MCKESSON CORP. v. FLORIDA ALCOHOL & TOBACCO DIVISION
Legal provision: Amendment 11: Eleventh Amendment
ORAL ARGUMENT OF ANDREW L. FREY, ESQ. ON BEHALF OF THE PETITIONER, McKESSON CORPORATION
Chief Justice William H. Rehnquist: We will hear argument next in No. 88-192, McKesson Corporation v. Division of Alcoholic Beverages of Florida, consolidated with No. 88-325, American Trucking Associations v. Maurice Smith.
Mr. Frey, you may proceed whenever you are ready.
Mr. Frey: Thank you, Mr. Chief Justice, and may it please the Court, in 1983, the Arkansas Legislature enacted the Highway Use Equalization tax, imposed for the right to operate certain heavy trucks on the State's highways.
This tax was assessed at a rate of five cents a mile, up to a ceiling of $175 or 3,500 miles of operation.
All operations each year in excess of 3,500 miles were untaxed.
Now, because vehicles base registered in Arkansas tend to make much more extensive use of the State's highways than non-Arkansas vehicles, the free ride given by Arkansas for operations in excess of 3,500 miles resulted, as both courts below found, in a substantially lower tax cost per mile for Arkansas than for non-Arkansas truckers.
In fact, most members of the petitioner class paid the five cent a mile option, and the average cost for the in-state vehicle was one cent per mile.
Now, before this HUE tax even went into effect, this suit was filed challenging the validity of the tax on various grounds, and on behalf of a subclass consisting of non-Arkansas base registered truckers, a challenge was made under the commerce clause to the HUE flat tax on precisely the grounds ultimately upheld by this Court in the Scheiner case some four and a half years later.
Now, this extended effort by interstate truckers to rid themselves of the discriminatory HUE tax... I think it is important to appreciate what we went through during this period.
We began with an effort to have the tax proceeds placed in escrow rather than deposited in the State treasury, to facilitate refunds in the event that the tax was struck down.
That was rejected.
We went through the lower Arkansas courts and the Arkansas Supreme Court, and they upheld the validity of the tax under the commerce clause.
The case came up here.
Eventually, after the Scheiner decision, it was remanded.
After it was remanded, the State continued to collect the tax, doing everything in its power to delay the inevitable decision holding it un-Constitutional under the principles of Scheiner.
As a result of these efforts, we came back to Justice Blackmon, a circuit justice, seeking the imposition of an escrow to stop the bleeding, basically, and it was granted, and the funds from August 14, 1987 on were placed in escrow.
This, I think, is what produced legislation in Arkansas in October of 1987 repealing the HUE tax and replacing it with a tax of 2.5 cents per mile, but not flat... it would be paid by everybody.
The Arkansas Supreme Court actually did not get around to invalidating the HUE tax in this case until March of 1988.
Now, in what some might consider a tacit admission of weakness on the merits of the retroactivity issues brought before this court for review, Arkansas devotes nearly half of its brief to strikingly novel and, we think, quite farfetched arguments designed to avoid the merits, such is the contention that the 11th Amendment bars the exercise of appellate jurisdiction over a Federal question decided by a State court in any case that could not have been brought within the original jurisdiction of the Federal courts.
Now, unless there are questions on issues of this sort, I would like to devote my limited time to the merits of the retroactivity issue.
Unidentified Justice: Well, it seems to me that the question is not only retroactivity, but assuming that the tax is retroactively stricken, what the remedy is.
Mr. Frey: I do not believe that question is the question for this Court at this time.
That is, this is a suit that was brought under the illegal exactions provision of the Arkansas Constitution, and I think that it has to be taken as matters stand in this Court, although there is an unresolved claim of sovereign immunity in the case, as matters stand in this Court, in light of the decision of the Arkansas Supreme Court, Arkansas will give refunds if these taxes were exacted in violation of Federal law.
Whether they were exacted in violation of Federal law depends, in Arkansas' view, on the application of the Chevron test.
Unidentified Justice: And is that a statutory refund procedure?
Mr. Frey: It happens to be Constitutional.
It is a provision under the Arkansas Constitution.
Unidentified Justice: So you do not argue that there is some Federal rule requiring a refund whenever a State tax is struck down as un-Constitutional?
Mr. Frey: We would argue that if we were pressed to it in a subsequent stage of this case.
We do not argue that now.
That is, we do believe there is a Federal--
Unidentified Justice: That is your bottom line... you think there is some flat Federal requirement that.
whenever a State tax is struck down as un-Constitutional that refunds are required?
Mr. Frey: --No, no.
First of all, it is not our bottom line, because the question here is whether... the question of whether Scheiner is retroactive is a question of what, substantive rule of law governs our claim for refund of taxes.
I do not believe it is a question of our right to a remedy.
Now, if you say that the substantive rule of law that governs this case is not Aero Mayflower but Scheiner, you remand the case back to the Arkansas Supreme Court.
We believe that under Arkansas law, we would be entitled to a remedy at that point.
Now, if the Arkansas courts were to say, we are sorry, you are not entitled to any remedy, than they would have to overcome an argument that we have made and would make again that Federal law requires a refund.
When I say a refund, I do not mean necessarily 100 percent of the taxes, put some retroactive relief.
Unidentified Justice: Well, did the Supreme Court of Arkansas pretermit all other issues except whether or not this was... compiled with the Chevron tax?
Mr. Frey: It simply decided... which was all it needed to decide if it was correct... that under the Chevron test, Scheiner was not retroactive, and we agree that if that ruling is correct, we lose.
Our claim for refunds is foreclosed.
Unidentified Justice: Well, they did order a refund, did they not?
Mr. Frey: They did order a refund.
In other words, they decided in effect that the effective date of the Scheiner decision was August 14.
Unidentified Justice: So if there was more... If it was retroactive beyond that, there would be a refund?
Mr. Frey: The significant thing about the fact that they ordered a refund is that it shows that there is an Arkansas refund remedy.
Unidentified Justice: Exactly,--
Mr. Frey: So I do not believe that we have the problem that you have posed at this stage of the case.
It is a fascinating problem, but I do not think that you have to decide it on our case.
Unidentified Justice: --Let me--
--It may be around in the next case.
Mr. Frey: It may be.
It may be.
Unidentified Justice: Mr. Frey, is there any way in which the truckers could have resisted payment, been sued, and have the case come up that way?
Mr. Frey: Well, there are cases... you have pending on your docket the Ashland Oil case, which was a sales tax type of case, gross receipts tax case, where the tax was not paid, and they were sued by the State.
Unidentified Justice: But not this kind of a tax?
Mr. Frey: In this kind of tax, that cannot be done, because basically there would be criminal penalties for attempting to operate in the State of Arkansas without having paid the tax.
Unidentified Justice: You cannot pay under protest?
Mr. Frey: Arkansas would not allow payment under protest.
But we did file a suit... I think that it is quite clear under this Court's precedents, and I do not think that Arkansas contests it, that the filing of the suit before any payments of the tax were made constitutes the equivalent of a protest for purposes of Federal Constitutional law.
We did everything in our power to resist the payment of the tax, including asking for an escrow.
Unidentified Justice: Well, does the State court have any latitude in determining how retroactivity is affected?
That is to say, if in a case it said all the tax was passed on, and this particular taxpayer has not had any loss, does that affect retroactivity so that State issues are bound up with what you are going to begin talking to us about?
Mr. Frey: Well, I would say this.
First of all, the question of whether taxes were passed on, which no claim of pass-on has made in our case, would figure in for the Federal Chevron test.
That is, it would relate to the equities of making a refund.
Now, it might also relate to a separate, that is, the State may have a separate rule.
For example, States sometimes have rules that if you did not bear the legal incidence of the tax, say, in the case of a sales tax, the person that remits the tax, the store, is just a collector of the tax.
Some States have rules that say you cannot get a refund if the tax is invalid.
The question for this Court would be whether that would be, I think, an adequate State ground for denying a refund.
But I think it is clear from this Court's decisions that where the State court decides a question of Federal law is the basis for its decision, this court clearly has jurisdiction to review it.
Michigan against Long Three Affiliated Tribes... this goes back to Standard Oil v. Johnson in 1942, or even further.
Unidentified Justice: Are our cases clear that Chevron is the appropriate test to apply for determining retroactivity?
Mr. Frey: We suggest... everyone has thought it.
Most of the State amicus briefs in this case suggest the Chevron test.
The court has generally dealt with questions of retroactivity under the Chevron test in the civil area.
We think the Chevron test should be modified in the case of Constitutional violations by the Government in light of the principles that were set forth in the Owen case.
We think that there is a different problem presented when the Government violates Constitutional rights and then seeks to avoid retroactive application.
On the other hand, we think the Chevron best does state, in a general sense, the framework that you would look at.
We have not pressed our position so far as to say that all decisions involving claims of Constitutional violation have to be retroactive.
Unidentified Justice: Well, the State says, I guess, that we should apply the State rules on retroactivity, not a Federal rule at all.
Mr. Frey: I do not understand the State to be arguing that in this case.
If they are arguing that, that is news to me.
Now, they have argued that the commerce clause does not of its own force provide a cause of action or provide a right to relief.
We do not agree with that, but my point again is that Arkansas law, as Justice White pointed out, clearly provides a right to relief, because we got it on the escrow monies.
So I do not... I think this is all a distraction, and not a problem, in this case.
Now, I think, given the limitations of time... I have said a little bit about the first prong of the Chevron test, which goes to the question of the extent of justifiable reliance by the party seeking non-retroactive application.
Now, you have to look at this case with the understanding that it is now... we now know, in light of the Scheiner decision, that the State exacted from non-Arkansas truckers millions of dollars of taxes, un-Constitutionally.
That is a fact that we know.
The question we are addressing in the retroactivity inquiry is whether the rules under which this action was un-Constitutional should not apply.
The first prong of this retroactivity inquiry asked how strong is the reliance interest of the people who say do not apply the correct rule of law to this case.
Now, I am willing to concede that before Scheiner was decided, the outcome was not a sure thing.
I think Scheiner was a close case.
It could have gone either way.
The thing that made it a close case was the old Aero Mayflower precedents.
I think that even Justice O'Connor, in your dissent, that was the factor that was critical in your concerns in that case.
I think that but for Aero Mayflower, there would not have been any serious dispute under Complete Auto and Commonwealth Edison about the un-Constitutionality of the HUE tax.
Now, all I want to say about this kind of a close case is that if you satisfy the first prong... the first prong of Chevron is designed to establish the general rule that most decisions are retroactive.
Non-retroactivity is the exception.
Now, if you say every case that is close qualifies for treatment as a non-retroactive case, you are basically saying that virtually every case the Supreme Court of the United States decides is presumptively or likely to be non-retroactive, where you have to go through a Chevron analysis.
