Cases by Issue - Federalism

Merrill Lynch v. Dabit - Oral Argument

Fri, 09 Jan 2009 14:48:55 +0000

Case:

Merrill Lynch v. Dabit

Media File:

04-1371_20060118-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Jay B. Kasner

Chief Justice Roberts: We'll hear argument next in number 04-1371, Merrill Lynch, Pierce, Fenner & Smith versus Dabit.

Mr. Kasner.

Mr. Kasner: Mr. Chief Justice, and may it please the Court--

In an effort to limit State law securities class actions which undermine the market for nationally traded securities, Congress enacted SLUSA, a statute of broad preemption.

SLUSA, which is reprinted at page 8(a) of Petitioner's blue brief, preempts, subject to three specific statutory extensions, all State law covered class actions, quote,

"by any private party who alleges misrepresentations, omissions, or fraudulent behavior in connection with the purchase or sale of a covered security. "

The Second Circuit erred in implying an exception, that nowhere appears in the statutory language, and is wholly at odds with the purpose in the enactment of the statute for holders claims, a type of claim in which a plaintiff alleges, "I did not purchase" or

"I did not sell, but would have, had I known the allegedly false information. "

a type of claim which this Court, in Blue Chip Stamps, over 30 years ago, recognized as the most vexatious and abusive type of securities class action claims.

The court below erred, for a number of different reasons.

First and foremost, it completely violated the natural meaning of the statute.

As I have mentioned, an examination of SLUSA, beginning at page 8(a), reflects that no covered class action may be maintained, quote, "by any private party", a clause that this Court, time and again, has interpreted as perhaps the broadest way of phrasing "any and all private parties" making certain types of allegations.

Those allegations appear in (a) or (b), focusing on the conduct of the defendant in connection with the purchase or sale of a covered security.

Now, Congress could have... had it intended to inject a purchase/seller limitation, consistent with what the court below concluded, Congress could have phrased that language differently.

As the Court is aware, in the both the 1933 and 1934 acts, Congress has made express causes of action, subject to an explicit purchase or seller requirement.

For example, section 11 of the '33 act affords a private right of action to purchasers of securities in registered offerings.

Section 12 affords a private right of action to persons from whom an offer or sale of securities.

Section 9(e) of the '34 act, similarly, affords a purchase or seller requirement.

Significantly, SLUSA nowhere speaks in terms of a purchase or sale.

And it could have.

For example, Congress could have provided that no covered class action by any private party alleging "his or her sale" of a covered security is preempted.

It could have said,

"Any private party alleging a misrepresentation or omission of a material fact in connection with the plaintiff or that party's purchase or sale. "

It did not.

The decision of the court below is also at odds with this Court's teaching in United States versus O'Hagan, which was decided 1 year before SLUSA was enacted by Congress.

In United States versus O'Hagan, this Court concluded that the so called "misappropriation theory" stated a viable claim in a criminal case brought by the United States Government.

In responding to an argument by the defendant that no one involved that had been defrauded purchased or--

Justice Stevens: May I just ask you this question about the plain language?

If the word in 1(f)(1)(A) had not been

"in connection with the purchase of sale... sale of security. "

had been

"in connection with his or her purchase or sale. "

then it would have been covered, would it not?

Mr. Kasner: --Justice Stevens, if, by "his or her", it's referencing "any private party", I would agree with that.

That would be a different case in--

Justice Stevens: So, the question is whether we should construe the word "the" to be the functional equivalent of "his or her".

Mr. Kasner: --In essence, Justice Stevens--

Justice Stevens: Is that true?

Mr. Kasner: --that's correct.

And I think that that question has been answered by this Court, on a number of different occasions.

Again, in United States versus O'Hagan, this Court concluded that the

"in connection with the purchase or sale of a security. "

does not mean

"in connection with the purchase or sale by another party to the securities transaction. "

but, rather, means

"in connection with the purchase or sale by anyone. "

Justice Scalia: Mr. Kasner, the... does the Securities and Exchange Commission have enforcement authority in this... in this area?

Mr. Kasner: It does, Justice Scalia.

Justice Scalia: Have they issued any rules or regulations on this... on this point?

Mr. Kasner: The point being, Your Honor, whether--

Justice Scalia: On the point that you're arguing, whether the critical language means the person's own sale, or not--

Mr. Kasner: --Yes, Your Honor.

In adjudicatory proceedings referenced in our brief, the SEC has unanimously, and uniformly, taken the position that it does not.

In briefs to this Court in criminal prosecutions, in civil prosecutions, the Government has consistently taken the position, as it has in this case, as an amicus, and as it did in the court below.

Justice Scalia: --Is it your position that we owe deference to the interpretation of the SEC?

Mr. Kasner: That is our position, Your Honor.

We do take the position that this Court should defer to the views of the SEC on that issue.

What that deference is, should it be Chevron or Skidmore, is not a question Your Honor has asked.

I'm happy to say that we believe, vis a vis 10(b)(5)--

Justice Scalia: Well, if it's just Skidmore, forget about it.

[Laughter]

I mean, that's--

Mr. Kasner: --Well, Your Honor, I actually carefully studied yesterday's opinion, where this Court discussed the Skidmore deference, and, either way, we think that this is... the statute is so clear that, deference or none, there really is no other way to read the language of the statute.

As I say, this Court, in United States versus O'Hagan, concluded squarely that this language does not mean the purchase or sale of the plaintiff's securities.

Justice O'Connor's concurring opinion, joined in by Justice Stevens, in the Holmes case makes that same point.

Significantly, Your Honors, the "in connection with" language, as a statutory matter, has consistently been construed by the Securities and Exchange Commission, and by this Court, as one of incredible breadth.

Most recently, in United States versus Zandford, this Court concluded that the

"in connection with the purchase or sale. "

language means anything that coincides with a securities transaction.

And what is significant in this case... it is conceded by the Respondent at page 8 of his brief... that the conduct alleged by the plaintiff below is in connection with the purchase or sale of securities.

There really can be no other conclusion.

At myriad paragraphs in the pleadings, appearing, among others, at joint appendix 53, paragraph 4; joint appendix 53(a), paragraph 5; joint appendix 59 to 60--

Justice Ginsburg: Mr. Kasner, may I just interrupt those references to ask you... one could agree that, for SEC enforcement purposes, for prosecutorial purposes, the "in connection with" is as broad as you suggest.

But for purposes of private actions, it isn't that broad; it is limited, as this Court said in Blue Chip Stamps.

It is possible for the same words, even in the same statute, in difference contexts, to mean different things.

Mr. Kasner: --Justice Ginsburg, I believe that this Court has answered Your Honor's question in the Blue Chip Stamp case, where it specifically rejected that sort of an approach, and one that was consistent with the court below.

What the Court, in Blue Chip Stamp... which, of course, was a civil case involving an alleged holder's claim was a class action... what this Court said, for purposes of a civil proceeding, is,

"purchase or seller requirement nowhere appears in the statutory language. "

The statute clearly says

"in connection with the purchase or sale of securities. "

But, as a statutory matter, this Court concluded, Your Honor, that a violation of 10(b)(5) had been alleged, notwithstanding going on to conclude that the plaintiff could not recover, as a matter of the private cause of action.

So, we understand... we believe, Your Honor, that it... and it is undisputed on this record... that all parties agree, as the court below concluded, that this... Congress intended to impart 10(b)(5) interpretation as a statutory matter into SLUSA.

We also think, Justice Ginsburg, that, were Your Honors to conclude that somehow "in connection with" means something different in a civil context, a narrower reading than in the broader context, that would, of course, violate, in our view, the rule of lenity that is applied by this Court.

It would also mark what we believe to be the first time, insofar as we have been able to determine... and Respondent cites no authority to the contrary... in which the same provisions in a statute that have civil and criminal--

Justice Ginsburg: Would you explain that rule of lenity?

Because, on criminal, it is as broad as can be.

I didn't know that there was a rule of lenity that applied strictly to civil liability.

Mr. Kasner: --Your Honor, we... and we have cited authority, including the Leocal decision of this Court, last year, in which, for statutory construction purposes, where you have a civil and a criminal statute that has both elements to it, the rule of lenity would dictate that the narrower reading be the one that is written.

So, in other words, if this Court were to have concluded, in Blue Chip... excuse me... in United States versus O'Hagan, that, as a criminal matter, the "in connection with" language is not tethered to the purchase or sale by a particular party in the case, that is a broader reading than the reading that the court below adopted in a civil case.

And so, what we're urging is that the rule of lenity would suggest that, if this Court, in U.S. v. O'Hagan, took the view that the "purchase or sale" requirement does not apply in a criminal context, that should also apply in a civil context, that a narrower reading should not be imparted into a civil context than you would find in a criminal context.

We also--

Chief Justice Roberts: But one reason you might want to adopt a narrower reading, though, is, we're dealing here with the preemption provision.

It's one thing to say that, when you're talking about the SEC's enforcement powers, you adopt a broad reading; but it's quite another thing, when you're talking about displacing State law, that you would necessarily adopt the same broad reading.

Mr. Kasner: --Mr. Chief Justice, I think, in this case, there is no other purpose to be served by this statute than to preempt.

To the extent that embedded in Your Honor's question is a question with respect to the so called presumption against preemption, we don't think that those concerns, or the concerns to which Your Honor just referred, apply in this case, because the statute is clear; there is no ambiguity in the language that Congress used, and hence... and it would have made no sense, Mr. Chief Justice, for Congress to have--

Chief Justice Roberts: But there's a lot of... I think our cases establish that a phrase like "in connection with" carries with it a lot of ambiguity.

You don't know exactly how rigorous the connection has to be.

I mean, a auto accident by a broker who's leaving his office... he wouldn't be in the office if he weren't buying and selling securities.

I mean, is that auto accident

"in connection with the purchase and sales of securities? "

No.

And yet, you know, theoretically it could be.

It's a... there's a lot of ambiguity in determining how much breadth to give that phrase.

Mr. Kasner: --Well, Mr. Chief Justice, I would agree with you that, in terms of deciding, for... as a substantive matter, for purposes of 10(b)(5), SEC versus Zandford, how far the outer reaches of the "in connection with" language go may well be susceptible of differences of opinion.

There is no difference of opinion to which there can be any disagreement, in this case, about the plain language of the preemption, because the conduct... no matter what the conduct is that is involved

"in connection with the purchase or sale of securities. "

one thing that is totally crystal clear, based on this Court's cases and congressional purpose, is that the

"in connection with the purchase or sale. "

language, as used here, does not restrict its application to the purchase or sale by the plaintiff such that--

Justice Stevens: No, but that's a normal reading of the word, so that you... when you say a purchase or... it normally would be

"in connection with the purchase or sale of securities by the party that litigates. "

And that would be your first take on it.

But then you say,

"Well, we have cases out there that construe it a little more narrowly. "

And this is not somewhat unusual... and I know it's not totally unusual... for Congress to preempt a State cause of action that without... where there is no parallel Federal remedy.

Mr. Kasner: --Justice Stevens, one misimpression I believe that the court below was under, and I believe is perpetuated by Respondent in his amici, this statute does not preempt a State law claim.

This is not like the cases, for example--

Justice Stevens: It just preempts class actions.

Mr. Kasner: --It preempts class actions.

And it's significant, because Congress made a policy judgment.

Originally, as originally introduced in the House, SLUSA would have preempted all State law securities cases.

All of them.

As the statute wound its way through the House and the Senate, it... and principally in response to testimony by the SEC Commissioner Levitt, who went to the Hill three separate times on this legislation... specific statutory exemptions were put in.

But it... getting back, though, to the purpose behind--

Justice Stevens: In going through that legislative history, did you find any evidence that they intended to preempt any State law claims that were not... did not have a parallel Federal claim?

Mr. Kasner: --Justice Stevens, the--

Justice Stevens: Other than the language of the statute?

Mr. Kasner: --Well, we believe that the--

Justice Stevens: Yes.

Mr. Kasner: --this inquiry--

Justice Stevens: But you--

Mr. Kasner: --begins and ends--

Justice Stevens: --you brought up the legislative history.

Mr. Kasner: --Yes.

Justice Stevens: So, you're an expert on that subject.

[Laughter]

Yes.

Mr. Kasner: Your... Justice Stevens, the only reference to the purchaser or seller issue is one that is referenced by the Respondent.

And, in that instance, a professor from Cornell, Professor Painter, went to the Hill, and he said,

"If you enact this statute, you are going to be closing off claims of people who are not purchasers or sellers, because those cannot be bought in the Federal court. "

But back for a moment, though, to the issue of what is not preempted in the policy behind this statute, there was another component that Congress was seeking to remedy here, and that was the so called "safe harbor".

In 1995, when Congress enacted the Private Securities Litigation Reform Act, one piece of that was an effort to encourage public companies to make predictive statements publicly.

There had been a rash of litigation, at the time, against public companies whose predictive statements proved false.

And so, Congress said,

"Wait a minute. "

"We will allow you an insulation from liability, if your forward statements prove false, if the plaintiff cannot allege either that they were made with actual knowledge or not accompanied by meaningful cautionary language. "

Another purpose of this statute was to--

Justice Souter: May I interrupt?

Because I'm--

Mr. Kasner: --Yes.

Justice Souter: --your time is running out.

Mr. Kasner: Yes.

Justice Souter: Is my understanding correct that, on your reading, State class actions of less than 50 parties are also left unpreempted?

Mr. Kasner: Justice Souter, the definition... yes.

The answer to--

Justice Souter: Okay.

Mr. Kasner: --your question is, yes.

Justice Souter: So--

Mr. Kasner: The definition--

Justice Souter: --individual actions and small State class actions.

Mr. Kasner: --Individual actions, less than 50 people, arbitrations, public enforcement.

And, with that, Mr. Chief Justice, I would like to reserve the balance of my time.

Argument of Thomas G. Hungar

Chief Justice Roberts: Thank you, Mr. Kasner.

Mr. Hungar.

Mr. Hungar: Thank you, Mr. Chief Justice, and may it please the Court--

The fundamental flaw in the Court of Appeals analysis is that it requires the phrase "in connection with" to be given two different and irreconcilable interpretations, depending on the identity of the plaintiff.

Nothing in the text or history of the securities laws justifies that implausible interpretation.

The Securities and Exchange Commission--

Justice Stevens: Mr. Hungar, I just wonder if that's correct.

Is... am I not right to say that the word "the" had been read to mean "his or her", that argument would not apply?

Mr. Hungar: --I think that's correct, Justice Stevens, but--

Justice Stevens: Well, then you don't have to have differing interpretations of "in connection with".

You just have to know what the word "the" means.

Mr. Hungar: --Well, the Mr. Kasner indicated, that issue has been dispositively resolved by this Court and the Commission in concluding that the purchaser/seller rule is not a limitation on the scope of the prohibition in section 10(b).

And if your interpretation were the one that were adopted, that would not be the case.

Justice Scalia: I always thought "the" meant "the".

[Laughter]

Mr. Hungar: Certainly, that would be our submission.

Justice Scalia: And "his or her" means "his or her".

Mr. Hungar: Yes, Your Honor.

And, again--

Chief Justice Roberts: No, but you--

Mr. Hungar: --if it--

Chief Justice Roberts: --think it means "any".

Mr. Hungar: --I'm sorry?

Chief Justice Roberts: You think it means "any", right?

You're reading "the" to mean "any".

Mr. Hungar: Right, it's "the"... well, it's "the", in the sense of

"the activity of purchasing and selling securities. "

yes.

It's... and that's how this Court has interpreted, in the O'Hagan case, for... if that interpretation... if SEC could bring an enforcement action, or the Justice Department could bring a prosecution, in a case like O'Hagan, where the... where the Court specifically said that the purchaser or seller was not defrauded.

It's not that... it's not true that section 10(b) requires that the purchaser or seller be defrauded.

And so, we submit that this would be--

Justice Stevens: Well, it certainly doesn't require the Commission to be a purchaser or seller, either.

You know--

Mr. Hungar: --Well, we certainly would agree with that, Your Honor, that--

Justice Stevens: --Yes.

Mr. Hungar: --But, more generally, it doesn't require that there be a purchaser or seller who's defrauded, and yet the purchaser/seller rule, for the purpose of implied actions, does require that.

Justice Stevens, you asked about whether there is any indication in the legislative history that Congress intended this act to preempt class action claims where there would be no Federal remedy.

The answer to that is, absolutely yes.

It is perfectly clear from the legislative history that Congress knew, and expected, that claims that could be brought under State law as class actions, such as aiding and abetting claims or negligent misrepresentation claims, claims that would not satisfy the Federal--

Justice Stevens: Right.

Mr. Hungar: --scienter requirements for... and, of course, the claims that would not satisfy the requirements of the PSLRA.

None of those could be brought in Federal court, because they're barred by the various provisions of Federal law.

Justice Stevens: No, but they would be at... adjudged under a different standard, you're dead right.

As far as the parties involved, the... that's what I was really asking.

Mr. Hungar: Well, in cases where the... where the only claim is against aiders and abetters, those parties would be... would be out of court; or, likewise, cases where parties could not satisfy the scienter requirement, those parties would be out of court.

So, Congress knew that it would be foreclosing remedies for certain categories of claims, and that was part of the point of the act, as the conference committee report makes clear.

Justice Ginsburg: What about the--

Mr. Hungar: Congress was--

Justice Ginsburg: --the claim that's made here, the second claim, where the broker said,

"We lost clients, so... as a result of this deception... and we want to be compensated for that. "

not being about the inflated price of the security--

Mr. Hungar: --Your--

Justice Ginsburg: --just that

"our clients don't trust us anymore, because we gave them such bad advice. "

Mr. Hungar: --Your Honor, the... that issue is not before this Court--

Justice Ginsburg: I know, but I--

Mr. Hungar: --because it was not--

Justice Ginsburg: --wanted to know what the Government's position was on that claim.

Could that be brought in a State court--

Mr. Hungar: --The--

Justice Ginsburg: --even as a class action?

Mr. Hungar: --The Commission addressed that question in its amicus brief in the Court of Appeals, and took the position that that claim was not in connection with the purchase or sale of securities, because the injury occurs after the fraud has been completed, and is... and has to do with the lost future relationship, rather than fraud in connection with the purchase or sale of securities.

And so, we didn't address that in our brief here, obviously, but the Commission took the position, below, that that would not be preempted, because it's not in connection with the purchase or sale of securities.

Justice Ginsburg: How do you deal with the Court's... the footnote in the Blue Chip Stamps... that the court says... in the Federal court...

"these 10(b) actions have to be limited to actual purchasers and sellers. "

but that limitation is attenuated, because deserving claims by nontraders would lie under State law, including the very suit that was involved in Blue Chip Stamps and in the Second Circuit case that paved the way for Blue Chip?

Mr. Hungar: Your Honor, that was an accurate description of the state of the law, as it existed at the time, at least in theory, although, as a practical matter, Respondents have not been able to point to a single reported case a... of a holder class action in State court prior to the adoption of the Uniform Standards Act.

So, while it was true, as a theoretical matter, that such claims could be brought under the law of some States, there are... there is no history of State class actions in this area, which is one of the reasons why we think that reliance on the assumption of nonpreemption makes no sense here.

Securities class actions prior to the PSLRA were brought in Federal court, and it was only the PSLRA that resulted in cases, such as the type of case at issue here, being brought in State courts.

And Congress... once it saw that problem, Congress was concerned that the requirements of the PSLRA were being evaded, and it was also concerned, as the conference committee report makes clear, that, now that these securities class actions were being brought in State court, there was the potential danger of 50 varying State standards being applied, as this very case suggests, and Congress acted to remedy both of those problems, as the conference committee report makes clear, both the risk of nonuniformity in securities class actions that are targeted by the act, and the risk of evasion of the PSLRA.

Respondent's position would frustrate both of those objectives, because it would... it would permit the most abusive category of lawsuits to proceed in State court, and it would permit such holder claims to be brought... for instance, based on negligence, if State law permitted that; based on conduct that would be protected by the Federal safe harbor for forward looking statements under the PSLRA.

So, the PSLRA protections would be frustrated by their interpretation.

So, the very goals that Congress explicitly sought to achieve, stated in the... in the text of the statute, in the purposes section and also in the conference committee report, would be frustrated.

And, again, that approach requires the Court to accept an inconsistent interpretation of the text of the "in connection with" requirement, depending on the identity of the plaintiff, which would be an extraordinary way to construe a statute, particularly when there's nothing in the legislative history that provides even a hint of a suggestion that Congress would have intended that result.

And with respect to Blue Chip, Your Honor, it's important to remember what Blue Chip was doing.

Blue Chip was not a case about the scope of the 10(b) prohibition.

Instead, it was a case about what to infer about what Congress would have wanted to authorize as an... as a right of action, if it had addressed the question.

And that's why the Blue Chip court made very clear that the conduct at issue there involving injuries to holders can be a violation of section 10(b)... i.e., it can be in connection with the purchase or sale of securities... it's just that they did not think that Congress would have wanted to authorize a private right of action.

So, again, when we're talking about the scope of the "in connection with" requirement, which is what is at issue here, that approach is the same approach that should be followed here, the same approach that was in... followed in O'Hagan and in Zandford, and compelled to the conclusion that, since the conduct at issue here is unquestionably

"in connection with the purchase and sale of securities. "

as this Court has construed that phrase, it is preempted by the Uniform Standards Act.

If the Court has no further questions, I thank the Court.

Argument of David C. Frederick

Chief Justice Roberts: Thank you, Mr. Hungar.

Mr. Frederick.

Mr. Frederick: Thank you, Mr. Chief Justice, and may it please the Court--

Our position is that SLUSA does not preempt class actions serving holder claims.

Congress incorporated this Court's interpretation of SLUSA.

SLUSA rechanneled State suits to Federal court.

It was not designed to eliminate State remedies that could not be pursued as Federal 10(b)(5) claims.

That interpretation is the better reading of the text, the context, and the history of SLUSA's handling of private securities actions.

If I could start with the text--

Justice Kennedy: Can you tell me, do you agree that a holder action falls with 10(b)(5), generally?

Mr. Frederick: --No, because this Court, in the Blue Chip Stamps case, said that it did not.

In footnote 5, Justice Rehnquist--

Justice Kennedy: But what about enforcement actions taken by the--

Mr. Frederick: --In enforcement--

Justice Kennedy: --SEC?

Mr. Frederick: --actions, the SEC can bring enforcement authority, pursuant to 10(b)(5).

And so, to that extent, misconduct that would be connected to what, in a private context, would be deemed a holder claim, does fall within the SEC's--

Justice Kennedy: But then, the--

Mr. Frederick: --jurisdiction.

Justice Kennedy: --then it does fall within... holder actions do fall within 10(b)(5), for some purposes.

Mr. Frederick: They do, for enforcement purposes; they do not, for private civil action purposes.

Justice Kennedy: So, you want us to interpret the text two ways, depending on the purpose.

Mr. Frederick: No.

What I want you to do is to understand what Congress intended.

And what Congress intended, in SLUSA, I think is quite clear if you start at the beginning of the statute and you just start reading your way through it, because what Congress did in SLUSA was attempt to stop a flight of cases that had been brought in Federal court heretofore, but were migrating to State court, Congress perceived, as a result of the enactment of the PSLRA.

Section 2 of SLUSA... and it is very important, Your Honors, that you look carefully at section 2 of SLUSA, because it has five congressional findings.

They are not adequately briefed, or even discussed, by the Second Circuit, but one of them says that the PSLRA sought to prevent abuses.

The second one says, since an enactment of that, Congress perceives that a number of securities class action lawsuits have shifted from Federal to State courts.

The third one says, that shift has prevented the act from achieving its objectives.

The next one says, State securities regulation is of continuing importance.

The then, the fifth one says, in order to prevent certain State private securities class actions alleging fraud from being used to frustrate the objectives of the PSLRA, it is appropriate to enact these national standards.

Justice Scalia: The Government doesn't say that "all" are covered.

The Government acknowledges that there are some actions that could still be brought in State court.

Mr. Frederick: The point, though, Justice Scalia, is that what Congress, in the PSLRA, was doing was attempting to ratchet up the pleading requirements for Federal law claims.

Justice Scalia: It's so... it's so counterintuitive.

As the Government points out, these holder claims lend themselves to abuse much more than do the narrow purchase and sale claims.

Mr. Frederick: Absolutely--

Justice Scalia: And why--

Mr. Frederick: --not.

Justice Scalia: --why the Government would want to police the one, and let the other, you know, proliferate, seems very strange to me.

Mr. Frederick: That's not correct, Justice Scalia.

And it's important to emphasize this.

What the Court addressed in the Blue Chip Stamps case was a very different kind of case.

It involved nonpurchasers.

And the Court reasoned that it would be speculative for somebody out there to say,

"Well, I would have purchased the security, had I known. "

A holder claim, as recognized for a century in various State courts, involves a claim by somebody who holds a security and is induced by fraud not to sell that security.

The restatement set of torts, section 525, recognizes that the fraud by forebearance of... to cause you not to take an action is just as much a fraud as one that--

Chief Justice Roberts: But the--

--But the fraud is caused... the fraud causes other people to want to buy the security.

They do so at a higher price.

It causes the price to go up.

It's

"in connection with a purchase or sale. "

maybe not of the holder's securities.

But it's certainly... the holder's claim wouldn't exist, but for purchases and sales that caused the price to go up.

Mr. Frederick: --In most circumstance, that's correct, Mr. Chief Justice.

But that, I don't think is material.

The level of damages that a holder sustains should not determine what the elements of the liability are.

And what is striking about the Government and Merrill Lynch's position here is that intentional fraud is going to be given a pass because of those persons who are uniquely harmed, because, for 20 years--

Chief Justice Roberts: But what your clients want to do is cash in on the fraud.

They don't... their claim is that they didn't get to sell the stock at an inflated price to somebody who didn't know about the fraud.

That's the damages that they want to collect.

And that seems to be an odd claim to recognize.

Mr. Frederick: --That's the same kind of claim that in... to get back to Justice Scalia's question... arises in the purchaser/seller context.

The only difference is that the measure of damages is computed by when you purchase or sell, as opposed to when you bought it, before the fraud occurred.

I mean, Wall Street has been telling investors, for two or more decades,

"Buy and hold. "

"Rest your retirement, hold your securities. "

Justice Breyer: In that--

Mr. Frederick: In--

Justice Breyer: --in... suppose a person bought the stock at price 30 before any fraud took place, and then he holds it, and then the fraud, and then, subsequently, the word of the fraud gets out, the price falls a lot, and he sells it.

Does he have a claim, under Federal... ordinary... you know, does he... can he go into Federal court?

Mr. Frederick: --No.

Justice Breyer: No.

Mr. Frederick: Blue Chip--

Justice Breyer: Okay.

