We the Corporations Page 19
* * *
AFTER THE DOOR TO the grand-jury room closed to shut DeLancey Nicoll outside, Edwin Hale was ushered into a seat before the gathered panel of jurors and Henry Taft administered the oath. Hale’s swearing of the oath was, on the one hand, banal and routine; witnesses have sworn “to tell the truth, the whole truth, and nothing but the truth” countless times since that language was first adopted by the courts of fourteenth-century England. Nonetheless, the oath in this instance was notable for two reasons. The first was that Hale had absolutely no intention of living up to that promise. The whole truth might include admitting to illegal gambling, embezzling funds, and conspiring to steal from his employer. No, he could not tell the whole truth—nor would he have to if he stuck to Nicoll’s plan.7
The second reason the oath was significant on this day was that it was a corporation taking it. Hale was not appearing in his personal capacity but as an officer of MacAndrews & Forbes, the licorice company. By subpoenaing Hale, Taft was seeking to make the corporation, MacAndrews & Forbes, reveal the secrets about its business dealings. Because a corporation cannot take the stand and can only testify through an officer, as Blackstone had noted, when Hale appeared before Taft’s grand jury he was there to testify in his capacity as an officer of the corporation.
SPECIAL ANTITRUST PROSECUTOR HENRY TAFT ARGUED AGAINST EXTENDING TO CORPORATIONS THE CONSTITUTION’S RIGHTS FOR CRIMINAL SUSPECTS.
Taft began his inquisition with a series of standard questions. He asked Hale to state his name, his hometown, and his current place of residence. To the last question, Hale responded vaguely, “New York City,” omitting any mention of the Hotel Earlington on West 27th Street, where he lived in a bachelor apartment next door to Harry Smock, another employee of MacAndrews & Forbes; in addition to an address and an employer, the two men also shared a love of gambling and, when that did not work out, a willingness to steal.8
“What is your business?” asked Taft.
“I am secretary and treasurer of MacAndrews & Forbes Company,” replied Hale. Although Hale did not elaborate, MacAndrews & Forbes was the nation’s leading importer of licorice root. Business for the corporation was booming. Almost since the dawn of human history, licorice has been revered for its medicinal properties—prescribed for ailments ranging from athlete’s foot to emphysema—as well as for its more spiritual benefits. The malodorous plant was, for example, placed in Tutankhamen’s tomb to shepherd the child pharaoh’s soul safely to the afterlife. MacAndrews & Forbes favored instead licorice’s commercial qualities. The commodity had become especially valuable once tobacco companies like James Duke’s American Tobacco developed an insatiable demand for it. The company bathed tobacco leaves in licorice to sweeten and mellow their flavor.9
If James “Buck” Duke was not the father of the American tobacco industry—an honor appropriately reserved for John Rolfe, the Virginia Company colonist who first developed tobacco into a marketable crop in 1614—he was at least the savvy son-in-law who doubled the family fortune. The modern era of American tobacco, in which large, profitable tobacco corporations marketed mass-produced, branded products on a national scale, began with Duke. In 1884, his North Carolina tobacco company was the first to adopt automated rolling machines, which dramatically increased production, lowered costs, and expanded the consumer market for cigarettes. His company was also the first in the industry to spend lavishly on advertising, promoting his brands in the new magazines, newspapers, and weeklies that coincided with the late nineteenth century’s growing literacy rates. Duke, like many of the most successful executives before and since, understood the value of innovation.10
It was Duke’s leveraging of one innovation in particular that led more or less directly to Edwin Hale’s appearance before the grand jury: the trust. The first trust was John D. Rockefeller’s Standard Oil Company, formed in 1879. The idea was the brainchild of a lawyer named Samuel Dodd. Rockefeller had wanted to expand his regional, Ohio-based company by buying up other oil companies, but Ohio corporate law prohibited one corporation from owning stock in another corporation. Rockefeller hired Dodd to find a way around that bar. Dodd, much like his fellow Pennsylvanian Horace Binney, who devised the novel argument about piercing the corporate veil to win the first corporate rights case, was nothing if not creative. He came up with an ingenious plan based on an ancient practice dating from the Middle Ages.11
During the Crusades, English knights would be abroad for years at a time fighting for Christendom. Men of property, knights needed someone to take care of their affairs during their long absences. Because their wives had an inferior legal status, knights could not leave the decision-making to them. Instead, a knight would select a kinsman to manage his property and see to his family. Yet the rules were strict: the kinsman was not allowed to use the knight’s money or assets for his own personal gain. He was obligated to manage the property in the interests of the absent knight. This medieval practice evolved into a legally authorized device, the trust, which today still allows one person to hold and manage property exclusively for the benefit of another.12
