CORY v. WESTERN OIL & GAS ASSN.

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ORAL ARGUMENT OF DENNIS M. EAGAN, ESQ. ON BEHALF OF THE APPELLANTS

Chief Justice Warren E. Burger: We will hear arguments next in Cory against Western Oil and Gas.

Mr. Eagan, you may proceed whenever you are ready.

Dennis M. Eagan: Mr. Chief Justice, and may it please the Court:

This case is here on appeal from the decision of the Court of Appeals for the Ninth Circuit.

The lower court held invalid a leasing regulation of the California State Lands Commission.

That regulation authorized the negotiation of rent for leases of state property based upon the volume of commodities crossing the leased land.

The regulation did not prescribe rates.

The lower court concluded that such a form of rent, regardless of amount, constitutes an unreasonable burden on commerce.

It further concluded that such a form of rent constituted a tariff when used with regard to lessees engaged in interstate or foreign commerce.

And, finally the Ninth Circuit held that the Commission was limited in recovering on its ground leases not a return on its ground leases but only a recovery of the cost, its out-of-pocket costs, when charging rent.

This is a remarkable decision.

The decision accords second class status to the state as a lessor.

It means that the state in many instances will be constrained to take less in the way of rent than would another lessor in similar circumstances.

Unidentified Justice: Do you think the result would have been the same under the reasoning of the Court of Appeals if the measurement had not been related to traveling over California territory but simply a percentage of the volume of material taken out?

Dennis M. Eagan: Well, of course, Your Honor, this is one fact that we would like to drive home to the maximum extent possible.

The charge is not made merely for the entry of goods into the political jurisdiction of California.

It is tied explicitly only to those parcels of property limited in number which are made... privately appropriated by the lessees to their own use for commercial gain.

I really don't know what type of rent the Ninth Circuit would have considered permissible other than a non-variable, flat annual rent such as the Commission also charges.

There is a final line tossed off in the opinion concerning this is not to say that all forms of volumetric rent are forbidden, but there is really no analytical clue in the decision of the Ninth Circuit concerning what type of variable rent it would have found permissible.

It seems to me the thrust of the Ninth Circuit's decision is that any form of variable rent, at least with regard to the state and when it deals with interstate or foreign lessees, any such variable rent is prohibited to them.

Unidentified Justice: May I ask, Mr. Eagan, is the rent calculated on the basis of volume of oil, is that it, in transit?

Dennis M. Eagan: Well, another point, Your Honor, it is not limited to oil.

That is one commodity.

Unidentified Justice: Or whatever goods, generally yes.

Dennis M. Eagan: In this case, given the Plaintiffs, we are talking about oil and petroleum products.

Let me just tell you what the facts are.

I don't know quite the direction Your Honor is taking with the question.

The goods--

Unidentified Justice: Well, you didn't expressly mention the export/import clause, did you?

Dennis M. Eagan: --Yes, I did, Your Honor.

That was the second aspect of the Ninth Circuit's holding, that apart from the problems it found--

Unidentified Justice: Well, the considerations would be different whether that clause was violated from the consideration of if the commerce clause is violated.

Dennis M. Eagan: --Well, certainly the import/export clause is different.

In fact, it is so different that we don't see there is any application in this case because it does deal with taxes and this Court in Michelin versus Wages, for instance, that even with regard to taxes the question there is what type of taxes?

Is it merely for the privilege of entry or is it tied to some service the government provides?

We submit it is an a fortiori case, if you will, when you are talking not about a tax at all but a form of rental.

What the decision in effect calls for is a subsidy, a subsidy to these oil companies.

The decision is also unfair to the other lessees of the Commission because what this ruling of the Ninth Circuit means is that certain lessees, among them these oil companies, are entitled to special treatment and these other lessees, the lessees of the state that are engaged in intrastate commerce, yes, they may be asked to pay a variable rent, whereas this special class, they cannot be asked to pay such a rent.

Justice Sandra Day O'connor: Mr. Eagan, would the situation be any different if the State of California either owned or controlled every parcel of land through which the products could enter to go to the refineries?

Dennis M. Eagan: If, indeed, there was a monopoly.

Of course, we think it is very clear there is no such monopoly, but if there were a monopoly, I think the only bearing that might have on the arguments made by the state in this case it might preclude assertion of the market participant doctrine.

Cases of this Court are not all that clear that you have got to have competitors in order to avail yourself of a doctrine.

But, that would get us then into the question of reasonableness.

Certainly the state is entitled to charge rent, no question.

The oil companies concede that.

And, if you concede that--

Justice Sandra Day O'connor: What percentage of this product annually coming into California passes through sources other than state land or does the record tell us?

Dennis M. Eagan: --Well, it is not in the record, Your Honor.

I do have some figures, but I can say this, the majority of petroleum and petroleum products either coming into California or going out of California does not pass over state lands.

I think the largest single port in terms of petroleum and petroleum products is Long Beach and this is revealed in our cite to the Corps of Engineers' Waterborne Commerce Study.

Justice John Paul Stevens: Mr. Eagan, can I ask kind of a basic question here which is whether we should look at this as a tax case or property private rental case?

Would you agree that if it were a tax case and yet a tax formula just like this for entry into the state that it would fall or would you defend it any way?

Dennis M. Eagan: Not at all, Your Honor.

Of course, it is not a tax, but if it were it seems to me that would lead this Court into application of some of the formulas for evaluating taxes that it has come up with, both in the interstate commerce field and the foreign tax field.

I am thinking of complete Auto Transit versus Brady, Michelin versus Wages, and the import of those cases is that interstate commerce must pay its own way.

Justice John Paul Stevens: But here it pays a lot more than its own way, doesn't it?

Dennis M. Eagan: Not at all, Your Honor.

The problem is... That is the diversionary issue if you will that the oil companies have consistently tried to introduced into this case.

Unidentified Justice: Yes, and the Court of Appeals.