Mr. Frederick: --Stamps said no.

Justice Breyer: Yes.

Mr. Frederick: In State courts, in the Weinberger case that we cite, they... they very carefully say this was not a State court class action, but what Judge Friendly, in the Weinberger case, addressed was a State law holder--

Justice Breyer: All right, then--

Mr. Frederick: --class action--

Justice Breyer: --then... I see that... then what's worrying me is this, that... one thing worrying me is that... let's take an ordinary buyer case.

All right?

And what happened is that the... some buyers would like to bring a fraud suit in Federal court.

They have to go to Federal court now.

They can't go to the State court.

But they have a little brainstorm, or the lawyers do, and they say,

"Well, in any case where a buyer would have a claim, and we don't want to go into Federal court, there surely are going to be a class of holders that would also have the kind of claim you say. "

So, there we are, same actions, all in the State court, just happens to have found a different class of claimant.

And there always will be such a class.

Mr. Frederick: --There will be, in most circumstances.

There are some circumstances where harms are unique to holders.

But, Justice Breyer, can I point out to you that, in the antitrust context, there is, under Illinois Brick, a requirement that you must be in the direct chain, in a direct purchaser, but there are some 30 States that have allowed standing for people--

Justice Breyer: Well, that's fine.

And I--

Mr. Frederick: --that are indirect purchasers.

Justice Breyer: --and what I'm not facing, in the antitrust area, is what, it seems to me, on your interpretation now, would be, Congress passes a law, which becomes a futile act, because what they're anxious is... to do is to get the cases in the class actions... not all the cases... but the class actions in the Federal court.

And then, in every single case, or 99.9999 percent, where we've kept this action out of Federal court, there's going to be a comparable action, with holders as the plaintiff, in a State court.

Mr. Frederick: Well--

Justice Breyer: Now, what... that's a... my concern.

What do you--

Mr. Frederick: --And let me address that this way.

What court... what... Congress was very clear in the legislative debates, was... it did not want to cut off meritorious claims.

It simply wanted to rechannel them.

Justice Breyer: --Can you... can you ease my concern there?

Is there anything you can say that could ease my concern that we'll have the same set, that they'll just be in State court with a different class?

Mr. Frederick: Many States doesn't recognize holder claims as a matter of State law, and they have the same kinds of heightened pleading requirements that were imposed under the PSLRA.

Justice Breyer: And, by the way, my concern is not that it's a "bad thing", in quotes.

My concern is that it's hard for me to think Congress would have done something that wouldn't have had much effect.

Mr. Frederick: I think your concern should be, What did Congress intend?

And--

Justice Souter: Well, what do you make of--

Mr. Frederick: --And--

Justice Breyer: Right.

That's just--

Mr. Frederick: --And I don't think Congress intended to eliminate a swath of class actions concerning a type of claim that this Court had said could not be brought under--

Justice Souter: --Well, then--

Mr. Frederick: --Federal law.

Justice Souter: --what do you make of the legislative history?

I mean, your friend on the other side pointed out that there was very clear testimony to the effect that if the statute passed, with the text that we're dealing with, that it would, indeed, cut out a series of claims.

Mr. Frederick: I don't think that that was... if you read that in context, I don't think that it was a statement by the speaker, in that instance, of Congress's intent to go beyond those claims that were cognizable under Federal law, and to cut off a whole category of claims that were unique to State law.

Justice Stevens: Mr. Frederick, you mentioned cutting off a whole category of claims.

And, earlier, you said they didn't want to give a pass to this kind of claim.

But this is not a pass, because there are all sorts of remedies retained... derivative suits, 49-person actions, and so forth.

And are you aware... you mentioned the 100 years of State precedent... is there any precedent in the State law for class actions for holder claims?

Mr. Frederick: Well, we think the Weinberger case recognized that class actions could be brought, under New York law.

It was a Federal case--

Justice Stevens: But this--

Mr. Frederick: --but it was--

Justice Stevens: --is not a case where we have a 100-year body of law of class action after class action brought on State law grounds for this type of claim.

Mr. Frederick: --True.

But, in the '90s, you had a unique form of fraud that was being perpetrated on Wall Street that did affect holders in a unique way.

And we've highlighted market timing in our briefs.

In that circumstance, it would be futile for 49 holders to get together and assert that they had been harmed by market timing, because the aggregate of their harm is so small that you really have to look at it in a large context.

John Vogel, the head of Vanguard for many years, and one of most respected mutual fund advisors, says that there are as many as $5 billion lost by people who buy and hold, as we've been taught to do by Wall Street, but whose aggregate losses accrete every year by virtue of market timing.

That is a unique harm caused to holders, which, under their theory, would not be cognizable, because it would be preempted, and it would be impossible, as a practical matter, for someone to get together with 48 of his or her fellow victims and try to bring a claim to redress that.

There's--

Justice Stevens: But you're--

Mr. Frederick: --no evidence--

Justice Stevens: --you're describing the present importance of the... that.

But I don't think you've answered my question about historic... as a matter of history, we don't have a history of timer claims.

Mr. Frederick: --We don't have a history of timer claims, but what we also don't have, Justice Stevens, is an indication by Congress, throughout the entire legislative debate or the conference reports or anything, where holder claims which had been brought were perceived to be a problem and were perceived to be within the ambit of what Congress was doing.

Because, remember--

Justice Scalia: No, because they... I mean, the argument made by the Government

"Of course not, because the only reason they're brought is precisely to evade this congressional legislation. "

They didn't exist, before; and they've become common, afterwards.

Now... you know, I... you can say--

Mr. Frederick: --They could--

Justice Scalia: --that they--

Mr. Frederick: --they could not be brought under Federal law, before.

And I would acknowledge that, because of a series of this Court's decisions, it is easier to prove a purchaser/seller claim, where the facts warrant that, under 10(b) prior to the PSLRA than it was to prove a holder claim.

Judge Friendly, in the Weinberger opinion, makes very clear that the value to be attributed to the class action settlement there has to be diminished because of the difficulty of proof of such claims.

But that--

Justice Scalia: --I thought that there were... well, never mind.

Justice Stevens: There would--

Mr. Frederick: --I'd like to address the point that the Government makes about how this would supposedly affect the SEC's enforcement authority--

Justice Ginsburg: Before--

Mr. Frederick: --because--

Justice Ginsburg: --you get to that, just... Mr. Frederick, the logic of it... but... here, Congress is tightening the requirements for class actions, but then there is this class, which... Blue Chip did say there's a lot... room for a lot of abuse in holder classes... would be left to the State courts for whatever strict or lenient rules.

So, why would Congress, with respect to this category, want there to be a more plaintiff friendly rule than the rule that Congress has just put in place for the purchaser/seller 10(b) actions?

Mr. Frederick: --Justice Ginsburg, I don't think that it's correct to characterize it as more plaintiff friendly.

If you're in Minnesota, you can't bring one of these claims, because State law doesn't recognize it.

Justice Ginsburg: Well, at least in some States.

Mr. Frederick: In some States, you... where the common law or the State statutes recognize these claims, all that we're arguing is that Congress didn't focus on these.

In the normal presumption against preemption, you don't, you know, cut through a wide swath of claims where Congress hasn't expressed an intent specifically to preempt them.

That's our position, and particularly where the congressional findings--

Justice Ginsburg: But you... you're admitting that an... that anomaly could be part of the scene, that you'd have a State that allows you to sue for negligence, and doesn't have heightened pleading requirements for holder claims; and so, those claims would be treated more... in a more plaintiff friendly way than Federal claims.

Mr. Frederick: --Yes.

Certainly, just as "breach of fiduciary duty" and

"breach of the covenant of good faith and fair dealing. "

are State law claims, negligence is a State law claim, all of those give rise to variations, State by State.

But what Congress was getting at were fraud claims that were Federal law fraud claims.

And, when it did so, it was heightening the pleading requirements and, seeing what people were doing was taking what were Federal law claims and migrating them to State court under, ostensibly, more lenient standards--

Justice Breyer: --But why, in your theory... suppose you're right.

I mean, you're right.

I assume that.

You can have these holder claims.

But why couldn't any buyer, who's... has to go to Federal court because he has the buyer claim, just say, "I'll bring a holder claim"?

Mr. Frederick: --He can't do that under the--

Justice Breyer: Because?

Mr. Frederick: --under the Second Circuit's test, because--

Justice Breyer: I know.

But what I'm asking is, What's the logic of that?

I mean, you're either right or you're wrong.

If Congress didn't want to cut off the holder claim, they didn't.

So, what's to show that they wanted to cut it off for some people, but not other people?

Mr. Frederick: --The logic is that, for the buyers of those claims, they are meeting the Federal standard of "in connection with"--

Justice Breyer: Not in this suit.

Mr. Frederick: --"# purchase or sale".

Justice Breyer: Not--

Mr. Frederick: Yes.

Justice Breyer: --in this suit.

Mr. Frederick: Yes, they are, because they're buying... the reason why these people have... under the Second Circuit's standard, which we think is correct, is that you have to have bought the stock before the fraud, and you were holding it throughout that period of fraud; and so, your purchase is not "in connection with" the fraud, the misrepresentation.

But somebody who sees the prospectus, who sees what Mr. Blodget was saying, which was that there were stocks that were, quote, "a piece of crap", but they were giving them the highest buy recommendation... those people are making their purchase "in connection with"--

Justice Breyer: So, if I'm both--

Mr. Frederick: --"# a fraud".

Justice Breyer: --I bought it in May, in reliance on this ridiculous thing.

"Buggy whips make gold".

I believed it.

I bought buggy whips.

Now... we're now in December.

And every month, they kept repeating it.

And my claim is,

"Yes, I know, I bought it in May, in reliance, but I kept it in July, because I kept seeing it repeated and repeated. "

Do I--

Mr. Frederick: I think--

Justice Breyer: --have a claim?

Mr. Frederick: --I think, also, one of the Second Circuit's standard, that--

Justice Breyer: In the Second Circuit, I do not.

But I want to know why not.

Mr. Frederick: --Well, I think that the reason why not is that if the fraud is affecting the plaintiff's decision to purchase, then that falls within SLUSA, and that is preempted, although it allow... you are allowed to have a Federal remedy under that standard.

You're rechanneled to Federal court.

But if you buy... to use your hypothetical, you buy in January, but the fraudulent misrepresentations are not made until May or June, you're precluded from bringing a Federal law claim.

Justice Scalia: What if I choose not to complain about my buying, I just choose to complain about my holding?

It's true, I was harmed because I jumped in.

And that's one harm.

But it's an entirely separate harm that I was induced to hold it--

Mr. Frederick: That's--

Justice Scalia: --by these continuing misrepresentations.

Why can't that part of the suit be brought in State court?

Mr. Frederick: --That's our position.

Justice Scalia: It is?

Okay.

So, you--

Mr. Frederick: Yes.

Our position--

Justice Scalia: --you--

Mr. Frederick: --is that--

Justice Scalia: --you agree--

Mr. Frederick: --is that--

Justice Scalia: --you agree that a buyer--

Mr. Frederick: --I--

Justice Scalia: --who... whose purchase is excluded, can nonetheless sue--

Mr. Frederick: --No, I--

Justice Scalia: --in a State--

Mr. Frederick: --No, I'm sorry, I misunderstood your hypothetical.

I thought your hypothetical was that if you bought, prior to the fraud--

Justice Scalia: --No, no, no, no.

You bought--

Mr. Frederick: --If you bought--

Justice Scalia: --in reliance--

Mr. Frederick: --in connection with--

Justice Scalia: --on the fraud--

Mr. Frederick: --a fraud--

Justice Scalia: --Yes.

Mr. Frederick: --then you are... you are... you are forced into Federal court--

Justice Scalia: Why?

Mr. Frederick: --under SLUSA.

Justice Scalia: Why?

I have--

Mr. Frederick: Because--

Justice Scalia: --a buying claim, and I have a holding claim.

Why do--

Mr. Frederick: --That was--

Justice Scalia: --What is there in the statute that says the two have to go with each other?

Mr. Frederick: --That was the decision that Congress made.

Justice Scalia: Where?

Mr. Frederick: In this preemption provision--

Justice Scalia: Well, I'm not making--

Mr. Frederick: --that your--

Justice Scalia: --a buying claim.

I... and there's nothing in my complaint about my buying the stock.

I say--

Mr. Frederick: --Your--

Justice Scalia: "# I was induced to hold the stock by these representations that occurred in February, March, April, and May. "

"I bought, in January, also in reliance on fraud, but I'm not complaining about that. "

Mr. Frederick: --What the Second Circuit said, which I think is correct, is that... is that your damages have to be totally and apart from the fraud as a purchaser, and that where--

Justice Scalia: But they are--

Mr. Frederick: --the reason why they set this timeframe for holder claims is that those kinds of claims that you're talking about, Justice Scalia, would be a classic purchaser/seller type claim, and you can bring that in Federal court.

And that's the point here, that, where you've got long term holders, and you've got people who purchased in the '80s or the '70s, and they're being induced to hold for decades, and they may want to make... they may suffer their damages as a result of collateral that they want to borrow against... they have no practical means of recovery--

Justice Scalia: --As a practical matter, my damages from the holding may be much greater than my damages from the initial purchase.

And you're saying,

"Tough luck, Charlie. "

"You bought a month too soon... or a month too late. "

"You should have brought... bought before the fraud. "

Mr. Frederick: --What the Second Circuit said, which I think is correct, is that that becomes a level of line drawing that we don't think Congress did intend to get into.

Justice Breyer: I agree with you.

But that's the trouble.

Because, in order to make the Second Circuit's argument, you have to say the following,

"Congress couldn't have intended to allow people who have a buyer claim to make a totally separate holder claim, because that would gut the statute, and they wouldn't want to engage in a futile act. "

But now you're asking us to do about the same thing, when you talk about a person who doesn't have the buyer claim and you're trying to get us to say,

"Congress thought... Congress thought an individual action there, their own separate action in the State court, wasn't good enough; it would have wanted to preserve the... hold your claim for them. "

Now, that's possible, but it requires me to think Congress is going through quite a few hoops here.

Mr. Frederick: The hoops that Congress went to, and which I have articulated, in the congressional findings, are that the particular harm that Congress was addressing in SLUSA... this was a narrow... you know, this was a narrowly framed preemption as to Federal law claims, because a... the PSLRA only governed Federal law claims.

And if you could not bring a holder claim under Federal law, because of Blue Chip Stamps, you were forced into State court.

Okay?

So, when Congress is debating the evasion of the PSLRA, it is only talking about Federal law claims.

And there's nothing in the legislative history that they cited, or that we have found, to suggest that Congress gave any thought to preempting a class of holder claims.

Now, certainly--

Justice Stevens: --Mr. Frederick, can I ask sort of a background question?

Ever since Blue Chip... it's been on the books for a long time... has Congress ever considered legislation that would expand the 10(b)(5) private remedy to include holder claims?

Mr. Frederick: --I'm not aware of legislation, Your Honor.

Justice Stevens: I'm not, either.

I... just wondering if there was some we could--

Mr. Frederick: But what... what this Court did say, in Blue Chip Stamps, was that, when the Birnbaum decision... and it was an interpretation of

"in connection with purchase or sale. "

by what one Justice on this Court described as the

"Mother Court of the Court Appeals. "

--it was Chief Judge Swan, Judge Augustus Hand, and Judge Learned Hand... and they construed the words

"in connection with purchase or sale. "

to mean the plaintiff's purchase--

Justice Stevens: --Yes, but Blue--

Mr. Frederick: --or sale.

Justice Stevens: --but Blue Chip did not adopt the rationale of the Birnbaum case.

Mr. Frederick: Well, I think it... it did adopt the rule, though, as a basis of the wording.

And if you look at page 733 of the Court's opinion, it was adopting the rationale, in the sense that it saw Birnbaum as a construction of the language, and it adopted that.

And then in note 5, when Justice Rehnquist's opinion says,

"It would be odd to read in connection with purchase or sell to give a. "

quote,

"cause of action to everybody in the world. "

I think it's clear that that was suggesting that State law could recognize something that this Court said was not recognized under Federal law.

Justice Scalia: Mr. Frederick, it seems to me that the language "in connection with", you know, whether it means what Blue Chip meant or whether it means what the statute meant, is at least ambiguous.

And, if that's the case, why shouldn't we be guided by the Securities and Exchange Commission's determination, under Chevron, Mead, you know, anything but--

Mr. Frederick: This statute is a... about private civil actions, and it doesn't affect the SEC's enforcement authority or any action.

In fact, the SEC doesn't derive any greater power, or lesser power, as a result of the enactment of SLUSA.

It is entirely legislated against private civil actions.

Justice Scalia: --The--

Mr. Frederick: So, the SEC--

Justice Scalia: --Have we not given any weight to SEC determinations, as to its interpretation, where civil actions are involved?

I'm surprised at that.

Mr. Frederick: --This is an act, Justice Scalia, where the SEC's enforcement authority isn't affected one jot.

And so, I think it would be a strange application of Chevron, or even Skidmore, deference to say that the SEC gets some special weight because it's construing words in an enactment--

Justice Scalia: Yes.

Mr. Frederick: --that's addressed to private--

Justice Stevens: Do you know--

Mr. Frederick: --civil litigation.

Justice Stevens: --whether the SEC filed an amicus brief in Blue Chip?

Mr. Frederick: Yes.

And it took the position there that "in connection with" did have a broad construction.

And that position was rejected.

Justice Stevens: It took the position that the Seventh Circuit took in Eason, didn't it?

Mr. Frederick: That's correct.

Justice Stevens: Yes.

[Laughter]

Mr. Frederick: But the Court, there, I don't think was... it said that it was not in... giving any deference to the SEC's position, because it was an implied private right of action that this Court had recognized, and that the lower courts had recognized.

Justice Ginsburg: Before you finish... there's two questions I would like to ask him.

One is... we know about the holder claims.

They are saved for State actions.

They're not preempted.

What else would fall in this category that is not... that SLUSA doesn't affect, that can be brought as class actions in State court?

Mr. Frederick: Well, there are class actions that concern breaches of fiduciary duty, negligence.

And the question of whether or not they are

"in connection with purchase or sale. "

is going to have a profound impact on whether or not those claims are also preempted.

I can't spell out for you what the necessary consequences are, but there are a lot of State law claims brought under Blue Sky laws and other State remedies that traditionally have been observed and brought, even as State claims, but, under a... you know, the all encompassing parameter of

"in connection with purchase or sale. "

advanced on the other side, a decision that would favor that could have unknown preemptive consequences, which I would submit would be contrary to the normal way you would put Congress to the test of determining,

"Did it intend to preempt those claims? "

before adopting a broad interpretation that would do so.

And if I could point out--

Justice Ginsburg: You--

Mr. Frederick: --one of the strange things about this case and the SEC's position is that District Courts are going to be put in the rather unusual position of paying a rather high cost, because if they are confronted with a removal of a case brought under State law, where the defendant asserts that it is preempted under SLUSA, and the SEC hasn't taken any action at all, and has expressed no interest in this particular area, the District Court, to determine preemption, has to intuit whether or not this is within the SEC's enforcement authority.

So, you have... ordinarily, you would have private plaintiffs suing for wrongdoing on the same side of the case as the SEC, as the public enforcer.

But, here, you have them at loggerheads.

And the only way that the District Court can properly figure that out, whether or not the private victim can get a private remedy, is to cut back on the SEC's enforcement authority, will... if you will... would exact an awfully high cost.

I would submit that that kind of an anomaly is a rather unusual one, particularly where the SEC isn't a party in the case, and it is not being invited to submit a brief.

And yet, District Courts, in order to determine the preemption question here, are going to have to rule against the SEC in order to give a private remedy... to recognize a private remedy under State law, or to cut back on a remedy under State law by holding that it is within the SEC's enforcement jurisdiction.

Ultimately, what Merrill Lynch here is asserting is an immunity for a fraud that uniquely affects a certain class of holders who do not have a remedy under Federal law.

And I would submit that, where any party is seeking to get an immunity from an intentional fraud, the party bears a heavy presumption that that is, in fact, what Congress intended.

And I would submit to you that, both with the language of the statute, the findings that Congress made in the legislative history, Congress did not express an intent to eliminate holder class actions of greater than 49 persons.

Justice Scalia: I agree with that presumption against preemption, where the question is, Does this Federal statute, which says nothing about preemption, accidentally preempt some State law +/?

that there, the presumption makes sense.

But here, you have a statute, the whole object of which is preemption.

And I'm not sure that what you shouldn't do in that case is just give the language its most reasonable reading, with no thumb on either side of the scale.

Mr. Frederick: But it's preemption to rechannel.

And that's the important point, Justice Scalia.

The point was not to allow State law claims under State court systems, but to rechannel those actions into Federal court.

And if there are a category of victims of frauds who have no Federal remedy, it doesn't make sense to infer that Congress, without saying so, left those people without any remedy whatsoever.

Justice Stevens: Mr. Frederick, I want to be sure of one question.

I'm not sure I understood your argument about how the District Court has to deny the right to the SEC.

But the SEC wouldn't be bound by the District Court's decision, would it?

Mr. Frederick: Well, it depends on how the courts would construe the SLUSA cases as affecting the

"in connection with purchase or sale. "

in the SEC enforcement authority.

If you were to accept the premise that the Court's Zandford and O'Hagan decisions are binding on the SLUSA preemption language, anytime a court is construing--

May I finish, Mr. Chief Justice?

Chief Justice Roberts: Certainly.

Mr. Frederick: Anytime a court is construing that language, in the SLUSA context, it would necessarily have a collateral impact on the SEC's enforcement authority in 10(b).

Justice Stevens: Yes, but the SEC could relitigate it, I would think.

It wouldn't be bound by the judgment in a private suit.

Mr. Frederick: It could certainly relitigate it.

But the point of the persuasive authority of a construction of

"in connection with purchase or sale. "

I think, would have effects that are inappropriate.

Chief Justice Roberts: Thank you, Counsel.

Mr. Frederick: Thank you.

Rebuttal of Jay B. Kasner

Chief Justice Roberts: Mr. Kasner, you have 3 minutes remaining.

Mr. Kasner: Counsel referred to the findings in the legislation.

And I know this Court will go back and review those.

The... finding number 5 does not use the word "certain" anywhere in it.

What finding number 5 does say, however,

"It is appropriate to enact national standards for securities class action lawsuits involving nationally traded securities while preserving the appropriate enforcement powers of State securities regulators and not changing the current treatment of individual lawsuits. "

quote/unquote.

Justice Breyer and Justice Ginsburg asked questions that I think illustrate that Congress could not have intended such an anomalous result by allowing holders' claims to proceed as nonpreempted.

Justice Breyer, as a practical matter, you are 100 percent right in the premise of your question.

If this Court agrees with... that the court below is correct, every single securities class action that is brought in Federal court from that day forward will have a companion claim brought with it, asserted by holders.

And it's not simply holders in the fashion that Mr. Dabit appears, which is somebody who claims,

"I would have sold, had I, essentially, known inside information. "

a proposition which Judge Friendly expounded on in the Levine case in the Second Circuit, but you will also have holders... you will also have claims by people who come to court, in the State court, and say,

"You know, I would have bought securities if you had not issued such unduly pessimistic projections. "

just as was the case in the Blue Chip Stamp case.

And imagine the impact that that result would have on the safe harbor, which Congress enacted with the PSLRA to protect public companies in the United States and abroad, encouraging them to make forward looking statements.

If you allow a result which affords putative people, who would have bought and would have sold, in State court where the safe harbor doesn't apply, you will absolutely be gutting the statutory protections that Congress was seeking to protect.

I'd like to just make one point about the Weinberger verse... the Weinberger v. Kendrick case that is mentioned.

That involved an approval of a Federal court class action where State law holders' claims were being released.

In fact, the consideration that was approved there was less, because the claims were weaker.

We've heard a lot, Your Honors, about why Congress didn't mention holders' claims by name.

The reason they didn't mention holders' claims by name is that it wasn't until SLUSA was enacted and creative plaintiff strike suit lawyers brought holders' claims, in an effort to avoid SLUSA, that this problem became exacerbated.

But there is no doubt that the plain and natural meaning of SLUSA picks up all claims by any private party in connection with the purchase or sale of security.

If there are no--

Justice Stevens: It's surprising that the holder claims didn't respond to Blue Chip.

I think your argument would suggest they should have responded to Blue Chip by bringing a whole host of holder claims in the State court.

Mr. Kasner: --Yes, Your Honor.

Justice Stevens: Yes.

Mr. Kasner: Thank you.

Chief Justice Roberts: Thank you, Counsel.

The case is submitted.

Attribution:

The Oyez Project

Featured:

United States v. Georgia - Oral Argument

Fri, 09 Jan 2009 14:48:57 +0000

Case:

United States v. Georgia

Media File:

04-1203_20051109-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Paul D. Clement

Chief Justice Roberts: We'll hear argument first in United States versus Georgia, and Goodman versus Georgia.

General Clement.

Mr. Clement: Mr. Chief Justice, and may it please the Court--

Title II of the Americans with Disabilities Act validly abrogates the States' sovereign immunities as applied to the class of cases involving the unconstitutional treatment of disabled inmates.

That result follows from this Court's decisions in Nevada against Hibbs, and Tennessee against Lane.

In Lane, this Court held that it was clear, beyond peradventure, that Congress had an adequate basis to enact prophylactic legislation to ensure that individuals with disabilities had access to public services.

In reaching that conclusion, this Court surveyed a broad array of evidence, not just limited to the court access context, and, indeed, surveyed evidence involving prisons, in particular.

As a result, the sole remaining question, and the only question in Lane on which this Court applied an as applied analysis, is the question of whether or not Title II's remedies are congruent and proportional as applied to the particular context; here, the context of the discriminatory, inhumane, or otherwise unconstitutional treatment of inmates with disabilities.

Now, if one applies the congruence and proportionality analysis of Lane, in particular, in the prison context, it easily passes constitutional muster.

For all of the factors that this Court emphasized as making Title II appropriate in the court access context... the absence of absolute mandates, the inherent flexibility of the reasonable modification standard, the fact that benefits are limited to otherwise eligible individuals, the defenses for fundamental alterations or undue burdens... all of those factors apply with full force in this context.

Justice O'Connor: Can it... with respect to the reasonableness aspect, in Turner versus Safley, we said prison administrators have a good deal of latitude, in the prison context, in order to maintain order.

Now, do you see the reasonableness requirements of the Disabilities Act as being congruent with the Turner Safley reasonableness analysis?

Mr. Clement: Absolutely, Justice O'Connor.

And one of the reasons that I think that Title II is particularly congruent and proportional in the prison context is, the reasonable modification standard, which, after all, uses the term "reasonableness", is very well amenable to the kind of Turner deference standard this Court applied.