Dodd realized that, like the knights of old, the major stockholders of the different oil companies could tender their property (i.e., their stock) to a modern group of “kinsmen” (the trustees), who would manage the assets on the stockholders’ behalf. The stockholders became beneficiaries of the trust, entitled to a share of the trust’s income and the right to vote for trustees. And the trustees would control multiple companies. Because the trust was not incorporated, it was not technically a corporation—and, as a result, would not be governed by Ohio’s restrictive corporate law rules. Implementing Dodd’s plan, Rockefeller soon controlled 80 percent of the country’s oil refining and 90 percent of the nation’s oil pipelines. Standard Oil became the largest business enterprise in the world.13
The justices on the Ohio Supreme Court reacted with alarm to Standard Oil’s end-run around the state’s corporate law code, ruling in 1892 that the trust was illegal and ordering that it be dissolved. Dodd, a wellspring of corporate law innovations, came up with another: reincorporate Standard Oil in New Jersey, where the rules of corporate law were being overhauled—under the watchful supervision of a lawyer for the cotton oil trust—to loosen the traditional restrictions on corporate management. Beginning in 1888, New Jersey became the first state to allow one corporation to own stock in another, which was precisely what Rockefeller was looking to do. Over the course of the next decade, New Jersey would also allow corporations to freely form for any business purpose whatsoever and eliminate traditional limits on the size of firms. Corporations were not required to base their operations in New Jersey to take advantage of the new corporate laws, so long as they paid the state’s mandatory corporation fees. Other states soon followed, and the wave of reform was said to have “turned corporate law inside out”; after hundreds of years, no longer would the body of rules governing the formation and governance of corporations be used in any significant way to regulate corporations.14
Dodd shifted all the oil trust’s assets to a New Jersey corporation, Standard Oil of New Jersey, keeping the same management structure and same market control. The practice quickly accelerated in the succeeding years, with nearly all of the nation’s big corporations and trusts following Standard Oil’s blueprint and reincorporating in New Jersey, including Buck Duke’s American Tobacco Company. Speaking to the New York State Bar Association in 1899, just a decade after the new corporate code was enacted, attorney Charles F. Bostwick noted that “so many trusts and big corporations were paying tribute to the State of New Jersey that the authorities had become greatly perplexed as to what should be done with the surplus revenue.”15
STANDARD OIL FORMED AN IMMENSELY SUCCESSFUL TRUST, AND EFFORTS TO BREAK UP THE TRUSTS WOULD LEAD TO THE EXPANSION OF CORPORATE RIGHTS.
Decades later, long after the trusts had been defeated, some corporate law scholars would argue that New Jersey’s reforms were the beginning of a “race to the bott
om.” States seeking the revenue from incorporation fees continually made corporate law more permissive, which attracted corporate executives freed up by the new rules. Over time, the traditional corporate law doctrines limiting the power of corporate officers were rendered largely meaningless; corporate law became mainly a template that private parties could use to organize their affairs. After New Jersey’s windfall, Delaware was one of several states to follow suit. Although populists in New Jersey would eventually strengthen that state’s corporate code, Delaware continued to make its laws more permissive. Today, the tiny state named after one of America’s forgotten founders is home to less than 1 percent of the American population but more than 60 percent of Fortune 500 companies.16
* * *
BACK IN 1905, when Edwin Hale was called by Henry Taft to testify before the grand jury investigating the Tobacco Trust, American consumers bought most of their staples from a handful of trusts: sugar, whiskey, cotton, linseed oil, cookies, crackers, and fruit. In the last decade before electricity became common in urban areas, Americans at night enjoyed these items under the glow of gas lamps fueled by Standard Oil. Buck Duke’s American Tobacco Company, meanwhile, was responsible for production of over 75 percent of the smoking tobacco, 90 percent of the snuff, and 80 percent of the chewing tobacco sold in America.17
As part of the Tobacco Trust, Duke took over the American licorice industry too. Seeking vertical integration, Duke bought up two-thirds of MacAndrews & Forbes stock, and then took control of all the other major American licorice root importers. He then fixed the price of licorice, divvied up customers among the companies, limited production, and refused to sell to customers unwilling to sign long-term contracts at an inflated cost. The result was that American Tobacco controlled 95 percent of the licorice trade and used that market power to raise prices nearly 50 percent.18
THE AMERICAN TOBACCO COMPANY WAS BEHIND THE FIRST SUPREME COURT CASE ON THE RIGHTS OF CORPORATIONS UNDER THE FOURTH AND FIFTH AMENDMENTS.
