Attorney General v. Consolidated Gas Co.

In this proceeding the Attorney General seeks the leave of the court to bring an action against the Consolidated Gas Company of New York to procure a judgment vacating the charter and annulling the corporate existence of the company. The present appeal is from an order at Special Term refusing to give the desired leave; The application is made under Code Civ. Proc. § 1798, which authorizes the Attorney General to bring such an action, in certain cases, upon obtaining leave so to do from the court. Whether or not such leave should be given rests in each case in the sound discretion? of the court, and is not to be given as a matter of course. Matter of the Attorney General, 81 Hun, 541 , 30 N. Y. Supp. 1093 . Weight undoubtedly is to be given to the fact that the Attorney General has felt it to be his duty to apply for the required leave, but the court is also charged with a duty in the premises to consider seriously whether upon the facts presented the public interests require that such an action should be brought. In the present case we are not embarrassed by any material dispute as to the facts.

It appears from the petition that the Consolidated Gas Company of New York was organized in 1884 by the consolidation of six domestic gaslight companies then engaged in manufacturing and selling gas in the city of New York, in which business the Consolidated Gas Company has engaged since its organization. This consolidation was effected under the provisions of chapter 367, p. 448, Laws 1884, and, so far as appears, all the formalities prescribed by that act were duly complied with. Subsequently, and at divers times, the Consolidated Gas Company has acquired, by purchase, either the whole or a majority of the capital stock of a number of electric lighting and gaslighting companies, all of which it controls by virtue of its said purchases of stock. The grounds upon which the Attorney General seeks to annul its charter are (1) that it has violated provisions of law whereby it has forfeited its charter and become liable to be dissolved'by the abuse of its corporate powers; and (2) that it has exercised and is exercising franchises not conferred upon it by law.

The charge that the Consolidated Gas Company has violated provisions of law, and thereby forfeited its charter, is based upon its purchase of the stock of other, and, possibly, competing, gas and electric lighting companies, the effect of which it is said is to create a monopoly and prevent competition. It is not to be denied that section 40 of the stock corporation law (Laws 1890, p. 1073, c. 564), which was re-enacted with an amendment by chapter 601, p. 1751, Laws 1902, in terms permitted the purchases of stock. It provides that:

“Any stock corporation * * * may purchase, acquire, hold and dispose of the stock, bonds * * * of any corporation * * * if authorized, so-

to do by a provision in the certificate of incorporation * * * or if the corporation whose stock is so purchased * * * is engaged in a business similar to that of such stock corporation.”'

And under section 61, subd. 3, of the transportation corporation act (Laws 1890, p. 1147, c. 566), it seems that the Consolidated Company could have lawfully consolidated with the several companies of which it bought the stock. The learned Attorney General insists, however, that this authority to purchase stock in and to consolidate with other corporations must be exercised, in order to be lawful, in such a way as not to contravene section 7 of the stock corporation law, as amended by Laws 1897, p. 313, c. 384, or the so-called “Anti-Monopoly Acts of 1897 and 1899” (chapter 383, p. 310, Laws 1897; chapter 690, p. 1515, Laws 1899). Section 7 of the stock corporation law provides that:

“No domestic stock corporation, and no foreign corporation doing business in this state, shall combine with any other corporation or person for the creation of a monopoly, or the unlawful restraint of trade, or for the prevention of competition in any necessary of life.”

The so-called "Anti-Monopoly Acts” have frequently been before the courts. Their object is “to destroy monopolies in the manufacture, production and sale in this state of commodities in common use, to prevent combinations in restraint of competition in the supply or price of such commodities, or in restraint of the free pursuit of any lawful business, trade or occupation. The act in this respect is little more than a codification of the common law upon the subject.” Matter of Davies, 168 N. Y. 89 -101, 61 N. E. 118 -120, 56 L. R A. 855 . Conceding, as we well may, the general proposition that the power given by section 40 of the general corporation law must be so exercised as not to contravene the other provisions of law above cited, it still remains to be considered whether or not the purchase by the Consolidated Company did, in fact, contravene these statutes. It may be conceded, as was doubtless the fact, that the purpose of acquiring a controlling interest in the several corporations mentioned in the petition was to prevent competition, so far as possible, by centering in the hands of the Consolidated Company the business of furnishing illuminating gas and electricity, in so far as that business had been entered upon by the companies whose stock was purchased. But a contract or purchase of stock for the purpose of preventing competition is not of itself necessarily illegal. Rafferty v. Buffalo City Gas Co., 37 App. Div. 618 , 56 N. Y. Supp. 288 ; Diamond Match Company v. Roeber, 106 N. Y. 473 —483, 13 N. E. 419 , 60 Am. Rep. 464 . What is prohibited is the creation of a monopoly, and establishing such a competition as will result in limiting the supply and enhancing the cost of the commodity dealt in. (In no sense can the consolidation of the lighting companies in the city of New York into a single corporation be said to create such a monopoly for it gains thereby no exclusive right. The field is still open to any other company that can obtain the necessary con-senS~from"the constituted Authorities, and neither the production nor the price can be arbitrarily fixed by the ConsolMated"Company." In this respecTlHere is a very clear distinction between a company supplying gas or electricity and a corporation or combination of producers who

