Northern Securities Co. v. United States

views updated

Northern Securities Co. v. United States

Excerpt from the United States Supreme Court decision

1904

"The supremacy of the law is the foundation rock upon which our institutions rest."

In 1904 the U.S. Supreme Court ruled that the federal government had the right to break up a corporation called the Northern Securities Company. The company had been organized in November 1901 by Wall Street banker J. Pierpont Morgan (1837–1913) and railroad owner James J. Hill (1838–1916). The purpose of the new company was to acquire stock in two railroads, the Northern Pacific and the Great Northern. Both ran trains across the northern part of the United States, from the Great Lakes in the East to Puget Sound (near Seattle) in the West.

The government of President Theodore Roosevelt (1858–1919) filed suit to break up Northern Securities, on the grounds that such a company violated the 1890 Sherman Antitrust Act. The government argued that simply by forming a company that owned stock in two competing railroads (one of which, the Northern Pacific, was bankrupt), Morgan and Hill would be acting to discourage competition in the railroad business in the northern part of the country. The Sherman Antitrust Act was designed to prevent that very thing. (A trust was a corporation whose purpose was to own stock in other companies within the same industry; by owning many companies in the same industry, trusts were a way of controlling, or avoiding, competition.)

The owners of Northern Securities fought the government's lawsuit. They claimed that the federal government had no right under the U.S. Constitution to regulate the purchase of stocks in a company; instead, the companies told the Supreme Court, that right belonged to state governments. Since the Northern Securities Company had been formed under the laws of New Jersey, the federal government had no legal power to stop it. The company's lawyers also argued that there was a difference between conducting interstate commerce (business between states), which the federal government had the Constitutional power to regulate, and the act of buying or selling shares in a railroad company.

In effect, the legal argument that reached the Supreme Court in December 1903 was about the power of the federal government to regulate companies. President Roosevelt believed that the federal government should act forcefully to control companies that threatened to discourage competition and thereby drive up prices or force other companies to follow orders. President Roosevelt believed that only the federal government was large enough to exert control over giant firms that came into existence toward the end of the nineteenth century.

On the other side, Morgan and Hill argued that the powers of the federal government were limited by the Constitution, and that rules about interstate commerce could not be extended to the act of simply owning property (as opposed to operating a company). Viewed in this light, the Supreme Court case dealt with a basic issue: the rights of private property owners versus the rights of a democratically elected government.

The Supreme Court was divided, five to four, in its decision. The majority of the Court's nine justices ruled in favor of the government, saying in their opinion that the only reason for the existence of Northern Securities was to create a monopoly on railroad traffic across the northern part of the country. The court ordered the company to be disbanded by selling the railroads it had acquired.

The minority of four Supreme Court justices felt that the government had gone too far in arguing that there was no difference between owning stock in a company and acting in a way to interfere with interstate commerce. Taken to its extreme, wrote Justice Oliver Wendell Holmes (1841–1935), the federal government could conceivably argue that any ownership of property might result in discouraging competition (referred to as restraint of trade) and therefore was a proper subject for regulation by the federal government.

The arguments put forth by both sides have remained a hot topic of political debate. The question of how much federal regulation is proper and good for people, and for business, is still an issue in the twenty-first century.

Things to remember while reading the excerpt from Northern Securities Co. v. United States:

