People v. Mich. Bell Tel. Co. , 246 Mich. 198 ( 1928 )

Admittedly the 4 1/2 per cent. contract (now 4 per cent.) is the sole cause of this litigation. The attorney general, I think, makes it clear in briefs and upon oral argument that he does not desire to paralyze the business of the State by ousting the defendant completely from doing telephone business in the State, and, as I understand the opinion of my Brother CLARK, the judgment of ouster he says should be entered does not go so far. In other words, the defendant will "be ousted of right to have credit in a computation of rates for payments to the American company under and as upon the contract." I shall presently consider the propriety of quo warranto proceedings to test the validity of the contract, and what I shall now say will be upon the theory that the action is an appropriate one for the purpose.

The original 4 1/2 per cent. contract between the Michigan company and the predecessor of the American Telephone and Telegraph Company (The Bell company) was entered into when that company owned not a share of stock in the Michigan company, and the business relations between the two companies have been substantially the same after as before the American company commenced to buy stock in the Michigan company. The contract was before this court in City of Detroit v. Michigan RailroadCommission, 209 Mich. 395, and in Michigan Public UtilitiesCommission v. Telephone Co., 228 Mich. 658, and before the United States Supreme Court in Houston v. Southwestern Tel.Co., 259 U.S. 318 (42 Sup. Ct. 486), and Southwestern Bell Tel.Co. v. Public Service Com., 262 U.S. 276 (43 Sup. Ct. 544, 31 A.L.R. 807). I was disqualified in the Detroit Case (209 Mich.), and, of course, did not read the record, although I was somewhat familiar with the proofs. I did sit in the UtilitiesCommission Case (228 Mich.), and I then read the record in that case, so far as it pertained to the 4 1/2 per cent. contract and the depreciation reserve, and at the same time I read the record in the Houston Case (259 U.S.), and the record in the SouthwesternBell Case (262 U.S.), so far as they pertained to these subjects. I have read the voluminous record in the instant case with care, and I must confess that upon the question of the 4 1/2 per cent. contract, so far as I am able to discover, the records in all the cases are substantially identical and in many instances the same witnesses appear. In all of the decided cases the American Telephone and Telegraph Company owned all or substantially all of the stock of the local company; in all of the cases this fact was stressed and in all of these cases the validity of the 4 1/2 per cent. contract was sustained. In each of the decided cases, this result was reached having in mind the rule that agreements between the parent and subsidiary companies must be closely scrutinized, and if procured by domination or unfairly, should be disregarded in a rate-making case. But each case recognized that the men who furnish the money to run a business should have some reasonable say as to its proper expenditures and management; as stated by Mr. Justice McReynolds in the Southwestern Bell Case:

"It must never be forgotten that while the State may regulate with a view to enforcing reasonable rates and charges, it is not the owner of the property of public utility companies and is not clothed with the general power of management incident to ownership. The applicable general rule is well expressed inState Public Utilities Commission, ex rel. Springfield, v.Springfield Gas and Electric Co., 291 Ill. 209, 234 (125 N.E. 891):

" 'The commission is not the financial manager of the corporation and it is not empowered to substitute its judgment for that of the directors of the corporation; nor can it ignore items charged by the utility as operating expenses unless there is an abuse of discretion in that regard by the corporate officers.' "

I see no reason for reaching a different conclusion in the instant case than that reached in the cases cited.

But forgetting the other cases and taking this record alone, I am satisfied that the State has signally failed to establish domination over the Michigan company in the offensive or illegal sense by the American company. The contract which it is claimed was procured by domination is the same in essentials as the earlier contracts made when the American company and its predecessor had no financial interest in the Michigan company, and is substantially the same as entered into with companies in which it does not own the controlling stock. Speaking from this record and this record alone, I am satisfied the services performed under this contract are worth every dollar the Michigan company pays.

Some of us remember the advent of the telephone, the little exchanges which sprang into being with their crude instruments and cruder service. This record discloses the millions upon millions which have been expended by the American Telephone and Telegraph Company in the development and perfection of telephony, the benefit of which and of future developments are and will be available to defendant under the contract assailed. Mr. Jackson, who was the first president of the Michigan company, and its president in 1887 when the first contract was entered into with the Bell company (predecessor of the A. T. T. Company), and who is now retired, testifies:

"Well, generally speaking, I may say that I have considered, and I do now consider, that the agreement for the use of the Bell instruments, and all that is implied thereby, is the greatest asset that the Michigan State Telephone Company has."

While of little moment to this case, it is interesting historically to note that in the instant case the attorney general is insisting that the American company come into the State and become domesticated at the peril to the defendant of losing its franchise, and in 1909 the then attorney general insisted that the American company keep out of the State, and this court, in American Telephone and Telegraph Co. v.Secretary of State, 159 Mich. 195, refused it permission to come into the State and become domesticated. But, of course, times do change.

The remedy by quo warranto is an extraordinary remedy. It is resorted to against corporations for violation of the privileges conferred upon them by the State. Complete ouster is not required. In Attorney General v. National Cash RegisterCo., 182 Mich. 99 (Ann. Cas. 1916 D, 638), the defendant was assessed the maximum fine and ousted from continuing its illegal practices, some of which were set up in the opinion. Here the defendant will not be ousted from continuing any illegal practices, because it is not claimed that it has been guilty of any illegal practices; it will be ousted and only ousted of its right in a rate-making case to have credit by the Michigan utilities commission for payments made to the American company pursuant to the terms of the contract. What testimony shall be received, and what credits shall be given by the commission in a rate proceeding before that body is, in the first instance, for the determination of the commission, subject, of course, to judicial review. This court ought not onquo warranto oust the defendant or any other corporation from introducing any evidence it sees fit or asserting any rights it may be advised it has in proceedings had before the administrative boards of the State. If the defendant has ceased to function as a corporation of this State and is but a cloak or dummy under which, and through which, the American company is doing the telephone business of the State (which claim the State, in my judgment, has signally failed to establish), if it is no longer exercising its corporate franchises, it should be ousted in toto.

Proceedings in quo warranto should not be used to decide for the commission and in advance of a proceeding before it, what evidence shall and what shall not be considered by it, what claims shall be and what claims shall not be considered by that body, if and when it has occasion to act in the future. Nor should such proceeding be used as a club; nor should this court enter a judgment which may under any circumstance be regarded as only a gesture. In my judgment this proceeding should be dismissed, leaving to the commission to decide in the first instance, and subject to judicial review, what it will consider and what it will not consider in rate proceedings which may in the future come before it.