Dayton and Goose Creek

The Supreme Court for the third* time in recent months upheld the Transportation Act, generally known as the Esch-Cummins Railroad Law.

The provision of the act in question was the so-called "recapture" clause. By this clause the Interstate Commerce Commission, after fixing freight rates and a fair rate of return on the assessed valuation of each road, may "recapture" one-half of the earnings of any road which exceed such a "fair return." The rate of a fair return has been fixed by the Commission at 5.75% per annum. The moneys received by the Government under this provision of the Act are placed in a fund from which loans are made and equipment leased to railways, the purpose being to bolster up the weaker roads with part of the excess earnings of the stronger roads.

The case was brought by the Dayton-Goose Creek Railway Co., a small road operating in Texas. It reported to the Commission that in ten months of 1920 its profits were $21,666 more than the "fair rate" and that in twelve months of 1921 its profits were $33,766 in excess. The Commission asked the road to remit one-half of these amounts. The railway asked for an injunction to prevent this capture of part of its profits, on the grounds that the "recapture" clause was unconstitutional. The Federal Court for the Eastern District of Texas denied the petition. The railway appealed the case to the U. S. Supreme Court and was joined in the contest by 19 large railways who wished to test the law. The case was defended by the Government and, with permission of the Court, by the National Association of Owners of Railroad Securities.

The contesting railways contended that Congress did not have the power to determine what they should do with their earnings and that it was a confiscation in violation of Constitutional rights to "capture" these or any portion of their earnings. Chief Justice Taft wrote and read the decision of the Court. He maintained:

The Law's Intent. "The new act seeks affirmatively to build up a system of railways prepared to handle promptly all the interstate traffic of the country. It aims to give the owners of the railways an opportunity to earn enough to maintain their properties and equipment in such a state of efficiency that they can carry well this burden."

The Law's Scope. "It is insisted here [by the railways], that the power to regulate 'interstate commerce is limited to the fixing of reasonable rates and the prevention of those which are discriminatory, and that when these objects are attained the power of regulation is exhausted. This is too narrow a view of the commerce clause. To regulate in the sense intended is to foster, protect and control the commerce with appropriate regard to the welfare of those who are immediately concerned, as well as the public at large, and to promote its growth and insure its safety."

The Recapture Clause enables the Government "to maintain uniform rates for all shippers and yet keep the net returns of railways, whether strong or weak, to the varying percentages which are fair for them."

No Confiscation. "Under the Transportation Act the carrier is only a trustee for the excess over a fair return. Though in its possession,, the excess never becomes its property, and it accepts custody of the product of all the rates with this understanding."

While maintaining that the recapture provision was not confiscatory, the Court declined, from the evidence presented, to pass on the adequacy of the valuation on which "fair earnings" were based.

*The Supreme Court in two previous cases held: 1) That the Interstate Commerce Commission had power to raise intrastate commerce rates where they were low enough to discriminate against interstate commerce; 2) that the Commission in making division of joint rates between groups of carriers might give a weaker group a greater share.