In the first century or so of our national existence, one of the Constitution’s provisions that was most often at issue was the Contract Clause. But following New Deal era decisions that eviscerated it, hardly any cases have since centered on it. The clause has been so forgotten that few Americans even know it’s there, in Article I, Section 10, reading, “No state shall pass any law impairing the obligation of contracts.”
The Constitution’s drafters had good reason to include that language, meant to assure people that contracts would be inviolate. During the years under the Articles of Confederation, the states frequently undermined the confidence in contracts by enacting debt relief laws and revoking business charters. The first state law to be declared invalid by a federal court was a Rhode Island statute that let a politically connected state businessman out of his debts. Unless contracts were reliable, the Founders knew, the new nation’s commercial development would itself be impaired.
American courts took the Contract Clause very seriously until the New Deal. Professor James W. Ely’s recent book The Contract Clause: A Constitutional History (which I reviewed here) recounts the way the Marshall Court esteemed the clause and how it held up quite well (although with some erosion) during the “Progressive” era.
Then came the Great Depression.
Just as the Court turned its back on other cornerstones of limited government and the rule of law during that era, so did it jettison the once-formidable Contract Clause. In a 1934 decision, Home Building & Loan Association v. Blaisdell, Chief Justice Hughes decided that during the “emergency” of the Depression, the Court had to allow legislatures to impose a moratorium on mortgage foreclosures. In an early exemplar of “living Constitution” theory, the Chief Justice said that the Contract Clause “is not an absolute one and is not to be read with literal exactness….” He went on to say that the Constitution’s restraints on power “must not be confined to the interpretation which the framers, with the conditions and outlook of their time, would have placed upon them.”
Just imagine if the First Amendment had been treated that way, giving the government wide latitude to censor or punish free speech and the press on the breezy, “Well, times have changed” approach. The First Amendment would be cowering in the shadows today.
Conversely, imagine if the Court had developed a robust, pro-contract jurisprudence based on the Contract Clause to match its pro-speech jurisprudence emanating the its favored First Amendment. Lots of governmental interference with people’s liberty to shape their lives through contracts they want — or don’t want — would have been prevented, such as minimum wage laws.
But that’s not what happened to the Contract Clause. The courts kept allowing the states to whittle away at it by devising a three-factor “balancing test” whereby the assertion of the slightest state interest in meddling with contracts was usually good enough.
Which brings us to the case at hand, Sveen v. Melin.
Mark Sveen and Kaye Melin were married in 1997 and lived in Minnesota. After their marriage, Sveen purchased a life insurance policy, naming Kaye as primary beneficiary and his children by a previous marriage as contingent beneficiaries. The couple divorced in 2007 and Sveen died in 2011.
The trouble arose out of the fact that the state changed its probate code in 2002. The law now provided that life insurance beneficiary designations would be revoked upon divorce. After the divorce, Mark did not change the beneficiary designation, leaving Kaye listed as the primary beneficiary when he died. Naturally, both Melin and the Sveen children want the proceeds, the latter arguing that under the new Minnesota law, they are entitled to the money. Hence the suit.
That’s where the Contract Clause enters the picture. Did Minnesota violate it when it in effect rewrote existing life insurance contracts with its revocation-upon-divorce statute? The federal district court upheld the statute and found for the Sveens, but on appeal, the Eighth Circuit reversed. The Eighth Circuit held that policyholders are entitled to have their last known wishes under a contract enforced and that the Contract Clause barred the state from tampering with them.
Not happy with that outcome, the Sveens appealed to the Supreme Court, which granted certiorari. For the first time in decades, the Contract Clause is squarely before the Court.
An amicus brief has been submitted by Professor Ely and in it, he makes a powerful argument in favor of upholding the Eighth Circuit and breathing life back into the Contract Clause.
Here is the gist of Professor Ely’s argument:
“This Court should take this opportunity to reject the current three-factor test and return to the original understanding of the Contract Clause. Under such an approach, there is no question that Respondent (Melin) must prevail. Yet, even if the Court is not inclined to fundamentally reevaluate its Contract Clause jurisprudence, Respondent must still prevail because it is not possible to rule for Petitioners without reinventing the three-factor test as a hyper-deferential, state-always- wins charade. Such a ruling would truly mean the end of the Contract Clause.“
But what’s wrong with the current approach to the Contract Clause, one that, as Chief Justice Hughes said in Blaisdell is based on the “growing appreciation of public needs and the necessity of finding ground for a rational compromise between individual rights and public welfare”?
A lot, Ely argues. It tears apart the plain meaning of the Clause, whose words, wrote Chief Justice Marshall, “are express and incapable of being misunderstood.” Nor, Ely continues, was there ever any justification for the politically expedient “let’s forget about this Clause because the country is facing an emergency” rationale of Blaisdell and subsequent cases. The truth is that the Clause was inserted precisely because the nation needed contractual stability in the distressed times of 1787 and no amount of economic turmoil can be alleviated by allowing states to rewrite contracts. (Minnesota doesn’t even have that weak defense available for its insurance beneficiary statute.)
Furthermore, Ely contends, the current interpretation of the Clause (again, Marshall would laugh at the idea that it needs any “interpretation”) is far too vague, giving lower courts little guidance. They are only supposed to apply the Contract Clause only if the legislative interference is “substantial” and “unreasonable.” Ely comments, “Yet it is sadly ironic that the Court has fashioned such an amorphous test for the Contract Clause – the one constitutional provision that, more than any other, was designed to ensure stability and predictability in commercial relationships.”
The Supreme Court will hear oral arguments in the case on March 19. It would be one of the great results of its current term if the justices would not merely uphold the Eighth Circuit but also give a full-throated declaration that the Contract Clause will henceforth be read just as it was written.