Trustees of Dartmouth College v. Woodward

The legal structure of the modern U.S. business corporation had its genesis in Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518, 4 L. Ed. 629 (1819), which held that private corporate charters are protected from state interference by the Contracts Clause of the U.S. Constitution (art. I, § 10).

Dartmouth College was founded in 1769 by Reverend Eleazer Wheelock as a school for missionaries and Native Americans. During the 1750s, Wheelock financed the school with his own money. He launched an extensive fundraising effort in England and Scotland in the 1760s and received generous contributions. However, his benefactors wanted assurances that the money they were sending overseas would be properly spent. To allay their concerns, Wheelock instituted a management structure by which an English board controlled the school's finances and a colonial board managed the everyday affairs of the school and its missions. In 1769, Wheelock obtained a corporate charter from the royal governor of New Hampshire. The charter outlined the governing structure of the school, including the English and colonial boards of trustees.

After Wheelock's death in 1779, his son, John Wheelock, assumed the presidency of Dartmouth College. During the ensuing years, various circumstances, including the American Revolution, brought severe hardships to the college. Funding was scarce, land titles were uncertain, and the value of the college's assets diminished. Disputes arose between Wheelock and the colonial—now U.S.—board of trustees over the administration of the college, and in August 1815, a group of dissatisfied board members prepared resolutions to remove Wheelock from office. A struggle for control followed, and the dissident faction, composed of Republicans who wanted the state of New Hampshire to control the school, enlisted the support of the legislature. In December 1816, the legislature passed a law that renamed the college Dartmouth University and made it a public school controlled by a state-appointed governing board.

The controlling faction on the old board, most of whom were Federalists who supported Wheelock, wanted to maintain Dartmouth College's private, sectarian character. They maintained that the school's charter was a contract between King George III and the trustees. Because Article I, Section 10, of the U.S. Constitution prohibits states from passing any law that impairs contractual obligations, they argued that the legislature could not alter the governing method prescribed in the charter. The Republicans maintained that because the charter was handed down by the English monarchy before the American Revolution, it had no legal effect in a U.S. court. Furthermore, they contended that even if the charter was valid, it was not a contract within the meaning of Article I, Section 10, but rather an amendable legislative act.

In February 1817, the trustees filed a lawsuit against William H. Woodward, a former secretary of the old board who had transferred his allegiance and become the secretary-treasurer of the new state-appointed board. The suit claimed that the legislature's actions violated the old board's constitutional freedom of contract and petitioned the court to compel Woodward to return the college's records, books, and seal, and to pay $50,000 in damages. The New Hampshire Supreme Court ruled against the plaintiffs, holding that Dartmouth College's charter was not a contract entitled to constitutional protection (Dartmouth College, 1 N.H. 111 [1817]).

The trustees appealed to the U.S. Supreme Court and enlisted the brilliant lawyer and orator DANIEL WEBSTER to argue their cause. An 1801 graduate of Dartmouth, Webster made an impassioned plea to the Court to uphold the original charter and maintain the school's private character. He argued that the school was created out of the bounty of its founder and that the founder conferred on the trustees certain rights. Although the institution may have some public characteristics, Webster contended that it was still a private enterprise whose trustees could not be deprived of their property, immunities, or privileges without DUE PROCESS OF LAW. He further argued that a charter constitutes a contract in the fullest sense of the law because it includes all the elements of a contract: competent parties, subject matter, mutual consideration, agreement of the parties, and mutual obligations. Webster reminded the justices of the dangers of unchecked legislative power. He argued that no less than the future of all private colleges hung in the balance of the Court's decision and that if the New Hampshire statute were upheld, all colleges would be subject to the vagaries of politics. He concluded his arguments by addressing Chief Justice JOHN MARSHALL: "It is, sir, as I have said, a small college. And yet there are those who love it." Webster's eloquence reportedly moved some observers, including Marshall, to tears.

The parties completed their arguments near the end of the Court's 1818 term. At the close of the term, Justice Marshall announced that the Court was undecided and would continue its consideration of the case to the 1819 term. On February 2, 1819, Marshall read the Court's opinion, which he had written: "The opinion of the court … is, that [the charter] is a contract, the obligation of which cannot be impaired without violating the constitution." The Court held that Wheelock and the college's trustees had received the charter in return for their agreement to operate the school under the terms of the charter. This mutual obligation was the basis of the Court's finding that a contract existed and that the contract fell within the Contracts Clause's protection.

Marshall's opinion defined a corporation as "an artificial being, invisible, intangible, and existing only in contemplation of law." According to the Court, a corporation possesses only the properties and powers conferred upon it by law. Dartmouth College was a corporation and, as a party to the contract created by the charter, could enforce its constitutional right to be free from impairment of its obligation.

The Dartmouth College case had far-reaching implications. By establishing that private corporate charters are contracts protected by the Constitution, this decision enabled business corporations to operate under whatever terms are dictated in their charters, without fear of interference by the state. This freedom was an important agent in the enormous growth of corporations in the nineteenth and early twentieth centuries, a necessary adjunct to the development of the U.S. economy. In addition, the case was the first to recognize that a corporation is a "person" for legal purposes, able to sue and be sued. It also established the principle that vested property rights, such as those granted in a corporate charter, fall within the purview of the Contracts Clause. By so doing, the decision established that the Contracts Clause protects the right to acquire and dispose of property. This protection, in turn, encouraged economic venture and development.

Although the Dartmouth College case is most often cited for its effect on the law of business corporations, it also significantly influenced the development of higher education in the United States. By confirming the autonomy of Dartmouth College as a private institution, the Court ensured that other private colleges would operate free of state interference. The decision probably influenced the growth of public colleges, as the only schools states could legally control were those founded by the states. Finally, by prohibiting the legislature from interfering with Dartmouth's trustees, faculty, and students, the Court, perhaps inadvertently, bolstered the concepts of ACADEMIC FREEDOM and tenure for academic faculty. Webster, in his arguments before the justices, implored them to protect the Dartmouth faculty's "sacred" property rights, to which they were entitled by virtue of their forgoing "the advantages of professional and public employments, … to devote themselves to science and literature, and the instruction of youth."

The Dartmouth College case was criticized by some as awarding free rein to corporations and usurping state regulatory power. However, the case was interpreted not to prevent states from regulating businesses but rather to restrict states from interfering with a corporation's charter provisions. In fact, states have always regulated business corporations to benefit the public interest. The Court made it clear through subsequent decisions that Dartmouth College was not to be interpreted as corporate carte blanche. For example, in Providence Bank v. Billings, 29 U.S. (4 Pet.) 514, 7 L. Ed. 939 (1830), the plaintiff argued that its charter implied an exemption from taxation and that a general tax on banks would be a burden on its freedom of contract. The Court held that the Dartmouth College doctrine did not prohibit states from taxing banks. Corporations have the legal characteristics of any individual, and all individuals are obligated to share in the public burden of taxation. A further refinement of the doctrine came in West River Bridge v. Dix, 47 U.S. (6 How.) 507, 12 L. Ed. 535 (1848), in which the Court held that all contracts are subject to the superseding power of EMINENT DOMAIN and "the preexisting and higher authority of the laws of nature, of nations, or of the community." That higher authority gives states the right to tax and regulate corporations.