THE SOUTHERN PACIFIC MERGER CASES
New Era
There is no question that the final separation of the finances of the Central Pacific from those of the United States government was a matter of very great importance to both parties. The direct result was to place the federal government outside the Central Pacific instead of inside it. Instead of holding the dual relation of creditor and regulating body, Congress now stood as regards the Central Pacific in the same position as with respect to every other railroad in the United States—without interest in the company’s internal finance, but free to act in the interests of the consuming, shipping, and investing public. This was an immense advantage, both from the point of view of the government and from that of the railroad itself.
The Central Pacific reorganization of 1899, moreover, not only accomplished a desirable change in the external relations of the Huntington lines, but it also brought about a change in the relations between the Central Pacific Railroad and the Southern Pacific Company which was of considerable significance. It will be recalled that from 1885 to the time of the reorganization of the Central Pacific in 1899, these relations had rested upon a leasehold interest only. The insecurity of such a connection had been brought forcibly to the attention of the Southern Pacific management during the course of the reorganization proceedings. But as a result of the participation of the Southern Pacific in the reorganization which made possible the repayment of the government debt, that company became possessed of the ownership of the entire outstanding Central Pacific common and preferred stock. While such ownership still lacked the completeness which would have followed the assumption of direct title to the Central Pacific road-bed and rolling stock, it was considered satisfactory, and certainly was an improvement from the Southern Pacific’s point of view over anything which had gone before.
Separated from all financial connection with the government and with its parts joined together by the double tie of leasehold and stock control, the Central Pacific-Southern Pacific system, on the conclusion of the Central Pacific reorganization of 1899, entered upon a new era which contained possibilities of new policies, and of a sounder and more profitable development than it had yet known. There was, too, one additional circumstance which made it easy for the stockholders of the Southern Pacific in 1900 to embark upon new policies—namely, the death of Mr. Huntington. Of the original associates, Huntington was the last survivor. Mark Hopkins had died in 1878, Charles Crocker in 1888, and Stanford in 1893. For ten years, at least, Huntington had been the active manager of the Southern Pacific properties. Personally, he never owned so much as 50 per cent of the Southern Pacific stock outstanding,[591] but by virtue of the support of the Crocker and the Hopkins interests, he exercised almost undisputed control. Huntington had reached the ripe age of seventy-nine years in 1900, and his death was not unexpected. The effect was none the less great, however, for the passing of Mr. Huntington meant the removal of the last of the men to whom the integrity and independence of the Central and Southern Pacific companies were matters of personal pride.
Purchase of Control by Union Pacific
It was the death of Mr. Huntington, to repeat, which now made possible a very important change in the relations which the Central Pacific and the Union Pacific railroads bore to each other. While the Union and the Central Pacific roads both owed their existence to the same federal legislation, and while they had been close business associates for over thirty years by virtue of geographical necessity, both had uncompromisingly maintained their independence. Neither Jay Gould, who was long influential in Union Pacific affairs, nor Huntington himself, were men who cared to form part of organizations which they could not control. Moreover, Huntington distrusted Gould. He once wrote Colton that Gould had scared the Kansas Pacific people so that they had let him, Gould, get into bed with them. For his part, he did not intend to follow the Kansas Pacific example. Gould might frighten him so that he would leave the bed, but never so that he would share it. After Gould’s death in 1890, the same disinclination to combine persisted. The Huntington group was now powerful, and still unwilling to enter a combination which it could not control. The record shows that proposals were made. The Union Pacific, dependent upon the Central Pacific for direct connection with San Francisco, and fearful lest at Mr. Huntington’s death his Southern Pacific stock should fall into unfriendly hands, offered to purchase his shares, or, failing in this, to conclude a permanent alliance. To this offer Mr. Huntington remained indifferent.
Huntington died, however, in August, 1900, leaving his Southern Pacific stock to his widow and nephew in the proportion of two-thirds and one-third, respectively; and both, as had been anticipated, proved willing to dispose of their holdings. Negotiations were carried to completion in February, 1901. Four hundred and seventy-five thousand shares were purchased from the Huntingtons and from Edwin Hawley, the late financier’s most intimate business associate, while enough was secured from other parties through Kuhn, Loeb and Company to make an aggregate of 677,700 shares, at an average price of 50.6146. Market quotations were then in the neighborhood of 45. On February 4, Kuhn, Loeb and Company engaged to deliver to the Union Pacific one month later 72,300 additional shares at the same price, plus 4 per cent interest from February 11, bringing the company’s holdings up to 750,000 shares.
This, in Mr. Harriman’s opinion, was sufficient for control. A year or two later an attempt to force the Southern Pacific to pay in dividends earnings which its managers thought should be expended in improvements led the Union Pacific to acquire 150,000 additional shares. In January, 1910, purchases were renewed for the last time, in view of pending legislation in Congress which promised to make the possession of an absolute majority of Southern Pacific stock desirable; but these purchases ceased after 74,000 shares had been obtained, and 50,000 of these shares were subsequently sold. This concluded the episode. On June 30, 1911, the Union Pacific through the Oregon Short Line owned 1,266,500 shares of Southern Pacific common, or 46 per cent of all outstanding stock—sufficient to give undisputed control.