And, of course, just last term, this Court, in Johnson against California and Wilkins... and in the Wilkinson case, Cutter against Wilkinson, applied deference to prison officials even in the context of strict scrutiny.

And so--

Chief Justice Roberts: Are you--

Mr. Clement: --I think it--

Chief Justice Roberts: --suggesting--

Mr. Clement: --applies, a fortiori.

I'm sorry, Mr.--

Chief Justice Roberts: --Are you--

Mr. Clement: --Chief Justice.

Chief Justice Roberts: --suggesting that the ADA does not add to the burdens of the State officials, it just simply tracks what's already required under Turner?

Mr. Clement: Mr. Chief Justice, I don't... I don't... I'm not up here today saying there's no prophylaxis at all with respect to Title II, but I think it is proportional and congruent, and I think the prophylactic gap between what the Constitution protects and what Title II protects is relatively narrow in the prison context, both because if you think about one set of claims, the Turner claims, much of that deference can be brought in under the reasonable modification standard; and then, if you think of the other class of cases, those involving deliberate indifference, I think in those class of cases, this is... the prison context is one of the rare contexts in which the State is under an affirmative obligation to provide accommodations to the medical needs of inmates, including disabled inmates.

And I think the fact that here's a case where the Constitution requires affirmative accommodation also helps narrow the prophylactic gap.

Chief Justice Roberts: Under Turner, one of the considerations that can be taken into account are the budgetary limitations of State officials.

Does that apply under the ADA, as well?

Mr. Clement: I think it certainly could.

I think... if you look at the cases that we collect at footnote 17 of our reply brief, which are cases where the lower courts have applied Turner style deference to claims under the Rehabilitation Act or under Title II, I think some of those Courts of Appeals have clearly taken into account those kind of budgetary concerns.

Justice Kennedy: Of course, all of the concerns you've mentioned could be taken care of by injunctive relief.

You don't necessarily need damages.

Mr. Clement: Well, I think damages are an important aspect of the remedial scheme, Justice Kennedy.

I would also point out that, because a number of States have challenged the application of Title II, in the prison context, in particular, as not being valid Commerce Clause legislation, it's not a foregone conclusion that there would be injunctive relief available.

But I do think if we want to focus on the damage--

Justice Kennedy: Well, but if we held the Act was applicable for injunctive relief, it would... it would be, because I'm... the pert part of your argument is that you could have a attorneys fees and triple damages where trial attorneys levy against the State treasury, which is... which is what the Eleventh Amendment is largely concerned with.

That... all of that would follow from what you've said so far.

Mr. Clement: --Well, I'm not sure about the treble damages, but certainly compensatory damages would be available.

This Court, of course, in Barnes against Gorman, has already said that punitive damages are not available under Title II.

And I think if you look at compensatory damages--

Justice Kennedy: I know they're not available under Title II, but, I mean, as a constitutional matter, there's certainly nothing barring them, based on what you've told us so far.

Mr. Clement: --Well, I think punitive damages would be a harder case, in terms of proportional incongruence.

But this Court has, even in the absence of congressional action, found damages to be an appropriate remedy for unconstitutional or unlawful State conduct.

Take the Bivens cases, for example, or the Franklin case, in Title IX, and, I think, if damages are appropriate where Congress hasn't acted, I think where Congress has provided for damages, damages are clearly an appropriate remedy.

But, with respect to damages, in particular, I think it's important to note that the prophylactic gap here is not large, because, in the Title IX context, in the Gebser case, this Court has already said that, in order for there to be compensatory damages, there needs to be a showing of deliberate indifference.

And now, there may be some difference between what "deliberate indifference" means under Gebser and what "deliberate indifference" means under Farmer against Brennan, but, whatever that small gap is, that certainly seems manageable.

Justice Ginsburg: General Clement, in two respects, it... I think you have addressed the cost concern by comparing, in your brief, the Federal experience, which is subject to these controls, and you said it wasn't an inordinate expense, but you also pointed out that every State prison system is subject to the Rehabilitation Act, because they get Federal funds.

Is there a difference between the obligation that State systems would have under the Rehabilitation Act and under the ADA?

Mr. Clement: No, Justice Ginsburg, we don't think so.

But one thing I think it's important to emphasize is that, although at the current time period all 50 States take Federal funds for their prisons, so that all 50 States are subject to the Rehabilitation Act, that wasn't true at the time that the ADA was passed.

And I think what that illustrates is both that Title II plays an important gap filling role and also that, for whatever reason, I think, this is an area... prisons taking Federal funds... where the degree to which they take Federal funds may wax and wane over time.

And so, I don't think this is a situation where Title II is purely duplicative of the Rehabilitation Act, but the difference is really in terms of the scope of the coverage, not in terms of the substantive obligations under the--

Justice Ginsburg: And the--

Mr. Clement: --two provisions.

Justice Ginsburg: --damage remedies available under the Rehabilitation Act is--

Mr. Clement: I'm--

Justice Ginsburg: --Damages are available?

Mr. Clement: --Yes, they are, as to the States.

Justice Scalia: General--

Justice O'Connor: But this--

Justice Scalia: --Clement, I'm interested in another statute that has applicability in the circumstances, and that's Section 1983 and the Prison Litigation Reform Act.

Under the... under the Prison Litigation Reform Act, if you're bringing a constitutional claim under Section 1983, you have to exhaust your prison remedies before you can do that.

And that is not the case here, is that right?

Mr. Clement: No, I don't think that is right, Justice Scalia.

I think that we would... we would say that the PLRA fully applies to claims under Title II and there is an exhaustion remedy.

There is also, of course, an exhaustion remedy inherent in Title II, because, in order to get a reasonable modification, you have to ask for the modification in the first place.

We also think that the PLRA applies, in all its provisions, to Title II claims.

And one important provision to keep in mind is 1997e(e)... 42 U.S.C. 1997 e(e)... which is a limitations on the damages that are available.

And, under that provision, in order to get damages for emotional or mental injury, you have to also show some sort of physical injury.

And the lower courts have interpreted that to require at least the kind of more than de minimis injury you need under the Eighth Amendment.

And I think the PLRA, together with Title II, in the particular area of damages, which is what Justice Kennedy has pointed out is the particular area of concern under the Eleventh Amendment, is even a further narrowing of the relief that's available and a further narrowing of the prophylaxis under the Title II.

So, I do think the PLRA is actually something that actually helps make sure that the remedy here is congruent and proportional.

Justice Stevens: May I ask you to comment on this?

This problem of... just troubles me a little bit.

If we hold this provision unconstitutional because it is not congruent and proportional and so forth, does it not follow that the Title II is entirely unconstitutional, it cannot even be enforced by injunctive relief?

Mr. Clement: Because of the lack of the Commerce Clause nexus?

Is that the--

Justice Stevens: Well, it--

Mr. Clement: --concern, Justice Stevens?

Justice Stevens: --the whole basis for the constitutionality of the statute, I think, is the Enforcement Clause of the Fourteenth Amendment.

Mr. Clement: Well, it was... when it was originally enacted, Justice Stevens, it was supported by both the Commerce Clause and, of course the--

Justice Stevens: That's true of Title II, as well as Title I?

Mr. Clement: --That is... that's true, the statute generally... and it's true of Title II.

We would make... we would certainly defend the Act as valid Commerce Clause legislation.

But I do think that is a much more difficult argument as to Title II, generally, and particularly difficult argument with respect to prisons.

I think, in that respect, it's--

Justice Stevens: Right.

Mr. Clement: --telling that, if you go back to the Government's brief in Yeskey, when we were dealing with constitutional challenges to the application of Title II to prisons, the Government focused all its energy on defending it as valid Section 5 legislation--

Justice Stevens: Right.

Mr. Clement: --and dealt with the Commerce Clause in a footnote.

So, I think we certainly, at that point, were of the view that the Section 5 authority was the much stronger basis to defend the statute, especially in the prison context.

Justice Stevens: So, what I'm suggesting is that it is not merely a matter of damages that's at issue here, but the entire validity of Title II.

Mr. Clement: We agree with that, Justice Stevens.

And I would say, with respect to... I mean, again, I don't want to mislead you, in the sense that we would be here defending it as Commerce Clause legislation, but I think that's a tricky argument.

If it's possible, I'd like to reserve the rest of my time for rebuttal.

Argument of Samuel R. Bagenstos

Chief Justice Roberts: Thank you, General.

Mr. Bagenstos.

Mr. Bagenstos: Thank you Mr. Chief Justice and may it please the Court:

The Americans with Disabilities Act is congruent and proportional as applied to the prison setting for essentially three reasons.

The first is the nature of the constitutional right that's at stake in the prison setting.

As in the access-to-courts setting, this is a setting where States have affirmative constitutional duties, including, in many circumstances, duties of accommodation of inmates' disabilities.

The second reason relates to the record of constitutional violations in this context, a record in the context of State treatment of inmates with disabilities that is extensive, that is judicially documented and confirmed on a nationwide basis.

And the third reason relates to the [*13] tailoring of the ADA remedy, which the -- which General Clement has spoken about to some extent already -- both limitations inherent in the ADA itself and in the PLRA, which fully applies to ADA cases.

Justice Scalia: Do those violations that you allude to... is there an extensive record of violations by the State of Georgia?

Mr. Bagenstos: There is not.

The same... the record of constitutional violations is nationwide.

We don't have any judicial findings--

Justice Scalia: Well, you're--

Mr. Bagenstos: --of constitutional violations--

Justice Scalia: --But the money--

Mr. Bagenstos: --by Georgia.

Justice Scalia: --is not coming from the Nation, it's coming from the State of Georgia.

Was the State of Georgia guilty of constitutional violations?

Mr. Bagenstos: Well, I mean, of course, in this case, the lower court said that there might have been a constitutional violation that allowed that claim to proceed in the--

Justice Scalia: No, no, my--

Mr. Bagenstos: --companion--

Justice Scalia: --I mean a record... a record that would have justified applying, against the State of Georgia, prophylactic measures.

Mr. Bagenstos: --Well, we think the prophylactic measures are justified by the nationwide record, just as in this Court's case--

Justice Scalia: Even against people who played no part in that nationwide record.

Mr. Bagenstos: --Well, that's this Court's cases on prophylactic nationwide legislation, absolutely.

You know, in Tennessee versus Lane, this Court upheld nationwide prophylactic legislation on the basis of a record that included constitutional violations in only eight States.

Here, we have a record that touches on at least 37 States, if you look in pages 20 to 36 of our opening brief.

In--

Justice Breyer: This is... it's relevant to the... I just saw these as... I... just by chance, it... one of the cases in the SG's brief involved Georgia juvenile facilities, where mentally ill patients were restrained, hit, shackled, put in restraint chairs for hours, sprayed with pepper spray.

Mr. Bagenstos: --Well, I think--

Justice Breyer: And that seemed to be one instance coming out of Georgia.

Mr. Bagenstos: --I think that's right.

I think that's--

Justice Scalia: But was that before or after the enactment of this statute?

Mr. Bagenstos: --I believe that was pre-ADA, Your Honor.

Justice Scalia: Yes.

Mr. Bagenstos: But I think that the point... the point is that the record of constitutional violations here is a nationwide record.

It's a record that includes some incidents from Georgia.

It's a record that includes many incidents from many other States; as I say, 37 different States.

It's a record of constitutional violations that's been judicially confirmed.

We have courts actually finding--

Justice Scalia: Well--

Mr. Bagenstos: --in final adjudications--

Justice Scalia: --I'm looking at the--

Mr. Bagenstos: --constitutional violations.

Justice Scalia: --at the chart in one of the amicus briefs, which shows that there are, for Georgia... and it lists all the States... for Georgia, zero arguable State violations prior to the Act.

Mr. Bagenstos: Well, I think that's... I mean, I think that's because they exclude--

Justice Scalia: The--

Mr. Bagenstos: --juvenile facilities from their--

Justice Scalia: --Well--

Mr. Bagenstos: --consideration.

Justice Scalia: --State and local violations.

Mr. Bagenstos: Right.

Justice Scalia: But State and local units don't enjoy the sovereign immunity of the State.

Mr. Bagenstos: The... I mean--

Justice Scalia: You--

Mr. Bagenstos: --you know--

Justice Scalia: --don't need this Act to sue them.

Mr. Bagenstos: --Well, I would say, in Georgia, of course, State and... of course, local facilities are arms of the State in Georgia.

That's been the judicial holding.

And so, for Eleventh Amendment purposes, we would consider them.

But I would say the record of constitutional violations here that justifies nationwide prophylaxis is really far more extensive than the record that's been before this Court in Tennessee v. Lane and Nevada v. Hibbs and touches on touches on even more States than, you know, the nationwide literacy test ban that was upheld in Oregon v. Mitchell.

At the time this Court upheld that, only 22 States had literacy tests, I think.

Justice Stevens: May I ask you this?

The notion of our reviewing the adequacy of the evidence before Congress is something that's always seemed, sort of, puzzling to me.

Do you know what... what is... what standard do you suggest that we should apply in determining whether the evidence before Congress was sufficient?

Mr. Bagenstos: In determining whether the evidence before Congress was sufficient, I think, you know, this Court has said... I think the standard comes from City of Boerne... it's the congruence and proportionality test, but it recognizes that Congress has to have a great deal of leeway in determining where the line between enforcement and substantive change in the law lies.

And, you know, here we have, whatever standard we use, the kind of record of constitutional violations that justifies prophylaxis.

We have... we have constitutional rights that impose on States obligations of accommodation.

So, the ADA is, in no circumstance--

Justice Stevens: Yes, I understand your view is that, whatever the standard is, you win.

I'm just curious, do you have a--

[Laughter]

--do you have a formulation of what the proper standard should be?

Mr. Bagenstos: --Well, as I said, I think the... I do think that the proper standard should be the City of Boerne standard of congruence and proportionality, exercised with the kind of deference that this Court said in Boerne, which I think this Court adopted in Lane, to the factfinding capabilities of the... of the... of the Congress.

Chief Justice Roberts: I understand your submission... and that's what I heard from the Solicitor General, as well... on the difference between enforcement and the substantive right.

You're assuring us that we don't need to worry about that, because there's no great difference between what you think is required under the ADA and what's required under the Constitution.

Mr. Bagenstos: Well, Mr. Chief Justice, I think there is clearly a difference.

Right?

There's a prophylactic sweep to the statute.

It's just that it's not very much, in this context, for a number of reasons, one being the nature of the constitutional rights, that they impose requirements that are affirmative duties, the other being the way the reasonableness language of the ADA has been consistently read by lower courts to take account of context, and another being the Prison Litigation Reform Act, which further ties the ADA to the--

Chief Justice Roberts: But I'm just wondering if that's--

Mr. Bagenstos: --constitutional violation.

Chief Justice Roberts: --a reasonable reading of the ADA, which I had always understood to be a significant change in... in terms of what rights are available to the disabled.

And it seems to me quite different from Turner against Safley, which talks about the demands of the prison environment and the... and a high level of deference to prison administrators.

Do you think that approach is, in fact, consistent with what Congress had in mind with the ADA?

Mr. Bagenstos: I think that the approach of taking into account the significant State interest in uniform treatment in the prison setting uniquely, yes, is very much consistent with what Congress had in mind, just as this Court, in the Cutter case, you know, read the "compelling State interest" language, much more stringent language about the... about what the State has to satisfy... as taking--

Justice O'Connor: One--

Mr. Bagenstos: --account of--

Justice O'Connor: --One--

Mr. Bagenstos: --these concerns.

Justice O'Connor: --One concern is that, in the prison situation, the prison is exerting control over all aspects of the prisoner's daily life.

That's very different from just court access, as in Tennessee versus Lane, and it could require very extensive requirements, perhaps.

Is that a concern, or should it be, in the "congruence and proportionality" examination?

Mr. Bagenstos: Well, I think there are two sides to that coin.

I think, definitely, the scope of the ADA in the prison setting, you know, is important.

I think that the lower court's reading of Mr. Goodman alleges, may be entirely unreasonable, where what's at stake is attending an arts-and-crafts class, or something like that.

So, I think that is important, but I think the flip side of the... of the State's complete control over every aspect of the inmate's environment is, this is one of the few areas of Government where States have affirmative constitutional duties, including--

Justice Souter: Mr. Bagenstos, on this point, do we have any figures on what... I guess it's the Rehabilitation Act that applies to the Federal Prisons... do we have any figures on... you know, on what that has cost in required accommodations?

Mr. Bagenstos: --You know, I don't know the figures for that.

Perhaps the Solicitor General can answer as to what the burden has been on the Federal Government.

I think, you know, the Solicitor General states in his brief... in his reply brief, particularly... that the burden has not been significant, the Government--

Justice Souter: Yes.

Mr. Bagenstos: --has not--

Justice Ginsburg: It applies... it applies to State prisons, as well, because of its Spending--

Justice Souter: Well, yes, that's right.

Justice Ginsburg: --Clause legislation.

Justice Souter: Yes.

That's right.

Mr. Bagenstos: --That's true.

It does apply to State prisons, as well, Justice Ginsburg.

However, we... you know, we obviously can't be sure that it's always going to cover every State prison.

It hasn't, at times, in the past.

It might not, at times, in the future.

I think, you know, one of the significant aspects of the Rehabilitation Act is... and I think the amicus brief filed on behalf of Mr. Goodman by the former President George H. W. Bush really emphasizes this... the ADA was passed based on a firm conclusion by Congress that the Rehabilitation Act had failed, that it hadn't worked.

And I think the record of constitutional violations here shows that, that we have such an extensive record of judicially confirmed, judicially established findings of constitutional violations in the prison context, and we have constitutional rights that impose on States the same kinds of requirements, not in all particulars, but in very similar ways, as the ADA does, itself.

I think that's where... that's where the congruence and proportionality really comes in.

Justice Kennedy: Why is it so clear that damages are necessary and that equitable relief shouldn't suffice?

It's--

Mr. Bagenstos: Well--

Justice Kennedy: --it's puzzling... it's puzzling to me, the notion that trial attorneys and their clients can levy upon the funds in State treasuries under the Eleventh Amendment.

Why is it congruent and proportional to allow that?

Mr. Bagenstos: --Well, a couple of points about that.

I mean, the first is the deterrent function of damages is really essential in this context.

I think that's the import of the record of constitutional violations.

Section 1983 failed.

I think the second point about damages is, they're very limited in the prison context.

They're limited by this Court's decision in Barnes, no punitives.

They're--

Justice Kennedy: Well, where you say Section 1983 failed, the ADA could allow equitable remedies.

Mr. Bagenstos: --The ADA could allow equitable remedies, but... could certainly--

Justice Kennedy: And why--

Mr. Bagenstos: --allow--

Justice Kennedy: --And why shouldn't that... why shouldn't that suffice?

Mr. Bagenstos: --Well, I think, you know, this... something this Court has said repeatedly, that the deterrent function of damages is important... and here, we have... we have a very good... we have very good evidence that we need deterrents in this context.

We need deterrents because constitutional violations have continued and continued.

But I--

Justice Scalia: Why don't--

Mr. Bagenstos: --think that--

Justice Scalia: --Why don't you need it for 1983 violations?

Mr. Bagenstos: --But--

Justice Scalia: Constitutional violations.

Not just prophylaxis--

Mr. Bagenstos: --Well, there--

Justice Scalia: --but actual constitutional violations by the prisons under 1983--

Mr. Bagenstos: --I think it--

Justice Scalia: --that don't happen to relate to the handicapped and, thus, are not covered by this legislation.

You can't get damages there.

Mr. Bagenstos: --Well, you know, I think that the... with respect to constitutional violations that might not relate to people with disabilities, you know, that's something Congress could certainly consider in other legislation.

Here, Congress would... have, staring in front them... right +/?

a record of constitutional violations that showed... right +/?

proven constitutional violations showed that the 1983 remedy, which doesn't authorize damages against the State, wasn't working.

We need to have some additional remedy.

We need some additional deterrents and spur to compliance on the part of States.

But I think it's also important to note how limited the damages remedy in this context is.

It's not just the absence of punitive damages.

It's not just... you know, we also have the provision of the PLRA that says no damages for mental and emotional injury in the absence of physical injury, which means that, in the kinds of cases that are peripheral to core constitutional rights, we're not going to have damages anyway.

It also... we also have the exhaustion requirement of the PLRA, which imposes on plaintiff the requirement that they go to the prison and tell them, PLRA, we're very likely to have deliberate indifference, a problem that prison officials have refused to resolve--

Justice Scalia: Well, wait, but... you know, in 1983, when you exhaust your prison remedies, the prison fixes what was wrong, and that's the end of it.

But, under this Act, you go through your prison remedies, what do you ask the prison for?

Money?

The prison can't give you money, so they say,

"No, you can't get your money. "

I--

Mr. Bagenstos: --Well, I think--

Justice Scalia: --mean, the prison-remedy thing is... the only thing it does is make it take a longer time to get to court, but it does the prison no good.

It's going to be liable for damages anyway.

Mr. Bagenstos: --Well, I think that, of course, the prison can reduce its damages liability, and, of course, where we have a continuing violation after exhaustion, which is what... when people file these lawsuits, when they have continuing problems, like Mr. Goodman alleges were continuing problems in his case... we will have cases where we have very much... very likely to have deliberate indifference.

And so, I think that's an important thing, too.

I think the other important point about Turner v. Safley that the Solicitor General spoke about... right +/?

many of the constitutional rights in the prison setting that are significant here don't implicate Turner v. Safley.

Eighth Amendment cruel-and-unusual-punishment claims don't implicate Turner v. Safley, as this Court said in the Johnson case.

And we have a very substantial record of Eighth Amendment violations.

Of course, the Eighth Amendment requires accommodation of serious medical needs, as this Court has said ever since Estelle v. Gamble, and ADA.

And so, I think another very significant aspect of the congruence and proportionality here is how close the ADA's disability definition is to the class of people who implicate constitutional rights, affirmative constitutional rights of accommodation, under the Eighth Amendment itself.

And so, I think that's another very significant aspect of the tightness of the fit here.

But, here, I think the most salient fact is, if you ever had a record justifying prophylaxis nationwide, the record here, that touches on 37 different States, that includes, in many cases, statewide findings of constitutional violations, is it, it's a record that justifies, certainly, some prophylactic legislation; at least... at the very least, the minimal prophylaxis that we have in the ADA in the prison setting.

It's a kind of... it's a kind of prophylaxis that's very much like the kind of prophylaxis this Court has previously upheld in Tennessee v. Lane, where we had very similar affirmative constitutional obligations, and in Nevada v. Hibbs, where we had a much less significant record, nationwide, of constitutional violations.

And so, for all those reasons, you know, we believe that the ADA is congruent and proportional in the prison setting.

And if the Court has no further questions--

Chief Justice Roberts: Thank you, Counsel.

Mr. Bagenstos: --Okay.

Okay.

Argument of Gregory Andrew Castanias

Chief Justice Roberts: Mr. Castanias.

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

Before I sit down today, I'd like to make three basic points, and hopefully I'll get to make... elaborate on each of them a little bit.

First of all, this case is not anything like Tennessee versus Lane.

It doesn't involve the very important civil right of access to courts, access to voting booths, or anything like that.

It involves--

Justice Breyer: But was there... there was a reporter who was one of the disabled people, I think, wasn't there, in Tennessee versus Lane?

Mr. Castanias: --I believe that's correct--

Justice Breyer: And so--

Mr. Castanias: --Your Honor.

Justice Breyer: --what is the right that that reporter has that's specific to courthouses?

Mr. Castanias: As I understand it, Your Honor, from reading the opinion, that right was the specific right to access the courts.

It's the public right of access to see court proceedings, like the people--

Justice Breyer: Well, was there any problem of that in Tennessee versus Lane?

I thought the courthouse officials there said,

"There'll be a trial. "

"No problem there, just whether you have to walk up the steps or don't, and we'll give you a trial down below. "

Was there... it's the right of access to courthouse, specially?

Mr. Castanias: --It's the right of access to courts, specifically, that was the context that was... that was created for purpose of the as-applied analysis in Lane.

The second point I hope I'll get to address today is the very fundamental differences between the prison context the... and the courthouse context at issue in Lane, and the reasons why the prison context that it's... that is at issue in this case makes this case so fundamentally different.

The prison context, as Justice O'Connor pointed out, is one where issues of safety and security and, as well, from the Court's decisions, issues of federalism and deference to prison officials hold sway.

Those were not at issue in Lane, and they--

Chief Justice Roberts: Well, your--

Mr. Castanias: --have a--

Chief Justice Roberts: --your friends on the other side say that's not a big deal, because the ADA looks only to reasonable accommodations; you can take all those factors into account; and presumably the lower courts would.

In other words, they say you're already subject to most of these obligations anyway, and it's just a little bit extra, under the ADA.

Mr. Castanias: --Well, Mr. Chief Justice, we respectfully, but strenuously, disagree with that submission, and I'll give you a very good example of what they're not talking about here.

What's happening under the ADA, as a practical matter in the prison context, is that it's giving prisoners trials on issues like whether or not they have access to the television room in the prison.

That's not a constitutional right.

Before the ADA, that was never understood to be a constitutional right.

Justice Ginsburg: Have Courts of Appeals approved those determinations?

Mr. Castanias: I'm not aware, Justice Ginsburg, of any Court of Appeals that has ruled on that yet, but I am aware of two District Court cases... I could give you the names of them... where summary judgment was denied, and a trial was given to the inmate.

One is Brown against King County Department of Adult Corrections--

Justice Ginsburg: And how many has it... in the District Courts, how many have been rejected when it's something like television or recreation?

Mr. Castanias: --Justice Ginsburg, without making any representations that I am going to canvas the universe on this, I have not seen a case where the District Court has rejected a trial in that respect.

And I think, Your Honor, this gives me an opportunity to talk about one of the fundamental problems--

Justice Ginsburg: Well, before you do that--

Mr. Castanias: --Sure.

Justice Ginsburg: --as I understand it, and as the Solicitor General confirmed, you are subject to the Rehabilitation Act, where the substantive scope is the same.

So, what... you are saying, in the prison context, this is undue, but you all... you are already subject to it under one Act.

And how has that been working out?

Mr. Castanias: Justice Ginsburg, I don't have any data on that, and we haven't... we don't have any in our brief.

The Solicitor General's data that he put in on the Federal Bureau of Prisons came in his reply brief, and we certainly haven't had--

Justice O'Connor: But do you--

Mr. Castanias: --an opportunity--

Justice O'Connor: --agree that--

Mr. Castanias: --to pull that together.

Justice O'Connor: --the Rehab Act contains the same essential requirements as ADA?

Mr. Castanias: Well, the Rehabilitation Act is a little different than the ADA, but it certainly is protective of many of the same rights.

