wages. In Lochner v. New York (1905), for example, a five-member majority overturned a labor law limiting the number of hours that bakers could work each week, and the majority insisted that employees should have the freedom to work as many hours as they wished. In Adair v. United States (1908) and Coppage v. Kansas (1915), the Court struck down federal and state laws that outlawed yellow dog contracts (employment contracts in which workers agree not to join unions). The majority of the Court was not impressed with the inequality in bargaining positions between employers and workers. Justice Oliver Wendell Holmes wrote vigorous dissents in such cases.

Nevertheless, the freedom of contract doctrine was used in ways that would later be considered progressive. In Buchanan v. Warley (1917), for example, the concept was a major reason for the Court’s overturning of a St. Louis segregation ordinance that prohibited whites from selling residential housing to African Americans.

The Court often accepted the constitutionality of restraints on the freedom of contract, but only when a majority concluded that a restraint was a reasonable means for enforcing legitimate police powers. For example, the Court in Holden v. Hardy (1898) upheld a Utah law that made it illegal for miners to work more than eight hours a day because of the manifest dangers of underground mining. Likewise, in Muller v. Oregon (1908), the Court determined that the special health needs of women provided justification for limiting their industrial workday to ten hours. Yet, in Adkins v. Children’s Hospital (1923), a bare majority overturned a District of Columbia’s minimum wage for women. The obvious inconsistency between Muller and Children’s Hospital reflected the inherent subjectivity in all decisions grounded in substantive due process.

Judicial Revolution of 1937

The Court began to moderate its position on freedom of contract after Charles Evans Hughes became chief justice in 1930. During President Franklin D. Roosevelt’s first term, nevertheless, four conservative justices dubbed the “Four Horsemen” remained firmly committed to the Lochner/Adair line of thinking. In Morehead v. New York ex rel. Tipaldo (1936), Owen J. Roberts joined the four to overturn New York’s minimum-wage law. During the 1936 election, Morehead was widely denounced and was one of several cases that led to Roosevelt’s Court-packing plan. For several reasons, Roberts abandoned the Four Horsemen in West Coast Hotel Co. v. Parrish (1937), which upheld Washington state’s minimum-wage law. Speaking for a majority of five, Hughes acknowledged that the Constitution protected liberty, but he defined liberty as the absence of arbitrary restraints. Two weeks later, the Court abandoned its Adair precedent in National Labor Relations Board v. Jones and Laughlin Steel Corp., upholding the Wagner Act protections of labor’s right to organize and join unions.

After the Court reversed itself in 1937, it never again struck down a public policy based on the freedom of contract doctrine. In effect, it almost entirely abandoned any judicial supervision based on the doctrine a development that is part of its movement toward exercising only minimal scrutiny of all economic regulations. Since then, the Court has upheld economic regulations only when they have appeared to be rationally related to legitimate governmental interests. The Court might resurrect the freedom of contract doctrine if it were to find some governmental regulation of contracts totally unreasonable or arbitrary. Although the Court lost interest in freedom of contract after 1937, it did not entirely stop reading substantive due process guarantees into the Fifth and Fourteenth Amendments.

Bibliography

Cefrey, Holly. The Sherman Antitrust Act: Getting Big Business Under Control. New York: Rosen Publishing Group, 2004.

Corwin, Edward. Liberty Against Government: The Rise, Flowering, and Decline of a Famous Judicial Concept. Reprint. Westport, Conn.: Greenwood Press, 1978.

Ely, James, Jr. The Guardian of Every Other Right: A Constitutional History of Property Rights. New York: Oxford University Press, 1992.

Price, Polly J. Property Rights: Rights and Liberties Under the Law. Santa Barbara, Calif.: ABC-Clio, 2003.

Seigan, Bernard. Economic Liberties and the Constitution. Chicago: University of Chicago Press, 1980.