The State of South Dakota, having passed an act providing for
the appointment of a board of railroad commissioners and
authorizing that board to make a schedule of reasonable maximum
fares and charges for the transportation of passengers, freight,
and cars on the railroads within the state, provided that the
maximum charge for the carriage of passengers on roads of the
standard gauge should not be greater than three cents per mile, and
that board having acted in accordance with the statute, and having
published its schedule of maximum charges, the Chicago, Milwaukee
and St. Paul Railway Company filed the bill in this case in the
Circuit Court of the United States for the District of South Dakota
seeking to restrain the enforcement of the schedule. The railroad
commissioners answered fully, and testimony was taken before an
examiner upon the issues made by the pleadings. This testimony was
reported without findings of fact or conclusion of law. The case
went
Page 176 U. S. 168
to hearing. The Judge, without the aid of a master, examined the
pleadings and the mass of proof. He made findings of fact and
conclusions of law, delivered an opinion, and rendered a decree
dismissing the bill. This Court is of opinion:
(1) That neither the findings made by the court nor such facts
as are stated in its opinion are sufficient to warrant a conclusion
upon the question whether the rates prescribed by the defendants
were unreasonable or not, and that the process by which the court
came to its conclusion is not one which can be relied upon.
(2) That there was error in the failure to find the cost of
doing the local business, and that only by a comparison between the
gross receipts and the cost of doing the business, ascertaining
thus the net earnings, can the true effect of the reduction of
rates be determined.
(3) That the better practice would be to refer the testimony,
when taken, to the most competent and reliable master, general or
special, that can be found, to make all needed computations and
find fully the facts, so that this Court, if it should be called
upon to examine the testimony, may have the benefit of the services
of such master.
On February 3, 1897, the Legislature of South Dakota passed an
act relating to common carriers. Laws of 1897, c. 100. The act
provided for the appointment of a board of railroad commissioners,
and by section 20, this board was authorized to make a schedule of
reasonable maximum fares and charges for the transportation of
passengers, freight, and cars on the railroads within the state.
There was a proviso in the section that the maximum charge for the
carriage of passengers on roads of standard gauge should not be
greater than three cents per mile. On August 26, 1897, the board of
railroad commissioners, having taken the preliminary steps required
by the statute in respect to notice, etc., made and published its
schedule of maximum charges for the control of all local railroads.
On the next day, the Chicago, Milwaukee & St. Paul Railway
Company, plaintiff and appellant, filed its bill in the Circuit
Court of the United States for the District of South Dakota,
seeking to restrain the enforcement of such schedule. The bill
alleged generally that the existing rates were fair and reasonable,
that those established by the railroad commissioners were unjust
and unreasonable, would not only fail to afford the plaintiff
adequate compensation for
Page 176 U. S. 169
the services to be performed, but also would operate to deprive
it of its property without just compensation. The railroad
commissioners filed their answer on October 4, 1897, in which they
alleged that the existing rates were extortionate and unreasonably
high -- in many instances, so high as to prohibit the shipment of
ordinary products; that the freight rates were much higher than
those charged by the complainant company for similar services upon
its lines of railway in other and adjoining states, being about 90
percent higher than the rates charged in the State of Iowa; that
the passenger rates were at least twenty-five percent higher than
those charged by the plaintiff over its lines of railway in other
states, and much higher than those charged by other railway
companies for like transportation in other states. In addition to
these matters, the answer averred that the plaintiff and the
Chicago & Northwestern Railway Company were owners of competing
lines of railway, running westerly from Chicago and traversing the
States of Illinois, Wisconsin, Minnesota, and Iowa; that during the
years from 1880 to 1883, as competing companies they constructed
their lines of railway into and through that part of the then
Territory of Dakota, now the State of South Dakota; that at that
time there were no people, business, or industry to be accommodated
or served by the construction of said lines of railway, and that
