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C, Capitalism.

Edited By: Kermit L. Hall, James W. Ely Jr., Joel B. Grossman

From: The Oxford Companion to the Supreme Court of the United States (2nd Edition)

Edited By: Kermit L. Hall

From: Oxford Constitutions (http://oxcon.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023


In a capitalist economic system most productive assets are held by private owners, and most decisions about production and distribution are made by the market rather than government command. Capitalism thus suggests a system of economic regulation that involves minimal state involvement. Nonetheless, even the most capitalistic economic systems contain some governmental supervision. The government must establish basic institutional rules, such as contract law. The government must also legislate to correct “market failure,” or situations where the unregulated market does not work well. Most importantly, in any democratic system a large number of interest groups continually petition the government for laws that bias market processes in their favor. Perhaps the Supreme Court’s most important function as regulator of capitalism is to define the appropriate constitutional limit (p. 139) of governmental interference with individual, market-driven decision making.

The word “capitalism” does not appear often in Supreme Court opinions. Further, nearly all the references before 1950 are pejorative, appearing in first amendment cases involving the right to make statements attacking capitalism as an institution. Examples include United States v. Debs (1919), where the defendant attacked capitalism as a cause of war, and *Abrams v. United States (1919). In addition, Justice Louis D. *Brandeis used the term occasionally in dissenting opinions to speak about the evils of uncontrolled capitalism (Liggett v. Lee, 1933; Maple Flooring Manufacturers Association v. United States, 1925).

The Supreme Court has always occupied a central position in the development of American capitalist institutions since the beginning of the nineteenth century. The Constitution’s framers envisioned a regime in which most decisions about the allocation of goods and services should be private. The *Contracts Clause, the *Commerce Clause, the *Due Process Clause, and the *Takings Clause of the Fifth Amendment are strong examples of that commitment. Through its interpretation of the Constitution and a wide array of federal and state statutes and *common law rules, the Supreme Court has defined the balance between individual prerogative and the independence of markets on the one hand, and sovereign power to interfere on the other.

Until the late 1930s the prevailing economic ideology on the Supreme Court was that of the classical political economists, who had a strong bias in favor of the “unregulated” market. This is not to say that there was little regulation. States and local government regulated a great deal. Indeed, the Supreme Court believed that there was too much regulation and that much of it was created in the interest of regulated firms rather than the consuming public.

The historical relationship between the Supreme Court and American capitalism has developed through several controversies concerning the proper scope of federal and state regulatory power.

Recognition of the Business Corporation and Facilitation of Its Development.

Modern American capitalism would be unthinkable without the giant, multistate business corporation—a creature whose development was facilitated by a series of Supreme Court decisions.

The Supreme Court both adopted and expanded the common law’s view that the business *corporation is a “person” entitled to many of the same constitutional protections given to natural persons. Chief Justice John *Marshall had clung to the traditional English view of Sutton’s Hospital Case (1613) that a corporation was incapable of suing and being sued in its own name. Rather, the suit must name all the shareholders individually. Marshall’s view was rejected by his own Court in Bank of United States v. Dandridge (1827). From that point on corporations could freely sue and be sued in federal court. Likewise, the Marshall Court held in *Bank of the United States v. Deveaux (1809) that a corporation was not a “citizen” under the Constitution, but should be treated merely as a collection of its individual shareholders. Such decisions limited federal court access, because jurisdiction based on diversity of citizenship did not exist unless every shareholder in the dispute was from a different state than any party on the opposite side. Deveaux was overruled by the Taney Court in Louisville, Cincinnati & Charleston Railroad Co. v. Letson (1844), which held that a corporation should be deemed a “citizen” of the incorporating state. The result was substantially to increase federal protection of corporations.

The Supreme Court recognized the American business corporation as a “person” for federal constitutional purposes in *Santa Clara Co. v. Southern Pacific Railroad (1886). Although liberals attacked the Santa Clara decision as biased in favor of big business, the decision’s importance should not be exaggerated. Santa Clara was a sensible mechanism for permitting the corporation as an entity rather than its separate shareholders to assert the corporation’s constitutional claims. Giving the corporation itself the constitutional claim was more efficient than giving it to the shareholders themselves. After Santa Clara individual shareholders could assert the constitutional rights of the corporation only if they brought a stockholders’ derivative suit designed to force the corporation to defend its own rights. Such suits had been approved by the Court in Dodge v. Woolsey (1856).