I would think it would be protective of all of the same constitutional rights that the--

Justice O'Connor: And you agree that it applies at least where the States are accepting Federal money for the prison?

Mr. Castanias: --Well, as I understand it, Justice O'Connor, the Spending Clause power can be hived down on a program-by-program basis, not just as whether the State itself is receiving it.

So, without knowing specifically whether we're talking about the particular program--

Justice O'Connor: Does it apply in the prison in this case... the Rehab Act?

Mr. Castanias: --I don't know the answer to that, as I stand here, Justice O'Connor.

Justice Scalia: Mr. Schaerr, who's going to be representing some States as amici, will presumably have better information on that subject.

Mr. Castanias: I--

Justice Breyer: In your point of view, would it help if the Court said... I guess it would, but I... in order to get rid of this problem, if the Court said,

"Look, it says "reasonable". "

and of course a prison has special problems,

and, referring, say, to Turner versus Safley, said that,

"These things about television remote controls are not really, normally, a matter of unreasonableness. "

So, in other words, we hit... we... you give considerable discretion to the... to the warden, and the Act would have bite in cases where there is really a serious problem, like this one.

It's alleged to be a really serious problem.

Mr. Castanias: --Well, Justice Breyer, I think you're right to say that, except that that's not what the Act says.

The Act says--

Justice Breyer: I thought it said "reasonableness".

Mr. Castanias: --That's exactly right, and that... and the reasonable... the reasonable-accommodation or reasonable-modification standard of the ADA, both generally and specifically in Title II, imposes an affirmative burden on the States, which is very much unlike the rational-basis test of Cleburne.

It's very much unlike the rational-relationship test of Turner against Safley.

Quite the contrary, what happens in these cases... and this comes up in the television cases, as well as the access-to-chapels cases or any of the... any of the cases that the Petitioners have hypothesized... what happens in that case is, the Petitioner pleads that,

"I could access this if I only had a reasonable accommodation. "

and then the burden shifts to the State, at that point, to not just articulate reasonable grounds, but to, in fact, prove that it is not reasonable or that it would be an undue burden.

There is a case that the... that Petitioner Goodman has cited in both of his briefs to this Court, out of the Seventh Circuit, called Love against Westville Correctional Facility... comes out Indiana... and this case is a great example of why, Justice Breyer, the Turner against... the Turner against Safley integration into the reasonableness provisions of ADA Title II won't work, and isn't congruent and proportional, because--

Justice O'Connor: Is that case cited somewhere?

Mr. Castanias: --It is.

It's in both the... Petitioner Goodman's opening and reply briefs.

In the Love case... and this is... this is a law-school exam case, because the prisoner put forth his case, and the State of Indiana, while it was pre-Yeskey, nonetheless agreed that the ADA applied to the prison and, at the same time, didn't present any evidence.

And the prisoner won the case.

And they won the case, because all the State did is articulate reasons, like there was... it would cost too much.

And this court very clearly said,

"Look, you didn't put any evidence. "

"You lose. "

Now, that's what... that was one of the fundamental factors that caused this Court to find, in both Kimel and Garrett, the statutes unconstitutional, because the--

Justice Ginsburg: But maybe in the prison setting, the lower courts would pay some attention to the Court's recent decision in Cutter against Wilkinson, where the Court made it very clear that a high level of deference... even dealing with a strict-scrutiny standard for religious freedom... that a high level of deference would be paid to prison administrators' judgment of what safety and discipline requires inside a prison.

Wouldn't that... wouldn't that carry over to the ADA, were it to apply?

Mr. Castanias: --You--

Justice Scalia: We could say that--

Mr. Castanias: --But you--

Justice Scalia: --in this opinion.

I mean, that would make it happen, wouldn't it?

Mr. Castanias: --You could... I mean, you could absolutely say it.

You... the Court can say anything it wants here.

But the problem is, is that this was... this was one of the fundamental problems with ADA Title I--

Justice Ginsburg: Do you think that the--

Mr. Castanias: --and with the ADEA--

Justice Ginsburg: --that if the prison explained what their practices were, in terms of the needs of security, that a lower court will then say,

"Well, never mind that. "

"The Supreme Court just said it. "

"We don't have to enforce it? "

I don't think there would be that kind of lawlessness.

Mr. Castanias: --Well, I'm... I... Justice Ginsburg, were... if this Court were to uphold the damages remedy in this case, this would be what the States would be left to argue.

And in... while it is true that you have said, in a couple of recent cases, that strict scrutiny is not quite as fatal, in fact, as usual, that strict-scrutiny case that you're referring to is the true exception in the prison context, where strict scrutiny was applied.

And it involved the very important, very core Fourteenth Amendment right against racial discrimination.

Here, we're talking about a statute that was framed by Congress as basically trying to change the Cleburne rule, trying to bring an added level of scrutiny to claims, equal-protection--

Justice Ginsburg: It's interesting--

Mr. Castanias: --type claims.

Justice Ginsburg: --that you cite that case, in terms of Justice Scalia's remark,

"Watch what we do, not what we say. "

Cleburne was a remarkable case in that respect.

It purported to apply rational-basis review, but the plaintiffs won.

Mr. Castanias: That's exactly right, Justice Ginsburg.

And, in fact, the reason that the plaintiffs won is that the State, in that case, the State defendants, offered four reasons, all of which were found to be not legitimate State reasons.

It was a straightforward application of the rational--

Justice Ginsburg: But if you think--

Mr. Castanias: --basis test.

Justice Ginsburg: --if you think of the... any conceivable basis... doesn't even have to be offered if the... if it's, indeed, the rational-basis test.

It has been suggested that something more is going on in Cleburne, and, I think, in all candor, one would have to say so.

Because if you looked at the rational-basis test that had gone before, this one looked no better, no worse.

Mr. Castanias: I think that the Tennessee Solicitor General Moore, at the end of the Lane argument, said,

"We have to take the Court as... for what it does say. "

And it said it was applying rational-basis scrutiny in that case.

Justice Scalia: Mr. Castanias, suppose the Court agrees with you that the response here is not proportionate, and, hence, that the prophylactic aspects of this statute are invalid.

There remains the fact that the statute covers actual constitutional violations for which you don't need any special proportionality.

Certainly, the Government can allow the States to be sued for constitutional violations.

And the plaintiff here claims that some of the acts he's seeking damages for do amount to constitutional violations.

How can we possibly say that that suit does not lie?

Mr. Castanias: Well, I think, Your Honor, there are two answers to that.

First of all is, Section 1983 already did that.

And the reason that that... that may not--

Justice Scalia: It doesn't lie damages here.

Can you get damages under 1983?

Mr. Castanias: --Absolutely.

Justice Scalia: Against the State?

Mr. Castanias: You can get it against State officers acting--

Justice Scalia: State officers don't have any money.

[Laughter]

We're talking about damages against the State.

Mr. Castanias: --Well, you cannot get damages against the State--

Justice Scalia: Under--

Mr. Castanias: --under Section--

Justice Scalia: --1983--

Mr. Castanias: --1983, that's--

Justice Scalia: --absolutely.

Mr. Castanias: --right.

That is exactly right.

But the other answer, Justice Scalia, is that to get to that result... and I think it's remarkable that both Petitioners' counsel stood up here, and the way they framed the question was,

"This is just remedial for these actual constitutional violations in prison. "

To get to that result, you would have to rewrite the ADA in a way that would make the reasonable-modification or reasonable accommodations provision basically an empty vessel to put whatever constitutional law you want in--

Justice Scalia: No, no, I mean the portions that go beyond constitutional violations are no good.

I'm not... I'm not going to read it unrealistically so that it only includes constitutional violations.

But, to the extent that it includes constitutional violations, why isn't that lawsuit perfectly okay?

Mr. Castanias: --Let me... let me... let me pause for a second and think about that.

The... I think the problem with that... my instinct is that there is a problem with that, and I think the problem with that... not just because, Your Honor, I represent the State... but I think the problem with that is that it is, in no way, congruent to the constitutional rights.

In other words, what it's doing is, it's giving, only to a limited class of prisoners, a particular set of rights.

In a way, this is the... this is the underbreadth argument that we made in our brief that the... that the Petitioners, in their replies, made fun of a little bit.

But, quite honestly, this is... this... it would be giving disabled inmates... making them into a special class for purposes of constitutional violations that don't apply just to disabled inmates at all.

Quite the--

Justice Breyer: Well, that's--

Mr. Castanias: --contrary--

Justice Breyer: --This is true.

This is exactly the point I had asked about before.

This is a better point.

Because I thought that bridge was... that... was crossed in Lane.

That is, I don't see how you can say that Lane was not giving... saying it's constitutional to have prophylactic rules.

And that's why I raised the reporter.

I've never heard of a First Amendment right of a paper to send a particular reporter.

I mean, if there's a disabled reporter who couldn't get into the courtroom, I guess they could send a different reporter.

Maybe that's a First Amendment right, but I have not heard of it.

So, I thought that, really, Lane is saying,

"You can sweep, within the prophylactic rules, a lot of things that are not, in fact, constitutional violations, but simply discrimination against disabled people. "

Mr. Castanias: --I think, Justice Breyer, with regard to Lane, the right that was at issue was not the right of the paper to send a reporter, it was the right of the reporter--

Justice Breyer: I think there is a First Amendment right for a newspaper, for example, to send a particular reporter to the courtroom.

That's an interesting question.

I never thought of that one.

I--

Mr. Castanias: --No, actually, Justice--

Justice Breyer: --you don't think Lane stands for the proposition of their prophylactic rules being perfectly legitimate under the Eleventh Amendment, where you have a set of constitutional violations?

Mr. Castanias: --Justice Breyer, I think... I think I either misstated my answer to you, because I was trying to--

Justice Breyer: No, I was asking--

Mr. Castanias: --I--

Justice Breyer: --I'm--

Mr. Castanias: --Let me try to answer that and--

Justice Breyer: --Yes.

Mr. Castanias: --say to you that I think, first of all, the First Amendment right that was at issue there was the general right that's possessed by the public to attend court proceedings, not just a right that was inherent in the newspaper or the... a right that was prophylactically being exercised there.

Justice Kennedy, you asked the Petitioner's counsel about alternative remedies here, and I think there's an important point to make with regard to Title III of the ADA, and that's the title of the ADA that applies, not to public entities, as we have here, like the State prison, but the title that applies to public accommodations, like restaurants and hotels.

And it's important to note, I think, that, in that title, Congress did not provide for money-damages remedies.

Quite the contrary, it provided for an Attorney General action, and it provided for injunctive relief.

And so, the notion that States somehow are special and should be the ones that get damages against them for violating the... violating access rights is, in words that the Court has used... in Boerne and the cases following it, that is a real indignity to the States.

And, beyond that, the standard that applies--

Chief Justice Roberts: Well, presumably, that's because the prisoners don't have a lot of choice as to which accommodations they're going to select from.

[Laughter]

Mr. Castanias: --I'm not sure, Mr. Chief Justice, that it follows that damage... that damages follow from that observation.

And I think, with regard to the choices that are available to prisons, much has been made in this case about the affirmative obligations of the State to provide the minimum standards of health and safety for prisoners.

And I'd point out that, in the Court's decision in DeShaney... specifically, footnote 7... the former Chief Justice wrote for the Court that, in determining both the scope and how to satisfy those, there is an enormous amount of discretion imposed in the State.

So, it's hard to say that that provision is allowing for... that minimal affirmative burden that's on the State is in any way congruent with the broad affirmative remedies that are at stake in this case.

Now, if I could just go through, very quickly, the various constitutional rights that are being addressed here by the... that are being claimed here by the Petitioner, you can see, in each case, why it's not a proportional and congruent remedy to use Title II of the ADA to enforce them.

First of all, with regard to the Equal Protection Clause, it's almost obvious, from the findings of Congress, that they meant to impose a higher degree of scrutiny.

By citing the words of Carolene Products, as well as Matthews against Lucas, that's... have justified heightened scrutiny to apply to the disabled, this is almost proof positive that Title II... and the ADA, in general... is changing the level of constitutional law.

It's not enforcing; it's changing the law.

Justice Scalia: Well, that just proves that they went too far.

It doesn't prove that, to the extent that it covers a constitutional violation, it's okay.

We will say the excess is bad.

Mr. Castanias: Well, Justice Scalia, I think the answer to that comes back to Kimel and Garrett.

The excessive change in the constitutional law was held to have crossed the line in that case.

And here, we have the same problems.

We have the changing of the burdens.

We have the changing of the level of scrutiny.

And we have the efforts, the same efforts that were used in Kimel and Garrett--

Justice Stevens: Do you think--

Mr. Castanias: --to make--

Justice Stevens: --the level of scrutiny applied in Cleburne was precisely the same rational-basis level that is applied in a lot of other rational-basis cases?

Mr. Castanias: --I think it was, Justice Stevens, because you can only talk about the conceivable remedies in the context of what the State puts forth.

And perhaps a creative judge could say,

"Aha, but that's the State... you didn't think about this one. "

And the fact that Justice White's opinion... I think it was Justice White's opinion for the court in Cleburne... didn't go on and think about four other conceivable bases, I don't think is a fault of the decisionmaking process at all.

With regard to the Petitioner's efforts to enforce the guarantee against cruel and unusual punishment, there is no intent standard in the ADA at all.

In fact, this would scrub out the deliberate-indifference standard entirely, and, in the... at least Goodman's reply brief, he admits that that basically would be what would happen.

He says that would be appropriate prophylaxis.

I think that is an astonishing claim in this case.

Justice Ginsburg: Can we go back, Mr. Castanias, to Justice Scalia's question about the core concerns?

And we have been told by Respondents that their core concerns are sanitation, mobility, protection from physical injury.

Now, that sounds to me like constitutional Eighth Amendment heartland.

Mr. Castanias: And in that case, Justice Ginsburg, if I could just briefly--

Chief Justice Roberts: Sure.

Mr. Castanias: --conclude?

In that case, Justice Ginsburg, the Constitution, through Section 1983, does provide a remedy.

It will provide a remedy that will get the prison to stop that.

If there are no other questions, we'd ask that the judgment be affirmed.

Argument of Gene C. Schaerr

Chief Justice Roberts: Thank you, Counsel.

Mr. Schaerr, we'll hear now from you.

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

Let me begin by attempting to answer Justice Scalia's questions... question about the Rehabilitation Act.

My understanding is that the key difference between the Rehabilitation Act and Title II is that... is that the Rehabilitation Act requires intentional conduct, which, obviously, is a much... a much higher standard.

Instead of dwelling on the record offered in support of Title II... and we agree with Georgia that the record was not sufficient... I'd like to focus on the congruence and proportionality requirements, which are quite separate from the record requirement, and which we believe are independently dispositive in this case, for two separate reasons.

But, first, I think it's important to recall the two key purposes that the congruence-and-proportionality analysis serves.

One of those, as the Court has reiterated, is to prevent Section 5 from becoming a kind of police power through which Congress can regulate the States and impose litigation and other burdens on them as though they were mere corporations.

The second purpose, of course, is ensuring that the specific remedies that Congress chooses, and especially the abrogation of sovereign immunity... sovereign immunity that this Court has held is within Congress's Section 5 power, are a measured response to Congress's legitimate goals.

And that's obviously important, because of the... of the... of the tension between the Section 5 power, on the one hand, and the Eleventh Amendment and other provisions of the Constitution that protect--

Justice Stevens: May I just--

Mr. Schaerr: --the State's sovereignty.

Justice Stevens: --be sure I understand this point?

Mr. Schaerr: Yes.

Justice Stevens: Are you, in fact, arguing that the statute might be... I know you don't agree with it... might be proportionate and congruent with respect to all of its prohibitions, but, to the extent it provides for a damage remedy, then it crosses the line?

Mr. Schaerr: I do believe that the statute could be invalidated on that ground alone, but I don't think the Court needs to do that, because I think it's clearly not congruent with constitutional requirements.

And let... and I believe there are--

Justice Stevens: But--

Mr. Schaerr: --four reasons for that.

Justice Stevens: --But is that... it... because it has a damage remedy, or would it be equally noncongruent without the damage remedy?

That's what I'm trying--

Mr. Schaerr: I--

Justice Stevens: --I'm following up on Justice Kennedy's question to your colleague.

Mr. Schaerr: --Well, the way... the way I would view it is that the damage remedy is disproportionate to Congress's legitimate goals in this case, for a couple of reasons.

Number one, as in... as in Florida Prepaid and some of this... some of this Court's other decisions, the abrogation of sovereign immunity is not limited to the specific areas that Congress and the courts have identified as the greatest concern, from a constitutional standpoint.

And, number two, the abrogation of sovereign immunity is not limited to the States, or categories of States, where there has been a finding of unconstitutional action.

So, we do think that that would be a sufficient basis to invalidate this statute's abrogation of sovereign immunity, but we also think that the statute is not at all congruent with the requirements of the Constitution.

And, as--

Justice Souter: Mr.--

Mr. Schaerr: --I said, I think there are four reasons for that.

Justice Souter: --Mr. Schaerr, before you go on, may I just ask you one question on the point that you made... and you made it in the brief... about the failure to establish a... some kind of a history of unconstitutional action in this particular State?

Do I understand you to claim that that is a... that a record of some sort must be made by Congress?

Or can a record of that sort be made in the courts, in the course of litigation, as a predicate for a particular lawsuit like this one?

Mr. Schaerr: Well, City of Boerne and other courts... other decisions of this Court say that, to be a valid exercise of Congress's Section 5 authority, it has to be a response to a record of constitutional violations.

Justice Souter: Right, but Congress--

Mr. Schaerr: And it's hard for me to--

Justice Souter: --but Congress normally operates on a... on a national scale--

Mr. Schaerr: --True.

Justice Souter: --so that, I mean, we... I guess, we would normally say,

"Well, you can show 40 States out of 50 were in trouble. "

"That's probably good enough to get you across the line, at least. "

But you're not saying that.

So, are you saying that Congress has got to make the record with respect to each individual State?

Mr. Schaerr: No, I'm not claiming that Congress necessarily has to make the record, but I believe the record has to have been created before Congress acts; otherwise, the--

Justice Souter: So, it could be done--

Mr. Schaerr: --legislation isn't--

Justice Souter: --it could be done--

Mr. Schaerr: --a response--

Justice Souter: --in the litigation of this case, then.

There could be a trial record of prior violations.

Mr. Schaerr: --No, I... I don't think the record in this case would satisfy it, because this... because--

Justice Souter: No, but my question is, Where does the record have to be made?

Does Congress have to make it, on a State-by-State basis, or may that record be made in the course of a trial in a particular State as a predicate for subjecting that State to liability in this instance?

Mr. Schaerr: --Well, this Court's decisions suggest that the record has to at least have been within Congress's awareness at the time the statute was passed.

Justice Souter: So that Congress could have known this, whether they specifically adverted to it, or not.

That would be sufficient.

Mr. Schaerr: I think that's correct.

Again, four reasons why Title II is not congruent with the... with the requirements of the Constitution.

First, as in Garrett, the substantive accommodation duty imposed by Title II far exceeds the requirements of the Constitution.

And to see why, we need look no further than Mr. Goodman's complaints that are in the Joint Appendix, the Government's Addendum C, and the Justice Department's implementing regulations, which are found at 28 C.F.R. Section 35.130(b).

And if you... if you look at Mr. Goodman's complaint, yes, there are some allegations there that obviously raise constitutional issues, but there are a lot of allegations that clearly state a claim under the Justice Department's interpretation of Title II, but, equally clearly, don't raise constitutional issues.

For example, on page 65, he has a claim seeking to make the TV lounge and other entertainment facilities wheelchair accessible.

Pages 53, 57, and 82, he makes a claim for better access to recreation facilities, rehabilitative exercises, and physical therapy.

At page 64 of the Joint Appendix, he makes a claim to force the State to install wheelchair-accessible bathrooms.

Justice Kennedy: And I'm saying this to help you.

I'd love to get reason 2.

I'm wondering--

[Laughter]

Mr. Schaerr: Okay.

Justice Scalia: Even if they're bad, why aren't the other ones good?

Mr. Schaerr: Well, in order to abrogate the State's sovereign immunity, there has to have been a valid exercise of Congress's power, and there has to be a statute that represents a valid exercise of that power; otherwise, there's no basis for subjecting the States to liability.

So, I don't think it's enough just to say,

"Maybe there... maybe there is an Eighth Amendment claim here that's legitimate, and maybe, therefore, in this case, the State's sovereign immunity can be abrogated. "

It has to be done pursuant to a legitimate exercise of Congress's power.

Reason number two, Justice Kennedy, is that, as in Boerne and Garrett, even where constitutional issues are implicated, Title II effectively imposes heightened scrutiny on many decisions that are subject to rational-basis review under the Constitution... for example, access to the law library, religious services, associational rights, those sorts of things.

And that, I think, is the key distinction between this case and Lane and Hibbs.

And so, as the Court put it in Garrett, even with the undue-burden exception, the statute makes unlawful a range of alternative responses that would be reasonable under the Constitution, but would fall short of imposing an undue burden on the employer.

Number three, as in Garrett, Title II prohibits standards and criteria that have a disparate impact on the disabled, even though that obviously wouldn't be enough to establish a constitutional violation if the disabled were a suspect class.

And, again, the Court need only look at the Justice Department's regulations to see how they impose a disparate-impact requirement.

And, fourth, again, as in Kimel and Garrett, Title II reverses the burden of proof.

As the Court held in Garrett, under the Constitution, classifications based on disability are prima facie--

Justice Breyer: Well, why isn't all that true of Lane?

Everything you've said is also true of the prophylactic part of Lane.

I mean, I've never heard that people took seriously... though maybe they should have... but, before the ADA, I have never heard there was a constitutional right of a disabled person to go to a courthouse on the second floor.

There were second-floor courthouses all over the country.

I don't know that was true of the bathrooms.

I don't know it was true of a lot of things in courthouses.

So, I think your argument could be made in schools, courthouses, all over the place.

And I take it that Lane said, "Prophylaxis"... whatever the word is... "of that sort"--

[Laughter]

"# is fine under Title II, given a core of constitutional violations. "

So, how do you distinguish them that?

Mr. Schaerr: --Well, I think it... one of the ways is the one... is the one I just mentioned a... mentioned a minute ago.

It's... Lane was certainly dealing with rights that have been considered by--

Justice Breyer: You mean--

Mr. Schaerr: --the Court--

Justice Breyer: --beyond a--

Mr. Schaerr: --to be--

Justice Breyer: --the average public, you had a constitutional right?

I mean, you might have.

I might be surprised.

But, interesting.

Mr. Schaerr: --Well, I--

Justice Breyer: The average person could have brought a lawsuit, a person in a wheelchair, and said,

"All the courthouses in this country, or in this county, are on the second floor, and moreover the bathrooms... I need a special bathroom. "

and they would have won without the ADA.

Why did we need the ADA, then?

Mr. Schaerr: --Well, I'm not sure the claim... I'm not sure, Justice Breyer, that the claim of the person who wanted access to the courthouse to serve as a reporter was necessary to the result in Lane in all of that.

Justice Breyer: Ah.

Ah, you're saying... I... what I just heard was, it's... the reporter just was a stand-in for the average person, that the average person had these constitutional rights, which may have been a--

Mr. Schaerr: I think that would be one way of understanding it, though not the only way.

Thank you.

Rebuttal of Paul D. Clement

Chief Justice Roberts: Thank you, Mr. Schaerr.

General Clement, you have four minutes remaining.

Mr. Clement: Thank you, Mr. Chief Justice.

Before I say anything else, I want to just clarify that the scope of the Rehab Act and Title II is really coextensive.

Mr. Schaerr made a reference to the fact that you need intentional conduct under the Rehab Act.

I think that was true for a while in the lower courts with respect to damages claims.

I think after this Court's decision in Gebser, in the context of damages claims, the lower courts have generally required deliberate indifference both in the Rehabilitation Act context and in the Title II Act context, to the extent they've reached the issue.

But with respect to the substantive obligations, they really are identical.

And I do think that's important, in a couple of ways.

In particular, I think it's worth remembering here that the damages remedy in Title II... and this is different than Title I, where there was a specific provision for back-pay... but in Title II, the damages remedy is just an incorporation of the damages remedy available under the Rehab Act, which, in turn, incorporates Title VI and Title IX remedies.

And those, of course, are entirely judge-made.

And so, one of the things this Court recognized in Gebser, in deciding there had to be deliberate indifference for a compensatory-damages claim, is, this Court said, the judge-made nature of those remedies gives the court a particularly free hand in making those remedies make sense, in terms of the statute, and, I would think, a fortiori, in terms of the Constitution.

So, if--

Chief Justice Roberts: General, when you... earlier, you told us that this doesn't add much to the Constitution, in Turner versus Safley, and then we hear about access to the TV lounge, which doesn't sound like a constitutional deliberate-indifference Eighth Amendment claim.

I mean, if it's important to us how much of this applies, how do we address that issue?

Mr. Clement: --Well, let me address the specter of all these claims for TV access, because I do think that that's something that can be taken care of in any number of respects.

One is, a sensible application of Turner-type principles to the reasonable-modification standard can certainly be done in a way to weed out those claims.

I also think... especially given Justice Kennedy's principal concern with damages, I think here's an area where the PLRA is particularly helpful, because I don't know what kind of physical injury you're going to be able to show to being denied access to the TV room.

And since that's what you need to show under the PLRA in order to recover any damages for mental and emotional suffering that I suppose you could try to bring a claim for emotional suffering for not seeing TV... I'm not sure which way that would cut... but, in any event--

[Laughter]

--I think, in those contexts, the PLRA is the gateway you need to some physical injury, so I think that's going to help weed these out as a matter of damages claims.

And so, I think that's going to have a helpfulness, too.

Also, I think, in some... in some sense, you can't lose sight of the fact that perhaps the reason that somebody's being denied access to the TV room is because they're in a wheelchair on the second floor, and the TV room and the law library and the religious services and everything else they need in the prison is on the first floor.

And, in those contexts, it may be an appropriate degree of prophylaxis.

But I guess what I would say is, I would think that this Court would want to interpret the PL... # I'm sorry, would want to interpret Title II in a way that avoids constitutional problems, rather than in a way that engenders it.

And so, to the extent the access to the TV room is critical to the constitutionality of the statute, I think the reasonable-modification standard provides plenty of tools to apply Turner-type principles and ameliorate the constitutional problems.

I mean, if you compared this case with Cutter against Wilkinson from last term, there you had a statutory strict-scrutiny standard that was specifically directed at the prisons in one other context.

And, nonetheless, this Court said,

"That can be applied with Turner deference-type principles. "

Here, you have a statute that applies broadly, and I would think it would be a very easy act of interpretation and constitutional avoidance to say that,

"In the prison context, we're going to interpret in a way that avoids constitutional difficulties. "

If I could try to address just one or two specific questions... Justice Souter, you asked about the practical experience of the Federal Government.

