Michigan Bell Telephone Co. v. Odell

• Decision Date: 25 November 1930
• Docket Number: No. 1322.,1322.
• Citation: 45 F.2d 180
• Parties: MICHIGAN BELL TELEPHONE CO. v. ODELL et al.
• Court: U.S. District Court — Western District of Michigan

45 F.2d 180 (1930)

MICHIGAN BELL TELEPHONE CO. v. ODELL et al.

No. 1322.

District Court, E. D. Michigan, S. D.

November 25, 1930.

Stevenson, Butzel, Eaman & Long, of Detroit, Mich. (Thomas G. Long, of Detroit, Mich., of counsel), for plaintiff.

Wilber M. Brucker, Atty. Gen. of State of Michigan, and Harold Goodman, Sp. Asst. Atty. Gen., for defendants.

Clarence E. Wilcox, Corp. Counsel, and David H. Crowley, Sp. Counsel, both of Detroit, Mich., for intervener City of Detroit.

Ganson Taggart, City Atty., of Grand Rapids, Mich., for intervener City of Grand Rapids.

Before TUTTLE, SIMONS, and MOINET, District Judges.

PER CURIAM.

The plaintiff is a Michigan corporation owning and operating a public utility in the state; the defendants are the members of the Michigan Public Utilities Commission and the Attorney General. The interveners are the cities of Detroit and Grand Rapids and a number of other cities of the state, which, in the absence of objections, were permitted to intervene. The bill is filed to declare null and void certain specified orders of the defendant commission prescribing maximum telephone rates to be charged by the plaintiff in its various exchanges in the state, such rates being alleged to result in confiscation of the plaintiff's property and in violation of its rights under the Fourteenth Amendment to the Constitution of the United States. The bill prays for a permanent, but not for a temporary, injunction. Subsequent to the filing of the original bill, the plaintiff filed a supplemental bill reciting further orders of the commission in respect to rates, and asking for the same relief from such orders as had been prayed for in the original bill.

No temporary injunction having been sought, an order was entered by one of the District Judges referring the cause to a special master with instructions to hear proofs and to make findings of fact and law upon the respective issues involved, and to report his findings to the court. Upon the filing of the master's original report and a supplemental report following a re-reference, exceptions were filed on behalf of the several defendants and a waiver of exceptions on behalf of the plaintiff.

No temporary injunction having been sought, and there being under such circumstances no legal requirement for the convening of a statutory court under section 266 of the Judicial Code (28 USCA § 380), no such court was convened, but, the cause being of major importance, and counsel for all parties giving approval thereto, the hearing upon exceptions to the master's report was had before the three judges of the district, all three collaborating in a study of the case, and all joining in this opinion.

An early contention of the defendants was that the plaintiff was not entitled to file its bill because it had not sufficiently complied with the legal requirement that it should make reasonable efforts to exhaust its remedy before the commission before resorting to this court. The conclusion of the master upon the facts and the law that the plaintiff is properly before the court not being challenged by any exceptions on the part of any of the defendants, the report of the master is in this respect confirmed.

The separable contention of the city of Detroit that, in determining the reasonableness of the telephone rates in effect in the Detroit exchange, the property, revenues, and expenses of the plaintiff involved in the furnishing of telephone service in that city should be segregated from those involved in connection with the other exchanges in the state, and that, if that be done, the present rates prescribed by the commission for the Detroit exchange are sufficient to afford a fair return upon the fair value of the plaintiff's property devoted to the furnishing of service in such city, was held by the master to be contrary to established law on this subject, for the reason that, in determining whether rates prescribed by a state for a public utility are confiscatory, the property, revenues, and expenses of such utility ought to be considered on a state-wide basis. With this conclusion we agree, and the master is in this respect confirmed upon the authority of St. Louis & San Francisco Railway Company v. Gill, 156 U. S. 659, 667, 15 S. Ct. 484, 491, 39 L. Ed. 567, 673; Puget Sound Traction Light & Power Company v. Reynolds, 244 U. S. 574, 37 S. Ct. 705, 61 L. Ed. 1325; New York Telephone Company v. Prendergast (D. C.) 36 F.(2d) 54; United Gas Company v. Kentucky Railroad Commission, 278 U. S. 300, 49 S. Ct. 150, 73 L. Ed. 390.