Harriman System
This purchase by the Union Pacific of a controlling interest in the stock of the Southern Pacific, made the latter a partner in a railroad system of about 18,500 miles, stretching from Omaha, Kansas City, and New Orleans on the east, to Los Angeles, San Francisco, and Portland on the west, and, by means of the Morgan Steamship Line, reaching New York. In addition, the Union Pacific owned a majority of stock in the Pacific Mail Steamship Company, which carried freight and passengers from the Pacific Coast to the Orient and to Panama. Of the total mileage west of the Mississippi-Missouri River and south of the Northern Pacific Railroad, the Harriman management controlled 19 per cent. Finally, through stock ownership in the Illinois Central, the Chicago and Alton, and other lines, and by contract with the San Pedro, Los Angeles, and Salt Lake, it possessed in varying degree influence over connecting and competing roads.
Undoubtedly its association with the Union Pacific increased the prestige of the Southern Pacific Company at the time when the merger took place. The association involved, however, serious dangers, for it placed the credit and the earning power of the Southern Pacific at the disposal of Mr. Harriman for speculative projects in eastern fields, and also it ran counter to a national policy opposed to great accumulations of capital under single control which was presently to become clearly defined. It is true that public hostility toward big business seemed unimportant in 1901 when the Union Pacific and the Southern Pacific first combined, yet the attitude of the courts toward monopoly became a matter for serious consideration by the latter in 1911, ten years after the original merger had taken place, when the federal government attacked the Union Pacific-Southern Pacific consolidation as a combination in restraint of trade under the terms of the Sherman Anti-Trust Act of 1890. A brief discussion of the issues of this extremely important lawsuit is therefore necessary.
There was perhaps some ground for conflicting views with respect to the motive which had induced the Harriman interests to seek control of the Southern Pacific. The obvious explanation of the operation was that the Union Pacific desired to increase its power in the South West. It was stoutly maintained by Mr. Kahn, of Kuhn, Loeb and Company, however, that the desire to control the Southern Pacific line from San Francisco to El Paso was not a motive in the transaction. The necessity of buying the Sunset route, he said, was considered an obstacle and a deterring feature. If a way could have been found to secure the Central Pacific alone, it would have been preferred at the time. The possible reduction of competition was not even considered at any of the meetings of the executive committee at which the subject was brought up. Speaking of the Southern Pacific, Mr. Kahn declared:
We knew it would require a great deal of money to be spent on it, we knew it added thousands of miles to the burden of administration and management. We were very anxious that the Union Pacific should receive as much of the administrative ability and of the railroad genius of Mr. Harriman as it was possible for him to give it, and we were rather disinclined to put upon him any more burden than was necessary to the best development of the Union Pacific; and therefore we, individually, felt that if the Southern Pacific could be separated, keeping only the Central Pacific and the north and south lines in California, and getting rid of the southern part of the Southern Pacific, we would be getting rid of a nuisance.[592]
Arguments of Railroad Counsel
The contention of the Union Pacific Railroad in 1911 was that the consolidation of the Union Pacific and Southern Pacific properties was legal under the Sherman law irrespective of motive, because the two systems were not competing, and that the government was unable to interfere in any case because the consolidation took place through the means of a purchase of stock instead of by contract or agreement between the railroad corporations concerned. On this last point the railroad also argued that, as a matter of law, ownership by one railroad of another’s stock did not constitute control unless a clear majority was held. Control, said counsel, is a matter of power. A minority may direct the operation of a railroad because the majority has confidence in it, but this is lawful. The argument applied to the Southern Pacific case because it was known that the Union Pacific possessed only a minority interest in the first-named company.
Apart from this, counsel contended that a purchase of stock was a thing which the federal government could not control, for the reason that the acquisition or disposition of property was not commercial intercourse. “If any citizen should step into a broker’s office on Broadway, New York, buy some stock in the Pennsylvania Railroad, pay for it, put the certificates in his pocket, and walk out, would he, or the broker, or the broker’s principal, be engaged in commercial intercourse between nations and parts of nations?... Would a state corporation buying those certificates be in any different situation from an individual purchaser, if the State of its domicile had endowed it with corporate power to buy stock?”
Moreover, to continue the argument, though purchases of stock were subject to federal law, they would violate no provisions of the Sherman Act. A purchase or sale is not a contract in restraint of trade, for a contract is executory, implying something yet to be done; while a sale is executed, completed when made and because it is made. Nor is a contract in restraint of trade necessarily unlawful. It must be undue, that is, not entered into with the legitimate purpose of reasonably forwarding personal interest and developing trade. The same may be said of an attempt to monopolize. Every act of competition tends to drive competitors out of business, but competition is legal, in the absence of fraud or duress. It follows that an individual may buy out a competitor, and then another competitor, and so on, and a corporation may do the same thing. “It is evident,” said Mr. Dunne’s brief, “fraudulent, intimidating, coercive, and other like wrongful and unlawful methods apart—that here we touch a fundamental principle of the freedom to buy and sell, of the legal right of the individual in respect to his own property.”