One of the most important doctrines facilitating the multistate business corporation during the late nineteenth century was that the states lacked the power to exclude “foreign” corporations, or those chartered in a different state, from doing business within their borders. The traditional view had been to the contrary. In *Bank of Augusta v. Earle (1839), the Taney Court held that corporations of one state could do business in another state, but only subject to that state’s permission and regulation. As late as the 1880s the Supreme Court permitted states to exclude foreign corporations from doing business directly within their borders. However, in Welton v. Missouri (1876) it held that the Commerce Clause forbad states from excluding the products made by out-of-state corporations. Under Welton a corporation chartered, for example, in New Jersey could not build a plant in New York without New York’s consent, but New York did not have the power to exclude the New Jersey corporation’s goods, if the goods could legally be (p. 140) sold by New York’s own corporations. The Court gradually narrowed state power to exclude foreign corporations from manufacturing within their borders as well, finally holding in Western Union Telegraph Co. v. Kansas (1910) that a corporation is a “person” within the jurisdiction of a state where it is doing business, and entitled not to be expelled except for violations of state law.

During the nineteenth century the Supreme Court frequently became involved in matters of corporate finance, the extent of limitations on corporate liability, and the scope of a corporation’s power under its charter. The result was substantial federal doctrine regulating the inner workings of the corporation, its finances, and its dealings with outsiders. For example, in Sawyer v. Hoag (1873) the Court adopted the “trust fund” doctrine, which held that if a corporation’s stated paid-in capital was larger than the amount the shareholders had actually paid in, the shareholders themselves could be liable for the shortfall. The doctrine was designed to protect creditors from “watered” stock. Likewise, the Court often considered the question whether corporate activities were ultra vires, or unauthorized by the corporate charter—generally adopting a narrower view than that which prevailed in the states. For example, in Thomas v. West Jersey Railroad (1879), the court struck down as ultra vires an effective merger of two railroads when one leased all its track to the other.

The Supreme Court gradually relaxed the strict rule preventing corporations from doing business not authorized in their charters, particularly if the additional business was “necessary or convenient” to the corporation’s authorized business. For example, in Jacksonville, Mayport, Pablo Railway & Navigation Co. v. Hooper (1896), the Court permitted a railroad to acquire a hotel in order to accommodate railroad passengers. The result was increased judicial approval of corporate vertical integration, a phenomenon that characterized much of the corporate growth at the turn of the century.

An unanticipated result of the use of business purpose statutes to challenge corporate mergers was that mergers of competitors were generally legal. For example, a corporation authorized to manufacture and distribute fuel oil, such as Standard Oil Company, could legally acquire a competing refinery, for that acquisition would not involve the corporation in unauthorized business. However, if Standard attempted to acquire a shoe factory, the acquisition would have been challenged as outside the scope of Standard’s charter. As a result mergers of competitors—usually the most damaging to competition—were generally legal, while “conglomerate” mergers, whose competitive consequences are generally negligible, were forbidden. The result was that American merger policy gradually ceased to be the prerogative of corporate law and entered the domain of the *antitrust laws.

In Briggs v. Spaulding (1891) the Court adopted a broad version of the “business judgment” rule, thereby giving corporate directors expansive power to make decisions without concern about liability suits from stockholders. This decision as well as others served to separate the ownership of the American business corporation from its management. The eventual result was a cry for more intensive regulation.

During the *New Deal era the Supreme Court gradually accommodated much more intensive regulation of the American business corporation. For example, in Federal Trade Commission v. F. R. Keppel & Bros. (1934), the Court held that the FTC had the power to reach “unfair” business practices even if such practices were not anticompetitive under the antitrust laws.

