Dartmouth College v. Woodward

The Dartmouth College Decision as a Pillar of the Regulatory State

Editors’ Note: Naomi Lamoreaux continues HistPhil’s forum marking the 200th anniversary of the Dartmouth College v. Woodward decision.

In 1819 the U.S. Supreme Court announced in Dartmouth College v. Woodward that a charter granted by the state to form a private corporation was a contract protected by Article I, Section 10 of the federal constitution:  “No State shall … pass any … Law impairing the Obligation of Contracts.” The ruling overturned a New Hampshire statute altering the composition of Dartmouth’s board of trustees to give state officials more oversight over the college.[i] Because the Court declared corporate charters to be inviolable contracts, it might be thought that the decision limited states’ regulatory powers over corporations. The ruling had no such effect, however. Not only did states quickly learn to insert “reservation clauses” into charters so that they could continue unilaterally to alter the contracts’ terms, but Chief Justice John Marshall’s memorable language describing corporations as “artificial beings” has been cited in countless opinions over the last two centuries to uphold state authority over corporations. Only in recent years has the Supreme Court begun radically to undermine this stream of decisions, and Marshall’s famous words—so long in the mainstream of corporate and constitutional law—are now being evoked primarily in dissenting opinions. The two hundredth anniversary of the Dartmouth College case is an apt occasion to remember that treating corporations as if they had the rights of natural persons requires overturning longstanding and deeply rooted precedents to the contrary.

At the time of the American Revolution corporations could only be formed with the express permission of the state. Indeed, the so-called “Bubble Act,” enacted in Britain in 1720 and extended to the colonies in 1740, made it a crime for a business to claim corporate privileges (such as legal personhood, limited liability, and perpetual life) without first receiving a charter from Parliament or the King. After independence, legislatures in the new American states assumed Parliament’s powers and began to issue corporate charters, doling them out (as well as other economically valuable privileges) to groups derided as “the favored few” by those not on the receiving end. Because charters were politically controversial, grants made by one set of legislators were sometimes undone by another. For example, Pennsylvania chartered the Bank of North America in 1782, but a shift in political composition of the legislature led to the repeal of the act in 1785. A subsequent assembly reinstated the charter in 1787, though with less liberal provisions than initially granted. In Massachusetts, complaints that the 1784 charter of the Massachusetts Bank was too generous led the General Court to pass an “Addition” in 1792 that placed greater limits on the bank’s operations. Conflict over the disestablishment of the Anglican Church led the Virginia legislature in 1786 to repeal an act incorporating the Episcopal Church that its predecessor body had enacted just two years before. Disestablishment also led to an effort, spearheaded by Thomas Jefferson, to amend the charter of the College of William and Mary to shift control of the institution from the Anglican Church to the state government. Legislatures similarly attempted to meddle with the boards of Harvard College, King’s College (Columbia), Yale College, the College of Philadelphia, the University of North Carolina, and, most famously, Dartmouth College in New Hampshire.[ii]

What was unusual about the Dartmouth College case was not the legislative interference that provoked it but rather the trustees’ determination to pursue their prerogatives all the way to the U.S. Supreme Court. The verdict that resulted in favor of the college has often been interpreted as a conservative, pro-property-rights decision that limited the powers of increasingly democratic state governments. However, it had no such implications. As Justice Joseph Story suggested in his concurring opinion, legislatures could insert reservation clauses into charters that gave them the right subsequently to alter the contracts’ terms, or even abrogate them entirely.[iii] Legislatures in fact had already begun to include such clauses in charters, but the practice became much more common after the decision. Most state constitutions eventually required it, and the Supreme Court repeatedly upheld its constitutionality.[iv] The ruling’s impact was limited even in the case of corporations chartered before the decision was handed down. Many early charters had finite durations, and legislatures typically insisted on reservation clauses as a condition for renewal. Other early charters included ceilings on capital or other similar constraints. In order to get those lifted corporations typically had to accept reservation clauses. The Supreme Court also signaled in the Charles River Bridge case (1837) that it would construe corporate charters strictly, allowing legislatures to modify understandings that had not explicitly been written into their provisions. Thus the proprietors of the Charles River Bridge Company thought they had been granted a monopoly on travel between Boston and Charlestown in Massachusetts, but because the charter did not include language saying so, the Court allowed the state legislature to incorporate a competing bridge nearby.[v]

Rather than limiting the regulatory powers of the states, the Dartmouth College decision actually reinforced them in important ways. Although corporate charters were protected by the Constitution’s contract clause, the terms of a corporation’s existence were defined by its charter. As Marshall famously put it in his opinion, “[a] corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.”[vi] Over the past two centuries these words have been quoted or paraphrased in literally hundreds of decisions by state and federal courts upholding state regulatory measures over corporations. As recently as 1987, for example, Supreme Court Justice Lewis Powell quoted Marshall’s words in ruling that an Indiana law governing voting rights in corporations was not preempted by a federal statute. Powell went on to conclude, “It thus is an accepted part of the business landscape in this country for States to create corporations, to prescribe their powers, and to define the rights that are acquired by purchasing their shares.”[vii]

