Dartmouth College v. Woodward

From Public Servant to Private Business: Dartmouth College and the Transformation of the Corporation

Editors’ Note: Evelyn Atkinson continues HistPhil‘s forum marking the bicentennial of the Dartmouth College v. Woodward case.

In 1853, the Supreme Court of Ohio declared that the case of Trustees of Dartmouth College v. Woodward (1819) had become “a subterfuge for fraud and a means of shielding corporations from responsibility and correction for the abuse of their corporate franchises.”[1] This certainly had not been the intention of U.S. Supreme Court Chief Justice John Marshall and Justice Joseph Story when they had penned their famous opinions in the case three decades earlier. Yet over the course of the nineteenth century, Dartmouth College v. Woodward changed the course of U.S. corporate law in ways that could not have been foreseen. The long-term effect of Dartmouth was to significantly limit the power of states to oversee and control most corporations – be they educational, religious, or business corporations – within their borders.

In 1819, the U.S. Supreme Court held in Dartmouth College that corporate charters were “contracts” protected by the federal Constitution’s Contract Clause, which forbids any state from passing a law that “impairs the obligation of contracts.” As one contemporary commentator remarked, this was novel doctrine: until Dartmouth College, “no one believed seriously that a charter of incorporation fell within this clause.” Although Dartmouth College involved an eleemosynary corporation (a university), the decision was immediately seized on by business corporations. These infrastructure (or “internal improvement”) corporations, like bridges, railroads, and turnpikes, mobilized the Contract Clause as a shield against state regulation, claiming that their charters were contracts that could not be impaired by subsequent legislation. The U.S. Supreme Court accepted this interpretation of the Contract Clause, with limits, in Charles River Bridge v. Warren Bridge (1837). Although Chief Justice Roger Taney affirmed that corporate charters were contracts constitutionally protected by the Contract Clause from state impairment, he held that charters needed to be read narrowly so as not to prevent the state’s ability to regulate for the public welfare – after all, he said, “the public also have rights.” This formulation framed the interests of corporations and the public as inherently antagonistic.  In spite of the limit to corporate rights under the Contract Clause that Taney carved out, business corporations now had an avenue for claiming constitutional protection against state regulation.

The other lasting legacy of Dartmouth was its distinction between public and private corporations. In his concurring opinion, Justice Story had divided corporations into “public” (those wholly owned by the state) and “private” (all others). Yet this was not the traditional view of corporations in the early American Republic. Early treatises recognized that corporations by their very nature were both public and private, chartered by the state to fulfill a public purpose but owned by private persons. The first American treatise on corporations, published in 1832, made clear that the primary purpose of the state’s grant of incorporation was “to gain the union, contribution and assistance of several persons for the successful promotion of some design of general utility.”[2] This was particularly necessary in the United States, in which individual states, suffering from an “absence of great capitalists,” relied on the aggregation of “the resources of many persons” in order to construct necessary infrastructure like bridges and turnpikes.[3] The U.S. Supreme Court had acknowledged this public purpose of the corporation in Dartmouth College, noting, “The objects for which a corporation is created are universally such as the government wishes to promote.”[4] Among the public, this more democratic view of the corporation persisted throughout the nineteenth century; local communities, which subscribed to stock in internal improvement corporations in order to promote infrastructure development, considered the corporation to be a community endeavor, whose officers acted “not for [their] own interest distinct from that of the public.”[5] The corporation was the “child” or “servant” of the people, created by the legislature’s grant of a charter, which in exchange for the privileges of incorporation owed the public a legal duty of care and service.[6] As one Wisconsin paper announced in 1874, “corporations created by and for the benefit of the state, i.e. for the people at large, are… like other creatures, subject to their creator, and his will, which is law.”[7]

Justice Story’s private/public distinction presented an alternative vision of the corporation. Instead of a public-private partnership, Story framed corporations as private entities, with constitutional rights that could only be impaired when the state proved that there was sufficient public interest basis for regulation – a determination to be made by courts, not legislatures, a transfer of power from states to federal courts that challenged state sovereignty over the economy. Beginning with Dartmouth College and Charles River Bridge and continuing throughout the nineteenth century, the U.S. Supreme Court ignored Americans’ popular view that corporations were creatures of the state whose primary purpose was public service. By holding that corporations possessed the constitutional right to protection against impairment of contracts, the Court equated corporations with any other market actor; their only purpose was private profit, and their only obligations were those set out in their charter. A treatise on corporations published in 1846 endorsed this competing vision, writing that the actions of corporations “are done with a view to their own interest, and if thereby they incidentally promote that of the public, it cannot reasonably be supposed they do it from any spirit of liberality they have beyond that of their fellow citizens.”[8]