More recently, the Supreme Court has exhibited a strong tendency to relax certain aspects of corporate regulation. Several decisions have developed the concept that the market for corporate securities is generally efficient; as a result, corporate managers have no special obligation to provide information to buyers and sellers of its securities (Chiarella v. United States, 1980; Basic, Inc. v. Levinson, 1988). Furthermore, the Court has held that at least some people should be able to profit from secret information about corporate illegality by buying and selling of the corporation’s stock. Such transactions may encourage the discovery of such information (Dirks v. Securities and Exchange Commission, 1983). The fact that such trading may be “unfair” to people who do not have the information is not as important as the fact that permitting such trades makes the market work more efficiently. More recently, in Central Bank of Denver v. First Interstate Bank of Denver (1994), the Supreme Court greatly limited liability for “secondary” actors such as lawyers or accountants who might be indirectly involved in stock fraud.

Judicial Limits on the Jurisdictional Power to Regulate.

Nineteenth-century political economy was biased in favor of the free market and against regulation. This bias appeared in substantive legal rules as well as procedural and jurisdictional restrictions on state regulatory power. One important device that the Supreme Court has used to protect American capitalism from political interference is legal rules that confined state authority to the state’s own territory, and federal authority to activities clearly in the flow of interstate commerce.

(p. 141) The Supreme Court held in *Gibbons v. Ogden (1824) that the Constitution’s Commerce Clause forbad a state from giving a steamboat company a monopoly of the route between ports in two different states. Gibbons limited the scope of such rights to intrastate activities. In *Wabash, St. Louis and Pacific Railway Co. v. Illinois (1886) the Supreme Court held that a state could not impose rate regulation on railroad traffic if any part of the railroad’s route lay outside the state. Pennoyer v. Neff (1877) reflected the Court’s view that state courts had little power to obtain jurisdiction over people located outside the state.

Perhaps the most controversial limitation on state regulatory power in the nineteenth century was the rule in *Swift v. Tyson (1842) that in federal court controversies between citizens of different states, the federal judge was not bound to follow state law but could refer to a “general” common law. Justice Joseph Story’s purpose in Swift was unambiguous: interstate markets would work efficiently only if they were governed by a body of uniform rules that entrepreneurs could rely on. If one state engaged in parochial rule making—for example, to protect its debtors from out-of-state creditors—merchants would lose confidence in the interstate commercial market. Although Swift itself applied only to common law rules, later decisions such as Watson v. Tarpley (1855) applied the same rule to state statutes. The result encouraged development of a uniform system of commercial rules in federal court long before such transactions were comprehensively regulated by federal statute.

The Supreme Court also limited the states’ power to apply their substantive law to activities that occurred outside the state. Allgeyer v. Louisiana (1897) substantially undermined state power to regulate out-of-state insurance companies. New York Life Insurance Co. v. Dodge (1918) reduced the power of a state to apply its unique contract law to contracts that had been executed in a different state. Importantly, however, the general common law was not considered “regulatory,” but rather as a body of universal rules that courts need only recognize. As a result, a state could apply the general common law to interstate transactions even if it could not do so by statute (Western Union Telegraph Co. v. Call Publishing Co., 1901). This was consistent with the Court’s general position that the common law, if properly applied, did not interfere with markets but rather facilitated them.

The nineteenth-century Supreme Court’s hostility toward state regulation also showed up in severe limitations on state administrative agencies. For example, in *Chicago, Milwaukee, and St. Paul Railway Co. v. Minnesota (1890), the Court struck down a state statute that gave a regulatory agency final authority to set railroad rates. Only in the 1920s did the Supreme Court become tolerant of railroad rate making by regulatory agencies rather than court or legislature (Wisconsin Railroad Commission v. Chicago, Burlington & Quincy Railroad Co., 1922).

The Supreme Court was also hostile toward regulatory incursions by the federal government and limited federal power to transactions that clearly involved interstate commerce, narrowly defined. For example, in United States v. *E. C. Knight Co. (1895) the Court held that the federal antitrust laws could not be applied to a multistate manufacturing trust because manufacturing itself was not the same thing as interstate movement of goods. Likewise, *Hammer v. Dagenhart (1918) struck down a federal child labor statute because the labor itself was performed within a single state. It was not sufficient that the goods produced by the labor were destined to be shipped in interstate commerce.