Government’s Contention of Previous Competition
The arguments of railroad counsel in defense of the Union Pacific-Southern Pacific merger rested predominantly, although not wholly, upon points of law such as have been mentioned. Fundamental as some of these were, the main interest in the case for the ordinary student will be found in the elaborate analysis of the competitive relations between the Southern Pacific and the Union Pacific which the government developed in the course of its argument. So far as the writer is aware, no record has ever been presented to any court in which the nature and extent of the competition between two great railroad systems has been so thoroughly discussed.
In establishing the fact that competition had been active between the Southern Pacific and the Union Pacific before the merger of the two companies in 1901, the government insisted upon the fact that the Central and Southern Pacific managers had continuously diverted all the traffic which they could control to the Sunset route so long as they remained independent of Union Pacific dictation.[593] The government examined no less than seventy witnesses—shippers, Southern Pacific employees and ex-employees, and representatives of independent railroad lines. Among those who testified were Mr. Hawley, for nineteen years eastern agent of the Southern Pacific and afterwards a financier of prominence; Messrs. Stubbs, Spence, and Munroe, of the traffic department of the Southern Pacific; Paul Morton, one-time vice-president of the Equitable Life Assurance Company; Mr. Jeffery, president of the Denver and Rio Grande; and Mr. Hannaford, in charge of traffic on the Northern Pacific.
Substantially all these witnesses testified that traffic from the Atlantic seaboard could move to the Pacific Coast either via the Morgan Steamship Line to New Orleans and thence over the Sunset route of the Southern Pacific to San Francisco, or via the trunk lines and their connections to Omaha, thence over the Union Pacific to Ogden and over the Central Pacific to the coast. Although the Southern Pacific was interested in both of these routes, it secured all the revenues from freight moving via the Sunset route, and only 30.1 per cent of the total revenue from freight delivered to it by the Union Pacific at Ogden. In consequence, it used its best efforts to influence freight to travel by the southern line.
Map showing mileage owned in 1913 by the Central Pacific Railway and the Southern Pacific Railroad.
The government showed by the evidence of shippers that freight was actually solicited in competition between the two Pacific companies. The Southern Pacific, it appeared, took traffic at New York rates from as far west as Buffalo and Pittsburgh, not including those cities, and from as far south as Norfolk. Not only this, but the Union Pacific was not altogether restricted to the route via Ogden. By diverting freight at Granger and sending it north to Portland over the Oregon Short Line and the Oregon Railroad and Navigation Company, it could affect the transcontinental rate in two ways. In the first place, it was physically possible for traffic to move from Portland to San Francisco by boat; and in the second place, a slight reduction in the rate to Portland compelled a cut to every Pacific terminal point in order to maintain these different cities in the same relative position for the distribution of eastern goods. As Mr. Stubbs expressed it, “Let the rate be cut on the Great Northern, and it goes down to the Gulf of California.”
Mention may also be made of the route via the Isthmus of Panama, in which the Southern Pacific had an interest by virtue of its control of a steamship line from San Francisco to Panama. The business was not large, but in so far as any moved this way it was in competition with the rail lines via Ogden.
Competition between Other Points
In addition to competition between the Southern Pacific and the Union Pacific on business between the Pacific Coast and points east of the Missouri River, the government succeeded in showing the existence of competition between the Atlantic seaboard and Colorado and Utah common points. A good many sheep wintered in the desert west of Salt Lake, and in the spring moved to the summer ranges in Idaho where they were sheared. The railroad near which the shearing took place secured the outbound wool, and for this reason the Union Pacific, Southern Pacific, and Rio Grande Western offered every attraction possible in order to influence the movement of the flocks. The Union Pacific for instance, at one time paid a head tax which Wyoming levied on all sheep brought into that state. The Oregon Short Line purchased salt on behalf of the sheep owners, carried it to Idaho, and collected the purchase price only when the salt was delivered. In the same way there was competition in respect to cattle and horses which wintered in southern Idaho and northern Nevada and moved east in the spring.
In return for the wool, cattle, hides, etc., shipped east, there were brought in shipments of miscellaneous merchandise, dry goods, machinery, and the like. When the Union Pacific handled the business, the freight moved from New York to Norfolk or Newport News, thence by rail to Omaha and over the Union Pacific lines to destination. When the Southern Pacific took it, the freight went by Southern Pacific steamers to New Orleans or Galveston, and thence over railroads controlled by the company to Fort Worth, Texas, where it was given to connecting lines for delivery at destination. The rate was the same either way, but the rivalry between soliciting agencies was intense.
