by Adam Winkler
In 1916, Ford announced that his company would not distribute a special dividend to stockholders despite having on hand an extraordinary cash surplus of $60 million. With Europe at war, Ford justified the decision as necessary to prevent the “discharge of a large number of employees in case there should be a sudden depression of business.” Ford also detailed a plan to use some of the surplus to build the largest manufacturing plant in the world at River Rouge outside of Detroit, which would allow him to lower prices for consumers even more.26
The Dodge brothers, who would go on to build quite a successful car company of their own, condemned Ford for running his corporation “as a semi-eleemosynary institution and not as a business institution.” Helping employees and the larger public were goals “worthy in themselves but not within the scope of an ordinary business corporation.” Ford was obligated to run the company in the interests of stockholders, which meant distributing to them the cash surplus. The brothers’ lawsuit raised an important question: Can corporations be run in the interest of stakeholders like employees, customers, and the larger community—or must they be managed to maximize profits?
During the trial, the outspoken Ford insisted that his company had the right to make business decisions in the interests of the public even if stockholders had to sacrifice. The Ford Motor Company was organized “to do as much good as we can, everywhere, for everybody concerned,” Ford testified, and only “incidentally to make money.” He could have claimed that his corporation would benefit in the long run from these policies, as executives often do today when pressed to defend socially responsible policies, but Ford stubbornly refused on principle. “My ambition,” Ford said, is “to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.”27
HENRY FORD WITH JAMES AND HORACE DODGE.
Citing Ford’s testimony, the Michigan Supreme Court ruled against Ford and his public-spirited view of the corporation. While corporations might lawfully make “an incidental humanitarian expenditure of corporate funds,” the court held, they could not commit to “a general purpose and plan to benefit mankind at the expense” of stockholders. Although judges typically defer to corporate executives under the “business judgment rule,” which says that courts will not second-guess business decisions made in good faith, here Ford had offered no valid business reason to refuse to distribute a special dividend. Even if the company kept enough money to build the River Rouge plant—which was a legitimate business move—there would still be $30 million in cash reserves on hand and a steady flow of additional revenue from ever-increasing car sales. “A business corporation is organized and carried on primarily for the profit of the stockholders,” the court explained. “The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself.”28
Dodge Brothers v. Ford Motor Company has become “an iconic statement that corporations have no obligations beyond the bottom line,” according to corporate law scholar Kent Greenfield. The economist Milton Friedman captured this view of the corporation in the title of a well-known article he wrote for the New York Times Magazine in 1970: “The Social Responsibility of Business Is to Increase Its Profits.” Of course corporations can take measures that also benefit other stakeholders, yet the majority view is that such activity must ultimately be in the long-term interests of the company and its stockholders. Genuine corporate social responsibility—done purely to serve employees, customers, or society, at the long-term expense of stockholders—would be a breach of management’s fiduciary duties.29
This principle of “shareholder wealth maximization” has become deeply engrained in America’s corporate culture. Critics, however, blame this one-dimensional—some say “pathological”—view of the corporation for any number of corporate misdeeds, from the Deepwater Horizon oil spill of 2010, which was linked to safety shortcuts taken to prop up share prices, to Enron’s accounting fraud, done to hide debt from investors. Nonetheless, today nearly every law student reads the Ford case and learns that, by law, a corporation exists to further the interests of stockholders, not the interests of employees, customers, or the larger community. For those who believe that corporations should be more than profit-maximizing automatons, Dodge v. Ford Motor Company, writes Greenfield, is “corporate law’s original sin.”30
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IN THE LOUISIANA ADVERTISING tax case, Eberhard P. Deutsch and Esmond Phelps, the lawyers for the newspaper companies, sought to portray their clients as being fundamentally different from ordinary profit-maximizing corporations. These companies played a special role in a democratic society. They were an essential part of “the press” protected by the Constitution, and their unique mission was “to gather and disseminate information” in order to educate voters and keep the government in check. Press corporations would not fulfill those important social functions if the government could punish them for publishing things contrary to government dogma.31
When Deutsch and Phelps’s case reached the Supreme Court in January 1936, the justices were in yet another new home—and on the verge of a new mission. The justices, who were hearing cases for the first time in their Cass Gilbert–designed neoclassical marble palace, would soon abandon the Lochner-era commitment to the liberty of contract and make a new one to preserve civil rights and civil liberties. Huey Long was dead, the victim of an assassin’s bullet at the age of 42. Despite his youth, the Kingfish had gained national notoriety as a demagogue and a tyrant who abused government power to muffle political rivals. One of Long’s final embarrassments came when, drunk, he got into a fistfight in the bathroom of a swank Long Island country club. As the national media hounded him, Long lashed out, bragging about how he had silenced Manship’s Capital City Press and the other urban dailies in his state: “The newspapers in Louisiana have learned their lesson. They don’t try anything like this down there. They don’t dare!”32
It was this image of Long, the dough-faced persecutor of political opponents, that animated the arguments in the Supreme Court. The newspaper companies portrayed themselves as political dissenters being silenced for countering the powerful Long. The advertising tax was not just an ordinary tax on a business; it was an effort by Long’s forces to manipulate the political process and stifle the voice of Long’s opponents.