the construction was not in response to any existing demand for the
same, but was for the purpose of preempting and occupying the
territory in anticipation of its settlement and development; that a
rapid occupation followed such extension of railroad lines, and a
large immigration flowed into the territory; that this rapid
immigration ceased in 1884, and that many of the settlers
disappeared in the years following, so that in certain portions of
the territory there was almost a depopulation; that going in thus
early, the plaintiff acquired its right of way, depots, and
terminal grounds at a substantially nominal cost; that the
capitalization of the railroad, in stocks and bonds, was fixed
during this period of excitement and rapid immigration, had never
been changed, and was extravagantly high. The answer also
contrasted the value of
Page 176 U. S. 170
the property as shown by such capitalization in stocks and bonds
and that returned by the railroad company to the state for the
purposes of taxation. It also averred that the Dakota lines were of
much greater earning value to complainant than the mere
pro
rata mileage of the lines in that state would indicate, and
that no account had been taken or allowance made for the value to
the plaintiff of the long haul business done on other parts of its
lines afforded by the interstate business running into Dakota. Upon
the issue thus presented by these pleadings, testimony was taken
before an examiner. This testimony is preserved in the record, and
amounts to several hundred printed pages. The examiner simply
reported the testimony, without any findings of fact or conclusions
of law. The case went to hearing before the district judge, who,
without the aid of a master, examined the pleadings and this volume
of testimony, and, on July 20, 1898, rendered a decree dismissing
plaintiff's bill. 90 F. 363. Besides delivering an opinion, the
court made the following findings of facts and conclusion of
law:
"This cause came on to be heard upon the pleadings and proofs at
this term and was argued by counsel, and thereupon, upon
consideration thereof, the court finds the following facts:"
"I. That the value of complainant's property in the State of
South Dakota is ten million dollars."
"II. That the fair value of the proportion of complainant's said
property assignable to local traffic was, for the year ending June
30, 1894, $2,200,000, and for the year ending June 30, 1895,
$2,600,000, and for the year ending June 30, 1896, $2,100,000, and
for the year ending June 30, 1897, $1,900,000."
"III. That the gross local earnings of complainant in the State
of South Dakota for the fiscal year ending June 30, 1894, was
$407,606.35, and for the year ending June 30, 1895, was
$330,642.85, and for the year ending June 30, 1896, was
$328,105.95, and for the year ending June 30, 1897, was
$311,085.42."
"IV. That the local earnings on the complainant's lines under
existing tariffs, on the same proportion of the total
Page 176 U. S. 171
value of the roads in South Dakota as the local earnings bear to
the gross earnings from all sources in South Dakota, were: for the
year 1894, 18.5 percent; for the year 1895, 12.7 percent; for the
year 1896, 15.6 percent; for the year 1897, 16.3 percent"
"V. That, applying the schedule of rates sought to be enjoined
in this action to the local traffic during the years above
mentioned, on the same method of calculation, the value of
complainant's property assignable to local traffic would be for the
years ending June 30, 1894, $1,900,000; June 30, 1895, $2,300,000;
June 30, 1896, $1,800,000; June 30, 1897, $1,600,000."
"VI. Under the commissioners' schedule, the gross earnings from
local traffic would have amounted to the sum of $342,381.98 for the
year ending June 30, 1894, and $277,518.40 for the year ending June
30, 1895, and $275,607.79 for the year ending June 30, 1896, and
$261,295.21 for the year ending June 30, 1897."
"VII. That these earnings for the fiscal year 1894 would equal
18% of the value thus ascertained, and for the year 1895 would
equal 12.1% and for the year 1896 would equal 15.3% and for the
year 1897 would equal 16.2%."
"VIII. That, owing to the small difference between the
percentage earned under the complainant's schedule of rates and
fares and the commissioners' schedule of rates and fares for the
four years prior to the commencement of this suit, and owing
further to the amount of the percentages which would have been
earned during said four years under the commissioners' schedule,
the court is unable to find beyond a reasonable doubt that the
local earnings under said commissioners' schedule would not during
the years aforesaid have earned the reasonable cost of earning said
local earnings and some reward to the owner of the property over
and above said cost of operation."