Dennis M. Eagan: Excuse me?

Unidentified Justice: And the Court of Appeals.

Dennis M. Eagan: Well, the Court of Appeals realized that really the issue was the form or mode of rent rather than amounts.

But, what seemed to bother the Court of Appeals was not so much the initial lease where at time one there is no lease at all and the question is should the oil company enter into the lease based on volumetric rental.

That situation, at least in terms of what the Court said, didn't seem to bother it.

What it focused on was this renewal context where you have a refinery... and there are some of them with internal leases that do involve this situation... a refinery on the upland, hard by the wharf site that is leased from the state.

And, what the Court seemed to be concerned about was a perceived potential for the state demanding and getting extortionate rents.

Now, I think there are some ready answers to that concern of the Ninth Circuit, but we don't think analysis under the commerce clause provides answers to those questions.

First, if indeed there is a potential for extortionate rents, that concern, it seems to us, applies regardless of the form of rent that you are talking about.

It applies as well that type of concern with a flat annual rent based on a stated percentage of fee value.

What if the stated percentage proposed by the state is 90 percent?

The oil companies certainly would be taking issue with that kind of proposal.

So, it is not really the mode of rent, it is the amount, regardless of mode, that could present a problem in those situations.

Secondly--

Unidentified Justice: In your view, does the Constitution oppose any limit on the amount you can charge even if you regard this rent?

Dennis M. Eagan: --If the market participant clause is indeed applicable, Your Honor, no, the Constitution does not provide any limits.

And, this is not an amounts case either.

Justice John Paul Stevens: Either form or amount?

Dennis M. Eagan: Excuse me?

Justice John Paul Stevens: It would not pose any limit as to either form or amount, method of computation or amount.

Dennis M. Eagan: That is correct.

Justice John Paul Stevens: If you went on market participant.

Why do you have to win on market participant theory so to speak?

Isn't the state as a general proposition entitled to rent the same way a private landlord is unless there is some commerce clause implication or unless there is some export/import clause?

And you say the commerce clause argument of your opponent is defeated by the market participant argument?

Dennis M. Eagan: There are a number of alternative responses to it, Your Honor.

One is we are a participant in the market.

We are not taxing, we are not regulating, which had been the traditional concerns of the commerce clause, not a proprietary activity of the state, and, therefore, we argue the market participant line of cases of this Court takes us out from under any application of the commerce clause.

But, we don't have to win on that point to prevail in this lawsuit.

If we concede for whatever reason the market participant clause isn't applicable, we are nonetheless entitled to charge rent.

The question then becomes a two-fold question, is there some type of monitoring function that this Court has with regard to either modes or amounts and if there is what should the test be?

Justice William H. Rehnquist: Well, of course, what if the State of California owned all of the... owned a half-mile strip all the way around the coastline and all the way around the eastern border of state and northern border and southern border and said, you know, everybody that is bringing any goods in here, we are going to have to charge them a little rent to cross this land?

Now, there would there not be perhaps some commerce clause implications in a way there wouldn't be if you were simply renting property in downtown San Francisco?

Dennis M. Eagan: Well, the example used... It is hard to conceive a mere transit use being something that could generate a rent.

But, conceding somehow that the state could construct things where it could set up a legitimate or colorable lease for that type of situation, yes, the state would be subject to the commerce clause.

The question then becomes where is the remedy, is it with Congress solely or is there some monitoring role that this Court has to perform?

And, if there is a monitoring role this Court has, we are quite willing to subject to scrutiny the amounts of particular rents that may be charged in the future by the State Lands Commission with regard to particular ground leases.

Justice William H. Rehnquist: What sort of scrutiny would be imposed--

Dennis M. Eagan: This Court very well might be reluctant to get into that thicket, because in the tax field it occasionally has demonstrated some reticence about getting into numbers, calculations.

Commonwealth versus Edison Montana is a prime example.

The Court was content there to say there has to be some apparent relationship between benefits provided by the state and the tax in that case paid for the severance of coal.

And, this Court very well might say, geez, we really don't think that is an appropriate function for this Court and we are going to defer to Congress.

And, Congress... that is not an idle alternative.

Congress does review these things and does respond when pressure is brought concerning this type of consideration.

I think the Evansville case is a good example.

In that case, this Court upheld a user tax authorizing or validating a volumetric charge, if you will, in the form of a tax by the Evansville Airport Authority.

Chief Justice Warren E. Burger: --Mr. Eagan, supposed a state owned a lot of land and part of it is cut up by a deep canyon and they built a bridge across that canyon.

What is there that would interfere with the state charging any fee they wanted for crossing that bridge?

Dennis M. Eagan: Well--

Chief Justice Warren E. Burger: No navigable stream involved, just a dry, great big dry hole.

Dennis M. Eagan: --Well, one, they would be entitled to charge something for it, no question.

No question, Your Honor, they would be entitled to charge something.

In terms of what constraints there might be, there very well might be a practical constraint, as we maintain there is in this case.

Are there other alternatives?

Chief Justice Warren E. Burger: Suppose they charged on the basis of tonnage, weight?

Dennis M. Eagan: That is not uncommon.

Apparently for coal rights-of-way that is a common means of charging for use of a--

Chief Justice Warren E. Burger: You might charge an automobile that weighed about two tons at most, you charge one fee, but if a great big truck is going to cross that weighs 20 tons, you charge him a good deal more.

Is there any barrier to that that you know of?

Dennis M. Eagan: --Well, let's assume that we have analyzed the market participants... or at least the availability of other practical alternatives and the Court has found there are none.

It seems to me if there are, then the Court may not concern itself.

There are other alternatives that the persons had.

But, if there are no alternatives, then the decision is is there a role for this Court to play and, if so, what is the test it should apply in evaluating that type of per ton of vehicle moving across this bridge in Your Honor's example?

Unidentified Justice: Yes, but the Chief Justice's question was couldn't the state charge based on the amount of tonnage, in short, a charge commensurate to how the bridge was used?

