The laws of Michigan prescribing a maximum intrastate passenger
fare for railroads whose gross passenger earnings equalled a
certain amount per mile required that all lines of a railroad
within the state should be treated as a unit in computing such
earnings and in applying the rate limitation. In determining
whether the rate was confiscatory in this case,
(1) In the absence of any suggestion of illegality or
mismanagement in acquisition or operation, all parts of the
railroad's system within the state, profitable or unprofitable,
should be embraced in the computation. P. 250 U. S.
(2) Unremunerative parts were not to be excluded because built
and used primarily for interstate traffic (p. 250 U. S.
), or because not required to supply local
transportation needs (p. 250 U. S.
); nor was a reasonable,
Page 250 U. S. 608
though unremunerative, extension of service because furnished by
acquiring traffic rights from another company. P. 250 U. S.
(3) Sleeping car, parlor car, and dining car services should not
he treated as separate operations, but the passenger service,
including these facilities, must be treated as a whole.
(4) In the present state of railroad accounting, what formula
should be adopted for dividing charges and expenses common to
freight and passenger services and not capable of direct allocation
is a question of fact, rather than of law, and the Court cannot say
that the trial court erred in adopting the method pursued in this
case. P. 250 U. S.
The case is stated in the opinion.
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
The Constitution of Michigan (Article XII, § 7) authorizes the
legislature to pass laws establishing "reasonable maximum rates or
charges for the transportation of passengers and freight." In 1907,
it fixed two cents a mile as the maximum intrastate passenger fare
on railroads operating in the Lower Peninsula and three cents for
those in the upper. By act approved May 2, 1911 (Public Laws No.
276), the two-cent rate was made applicable to all the railroads of
the state whose gross earnings on passenger trains equal or exceed
$1,200 per mile of line operated. Before the statute took effect,
the Duluth, South Shore & Atlantic Railway Company, an
interstate carrier operating in the Upper Peninsula, brought this
suit in the district court of the United States for the Eastern
Page 250 U. S. 609
Michigan to enjoin the enforcement of the act. The bill alleged
that the reduced rate would deprive plaintiff of its property
without due process of law in violation of the Fourteenth
Amendment. The Attorney General and the railroad commissioners of
the state, being charged by the law with its enforcement, were made
defendants. They denied that the rate was confiscatory, and on this
issue the district court found for the railway. A final decree
granting the relief sought was filed February 14, 1918, and an
appeal to this Court was promptly applied for by the defendants and
allowed. Meanwhile, on January 1, 1918, the federal government had
taken over the operation of this and other railroads, and is still
operating the same. The two-cent rate was never put into effect on
this railroad, as a restraining order issued upon the filing of the
bill was continued until entry of the final decree. In 1919, the
statute attacked here was repealed (Michigan Public Laws No. 382).
But the case has not become moot for the following reason: on
continuing the restraining order, the railway was required to issue
to all intrastate passengers receipts by which it agreed to refund,
if the act should be held valid, the amount paid in excess of a
two-cent fare. Later the railway was required to deposit, subject
to the order of the court, such amounts thereafter collected. The
fund now on deposit exceeds $800,000, and the refund coupons are
still outstanding. In order to determine the rights of coupon
holders and to dispose of this fund, it is necessary to decide
whether the Act of 1911 was, as respects this railroad,
The issues of fact were tried below with great thoroughness. The
case was referred to a special master to hear the proofs and to
report the evidence together with his findings to the court. The
report fills 503 pages of the printed record. The transcript of the
testimony introduced before him covered more than 12,000
typewritten pages, and there were besides many exhibits. The
evidence before the
Page 250 U. S. 610
master related largely to the results of the operation of the
railroad for the four years ending June 30, 1913. When the case
came on for hearing before the district judge in 1917, supplemental
evidence was taken in open court covering the operations of the
four additional years ending June 30, 1917. The evidence disclosed
the usual diversity of opinion as to the value of the property and
as to the proper method of dividing between the passenger and
freight services the common expenses and the charges for property
used in common. Upon the whole evidence, the court found that the
two-cent fare would have resulted in a return on intrastate
passenger business of less than 2 percent during the six years
ending June 30, 1917.
Between the commencement of this suit and the entry of the final
decree, many of the questions in controversy below have been
settled by the decisions of this Court in other cases. [Footnote 1
] The state officials do not
deny that there was legal evidence to justify the findings of fact
made by the lower court; nor do they request that this Court should
undertake a general review of the evidence. But they insist that
the finding of the district judge of the low return is erroneous,
and that the error is due partly to his having included in his
calculations property and operations which
Page 250 U. S. 611
should have been excluded, and partly to his having adopted
improper formulas for the division of common charges and expenses
as between the freight and the passenger services, and that, if
these specific errors are corrected, it will appear that the
two-cent fare would have been highly remunerative. These alleged
errors must be considered separately.