These two elements of Dartmouth College – the ability of corporations to claim constitutional protection as a shield against state regulation, and the public/private distinction – became serious hurdles to state regulation of business corporations as the nineteenth century wore on. The Supreme Court, however, did follow Charles River Bridge’s holding that regulations were not unconstitutional when necessary for the public welfare. Yet they grounded this exception in the state’s police power, not in the special nature of the corporation as a quasi-public entity. In the Granger Cases, which involved railroad corporations as well as a private partnership, the Court held that any business that was “affected with a public interest,” corporation or not, could be regulated to promote the public welfare. By lumping together corporations with private partnerships, the Court treated business corporations as no different than any other market actor. The ability of states to regulate was based on the state’s police power, which required a public interest justification, not on the nature of the corporation as private-public entity designed to fulfill a public purpose. The consequence of this elision between corporations and private market actors was that when the U.S. Supreme Court began to narrow the scope of the police power in the early twentieth century, the scope of permissible state regulation of corporations was narrowed as well.

While the primary purpose of the Dartmouth College litigation was to protect a private eleemosynary corporation from undue state oversight, the long-term consequence of the decision was to shield business corporations from state regulation. Over the course of the nineteenth century, beginning with Dartmouth College, the Supreme Court moved away from an understanding of internal improvement corporations as creatures of the public designed to promote the public welfare, toward a conception of business corporations as entities the primary purpose of which was private gain, and which could be regulated only to the same extent as private businesses and no more. For proponents of regulation of corporations, particularly the railroad monopolies, this transformation posed a serious hurdle. As the Wisconsin Supreme Court bemoaned in 1874, states suffered from “the thraldom of that decision,” which had effectively put corporations “above the law of the land.”[9] The distinction between public and private was “arbitrary,” the Ohio Supreme Court complained; it was “unreasonable” to claim that simply because the shareholders were private, corporations “must be denominated private institutions, and for that reason placed beyond the reach of… the State by which they were created.”[10] The Dartmouth College doctrine was faulted for “applying old names to new things”: if “Judge Story had lived to see” the powerful railroads and banks of the mid-nineteenth century, the Wisconsin Supreme Court alleged, he would not have called corporations “private” that were “of such great and various public relation and public significance.”[11] Yet the effect of Dartmouth College on corporate law was irrevocable; as the U.S. Supreme Court itself remarked, by the end of the nineteenth century Dartmouth College and its progeny had become “so imbedded in the jurisprudence of the United States as to make them to all intents and purposes a part of the Constitution itself.”[12]

-Evelyn Atkinson

Evelyn Atkinson is a doctoral fellow at the American Bar Foundation and a Ph.D. candidate in History at the University of Chicago. Her dissertation, “American Frankenstein: Creating the Constitutional Corporate Person,” traces the development of the constitutional law of corporate personhood in the nineteenth century United States. Evelyn’s scholarly publications have appeared in Law & Social Inquirythe Law and History Reviewthe Yale Journal of Law & Humanities, and the Harvard Journal of Law & Gender. She received her J.D. cum laude from Harvard Law School and her B.A. in Liberal Arts from Sarah Lawrence College.

NOTES

[1] Bank of Toledo v. City of Toledo, 1 Ohio St. 622, 629 (1853).

[2] Joseph K. Angell & Samuel Ames, Treatise of the Law of Private Corporations Aggregate (Boston: Hilliard, Gray, Little & Wilkins, 1832), 7-8.

[3] Joseph K. Angell & Samuel Ames, Treatise of the Law of Private Corporations Aggregate (Boston: Little, Brown & Co., 1855) (5thed.), 57.

[4] Trustees of Dartmouth College v. Woodward, 17 U.S. 518, 637 (1819).

[5] “To the Hon. Senate and House of Representatives,” Columbian Centinel American Federalist, Nov. 5, 1825.

[6] “Railway Control,” Boston Daily Advertiser, Sept. 17, 1874.

[7] “Pith of the Press,” Milwaukee Daily Sentinel, May 23, 1874 (quoting the Appleton Post).

[8] Joseph K. Angell & Samuel Ames, Treatise of the Law of Private Corporations Aggregate (Boston: Little & Brown, 1846) (3rd ed.), 28.

[9] Attorney General v. Chicago & N.W. Ry. Co., 35 Wis. 425, 547 (1874)

[10] Bank of Toledo v. City of Toledo, 1 Ohio St. 622, 643 (1853).

[11] Attorney General v. Chicago & N.W. Ry. Co., 35 Wis. 425, 568 (1874)

[12] Stone v. State of Mississippi, 101 U.S. 814, 816 (1879).

 

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