Merrick v. Halsey & Co., 242 U.S. 568 (1917)
U.S. Supreme CourtMerrick v. Halsey & Co., 242 U.S. 568 (1917)
Merrick v. Halsey & Company
Argued October 16, 17, 1916
Decided January 22, 1917
242 U.S. 568
The Michigan "Blue Sky Law," Act No. 46, Public Acts, 1915, p. 63, is the same in principle as the laws of Ohio and South Dakota, involved in Hall v. Geiger-Jones Co., ante, 242 U. S. 539, and Caldwell v. Sioux Falls Stock Yards Co., ante, 242 U. S. 559, and is sustained over constitutional objections for the same reasons.
Whether the dealing in stocks and other securities, or sale of their own issues by corporations, require governmental regulation for the prevention of fraud, and whether such regulation should be by executive control or otherwise are questions for the state legislature, and unless its judgment in these regards, or the execution of it, be palpably arbitrary, the courts will not interfere.
It is not a function of this Court to pass upon the expediency or adequacy of legislation.
The purpose of the Michigan statute is to protect investors in securities not from financial loss generally, but from fraud.
In prevention of fraud, the regulatory power of a state is not necessarily confined to those classes of business which by their nature or as generally conducted involve or encourage fraud; it may extend to those in which fraud usually, when it arises, is occasional and
confined to individual transactions, but which may nevertheless be conducted for fraudulent purposes.
The limitations of the Constitution are not so rigid as to render state legislation inadequate to the changing conditions of life.
Section 3 of the Michigan act, which exempts from its operation securities "listed in any standard manual of information" approved by the securities commission, held not to render the act unduly discriminatory or involve unlawful delegation of power.
The act complies with the requirement of the Michigan Constitution that no law shall embrace more than one object, which shall be expressed in its title.
228 F. 805 reversed.
The question in the case is the validity of the Blue Sky Law (using this designation for convenience) of the State of Michigan. The law is almost identical with that of South Dakota, which is the subject of the decision in No. 386, ante, 242 U. S. 559.
The pleadings are elaborate, and practically defy synopsis. There are direct complainants and intervening complainants, expressing the grievances of dealers in the state and outside of the state, and of persons who would like to be dealers in the state, but are deterred, they allege, by the expense of the undertaking. The law therefore is assailed from all points and in all aspects.
The original bill includes in it as parties corporations, individuals, copartnerships, residents, and citizens of different states, all engaged in the investment banking business and in the business of buying and selling stocks, bonds, and other securities, and offering them for sale in Michigan, and who have contracted from time to time to sell such securities for the owners thereof and for the issuers thereof. They have expended large sums of money in advertising their business and have a valuable goodwill and an extensive clientele, and have acquired valuable information as to the conduct of their business and as to the names and addresses of persons, firms, and corporations who buy the designated securities in Michigan. They send into the state their agents and employees, who there
solicit orders for the securities and transmit such orders to complainants at Chicago, Illinois, which orders are accepted, and the securities so purchased are transmitted to Michigan. Their representations of the securities are true representations, they allege, and that they have been solicited to sell and have contracted to sell them, but have been informed that they cannot be permitted to sell them without complying with the Michigan statute.
The various provisions of the statute are set out, with details as to the manner of its operation, the irrelevancy of it is asserted, the useless labor of it -- in some cases the impossibility of it -- and in other cases its unreasonableness, and it is further asserted that its exaction of matters of confidence and its requirements invade and destroy property rights, curtail freedom of contract, and otherwise seriously damage complainants' business and property. All of this is alleged with industrious and elaborate detail.
The other charges of invalidity against the act are: (1) it is in violation of the Constitution of Michigan, which provides that no law shall embrace more than one object, which shall be expressed in its title, with specifications; (2) it offends against the Fourteenth Amendment of the Constitution of the United States, especial stress being put upon the exceptions of the statute, which are asserted to be discriminations in violation of the equal protection of the laws guaranteed by that Amendment; (3) it imposes a burden on interstate commerce in violation of § 8, Article I, of the Constitution of the United States.
