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
Page 242 U. S. 569
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
Page 242 U. S. 570
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
Page 242 U. S. 571
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
Page 242 U. S. 572
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
Page 242 U. S. 573
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."
Page 242 U. S. 584
MR. JUSTICE McKENNA, after stating the case as above, delivered
the opinion of the Court.
The statute of Michigan is the same as the statutes of South
Dakota and Ohio, and our reply to the attacks made upon it might be
rested upon our discussion of those statutes.
But in the present case, as we have said elsewhere, the
arguments, while fundamentally the same, are in some respects more
circumstantial. All the supposed consequences of the law are
dilated upon -- wherein, as it is contended, it meddles with or
burdens a business asserted to be legitimate, wherein it prohibits
or gives power to an executive officer to arbitrarily prohibit such
business, and wherein it confuses legislative and executive powers,
and in these ways and other ways, as it is further contended,
transgresses the Constitution of the United States. Many cases are
cited to support the contentions, and publicists are avouched to
the same end. In our discussion we cannot be as elaborate in
details as counsel, nor is it necessary. There are certain outside
propositions upon which all others may be regarded as dependent.
These propositions were considered in the other cases, and we need
now only supplement what was there said.
The appellants justify the law by the police power of the state
and its comprehensive reach. Replying, appellees urge against it
the limitations of the Fourteenth Amendment
Page 242 U. S. 585
and the national supremacy over interstate commerce, and
applying the Fourteenth Amendment, assort in many ways (we select
one and upon it the changes are rung) that the issue of the
securities "is in effect the making of contracts
proper and
necessary and essential' to the pursuit of lawful livelihoods or
avocations," and cannot be "made the subject of discretionary
executive license," controlling thereby individual
transactions.
The assertion encounters immediately many cases in which laws
have been sustained limiting the making of contracts and regulating
business through executive agencies and necessarily controlling
individual transactions. Indeed, there are too many for even
marginal citation. They, however, are attempted to be distinguished
or restricted. It is said by counsel that they "deal with
administrative control over matters of public right or public grant
or existing at public sufferance." And it is admitted that "the
legislature may deal drastically with many matters of private
right, to prevent or redress individual wrongs." It is further
admitted that "drastic remedies may be prescribed
by law
[italics ours] for evils deemed by the legislature to require
them." Excluding the proposition so expressed from application to
the Michigan law, it is insisted that the business to which it
applies
"neither requires nor justifies nor is susceptible of
administrative or executive control for the purpose of preventing a
wrong or injury by one individual to another."
Of course, the implication, if not the direct assertion, is that
the business of dealing in securities has not that character.
Neither the principle nor the assertion is very tangible. The first
incidence of any evil from a business or conduct is upon some
individual, and through the individual (let us say individuals, for
necessarily there are more than one) upon the community; nor can it
be affected in any other way. Besides, it is for the state to judge
in such circumstances, and the judgment and its
Page 242 U. S. 586
execution would have to be palpably arbitrary to justify the
interference of the courts. Counsel, indeed, frankly concedes the
evil of "get-rich-quick" schemes and quotes the banking
commissioner of the State of Kansas for the statement that the
"Blue Sky" law of that state had saved the people of the state
$6,000,000 since its enactment, and that between 1,400 and 1,500
companies had been investigated by the department, and less than
400 of the number granted permits to sell securities in the state.
Counsel also quotes the confidence of the commissioner in the
efficacy of the law, and that it will "eventually result in the
regulation and supervision of all kinds of companies in the same
manner as banks are now regulated and supervised."
Against this statement, however, counsel cites the view
expressed by the British Board of Trade of the inexpediency of an
official investigation "into the soundness, good faith, and
prospects" of companies. Upon this difference in views we are not
called upon to express an opinion, for, as we have said, the
judgment is for the state to make, and in the belief of evils and
the necessity for their remedy and the manner of their remedy the
state has determined that the business of dealing in securities
shall have administrative supervision, and twenty-six states have
expressed like judgments.
Much may be said against these judgments, as much has been said,
and decisions of the courts have been cited against them. We are
not insensible to the strength of both, but we cannot stay the
hands of government upon a consideration of the impolicy of its
legislation. Every new regulation of business or conduct meets
challenge, and, of course, must sustain itself against challenge
and the limitations that the Constitution imposes. But it is to be
borne in mind that the policy of a state and its expression in laws
must vary with circumstances. And this capacity for growth and
adaptation we said, through Mr. Justice
Page 242 U. S. 587
Matthews, in
Hurtado v. California, 110 U.
S. 516,
110 U. S. 530,
is the "peculiar boast and excellence of the common law." It may be
that constitutional law must have a more fixed quality than
customary law, or, as was said by Mr. Justice Brewer in
Muller
v. Oregon, 208 U. S. 412,
208 U. S. 420,
that "it is the peculiar value of a written constitution that it
places in unchanging form limitations upon legislative action."
This, however, does not mean that the form is so rigid as to make
government inadequate to the changing conditions of life,
preventing its exertion except by amendments to the organic law. We
may feel the difficulties of the new applications which are
invoked, the strength of the contentions and the arguments which
support or oppose them, but our surest recourse is in what has been
done, and in the pending case we have analogies if not exact
examples, to guide us. So guided and so informed, we think the
statute under review is within the power of the state. It burdens
honest business, it is true, but burdens it only that, under its
forms, dishonest business may not be done. This manifestly cannot
be accomplished by mere declaration; there must be conditions
imposed and provision made for their performance. Expense may
thereby be caused and inconvenience, but to arrest the power of the
state by such considerations would make it impotent to discharge
its function. It costs something to be governed.