Dennis M. Eagan: Yes, Your Honor, I think they could.

Unidentified Justice: There wouldn't be any problem about that, would there?

Dennis M. Eagan: I--

Unidentified Justice: But, that isn't in this case, is it, because it doesn't make any difference about wear and tear on the state's property, how much volume is carried.

Dennis M. Eagan: --Well, there is volume, of course, depending on--

Unidentified Justice: Yes, there is, but the state's property that is used in this case isn't going to deteriorate because twice as much volume is in one year than in another.

Dennis M. Eagan: --Your Honor, that is true of any ground lease.

Unidentified Justice: Well--

Dennis M. Eagan: And, if you--

Unidentified Justice: --So it is true of this one, right?

Dennis M. Eagan: --It is certainly true of this ground lease.

It is true of every ground lease.

And, where that type of focus leads is back into the user tax cases where the person is limited to cost reimbursement solely and no type, no type of ground lease is so limited, whether we are talking about variable rent or fixed annual rent of the type endorsed here by the oil companies.

Unidentified Justice: Mr. Eagan, do you recognize any constraints on rent by reason of the import/export clause?

Dennis M. Eagan: Not by reason of the import/export clause, no, Your Honor.

Unidentified Justice: None at all?

Dennis M. Eagan: It just is not applicable to rent if we are dealing in fact with a ground lease and indisputably that is what we are dealing with here.

Unidentified Justice: Of course, that clause and the tonnage clause both were intended, weren't they, to prevent coastal states like California from exploiting their geographic positions at the expense of sister states, do they not?

Dennis M. Eagan: But, the corollary... It is true enough, Your Honor, but the corollary--

Unidentified Justice: Yet you say there is no concern at all in measuring a propriety of the rent with that consideration?

Dennis M. Eagan: --This concern of the framers of the Constitution finds expression in a number of clauses and three of them probably central are the commerce clause and the import/export clause.

Now, we will concede that they are all trying to get at the same potential problem, but they focus on different means that might be used by the states to affect this.

Unidentified Justice: Well, let me put it this way.

If you are clear under the commerce clause, does that mean you are also clear under the import/export clause?

Dennis M. Eagan: The analysis proceeds independently.

It seems to us when you are talking about rent there is a clear quid pro quo.

Even if you are talking about a tax, you are entitled to that under the import/export clause.

Clearly a ground rent a fortiori is out from under the import/export clause.

The real issue in this case is whether the commerce clause has anything to say about the rent, the mode of rent that is being used here by the Commission.

Unidentified Justice: Well, do you think you could just refuse to lease at all?

Dennis M. Eagan: Yes, Your Honor.

One example might be... suppose we are approached by--

Unidentified Justice: And whether it is commerce or import/export clause considerations.

You could still just say, sorry, but you can't come across our--

Dennis M. Eagan: --There might be health and safety concerns, really governmental concerns that they want to lease--

Unidentified Justice: --Just like off-shore oil drilling.

Dennis M. Eagan: --I am not saying--

Unidentified Justice: Which wouldn't be fencible, would it?

Dennis M. Eagan: --That is not in my section, Your Honor.

Unidentified Justice: Yes.

[Laughter]

Dennis M. Eagan: If there is a monopoly, which there clearly is not here, but if there were a monopoly, indeed, you may get into motivation.

Certainly though in our view, if there is a good faith motive for saying to an oil company we are not going to lease to you because where you want to lease there is environmental considerations that cut against that type of use.

But, if you had a situation such as Oklahoma versus Kansas Natural Gas Company, where clearly what the state was trying to do was to use its property in a way that was--

Unidentified Justice: How does the oil company use the state property?

Dennis M. Eagan: --Well, the prime example and obvious example would be Standard Oil's Longworth in Richmond.

It is on the East Bay and I think currently is about 33 acres of property.

Standard takes that property, constructs a wharf on it and underneath the wharf are pipelines and then also included within the metes and bounds description area of the lease are berthing areas.

Both as to the wharf and... as to the berthing areas Standard is entitled to the exclusive use of that property, to that extent excluding both the state and other members of the public from this land which is subject to certain common law public trust.

Unidentified Justice: Well, does the property or leasing deteriorate from year to year because of the use that you permit the oil company to put it to?

Dennis M. Eagan: I don't think you can make that generalization, no, Your Honor.

Unidentified Justice: So, it is not like a highway, for instance?

Dennis M. Eagan: No, this is a ground lease.

Conceivably there might be situations where some damage or erosion occurs, but we are not grounding any of our arguments on any kind of wear and tear and that is where we think--

Unidentified Justice: Who provides the police and fire protection?

Dennis M. Eagan: --Well, that particular example, probably the City of Richmond, California.

Unidentified Justice: It is public at any rate?

Dennis M. Eagan: The public.

I don't know if any state agency is involved and I assume that Standard probably has some of its own personnel.

Unidentified Justice: Does the Commission take the position that it may charge any rent that is applicable there?

Dennis M. Eagan: No, Your Honor.

Unidentified Justice: What limits does it recognize?

Dennis M. Eagan: Well, again, it wants to lease its property, at least if it has a piece of ground that it thinks is appropriate for that use.

And, if it were to propose very high rents, it wouldn't have many takers in terms of potential lessees.

And, certainly in the renewal context, which seemed to concern the Ninth Circuit, there are legal limitations in the lease itself.

There is a breach of contract action there on behalf of the oil companies if they think what is being proposed in the way of a new rental is unreasonable.

Unidentified Justice: But, what about... Do you think there are any federal constitutional limitations on the amount of the rent that the state may charge?

Dennis M. Eagan: In a monopoly--

Unidentified Justice: Any at all.

Well, on the facts of this case.

Dennis M. Eagan: --On the facts of this case--

Unidentified Justice: You can charge anything you want to as far as the federal Constitution is concerned, isn't that your case?