"IX. That the court is unable to find from the testimony what
the actual cost of earning the local earnings for the fiscal years
ending June 30, 1894, 1895, 1896, and 1897 was."
"X. As a conclusion of law, the court finds that the enforcement
of the proposed schedule of reasonable maximum rates
Page 176 U. S. 172
and fares will not deprive the complainant of its property
without due process of law, or deprive it of the equal protection
of the laws, or operate to take the property of complainant for
public use without just compensation."
From the decree thus entered, the plaintiff took its appeal to
this Court.
MR. JUSTICE BREWER delivered the opinion of the Court.
Few cases are more difficult or perplexing than those which
involve an inquiry whether the rates prescribed by a state
legislature for the carriage of passengers and freight are
unreasonable. And yet this difficulty affords no excuse for a
failure to examine and solve the questions involved. It has often
been said that this is a government of laws, and not of men, and by
this Court, in
Yick Wo v. Hopkins, 118 U.
S. 356,
118 U. S.
369:
"When we consider the nature and the theory of our institutions
of government, the principles upon which they are supposed to rest,
and review the history of their development, we are constrained to
conclude that they do not mean to leave room for the play and
action of purely personal and arbitrary power."
When we recall that, as estimated, over ten thousand millions of
dollars are invested in railroad property, the proposition that
such a vast amount of property is beyond the protecting clauses of
the Constitution, that the owners may be deprived of it by the
arbitrary enactment of any legislature, state, or nation without
any right of appeal to the courts, is one which cannot for a moment
be tolerated. Difficult as are the questions involved in these
cases, burdensome as the labor is which they cast upon the courts,
no tribunal can hesitate to respond to the duty of inquiry and
protection cast upon it by the Constitution.
Railroad
Commission Cases, 116 U. S. 307;
Page 176 U. S. 173
Dow v. Beidelman, 125 U. S. 680;
Georgia Railroad & Banking Co. v. Smith, 128 U.
S. 174;
Chicago, Milwaukee & St. Paul Railway v.
Minnesota, 134 U. S. 418;
Chicago & Grand Trunk Railway v. Wellman, 143 U.
S. 339;
Reagan v. Farmers' Loan & Trust
Co., 154 U. S. 362;
St. Louis & San Francisco Railway v. Gill,
156 U. S. 649;
Convington &c. Turnpike Co. v. Sandford, 164 U.
S. 578;
Smyth v. Ames, 169 U.
S. 466.
It is often said that the legislature is presumed to act with
full knowledge of the facts upon which its legislation is based.
This is undoubtedly true, but when it is assumed from that that its
judgment upon those facts is not subject to investigation, the
inference is carried too far. Doubtless, upon mere questions of
policy, its conclusions are beyond judicial consideration. Courts
may not inquire whether any given act is wise or unwise, and only
when such act trespasses upon vested rights may the courts
intervene. A single illustration will make this clear: it is within
the competency of the legislature to determine when and what
property shall be taken for public uses. That question is one of
policy over which the courts have no supervision; but if, after
determining that certain property shall be taken for public uses,
the legislature proceeds further and declares that only a certain
price shall be paid for it, then the owner may challenge the
validity of that part of the act, may contend that his property is
taken without due compensation, and the legislative determination
of value does not preclude an investigation in the proper judicial
tribunals. The same principle applies when vested rights of
property are disturbed by a legislative enactment in respect to
rates.
In approaching the consideration of a case of this kind, we
start with the presumption that the act of the legislature is
valid, and upon any company seeking to challenge its validity rests
the burden of proving that it infringes the constitutional guaranty
of protection to property. The case must be a clear one in behalf
of the railroad company, or the legislation of the state must be
upheld.
Such being unquestionably the law, it is obviously of the
Page 176 U. S. 174
utmost importance that the facts shall be clearly and accurately
found and distinctly stated by the trial court, and that those
facts shall sustain the conclusion reached.
