Dayton-Goose Creek R. Co. v. United States, 263 U.S. 456 (1924)

U.S. Supreme Court DAYTON-GOOSE CREEK R. CO. v. U S, 263 U.S. 456 (1924)

263 U.S. 456

DAYTON-GOOSE CREEK RY. CO. v. UNITED STATES et al. No. 330. Argued Nov. 16-19, 1923. Decided Jan. 7. 1924.

Messrs. Frank Andrews, of Houston, Tex., Robert J. Carey, of New York City, and Robert H. Kelley, of Houston, Tex., for appellant.[ Dayton- Goose Creek R Co v. U S 263 U.S. 456 (1924) ]

[Page 263 U.S. 456, 464]

Mr. P. J. Farrell, of Washington, D. C., for Interstate Commerce Commission.

[Page 263 U.S. 456, 466]

Mr. Solicitor General Beck, of Washington, D. C., for the United States.

[Page 263 U.S. 456, 474]

Mr. Chief Justice TAFT delivered the opinion of the Court.

The main question in this case is whether the so-called 'recapture' paragraphs of the Transportation Act of 1920 (chapter 91, 422, 41 Stat. 456, 489-491 [Comp. St. Ann. Supp. 1923, 8583a] adding section 15a, pars. 5-17, to the Interstate Commerce Act) are constitutional.

The Dayton-Goose Creek Railway is a corporation of Texas, engaged in intrastate, interstate, and foreign commerce. Its volume of intrastate traffic exceeds that of its interstate and foreign traffic. In response to orders of the Interstate Commerce Commission, the carrier made returns for 10 months of 1920, and for the full year of 1921, reporting the value of its railroad property employed in commerce and its net revenue therefrom. It earned $21,666.24, more than 6 per cent., on the value of its property in the 10 months of 1920, and $33,766.98

[Page 263 U.S. 456, 475]

excess in the 12 months of 1921. The Commission requested it to report what provision it had made for setting up a fund to preserve one half of these excesses, and to remit the other half to the Commission.

The carrier then filed the present bill, setting forth the constitutional invalidity of the recapture provisions of the act and the orders of the Commission based thereon, averring that it had no adequate remedy at law to save itself from the irreparable wrong about to be done to it by enforcement of the provisions, and praying that the defendants, the United States, the Interstate Commerce Commission, and the United States district attorney for the Eastern district of Texas, be temporarily restrained from prosecuting any civil or criminal suit to enforce the Commission's orders and that the court on final hearing make the injunction permanent. The Commission answered the bill. The United States and the district attorney moved to dismiss it for want of equity jurisdiction and for a lack of equity. An application for an interlocutory injunction before a court of three judges under the Act of October 22, 1913, c. 32 (38 Stat. 208, 220), was denied, and the court, proceeding to consider the equities, dismissed the bill.

The question of equity jurisdiction raised below has not been discussed here by counsel for the appellees, either upon their briefs or in oral argument. They do not rely on it, but seek without delay a decision on the merits.

While the Dayton-Goose Creek Railway Company was the sole complainant below and is the sole appellant here, 19 other railway companies have, as amici curiae, upon leave granted, filed briefs in support of its appeal. Their names appear in the margin.1-

[Page 263 U.S. 456, 476]

By section 422 of the Transportation Act there was added to the existing Interstate Commerce Act, and its amendments, section 15a. The section in its second paragraph directs the Commission to establish rates which will enable the carriers, as a whole or by rate groups of territories fixed by the Commission, to receive a fair net operating return upon the property they hold in the aggregate for use in transportation. By paragraph 3 the Commission is to establish from time to time and make public, the percentage of the value of the aggregate property it regards as a fair operating return, but for 1920 and 1921 such a fair return is to be 5 1/2 per cent., with discretion in the Commission to add one-half of 1 per cent. as a fund for adding betterments on capital account. By paragraph 4 the Commission is to fix the aggregate value of the property from time to time, using in doing so the results of its valuation of the railways as provided in section 19a of the Interstate Commerce Act (Comp. St. 8591) so far as they are available and all the elements of value recognized by the law of the land for rate-making purposes, including so far as the Commission may deen it proper, the investment account of the railways.

