Transcript

IN THE SUPREME COURT OF THE UNITED STATES

ARKANSAS LOUISIANA GAS COMPANY, Petitioner, v. FRANK J. HALL ET AL.

No. 78-1789

April 20, 1981

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 11:09 o'clock a.m.

APPEARANCES:

REUBEN GOLDBERG, ESQ., Goldberg, Fieldman & Letham, 1700 Pennsylvania Avenue, NW, Washington, D.C. 20006; on behalf of the Petitioner.

JAMES FLEET HOWELL, ESQ., Wiener, Weiss, Madison & Howell, 411 Commercial National Bank Bldg., Shreveport, Louisiana 71161; on behalf of the Respondents.

PROCEEDINGS

MR. CHIEF JUSTICE BURGER: We'll hear arguments next in Arkansas Louisiana Gas Company v. Hall. Mr. Goldberg, you may proceed when you are ready.

ORAL ARGUMENT OF REUBEN GOLDBERG, ESQ., ON BEHALF OF THE PETITIONER.

MR. GOLDBERG: Mr. Chief Justice and may it please the Court:

This case involves a suit filed by the respondents in the State Court of Louisiana with respect to a contract that is on file with the Federal Energy Regulatory Commission as the respondent's Rate Schedule No. 4. In that suit they sought damages which were in fact a claim for a retroactive rate increase under the Natural Gas Act. The respondents were successful in that suit and it is petitioner's position that the decision of the court below violated the Filed Rate Doctrine, violated the primary jurisdiction of the Commission and its exclusive rate jurisdiction and Commission regulations. And I should say to the Court that these positions were steadfastly maintained through each of the courts through the State of Louisiana, the trial court as well as the courts of appeal.

The contract between petitioner and respondents provides for the sale by respondents to petitioner at the wellhead of the entire stream of wet gas from respondents' wells located in the Sligo field in North Louisiana. I should say at this point that gas is known as wet gas when the gas stream contains liquefiable hydrocarbons. These liquefiable hydrocarbons exist in the gas stream in a gaseous state and they are extractable through a simple process at a processing plant at the surface. When these liquefiable hydrocarbons have been extracted, the gas stream is known as dry gas or residue gas, and the terms are used interchangeably.

Now, to return to the contract which is at the seat of this case, the negotiations leading to its execution were quite lengthy. The respondents wanted a provision included in the contract which is known in the industry as a favored nation provision. They wanted one that would escalate fixed prices that had been agreed to in the contract if any buyer of gas in the Sligo field paid any seller a price higher than the fixed prices in the contract. They also wanted the favored nation provision to apply to liquefiable hydrocarbons and to condensate, which is a form of crude oil that at the surface without any processing drops out; it becomes a liquid and drops out in the separator.

The favored nation provision that finally emerged when the petitioner rejected these proposals of respondent is the one that appears in the contract. It's in the Joint Appendix at page 99. It does not apply to hydrocarbons and condensate and is triggered only by the purchase of gas by petitioner in the Sligo field from -- and I quote these words, because they are important -- "another party seller" at a price higher than the fixed prices established in the contract for the wet gas.

The favored nation provision provides that in determining whether a given price is in fact a higher price, the provisions of the contracts being compared bearing on that determination such as point of delivery, delivery pressure, are to be compared and adjustments made for the differences between them. Only when the differences are found and adjustments are made for them can it be known whether in fact the favored nation was triggered.

Petitioner also agreed to a proposal that had been made by respondents for the elimination from the contract of payments for extracted liquids in return for an increase in the price for the gas of 1/4 of a cent.

The favored nation provision during the negotiations received so much attention and was so carefully dealt with by the petitioner that it actually became thereafter the model for petitioner's favored nation provisions in contracts. In 1954, after this Court in the Phillips Petroleum case had declared that producers of natural gas selling gas in interstate commerce were subject to the Natural Gas Act, the respondents filed a contract and secured from the Commission certificates of public convenience and necessity to make the sales as required by the Act. And as I have said before, at the outset, it's the respondents' Rate Schedule No. 4 on file with the Commission.

Some years later, in 1961, the petitioner acquired an interest in a United States Government mineral lease of lands in the Sligo field, the very same field. Petitioner, having acquired that interest, thereby became obligated to make royalty payments to the United States for the value of the extracted liquid hydrocarbons and condensate and for the value of the residue or dry gas. The lands involved in the government lease had been withheld for a time by the Government from production and development but it developed that adjacent landowners were draining the minerals from underneath the Government lands and the Government opened them up to development and that produced the government lease.

And it is interesting that the Hall group -- I refer to the respondents sometimes as the Hall group -- had land adjacent to the government lease.

Petitioner's acquisition of the interest in the government lease was not concealed from anyone. The petitioner had no reason to keep the matter hidden; it did not keep it hidden; and it could not have been kept hidden from knowledgeable, active oil and gas men such as existed in the Hall group.

Additionally, the papers assigning the interest to the petitioner and the approval of the assignment was a matter of public record. It was recorded in the Recorder's Office of Bossier Parish, and actually, in the 1962 report to its stockholders, the petitioner discussed in that report its interest in the lease and its activities thereunder. And I should say right here that despite the charges of fraudulent concealment by the respondents in the lower courts, the trial court made no findings on the point. The intermediate court of appeal, the Court of Appeal of Louisiana, found that there was no fraudulent concealment and that finding was affirmed by the Supreme Court of the State of Louisiana, and the fact is there was no concealment of any kind of the facts with respect to the lease, fraudulent or otherwise.

QUESTION: Well, but the respondents' position as I understand it, Mr. Goldberg, is that Arkla had a duty under the contract to report that they were getting a higher price from the United States than they were getting from the respondents. That's their position, isn't it?