Supreme Court cases are often argued in terms that seem removed from the issue at hand. In the case of Northern Securities, one such argument was whether applying the Sherman Antitrust Act to a holding company (a company whose only purpose was to own stock, as opposed to operating a business) was something new, or just a continuation of well-established law. Both sides of the Supreme Court argued in their legal opinions that nothing new was (or should be) happening in this case. The majority argued that regulating Northern Securities by disallowing it was following well-established precedents (previous cases). The minority argued that regulating Northern Securities by disallowing it was violating well-established precedents. The argument was significant because the Supreme Court tries to determine, and follow, how similar disputes over the law have been decided in the past, since the court has no Constitutional power to create new laws.
The growth of American railroads had been accompanied by many consolidations and sales of smaller companies to larger ones. Typically, a company would lay railroad track only between two cities. In a region, there might be many companies controlling small railroads that could not make money on their own. Consequently, larger companies would buy up smaller railroads to create a network of railroads that connected towns throughout a region. This practice had long been recognized as the nature of the business; did the Northern Securities Company do something beyond this sort of consolidation? The owners said no; the government said yes.
The legal case of Northern Securities was also a political issue. President Roosevelt was labeled a progressive, a politician who believed the government needed to provide a counter-weight to the power of private businesses. Some of his political opponents argued that the government had no business interfering with business, and that in fact privately owned businesses were a necessary check on government power. This fundamental argument over the role of government and private property was carried out in the Northern Securities case in a slightly different form. The two sides argued over the relative powers of the federal government and the state governments (which were often sympathetic to big businesses to gain an advantage over other states in attracting jobs) to regulate corporations, and the issue of who owned stock in corporations.
The Supreme Court in this case was deciding on whether a lower court was right in upholding the federal govern-ment's suit challenging the formation of the Northern Securities Company. For that reason, the majority opinion sometimes refers to the court's "affirmance," or upholding, of "the case below," meaning the ruling of the lower court.
After the Supreme Court justices decided the case, they asked one justice, John Marshall Harlan (1833–1911), to write the Court's opinion, or finding. Occasionally, legal opinions use advanced vocabulary or refer to familiar things with unfamiliar words (or use familiar words to describe unfamiliar things). For example, this case uses the word "combinations" to refer to companies that own other companies.

Excerpt from NORTHERN SECURITIES COMPANY et al., Appts., v. UNITED STATES

Mr. Justice Harlan announced theaffirmance of thedecree of thecircuit court , and delivered the following opinion: …

Appts.:: Appellants; group appealing a previous court ruling.
Affirmance:: Agreement.
Decree:: Ruling.
Circuit court:: A Federal court below the Supreme Court, whose decisions can be appealed to the Supreme Court.

The Great Northern Railway Company and the Northern Pacific Railway Company owned, controlled, and operated separate lines of railway,—the former road [i.e., the Great Northern] extending from Superior, and from Duluth and St. Paul [Minnesota], to Everett, Seattle [Washington], and Portland [Oregon], with a branch line to Helena [Montana]; the latter [i.e., the Northern Pacific] extending from Ashland, and from Duluth and St. Paul [Minnesota], to Helena [Montana], Spokane, Seattle, Tacoma [Washington] and Portland [Oregon]. The two lines, main and branches, about 9,000 miles in length, were and are parallel and competing lines across the continent through the northern tier of states between the Great Lakes and the Pacific, and the two companies were engaged in active competition for freight and passenger traffic, each road connecting at its respective terminals with lines of railway, or with lake and river steamers, or with seagoing vessels.… Prior to November 13th, 1901, defendant [James J.] Hill and associatestockholders of the Great Northern Railway Company, and defendant [J. Pierpont] Morgan and associate stockholders of the Northern Pacific Railway Company, entered into acombination to form, under the laws of New Jersey, aholding corporation , to be called the Northern Securities Company.…

Stockholders:: Persons owning shares of public companies.
Combination:: Partnership.
Holding corporation:: A company whose only purpose is to own other companies.

Early in 1901 the Great Northern and Northern Pacific Railway Companies, having in view theultimate placing of their two systems under a common control, united in the purchase of the capital stock of the Chicago, Burlington, & Quincy Railway Company, giving in payment, upon an agreed basis of exchange, thejoint bonds of the Great Northern and Northern Pacific Railway Companies.… In this manner the two purchasing companies became the owners of … the Chicago, Burlington, & Quincy Railway Company, whose linesaggregated about 8,000 miles, and extended from St. Paul [Minnesota] to Chicago, and from St. Paul and Chicago to Quincy, Burlington, Des Moines [Iowa], St. Louis, Kansas City, St.Joseph [Missouri], Omaha Lincoln [Nebraska], Denver [Colorado], Cheyenne [Wyoming], and Billings [Montana], where it connected with the Northern Pacific Railroad. By this purchase of stock the Great Northern and Northern Pacific acquired full control of the Chicago, Burlington, & Quincy main line and branches.

Ultimate:: Final.
Joint bonds:: Shares of two or more companies.
Aggregated:: Totaled.