It is contended that the Western Division should
be excluded from the calculation. The Duluth, South Shore &
Atlantic Railway extends from Sault Ste. Marie to Duluth, and has,
including branches, 584 miles of line, 475 of which are in
Michigan. The Eastern Division serves mainly the iron region; the
Central, the copper country; the Western, extending through
sparsely settled country from Nestoria, Michigan, 101 miles to the
Wisconsin state line, and thence to Duluth, serves mainly
interstate business. This division is said to have been built not
in a desire to serve local needs, but for the purpose of
establishing a through line from Duluth to Sault Ste. Marie. The
statement, if true, furnishes no reason for excluding it from the
calculation. The cost per mile of transporting passengers varies
greatly on different parts of the same railroad system according to
circumstances, being dependent, among other things, upon the cost
of the roadbed and terminals, the grade, the number and character
of the trains, the density of traffic, and the length of the haul.
The justification for a uniform fare per mile is furnished by the
doctrine of averages, and the Legislature of Michigan made clear
its purpose to apply the doctrine of averages in order to give to
travelers the benefit of the two-cent fare on those portions of a
railroad on which travel was light and the cost of carrying each
passenger necessarily far in excess of two cents a mile. For this
"That, in computing the passenger earnings per mile of any
company, the earnings and mileage of all branch roads owned,
leased, controlled, or occupied or that may hereafter
Page 250 U. S. 612
be owned, leased, controlled or occupied by such company . . .
shall be included in the computation [i.e.,
whether the year's gross passenger earnings equal $1,200 per mile],
and the rate of fare shall be the same on all lines owned, leased,
controlled or occupied by such company."
In other words, the legislature has declared that, for the
purpose of determining the right of an intrastate passenger to
travel on any part of the company's lines at the rate of two cents
a mile, all of the lines within the state must be treated as one;
that those on which travel is light must be averaged with those on
which it is dense, and obviously also that those parts of the
system which are unprofitable must be taken with those which are
profitable. Every part of the railroad system over which the
passenger is entitled by the act to ride for a two-cent fare must
be included in the computation undertaken to determine whether the
prescribed rate is confiscatory. This is true at least in the
absence of illegality or mismanagement in the acquisition or
operation of the division in question, and of such there is not
even a suggestion in the record. There is nothing in San Diego
Land & Town Co. v. National City, 174 U.
, 174 U. S. 758
or in San Diego Land & Town Co. v. Jasper,
189 U. S. 439
189 U. S. 446
upon which the state officials rely, which is inconsistent with
It is likewise contended that the so-called
South Line between Marquette and Ishpeming should be excluded from
the calculation. This line, which for miles substantially parallels
the main line, was originally built as an independent road, and was
purchased by plaintiff's predecessor in 1884 probably to avoid
ruinous competition. It is used mainly for heavy freight, and the
intrastate passenger travel over it is light. It is asserted that
the construction of this road was not required to supply the
transportation needs, and that it would still be possible to carry
all existing traffic between Marquette and
Page 250 U. S. 613
Ishpeming over the main line. What has been said above in regard
to the Western Division applies equally to the South Line.
It is contended also that a loss was incurred in
operating through passenger trains from Houghton over the Mineral
Range Railroad to Calumet, and that such loss should be excluded
from this calculation. This extension of plaintiff's service was
clearly reasonable in view of the importance of Calumet, which lies
only fourteen miles from its own lines. It was admitted by the
state officials that passengers on the route were, under the act,
entitled to travel at the two-cent rate. The fact that the service
was furnished by acquiring traffic rights, instead of by building
an independent line, clearly affords no reason for excluding the
results of the operation from the calculation.
The further contention is made that the
sleeping car, parlor car, and dining car services should be treated
as separate operations, that they should be charged with their
proportion of specific and general expenses, but credited only with
the amounts received from charges for the specific service, and
that no part of the apparent loss on these services should be taken
into consideration in determining whether the two-cent fare is
confiscatory. In support of this contention, it is urged that these
services were voluntary; that the law (Michigan Public Acts of
1875, No. 38) permits railroads to make special charges for these
services "in addition to the regular passenger fares allowed by
law," and that travelers in day coaches must not be allowed to
suffer because a railroad fails to make these services
compensatory. On American railroads of importance, these services
have been well nigh universal for more than a generation, and the
charges for them are substantially uniform throughout the country.