Paragraph 5 declares that because it is impossible to establish uniform rates upon competitive traffic which will adequately sustain all the carriers needed to do the business, without giving some of them a net income in excess of a fair return, any carrier receiving such excess shall hold it in the manner thereafter prescribed as trustee for the United States. Paragraph 6 distributes

[Page 263 U.S. 456, 477]

the excess, one half to a reserve fund to be maintained by the carrier, and the other half to a general railroad revolving fund to be maintained by the Commission. Paragraph 7 specifies the only uses to which the carrier may apply its reserve fund. They are the payment of interest on bonds and other securities, rent for leased lines, and the payment of dividends, to the extent that its operating income for the year is less than 6 per cent. When the reserve fund equals 5 per cent. of the value of the railroad property, and as long as it continues to do so, the carrier's one-half of the excess income may be used by it for any lawful purpose. Under paragraph 10, and subsequent paragraphs, the general railroad revolving fund is to be administered by the Commission in making loans to carriers to meet expenditures on capital account, to refund maturing securities originally issued on capital account and for buying equipment and facilities and leasing or selling them to carriers.

This court has recently had occasion to construe the Transportation Act. In Wisconsin R. R. Commission v. C., B. & Q. R. R. Co. 257 U.S. 563, 42 Sup. Ct. 232, 22 A. L. R. 1086, it was held that the act in seeking to render the interstate commerce railway system adequate to the country's needs had by sections 418 and 422 (Comp. St. Ann. Supp. 1923 , 8583, 8583a), conferred on the Commission valid power and duty to raise the level of intrastate rates when it found that they were so low as to discriminate against interstate commerce and unduly to burden it. In the New England Divisions Case, 261 U.S. 184, 43 Sup. Ct. 270, it was held that under section 418 the Commission in making division of joint rates between groups of carriers might in the public interest consult the financial needs of a weaker group in order to maintain it in effective operation as part of an adequate transportation system, and give it a greater share of such rates if the share of the other group was adequate to avoid a confiscatory result.

[Page 263 U.S. 456, 478]

In both cases it was pointed out that the Transportation Act adds a new and important object to previous interstate commerce legislation which was designed primarily to prevent unreasonable or discriminatory rates against persons and localities. The new act seeks affirmatively to build up a system of railways prepared to handle promptly all the interstate traffic of the country. It aims to give the owners of the railways an opportunity to earn enough to maintain their properties and equipment in such a state of efficiency that they can carry well this burden. To achieve this great purpose, it puts the railroad systems of the country more completely than ever under the fostering guardianship and control of the Commission which is to supervise their issue of securities, their car supply and distribution, their joint use of terminals, their construction of new lines, their abandonment of old lines, and by a proper division of joint rates, and by fixing adequate rates for interstate commerce, and in case of discrimination, for intrastate commerce, to secure a fair return upon the properties of the carriers engaged.

It was insisted in the two cases referred to, and it is insisted here, that the power to regulate interstate commerce is limited to the fixing of reasonable rates and the prevention of those which are discriminatory, and that when these objects are attained, the power of regulation is exhausted. This is too narrow a view of the commerce clause. To regulate in the sense intended is to foster, protect and control the commerce with appropriate regard to the welfare of those who are immediately concerned, as well as the public at large, and to promote its growth and insure its safety. The Daniel Ball, 10 Wall. 557, 564; County of Mobile v. Kimball, 102 U.S. 691, 696, 697 S.; California v. Pacific Railroad Co., 127 U.S. 1, 39, 8 S. Sup. Ct. 1073; Wilson v. Shaw, 204 U.S. 24, 33, 27 S. Sup. Ct. 233, L. Ed. 351; Second Employers' Liability Cases, 223 U.S. 1, 47, 32 S. Sup. Ct. 169, 38 L. R. A. (N. S.) 44; Luxton v. North River