Prior to November 13th, 1901, defendant Hill and associate stockholders of the Great Northern Railway Company, and defendant Morgan and associate stockholders of the Northern Pacific Railway Company, entered into a combination to form, under the laws of New Jersey, a holding corporation, to be called the Northern Securities Company … to which company, in exchange for its own capital stock upon a certain basis and at a certain rate, was to be turned over the capital stock, or a controlling interest in thecapital stock, of each of the constituent railway companies, with power in the holding corporation to vote such stock and in all respects to act as the owner thereof, and to do whatever it might deem necessary in aid of such railway companies or to enhance the value of their stocks. In this manner the interests of individual stockholders in the property andfranchises of the two independent and competing railway companies were to be converted into an interest in the property and franchises of the holding corporation. Thus, as stated in article 6 of thebill, "by making the stockholders of each system jointly interested in both systems, and by practically pooling the earnings of both for the benefit of the former stockholders of each, and byvesting the selection of the directors and officers of each system in a common body,to wit , the holding corporation, with not only the power, but the duty, to pursue a policy which would promote the interests, not of one system at the expense of the other, but of both at the expense of the public, allinducement for competition between the two systems was to be removed, avirtual consolidation effected, and a monopoly of the interstate and foreign commerce formerly carried on by the two systems as independent competitors established." …

Capital:: Accumulated wealth.
Franchises:: Groups.
Bill:: Document.
Vesting:: Putting.
To wit:: Namely.
Inducement:: Offer; incentive.
Virtual:: Practical.

The government charges that if the combination was held not to be in violation of the [1890 Sherman Antitrust] act of Congress, then all efforts of the national government to preserve to the people the benefits of free competition among carriers engaged ininterstate commerce will bewholly unavailing , and all transcontinental lines, indeed, the entire railway systems of the country, may be absorbed, merged, and consolidated, thus placing the public at the absolute mercy of the holding corporation.…

Interstate commerce:: Business between two or more states.
Wholly unavailing:: Completely futile.

In our judgment, the evidence fully sustains thematerial allegations of thebill , and shows a violation of the act of Congress, in so far as it declares illegal every combination orconspiracy inrestraint of commerce among the several states and with foreign nations, and forbids attempts to monopolize such commerce or any part of it.…

Material allegations:: Relevant charges, accusations.
Bill:: Lawsuit.
Conspiracy:: Secret plan.
Restraint:: Restriction.

It isindisputable upon this record that under the leadership of the defendants Hill and Morgan the stockholders of the Great Northern and Northern Pacific Railway corporations, having competing and substantially parallel lines from the Great Lakes and the Mississippi river to the Pacific ocean at Puget Sound combined and conceived the scheme of organizing a corporation under the laws of New Jersey which should hold the shares of the stock of the constituent companies; such shareholders,in lieu of their shares in those companies, to receive, upon an agreed basis of value, shares in the holding corporation.… The stockholders of these two competing companies disappeared, as such, for the moment, but immediately reappeared as stockholders of the holding company, which was thereafter to guard the interests of both sets of stockholders as a unit, and to manage, or cause to be managed, both lines of railroad as if held in one ownership. Necessarily by this combination or arrangement the holding company in the fullest sense dominates the situation in the interest of those who were stockholders of the constituent companies; as much so, for every practical purpose, as if it had been itself a railroad corporation which had built, owned, and operated both lines for the exclusive benefit of its stockholders. Necessarily, also, the constituent companies ceased, under such a combination, to be in active competition for trade and commerce along their respective lines, and have become, practically, one powerful consolidated corporation, by the name of a holding corporation, the principal, if not the sole, object for the formation of which was to carry out the purpose of the original combination, under which competition between the constituent companies would cease. Those whowere stockholders of the Great Northern and Northern Pacific and became stockholders in the holding company are now interested in preventing all competition between the two lines, and, as owners of stock or of certificates of stock in the holding company, they will see to it that no competition is tolerated.… No scheme or device could more certainly come within the words of the [Sherman Antitrust] act,—"combination in the form of a trust or otherwise … in restraint of commerce among the several states or with foreign nations."…

Indisputable:: Without doubt.
In lieu:: Instead.

The circuit court was undoubtedly right when it said—all the judges of that courtconcurring —that the combination referred to "led inevitably to the following results: First, it placed the control of the two roads in the hands of a single person, to wit, the Securities Company [corporations are a sort of artificial person, under the law], by virtue of its ownership of a large majority of the stock of both companies; second, it destroys every motive for competition between two roads engaged in interstate traffic, which were natural competition for business, by pooling the earnings of the two roads for the common benefit of the stockholders of both companies." …

Concurring:: Agreeing.

