Business Without Precedents

THE change in attitude of the Supreme Court which has produced what is aptly referred to as a new Constitution is usually thought of as relating to matters of public law, such as the powers of Congress and of the Executive. In fact, this change equally affects private law and may be of even greater significance in that field. It is the primary purpose of this paper to discuss that phase of the ‘judicial revolution.’

Those who are not lawyers often think of the Supreme Court as existing solely to interpret and implement the Constitution, enforcing adherence to the general framework of our government there prescribed. In fact, the Court is by no means confined to that function and deals with many questions which do not concern the Constitution.

Many cases which come before the Court hinge upon the interpretation of laws enacted by Congress, now so vastly increased in number and scope — the tax laws, the bankruptcy laws with their new phases, the patent laws, and so on. In plentiful addition other cases involving merely matters of private law relating to ordinary run-of-mine business transactions come up through the exercise of jurisdiction conferred upon the federal courts in cases arising between citizens of different states.

It is well said that the ‘revolution’ in the Court, now so widely recognized, consists in part ‘in the willingness of the Court to reëxamine established principles and overrule all precedents which do not seem to it justified on a purely pragmatic basis by present needs.’ This sounds progressive, but there is much more in the proposition than meets the eye at first glance.

That readiness to reëxamine and overrule has now brought within the scope of action by Congress many subjects previously held to have been allocated by the Constitution to the states, such as agriculture, manufacturing, and conditions and terms of employment, and has so magnified the ‘indestructible union’ of the nineteenth-century conception that in important respects the ‘indestructible states’ of that conception persist only in a geographical sense.

It is too soon to appraise the effect of the elimination of limitations on the power of Congress brought about in the past two and a half years by this change in the attitude of the Court. The change is now a matter of history, and, whatever one’s estimate of the probable effect, there were strong arguments making for the more liberal view which has now prevailed.

There were also special arguments making for the accomplishment of the change by Court decisions overruling prior decisions rather than by the necessarily cumbersome and long-drawn-out process of constitutional amendment. The finding of unexpected elasticity in the Constitution may have avoided prolonged controversy and dangerous strain.

It is one thing, however, to have the Court overrule precedents which established limitations on the powers of Congress, now believed by the Court to be unwarranted by the Constitution itself, which otherwise could be eliminated only by constitutional amendment. It is quite another thing for the Court to overthrow precedents in private law upon which business has been conducted and planned, but which could be eliminated as desired by the less disturbing method of Congressional action. Judicial revision of this sort is calculated to create uncertainties not inherent in legislative action, tending to restrain and inhibit business effort vital to the economic life of the country.

Except in its most elementary phases, business does not spring up spontaneously as flowers in the spring, but must be planned long in advance. A steady flow of new enterprise is essential to maintain and increase the flow of goods and services by which we live. Business building means the construction of factories, the acquisition of equipment, the making of goods, the conducting of selling campaigns, the raising of capital, and the making of heavy expenditures — all in advance of any return.

The business man — the essential entrepreneur — will in general undertake his operations only if he feels reasonable assurance that he can reap where he sows. His effort and the support of his backers rest on faith in rules of the game.

In the building up of a great body of rules and principles in reliance upon which business operation is undertaken, the federal courts have had a very large part. Interpretation of the tax law, the bankruptcy act, the reorganization sections, and the patent laws, for example, is all part of these rules, as well as the great body of decisions as to contract and property rights.

A loan which could be secured, an expansion which could be financed, a needed change in the structure of a business enterprise which could be accomplished, might have to be given up if resulting rights depended upon a mere guess as to what the courts will choose to decide. Danger of protracted and expensive litigation, even with hope of success, is enough to check fruitful enterprise.

In addition to striking down limitations upon the powers of Congress previously established by decisions on constitutional questions, the Court has already gone far in overruling established precedents in the other fields, creating serious uncertainties as to private law.

One of the earlier of these notable overrulings was that in 1938 which struck down a doctrine followed for nearly one hundred years, to the effect that the federal courts in passing upon questions presented between citizens of different states turning upon the common law rather than statute were not constrained to follow the decisions of the particular state, but could decide the question as a matter of general law. Under the doctrine then abandoned, the federal courts had built up a great body of decisions tending to unify the legal principles prevailing in the several states.

