Southern Pacific Company v. Campbell/Opinion of the Court

This is an appeal from a decree of the circuit court entered July 18, 1911, dismissing the bill, on demurrer, for want of equity. 189 Fed. 182.

The bill was filed by the complainants, the Southern Pacific Company and the Oregon & California Railroad Company, to set aside an order made by the Railroad Commission of Oregon under date of September 21, 1910, and to enjoin the defendants, the members of the commission and the attorney general of the state, from enforcing it. By this order the commission found, after hearing, that certain freight rates maintained by the Southern Pacific Company between Portland and other places on its lines in Oregon were unreasonable, excessive, and discriminatory, and the commission required the company, in lieu of the rates thus disapproved, to put into effect the 'just and reasonable and nondiscriminatory charges' set forth in the order.

The first, and principal, contention of the appellants is that this requirement was invalid as constituting a regulation of intertate commerce. The order, however, related solely to intrastate traffic, and the question raised by the bill, so far as its allegations bear upon the conditions of interstate transportation, does not differ in its essential features from that which was passed upon in the Minnesota Rate Cases. Simpson v. Shepard, 230 U.S. 352, 57 L. ed. --, 33 Sup. Ct. Rep. 729. This objection to the order cannot be sustained.

It is further insisted that the order was confiscatory. The railroad property in question was that of the Oregon & California Railroad Company, which was operated by the Southern Pacific Company under lease made in 1887. It was provided by the lease that the Southern Pacific Company should keep the property in good condition, 'operate, maintain, add to, and better the same at its own expense,' and should pay over annually to the lessor company the amount remaining of the net earnings, after all charges and expenses incurred by the Southern Pacific Company under the lease, and all taxes and interest, current fixed charges, and all indebtedness of the lessor to the Southern Pacific Company, had been paid, save that if such amount should exceed specified percentages of the preferred and common stock of the lessor, the excess might be retained by the lessee.

It was alleged that after payment of operating expenses, taxes, interest, and other reasonable and legitimate expenses, a deficit had accumulated, representing an indebtedness to the Southern Pacific Company, and amounting on June 30, 1906, to the sum of $6,222,037; but it also appeared that this deficit was reduced in the following years so that on June 30, 1909, it amounted to $3,207,008.37.

The capital stock consisted of preferred stock of the par value of $12,000,000, and common stock of the par value of $7,000,000 and the bonded indebtedness amounted to $17,745,000, making in the aggregate $36,745,000. In one part of the bill it was alleged, without particulars showing the constituent items, that the total value of the property in Oregon, held under the lease, consisting of approximately 670 miles of road, with rolling stock, stations, terminals, and appurtenances, amounted to $43,594,886.73. But a later averment, in connection with the allegations as to outlays and return, was that 'the properties of the Oregon & California Railroad Company are of the reasonable value of a sum representing the outstanding bonded indebtedness and the deficit, as aforesaid, and the capital stock of the company;' and so valued, the total would be $39,952,008.37.

The receipts from the entire property and the disbursements for several years were stated. It was averred that for the fiscal year ending June 30, 1909, the total receipts were $7,104.081, and the disbursements $5,839,698. As the court below pointed out, the bill was silent as to what was embraced in the aggregate expenditures, and the court thought it fair to assume that the total disbursements, as alleged, included not only the expenses of operation, but also interest on bonds and on open accounts, and thus, that the averment showed, for the fiscal year ending June 30, 1909, a net balance of $1,264,383 as a return on the investment represented by $19,000,000 in par value of capital stock. It was alleged that the 'annual loss of interstate and intrastate business combined,' which would result if the order in question were enforced, would amount to $156,072.48. The court below concluded that on this showing it could not be said, in advance of actual experience, that the rates fixed by the commission would not afford a fair return upon the value of the property.

The order, as already noted, was made in September, 1910, and the bill was brought in October, 1910, but the receipts and disbursements for the fiscal year ending June 30, 1910, were not given. In addition to this omission, the bill was destitute of any allegation showing the expenses incurred in the conduct of the intrastate business as distinguished from the interstate business, or the share of the value of the property which was assignable to the former. In short, the allegations of the bill were wholly insufficient to show that the complainants would be deprived of just compensation in their business of intrastate transportation by virtue of the operation of the order.

In sustaining the demurrer the court gave to the complainants thirty days in which to plead further; and they thus had opportunity for amending their bill so as to present additional averments which would correct deficiencies in the original allegations, and remove any possible misapprehension as to the facts intended to be set forth. But the complainants informed the court that they did not desire to avail themselves of this opportunity, and accordingly the bill was dismissed. We think that it cannot be said that any error was committed in thus disposing of the contention as to confiscation.