[Based on earlier Supreme Court decisions it is clear] that although the act of Congress known as the anti-trust act has no reference to the mere manufacture or production of articles orcommodities within the limits of the several states, it does embrace and declare to be illegal every contract, combination, or conspiracy, in whatever form, of whatever nature, and whoever may beparties to it, which directly or necessarily operates in restraint of trade or commerce among the several states or with foreign nations;

Commodities:: Goods.
Parties to:: Involved in.

That the act is not limited to restraints of interstate and international trade or commerce that are unreasonable in their nature, but embraces all direct restraints imposed by any combination, conspiracy, or monopoly upon such trade or commerce;

That railroad carriers engaged in interstate or international trade or commerce areembraced by the act;

Embraced:: Covered.

That combinations, even among private manufacturers or dealers, whereby interstate or international commerce is restrained, are equally embraced by the act;

That Congress has the power to establish rules by which interstate and international commerce shall be governed, and, by the anti-trust act, hasprescribed the rule of free competition among those engaged in such commerce;

Prescribed:: Ordered.

That every combination or conspiracy which would extinguish competition between otherwise competing railroads engaged in interstate trade or commerce, and which would in that way restrain such trade or commerce, is made illegal by the act;

That the natural effect of competition is to increase commerce, and an agreement whose direct effect is to prevent this play of competition restrains instead of promoting trade and commerce;

That tovitiate a combination such as the act of Congress condemns, it need not be shown that the combination, in fact, results or will result, in a total suppression of trade or in a complete monopoly, but it is only essential to show that, by its necessary operation, it tends to restrain interstate or international trade or commerce or tends to create a monopoly in such trade or commerce and to deprive the public of the advantages that flow from free competition;

Vitiate:: Make ineffective.

That the constitutionalguaranty of liberty of contract does not prevent Congress from prescribing the rule of free competition for those engaged in interstate and international commerce; and,

Guaranty of liberty of contract:: Protection of contracts.

That under its power to regulate commerce among the several states and with foreign nations, Congress had authority to enact the statute in question.…

The means employed in respect of the combinations forbidden by the anti-trust act, and which Congress deemedgermane to the end to be accomplished, was to prescribe as a rule for interstate and international commerce (not for domestic commerce [within one state]) that it should not bevexed by combinations, conspiracies, or monopolies which restrain commerce by destroying or restricting competition. We say that Congress has prescribed such a rule, because, in all the prior cases in this court, the anti-trust act has beenconstrued as forbidding any combination which, by its necessary operation, destroys or restricts free competition among those engaged in interstate commerce; in other words, that to destroy or restrict free competition in interstate commerce was to restrain such commerce. Now, can this court say that such a rule is prohibited by the Constitution or is not one that Congress could appropriately prescribe when exerting its power under the commerce clause of the Constitution [that gives the federal government the right to regulate business carried on between states]? Whether the free operation of the normal laws of competition is a wise and wholesome rule for trade and commerce is an economic question which this court need not consider or determine. Undoubtedly, there are those whothink that the general business interests andprosperity of the country will be best promoted if the rule of competition is not applied. But there are others who believe that such a rule is more necessary in these days of enormous wealth than it ever was in any former period of our history. Be all this as it may, Congress has, in effect, recognized the rule of free competition by declaring illegal every combination or conspiracy in restraint of interstate and international commerce. As, in the judgment of Congress, the public convenience and the general welfare will be bestsubserved when the natural laws of competition are left undisturbed by those engaged in interstate commerce, and as Congress hasembodied that rule in a statute, that must be, for all, the end of the matter, if this is to remain a government of laws, and not of men.…

Germane:: Relevant.
Vexed:: Disturbed.
Construed:: Understood.
Prosperity:: Success.
Subserved:: Served as a means of aiding.
Embodied:: Incorporated.

Indeed, when Congress declared contracts, combinations, and conspiracies in restraint of trade or commerce to be illegal, it did nothing more than apply to interstate commerce a rule that had been long applied by the several states when dealing with combinations that were in restraint of their domestic commerce. The decisions in state courts upon this general subject are not only numerous and instructive, but they show the circumstances under which the anti-trust act was passed. It may well be assumed that Congress, when enacting that statute, shared the general apprehension that a few powerful corporations or combinations sought to obtain, and, unless restrained, would obtain, such absolute control of the entire trade and commerce of the country as would bedetrimental to the general welfare.…

Detrimental:: Damaging.