[Page 263 U.S. 456, 479]

Bridge Co., 153 U.S. 525, 529, 14 S. Sup. Ct. 891. Mr. Justice Bradley, speaking for the court in California v. Pacific Railroad Company, 127 U.S. 39, 8 Sup. Ct. 1080 (32 L. Ed. 150), said: 'The power to construct, or to authorize individuals or corporations to construct, national highways and bridges from state to state, is essential to the complete control and regulation of interstate commerce. ... This power in former times was exerted to a very limited extent, the Cumberland or National road being the most notable instance. ... But since, in consequence of the expansion of the country, the multiplication of its products, and the invention of railroads and locomotion by steam, land transportation has so vastly increased, a sounder consideration of the subject has prevailed and led to the conclusion that Congress has plenary power over the whole subject.'

If Congress may build railroads under the commerce clause, it may certainly exert affirmative control over privately owned railroads, to see that such railroads are equipped to perform, and do perform, the requisite public service.

Title IV of the Transportation Act, embracing sections 418 and 422, is carefully framed to achieve its expressly declared objects. Uniform rates enjoined for all shippers will tend to divide the business in proper proportion so that when the burden is great, the railroad of each carrier will be used to its capacity. If the weaker roads were permitted to charge higher rates than their competitors, the business would seek the stronger roads with the lower rates, and congestion would follow. The directions given to the Commission in fixing uniform rates will tend to put them on a scale enabling a railroad of average efficiency among all the carriers of the section to earn the prescribed maximum return. Those who earn more must hold one half of the excess primarily to preserve their sound economic condition and avoid wasteful expenditures and

[Page 263 U.S. 456, 480]

unwise dividends. Those who earn less are to be given help by credit secured through a fund made up of the other half of the excess. By the recapture clauses Congress is enabled to maintain uniform rates for all shippers and yet keep the net returns of railways, whether strong or weak, to the varying percentages which are fair respectively for them. The recapture clauses are thus the key provision of the whole plan.

Having regard to the property rights of the carriers and the interest of the shipping public, the validity of the plan depends on two propositions.

First. Rates which as a body enable all the railroads, necessary to do the business of a rate territory or section, to enjoy not more than a fair net operating income on the aggregate value of their properties therein economically and efficiently operated, are reasonable from the standpoint of the individual shipper in that section. He with every other shipper similarly situated in the same section is vitally interested in having a system which can do all the business offered. If there is congestion, he suffers with the rest. He may, therefore, properly be required in the rates he pays to share with all other shippers of the same section the burden of maintaining an adequate railway capacity to do their business. This conclusion makes it unnecessary to discuss the question mooted whether shippers are deprived or constitutional rights when denied reasonable rates.

If should be noted that, in reaching a conclusion upon this first proposition, we are only considering the general level of rates and their direct bearing upon the net return of the entire group. The statute does not require that the net return from all the rates shall affect the reasonableness of a particular rate or a class of rates. In such an inquiry, the Commission may have regard to the service done, its intrinsic cost, or a comparison of it with other rates, and need not consider the total net return at all. Paragraph agraph 17 of section 15a makes this clear:-

[Page 263 U.S. 456, 481]

'The provisions of this section shall not be construed as depriving shippers of their right to reparation in case of overcharges, unlawfully excessive or discriminatory rates, or rates excessive in their relation to other rates, but no shipper shall be entitled to recover upon the sole ground that any particular rate may reflect a proportion of excess income to be paid by the carrier to the Commission in the public interest under the provisions of this section.'

This last clause only prevents the shipper from objecting to a particular rate otherwise reasonable, on the ground that the net return from the whole body of rates is in excess of a fair percentage of profit, a circumstance that was never relevant in such an inquiry, as hereafter shown.

