BUSINESS ENTERPRISE AND THE LAW

BY GILBERT HOLLAND MONTAGUE, OF THE NEW YORK BAR

(From the North American Review, November, 1910)

From the end of the Civil War until the passage of the Interstate Commerce Act and the Sherman Anti-Trust Act, popular faith in competition, unhindered by governmental interference, continued practically undisturbed. "In the early history of railroad transportation," said Attorney-General Moody, later Justice of the Supreme Court of the United States, in his annual report for 1906, "the practice of rebating was common, well understood, and not prohibited by any Federal statute. It was regarded as one aspect of the spirit of competition which the common law cherished." The last century conception of competition and freedom of contract and absolute individualism of conduct, unhampered by any legal restrictions, was rooted in the theory of the Declaration of Independence and the Constitution, and fostered by the tremendous commercial progress which it had produced. Against this principle, the Interstate Commerce Act, which prohibited private bargaining between the railroad and the shipper, and the Sherman Anti-Trust Act, which forbade the attainment of industrial dominance, toward which all competition aimed, seemed incongruous and irrational contradictions, weapons pusillanimously seized by the industrially unfit against their superiors. The spiritless enforcement of these statutes, from the time of their enactment until 1903, shows how pharisaical they were generally considered by the community. "A careful examination," to quote again from Attorney-General Moody, "discloses that there were in those years seventy-nine indictments (under the Interstate Commerce Act), upon which the Government failed in sixty-two and succeeded in seventeen. No sentences of imprisonment were executed and the total fines amounted to $16,376. It is safe to say that these penalties, distributed over many years, were, as deterrents from the commission of prohibited offenses, a negligible factor." The indifferent enforcement of the Sherman Anti-Trust Act was still more conspicuous. Attorney-General Olney, in his annual report for 1893, protested "that as all ownership of property is of itself a monopoly, and as every business contract or transaction may be viewed as a combination which more or less restrains some part or kind of trade or commerce, any literal application of the provisions of the statute is out of the question." Reviewing the prosecutions, brought under the Sherman Anti-Trust Act during this period, Attorney-General Moody stated: "From the date of the enactment of the law to the beginning of

President Roosevelt's administration in 1901, sixteen proceedings were begun and have been concluded - five of them indictments, in all of which the Government has failed, and eleven of them petitions in equity, in which the Government prevailed in eight and failed in three. . . . The apathetic enforcement of the Interstate Commerce Act and the Sherman Anti-Trust Act, during this period, was due not so much to reluctance on the part of the prosecutors as to the conviction of the community that a vigorous enforcement of these statutes was contrary to the approved mode of business competition. During the decade immediately succeeding the war with Spain, a series of events occurred which shook this long-cherished popular belief. Investigation into the management of certain railroads, insurance companies, and street railways revealed startling corruption and dishonesty. Newspapers and magazine-writers attacked methods of business competition which previously had never been questioned. The indignation thus engendered stirred depths of popular conscience which had never been aroused by the agitation for the Interstate Commerce Act, nor by the clamor for the Sherman Anti-Trust Act. The opinion grew that business competition, at least in some of its manifestations, was a crude and unjust force in the social economy.

In 1903, the Roosevelt administration had practically only two statutes through which the Federal Government could exercise any control or interference with competition. These statutes were the Interstate Commerce Act and the Sherman Anti-Trust Act.

In response to increasing popular demand, Congress appropriated, in 1903, $500,000 to be expended by the Attorney-General in prosecutions under these statutes. At the same time, acts were passed facilitating trials under these statutes, and particularly strengthening the hands of the Government in dealing with discriminatory practices of railroads. The Department of Commerce and Labor was created, and invested with abundant powers to investigate large business concerns everywhere.

In 1903, the Interstate Commerce Commission stated that discriminatory practices were no longer characteristic of railroad. operations, and that never before had the law been so strictly observed.

