We the Corporations

by Adam Winkler

  Taney wrote the majority opinion against Webster and the Charles River Bridge Company. Taney explained that the company’s original charter said nothing about a monopoly. Although some people back in 1785, when the company was first chartered, might have assumed otherwise because monopolies were so commonplace, in fact the charter was silent on the question. Although the Marshall court would likely have read the charter broadly in favor of the existing corporation, as it did in Dartmouth College, the Taney court thought it necessary to strictly construe charters to limit corporate power and enhance the regulatory authority of the state. Taney, an opponent of monopoly generally, was not about to read monopoly privileges into an otherwise ambiguous charter—especially not if it meant helping out a client of Webster. Without overturning Dartmouth College, the Taney court nevertheless imposed new limits on the reach of the Marshall court’s decision. Even if a charter were a contract, it would be read narrowly and not presumed to include an implicit guarantee of monopoly privileges. Taney warned that one “must not forget that the community also have rights, and that the happiness and well being of every citizen depends on their faithful preservation.”

  A CORPORATE REFORMER, CHIEF JUSTICE ROGER TANEY EMPLOYED THE PRINCIPLES OF CORPORATE PERSONHOOD TO LIMIT THE RIGHTS OF CORPORATIONS.

  Taney’s decision in Charles River Bridge Company would eventually be recognized as a historic ruling that expanded competition at the expense of exclusive corporate privileges. Historians credit the decision as a boon for the economy, unsettling the rights of some older corporations but spurring the creation of many new ones, which were more apt to innovate. For Webster, however, the decision was a sign of difficult times ahead.42

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  TWO YEARS AFTER HIS DEFEAT in the Charles River Bridge Company case, Daniel Webster was back before the Taney court, representing the Second Bank of the United States in Bank of Augusta v. Earle. Webster faced a bench that was hostile to his worldview and a chief justice that was hostile to him. A sign of how much the court had changed from when he could enchant the justices with his oratory, Webster in one appearance before the Taney court was left to joke awkwardly, “It has been my duty to pass upon the question of the confirmation of every member of the Bench, and I may say that I treated your honors with entire impartiality—for I voted against every one of you.”43

  Webster was still representing the Second Bank and still arguing for expansive rights for corporations. The constitutional provision at issue in the Earle case was the comity clause of Article IV, section 2 of the Constitution: “The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.” This was essentially an antidiscrimination rule prohibiting states from treating out-of-state (or “foreign”) citizens who move into the state differently from their own native citizens. If a Pennsylvanian moved to Alabama, for example, he would be entitled to all the same legal rights and privileges that a native Alabaman would have. This constitutional principle helped glue together the many states into one nation by encouraging the mobility of people across state borders. Webster in Earle claimed that corporations should have the same constitutional protection against discrimination.44

  EVEN AS THE SUPREME COURT UNDER ROGER TANEY TURNED AGAINST HIM, DANIEL WEBSTER CONTINUED TO ARGUE FOR THE RIGHTS OF CORPORATIONS.

  The Second Bank was not the first litigant to bring a case under the comity clause. In fact, by 1839, there was already a well-developed jurisprudence on the privileges and immunities of state citizens under Article IV. In this instance, the corporation was a constitutional leverager, adapting previously decided cases involving individual rights to promote the rights of business. Yet, in Webster’s hands, the Second Bank was pursuing an innovative take on an older argument. Individuals sought the right to be free from discrimination when they packed up their belongings and moved into a state, but the Second Bank was asking for something quite different. The Second Bank wanted to come into any state and do business there without having to move at all. Corporations, Webster argued, should be able to come into a state and operate under the same terms and conditions as any local corporations, even if headquartered elsewhere. What Webster was seeking, in essence, was to give corporations a constitutional right to do business nationwide without state interference.

  The issue arose largely due to the growing interstate marketplace of the 1830s, coupled with a long tradition of state control over corporations and other businesses operating within their borders. With a few exceptions (like the Bank of the United States), corporations in early America did most of their business in their home states, with suppliers and customers being primarily local. By the 1830s, business corporations were increasingly operating across state lines, assisted by millions of federal dollars going to internal improvements—highways, railroads, canals—that spurred trade. State lawmakers enacted numerous restrictions on out-of-state corporations, such as taxes, license fees, cash bond requirements, and outright prohibitions on their ability to engage in certain business activities altogether. Some of these restrictions were sheer protectionism, designed to preserve local businesses from competition. Oftentimes, however, the restrictions were populist measures to protect state residents from special dangers presented by out-of-state corporations. During that time, the primary way to regulate corporations was through charters and conditions on incorporation—unlike today, when states use other types of laws, such as labor laws, workplace safety laws, and consumer protection laws, to accomplish that goal. Because foreign corporations were by definition incorporated elsewhere, they were hard for state lawmakers to regulate and supervise. Bank of Augusta v. Earle presented the question of whether these state laws imposing special conditions on foreign corporations were constitutional under the comity clause. It was but the first of several innovative constitutional arguments corporations would make in a nearly century-long battle to defeat these types of state laws.45

