Freedom to contract has been the cornerstone of American prosperity. Americans have built their wealth by engaging in trillions of private transactions for the mutual benefit of all parties, as well as society at large.
The government, and those who rely on it, has always been inherently hostile to the private right to contract. Government regulators, for example, are devoted to interfering with this right in order to advance a purported governmental interest. Taxation on the proceeds from private contracts often destroys the benefits provided.
The framers of the United States Constitution recognized how essential the right to contract is to freedom and economic prosperity. They expressly prohibited interference with private contracts in the original Constitution, prior even to passage of the Bill of Rights.(1) The Bill of Rights themselves likewise included such protection in the Fifth Amendment.(2) In the aftermath of the Civil War, Congress and the States once again affirmed this right by including it in the Fourteenth Amendment.(3)
Historically, the judiciary had opposed efforts by government to interfere with the private right to contract. Between 1899 and 1937 --- which includes the depths of the Great Depression --- the Supreme Court invalidated 197 separate state or federal regulations based on their interference with contractually-related rights.(4) The judiciary rightly viewed its role as a defender of the fundamental right to contract.
Relentless pressure towards government control, coupled with unanswered academic attacks on free enterprise, has resulted in abandonment by the judiciary of the right to contract. Courts have turned away from defending rights that are in the Constitution, and instead invent rights that were never in the Constitution. The judiciary ultimately created an arbitrary distinction between economic rights and social rights.
Two decisions in the 1990s highlighted the judicial abandonment of the right to contract. The first decision, FCC v. Beach Communications, Inc., was a 9-0 reversal by the Supreme Court of a lower court's defense of economic liberty.(5) The second decision, United Senior's Association v. Shalala, was a subsequent rejection by a lower court of certain rights by physicians to contract with their patients.(6)
In Beach Communications, the Supreme Court reviewed an arbitrary rule that prohibited satellite dish owners from competing with local cable television franchises except where the viewers resided in property under common ownership (like a single apartment complex). In sweeping language, the Court unanimously held that economic regulations "may be based on rational speculation unsupported by evidence or empirical data," and that it is "irrelevant for constitutional purposes whether the conceived reason for the challenged distinction actually motivated the legislature."(7)
Under this holding, virtually every economic regulation will be upheld by the courts, no matter how arbitrary or anti-competitive. All a court need do is engage in "speculation unsupported by evidence or empirical data" in order to uphold a statute. Many courts have already so held in reliance on Beach Communications.
In the second decision, Reagan-appointed Judge Hogan in the District of Columbia dismissed a challenge to the 1997 Medicare opt-out statute (Section 4507 of the Balanced Budget Act of 1997). The Court held that:
"The Court does not pass judgment on Congress' wisdom in passing Section 4507; the Court's role here is solely to determine whether the United States Constitution confers a fundamental right on individuals to contract privately with their physicians. The Court finds that it does not."(8)
Professor Richard Epstein of the University of Chicago Law School observed that "Judge Hogan's decision comes as no surprise given the current tenor of constitutional law, with its regrettable effort to distinguish between fundamental personal liberties and mere contract rights."(9)
To some, these decisions reflect judicial restraint designed to allow the political process and free markets to sort out economic policy. Unfortunately, judicial restraint often creates a vacuum into which unwarranted judicial activism soon steps.
Such judicial activism has appeared in two recent decisions in Missouri. Unless reversed, these decisions will leave individuals defenseless against judicial attempts to interfere with fundamental economic freedoms.
In Zipper v. Health Midwest,(10) the Missouri Court of Appeals considered whether a hospital may arbitrarily violate its medical staff bylaws in terminating a physician's privileges. Dr. Ronald Zipper had negotiated and agreed to medical staff bylaws that expressly established contractual obligations between the hospital and the medical staff. These contractual obligations included specific procedures governing hospital privileges.
Although no patient had ever complained about Dr. Zipper, the hospital arbitrarily determined that Dr. Zipper was performing too many back surgeries for its liking. When Dr. Zipper attempted to enforce his contractual protections in court, however, the Missouri Court of Appeals contradicted hundreds of years of legal precedent and declared that the bylaws are not contractually enforceable.
In the name of supposed public policy, the Court thereby invalidated contractual obligations between two sophisticated private parties. Once a staunch defender of an individual's right to contract, the judiciary has thereby begun to interfere with this right itself.