MR. GOLDBERG: I'm not sure that they expressly stated that claim but our position is --

QUESTION: I don't find the complaint here -- I understood from the briefs that, in effect, what they're saying is, you breached the contract by not formally advising them you were getting a higher price from the United States than you were getting from them, and that this is a breach of contract.

MR. GOLDBERG: No, their claim of a breach of contract is that the royalty payments made under the government lease constituted a purchase from a party seller, the Government, of gas, and that therefore, since that's the language of the favored nation provision, and they claim that it was a higher price than the fixed prices in the contract, and therefore, they said, the favored nation provision was triggered.

QUESTION: Well, as I recall it, you argue in the briefs that purchase, you didn't realize that the contract provision came within purchase until that was decided in '78, wasn't it, or something like that?

MR. GOLDBERG: No, it's our position that settled Louisiana law as well as federal law says that a royalty payment is not a purchase of gas. The reason is that a --

QUESTION: But in 1978 did not the Louisiana courts construe the word "purchase" as including what happened here?

MR. GOLDBERG: Oh, yes, yes.

QUESTION: And you didn't know about it, you say, until 1978? But wouldn't that be a defense to a contract action?

MR. GOLDBERG: Our defense to the contract action --

QUESTION: Well, I know, you're arguing that primary jurisdiction, they have no jurisdiction to do this at all. But if it's a simple contract claim, breach of contract claim.

MR. GOLDBERG: Well, we also --

QUESTION: And you had that defense.

MR. GOLDBERG: We also say that under the terms of the contract, the favored nation provision was not triggered because the royalty payments did not constitute a purchase and the decision of the court below was in error. In actual fact, Mr. Justice Brennan, the Court of Appeal agreed with the petitioner that under settled state and federal jurisprudence the royalty payments did not constitute a purchase, but it went on, nevertheless, to hold, that there was a triggering by reason of the royalty payments, we say, and that decision ignored the commonly understood and accepted usage of the phrase "purchase" --

QUESTION: Well, I know, but is that anything we can review?

MR. GOLDBERG: What we've asked you to do here --

QUESTION: What's the federal question involved in that?

MR. GOLDBERG: Whether the award of the court below violated the Filed Rate Doctrine, violated the primary jurisdiction and exclusive rate jurisdiction of the Commission, and regulations of the Commission.

QUESTION: But if the respondents had known that the favored nation clause was triggered, if you had told them so, or at least had given them the information on which they could conclude that, I take it between '62 and '72 they might have gone to the federal commission and got approval of the rates.

MR. GOLDBERG: I don't know what they would have done but that's what they should have done. That's what they should have done.

QUESTION: Well, maybe they -- well, they didn't know, they didn't know; you didn't tell them.

MR. GOLDBERG: And even if they didn't know it and found out for the first time in '74 -- let's assume that for the sake of argument -- their proper course of action was to go to the Commission. The fact of the matter is, they finally did go to the Commission recently asking for a waiver of the filing requirements, recognizing that they were in jeopardy without that waiver. So that if they had asked for the waiver at that time, at any time earlier than 1974, they would have been confronted by the same proposition, that the Commission has denied on the merits that request for a waiver in a very well reasoned order which is an appendix to our reply brief.

But I think we started out on the proposition as to whether they had made some other claim and I don't recall that they made any other claim other than the royalty payments constituted the purchase.

QUESTION: Do you contend, Mr. Goldberg, that the reasoning of this recent order would have applied if they had asked, or if they'd filed back in 1962 or '63?

MR. GOLDBERG: In 1962 they were asking for an increase back to 1961 --

QUESTION: But you think the reasoning of this order would have applied?

MR. GOLDBERG: Yes, I --

QUESTION: I thought it was based on the fact that they were so late.

MR. GOLBERG: We would have had the same considerations that the Commission refers to.

QUESTION: If they came in '62 and said, we want to get the higher rate for the period '62 to '72, the next ten years.

MR. GOLDBERG: I don't think they could come in and --

QUESTION: We don't know whether the Commission would have let them do it or not.

MR. GOLDBERG: We do not. We do not.

QUESTION: You don't deny that it was at least possible the Commission would have let them do that?

MR. GOLDBERG: Well, the present Federal Energy Regulatory Commission as presently constituted has said in their order that they hesitate to speculate on what the Commission would have done. I do, too.

QUESTION: Well, doesn't that mean that it was at least a possibility that it would have been done had they been able to act promptly?

MR. GOLDBERG: I suppose that possibility could exist. The possibility could exist also that they might not have been able to demonstrate either that there was triggering or that it was in fact a higher price.

QUESTION: But who's responsible for the fact that they were unable to go in in '62?

MR. GOLDBERG: Not the petitioner. The petitioner, we submit, did everything that was required of it, and there is no provision in the contract, nothing --

QUESTION: But if you read the contract the other way. Now, that depends on how one reads the contract. But if we assume that the Louisiana court correctly reads the contract and that you did have a duty to notify them, then are you not responsible for the delay?

MR. GOLDBERG: If you assume that we had a duty, then I suppose it would be we would be responsible for the delay if that is the federal jurisprudence, because this contract is not controlled by state jurisdiction, state jurisprudence. It is a contract on file as a rate schedule. As a rate schedule under the Natural Gas Act it is the federal jurisprudence that determines how that contract is to be handled and interpreted, particularly in the light of the public interest requirements of the Natural Gas Act. This is one of the difficulties with the state court's decision. The state court referred to Article 2040 of the Louisiana Civil Code and determined that under that civil code provision there was a duty upon -- that being, not a duty, but that the petitioner had prevented the respondents from complying with the rate change filing requirements of the Act, and that therefore they should be deemed as having fulfilled those requirements. And I point out in that connection that the court also recognized when it said that, that it was dealing with the Natural Gas Act and that it had to meet the next requirement, would the Commission have allowed it? And it concluded, yes, the Commission would have allowed it, and the Commission has told you in -- told the Court --

QUESTION: The state court said, on the preponderance of the evidence we think it's more likely they would than they would have not. And as I understand, the Commission said, well, we don't know what we would have done.

