''Business Affected With a Public Interest' '--In endeavoring to measure the impact of the due process clause upon efforts by the States to control the charges exacted by various businesses for their services, the Supreme Court, almost from the inception of the Fourteenth Amendment, devoted itself to the examination of two questions: (1) whether the clause precluded that kind of regulation of certain types of business, and (2) the nature of the restraint, if any, which this clause imposed on state control of rates in the case of businesses as to which such control existed. For a brief interval following the ratification of the Fourteenth Amendment, the Supreme Court appears to have underestimated the significance of the due process clause as a substantive restraint on the power of States to fix rates chargeable by an industry deemed appropriately subject to such controls. Thus, in Munn v. Illinois, 138 the first of the ''Granger Cases,'' in which maximum charges established by a state legislature for Chicago grain elevator companies were challenged, not as being confiscatory in character, but rather as a regulation beyond the power of any state agency to impose, the Court, in an opinion that was largely dictum, declared that the due process clause did not operate as a safeguard against oppressive rates, that if regulation was permissible, the severity thereof was within legislative discretion and could be ameliorated only by resort to the polls. Not much time elapsed, however, before the Court effected a complete withdrawal from this position. By 1890 139 it had fully converted the due process clause into a positive restriction which the judicial branch was duty bound to enforce whenever state agencies sought to impose rates which, in its estimation, were arbitrary or unreasonable.
In contrast to the speed with which the Court arrived at those above mentioned conclusions, more than fifty years were to elapse before it developed its currently applicable formula for determining the propriety of subjecting specific businesses to state regulation of their prices or charges. Prior to 1934, unless a business was ''affected with a public interest,'' control of its prices, rates, or conditions of service was viewed as an unconstitutional deprivation of liberty and property without due process of law. During the period of its application, however, this standard, ''business affected with a public interest,'' never acquired any precise meaning, and as a consequence lawyers were never able to identify all those qualities or attributes which invariably distinguished a business so affected from one not so affected. The most coherent effort by the Court was the following classification prepared by Chief Justice Taft. 140 ''(1) Those [businesses] which are carried on under the authority of a public grant of privileges which either expressly or impliedly imposes the affirmative duty of rendering a public service demanded by any member of the public. Such are the railroads, other common carriers and public utilities. (2) Certain occupations, regarded as exceptional, the public interest attaching to which, recognized from earliest times, has survived the period of arbitrary laws by Parliament or Colonial legislatures for regulating all trades and callings. Such are those of the keepers of inns, cabs and grist mills. . . . (3) Businesses which though not public at their inception may be fairly said to have risen to be such and have become subject in consequence to some government regulation. They have come to hold such a peculiar relation to the public that this is superimposed upon them. In the language of the cases, the owner by devoting his business to the public use, in effect grants the public an interest in that use and subjects himself to public regulation to the extent of that interest although the property continues to belong to its private owner and to be entitled to protection accordingly.''
Through application of this now outmoded formula the Court found it possible to sustain state laws regulating charges made by grain elevators, 141 stockyards, 142 and tobacco warehouses, 143 and fire insurance rates 144 and commissions paid to fire insurance agents. 145 Voided, because the businesses sought to be controlled were deemed to be not so affected, were state statutes fixing the price at which gasoline may be sold, 146 or at which ticket brokers may resell tickets purchased from theatres, 147 and limiting competition in the manufacture and sale of ice through the withholding of licenses to engage therein. 148
Nebbia v. New York .--In upholding, by a vote of five-to-four, a depression-induced New York statute fixing prices at which fluid milk might be sold, the Court in 1934 finally shelved the concept of ''a business affected with a public interest.'' 149 Older decisions, insofar as they negatived a power to control prices in businesses found not ''to be clothed with a public use'' were now viewed as resting, ''finally, upon the basis that the requirements of due process were not met because the laws were found arbitrary in their operation and effect. Price control, like any other form of regulation, is [now] unconstitutional only if arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt, and hence an unnecessary and unwarranted interference with individual liberty.'' Conceding that ''the dairy industry is not, in the accepted sense of the phrase, a public utility,'' that is, a ''business affected with a public interest,'' the Court in effect declared that price control henceforth is to be viewed merely as an exercise by the government of its police power, and as such is subject only to the restrictions which due process imposes on arbitrary interference with liberty and property. Nor was the Court disturbed by the fact that a ''scientific validity'' had been claimed for the theories of Adam Smith relating to the ''price that will clear the market.'' However much the minority might stress the unreasonableness of any artificial state regulation interfering with the determination of prices by ''natural forces,'' 150 the majority was content to note that the ''due process clause makes no mention of prices'' and that ''the courts are both incompetent and unauthorized to deal with the wisdom of the policy adopted or the practicability of the law enacted to forward it.''