We are of opinion that neither the findings made by the court
nor such facts as are stated in its opinion are sufficient to
warrant a conclusion upon the question whether the rates prescribed
by the defendants were unreasonable or not, and we are also of
opinion that the process by which the court came to its conclusion
is not one which can be relied upon. The court proceeded upon the
theory that a comparison of the actual gross receipts of the
company from its South Dakota local business with those which it
would have received if the rates prescribed by the defendants had
been in force was sufficient to determine the question of the
reasonableness of these latter rates, and instituted such
comparison with respect to the four years preceding the
commencement of this suit. Now it is obvious that the amount of
gross receipts from any business does not, of itself, determine
whether such business is profitable or not. The question of
expenses incurred in producing those receipts must be always taken
into account, and only by striking the balance between the two can
it be determined that the business is profitable. The gross
receipts may be large, but if the expenses are larger, surely the
business is not profitable. It cannot be said that the rates which
a legislature prescribes are reasonable if the railroad company
charging only those rates finds the necessary expenses of carrying
on its business greater than its receipts.
In the light of these general and obvious propositions, we
proceed to examine the computations and reasoning of the court. For
reasons which will be apparent hereafter, we do not stop to inquire
whether its findings are correct deductions from the testimony, but
take them as they are stated. It may be premised that the books of
the plaintiff, showing its business for the four years, were
examined, and so much as was deemed necessary admitted in evidence.
From those books was disclosed with mathematical accuracy the gross
receipts of the company on all its business in all the states
during each of the four years, and the actual cost of doing that
business
Page 176 U. S. 175
during each of those years; also the gross receipts from the
business done in South Dakota, and separately the amount which was
received in that state from interstate business and that from
local. If the schedule of rates prescribed by the defendants had
been in force during the four years, and the same amount of
business had been done by the company, the reduction in gross
receipts from the passenger business would have been fifteen
percent, and from the freight business seventeen percent. Of
course, the cost of doing the business would be substantially the
same. The court found the value of the plaintiff's property in
South Dakota to be $10,000,000, although, according to the
testimony, it was bonded for over $19,000,000. It held that it was
not fair to consider that sum, $10,000,000, the value of the
property employed in doing local business, for it was also used in
doing interstate business, and that the true way to determine the
value of the property which could be regarded as employed in local
business was by dividing the total value of $10,000,000 in the same
proportion that existed between the amount of gross receipts from
interstate business and that from local business, each of which
amounts was, as we have seen, accurately shown by the testimony.
Upon that basis of division, it found that the value of the
company's property employed in local business was for the first
year, $2,200,000; the second year, $2,600,000; the third year,
$2,100,000, and the last year, $1,900,000, and also that the gross
receipts from local business were for the first year, 18.5 percent
of the valuation; for the second year, 12.7 percent; for the third
year, 15.6 percent, and for the last year, 16.3 percent. In other
words, for these several years, the company received as
compensation for doing its local business the percent named of the
real value of the property used in doing that business. Then,
proceeding on the supposition that the defendants' schedule had
been in force and the rates reduced as therein prescribed during
these four years, it divided the valuation of $10,000,000 on the
like proportion of the receipts from interstate business to the
receipts from local business as thus diminished, and upon such
division found that the valuation of the plaintiff's property
engaged in local
Page 176 U. S. 176
business would have been, for the first year, $1,900,000; for
the second year, $2,300,000; for the third year, $1,800,000, and
the last year, $1,600,000, and upon such basis that the gross
receipts from local business would have amounted to 18 percent of
the value of the property for the first year, 12.1 for the second,
15.3 for the third, and 16.2 for the last. Upon this, it held that
the difference between the percent of receipts in the two cases was
slight, and that there was no change in what may rightfully be
called the earning capacity of the property sufficient to justify a
declaration that the reduced rates prescribed were unreasonable. In
other words, it was of the opinion that the earning capacity was so
slightly reduced that it could not be affirmed that the new rates
were unreasonable.
