USA > US Constitution > Regulation of Businesses, Corporations, Professions, and Trades

Regulation of Businesses, Corporations, Professions, and Trades

Generally. — States may impose significant regulations on businesses without violating due process. "The Constitution does not guarantee the unrestricted privilege to engage in a business or to conduct it as one pleases. Certain kinds of business may be prohibited; and the right to conduct a business, or to pursue a calling, may be conditioned. . . . Statutes prescribing the terms upon which those conducting certain businesses may contract, or imposing terms if they do enter into agreements, are within the State's competency."217 Still, the fact the State reserves the power to amend or repeal corporate charters does not support the taking of corporate property without due process of law, as termination of the corporate structure merely results in turning over corporate property to the stockholders after liquidation.218

Foreign (out-of-state) corporations also enjoy the protection under the due process clauses, but this does not grant them an unconditional right to enter another State or to continue to do business therein. Language in some early cases suggested that States had plenary power to exclude or to expel a foreign corporation.219 This power is clearly limited by the modern doctrine of the "negative" commerce clause, which constrains states' authority to discriminate against foreign corporations in favor of local commerce. Still, it has always been acknowledged that states may subject corporate entry or continued operation to reasonable, non-discriminatory conditions. Thus, for instance, a state law which requires the filing of articles with a local official as a prerequisite to the validity of conveyances of local realty to such corporations is not violative of due process.220 Or, statutes which require a foreign insurance company to maintain reserves computed by a specific percentage of premiums (including membership fees) received in all States,221 or to consent to direct actions filed against it by persons injured in the host State are valid.222chanrobles-red

217 Nebbia v. New York, 291 U.S. 502, 527-28 (1934). See also New Motor Vehicle Bd. v. Orrin W. Fox Co., 439 U.S. 96, 106-08 (1978) (upholding regulation of franchise relationship).

218 New Orleans Debenture Redemption Co. v. Louisiana, 180 U.S. 320 (1901).

219 National Council U.A.M. v. State Council, 203 U.S. 151, 162-63 (1906).

220 Munday v. Wisconsin Trust Co., 252 U.S. 499 (1920).

221 State Farm Ins. Co. v. Duel, 324 U.S. 154 (1945).

222 Watson v. Employers Liability Assurance Corp., 348 U.S. 66 (1954). Similarly a statute requiring a foreign hospital corporation to dispose of farm land not necessary to the conduct of their business was invalid even though the hospital, because of changed economic conditions, was unable to recoup its original investment from the sale. New Orleans Debenture Redemption Co. v. Louisiana, 180 U.S. 320 (1901).

Laws Prohibiting Trusts, Restraint of Trade or Fraud. — Even during the period when the Court was invalidating statutes under liberty of contract principles, it recognized the right of states to prohibit combinations in restraint of trade.223 Thus, states could prohibit agreements to pool and fix prices, divide net earnings, and prevent competition in the purchase and sale of grain.224 Further, the Court held that the Fourteenth Amendment does not preclude a State from adopting a policy prohibiting competing corporations from combinations, even when such combinations were induced by good intentions and from which benefit and no injury have resulted.225 The Court also upheld a variety of statutes prohibiting activities taken by individual businesses intended to harm competitors226 or restrain the trade of others.227chanrobles-red

223 See, e.g., Grenada Lumber Co. v. Mississippi, 217 U.S. 433 (1910) (statute prohibiting retail lumber dealers from agreeing not to purchase materials from wholesalers selling directly to consumers in the retailers' localities upheld); Aikens v. Wisconsin, 195 U.S. 194 (1904) (law punishing combinations for "maliciously" injuring a rival in the same business, profession, or trade upheld).

224 Smiley v. Kansas, 196 U.S. 447 (1905). See Waters Pierce Oil Co. v. Texas, 212 U.S. 86 (1909); National Cotton Oil Co. v. Texas, 197 U.S. 115 (1905), also upholding antitrust laws.

225 International Harvester Co. v. Missouri, 234 U.S. 199 (1914). See also American Machine Co. v. Kentucky, 236 U.S. 660 (1915).

