O'Fallon v. The People

Profits on eleven billion dollars swung closer to U. S. railroads and their owners last week when the U. S. Supreme Court decided in favor of the St. Louis and O'Fallon R. R. in its dispute with the Interstate Commerce Commission on the most fundamental issue in the transportation world--valuation. The Supreme Court, five to three, ruled that the I. C. C. had failed to give to "current reproduction value" the consideration Congress intended in the Transportation Act of 1920.

"Congress must be obeyed," declared Justice McReynolds in rendering the majority opinion from which dissented Justices Holmes, Brandeis and Stone. Justice Butler, as a onetime railroad attorney, did not participate in the case. The Court's ruling set at naught the valuation placed by the I. C. C. on the O'Fallon, relieved the road of paying to the U. S. a share of its profits on that valuation and sent rail stocks jubilantly sky-rocketing in Wall Street. C. & O. spurted up 23 points, N. Y. C. 12, N. & W. ii.

A midget road for a test case, the O'Fallon carries coal over a nine-mile track in Southern Illinois. It is owned largely by the Adolphus Busch estate which also owns the Manufacturers' R. R., a 20-mile system in Missouri physically unconnected with the O'Fallon.

The Transportation Act of 1920 specified that carriers could earn 6 per cent on the value of their property as fixed by the I. C. C. All profits above that figure were "recapturable"--half into the carriers' reserve fund, half to an I. C. C. fund for special loans to less profitable roads.

The O'Fallon claimed that at no time since 1920 was its value less than $1,350,000. The I. C. C. fixed annual values for it ranging from $875,000 to $978,000, on which its profits were computed and an order, the first of its kind, issued compelling the road to pay about $226,000 to the I. C. C.'s fund.

The valuation issue with its corollary, confiscation, was clearly posed. The O'Fallon went into court to fight the I. C. C.'s order. The great railroads of the land clustered about the midget line in friendly fashion. St. Louis' lawyer Daniel N. Kirby represented the O'Fallon, Frederick H. Wood of Manhattan's famed law firm of Cravath de Gersdorff, Swaine & Wood, represented the big-brother carriers. The I. C. C. accepted the challenge, named Chicago's Walter L. Fisher, Taft-time Secretary of the Interior, to fight its legal battle. Before a Federal Court at St. Louis, the O'Fallon contended that it and the Manufacturers' R. R. were one, and should be so valued. The O'Fallon's excess profits on this basis would have been equalized by the Manufacturers' lack of profits. The lower court sustained the Commission, ducked the question of valuation by claiming that regardless of what method the commission used, the O'Fallon still had profited by more than 6 per cent, so must contribute to the I. C. C. fund. An appeal was taken to the Supreme Court. The I. C. C. added George Woodward Wickersham, Taft-time Attorney-General, to its legal staff.

The O'Fallon case was loosely called "the greatest law suit in history" because: rail rates are fixed by the I. C. C. to allow the carriers a profit. The amount of profit depends on valuation. For 15 years the I.C. C. has been tentatively valuing U. S. rail properties. I. C. C. valuations have generally been on the principle of original costs, plus improvements, less depreciation. The carriers have contended for valuations on the basis of reproduction at present price levels ("current reproduction value"), less depreciation. In 1920 the I. C. C. valued U. S. railroads at approximately 19 billion dollars. The roads valued themselves at 30 billions. Both sides agreed that about five billions have been spent on improvements and replacements since 1920. The point at issue was the eleven-billion-dollar difference between the roads' value of themselves and the commission's value.

The Supreme Court's decision avoided specifying how much such cost must be a factor in the I. C. C.'s evaluating system. That was the railroad's mighty victory.