I wonder whether you want to walk down that road.
Now, let me turn to the second prong very briefly, and there is wealth of things to cover here.
But it is a very important point that the State court missed, and that the State misses in its brief, in talking about the importance of the policies that underlay the Scheiner rule, and whether, in deciding the retroactivity of Scheiner, you would be furthering or impeding those policies.
They say, well, there are no individual rights under the commerce clause, they say, well, the problem has been cured for the future, so what is the problem?
Now, what they are turning a blind eye to is the institutional concerns that underlie the commerce clause itself, which is the tremendous hydraulic pressures on State legislators to enact parochial, discriminatory legislation that favors local interests at the expenses of out-of-State interests.
We would say that the commerce clause cases are almost a paradigm of the case in which the second prong of the Chevron test calls for full retroactivity.
Let me just say, I will not talk about the equities, because my time is running out.
I would just like to say one word about the post-Scheiner taxes, and reserve the balance of my time for rebuttal.
I do not understand.
The State collected substantial sums of money after Scheiner was decided under a tax that was plainly un-Constitutional.
It makes no defense here--
Unidentified Justice: Well, are you claiming that your clients did not have to pay it, or should pay no tax to Arkansas?
Mr. Frey: --No we are certainly... they should pay their fair share.
What we are looking for is, Arkansas was willing to let its own people operate their trucks on the highways for basically one cent a mile.
Unidentified Justice: But I mean, during this period of time when you were running trucks on the Arkansas highways do you concede that you are liable for some sort of tax?
Mr. Frey: Yes, certainly.
The problem is that we should not be made to pay the tax that should have been paid by the Arkansas people, and that is the focus of our complaint.
We are not seeking refunds.
We do not say Federal law requires every penny of tax that we paid to be refunded.
We say Federal law requires a refund of the illegal portion, the discriminatory portion.
I would like to reserve the balance of my time.
Unidentified Justice: Very well.
We will hear now from you, Mr. Robertson, and you are representing the Petitioner McKesson Corporation, are you not?
ORAL ARGUMENT OF DAVID G. ROBERTSON, ESQ., ON BEHALF OF THE PETITIONER McKESSON CORPORATION
Mr. Robertson: Yes, we are.
Mr. Chief Justice, and may it please the Court, in June, 1986, Petitioner McKesson decided to challenge Florida's successive enactments of the Alcoholic Beverage tax schemes that discriminated against interstate commerce in favor of local interests.
McKesson's Constitutional claims in State court requested relief both prospectively and retroactively.
For prospective relief, we asked the State court to enjoin the Starers continuing enforcement of a discriminatory tax, and for retroactive relief, we asked the State court to grant Florida's historic remedy for a discriminatory, un-Constitutional tax, a Florida tax refund.
McKesson challenged Florida's alcoholic beverage tax scheme on commerce clause and other Constitutional grounds.
Mckesson argued that the Florida tax, both in purpose and in effect, discriminate against interstate commerce in favor of local interest.
McKesson specifically invoked Florida's general tax refund scheme, specifically section 216.25.
McKesson argued that under this Court's decisions, as well as the State statute, the appropriate remedy for the extraction of un-Constitutional taxes was the return, not of the entire tax, but only of the discriminatory portion of the tax.
In February, 1988, a unanimous Florida Supreme Court agreed with McKesson that the Florida tax scheme discriminated against interstate commerce in violation of the commerce clause.
The Court recognized that McKesson's disfavored products directly competed with the local producer's favored products.
The court recognized that as a result of the tax scheme, the State in effect had to use the courts... stripped away from McKesson its natural economic advantages, and thus the court concluded that the tax scheme has disadvantaged McKesson, raising our relative cost of doing business, and had advantaged McKesson's favorite competitors.
Nevertheless, despite this Court's decisions on Constitutional tax refunds, despite the Florida court's own decisions, and despite those findings of competitive injury, the State refused to refund any portion of the un-Constitutional taxes.
The Florida court denied McKesson relief by constructing it's own retroactivity doctrine that totally collides with this Court's retroactivity doctrine in Chevron.
Unidentified Justice: And you take that position that the rule that has to be applied is the Chevron rule?
Mr. Robertson: We take the position that when a State court invokes the Federal Constitution to declare a State tax un-Constitutional, the court should use the Chevron standard to decide whether that finding should be applied retroactively or only prospectively.
Unidentified Justice: How in that Chevron test does the action, the continuing action of the Florida legislative process fit into the test?
Mr. Robertson: We brought Florida's continuing history of enacting un-Constitutional statutes to the attention of the Florida courts for two reasons, vis a vis Chevron.
First, under our commerce clause claim, we wanted the court to see what the legislature's purpose was in enacting the particular statutes.
Secondly, vis a vis Chevron, we wanted to demonstrate to the court that in applying a test for retroactivity, the court should pay close attention to whether our basic commerce clause interests in the national common market would be frustrated or advanced by a particular remedial measure.
McKesson, indeed, submits that Chevron's first prong should be a threshold test.
Chevron's first prong, of course, requires a court to demonstrate that it has established a new rule of law.
And the reasoning of Chevron strongly suggests that that initial requirement should be a threshold requirement.
Chevron, of course, cites to Hanover Shoe, and Hanover Shoe says that a court has absolutely no reason to consider the theory of prospectivity unless the court has overruled clearly declared judicial precedent, and therefore needs to consider whether parties who reasonably relied upon a law may be injured by retroactive application of the new law.
Unidentified Justice: If this is a State cause of action, in the other case there is no dispute that you are proceeding under Chevron, and the dispute is just how Chevron applies.
Here, I gather, there is a dispute as to whether to use Chevron or a State rule.
Why should you not use a State rule, if it is a State cause of action?
In other words, do you not have to establish, in this case, unlike the other one, that it is a Federal right that you are asserting?
Mr. Robertson: Well, in this particular case, we based our claim upon the commerce clause, and we said to the Florida Supreme Court that we were entitled, as a matter of Federal as well as State law, to a refund of the discriminatory taxes.
And the Florida Supreme Court in its opinion, notes that fact.
Unidentified Justice: Do you agree that that is essential to your case, that you have to establish that you have a Federal right to the recovery of the money?
Mr. Robertson: We do not believe that that is essential, because in this particular case--
Unidentified Justice: Well, why is it not, if it is a State right to the recovery of the money, cannot the State condition that right on whatever it wants, including using its own retroactivity?
Mr. Robertson: --In this particular case, the only basis for the State Supreme Court's refusing to grant a refund was its application of a retroactivity standard.
All we are saying in this particular case is that when a State court invokes the Federal Constitution to declare a statute un-Constitutional, along with it comes the obligation to use the Chevron standard to determine whether that finding should be retroactive.
Other than that, we had complied with every facet of the State procedures for refunds.
Unidentified Justice: Well, why cannot I say that it is Federal... it is un-Constitutional under Federal law, and therefore in the future you cannot do it?
Now, I am willing, although I am not bound to do so... as a State, I am willing to provide monetary compensation for past violations.
But for that purpose, I am going to have my own retroactivity rules.
I do not know why, just because you are deciding the unlawfulness under Federal law, you also must decide the compensation under Federal law.
Mr. Robertson: Our contention is that historically this Court, not only in criminal cases such as Chapman, but also in civil cases, as recently as Allegheny Pittsburgh, has not allowed the State court to dictate the remedy for a Constitutional violation vis a vis a tax statute.
Rather, the Court has required the State to follow Federal equitable standards in determining whether the particular decision should be applied retroactively or prospectively.
Indeed, right now--
Unidentified Justice: Even though it is a State remedy, and not a Federal claim?
Mr. Robertson: --In a sense to go back to the words of Bacchus, the Federal claim and the State remedy are intertwined, and in each particular case, the State court has to be sure that enforcing the Federal remedy it does not allow the State remedy procedure to collide with the Federal Constitutional right and its attendant equitable doctrine.
Unidentified Justice: Well, suppose we have a State remedial scheme that is evenhandedly applied, and it operates as a matter of State law to deny you recovery in this case?
Mr. Robertson: We think as the Court decided in the old case of Sunburst that a State court has an absolute right to use any retroactivity standard it wants, as long as it is exclusively deciding an issue of State law.
But once a State court begins to use the Federal Constitution to enforce Federal Constitutional principles, then the Court should look to the Federal standard.
Otherwise, we will end up with very different State enforcing very different standards, and utter confusion in terms of whether parties who pay taxes inter and intra-State are deserving of a refund.
But I think what is critical--
Unidentified Justice: So you have an interest other than simply being treated equally with Florida taxpayers under Florida law?
Mr. Robertson: --Absolutely not.
We are only looking for equal treatment.
We are only looking for the State to tax us at exactly the same rate as it taxed our local competitors, and that is why we are not asking for a return of the entire tax.
Far from it.
We are simply saying that since, in this particular case, Florida cannot make any type of argument whatsoever... and the Florida has not, on appeal, tried to do it... that their decision constituted a new principle of law.
In this particular case, given that Chevron's first prong should be a threshold prong, following our demonstration that their decision, which relied on old decisions like Hunt and Lewis and Pike and Bacchus... you know, this was not a situation where they were confronting a new situation.
They were applying this Court's oldest commerce clause cases, and in doing that, they said the Florida legislature once again has overstepped and tried to extract un-Constitutional taxes.
All we are saying is that since the court did not have to create a new principle of law to reach that finding, they cannot invoke any type of retroactivity doctrine.
They fail to meet Chevron's first prong, and therefore in this particular situation a refund of the un-Constitutional taxes is appropriate.
Unidentified Justice: What if it were proven that... what if the Court just said, well, you may be entitled to a refund if you have really been hurt, but we hold that you have passed on every dollar worth of this tax?
Mr. Robertson: First, under Chevron's three prongs, a court would have to get by that initial prong, because after all, retroactivity is a word--
Unidentified Justice: But you say that you are only asking for the return of a... you only want to be treated fairly.
Mr. Robertson: --Exactly.
Unidentified Justice: And you want to... but if you have never been hurt by this tax, if all you have done is passed it on to your customers, why should you get a refund?
Mr. Robertson: Let me speak to that.
This is not a case like Bacchus.
McKesson in this particular case suffered a significant economic injury, and the Florida Supreme Court so found.
McKesson's products were competing across a broad spectrum, with the local producers' products, and McKesson, in that competitive marketplace, suffered--
Unidentified Justice: You want your refund, and to get a refund you are going to have to prove competitive injury, and recover only what the competitive injury was?
Mr. Robertson: --We have two answers to that.
The first is, under Chevron's first prong, the court should not reach that, because Florida, after all, cannot prove that it justifiably relied upon those un-Constitutional statutes.