The New Deal effected a dramatic change in the Supreme Court’s philosophy concerning the regulatory power of both the federal government and the states. Swift was overruled by Erie Railroad Co. v. Tompkins (1938). The International Shoe case (1945) greatly expanded state court jurisdiction over outsiders. The limitations on a state’s power to apply its substantive law to transactions occurring elsewhere were relaxed in Watson v. Employers Liability Assurance Corp. (1954). On the other side, *National Labor Relations Board v. Jones & Laughlin Steel Corp. (1937) greatly expanded federal power to regulate labor relations, provided the employer had any substantial interstate business. Hammer, the child *labor decision, was expressly overruled by United States v. *Darby Lumber Company (1941). Since the Court’s decision in *Wickard v. Filburn (1942), federal power to regulate has extended to highly localized activities where the “effect” on interstate commerce seems to be all but trivial.

Monopoly: State Power to Restrict Competition.

“Monopoly” has two meanings in the history of American capitalism. Historically, a monopoly was an exclusive right given to a private entrepreneur by the sovereign. Later, “monopoly” came to refer to large firms that were dealt with under the antitrust laws.

Aside from the Gibbons case noted earlier, the Supreme Court’s first important brush with state created monopoly was the *Charles River Bridge case of 1837. Taking a strictly classicist approach, Chief Justice Roger B. Taney held that, although a state had the basic power to confer monopoly privileges on a business corporation, such rights would not be implied.

Even state power to create monopolies was challenged in the *Slaughterhouse Cases (1873), (p. 142) where a bitterly divided Court approved a corporate charter that gave one corporation the exclusive right to operate a public slaughterhouse in New Orleans. The Court found that no clause of the recently enacted Thirteenth and Fourteenth Amendments took the power to create monopolies away from the states. The Slaughterhouse grant has been widely described as a product of the worst kind of special interest legislation. However, it was really a quite sensible mechanism for dealing with an important public health problem that arose when small slaughterhouses deposited animal waste into the Mississippi River, which constituted New Orleans’ supply of drinking water.

“Liberty of Contract”: Price Regulation, Protective Labor Legislation, and Regulation of Product Quality.

Classical political economy was committed to the belief that people should be able to enter and enforce any lawful contract. In the first half of the nineteenth century the Constitution’s Contract Clause became one of the most important vehicles for protecting the market system. A second, quite different version of liberty of contract was not expressly written into the Constitution but was created by the Supreme Court around the beginning of the twentieth century in the doctrine of substantive due process.

Both branches of liberty of contract doctrine reflected hostility against legislation that interfered with private economic decision making. This hostility can be seen in the Court’s attitude toward the political process—for example, its conclusion in Marshall v. Baltimore & Ohio Railroad Co. (1853) that legislatures were enslaved to special interests, whose lobbyists “subject the State government to the combined capital of wealthy corporations, and produce universal corruption. …” These “[s]peculators in legislation” would “infest the capital of the Union and of every State, till corruption shall become the normal condition of the body politic …” (pp. 334–335).

Liberty of Contract under the Contract Clause.

The Contract Clause forbad the states from impairing the obligation of previously created contracts. During the Marshall period the Supreme Court developed two distinct branches of Contract Clause jurisprudence. A “private” branch generally prevented states from interfering with previous contracts between private parties and was principally a limitation on state power to pass debtor relief statutes. *Sturges v. Crowinshield (1819) held that a state could not limit a creditor’s recovery to a debtor’s existing property, excluding attachment of future wages. *Ogden v. Saunders (1827) upheld state insolvency statutes provided they were applied only to debts created after the statute was passed. Later Supreme Courts generally followed the Marshall-era policy of according strict protection to previously created private agreements. For example, *Bronson v. Kinzie (1843) prevented states from making it more difficult to foreclose mortgages that already existed when the statute was passed. And *Gelpcke v. Dubuque (1864) forbad states from invalidating municipal bonds that had been sold to out-of-state creditors. Not until the New Deal, when constitutional classicism was in its death throes, did the Supreme Court deviate substantially from this course. For example, Home Building and Loan Association v. Blaisdell (1934) sustained a Depression-era statute placing a moratorium on mortgage foreclosures.