Second. The carrier owning and operating a railroad, however strong financially, however economical in its facilities, or favorably situated as to traffic, is not entitled as of constitutional right to more than a fair net operating income upon the value of its properties which are being devoted to transportation. By investment in a business dedicated to the public service the owner must recognize that, as compared with investment in private business, he cannot expect either high or speculative dividends but that his obligation limits him to only fair or reasonable profit. If the company owned the only railroad engaged in transportation in a given section and was doing all the business, this would be clear. If it receives a fair return on its property, why should it make any difference that other and competing railroads in the same section are permitted to receive higher rates for a service which it costs them more to render and from which they receive no better net return? Classification of railways in the matter of adjustment of rates has been sustained in numerous cases. In the Minnesota Rate Cases, 230 U.S. 352, 469, 473 S., 33 Sup. Ct. 729, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18, it was held that the rates imposed by the state upon two railways were not confiscatory, but that they were so in

[Page 263 U.S. 456, 482]

the case of a third railway performing service in the same territory, because the latter was put to greater expense in rendering the service. An injunction was refused to the first two railways and was granted to the third. The same principle has been upheld in analogous cases. Chicago, Burlington & Quincy Ry. v. Iowa, ; Dow v. Beidelman, 125 U.S. 680, 8 Sup. Ct. 1028; Chicago & G. T. Ry. v. Wellman, 143 U.S. 339, 12 Sup. Ct. 400; Interstate Commerce Commission v. Union Pacific Ry., 222 U.S. 541, 549, 551 S., 32 Sup. Ct. 108; Northern Pacific Ry. Co. v. North Dakota, , 599, et seq., 35 Sup. Ct. 429, L. R. A. 1917F, 1148, Ann. Cas. 1916A, 1.

It is argued that to cut down the operating profit of the stronger roads to a certain per cent. is not cutting or reducing rates, since the net income of a carrier has no proper relation to rates and cannot be uses as evidence of their reasonableness. Northern Pacific Ry. v. North Dakota, 236 U.S. 585, 35 Sup. Ct. 429, L. R. A. 1917F, 1148, Ann. Cas. 1916A, 1, and Interstate Commerce Commission v. Union Pacific R. R., 222 U.S. 541, 32 Sup. Ct. 108, are cited to this point. They merely decide that where the reasonableness of one rate or a class of rates is in issue, the total operating profit of the railroad or public utility is of little use in reaching a conclusion. This is shown by the words of Mr. Justice Lamar, speaking for the court, in Interstate Commerce Commission v. Union Pacific Railway, 222 U.S. 549, 32 Sup. Ct. 111 (56 L. Ed. 308); 'Where the rates as a whole are under consideration, there is a possibility of deciding, with more or less certainty, whether the total earnings afford a reasonable return. But whether the carrier earned dividends or not sheds little light on the question as to whether the rate on a particular article is reasonable. For, if the carrier's total income enables it to declare a dividend, that would not justify an order requiring it to haul one class of goods for nothing, or for less than a reasonable rate. On the other hand, if the carrier earned no dividend, it would not have warranted an order fixing an unreasonably high rate on such article.'-

[Page 263 U.S. 456, 483]

There is nothing in the act requiring the use of the net return as evidence to fix a particular rate. As we have already pointed out, paragraph 17, section 15a, gives fullest latitude for evidence on such an issue.

Reliance is also had on decisions of this court in cases where the question was of the reasonableness of state rates, and it was held that evidence to show that the revenue of the carrier from both state and interstate commerce gave a fair profit, was not relevant. The state cannot justify unreasonably low rates for domestic transportation, considered alone, upon the ground that the carrier is earning large profits on its interstate business, and on the other hand the carrier can not justify unreasonably high rates on domestic business on the ground that only in that way is it able to meet losses on its interstate business. The Minnesota Rate Cases, 230 U.S. 352, 435, 33 S. Sup. Ct. 729, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18; Smyth v. Ames, 169 U.S. 466, 541, 18 S. Sup. Ct. 418. But this conclusion does make against the use of a fair return of operating profit as a standard of reasonableness of rates when the issue is as to the general level of all the rates received by the carrier.