226 Central Lumber Co. v. South Dakota, 226 U.S. 157 (1912) (prohibition on intentionally destroying competition of a rival business by making sales at a lower rate, after considering distance, in one section of the State than in another upheld). But cf. Fairmont Co. v. Minnesota, 274 U.S. 1 (1927) (invalidating on liberty of contract grounds similar statute punishing dealers in cream who pay higher prices in one locality than in another, the Court finding no reasonable relation between the statute's sanctions and the anticipated evil).

227 Old Dearborn Co. v. Seagram Corp., 299 U.S. 183 (1936) (prohibition of contracts requiring that commodities identified by trademark will not be sold by the vendee or subsequent vendees except at prices stipulated by the original vendor upheld); Pep Boys v. Pyroil, 299 U.S. 198 (1936) (same); Safeway Stores v. Oklahoma Grocers, 360 U.S. 334 (1959) (application of an unfair sales act to enjoin a retail grocery company from selling below statutory cost upheld, even though competitors were selling at unlawful prices, as there is no constitutional right to employ retaliation against action outlawed by a State and appellant could enjoin illegal activity of its competitors)

Laws and ordinances tending to prevent frauds by requiring honest weights and measures in the sale of articles of general consumption have long been considered lawful exertions of the police power.228 Thus, a prohibition on the issuance or sale by other than an authorized weigher of any weight certificate for grain weighed at any warehouse or elevator where state weighers are stationed is not unconstitutional.229 Similarly, the power of a State to prescribe standard containers to protect buyers from deception as well as to facilitate trading and to preserve the condition of the merchandise is not open to question.230

A variety of other business regulations which tend to prevent fraud have withstood constitutional scrutiny. Thus, a State may require that the nature of a product be fairly set forth, despite the right of a manufacturer to maintain secrecy as to his compounds.231 Or, a statute providing that the purchaser of harvesting or threshing machinery for his own use shall have a reasonable time after delivery for inspecting and testing it, and may rescind the contract if the machinery does not prove reasonably adequate, does not violate the due process clause.232 Further, in the exercise of its power to prevent fraud and imposition, a State may regulate trading in securities within its borders, require a license of those engaging in such dealing, make issuance of a license dependent on the good repute of the applicants, and permit, subject to judicial review of his findings, revocation of the license.233chanrobles-red

228 Schmidinger v. City of Chicago, 226 U.S. 578, 588 (1913) (citing McLean v. Arkansas, 211 U.S. 539, 550 (1909)). See Hauge v. City of Chicago, 299 U.S. 387 (1937) (municipal ordinance requiring that commodities sold by weight be weighed by a public weighmaster within the city valid even as applied to one delivering coal from state-tested scales at a mine outside the city); Lemieux v. Young, 211 U.S. 489 (1909) (statute requiring merchants to record sales in bulk not made sin the regular course of business valid)); Kidd, Dater Co. v. Musselman Grocer Co., 217 U.S. 461 (1910) (same).

229 Merchants Exchange v. Missouri, 248 U.S. 365 (1919).

230 Pacific States Co. v. White, 296 U.S. 176 (1935) (administrative order prescribing the dimensions, form, and capacity of containers for strawberries and raspberries is not arbitrary as the form and dimensions bore a reasonable relation to the protection of the buyers and the preservation in transit of the fruit); Schmidinger v. City of Chicago, 226 U.S. 578 (1913) (ordinance fixing standard sizes is not unconstitutional); Armor & Co. v. North Dakota, 240 U.S. 510 (1916) (law that lard not sold in bulk should be put up in containers holding one, three, or five pounds weight, or some whole multiple of these numbers valid); Petersen Baking Co. v. Bryan, 290 U.S. 570 (1934) (regulations which imposed a rate of tolerance for the minimum weight for a loaf of bread upheld); But cf. Burns Baking Co. v. Bryan, 264 U.S. 504 (1924) (tolerance of only two ounces in excess of the minimum weight per loaf is unreasonable, given finding that it was impossible to manufacture good bread without frequently exceeding the prescribed tolerance).

231 Heath & Milligan Co. v. Worst, 207 U.S. 338 (1907); Corn Products Ref. Co. v. Eddy, 249 U.S. 427 (1919); National Fertilizer Ass'n v. Bradley, 301 U.S. 178 (1937).