But the second answer is... and this draws back to some of the Court's decisions in the anti-trust area... it does not make sense, as it did not make sense in Hanover Shoe, to allow the perpetrator, the State extracting un-Constitutional taxes, or the anti-trust violator... to force the victim to prove the amount of the disruption of the economic market.
Unidentified Justice: But you are saying in effect that you are getting damages for competitive injury, which could be totally different than the amount of the tax paid, I would think.
Mr. Robertson: That is correct.
We... it could be totally different, and we are not asking for damages.
We are only asking for a tax refund.
Unidentified Justice: But you are saying that you... because you have competitive injury, you are entitled to the tax refund, even though you may have completely passed the tax along?
Mr. Robertson: We are saying that in this case, as in Bacchus, we had to demonstrate our standing, and to do that, we established to the satisfaction of the Florida court that we had suffered a significant economic injury.
We are saying that once we have established that, it does not make sense for the State to turn around and say, "You passed it on".
I mean, this is a situation where the legislature was intending to injure us.
Unidentified Justice: I think that you have answered the question.
Thank you, Mr. Robertson.
We will hear now from you, Mr. Farr.
Mr. Farr, you are representing the State of Florida, right?
Mr. Farr: That is correct, Mr. Chief justice.
Mr. Chief Justice, and may it please the Court, I think the best way to see why McKesson is not entitled to a tax refund in this case is to look at the injunction issued by the State courts, and to ask what tax McKesson would have paid if that injunction had been issued the day before the tax took effect.
As the Court is aware, the injunction effectively denied tax preferences which had been in the statute for sales of a small group of alcoholic beverages, striking the preferences from the statute.
No one questions that this was the right, remedy, the right way to make the statute Constitutional.
If that same injunction had been issued on June 30, 1985, which is the day before the effective date of the 1985 statute, McKesson would not have paid one penny less in taxes.
Given that fact, it was entirely reasonable for the Florida State court to say that it was inappropriate to force a refund that would have a severe impact on the State treasury solely for the purpose of giving a windfall to McKesson.
ORAL ARGUMENT OF H. BARTOW FARR III, ESQ. ON BEHALF OF THE RESPONDENTS DIVISION OF ALCOHOLIC BEVERAGES AND TOBACCO, DEPARTMENT BUSINESS REGULATION, STATE OF FLORIDA, ET AL
Unidentified Justice: Florida producers were operating at an advantage during that time, as compared to McKesson?
Mr. Farr: That is correct, Mr. Chief Justice.
The rule that we are seeking here and advancing here is a very narrow one.
It is simply that when a very minor exemption is part of a general taxing statute and is struck down, that does not bring down the entire taxing statute during the period that the exemption was in effect.
To take an example from a case that this Court decided just a few weeks ago, the Texas Monthly case, the Court found that the tax exemption for sales of religious publications in Texas violated the establishment clause.
Although the Court did not directly address the issue of remedy in that case, the plurality opinion indicated quite clearly its view that Texas Monthly and other magazines of general circulation would not be entitled to a tax refund if on remand the State courts eliminated the exemption.
Indeed, any of those--
Unidentified Justice: Now, suppose they did not, and they just continued passing statutes which had tiny variations from the first, but continued essentially an unlawful exemption scheme in place?
Mr. Farr: --It is possible--
Unidentified Justice: Which is what happened here.
Mr. Farr: --Mr. Justice Kennedy, at some point you might get a situation where a refund was the only possible remedy.
Unidentified Justice: Well, why is that point not here?
I mean, there certainly is evidence of an apparent pattern of conduct by the State legislature in Florida whereby the State court will find law un-Constitutional, or the tax, and then the Court will apply it only prospectively, and the legislature devises a new variation every time one is struck down?
Mr. Farr: --Well, Justice O'Connor, let me say a couple of things.
First of all, of course, as McKesson itself points out, the Florida State courts in many situations have given refunds of State taxes when they are struck down on various grounds.
Unidentified Justice: Well, but let us say that this is a situation where they have not, and there is just this pattern avoiding giving anything back.
Should Chevron be applied then, in those circumstances?
Mr. Farr: I do not think Chevron is the right analysis under any circumstances, Justice O'Connor.
But let me speak to the particular point about the so-called rogue legislature... the legislature that there is just no control over.
First of all, I think that it is a fair question even in that context whether the penalty of what amounts to several hundreds of millions of dollars of taxes is an appropriate penalty for a tax exemption that may confer $5 million or $10 million worth of tax benefits.
But the second point that I would make is that the Florida courts have made very clear that they will use their injunctive power not just way after the fact, but in order to keep an un-Constitutional scheme from going forward very shortly after it has been enacted.
If you look at the history in this particular case, when McKesson filed suit, an injunction was issued that was not stayed on appeal.
But when the 1988 statute was challenged, the court determined that that was also an un-Constitutional statute, refused to stay the injunction on appeal, and ever since the date of that injunction, that statute has been... any discrepancies in that statute have been enjoined.
So, the notion that it is necessary to have what is effectively a huge damages remedy in order to control the legislature simply does not fit with what the Florida courts have done in this situation.
Unidentified Justice: You assume that you are talking about hundreds of millions of dollars when as I understand it, the request is only not to refund all the taxes that were paid, but only to be made whole, only to be put in an equal position?
Mr. Farr: Well, to begin with, let me say that the rule that McKesson is asking for is by no means limited that way.
If the exemption, for example, had been an exemption whereby the sales tax on distribution of local products was no tax at all... was a complete exemption... then they would say, under their logic, that you are entitled to all of your taxes back.
But in this particular case, their refund request was for $85 million, just to start with, and they were just one of a great number, forty or fifty, distributors of interstate products.
Now, even if some portion of that would not be returned because it would be covered by the sliding scale taxes, that still would be an enormous amount of money, particularly if spread to all distributors.
Again, you are looking at the particular nature of the violation here.
This is a very small exemption in a broad, general tax.
And if I could return to Texas Monthly for a second, in the dissent in Texas Monthly, Justice Scalia points out that there are numerous State taxes which provide an exemption from ad valorum property taxes for the homes of clergymen.
Now, as I understand McKesson's rule, if those exemptions are now un-Constitutional, at least as of February 22, 1989, the entire ad valorem taxes in all of those taxes are a nullity, and that everyone who is not a clergyman and pays a residential property tax could come into court and say I want all of my tax back.
What effectively you are doing here is not creating a remedy that is tailored to the violation.
It is really creating an incentive for lawyers just to work through the tax books to try and fine an exemption, no matter how minor, and then use that exemption, if it is improper, to create a tax shelter for years of back taxes.
Unidentified Justice: Of course, that is such a horrible example, perhaps, because it is not unlawful to provide the exemption for the clergymen.
I mean, if you pick some law that all the States have thought to be okay, and that maybe is okay... I was dissenting, after all, in Texas Monthly--
Mr. Farr: I understand.
Unidentified Justice: --you can get some very horrible results.
Mr. Farr: But, Justice Scalia--
Unidentified Justice: That either shows that you are right, or that Texas Monthly was wrong.
But... or that Texas Monthly should not be extended to the logical conclusion that the clergymen exemptions are wrong.
Mr. Farr: --Well, on the merits, of course, the question would be... it is certainly an open question as to whether that is un-Constitutional.
But just assume for a moment the ridiculousness of the remedy does not arise because of the fact that it would be ridiculous to say that the difference is un-Constitutional.
The absurdity arises from the fact that the remedy is just wholly disproportionate to the un-Constitutionality, even if it exists.
Unidentified Justice: Even in one State.
Mr. Farr: Even in one State.
Unidentified Justice: Well, suppose we were to agree with the Petitioner that in view of Florida's action here, that the court... we should not just abstain from deciding the issue, as the court did in bacchus and Tyler Pipe and Scheiner, but that some rule ought to apply.
What should that rule be?
Mr. Farr: I think the question that the court ought to ask is under general remedial principles, what is the proper remedy?
Did the Florida State courts determine that this was an appropriate remedy, or not?
That is normally what happens in the case of a Constitutional violation.
Lower courts determine what the remedy is, and this Court will review it--
Unidentified Justice: That is within the Federal system, really.
We do not extent that principle to State courts.
Mr. Farr: --Well, to some extent you do, Mr. Chief Justice.
I mean, there are State courts that determine remedies for a Constitutional violation, and this Court has said, particularly in a situation like Allegheny Pittsburgh, essentially there as no remedy at all in a situation where you are asking somebody to go out and raise every other person's allotment one by one by some sort of administrative proceeding.
The Court has been willing to go that far in terms of remedy.
But I think that even if this court finds a role in terms of reviewing this remedy that considerable deference should be given to the State courts which are obviously closer to the situation in determining whether they have so misjudged the proper remedy and adequate remedy in this case that their judgement should be overridden.
And as I submit, that is a long way from what is actually happening in this case.
Unidentified Justice: And you think Chevron is not the proper stand?
Mr. Farr: I think Chevron is not, Your Honor.
First of all, this Court has never said that Chevron is a general, all-purpose rule for Constitutional remedies.
Chevron, it seems to me, applies in a particular situation when the court has established the Constitutional rule, and the remedy is known, for example, if there is a Constitutional violation in the criminal area, which I understand is not specifically governed by Chevron.
The remedy is almost certainly a new trial in most cases, or new sentencing.
There is no dispute about the remedy itself.
The question is, once the violation and the remedy are known, which group of people gets the benefit of the remedy?
Unidentified Justice: Well, apparently both parties in the other case do not take issue with the application of Chevron.
Mr. Farr: Well, the Arkansas Supreme Court in the other case did apply Chevron.
In this particular case, the Florida Supreme Court did not apply Chevron.
It looked to Lemon v. Kurtzman, which is a decision that weighs heavily upon equitable principles, and a State case called Gulesian, which makes no mention of Chevron and is based solely on trying to balance the equities between hardship to the treasury and the possible benefits to the individual taxpayers.
I think that is the course that they quite clearly followed here in determining that to go back and to say to McKesson,
"Even though you paid exactly the same tax, that you should have paid, and the State can Constitutionally require you to pay in the future, and is requiring you to pay in the future, we are not going to go back and say that you are going to get $85 million or even $50 million of a windfall just because of these minor exemptions. "
Unidentified Justice: Cannot a State enjoin the collection of a tax prospectively if it sees this differential?
Mr. Farr: Oh, absolutely, Your Honor.
Unidentified Justice: Well, does that not give the same windfall?
Mr. Farr: No, Your Honor, it does not.
That is exactly the point that I wanted to begin with.
If this tax had been enjoined the day before it took effect at all, McKesson would not have saved a penny.
They would have paid exactly the same amount of tax.
The only difference is that a handful of sales which were subject to a lower tax would have been raised to a higher tax.