The power to make such decisions could have been eliminated by Congress through amendment of the historic statute under which the federal courts act. It could have been eliminated wholly or in part by the state legislatures through enactment of statutes codifying particular branches of law. It was in fact eliminated by a single pronouncement of the Supreme Court, and a vast body of law carefully built up over many decades was largely deprived of authority.

A most important instance of the kind of change here referred to occurred in a field in which the Court has done some of its most constructive work —that of making the several states act in trade and commerce as part of a unified nation rather than as independent principalities, each seeking to further its own interest at the possible expense of the others. Ever since the great case of Gibbons v. Ogden, decided in 1824, interpreting the interstate commerce clause of the Constitution, the Court had refused sanction to statutes and regulations the effect of which was to interfere with commerce between the several states.

The rules against state interference with interstate commerce are based upon the so-called commerce clause of the Constitution. Yet they are not ‘constitutional ‘ rules in the sense that they cannot be changed without a constitutional amendment. In this field of law the Court has purported only to enforce the presumed intention of Congress that channels of interstate trade be kept clear, an intention deduced mainly from the elementary fact that the United States is a single nation and that Congress probably wants to keep it so. Nevertheless, though Congress could modify or abolish this protection at will, the new Court has taken the initiative.

One aspect of the prohibition upon interference with interstate commerce was the rule, first declared in 1872, which forbade the states to tax business transactions in such a way that sales in interstate commerce might be subjected to heavier tax burdens than similar sales wholly within a state. The states were restrained from imposing taxes which might have the effect of tariff barriers at state borders — one of the main evils which the Constitution was intended to eliminate.

There were two branches to this rule against state taxation of interstate commerce: not only were the states forbidden to undertake hostile discriminations against interstate commerce, but they were prevented from applying their ordinary taxes in such a way as to subject interstate business to an unusually heavy tax burden. That is to say, the Court condemned taxes whose effect was to hamper interstate trade, as well as those specifically directed to that end.

If a Pennsylvania manufacturer must pay a two per cent gross sales tax in Pennsylvania and a similar tax in New York whenever he sells to a New York buyer, he operates at a two per cent disadvantage as against his New York competitors. To the extent of this differential the dual tax operates to protect the relatively inefficient manufacturer in his home market — the essence of the protective tariff.

In an opinion announced in January 1940, the new Court, over the dissent of Chief Justice Hughes and Justices McReynolds and Roberts, narrowed the rule to a bare protection against intentional discrimination; and in a dissent announced two weeks later Justices Black, Frankfurter, and Douglas (Justice Murphy not sitting) served notice that they would be willing to narrow still further the protection of interstate commerce.

Whatever the abstract desirability of building business enterprise on a national scale, instead of conforming it to state boundaries, centralization does exist; it exists in large part because the Supreme Court has protected the free national market from provincial raids by state legislatures. Vast investments have been made in the faith that such protection would endure until Congress declared otherwise, and for many decades Congress has acquiesced in this development, with apparent approval. Now a change is made by the fiat of the Court which tends toward reducing all industry to a welter of local subsidization, interstate reprisals, and general chaos such as the Twenty-first Amendment, by partially repealing the commerce clause, has produced in the liquor trade.

It is difficult to see why the Court has narrowed the protection of interstate commerce, unless it either is assuming certain legislative functions or believes that Congress has abandoned the view that the country is an economic unit — a view to which in other connections the Court strongly adheres. If the attitude of Congress is to be inferred from its actions, one might suppose that the Wagner Act, the new AAA, the Bituminous Coal Act of 1937, and other New Deal legislation recently sanctioned by the Court, indicate strongest Congressional recognition and endorsement of the very economic unity which the rule against interstate tariffs was established to protect.