MR. GOLDBERG: I think that we could have demonstrated to the Commission --

QUESTION: But you didn't.

MR. GOLDBERG: We didn't because they made no filing, but if you're asking me to speculate --

QUESTION: No, all I asked you was whether or not it were possible as a matter of law that they could have ruled in favor of allowing the higher rate, back if they'd made a timely filing?

MR. GOLDBERG: If they also met the qualifications of the favored -- the Commission would have had to find that the favored nation was triggered because the royalty payments constituted a purchase from any party seller. I have difficulty seeing how the Commission could have decided that. The jurisprudence was against that decision and a royalty interest has no gas to sell.

QUESTION: I thought the way the case comes to us we assume for purposes of whether the Filed Rate Doctrine applies or not that there was a violation of the favored nations agreement, the duty and all the rest. And you argue, well, nevertheless, the Filed Rate Doctrine precludes the higher rate.

MR. GOLDBERG: That's right, because the allowance by the court below violates the determinations under the Filed Rate Doctrine. It violates the Commission's ceiling prices.

I would point out also that the Commission in that order of November 5, 1980, which is part of, attached to our reply brief as an appendix, that the Commission points out that its review of the record reveals to it, and it concludes, that Arkla could reasonably have assumed that the royalty payments did not trigger the favored nation provision. And I submit that, under those circumstances, if we could have reasonably assumed that, I think the more reasonable inference is that we could have demonstrated to the Commission, if back in 1962, perhaps, and the Commission would not in 1962 have found that the favored nation provisions had been triggered.

The file doctrine says, the Filed Rate Doctrine says that no one can claim a rate as a legal right that is other than the filed rate, and that not even a court can authorize commerce in the commodity on other terms. Now, the courts below sought to avoid the Filed Rate Doctrine by labeling respondents' claim as a claim for damages.

QUESTION: I suppose, Mr. Goldberg, your position would be that it applied even, even had Arkla here deliberately and intentionally not informed the respondents that they were getting a higher rate in a situation where they should have given it? I guess you'd still say that under the filed rate doctrine, nevertheless, they can't prevail.

MR. GOLDBERG: Yes, but I'd like to say first, we don't have to go that far, back to the states.

QUESTION: I know. But answer my question. Am I right?

MR. GOLDBERG: Yes.

QUESTION: That's how far you would go?

MR. GOLDBERG: Yes.

QUESTION: All right.

MR. GOLDBERG: And we say, also, that if you read Montana-Dakota, in that situation, where the Filed Rate Doctrine was held to apply, the complainant in that case, the plaintiff in that case was under the thumb of a parent corporation, was clearly prevented from going before the Commission and protesting the rates involved. Nevertheless, it was held that the Filed Rate Doctrine precluded them from having a claim. And we say that that is no less the situation in this case.

QUESTION: Isn't it correct that that case really just held that that precluded them from having a claim under the federal statute. It didn't really decide whether there might a state law claim of some kind?

MR. GOLDBERG: No, we think that if you read the case as a whole --

QUESTION: That case did arise in the federal judicial system and the first question is whether federal jurisdiction --

MR. GOLDBERG: They sought to draw a right to their cause of action from the terms of the Federal Power Act itself.

QUESTION: Correct.

MR. GOLDBERG: But a reading of that decision clearly demonstrates that even if they had gone to the state court they could not have maintained that action, and that they --

QUESTION: They could not have maintained an action for violation of the Federal Power Act in the state court but the court really didn't have any occasion to decide whether there was any breach of fiduciary relationship that might give rise to a common law claim.

MR. GOLDBERG: I think the --

QUESTION: Which wasn't before the court.

MR. GOLDBERG: I think the language of the court in that case clearly says that by reason of the fact that there is a Federal Power Act there is no recourse available to the state court either. If they had any recourse it would have been only to the Commission. If the respondents here had any recourse it was only to the Commission and they have gone to the Commission and the Commission has pretty well indicated in that order of November 5, 1980, that they are not entitled to the relief that they claim. The decision of the court below undertakes to assert that the contract is to be interpreted on the basis of state law and that it derives its force and effect from state law. The fact of the matter is, it derives its force and effect, particularly with respect to rate matters, from the Natural Gas Act, and it is federal jurisprudence that determines how that contract is to be interpreted. And under federal jurisdiction -- I refer particularly to the Mobile case -- there is no purchase of gas associated with the payment of a royalty.

When the Supreme Court of Louisiana held that the Commission would undoubtedly have allowed the rate had they gone to the Commission at an earlier time, we think the court was induced to make that statement by a statement by the Commission in an earlier order it had issued in which it said that the rates did not exceed the ceiling prices. The Commission has since that time advised that it was in error because it thought the sale was a sale at the plant and not a sale at the wellhead. As a sale at the wellhead it clearly exceeded the ceiling prices and the Commission says very clearly it was a violation of the Filed Rate Doctrine.

With respect to the matter of primary jurisdiction, the Commission's exclusive rate jurisdiction extends not only to the unit rates and charges and to all classifications, practices and regulations affecting, such rates and charges, but -- and I quote -- "to all contracts which in any manner affect or relate to such rates, charges, or to classification of the services."

I'd like to go on but I would love also to preserve some five minutes, and I notice my light is on. Thank you.

MR. CHIEF JUSTICE BURGER: Mr. Howell.