Although courts have sometimes looked through the legal form of the corporation to the people who made it up and taken steps protect shareholders’ constitutional rights, for the most part they have treated corporations as entities that shareholders created in order to secure particular advantages from the state, such as legal personhood and limited liability, and that consequently only had those rights that the state granted in its charter.[viii] This view became particularly important when large numbers of states enacted general incorporation laws during the 1840s and 1850s. These laws were responses to the same controversies about corporate privileges that earlier had led to legislative meddling in the affairs of corporations; the underlying idea was to remove the favoritism inherent in special legislative grants by enabling anyone who wanted to form a corporation to do so. General incorporation laws did not, however, eliminate the fear that wealthy business people would disproportionately benefit from access to the corporate form and use their advantages to run roughshod over their competitors. Hence they too tended to be highly regulatory in their content and to include reservation clauses that enabled states to add new regulatory provisions later on. Another fear was that states with more permissive laws would undermine the regulations of those that were stricter. The Supreme Court attempted explicitly to counter this worry in decisions that echoed Marshall’s Dartmouth College language. In 1869, for example, Justice Stephen J. Field wrote in Paul v. Virginia that the privileges and immunities of citizens guaranteed by Article Four of the Constitution did not extend to the “special privileges” that states granted in the form of corporate charters. Corporations were “artificial persons created by the legislature” and thus possessed “only the attributes which the legislature has prescribed.” Because a corporation was “the mere creation of local law,” it could have “no legal existence beyond the limits of the sovereignty where created.” Other states might admit “foreign” corporations (that is, those chartered by other states) “upon such terms and conditions” as they thought “proper to impose,” or exclude them altogether: “The whole matter rest[ed] in their discretion.”[ix] These terms and conditions certainly included economic regulation. For example, in affirming a state antitrust case brought by Texas against a Standard Oil affiliate, Justice Joseph McKenna ruled in 1900 that the powers of a corporation are not those of a natural person. “A corporation is a creature of the law, and none of its powers are original. They are precisely what the incorporating act made them, and can only be exerted in the manner which that act authorizes.”[x]

Corporations’ special status as artificial persons created by state law was also interpreted as allowing the federal government to treat them differently from natural persons. A good example was tax policy. In 1894 Congress had passed a law establishing a national income tax that the Supreme Court declared unconstitutional.[xi] In 1909, four years before the Sixteenth Amendment constitutionalized the income tax, Congress tried again and enacted an “excise” tax that was in effect an income tax levied only on corporations. In his opinion for the Supreme Court upholding the tax in 1911, Justice William R. Day declared, “The thing taxed is not the mere dealing in merchandise … but … the privileges which exist in conducting businesses with the advantages which inhere in the corporate capacity of those taxed, and which are not enjoyed by private firms or individuals”—advantages like limited liability, the ability to concentrate management, and perpetual life. As artificial entities granted privileges by the state, corporations were different from natural persons, and it was their special advantages that justified the imposition of the tax.[xii]

Corporations’ contractual status meant their political activities could be regulated as well. In 1907 Congress passed the Tillman Act prohibiting corporations from contributing money to campaigns for national office. The first constitutional challenge to the ban came nearly a decade later, in 1916, when several breweries that had been charged under the law sued unsuccessfully in hopes of getting their indictments quashed. The opinion of the federal judge who heard the case fell squarely into the stream of decisions based on Marshall’s language. The judge had no doubt that corporations were different from natural persons. They were creatures of government, and therefore their campaign contributions could be regulated by their creators: “That Congress may control those corporations which the federal government has created goes for the saying.” The only question was whether Congress had the authority to regulate the political activities of state-chartered corporations, and the judge determined that it did. As “artificial creatures,” corporations were “not citizens of the United States, and, so far as the franchise is concerned, must at all times be held subservient and subordinate to the government and the citizenship of which it is composed.”[xiii]

In recent years the Court has undone the campaign finance laws and, in the process, has taken the radical step of treating corporations as if they had the same rights as natural persons. The first foray in this direction was First National Bank of Boston v. Bellotti (1978), in which the Court overturned a Massachusetts law limiting the ability of banks and business corporations to use their funds in campaigns involving referenda. Justice William Rehnquist strongly dissented from Powell’s opinion on behalf of the Court’s majority. Quoting Marshall’s description of a corporation as “an artificial being, invisible, intangible, and existing only in contemplation of law,” Rehnquist reminded the justices in the majority that “[a] State grants to a business corporation the blessings of potentially perpetual life and limited liability to enhance its efficiency as an economic entity. It might reasonably be concluded that those properties, so beneficial in the economic sphere, pose special dangers in the political sphere.”[xiv]