And, as we point out in our opening brief, at page 45, it's been less than 1 percent of our litigation, and less than 2 percent of our compliance cost.

Thank you, Mr. Chief Justice.

Chief Justice Roberts: Thank you, General. The case is submitted.

Attribution:

The Oyez Project

Featured:

Central VA Comm. College v. Katz - Oral Argument

Fri, 09 Jan 2009 14:48:59 +0000

Case:

Central VA Comm. College v. Katz

Media File:

04-885_20051031-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of William E. Thro

Chief Justice Roberts: We'll hear argument next in Central Virginia Community College versus Katz.

Mr. Thro.

Mr. Thro: Mr. Chief Justice, and may it please the Court--

This case involves a conflict between two constitutional values.

On the one hand, Congress has the sovereign power to make laws which apply to everyone, including the States.

On the other hand, the States have sovereign immunity from all aspects of suit.

In the past, this Court has reconciled this conflict by drawing a line between sovereign power and sovereign immunity.

States are bound by Federal law, but the States are immune from monetary damages for violations of those laws.

In the bankruptcy context, this line means the States are bound by the discharge decisions, but that the States are immune from the trustee's attempts to augment the estate through monetary judgment.

Justice O'Connor: Can you tell us how often States are creditors in bankruptcies around the country?

Do you have any idea?

Mr. Thro: There is some information to that effect in the amicus brief of Ohio and every other State of the Union, Justice O'Connor, but my recollection is that the States are creditors in probably the majority of bankruptcies around the country.

Justice O'Connor: So, if you're correct, how would the result you want affect all the other creditors in these bankruptcies?

Mr. Thro: It would have some impact on the other creditors, in that you would not be able to augment the estate by collecting a monetary judgment from the State.

Justice O'Connor: And probably, on your theory, States can disregard the automatic stay that issues--

Mr. Thro: No, not at all--

Justice O'Connor: --when a bankruptcy--

Mr. Thro: --Your Honor.

Justice O'Connor: --commences?

Mr. Thro: No.

Under our... under our theory, the... theory, the States are bound by the automatic stay.

The States are also bound by--

Justice O'Connor: How is that, on your theory?

Mr. Thro: --Well, because--

Justice O'Connor: Why wouldn't the sovereign immunity extend to that?

Mr. Thro: --The automatic stay is an exercise of sovereign... of the sovereign power of Congress, just as the discharge decisions of a bankruptcy court are an exercise of the sovereign power of Congress.

The States are bound by the discharge decisions.

States are also bound by the automatic stay.

Where we draw the line is where the trustee attempts to get a monetary judgment as a means of augmenting the estate, which is what is happening with this case.

Justice Kennedy: Well, why don't we say that that's the exercise of the sovereign power of commerce, just... of Congress, just like you said?

That--

Mr. Thro: The automatic--

Justice Kennedy: --I mean, it seems that that answer is just conclusory, that it's an exercise of the sovereign power of Congress, okay.

That's just... that's just a conclusion.

That's not a reason.

Mr. Thro: --Yes, Your Honor.

The... this Court's decisions have struck a balance between respecting the need for the States to obey Federal law and, at the same time, respecting the constitutional value of the States' sovereign immunity.

What we have here in... with respect to the automatic stay and with respect to the discharge decisions, is States being bound by Federal law, no different than the States being bound by the minimum wage law, for example.

But what we have with respect to the trustee's attempts to augment the estate by collecting a monetary judgment against the States is an attempt to invade the State treasury, which this Court's decisions clearly state is barred by sovereign immunity.

Justice Breyer: Tell me, if you're... if you're right... let's suppose you're right.

I'm over here.

That's--

[Laughter]

Mr. Thro: Sorry, Justice Breyer.

Justice Breyer: That's all right.

So, it's hard to figure out, because the direction... you can't tell by the sound.

I don't know if there's a modern system that would help with that, but... you're right.

Suppose that the State... suppose you're right.

What I'd worry about... and I'd like your response to this... is that in bankruptcies, or weak firms... a lot of firms are weak, and they owe a lot of money to the States.

So, the States figure this out after a while.

It takes a few years to seep through, but once they see what they can do, they say,

"Here's what we'll do. "

"Settle your claims against the State, which happen to be pretty good, for 50 cents on the dollar. "

"Give us the money. "

"And you're... we're out of it. "

So, they settle it.

A month later, phhht, bankrupt.

Now, two things have happened.

The States got 50 cents on the dollar, every other creditor gets 5 cents on the dollar, because they were a month ahead of it.

The second thing that happened is, the creditor... the firm lost the chance to come in and be rehabilitated.

So, the result of this is two bad things, bankruptcy's law's basic purpose, to treat creditors fairly, bankruptcy law's basic purpose, to give firms a chance to rehabilitate, are both seriously undermined.

So, given the Bankruptcy Clause in the Constitution, how is it possible to say that Congress does not have the power to prevent those two very, very seriously harmful results... harmful in terms of the basic purpose of the Bankruptcy Clause?

Mr. Thro: Your Honor, the Constitution... specifically, the Eleventh Amendment... confirms that the States are not to be treated like private parties.

Private parties are not immune from contract actions; States are.

Private parties are not immune from torts... from tort actions.

Justice Breyer: But there is not a Tort Clause of the United States Constitution.

There is not a Contract Clause.

And there is a Bankruptcy Clause.

Mr. Thro: There is a Bankruptcy Clause, Your Honor, and that clause empowers Congress to make bankruptcy laws which apply throughout the entire Nation and which apply to the States.

However, the Bankruptcy Clause does not authorize Congress to abrogate the State's sovereign immunity from suit.

When... while abrogation can be accomplished using other provisions, it cannot be accomplished using the bankruptcy provision.

Justice Scalia: Bankruptcy Clause presumably does not allow Congress to set up the bankruptcy law in such a way that it would amount to a taking of property without just compensation, right?

Wouldn't allow another constitution to be violated.

So the only question here is whether the constitutional protection of States' sovereign immunity can be taken away by the Bankruptcy Clause; whereas, other provisions clearly can, right?

Mr. Thro: Yes, Your Honor.

And this Court said, in Seminole Tribe, that the Article 1 powers could not be used to take away, or to abrogate, the States' sovereign immunity.

Now, obviously, section 5 of the Fourteenth Amendment can be used to do it, but there is no suggestion that Congress used section 5 of the Fourteenth Amendment in enacting its attempt to abrogate sovereign immunity.

Justice Stevens: But, may I ask, how do you... how do you reach the conclusion that you're bound by the automatic stay and the discharge?

Why aren't those also an infringement of State sovereignty?

Mr. Thro: I think there is a strong argument which can be made that both the automatic stay and the discharge decisions infringe upon State sovereignty.

However, this Court's decisions, dating back to at least New York versus Irving Trust in 1933, have made it clear that the States are bound by the provisions of the discharge orders.

I think, also, the automatic stay is something similar to the Ex Parte Young doctrine, in terms of the States being enjoined from doing something else.

However--

Justice Scalia: To say... to say that the State can't be sued is not the same thing as saying that the State can sue, is it?

You--

Mr. Thro: --No, it's not, Your Honor.

Justice Scalia: --you can prevent the State from suing, even though you can't sue the State.

There's no incompatibility, is there?

Mr. Thro: No, there's not, Your Honor.

What we have--

Justice O'Connor: Now, do you... do you agree that there are situations where, notwithstanding the sovereign immunity of States, there can be in rem jurisdiction in a court to resolve claims against property--

Mr. Thro: --Certain--

Justice O'Connor: --and bind the State, as well?

Mr. Thro: --Certainly, this Court's decisions indicate that, in some instances, there can be in rem decisions which--

Justice O'Connor: Well, maybe bankruptcy estates are one such instance.

Mr. Thro: --As this Court noted in Hood, the bankruptcy decisions regarding the discharge are in rem and, of course, are binding upon the State.

But what we have here is not an in rem proceeding.

As this Court noted in Nordic Village, an action to recover a preferential transfer claim is not an in rem proceeding.

Rather, as this Court noted in Schoenthal versus Irving Trust in 1932, and Granfinanciera versus Nordberg in 1989, actions to recover preferential transfer are much like actions to recover a contract claim.

That is, like a contract claim, they do not involve the core bankruptcy proceedings, but, rather, involve matters that are... or controversies that are tangential to the core bankruptcy proceedings.

They're nothing more than an attempt to augment the State.

And where we would draw the line, and where we propose that this Court draws... draw the line... and a line that we believe is consistent with this Court's previous decisions... is that the States are bound by discharge, the States are subject to the automatic stay, but the trustees' attempts to obtain monetary judgments, and thereby augment the value of the estate, are barred by sovereign immunity.

Justice Stevens: Wouldn't it at least be theoretically possible to differentiate between setting aside a preference, on the one hand, and just bringing a suit for a tort or a breach of contact, on the other?

One could treat the assets that are... were transferred prematurely... or hastily, whatever you call it... as part of the estate.

At least it's conceptually possible.

Mr. Thro: Right.

Conceptually, it's possible.

And certainly there is an argument that the bankruptcy code says that preferential transfer is, in fact, property of the State.

With respect, however, to a preference to a State, we would say that that particular reading, as applied to the State, is unconstitutional.

I don't believe Congress can make a law which would require the State to divest money or something to which the State has in its possession in which the State has a colorable claim of ownership.

Here, there is no dispute that the money is in the State treasury.

What they are trying to do is to recover a monetary judgment from the State.

As this Court said in Schoenfeld [sic] and in Granfinanciera, this is very much like a contracts claim.

Justice Scalia: I suppose you could say that a... the intangible of a contract claim is part of the estate, too, right?

It's--

Mr. Thro: The current bankruptcy code does not say that.

In theory, I--

Justice Scalia: --But, I mean, you could be... there's no less reason to say that that's part of the res than there is to say that the preferential transfer is.

Mr. Thro: --That's correct, Your Honor.

And just as the contract claims are barred, so are the preferential--

Justice Stevens: Except Congress--

Mr. Thro: --transfer claims.

Justice Stevens: --has drawn that very distinction hadn't it?

Mr. Thro: I'm sorry, Your Honor?

Justice Stevens: I said Congress has drawn the distinction that... between the preferential claim and the contract claim.

Mr. Thro: Congress has drawn a distinction between preferential transfer claims and contracts claims.

However, this Court has noted that the difference between an action to recover a contract claim in order to augment the estate and an action to recover a preferential transfer in order to augment the estate, that there really is no difference.

Both are--

Justice Stevens: But the theory of the second is that you're not augmenting the estate, you're merely preserving the estate, isn't it?

Mr. Thro: --I think... Congress has certainly defined the estate so that a preferential transfer is considered property.

I'm not sure that Congress can do that when the preferential transfer involves the estate.

That strikes me as the effect of Congress, in effect, saying that property which clearly belongs to the State no longer does.

I think that's probably an affront to Tenth Amendment federalism concerns.

But what we do have here is a situation where, like in a breach of contract claim, they are trying to recovery a monetary judgment in order to augment the estate.

It's our position that that is barred by sovereign immunity.

Justice O'Connor: Well, now--

Justice Souter: What if the--

Justice O'Connor: --Mr. Thro, doesn't the Respondent want to dismiss the contract claims here?

Mr. Thro: The Respondent had asked the bankruptcy court... after reading our brief, the Respondent asked the bankruptcy court to dismiss--

Justice O'Connor: Yes.

So, why do you insist that they be adjudicated?

Mr. Thro: --Well, Your Honor, I think this is an attempt by the Respondent to rewrite the question presented.

Neither--

Justice O'Connor: Yes, but why--

Mr. Thro: --our petition--

Justice O'Connor: --why should we force a plaintiff below to pursue claims they want to give up?

That just seems so odd to me.

Mr. Thro: --It is rather odd, Your Honor, but my read of this Court's rules are that there is no mechanism for a Respondent, the party that won below, to, in effect, give up its victory once they get in this Court.

I'm not quite sure why they wish to drop the breach of contract claims.

Perhaps they feel that by dropping the breach of contract claim, they somehow obtain a tactical advantage.

And, if that's the case, certainly this Court should not allow them to rewrite the question presented in order to obtain a tactical advantage.

But, in any event, both the breach of contract claim and the preferential transfer claims are attempts to augment the estate and are barred by sovereign immunity.

Justice Kennedy: Well, do you think the waiver argument that's made is properly before us?

Mr. Thro: No.

The waiver argument is not properly before you.

It was not passed upon by the Court of Appeals below.

Moreover, it was, for the most part, not preserved in the Court of Appeals below.

While they did argue that Virginia Military Institute waived sovereign immunity for all claims involving Virginia Military Institute in the Sixth Circuit, they made no such argument that filing proof of claim constituted a waiver of sovereign immunity for the transactions involving the other institutions.

Justice Kennedy: You may be right about that, but, while I've got you here, let's assume just one State entity, not multiple State entities.

And the State has received a preferential transfer of $2,000.

It still has an outstanding claim... a different claim against the same bankrupt for $1,000.

And it goes in to enforce its claim for $1,000.

Could we hold, consistently with the Eleventh Amendment, that that is a waiver?

Mr. Thro: I believe that this Court's decisions indicate the following position.

When a State files a proof of claim, it exposes itself to the trustee's defenses to that claim.

So, in other words, if the... if the... if the preferential transfer was part of the same transaction or occurrence--

Justice Kennedy: No, different claim.

The--

Mr. Thro: --Different claim.

Justice Kennedy: --One, the State received $2,000 worth of taxes, but it... still have its $1,000 contract claim.

Mr. Thro: Then I believe that this Court's opinions indicate that that would not be a waiver with respect to the different transaction or occurrence.

Certainly, by filing the proof of claim you would expose yourself to the trustee's defenses with respect to the same transaction or occurrence.

Justice Souter: --Go--

Justice Ginsburg: So was... there's a section in the back of... I think it's 160(c)... that says if it's an unrelated transaction, then... so, it would be a permissive counterclaim if we had ordinary civil proceedings.

Then there can be a setoff to the extent of the claim that's being made against the bankrupt estate.

There can't be any affirmative recovery, as there could be with a permissive... with a compulsory counterclaim.

But you're saying that that section is unconstitutional... 160(c)?

Mr. Thro: To the extent that 106(c) goes beyond the rule announced in Gardner, then, yes, it has constitutional problems.

But you need not reach the constitutionality of 106(c).

What we were talking about here is basically a straightforward application of this Court's precedence in a line that you have drawn in other contexts.

Justice Ginsburg: But if we're talking just about VMI, not about the other schools, then you... if this claim is unrelated, so that it would be a permissive counterclaim, then you would say not even against VMI could you have the setoff.

Mr. Thro: That's correct, Your Honor.

In... this Court's decisions dealing with what effect happens when a sovereign entity initiates litigation indicate that the sovereign, by initiating litigation, certainly exposes itself to defenses, but does not expose itself to affirmative recoveries.

Justice Ginsburg: But why shouldn't a setoff be a defense, even if it's unrelated?

I mean, there were such things in... at common law, were there not, that you could set off an unrelated debt?

Mr. Thro: Yes, Your Honor.

And to the extent that a setoff is a defense, it would be permitted.

But I may have misunderstood your hypothetical that you were talking about, a setoff which involved an affirmative recovery against the State.

Justice Ginsburg: No, I meant a setoff--

Mr. Thro: Okay.

Justice Ginsburg: --only--

Mr. Thro: Then I misunderstood your hypothetical.

I'm sorry, Your Honor.

Justice Souter: --Mr. Thro, I... am I correct in assuming that if the... if the preference in a case like this, that had been given to the State, were not a bank transfer, a check, but were some tangible object, like a gold bar, that there would be in rem jurisdiction on the part of the court to get the gold bar back as a... even though its function is that of a preferential transfer?

Mr. Thro: I don't think so, Your Honor.

I... although this Court has recognized certain in rem exceptions to sovereign immunity, particularly in the admiralty context, this Court has never recognized... said that sovereign immunity allows a Federal court to order the State to return something where, number one, it's in the State's possession, as it would be in your hypothetical, and, number two, the State has at least a colorable claim of ownership, which, if I understood your hypothetical correctly, the State does have a colorable claim of ownership.

But you need not reach... deal with the intangible or personal property issues.

The only thing that is at issue here is a demand for a monetary judgment.

Justice Souter: Well, that's... with respect to... I mean, you can say that of any claim that is valued in dollars.

But, I mean, your... you know, what I'm getting at is your position that there is no distinction to be drawn between the contract action and the preferential transfer.

And my point was, some transfers might be satisfied... might be sought in what, at least in the traditional classification, would be an in rem, rather than an in personam, action.

Would your answer be any different if the... if the gold bar were simply sitting on the... on the desk of some State purchasing agent, as opposed to deposited in the... in the State treasury or sold by the State for the monetary value?

Mr. Thro: As I understand this Court's decisions on this, if the... if the property is in the possession of the State, and if the State has a colorable claim to ownership, then sovereign immunity will bar the... a court--

Justice Souter: Okay, so--

Mr. Thro: --a Federal court order to--

Justice Souter: --in effect, you're saying there are some in rem exceptions, but not all in rem actions are exceptions.

And this would not--

Mr. Thro: --This Court has certainly recognized certain in rem exceptions, notably in the Treasure Salvors case, where the State did not have a colorable claim to title, and also in Deep Sea Research, where the State did not have possession of the object.

Also, in the Whiting Pools case, the Federal Government had possession of a intangible asset, but it was clear that the debtor still had the ownership interest, and this Court said that, in that circumstance, the Federal court would... could order the return.

Justice Scalia: Well, I suppose you could have a contract action that... in which the State promises to turn over a particular parcel of land that it owns, or even, for that matter, a gold bar that is on somebody's... some State functionary's desk.

And I guess you could have a suit for that gold bar or for the piece of property.

And I guess you could call that an in rem action, if you wanted to.

But it wouldn't be.

Mr. Thro: Right.

It would be a gross in... a radical in... expansion of in rem jurisdiction.

Traditionally--

Justice Souter: --Well, because--

Mr. Thro: --in rem--

Justice Souter: --because we normally deal with that as specific performance of the contract, and what... you know it's in rem, in the sense that we're talking about an object, but that's not what we mean, traditionally, by "in rem jurisdiction", is it?

Mr. Thro: --Traditionally, in rem jurisdiction has a couple of characteristics.

One is, it is... it is everyone against the world.

It binds--

Justice Souter: Yes, you sue... in effect, you sue the race, rather than--

Mr. Thro: --Right.

Justice Souter: --than the person.

Mr. Thro: And--

Justice Souter: And in the... in a... in a specific performance contract action, you sue the person.

Mr. Thro: --Right.

And a specific performance contract action, while barred in Federal court, would, of course, be allowed in State court, to the extent that Virginia has--

Justice Scalia: What about a rescission action in which the private party has conveyed property to the State, and the State doesn't pay, and the private party seeks to rescind the action and to receive back the property that it turned over, which is real estate or a gold bar?

Could that not--

Mr. Thro: --Right.

Justice Scalia: --not be a... characterized as an in rem action?

He's seeking back the property he gave over.

Mr. Thro: I don't believe it could be characterized as an in rem action, given the traditional understandings of "in rem".

But, regardless of whether you call it "in rem" or "in personam", sovereign immunity would still bar such a thing in Federal court.

This Court has never said that there is an in rem exception to sovereign immunity.

To the contrary, you explicitly rejected an in rem exception to sovereign immunity in Nordic Village, at least where money was concerned.

You have allowed recovery in certain limited circumstances, such as the admiralty cases.

Those do not exist here.

This is not an in rem proceeding.

Preferential transfer is not an in rem proceeding under Nordic Village.

Moreover, as this Court's opinions in Schoenthal and Granfinanciera make clear, it's more... it's a traditional sort of common law, similar to a contract action.

Justice Kennedy: I'd like to get away from in rem and back to the waiver aspect that's being argued here.

Let's assume that there is an offset obligation that the State has to comply with, that there's been a preference and it has another claim, and with just one entity.

If that's true, it seems to me somewhat unfair to say that the State can proceed on multiple fronts with different entities and fractionate its immunity so that if there are more than three entities... or if there are three or four entities, each one is judged separately as to the offset obligation.

It seems to me that if one State entity is subject to offset, then all of them are.

Mr. Thro: I believe--

Justice Kennedy: Otherwise, the State immunity, it seems to me, can be... can be fractionated.

Mr. Thro: --Well, I believe that this Court's decisions in the bankruptcy context draw the line with respect to the same transaction or occurrence.

So, to the extent that it arises out of the same transaction or occurrence, then you've got that, sort of, partial or limited waiver.

Where--

Justice Kennedy: But I--

Mr. Thro: --however, with--

Justice Kennedy: --I thought, with respect to Justice Ginsburg's colloquy... and my own, earlier... that we said that there is an offset obligation, even if they're different claims.

Mr. Thro: --There is an offset.

I--

Justice Kennedy: And now... and now I want to extrapolate from that to multiple entities, each of which asserts its own immunity.

Mr. Thro: --Right.

I think the offset obligation... my understanding of Justice Ginsburg's hypothetical was that the... was that we were talking about an offset that would not be an affirmative recovery, but would merely be using as... an offset as one of the trustee's defenses to the claim.

Justice Scalia: Against the entire State--

Mr. Thro: Against the entire State.

Justice Scalia: --including any money owed to the other... to the other State institutions.

You acknowledged that that--

Mr. Thro: Yes.

Justice Scalia: --offset could be--

Mr. Thro: Yes.

Justice Scalia: --applied not just against the college here, but against the--

Mr. Thro: No.

Justice Scalia: --other entities.

Mr. Thro: The offset with respect to that particular... with respect to that particular transaction or occurrence, not to the other transactions or occurrences.

Justice Ginsburg: --So, you're not... I thought your position was, VMI, okay.

If they filed a claim, then they're open to affirmative recovery if it's a compulsory counterclaim; offset, if it's a permissive counterclaim.

But I thought you said, as to the three other schools, no waiver.

There's not... no way you can lump them in.

I thought that was--

Mr. Thro: Yes.

Justice Ginsburg: --your position.

Mr. Thro: There is no way that you can lump in the other three schools.

With respect to VMI, by filing a proof of claim, VMI exposed itself to the trustee's defenses.

To the extent that the setoff is a defense for the trustee, then, of course, that setoff would apply to VMI.

Before I sit down, I'd like to make three points.

First, Seminole Tribe controls.

Congress may not use its Article 1 Bankruptcy Clause to abrogate sovereign immunity.

Second, to rule in favor of Virginia does not require any alterations in this Court's jurisprudence; however, to rule for Mr. Katz on any theory requires certain fundamental changes in this Court's jurisprudence.

Finally, regardless of context, sovereign immunity bars monetary judgment claims.

States are immune from contract actions; private parties are not.

States are immune from court actions; private parties are not.

States are immune from actions by the trustee to augment the estate; private parties are not.

Thank you.

Argument of Kim Martin Lewis

Chief Justice Roberts: Thank you, Counsel.

Ms. Lewis.

Ms Lewis: Mr. Chief Justice, and may it please the Court--

The... if the States are permitted to opt out of the collective bankruptcy process, and they're permitted to disregard Federal preference statutes with impunity, it will have a negative effect on the bankruptcy process.

States are large creditors.

Chief Justice Roberts: Well, it's the same problem in the patent area, isn't it?

And yet, in the Florida Prepaid cases, we've enforced the sovereign immunity with respect to patent proceedings.

Ms Lewis: Your Honor, in the Florida Prepaid case, there was an alternative State remedy.

In that case the plaintiff could sue the State of Florida... I'm sorry... yes, could sue the State of Florida in that particular case.

In this case, they can't do that.

There is a... an estate representative, who has one option, and that option, to preserve the collective benefit of the estate, is to sue the estate... or to sue the State in the bankruptcy court.

Justice Souter: Assuming that's so, for sovereign immunity purposes, why should it make a difference?

Ms Lewis: For... well--

Justice Souter: Yes, I mean, this is a tougher case, but if sovereign immunity is the issue, why does it make any difference?

Ms Lewis: --I do believe that it makes a difference that there is no alternative remedy.

However, in this case, I don't think--

Justice Souter: Why?

What does that have to do with the theory of sovereign immunity?

Ms Lewis: --I'm not sure that it has anything to do, directly, with the theory of sovereign immunity, but--

Justice Souter: Believe me, I... I mean, I... as you know, I'm not a big fan of sovereign immunity in these circumstances, but I'm not quite sure how to get around it, based on the fact that there is no alternative remedy here.

Ms Lewis: --Well, Justice Souter, the thing that I think is very troubling in this case is that there's a very basic bankruptcy policy, and that basic bankruptcy policy on preferences is equality of distribution and to prevent of abusive debt collection practices on the eve of bankruptcy.

Justice Souter: Then, basically, you're making the argument from the uniformity phrase... uniform bankruptcy laws.

That's essentially your argument.

And you're saying, in the... in this case, that that trumps the sovereign immunity, and that gets you out of Seminole Tribe.

Ms Lewis: I believe that it... I believe that it does, Your Honor.

But I... I'm not sure the Court even has to reach the uniformity argument in this case, because the fact that Virginia Military Institute, on behalf of the Commonwealth of Virginia, waived its sovereign immunity.

Justice O'Connor: Well, but, of course, that doesn't hold true for the other agencies, necessarily, unless you think VMI can waive it for all of them.

That seems to me to be only a partial argument.

Ms Lewis: Justice O'Connor, the... VMI waived the only sovereign immunity that existed, which was the Commonwealth of Virginia's sovereign immunity.

And, as a result... all of the agencies of the Commonwealth of Virginia served as unitary creditors... and so, when VMI waived the only sovereign immunity that existed, there was nothing left to waive.

And, at that point, the recoveries of the estate... which were recoveries against other agencies, not only VMI... were... the Respondent was permitted to bring those actions.

Chief Justice Roberts: Your waiver argument is... is it under 106(b) or 106(c)?

It's beyond both of those, isn't it?

Ms Lewis: Chief Justice, it's not under 106(b) or 106(c), because the waiver of sovereign immunity... 106(a) provides that, with respect to preference claims--

Chief Justice Roberts: That's an abrogation, that's not--

Ms Lewis: --That--

Chief Justice Roberts: --a waiver.

Ms Lewis: --that's correct, Your Honor.

Chief Justice Roberts: Well, my question would be, How can you argue in favor of waiver when you have a statute with a much more limited waiver, the limits in 106(b) and 106(c), and you're saying,

"Well, they waived it much more broadly? "

It would seem to me that the most you can argue is that there was a waiver under 106(b) or 106(c), but that doesn't get rid of the whole case.

