After the Civil War, United States commerce experienced rapid growth, both among the states and in international markets. Congress passed the Interstate Commerce Act in 1887 regulating interstate trade. Many state legislatures wrote constitutional provisions and statutes intended to protect their states’ businesses from what they perceived as unfair competition from other states.
For example, the 1879 Louisiana Constitution contained Section 236, which provided that a corporation with its main offices outside the state could only do business in Louisiana if it received a license to do so and maintained an office and authorized agent in the state. The provision was intended to protect the citizens of Louisiana from insurance fraud. Louisiana Act 66 of 1894 provided that anyone who purchased marine insurance from an out of state marine insurance company that had not complied with the Louisiana regulations “shall be subject to a fine of one thousand dollars, … for the use and benefit of the charity hospitals in New Orleans and Shreveport.”
E. Allgeyer and Company, located in New Orleans, exported cotton to ports in Great Britain and Europe. The company sought to purchase shipping insurance coverage from Atlantic Mutual Insurance Company of New York to cover cotton shipments scheduled to depart from New Orleans. In October of 1894, Allgeyer mailed his request for insurance coverage. In December, the state of Louisiana filed suit against Allgeyer, charging him with violation of the Louisiana law.
Allgeyer maintained that the Louisiana law violated the U.S. Constitution’s Fourteenth Amendment by depriving him of liberty of contract without due process. He argued that contracts such as his were beyond the jurisdiction of state courts, and the U.S. Constitution protected the right of people to make contracts with parties in other states, free of arbitrary restrictions. The Contract Clause forbids the states impairing the obligations of contracts in Article I, Section 10, Clause 1, but it does not specifically provide for the liberty of contract, which is more rooted in reason and natural law. Therefore, Allgeyer based his liberty of contract claim in the Fourteenth Amendment, rather than the Contract Clause.
The parish court found in favor of Allgeyer, but Louisiana’s Supreme Court reversed the decision and fined Allgeyer $1000 to be paid to support the charity hospitals.
The Louisiana Supreme Court wrote,
“There is in the statute an apparent interference with the liberty of defendants in restricting their rights to place insurance on property of their own whenever and in what company they desired, but in exercising this liberty they would interfere with the policy of the state that forbids insurance companies which have not complied with the laws of the state from doing business within its limits. Individual liberty of action must give way to the greater right of the collective people in the assertion of well-defined policy, designed and intended for the general welfare.”
Allgeyer appealed the decision and in 1897 the U.S. Supreme Court agreed to hear the case. The central question was whether the Louisiana law limiting contracts its citizens could make with parties in other states violated the Due Process Clause of the Fourteenth Amendment.
In an opinion written by Justice Rufus W. Peckham, the U.S. Supreme Court unanimously ruled in Allgeyer’s favor, basing their reasoning in principles of natural law, and ruling for the first time that a state law regulating business violated liberty of contract:
“The ‘liberty’ mentioned in [the Fourteenth] amendment means not only the right of the citizen to be free from the mere physical restraint of his person, as by incarceration, but the term is deemed to embrace the right of the citizen to be free in the enjoyment of all his faculties, to be free to use them in all lawful ways, to live and work where he will, to earn his livelihood by any lawful calling, to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary, and essential to his carrying out to a successful conclusion the purposes above mentioned.”
The decision increased federal influence over state laws. The Fourteenth Amendment was written after the Civil War to protect the personal rights of African-Americans. Allgeyer v. Louisiana was the first decision in what would become a 40-year period in which the U.S. Supreme Court invalidated a number of state-level economic regulations, such as those affecting working conditions, wages and hours. The Court extended the substantive meaning of the Due Process Clause to protect economic rights, liberty of contract, and commercial activity as part of the definition of liberty. Justice Rufus W. Peckham, author of the Allgeyer decision, also wrote later for the majority in the 5-4 decision, Lochner v. New York (1905). He explained that the state’s police power was limited to laws protecting the public’s morals, health, safety, and welfare, and a maximum hours law for bakers in New York did not meet that test, because it violated the liberty of contract. The Lochner Era represented a chapter of laissez-faire decisions in which the Court protected property rights and liberty of contract up through 1937. With that year’s decision in West Coast Hotel v. Parrish during the Great Depression, the Court reversed itself by upholding a state minimum wage law. Since then, the high court has largely permitted increased levels of state and federal regulation of the economy, based on the U.S. Constitution’s Interstate Commerce Clause, Article 1, Section 8, Clause 3.
Allgeyer v. Louisiana (1897) Supreme Court decision: https://supreme.justia.com/cases/federal/us/165/578/
Gennie Westbrook, formerly a classroom teacher, is a Madison Fellow (2000 TX), and senior advisor for education at The Bill of Rights Institute.
Allgeyer v. Louisiana – The Regulation Of Business – JRank
Allgeyer v. Louisiana, www.Justia.com https://supreme.justia.com/cases/federal/us/165/578/
Michael Les Benedict, Allgeyer v. Louisiana, Oxford Companion to the Supreme Court, Kermit Hall ed. 1992.