The reduction of the net operating return provided by the recapture clause is, as near as may be, the same thing as if rates had all been reduced proportionately before collection. It is clearly unsound to say that the net operating profit accruing from a whole rate structure is not relevant evidence in determining whether the sum of the rates is fair. The investment is made on the faith of a profit, the profit accrues from the balance left after deducting expenses from the product of the rates, and the assumption is that the operation is economical and the expenditures are reasonably necessary. If the profit is fair, the sum of the rates is so. If the profit is excessive, the sum of the rates is so. One obvious way to make the sum of the rates reasonable, so far as the carrier is concerned, is to reduce its profit to what is fair.

[Page 263 U.S. 456, 484]

We have been greatly pressed with the argument that the cutting down of income actually received by the carrier for its service to a so-called fair return is a plain appropriation of its property without any compensation; that the income it receives for the use of its property is as much protected by the Fifth Amendment as the property itself. The statute declares the carrier to be only a trustee for the excess over a fair return received by it. Though in its possession, the excess never becomes its property, and it accepts custody of the product of all the rates with this understanding. It is clear, therefore, that the carrier never has such a title to the excess as to render the recapture of it by the government a taking without due process.

It is then objected that the government has no right to retain one- half of the excess, since, if it does not belong to the carrier, it belongs to the shippers and should be returned to them. If it were valid, it is an objection which the carrier cannot be heard to make. It would be soon enough to consider such a claim when made by the shipper. But it is not valid. The rates are reasonable from the standpoint of the shipper as we have shown, though their net product furnishes more than a fair return for the carrier. The excess caused by the discrepancy between the standard of reasonableness for the shipper, and that for the carrier due to the necessity of maintaining uniform rates to be charged the shippers, may properly be appropriated by the government for public uses because the appropriation takes away nothing which equitably belongs either to the shipper or to the carrier. Yet it is made up of payments for service to the public in transportation, and so it is properly to be devoted to creating a fund for helping the weaker roads more effectively to discharge their public duties. Indirectly and ultimately this should benefit the shippers by bringing the weaker roads nearer in point of

[Page 263 U.S. 456, 485]

economy and efficiency to the stranger roads and thus making it just and possible to reduce the uniform rates.

The third question for out consideration is whether the recapture clause, by reducing the net income from intrastate rates, invades the reserved power of the states and is in conflict with the Tenth Amendment. In solving the problem of maintaining the efficiency of an interstate commerce railway system which serves both the states and the nation, Congress is dealing with a unit in which state and interstate operations are often inextricably commingled. When the adequate maintenance of interstate commerce involves and makes necessary on this account the incidental and partial control of intrastate commerce, the power of Congress to exercise such control has been clearly established. Minnesota Rate Cases, 230 U.S. 352, 432, 433 S., 33 Sup. Ct. 729, 48 L. R. A. (N. S.) 1151, Ann. Cas. 1916A, 18; Illinois Central R. R. Co. v. Behrens, 233 U.S. 473, 477, 34 S. Sup. Ct. 646, Ann. Cas. 1914C, 163; The Shreveport Case, 234 U.S. 342, 351, 34 S. Sup. Ct. 833; Illinois Central Case, 245 U.S. 493, 506, 38 S. Sup. Ct. 170; Wisconsin Railroad Commission v. Chicago, Burlington & Quincy Railway, , 42 Sup. Ct. 232, 22 A. L. R. 1086. The combination of uniform rates with the recapture clauses is necessary to the better development of the country's interstate transportation system as Congress has planned it. The control of the excess profit due to the level of the whole body of rates is the heart of the plan. To divide that excess and attempt to distribute one part to interstate traffic and the other to intrastate traffic would be impracticable and defeat the plan. This renders indispensable the incidental control by Congress of that part of the excess possibly due to intrastate rates which, if present, is indistinguishable.