The “public” branch of Contract Clause jurisprudence historically limited a state’s power to renege on its own contractual obligations. *Fletcher v. Peck (1810) held that a state could not revoke its previously given land grant, and the *Dartmouth College case (1819) extended that rule to corporate charters. The public branch of Contract Clause jurisprudence revealed a great tension in Supreme Court liberty of contract analysis. On the one hand, corporate charters were contracts, and belief in the sanctity of contract was nothing less than an article of faith. On the other, early nineteenth century states had given corporations a wide array of monopoly privileges, tax exemptions, and other special prerogatives. These were generally abhorrent to classical political economy’s view that the market alone should govern the fortunes of its entrepreneurial participants. The question now was whether to permit the states to renege on some of these promises—thus restoring the fairness and balance of the market—but in the process undermine the sanctity of the contract as corporate charter. The general answer was that even liberty of contract should be subordinated to the greater good of preserving the market.

In other areas the Supreme Court gave the states broad power over their corporations—holding, for example, in the Railroad Commission Cases (1886) that a corporate charter that permitted a railroad to charge “reasonable” rates nevertheless permitted a state agency to determine what rates were reasonable. After about 1850, the Contract Clause was no longer a substantial impediment to state power to limit corporate prerogative.

Substantive Due Process and Liberty of Contract.

The *Fourteenth Amendment doctrine of substantive due process was a product of a uniquely American version of classical political economy. In England, where land was scarce, labor restive, and social and economic mobility quite restricted, classicism’s strict preference for the market had given way by 1850 to much more interventionist views of the role of the state. Economists such as John Stuart Mill and later (p. 143) Alfred Marshall supported some state-imposed redistribution of wealth.

But America after the Louisiana Purchase (1803) held an abundance of undeveloped land and experienced both rapid economic growth and apparent high mobility for those who were ambitious. Within the classical vision, every laborer could quite easily become a landowner or entrepreneur—never mind that this did not include slaves or, in most states, women. Adam Smith’s historical reverence for the unrestrained market persisted in the United States long after it was tempered in England. The Supreme Court justices may not have read the classical political economists directly, but they were quite familiar with Thomas M. Cooley’s thoroughly classical Treatise on the Constitutional Limitations Which Rest Upon the Legislative Power of the States of the American Union (1868), which provided the intellectual foundation for substantive due process as a constitutional doctrine.

Substantive due process, unlike Contract Clause doctrine, regulated not merely the sanctity of preexisting contracts, but also the right of people to enter into various kinds of contracts. The era was hardly a period of “dry formalism,” as Roscoe Pound and other Progressive critics suggested, but rather of great judicial creativity. For example, in In re *Debs (1895) the Court cut from new cloth the doctrine that the executive branch has the power to protect interstate commerce from labor disputes, even though Congress had not passed a statute authorizing the executive’s action. And in Ex parte *Young (1908) Justice Rufus W. Peckham held that the sovereign immunity provision of the eleventh amendment did not apply when a private party seeks to enjoin a state official from enforcing an unconstitutional statute, because the official is “stripped of his official or representative character” (p. 160). In this case, the statute was a railroad rate regulation alleged to violate due process of law.

The most controversial of the Supreme Court’s substantive due process decisions was *Lochner v. New York (1905), which struck down a statute that forbad bakers from working more than ten hours per day or sixty hours per week. The Court also struck down statutes that regulated product quality. For example, in Jay Burns Baking Co. v. Bryan (1924), it upset a statute requiring standardized weights for bread; and in Weaver v. Palmer Bros. (1926), a statute regulating the quality of bedding materials.

One of the most frequent targets of substantive due process analysis was rate regulation. In *Munn v. Illinois (1877), which had preceded the substantive due process era, the Supreme Court permitted a state to regulate an unincorporated firm’s prices, provided that it operated in a market “affected with a public interest.” These markets included enterprises that traditionally had been accorded monopoly protection or eminent domain power, such as shipping lines, common carriers and—in the case of Munn—grain elevators.

But later the Court made clear that the states lacked a general power to regulate rates; further, the prerogative of deciding what kinds of industries were affected with the public interest belonged to the courts, as in *Tyson & Brother–United Theatre Ticket Offices v. Banton (1927). Perhaps the most famous decision involving price regulation is *Adkins v. Children’s Hospital (1923), which overturned a Washington, D.C., minimum wage law that applied only to women. The Supreme Court, using language borrowed from the classical political economists, concluded that “the right of the owner to fix a price at which his property shall be sold or used is an inherent attribute of the property itself,” and that there is a “moral requirement” of “just equivalence” between the price to be charged for labor and the value the employer places upon it (p. 558).