Dennis M. Eagan: --There is no monopoly and, therefore, the constraints will be practical constraints, not constitutional constraints.

Justice Sandra Day O'connor: Well, Mr. Eagan, you say there is no monopoly.

I guess the courts below both found there was.

Dennis M. Eagan: No, Your Honor.

There were statements by both the District Court and the Ninth Circuit made in the context of the renewal situation where you have an adjacent refinery and there is something to the effect that in that circumstance the companies must, must use the adjacent tidelands.

There was no general statement by either court below that could be interpreted as saying the state has a strip all the way along the coast.

Justice Sandra Day O'connor: I guess whether there is a monopoly depends on how you define the market and how you define the market is going to determine the answer to the question and how big a chunk of the coastline do we look at in defining the market?

Dennis M. Eagan: Well, we have cited in our briefs the shoreline mileage that is subject to local control.

We do not have a figure for private control, but the locally controlled... local government controlled shoreline mileage in California is approximately 418 miles.

Now, the Corps of Engineers has a report out of 1971 which indicates that if you include the entire coast of California, including the bays, that the total is about 1500 miles.

Justice Sandra Day O'connor: What do you say is the relevant market for our purposes?

Dennis M. Eagan: I am not sure it is confined to marine terminal sites.

There are alternative means for transporting and dispatching petroleum and petroleum products from these facilities.

Rail is one.

On-shore pipelines are another.

The citation we have to the Atlas of California shows you where these on-shore pipelines are and how the crude oil and also the products move in those pipelines.

Unidentified Justice: But, from a well to a pipeline going ashore.

Dennis M. Eagan: Yes.

Unidentified Justice: That would be crossing state property too.

Dennis M. Eagan: Not in all cases, Your Honor.

Unidentified Justice: Not in all cases, but it certainly... Some wells located in some positions are going to have to have to cross state property.

Dennis M. Eagan: Not necessarily.

There are grants to the local governments that do go out to the three mile limit and they are--

Unidentified Justice: I know, but if a well is in a certain location, it won't be in any position to do that.

Dennis M. Eagan: --Well, as a practical matter, Your Honor, most of the offshore--

Unidentified Justice: Unless you take a terrific detour.

Dennis M. Eagan: --As a practical matter the OCS development in California is off the southern part of the coast and that is where many of the grants are that go out to the three mile limit.

Chief Justice Warren E. Burger: The right-of-way on which the pipeline is located is how much area, how much on either side of the pipeline?

Dennis M. Eagan: I don't know a precise--

Chief Justice Warren E. Burger: It is a substantial amount I would assume.

Dennis M. Eagan: --It is.

It is a center line description and it may be 20 to 50 feet on either side.

I just don't know.

Chief Justice Warren E. Burger: Does that have possible impact on real estate development if that land... assuming it is otherwise highly suitable for real estate development?

Do people want to have their house backing up on a pipeline?

Dennis M. Eagan: Well, in many instances where that pipeline crosses up on property, which in most cases is private land, that might very well present a problem.

Generally, the pipelines anyway as opposed to the wharfs that the Commission leases are located under water.

Chief Justice Warren E. Burger: Would the possible diminution, if it could be demonstrated, diminution in assessed valuation of land for residential purposes and, therefore, a lower tax revenue on the part of the states or local governments be a factor to be taken into account in fixing this rent or this charge?

Dennis M. Eagan: We view taxes of whatever source or whatever type as really entirely independent.

The state is acting as a landowner, it is leasing its property, and it seems to me it is entitled to do so and should do so independent of other considerations such as that.

Your Honor, I would like to reserve some of my time for rebuttal.

Justice Sandra Day O'connor: Well, Mr. Eagan, as I understand it, your position is that subject to only the commerce clause that there is a monopoly.

The state can charge what the market will bear.

And, I take it it is also your position that the courts below didn't decide whether there was a monopoly despite language in the opinion.

Dennis M. Eagan: That is correct.

And, if they had--

Justice Sandra Day O'connor: So, we would have to remand to the courts below for that determination in your view?

Dennis M. Eagan: --No at all, Your Honor.

This case came up not after a trial on the merits but after cross motions for summary judgment.

And, there are undisputed material facts and the loose language frankly used with regard to the renewal contacts about must use really is not germane to the issue which is what is wrong with this mode of rent?

Again, this is not an amounts case.

The decision here forecloses any volumetric rent.

Justice John Paul Stevens: They expressly said to the contrary in the last sentence of their opinion.

Dennis M. Eagan: Excuse me?

Justice John Paul Stevens: They expressly said the contrary in the last sentence of their opinion.

They said they didn't outlaw volumetric.

Maybe they didn't mean it, I guess.

Dennis M. Eagan: Your Honor, with deference to the Ninth Circuit, that seems to me to be a throw-away line.

It is really not--

Justice John Paul Stevens: They also limited their holding to tide and submerged lands.

I guess you don't think that is--

Dennis M. Eagan: --Certainly the regulation is not so limited.

I guess--

Justice John Paul Stevens: --No, but the holding is.

Dennis M. Eagan: --Well, the wording is so limited, but the principle, it seems to me, carries you back much farther than inland, than the tidelands.

It seems to me the critical factor is who it is you are dealing with in the court's view.

If you are dealing with a person engaged in interstate or foreign commerce, that is the critical consideration.

As to those lessees, you cannot charge this type of rent.

The intrastate people, the state courts have said it is okay to charge them this type of rent, but when we get to the Ninth Circuit, no, you have a special class entitled to special treatment.

These companies charge this form of rent to their own service station leases.

They pay it to the ports, but it is the state somehow that can't make this charge.

It is the state that has to give them a subsidy.

This Court down through the years has consistently accorded a wide range of discretion to governmental entities in terms of the measure of the charge that they are entitled to make of persons engaged in interstate commerce.

The Parkersburg and Keokuk cases you had a rental charge based on the tonnage of the vessel.