Unidentified Justice: If that is now the injunction read.
Mr. Farr: If that is how the injunction read.
But that is in fact the injunction that was issued in this case, and indeed with regard to the 1988 statute, the statute was enjoined, really, just a matter of a couple of months after it took effect.
That is again exactly what happened.
It raised the taxes... it equalized the taxes for both categories of taxpayers.
Unidentified Justice: Has anybody ever made a due process... your solution seemed very nice, assuming that it is proper for the Florida courts to do that, to say to the people who had the lower tax that we are going to determine, almost as as a legislature, that we are going to raise your tax.
Has there ever been a due process challenge to that?
I mean, the legislature voted to tax me so much, and here is a court coming in and saying,
"No, we are going to tax you more, because if we do not tax you more, we are going to have to give back a lot of money to these other people. "
Mr. Farr: Well, I think there are two points, Justice Scalia.
First of all, I think that it generally is within the power of the State courts... certainly the Federal courts do it with regard to Federal legislation.
They extend benefits and determine how--
Unidentified Justice: I am not talking about extending the benefits.
I am talking about extending the detriment.
I am talking about making you pay tax which the legislature never voted.
Mr. Farr: --Well, in this particular case the Florida legislature... I think that you do not have to worry about that, because the Florida legislature effectively ratified just what the Florida Supreme Court did in this case.
Unidentified Justice: Well, we have to worry about it for the purposes of the validity of your theory that there is no problem.
Everything is okay.
You are just looking at the matter as though it had all come up at the time of the injunction, that what the Florida court would have done would have produced the same result that you are now urging upon us.
I am not sure that they could have done that.
Mr. Farr: Well, Your Honor, first of all, I am not sure what McKesson's ground is to gripe about that.
I mean, if McKesson is going to say that it is possible that the State courts could not have issued an injunction dealing with a State law, passed by the State legislature, conforming that to the Constitution, which would have raised somebody else's taxes, and because they might not have been able to do that, we would like to walk away with $85 million or $60 million in tax refunds seems to me a burden that they are not able to carry.
I was going to mention the 11th Amendment, but I have a feeling that in the very brief time remaining that I am not going to be able to say much more than that nobody disagrees with the two basic premises of our argument, which I will not even be allowed to state.
Unidentified Justice: You are correct.
You are representing Arkansas.
Mr. Randolph: Yes, Mr. Chief Justice.
May it please the Court, I think that no matter how one cuts it or views it, the question here today in both cases is whether there is a Federal right to e particular remedy, the remedy being tax refunds.
And I notice that my friend Mr. Frey could not avoid saying that right before he sat down in this case.
He has told, I think, only half the story with respect to what happened in Arkansas here.
Two grounds were raised by the trucking association and the other petitioners when this case went back to the Arkansas Supreme Court on remand.
They said first, we are entitled to refunds under State law.
That is in their opening brief and in their reply brief in the Arkansas court.
They said secondly, even if we are not entitled to refunds under State law, the Federal Constitution requires that we get refunds, They said also that the only relevance that they could see with respect to the division of refunds between before Justice Blackmon's order in August and after Justice Blackmon's order in August was State sovereign immunity, because the State sovereign immunity in Arkansas runs like this.
If the money has been deposited into the treasury of the State, the State is immune from suit.
A suit cannot be brought against the State to recover money out of the treasury.
It is almost like Edelman v. Jordan.
However, if there is an escrow account set up, then the State will refund money because the sovereign immunity of the State does not attach.
That is why, when petitioners, and Mr. Frey mentioned this, went into State court for the first time on this case in 1983, they sought a preliminary injunction.
What kind of preliminary injunction did they seek?
They sought an escrow order.
And they said, and we quoted in their preliminary injunction brief... I think it is on paged or footnote four of our brief, but, let me read it from the record and what they told the Arkansas courts.
And this is on page 234.
The court well knows the rules of Arkansas, of the Arkansas Supreme Court concerning tax monies paid voluntarily and deposited in the treasury of the State cannot be recovered except under cumbersome claims commission procedures and a special appropriation by the legislature.
Now, the point of all this is as follows.
In the Arkansas Supreme Court, two claims were raised.
We are entitled to a refund under State law, and we are entitled to a refund under the Federal Constitution.
The petitioners in this case did not get refund.
Therefore, it follows necessarily that the Arkansas court rejected both of those arguments.
As I said, the question, no matter how one looks at it in this case, is whether there is some, to quote Mr. Frey, Federal right to a refund.
ORAL ARGUMENT OF A. RAYMOND RANDOLPH, ESQ. ON BEHALF OF THE RESPONDENTS, MAURICE SMITH, DIRECTOR, ARKANSAS HIGHWAY AND TRANSPORTATION DEPARTMENT, ET AL.
Unidentified Justice: On what basis did they get a refund after the date of Justice Blackmon's order?
Mr. Randolph: Under State law, because it was in, the money was in escrow, and there is no sovereign immunity--
Unidentified Justice: I know.
The money is in escrow, but you have to have some right to it.
Mr. Randolph: --There is an illegal exaction statute, and the court--
Unidentified Justice: There is a State law remedy?
Mr. Randolph: --There is a Constitutional--
Unidentified Justice: For a refund?
Mr. Randolph: --There is a Constitutional provision that is set against, the State cannot be sued in its own courts, and that Constitutional provision gives way when the money is in an escrow account.
There is a case from the 1940s, I believe, called Crossett Lumber Company.
We cited it on page 4 of our brief, or in footnote 4, that explains all that.
Unidentified Justice: Do we know whether the money they did get was granted pursuant to a State right or a Federal right?
I guess that we just do not know.
We just know that the State sovereign immunity was eliminated for that, but we do not know whether the right was a State or Federal one.
There is no--
Mr. Randolph: You cannot tell in the face of the opinion or the judgement.
But for what it is worth, the petitioners in this case filed a petition for rehearing in the Arkansas Supreme Court, claiming that sovereign immunity had been decided, and that the court had decided sovereign immunity incorrectly and should not have prevented them from getting refunds prior to Justice Blackmon's escrow order.
But, regardless, this Court is sitting to decide Federal questions, and the Federal question presented in our case is, do they nave a right to a refund?
Now, they argue on the Chevron basis, and claim, I suppose, that that is not really a claim under Federal law for a refund, although the argument in favor of retroactivity is, we are entitled to a refund.
That is why Chevron should be retroactive.
And I think we Just keep going around in circles.
The question here is, I think, essentially, does the Constitution, does the commerce clause, should it be enforced by the court not only by granting injunctive relief but also by giving retroactive monetary awards?
That is the question.
And our brief addresses that question, and points out a number of factors here.
And I would like to go into them in the context of the facts of this particular case, which I need to address because I think there has been some misunderstanding about what we have, what is involved exactly here.
The tax that is concerned in the Arkansas case applied only to the heaviest trucks in the industry.
Those trucks weigh more than 36 tons... up to 40 tons.
All the plaintiffs in this case, and all of the petitioners here, are interstate carriers.
They are not intrastate carriers.
Now, we heard about a test that said that truckers base-registered in Arkansas pay three times less than truckers based elsewhere.
That is not a test that has anything to do with discrimination against interstate commerce, because it is a test that takes a group of interstate truckers, and compares them to another group of interstate truckers.
There is, in six years of litigation here, there has never been one intra, wholly intrastate truck identified that is hauling 40 tons back and forth from Fort Smith to Little Rock, or wherever, in Arkansas.
These are the jumbos of the industry, and to ask the question how many intrastate trucks there are involved in this case is to ask why do we not use the Queen Mary as the Staten island Ferry.
Unidentified Justice: --What is this argument addressed to?
Mr. Randolph: The remedy that they are seeking is not a remedy to put interstate commerce on a plane of equality with intrastate commerce, because that remedy does not have anything to do with it.
More than that, you will notice in the brief here that the petitioners never identity who they are very odd in a brief.
But we never know who the plaintiffs are, who the petitioners are.
The reason for that, I think, is that when this case began, two Arkansas based truckers, Jones, for example, and Cawood, who are named petitioners here, were base-registered in Arkansas.
A couple years later, as Exhibit 3 in the State Supreme Court shows, they just registered and got their license plates from other States.
Now they are in the out of State class, because truckers can base register wherever they have a telephone, basically.
It has nothing to do with intra versus interstate commerce, and it is not a question of residency or favoring local commerce.
So that is the way this case shapes up here.
And what we have got... I notice there is an analogy of football, a football analogy, that the petitioners use here.
They talk about the University of Arkansas, and people being charged three times as much to go to see the game, and it is not an answer to say, well, even though they were charged three times as much, take a look at what happened.
They saw the game.
That does not mean they should not get a refund.
This case here is before the court as a case where the entire stadium is filled with interstate truckers, where they have gone into Arkansas, into the stadium, to make money, they made--
Unidentified Justice: Mr. Randolph, can I interrupt with a question?
Mr. Randolph: --Yes.
Unidentified Justice: At this stage of the litigation, you do not challenge the... you do not defend the Constitutionality of this scheme that as in place, do you?
Mr. Randolph: I do not.
Unidentified Justice: So there is a class that suffered, and a class that benefited?
Mr. Randolph: Well, I do not think this class suffered, and that is what I am about to--
Unidentified Justice: Well, then why was the statute un-Constitutional?
Mr. Randolph: --Because of the internal consistency test of Scheiner.
If every other State had passed a tax like this on the heaviest trucks, then interstate commerce would have been deferred, because you would want to stay within the State and not go.
Unidentified Justice: But then under your view, it, seems to me that they should not even enjoin the further collection of the tax, if there are not some victims of this discrimination out there.
Maybe I misunderstand your argument.
Mr. Randolph: Yes, I think--
Unidentified Justice: But that seems to be where it is leading.
Mr. Randolph: --We have to be careful... there is a pejorative attached to "victim of discrimination".
I mean, it is clear that we do not have a 14th Amendment, equal protection or due process here.
The Court itself said in Scheiner that Congress could have done this, and I take it that means that Congress would not be violating the 14th Amendment of equal protection.
What we are talking about here is truckers who were allowed to come into the State for the first time.
They were just charged under the wrong formula.
They made $115 million a year.
The roads of Arkansas suffered to the tune of $53 million a year, and the total taxes collected were only $26 million.
There was a subsidy there, even under the old scheme, and what the petitioners are asking for is to be subsidized even more.
The amount of the tax they paid in total was certainly fair.
It was far less than the damage they were causing to the highways of Arkansas.
Unidentified Justice: Well, if that though is reflection on the Arkansas taxing authorities... perhaps more could have been exacted it more had been exacted from Arkansas truckers too.
Mr. Randolph: That is true.