It would be practically impossible, as it would be obviously
unwise, for a railroad like the plaintiff's either to discontinue
Page 250 U. S. 614
services or to increase the charges to cover the cost of the
particular service on its line. It is inconceivable that the
Legislature of Michigan should have intended in enacting the
two-cent fare law to deny to its citizens these customary
facilities, and, for the purpose of determining whether the act is
confiscatory, the passenger service including these facilities must
be treated as a whole. The fact alleged that these facilities are
used mainly by interstate travelers is immaterial.
The remaining objection relates to the formula
adopted by the lower court for dividing charges and expenses common
to freight and passenger services and not capable of direct
allocation. What method should be pursued in making such division
is a very difficult problem to which railroad accountants, the
Interstate Commerce Commission, and state railroad commissions have
for years given serious attention. [Footnote 2
] Despite much patient study and the exhibition
of great ingenuity, no wholly satisfactory method has yet been
devised. The variables due to local conditions are numerous, and
experience teaches us that it is much easier to reject formulas
presented as being misleading than to find one apparently
Page 250 U. S. 615
adequate. The science of railroad accounting is in this respect
in process of development, and it may be long before a formula is
devised which can be accepted as satisfactory. For the present, at
least, the question what formula the trial court should adopt
presents a question not of law, but of fact, and we are clearly
unable to say that the lower court erred in adopting the method
there pursued. [Footnote 3
The decree of the district court is
Interstate Commerce Commission v. Union Pacific Ry.
Co., 222 U. S. 541
The Minnesota Rate Cases, 230 U.
; The Missouri Rate Cases, 230 U.
; Chesapeake & Ohio Ry. Co. v.
Conley, 230 U. S. 513
Oregon R. Co. & Nav. Co. v. Campbell, 230 U.
; Southern Pacific Co. v. Campbell,
230 U. S. 537
Allen v. St. Louis, I. M. & S. Ry. Co., 230 U.
; Missouri Pacific Ry. Co. v. Tucker,
230 U. S. 340
Wood v. Vandalia R. Co., 231 U. S. 1
Louisville & Nashville R. Co. v. Garrett, 231 U.
; In re Engelhard, 231 U.
; San Joaquin, etc., Irrigation Co. v.
Stanislaus County, 233 U. S. 454
Northern Pacific Ry. Co. v. North Dakota, 236 U.
; Norfolk & Western Ry. Co. v. West
Virginia, 236 U. S. 605
Missouri v. Chicago, B. & Q. R. Co., 241 U.
; Rowland v. St. Louis & San Francisco R.
Co., 244 U. S. 106
Darnell v. Edwards, 244 U. S. 564
Denver v. Denver Union Water Co., 246 U.
The Interstate Commerce Commission, upon its organization July
1, 1887, required the railroads to report operating expenses
separately as between the freight and passenger services. The
difficulties were so great and the results so widely discredited
that the requirement was withdrawn as of June 30, 1894. The
requirement was restored as of July 1, 1915. In the Matter of
Separating of Operating Expenses, 30 I.C.C. 676. In the interval,
railroad accounting had in this respect made gradual advances. J.
M. Talbott, Transportation by Rail (1904); Buell v. Chicago,
Milwaukee & St. Paul Railway Co., 1 Wis.R.Com. 324 (1907);
The Minnesota Rate Cases, 230 U.
, 230 U. S.
-461 (1912); 14 American Railway Engineering
Association Proceedings, pp. 587, 1128-1135 (1913); Western
Passenger Fares, 37 I.C.C. 1, 12-30 (1915). See
Lorenz, Railroad Rate Making, 30 Quarterly Journal of Economics,
pp. 221-232 (1916); W. J. Cunningham, The Separation of Railroad
Operating Expenses between Freight and Passenger Services, 31
Quarterly Journal of Economics, pp. 200-249 (1917).
The average rate of return for the years 1914-1917, according to
the formula adopted by the trial judge, was 1.2%. By the use of a
formula more favorable to the defendant, he found it to be 2.52%.
The modified revenue train mile ratio used by the plaintiff showed
a loss of over $100,000 a year, while the gross ton mile ratio
proposed by the defendant indicated an average return of at most
5.82%. Of these methods employed by the parties, it may be noted
that the Interstate Commerce Commission has said:
"The representatives of the state commissions advocated the use
of 'gross ton miles' as a basis, while the representatives of the
railways favored 'engine ton miles.' The discussion seemed to be
somewhat influenced by the possible effect of these respective
bases on statistical evidence which might be introduced in
passenger rate cases. It may fairly be said that the facts and
arguments presented do not warrant the final approval by the
Commission of either the gross ton mile or the locomotive ton mile
at this time."
Rules Governing the Separation of Operating Expenses Between
Freight Service and Passenger Service on Large Steam Railways,
Effective July 1, 1915, p. 3. These rules are now in process of