Summary
APPEAL PROM THE DISTRICT COURT OP THE UNITED STATES FOR THE EASTERN DISTRICT OP MICHIGAN.
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, 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, co-partnerships, 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 good will 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 expiessed 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. Transportation 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 Fed. Rep. 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 fibre 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 Fed. Rep. 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.”
One who “in the course of continued or successive transactions of a similar nature” offers or sells stocks, bonds or other securities owned by him, cannot be prohibited from continuing such “business” except under executive license, subject to revocation. In its every act and aspect, the business represents simply a varying number of transactions, each of which is an individual transaction and a matter of individual right. This business, and the issuing of stocks and bonds by corporations, is no more “affected by a public interest” than the business of buying and selling groceries. Alabama & N. O. Transportation Co. v. Doyle, 210 Fed. Rep. 173, 179. The professed aim of “blue-sky” legislation is to eliminate-the “get-rich-quick” fakirs. The present act by its terms is directed against the great normal business and the bulk of individual transactions involving the sale and re-sale of outstanding securitiés amounting to billions of dollars in amount. No effort whatever has been made to confine its operation to securities involving elements suggestive of fraud and danger. It includes the “get-rich-quick” promoter in the same way that an act directed against the purchase and salé of any wearing apparel would include the street peddler in paper collars.
There has nowhere at any time been any suggestion of any wide-spread fraud in the sale or distribution of so-called investment securities. There are in' fact many businesses where fraud is supposed to be more prevalent, including as instances horse trading and the automobile business. In practically every contractual transaction fraud is possible, and its prevention a proper subject for legislative action. If, upon a legislative assumption of the prevalence of fraud in any general business (as distinguished from a limited or special method of doing búsiness) the entire business and the right to carry it on may be made the subject of discretionary executive license, then no business can be judicially protected from the assertion of this power.
So far as we have been able to discover, no case has ever reached this court where the power of executive license was asserted except against a business clearly subject to the power of prohibition. Many such cases have, however, been before the state courts and the acts held unconstitutional. People v. Berrien, 124 Michigan, 664, 666; People v. Warden, 157 N. Y. 116, 123; People v. Jenkins, 202 N. Y. 53, 57; Chaddock v. Day, 75 Michigan, 527; Lochner v. New York, 198 U. S. 45, 63; Bessette v. People, 193 Illinois, 334.
In a special sense “police power” relates only to “great public needs,” represented by “public peace, health, morals and safety.” The term has also been more broadly used as synonymous with governmental power. Its use in the different classes of cases by no means implies that legislation to promote the public'convenience may authorize the executive to seize the person or property of the individual in the same way as is permitted to legislation relating to public health; nor, that legislation to prevent fraud in individual transactions of purchase and sale may take the form of subjecting the right to engage in such transactions to discretionary executive license. In Powell v. Pennsylvania, 127 U. S. 678, the act was rested primarily on the protection of the public health. See also Plumley v. Massachusetts, 155 U. S. 461. Rast v. Van Deman, 240 U. S. 342, dealt with a prohibition of a particular and novel method of doing business, conceivably pregnant with a special danger to the public. In the present case we have a prohibition of an entire business consisting primarily of a succession of normal individual transactions. The right is asserted, not to prohibit specific methods of carrying on this business nor of requiring specific safeguards against fraud, but of prohibiting the whole business, unless in the first instance the right to engage in it is granted by an administrative officer or board upon its determination of the essentially administrative question as to the character of the individual.
Unless we start with the proposition that the right to sell securities owned by individuals as a business is not an inherent right, it is difficult to conceive of any other principle upon which such power may be upheld. "The determination as to the character of the individual must be essentially an individual determination of the particular officer or board. It applies not alone against local dealers known in the community, but against dealers of other States and remote cities. Once such a jurisdiction is held to be legally vested in an administrative officer, its exercise becomes potentially arbitrary beyond the power of real protection in the courts — a power of complete control over a business which is essentially individual and competitive. Such a power once asserted and exercised is bound to destroy the normal interstate business in the sale of securities.