For a time the Court effectively ignored its own decision, but in 2010 Bellotti became the key precedent in another case that overturned restrictions on campaign finance, Citizens United v. Federal Election Commission. This time Justice John Paul Stephens dissented, quoting Marshall’s famous words and observing with more than a hint of sarcasm, “The Framers thus took it as a given that corporations could be comprehensively regulated in the service of the public welfare. Unlike our colleagues, they had little trouble distinguishing corporations from human beings, and when they constitutionalized the right to free speech in the First Amendment, it was the free speech of individual Americans that they had in mind.”[xv] It is a measure of how radically the recent Court has moved away from the originalist ideals that many of its members supposedly espouse that Marshall’s Dartmouth College language, for almost two centuries the foundation for the Court’s view of corporations and the relationship between corporations and the state, is now quoted mainly in dissent.

-Naomi R. Lamoreaux

Naomi R. Lamoreaux is Stanley B. Resor Professor of Economics and History at Yale University and a Research Associate at the National Bureau of Economic Research. During the 2019-20 academic year she has been serving as Pitt Professor of American History and Institutions at the University of Cambridge. She has written The Great Merger Movement in American Business, 1895-1904 and Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England, edited eight other books, and published numerous articles on business, economic, and financial history.

NOTES

[i] Dartmouth College v. Woodward, 17 U.S. 518 (1819).

[ii] Most of the colleges had royal charters from before the Revolution, but state legislatures claimed the right to modify those as well. For additional information on these episodes, see Bray Hammond, Banks and Politics in America: From the Revolution to the Civil War (Princeton:  Princeton University Press, 1957), Ch. 2; Pauline Maier, “The Debate over Incorporations: Massachusetts in the Early Republic,” in Massachusetts and the New Nation, ed. Conrad Edick Wright (Boston: Massachusetts Historical Society, 1992), 73-117; and Maier, “The Revolutionary Origins of the American Corporation,” William and Mary Quarterly 50 (Jan. 1993): 51-84; Bruce A. Campbell, “John Marshall, the Virginia Political Economy, and the Dartmouth College Decision,” American Journal of Legal History 19 (Jan. 1975): 40-65; and Campbell, “Dartmouth College as a Civil Liberties Case: The Formation of Constitutional Policy,” Kentucky Law Journal 70 issue 3 (1981-82): 643-706.

[iii] Dartmouth College v. Woodward, 17 U.S. 518 (1819) at 712.

[iv] For an overview, see Francis J. Putman, “State Interference, Under the Reservation Clause, with Contracts between the Stockholders of Corporations,” New York University Law Quarterly Review 7 (Dec. 1929): 487-495. Key cases upholding unilateral changes authorized under reservation clauses include Pa. College Cases, 80 U.S. 190 (1872); Miller v. State, 82 U.S. 478 (1872); and Greenwood v. Freight Co., 105 U.S. 13 (1882).

[v] Charles River Bridge v. Warren Bridge, 36 U.S. 420 (1837); Stanley I. Kutler, Privilege and Creative Destruction: The Charles River Bridge Case (Philadelphia: Lippincott, 1971).

[vi] Dartmouth College v. Woodward, 17 U.S. 518 (1819) at 636.

[vii] CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69 (1987) at 89-91.

[viii] Margaret M. Blair and Elizabeth Pollman, “The Supreme Court’s View of Corporate Rights: Two Centuries of Evolution and Controversy,” in Corporations and American Democracy, eds. Naomi R. Lamoreaux and William J. Novak (Cambridge, MA: Harvard University Press, 2017): 245-285. See also Ruth H. Bloch and Lamoreaux, “Corporations and the Fourteenth Amendment,” in the same volume, pp. 286-325.

[ix] Paul v. Virginia, 75 U.S. 168 (1869) at 177, 181.

[x] Waters-Pierce Oil Co. v. Texas, 177 U.S. 28 (1900) at 43.

[xi] Pollock v. Farmers’ Loan and Trust Co., 157 U.S. 429 (1895); and Pollock v. Farmers’ Loan and Trust Co., 158 U.S. 601 (1895).

[xii] Flint v. Stone Tracy Co., 220 U.S. 107 (1911) at 161-162.

[xiii] United States v. United States Brewers’ Ass’n, 239 F. 163 (1916) at 168-169.

[xiv] First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978) at 823, 825-826. Amazingly, Powell later cited Rehnquist’s dissent to his own opinion in CTS Corp. v. Dynamics Corp. of Am., where he quoted Marshall’s words to uphold a state regulation. See 481 U.S. 69 (1987) at 89.

[xv] Citizens United v. FEC, 558 U.S. 310 (2010) at 428.

 

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