Ms Lewis: Your Honor, I don't believe that 106(b) or 106(c) limits the waiver in this case, because, again, the sovereign immunity that was waived was the sovereign immunity of the Commonwealth of Virginia.

And so, the claims that were asserted in that action, the preference actions that are served against VMI and the other institutions, are preserved, because we can--

Justice Scalia: Well, you're saying that much of the language of (b) is ineffective and superfluous?

(b) certainly tries to limit it.

It says

"has waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction. "

You're just saying all of that is ineffective, then?

Ms Lewis: --I'm saying that, in this context, it isn't... it isn't effective, Your Honor.

Justice Scalia: In what context would it be effective?

Ms Lewis: The... 106(b) was intended for claims that didn't... that did not arise under the bankruptcy code.

106(a) claims, which was the abrogation of sovereign immunity, are claims that arise under the code.

106(b) and 106(c), there is no sovereign immunity to waive.

So, 106(b) and 106(c) were designed for the contract claims that Justice Scalia referred to earlier in the Petitioner's argument.

And then we looked to the Federal... this Court's jurisprudence with respect to what constitutes a waiver of sovereign immunity.

And we would most naturally look at the Lapides case, in which... in which a State came into this... removed a case from State to Federal court, and the court said it didn't matter the type of claim that was being asserted, or that there was affirmative recovery that was being asserted, but, in fact, they constituted a waiver of sovereign immunity.

And the State certainly can't say, here, that they didn't know the filing of a proof of claim would constitute a waiver of sovereign immunity, because back in 1947, in the Gardner versus New Jersey case, this Court acknowledged that filing a proof of claim constituted a waiver.

And there are ways that a State could avoid this.

They could have a process by which they had to go through... whether it be the Attorney General's office, or whomever... that in order to file a proof of claim, they had to first go somewhere to get authority to do that.

And that most naturally happens with corporations, because, as this Court is aware in the Granfinanciera case, if you... if you assert a proof of claim, you waive your jury trial right.

And that is a large issue for corporations--

Chief Justice Roberts: How do we interpret the statute to establish that Congress intended the States to waive their immunity with the filing of the claim?

I don't see that anywhere in the statute.

Ms Lewis: --I'm sorry, can you--

Chief Justice Roberts: You're arguing that by filing the claim, the State has waived all of its immunity, but I don't see where in the statute it imposes that kind of waiver upon States.

I see where they abrogate the immunity, but that's different than saying that there's a waiver.

Is your argument that just because they abrogated immunity, and it turned out they didn't... may or may not have that authority, they necessarily imposed a waiver?

Ms Lewis: --I don't think 106(b) applies with respect to the preference claims, Your Honor.

Chief Justice Roberts: Okay.

Well, then where is the waiver of sovereign immunity in this statute?

Ms Lewis: The... in... 106(b) and 106(c) specifies the conduct by which a sovereign must... must engage in, in order to waive sovereign immunity in a noncore matter, in those matters not set forth in section 106--

Chief Justice Roberts: But I thought... you're not relying on 106(b) and 106(c).

Ms Lewis: --That's correct, Your Honor.

Chief Justice Roberts: So, where is the waiver of immunity on which you're relying?

Ms Lewis: The waiver of sovereign immunity is the jurisprudence of this Court, that Eleventh Amendment sovereign immunity is not absolute, that a sovereign can waive that sovereign immunity.

And it did, in Gardner versus New Jersey.

And, again, this Court looked at that in the Lapides case.

Chief Justice Roberts: But you have no argument that Congress imposed a waiver.

Ms Lewis: That's correct, Your Honor.

Chief Justice Roberts: Okay.

Justice Scalia: And, again, I still don't see how you distinguish (b) when you say

"(b) doesn't apply here, it may apply in other cases. "

If it doesn't apply here, why would it apply in other cases?

Ms Lewis: Your Honor--

Justice Scalia: I mean, if you are appealing to this broader principle, that you either waive all of sovereign immunity or you waive none of it at all, and you can't just restrict it to the particular claim, which is what (b) says, I don't know why, in any case, that wouldn't be true.

Ms Lewis: --Justice Scalia, again, it's because we do not believe 106(b) governs here, because it deals with claims that are not abrogated under 106(a) of the bankruptcy code.

Justice Stevens: Of course, if Congress had thought it had successfully abrogated, there would be no reason to provide for a waiver, I don't suppose.

Ms Lewis: That's correct, Justice Stevens.

And I think this Court has recognized that bankruptcy is different in other contexts.

And I think that it's very important to talk about bankruptcy differently.

This Court has looked at, in... just last term, in the Hood case, which was the debtor's discharge.

And the Court said that that constituted in rem authority.

This Court, in Perez versus Campbell, said that somebody cannot be denied a driver's license simply because they failed to play a discharged obligation.

The Court, in the Irving Trust case, said that a State is required to satisfy the procedure of bankruptcy if they want to participate in the claims process.

In Van Huffel and Straton, this Court said that a bankruptcy estate is permitted to sell property free and clear of the State's tax liens.

In Whiting Pools, this Court said the IRS, who seized property on the eve of bankruptcy on behalf of a... of a lien, had to return that in its in rem jurisdiction.

And I believe it was Justice O'Connor who asked the question of Petitioner with respect to, How would this affect the automatic stay?

And how I've thought of that is, sometimes the automatic stay, there may be an effect with respect to monetary relief, and there may be an effect as far as an injunctive relief.

For example, if there was a judgment that a State had, prior to bankruptcy, against the estate, and then sought to enforce the judgment, executed on the debtor's bank accounts post petition, debtor didn't know about it, because, in a... in a debtor's reorganization, the first month of the debtor's bankruptcy, you can't... you're not following everything that's happening in the case.

There is an execution on the bank account, the money is taken into the State's coffers.

Does that mean that the State is bound by the automatic stay, or is the State not bound by the automatic stay?

It was money that was transferred from one... from the estate to the State.

Justice Breyer: I thought (b) and (c)... tell if I'm right about this... but suppose an individual bankruptcy, and sometime prior to the bankruptcy the individual got into an automobile accident and ran into a State building and wrecked it.

All right?

Now, I take it that, in a State that hasn't waived sovereign immunity, that individual, were he not bankrupt, might not be able to bring a lawsuit for his damages caused by a claim that the wall was too high or something.

Each is claiming the other is negligent.

I guess the person wouldn't be able to file.

And the fact that he's bankrupt, he couldn't, either.

Okay.

Now, in (b), I guess it's saying that if the State happens to come in, after he's gone bankrupt, and brought his negligent suit against him, he can respond.

Ms Lewis: That's correct, Your Honor.

That--

Justice Breyer: So, if, in fact, you were to lose on (a), I guess the whole section would fall, because it wouldn't make any sense anymore, and we'd just wipe out the whole thing, (a), (b), and (c).

Ms Lewis: --That's correct, Your Honor.

It was... it was a--

Justice Breyer: All right.

So, then the case really turns on the extent to which the Government can... sorry, the extent to which Congress can waive sovereign immunity, as they seem to have waived it in (a), whether the Constitution permits them to do what they did in (a).

Ms Lewis: --Right, to abrogate sovereign immunity.

Justice Breyer: And if you win on that, you win.

And if you lose on that, the whole section 106 would probably fall.

Ms Lewis: I believe 106 would fall, but, if 106 falls, doesn't mean that Respondent would lose, as far as the waiver argument, because--

Justice Breyer: I'm not sure, because if you lose on the whole thing... suppose you were to say Congress doesn't have the power to do anything there.

I just wonder if (b) and (c) would survive, because they may have had something else in mind.

But maybe that's too complicated to go into now.

Ms Lewis: --Well, Justice Breyer, I think that (b) and (c), as pointed out by another one of the Justices, may be a limitation on the general concept of common law waiver.

So, to the extent that 106 would be... this Court were to rule (b) that would... unconstitutional, you would look to the general common law waiver of sovereign immunity, which would be the Gardner versus New Jersey case and the Lapides case.

The--

Chief Justice Roberts: Well, how do you... how do you have an informed waiver if the argument is over the authority to abrogate?

In other words, the Federal Government is saying, under your theory, that we're abrogating your immunity.

And the State's saying, "You don't have that authority".

And how do you get an informed waiver, simply because the State participates in a bankruptcy proceeding, on the basis of the legal theory that they're asserting here today, that Congress doesn't have the authority to abrogate the immunity?

Ms Lewis: --We believe, obviously, Congress had the right to abrogate sovereign immunity--

Chief Justice Roberts: I understand that.

But your theory, as I read in your brief, as an alternative argument, is that there was a--

Ms Lewis: --That's correct.

Chief Justice Roberts: --waiver.

The State waived its immunity by participating through... in the--

Ms Lewis: That's correct.

Chief Justice Roberts: --bankruptcy proceeding.

How is there an informed waiver if the argument is over the authority to abrogate?

Ms Lewis: Well, Your Honor, I believe, because this Court has recognized, in Gardner versus New Jersey, that if a State files a proof of claim, it constitutes a waiver, that the State had to have to been informed, it had to know that the actual conduct of filing a proof of claim would have a consequence of a waiver.

Chief Justice Roberts: Yes, but all the... all the statute does is abrogate.

Ms Lewis: All--

Chief Justice Roberts: In 106(a).

It's--

Ms Lewis: --That's correct--

Chief Justice Roberts: --an attempt to--

Ms Lewis: --Your Honor.

Chief Justice Roberts: --abrogate.

Ms Lewis: That's correct.

Chief Justice Roberts: And if it turns out that Congress doesn't have that authority, I don't see how you can say the State has made an informed waiver, when their theory is,

"Guess what? "

"You don't have that authority to abrogate. "

Ms Lewis: Well, Your Honor, 106(a) certainly didn't exist back in Gardner versus New Jersey in 1947 either.

And I think that the... the fact that... if sovereign immunity exists, sovereign immunity can be waived.

I'm not sure--

Justice Breyer: No, no, no, he's... so, I'm wrong.

What I said is wrong.

The answer has to be that... we're only talking about (a) at the moment.

And what Congress tried to do in (a) is abrogate sovereign immunity insofar as it is constitutional to do so.

So, then, you say, if you lose on it, it's unconstitutional for it to do so here, but it could... it is constitutional for it to do so insofar as there is this situation that the State brings a case against the estate, and you can do an offset, et cetera.

But it would have nothing to do with (b) and (c).

It would have to do with reading that into (a), I guess.

Ms Lewis: --I believe that's correct--

Justice Breyer: All right.

Ms Lewis: --Justice Breyer.

Justice Ginsburg: In... I don't follow that, because I thought the theory of the cases were that you can waive something by conduct.

And so, when you ask a court for relief against a party, then it's reasonable to say,

"If you're coming in and asking the court to give you something, then it's only fair that your adversary should be able to-- "

Justice O'Connor: A light bulb exploded.

A light bulb exploded.

Chief Justice Roberts: I think we're... I think it's safe.

Justice Breyer: A light bulb went out.

Chief Justice Roberts: It's a trick they play on new Chief Justices all the time.

[Laughter]

Justice Scalia: Happy Halloween.

[Laughter]

Justice Ginsburg: --Let me ask this--

Justice Kennedy: Take your time.

We're interested--

Chief Justice Roberts: We're even... yeah, we're even more in the dark now than before.

[Laughter]

Justice Ginsburg: --If you lose on the abrogation notion, and the Court holds that there is no authority in Congress to abrogate sovereign immunity, still the bankruptcy code codifies what is, across the board, the law.

That is, if you come to a court and say, "Give me X against D", that D should be able to come back and say,

"Either I want full relief because it's a compulsory type counterclaim. "

"I have to bring it here. "

"I can't bring it separately. "

"Or at least a setoff. "

I mean, that was understood, that a party over whom the court would not have jurisdiction otherwise, is amendable to the court's jurisdiction to the extent of a counterclaim or a setoff.

So, I don't see why (b) and (c) are not discrete from (a).

(b) and (c) are implementing the idea of a setoff.

You come to court for a claim, you are deemed to have waived any jurisdictional objection to the counterclaim or the setoff.

Ms Lewis: I understand that argument, Justice Ginsburg, but I believe when Congress enacted 106(a), (b), and (c), that they enacted it... (a), being those actions which were abrogated, (b) were those actions that remained.

And those actions that remained, there were limitations to that waiver.

Because this is not... there was nothing to waive on sovereign immunity on 106(b) as to preference actions, for example.

Contract claims are different.

Contract claims would have... are not abrogated under 106(a), so, therefore, the only way they can be waived is under 106(b).

Justice Kennedy: --Well, it's the same question.

But let's say that the court thinks there might be merit to the argument of waiver, that the State entity comes in asking to be treated as a creditor, and its preference is then before the bankruptcy court.

How is that issue preserved in the question you raise?

You say, maybe the Congress used Article 1 to abrogate the State's sovereign immunity.

Ms Lewis: Did you ask how it's preserved?

We raised the--

Justice Kennedy: It just seems to... seem to me to be part of the question presented.

Ms Lewis: --Your Honor, I think, to the extent that this Court can avoid addressing the Constitution about constitutionality of a statute... and, in the situation of waiver, we believe that it can... then we believe that's the appropriate jurisprudence.

Justice Kennedy: Well, you asked... you framed the question.

Justice Ginsburg: No.

No.

Justice Kennedy: Oh, no, you... you're right.

You're right.

You're exactly right.

Chief Justice Roberts: Well, to what extent was this argument raised below, I guess is a--

Ms Lewis: Chief Justice, it was raised, to the extent of VMI's sovereign immunity.

And the reason that it was is, at the time that the motion to dismiss was filed, as recognized by the Petitioner in their brief, and as recognized by the court, at the bankruptcy court level, the Hood decision at the Sixth Circuit had been a decision.

And so, there was no necessity for the court to engage into any other proceedings, other than to deal with the Hood decision.

Justice Stevens: May I ask a question on another subject, just talking for a minute about your in rem theory of the case?

And I understand you would contend that assets have been subject to a fraudulent transfer or a preference should be deemed to be part of the estate.

But is it not true that this case also involves a claim on the accounts receivable?

And do you contend they also should be treated as part of the estate?

Ms Lewis: Justice Stevens, we did seek to dismiss the causative action with respect to the accounts receivable and the causative action that we--

Justice Stevens: Is that because you concede, in effect, that they would not be part of the estate if we adopted an in rem theory that included the preferential transfers?

Ms Lewis: --They would not be part of the estate--

Justice Stevens: Okay.

Ms Lewis: --in a situation of... if this adopt... Court adopted an in rem theory, that's correct.

Justice Breyer: Which would not?

I'm sorry.

Ms Lewis: Any recoveries on behalf of State contract claims, account receivable as collections.

Justice Breyer: And you have some of those.

Ms Lewis: We do, Your... Justice Breyer.

Justice Breyer: Are you trying to get those in this case?

Ms Lewis: No, we are not.

Justice Breyer: Oh, okay.

Ms Lewis: We sought to dismiss them.

Justice Scalia: Well, you were, but you're not.

Ms Lewis: That's correct, Justice--

Justice Scalia: I mean, you're--

Ms Lewis: --Scalia.

Justice Scalia: --trying to get rid of that, right?

Ms Lewis: That's correct, Justice Scalia.

Justice Stevens: Now, that doesn't fit into your in rem theory, but why wouldn't you have been able to recover that on a waiver theory?

If you... and I understand your waiver argument is, you can defend the judgment on the ground not... you know, any ground to uphold the judgment is okay for the Respondent.

But why wouldn't you have tried to defend that part of your case on the waiver theory?

Ms Lewis: It would have been the waiver with respect to just VMI's contract claims.

And, I apologize, off the top of my head I don't recall what the value of just the VMI contract claims would have been.

But that's what we believe the waiver would have been limited to.

It would have not included the contract claims of Central Virginia Community College, Blue Ridge.

Justice Scalia: Would you explain to me again why it's okay that your waiver argument below was only directed to the claims against VMI?

Ms Lewis: At the--

Justice Scalia: I'm not... I didn't understand your answer to that.

You made a much narrower argument there than you're making here.

Ms Lewis: --I--

Justice Scalia: You didn't... you didn't assert that all the sovereign immunity for the entire State and all of its institutions had been waived simply because of the claim by VMI.

You didn't make that argument.

Ms Lewis: --At the time of that decision, Justice--

Justice Scalia: Yes.

Ms Lewis: --Scalia, the Sixth Circuit Hood decision had already been decided, and, just as it was acknowledged in the--

Justice Scalia: What... which said what?

Ms Lewis: --Which said that sovereign immunity is waived, or abrogated, for preference actions in... it was actually across the board... an abrogation of State sovereign immunity.

And, at that point, there was notice--

Justice Scalia: Well, then why didn't you make the argument?

I mean, if Hood said, when you make a partial... or one institution... if I understand what you're saying, Hood said that a waiver by one institution waives for the whole State.

Is that... is that what Hood said?

Justice Ginsburg: No.

Hood said--

Ms Lewis: --No.

Justice Ginsburg: --that Congress could abrogate--

Ms Lewis: That's correct.

Congress could--

Justice Ginsburg: --through the Bankruptcy Clause.

The... what... and then when the case came to this Court, we didn't--

Justice Scalia: Yes.

Justice Ginsburg: --address that issue.

Justice Scalia: But if you're making a separate waiver argument, apart from the abrogation argument, I don't see why you would not make that waiver argument as broadly as possible.

It's a separate argument from the abrogation argument.

Ms Lewis: --We--

Justice Scalia: And you're making it as a separate argument here.

But here, you're making it as to all claims against all State institutions; whereas, below you made it only as to the claims against VMI.

I don't understand that.

Ms Lewis: --At the time, 106(a), in the Sixth Circuit, it was determined that that was constitutional.

So, at the time, the only thing left for the States to waive was the contract actions.

And the contract actions of VMI were the only things that could be waived as part of the--

Justice Scalia: I see.

Ms Lewis: --underlying--

Justice Scalia: I see.

Chief Justice Roberts: --So, the... so, the long and short of it is, for good and sufficient reasons you did not make the same waiver below that you're making here today.

Ms Lewis: --That's correct, Chief--

Chief Justice Roberts: Okay.

Ms Lewis: --Justice.

Justice Kennedy: And the proof of claim in VMI was $43,000, and the preference was $25,000.

Ms Lewis: That's correct.

Justice O'Connor: Now, on your in rem argument, how do you distinguish Nordic Village's case?

Ms Lewis: In the Nordic Village case, the trustee in that case focused on the money damages.

They didn't focus on the portion of the preference statute that says you can get the transfer back, you can get the property back.

And as this Court recognized in Bowen versus Massachusetts, just because it is monetary relief doesn't mean that it's money damages.

And that's how we distinguished the Nordic Village case, Your Honor.

The... this Court, I believe, would be extending the Article... its jurisprudence if it permitted the bankruptcy estate not to be able to sue the States.

This Court has recognized that a private citizen, Indian tribes, and foreign sovereigns cannot be sued.

But this Court's never recognized a Federal entity cannot pursue a State.

And this Court... this is a situation where there is no alternative remedy.

We aren't in a situation where we have the ADA, the ADEA, where the EEOC can bring an action on behalf of the Government and on behalf of the individuals to enforce a Federal law.

We have no other enforcement in bankruptcy, other than the collective bankruptcy process, the bankruptcy code.

And the bankruptcy code assigns to the debtor in possession, or to the trustee, the ability to collect on behalf of the estate.

Bankruptcy is unique in its very in rem application and its very narrow and specialized enforcement of the bankruptcy system.

The framers recognized the critical nature of binding the States in a uniform scheme.

The decision below ought to be affirmed on the basis of in rem, on the basis of the Constitution, and on the basis that Virginia, the Commonwealth of Virginia, waived its sovereign immunity.

Thank you.

Rebuttal of William E. Thro

Chief Justice Roberts: Thank you, Counsel.

Apologize for the fireworks.

[Laughter]

Mr. Thro, you have three and a half minutes left.

Mr. Thro: Thank you, Mr. Chief Justice.

The question presented is whether or not Congress may use the Article 1 Bankruptcy Clause to abrogate sovereign immunity.

In Alden versus Maine, this Court held that there was a presumption that the States had retained their immunity unless it could be shown by conclusive evidence that the States surrendered their immunity in the plan of convention.

If Congress can use the Article 1 bankruptcy power to abrogate sovereign immunity, then one would expect there to be discussions to that effect at the constitutional convention, in the federalist and antifederalist writings, and in the ratifying conventions.

Yet, as the Sixth Circuit conceded in its version of Hood, there is no compelling evidence.

There is, at best, silence.

Silence cannot equal the compelling evidence.

Therefore, the Article 1 bankruptcy power cannot be used to abrogate sovereign immunity.

Justice Ginsburg: That's the question you've presented, Mr. Thro, but it was the same question that was presented to us in Hood.

And in Hood, we decided that we were not going to answer the question presented, we were going to decide the case on a lesser ground.

So, the Court, certainly if our venture in Hood was proper, here, too, we could decide the case on some other ground than the one you presented in your question.

Mr. Thro: Yes, you could, Your Honor.

But you should not address any of the alternative arguments raised by Mr. Katz.

Justice Scalia: We couldn't decide it in your favor, on some alternative ground, though, could we?

[Laughter]

Mr. Thro: Well--

Justice Scalia: Well, I mean, that distinguishes it--

Mr. Thro: --Yes, absolutely, Your Honor--

Justice Scalia: --The difference between this and Hood.

Mr. Thro: --Your Honor, but I believe that the proper exercise of judicial restraint is to decide the question presented, and only the question presented, and do the other grounds for perhaps another day.

All of Katz's... all of Katz's novel arguments raise complex constitutional issues and, quite frankly, ask for radical alterations of this Court's jurisprudence.

Justice Stevens: May I ask if you think, within the text of the question presented, we could decide whether the sovereign immunity was abrogated by the convention itself, not by Congress?

There is that argument out there, you know.

Mr. Thro: Yes.

Within... I think, in effect, if you were to decide... if you decided that the convention itself had intended--

Justice Stevens: Abrogated.

Mr. Thro: --for the States not to have sovereign immunity in bankruptcy, then you would conclude that the Article 1 Bankruptcy Clause includes the abrogation power.

So, I think it's, sort of, two sides of the same question.

Returning to Justice Ginsburg's question, a second reason for not addressing Katz's arguments were, they were not passed on below.

As this Court noted in Granfinanciera, where--

Justice Ginsburg: Well, then that would be a ground to allow them to present it below.

They had a total winner--

Mr. Thro: --Yes.

Yes.

Justice Ginsburg: --on that hands below.

Mr. Thro: Yes, absolutely.

You... it... you can... you should decide the question presented.

And if you decide the question presented in our favor... that is, that Congress has... does not have the power to abrogate sovereign immunity... you would presumably remand to the Sixth Circuit for further proceedings, consistent with your opinion.

At that time, Katz could attempt to present these other defenses.

We would, of course, argue that some of those defenses had not been properly preserved.

But it has not been briefed below.

Chief Justice Roberts: Thank you, Counsel.

Mr. Thro: Thank you.

Chief Justice Roberts: The case is submitted.

Attribution:

The Oyez Project

Featured:

Mid-Con Freight Systems, Inc. v. Michigan Pub. Serv. Comm'n - Oral Argument

Fri, 09 Jan 2009 14:49:04 +0000

Case:

Mid-Con Freight Systems, Inc. v. Michigan Pub. Serv. Comm'n

Related Transcript:

transcript.xml

Transcript:

Argument of Robert Digges, Jr.

Chief Justice Rehnquist: We'll hear argument now in American Trucking Associations v. Michigan Public Service Commission and a companion case.

Mr. Digges.

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

This case is a challenge to Michigan's $100 per truck flat annual fee that is imposed on all trucks that are registered to do point-to-point operations in the State of Michigan.

We submit that this fee, this flat per truck fee, has the same impermissible effects on interstate commerce as the two flat truck fees that were struck down by this Court in American Trucking Associations v. Scheiner.

In the American Trucking Associations v. Scheiner case, this Court looked at the practical effect of these fees and found that because of their unapportioned structure, that the fees had four interrelated types of impermissible effects on interstate commerce.

First, the Court found that these kinds of flat fees were a financial barrier against out-of-state motor carriers even coming into the State that imposed the... the fee.

There's no question in this case that the Michigan flat fee has the same kind of protectionist quality.

Justice Souter: Well, it... it does for trucks that want to deliver things within the State of Michigan.

It doesn't for anybody else.

Mr. Digges: Yes, it... it discriminates and it... it has an exclusory effect on trucks... out-of-state carriers that want to compete in the... and bring their trucks across the... the border of Michigan and compete against local carriers for intrastate hauls.

Justice Souter: It would have that... it certainly has that tendency.

Do we have... do we know in fact what the effect is?

Is it deterring anybody?

How many trucks does it affect?

Mr. Digges: There was not a trial below.

So we don't have that fact.

We believe that as in the Scheiner case, these... these tendencies are inherent there.

Because of the structure of the fee, it not only has this effect, it has what this Court called a hydraulic pressure effect, and that is to... for carriers, once they have paid this fee as an entrance fee, to pull their trucks out of interstate commerce and to concentrate them into... in the State of Michigan in the local activities.

And that... in fact, the State acknowledges that.

Below, the State said that motor carriers should allocate or dedicate their trucks to the State of Michigan in order to avoid these consequences.

And even the Michigan Court of Appeals recognized that, saying a local carrier would be discouraged from operating in interstate commerce.

Justice Scalia: Of course, it also... I mean, you say it... it favors the in-state... intrastate carrier because if you're doing nothing but intrastate carriage, you... you amortize the $100 over many more miles, whereas the interstate carrier, much of whose business is out-of-state, doesn't do that.

On the other hand, you can certainly argue that... that this tax discriminates against intrastate carriers in... in another respect, that is to say, interstate carriers who... who do nothing within the State do not pay it, whereas the... the Michigan carrier that does a lot of interstate business but if he does one piece of intrastate business... interstate business, he still pays it.

Isn't that right?

Mr. Digges: Well, Your Honor, I think what... what that's saying... and I know that was the argument made in the Solicitor General's brief... is that you can discriminate against one component of interstate commerce, those carriers that want to actually compete and do intrastate business in the State, as long as you give a benefit to another component of interstate commerce, those who just wish to operate in the... in the State of Michigan in interstate commerce.

Justice Souter: Well, it's not so much that you necessarily can do it, but it... it sort of interrupts the... the kind of the a priori reasoning and you're thrown back on a... on... on a practical effects analysis under Pike.

Mr. Digges: No, Your Honor.

I think what happens is that... that there are the segment of carriers that would like to compete against intrastate carriers.