But this leads me--
Unidentified Justice: Do you think they would have been do you think that they would have been entitled to a refund back to the date of Scheiner if instead of remanding, we had summarily reversed?
Mr. Randolph: --If you had summarily reversed instead of remanding and asking for reconsideration, then I think the Arkansas tax would have been void at that moment.
What would have happened then is that the legislature of Arkansas would have had to convene a special session.
Unidentified Justice: But if it continued to collect the tax without an escrow, you would say no refund?
Mr. Randolph: I would say that they would be violating an order of this Court or an order of the Arkansas court, and I think that sanctions would be appropriate.
Unidentified Justice: Well, that was reversed, that is all.
Mr. Randolph: Well, If you reverse, then the Arkansas court, I think we have to presume, would follow the law.
They are bound to follow the law of this court as well as any other court.
What you are asking is what if the Arkansas court defied this court, and I think it is an unrealistic hypothetical.
Unidentified Justice: Well, the State taxing people just continue to collect the tax.
Mr. Randolph: Well, it they did, they would have been enjoined immediately, and the money would not have been going into the treasury of Arkansas, because it is not deposited until after a certain period of time.
And I think that it would not have been a sovereign immunity problem them, Mr. Justice White.
Unidentified Justice: Do you think it is irrelevant to the refund question as to whether or not any fool should have known after Scheiner that this tax was un-Constitutional?
Mr. Randolph: I do not, think it was all... I think it I relevant, but I do not think it was all that clear.
The petitioners rested on a factual basis in their claim in the Arkansas courts.
There were no finding of fact in this case... zero.
The Arkansas court denied relief on the basis of Aero Mayflower in the record is stale.
The figures that Mr. Frey refers to are from 1983.
We do not know what the situation was in 1985.
Unidentified Justice: We are not talking about back to 1983.
I am just talking about back to the date of Scheiner.
Mr. Randolph: I think that there was a question about whether there was a factual basis for a difference.
But I would like to just conclude here, if I may, with the question of the commerce clause.
This is a commerce clause violation.
Does it bring with it, a right to receive retroactive monetary awards in the form, in these cases, of taxes?
And I say no.
The commerce clause is only a grant, of authority to Congress, and whatever its negative implications are, they do not carry with it a license to the judiciary, the Federal judiciary, to create damage remedies.
It is ironic in this case, now that Arkansas has conformed its statute to the requirements of this Court, that to require that kind of relief, petitioners say, well, they can just raise their taxes on heavy trucks.
But to do that would put in Arkansas a barrier... the kind of barrier or a similar type of barrier that this court has talked about in Scheiner, to keep other trucks out.
Arkansas has a 2.5 cent per mile tax now.
It raises $26 million a year.
Petitioners are asking for $122 million or so in refunds.
That means that, Arkansas would have to raise its tax to collect that, if we are talking about a fiscal year, to somewhere in the neighborhood of 15, 16, 17 cents a mile... assuming that any interstate trucker would be fool enough not to go around Arkansas after that tax was in effect.
That creates a barrier.
Is that the way the commerce clause should be enforced to preserve Congress' prerogative?
If Congress had legislated Scheiner, they would not have made that decision retroactive, and we cited legislation in our brief to show that when Congress does legislate with respect to State taxes, it makes its decision prospectively only, prospective only.
Indeed, in the railroad area, when Congress legislated and found certain State taxes to be a burden on interstate commerce, they gave the States three years to adjust their State property system.
Now, here, all we are asking for is prospective only, in terms of what the relief ought to be.
And it is not that these truckers suffered, because they made $115 million a year as a result of Arkansas' decision to open its highways up to them.
Unidentified Justice: Prospective to when?
Mr. Randolph: From the date that the sovereign immunity of the State did not apply, which would be August 14, 1987.
And they have gotten that relief.
And what we are saying is--
Unidentified Justice: That was the date of the Arkansas court decision?
Mr. Randolph: --That was the date of the escrow order ordered by Justice Blackmon.
Unidentified Justice: Thank you, Mr. Randolph.
Mr. Frey, you have two minutes remaining.
REBUTTAL ARGUMENT OF ANDREW L. FREY ON BEHALF OF PETITIONER McKESSON CORPORATION
Mr. Frey: Thank you, Mr. Chief Justice.
First of all, with respect to the question that Justice O'Connor has asked several times, whether Chevron is the test, I think that we should remember that the norm is to apply the correct Federal rule of law.
We are looking for when it is justifiable not to apply correct Federal law.
The Chevron test is an effort by this court to explain those circumstances.
Unidentified Justice: Do you say that retroactivity should go clear back to 1983?
Mr. Frey: We would say that it would go back to 1983.
Unidentified Justice: Because it was predictable, is that it?
Mr. Frey: When we say that when the statute was enacted, it was--
Unidentified Justice: Anybody should have known that it was un-Constitutional?
Mr. Frey: --No.
Anybody should have known that it might be un-Constitutional, and we say that is enough to satisfy the first prong.
Unidentified Justice: Oh, I see.
Mr. Frey: We do say it should go back to 1983.
Unidentified Justice: Even though, even though there were cases on the books that were against it that had not been overruled?
Mr. Frey: Even though, yes.
We do, and we have tried to explain in our brief.
Unidentified Justice: Yes.
Mr. Frey: Let me just say a couple of things.
State sovereign immunity is clearly not the ground of the decision of the Arkansas Supreme Court.
You can read that opinion.
I defy anybody to find a word in there about sovereign immunity.
They may rule sovereign immunity if the case gets back to them.
I think Mr. Randolph has confused the cause of action, which is a State cause of action for refund, with the defense of sovereign immunity.
It is clear that we have a cause of action for a refund.
What I believe has not yet been passed upon by the Arkansas Supreme Court, and I think its silence is significant, because normally sovereign immunity would be decided as the ground of decision if it existed... sovereign immunity.
They have held that the provision of the Constitution does justify refunds, thus reach refunds against, counties and cities.
They have held that the provision does apply to the State.
They have not yet addressed the question of whether it applies to refunds from the State.
Now, finally, Mr. Randolph says that the commerce clause does not reach the discrimination between Arkansas-based interstate operators anti non-Arkansas interstate operators.
That is totally inconsistent with Scheiner itself.
That kind of discrimination is clearly reached by the commerce clause.
The only people who maintain this claim, this claim, are the non-Arkansas based people.
Now, I think it is also relevant, and we have answered, I think, everything that Mr. Randolph has said today... we have addressed in our reply brief, so I will not try to cover all those things, and I cannot in the time I have.
I think that it is clear that there is discrimination both between our members and Arkansas intrastate, and between our members and Arkansas interstate.
Now, there is some talk about the effect of refund decision on interstate commerce.
Justice O'Connor in your opinion in Scheiner itself, you expressed a concern about the effect on the State budget of refunds.
And I think it is important to understand, first of all, the refunds do not all have to be paid in a year.
We are not talking about, raising a tax.
The refunds can be spread out.
They can be financed by bonds.
Not a word was said about the various ameliorative steps that can be taken.
Secondly, the State is a conduit--
Chief Justice William H. Rehnquist: Mr. Frey, your time has expired.
The case is submitted.
Unidentified Justice: The honorable court is now adjourned until Monday next at ten o'clock.
IN THE SUPREME COURT OF THE UNITED STATES
McKESSON CORPORATION, Petitioner v. DIVISION OF ALCOHOLIC BEVERAGES AND TOBACCO, DEPARTMENT OF BUSINESS REGULATION OF FLORIDA, ET AL.
December 6, 1989
The above-entitled matter came on for oral argument before the Supreme Court of the United States at 11:49 a.m.
DAVID G. ROBERTSON, ESQ., San Francisco, California; on behalf of the Petitioner.
H. BARTOW FARR, III, ESQ., Washington, D.C.; on behalf of the Respondents.
CHIEF JUSTICE REHNQUIST: We'll hear argument now in No. 88-192, McKesson Corporation v. the Division of Alcoholic Beverages and Tobacco, et cetera, of Florida.
ORAL REARGUMENT OF DAVID G. ROBERTSON ON BEHALF OF THE PETITIONER
MR. ROBERTSON: Mr. Chief Justice, and may it please the Court:
McKesson has challenged Florida's enactment of a tax scheme that discriminated against interstate commerce in favor of local interests.
McKesson maintains that under federal constitutional law the appropriate remedy includes retroactive as well as prospective relief. Florida's response has been that its unconstitutional statutes, to use the words of one Florida legislator, should not cost the state even dollar one.
Florida enacted the unconstitutional statutes in violation of clearly established Commerce Clause law. Florida forced McKesson to pay the discriminatory tax for approximately 23 months while McKesson litigated the constitutionality of the statute.
Florida, after McKesson succeeded on its constitutional claim, refused to refund any portion of the unconstitutional taxes. And indeed, the Florida Legislature, after McKesson succeeded, simply replaced the old unconstitutional statute with a new unconstitutional statute.
This Court's first question on reargument asks whether a state whose tax statute violates clearly established Commerce Clause law must provide retroactive relief. McKesson's affirmative answer requires a narrow ruling on retroactivity.
Other states in other cases, where the state has passed a law that does not violate clearly established constitutional law, may have appropriate arguments against retroactive relief. But Florida in this case does not.
QUESTION: Mr. Robertson, do you take the position that the nature of the relief is limited to a refund of any taxes paid? Is that the relief that the federal constitution requires the state to give you?
MR. ROBERTSON: We are basing our claim upon this Court's historic interpretations of the Commerce Clause, and we are asking for a very precise equitable remedy. The difference between --
QUESTION: Well, do you say -- I'll try to rephrase my question so you can answer it.
Do you say that the Constitution requires for a Commerce Clause violation that the state refund all the taxes that you paid under the unconstitutional scheme?
MR. ROBERTSON: We think in a situation where a state has passed a statute that violates --
QUESTION: Can't you -- is that unanswerable?
MR. ROBERTSON: We would say sometimes.
MR. ROBERTSON: Sometimes.
MR. ROBERTSON: When the state has passed a law that violates clearly established Commerce Clause law, then the state has no right to rely upon its collection of those revenues, and the state should refund the discriminatory tax.
QUESTION: Well, are we guided by the principles set forth in Milliken against Bradley for devising equitable remedies?
MR. ROBERTSON: The Court is, and in this particular case we think the only remedy that protects the constitutional interest, that protects interstate commerce against protectionist legislation is a retroactive refund, at least where the statute violated clearly established law.
QUESTION: Well, what -- why can't a state constitutionally limit its remedial scheme to actual damages?
MR. ROBERTSON: We would agree in a case where the state is applying its own state law; it could do that. But in a Federal constitutional case, where the state invokes the Federal Constitution to declare a statute unconstitutional, we believe the state has to apply Federal remedial principles.