It is further objected that no opportunity is given under section 15a for a judicial hearing as to whether the return fixed is a fair return. The steps prescribed in the act constitute a direct and indirect legislative fixing

[Page 263 U.S. 456, 486]

of rates. No special provision need be made in the act for the judicial consideration of its reasonableness on the issue of confiscation. Resort to the courts for such an inquiry exists under sections 208 and 211 of the Judicial Code (Comp. St. 997, 1004). It is only where such opportunity is withheld that a provision for legislative fixing of rates violates the Federal Constitution. Ohio Valley Water Co. v. Ben Avon Borough, 253 U.S. 287, 40 Sup. Ct. 527.

The act fixes the fair return for the years here involved, 1920 and 1921, at 5 1/2 per cent. and the Commission exercises its discretion to add one-half of 1 per cent. The case of Bluefield Waterworks & Improvement Co. v. Public Service Commission, 262 U.S. 679, 43 Sup. Ct. 675, is cited to show that a return of 6 per cent. on the property of a public utility is confiscatory. But 6 per cent. was not found confiscatory in Willcox v. Consolidated Gas Co., 212 U.S. 19, 48, 50 S., 29 Sup. Ct. 192, 15 Ann. Cas. 1034, 48 L. R. A. (N. S.) 1134, in Cedar Rapids Gas Light Company v. Cedar Rapids, 223 U.S. 655, 670, 32 S. Sup. Ct. 389, or in Des Moines Gas Co. v. Des Moines, 238 U.S. 153, 172, 35 S. Sup. Ct. 811. Thus the question of the minimum of a fair percentage on value is shown to vary with the circumstances. Here we are relieved from considering the line between a fair return and confiscation, because under the provisions of the act and the reports made by the appellant the return which it will receive after paying one-half the excess to the Commission will be about 8 per cent. on the reported value. This can hardly be called confiscatory. Moreover, the appellant did not raise the issue of confiscation in its bill and it cannot properly be said to be before us.

It is also, said in argument that the value of the carrier's property, upon which the net income was calculated, was too law and was unfair to the carrier. The value of property, it is argued, really depends on the profit to be expected from its use, and should be calculated on the income from rates prevailing when the law was passed which

[Page 263 U.S. 456, 487]

must be presumed to have been reasonable. The true value of the carrier's property would thus be shown to be so much higher than reported that the actual return would not be higher than 6 per cent. of it and there would be no excess.

We do not think that, with the record as it is, such an argument is open to the appellant. it did allege that the values upon which the return was estimated were not the true values, but it did not allege what the true values were. This was not good pleading and did not properly tender the issue on the question of value. Under orders of the Commission, the carrier itself reported the values of its properties for 1920 and 1921, upon which the excesses of income were calculated. The bill averred that a return of these particular values was required under the orders of the Commission. This statement is not borne out by the orders themselves. They gave the carrier full opportunity to report any other values and to support them by evidence. This it did not do. We cannot consider an issue of fact that was primarily at least committed by the act to the Commission, when the carrier has not invoked the decision of that tribunal.

The decree of the District Court is affirmed. Footnotes

Footnote 1 Southern Pacific Company; Lehigh Valley Railroad Company; Western Pacific Railroad Corporation; New York Central Railroad Company; Union Pacific Railroad Company; Chesapeake & Ohio Railway Company; Western Maryland Railway Company; Illinois Central Railroad Company; Delaware, Lackawanna & Western Railroad Company; Virginian Railway Company; Duluth, Missabe & Northern Railway Company; Chicago & Eastern Illinois Railway Company; Kansas City Southern Railway Company; El Paso & Southwestern Railroad Company; St. Louis Southwestern Railway Company and Wabash Railway Company; Pere Marquette Railway Company; Assistant General Counsel of the New York, Chicago & St. Louis Railroad Company and the New Orleans, Texas & Mexico Railway Company.