The fact that other carriers may be getting a break in terms of regulatory fees... and we don't know that to be the truth, getting the other interstate carriers.

It's the Boston Stock Exchange, and I think it was said again in the Scheiner case that... that you can't discriminate among interstate carriers.

And as we pointed out in our brief, you could set up a situation in which a... a State discriminated in favor of interstate carriers in situations or industries where their locals had no interest in competing, but where their... their locals were interested in competing, they could set up a discriminatory system.

So you can protect timber industry in... in Oregon and--

Justice Stevens: But may I ask this question?

Suppose you have an interstate carrier that does 100,000 miles of business in Michigan and you have an intrastate carrier that does a 100,000 miles of business in Michigan.

They both say the... pay the same tax, don't they?

Mr. Digges: --If they each do 100,000 miles of intrastate business in Michigan--

Justice Stevens: Yes.

Mr. Digges: --they would pay the same flat fee.

Justice Stevens: They would both pay the same tax, both the intra and the interstate.

Now, that doesn't sound to me like discrimination against either one.

Mr. Digges: If... if this... if this tax was apportioned based on mileage, it would not be discrimination, but unfortunately, it is not and--

Justice Stevens: No, but I'm just saying if the intrastate and interstate carriers both have the same intrastate mileage, they both pay the same tax.

Mr. Digges: --And we... we would... and again, if this was a mileage-apportioned fee, it would be... it would be fine.

But the fact is as in Scheiner, the out-of-state carriers, because the interstate carrier is... is operating--

Justice Stevens: Yes, but you might have an intrastate carrier that does a smaller amount of mileage, only 50,000 miles, and an interstate carrier that pays... does 100,000 miles.

They both pay the same tax too.

And everybody is treated alike on their intrastate business.

Mr. Digges: --That would be true but that--

Justice Stevens: And the tax only operates on intrastate business.

Mr. Digges: --The factual situation is going to be that the interstate carrier is just not going to have the opportunity to do as much business in Michigan as the intrastate carrier.

Justice Scalia: Well, it seems to me you should have introduced some evidence on that point.

I mean, it... it really is an assumption of your unfairness argument that purely intrastate carriers do significantly more intrastate business than interstate carriers who choose to do some interstate business.

Now, does that strike you as self-evident?

It does not need any--

Mr. Digges: Yes.

Yes, Your Honor.

Justice Scalia: --demonstration?

Mr. Digges: It does strike me as self-evident.

In fact, to courts below... we have... we've made this argument.

We've seen this argument now.

The cases have called it intuitively obvious.

And from the discussion of... in the Scheiner case and from the discussion in the Nippert case, the very difference between interstate and intrastate commerce means that on average the interstate carrier is just not going to use the State's facilities as much as the in-state carrier.

Chief Justice Rehnquist: Wouldn't we be better able to decide this question after a trial rather than speculation on both sides?

Mr. Digges: I don't think a trial is necessary because, as I say, this... this Court quoted Justice Frankfurter clearly, and I think the Solicitor General in his brief says that on average the out-of-state carrier is not going to get as much benefit from this fee.

This is a variable cost fee.

In effect, the out-of-state carrier is having to pay more than its fair share of the cost of the... of the State's regulatory system.

And again, that's something that was accepted in the Scheiner case, accepted in... in the Nippert case.

And the intrastate carrier... every time that it operates in the State, it is using that privilege.

Chief Justice Rehnquist: Well, Nippert was over 100 years ago, wasn't it?

Mr. Digges: I think the Nippert case was from the 1940's I believe.

In any event, as we've been discussing--

Chief Justice Rehnquist: It seems like 100 years ago.

[Laughter]

Mr. Digges: --It's--

Justice Ginsburg: Mr. Digges, this... the... the... there was a question about the ramifications of the position that you're presenting.

That is, there are many situations in which there is some kind of licensing fee that is imposed on everyone, the same dollar amount, although some people who are licensed will be doing because in other States and have to get licenses there as well.

The example that was featured in the... in the briefs on the other side of the lawyer who is licensed, say, in Massachusetts and also in D.C. does not get any break on his D.C. Bar admission because he is also admitted in Massachusetts, and in fact, does most of his practice out-of-state, out of the District.

Mr. Digges: --Yes, Your Honor.

I know that... that example was given.

I think there are a variety of flat fees that would be unaffected by this.

There are fees that would be administrative charges and... and if all the State is doing is charging, for example, the cost of a background investigation or the cost of a truck inspection, a fixed cost, then it's fair to ask the carrier to pay a fixed fee or to ask the taxpayer to pay a fixed fee.

With respect to the bar fees, they are obviously different than the trucking industry and... and the taxation of an instrumentality in interstate commerce.

But we think that there may be impracticalities in apportioning a bar fee.

You could have an attorney in his office in Virginia that is working for a California customer or California client that is being... for a case that is being tried in the court system of Oregon, and then for transaction work, he could be working for a customer or a client in... in Missouri for... a multi state.

So it may be difficult to apportion fees.

We haven't really examined that.

But we know from this Court's decisions that... that is easy and can be apportioned for truck fees, and truck fees... this Court said in Scheiner that the technology is now available to look at the extent of the activity and the taxpayer in... in... of the truck in the State, and later on in a subsequent decision said that you can easily track large physical objects over States.

So you can apportion these fees on trucks to their mileage in the State, to their loads, to the gross revenue associated with the--

Justice Ginsburg: But the Scheiner case didn't make a distinction based on in-state activity.

I thought that that... that flat fee was applicable to every motor carrier that went on the roads in Pennsylvania.

Mr. Digges: --That is accurate, Your Honor, but... but nominally Scheiner... for instance, the Pennsylvania Supreme Court in the Scheiner case did say that... did uphold the fee because they said only Pennsylvania could charge for the privilege of using Pennsylvania's highways.

So like a lot of... like all interstate commerce, you can always... as... as the Court said in Nippert, you can always find... carve out a local activity to say that this is going to be the focus of the tax.

I think a problem here is with the... the approach taken by the State and the Solicitor General is they suggest that you go back to the days in which you're trying to draw a line between interstate and intrastate activity, this time not because the intrastate activity is going to be immune from the tax, but this time because you're going to have some separate, different kind of test applicable to something that clearly is subject to Commerce Clause protections, but is... is, in their view, subject to a more lenient Commerce Clause protection.

And I don't think this Court wants to retreat back to the days of having to draw a line between interstate and intrastate commerce and... and then having separate tests.

If there are no more questions, I'd like to reserve the rest of my time for rebuttal.

Thank you.

Argument of James H. Hanson

Chief Justice Rehnquist: Very well, Mr. Digges.

Mr. Hanson.

Mr. Hanson: Mr. Chief Justice, and may it please the Court: In contrast to the ATA case, the question before the Court today in the Mid-Con case is whether the fee on vehicles operating solely in interstate commerce is preempted by 49 U.S.C., section 14504.

Justice O'Connor: It's the same fee we're talking about.

Mr. Hanson: It is--

Justice O'Connor: But a different theory of invalidity.

Mr. Hanson: --It is not the same fee.

The... the fee under subsection (1) that ATA is arguing about is an intrastate fee charged only to--

Justice O'Connor: Intrastate.

Mr. Hanson: --carriers that engage in intrastate activities.

Justice O'Connor: Okay, and yours is the interstate fee.

Mr. Hanson: The subsection (2) fee under 478.1--

Justice Kennedy: And your fee applies to all Michigan-plated vehicles.

Am I correct about that?

Mr. Hanson: --That are operating solely in interstate commerce.

Justice Kennedy: Yes.

Justice Souter: Do... do I understand that the two distinctions in what is done with the... or the way the fee is collected and what's done with it is that the... the fee is charged against the... is it the operator as opposed to the owner, if there is a distinction?

Is... is that correct?

Mr. Hanson: All of the fees under subsections (1) and (2) are charged against the motor carrier--

Justice Souter: The carrier.

Mr. Hanson: --or--

Justice Souter: That's the term I should use.

Mr. Hanson: ----motor carrier, not to the owner.

Justice Souter: Which may not be the owner.

And number two, as I understand it, as distinct from the registration fee, this fee goes to a different State department.

Is that right?

Mr. Hanson: That's correct.

Justice Souter: Now, let... that's... that's a premise for a question I want to ask you, and the question is in economic effect, is there any difference really between charging this $100 fee with those differences from the registration fee and simply jacking up the registration fee by $100?

Would there... would there be any economic difference to the... to the public or... or indeed even to the carriers if they simply jacked up the... the registration fee by $100?

Because the... the registration fee is passed on to the carrier, if it's not the owner, and the carrier... it doesn't make any difference to the carrier whether the... whether the State diverts the $100 up front or... or divides the... the registration fee after it's paid.

So is there any economic difference?

Mr. Hanson: Yes, there is and the reason why there is a difference is that the... the fees that are paid for plating are under the... under the International Reciprocity Plan, the registration plan, the IRP.

And that is an apportioned fee.

It is charged to all vehicles, all commercial motor vehicles, regardless of whether it's for-hire or private, regardless of it's in state or... of interstate.

So everybody pays their apportioned amount based on mileage.

Justice Souter: No, but that... that... maybe I don't understand.

That... that tells us what happens to the money after it's paid, but it doesn't make any difference to the person who is paying the money, does it?

Mr. Hanson: Yes, it does.

Justice Souter: Except that he only has to pay in one place, and... and if they--

Mr. Hanson: He pays--

Justice Souter: --increase the registration fee, he'd only have to pay in one place, once.

Mr. Hanson: --But he would only pay the fee based on his mileage in the State.

It is not a flat fee if it is put onto the IRP fees.

Those--

Justice Ginsburg: Who... who sets the fee for the plating?

Mr. Hanson: --The... the State does.

It is administered by the Michigan Secretary of State--

Justice Ginsburg: So--

Mr. Hanson: --but I believe all of those are statutory fees.

Justice Ginsburg: --you could have... unlike the... the fee, the $10 fee, that--

Mr. Hanson: The SSRS.

Justice Ginsburg: --the Federal cap, this would... for plating it could be anything each individual State chooses it to be?

Mr. Hanson: In terms of the plating fee?

Justice Ginsburg: Yes.

Mr. Hanson: Each State is free to charge its... its own amount as the plating fee.

Justice Souter: Sure, but it... so... so regardless of what Michigan does with the apportioned amounts, the amount it charges to the... to the owner, in the case of the... the plating fee, is... is simply set by the State of Michigan.

Mr. Hanson: That is--

Justice Souter: Yes.

Mr. Hanson: --that is correct.

Justice Souter: So what... and... and the... the virtue of the apportionment is that the... that the owner or the... or the owner, I guess in this case, does not have to pay fees in 49 other States.

Mr. Hanson: That is correct.

Justice Souter: But he doesn't... it doesn't matter to... that's the value to him.

It doesn't matter to him how they apportion whatever that fee is that Michigan charges.

Mr. Hanson: If they apportion it, however, it is... it is not... it does not... if they put it into the IRP, it is not part of the registration process.

The thing that the--

Justice Souter: But who... I mean, is... that's... that's fine as a matter of administration, but in terms of the... the end effect on the person who has to pay it and on the consumers to whom it is ultimately passed on, what difference does it make?

Mr. Hanson: --Well, the... the difference for the person who is paying it under IRP is that if only 20 percent of their interstate miles as a solely interstate operating carrier, if only 20 percent are in the State, they would, in fact, only pay $20 per vehicle.

Justice Breyer: Can I ask a quick question?

The... there are three things.

Were... were you finished?

Justice Scalia: No, I don't think he... I didn't--

Justice Breyer: Sorry.

Justice Scalia: --I don't understand your answer.

If you were finished, I don't understand.

Justice Breyer: Okay.

Mr. Hanson: If it's... if it is put into a plating charge as opposed to a registration... part of the registration of a carrier for the privilege or the opportunity to carry on interstate trucking activities in the State of Michigan, that is the flat fee that we're talking about.

Under the SSRS we believe that $100 charge exceeds the $10 maximum and is therefore preempted.

If they put it into the IRP, that... IRP is charged against the owner of the vehicle, paid against the Secretary of... paid to the Secretary of State.

It is not a qualification under... for the privilege of engaging in interstate trucking in the State of Michigan.

The SSRS sets up the standards by which a carrier becomes qualified to operate in the State.

Michigan exceeds those standards.

If you put those fees into the IRP fees, then the carrier... or then the owner of the vehicle pays only the proportionate amount based on his mileage in the State.

Justice Stevens: May I ask this question?

Supposing the... Michigan changed its system and said we're going to charge you $90 for... as a plating fee.

We're only talking about vehicles that are plated in Michigan.

We're going to charge you $90 for a plating fee and now we're going to take 10... what used to part of the $100 and another $10 registration fee.

Would that be permissible?

Mr. Hanson: It would be permissible because the... if the $10 is charged to the carrier as part of the registration process, in order to be qualified to engage in interstate trucking.

The $90 would be charged to the owner of the vehicle and would be paid on an apportioned basis under IRP.

Justice Souter: Okay.

What if he said $20 instead of $10?

Mr. Hanson: If he said $20 was going to be put towards the... the State instead of... instead of $100?

Justice Souter: Yes.

Mr. Hanson: And $80 towards IRP?

Justice Souter: Yes.

Mr. Hanson: In that case, that would still violate the... the SSRS, if it is done as part of the registration process, which is what Michigan does.

Michigan... even though you're properly SSRS registered, Michigan still requires, under its SSRS form... it directs the carrier to specifically identify vehicles by make, model, and serial number to obtain a decal by paying $100 for that fee.

If they pay $20, that exceeds the $10 maximum that Congress set up in the SSRS in order to be qualified to operate in interstate trucking in the State of Michigan, as an interstate carrier in... in Michigan.

Justice Scalia: But that... that assumes it's an SSRS charge, and the State denies that it... it has anything to do with SSRS.

Don't you have to establish that it's part of the SSRS program?

Mr. Hanson: I think what you have to do is you have to look at what the... the standards do.

The... the registration standards in the SSRS are set up as the process by which a carrier has the privilege to enter into interstate trucking activities in Michigan.

When you look at the statute--

Justice Souter: Okay, but what... what if the State says, you can enter... enter into interstate activities for nothing?

We're simply going to increase the registration fee by $100.

Couldn't the State do that?

Mr. Hanson: --The State could do that and that would be perfectly permissible.

Justice Souter: So this is pure formalism.

Mr. Hanson: It is not pure form.

Any... what... what Congress did was say that in order to qualify a carrier... they were concerned about the burdens.

When ISTEA was enacted in 1991, they were concerned about the burdens on carriers of individual State registration requirements.

And they sought to... to alleviate that by making it so that carriers could only... would only have to register in one State so they could do business in all States on an interstate basis.

Justice Scalia: Maybe they sought to but maybe they didn't succeed.

As I read the statute, it... it really applies to the... the limitation of $10 only to those fees that are SSRS fees, and these are not.

So maybe there's... there's a hole in the Federal statute.

Mr. Hanson: And I don't believe that's the case, Justice Scalia.

Justice Scalia: You're trying to make the Federal statute work sensibly, but--

Mr. Hanson: Right.

Justice Scalia: --I hate to tell you, but not all statutes work sensibly.

Mr. Hanson: Right.

I think what you have to do, though, is go back and look at what Michigan does.

Michigan has a... a State statute, 478.7(1), that says in order to operate to carry property on an interstate basis in Michigan, you must register with the PSC and you must pay the required vehicle fees.

The registration standards are what they do as in accordance with SSRS: insurance, service of process, and operating authority.

Then you have to pay a fee, and the fee is limited to $10 per vehicle.

In the case of Michigan, those vehicle fees are set forth in two different sections of the statutes.

One is.7(4), which is the $10 SSRS fee.

The other one is subsection... it's 2(2).

That fee is $100--

Chief Justice Rehnquist: Thank you, Mr. Hanson.

Mr. Hanson: --in order for a Michigan-plated vehicle to engage in interstate commerce.

Chief Justice Rehnquist: Your time is expired.

Mr. Hanson: Thank you.

Argument of Henry J. Boynton

Chief Justice Rehnquist: Mr. Boynton, we'll hear from you.

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

The petitioner, American Trucking, began its reply brief with the claim that the central reality in this case is that the Michigan intrastate fee places significant burdens on interstate commerce.

The Michigan Court of Appeals rejected this claim squarely, saying that as a matter of... that that was a matter of pure speculation.

There's no evidence in the record before this Court that the trucking companies'route choices are affected by the intrastate fee.

Furthermore, there is no evidence in the record that the intrastate fee keeps anyone out from engaging in intrastate trucking in Michigan.

Justice Scalia: It sure does make sense to me, though.

Surely it's the case that a company that does nothing but intrastate Michigan business will, by and large, log in many more miles intrastate than a company which does interstate business but part of its business is intrastate Michigan business.

I... I just... it seems to me obvious that--

Mr. Boynton: Well, the Michigan Court of Appeals said that that very well may be the case, but they pointed to the fact that there were no facts to support that finding.

And this is completely different than in Scheiner.

In Scheiner you had a... a trial, you had evidence before the court.

This Court noted that the... the cost to an interstate trucker in that situation was five times greater than the cost to a trucker that was in Pennsylvania.

You just simply don't have those facts here.

What you have is a discrete or a distinct local activity that is something that doesn't affect the interstate commerce.

Justice Scalia: --It... it's the case that a company that does only intrastate Michigan business logs all of its miles on... in Michigan.

Right?

No miles outside of Michigan.

Mr. Boynton: That's right.

Justice Scalia: And it seems to me it's obvious that a... a company that does interstate business does not log all of its miles in... in Michigan, and likely... likely... very likely does... does less miles in Michigan than... than a purely intrastate Michigan trucker.

Mr. Boynton: Well, Justice Scalia, that very well may be true, but we don't have any way of... of qualifying or quantifying the burden here because we don't have those facts.

Justice O'Connor: Is it difficult to apportion the intrastate fee based on the number of miles traveled intrastate?

Mr. Boynton: Well, Your Honor, I... I think it is very difficult to do that.

As the United States noted in its brief, they didn't think that mileage would be appropriate because this... this fee doesn't support the maintenance of the highways.

What this fee does is allows trucking companies or allows that truck to operate that truck in intrastate business.

So mileage isn't appropriate.

Our position is that mileage isn't appropriate because it's next to impossible to try and figure out.

What do you compare it to?

Do you... do you compare it to interstate miles?

Do you compare it to a ratio of interstate... intrastate to interstate?

And if you do that, how... how can you come up with a accurate picture of, you know, what the value of that license is in Michigan?

It may be--

Justice O'Connor: Does it make any difference how high the... the fee is set?

If it were $10,000 a truck, does that raise any concerns that are different?

Mr. Boynton: --Well, Your Honor, the Michigan Court of Appeals had taken the position that this was a fee, not a tax, and under a fee... if... if a fee was $10,000, if the expenses matched the... the revenue from it, well, then it... it would be a... could be sustained as a fee.

Now, if were a tax--

Justice Scalia: You... you defend that position, that... that it doesn't violate the Commerce Clause so long as it's a fee not a tax?

Mr. Boynton: --Your Honor, we think that the... if it's a fee and not a tax, the Michigan Court of Appeals applied the correct standard, and that was the standard of Pike v. Bruce Church.

And you would look to the... whether the statute regulated even-handedly, whether it affected a legitimate local--

Justice Scalia: Whenever it's a fee, not a tax, you immediately go to Pike Church.

Mr. Boynton: --I think that... that that was what the Michigan Court of Appeals--

Justice Scalia: I know.

I know that's what they said.

Mr. Boynton: --Yes, and I... I think that's a--

Justice Scalia: I found it very strange.

Mr. Boynton: --I think that's an appropriate manner in dealing with it.

But if you... if you look at the Michigan Court of Appeals opinion--

Justice O'Connor: What makes it a fee instead of a tax other than the court saying so?

Mr. Boynton: --Well, first of all, it provided a direct benefit to the intrastate truckers.

They were able to operate in the State of Michigan.

Second of all, they pointed out that it was in relation to the services granted, being able to do that, and then the third component would be the voluntariness, whether they could agree to... they didn't have to engage in intrastate trucking--

Justice Scalia: You could say the same about a tax.

You could say, you know, you only have to pay this tax if you operate in Michigan.

You don't want to operate; you don't have to pay it.

And you could also say unless you pay the tax, you cannot operate in Michigan.

Does that make it a tax or a fee?

Mr. Boynton: --Well, I think in the Michigan Court of Appeals opinion, it... it was a fee, and I think... I think what we come back to, Your Honor, is the idea is there a specific class of individuals or businesses that are benefitted.

And I think that that's the distinction between a fee and tax.

Also, a tax is a general revenue-raising measure, whereas a fee is not.

And that's another distinction of... of a tax.

And indeed, this Court... in National Cable Industry v. the United States, which we cited in our brief, this Court said as whether an exaction is a tax or a fee depends on whether its purpose is to raise revenue or regulate an industry or services.

One of the things--

Justice Kennedy: I'd like to get back just for a moment--

Mr. Boynton: --Yes, Your Honor.

Justice Kennedy: --to the answer you gave about apportionment because I wasn't quite sure I understood the answer.

You said, well, apportionment is very difficult.

What are you supposed to do?

What are you... what's the base?

Well, and you said, should we apportion against... between in-state and out-of-state, and I would think the answer is yes.

That's the whole point.

Mr. Boynton: Well--

Justice Kennedy: And if we're talking about mileage here, maybe this is something that's eminently susceptible of apportionment.

Now, it may be that administratively this is just too expensive.

That may be... that may be a very valid argument.

But so far as saying that there's no basis for apportionment, I didn't understand your answer.

Mr. Boynton: --Well, I... I... maybe I misspoke myself.

What I really meant to say was it would be very difficult to do.

And in our joint appendix... in the joint appendix--

Justice Kennedy: It would be difficult to do administratively.

But... just because of the cost of collecting all the--

Mr. Boynton: --Well, Your Honor, I think that you got to look at what's the total cost here.

The cost is not only to the administrative aspect by the State, but this imposes another cost on the truckers.

Justice Kennedy: --That... that... I agree that that is expensive.

However, it seems to me that it would be easier to do it with trucks which have miles than with--

Mr. Boynton: But, Your Honor, the problem is--

Justice Kennedy: --than with, say, attorneys or accountants or whatever.

Mr. Boynton: --Your Honor, the problem with that is that this fee, this intrastate fee, does not go to maintain the highways as it was in Scheiner.

They make the argument that it's very easy that the mechanism... they, being American Trucking, makes the argument that it's very easy to just start logging up the miles and... and you have the mechanism there.

But the difference between Scheiner and this case is that in Scheiner you were measuring all intrastate miles, any miles traveled within that State.

And there's a mechanism available administratively to do that.

The IRP requires that.

But here you're not logging all intrastate miles.

You're only logging those miles in the State that involve a point-to-point delivery, from one intrastate point to another.

So you don't... you'd have to get a whole new record keeping or you'd have to keep track of a while different set of miles than you would with respect to the IRP.

And that's the thing that I find striking about this, that the American Trucking Association is basically saying to its members that they want to have them do more record keeping on their part.

Justice Scalia: But the American Trucking Association is... is willing to be thrown into the... into the briar bush apparently.

It certainly involves no... no difficulty for your Michigan intrastate truckers.

All of their miles are intrastate.

And the plaintiffs here say we're... we're willing to... you know, to provide figures showing how much of our carriage was... was exclusively intrastate if you want to apportion.

Mr. Boynton: Well, that may be, Your Honor, but the... the point is... what we're dealing with is a... a fee that has revenues of about $3 million.

And if you have additional record keeping, how much of that $3 million is going to have to be devoted to paying for the administrative costs that are involved?

Justice Stevens: May I ask this question?

Is the fee payable before the... a carrier may engage in business or is it after the carrier has paid?

Is it... is it like a tax that's paid after the year is out?

Mr. Boynton: It's paid before.

They... they have to have--

Justice Stevens: If you had to pay it before, there would be no way to calculate it ahead of time because nobody would have had any mileage.

Isn't that correct?

Mr. Boynton: --I'm sorry.

Justice Stevens: If you have to pay it before the year begins and before you're allowed to engage in the business, you would have no way of measuring the number of miles you're going to travel during the... the ensuing year.

Mr. Boynton: That's correct.

You would have to have--

Justice Scalia: Well, I suppose that's the same thing for the $10 fee for the whatever the acronym is there.

That's paid at the beginning of the year, isn't it?

And it has to be apportioned among the States.

And you don't know how to apportion it at the beginning of the year.

Mr. Boynton: --Now, you're talking about the interstate fee, Your Honor.

Justice Scalia: Right, right.

But I'm saying the same problem arises when you do any apportioning.

Mr. Boynton: Well, it... let me back up.

The reason I asked with you... when you were referring to the $10 fee is because the intrastate fee... we have a $10 component in that as well.

You can obtain a temporary fee for $10 for 72 hours to conduct an intrastate operation.

So the statute in... structurally has some apportionment factor in it.

So you don't have to necessarily buy the $100 intrastate fee decal to conduct intrastate operations.

Justice Scalia: It's like a 3-day fishing license.

Mr. Boynton: I suppose that would be one way--

Justice Ginsburg: How... how does that work in... in practice?

Is it easily accessible?

Suppose the company--

Mr. Boynton: --Well--

Justice Ginsburg: --wants to fill up its truck and... and it said, well, this is going to be... the only haul this season for me, so I want the 3-day permit.

Mr. Boynton: --Yes, Your Honor, you can obtain the permits in advance.

You don't have to have trucks lined up at the border waiting to get a decal or get a permit.

You can purchase them in advance.

So that... that's available to the truckers.

The one thing I should mention, though, is you have to have one... you already have to have one vehicle licensed intrastate.

You already have to have paid the fee on one vehicle, and then you would be eligible to purchase additional temporary permits as the need arose based on seasonal needs or an emergency situation.

So that... that allows the... the statute... I... I would submit to Your Honor, allows some apportioning in and of itself.

Justice Ginsburg: This... this applies only to operations that are both licensed and registered in Michigan.

Is that so?

Mr. Boynton: No.

Your Honor I think is referring to the interstate fee--

Justice Ginsburg: Right, right, yes.

Mr. Boynton: --which is a different fee, which is in the Mid-Con case.

Our position--

Justice O'Connor: Are you going to address the Mid-Con question?

Mr. Boynton: --I'm sorry?

Justice O'Connor: Are you going to address the Mid-Con question?

Mr. Boynton: I was going to do that right now, Your Honor.

The position that the State of Michigan and the Michigan Public Service Commission has is the SSRS does not preempt the interstate fee.

And the reason for that is--

Justice O'Connor: Well, what's the point of the limitation in SSRS to $10 if the State can impose any additional fee it wants just by calling it a different name?