Did these agreements among American Tobacco, MacAndrews, and the other licorice companies amount to an unlawful restraint of trade in violation of the Sherman Antitrust Act? That was the question the special prosecutor Taft was charged with answering. The antitrust law, enacted in 1890, outlawed any “contract, combination . . . or conspiracy” that restrained trade and prohibited attempts “to monopolize any part of the trade or commerce among the several States.” The Sherman Act was inspired by the rise of muckraking journalism in the late 1800s. The Muckrakers, who borrowed their name from a seventeenth-century Christian allegory about people who refused salvation to live instead in filth, were reform-minded journalists who investigated corporate corruption and other social ills. Among their favorite targets were the trusts, especially Standard Oil. Henry Demarest Lloyd’s exposé of that company, “The Story of a Great Monopoly,” published in The Atlantic in 1881, was one of the earliest and most influential pieces of muckraking journalism. It revealed how Rockefeller had come to dominate not only the national petroleum market—making Standard Oil “the meanest monopoly known to history”—but also politics. “The Standard,” Lloyd wrote, “has done everything with the Pennsylvania legislature, except refine it.”19
For the first ten years after it was enacted, the Sherman Act was ignored by both corporate America and the Department of Justice. Although many states actively enforced their own state antitrust laws during this time, the federal government remained on the sidelines until Roosevelt’s 1902 suit to dissolve financier J. P. Morgan’s railroad trust, the Northern Securities Company, the first major prosecution under the law. When Roosevelt assumed the presidency, few would have predicted his historical reputation would be so intimately tied to trust busting. Born into wealth, Roosevelt had been vice president in a McKinley administration well known to favor business interests. Indeed, as we will see, McKinley won the 1896 and 1900 elections with an unprecedented amount of corporate funding for his campaign—a real occurrence of the kind of corporate takeover of the electoral process that worries Citizens United’s critics. While Roosevelt was not opposed to big business—and would even come to rely on corporate money to fund his own reelection campaign—he believed that numerous trusts gained their success by wrongful means.20
Because the Sherman Act had not previously been seriously enforced, the Department of Justice had little experience with antitrust cases, and private lawyers like Henry Taft, who had defended corporations in antitrust cases brought under state law, were hired to conduct the prosecutions. In the grand-jury room, prosecutors have enormous, unchecked power. Mandated by the Fifth Amendment, grand juries are the vehicle by which the federal government brings criminal charges against someone. Distinct from the more familiar trial jury, which presides over public trials to render final verdicts of guilt, the grand jury’s role is to determine if charges should be brought in the first place. The Framers saw the grand jury as a check on governmental power, yet given the prosecutor’s nearly complete authority over the proceedings, it has not worked out that way. The grand jury meets in secret, hearing evidence and testimony brought to the jurors’ attention by the prosecutor alone. There is no judge, and the normal rules of evidence that limit what jurors see in an ordinary trial do not apply. According to an old courthouse saying, the grand jury would indict a ham sandwich if the prosecutor asked it to.21
Yet Taft was as unfamiliar with the grand-jury room as his witness, Hale. Indeed, Hale was the very first witness Taft called to testify in his first case as a prosecutor. Nevertheless, the grand-jury room was certainly a more comfortable environment for Taft than for Hale. Unlike Taft, Hale had to worry someone might discover that he had embezzled from MacAndrews & Forbes $50,000—or roughly $1.3 million in 2017 dollars.