Another matter upon which the Supreme Court had attempted to evolve a workable compromise between the conflicting interests of the several states was the problem of multiple death taxation. If the United States is a single nation, there seems to be no reason why a man’s estate should bear a heavier tax burden because his activities crossed state lines. The governmental protection he has received has been no greater, in the aggregate, than if he had confined his interests to a single state. Yet clearly an estate might be virtually wiped out as a result of taxation in each of several states where the decedent lived or in which he had business interests — each state claiming that he was ‘domiciled’ within its borders or that his property had a ‘situs’ there, and that it therefore lias the right to impose a death tax.

In a line of decisions beginning in 1925, the Supreme Court undertook to avoid this possible hardship by a system of rules based on the concept of ‘jurisdiction to tax.’ As Justice Frankfurter suggested in an article published in the Yale Law Journal in that same year, it would have been possible for the states, by compacts concluded with Congressional approval, to modify these rules as to ‘jurisdiction to tax.’ Yet, in two fiveto-four decisions announced in May 1939, the Court repudiated the rule against multiple death taxation. Apparently the only situation in which the Supreme Court will now intervene is where the various claims for death taxes exceed the entire estate, as in the case involving the estate of the late Colonel E. H. R. Green, where four states and the Federal Government claimed taxes aggregating $37,727,213 on an estate of $35,831,303. In that case the Court eliminated all but one of the state taxes; but it indicated that it would not have done so had the combined tax claims been merely equal to, not more than, the amount of the estate.

Other cases decided in the past year, though perhaps less important in themselves, still are not without significance as indications of the new Court’s idea of its place in the scheme of government.

In one recent decision the Court upset a long-standing rule as to the possibility of suing a corporation in a federal court located outside the state of incorporation. The majority opinion was a brilliant exercise in legal dialectic. As an original proposition, the majority’s interpretation of the jurisdictional statute may have been the sounder one. But the majority made no effective answer to the brute fact that the minority view, based on statements in Supreme Court opinions rendered before the turn of the century, had been acquiesced in by Congress, followed by the lower federal courts, and generally accepted by the bar for over forty years. Congress could have changed the rule had it seen fit to do so. Yet the Court felt free to effect the change by its own action.

Still more recently the Court overruled two 1935 cases involving the question whether Congress had intended to extend the federal estate tax to a certain class of gifts. In vain did Justice Roberts adduce evidence that Congress had in effect approved the rule laid down in two overruled cases. Presumably, in the years since 1935 a number of decedents had disposed of their property in reliance on these cases. Congress could have changed the rule had it wished to do so; and in making the change it could have protected such dispositions. But the Court preferred not to await Congressional action.

The present attitude of the Court is shown not only in readiness to overrule judicial precedents but also in willingness to overrule, in effect, the language of federal statutes in order to carry out what the Court declares to be the intention of Congress.

It often happens that the language of the statute is susceptible of different interpretations. It has long been established that in making a choice between possible interpretations the Court may properly examine such material as the reports of legislative committees and Congressional debates in order to determine the purpose of the statute. Where the language of the statute is clear, however, it has been supposed that business men can safely rely upon the mere wording. Several decisions rendered during the last term of Court appear to go beyond the line of statutory interpretation and to amount to judicial legislation.

One case involved the question of whether a corporation having publicly owned securities outstanding, and desiring to effect modification of its unsecured obligations, may avail itself of the relatively simple machinery for that purpose provided by the new Chapter XI of the Bankruptcy Act, or must resort to the more cumbersome system established by Chapter X, which provides, among other things, for the taking of an active rôle by the Securities and Exchange Commission.

Under the wording of the statute, it seemed plain that any corporation whatever requiring only a modification of unsecured obligations was free to seek relief under the simpler Chapter XI, and that Chapter X was to be used for what is usually called a corporate reorganization involving general revision of the corporation’s capital structure.

By a 5 to 3 vote, however, the Court decided that the corporation in question could not avail itself of the simpler remedy, on the ground that the desirability of the more elaborate safeguards afforded to investors by the Chapter X procedure requires exclusion of large publicly held corporations from the benefits of Chapter XI. The dissenting Justices pointed out, without contradiction, that the attention of Congress had been called to the possible desirability of withholding the benefits of Chapter XI from corporations having publicly owned securities, and that Congress apparently rejected that suggestion, for in wording Chapter X no such limitation was made.