232 Advance-Rumely Co. v. Jackson, 287 U.S. 283 (1932).

233 Hall v. Geiger-Jones Co., 242 U.S. 539 (1917); Caldwell v. Sioux Falls Stock Yards Co., 242 U.S. 559 (1917); Merrick v. Halsey & Co., 242 U.S. 568 (1917).

The power to regulate also includes the power to forbid certain business practices. Thus, a State may forbid the giving of options to sell or buy any commodity at a future time234 It may also forbid sales on margin for future delivery,235 and may prohibit the keeping of places where stocks, grain, and the like, are sold but not paid for at the time, unless a record of the same be made and a stamp tax paid.236 A prohibitive license fee upon the use of trading stamps is not unconstitutional,237 nor is imposing criminal penalties for any deductions by purchasers from the actual weight of grain, hay, seed, or coal purchased, even when such deduction is made under a claim of custom or under a rule of a board of trade.238

Banking, Wage Assignments and Garnishment. — Regulation of banks and banking has always been considered well within the police power of states, and the Fourteenth Amendment did not eliminate this regulatory authority.239 A variety of regulations have been upheld over the years. For example, state banks are not deprived of property without due process by a statute subjecting them to assessments for a depositors' guaranty fund.240 Also, a law requiring savings banks to turn over deposits inactive for thirty years to the State (when the depositor cannot be found), with provision for payment to the depositor or his heirs on establishment of the right, does not effect an invalid taking of the property of said banks; nor does a statute requiring banks to turn over to the protective custody of the State deposits that, depending on the nature of the deposit, have been inactive ten or twenty-five years.241chanrobles-red

234 Booth v. Illinois, 184 U.S. 425 (1902).

235 Otis v. Parker, 187 U.S. 606 (1903).

236 Brodnax v. Missouri, 219 U.S. 285 (1911).

237 Rast v. Van Deman & Lewis, 240 U.S. 342 (1916); Tanner v. Little, 240 U.S.

369 (1916); Pitney v. Washington, 240 U.S. 387 (1916).

238 House v. Mayes, 219 U.S. 270 (1911).

239 Doty v. Love, 295 U.S. 64 (1935) (rights of creditors in an insolvent bank not violated by a later statute permitting re-opening under a reorganization plan approved by the court, the liquidating officer, and by three-fourths of the creditors) Farmers Bank v. Federal Reserve Bank, 262 U.S. 649 (1923) (Federal Reserve bank not unlawfully deprived of business rights of liberty of contract by a law which allows state banks to pay checks in exchange when presented by or through a Federal Reserve bank, post office, or express company and when not made payable otherwise by a maker).

240 Noble State Bank v. Haskell, 219 U.S. 104 (1911); Shallenberger v. First State Bank, 219 U.S. 114 (1911); Assaria State Bank v. Dolley, 219 U.S. 121 (1911); Abie State Bank v. Bryan, 282 U.S. 765 (1931).

241 Provident Savings Inst. v. Malone, 221 U.S. 660 (1911); Anderson Nat'l Bank v. Luckett, 321 U.S. 233 (1944). When a bank conservator appointed pursuant to a new statute has all the functions of a receiver under the old law, one of which is the enforcement on behalf of depositors of stockholders' liability, which liability the conservator can enforce as cheaply as could a receiver appointed under the preexisting statute, it cannot be said that the new statute, in suspending the right of a depositor to have a receiver appointed, arbitrarily deprives a depositor of his remedy or destroys his property without the due process of law. The depositor has no property right in any particular form of remedy. Gibbes v. Zimmerman, 290 U.S. 326 (1933).