Still again, there was competition between Portland and Utah and Colorado common points, including certain points in Nevada. Portland enjoys a fairly direct route over the Oregon Railroad and Navigation Company’s tracks to Huntington, and from there over the Oregon Short Line to Granger, a few miles east of Ogden. The Southern Pacific runs south from Portland to Roseville, near Sacramento, and thence east through California, Nevada, and Utah to Ogden. The distance over the one route is 945.3 miles, and over the other 1,487.3 miles. The Roseville route has nearly twice the rise and fall of the route via Huntington, while the curvature also is greater. In a calculation made by Mr. Kruttschnitt, he estimated that the direct line haul was equivalent to 3,498 miles of straight level track, but that the haul via Roseville was equivalent to 6,164 such miles. The evidence nevertheless showed that some business, especially lumber, had moved the long way round before 1901. Traffic had also moved via the Oregon Short Line and Central Pacific to points as far west of Ogden as Wells, Nevada. How much all this amounted to was not clearly shown—at best it was probably not a great deal. After the consolidation of the Union Pacific and Southern Pacific in 1902, through rates with the Oregon Railroad and Navigation Company via the Shasta route were discontinued and competition ceased.
Other kinds of competition included competition for traffic between San Francisco and Portland, between San Francisco and points in Montana and Idaho, and competition for Oriental traffic destined to points in the United States east of the Missouri River. In short, the voluminous evidence thus summarized showed that active competition had existed of almost every conceivable kind. There had been competition of parallel routes between the same termini, of parallel or roundabout routes between different termini, of roundabout routes entirely controlled by the competing lines, of the routes in which the Union Pacific and Southern Pacific were links only in chains of connecting and independent roads, and finally there had been competition in cases where one competitor had to rely upon the other for a greater or less proportion of the haul.
Dissolution of Merger
This demonstration that the Union Pacific and the Southern Pacific had competed with each other before the merger of 1901, followed by easily secured evidence that the competition had ceased after the merger, was sufficient to persuade the Supreme Court to grant the government a decree, in spite of the protests of the defendant railroads.[594] The effect upon the Southern Pacific was of course important. A drastic reorganization of the affairs of the company was called for in order to take the Southern Pacific out of the control of the Union Pacific and to re-establish the conditions of the Huntington régime. Such a reorganization presently occurred. While the details of this transaction are not of present significance, it may be said, in brief, that after several abortive attempts the Union Pacific disposed of all its Southern Pacific stock under a reorganization plan dated May, 1913, delivering some of this stock to the Pennsylvania Railroad in exchange for stocks of the Baltimore and Ohio Railroad, and selling the rest to the general public.[595] Henceforth the rail lines of the Southern Pacific were not to reach east of New Orleans and of Ogden.
Attack on Control of Central Pacific
When the United States Supreme Court declared that the Union and Southern Pacific systems must be separated, it merely restored the latter to a condition of independence. The United States Department of Justice was of opinion, however, that the logic of the decision went further than this, and, encouraged by its preliminary success, it took the dramatic step of attempting to separate the Southern Pacific and the Central Pacific companies by the application of the same principles which had torn the Southern Pacific and the Union Pacific apart. The new suit was known as the United States v. Southern Pacific Company, and, like the old, was brought under the Sherman law.[596]
The principal points in the case of the United States v. the Southern Pacific Company were as follows. A glance at the accompanying map will show that the Central Pacific Railroad, from Ogden to Sacramento, and the Western Pacific, from Sacramento to Oakland, were in practical effect but the western end of a route of which the Union Pacific formed the eastern part. So far as competition was concerned, all parts of the route were on a parity. If the Union Pacific competed with the Southern Pacific when it hauled eastern freight from Omaha to Ogden, the Central Pacific did likewise when it hauled the same freight from Ogden to Sacramento. If it would promote competition to place the Southern Pacific and the Union Pacific in separate hands, the same could be said of the Central Pacific and its southern neighbor. So much is reasonably clear even from a cursory examination of the facts.
In at least two important respects, however, the relations between the Southern Pacific and the Central Pacific differed from those between the Southern Pacific and the Union Pacific. These points were emphasized in the briefs of counsel, and formed the basis of the companies’ defense. Unlike the Union Pacific, the Southern Pacific had obtained control of the stock of the Central Pacific at a time when and under circumstances in which the federal government was an interested party. If the details of the reorganization of 1898 are recalled, it will be remembered that the government then accepted notes in satisfaction of its claims against the Central Pacific which were secured by mortgage bonds carrying a Southern Pacific guaranty. This guaranty, in turn, was offered by the guaranteeing company as one element in a series of transactions which included the acquisition of Central Pacific stock by the Southern Pacific in exchange for the latter’s own stock certificates. The implications of this episode were mentioned when the transaction was described. While it certainly gave no permission to the Southern Pacific to violate the Sherman or any other law as a consideration for assisting the Central Pacific to pay its debts, the government did lay itself open to the charge of having at one time approved and enjoyed the fruits of a transaction of which it later complained.