Another case in which the Court seems to have taken over Congressional functions involved the question whether the income of a trust established by a husband for his wife’s benefit is taxable as a part of the husband’s income, rather than the wife’s. The trust was to last for five years (unless the husband or wife died during that term), and the income realized on the trust properties during the life of the trust was to belong to the wife. Congress had never placed in the statute language imposing a tax on the husband in such circumstances; indeed, repeated proposals to that effect were rejected. But the Court approved these rejected proposals and sustained the tax.

In another instance, the Court was called upon to decide whether national banks have the power to pledge their assets to secure deposits made by federal governmental agencies of funds other than so-called ‘public monies.’ Congress had granted such power with respect to public monies. The Court had repeatedly declared that, by so doing, Congress had impliedly withheld that power with respect to all other deposits, thus overruling the contrary view theretofore persistently expressed by the Comptroller of the Currency. But now the Court, apparently impressed by the desirability of giving federal governmental agencies priority over other depositors, has cited approvingly the formerly rejected view of the Comptroller and held that the pledge power existed not only for public monies but also for deposits by federal governmental agencies.

In the matter of the private-law precedents we are not directly concerned with the soundness of the decisions overruled. It is sufficient for present purposes that they had enough support in public policy so that conscientious men can reasonably differ as to whether they were correctly decided in the first place; that they had become a part of the fabric of the law, and had been relied upon as such; and that, if their practical effect was believed to be undesirable, the situation could have been remedied through the regular processes of legislation.

In England the highest court declines to overrule any of its past determinations for the very reason that Parliament has full power to change any rule believed to have been wrongly laid down by the judicial process. That principle of adherence to former decisions — in legal terminology the rule of stare decisis, ’let it remain decided’ — is based not upon black-letter logic, but upon the realistic necessity of enabling those most concerned to predict the legal consequences of their acts.

In the past our highest court had followed that principle with fair consistency in nonconstitutional cases, for the reason for which the highest court of England follows it in all cases. While the new Court has not formally repudiated the principle of adherence to prior decisions, that principle is fast becoming ‘more honored in the breach than the observance.’

The interplay of stability and change in the law has been a good deal of a puzzle even to the greatest of our jurists, such as the late Justice Cardozo. There is a fundamental need for stability; there is also a need for ‘checking the actual working of accepted legal doctrines in the particular, as well as in the large, and at times correcting them by the leeway which inheres in judicial action.’ It will be unfortunate indeed, however, if change of established legal doctrines by judicial action is permitted largely to eliminate stability, particularly in a time when difficulties of business planning are so great and when the road to administrative change is more open than ever.

To protest against a free exercise of the power of the Court to set aside rules of law laid down in the past, and since relied upon, is by no means to maintain that errors and injustices should go uncorrected. It is simply to insist that the legislature is the more satisfactory agency of correction where it is free to act.

Legislative action has the great value of permitting the entire subject matter which a judicial decision touches only in part to be dealt with more completely and on a basis which a more representative body deems appropriate.

Also the legislature, unlike the Court, possesses facilities now extensively utilized for detailed factual investigation of all aspects of a question. And, unlike the Court, the legislature is under no compulsion to establish a new rule of law in order to settle an immediate controversy. The legislature need act only when investigation is complete and after ample time for deliberation on all the implications of the proposed action.

A further great advantage in legislative correction of rules of law is that changes so made do not expose completed transactions to unexpected unsettlement, but simply prescribe the rule to prevail in the future. There is also nothing in the fact that the legislature changes the law relating to a particular subject matter to suggest that the law in general is precarious and uncertain, as does, of course, overruling of prior decisions by the courts or disregard of a Congressional purpose plainly declared by statutory language or previous judicial interpretation.

The great complaint regarding certain earlier decisions of the Supreme Court applying clauses of the Constitution so as to limit the powers of Congress was that this amounted to ‘judicial legislation.’ There are two sides to the question of whether that was a fair characterization. There is no doubt, however, that ready departure by the Court from precedents judicially established in the field of private law, which can be modified or eliminated by Congressional action, is subject to that complaint. The uncertainties and doubts which such a practice creates will be reflected in hesitation and slowing down of vitally needed business enterprise and economic activity.