Now, the obvious argument which was made by the vessel people in that case, well, this is a duty of tonnage.

The court said no, it is not, it is rent.

Justice John Paul Stevens: They said that was proportionate to the amount of use, but here you have got vacant land.

Dennis M. Eagan: Well, it seems to me if we are going to try to draw a distinction between improved property, where, say, the port provides the wharf, and the situation that usually obtains here, unimproved ground, all that goes to, it seems to me, Your Honor, is the amount that is likely to be negotiated for the charge.

It is clear from the record that even though they provide improvements, a portion of the volumetric return that the ports gets is a return on the land.

There is no question about that.

And, there are also clear instances in the record where the ports themselves lease unimproved land and where the company provides the improvements, yet nonetheless a volumetric charge was made.

Unidentified Justice: I don't understand why you draw a difference between whether there is a monopoly or not.

It seems to me that we have to make up our mind whether we are going to credit this statement of the Court of Appeals.

The permanency of Plaintiff's facilities does not permit them to shop around.

There is no other competitor to which they can go for the rental of the required strip of California coastline.

The Commission has a complete monopoly over the sites used by the oil companies.

Now, assume we credit that.

What are we supposed to do then under your view?

Dennis M. Eagan: I assume you would interpret that, Your Honor, the monopoly statement or the must use is confined to the context the court has discussed there, the renewal situation, the refinery adjacent to the lease.

Unidentified Justice: Well--

Dennis M. Eagan: I think it is clear the court is not there talking about or implying that the state has a monopoly up and down the California coastline.

It's demonstrably untrue, it does not.

Unidentified Justice: --I agree, but it doesn't have a monopoly over these particular sites because of the permanency of these facilities, refineries, etcetera.

Dennis M. Eagan: The critical consideration seems to us in deciding whether a monopoly exists--

Unidentified Justice: Let's just assume that there was a monopoly, that we said that the state has a monopoly at least with respect to a lot of these sites, what are we supposed to do then under your view?

Dennis M. Eagan: --It is a threshold response.

It seems to me that that is not a common use of the word "monopoly", but if the state does have a monopoly, then this Court very well may say market participation is out the window, we have got to step in and look at this mode of rent and ask ourselves is this mode, under some principle in the Constitution is this mode of rent bad?

Is there something in the Constitution that legitimizes solely flat, annual amounts of rent?

Is that, as a matter of constitutional principle, the only mode of rent that the State of California may use?

Unidentified Justice: Thank you very much.

Dennis M. Eagan: We are not saying there is no scrutiny.

Excuse me, Your Honor, do I have any time for rebuttal?

Chief Justice Warren E. Burger: We will see.

Mr. Verleger?

ORAL ARGUMENT OF PHILIP K. VERLEGER, ESQ. ON BEHALF OF THE APPELLEES

Philip K. Verleger: Mr. Chief Justice, thank you, and may it please the Court:

Let me start with this point, I think, and sort of pick up where we were a minute ago.

As successors to the English Crown, the original 13 states, we are thought generally considered to have acquired the tide and submerged lands underlying the harbors and the rivers of each of their states from the moment when those 13 states were formed.

It also, I think, has not been disputed on this record, and I don't believe can be, that as the other states joined the Union they came to acquire similar rights.

If one needs to have a citation, one is Shively v. Bolby at 153 U.S., but there are many cases that state that proposition and I won't belabor it.

Now, the second point, one has this basic picture that the states started out owning the tide and submerged lands that underlay the harbors and the adjacent coastline.

Now let me say that in U.S. v. California it was established they didn't own out to the three mile limit, but Congress promptly in effect reversed that decision with the Submerged Lands Act and it has since been clear... and this, I believe, corresponds pretty well to the general thinking about the law at an earlier date... that they had this band that borders along the ocean.

Now that is the first basic proposition.

A second basic proposition is that the commerce clause, the import/export clause and the tonnage clause were of fundamental importance in the very adoption of the Constitution.

Every historian that I have read and many of the cases of this Court including Michelin Tire and others, speak strongly of the fact that in the years of the Articles of Confederation, the first ten years roughly of the Republic, they are proliferated, there grew a bale of assorted tariffs, barriers, and restraints of one kind or another that the states adopted not only with respect to foreign imports but with respect to each other.

And, the Constitutional Convention was caused preeminently because of disagreement and through that condition and dissatisfaction with it.

And, one of the fundamental objectives of the founders was to end it.

Now, those founders were lawyers and if one looks at the basic characteristics of the charges we are dealing with here, one has to say that if the state's interpretation is correct, then it must have been intended by the founders that those provisions which were so important be totally ineffective, because the facts are these.

If one wishes to import any commodity, if one wishes to bring it in interstate commerce by transportation by vessel, one is going to have to have a dock, some sort of facility.

It can't fly through the air from the ship into the land.

Today petroleum, which wasn't thought of then, is one of the major commodities that moves in the world.

It is a major commodity that moves in vast quantities into the coast of California.

California, as it happens, uses about two million barrels a day of petroleum and it only produces something on the order of 800,000 from the internal sources.

Today it is commencing to produce a great deal on the outer continental shelf.

All of that requires pipeline transportation and that pipeline has to be laid in tide and submerged land and quantitatively most of that land belongs to the State of California.

The numbers are in our brief.

They come to 93 percent of the total if you include... If you exclude the cities.

It is our view that the cities are political subdivisions of the state and you need to count them.

I don't think a tariff becomes more permissible because one agency of the state chooses to adopt it along with a portion of the border it controls and--

Unidentified Justice: What is the percentage of private?

Philip K. Verleger: --Private ownership is on the order of two percent.

Justice William H. Rehnquist: What is the breakdown between the City of Los Angeles, say, and then the state in Southern California?

Philip K. Verleger: The City of Los Angeles in general owns the tidelands.