Leaving aside some of the smaller and exceptional classes of business and local nuisances subject to municipal regulation, and dealing with the important ■ businesses which have been held subject to discretionary administrative control, such as the railroads; banks, insurance, and liquor business, it is, we believe, correct to say that they are subject to completé power of prohibition against the individual; that they may be confined to corporations; and that they may be taken over and operated by the State. Each is susceptible to administrative control, and if necessary of complete ownership and operation by the State.
The business of dealing in the stocks and bonds of corporations is not within the principle laid down in German Alliance Insurance Co. v. Lewis, 233 U. S. 389, and the cases upon which it was decided. Munn v. Illinois, 94 U. S. 113; Budd v. New York, 143 U. S. 517; Brass v. Stoeser, 153 U. S. 391; People v. Budd, 117 N. Y. 1, 27. The facts submitted in the present case show that there is no mature universal sense of the people regarding the regulation of the sales of stocks and bonds. The legislation flared up suddenly under popular agitation and has died down as rapidly. An equally widespread clamor easily might be cultivated regarding the management of department stores, or of any of the other manifold activities of business life which the Constitution and free institutions protect from the meddlesome interference of governmental bureaucracy. See American Surety Co. v. Shallenberger, 183 Fed. Rep. 636, 639; German Alliance Insurance Co. v. Barnes, 189 Fed. Rep. 769, 778; German Alliance Insurance Co. v. Hale, 219 U. S. 307.
The prohibition against making a particular offering or sale except upon a “certificate of authority” from a state commission is invalid. Even though a fraudulent intent cannot justly be ascribed to the promoter, yet if in the opinion of the commission he has deceived himself and is deceiving others as to the merits and prospects of his scheme, which is in its opinion unsafe, then it would in its opinion “work a fraud on the purchaser,” deceive him and cause him loss. This deception and this loss, though unintended, the act plans to prevent. This is the crux of the act. The purpose is to protect a minority of “investors,” looking for vast gains, against a danger existing in a small minority of transactions. It prohibits a hundred transactions, because, one of them may be fraudulent, and compels the ninety-nine innocent parties to get a permit and pay a fee, and to establish their honesty and the sound basis of their proposition before they can sell a share of stock. Where not completely prohibitive in the first instance, it will become so as to any normal offering of investment securities the moment the commission exercises its uncontrolled discretion of conducting an extended investigation of the property and business at the expense of the applicant.
Dealing with the substance, we have a delegation of complete power, including the legislative and the judicial. The thing prohibited is not fraud. ■ It is the transaction. It is made a matter .of license, instead of a matter of right without a license. A whole field of ordinary legislation is abandoned to the actual government and control of an administrative commission. This field is the prevention of fraud or improvidence in the sale or purchase of securities.
This deprives the person both of liberty and property without due process of law. It is not within the police power. Chicago v. Netcher, 183 Illinois, 104, 110; State v. Indiana Oil Co., 120 Indiana, 575, 583; People v. Jenkins, 202 N. Y. 53, 57. The case is not like the case of banks, which invite the savings of whole communities and perform quasi-public service. The investments are essentially individual, and the fraud, if practiced, is individual. The losses sustained by fraud, as distinguished from losses due to wide-spread depressions and panics, are individual. The evil in its essence is simply an important one of the many individual wrongs which should be the subject of effective remedial legislation. See People v. Vandell, 146 N. Y. Supp. 992, 994.
Over quasi-public businesses and matters of public right, the tendency of modern decisions is to re-assert, rather than to create, the full power necessary to their effective control. There are also, of course, other subjects of prohibition and administrative control, distinct from any business, such as the control over the use of streets and public places, and the far-reaching control necessary at times for the protection of the public health, peace and safety, to which may be added the control over foreign commerce and over aliens which has been vested in the President, and the control given various officials or boards over governmental agencies, such as the post office, and governmental property, including public parks and reservations. As to each and all of these subjects, the control rests solely on the original principle of nécessity on which it was first asserted, and is historically and constitutionally an administrative power, the vesting and conditions of which are subject to law, that is to legislative grant and control. Such control not being legislative in its nature, an act vesting it in an administrator is in no sense a delegation of legislative power. Upon this principle we explain Lieberman v. Van De Carr, 199 U. S. 552; Gundling v. Chicago, 177 U. S. 183; Engel v. O’Malley, 219 U. S. 128; German Alliance Insurance Co. v. Lewis, 233 U. S. 389; Locke’s Appeal, 72 Pa. St. 491; Field v. Clark, 143 U. S. 649; Buttfield v. Stranahan, 192 U. S. 470; Union Bridge Co. v. United States, 204 U. S. 364; United States v. Grimaud, 220 U. S. 506; Interstate Commerce Commission v. Goodrich Transit Co., 224 U. S. 194; Fong Yue Ting v. United States, 149 U. S. 698, and like cases, as distin- • guished from Yick Wo v. Hopkins, 118 U. S. 370.