A State is acting clearly within its police power in fixing maximum rates of interest on money loaned within its border, and such regulation is within legislative discretion if not unreasonable or arbitrary.242 Equally valid is a requirement that assignments of future wages as security for debts of less than $200, to be valid, must be accepted in writing by the employer, consented to by the assign-ors, and filed in public office. Such a requirement deprives neither the borrower nor the lender of his property without due process of law.243

Insurance. — Those engaged in the insurance business244 as well as the business itself have been peculiarly subject to supervision and control.245 Even during the Lochner era the Court recognized that government may fix insurance rates and regulate the compensation of insurance agents,246 and over the years the Court has upheld a wide variety of regulation. For instance, a state may impose a fine on "any person 'who shall act in any manner in the negotiation or transaction of unlawful insurance . . . with a foreign insurance company not admitted to do business [within said State]."'247 Or, a state may forbid life insurance companies and their agents to engage in the undertaking business and undertakers to serve as life insurance agents.248 Further, foreign casualty and surety insurers were not deprived of due process by a Virginia law which prohibited the making of contracts of casualty or surety insurance except through registered agents, which required that such contracts applicable to persons or property in the State be countersigned by a registered local agent, and which prohibited such agents from sharing more than 50% of a commission with a nonresident broker.249 And just as all banks may be required to contribute to a depositors' guaranty fund, so may automobile liability insurers be required to submit to the equitable apportionment among them of applicants who are in good faith entitled to, but are financially unable to, procure such insurance through ordinary methods.250chanrobles-red

242 Griffith v. Connecticut, 218 U.S. 563 (1910).

243 Mutual Loan Co. v. Martell, 222 U.S. 225 (1911).

244 La Tourette v. McMaster, 248 U.S. 465 (1919); Stipich v. Insurance Co., 277 U.S. 311, 320 (1928).

245 German Alliance Ins. Co. v. Kansas, 233 U.S. 389 (1914).

246 O'Gorman & Young v. Hartford Ins. Co., 282 U.S. 251 (1931).

247 Nutting v. Massachusetts, 183 U.S. 553, 556 (1902) (distinguishing Allgeyer v. Louisiana, 165 U.S. 578 (1897)). See also Hoper v. California, 155 U.S. 648 (1895).

248 Daniel v. Family Ins. Co., 336 U.S. 220 (1949).

249 Osborn v. Ozlin, 310 U.S. 53, 68-69 (1940). Dissenting from the conclusion, Justice Roberts declared that the plain effect of the Virginia law is to compel a non-resident to pay a Virginia resident for services which the latter does not in fact render.

250 California Auto. Ass'n v. Maloney, 341 U.S. 105 (1951).

However, the Court has discerned some limitations to such regulations. A statute which prohibited the insured from contracting directly with a marine insurance company outside the State for coverage of property within the State was held invalid as a deprivation of liberty without due process of law.251 For the same reason, the Court held, a State may not prevent a citizen from concluding a policy loan agreement with a foreign life insurance company at its home office whereby the policy on his life is pledged as collateral security for a cash loan to become due upon default in payment of premiums, in which case the entire policy reserve might be applied to discharge the indebtedness. Authority to subject such an agreement to the conflicting provisions of domestic law is not deducible from the power of a State to license a foreign insurance company as a condition of its doing business therein.252

A stipulation that policies of hail insurance shall take effect and become binding twenty-four hours after the hour in which an application is taken and further requiring notice by telegram of rejection of an application was upheld.253 No unconstitutional restraint was imposed upon the liberty of contract of surety companies by a statute providing that, after enactment, any bond executed for the faithful performance of a building contract shall inure to the benefit of material men and laborers, notwithstanding any provision of the bond to the contrary.254 Likewise constitutional was a law requiring that a motor vehicle liability policy shall provide that bankruptcy of the insured does not release the insurer from liability to an injured person.255 There also is no denial of due process for a state to require that casualty companies, in case of total loss, pay the total amount for which the property was insured, less depreciation between the time of issuing the policy and the time of the loss, rather than the actual cash value of the property at the time of loss.256chanrobles-red

251 Allgeyer v. Louisiana, 165 U.S. 578 (1897).

252 New York Life Ins. Co. v. Dodge, 246 U.S. 357 (1918).

253 National Ins. Co. v. Wanberg, 260 U.S. 71 (1922).

254 Hartford Accident Co. v. Nelson Co., 291 U.S. 352 (1934).

255 Merchants Liability Co. v. Smart, 267 U.S. 126 (1925).

256 Orient Ins. Co. v. Daggs, 172 U.S. 577 (1899) (the statute was in effect when the contract at issue was signed).

Moreover, even though it had its attorney-in-fact located in Illinois, signed all its contracts there, and forwarded therefrom all checks in payment of losses, a reciprocal insurance association covering real property located in New York could be compelled to comply with New York regulations which required maintenance of an office in that State and the countersigning of policies by an agent resident therein.257 Also, to discourage monopolies and to encourage rate competition, a State constitutionally may impose on all fire insurance companies connected with a tariff association fixing rates a liability or penalty to be collected by the insured of 25% in excess of actual loss or damage, stipulations in the insurance contract to the contrary notwithstanding.258

