Allgeyer v. Louisiana
Significance: The Supreme Court first used the freedom of contract doctrine to overturn a state law as unconstitutional.
In order to regulate insurance businesses, Louisiana prohibited its residents from entering into most types of insurance contracts with companies located outside the state. Allgeyer and Company was fined $1,000 for making such a contract with a New York firm. By a 9-0 vote, the Supreme Court ruled that the law unconstitutionally violated the liberty of citizens to enter into business contracts without unwarranted interference by the state. Writing for the Court, Justice Rufus W. Peckham explained that his opinion was based on the concept that substantive economic liberties were protected by the due process clause of the Fourteenth Amendment. Further, having earlier ruled that insurance was not a form of commerce, the Court could not base the decision on the issue of state jurisdiction. Although Allgeyer recognized the authority of states to regulate private companies, it insisted that states must justify the reasonableness of all such regulations. Freedom of contract was to be the rule, with exceptions allowed only when clearly necessary to protect the safety, health, or welfare of the public. Through the next four decades, the Allgeyer precedent provided a theoretical basis for overturning numerous laws that regulated terms of employment such as laws requiring maximum working hours or minimum wages. The Court finally stopped giving special protection for the freedom of contract doctrine in West Coast Hotel Co. v. Parrish (1937).