The relations between the plaintiff and the American Telephone & Telegraph Company, particularly the so-called license contract under which the plaintiff paid originally 4½ per cent. and now pays 1½ per cent. of its gross revenues in consideration of various engineering, accounting, and financial assistance given to it by the other contracting party, was the subject of much dispute before the master, as indeed it has been elsewhere in rate cases involving telephone companies, and as it has been between the present litigants before the courts of Michigan. It is clear that as a matter of law the master was right in holding untenable the contention that the plaintiff may not here seek relief because it is not the real party in interest; such contention being made in reliance on the Michigan statute (Comp. Laws 1915, § 12353) providing that "every action shall be prosecuted in the name of the real party in interest." We agree with the master that it is fundamental that a state statute restricting the right to maintain suits in its courts is not applicable to or binding upon a federal equity court, and that no state procedure can affect a substantive federal right. Pacific Telephone & Telegraph Company v. Kuykendall, 265 U. S. 196, 44 S. Ct. 553, 68 L. Ed. 975; Central Vermont Railway Company v. White, 238 U. S. 507, 35 S. Ct. 865, 59 L. Ed. 1433, Ann. Cas. 1916B, 252. The legal effect of the contract between the American Telephone & Telegraph Company and its subsidiaries has already been litigated and adjudicated in the United States Supreme Court adversely to contentions similar to that made by the defendants here. Houston v. Southwestern Bell Telephone Company, 259 U. S. 318, 42 S. Ct. 486, 66 L. Ed. 961; Southwestern Bell Telephone Company v. Missouri, 262 U. S. 276, 43 S. Ct. 544, 67 L. Ed. 981, 31 A. L. R. 807. The Michigan Supreme Court has likewise sustained this contract in City of Detroit v. Michigan Railroad Commission, 209 Mich. 395, 177 N. W. 306; Michigan Public Utilities Commission v. Michigan State Telephone Company, 228 Mich. 658, 200 N. W. 749. Reliance is now placed by the defendants upon the decision of the Michigan Supreme Court in a quo warranto proceeding. People v. Michigan Bell Telephone Company, 246 Mich. 198, 224 N. W. 438, decided in 1929 during the pendency of this suit, in an endeavor to secure the elimination from consideration of the contract percentage as an element of the company's expense of doing business. The master concluded that the opinions of the United States Supreme Court in the cases cited are, until modified by that court, binding upon us, and in this conclusion we agree. In any event, the judgment of ouster by the Michigan Supreme Court in the quo warranto proceeding was predicated upon the company's failure to include in its computation of rate the reasonable value of the services rendered and the facilities furnished by the American Telephone & Telegraph Company. The master found that the reasonable value of the services and facilities furnished is not exceeded by the amount provided by the instrument. This amount is now substantially less than it was at the time of the commencement of this suit, and we see nothing in the record warranting the sustaining of the exception to the master's finding in this respect. We take the same view as the master that the profits of the Western Electric Company, another subsidiary of the American Telephone & Telegraph Company, are not to be considered as affecting the true cost of equipment and supplies purchased by the plaintiff.

The master found on all the relevant facts and circumstances, as disclosed by the record, that, in order to avoid confiscation, the plaintiff was entitled to an annual return of 7 per cent. upon the fair value of the property of the plaintiff in Michigan used and useful in the rendition by it of telephone service within the state, and that any return less than that rate is so unreasonably low as to be confiscatory and invalid. The defendant commission, by its opinion of January 6, 1926, allowed the plaintiff a similar return, although it is now suggested by counsel that less than that would not be unreasonable. We do not suggest that the defendant commission is precluded by such order from now urging a lower rate of return, if the relevant facts as disclosed by the present record would indicate the fairness of some lower rate, giving full consideration, however, to the commission's judgment of the fairness of a 7 per cent. return as of the date of the order. This court in Monroe Gaslight & Fuel Company v. Michigan Public Utilities Commission, 11 F.(2d) 319 (two of the present judges sitting), held that such rate would permit the utility a reasonable return. It was there also a rate approved by the commission. A similar rate was approved as a fair return upon property of like nature in 1929 in New York Telephone Company v. Prendergast, supra, and by the United States Supreme Court in Pacific Gas & Electric Company v. San Francisco, 265 U. S. 403, 44 S. Ct. 537, 68 L. Ed. 1075. Rates of 7½ per cent., or even 8 per cent., have been considered necessary to avoid confiscation in other controversies, but not upon the same type of utility. United Railways & Electric Company of Baltimore v. West, 280 U. S. 234, 50 S. Ct. 123, 74 L. Ed. 390; Consolidated Gas Company of New York v. Prendergast (D. C.) 6 F.(2d) 243. We confirm the...