Having thus concluded that it is no longer the nature of the business that determines the validity of a regulation of its rates or charges but solely the reasonableness of the regulation, the Court had little difficulty in upholding, in Olsen v. Nebraska, 151 a state law prescribing the maximum commission which private employment agencies may charge. Rejecting the contentions of the employment agencies that the need for such protective legislation had not been shown, the Court held that differences of opinion as to the wisdom, need, or appropriateness of the legislation ''suggest a choice which should be left to the States;'' and that there was ''no necessity for the State to demonstrate before us that evils persist despite the competition'' between public, charitable, and private employment agencies. The older case of Ribnik v. McBride, 152 which had invalidated similar legislation upon the now obsolete concept of a ''business affected with a public interest,'' was expressly overruled.
Development .--In Munn v. Illinois, 153 its initial holding concerning the applicability of the Fourteenth Amendment to governmental price fixing, 154 the Court not only asserted that governmental regulation of rates charged by public utilities and allied businesses was within the States' police power, but added that the determination of such rates by a legislature was conclusive and not subject to judicial review or revision. Expanding the range of per missible governmental fixing of prices, the Court in Nebbia 155 declared that prices established for business in general would invite judicial condemnation only if ''arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt.'' The latter standard of judicial appraisal, as will be subsequently noted, represents less of a departure from the principle enunciated in the Munn case than that which the Court evolved, in the years following 1877, to measure the validity of state imposed public utility rates, and this difference in the judicial treatment of prices and rates accordingly warrants an explanation at the outset. Unlike operators of public utilities who, in return for the grant of certain exclusive, virtually monopolistic privileges by the governmental unit enfranchising them, must assume an obligation to provide continuous service, proprietors of other businesses are in receipt of no similar special advantages and accordingly are unrestricted in the exercise of their right to liquidate and close their establishments. Owners of ordinary businesses, therefore, at liberty to escape by dissolution the consequences of publicly imposed charges deemed to be oppressive, have thus far been unable to convince the courts that they too, no less than public utilities, are in need of protection through judicial review.
Consistently with its initial pronouncement in the Munn case that reasonableness of compensation allowed under permissible rate regulation presented a legislative rather than a judicial question, the Court, in Davidson v. New Orleans, 156 also rejected the contention that, by virtue of the due process clause, businesses were nevertheless entitled to ''just compensation'' for losses resulting from price controls. Less than a decade was to elapse, however, before the Court, appalled perhaps by prospective consequences of leaving business ''at the mercy of the majority of the legislature,'' began to reverse itself. Thus, in 1886, Chief Justice Waite, in the Railroad Commission Cases, 157 warned that ''this power to regulate is not a power to destroy; [and] the State cannot do that in law which amounts to a taking of property for public use without just compensation or without due process of law;'' in other words, a confiscatory rate could not be imposed. By treating ''due process of law'' and ''just compensation'' as equivalents, the Court, contrary to its earlier holding in Davidson v. New Orleans, was in effect asserting that the imposition of a rate so low as to damage or diminish private property ceased to be an exercise of a State's police power and became one of eminent domain. Nevertheless, even the added measure of protection afforded by the doctrine of the Railroad Commission Cases proved inadequate to satisfy public utilities; the doctrine allowed courts to intervene only to prevent legislative imposition of a confiscatory rate, a rate so low as to be productive of a loss and to amount to taking of property without just compensation. The utilities sought nothing less than a judicial acknowledgment that courts could review the ''reasonableness'' of legislative rates. Although as late as 1888 the Court doubted that it possessed the requisite power, 158 it finally acceded to the wishes of the utilities in 1890, and, in Chicago, M. & St.P. Railway v. Minnesota 159 ruled as follows: ''The question of the reasonableness of rates . . . , involving as it does the element of reasonableness both as regards the company and as regards the public, is eminently a question for judicial investigation, requiring due process of law for its determination. If the company is deprived of the power of charging rates for the use of its property, and such deprivation takes place in the absence of an investigation by judicial machinery, it is deprived of the lawful use of its property, and thus, in substance and effect, of the property itself, without due process of law. . . .''