It is also urged that the railroad commission act of Oregon (Laws of 1907, chap. 53), and the order in question, were void as against the Oregon & California Railroad Company, and the lessee of its property, upon the ground that the act and order impaired the obligation of the contract contained in the charter of the firstmentioned company. That company was incorporated in 1870, under the general incorporation act of Oregon, approved October 14, 1862, which, in § 34 provided: 'Every corporation formed under this act for the construction of a railroad, as to such road shall be deemed common carriers, and shall have power to collect and receive such tolls or freight for transportation of persons or property thereon as it may prescribe.' Reference is also made to the following provision of the Constitution of Oregon pursuant to which this incorporation act was enacted: 'Corporations may be formed under general laws, but shall not be created by special laws except for municipal purposes. All laws passed pursuant to this section may be altered, amended, or repealed but not so as to impair or destroy any vested corporate rights.' Art. 11, § 2. The sole question presented on this branch of the case, it is said by counsel for the appellants, 'is whether the judgment of the carrier in fixing rates for transportation of persons or property shall be supervised, regulated, and supplanted by the judgment of the state exercised through a railroad commission, or shall it remain as it was at common law, within the exclusive power and jurisdiction of the carrier to fix these rates, subject only to the power of the courts, upon judicial inquiry, to denounce and decline to enforce rates that are excessive and unreasonable.'

As to this question, it is sufficient to say that it is well established that a general charter provision such as the one quoted, giving power to charge and collect tolls, necessarily implies that the charges shall be reasonable, and does not detract from the power of the state through its legislature, or the agency lawfully constituted thereby, to prescribe reasonable rates to be observed by the carrier. State v. Southern P. Co. 23 Or. 424, 432, 433, 31 Pac. 960; Stone v. Farmers' Loan & T. Co. 116 U.S. 307, 330, 29 L. ed. 636, 644, 6 Sup. Ct. Rep. 334, 388, 1191; Dow v. Beidelman, 125 U.S. 680, 688, 31 L. ed. 841, 843, 2 Inters. Com. Rep. 56, 8 Sup. Ct. Rep. 1028; Georgia, R. & Bkg. Co. v. Smith, 128 U.S. 174, 181, 32 L. ed. 377, 380, 9 Sup. Ct. Rep. 47; Chicago, M. & St. P. R. Co. v. Minnesota, 134 U.S. 418, 455, 33 L. ed. 970, 979, 3 Inters. Com. Rep. 209, 10 Sup. Ct. Rep. 462, 702; Covington & C. Bridge Co. v. Kentucky, 154 U.S. 204, 215, 38 L. ed. 962, 967, 4 Inters. Com. Rep. 649, 14 Sup. Ct. Rep. 1087; Louisville & N. R. Co. v. Kentucky, 161 U.S. 677, 696, 40 L. ed. 849, 857, 16 Sup. Ct. Rep. 714; Owensboro v. Owensboro Waterworks Co. 191 U.S. 358, 370, 48 L. ed. 217, 224, 24 Sup. Ct. Rep. 82. In the case of Stone v. Farmers' Loan & T. Co., supra, where the charter empowered the railroad company 'from time to time to fix, regulate, and receive the toll and charges by them to be received for transportation of persons or property on their railroad,' and it was insisted that a subsequent statute creating a railroad commission with authority to fix maximum rates was an impairment of contract obligation, the court said: 'The claim now is that by § 12' (the provision referred to) 'the state has surrendered the power to fix a maximum for this company, and has declared that the courts shall be left to determine what is reasonable, free of all legislative control. We see no evidence of such intention. Power is granted to fix reasonable charges, but what shall be deemed reasonable in law is nowhere indicated. . . . Consequently, all the power which the state had in the matter before the charter it retained afterwards. The power to charge being coupled with the condition that the charge shall be reasonable, the state is left free to act on the subject of reasonableness, within the limits of its general authority, as circumstances may require. The right to fix reasonable charges has been granted, but the power of declaring what shall be deemed reasonable has not been surrendered.'

The remaining questions may be briefly disposed of. The complainants were not entitled to have the court below substitute its judgment for that of the commission, or determine the matters which properly fell within the province of that body. The conditions of traffic, the adjustment of rates with respect to the different commodities transported, and the appropriate basis for classification, were subjects for the consideration of the commission, and there was nothing shown which would have warranted the court in overriding the decision of the commission upon the ground that its action was of such an arbitrary character as to constitute an abuse of power.

The criticism made in the bill, that the railroad commission act violated the state Constitution in conferring upon the commission authority to exercise legislative, executive, and judicial powers, has been answered by the decision of the state court sustaining the statute. State v. Corvallis & E. R. Co. 59 Or. 450, 117 Pac. 980. The provision of the statute that suit might be brought in the state court to set aside orders of the commission upon the ground that the rates fixed were unlawful, or that the regulation or practice prescribed was unreasonable, did not infringe the rights of the complainants. The procedure permitted by the statute is consistent with the 14th Amendment. Portland R., Light & P. Co. v. Railroad Commission decided June 10, 1913, [229 U.S. 397, 57 L. ed. --, 33 Sup. Ct. Rep. 820]. And, finally, the penal provisions, of which complaint is made, are separable (Reagan v. Farmers' Loan & T. Co. 154 U.S. 362, 395, 38 L. ed. 1014, 1022, 4 Inters. Com. Rep. 560, 14 Sup. Ct. Rep. 1047; Willcox v. Consolidated Gas Co. 212 U.S. 19, 53, 54, 53 L. ed. 382, 400, 29 Sup. Ct. Rep. 192, 15 Ann. Cas. 1034; Western U. Teleg. Co. v. Richmond, 224 U.S. 160, 172, 56 L. ed. 710, 717, 32 Sup. Ct. Rep. 449; they furnish no ground for denying effect to the rates, if otherwise valid.

Out conclusion is that the demurrer was properly sustained.

Decree affirmed.