Under the latter objection, there is elaborate specification of particulars which exhibit, with the specifications under the other objections, every shade of meaning, purpose, or effect that ingenuity can ascribe to the statute -- indeed, every provision of the statute is reviewed and charged with some form of illegality. However, the attacks may be condensed in the charge that the statute is a violation of the prohibitions of the Fourteenth Amendment
of state action because of its restrictions or prohibitions of a lawful business, and a violation of the commerce clause of the Constitution because the designated securities are articles of commerce, and, as such, entitled to unmolested transportation between the states, and that the statute is a direct burden upon them in many cases, prohibitive in others, with the addition that the statute delegates legislative power to the commission created by it, inflicts cruel and unusual punishments, and imposes penalties whose object is to deter from a test of its validity, and inflicts cruel and unusual punishments, in violation of the Constitution of Michigan.
It is also alleged that in a suit entitled Alabama & N. O. Transp. Co. v. Doyle, in the District Court for the Eastern District of Michigan, the statute, of which the statute under review is an amendment, was declared unconstitutional and void, the opinion in which case is reported in 210 F. 173, and that the statute there passed upon is similar in all illegal particulars to the present statute. A remedy in equity is asserted because of alleged irreparable injury and on account of the penalties imposed, and an injunction is prayed against the enforcement of the act.
At the same time that the bill outlined above was filed, another bill was filed by the Weis Fibre Container Corporation, a corporation of South Dakota, whose purpose is to manufacture, buy, and sell paper or fiber containers and similar products. It is not an investment company, but a manufacturing company. Its securities are not supervised or regulated by any public service board or commission, and the proceeds from the sale of its stocks and securities are employed in the prosecution of its business, and are not otherwise invested. The corporation is duly authorized to do business in Michigan; its stock is valuable, and it has offered it for sale in Michigan directly and through agents and employees, and it is alleged that the
representations made in regard thereto are true. It has solicited various persons in Michigan to offer its stock for sale, and they have informed it that its stocks cannot be sold in Michigan unless full compliance is made with the statute.
The bill attacks the statute for the illegalities detailed in the other bill, and, considering that the only remedy is in equity, prays an injunction against the enforcement of the act.
A restraining order was issued entitled in both cases. Subsequently, on September 16, 1915, a partnership, organized and existing under the laws of the State of Ohio, having the name of Otis & Company, and composed of citizens of Colorado and Ohio, filed a petition in intervention.
That company is a dealer in bonds and other securities in Michigan, and such bonds and securities are of the kind which the statute of the state regulates. It also sends agents into the state to solicit orders for such securities and transmits orders to its offices in Cleveland, Ohio.
It asserts identity of situation with the complainants in the other bills, and adopts their charges against the statute, and prays to be made a party complainant to the cause, and for the benefit of the restraining order issued therein, and for such other relief as the court may deem meet.
A demurrer was filed to the bills and a motion made for injunction. The company was given the benefit of the restraining order and a like benefit was given to all others who might petition to intervene, the restraining order to continue until the disposition of the motion which had been made for injunction. The injunction was subsequently granted (228 F. 805), and to review it, this appeal is prosecuted.
There was a partnership under the name of Remick, Hodges, & Company, Remick and Hodges being residents of New York and March a resident of New Jersey, having their office at the City of New York and engaged in buying
and selling stocks, bonds, and other securities. Their business is known as investment banking and is carried on in New York and by their agents there and elsewhere, and by mail with various corporations, associations, and persons throughout the United States and in the State of Michigan. They own many of such securities which they have offered and are offering for sale, and desire to continue to offer to their customers in the State of Michigan. They have no place of business in the state, and are not at the present time sending agents into the state, but are endeavoring to sell securities there; but the volume of such business is not sufficient to justify them to attempt to comply with the statute of the state, and the statute, if enforced against them, will have the effect of preventing them from making any further offers in the state, and from attempting to establish or develop any business therein, and they are excluded thereby from interstate commerce in such securities which they have heretofore enjoyed.
They allege themselves to be in like situation with complainants, and adopt the allegations of complainants' bills, and especially complain of the penalties which may be enforced against them and their agents, and pray to come into the suit as parties.
The causes were subsequently consolidated by a nunc pro tunc order.
The injunctions restrained the defendants from enforcing the act and from beginning or instituting any action, civil or criminal, against complainants, "based upon or pursuant to such act."