In 1905, however, came the revelations of the collusion between certain freight shippers and several high officials of the Pennsylvania Railroad. About the same time came the disclosures regarding conspicuous breaches of trust on the part of certain officers of the largest life-insurance companies in the country.

Responding again to popular demand, each Federal prosecuting officer was instructed, in a circular letter from the Attorney-General, to proceed in each case brought to his attention showing a violation of the Interstate Commerce Act and the Sherman Anti-Trust Act. As a result, seventy-seven indictments were returned under the In

terstate Commerce Act, upon which thirteen corporations and seventeen individuals were found guilty. The corporations were fined in sums ranging from $15,000 to $108,000 each, and the individuals were fined in sums ranging from $1,000 to $10,000 each. During the succeeding year several sentences of imprisonment were inflicted, and fines aggregating $416,125 were imposed. Equal activity was displayed in the enforcement of the Sherman Anti-Trust Act. Proceeding upon the construction of the Act which the Government had successfully applied in the Northern Securities Case, the Government procured the dissolution of the "Beef Trust," composed of Swift & Co. and its allied concerns, and began proceedings against the General Paper Company and its associated companies, familiarly called the "Paper Trust," and against various combinations in the grocery, beef, lumber and transportation business. By the close of 1906, the Roosevelt administration had a record of twenty-three proceedings commenced under this Act, seven of which had been successfully concluded and the rest still pending. These included proceedings against the American Tobacco Company and several other corporations interested in the tobacco and licorice business, against thirty-one corporations and twenty-five individuals engaged in the manufacture of fertilizer, against the Standard Oil Company and seventy other corporations and individuals concerned in the manufacture of refined oil and petroleum products, and against combinations in transportation, paper, groceries, elevators, salt, meat, lumber, drygoods, oil, tobacco, fertilizer and ice. Before the close of the administration thirty-seven such proceedings had been begun under the Sherman Anti-Trust Act.

The activity of the Federal administration was exceeded by the zeal of the State Legislatures. In 1899, Texas had passed laws relieving persons purchasing goods of a trust from liability to pay the purchase price, and requiring every corporation that owned or leased the patent of a machine to offer such machines for sale, instead of reserving them for exclusive use. In 1905, Arkansas relieved persons purchasing goods of a trust from liability to pay therefor, and authorized such persons to recover from the trust any money or value paid on account of such goods. Arkansas also enacted that in the prosecution of any trust the prosecuting attorney might compel any nonresident to appear with his books and papers, within six days and the necessary time required to travel; and in the event of his failure to appear, the trust was made liable to judgment on default. In 1907, the Governor of Texas recommended a law empowering the AttorneyGeneral to have "full and free access to all the works, plants, offices, books, vouchers and papers" of any corporation doing business in Texas without reference to whether such works, offices and papers were within the State or without it. Legislation in accordance with this

recommendation was adopted, with the added provision that if access to works, offices and papers outside the State were denied, judgment might be rendered against the trust. At the same time, Texas increased the penalty for violation of its anti-trust act to imprisonment for ten years. Already a number of States had imposed enormous penalties upon the sale of commodities at less than the "cost of manufacture," or at a price greater or less than their "fair market value," or at a price greater or less than such commodities were sold for in any other place "under like conditions." These penalties were fines varying from $1,000 to $10,000 and terms of imprisonment running from one year to ten years. In 1907 such statutes had been enacted in specially drastic form in Indiana, Mississippi, Arkansas, Missouri, Minnesota, North Carolina, Kansas, Iowa, South Carolina, Texas and North Dakota; and similar legislation had been recommended by the Governors of California and Colorado.