This judicial activism expanded further in another Missouri case entitled U.S. v. Gailey.(11) Dr. Raymond Keith Gailey had relied on the express terms of his contract with a private hospital in obtaining reimbursement for his first-year expenses for the salary of his business manager. The hospital later contested the number of hours worked by that business manager in the first year, although it could not dispute that Dr. Gailey did incur the expenses he reported to the hospital.
The government took the view that Dr. Gailey's private contract with the hospital did not permit him to obtain reimbursement for the salary of his business manager to the extent that she failed to work 40 hours per week. This interpretation was unsupported by the express terms of the contract itself, which required reimbursement regardless of hours worked.
Ordinarily, the government's interpretation of a contract between two private, sophisticated parties would be irrelevant. But in a further expansion of judicial interference, the Court allowed the government to prosecute Dr. Gailey for federal mail fraud based on its unsupported interpretation of the private contract.
Although there was no obvious basis for federal jurisdiction, the government based its federal prosecution on a solitary use of the U.S. Postal Mails by the hospital in sending Dr. Gailey a check related to the contract. A private dispute between Dr. Gailey and his hospital, over the hours worked by Dr. Gailey's business manager under a private contract, was thereby converted into a federal mail fraud prosecution and conviction. Dr. Gailey's reliance on the terms of his contract with the hospital will likely result in revocation of his license to practice medicine.
One hundred years ago the judiciary was a vigorous defender of legitimate constitutional rights on behalf of the American people. Twenty-five years ago the judiciary had abandoned its defense of contractual rights, but still respected their enforceability.
Now courts are themselves affirmatively interfering with contractual rights. The dangerous precedents set by the decisions involving Drs. Gailey and Zipper are the alarming result of relentless attacks on the right to contract.
Governmental efforts, whether by the legislature or the judiciary, to control the right to contract are inevitably futile, because the free markets are more powerful than any government. History teaches, however, that vigilance is required to defend against never-ending attempts by governments to interfere arbitrarily with economic rights.
1. U.S. Const. Art. I, § 10 ("No State shallpass anyLaw impairing the Obligation of Contracts."). The full text of the U.S. Constitution is available for downloading and searching from http://www.theshop.net/adriver/luke/const.htm.
2. U.S. Const. Amend. V ("No person shall bedeprived oflibertywithout due process of law."). For more than one hundred years the courts applied this clause to protect the right to contract. See, e.g., Adair v. United States, 208 U.S. 161 (1908) (holding that an employer has the same right to prescribe terms on which to hire an employee as an employee has to prescribe terms on which he will sell his labor, and legislation which interferes with this right is an unjustified interference with liberty of contract).
3. U.S. Const. Amend. XIV ("No State shalldeprive any person of libertywithout due process of law."). For fifty years the courts interpreted such liberty to include the general right to make a contract in relation to a business. See, e.g., Lochner v. United States, 198 U.S. 45 (1905).
4. L. Tribe, American Constitutional Law § 8-2 & n.2 (2d Ed. 1988).
5. FCC v. Beach Communications, Inc., 508 U.S. 307 (1993).
6. United Seniors Ass'n v. Shalala, CA-97-3109 (D.D.C. Apr. 14, 1998).
7. 508 U.S. at 315.
8. United Seniors Ass'n, supra note 6.
9. Health Freedom Watch, May/June 1998, posted at http://www.forhealthfreedom.org/Publications/NoConstitutionalRight.html.
10. Case No. WD-51357 (Ct. App. Mo. W.D. Aug. 4, 1998). See also "Hospital Bylaws Not a Contract with Doctors Western District Adopts Minority View," 12 M.L.W. 904, 924 (Aug. 10, 1998).
11. Case No. 98-05001-01-CR-SW-4 (W.D. Mo.).
Andrew L. Schlafly, Esq., is General Counsel for AAPS. He is a graduate of Harvard Law School and has served as an Adjunct Professor at Seton Hall Law School. He may be reached by e-mail at email@example.com.
For another short and brilliant article expounding on what the Founding Fathers expressed and intended in the Contract Clause of our Constitution and its relationship to individual freedom, the reader is referred to Dr. Thomas J. DiLorenzo's, "The Founders on Government: Implications for Economic Freedom," in the Spring 1997 issue of the Medical Sentinel. ---Ed.
Originally published in the Medical Sentinel 1999;4(2):68-69. Copyright©1999 Association of American Physicians and Surgeons (AAPS)