Despite a last-ditch attempt to reconcile Munn with Chicago, M. & St.P. Railway by confining application of the latter decision to cases in which rates had been fixed by a commission and denying its pertinence to rates directly imposed by a legislature, 160 the Court in Reagan v. Farmer's Loan and Trust Co. 161 set at rest all lingering doubts over the scope of judicial intervention by declaring that, ''if a carrier,'' in the absence of a legislative rate, ''attempted to charge a shipper an unreasonable sum,'' the Court, in accordance with common law principles, will pass on the reasonableness of its rates, and has ''jurisdiction . . . to award the shipper any amount exacted . . . in excess of a reasonable rate. . . . The province of the courts is not changed, nor the limit of judicial inquiry altered, because the legislature instead of a carrier prescribes the rates.'' 162 Reiterating virtually the same principle in Smyth v. Ames, 163 the Court not only obliterated the distinction between confiscatory and unreasonable rates but contributed the additional observation that the requirements of due process are not met unless a court not only reviews the reasonableness of a rate but also determines whether the rate permits the utility to earn a fair return on a fair valuation of its investment.
Limitations on Judicial Review .--Even while reviewing the reasonableness of rates the Court recognized some limits on judicial review. As early as 1894, the Court asserted: ''The courts are not authorized to revise or change the body of rates imposed by a legislature or a commission; they do not determine whether one rate is preferable to another, or what under all circumstances would be fair and reasonable as between the carriers and the shippers; they do not engage in any mere administrative work; . . . [however, there can be no doubt] of their power and duty to inquire whether a body of rates . . . is unjust and unreasonable . . . and if found so to be, to restrain its operation.'' 164 And later, in 1910, the Court made a similar observation that courts may not, ''under the guise of exerting judicial power, usurp merely administrative functions by setting aside'' an order of the commission within the scope of the power delegated to such commission, upon the ground that such power was unwisely or expediently exercised. 165
Also inferable from these early holdings, and effective to restrict the bounds of judicial investigation, is a distinction between factual questions that relate only to the wisdom or expediency of a rate order, and are unreviewable, and other factual determinations that bear on a commission's power to act and are inseparable from the constitutional issue of confiscation, hence are reviewable. This distinction was accorded adequate emphasis by the Court in Louisville & Nashville R.R. v. Garrett, 166 in which it declared that ''the appropriate question for the courts'' is simply whether a ''commission,'' in establishing a rate, ''acted within the scope of its power'' and did not violate ''constitutional rights . . . by imposing confiscatory requirements.'' The carrier contesting the rate was not entitled to have a court also pass upon a question of fact regarding the reasonableness of a higher rate the carrier charged prior to the order of the commission. All that need concern a court, it said, is the fairness of the proceeding whereby the commission determined that the existing rate was excessive, but not the expediency or wisdom of the commission's having superseded that rate with a rate regulation of its own.
Likewise, with a view to diminishing the number of opportunities courts have for invalidating rate regulations of state commissions, the Court placed various obstacles in the path of the complaining litigant. Thus, not only must a person challenging a rate assume the burden of proof, 167 but he must present a case of ''manifest constitutional invalidity''; 168 if, notwithstanding this effort, the question of confiscation remains in doubt, no relief will be granted. 169 Moreover, even though a public utility which has petitioned a commission for relief from allegedly confiscatory rates need not await indefinitely for the commission's decision before applying to a court for equitable relief, 170 the court ought not to interfere in advance of any experience of the practical result of such rates. 171
In the course of time, however, a distinction emerged between ordinary factual determinations by state commissions and factual determinations which were found to be inseparable from the legal and constitutional issue of confiscation. In two older cases arising from proceedings begun in lower federal courts to enjoin rates, the Court initially adopted the position that it would not disturb findings of fact insofar as these were supported by substantial evidence. Thus, in San Diego Land Company v. National City, 172 the Court declared that after a legislative body had fairly and fully investigated and acted, by fixing what it believed to be reasonable rates, the courts cannot step in and set aside the action due to a different conclusion about the reasonableness of the rates. ''Judicial interference should never occur unless the case presents, clearly and beyond all doubt, such a flagrant attack upon the rights of property under the guise of regulation as to compel the court to say that the rates prescribed will necessarily have the effect to deny just compensation for private property taken for the public use.'' And in a similar later case 173 the Court expressed even more clearly its reluctance to reexamine ordinary factual determinations. It is not bound ''to reexamine and weigh all the evidence . . . or to proceed according to . . . [its] independent opinion as to what are proper rates. It is enough if . . . [the Court] cannot say that it was impossible for a fair-minded board to come to the result which was reached.''