The kind of combinations which the law forbids is well described in the leading case of Cummings v. Union Bluestone Co., 164 N. Y. 401 , 58 N. E. 525 , 52 L. R. A. 262 , 79 Am. St. Rep. 655 , as a combination which threatens “a monopoly with which the individual would be practically powerless to compete, and the many consumers who would be severally exposed and coerced would be either compelled to submit to its exactions, or to forego the purchase of the commodity of customary use needful for them, and but for this monopoly obtainable in the market at a reasonable price. * * * And hence it is that contracts by which the parties to them combine for the purpose of creating a monopoly in restraint of trade to prevent competition and thus to limit production to increase prices and maintain them are contrary to sound public policy and are void.” On the case of the Consolidated Gas Company it cannot, as a result of its control of the business of furnishing light, either limit production or increase prices and maintain them, because both of those matters are within the control of the Legislature, It is within the power of that body, and it has frequently used the power, to fix the maximum rate which may be charged to con-sumers, and it is well settled that any person within the territory served "by a gas or electric light company is entitled to be furnished with such gas or electricity as he requires upon payment of the statutory price therefor, and can compel the company so to furnish itX That a single company thus regulated bv law as to price and production does not -offend against the anti-monopoly laws, even although its field of operation extends over a whole city, seems to be quite clear. Competition between two or more companies, each occupying exclusively a separate field of operation-could benefit no one. A competition which would operate to reduce prices must be between companies occupying the same field, and, while the consolidation of control effected by the purchases of stock in other companies by the Consolidated Company does not necessarily prevent such competition, it is the settled policy of the state to discourage competition of- this character, and the reasons for the adoption of this policy have been clearly stated by the Court of Appeals. People ex rel. N. Y. Electric Lines Company v. Ellison, 188 N. Y. 523 , 81 N. E. 447 . By section 11 of the gas and electric cbm-mission act of 1905 (chapter 737, p. 2096, Laws 1905), it was provided that no corporation for the manufacture and supply of gas should exercise its power without first obtaining a certificate of authority from the commission, and the commission was authorized to withhold its certificate “if the territory within which such corporation proposes to -operate is already supplied by an ample and well constructed system, furnishing the service which such corporation proposes to furnish, at a fair and reasonable rate”; and, while the act containing this provisión has been superseded and repealed by the public service commission law (chapter 429, p. 889, Laws 1907), that act continues the prohibition of the exercise of its powers by any gas or electrical corporation until it shall first have obtained the permission and approval of the proper commission provided for by the act. We are therefore of the opinion

The second ground upon which the Attorney General seeks to vacate the charter of the Consolidated Gas Company, and thus terminate its corporate existence, is that:

“It has exercised and is exercising franchises not conferred upon it by law.”

The basis for this contention is that certain consents or permits issued by the municipal authorities of the city of New York to the constituent companies bv the consolidation of which the Consolidated Company was created were so framed as to contain a limit of time during which they should continue to be effective, and that that time has expired. Section 5, c. 367, p. 450, Laws 1884, under which the Consolidated Gas Company was organized by a combination of six constituent companies, provided that:

“The new corporation shall hold and enjoy the same and all the rights of property franchise and interests in the same manner and to the same extent, as if the several companies so consolidated had continued to retain the title and transact the business of such corporation.”

The several statutes under which the constituent companies were organized gave to them power and authority to manufacture, distribute, and sell gas, with incidental pow.er and authority to lay pipes or mains in the public streets and avenues, subject, however, to the qualification that no street or highway should be dug into for the purpose of laying such mains without the consent of the municipal authorities first had and obtained. The franchise to be a corporation and to transact business comes from the state, as does also the right, incidental and necessary to the enjoyment of the franchise, to lay pipes and mains in the streets, to maintain them when laid so long as necessary for the beneficial enjoyment of the corporate franchise, and for that purpose to dig into and open the streets. The state might have given authority to open the streets without any consent from the local authorities, and has done so in many cases, but in general, and particularly in the case of the constituent companies mentioned in the petition, it has required the consent of the local authorities to be obtained before a street surface should be disturbed for the purpose of laying gas mains. In these cases the right to lay mains comes from the state; permission to exercise the right being made dependent upon the consent of the local authorities. It was competent for the local authorities to give a general consent covering a fixed period of time, or running during the life of the corporation, or to give consents from time to time as the necessity for opening the street surface arose. The first alternative was chosen, and to each company was given a general consent, limited as to areas to which it applied, and as to the time during which it should remain effective. These periods of time have expired; and while it was un

The order appealed from must be affirmed, with $10 costs and' disbursements. All concur, except RAUGHRIN, J., who dissents.