I can't from memory state the exact seaward border although I believe it is somewhere in the vicinity of the breakwater.

When you move up to Long Beach, Long Beach owns it.

You move down to Huntington Beach and Seal Beach and in general those little municipalities own some along the coast.

Then when you get farther out between there and the three mile limit generally, and I can't speak to each individual situation, the state has it.

The facts are that up in the bay area where the refineries are they are almost entirely dependent on state land.

The fact is that all of this vast new oil production comes on stream in Santa Barbara, which looks like it may ultimately aggregate somewhere between a third as much and as much as Alaska, all depends on pipelines across the state owned property in order to come ashore.

I would add--

Unidentified Justice: How does it break down on the shore-line as such?

Philip K. Verleger: --The shoreline, I won't quarrel... if you are just going along the beach, I would not quarrel with the figures that the Attorney General has given us.

You wind up with more than it looks like because of the intricacy of... You measure the thing along and--

Unidentified Justice: That doesn't tell the whole story.

Philip K. Verleger: --No, it doesn't.

Unidentified Justice: You have to look out in the ocean a little bit.

Philip K. Verleger: You have to look out in the ocean and that is the reason for the difference between the 400 versus 1200 miles or more that they quote in the 92 versus 98 percent we quote.

Justice Sandra Day O'connor: Well, Mr. Eagan, do you think the position that the state must grant a right-of-way.

Philip K. Verleger: Mr. Verleger, but I don't mind.

Justice Sandra Day O'connor: Excuse me, yes, Mr. Verleger.

Philip K. Verleger: Your Honor, our position that certainly the state has discretion when it came to particular decisions as to where rights-of-ways would be taken.

We don't say a company has a right to put a right-of-way wherever they want.

But, if the state adopted a policy which effectively precluded use of the tide and submerged lands for pipelines to bring the oil ashore, that is very like what was done in one of the old cases.

I think Hardin was the last name and it was in the Eighth Circuit and we have cited it, where the state said that you couldn't use the streets which the state owned for pipelines to carry gas out of the state.

That was held unconstitutional.

In my view, it would be just as plainly unconstitutional for the state to do the same thing here.

The harbors are the great highway it seems to us of the world and today the outer continental shelf has become the same.

And, the decisions that deal with whether North Dakota or some other state wants to have a cement plant have very little application to this sort of property.

This is a very different situation.

Justice William H. Rehnquist: It is different for what reason in your view, Mr. Verleger, because of the connection with the coastline?

Philip K. Verleger: The state's own decisions say that the state holds this property as trustee for purposes of commerce and navigation.

I think that ties back in a way to the ownership of the original English Crown.

It would be my belief that the reason that this land was held appertain to the public is because it has a public use.

Justice William H. Rehnquist: Well, is that a state law point that--

Philip K. Verleger: There is a state constitutional provision in addition that says the same thing.

Justice William H. Rehnquist: --Is part of your argument based on state law?

I didn't think the Ninth Circuit's opinion was based at all--

Philip K. Verleger: I would use that... Well, I guess it is accurate to say that that fragment of my argument mentions that proposition.

I think that that is a proposition that follows independently of the state law.

I do not think that the states are free to use their tide and submerged lands to defeat commerce, to create a barrier, and that, indeed, is the holding of the case I have just referred to.

Justice William H. Rehnquist: --So, your reasoning that you submit to us is limited to tide and submerged lands?

Philip K. Verleger: Our lawsuit relates only to tide and submerged lands.

That is all we sued over.

Unidentified Justice: That is all you are leasing from the state.

Philip K. Verleger: At least it is all we are leasing in this case.

I won't guarantee that somebody doesn't have an oil lease somewhere or something else.

But, that is what we are talking about here.

Unidentified Justice: And those leases cover lands that are used to carry oil from somewhere else?

Philip K. Verleger: Those leases cover basically lands that are used for pipelines to bring oil from ships that are anchored either by docks or in some instances out at sea in water that is two or three hundred feet deep, to bring that in to the refinery.

They are used to carry oil from offshore platforms.

And, one of the interesting features in the argument that has been made by a lessee in this case is that it points to the absolute necessity of a commerce clause review and import/export review of these various... of these terms.

They have said there are all these little municipalities that have similar positions.

Well, we have a brief from Santa Monica which deals with one of them.

It is true enough as they point out that there is a pipeline that comes ashore and it then goes down through a half a dozen municipalities and finally reaches a refinery.

They say, one, that we are about half way decided we don't want to allow any such pipelines; and, two, they are free to charge anything they want.

Now, I submit that unless some principle such as that found in the user cases continues to be applicable to pipelines, to the very mechanism and means of interstate transportation, one is going to wind up with a situation where a shipper in the United States is going to be roughly in the same position as a trader in the Middle Ages when he had to pay a duty at every little castle that he passed from Frankfort, let's say, down to Italy.

Justice William H. Rehnquist: Well, supposing that California had totally socialized real property, that only the state owned real property, and your clients wanted to lease a place from the state to have a service station and it was in Bakersfield, it had nothing to do with the coastline at all.

Nonetheless, obviously, the cars that pulled in there if it were a service station were going to be moving in interstate commerce.

Would you say that the state couldn't charge whatever it wanted to ground lease that land to an oil company for a service station?

Philip K. Verleger: When it comes to leasing land they owned in Bakersfield for a service station, I don't know of any barrier to their leasing whatever they want.

The think the basic difference here is we are talking about a means of commerce.

We are talking about the mechanism by which property comes across the border into the state, and we are saying that the state cannot, by calling what it collects rent, collect exactly the same charges it would as a tariff and legitimatize the charge by changing its label.

Justice Sandra Day O'connor: Well, can the state, Mr. Verleger, charge a reasonable rent under your view?

Philip K. Verleger: There is no question in my mind but that they can.

Let me say in that connection--

Justice Sandra Day O'connor: Well, the state court said this was a reasonable rent.