ORAL ARGUMENT OF JAMES FLEET HOWELL, ESQ., ON BEHALF OF THE RESPONDENTS

MR. HOWELL: Mr. Chief Justice and may it please the Court.

Respondents respectfully submit that the core fundamental issue presented in this case involves the separate and independent obligation of the petitioner herein, Arkansas Louisiana Gas Company, to respond in compensatory damages out of its own assets and profits for the actual losses that it wrongfully caused the 15 individual respondents herein to sustain and incur from September, 1961, through December, 1975, by continuously breaching and violating their favored nations rights under the '52 contract and by uncooperatively and effectively withholding all of the true, relevant, and material facts concerning that breach of contract from respondents from 1961 through 1975. We respectfully submit that the statement of the situation concerning the payments that Arkla made to the United States Government by opposing counsel are not precisely consistent with the contracts between Arkla and the United States Government. An examination of Section 2(n) of the 1961 protective lease contract, Exhibit P-45, reflects that that contract anticipated the situation that actually existed between Arkla and the Government.

In other words, Arkla was in a dual capacity. It was not the typical lessee. It was a lessee that was also a pipeline purchaser that owned and operated a pipeline system and a gas processing plant in the Sligo field, and under Section 2(n) of that Government lease contract Arkla was obligated contractually to purchase the Government's gas at reasonable rates and reasonable prices. And the Government did require Arkla to pay the prices the Government felt was reasonable for the Government's royalty gas as delivered into Arkla's Sligo pipeline system. As evidenced by Exhibit P-82, Arkla and the Government negotiated as to the price that Arkla would have to pay to the Government for the Government's royalty gas and the explicit language of that letter contract, Exhibit P-82, sets forth so many cents per Mcf to be paid by Arkla for the Government's royalty gas.

Now, with respect to the problem that these respondents had in discovering and obtaining the true facts concerning Arkla's payments of higher prices to the United States Government for the Government's royalty gas produced in the Sligo field and delivered into Arkla's Sligo pipeline system and into Arkla's Sligo gas processing plant, I think we must begin with the fact that at the time it became necessary for Arkla to arrive at a price that it would pay the Government, one of their officials, Mr. I. C. Templeton, a vice president who was in charge of negotiating price on behalf of Arkla with the Government, wrote a memorandum on November 17, 1961, to Mr. B. E. Harrell, the senior vice president who actually negotiated our '52 contract on behalf of Arkla, and inquired of Mr. Harrell, what price should we pay the Government?

Mr. Harrell came back with a memorandum dated November 20, 1961, which is in evidence as Exhibit P-58, wherein he said, "I have no particular opinion as to what price Arkla should pay the Government but I do wish to point out that we have a favored nations contract with Mr. W. E. Hall et al. and they are receiving approximately 8-1/2 cents at this time."

Here is the company official who was very familiar with the negotiations that led to the perfection of the '52 contract and he said, I do not know whether payment of a higher price to the Government would breach, activate, or trigger this favored nations clause. But if it does, it could cost Arkla millions of dollars during the life of the '52 contract. So, in Arkla's -- in the mind of their chief vice president who negotiated the contract with respondents in '52, there was a serious question about whether the payment of a higher price to the Government would activate or trigger this favored nations clause.

One month later, on December 27, 1961, the corporate counsel, Mr. Robert Roberts, Jr., had received a copy of Mr. Harrell's warning memorandum, wrote the company, and said, in connection with the government lease contract -- and this memorandum is in evidence as Exhibit P-62, he said, it's a very difficult problem in connection with the government lease, and Arkla doesn't want to buy any gas or set a price. So, with that background, let's look at what happened from 1961 forward.

As testified to by Frank Hall, he and his now-deceased father, W. E. Hall, Sr., went to Arkla's office month after month, year after year, from '61 to '73, to seek to determine if Arkla was paying anybody else a higher price in the Sligo field, obviously to see if they had any rights under their favored nations clause. Each time Mr. Harrell and Mr. Miles, primarily on behalf of Arkla, told them that they were receiving the highest prices that Arkla paid to anyone else in the Sligo field, that Mr. Hall was a royalty owner, he was an overriding royalty interest owner, and a working interest owner, and he didn't delineate, are you paying a higher price for royalty gas or are you paying a higher price for working interest gas, he just said, are you paying anyone else in the field a higher price?

On each occasion, they were told, you're getting the highest price that we're paying to anyone else in the field. Now, these people relied upon this, they believed it in good faith, and they had no way to check. There was nothing of record as to what price Arkla was paying the Government. They didn't even know they were taking any of the Government's royalty gas into their pipeline system, or into their Sligo plant.

QUESTION: Well, the points you're making surely bear on the equities, perhaps, but is that controlling?

MR. HOWELL: Your Honor, I think -- yes, sir, I think to the extent that we sued for breach of contract because they destroyed these people's contractual rights and their rights to enforce and implement their contractual rights consistent with all applicable laws, rules, and regulations. And --

QUESTION: Mr. Howell, what would be the -- if you're right and we were to affirm --

MR. HOWELL: Yes, sir.

QUESTION: What damages would you recover, say, for the period from '62 through '72?

MR. HOWELL: The damages should be measured by what the United States Government received, Your Honor.

QUESTION: In other words, the difference between what you're getting and what the United States got?

MR. HOWELL: Yes, sir.

QUESTION: Well, now, then that's really in effect the rate increase, isn't it, for that period?

MR. HOWELL: Your Honor, it's award of damages measured by --

QUESTION: I know, that's the name of it.

MR. HOWELL: Yes, sir.

QUESTION: In effect it's the same thing as a rate increase.