  Joseph B. Earle and W. D. Primrose, a pair of hard-up businessmen from Mobile, claimed Alabama law prohibited out-of-state banks like the Second Bank, now chartered in Pennsylvania, from operating in the state. It was a convenient argument given that Earle and Primrose had eagerly borrowed money from the Second Bank and a number of other out-of-state banks. In the midst of the Biddle-induced panic of 1837, however, the two men sought desperately for a way out of their agreements. They seized upon a provision of the Alabama constitution that barred the state legislature from chartering any bank in which the state did not own stock. Because Alabama was not a stockholder in the Second Bank, Earle and Primrose argued, the bank was not authorized to conduct business there. The argument was not a strong one—Alabama law only spoke to the legislature’s power to charter a bank and said nothing about an already chartered, foreign corporation conducting business in the state—but the two men won in the lower court.46

  When the Supreme Court heard the case in 1839, the controversy was headline news and stirred up “much excitement in the mercantile community.” The prospect that Earle and Primrose would be excused from their obligations, it was said, “frightened half the lawyers and all the corporations of the country out of their properties.” Webster, on behalf of the Second Bank, argued that corporations, like individuals, have a right to do business in any state they wish. States could regulate them like any other similarly situated business, but could not discriminate against out-of-state corporations through higher taxes and special rules. Although the text of the comity clause only said that states could not discriminate against foreign “Citizens,” Webster relied on the logic of Bank of the United States v. Deveaux.47

  The first corporate rights case also presented the question of whether corporations were “Citizens.” And while the earlier precedent was construing a different provision of the Constitution—Article III in Deveaux and Article IV in Earle—Webster argued that the court should once again pierce the corporate veil. Corporations might not be citizens but their members were. Corporations, Webster insisted, “m
ay do in their corporate character, in Alabama, all such acts, authorized by their charter, as the members thereof would have a right to perform as individuals.” The members of the Second Bank were citizens of other states entitled to do business in Alabama. The corporation, which was just a stand-in for its members, should enjoy the same rights.48

  Arguing on behalf of Earle and Primrose was Charles Ingersoll, whose father Jared argued against corporate rights in Bank of the United States v. Deveaux. The son was a populist lawyer and politician whose name was said to be “a rallying standard for the enemies of large corporations, money powers, and other unpopular causes.” Playing upon the Taney court’s sympathy for states’ rights and hostility to corporate privilege, Ingersoll claimed that states, as sovereigns, had the inherent right to determine which, if any, corporations could do business within their borders. Citizens of foreign states could do business anywhere under the comity clause, but corporations were entities separate and distinct from their members; the citizenship of the latter did not attach to the former. Corporations, moreover, were subject to much broader state control than ordinary individuals. Webster’s argument, Ingersoll warned, turned democracy upside down by creating “sovereign corporations and subject states.”49

  Ingersoll’s populist arguments had appeal, no doubt, to Taney and his brethren. Indeed, over the course of Taney’s tenure, the Supreme Court would expand the power of the federal courts over commercial matters, enabling federal judges to play a larger role in overseeing the interstate businesses of the emergent national economy. While Taney believed in the authority of states to regulate corporations, the new, large interstate businesses posed an obvious challenge to the small, localized state courts of the mid-nineteenth century. Federal courts, by contrast, applying federal common law, could better supervise corporations operating across multiple state lines.50

  The Supreme Court’s decision in Bank of Augusta v. Earle, handed down in March of 1839, announced a new approach to corporate rights. The court rejected Webster’s argument that, as Taney’s majority opinion characterized it, “the court should look behind the act of incorporation and see who are the members of it.” Instead, Taney held, the corporation “is a person for certain purposes in contemplation of law,” “Whenever a corporation makes a contract, it is the contract of the legal entity—of the artificial being created by the charter—and not the contract of the individual members. The only rights it can claim are the rights which are given to it in that charter, and not the rights which belong to its members as citizens of a state.” In Taney’s view, corporate personhood required a strict separation between the rights of the corporation and the rights of its members.51

  To Taney, the corporate person had more limited rights than an ordinary person because of the way corporations were organized. In Earle, Taney made reference to a recent development in the organization of corporations gradually taking hold by the late 1830s: limited liability. Stockholders could lose the money they invested in stock if a corporation went bankrupt, but their personal assets were completely shielded from that corporation’s creditors. Limited liability, then, was a function of corporate personhood. The corporation was its own, independent person in the eyes of the law, and it had legal rights—or, in this instance, legal obligations—wholly separate and distinct from those of its members. Taney suggested that stockholders should not be able to take advantage of personhood to shield their assets, only to turn around and argue for piercing the corporate veil when it came to corporate rights.

  Taney’s opinion in Bank of Augusta v. Earle was the first time the Supreme Court ruled explicitly against extending a constitutional right to corporations. And unlike the Marshall court’s corporate rights cases, Earle embraced corporate personhood. Because a corporation was its own legal person, its rights and duties were separate and distinct from those of its members. Corporations had only those rights appropriate for this unique and special type of legal entity, one that already enjoyed special legal privileges, such as limited liability. Corporate personhood served as a limit on the rights of corporations and a basis for distinguishing corporations from ordinary people.