And all, we take it, will agree, as established firmly by the decisions of this court, that the power of Congress over commerce extends to all theinstrumentalities of such commerce, and to every device that may be employed to interfere with the freedom of commerce among the states and with foreign nations. Equally, we assume, all will agree that the Constitution and the legal enactments of Congress are, byexpress words of the Constitution, the supreme law of the land, anything in the constitution and laws of any state to the contrary notwithstanding.…

Instrumentalities:: Tools.
Express:: Clearly stated.

No state can, by merely creating a corporation, or in any other mode, project its authority into other states, and across the continent, so as to prevent Congress from exerting the power it possesses under the Constitution over interstate and international commerce, or so as toexempt its corporation engaged in interstate commerce from obedience to any rule lawfully established by Congressfor such commerce. It cannot be said that any state may give a corporation, created under its laws, authority to restrain interstate or international commerce against the will of the nation as lawfully expressed by Congress. Every corporation created by a state is necessarily subject to the supreme law of the land.…

Exempt:: Free.

The court may make any order necessary to bring about thedissolution or suppression of an illegal combination that restrains interstate commerce. All this can be done withoutinfringing in any degree upon the just authority of the states. The affirmance of the judgment below will only mean that no combination, however powerful, is stronger than the law, or will be permitted to avail itself of the pretext that to prevent it doing that which, if done, would defeat a legal enactment of Congress, is to attack the reserved rights of the states.…

Dissolution:: Breakup.
Infringing:: Blocking.

We repeat that no state canendow any of its corporations, or any combination of its citizens, with authority to restrain interstate or international commerce, or to disobey the national will as manifested in legal enactments of Congress. So long as Congress keeps within the limits of its authority as defined by the Constitution, infringing no rights recognized or secured by that instrument, its regulations of interstate and international commerce, whetherfounded in wisdom or not, must be submitted to by all. Harm, and only harm, can come from the failure of the courts to recognize this fundamental principle of constitutional construction. To depart from it because of the circumstances of special cases, or because the rule, in its operation, may possibly affect the interests of business, is to endanger the safety and integrity of our institutions and make the Constitution mean not what it says, but what interested parties wish it to mean at a particular time and under particular circumstances. The supremacy of the law is the foundation rock upon which our institutions rest.

Endow:: Give.
Founded:: Established.

What happened next …

As a result of the Supreme Court decision, the Northern Securities Company was broken up. Hill and Morgan were not allowed to form a common company that owned two competing railroads.

In a much larger sense, the Northern Securities decision opened the way for greatly expanded regulation by the federal government of companies, most of which engage in interstate commerce. In effect, the court said that by granting the federal government the right to regulate interstate commerce, it also gave the federal government the right to regulate many other aspects of business that previously were state matters.

In a practical sense, this case (and others like it) defined the modern federal government, and its role in regulating many aspects of business, ranging from food safety to the operation of airlines and railroads.

The outcome of Northern Securities pleased President Theodore Roosevelt. But in 1912 Roosevelt became frustrated with the record of his successor, President William Howard Taft (1857–1930), partly on the grounds that Taft had not been as aggressive as Roosevelt would have liked in regulating corporate behavior. Consequently Roosevelt decided to challenge Taft for the Republican presidential nomination in 1912. Roosevelt lost and started his own party, the Progressive Party. But in the presidential election that year, the Republican vote was split between Taft and Roosevelt, and Democrat Woodrow Wilson (1856–1924) won the election. In some respects, the split of the Republicans was permanent, since in later years the Republican Party became associated with opposition to federal regulation and the Democrats were, more often than not, the champions of such regulation.

Did you know …

Public sentiment against giant corporations that controlled whole industries started as early as 1880. It took over twenty years before the federal government, under President Theodore Roosevelt, got around to challenging the "trusts" in court. Seven years after the Northern Securities case, an even larger trust was "busted" by the Supreme Court. It was the oil trust known as Standard Oil, owned by John D. Rockefeller (1839–1937), who was by then the richest person in the country.