But counsel say that the conditions imposed either are not
adequate to such purpose or transcend what is necessary for it.
Indeed, it is asserted that the statute has not that purpose, "but
rather to prevent financial loss." The assertion is against the
declaration of the title of the statute and against the words of
its body, and cannot be justified by assigning to it the purpose of
the law which it amends; nor can we assent to the contention that
such purpose must be inferred from § 8 or other provisions
which point, it is said, to the probability of financial loss, not
fraud. The act must be considered from its declared
Page 242 U. S. 588
purpose and as a whole, not from detached portions which can be
easily overwhelmed when assigned a false character.
It is, however, said that, assuming the statute have such
purpose, the fraud referred to is not a proper object for the
police power, and it is asked,
"Can the occasional fraud, that fraud which arises in the
individual transaction, justify a law regulating the business of
which the single transaction is a part? Or must it be fraud which
is incidental to the business -- a fraud which the business itself,
from its character and the manner in which it is generally
conducted, invites and encourages?"
And, quoting from
People ex Rel. Tyroler v. Warden, 157
N.Y. 116:
"It is a novel legislation, indeed, that attempts to take away
from all the people the right to conduct a business because there
are wrongdoers in it."
To the latter we say the right to do business is not taken away;
the other we have already answered, and need only add that we
cannot, upon such considerations, limit the power of the state. The
state must adopt its legislation to evils as they appear, and is
not helpless because of their forms.
Engel v. O'Malley, 219 U. S. 128, was
not decided because fraud was incidental to the business of banking
by individuals or partnerships, but because fraud could be
practised in it, and that hence it could be licensed. Nor was it
decided in
Allen v. Riley, 203 U.
S. 347, that the transfer of patent rights was of itself
illegal, or that any particular transfer would be deceptive, but
that some transfers might be, and so a statute of Kansas which
required any person selling or offering to sell such rights to
conform to certain requirements was declared valid. Nor did we
hesitate to hold valid the regulation of the business of employment
agencies. It was a lawful business, and would not in instances be
injuriously conducted; but in instances it might be, and because it
might be, with injurious consequences, its regulation was provided.
This Court sustained
Page 242 U. S. 589
the regulation and the condition that it was to be enforced
according to the legal discretion of a commissioner.
Brazee v.
Michigan, 241 U. S. 340.
See also Brodnax v. Missouri, 219 U.
S. 285. Other cases might be cited of similar
import.
It may be that there are better ways to meet the evils at which
the statute is directed, and counsel have felt it incumbent upon
them to suggest a better way. We can only reply that it is not our
function to decide between measures, and, upon a comparison of
their utility and adequacy, determine their legality.
The contentions upon the discriminations of the statute we rest
upon the comment made on like contentions in the other cases. A
special emphasis, however, is put by appellees upon the adoption by
the Commission of "so-called "standard manuals of investment." The
adoption of these manuals, it is said, is justified by the
Commission under § 3, which enumerates the securities that are
exempt from the law, among others, "(h) securities which are listed
in any standard manual of information approved by said Commission."
The provision is attacked as "the Michigan idea" of providing an
easy way out of the act at all times." And further: "It is not so
much an exemption of existing standard securities as a working
exemption available for new offerings to be listed as issued." And
again: "It is to be a permanent means of exempting new securities
from the act." Even this, it is asserted, is not all of the power
that is given for discrimination, for it is pointed out that the
Commission may call for additional information than that contained
in the manuals, and may, pending the filing of the information,
suspend the sale of the securities, and may also suspend, either
temporarily or permanently, the sale of any securities listed in
such manuals after a hearing upon notice, if the Commission shall
find that the sale of such securities would work a fraud upon the
purchasers thereof.
Page 242 U. S. 590
The exemption and the provision are declared to be
unconstitutional, and it seems to be intimated that in the
flexibility of what is considered their subterfuge a vicious
character is not only given to the act, but constituted its
inducement, and therefore brings the act down with it, for without
it, it is insisted, the statute would not have been enacted. We
cannot agree either to the characterization of the provision or its
effect. The first would attribute a sinister purpose to the
legislation of which there is no indication; the second would give
too much importance to a subordinate provision, one that is only
ancillary or convenient to the main purpose.
The contentions based on the exemption and provision are a part
of that which accuses the law of conferring arbitrary discretion
upon the Commission, and committing to its will the existence or
extinction of the business. The accusation is formidable in words,
but it is the same that has been made many times. It is answered by
the comment and the cases cited in the opinion in the other cases.
Besides, we repeat, there is a presumption against wanton action by
the Commission, and if there should be such disregard of duty, a
remedy in the courts is explicitly given, and if it were not given,
it would necessarily be implied.
Objection is made that the title of the act does not indicate
its provisions, and that the act hence violates the Constitution of
Michigan. The objection is untenable, and does not call for
particular notice.
Answer to the contention that the statute is an interference
with interstate commerce we leave to our opinion in Nos. 438, 439,
and 440,
ante, 242 U. S. 539.
Decree reversed and cause remanded for further proceedings in
conformity with this opinion.
MR. JUSTICE McREYNOLDS dissents.