Taft, however, was focused on antitrust issues, and he had called Hale to testify in the hope that the executive would prove a wellspring of information on MacAndrews & Forbes’s anticompetitive practices. He knew nothing of Hale’s own crimes; his aim instead was the Tobacco Trust. MacAndrews & Forbes was just the tool Taft would use to gain incriminating information on the American Tobacco Company and its business dealings. In the same way that a prosecutor might file charges against a small-time street dealer in the hopes of bringing down the drug kingpin, Taft was going after MacAndrews & Forbes to get Buck Duke.
For DeLancey Nicoll, waiting outside of the grand-jury room, MacAndrews & Forbes was also just a tool. As Taft sought to use Hale’s appearance to open the spigot of incriminating evidence on the Tobacco Trust, so was Nicoll determined to use Hale to gum up the inquiry on behalf of the tobacco companies. Chances are Nicoll, a chain smoker, passed some of the time out in the hallway enjoying an American Tobacco cigarette. Or perhaps he spent the time reflecting on the inequities of the criminal justice system, as the former district attorney—who first won election as a reform candidate—was known to do. Nicoll had once complained that “the rich can go practically unpunished, unless their crime is so glaring . . . while the poor have to receive the penalty of their offense in every instance.” Whatever his general sensitivities about equal justice, however, Nicoll was determined to see that in this case at least his very wealthy client, American Tobacco, went unpunished.22
* * *
INSIDE THE GRAND-JURY ROOM, Taft continued to question Hale about MacAndrews & Forbes. “That company is engaged in what business?” Taft asked.
The answer was hardly a secret but Hale paused nonetheless. This was the question for which he and Nicoll had prepared. Nicoll had told Hale what to say and how to say it. Nicoll’s strategy, designed to protect American Tobacco’s interests, would also protect him. “I shall have to respectfully decline to answer further questions,” Hale responded to Taft. His explanation of why he could not answer any more questions was obviously rehearsed: “first, that there is no legal warrant or authority for my examination as a witness, and second,” he said, invoking the Fifth Amendment, “that my answers may tend to criminate me.”
“Who
is the president of the MacAndrews & Forbes Company?” Taft asked. “I shall only have to repeat what I said before,” Hale replied. The special prosecutor tried to return to Hale’s past, about which the witness had already offered some superficial answers. Perhaps Hale would continue to talk about that. “What business were you in before you came to New York City?” Taft asked. Hale was not fooled and tartly responded, “I shall have to decline to answer further questions on the same grounds.”
Taft persisted in rattling off questions. “Is there any agreement, or understanding, or arrangement, between the American Tobacco Company and MacAndrews & Forbes Company, in relation to the trade or business in licorice, licorice paste, or licorice mass, affecting the business between several states of the United States?” Hale declined to reply.
This fruitless back-and-forth continued for several minutes before Taft turned to the documents Hale had been ordered to bring in the subpoena. MacAndrews & Forbes’s company records and correspondence were likely to have plenty of useful information. “Have you brought any of the papers called for by that subpoena?” Taft must have known the answer to that question before he even asked it. Given the breadth of the subpoena, which requested all contracts, correspondence, and any other documents MacAndrews & Forbes had ever created or received from over a dozen different companies, Hale would have to have brought with him boxes and boxes of papers.
“I have not,” answered Hale.
It was futile for Taft to allow himself to become frustrated. He could not force Hale to answer or produce the documents. A judge, however, could. A week later, Taft hauled Hale before Emile Henry Lacombe, a law-and-order federal judge with little tolerance for troublemakers. The issues in the case revolved around the Fourth and Fifth Amendments to the Constitution. When Hale refused to turn over the enormous quantity of documents subpoenaed by Taft, he was asserting the Fourth Amendment “right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures.” When he refused to testify about MacAndrews & Forbes and the Tobacco Trust, he was asserting rights under the Fifth Amendment, which provided, “No person shall be . . . compelled in any criminal case to be a witness against himself.” The unusual twist was that Hale was not asserting these rights on behalf of himself—at least not so far as anyone else involved in the tobacco investigation knew. He was asserting those rights explicitly on behalf of MacAndrews & Forbes, a corporation. The subpoena and grand jury questions, Nicoll told Judge Lacombe, violated the corporation’s constitutional rights.23