MR. HOWELL: Well, I think it can be styled that way semantically but I would say from the legal proposition it would be the payment of damages by Arkla --

QUESTION: Well, in any event, it would an amount of money --

MR. HOWELL: Yes, sir.

QUESTION: Without prior Commission approval which would be exactly what you would have sought in the way of approval of a rate increase had you known about this deal with the Government, isn't it?

MR. HOWELL: Yes, sir, and in that regard --

QUESTION: Doesn't that have some significance on the real issue we've got to decide?

MR. HOWELL: Your Honor, I think, perhaps in this context, we filed a petition with the Federal Power Commission on June 30, 1976. We asked them to clarify what we could and would have received as contractually authorized if we had been able to file, if we'd have had the true facts to make a Section 4(d) notice filing. And they set forth rather explicitly and expressly that if we were contractually authorized to receive the same prices that the Government received from Arkla for its gas and for the liquids and the condensate, that, one, if it was a severable price for the liquids and the condensate like the Government received, there would have been no Commission jurisdiction over the liquids and the condensate. It was simply a matter of contract law.

And they said, with respect to the dry residue gas, if we were contractually authorized and if we'd have filed for the same price that the Government received for the dry residue gas, these are the maximum area rate ceilings up to which we would have approved. And they said, not maybe, or possibly, they said, we would have approved your contractually authorized prices up to these area rate ceilings. And that was filed in evidence. That's Exhibit D-59, Your Honor. It's a November 8, 1976, order issued by the Federal Power Commission.

QUESTION: Well, are you telling me then, actually, you in effect had Commission approval on the difference?

MR. HOWELL: The Commission deferred to the courts, Your Honor, the question as to whether or not we were contractually authorized. In other words, we brought the suit in state court, and part of our proof was to prove --

QUESTION: Well, what I'm trying to get, Mr. Howell, did the Commission in effect tell you, if you can get approval of the -- if there was a violation of the contract here and you were entitled to it, consider that we've approved it?

MR. HOWELL: Your Honor, I interpret it that way and I think the Louisiana courts did too, because the order clearly says, if you would have filed and if you were contractually authorized, these are the rates --

QUESTION: Is that order in our Appendix?

MR. HOWELL: Yes, sir. It's Exhibit D-59. It's in the Joint Appendix at page 183.

QUESTION: 180?

MR. HOWELL: Yes, sir, and it was cited by the Louisiana court in its opinion in the appendix at the top of page 62, in the Joint Appendix, the Louisiana Supreme Court specifically relied upon the Federal Power Commission's November 8, 1976, order.

QUESTION: Could I ask you if you had, say, in 1972 on '-3, you had gone to the Commission and asked for a rate increase, saying that you were contractually permitted to increase the rates and please give us permission to charge a higher rate, and the Commission had said fine, that's fine, now, that certainly would have been permission for you prospectively to file, to charge higher rates?

MR. HOWELL: Yes, sir.

QUESTION: Is the Commission authorized to give retroactive effect to any rate increase?

MR. HOWELL: No, sir. In what you call a retroactive rate increase, Your Honor --

QUESTION: So, the question that my brother Brennan asked you, was, do you interpret the Commission's response to what you did file as saying, we consent to your charging higher rates from 1961 up to -- I don't think they have the authority to make rate increases retroactive.

MR. HOWELL: Your Honor, they defer to the courts, recognizing that the courts had concurrent jurisdiction over breach of contract --

QUESTION: I understand that. I understand that.

MR. HOWELL. Yes, sir.

QUESTION: Even if it were conceded that the contract permitted you to -- if there was no question whatsoever about that, the Commission would -- the most the Commission could do is say, prospectively, you may charge higher rates?

MR. HOWELL: Well, at the time we found out about it, Your Honors, in 1974 --

QUESTION: Well, that's the problem.

MR. HOWELL: Yes, sir, that is the problem. That is the problem. And it's our position that Arkla's breach of the contract and withholding of the facts gave rise to a separate and independent cause of action under state law for recovery of damages to be paid by Arkla and the stockholders and not to be included in Arkla's rate base or passed on to consumers. And I believe this Court in 1961, as I read the Pan American Petroleum v. Superior Court of Delaware, recognized that the Natural Gas Act, which effectuated a stream of regulation based on private contracts, held that these common law contract rights were not abrogated or destroyed by the Natural Gas Act and that we were still afforded rights to be treated as we should have been treated and that is, the fact should have been disclosed. These parties should have been given an opportunity to file their Section 4(d) notices and put their contractually authorized prices into effect.

Mr. Justice Stevens posed the question as to what would have happened in '61 if we would have known about this information. We would have filed a Section 4(d) notice with the Commission. If there was any dispute at that time about whether or not we were contractually authorized, the chances are, I submit, based on the Commission's long-time policy of deferring contractual questions to the courts, they would have deferred us to the courts at that time. We would have gone to court to determine if we were contractually authorized a higher price, the court would have decided it, and then prospectively we could have received whatever the court said we were contractually authorized to, consistent with the Commission's area rate ceilings. But that whole process was prevented from occurring because they withheld the facts and failed to comply with their affirmative duty to disclose the true facts.

I think it's adequately been discussed in other --

QUESTION: As I understand the Commission, the Commission opposes the result you want to reach here?

MR. HOWELL: Yes, sir, they --

QUESTION: And on the ground that this would undercut their authority despite the claim of -- your claim based on the equities, and despite your in effect claiming estoppel --

MR. HOWELL: Yes, sir.

QUESTION: Or misrepresentation or whatever -- ?

MR. HOWELL: Just a breach of an affirmative duty to disclose true and material facts relative to contractual rights.

QUESTION: And the Commission -- that's the Commission's position, isn't it?

