The Supreme Court ruled in People v. United States that the obligatory codes provision of NIRA was unconstitutional because it tried to control non-interstate trade and that the codes reflected an improper transfer of power from the legislature to the administration. The court also ruled that parts of the Agricultural Adjustment Act were not severable from the codes provision.
In addition, the Court held that the Commerce Clause prohibits Congress from regulating activities that do not involve interstate commerce. Because most industries involved in producing goods for sale or use within a state rely on resources obtained outside the state for their ingredients or components, they are exempt from federal regulation under the clause. The Court stated that this exemption was necessary "to prevent a central government of unlimited powers under the Constitution from transforming itself into a direct government over all matters affecting the people."
Furthermore, the Court held that the Necessary and Proper Clause does not provide an independent basis for the exercise of federal authority because that clause is not self-executing. It can only be executed by implementing legislation such as statutes or regulations.
In conclusion, the Court held that all of the provisions of NIRA were dependent upon one another and could not be separated without destroying their meaning and purpose. As such, the Court found them all unconstitutional.
The United States Supreme Court concluded in May 1935 that NIRA was unconstitutional, in part because the United States Constitution does not allow the federal government authority to regulate non-interstate commerce. The court's decision was rendered by a 5–4 vote, with Chief Justice Charles Evans Hughes writing for the majority and Oliver Wendell Holmes Jr. dissenting. The ruling effectively killed off Congress's attempt at regulating business practices within the country by means of legislation.
The court based its conclusion on the fact that many of the provisions of NIRA were more than reasonable regulations; they were laws governing labor practices, prices, and other matters related to industry. The court also pointed out that many of these provisions were inconsistent with existing law or with each other. For example, one provision allowed the president to create trade associations that could write voluntary code agreements to regulate business practices within their respective industries. The court found this provision to be an improper delegation of power from Congress to the executive branch of the government.
In addition to being unconstitutional, the court also felt that many of the provisions of NIRA were not necessary to save the country from another economic crisis. This shows that the court believed that Congress did not use good judgment when it passed NIRA.
The NIRA was deemed unconstitutional by the Supreme Court in 1935 because Congress had unconstitutionally ceded legislative power to the president to design the NRA rules. Workers were promised the right to organize unions and engage in collective bargaining, and many were urged to join unions. In addition, the act provided for federal assistance to state governments that wanted to establish their own industrial commissions.
In a 6-3 decision written by Chief Justice Charles Evans Hughes, the court ruled that Congress cannot delegate its powers to another branch of government. "We are of the opinion that the delegation by Congress of authority to the President to designate which industries shall be brought within the operation of the Act is an unlawful delegation of legislative power," the majority said.
Justice Louis D. Brandeis wrote a dissenting opinion in which he argued that the act did not violate the Constitution because it allowed Congress to withdraw any law or regulation that interfered with voluntary collective bargaining. He also argued that if Congress can regulate wages and hours for all workers in a particular industry, it can also regulate them for only some of them. This, he claimed, would not constitute a delegation of power because the implication is that Congress can decide what laws to pass regarding specific industries at any time.
A second dissent was filed by Owen J. Roberts, who argued that the act violated the nondelegation doctrine because it gave the president too much power.