Moreover, in reviewing orders of the Interstate Commerce Commission, the Court, at least in earlier years, 174 chose to be guided by approximately the same standards it had originally formulated for examining regulations of state commissions. The following excerpt from its holding in ICC v. Union Pacific R.R. 175 represents an adequate summation of the law as it stood prior to 1920: ''[Q]uestions of fact may be involved in the determination of questions of law, so that an order, regular on its face, may be set aside if it appears that the rate is so low as to be confiscatory . . . ; or if the Commission acted so arbitrarily and unjustly as to fix rates contrary to evidence, or without evidence to support it; or if the authority therein involved has been exercised in such an unreasonable manner as to cause it to be within the elementary rule that the substance, and not the shadow, determines the validity of the exercise of the power. . . . In determining these mixed questions of law and fact, the Court confines itself to the ultimate question as to whether the Commission acted within its power. It will not consider the expediency or wisdom of the order, or whether, on like testimony, it would have made a similar ruling . . . [The Commission's] conclusion, of course, is subject to review, but when supported by evidence is accepted as final; not that its decision . . . can be supported by a mere scintilla of proof--but the courts will not examine the facts further than to determine whether there was substantial evidence to sustain the order.''
The Ben Avon Case .--These standards of review were abruptly rejected by the Court in Ohio Valley Co. v. Ben Avon Bor ough, 176 as being no longer sufficient to satisfy the requirements of due process. Unlike previous confiscatory rate litigation, which had developed from rulings of lower federal courts in injunctive proceedings, this case reached the Supreme Court by way of appeal from a state appellate tribunal; 177 although the state court had in fact reviewed the evidence and ascertained that the state commission's findings of fact were supported by substantial evidence, it also construed the statute providing for review as denying to state courts ''the power to pass upon the weight of such evidence.'' Largely on the strength of this interpretation of the applicable state statute, the Court held that when the order of a legislature, or of a commission, prescribing a schedule of maximum future rates is challenged as confiscatory, ''the State must provide a fair opportunity for submitting that issue to a judicial tribunal for determination upon its own independent judgment as to both law and facts; otherwise the order is void because in conflict with the due process clause, Fourteenth Amendment.''
Without departing from the ruling previously enunciated in Louisville & Nashville R.R. v. Garrett, 178 that the failure of a State to grant a statutory right of judicial appeal from a commission's regulation is not violative of due process as long as relief is obtainable by a bill in equity for injunction, the Court also held that the alternative remedy of injunction expressly provided by state law did not afford an adequate opportunity for testing judicially a confiscatory rate order. It conceded the principle stressed by the dissenting Justices that ''where a State offers a litigant the choice of two methods of judicial review, of which one is both appropriate and unrestricted, the mere fact that the other which the litigant elects is limited, does not amount to a denial of the constitutional right to a judicial review.'' 179
History of the Valuation Question .--For almost fifty years the Court wandered through a maze of conflicting formulas for valuing public service corporation property only to emerge therefrom in 1944 at a point not very far removed from Munn v. Illinois. 180 By holding in FPC v. Natural Gas Pipeline Co., 181 that the ''Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas,'' and in FPC v. Hope Natu ral Gas Co., 182 that ''it is the result reached not the method employed which is controlling, . . . [that] it is not the theory but the impact of the rate order which counts, [and that] if the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end,'' the Court, in effect, abdicated from the position assumed in the Ben Avon case. 183 Without surrendering the judicial power to declare rates unconstitutional on ground of a substantive deprivation of due process, 184 the Court announced that it would not overturn a result it deemed to be just simply because ''the method employed [by a commission] to reach that result may contain infirmities. . . . [A] Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order . . . carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.'' 185 The Court recently reaffirmed Hope Natural Gas's emphasis on the bottom line: ''[t]he Constitution within broad limits leaves the States free to decide what rate-setting methodology best meets their needs in balancing the interests of the utility and the public.'' 186
In dispensing with the necessity of observing the old formulas for rate computation, the Court did not articulate any substitute guidance for ascertaining whether a so-called end result is unreasonable. It did intimate that rate-making ''involves a balancing of the investor and consumer interests,'' which does not, however, '''insure that the business shall produce net revenues'. . . . From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock. . . . By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital.'' 187
[Footnote 149] Nebbia v. New York, 291 U.S. 502, 531 -32, 535-37, 539 (1934). In reaching this conclusion the Court might be said to have elevated to the status of prevailing doctrine the views advanced in previous decisions by dissenting Justices. Thus, Justice Stone, dissenting in Ribnik v. McBride, 277 U.S. 350, 359 -60 (1928), had declared: ''Price regulation is within the State's power whenever any combination of circumstances seriously curtails the regulative force of competition so that buyers or sellers are placed at such a disadvantage in the bargaining struggle that a legislature might reasonably anticipate serious consequences to the community as a whole.'' In his dissenting opinion in New State Ice Co. v. Liebmann, 285 U.S. 262, 302 - 03 (1932), Justice Brandeis had also observed: ''The notion of a distinct category of business 'affected with a public interest' employing property 'devoted to a public use' rests upon historical error. In my opinion the true principle is that the State's power extends to every regulation of any business reasonably required and appropriate for the public protection. I find in the due process clause no other limitation upon the character or the scope of regulation permissible.''