I agree with the majority of the court that the continuance of the use of the gas mains and lateral house connections in the streets of this city, after the period specified in the

I. am of opinion, however, that the learned Attorney General, in charging and showing that the Consolidated Gas Company purchased a controlling interest in other gas companies and in electric light companies supplying gas or electricity for light, heat, or power in the borough of Manhattan or the Bronx for the purpose of obtaining a monopoly in the manufacture and sale of gas or in generating and furnishing electricity for light, heat, or power, which are commodities in common use, and with a view to stifling competition in the manufacture or generation or sale thereof, presents a question of law as to whether the Consolidated Gas Company has not violated the provisions of section 1, c. 690, p. 1514, Laws 1899, being the “Anti-Trust Act,” so called, and of section 7 of the stock corporation law, being chapter 564, p. 1069, Laws 1890, and of section 168 of the Penal Code, for which its charter may be annulled.

The case of Rafferty v. Buffalo City Gas Company, 37 App. Div. 618 , 56 N. Y. Supp. 288 , is not, I think, decisive of these questions, and Judge Holt in the United States Circuit Court, Southern District of New York, in Burrows v. Interborough Metropolitan Company et al. (C. C.) 156 Fed. 389 , recently held with the contention of the Attorney General that section 40 of the stock corporation law, which authorizes one stock corporation to purchase and hold stock in certain other stock corporations engaged in a similar business, is limited and qualified by the provisions of section 7 of the same act and by the provisions of section 1 of the anti-trust law, so called. I refrain at this time from agreeing or disagreeing with Judge Holt’s construction, because the question is not presented for decision on the merits now; but I think that the questions are of sufficient public importance to require that they shall be decided by the Court of Appeals, which can only be done as matter of right by permitting the Attorney General to bring an action. If such leave be not granted, then I think that this court should either modify the order of the Special Term denying the Attorney General’s motion for leave to sue by reciting that the denial is not in the exercise of the discretion of the court, but upon the ground that the facts presented do not show a cause of action, or else certify to the Court of Appeals the question as to whether section 40 of the stock corporation law is modified or qualified by section 7 thereof or by section 1 of the anti-trust law, so called, in either of which cases I think the Court of Appeals would decide the question upon the merits. See Hewitt v. Wood et al., 67 N. Y. 394 ; People ex rel. Lehmaier v. Interurban St. Ry. Co., 177 N. Y. 296 , 69 N. E. 596 ; Matter of Thurber, 162 N. Y. 244 , 56 N. E. 631 ; Schneider v. City of Rochester, 155 N. Y. 619 , 50 N. E. 291 ; Birge v. B. I. B. Co., et al., 133 N. Y. 477 ,

If the corporation has violated either of these statutes its charter ought to be annulled, and I think that the Legislature did not intend to authorize the court to refuse leave to bring the action when the court is of opinion that the action ought not to be brought, assuming that it could be successfully maintained. I am of opinion that the Legislature intended to vest the Attorney General with authority to determine, in his discretion, whether or not an action for the annulment of a charter of a corporation should be brought where a cause of action for annulment exists; and it only requires leave of the court to the end that the court might determine whether a cause of action exists for the annulment of the charter so that the corporation might not be put to the trouble and expense of a litigation, unless the facts presented by the Attorney General show prima facie a cause of action, or present a question of such gravity as to render it proper that it be decided upon a trial, rather than upon the motion; and this construction is emphasized by the practice of limiting the leave, by the order, to the prosecution of the cause of action arising on the facts presented on the application for leave to sue. Matter of Attorney General, 81 Hun, 541 , 30 N. Y. Supp. 1093 ; Matter of Attorney General, 50 Hun, 511 , 3 N. Y. Supp. 464 ; People v. Boston, H. T. & W. Ry. Co., 27 Hun, 528 ; People ex rel. Gould v. Met. Telegraph Co., 2 Civ. Proc. Rep. (McCarthy’s) 295. If section 7 of the stock corporation law or section 1 of the anti-trust law, so called, supra, be applicable to the defendant, I do not agree with the majority of the court that the petition of the Attorney General does not show that they have been violated, and, on. the contrary, I am of opinion that the facts stated in the petition present a prima facie case of a violation of both statutes, assuming them to be applicable to the defendant; that is to say, it appears presumptively that the controlling interest in the other corporations was purchased for the purpose of creating a monopoly and restraining competition in the business in which the corporations are engaged.

I therefore vote for reversal of the order, and for granting leave to bring the action.