The more important distinction between the later and the earlier merger cases in which the Southern Pacific was involved, lay in the circumstances that the combination of the Union Pacific and the Southern Pacific had been a recent matter, while the relations between the Central Pacific and the Southern Pacific had begun almost as soon as the latter corporation had been organized. In discussing the construction of the Southern Pacific, the remark has been made that the two enterprises were originally but different manifestations of the activities of a single group of men. The first statement in the brief of Mr. Herrin, chief counsel for the defense in the Central Pacific case, was similarly that: “This case does not involve any combination of competitive units, or any combination at all, for the Southern Pacific and Central Pacific lines were projected and built and have been operated since their organization as one property.”[597] These two characterizations indicate a difference of considerable significance between the Union Pacific and the Central Pacific cases.
Final Decision Doubtful
It must be pointed out, nevertheless, that in spite of the long and close association between the Central and the Southern Pacific railroads, there were certain features in this controversy which made it difficult to forecast the final decision of the Supreme Court of the United States. Counsel for the railroad company in the Union Pacific case dwelt much upon legal technicalities. But in the Southern Pacific case the forms were all opposed to the company’s contentions. For one reason or another, doubtless largely for political effect, the associates had always scrupulously insisted upon the separate identity of the two companies concerned. The corporations had been made to appear to deal with each other at arm’s length, and there had even been much discussion of the relative profitableness to each of the contracts concluded between them.
Nor was the matter one of form alone, as we have seen in earlier chapters of this study. While the construction of both roads was financed by the same parties, after 1880 the associates disposed of the greater part of their Central Pacific holdings. The Southern Pacific and the Central Pacific were still held together by lease relations, it is true, but they then became separate, not merely in organization but also in ownership. The separate ownership continued until 1899, when the new arrangements were made to undo which the government brought suit. It followed that counsel for the defendant railroads were in the position of defending a combination of legally distinct corporations, owned by different parties, with no connection between them save through the minority holdings of individual stockholders and through the very arrangements of which complaint was made. As an answer to this indictment, the circumstance that the same parties had found their profit in building each of the defendant lines could hardly be given weight, nor was the fact that the original consolidation antedated the Sherman law important.
The suit of the United States v. Southern Pacific Company was argued before the circuit judges of the Eighth Circuit sitting at St. Louis in December, 1915. The decision of a majority of this court was rendered in March, 1917, and was unfavorable to the government’s contention.[598] The grounds of this opinion were not brought out with complete distinctness, but two judges held that there had never been a “natural and existing competition” in interstate commerce between the Southern Pacific and the Central Pacific. Nearly half of the text of the decision, moreover, was devoted to a description of the financial settlement of 1899, in which Congress appeared to have treated the control of the Central Pacific by the Southern Pacific as consistent with the statutes of the United States. Judge Carland dissented from the conclusions of his colleagues in a carefully prepared opinion. The case was appealed, and after full oral argument, was submitted to the Supreme Court on April 19, 1921. An early decision is expected. Meanwhile, the continued close relations between the Central Pacific and the Southern Pacific are approved by public sentiment upon the Pacific Coast, while the continuance for the present of common control of the two companies certainly avoids many practical difficulties.
OIL AND TIMBER LAND LITIGATION
Oil Land Ownership
The discussion in the previous chapter dealt with litigation under the Sherman law which checked the absorption of the Southern Pacific by the Union Pacific system and profoundly altered the relations of these two companies to each other. Our narrative will close with the mention of two other suits or groups of suits which concerned, the one, the possession of certain oil properties in southern California, and the other, the administration of lands—mainly timber lands—granted to the Oregon and California Railroad in the North by federal legislation of 1866 and 1869. The Southern Pacific Company took part in both of these controversies as a principal interested party.
The oil lands which until recently belonged to the Southern Pacific Railroad lay principally in the West San Joaquin fields in southern California. They covered an area of between 160,000 and 170,000 acres. In 1917, a committee of the California State Council of Defense estimated that the Southern Pacific and its subsidiary companies controlled 26.4 per cent of the total output of the state, although much of the oil so controlled was not produced upon the company’s own land. The actual production of oil by the Southern Pacific Company in June, 1918,[599] was 49,679 barrels out of 282,672 barrels of production by all companies in the state, or a little less than 18 per cent.[600] No later statistics of production by companies have been made public. In June, 1920, however, the Southern Pacific Land Company owned 19.38 per cent of all the proven oil land in California, and in addition the Southern Pacific Company held a controlling interest in the Associated Oil Company, also a large producer.
Unquestionably the Southern Pacific oil lands are valuable. A witness in one of the recent cases testified that he had told Mr. Huntington in 1893 that the railroad oil lands were worth more than the entire Southern Pacific Railroad, while it is common report that the value of the properties may run into the hundreds of millions of dollars. All this is, moreover, recent. The discovery of oil in large quantities was first made in southern California in the Kern River field, near Bakersfield, in the spring of 1899. This was followed by discoveries in the so-called McKittrick and Sunset fields, and by an oil boom of extraordinary proportions. In so far as the railroad owns oil lands, it has therefore recently secured an unearned increment which is not only of great size, but of a character entirely unanticipated by legislators of earlier days. This has given rise to controversy, in which the government has questioned the railroad title.