One of the markets consistently found to be affected with the public interest was the railroads, and the Supreme Court generally upheld state and later federal regulation of railroad rates. However, in *Smyth v. Ames (1898), it held that such regulation must provide the railroad with a reasonable return on its investment. The rule that rate regulation is generally permissible, but regulation that deprives a private entrepreneur of a reasonable competitive profit is an unconstitutional taking of property, generally survives to this day.

Progressive Era critics characterized the Supreme Court majority during the early twentieth century (particularly Justices Rufus W.*Peckham, James C. *McReynolds, Willis *Van Devanter, George *Sutherland, Pierce *Butler, and William Howard *Taft) as a probusiness, antilabor group of mediocre intellectuals. But that view both underestimates the justices’ intellect and overestimates their favoritism toward business. They were classicists, committed to the unregulated market. As such, they were just as quick to condemn probusiness regulatory legislation as wage-and-hour legislation. Progressive critics began with the premise that virtually all regulation was in the public interest and then focused their critique of the Court almost exclusively on protective labor legislation. In fact, however, the Court struck down equal numbers of statutes that were the product of regulatory “capture” by special interest groups within the business class. For example, in Louis K. Liggett Co. v. Baldridge (1928) it condemned a statute that required the licensing of pharmacists, designed mainly to protect (p. 144) druggists from cost-cutting new competitors. In New State Ice Co. v. Liebmann (1932) it upset a statute that conditioned entry into the ordinary business of manufacturing ice on the applicant’s demonstration of “necessity” and inadequacy of existing facilities—another device for protecting existing firms from competition.

Even during the heyday of substantive due process, the Supreme Court did not condemn all regulatory legislation. It upheld legislation it believed corrected an undesirable effect of the unregulated market. *Muller v. Oregon (1908) sustained a ten-hour law similar to that struck down in Lochner (1905), but which applied only to women. Brandeis’s famous *Brandeis brief cited social science data that women occupy a special position as the bearers of society’s future children; and that women were generally unable to represent their own interests responsibly in the contracting process. The Supreme Court accepted these sexist, paternalistic arguments. Likewise, in Village of Euclid v. Ambler Realty Co. (1926) the Supreme Court upheld comprehensive land use planning and zoning—largely on the argument that high density and unplanned development could impose large costs on other members of the community, through increased traffic, noise, congestion, and demand for public services.

In a single year, 1937, substantive due process ended even more quickly than it began, largely as a result of the famous *court-packing plan of the Roosevelt administration, and Justice Owen J. *Roberts’s change of mind on the subject of minimum wage legislation in West Coast Hotel Co. v. Parrish (1937), which overruled Adkins.

More recently, however, the Supreme Court has been accused of revitalizing the spirit of Lochner by manufacturing other doctrines to limit regulatory power. For example, in *Seminole Tribe of Florida v. Florida (1996), which expanded state sovereign immunity from federal lawsuits, Justice David *Souter accused the majority of applying a Lochner-like hostility toward regulation. He repeated that accusation in Alden v. Maine (1999), which held that Congress could not force state courts to entertain lawsuits under federal legislation regulating working conditions and wages. Justice Stephen G. *Breyer made a similar accusation in College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board (1999), in which the Supreme Court held that state agencies could not be sued under federal law for false advertising. Unquestionably, the Rehnquist Supreme Court has sought to cut back on federal regulatory power under a variety of constitutional doctrines.

The Supreme Court as Regulator of Business Competition.

One of the Supreme Court’s most important roles as manager of American capitalism flows from its position at the top of the hierarchy of institutions that regulate the competitive process. Competition is regulated by courts and administrative agencies of both state and federal government. The Supreme Court oversees all of these to one degree or another.