In all these cases, though we think and speak of a delegation of legislative power, it is a vesting of administrative power not within either the letter or spirit of the constitutional rule of prohibition against the delegation of such power. See also Public Clearing House v. Coyne, 194 U. S. 497; Ekiu v. United States, 142 U. S. 65, citing United States v. Jung Ah Lung, 124 U. S. 621. This broad power cannot exist, it cannot be judicially recognized as it has been recognized, if the principle and precedents on which it rests are to be held applicable to the entire field of remedial legislation.
The so-called standard manual feature of the act is unconstitutional and void. The act is utterly unreasonable— an unnecessary and arbitrary interference with private rights, in violation of due process of law. Gundling v. Chicago, supra. Section 8 prohibits the sale of stock in Michigan if upon investigation the commission disagrees with the value which has been placed upon the property by the authorities of the issuing State. This and the power given the commission to make detailed examination of investment companies’ property and affairs at the expense of such company and to make an appraisal at the like expense of its properties, is utterly unreasonable, and, as applied to. the normal business, potentially prohibitive.
The act impairs the freedom of commerce between the States. There would be no question on this point but for the forced construction attempted to be placed upon Nathan v. Louisiana, 8 How. 73, and Paul v. Virginia, 8 Wall. 168. So far as the latter case goes, the distinction is plain between a policy of insurance, which is a contract between the parties having nothing to do with interstate commerce, except that the parties may reside in different States, and the case of stocks and bonds as subjects of interstate sale. The former case depended on the right of a State to tax its own citizens for the prosecution of any particular business or profession within the State. It is negligible as applied to the present statute. The interstate sale of securities falls clearly within the opinion of Chief Justice Marshall in Gibbons v. Ogden, 9 Wheat. 1, 189. The sale of stocks and bonds when issued and offered for sale by a dealer in New York or Chicago to an investor in Michigan, represents something more than the contract of insurance dealt with in Paul v. Virginia. It is a “subject of trade and barter offered in the market as something having existence in value independent of the parties to them,” that is, of the parties to the transaction of purchase and sale. “They are not commodities,” but it is not necessary that a thing be a “commodity” in order to be a subject of sale or commerce. International Textbook Co. v. Pigg, 217 U. S. 91; Darnell v. Indiana, 226 U. S. 390; Lottery Case, 188 U. S. 321. The attempt to rely upon the inspection cases is hardly serious enough to require an answer. Generally speaking, a defect in personal property may be discovered by inspection. A fraud in the issuance of sale of stocks cannot be so discovered. What is here attempted is investigation of all questions relating to the soundness of enterprises and values of securities. See People v. Compagnie Gen. Transatlantique, 107 U. S. 59, 62; Turner v. Maryland, 107 U. S. 38; Patapsco Guano Co. v. North Carolina, 171 U. S. 345.
Laws like this have been condemned by fourteen federal judges in the following cases. Alabama & N. O. Transportation Co. v. Doyle, 210 Fed. Rep. 173; Compton Co. v. Allen, 216 Fed. Rep. 537; Bracey v. Darst, 218 Fed. Rep. 482; Sioux Falls Stock Yards Co. v. Caldwell (before this court), 230 Fed. Rep. 236; Halsey & Co. v. Merrick (this case), 228 Fed. Rep. 805; Sater v. Hollister (before this court), 230 Fed. Rep. 233.