[Footnote 150] Justice McReynolds, speaking for the dissenting Justices, labelled the controls imposed by the challenged statute as a ''fanciful scheme to protect the farmer against undue exactions by prescribing the price at which milk disposed of by him at will may be resold.'' Intimating that the New York statute was as efficacious as a safety regulation which required ''householders to pour oil on their roofs as a means of curbing the spread of a neighborhood fire,'' Justice McReynolds insisted that ''this Court must have regard to the wisdom of the enactment,'' and must determine ''whether the means proposed have reasonable relation to something within legislative power.'' 291 U.S., 556, 558 (1934).
[Footnote 152] 277 U.S. 350 (1928). Adams v. Tanner, 244 U.S. 590 (1917), was disapproved in Ferguson v. Skrupa, 372 U.S. 726 (1963), and Tyson & Bro. v. Banton, 273 U.S. 418 (1927), was effectively overruled in Gold v. DiCarlo, 380 U.S. 520 (1965), without the Court hearing argument on it.
[Footnote 162] Insofar as judicial intervention resulting in the invalidation of legislatively imposed rates has involved carriers, it should be noted that the successful complainant invariably has been the carrier, not the shipper.
[Footnote 163] 169 U.S. 466 (1898). Of course the validity of rates prescribed by a State for services wholly within its limits must be determined wholly without reference to the interstate business done by a public utility. Domestic business should not be made to bear the losses on interstate business and vice versa. Thus a State has no power to require the hauling of logs at a loss or at rates that are unreasonable, even if a railroad receives adequate revenues from the intrastate long haul and the interstate lumber haul taken together. On the other hand, in determining whether intrastate passenger railway rates are confiscatory, all parts of the system within the State (including sleeping, parlor, and dining cars) should be embraced in the computation, and the unremunerative parts should not be excluded because built primarily for interstate traffic or not required to supply local transportation needs. See Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 434 -35 (1913); Chicago, M. & St.P. Ry. v. Public Util. Comm'n, 274 U.S. 344 (1927); Groesbeck v. Duluth, S.S. & A. Ry., 250 U.S. 607 (1919). The maxim that a legislature cannot delegate legislative power is qualified to permit creation of administrative boards to apply to the myriad details of rate schedules the regulatory police power of the State. To prevent a holding of invalid delegation of legislative power, the legislature must constrain the board with a certain course of procedure and certain rules of decision in the performance of its functions, with which the agency must substantially comply to validate its action. Wichita R.R. v. Public Util. Comm'n, 260 U.S. 48 (1922).
[Footnote 164] Reagan v. Farmers' Loan & Trust Co., 154, U.S. 362, 397 (1894).
[Footnote 165] ICC v. Illinois Cent. R.R., 215 U.S. 452, 470 (1910). This statement, made in the context of federal ratemaking, appears to be equally applicable to judicial review of state agency actions.
[Footnote 177] Id. at 289. In injunctive proceedings, evidence is freshly introduced whereas in the cases received on appeal from state courts, the evidence is found within the record.
[Footnote 180] 94 U.S. 113 (1877). Because some of these methods or formulas, no longer required as a matter of constitutional law, may continue to be used by state commissions in drafting rate orders, a survey is provided below.
[Footnote 187] FPC v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944) (citing Chicago G.T. Ry. v. Wellman, 143 U.S. 339, 345 -46 (1892)); Missouri ex rel. Southwestern Bell Tel. Co. v. Public Serv. Comm'n, 262 U.S. 276, 291 (1923).