In a sign of how newspapers across the country appreciated the implications of the case, Deutsch and Phelps were joined on the briefs and in the Supreme Court hearing by Elisha Hanson, the general counsel of the American Newspaper Publishers Association. Largely due to the efforts of the Chicago Tribune’s McCormick, the association was now fully committed to establishing broader freedom of the press protections. The association’s newsletter, Editor & Publisher, likened Long’s attacks on the newspapers to the subjugation of dissidents in Germany. It was doubtful, the newsletter wrote, “if Hitler, Goering, and Goebbels have a lower estimate of a free and democratic process than this brazen, loud mouthed, smirking arriviste from Louisiana.”33
Before the justices in January of 1936, the Louisiana papers hammered the same theme. They quoted Long’s widely distributed circular admitting his motives: “The lying newspapers are continuing a vicious campaign” against Long’s policy programs, the pamphlet said. “We managed to take care of that element here last week. A tax of 2% on what newspapers take in was placed upon them. That will help their lying some.” If Long had wanted just to raise revenue by taxing advertising, the law should have applied to all newspapers. Instead, it applied only to thirteen of them, twelve of which were outspoken opponents of Long.
The thirteenth paper was The Lake Charles American-Press, published by the American Press Company, which had supported Long. Yet the inclusion of that paper did not mean the tax was a neutral revenue measure. The Louisiana papers again quoted Long, who had admitted that the American Press Company’s paper was only included by
necessity. “There was only one [large] newspaper in the State that had not joined up with the gang opposing me,” Long had said. Lawmakers “tried to find a way to exempt The Lake Charles American-Press from the advertising tax, but did not think we could do it,” Long explained, “but we would have done it if we could.”34
The lawyers also told the justices that the very purpose of the First Amendment was to prevent the government from silencing political dissenters. “That amendment was written to protect the people in their right to have a press free from restraint from whatsoever hostile source the threat of restraint might spring, and from any method sought to be applied—whether that method be censorship, licensing, taxation, seditious libel, injunction, writ of attachment or anything else.” Although the court had only previously held that prior restraints on publication were prohibited by the First Amendment, the lawyers argued that the Founders had broader concerns and sought to protect against any law that stifled or censored speech because it opposed government orthodoxy.
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THE JUSTICES THAT DECIDED the constitutionality of the Louisiana advertising tax were deeply divided over many constitutional issues, especially pertaining to the regulation of business. Those divisions would manifest themselves in the justices’ deliberations over Grosjean v. American Press Company, even as the case presented a rare instance of consensus on the ideologically riven court: all the justices thought Huey Long’s law was unconstitutional. The disagreement was over why. In their debates over that key question, the justices largely overlooked the newspapers’ identity as corporations. The justices saw this case through the lens of emerging First Amendment principles and concern for the persecuted, all but ignoring the corporate rights aspect of the controversy.
On one side of the court was a group of relatively strong pro-business justices, all appointed long before the Great Depression: George Sutherland, James McReynolds, Pierce Butler, and Willis Van Devanter. Nicknamed the “Four Horsemen of Reaction,” they were proponents of the Lochner jurisprudence and saw their role as enforcing limits on government’s authority to regulate property rights and the free market. They voted consistently against Roosevelt’s New Deal programs. The Four Horsemen clashed with the “Three Musketeers”: Louis Brandeis, Harlan Stone, and Benjamin Cardozo, the court’s liberals, who thought the Constitution permitted government considerably more leeway over economic matters. The two swing votes on the court were Owen Roberts, who tended to side with the Horsemen, and the formidable Chief Justice Charles Evans Hughes, who had seen firsthand how business corrupted politics during the Great Wall Street Scandal of 1905 and now often joined the Musketeers.35
In this case, the Musketeers were led by Cardozo, the rare instance of a judge so renowned that he was appointed to the Supreme Court by a president of the opposite political party—a situation impossible to imagine today. A Democrat who had profoundly shaped the law as chief justice of New York’s highest court, Cardozo was widely thought to be the only man worthy of filling Oliver Wendell Holmes’s seat when the legendary jurist retired in 1932. Nominated by Republican Herbert Hoover, Cardozo became a leader of the progressive wing of the court. In the newspaper case, Cardozo argued that Long’s advertising tax was unconstitutional because it infringed a civil liberty, the freedom of the press. Although the law was not a prior restraint, Cardozo agreed with the newspapers that the First Amendment should be read more broadly to protect against other forms of regulation, such as taxes, that could similarly stifle democratic debate. In a modern society, the free exchange of ideas required expansive free speech protections.36
THE JUSTICES OF THE SUPREME COURT WHO DECIDED THE LOUISIANA NEWSPAPERS CASE. STANDING, LEFT TO RIGHT: OWEN ROBERTS, PIERCE BUTLER, HARLAN STONE, BENJAMIN CARDOZO. SITTING, LEFT TO RIGHT: LOUIS BRANDEIS, WILLIS VAN DEVANTER, CHARLES EVANS HUGHES, JAMES MCREYNOLDS, GEORGE SUTHERLAND.