The peculiarity of the oil land litigation, and the reason why the federal government is involved, is found in the fact that the railroad land is mostly land-grant land, lying within the limits laid down by the Act of 1866 from which the Southern Pacific Railroad took its life. It follows from this that the railroad title was affected by certain reservations in the land-grant legislation, such as that of exempting mineral lands from the operation of the grants. The government offered to convey certain land to the railroad free of charge when it undertook to stimulate railroad building in California, but it did not include mineral land in this offer, except coal land and iron land. Not only this, but the exception of mineral lands was repeated in the patents later issued by the Department of the Interior, and in such patents the words, “excluding and excepting all mineral lands should any such be found in the tracts aforesaid,” were used, making the exemption apply to future discoveries as well as to discoveries occurring before the patents were issued. Evidently the legislature and the land office intended to limit the donations to the Southern Pacific by excluding unknown and immeasurable increments of value in so far as this might be done. Coal and iron were left, for the reason that these minerals were intimately connected with the construction and operation of the road.
Test Case
In 1910, one Edmund Burke filed a bill in equity in the Circuit Court of the United States for the Southern District of California, in which he challenged the title of the railroad to oil lands in an area covering five sections in Fresno County, California. This was a test case. Disregarding minor points, the larger questions at issue were the following:
The first question was as to whether or not oil was a mineral. The plaintiff said that it was a mineral, the defendant said that it was not. If oil was a mineral, then the railroad could not obtain title under the land-grant laws to land which was known to contain oil at the time the patent was applied for. If oil was not a mineral, there was no limitation. Now matters of definition always cause trouble. The word “mineral” is sometimes associated with metallic ores, a notion which would not include a resultant from the decomposition of organic matter such as California petroleum. Indeed, the Secretary of the Interior once held that the word “mineral” embraced only the more precious metals, such as gold, silver, cinnabar, etc., although on rehearing this view was rejected. Common usage includes more than the metallic ores, and the courts have considered as mineral such articles as clay, coal, and marble, and even deposits such as guano.[601] When the matter was presented to it, the United States Supreme Court followed common usage and held that petroleum was a mineral.[602]
The second point had to do with the effect of a patent. It was shown that the Southern Pacific had received patents as early as 1892 to lands which ultimately proved to contain petroleum, and there was dispute as to whether this subsequent discovery invalidated title to property once patented. On this point, fortunately, the law was clear. Quoting the Supreme Court:
The settled course of decision ... has been that the character of land is a question for the Land Department, the same as the qualifications of the applicant and his performance of the acts upon which the right to receive the title depends, and ... [that] when a patent issues it is to be taken upon a collateral attack, as affording conclusive evidence of the non-mineral character of the land and of the regularity of the acts and proceedings resulting in its issue, and upon a direct attack, as affording such presumptive evidence as to require plain and convincing proof to overcome it.
The Supreme Court therefore held that the Southern Pacific was secure in its possession of lands to which it held patent, unless fraud could be shown, and this irrespective of any saving clause in the patent itself, and without regard to the nature of the investigation by which the Land Office had originally satisfied itself as to the character of the land.[603]
Elk Hills Suit
The effect of the rulings of the Supreme Court in the test case of Burke v. Southern Pacific was not only to cause the dismissal of the pending suit, but to make it evident that the government must show fraud on the part of the railroad company before the company’s title could be disturbed. The holding of the court that oil lands were mineral lands was, however, an important victory for the government. It was under these circumstances that the federal government instituted a fresh series of suits. Of these, one suit called in question the title of the Southern Pacific to some 6,109 acres of land in the Elk Hills region of southern California, held under a patent issued December 12, 1904. The other suits attacked the legality of the railroad’s possession of substantially all its remaining oil lands, obtained at various dates from 1892 to 1902. The value of the lands involved in the second proceedings was estimated by the government as in excess of $421,000,000. Counsel alleged that the company’s land agents, Messrs. Eberlein and Madden, had accompanied the lists, which they had submitted to the government for patenting, with affidavits stating that the lands were not mineral lands, although both agents knew at the time the patents were applied for that the lands in question contained oil. This charge, if substantiated, amounted to a showing of fraud. In both cases the government sought to show that the presence of oil upon the lands sought was a matter of common knowledge, and that there was reason to believe that the company was fully cognizant of the facts.
Most of the sensational testimony taken in the oil land cases appeared in the so-called Elk Hills case. Mr. Eberlein here figured as the land agent for the Southern Pacific. Omitting again all relatively unimportant detail, it appeared that Mr. Eberlein had filed an affidavit with the Land Office in November, 1903, in which he swore to two pertinent facts: first, that he had caused the lands for which the railroad applied to be carefully examined by the agents and employees of the company as to their mineral or agricultural character; and second, that to the best of his knowledge and belief, none of the lands returned in the list were mineral lands. These statements had been repeated in September, 1904, when a substitute list was filed.