QUESTION: Well, but Milliken against Bradley says an equitable remedy need only restore the victims of discriminatory conduct to the position they would have occupied in the absence of that conduct.
MR. ROBERTSON: And in this particular case we are saying that the taxpayers who paid the unconstitutional tax should receive only the discriminatory tax as their refund, not the entire tax.
QUESTION: Well, what if it's been entirely passed on to McKesson's customers so McKesson isn't out a dollar?
MR. ROBERTSON: As the Court recognized in the Bacchus decision at footnote 7, McKesson and any other interstate competitor in a competitive market, whether it passes on all, some or none of the taxes, suffers a severe competitive injury.
The Florida Legislature anticipated --
QUESTION: Yeah, but I'm talking about the principles of Milliken against Bradley that you -- you agree should be applied here.
MR. ROBERTSON: We think that the narrow principle that should be applied here is that when an interstate competitor competes in a competitive market and suffers an economic loss as a result of a discriminatory tax, the legislature should not be allowed to enforce that competitive tax either retroactively or prospectively.
The Florida legislature knew that McKesson and other interstate competitors would have to pass on that tax by raising its prices and that the inevitable result would be that interstate commerce would lose transactions and the local protected interests would gain as a result.
I think that this Court's cases in the antitrust context are illuminating. In Hanover Shoe and in Illinois Brick the Court recognized the difficulties of forcing a plaintiff who is challenging improper conduct to prove the vagaries of pricing decisions. And the Court in effect said that the person who is complaining of that injury does not have to prove the exact disruption of the market.
And we think in the constitutional context the Commerce Clause deserves at least as much protection.
QUESTION: Could you prove these damages here if were to hold otherwise, if we were to require you to prove the damages?
MR. ROBERTSON: In fact, we could, and in fact the Florida Supreme Court recognized that. The court, when it resolve the issue of McKesson's standing to bring the action, stated that McKesson in fact had suffered a severe economic injury.
Our products directly competed against the local producers' products and we lost sales as a result of the discriminatory tax. Indeed, one might argue that a damages remedy, which we're not seeking, would result in a higher recovery than a refund remedy which simply carries out the equitable principles that this Court has applied in earlier tax cases.
McKesson submits in this case that Chevron does provide the appropriate standard for permitting state courts to make occasional exceptions to the general rule of retroactivity. As the Court noted in Lemon v. Kurtzman, which the Florida Supreme Court cited in passing, parties who justifiably rely upon old law sometimes deserve protection. And Chevron permits state courts to protect parties who justifiably rely upon old law when the court pronounces a new principle of law.
Now, we further submit that that Chevron test, that first prong, should be a threshold test. Chevron's first prong requires the Court initially to determine whether the Court in fact did articulate a new principle law.
A court, as this Court noted in Hanover Shoe, has no reason to confront the theory of retroactivity unless the court has declared a new principle of law.
Hanover Shoe characterizes a change in law that would allow a court to use retroactivity principles as an evulsive change which causes the current of the law to pass between new banks.
Now, the state in effect ignores the rationale for Chevron. The state suggests that in any tax case a state court may refuse to give its constitutional ruling full effect in order to avoid a refund of taxes.
We think the Court's decisions suggest otherwise. We think the issue of prospectivity should only arise when a decision of law constitutes a new unexpected rule of law.
Twenty other states in their amicus brief demonstrate that they understand the rationale for Chevron. A state that enacts a statute in violation of clearly established law is very, very different from a state that enacts a statute that does not violate clearly established law.
QUESTION: Mr. Robertson, what -- what other areas of the Constitution have we acknowledged the existence of a damages action merely from the text of the Constitution and not required the creation of a damages action as by Section 1983 or something like that?
The only thing I can think of is -- is -- is Bivens, I guess. Do you have anything else?
MR. ROBERTSON: Well, there's -- there's, of course, the line of cases where the Court has allowed actions for damages, such as Bivens and Carlson.
In this case, we are not asking you to create an action for damages. We are asking you to utilize the same equitable principles that the Court has exercised whenever taxpayers have challenged state tax statutes on the basis that they conflict with federal law.
If you go back as far as Justice Holmes' decision in Atchison, or if you go back to Justice Brandeis' opinion for the Court in Iowa-Des Moines, you see the Court saying that proper relief in a case of discriminatory taxation involves equal treatment of the parties.
And so we're saying that under that tradition, under that line of cases, all we are asking --
QUESTION: We'll resume there at one o'clock, Mr. Robertson.
(Whereupon, at 12:00 noon, oral argument in the above-entitled matter was recessed, to reconvene at 1:00 p.m. this same day.)
CHIEF JUSTICE REHNQUIST: Mr. Robertson, you may continue.
MR. ROBERTSON: Mr. Chief Justice, may it please the Court:
This Court's decision to enforce the Commerce Clause by requiring Florida to refund discriminatory taxes in this case will not grant McKesson a windfall in this case.
The state's windfall argument ignores that the Florida Supreme Court determined that McKesson had suffered a substantial economic injury. McKesson's products from other nations and other states directly competed with favored Florida products. We sold vodka from Michigan, vodka from England that directly competed against Florida vodka. We sold wine coolers from California that directly competed with Florida wine coolers.
In the face of that competition, McKesson could not raise its prices to cover the discriminatory taxes and retain its original market share. McKesson could either absorb all or most of the increased price and retain its original market share, or McKesson could raise its prices to cover the discriminatory tax and lose market share.
Under either economic scenario McKesson suffered a significant economic injury.
The state's --
QUESTION: Well, of course, all that depends on inelasticity or elasticity of demand in a very -- really complex inquiry, doesn't it?
MR. ROBERTSON: It depends --
QUESTION: Especially when you're talking about brand -- brand liquor which is often inelastic.
MR. ROBERTSON: That is correct, and that's why we submitted the affidavits of a professor of economics from Stanford and a viticologist from Davis to demonstrate, along with our own personnel's affidavits, that we had suffered a significant injury.
QUESTION: Of course, it ill-behooves Florida to say that it didn't -- it didn't cost you sales since the whole object of it was to cost you sales. I mean, that is --
MR. ROBERTSON: That's exactly our point. In the words of the Florida legislators, they passed the statute so that our market would shrink and the local producers' market would expand.
QUESTION: Mr. Robertson, do you know of any case where although a state has allowed suit in its own courts it has not explicitly waived its Eleventh Amendment immunity and we have entertained a suit for money damages where the suit was not initiated by the state but was initiated by an individual?
MR. ROBERTSON: I think --
QUESTION: Where we've entertained such a case on appeal?
MR. ROBERTSON: I think it's clear that this Court has held that a state must explicitly waive its rights under the Eleventh Amendment for it to be sued in Federal court. That's one of the two reasons why we brought our suit in state court. The other reasons, of course, being the Federal Tax Injunction Act.
QUESTION: So how are you up here is what I'm saying?
MR. ROBERTSON: We're up here because we believe that irrespective of the Eleventh Amendment this Court retains the jurisdiction to make final determinations concerning state court treatment of Federal law.
In other words, we would view the Eleventh Amendment, of course, as affecting the Federal courts' original trial court jurisdiction. We do not believe that over the long history of this Court the Court has ever viewed the Eleventh Amendment as restricting its right to make final determinations on Federal constitutional issues.
QUESTION: I'm asking you for a case where -- where we've done that and where it wasn't the state that initiated the suit, and where it was only money damages involved in the suit and not an injunction.
MR. ROBERTSON: Well, I think even if you go back to the case of -- a Commerce Clause case, Best v. Maxwell. In that particular case, the Court reversed a state court determination that the party was not entitled to a refund.
And I think in other cases such as Halliburton, indeed, and in a recent case --
QUESTION: Is that in your brief? Best?
MR. ROBERTSON: Yes. Yes, it is. In cases such as Halliburton and Texas Monthly, indeed in the case -- in cases as recent as Allegheny Pittsburgh, the Court has never suggested -- and Justice Stevens has made this clear in some of his Eleventh Amendment dissenting opinions, the Court has never suggested that it does not have jurisdiction to consider state court treatment of Federal constitutional issues.
If it were otherwise, we would have 50 states making constitutional determinations that would not be subject to review, at least with respect to damages issues.
QUESTION: Mr. Robertson, would you tell me that if -- I take it it's your position that the Commerce Clause violation gives you an individual constitutional right to recover something. I mean, your client.
MR. ROBERTSON: We believe that that --
QUESTION: An individual right.
MR. ROBERTSON: We believe that's the case.
QUESTION: Well, why is it a right for restitution of the taxes as opposed to the actual damages that were suffered? The competitive injury damages?
MR. ROBERTSON: As a matter of history and as a matter of equity, I think that the Court has, in cases such as Iowa-Des Moines, simply seen that as the most precise way of correcting the constitutional infirmity. I don't think --
QUESTION: If you were -- if you were applying the Milliken v. Bradley factors, you wouldn't necessarily come to that conclusion, would you?
MR. ROBERTSON: I think that in this particular case you would. In other cases you might not.
QUESTION: But in others you might not.
MR. ROBERTSON: That's correct.
QUESTION: Perhaps not here. Now, what if this -- here you have a state that provides a remedy by way of refund of taxes. Now, what if the state does not?
MR. ROBERTSON: As you have said, in this case the issue of sovereign immunity is not really an issue. I think that if the state did not provide a remedy, this Court's power to enforce and protect the Commerce Clause would allow it to create a remedy so that that structural provision which does generate benefits for interstate competitors would be effective.
Right now the states are watching this case and looking for guidance. Historically, state legislators have been very responsive to parochial pressures. They see little reason to resist the temptation to shift taxes to other states.
Only retroactive tax decisions will cause legislators to consider the constitutionality of their legislation.
QUESTION: I take it you say such a remedy would override the Eleventh Amendment.
MR. ROBERTSON: Since we have brought the action in state court, not Federal court, we think that we would have a right to proceed with that -- with that attempt at equitable relief against the state.
QUESTION: Well, but if the state refused to waive it, sovereign immunity, then what?
MR. ROBERTSON: I think one would still proceed in the state court on a federal cause of action under the federal Constitution, asking for, of course, an injunctive against prospective enforcement and also for retroactive relief.
I'd like to --
QUESTION: (Inaudible) relief in this case not by retroactively taxing the people who should have been taxed to be treated equally with you but saying in the future they'll be taxed a little higher. Why wouldn't that --
MR. ROBERTSON: I think in many cases states can use retroactive taxation to cure unconstitutional taxation.
QUESTION: No, I'm not talking about retroactive taxes. I have troubles with retroactive taxation. I'm not sure that they constitutionally can simply write you a letter saying, by the way, you're being taxed for activity several years ago. That's at least some problems.