MR. HOWELL: Your Honor, after the Louisiana Supreme Court rendered its judgment on March 5, 1979, they issued an order on April 25, 1979, and they said that we're not interested in the damages awarded for the liquids and the condensate, based on what the Government received. We are interested in the damages awarded on the dry residue gas by the Louisiana courts. And they ordered us to file copies of our complaints, our amended complaint, and all copies of all the damages evidence, and summaries of how the courts awarded damages for the dry residue gas, the difference between what we received and what the Government received during this period '61 to '72. And we filed that and they issued an order on May 18, 1979, saying that our damages were measured by what the Government received and what the Government received was fair and square with the Natural Gas Act, below the area rate ceilings, and no jurisdiction over the condensate and the liquids.

The Commission has taken the position that after 1972 when the Small Producer Act came into effect and these people were given small producer status, that is simply a breach of contract matter in which you recover those damages.

QUESTION: From '72 on?

MR. HOWELL: Yes, sir.

QUESTION: At least, any producer who was a small producer entitled to be exempt from filing?

MR. HOWELL: Yes, sir. Did not have to make a filing.

QUESTION: There is some argument about whether all of them are or not?

MR. HOWELL: But the Commission has held that we were, Arkla has treated us as such, and I really think that's --

QUESTION: So, from '72 on, it didn't make any difference whether --

MR. HOWELL: That's correct. And it's our position from '61 to '72 it made no difference with respect to the condensate and the liquids, that we should have been paid the same as the Government got because because the Commission has said, if there's a severable price paid to the Government, which there was, we should have the same --

QUESTION: Well, the Commission position is, though, from '61 to '72, as to the dry gas residue, you're not entitled to any --

MR. HOWELL: We've been caught in a Catch-22, Your Honor, that Arkla, by withholding the facts. And in the order, they refer to the Note, No. 5, 1980 order, the Commission said, we refuse to go back 20 years to see what would have been approved. Well, in their November 8, 1976, order, they said, if you were contractually authorized, we would have approved up to these maximum area rate ceilings. We defer to the courts to find out if you were contractually authorized. So after the Louisiana Supreme Court had rendered its judgment, staff counsel issued a brief saying, in order for us to get the damages for the dry residue gas from '61 to '72, we should seek a waiver of the Section 4(d) notice filing based upon Arkla's withholding of the facts in the prevention of performance in estoppel.

So, we filed for the waiver alleging that our prices were below area rate ceilings, that we were prevented from filing, there was no humanly possible way that we could make the filing. And the Commission ruled that in essence we're denying the waiver because it goes back 20 years. And that goes into the Catch-22 -- it goes back 20 years because they effectively withheld the fact the court needs.

QUESTION: Well, was the position, Mr. Howell, that there was no jurisdiction to grant a waiver?

MR. HOWELL: No, sir, they have the authority to grant a waiver and they granted it in 20-some-odd cases that we cited to the Commission -- Plaquemines, Piqua, and other decisions -- they've granted waivers; yes, sir.

QUESTION: Well, is that judgment that --

MR. HOWELL: No, sir, we've taken an appeal from their denial of the waiver to the 5th Circuit Court of Appeals.

QUESTION: Is it pending there?

MR. HOWELL: It's pending there. The FERC in -- the petitioner herein has asked that court to hold that proceeding in abeyance until this Court rules. Now, where we are procedurally, if you think it's necessary for us to get a waiver --

QUESTION: I was going to say, if you lose here, is the issue of a waiver still open in the 5th Circuit or isn't it?

MR. HOWELL: Your Honor, I think that the waiver issue is essential to us getting damages for the dry residue gas from '61 to '72 and this Court doesn't feel that it can address the waiver head-on in this breach of contract case, then I think certainly we're entitled to go through the process to --

QUESTION: Well, you're already there, I gather, and --

MR. HOWELL: Yes, sir, and entitled to finish it.

QUESTION: What does the Commission have to say about the waiver?

MR. HOWELL: Your Honor, the Commission said that it just goes back too far, it -- they say the equities are on our side in the original order that they issued. They supported our rates and said they were below area rates. They took that out, that footnote out in the errata notice, but simply, they say, it just goes back too far and we don't want to get into a position of speculating what someone else might have interpreted the contract back in 1961.

QUESTION: Well, it's kind of like the doctrine of laches, isn't it?

MR. HOWELL: Sir?

QUESTION: It's kind of like a doctrine of laches, isn't it, that you can't go back forever?

MR. HOWELL: Yes, sir, but it's being applied to us when we were prevented from taking the action necessary to implement our rights at that time. We're saying Arkla is estopped to rely on its own breach of contract and its own withholding of the facts which prevented us from implementing our contractual rights consistent with the Section 4(d) notice filings from '61 to '72 with respect to the dry residue gas. And that that's really why we've been damaged.

QUESTION: When was the waiver appeal taken?

MR. HOWELL: Your Honor, it was taken --

QUESTION: When was it filed in the Court of Appeals?

MR. HOWELL: The rehearing was denied, I believe, January 2 -- the waiver was denied on November 5, 1980. We filed application --

QUESTION: That was after -- that was after we granted certiorari?

MR. HOWELL: No, sir, I believe you granted certiorari January 19 of this year, if I'm not mistaken.

QUESTION: This year, did we?

MR. HOWELL: Yes, sir. We filed May 25, 1979.

QUESTION: So we knew that the waiver had been denied?

MR. HOWELL: Yes, sir.

QUESTION: And we also knew that you were appealing to the 5th Circuit?

MR. HOWELL: Yes, sir. Yes, sir.

QUESTION: When did you file your notice of appeal in the 5th Circuit?

MR. HOWELL: I believe it was January 7 or 8 of this year.

QUESTION: So, within five or ten days of the time we granted certiorari?