The Horsemen, led by Sutherland, a native Englishman who grew up in the wilds of Utah Territory in the 1870s, agreed the law was unconstitutional but argued instead that the problem was one of business taxation. Louisiana could tax all newspapers or no newspapers but could not only tax those newspapers with circulation in excess of 20,000. Regardless of whether Long and lawmakers sought to stifle opponents, a tax law could not arbitrarily apply only to a subset of businesses. Such discriminatory taxes, in the view of the Horsemen, were a way for the government to choose winners and losers in the marketplace. As Sutherland had written in a previous case, differential rates of taxation were “a mere subterfuge by which the members of one group of taxpayers are unequally burdened for the benefit of the members of other groups similarly circumstanced.” For the Musketeers, who believed government was within its powers to set different tax rates, the Louisiana law burdened liberty and interfered with democracy. For the Horsemen, the law burdened business and interfered with the free market.37
Sutherland was assigned to write the majority opinion, which prompted Cardozo to draft a concurrence emphasizing the civil liberties aspect of the case. Cardozo’s concurring opinion was so powerful, Sutherland found the justices gravitating away from his own argument. Instead of allowing Cardozo to steal away his majority opinion, Sutherland agreed to revise his own opinion to give more weight to the freedom of the press.
In February of 1936, as Americans were being reminded of the dangers of political persecution in newspaper stories about athletes marching past Adolf Hitler at the winter Olympics, the Supreme Court issued its opinion in Grosjean v. American Press Company. Sutherland’s opinion integrated concerns about taxation and political persecution: “The form in which the tax is imposed is in itself suspicious,” Sutherland wrote. The “plain purpose” of the tax was “penalizing the publishers and curtailing the circulation of a select group of newspapers.” Once again, the government was picking winners and losers. Yet, due to Cardozo’s influence, Sutherland also portrayed the case as one about persecution and democracy.38
“For more than a century prior to the adoption of the [First] amendment—and, indeed, for many years thereafter,” Sutherland’s opinion explained, “history discloses a persistent effort on the part of the British government to prevent or abridge the free expression of any opinion which seemed to criticize or exhibit in an unfavorable light, however truly, the agencies and operations of the government.” The advertising tax was “a deliberate and calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in virtue of the constitutional guaranties.” Echoing the argument of Manship and the Louisiana dailies, Sutherland recognized the special role the press plays in a democracy: “A free press stands as one of the great interpreters between the government and the people.”
The court’s decision in Grosjean was a landmark in the history of free expression in America. Yet in the justices’ internal debate over how to view the tax, one of the central issues in the case was obscured: the newspapers were corporations claiming to have liberty rights under the Constitution. Even if Long’s law went too far, how did Capital City Press and the other newspaper corporations involved have any constitutional right to challenge it?
Justice Sutherland’s opinion for the court breezed right over the issue on a corporationalist wind. Louisiana “contends that the Fourteenth Amendment does not apply to corporations; but this is only partly true,” Sutherland wrote. “A corporation, we have held, is not a ‘citizen’ within the meaning of the privileges and immunities clause. But a corporation is a ‘person’ within the meaning of the equal protection and due process clauses, which are the clauses involved here.” That was the entirety of the court’s discussion of corporate rights—and it was fundamentally misleading. While the court had said that corporations were people, it had also repeatedly held that corporations did not have liberty rights. The rights protected by the First Amendment, the court had clearly held in Gitlow, were liberty rights.
The court was able to gloss over the corporate rights issue in part because Louisiana’s attorneys, Gaston P
orterie and Charles Rivet, had done such an incompetent job briefing and arguing the case. They had focused on the wrong clause of the Constitution, the privileges or immunities clause, so the justices were able to dispense with their arguments easily. Ordinarily, the justices might feel compelled to correct such an error rather than seizing on it. Yet neither of the court’s two factions had strong reason to intervene. Cardozo and the Musketeers were eager to expand the freedom of the press against Long’s repressive tactics and strengthen the First Amendment’s protections more generally. Their commitment to expansive free speech principles meant inevitably that media corporations, which were becoming the public’s main source of information, would have to be protected. Sutherland and the Horsemen, meanwhile, were willing to blur the distinction between property rights and liberty rights in order to overturn the discriminatory taxes. If newspaper companies could also assert First Amendment claims to strike down such laws, the case amounted to an important victory for the free market. The end result of the justices’ agreement on the outcome was a Supreme Court case that afforded an unambiguous liberty right to corporations. Moreover, the court had portrayed the corporate speech involved as appropriate, legitimate, and even necessary in the democratic process.