Philip K. Verleger: --Well, the state court was reviewing that in terms of its standard for the review of an administrative agency, its decision, which at least in California... and actually a legislative decision.

And, in California the rule under those circumstances is... gives the agency so much discretion that I don't know... All you can do is treat it as a finding that the agency didn't use its discretion.

It is a different issue.

Justice Sandra Day O'connor: Well, if a volumetric rent is a typical sort of a rent for pipeline use--

Philip K. Verleger: It isn't.

Justice Sandra Day O'connor: --It is not?

Philip K. Verleger: No.

Justice Sandra Day O'connor: If it were, would it be reasonable.

Philip K. Verleger: In this particular instance I would say not because the Constitution... take imports first.

Expressly under the import/export clause it forbids a duty or an impost.

A duty or impost is, let us say, in round figures a dollar collected for every barrel that comes in.

And I submit that a dollar collected for every barrel that has come in is the same thing regardless as to what you call it.

Now, beyond that I would submit that we have a very close analogy in the tonnage tax cases which dealt very much with that problem.

The founders of the Constitution were concerned over the problem of evasion of the provision forbidding impost and duties and they adopted the tonnage clause because they were fearful that it would be evaded by charging the ship instead of the cargo.

Now, the--

Justice Thurgood Marshall: Counsel, what would you consider to be a reasonable rent?

Philip K. Verleger: --Well, I would consider... They fixed one before, Your Honor.

The rent was fixed in this way.

They appraised the value of the property as industrial property.

They used comparable industrial property.

They then determined the going rate of rental for industrial property in the area which they fixed at eight percent of its value and they charged it and our people paid it.

Now, in this instance, the leases still require that reasonable rate of rent.

Then they go on and file on to it the percentage rent, the through-put rent... what we call the tariff... as something extra.

We have no quarrel with the rental based on the reasonable value of the property.

Justice Thurgood Marshall: You consider the other more rental?

Philip K. Verleger: The other is more rent and the answer is since it is fixed on the basis of the commodity--

Justice Thurgood Marshall: And, it is unreasonable.

Philip K. Verleger: --More than unreasonable.

We think it is unconstitutional because essentially if you look at both of the cases that deal with imposts... Michelin Tire was very careful to say that this was not a charge for simple entry into the country.

In the tonnage tax cases the court was explicit in saying the state or the city... because those cases treat the state and the city as the same... could charge for facilities they provided but could not charge for the use of the unimproved bank of the river and that is essentially what we have here.

Now, if... Let me say as I go further in that connection that one of my puzzles in this connection has been the degree to which this case raises issues of the Montana Power and the Louisiana v. Maryland and the issues raised in the commerce clause and in import cases generally.

My reasons for uncertainty is simply that first of all in the first sentence of their brief the state recites that we do not... the first sentence of the reply brief... that we do not contend... the words are

"without question a simple charge for the privilege of bringing merchandise into the country would be prohibited under the import/export clause. "

That is the first sentence of the reply.

And, similarly, while I see no such concession as to commerce, I see no connected argument anywhere that this kind of a charge is all right under the commerce clause and I hesitate, therefore, to embark on a debate that may not be before this Court at this time at all and yet I am a little concerned that if I say nothing on it the subject may be the subject of a decision to which I have contributed very little because one hesitates to answer an argument that hasn't been made.

Let me say, therefore, simply these things.

That is it is my belief that the Court's most recent cases recognize the necessity of preserving something like the doctrine of the user tax cases here, to start with Evansville which says that the charge of one dollar per passenger at an airport was all right because it didn't exceed cost.

It is a 1972 decision.

It is a relatively modern decision.

To continue, in Montana Power this Court speaks of the invalidity of a tax which bears no relationship to the taxpayer's activities and it goes forward and refers to Nippert v. Richmond and Michigan-Wisconsin Pipeline v. Calvert.

Now, both of those cases were cases where impractical operation they taxed more severely on interstate commerce.

And, let me say simply that if one looks at the Army Engineers' statistics that our friends and the others have cited, it will practically appear that quite literally when it comes to crude oil this law has its application essentially 100 percent to imports and to interstate commerce and as to products it must be in the order of 90 percent.

Unidentified Justice: Mr. Verleger, I guess there is no doubt that Congress couldn't allow California by statute to charge these rents.

Philip K. Verleger: Congress could.

Unidentified Justice: And there would be no commerce or--

Philip K. Verleger: There would be no commerce clause problem clearly on import/export.

Unidentified Justice: --Oh, really?

Philip K. Verleger: Well, I--

Unidentified Justice: Did Congress authorize that?

Philip K. Verleger: --Well, I hadn't thought since... The two are different, that is all I mean to say.

My belief is that if Congress expressly did it it would be all right.

Unidentified Justice: There is nothing the Submerged Lands Act or any other statute would suggest--

Philip K. Verleger: I have found no congressional act.

I think the question of how this would affect the application to the oil brought in from federal leases, if it became prohibitively high, is a question that was involved in Louisiana v. Maryland, but not decided, and I don't think it is presented on the record here.

Unidentified Justice: --Incidentally, suppose California sold this whole coastline to private interest.

Could those people charge you any rent they wanted?

Philip K. Verleger: The answer is I think I don't know.

If it got too high, I expect I would be in court, but the truth is I haven't analyzed that problem, so I hesitate to speak to it.

Unidentified Justice: You would probably find a right of immanent domain in a pipeline company.

Philip K. Verleger: Some have it that might be used.

The problem is we don't have it against the state.

Unidentified Justice: Exactly, you don't.

Justice John Paul Stevens: May I ask just one question on your theory?

Philip K. Verleger: Sure.

Justice John Paul Stevens: Are you taking the position that no matter how reasonable the level of the rent might be, they can never use the volumetric formula?

Philip K. Verleger: It is our sense that... particularly under the import/export clause that the volumetric formula applied on imports produces exactly the same result as a tariff in the same amount.