MR. HOWELL: Yes, sir.

QUESTION: How do we know that, Mr. Howell? Frankly, I ask because I don't remember it.

MR. HOWELL: Your Honor, the other side, the petitioner herein, made a filing showing that our application for rehearing with the FERC had been denied. We made a filing to inform the Court that it had been denied, of course, but that we had taken the appeal to the 5th Circuit. I think it was done by me, so the letter would be, a copy of the petition for appeal attached. I believe that was the method by which it was attached. Your Honor, I think examination of what happened in the case of Western Natural v. Cities Service Gas Co., a case arising through the Oklahoma state courts, this Court having denied cert. and dismissed the appeal, and then the adjunct case going before the FPC and before the D. C. Circuit Court of Appeals where Cities Service Gas Company breached and violated a 1949 private gas sales contract -- ours was a 1952 contract. They withheld their cooperation, that is Cities Service Gas Co. withheld its cooperation, prevented Western Natural from getting an abandonment under Section 7(b) of the Natural Gas Act. They prevented Western Natural from filing a new contract with the Commission as a new rate schedule under Section 4 of the Act, and they prevented Western Natural from getting higher prices for its gas sold in interstate commerce. Western Natural went to court, that proved that Cities Service had withheld its cooperation, preventing them from getting Commission approval to abandon and to file a new contract with the Commission. They recovered compensatory damages for the breach of contract and for failure to cooperate of over $5 million. The Oklahoma Court of Appeal affirmed that judgment, this Court denied the Cities Service's appeal, and dismissed its petition for certiorari. Then it went before the FPC and the FPC recognized and delineated between the obligation of a pipeline company to pay just and reasonable area rates for natural gas sold in interstate commerce, and the obligation of a pipeline company to injuries must be absorbed by the company out of its own private corporate assets and profits and not included in its rate base or passed on to the consumer. Because breaching contracts or injuring someone through the violation of their civil rights or their employment opportunities is not a legitimate function of a pipeline company. A pipeline company is supposed to honor contracts. It's supposed to fulfill contracts. It's supposed to honor people's civil rights as well as their private rights. And if the Court is worried about the consumers having to pay any of these damages by Arkla passing it through, Arkla has to pursue that through a separate proceeding before the Commission and receive Commission approval. If the Commission is concerned about Arkla trying to pass any of this corporate damage obligation on to the public, the Commission can simply deny the attempt to pass through and make Arkla, the wrongdoer that caused these losses and damages, simply stand behind its obligation to make these people whole.

QUESTION: Would you think that if this were a completely private contract, no filed rates, just a contract between two private parties, that the doctrine of laches might move in and cut you off at some point in that period or not?

MR. HOWELL: Your Honor, not as long as they were withholding the facts, and I was getting to that a while ago. Mr. Frank Hall, one of the respondents, was having lunch at the Freeport Petroleum Club in January, 1974, when he inadvertently overheard a conversation between two gentlemen assumed to be employees of Arkla talking about the prices that Arkla was paying the Government. That's the first time any of these respondents had any idea that Arkla was paying a higher price to the Government or paying any price to the Government at all, and so, if laches would occur, it would seem like January of '74 would be the earliest time that they could have taken any action, and what they did after that was, they wrote letters to Arkla and called Arkla and asked them to give them the facts. And Arkla continued to withhold the facts. Will Hall, Jr., wrote letters to the Department of the Interior and asked them to tell him what prices Arkla was paying the Government. The Department of Interior took the position that that was privileged proprietary information, what the Department of Interior was receiving for we, the people's royalty gas, and refused to give them the information.

So they had to hire me in May of 1974 to simply obtain the facts. They didn't have the facts when they retained me in 1974, and pursuant to the Freedom of Information Act I finally received the information.

MR. CHIEF JUSTICE BURGER: We will resume there at 1 o'clock, counsel.

(Recess)

MR. CHIEF JUSTICE BURGER: Counsel, you may resume.

MR. HOWELL: Mr. Chief Justice, and may it please the Court:

Immediately before the noon recess I was addressing some questions about laches, and would like to follow that through, Your Honors.

As I was saying, that I had not been able on behalf of my clients to obtain the true facts until I received a letter from the United States Department of Interior dated June 24, 1974. That's in evidence as Exhibit P-142, where the Department of Interior advised me on behalf of these respondents as to the actual prices that the Government had been receiving from Arkla for its royalty gas in Sligo field. At that time I made a written demand upon Arkla for a full disclosure of all of the true facts, specifically, copies of their contracts with the Government and specifically all of the information concerning the prices that Arkla had been, was then paying to the United States Government, copies of checks, and other sales reports and production reports. And that amicable plan was rejected. In essence they forced us to file a lawsuit to judicially discover all of the truth, relevant material, and necessary facts from Arkla's own files and records.

And as the record in this case will reflect, we went through about two years of litigation which were devoted solely to discovery. We had to file motion after motion and obtain order after order in order to obtain all of the true facts necessary to prove the breach of contract and to prove the losses and damages. And the issue concerning obtaining a waiver of the notice filing requirement only came up, as I said, in 1979, when the FERC staff counsel suggested that in order to obtain the damages for the dry residue gas from '61 to '72, that we should think of obtaining a waiver of the notice filing requirement, which we very promptly filed for in May of 1979. And the waiver application was based on two contentions, one in light of the Western Natural v. Cities Service litigation that a waiver should not be necessary when it's a breach of contract that prevented you from making the filing in the first instance. But that if it was, we were entitled to it, because Arkla, by breaching the contract and withholding the facts from respondents for 14 years and then requiring respondents to go through six years of litigation to discover and prove the true facts, certainly the 20-year period that had elapsed was the fault of Arkla and not the fault of these respondents.