Meanwhile the railroads had not escaped attention. In 1903, ten States enacted statutes giving to their railroad commissions increased powers to fix freight and passenger rates and to supervise the details of operation. These States were Kansas, Arkansas, Florida, Missouri, North Carolina, South Carolina, North Dakota, Texas, Virginia and Wisconsin. In 1905, the powers of the railroad commissions were greatly increased in Georgia, Minnesota, Illinois, California, South Carolina, Kansas, Indiana, Washington and Wisconsin. In 1906, Ohio, Nebraska, Georgia, Louisiana, South Carolina, Kentucky and Wisconsin increased still further the powers of their railroad commissions. In 1907, railroad commissions were either created or vested with increased powers in Arkansas, Florida, Georgia, Indiana, Iowa, Kansas, Minnesota, North Carolina, Missouri, North Dakota, South Dakota, Alabama, Colorado, Montana, Pennsylvania, New York, New Jersey, Nevada, Michigan, Nebraska and Oregon. At the same time statutes of more arbitrary character were also enacted. In 1905, the Legislatures of Kansas, Washington, Missouri and Oklahoma passed laws fixing rigid regulations regarding freight. rates, car service, demurrage and storage charges upon all railroads operating within their limits; and North Carolina enacted that if a consignee claimed damages on a shipment, and the claim remained. unpaid for sixty days, and the consignee recovered the full amount by suit, the railroad should pay a penalty of fifty dollars. Florida prescribed a somewhat similar penalty in analogous circumstances. In 1906, Ohio, Virginia and Maryland adopted laws limiting passenger rates, except in minor exceptions, to two cents per mile. Similar bills were adopted in at least nine other States. Arkansas enacted that every railroad train passing through a town within half a mile of the State line should stop for passengers, unless it stopped within three hundred feet on the other side of the line; and also provided

that the consignee might collect any damage claim, not exceeding ten dollars, from the railroad agent at the destination, provided that he presented to the agent an itemized and verified statement of the damage within three days after the goods were received; and in the event that payment were refused, he might recover treble damages. Georgia required that claims for damages be paid by the railroad within sixty days under penalty of fifty dollars and interest.

In 1907, the passion for arbitrary legislation against railroads became almost national. Recommendations for the statutory regulation of railroad rates were made by the Governors of Alabama, California, Missouri, Arkansas, Colorado, Kansas, Massachusetts, Minnesota, Nebraska, North Dakota, West Virginia and Wisconsin. Maximum rates for passenger traffic generally two cents a mile — were urged by the Governors of Indiana, Iowa, Kansas, Michigan, Minnesota, North Carolina, Pennsylvania and Texas. Statutes in accordance with the latter recommendations were passed by Alabama, Arkansas, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Carolina, North Dakota, Pennsylvania, South Dakota, West Virginia and Wisconsin. Maximum rates for particular articles of freight were enacted in Alabama, Kansas, Minnesota, Missouri, Nebraska, North Carolina and North Dakota. Alabama took a leaf from the experience of North Carolina, Florida, Arkansas and Georgia and passed statutes similar to those of the latter States requiring substantially immediate payment by the railroads for all claims for damages under very heavy penalties.

This hostility toward large corporations was cleverly invoked by the Federal administration in support of measures conferring increased supervisory powers upon the Federal branch of the Government. In May, 1906, while the Hepburn Railroad Rate Bill was being debated in the Senate, the President sent a special message to Congress denouncing the "unfair advantage over its competitors" enjoyed by the Standard Oil Company, and declaring that the enactment of a law, giving the Interstate Commerce Commission the right to fix railroad rates, was necessary in order to prevent such abuses. In the storm of popular feeling aroused by this message, the bill was passed. While the Pure Food Bill and Meat Inspection Bill were meeting opposition in Congress, the President made public the report of the investigation of the Chicago packing establishments. In the national revulsion aroused by this disclosure, these bills were passed. While the passion for Federal control was highest, an Employers' Liability Law (since declared to be an unconstitutional exercise of Federal power) was enacted, a National Child's Labor Bil! was agitated, and the Federal regulation of large businesses generally was vigorously

1 An amended employers' liability law has since been upheld. - EDITOR'S NOTE.