Brief Fact Summary. Minnesota passed pension reform legislation, which increased the obligation that Allied Structural Steel Co. had to their employees.
Synopsis of Rule of Law. In determining whether a contract may be modified the Court will consider the severity of the impairment and the importance of the public interest to be served. The Court found that Minnesota’s police power was limited and invalidated the state pension reform legislation.
Issue. Does the Contract Clause limit the power of a state to abridge existing contractual relationships even in the exercise of its police power?
The Contract Clause does not operate to obliterate the police power of the states. They may use these powers for the common good even though private contracts previously entered into between individuals would be affected. There are limits upon the power of a state to abridge existing contractual relationships even in the exercise of its legitimate police power.
Previous cases such as Home Building & Loan Assn. V. Blaisdell, W.B. Worthen Co v. Thomas, and Treigle v. Acme Homstead Assn, illustrate the point that unless there is a real legitimate interest to interfere in the private contracts between people, then the legislation would be invalid under the Contract Clause.
The state law did operate as a substantial impairment of a contractual relationship. The company had no reason to anticipate that its employees pension rights could become vested except in accordance with the terms of the plan. It relied heavily on the contractual expectation in calculating its annual contributions to the pension fund. The Framers placed a protection on contracts because they enable individuals to order their personal and business affairs according to their particular needs and interest. The parties are entitled to rely on those binding obligations. The effect of the legislation was that an element that the company relied on heavily, funding the pension plan, was modified. This law nullifies express terms of the company’s contractual obligations and imposes a completely unexpected liability in potential disabling amounts without any provision for gradual applicability or grace periods. There is nothing on the record to show that this severe disruption was necessary
to meet an important general social problem.
Dissent. Justices Brennan, White, and Marshall dissenting.
This decision expands the reach of the Contract Clause. This Act does not relieve the employer or employee of any existing contract obligations. The Act creates an additional supplemental duty. This is no different in kind from myriad duties created by a wide variety of legislative measures which defeat settled expectations but are sustained. For this reason the Act does not implicate the Contract Clause.
Precedent has interpreted the constitutional provisions that may protect economic expectations such as those Allied Structural had, and these decisions recognize a broad latitude in states to effect even severe interference with existing economic values when reasonably necessary to promote the general welfare. The emphasis has been on state laws that diluted legitimate interests of the beneficiaries of a contract duty. This is only superimposing more obligations than those provided for by the contract. There is nothing sacrosanct about expectations rooted in contract that justify according them a constitutional immunity denied other property rights.
Discussion. A state built a stadium and was required by the bondholders to use the first $2.00 of the admission charge to repay the debt for the first six years. Two years later the legislature passed a bill requiring the stadium to admit all senior citizens for 50 cents. The challenge to this law would be the Contract Clause. The severity of the obligation versus the general benefit is compared. Here, the stadium builders will be in severe debt to their bondholders and in breach of their contract. The benefits to the general public are only for people over 65.
Another example is if a state has companies charging 17% interest and the voters approve legislation that says there will be a 10% cap on interest that banks could charge. Suppose that all banks withdraw their branches because it is not profitable to charge less than 15% interest. As a consequence, residents do not have credit cards. The 10% cap would probably be constitutional because it was a reasonable exercise of the State’s police power to pass the law protecting their citizens form usury.