But that there was some fallacy in this reasoning would seem to
be suggested by the fact that, although the defendants' schedule
would have reduced the actual receipts 15 percent on the passenger
and 17 percent on the freight business, the earning capacity for
the last year was diminished only one-tenth of one percent. Such a
result indicates that there is something wrong in the process by
which the conclusion is reached. That there was can be made
apparent by further computations, and in them we will take even
numbers as more easy of comprehension. Suppose the total value of
the property in South Dakota was $10,000,000, and the total
receipts both from interstate and local business were $1,000,000,
one-half from each. Then, according to the method pursued by the
trial court, the value of the property used in earning local
receipts would be $5,000,000, and the percent of receipts to value
would be ten percent. The interstate receipts being unchanged, let
the local receipts by a proposed schedule be reduced to one-fifth
of what they had been, so that, instead of receiving $500,000, the
company only receives $100,000. The total receipts for interstate
and local business being then $600,000, the valuation of
$10,000,000, divided between the two, would give to the property
engaged in earning interstate receipts in round numbers $8,333,000,
and to that engaged in earning local receipts $1,667,000. But if
$1,667,000 worth
Page 176 U. S. 177
of property earns $100,000 it earns six percent. In other words,
although the actual receipts from local business are only one-fifth
of what they were, the earning capacity is three-fifths of what it
was. And, turning to the other side of the problem, it appears that
if the value of the property engaged in interstate business is to
be taken as $8,333,000, and it earned $500,000, its earning
capacity was the same as that employed in local business -- six
percent. So that, although the rates for interstate business be
undisturbed, the process by which the trial court reached its
conclusion discloses the same reduction in the earning capacity of
the property employed in interstate business as in that employed in
local business, in which the rates are reduced.
Again, in another way, the error of the court's computation is
manifested. The testimony discloses that the operating expenses of
the entire system during each of the four years were over 60
percent of the gross receipts. If the cost of doing local business
in South Dakota was the same as that of doing the total business of
the company, then the net earnings of that local business would not
exceed 40 percent of the gross receipts. Reduce the gross receipts
15 percent -- and the reduction by the defendants' rates was 15
percent on passengers and 17 percent on freight business -- it
would leave only 25 percent of the gross receipts as what might be
called net earnings, to be applied to the payment of interest on
bonds and dividends on stock. But the testimony shows that the cost
of doing local business is much greater than that of doing through
business. If it should be 85 percent of the gross receipts (and
there was testimony tending to show that it was as much if not
more) then a reduction of 15 percent in the gross receipts would
leave the property earning nothing more than expenses of operation.
These computations show that the method which the court pursued was
erroneous, and that, without a finding as to the cost of doing the
local business, it is impossible to determine whether the reduced
rates prescribed by the defendants were unreasonable or not.
But here we are confronted by the ninth statement in the
findings of fact, to-wit,
"that the court is unable to find from
Page 176 U. S. 178
the testimony what the actual cost of earning the local earnings
for the fiscal years ending June 30, 1894, 1895, 1896, and 1897
was."