Before 1890, when the *Sherman Antitrust Act was passed, business competition was regulated mainly through the common law of trade restraints. The Supreme Court applied this law in diversity of citizenship cases. Oregon Steamship Navigation Co. v. Winsor (1873) upheld a ten-year covenant not to compete given as part of the sale of a steamship route. The covenant was reasonable because it (1) was ancillary to the sale of a business; (2) was restricted to a reasonable length of time; and (3) covered only the geographic area served by the route itself. But in Central Transportation Co. v. Pullman’s Palace Car Co. (1890) the Court condemned a noncompetition covenant contained in a ninety-nine-year lease of railroad sleeping cars because the period of protection was unreasonably long. The court also adopted common-law rules that were completely tolerant of business mergers, and even of price fixing, provided the price fixers did not use coercion or intimidation against others who attempted to undercut their prices. But in Gibbs v. Consolidated Gas Co. of Baltimore (1889) it held that price fixing of an article of “public necessity,” in this case illuminating gas, should be illegal even though price fixing in ordinary items might be protected by liberty of contract.

The Supreme Court’s position on price-fixing changed remarkably with the passage of the Sherman Antitrust Act in 1890. In its first substantive antitrust decision, United States v. Trans-Missouri Freight Association (1897), it condemned a price-fixing and traffic pooling arrangement among a group of railroads. The Supreme Court was unpersuaded by the economic argument, adopted by the lower court, that railroads were a network industry in which packages could reliably be transferred from one line to another only if there was a common scheme for scheduling and setting rates. It also rejected the argument that competition was particularly ruinous in the railroad industry. Since Trans-Missouri, price fixing by competitors has been almost uniformly illegal in the United States, unless an industry is exempted by federal or sometimes state legislation. In Loewe v. Lawlor (1908) the Court applied its new-found hostility toward price fixing to labor boycotts designed to secure a certain wage. The result was the rise of the federal labor injunction—a powerful union-busting device until New Deal labor legislation largely exempted labor unions from antitrust law. The new legislation, which greatly increased labor union bargaining power, was upheld by the Supreme Court in *National Labor Relations Board v. Jones & Laughlin Steel Co. (1937).

(p. 145) The Supreme Court also used the antitrust laws to develop an American merger policy dictated by principles of competition rather than corporate structure. In United States v. Addyston Pipe & Steel Co. (1899) it approved then-Judge William Howard Taft’s lower court ruling that price “fixing” that is merely ancillary to the combination of businesses into a single enterprise should not be treated as harshly as naked price fixing by firms that continue to hold themselves out as competitors. However, in *Northern Securities Co. v. United States (1904), the Court condemned a merger that eliminated all competition between two transcontinental railroads, and in United States v. Union Pacific Railway Co. (1912) it held that the federal antitrust law could condemn a merger even though the merger was entirely legal under state corporation law. From that point on protecting consumers from collusion and high prices became a dominant concern of federal merger policy.

In 1950, however, Congress amended the antitrust laws to reflect a much greater concern with the fortunes of small businesses forced to compete with large firms. The result was a twenty-year interlude from the 1960s into the early 1980s when the Supreme Court encouraged lower courts to void mergers that made the postmerger firm more efficient, on the theory that such mergers would injure competitors of the merging firms (as in Brown Shoe Co. v. United States, 1962). Only in the 1970s and 1980s did the Court begin to return to a more explicitly consumer-oriented merger policy.

Between naked price fixing at one end and simple mergers at the other lay an array of business combinations and practices that may contain some attributes of both. Beginning in 1911 with *Standard Oil v. United States and United States v. American Tobacco decisions, the Court began to fashion a “*rule of reason” for evaluating the great majority of these practices. As described by Justice Brandeis in Board of Trade of the City of Chicago v. United States (1918), the rule of reason required a court to examine the history and development of a particular practice, its likely effects on competition, and any efficiency rationales that the practice might have. The Court later used this approach to approve such things as an agreement of competitors to exchange information about prices (Maple Flooring Manufacturers Assn. v. United States, 1925). However, it condemned concerted boycotts directed against competitors under the per se rule (Eastern States Retail Lumber Dealers’ Association v. United States, 1914).