Nowhere in the lower federal courts or in the supreme court of any of the States has there been any dissent by even a single judge to the principle announced in the first Michigan case, holding the act void as applied to ordinary dealers in investment securities.
The regulation of the dealer and his calling is incidental to the main purpose of the act which is the regulation and prohibition, unless in compliance with the act, of the issue of stock and bonds by corporations and the making of loans in certain forms by individuals, co-partnerships and associations. The burden of the law falls somewhat upon the dealer but its heaviest load rests upon the issuer of the stocks, bonds or securities and the issuer may be any person, corporate or otherwise, engaged in any business whatever, except only the exempted classes.
The issue and sale of securities is a part of the freedom guaranteed by the Fourteenth Amendment to the Federal Constitution and by the constitution of Michigan. It is in effect the making of contracts “proper, necessary and essential” to the pursuit of lawful livelihoods or avocations. Allgeyer v. Louisiana, 165 U. S. 578; Kuhn v. Detroit, 70 Michigan, 537; Valentine v. Circuit Judge, 124 Michigan, 664.
The right to issue stock, to execute bonds and to secure their payment by the pledge of property is of no value unless the stock and bonds can thereafter be negotiated. This the law prevents except under heavy restrictions.
The law lays its burden not only upon the specific transaction and the particular investment company. By its sweeping definition of investment companies, it regulates all manner of business enterprises and all kinds of manufacturing and mercantile pursuits. Moredock v. Kirby, 118 Fed. Rep. 180; Valentine v. Circuit Judge, supra.
The purpose of the statute is not to regulate fraud, but rather to prevent financial loss. But even if it were otherwise, regulation of all business for the purpose of reaching the occasional fraud is clearly not justified. The fraud must be a necessary incident to the particular business, or the business must lend itself with peculiar ease to deception, else the business cannot be regulated— only the fraud. Tyroler v. Warden, 157 N. Y. 116.
This law subjects to the commission’s authority all secured commercial paper. It regulates the issue and sale of corporate securities. To say now that all corporate business and these securities are so frequently the vehicles of fraud and lend themselves so easily to deception that their entire issue and all their sale must be regulated, as this law regulates them, is to declare the very basis of modem business to be fraudulent. Valentine v. Circuit Judge, supra.
The court has power to determine for itself that no necessity exists for this statute. People v. Smith, 108 Michigan, 527. We insist that its very basis is “unreasonable and purely arbitrary.” Rast v. Van Deman & Lewis Co., 240 U. S. 342. Even if some law would be justified, we submit that the restrictions and burdens of this one do arbitrarily and unnecessarily interfere with constitutional rights; it absolutely suspends the issue, negotiation and sale of the securities for a period limited only by the whim of the commission. The provision of § 8 for an appraisal is another requirement so unreasonable and drastic as to be beyond the power of the State.
The requirement that all foreign investment companies must consent to the jurisdiction of all the courts of the State is another unreasonable restriction. It is settled that a corporation cannot be required so to submit itself. Sioux Remedy Co. v. Cope, 235 U. S. 197; Buck Stove & Range Co. v. Vickers, 226 U. S. 205. It violates the constitutional right of nonresident individuals by depriving them of the immunity allowed to citizens of this State, since citizens of Michigan must be sued by personal service. Moredock v. Kirby, supra; Caldwell v. Armour, 1 Penn. (Del.) 545; see 9 Fed. Statutes Ann., p. 176.
The law cannot be defended as a licensing law. It deals with individual transactions. A new application must be made on each new security. The test of the permission is not the character of the dealer or his solvency. It is the character of the security. The dealer is not licensed. The dealer who is licensed can only sell approved securities.
Nor is it an inspection statute. People v. Compagnie Gen. Transatlantique, 107 U. S. 59; Sligh v. Kirkwood, 237 U. S. 52, 59, and other cases.
The act is in conflict with the commerce clause; vests arbitrary power in the commission; its title covers more than one subject, and does not express the object, in violation of § 21, Article 5, of the Michigan constitution; it is class legislation; delegates legislative authority; and attempts to confer judicial powers, in violation of the Michigan constitution.
Syllabus and headnotes are prepared by the reporter or publisher, not the court, and are not part of the opinion.