But suppose, instead of that, Florida says you got undertaxed in our view the last couple of years, we're going to -- we're going to tax you a little higher the next few years --
MR. ROBERTSON: That -- that, of course, --
QUESTION: -- would that --
MR. ROBERTSON: -- would not correct the economic mischief that's been wrought during the earlier period of discriminatory practice.
QUESTION: Well, you can't tell. Maybe it would and maybe it wouldn't. It's -- it's a good try.
QUESTION: Well, for instance, in this particular case one saw a change in composition among the competitors in the market as a result of the discriminatory tax.
I'd reserve my remaining time.
QUESTION: Let me ask you one question, if I may, Mr. Robertson.
When you said a moment ago that you would proceed in Florida courts under a Federal cause of action, what cause of action would that be?
MR. ROBERTSON: If Florida did not provide a tax refund --
MR. ROBERTSON: -- remedy, we would assume that the Florida courts would enforce the Federal Constitution just as the Federal courts are required to do.
QUESTION: Oh, I though -- I thought you were talking about a Federal statutory remedy that would --
MR. ROBERTSON: No, no. No. We're just talking about the right to protect our constitutional rights vis-a-vis the Commerce Law.
QUESTION: What -- who would you sue?
MR. ROBERTSON: If the statute were in effect, we would, of course, sue the state and those who were actually enforcing the statute.
QUESTION: You think -- you think you have a Federal cause of action for any violation of the Federal constitution?
MR. ROBERTSON: Absolutely not. We think that in this particular case the Court can either construct an equitable remedy that will correct the discrimination, or, alternatively, of course, the Court could consider constructing a Bivens or Carlson type cause of action.
QUESTION: Thank you, Mr. Robinson -- Robertson. Excuse me.
ORAL REARGUMENT OF H. BARTOW FARR, III ON BEHALF OF THE RESPONDENTS
MR. FARR: Thank you, Mr. Chief Justice; may it please the Court:
As we see it, the issue in this case is whether Petitioner, who brought a state cause of action in state court, is entitled to a particular remedy, a refund from the state treasury, as a matter of Federal law.
We think the answer is that McKesson is not entitled to that refund for several reasons, two of which I'd like to emphasize this afternoon.
First of all, we think that in a state cause of action for monetary relief against the state, a state court can generally apply its own remedial principles so long as they are not arbitrary or discriminatory.
Second, we think that even if Federal principles did apply here, they wouldn't require the state courts to give a windfall to a taxpayer who would have paid the same tax with or without the unlawful provision, passed on the tax to its customers and suffered, at most, a minor competitive injury for which it has expressly not sought relief.
Now, I'd like to step back at the outset and just bring into focus what is and isn't at issue in this case.
All that Petitioner has chosen to do here is to bring a state cause of action for a tax refund. There is no question in this case, therefore, of a state court providing an inadequate remedy in a Federal cause of action. And I think that's an important distinction.
State courts generally are not able to limit remedies in Federal causes of action, such as Section 1983 actions. That's what this Court held in Felder v. Casey.
But at least since Erie it has generally been the opposite when a state creates the cause of action.
QUESTION: Well, he asserts that -- he asserts that the state has opened its courts to the suit, but he's asserting that this is a Federal cause of action, isn't he?
MR. FARR: Your Honor, I do not understand him to assert that. And, let me say, if he is asserting that, he's then wrong for a different reason because there is no Federal cause of action that applies against the state itself and the state treasury for damages in these situations.
QUESTION: For a void tax?
MR. FARR: That's correct.
QUESTION: For a wrongful tax. What about our -- our opinion in First English which says that you have an automatic Federal cause of action for a taking?
MR. FARR: First English is a case that involves the takings clause, and as I understand it, the takings clause is the only clause in the Constitution in which this Court has said there is an automatic remedy for damages that flows from the -- from the particular provision itself.
QUESTION: Oh. And if you call it a tax, it's not a taking?
MR. FARR: It is not a taking. There is no suggestion here, Your Honor, that this claim has ever been brought under the takings clause. There has never been that allegation. The Florida Supreme Court, of course, never had an opportunity to -- (inaudible) taking --
QUESTION: Well, the state wasn't the defendant in First English, was it?
MR. FARR: Not in First English. You're right. But even if -- even if First English -- the logic of that was extended to states, there has never been a claim here that this is a takings claim. Whether it could have been brought as a takings claim is simply not an issue right now.
But the Federal cause of action, of course, that most typically applies in the case of a constitutional violation is Section 1983 and, as the Court held last term, that is not a statute that provides a cause of action against states themselves, or state officials in their official capacity.
And even the implied causes of action, the Federal causes of action that this Court has implied directly from the Constitution, leaving out the takings clause for a second -- such as Bivens, for example -- applies only against individual officers in their individual capacities. There is no claim against the Federal Government itself under Bivens.
So the issue then here is really whether, when the state has created the cause of action under which the suit is brought, can it put reasonable limitations on the right to recovery so long as they don't offend some other constitutional provisions such as due process or equal protection. I think the answer to that is generally yes.
QUESTION: Mr. Farr, would it be a reasonable limitation to say we just won't give refunds for violations of Federal law?
MR. FARR: No, I don't be reasonable, Justice Stevens. I think that would be a discriminatory limitation. But that is certainly not what the Florida Supreme Court said here.
QUESTION: Well, what's -- what's really the difference between that case and this?
MR. FARR: Well, I think what the difference is -- that one would be essentially a generic rule. That Florida says if you have a state claim --
QUESTION: Well, let's say they have no -- they will have no -- no remedy by way of compensation for the taxpayer who paid more taxes than he should have.
MR. FARR: Regardless of the basis of your claim?
QUESTION: No. Whenever it's a federal claim.
MR. FARR: I think that is an arbitrary and discriminatory rule under the Court's precedents.
QUESTION: Well, what is the -- what is the Florida rule that you think is in effect here? One of the -- the other side of this coin is when can a Federal court entertain a cause of action seeking to enjoin a state tax and avoiding the Tax Injunction Act by saying the Florida law is inadequate?
Would you say that whenever the Florida remedy is less than complete that that means the taxpayer can always go into Federal court?
MR. FARR: I don't think so, Your Honor, but I don't think that is the issue here in all honesty. I think what the Florida Supreme Court said is not that we don't provide any refunds or that we don't provide any refunds if there is a Federal right involved.
What it said is we are not going to provide a refund in this case because of equitable considerations, in particular the fact that this was a tax that was passed on.
Now, it doesn't seem to me that there is anything arbitrary or irrational about that rule, or anything that closes the Federal -- excuse me, the state courts to claims against their tax statutes based on Federal law, simply because a particular litigant lost on that basis.
QUESTION: Well, is there -- do you have any examples where -- where the -- the Court has imposed this kind of a limitation on a refund with respect to a -- where there is a claim that local law has been violated? We just deny a refund for equitable reasons?
MR. FARR: Yes. In fact, that's the particular case that the -- one of the two cases that the Florida Supreme Court cited. The Galesian case is the case that was brought solely under state law and in a state cause of action, and the Court held no refund was appropriate in that case for, as it said here, equitable consideration.
QUESTION: But do they have any -- do you have any pass-on cases under state law?
MR. FARR: Well, the pass-on case that is most noted under state law is the Szabo case in which the Court held that if you have passed on the tax, you don't have -- you are not entitled to get a refund.
They did not cite that particular case in its opinion in this case, but that is the prevailing law in Florida.
QUESTION: I don't understand what that means, to pass on a tax. I suppose any tax imposed on a business, if the business wants to make the same profit it made, it raises its -- I mean, you know, you can view any tax as being passed on.
MR. FARR: Well, I think there are a couple of things. First of all, I think there are certain kinds of taxes, the basic sort of sales taxes, which more typically are ones that are simply added on to the price, where by operation of the law it is expected that the particular person who remits the tax is essentially more of a collector of the tax.
QUESTION: Yeah, but you may have to lower your price if -- if you want to sell the same number of goods and pass it on that way. And that doesn't seem to me to be different in kind from, let's say, an unconstitutional occupational tax that's imposed on a lawyer, or something, and the lawyer raises his fees to cover that.
I'm not sure it means anything to me to say this is a special kind of a tax that's been passed on. They all are.
MR. FARR: But I think -- well, I think the question that is addressed, in any case, is whether this taxpayer actually bore the economic incidence of the tax.
We are not suggesting, Justice Scalia, that there is not the possibility of some competitive injury when a tax is passed along.
When a distributor simply adds the tax to the price of the product and passes it along to the customer, it is possible that the distributor will lose market share. But there are a couple of points I'd like to make about that.
First of all, that is not the suit that has been brought in this particular case. McKesson did not seek damages for loss of market share. And if it did, it would have had to bring an entirely different cause of action because that is not covered by the state's action for a tax refund.
Secondly, if it did lose market share, to be perfectly honest, it couldn't have lost much because the market for the local products is essentially 2 percent of the entire market of sales and whatever part of that McKesson might have gotten, all the other distributors of interstate products would have been entitled to fight for it as well.
So, the idea that their claim for a tax refund is somehow a surrogate for a competitive injury claim simply would not stand up on the facts of this case. Indeed, they conceded that at the first argument.
QUESTION: Well, is there some cause of action under Florida law in which the taxpayer could sue the State of Florida for damages rather than a refund?
MR. FARR: Mr. Chief Justice, I don't think there is an action under Florida law. I think McKesson, had it wanted to bring that suit, would have had to bring a 1983 suit, the normal -- cause of action for Federal constitutional claims, against individual defendants for damages for loss of competitive position.
It chose not to bring that suit, however.
QUESTION: The state --
MR. FARR: That's correct. That is the standard form of cause of action and remedy for a violation of a Federal constitutional right. And had it brought a 1983 suit, there is no question -- and certainly no question after the decision in Will last term -- that they could not have brought that suit against the State of Florida or against its officials in their official capacity.
Just to return for a moment to the point about the state cause of action because I think it's helpful perhaps if I provide an example.
If, for example, the state had a statute that said if one of the state officers causes any injury to any person, violates any rights -- state, Federal, makes no distinction -- you may sue the state directly and obtain damages from the state treasury, but you may not obtain in that cause of action punitive damages and perhaps, let's say, there's a cap on damages for emotional distress.
We don't think that a plaintiff could come in, sue under that cause of action, establish, let's say, the violation of a Federal right, and then say we want punitive damages, or we want a million dollars in damages for emotional distress.
The state can properly say in this cause of action that we have provided -- there's nothing arbitrary about these limits -- those are the limits of that cause of action.
Now, that doesn't mean that the plaintiff couldn't have brought a 1983 action based on the same conduct against the individuals. And under Smith v. Wade, it would be entitled to punitive damages.