A state statute by which a life insurance company, if it fails to pay upon demand the amount due under a policy after death of the insured, is made liable in addition for fixed damages, reasonable in amount, and for a reasonable attorney's fee is not unconstitutional even though payment is resisted in good faith and upon reasonable grounds.259 It is also proper by law to cut off a defense by a life insurance company based on false and fraudulent statements in the application, unless the matter misrepresented actually contributed to the death of the insured.260 A provision that suicide, unless contemplated when the application for a policy was made, shall be no defense is equally valid.261 When a cooperative life insurance association is reorganized so as to permit it to do a life insurance business of every kind, policyholders are not deprived of their property without due process of law.262 Similarly, when the method of liquidation provided by a plan of rehabilitation of a mutual life insurance company is as favorable to dissenting policy-holders as would have been the sale of assets and pro rata distribution to all creditors, the dissenters are unable to show any taking without due process. Dissenting policyholders have no constitutional right to a particular form of remedy.263

Miscellaneous Businesses and Professions. — The practice of medicine, using this word in its most general sense, has long been the subject of regulation.264 A State may exclude osteopathic physicians from hospitals maintained by it or its municipalities,265 or may regulate the practice of dentistry by prescribing qualifications that are reasonably necessary, requiring licenses, establishing a supervisory administrative board, and prohibiting certain advertising regardless of its truthfulness.266 The Court has sustained a law establishing as a qualification for obtaining or retaining a pharmacy operating permit that one either be a registered pharmacist in good standing or that the corporation or association have a majority of its stock owned by registered pharmacists in good standing who were actively and regularly employed in and responsible for the management, supervision, and operation of such pharmacy.267chanrobles-red

257 Hooperston Co. v. Cullen, 318 U.S. 313 (1943).

258 German Alliance Ins. Co. v. Hale, 219 U.S. 307 (1911). See also Carroll v. Greenwich Ins. Co., 199 U.S.401 (1905).

259 Life & Casualty Co. v. McCray, 291 U.S. 566 (1934).

260 Northwestern Life Ins. Co. v. Riggs, 203 U.S. 243 (1906).

261 Whitfield v. Aetna Life Ins. Co., 205 U.S. 489 (1907).

262 Polk v. Mutual Reserve Fund, 207 U.S. 310 (1907).

263 Neblett v. Carpenter, 305 U.S. 297 (1938).

264 McNaughton v. Johnson, 242 U.S. 344, 349 (1917). See Dent v. West Virginia, 129 U.S. 114 (1889); Hawker v. New York, 170 U.S. 189 (1898); Reetz v. Michigan, 188 U.S. 505 (1903); Watson v. Maryland, 218 U.S. 173 (1910); See also Barsky v. Board of Regents, 347 U.S. 442 (1954) sustaining a New York law authorizing suspension for six months of the license of a physician who had been convicted of crime in any jurisdiction, in this instance, contempt of Congress under 2 U.S.C. � 192. Three Justices, Black, Douglas, and Frankfurter, dissented.

265 Collins v. Texas, 223 U.S. 288 (1912); Hayman v. Galveston, 273 U.S. 414 (1927).

266 Semler v. Dental Examiners, 294 U.S. 608, 611 (1935). See also Douglas v. Noble, 261 U.S. 165 (1923); Graves v. Minnesota, 272 U.S. 425, 427 (1926).

267 North Dakota State Bd. of Pharmacy v. Snyder's Drug Stores, 414 U.S. 156 (1973). In the course of the decision, the Court overruled Liggett Co. v. Baldridge, 278 U.S. 105 (1928), in which it had voided a law forbidding a corporation to own any drug store, unless all its stockholders were licensed pharmacists, as applied to a foreign corporation, all of whose stockholders were not pharmacists, which sought to extend its business in the State by acquiring and operating therein two additional stores.

