Economic Rights: the Contracts and Takings Clauses

AuthorCharles D. Kelso; R. Randall Kelso
ProfessionProfessors of Law

Page 951

Some provisions in the Constitution involving economic rights are structural protections. The Commerce Clause places limits on federal regulation of commerce, although, as interpreted today, these are modest limits, as noted at ßß 18.2.5 & 18.5. The Constitution also limits the ability of states to discriminate against interstate economic activity. In addition to specific limitations, like duties on imports and exports, discussed at ß 18.6.1, the Court has developed the dormant commerce clause doctrine to prevent states from "excessively burdening" interstate commerce, discussed at ß 20.3.2. The Article IV, ß 2 Privileges and Immunities Clause requires states to provide nonresidents the same rights given to residents for activities "sufficiently basic to the livelihood of the Nation" unless the state has a "substantial reason" for the difference in treatment, discussed at ß 20.3.3.

Other protections involving economic rights provide direct protection to individuals and flow from the First Amendment, the 13th Amendment, or the Fifth and 14th Amendments. The 13thAmendment's ban on slavery or involuntary servitude is discussed at ß 25.1. The economic rights protected against state infringement by the 14th Amendment's Privileges or Immunities Clause are discussed at ß 25.3. Economic rights protected against state infringement by the 14th Amendment's Equal Protection Clause, and against federal infringement by the Equal Protection component of the Fifth Amendment's Due Process Clause, are discussed at ßß & 26.4.1. Economic rights protected against infringement by the states under the 14th Amendment Due Process Clause, and against federal infringement by the Fifth Amendment Due Process Clause, are discussed at ßß & The First Amendment protection for commercial speech is discussed at ß 30.3.2.

The remaining protections in the Constitution for economic rights are the Article I, ß 10, cl. 1 Contracts Clause, which prevents states from passing any "Law impairing the Obligation of Contracts," and the Fifth Amendment Takings Clause, which provides "nor shall private property be taken for public use, without just compensation." It is applied to the states by the 14th Amendment Due Process Clause. The Contracts Clause is discussed at ß 22.1, and the Takings Clause at ß 22.2.

ß 22 1 The Contracts Clause

As discussed at ß 22.1.1, Chief Justice John Marshall laid the foundation for the Contracts Clause to become a significant restraint upon state action by holding that the Clause not only covered state interference with private contracts, but also various contractual dealings with the states themselves. During the first part of the formalist era, from 1873 to 1900, the Contracts Clause continued as a significant limit on state power. Between 1900 and 1937, however, the clause was less frequently applied for two main reasons: (1) the states more carefully defined and protected the extent of their regulatory police powers, and (2) the Court began to rely primarily on substantive due process as a restraint of state action affecting contract or property interests, as discussed at ß

During the Holmesian era, from 1937-1954, reasonableness review of economic legislation under equal protection or substantive due process theories was replaced with minimum rational review, with the result that those clauses became only slight restraints on state power, as discussed at ßß & Similarly, the Contracts Clause review took on the deference to government aspects of minimum rational review. Page 952

This situation continued during most of the instrumentalist era, from 1954-1986. Near the end of that era, however, when several particularly severe retroactive adjustments of contract rights were enacted without emergency justification, the Contracts Clause was brought back to life to a limited extent. By the end of the instrumentalist era, the Court had developed a formulaic methodology for Contracts Clause analysis, which in some cases constitutes a level of review more exacting than minimum rational review. The steps in this Contracts Clause analysis follow modern 3-part means/end reasoning (ends, benefits achieved, burdens imposed), discussed at ß, with a substantial burden requirement before the Clause is triggered, noted at ß 21.2.3 text following n.73. The relevant questions are:

(1) Has a state law, in fact, operated as a substantial impairment of a contractual relationship (preliminary substantial burden requirement).

(2) If so, the state must have a legitimate public purpose (the end requirement).

(3) If that is shown, the next inquiry is whether the adjustment of rights and responsibilities of contracting parties is of a character appropriate to the public purpose justifying the legislation's adoption (the means requirement). As discussed at ß 22.1.4, this test mirrors minimum rational review under the Equal Protection and Due Process Clauses, including a focus on both the benefits achieved by the statute and the statute's burdens. In contrast, if the subject-matter of the state law raises special concerns, such as when the state is impairing the contract obligations of the state's own contracts in a manner that favors the state, or if the legislation is not one of general application, but only touches a more narrowly defined group of individuals in society, less deference is given to the state's action and the Court will apply a "second-order" kind of rational review analysis, as defined at ß 7.2.1 and summarized in Table 7.2. As is true of both minimum and "second-order" rational review, the challenger has the burden to establish that the law is unconstitutional.1

ß 22 1.1 The Original Natural Law Era

In an opinion by Chief Justice Marshall, the Court held in 1810 in Fletcher v. Peck2 that the Contracts Clause limits the power of states to modify their own contracts, as well as contracts already existing between private parties. The Georgia legislature had made a land grant to certain investors, which the legislature sought to repeal upon discovery that fraud and bribery influenced passage of the legislation. A remote grantee, Fletcher, demanded rescission and restitution from his grantor, Peck, because, said Fletcher, Peck could not convey a good title after repeal of the land grant statute. Peck responded that he was a purchaser in due course and the state could not retroactively affect his title. The Supreme Court agreed with Peck that the land grant was a contract within the meaning of the Contract Clause and could not be retroactively altered.

In reaching this conclusion, the Court did not limit its analysis to the specific intent of the framers and ratifiers. As Professor Jefferson Powell has noted: Page 953

The clause was included in the 1787 Constitution because of the Philadelphia framers' dislike of state legislation that interfered with contractual relationships between private creditors and debtors, a fact of which the Court's early membership was well aware. . . . Marshall argued that property grants were a form of contract in that the grantor necessarily made an implicit promise not to reassert the property rights it was granting; he then pointed out that nothing in the Constitution's wording excepted grants generally or grants by legislatures from the protection of the contracts clause. Since the moral evil of legislative interference with "the lives and fortunes of individuals" was the same, whether worked by a bill of attainder, an ex post facto law (both clearly unconstitutional), or a law revoking a prior grant, Marshall concluded that the attempted revocation was unconstitutional. . . . The fact that the clause's framers only intended to protect private contracts from interference did not limit the Constitution's effect when reasoning from "general principles" revealed that revocation of public grants produced an "analogous moral evil."3

Thus, the general background moral principle against unjust interference with the "lives and fortunes of individuals" implicit in several cited constitutional provisions determined the outcome in the case. In terms of interpretation styles, this reflects a natural law approach to constitutional interpretation, and its focus on general principles, discussed at ßß &, and reasoning by analogy, discussed at ß, rather than a formalist approach, which involves greater focus on specific historical intent, discussed at ß

In several additional cases, the Marshall Court underscored the breadth of what is a protected contract. For example, in New Jersey v. Wilson,4 it invalidated a New Jersey statute that repealed a tax exemption that the legislature had granted certain lands fifty years earlier. In Dartmouth College v. Woodward,5 Chief Justice Marshall wrote for the Court that a state legislature could not change the provisions of the corporate charter issued to Dartmouth College because that charter was a contract. As Professor Powell noted, "Again, Marshall considered the moral and political implications of permitting a state legislature to intervene in settled expectations, and again he concluded for the Court that the...

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