And, of course, after the waiver was denied on November 5, 1980, we immediately filed a petition for rehearing with the Commission which was denied on January 2.

QUESTION: Are there many precedents, Mr. Howell, waivers by the Commission?

MR. HOWELL: Yes, sir. The two leading appellate decisions from the D. C. Circuit Court of Appeals are the Plaquemines case, decided in 1971. The Commission had declined to grant a waiver of a Section 4(d) notice filing for a five-year period prior to '71, and the Court of Appeals, the D. C. Circuit Court of Appeals ordered the Commission to grant a waiver if it found that the prices provided for under the contract were below area rate ceilings. And so it reversed and remanded to the Commission to grant the waiver.

In the Piqua case, decided by the Commission in 1978, the Commission granted a waiver saying that the Commission had a long history of granting waivers where through some inequity there was the noncompliance with the procedural notice filing requirement. And they said, in order to protect the integrity of the contract and the true intentions of the parties, they should grant a waiver to clear up the absence of the prospective notice filing requirement. So that --

QUESTION: So you were surprised when you got the denial?

MR. HOWELL: I've never been more shocked in my life, Your Honor, to be quite frank. We felt that -- and even the Commission recognized that the Louisiana courts had held, the courts to whom the Commission had deferred, had held that Arkla in breach of its contractual obligations failed to disclose the facts. Thank you.

MR. CHIEF JUSTICE BURGER: Thank you. Do you have anything further, Mr. Goldberg?

ORAL ARGUMENT OF REUBEN GOLDBERG, ESQ., ON BEHALF OF THE PETITIONER -- REBUTTAL

MR. GOLDBERG: Just a few things here.

Counsel referred to Section 2(n) of the Government lease as having some bearing on this case. It has absolutely no bearing whatsoever on the case. The Government had no gas to sell, and it never tendered any gas to Arkla which Arkla would have had to purchase. Arkla produced its own gas and it made royalty payments. The Government under the lease had the option to take gas in kind instead of accepting royalty payments. If it had exercised that option, it would have had gas to sell, gas it would have sold. And in order to have, to assure itself of a purchaser, Section (n) was in the provisions, but if it did not exercise that option Section (n) was entirely irrelevant.

Counsel keeps saying that they purchased residue gas and the Commission was misled at one time too, and it has corrected itself. It was basing its opinion that there was no breach in the ceiling prices, based upon the fact that it thought residue gas had been purchased. And if the Court will refer to our reply brief at pages 11 and 12 you will find the Commission's statement retracting their earlier statement and explaining why they had been misled.

Now, counsel also referred to a legal opinion which he said demonstrated a reference to the difficulty of the problem. That legal opinion had nothing to do with triggering. It was related, triggering of the favored nation clause. It was related to balancing takes from other producers, from a number of producers, how you balance takes.

There was a legal opinion dealing with triggering. When the Government demanded rents or royalty payments in excess of the fixed prices in the contract, Arkla was concerned about agreeing to that without first knowing whether it would trigger favored nation provisions and it submitted the question to its counsel and its counsel said, favored nations will not be triggered by the royal payment. A royalty payment is not a purchase of gas under well-settled federal and state jurisdiction. Now --

QUESTION: But counsel, a moment ago you referred to the fact that the Commission was misled and cited us to a footnote ten in your brief on page 11, I believe. And as I read that footnote--

MR. GOLDBERG: Page 11 of the reply brief.

QUESTION: Oh, of your reply brief? And is that an FERC proceeding?

MR. GOLDBERG: Yes; yes. That's at the bottom of page 11 and the top of page 12; there's a two-paragraph quotation.

QUESTION: Is there any argument in this case about -- or I'll put it the other way -- must we decide whether these companies are small companies that are freed from the filing requirements as of '72? Is there an issue about that?

MR. GOLDBERG: Yes. There is a small producer issue in the case. We discussed it in our brief, but I just simply haven't had the time to get to it.

QUESTION: But you mean, if someone is a small producer, then from '72 on there is no dispute?

MR. GOLDBERG: Not unless they can demonstrate -- there still is the question, even if you're a small producer. The small producer exemption says, you don't have to make a filing to get the rate increase but you still have to demonstrate, you still have to show that the increase is contractually authorized and that it is reasonable. So that --

QUESTION: Well, then, it'd all go back to the state court?

MR. GOLDBERG: Well, that's a question for the Commission.

QUESTION: Why is that?

MR. GOLDBERG: Because it's within the Commission's primary jurisdiction and in its exclusive --

QUESTION: I thought the Commission in this very case said that to the extent these companies are small producers, then it's up to the state court after '72?

MR. GOLDBERG: No, I don't think the Commission said that. The Commission did say, in some order, that there were five of the respondents that had small producer certificates but that the benefit of the small producer exemption was available to all of the respondents. It did say that. And that's -- that's on appeal --

QUESTION: But -- the Commission washed its hands of the whole matter then, with respect to post-'72 rate increase?

MR. GOLDBERG: No, I don't think that you could say that, because -- may I just --

QUESTION: Well, you were about to say that that's on appeal anyway, weren't you?

MR. GOLDBERG: It's on appeal in the United States district court.

QUESTION: All right. Well, that's where it presently sits?

MR. GOLDBERG: It's held in abeyance pending the outcome of this case.

What I did want to indicate, that the perception of the case and the development of its attitude towards its primary jurisdiction and exclusive rate jurisdiction is very interesting. When we first --

QUESTION: I don't want to extend your time, Mr. Goldberg.

MR. GOLDBERG: Thank you.

MR. CHIEF JUSTICE BURGER: Thank you, gentlemen. The case is submitted.

(Whereupon, at 1:10 o'clock p.m., the case in the above-entitled matter was submitted.)