In the face of these sworn assertions, the United States Supreme Court later found that Mr. Eberlein had not examined the lands in question, nor had he caused them to be examined by others. Indeed, Eberlein had even objected to the examination of the lands. He had protested verbally to Judge Cornish, vice-president of the Southern Pacific Company against examination, and to Mr. Markham, its general manager, and in 1908 he had summed up his repeated objections by writing to the assistant land agent of the company as follows:
The examination of our S. P. lands not yet patented by our oil experts must be stopped as information that they may obtain or give as to mineral character prior to patent will forever prevent our getting title.... Mr. Dumble (the company’s geologist) and his men should not be furnished by us with any data whatever except as to patented lands. For reasons above given such information will be embarrassing to them and us and may make them witnesses against this company in mineral contests hereafter.[604]
The most that can be said for such an epistle is that it indicated an anxiety to keep within the letter of the law.
Government Victory and Defeat
Besides falsely swearing that he had made an examination of the lands involved in the Elk Hills case, Mr. Eberlein made the positive statement in his affidavit that none of the lands covered by his application were mineral lands, in so far as he was informed. Now in this matter it is clear that the evidence before Mr. Eberlein, such as it was, pointed to a mineral and not to a non-mineral content of the land in question. This evidence consisted primarily in the results of work of Southern Pacific geologists in the general region of which the Elk Hills were a part, and in the presence there of a certain number of producing wells. It is on record that in 1902 the Southern Pacific withdrew from sale many of its patented lands which surrounded or were adjacent to the land in controversy “because they were in or near oil territory.” The following year the company decided to lease such of its lands as were considered valuable for oil purposes to a subsidiary company—the Kern Trading and Oil Company. The proposed lease was laid before Eberlein in August, 1904. He at once objected. In a letter to C. H. Markham, general manager of the Southern Pacific Company and second vice-president of the Southern Pacific Railroad Company, Eberlein set forth (September 10, 1904) the reasons for his opposition in these words:
In addition to this there is a very urgent reason for delaying the execution of these papers. We have selected a large body of lands interspersed with the lands sought to be conveyed by this lease and which we have represented as non-mineral in character. Should the existence of this lease become known, it would go a long way toward establishing the mineral character of the lands referred to and which are still unpatented.[605]
A similar letter addressed the week before to Judge Cornish in New York contained arguments of a similar nature. The protests were heeded, and the leases of lands in the McKittrick and Coalinga districts were held up. It was recognized, moreover, that the matter was a delicate one, and the papers relating to the proposed leases were placed in a special and private file separate from the general file of the land department of the railroad company. Summing up the evidence in the case, the United States Supreme Court later observed that the natural, if not the only, conclusion from the facts was that in pressing the selection the officers of the railroad company were not acting in good faith, but were attempting to obtain the patent by representing that the lands (covered by the Elk Hills litigation) were not mineral when they believed the fact was otherwise.[606] The decree of the United States Supreme Court requiring the cancellation of the railroad patents to the 6,000 acres of land in the Elk Hills district was given on November 17, 1919.
Three months before this Supreme Court decision, Judge Bledsoe, in the District Court for the Southern District of California, dismissed a suit challenging title to some 165,000 acres of land in the oil territory on the west side of the San Joaquin Valley.[607] This suit represented a consolidation of the oil land suits other than those included in the Elk Hills case. Perhaps 156,000 of the acres under litigation were claimed by the railroad. Cases are seldom alike, and the Bledsoe case differed from the Elk Hills controversy in several important details. In this case, for example, it appeared that the railroad had sold lands in the disputed territory at agricultural prices—a policy which it presumably would not have followed had it believed that these lands had mineral value. There was also lacking much of the direct evidence which had helped to demonstrate the fact that Mr. Eberlein had distorted the truth in his representations to the government. On the other hand, the refusal of Judge Bledsoe to believe that men like the general manager of the Southern Pacific, its land agent, and its vice-president would lend themselves to fraud, is less impressive after a perusal of the Elk Hills material. The government has announced that it will not appeal from Judge Bledsoe’s ruling—a decision which, on the face of things, appears to be a mistake.
Sale of Oil Lands
The most recent development in connection with the Southern Pacific oil lands is associated with the organization of the Pacific Oil Company. The formation of this company was announced in March, 1921. It purchased from the Southern Pacific Land Company, for the sum of $43,750,000, about 259,000 acres of lands in California, most of which were proven oil lands, and 200,690 shares (50.48 per cent) of the capital stock of the Associated Oil Company. This was the whole of the Southern Pacific interest in the oil fields. The Southern Pacific Company provided the funds for the purchase by subscribing to 3,500,000 shares of the Pacific Oil Company at $15 per share, but the railroad disposed of its newly acquired shares by extending to holders of its own stock the right to purchase Pacific Oil stock at $15 per share, one share of stock of the new company for each share of the Southern Pacific Company stock so held. This transaction will transfer the ownership of the railroad oil lands from the Southern Pacific Company to the stockholders of that company as fast as the subscription rights are taken up. Commenting on the plan for the separation of the oil and railroad properties, President Sproule observed that the plan was simply responsive to the spirit of the times. It seems likely, however, that it will have the additional result of preventing further action tending to disturb the railroad title. The president of the Pacific Oil Company is Mr. Shoup and its directors are men of influence in the East.[608]
Timber Land Grant
This summary discussion of the oil land litigation in California brings us to the last of the great cases with which the Southern Pacific has, in recent years, been concerned, namely, to the dispute between the federal government and the Oregon and California Railroad over the administration of timber lands in Oregon. By the Act of July 25, 1866,[609] Congress authorized the California and Oregon Railroad to build a railroad and telegraph line in the state of California from a point on the Central Pacific in the Sacramento Valley to the northern boundry of the state. The same act empowered “such company, organized under the laws of Oregon, as that state should designate,” to construct a railroad from Portland, Oregon, to a junction with the California and Oregon upon the Oregon-California boundary line. The legislature granted to the company mentioned a right-of-way, and in addition ten alternate sections of public land on each side of its track.