While statutes requiring pilots to be licensed268 and setting reasonable competency standards (e.g., that railroad engineers pass color blindness tests) have been sustained,269 an act making it a misdemeanor for a person to act as a railway passenger conductor without having had two years' experience as a freight conductor or brakeman was invalidated as not rationally distinguishing between those competent and those not competent to serve as conductor.270 An act imposing license fees for operating employment agencies and prohibiting them from sending applicants to an employer who has not applied for labor does not deny due process of law.271 Also, a state law prohibiting operation of a "debt pooling" or a "debt adjustment" business except as an incident to the legitimate practice of law is a valid exercise of legislative discretion.272chanrobles-red

268 Olsen v. Smith, 195 U.S. 332 (1904).

269 Nashville, C. & St. L. R.R. v. Alabama, 128 U.S. 96 (1888).

270 Smith v. Texas, 233 U.S. 630 (1914). See DeVeau v. Braisted, 363 U.S. 144, 157-60 (1960), sustaining New York law barring from office in longshoremen's union persons convicted of felony and not thereafter pardoned or granted a good conduct certificate from a parole board.

271 Brazee v. Michigan, 241 U.S. 340 (1916). With four Justices dissenting, the Court in Adams v. Tanner, 244 U.S. 590 (1917), struck down a state law absolutely prohibiting maintenance of private employment agencies. Commenting on the "constitutional philosophy" thereof in Lincoln Federal Labor Union v. Northwestern Iron & Metal Co., 335 U.S. 525, 535 (1949), Justice Black stated that Olsen v. Nebraska, 313 U.S. 236 (1941), "clearly undermined Adams v. Tanner."

The Court has also upheld a variety of other licensing or regulatory legislation applicable to places of amusement,273 grain elevators,274 detective agencies,275 the sale of cigarettes276 or cosmetics,277 and the resale of theatre tickets.278 Restrictions on advertising have also been upheld, including absolute bans on the advertising of cigarettes279 or the use of a representation of the United States flag on an advertising medium.280 Similarly constitutional were prohibitions on the solicitation by a layman of the business of collecting and adjusting claims,281 the keeping of private markets within six squares of a public market,282 the keeping of billiard halls except in hotels,283 or the purchase by junk dealers of wire, copper, and other items, without ascertaining the seller's right to sell.284chanrobles-red

272 Ferguson v. Skrupa, 372 U.S. 726 (1963).

273 Western Turf Ass'n v. Greenberg, 204 U.S. 359 (1907).

274 W.W. Cargill Co. v. Minnesota, 180 U.S. 452 (1901).

275 Lehon v. Atlanta, 242 U.S. 53 (1916).

276 Gundling v. Chicago, 177 U.S. 183, 185 (1900).

277 Bourjois, Inc. v. Chapman, 301 U.S. 183 (1937).

278 Weller v. New York, 268 U.S. 319 (1925).

279 Packer Corp. v. Utah, 285 U.S. 105 (1932).

280 Halter v. Nebraska, 205 U.S. 34 (1907).

281 McCloskey v. Tobin, 252 U.S. 107 (1920).

282 Natal v. Louisiana, 139 U.S. 621 (1891).

283 Murphy v. California, 225 U.S. 623 (1912).

284 Rosenthal v. New York, 226 U.S. 260 (1912). The Court also upheld a state law forbidding (1) solicitation of the sale of frames, mountings, or other optical appliances, (2) solicitation of the sale of eyeglasses, lenses, or prisms by use of advertising media, (3) retailers from leasing, or otherwise permitting anyone purporting to do eye examinations or visual care to occupy space in a retail store, and (4) anyone, such as an optician, to fit lenses, or replace lenses or other optical appliances, except upon written prescription of an optometrist or opthalmologist licensed in the State is not invalid. A State may treat all who deal with the human eye as members of a profession that should refrain from merchandising methods to obtain customers, and that should choose locations that reduce the temptations of commercialism; a state may also conclude that eye examinations are so critical that every change in frame and duplication of a lens should be accompanied by a prescription. Williamson v. Lee Optical Co., 348 U.S. 483 (1955).

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