But what the Petitioner here is trying to do is essentially mix and match, say, we have brought the state cause of action and now we want to just bring in a Federal rule that overrides any limits that the state courts might put on the remedy and obtain a refund.
QUESTION: Mr. Farr, if the state legislature acts clearly arbitrarily and in clear violation of the Commerce Clause in enacting a particular provision, with every reason to know and understand it's unlawful under the Federal Constitution, and if the taxpayer pays the unlawful tax under protest and then subsequently it is judicially determined that yes, indeed, the law was invalid and that these taxes were paid under protest, is it your view that nonetheless the state may refuse to refund the taxes and that's reasonable?
MR. FARR: May I answer the question in two parts because -- I'm taking two positions in front of the Court and I'd like to keep them separate for purposes of answering your question.
I do believe that if the state found, for example, that the tax had been passed on or that there were other good equitable reasons even in that situation, certainly in a state cause of action under my first argument the state could, still under those conditions, impose a limit on the refund. But -- I'm sorry.
QUESTION: What -- what is the test? Is it whether that's arbitrary or reasonable?
MR. FARR: That's right. Whether it would be so arbitrary under those circumstances.
Under the second point, which is essentially applying the Federal remedial standards of Milliken v. Bradley, we think all of those things obviously are factors.
The nature of the particular violation we have conceded is a factor, and if the law is clearly established, that is one factor. However, we still think that once you have crossed that first question there still is -- the major question is what exactly is the injury here and what is the proper remedy for that injury.
We don't think that somebody can come in and say -- for example, you couldn't say under the Equal Protection Clause a state legislature has violated the Equal Protection Clause and it absolutely should have known that it did so. And therefore, we're entitled to damages against the state treasury.
There simply isn't a cause of action, even if the state legislature acts clearly in violation of the Equal Protection Clause --
QUESTION: Well, suppose --
MR. FARR: -- that provides that remedy.
QUESTION: -- you conclude that under Milliken against Bradley the most reasonable remedy is damages for the injury to competition, but the state doesn't provide that -- all it provides is a tax refund law? Does that enter into the equation then on what's reasonable?
MR. FARR: I don't believe it does because that is a cause of action that could have been brought. Indeed, I think this is an important point.
I don't think that a plaintiff is entitled to try to put a reviewing court essentially into a box where it says, I have not sought relief for the injury I really suffered, if any. I was injured in a competitive way; I may have lost a few sales to these local products, but I haven't sued for that. And because I didn't sue for that if I don't get a tax refund, I'm not going to get any retroactive relief. So you have to give me a tax refund.
It seems to me that the answer to that argument is that had you brought the proper suit, or if you could still bring the proper suit, the proper approach is to bring that claim and then, as Justice Kennedy points out, it would have to be tested by all of the usual ways in which you test a cause of action.
QUESTION: Mr. Farr, why isn't it proper for the taxpayer to sue for the refund and the state responds by saying, well, the tax had probably been passed on so at least part of it is a windfall?
Would the proper response be to say to the extent that there is a windfall element here, we will cut the refund down to 40 percent or 3 percent, or whatever it might be?
I don't see how that can justify no -- no refund at all, just because you're not entitled to a hundred -- 100 percent refund.
MR. FARR: Well, I think the question --
QUESTION: Your damage there just would measure the amount of the appropriate relief.
MR. FARR: You know, Justice Stevens, I don't think that would be an unreasonable thing for the Florida Supreme Court to have said. I think the question is when somebody puts all their eggs in one basket essentially --
QUESTION: But that's the only basket the state procedure authorizes.
MR. FARR: But the fact that that's the only basket the state procedure authorizes doesn't mean it's the only basket. It's not just the state that --
QUESTION: Well, do you think they could say you're wrong as to the 1986 taxes but you're right as to the 1987 taxes. You've asked for 100 percent in both years and we're not going to give you any because you asked for more than you're entitled to?
MR. FARR: No, because there that is not -- that is simply the amount of relief that's sought.
QUESTION: Well, that's all that we're talking about here, is the amount of the relief. A portion of it is -- is -- is probably refund.
Of course, that's only one of the two reasons they gave. The other was they thought they acted in good faith and --
MR. FARR: Right.
QUESTION: -- that the statute is presumptively valid, and all that, which I haven't noticed you rely on that at all.
MR. FARR: Well, I haven't talked about that. But let me say that I think that there is the difference between a particular type of claim, and we're talking about not the amount of damages for a particular injury --
QUESTION: Well, the amount of refund.
MR. FARR: -- but a completely different injury, an injury that someone says, I have suffered --
QUESTION: No, they say that --
MR. FARR: -- (inaudible) competitive.
QUESTION: -- they've suffered. The want an entire refund and the reason the state says for not giving it the refund is that to a certain extent it's windfall. But that's a reason for giving less than 100 percent, not a reason for denying relief entirely, it seems to me.
MR. FARR: Well, Justice Stevens, let me add one more thing to this. I think that in fact even if this tax hadn't been passed on, it would have been a windfall in one sense. Which is that the particular question for the taxpayer is what tax would the taxpayer have paid had the system been constitutional.
QUESTION: And that's another reason for reducing the amount, but it's not a reason for reducing it to zero.
MR. FARR: Well, it may be. But let me --
QUESTION: See, what you're saying is the 2 percent of the -- you know, that the exemption applied to is relatively insignificant.
MR. FARR: The State of Florida right now has a perfectly constitutional system. All --
QUESTION: But it also has -- has collected in its treasury some money that it was constitutionally prohibited from collecting. And you're saying it ought to be able to retain that because they framed their remedy incorrectly.
MR. FARR: Well, Justice Stevens, I just frankly look at that differently from the way you're looking at it. Let me explain why.
The flaw in this tax statute was not that the state took in money that it shouldn't have taken in. The flaw in the tax statute is that it provided a very small preference --
MR. FARR: -- for a number of local products. In fact, by providing that preference the state didn't take in any more money. It took in less money than it would have taken if the preference hadn't been in the statute at all. And Petitioner didn't pay any more money than it would have paid if that preference hadn't been in the statute at all.
As we suggested at the first argument, if Petitioner had gotten the same injunction it got the day before the tax statute took effect, it would have paid precisely the same amount of taxes it paid.
Now, their answer to that, as I understand it, is well, that may be true, maybe we would have paid the same amount of taxes, but maybe we would have had some more sales.
All I'm saying is that is a different nature of injury. That's not the question of how much damages for the same injury. That's a different injury than the one they sued for.
If I could just address one other thing quickly. The basic understanding that I have of their position is that this refund is necessary because it will rein in legislatures who act unconstitutionally. And I'd just like to make two very quick points about that.
First of all, that is an argument that can be made in every case, of course, where there's a constitutional violation by a state. Yet, the standard procedure, the standard cause of action and the standard remedy that is provided in such situations is a cause of action in damages against the individual state defendants, not against the state itself.
Secondly, at least in Florida, the remedy of seeking to enjoin taxes before they take effect is fully in effect. There is no barrier in Florida to seeking that kind of relief.
And therefore, for example, if petitioner thought that what was happening in Florida -- and it obviously does think this -- is that Florida's simply just passing the same statute over and over again, petitioner could go in and get another injunction before a new statute took effect or, indeed, it could have, I believe, gone in and gotten its old injunction extended to the new statute saying that collection of taxes under this new statute was essentially no different from collecting the taxes under the old statute.
But it didn't do that. And, in fact, if it had done that -- the point I was just discussing with Justice Stevens -- there is no possibility that it would have had a claim for a refund because all that would have happened would have been that the exemptions, the preferences, would have been struck from the statute and petitioner would have paid exactly the same amount of tax.
QUESTION: Your argument in essence -- this particular argument is that Florida doesn't need to do anything, the Florida Supreme Court didn't need to even give an equitable reason for denying the refund. That McKesson just hasn't been hurt. It hasn't been illegally taxes.
MR. FARR: I mean, that is my belief, that they have not been hurt in that sense.
QUESTION: Well, no refund then.
MR. FARR: But I'm not defending the Florida Supreme Court on the grounds that it could have just simply ignored their claim. I think that would at least bring into question the point that I was --
QUESTION: Well, I know, but --
MR. FARR: -- making at the beginning.
QUESTION: -- it would certainly avoid all the argument about the amount.
MR. FARR: Well, I think that the question is not whether the Florida Supreme Court could have simply said nothing and dismissed their claim.
Then there would have been the questions as to perhaps whether the ground for that was -- because they don't given any refunds for Federal claims, which would have been discriminatory.
QUESTION: Well, what if they say -- what if they say all we did was give an exemption to somebody else that we shouldn't have and we should have -- but these people were taxed at the right rate. They don't deserve a refund? They weren't hurt.
MR. FARR: Whether they passed it on or not --
MR. FARR: -- I think that would be a perfectly sustainable judgment of the Florida Supreme Court, particularly in this state cause of action.
QUESTION: Thank you, Mr. Farr.
Mr. Robertson, you have two minutes remaining.
REBUTTAL ARGUMENT OF DAVID G. ROBERTSON ON BEHALF OF THE PETITIONER
MR. ROBERTSON: Hypothetically, if the state had taxed McKesson and the favored local producers at the same rate, McKesson would not have suffered any injury and would not be in court today. But, in fact, the state taxed McKesson at a higher rate than it taxed the favored competitors. And, as a result of that, just as the legislature intended, McKesson suffered a competitive injury.
QUESTION: Well, that may be -- that may be so, but it didn't pay more taxes than it should have.
MR. ROBERTSON: It paid more taxes in the sense that this Court in cases like Iowa-Des Moines has said that there is a right to equal treatment. And in this case we did not receive it.
I'd -- I'd just like to give a slight overview of Florida's view of equities.
First of all, in this decade Florida has passed three consecutive unconstitutional tax schemes with respect to the Commerce Clause. In the case of our statute, the governor's lawyers told him it was unconstitutional and said it would expose the state to tax refunds suits.
Secondly, the Florida courts, after we succeeded on the merits in the circuit court, refused to enjoin the statute pending the appeal to the Florida Supreme Court.
We went in and said, put this in effect so there is no discrimination, so there will be no injury, and the state did not back us on that. And as a result, the unconstitutional statute continued to collect discriminatory taxes.
And then next, after the state's supreme court finally decided that yes, indeed, this was another unconstitutional statute and we were entitled to relief, the court ticked off these two reasons: presumptively valid -- well, all state statues are presumptively valid. That gets you nowhere. And secondly, they said it was passed on. But anyone --
CHIEF JUSTICE REHNQUIST: Thank you, Mr. Robertson. Your time has expired.
The case is submitted.
(Whereupon, at 1:34 p.m., the case in the above-entitled matter was submitted.)