The Supreme Court also became heavily involved in business decisions about how products should be distributed. Dr. Miles Medical Co. v. John D. Park & Sons Co. (1911) condemned resale price maintenance, or agreements under which suppliers specify the price at which their products are to be resold. The much-criticized rule that resale price maintenance is illegal per se survives until this day. The Supreme Court’s position on nonprice restraints, such as clauses in which manufacturers specify store locations, has been far less consistent. Eventually Continental T.V. v. GTE Sylvania (1977) established that vertical non-price restrictions should be governed by the rule of reason. Since then, most such restrictions are legal.

The Rehnquist Court has played a less prominent role in the making of antitrust policy than earlier Supreme Courts. One explanation is that the 1960s and 1970s were turbulent times for antitrust, as older doctrines favoring small business gave way to a more relaxed set of rules that favored low cost, efficient producers. Most of these rules were settled by 1986, when William H. *Rehnquist was elevated to chief justice. In addition, during Chief Justice Rehnquist’s term of office the size of the Supreme Court docket has been severely reduced, to roughly half as many cases per year as other recent Courts have heard. The decline in the number of antitrust cases has been even more severe.

The Rehnquist Court’s leadership in antitrust has not been particularly strong, and some of the decisions are very hard to defend on economic grounds. For example, in Eastman Kodak Co. v. Image Technical Services (1992), the Court upheld a very dubious claim that a manufacturer of photocopiers with only 23 percent of the market could be a monopolist of its unique repair parts because someone who already purchased the photocopier was “locked in” to purchasing these parts from the defendant. The result has been a wave of monopolization claims against firms that are not monopolists of anything. In sharp contrast, in California Dental Association v. Federal Trade Commission (1999) the Court upheld restrictions on advertising that effectively permitted California dentists to cartelize their market. The pair of decisions creates an indefensible juxtaposition: a very benign attitude toward cartels, which are the most suspicious form of antitrust misconduct; and an overly aggressive attitude toward nonmonopolistic firms acting unilaterally, where anticompetitive results are highly unlikely.


One constitutional doctrine developed by the Supreme Court to limit state regulatory power is the *Fifth Amendment clause providing that private property may not be “taken” without payment of just compensation. The Court first applied the clause to the states in *Chicago, Burlington and Quincy Railroad Co. v. Chicago (1897). In *Pennsylvania Coal v. Mahon (1922) the Court, speaking through Justice Oliver Wendell *Holmes, struck down a state statute that required underground coal miners to support surface property (p. 146) even if the mining company owned a preexisting legal right to cause surface subsidence. Since the 1970s the Supreme Court has looked more closely at state and local regulatory legislation that reduces the value of private property or forces the property owner to accept the intrusion of unwanted objects or persons. During the Rehnquist era it has limited state and local government power to regulate land use by being much quicker to find liability for rules that are thought to have too harsh an impact on land owners. For example, *Nollan v. California Coastal Commission (1987) held that a state could not condition the right to develop coastal land on the landowner’s grant of an easement to the public. And in *Lucas v. South Carolina Coastal Council (1992) the Court held that compensation could be required if a regulation severely reduced the value of property and the land owner could not reasonably have anticipated that the state would have regulated in the manner that it did.


The governance of American capitalism was undoubtedly the primary activity of the Supreme Court in the nineteenth century. During that period the Court was heavily influenced by classical political economy, and this interest shows up in the Court’s strong bias in favor of the unregulated market. In the twentieth and early twenty-first centuries the mixture of decisions has changed somewhat, but overseeing the regulation of economic markets continued to be among the Supreme Court’s most important obligations. As regulator of capitalism the Supreme Court has frequently been doctrinaire and has often overruled itself when underlying ideology changed. Unquestionably, however, the Court has been a stabilizing influence on an economy which would have been far less robust had it been subject to every vagary of changing political power.

Lawrence M. Friedman, A History of American Law, 2d ed. (1985). Lawrence M. Friedman, American Law in the Twentieth Century (2002). Morton J. Horwitz, The Transformation of American Law: 1780–1860 (1978). Morton J. Horwitz, The Transformation of American Law, 1870–1960: the Crisis of Legal Orthodoxy (1992). Herbert Hovenkamp, Enterprise and American Law, 1836–1937 (1991). J. Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (1970). William J. Novak, The People’s Welfare: Law and Regulation in Nineteenth Century America (1996).

Herbert Hovenkamp