  The decision was not all bad news for Webster and the Second Bank. While refusing to pierce the corporate veil and give corporations the rights of their members, Taney also rejected Earle and Primrose’s baseless argument that Alabama law prohibited out-of-state banks from doing business there. While Taney made clear that states had the authority to prohibit out-of-state corporations if they liked, Alabama had never enacted any law excluding the Second Bank or the other corporations involved in the case. As a result, those companies were entitled to do business in Alabama absent legislation to the contrary, and the two men could not renege on their notes. Corporate rights in general had lost, but Webster and the Second Bank eked out a victory.52

  Nonetheless, Taney’s opinion articulated in decisive terms a principle both the Second Bank and Webster abhorred: states had the inherent power to exclude out-of-state corporations from their borders. Indeed, shortly after the Supreme Court’s ruling in Bank of Augusta v. Earle was handed down in 1839, Alabama put this principle into practice and prohibited the Second Bank from doing business in the state. In the Taney court, even Webster’s victories turned into defeats.53

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  IN THE YEARS after Earle, the Taney court set out to scale back the reach of Bank of the United States v. Deveaux. In a series of cases decided between 1844 and 1853, the Taney court narrowed, refocused, and finally rejected Bank of the United States’s rule that, for access to federal court, the citizenship of a corporation was defined by the citizenship of its members. The court held that a corporation’s citizenship was determined instead by the corporation’s own state of incorporation. The corporation was a separate, independent legal actor under the law. Moreover, for the Taney court, treating corporations as people was a way to limit corporate power. Although the court continued to hold that corporations could sue and be sued in federal court, the court revamped the rule so that the federal courts, now largely in the hands of Jacksonian judges, could use it to supervise the growing number of interstate businesses that states were finding increasingly difficult to control.

  Alexander Marshall—no relation to the late chief justice—was the plaintiff in the most colorful of the Taney court cases on the issue. A self-described “lobby member,” Marshall was hired in 1846 by the Baltimore & Ohio Railroad Company to bribe Virginia lawmakers to approve a right-of-way through the state to the Ohio River. “The mass of the members in our legislature are a thoughtless, careless, light-hearted body of men, who came here for the ‘per diem,’ ” Marshall explained in a letter to the B&O’s president. All it would take was “a contingent fund of at least $50,000” to turn the legislators into “wax, to be molded by the most pressing influences.” Marshall, however, was clearly not as skilled at the art of persuasion as Daniel Webster. Although a route was eventually approved by the legislature, it was not the one originally sought by the B&O, which then reneged on its agreement to pay Marshall.54

  That Marshall felt no embarrassment about bringing a lawsuit to enforce such an agreement reveals much about the nature of politics in the antebellum era. Unlike today, there were no campaign finance laws or lobbying restrictions. Yet corporations, even after the adoption of Jacksonian general incorporation laws, still had ample reason to try to corrupt lawmakers. This was especially true of a railroad like the B&O. Established in 1827 to compete with New York’s Erie Canal, the B&O was the nation’s first passenger line. The corporation was celebrated—earning a place on the game board of Monopoly in 1935—and, when it came to politics, widely mimicked. Many of the railroads that followed would similarly use cash or stock to sway elected officials to approve railroad measures. Graft was treated as a cost of doing business. Over the second half of the nineteenth century, bribery of public officials would become as commonplace as the leaden smoke billowing from the engines of the B&O’s imitators.55

  Mar
shall’s lawsuit against the B&O raised the same issues as the Bank of the United States case: Do corporations have a constitutional right to sue in federal court on diversity grounds? And, if so, how should courts determine the citizenship of a corporation? Back in 1809, the Supreme Court sought to protect corporations from the anticorporate bias of state courts by broadly reading the Constitution to give them access to friendlier federal tribunals. Corporations, the court ruled, had the right to sue in federal court based on the rights of their members. So long as a corporation’s members were from states different from the opposing party’s, then the parties were diverse and entitled to sue or be sued in federal court.

  ADVERTISEMENT FOR THE BALTIMORE & OHIO RAILROAD, 1864.

  By the 1840s and 1850s, however, Bank of the United States’s rule was being undermined by changes in both the economy and the corporation, many of them attributable to the rise of the railroads. With over 3,000 miles of track, the railroads were reshaping the nation. Lines like the B&O dramatically reduced the cost of shipping and increased the mobility of both goods and people. The impact was to begin to transform an agrarian society where people rarely saw anything more than thirty miles from their home to an industrial one with far broader horizons. Even more than the canals of the early 1800s, the railroad lines were essential to creating an increasingly integrated economy. Other businesses, too, were innovating in ways that would further that process. In 1844, Samuel Morse established the first telegraph line, making long distance communication immediate and, hence, more powerful. Surprisingly, Morse’s first long distance message was sent from the Supreme Court—he was demonstrating the technology before lawmakers, and the court’s chambers were in the basement of the Capitol—and the telegraph arrived successfully at its intended destination, the Baltimore depot of the B&O railroad.56