If the court meant by that to say that there was no testimony
tending to show what was the cost of doing local business, we are
constrained to say that the statement is erroneous, because there
was abundance of testimony bearing upon that question. If it meant
simply that it could not determine that fact with mathematical
accuracy, basing it upon testimony of the exact amount of money
paid out for doing such work, it is undoubtedly true, but there are
many things that have to be determined by court and jury in respect
to which mathematical accuracy is not possible. Take the ordinary
case of condemnation of real estate, the value is to be determined
by the trial tribunal, whether jury or court, and yet no one is
able to state the exact value. In this very case, the court fixed
the value of the company's property in South Dakota at $10,000,000,
and yet it is impossible from the testimony to say that this
conclusion was absolutely accurate, that there was testimony
tending to show to a dollar such value. Beyond the figures given
from the books of the company of the actual cost of doing the total
business of the company, there was the testimony of several experts
as to the relative cost of doing local and through business. Such
testimony is not to be disregarded simply because it cannot
demonstrate by figures the exact amount or percent of the extra
cost. It is obvious on a little reflection that the cost of moving
local freight is greater than that of moving through freight, and
equally obvious that it is almost if not quite impossible to
determine the difference with mathematical accuracy. Take a single
line of 100 miles, with ten stations. One train starts from one
terminus with through freight and goes to the other without stop. A
second train starts with freight for each intermediate station. The
mileage is the same. The amount of freight hauled per mile may be
the same, but the time taken by the one is greater than that taken
by the other. Additional fuel is consumed at each station where
there is a stop. The wear and tear of the locomotive and cars from
the increased stops and in shifting cars from main to side
tracks
Page 176 U. S. 179
is greater; there are the wages of the employees at the
intermediate stations, the cost of insurance, and these elements
are so varying and uncertain that it would seem quite out of reach
to make any accurate comparison of the relative cost. And if this
is true when there are two separate trains, it is more so when the
same train carries both local and through freight. It is impossible
to distribute between the two the relative cost of carriage. Yet
that there is a difference is manifest, and upon such difference
the opinions of experts familiar with railroad business is
competent testimony, and cannot be disregarded.
We think, therefore, there was error in the failure to find the
cost of doing the local business, and that only by a comparison
between the gross receipts and the cost of doing the business,
ascertaining thus the net earnings, can the true effect of the
reduction of rates be determined.
The question then arises what disposition of the case shall this
Court make? Ought we to examine the testimony, find the facts, and
from those facts deduce the proper conclusion?
It would doubtless be within the competency of this Court on an
appeal in equity to do this, but we are constrained to think that
it would not (particularly in a case like the present) be the
proper course to pursue. This is an appellate court, and parties
have a right to a determination of the facts in the first instance
by the trial court. Doubtless if such determination is challenged
on appeal, it becomes our duty to examine the testimony and see if
it sustains the findings; but if the facts found are not challenged
by either party, then this Court need not go beyond its ordinary
appellate duty of considering whether such facts justified the
decree. We think this is one of those cases in which it is
especially important that there should be a full and clear finding
of the facts by the trial court. The questions are difficult, the
interests are vast, and therefore the aid of the trial court should
be had. The writer of this opinion appreciates the difficulties
which attend a trial court in a case like this. In
Smyth v.
Ames, 169 U. S. 466, a
similar case, he, as circuit justice presiding in the circuit court
of Nebraska, undertook the work of examining the testimony,
Page 176 U. S. 180
making computations, and finding the facts. It was very
laborious, and took several weeks. It was a work which really ought
to have been done by a master. Very likely the practice pursued by
him induced the trial judge in this case to personally examine the
testimony and make the findings. We are all of opinion that a
better practice is to refer the testimony to some competent master,
to make all needed computations, and find fully the facts. It is
hardly necessary to observe that, in view of the difficulties and
importance of such a case, it is imperative that the most competent
and reliable master, general or special, should be selected, for it
is not a light matter to interfere with the legislation of a state
in respect to the prescribing of rates, nor a light matter to
permit such legislation to wreck large property interests.
We are aware that the findings made by the master may be
challenged when presented to the trial court for consideration, and
it may become its duty to examine the testimony to see whether
those findings are sustained, as likewise if sustained by the trial
court it may become our duty to examine the testimony for the same
purpose. But, before we are called upon to make such examination,
we think we are entitled to have the benefit of the services of a
competent master and an approval of his findings by the trial
court. As we have said, those findings may not be challenged by
either party, and if so, a large burden will be taken from the
appellate court.
For these reasons, we not merely reverse the decree of the
trial court, but also remand the case to that court with
instructions to refer the case to some competent master to report
fully the facts, and to proceed upon such report as equity shall
require.
