STONE v. FARMERS' LOAN & TRUST CO. 116 U.S. 307 (1886)

This case marks a transition in our constitutional law from the Supreme Court's use of the contract clause as a bastion of vested rights protected by corporate charter to its use of substantive due process as a check on state regulation of business. Here, however, the Court sustained the regulation before it even as it laid the basis for the new doctrine. The facts seemingly constituted an open-and-shut case for a victory of the contract clause. A railroad company's charter explicitly authorized the railroad to set rates for carrying passengers and freight. Thirty-eight years after granting the charter, the state of Mississippi empowered a railroad commission to revise rates. The trust company, a stockholder of the railroad, sued to enjoin Stone and other members of the commission from enforcing the state rate regulations. In past rate cases, whenever the contract clause argument had lost, the reserved police power doctrine had prevailed; in this case the state had reserved no power to alter the company's charter. The inalienable police power doctrine had defeated the contract clause argument only in cases involving the public health, safety, or morals. Yet the Court, by a vote of 7–2, held that the state had not violated the company's charter.

Chief Justice morrison r. waite, in his opinion for the Court, reasoned that the explicit grant of rate-making powers to the railroad did not imply either a grant of exclusive powers or that the state had surrendered a power to revise rates set by the railroad. The state's power to regulate rates, Waite declared, cannot be "bargained away" except by a positive grant. Never before had the Court construed a contract so broadly in favor of the public and so strictly against a corporation.

Waite added, however, that the regulatory power was not unlimited: under pretense of regulating rates, the state could not require the railroad to carry persons or property free, and "neither can it do that which in law amounts to a taking of private property … without due process of law. What would have this effect we need not now say, because no tariff has yet been fixed by the commission." Waite also declared that state rate-making does "not necessarily" deny due process. In effect he undercut his own proposition, asserted in Munn v. Illinois (1877), that the question of the reasonableness of rates is purely legislative in nature. (See granger cases.) In Stone the implied principle was that reasonableness was subject to judicial review. Moreover, the references to due process of law in effect reflected substantive due process, because a rate regulation could not violate due process except in a substantive sense. Stone heralded a new era in constitutional law, which the Court entered during the next decade.

Leonard W. Levy
(1986)