At the time Congress acted, there was no company in Oregon in condition to become the beneficiary of the grant. In 1867, however, the Oregon Central Railroad Company of Salem was incorporated, and the following year this railroad received the needed legislative designation. It appears that there was some dispute between the Oregon Central of Salem and another organization known simply as the Oregon Central Railroad Company, and that the doubt as to which of these two was entitled to receive the granted lands in Oregon delayed the filing of the necessary formal assent to the terms of the Congressional Act of 1866. In 1869, therefore, Congress extended the time for the filing of the required assent.[610]
At the time this privilege was accorded, however, Congress introduced an important limitation to its previous action, by providing that the lands granted by the Act of 1866 should be sold to actual settlers only, in quantities not greater than 160 acres to one purchaser, and for a price not exceeding $2.50 per acre. So amended, the Act of 1866 was accepted by the Oregon Central, and on March 16, 1870, the rights acquired were assigned to the Oregon and California Railroad. In 1887, the Oregon and California was absorbed by the Southern Pacific.
As a result of the legislation described, the Oregon and California Railroad Company received a total grant estimated at 3,821,902 acres, which it held subject to the requirement that it should dispose of the property to actual settlers, in small lots, at prices not exceeding $2.50 per acre. Now the simple facts with regard to the company’s administration of this estate are that it did not limit the price which it charged to $2.50 per acre, that it took no pains to ascertain whether or not, purchasers of its lands were actual settlers, and that it sold in whatever quantities were convenient from the point of view of revenue. Between 1894 and 1903, to take the period when the company neglected its obligations most grossly, there were sales at prices ranging from $5 to $40 an acre, and in amounts which in one instance reached the figure of 45,000 acres to a single purchaser. Out of 820,000 acres sold during this period, approximately 370,000 were sold to 38 purchasers in quantities exceeding 2,000 acres to each purchaser, and at prices higher than $2.50. These sales, according to the Supreme Court, were to persons other than actual settlers, and for other purposes than settlement. On January 1, 1903, the company reached the climax of its disobedience to law by withdrawing all of its lands from sale and refusing to accept offers for any of them, asserting that they were timber lands and unsuitable for settlement. In 1911 there were 2,360,492.81 acres unsold, of which 2,075,616.45 had been patented. Only a comparatively small part of the grant, that is to say, had been disposed of.
Land Rebought by Government
It is somewhat amazing that so clear a violation of the terms under which the Oregon and California held its land grant should have passed unchallenged. Nor can the obstinacy of the company’s defense fail to excite surprise. When the Attorney-General of the United States sought to have the Oregon and California grant declared forfeit[611] because of the company’s disregard of the terms of the law, it proved necessary to litigate for eight years, to take seventeen volumes of testimony, to consider 2,500 pages of briefs, and to obtain three court decisions and the enactment of a new law before the matter could be finally set at rest. It is unnecessary to go into the elaborate record, or the arguments by which counsel sought to demonstrate that the restrictive provisions of the Act of 1869 were beyond the power of Congress to enact, or to discuss the contentions that breaches of the law had been condoned and that the covenants were not in any case enforceable. The case was considered by the Circuit Court of the United States for the District of Oregon in 1911,[612] and by the Supreme Court of the United States in 1915.[613] Both courts pronounced the restriction on the alienation of Oregon and California lands binding.
The controversy was at last settled by a new Act of June 9, 1916, in which Congress resumed possession of the unsold lands appertaining to the grant, while appropriating the sum of $2.50 an acre for these lands as a payment to the railroad company.[614]
Under the terms of the act, the Secretary of the Interior was directed to ascertain the exact number of acres of land patented to the railroad company, and the number of acres of unpatented land which the company was entitled to receive in the future according to the original grants. The Secretary was then to calculate the value of all this land at $2.50 per acre, and to pay over the amount so ascertained to the railroad company from time to time from the proceeds of future sales of the lands or of the timber upon it, after deducting from the valuation the amounts already received by the railroad and by its predecessors in interest. The intent was clearly to allow to the railroad $2.50 per acre of the original grant, no more and no less, taking full account of the sums already received by the company. The constitutionality of the law was later upheld by the Supreme Court.[615]