Now, it is very clear that the state could not apply a tariff no matter how reasonable it was.

And that, I think, irrespective of all the criteria in complete thought of transit because you have got an express prohibition.

So, they can't have a reasonable tariff.

I have trouble with anything that permits them to do the same thing because it is obvious that from the beginning they owned all this real estate and while they have sold off some of it they have still got most of it.

The cities I count as the same thing.

It seems to me no defense at all to say that the cities are doing the same thing.

Justice John Paul Stevens: And, is it your understanding of the Ninth Circuit that that is what they held; that you cannot use this formula for the tidelands and the submerged lands on the border of the state.

Philip K. Verleger: I believe they so held.

Justice John Paul Stevens: Regardless of amount?

I mean, even if they had--

Philip K. Verleger: Also I have found... I think their view was that the amount was unreasonable too.

Justice John Paul Stevens: --I understand, but I couldn't quite tell whether one would have done it without the other.

Philip K. Verleger: One never knows for sure, but my view is--

Justice John Paul Stevens: But your view is that it is that on either ground independent of the other.

Philip K. Verleger: --I also urge, even though the cases I have to rely on are older, that a straight tariff, something that says you have got to pay fifty cents a bushel or a barrel to come into a state... into California from Nevada, for instance, unless justified under the rules of the user taxes, would be bad.

The Michigan-Wisconsin Pipeline case is as good an example as any.

Justice John Paul Stevens: You defend the lower court's commerce clause holding as well as the import/export?

Philip K. Verleger: I do.

Justice John Paul Stevens: But, you would prefer a decision on the latter.

Philip K. Verleger: Well, we are concerned with both because--

Justice John Paul Stevens: Well, I know, but in the commerce clause one... That argument wouldn't necessarily... You wouldn't necessarily win on that based on any volumetric no matter how small.

Philip K. Verleger: --No.

I think that in the commerce clause the critical question is the relation to cost idea that appears in the user tax cases.

I think that because of the special situation of transportation across state lines that... It seems to me the constitutional necessity that there be a prohibition on a simple set of tariffs that are put up by states at the border, that that doctrine remains essential and I note that in Footnote 12 in the Montana... in the Commonwealth Edison v. Montana Power this Court gives a continued effect of that doctrine in situations that are sort of quasi proprietary.

That is what the note said.

And this is pretty much that situation.

So, I would conclude that that doctrine arranged an essential there as to interstate commerce as well as foreign commerce.

It seems to me that the use of title as a vehicle for the imposition of creation of a barrier, however small, at the state border is just as undesirable for interstate commerce as it is for foreign and I note that in Michelin Tire this Court has sought to amalgamate the concepts of the import/export clause and the commerce clause to the extent feasible.

In that case what was done was to take commerce clause ideas and apply them to the import/export clause, but I would submit as one looks at the necessity of a protection against a true sort of barrier at the border that the same logic applies.

Let me add that there are plenty of situations that illustrate the necessity.

It is a fact, for instance, that oil from Alaska comes ashore in Long Beach.

It then is put into what is known as the four-corner pipeline.

It traverses the City of Los Angeles, it crosses the state's highways, it crosses the land of probably a hundred or a thousand maybe assorted cities and counties as it goes between Los Angeles and Midland, Texas.

And, every time it crosses a street or a highway, it is crossing some state's property.

If the rule is that the state... I say simply that if the rule is that the state can charge anything it wants for the use of its property, then I submit we will be back in the same situation as a peddlar in the Middle Ages.

Thank you.

Chief Justice Warren E. Burger: You have two minutes remaining, Mr. Eagan.

Dennis M. Eagan: Thank you, Your Honor.

I think from some of the questions from members of the Court there is some obvious concern with whether there is a monopoly.

I was able to find the reference to the Corps of Engineers' report.

It is entitled

"National Shoreline Study, California Regional Inventory. "

published in August 1971.

That report indicates there are approximately 1513 miles of coastline including the interior bays in California and of that amount 418 miles is in the ownership, the frontage, of local public entities pursuant to grants from the state legislature.

Now, of course, that 418 figures doesn't include the frontage that is owned by private parties and I just don't have a figure for that.

I should also say that the proportion of local cities to state ownership is probably even greater if we focus on what is desirable or useful.

That northerly 350 miles between San Francisco and the Oregon border really is not necessary or needed for this type of lease.

Second, I do want to clarify... and I can do it by reference to the record... that we are not talking about a volumetric charge here that is added on to an eight percent return.

This is just like a percentage lease.

There is a minimum rent, but that minimum rent is applied as a credit against the volumetric rent and you very well may have situations where all that is paid is the minimum rent because the volume has not been sufficient enough to generate a volumetric rent over the minimum.

The citations to the record for this are to two leases that talk about the minimum application at page 42 of the Joint Appendix, also page 64, a Union and a Standard lease, and also in the affidavit of the Commission at pages--

ORAL ARGUMENT OF DENNIS M. EAGAN, ESQ. ON BEHALF OF THE APPELLANTS -- REBUTTAL

Unidentified Justice: Mr. Eagan, can I ask just one question?

Is it your position here the same privileges with regard to rental charges in the land in dispute in this case as you would in any land any place in the state?

Dennis M. Eagan: --That is correct, Your Honor.

Just to underscore what is the contention of the Plaintiffs in this case, I quote again from the remark at oral argument before the District Court by counsel for the oil companies,

"To us what this case is about is just the validity of a through-put charge per se, whether the state can charge even one-millionth of a mil as a through-put fee. "

That is the import of the Ninth Circuit's decision, not even one-millionth of a mil is permitted to the state in this circumstance.

Chief Justice Warren E. Burger: Your time has expired now.

Dennis M. Eagan: Thank you.

Chief Justice Warren E. Burger: Thank you, gentlemen.

The case is submitted.

Unidentified Justice: The Honorable Court is now adjourned until tomorrow at 10:00.