Mr. Boynton: --Well, Your Honor, I think what you have to realize is you have... when you look at the text of the statute, I think what is very clear from reading the text is that the SSRS does not preempt all State fees and charges on motor carriers.

It only preempts those fees and charges that are specifically related to the registration of that motor carrier's interstate authority.

The interstate fee, or the Michigan-plated vehicle fee here, is not preempted because it's a regulatory fee that does not relate to the registration of the motor carrier's SSRS interstate authority.

Justice Kennedy: Of course, it... it does.

Number one, it's somewhat suspect at the outset because it applies only to interstate travel.

Mr. Boynton: Well--

Justice Kennedy: And... and then the... the other vehicles pay $100 for the... for the in-state fees, and so this seems to me that... that on... on its face shows that it's like a registration fee.

Mr. Boynton: --Well, Your Honor, I think a couple things.

Number one, I think that... I believe that if you look at the structure of the Michigan statute, you'll see that under section 2, which contains both the interstate fee and the intrastate fee, virtually all Michigan vehicles that are plated in Michigan... # the effect of it is that all vehicles that are plated in Michigan will have paid this $100 fee.

And furthermore, if you look at section 7 of the Michigan statute, which is 478.7, that involves the registration procedure.

That's specifically applicable to the registration of interstate authority.

And within that section 7, subsection (4) deals with the payment of the $10 fee for... and... and it's to be made by vehicles that are not plated in the State of Michigan.

Justice Breyer: That's... that's the problem.

Mr. Boynton: Well, that's the argument.

Justice Breyer: That's the problem because here we're dealing with the fee to be paid by the people who are plated in Michigan, and it looks like that $100 is the fee for them.

Well, let me... I have a question.

I'm trying to test this.

Suppose that I have a company in Maine.

All right?

And I have... I decide all my... I... I have all Maine plates, by the way.

And I decide I want my... now, let's... one word is license plates.

I'm going to talk about plating.

Another word is the ICC insurance.

Let's call it a decal.

And the third kind of a concept is whatever you refer to in your statute by a fee.

All right?

The $100.

Mr. Boynton: Right.

Justice Breyer: All right.

Now, suppose in Maine what I do with my trucks is I say I want Michigan to be my home State for purposes of... what do you call it?

The SS?

Mr. Boynton: SSRS.

Justice Breyer: Yes.

And so I go to Michigan, and now I pay all the registration fees here.

Do I get a... a certificate of some kind, a decal or something to show I did it?

Mr. Boynton: No.

Your Honor, I... I... you say that you're a Maine company--

Justice Breyer: Yes.

Mr. Boynton: --but your principal place of business is in Michigan?

Justice Breyer: Yes, yes.

So... that's right.

Mr. Boynton: Okay.

And your question is?

Justice Breyer: Do I get a decal after I go through all this procedure?

You have a whole form.

I pay $6 for Alabama.

I pay $2 for Idaho, and... but... but I do it all in one shopping place which happens to be Michigan.

Mr. Boynton: Okay.

Justice Breyer: Then do I get a little certificate to put on the truck to say I did it.

I... I registered my ICC decal everywhere.

Mr. Boynton: If that vehicle... if the vehicle you're registering is plated in Michigan--

Justice Breyer: No, it's not.

Mr. Boynton: --Okay.

You will pay nothing.

Justice Breyer: I know for Michigan.

But I have to pay.

But Michigan is my... I can't ask the question until I get clear on this.

Mr. Boynton: I'm sorry.

Justice Breyer: Don't... when I... when I go under this... this 49 U.S.C. 14504 and I choose a home State--

Mr. Boynton: That's correct.

Justice Breyer: --and I make all the relevant payments to that State, but they distribute, don't I get a piece of paper saying I did it?

Mr. Boynton: I believe so, Your Honor.

Justice Breyer: Fine.

Now, I'm now plated in Michigan, and I make Michigan my home State for this.

And I go and I make... I say, Michigan, I'm going to give you this big check to distribute, but the amount I'm putting here for Michigan, by the way, is zero.

And you say pay me $100.

No.

I'm not going to do it.

So I haven't paid them the $100.

I haven't paid Michigan everything, but I paid $2 for Idaho.

Do I get the decal or don't I?

Mr. Boynton: To get a decal from Michigan, you have to be Michigan-plated and you have to pay the $100.

Justice Breyer: Excellent.

Now, if I don't get the decal, because I didn't pay the $100, then that $100 is a charge that falls within the SSI.

It is a charge for a decal which shows that I registered the ICC and my insurance because otherwise, if it weren't, you'd give me the decal.

Mr. Boynton: Your Honor, we believe that under the... the section 7 of the Michigan law, there is no fee charged for your SSRS.

Justice Breyer: I'm talking about a fee.

I'm trying to... oh, fine.

If there's no fee charged and I didn't pay the $100 and I didn't pay anything else, you'd give me the decal.

But you said you wouldn't.

Mr. Boynton: Your Honor, you have to... you have to... if it's Michigan-plated, that's the triggering mechanism.

It's not the... that's... that's what triggers the $100 fee.

Justice Stevens: Mr. Boynton, may I just... may I just ask this question?

Is part of your position that the Federal statute does not prevent Michigan from waiving the $10 fee on... for this particular purpose?

Mr. Boynton: Our position, with respect to that, Your Honor, is the fact that under section 7 of the Michigan Motor Carrier Act, 478.7, Michigan has no authority to charge a Michigan-plated vehicle any fee at all.

Justice Stevens: Right.

So that... but you're saying to Justice Breyer then is they have waived the $10 and they do it to a narrow class, those vehicles who are plated in Michigan because they've already charged them $100, a very heavy charge for the privilege of being plated.

Mr. Boynton: Well, I don't know if I'm saying that, Your Honor.

I'm saying that the... there's a zero charge, and then there's... there's another charge with respect to a vehicle fee.

The one thing that I need to point out here is that the SSRS is not vehicle-specific.

It talks about numbers of vehicles, but the Michigan decal fee for... or the interstate fee is vehicle-specific.

You have to identify the particular--

Justice Scalia: Is that right?

Let me... let me... I wanted to ask this question to see whether it's vehicle-specific.

Suppose I have nine trucks.

They're Michigan-plated, so I have to pay $100 for each of the nine.

Mr. Boynton: --Interstate commerce.

Justice Scalia: Now, suppose I... suppose I only pay the fee for eight of them.

What happens?

Mr. Boynton: And how do you want to use the truck?

Do you want to use it in interstate commerce?

Justice Scalia: No.

I've paid for eight, but I haven't paid for the ninth.

As I read the Michigan law, it says shall not operate any motor vehicle upon or over the highways of this State while any of the fees imposed by this act remain unpaid.

Now, if... if I can't operate the other eight because I haven't paid for the nine, that sounds to me like a vehicle-specific tax.

Mr. Boynton: Yes, it is.

Justice Scalia: I mean... I mean the opposite.

It's... it's not vehicle-specific.

Mr. Boynton: Oh.

Justice Scalia: I've paid for the eight, and I can't operate at all because I haven't paid for the ninth.

Mr. Boynton: Well, I think administratively that... that wouldn't happen.

I... I think once you go--

Justice Scalia: It seems to me how it reads.

Am I reading the law wrong?

It says, shall not operate any motor vehicle while any of the fees imposed by this act remain unpaid.

Mr. Boynton: --I suppose that if the... for... for nonpayment of fees, a motor carrier risks its authority to operate in the State.

Justice Scalia: At all.

So it's not really vehicle-specific.

Mr. Boynton: Well, I... I think it is.

I would disagree with Your Honor.

Justice Souter: Well, the computation is vehicle-specific, but you're using all the vehicles as hostage for the payment of... of any shortfall.

That's what you're doing, isn't it?

Justice Scalia: So it's carrier-based.

Mr. Boynton: Well, Your Honor, I would have to disagree with Your Honor respectfully.

I think that the... that it is vehicle-specific because it identifies the particular vehicle that's involved here.

And I... I think you have to read the statute, the preemption statute, the scope of what preemption has sought to do here, and not all State fees and charges on motor carrier vehicles are preempted.

Justice Ginsburg: Do you place any reliance in this scheme on the fact that the only people subject to it are people who have their principal place of business in Michigan?

Mr. Boynton: No, Your Honor.

The triggering event for the interstate fee is the plating of the vehicle in Michigan.

Justice Souter: And... and anyone can choose to do that?

I mean, going back to Justice Breyer's example, anybody can say, well, I think I'd like to be plated in Michigan even though I operate in... in other States.

My principal place of business is in another State.

Mr. Boynton: Right.

I think all parties have noted, Your Honor, that the... under the SSRS it's much more stringent, more rigorous--

Justice Souter: No.

I'm just asking about what you do in Michigan.

Mr. Boynton: --Yes.

Yes, you can.

Justice Souter: You really can do that?

Mr. Boynton: You can plate wherever you have contacts with the State.

If your principal place of business is in Ohio but you have trucks going to and from Michigan, that... that would allow you to plate in State of Michigan.

Justice Souter: You... you can plate your whole fleet in Michigan under those circumstances.

Mr. Boynton: You could... you can choose where to plate your feet... plate your trucks, and a number of considerations go into that.

It's not just the license plating fees.

It has everything to do... as we noted in our brief, it could have to do with no fault insurance, the weight limits on trucks.

It's an economic decision and there's a number of different factors that go into that decision of where to plate a vehicle.

In conclusion, I would say that the Michigan Court of Appeals correctly decided this case.

And they... they found that the challenged fees in these cases are regulatory fees, that they serve the critical function of protecting the people of Michigan that use the highways.

And the Michigan Court of Appeals should be affirmed.

Argument of Malcolm L. Stewart

Chief Justice Rehnquist: Thank you, Mr. Boynton.

Mr. Stewart, we'll hear from you.

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

The United States as amicus curiae supports the State in American Trucking and the petitioner in Mid-Con.

With respect to American Trucking, in our view the central question in resolving the constitutional issue is not whether it would be possible to apportion the intrastate fee on a more precise basis.

The question is whether the Constitution requires it.

And in the prior cases that we've cited in our brief, both the older cases dealing specifically with intrastate transportation and the more recent cases dealing with authority to engage in other intrastate businesses, this Court has repeatedly upheld the authority of States and municipalities to charge flat fees for the privilege of engaging in the local business within the jurisdiction during the... the relevant period of time.

And that practice--

Justice Scalia: Gee, that seems to me really to go back on... on Scheiner.

And I thought we tried to get away from deciding Commerce Clause questions on the basis of whether it is interstate commerce or local commerce, you know, the original package doctrine and things that succeeded it.

And you're... you're just dragging back in this... this inquiry into whether it's really interstate or... or rather local.

Mr. Stewart: --Well, with... with respect, Your Honor, I think the Court has certainly abandoned the notion that there is a bright, absolute line between intrastate activities which are subject to plenary regulation by the States without any Commerce Clause inquiry and interstate commerce which is wholly immune from State regulation.

The Court has recognized that the question is more complicated than that.

But in cases like Jefferson Lines, for instance, the Court held that the sales price of a ticket for an interstate bus trip could be taxed in... in its entirety by the State in which the ticket was purchased because the sale of the ticket was regarded as a separate, discrete event properly severable from the underlying interstate transaction.

And the case for severance is all the more powerful here.

That is, here we're dealing not with a... an aspect of an interstate transaction, we're dealing with point-to-point hauls within the State of Michigan.

It's true that those may be undertaken by trucks that also do interstate business, and it's even true that in some instances the intrastate load may be carried on the same truck at the same time that it's also carrying goods between the States.

But the intrastate haul is itself a discrete commercial transaction.

To the shipper it's wholly irrelevant, in most instances, that the... the truck is also doing an interstate business.

And to differentiate this case from Scheiner, one of the things that the Court has looked at in the dormant Commerce Clause inquiry is the risk of multiple taxation.

And the Court doesn't just mean multiple taxation in... in the abstract because it's necessarily going to be the case that an entity that does business in many States will be taxed in many States.

Rather the question is whether there's an undue risk of multiple taxation on the same transaction or the same conduct or the same activity.

And that was at real risk in Scheiner because if you imagine a truck that's delivering cargo from Maine to Florida and passing through several States on the way, and it's required to pay a fee that is, in essence, a fee for entering the State, has nothing to do with the mileage traveled within the jurisdiction, it's entirely reasonable to say that the imposition of those cumulative trips... cumulative taxes for a single haul of goods from Maine to Florida is an instance of multiple taxation of the same event.

Here we don't have a problem with that.

The tax is being levied solely on point-to-point hauls within the State of Michigan.

If a particular truck also makes point-to-point hauls in some other State within the calendar year, it may be subject to two taxes, but they can't be characterized as two taxes on the same conduct or the same transaction.

The second aspect of... of Scheiner--

Justice Scalia: Yes, it could.

I mean, if... if this... this truck is making one... one haul, it's carrying some goods from Texas to... to Maine, but some other goods it picks up along the way within Tennessee and just carries it to another place within Tennessee, and then it picks some other goods in New Jersey, carries it elsewhere to New Jersey, you're going to be taxed.

It seems to me it's... it's one trip.

We never used to... used to divide railroads on the basis of well, the ICC has jurisdiction over just the interstate portions and... and the two stops within a State can be regulated by the State.

Mr. Stewart: --I mean, I think you're right that it wouldn't be reasonable to regard the within-Texas segment or the within-Oklahoma segment of a transfer of goods between States as a discrete, separable event.

But if the truck is picking up goods at one point in Texas and depositing them at another point in Texas, again from the shipper's point of view, that's clearly a discrete transaction.

The shipper is unlikely to have any interest in whether the same truck is simultaneously carrying goods among the States.

And it's reasonable to regard that as a discrete event that is taxable by the State in which it occurs.

The other point to make about Scheiner is that even if we assume, as the petitioner argues, that the average interstate truck that makes some point-to-point hauls within Michigan will do so less frequently than the average truck that does business solely within that State, there's still a whole different class of interstate truckers that makes substantial use of Michigan's roads that could be charged taxes on the basis of mileage traveled and they're being let off the hook because the State has chosen to focus this tax on intrastate activity.

Petitioners'response to this is that you can't discriminate against one class and then make up for it by... by discriminating in favor of a different class.

And if this were, to use title VII terminology, a disparate treatment case, we would agree.

That is, if a State overtly discriminates against one class of interstate or out-of-state activities and on the face of the law those people are treated less favorably, then we would entirely agree that the State couldn't make up for it by giving more favorable treatment to a different class of out-of-state entities.

But here the petitioner is making what amounts to a disparate impact claim, and the essence of a disparate impact claim is not that any particular individual has suffered unfair treatment.

The way you prove a disparate impact claim is to show the effect cumulatively upon the class, upon interstate truckers in this case in the aggregate.

And there's really no way to feel any kind of confidence that interstate truckers won't do better as a group by virtue of Michigan's decision to focus this tax on intrastate activity rather than on the basis of mileage, which would sweep in a lot of out-of-state truckers that are not currently covered.

I'd like to speak briefly at least about the... the Mid-Con case.

And in our view the best way of understanding... to... to return to the historical antecedents of the current SSRS provision, in its original form, as enacted in 1965, the statute said it's not an unreasonable burden of... on interstate commerce to require an interstate carrier to register its Federal certificate so along as you do so in accordance with the standards of the ICC.

If you go beyond those standards, it's an unreasonable burden on commerce.

Justice Scalia: I'd like to know the text you rely on.

Mr. Stewart: That was--

Justice Scalia: For... for preemption, the text of the current statute that you rely on.

Mr. Stewart: --The text of the current statute is set forth at page 82 of the appendix to the certiorari petition in Mid-Con, and it's now 49 U.S.C. 14504(b).

And the statute says, the first sentence, the requirement of a State that a motor carrier providing transportation subject to jurisdiction under subchapter 1 of chapter 135... and that refers to interstate transportation... providing interstate transportation and providing transportation in that State must register with the State is not an unreasonable burden on transportation referred to in section 13501.

Justice Scalia: 13501 deals just with SSRS.

Mr. Stewart: No. 13501 is the provision that... that defines the general regulatory jurisdiction of the Department of Transportation and the Surface Transportation Board.

And it basically says these agencies have general regulatory jurisdiction over transportation between points in one State and points in another State and... or between points in the same State passing through another State.

So in... in using that shorthand reference, the Congress just means interstate transportation.

Justice Stevens: May I ask this question?

Because I know your time is short.

Supposing Michigan imposed a new $10 fee per... and it identified it precisely as in order to comply with that statute and then reduced its present plating fee from $100 to $90, would that be permissible?

Mr. Stewart: Well, as long as the... again, to... in our view the distinctive and disqualifying feature of the current statute is that subsection (2) is imposed specifically on vehicles that operate entirely in interstate commerce.

And if Michigan reduced to $90 the extra--

Justice Stevens: I'm not saying... they reduced to $90 the plating fee, but then they enacted a new $10 fee specifically designed to comply with the statute.

Mr. Stewart: --As long as--

Justice Stevens: Could they do that?

Mr. Stewart: --As long as they were still imposing that additional... again--

Justice Stevens: The $90 is for plating.

It said only... only Michigan-plated vehicles pay the $90.

Everybody else... everybody... and everybody also pays the $10.

Mr. Stewart: --As long as that $90 fee was imposed not just on Michigan-plated vehicles generally, but specifically on Michigan-plated vehicles that operate entirely in interstate commerce, we would say that's preempted because our reading of the statute is that basically Congress has said there's a severe limit on what you can do to interstate carriers that you don't do to intrastate carriers.

Justice Scalia: Where does it say that?

Let... let me come back to the... to the section of the statute you're quoting.

You didn't finish the sentence.

It says that it's not an unreasonable burden when the State registration is completed under standards of the Secretary under subsection (c).

Subsection (c) is entitled SSRS, Single State Registration System.

Mr. Stewart: May I answer, Mr. Chief Justice?

Chief Justice Rehnquist: Briefly.

Mr. Stewart: The State doesn't argue that this registration was completed in accordance with this standard.

It argues that the provision doesn't apply at all because this is not the sort of registration requirement that the statute speaks of.

We think it is because it's imposed strictly on interstate carriers.

Rebuttal of Robert Digges, Jr.

Chief Justice Rehnquist: Thank you, Mr. Stewart.

Mr. Digges, you have 4 minutes remaining.

Mr. Digges: Thank you.

I'd like to just briefly cover three points.

First, I believe that... that is accurate to say that the Solicitor General's position is returning us to the pre-Complete Auto days of line-drawing, but more than that, the Solicitor General's position is ignoring the practical effect of these fees on taxpayers.

I think the... the citation to the Peddler v. Drummer line of cases illustrates that.

The only difference between the Peddler cases and the Drummer cases was that in the... in the Nippert case and... and the Drummer case, they looked at the practical effect on an out-of-state salesman and whether that salesman would be discouraged by the $50 fee that was being imposed from coming into the State.

In the Wagner case, they simply said that the fee fell on an essentially local event, didn't look at the form of the fee, didn't look at the form of the fee on the out-of-state salesman.

I don't think it can be disputed that to out-of-state... that out-of-state salesmen would be equally discouraged from coming into a State because a $50 fee or a $100 fee, whether or not they're carrying the goods with them in at that time or whether the goods are later mailed in.

So, again, it is returning to the line-drawing issues, and really there is no test that is made as to, after you... you draw these lines, what the appropriate test should be.

The second point is it... with respect to the administrative practicality of apportioning these fees.

The purpose of apportionment would not be, as in a highway tax, to... to show the amount of highway damage that was done by a truck.

The purpose of apportionment here is simply to show the extent of the taxpayer's level of activity in the State.

It would be like a general revenue tax in which we're trying to allocate the taxpayer's activity to particular States, make sure that that taxpayer is paying its fair share of the State's costs with respect... of the State's generic costs, in this case, generic regulatory costs.

So, again, I think that apportionment would be very easy.

As Justice Scalia said, the trucking industry is willing to take the onus of this.

We bill by the mile.

You could do it on number of loads.

You could do it in a lot... a lot of ways.

And by apportioning the fee, you eliminate the burden and you make the out-of-state carrier, who would be otherwise prohibited from only hauling a load or two... he would then have the ability to haul that load and... and not be discriminated against.

The final area I'd like to talk about a little bit is the need for additional... the need for evidence in this case.

Again, in the Nippert and the Scheiner cases, there... they... they... it was expressly said that there was no need for evidence in the cases because in the general average of instances, the out-of-state trucker will always pay more than the in-state trucker.

And in answer to your question, Justice Stevens, I think it was recognized in those cases that there would be some exceptions to that rule.

There would be a few out-of-state carriers that would operate more heavily in the State than in-state carriers.

But that exception wasn't... wasn't what was going to happen and the most often, and that the average of instances, it would always work to the disadvantage of the out-of-state carriers.

And... and the final point is that with respect to evidence, you have here also a failure of internal consistency test, and this Court has said a number of times that failure internal... of internal consistency is not a test related... it doesn't rely on specific facts but it relies on hypotheticals.

And in this instance, I think there's a very clear failure of internal consistency.

Like in Scheiner, there's a cumulative burden on an out-of-state trucker.

If a trucker wants to operate in intrastate commerce around the country, it has to... and just haul one load in every State, it has to pay 48 times a $100 fee or pay $4,800 in eligible... in order to be eligible to haul in all of those States.

So that illustrates how that's going to balkanize commerce, that that carrier is not going to be able to pay that kind of entrance fee nationwide.

So that carrier will operate in less intrastate activities in... in only a few States or maybe none.

And again, we think that that defeats the purpose.

When Congress passed economic deregulation of the trucking industry, that they wanted to open it up to out-of-state carriers to be able to augment their interstate loads.

Chief Justice Rehnquist: Thank you, Mr. Digges.

Mr. Digges: Thank you.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The Oyez Project

Featured:

San Remo Hotel v. San Francisco - Oral Argument

Fri, 09 Jan 2009 14:49:00 +0000

Case:

San Remo Hotel v. San Francisco

Media File:

04-340_20050328-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Paul F. Utrecht

Chief Justice Rehnquist: We'll hear argument now in No. 04-340, San Remo Hotel v. the City and County of San Francisco.

Mr. Utrecht, is that--

Mr. Utrecht: Yes, Your Honor.

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

The Ninth Circuit decision in this case should be reversed for three reasons.

The first reason is that the result is unfair and the rationale of the court is unfair.

Justice O'Connor: Well, what are your... exactly what claims are... is your client now raising in Federal court?

I mean, we don't take a case to just decide if something is unfair.

What are the precise claims your client is raising now in Federal court?

Mr. Utrecht: My client is making a facial and as-applied takings challenge to both the hotel conversion ordinance and the regulatory scheme of which it is a part.

And that claim... that Federal--

Justice O'Connor: I somehow thought that your question had boiled down to whether there was issue preclusion here.

Am I wrong?

Mr. Utrecht: --The issue before this Court is whether there's issue preclusion--

Justice O'Connor: I'm talking about the issues in this Court.

Mr. Utrecht: --Okay.

The issue in this Court is whether the Federal takings claim should be precluded under issue preclusion by a State court judgment that did not decide the Federal takings claim and could not have decided the Federal takings claim.

Justice Souter: Well, as I understand, I... I would... I will grant you that there are moments in the... in the Ninth Circuit opinion in which there seems to be a shift back and forth in the rhetoric between claim preclusion and issue preclusion.

But as I understand what the Ninth Circuit held, it did not hold that your claim was necessarily out of court because of claim preclusion.

It held that your claim failed because of the effect of issue preclusion on elements that were common, factual elements common to both the claim in the State court and the claim that you sought to bring in the Federal court.

Am... am I correct about that, about what the Ninth Circuit held?

Mr. Utrecht: The Ninth Circuit did limit its holding to issue preclusion.

It did not rule on claim preclusion.

Justice Souter: Okay.

Mr. Utrecht: The other part of your question about whether it was based on factual determinations could not have been based on factual determinations.

Instead, it was based on the prior State court determination that we did not state a claim... state a cause of action under California law for State compensation.

Chief Justice Rehnquist: Well, the Supreme Court of California decided only the State constitutional question, did it not?

Mr. Utrecht: That's correct, Mr. Chief Justice.

And because of that, we have never had an opportunity to have our Federal takings claim decided on the merits.

We believe that that undermines the Federal courts' primacy in deciding Federal questions, particularly Federal constitutional questions.

We also believe--

Justice O'Connor: Well, it was this Court's decision in the Williamson County case that led you and I assume other lawyers in these takings cases to return to State court and try to litigate everything.

Isn't that right?

Mr. Utrecht: --This Court in Williamson County said that before you could bring a Federal takings claim, you had to go to State court and seek compensation under State law.

Justice O'Connor: And you haven't asked us to revisit that Williamson County case, have you?

Mr. Utrecht: We have not asked that this Court reconsider the decision in Williamson County.

Justice O'Connor: Maybe you should have.

Mr. Utrecht: Well, at this point I don't think that we can.

Perhaps we could have in 1998 when the Ninth Circuit applied the Williamson County case and ordered us to go to State court with our unripe Federal claims, unripe under this Court's holding in Williamson.

But I think that at this point the question before the Court is given that we've complied with the procedural requirements that this Court established in Williamson County, are we now precluded by issue preclusion in the second litigation that this Court ordered because of the State court compensation ruling.

Justice Scalia: Mr. Utrecht, you... you refer to the primacy of Federal courts.

I'm... I'm not clear as to whether you are arguing for a different disposition where suit is first brought in Federal court erroneously because there's been no exhaustion and then the plaintiff is sent back to State court from the situation in which a plaintiff does the right thing and goes to State court immediately.

Now, in that case, would... would you still argue for primacy of the Federal court?

Mr. Utrecht: Absolutely, Your Honor.

I think that what this Court established in Williamson County is a two separate litigation scheme.

The first litigation concerns State compensation, and the second litigation concerns the Federal takings claim.

Justice Scalia: So... so your case does not hinge on the fact that when the State court acted, there was a pending... a pending Federal case asking for the Federal constitutional question to be resolved by a Federal court.

Mr. Utrecht: That's correct.

I think that the Second Circuit got this issue correct in the Santini case when it concluded that whether you started in Federal court and were ordered to proceed to State court under Williamson County or you looked at the Williamson County case and said, I'm going to start in State court because that's what Williamson County says that I'm required to do, it doesn't matter.

It shouldn't matter for purposes of issue preclusion on the Federal takings claim once it has been made ripe under the procedures required by Williamson County.

Justice Ginsburg: Is it your position that issue preclusion doesn't apply at all, or that there was no issue decided in the State court proceeding that carries over into the Federal proceeding?

Which one is it?

What... you suggested... you said, number one, no facts were found.

The question was whether there was sufficient statements to survive a 12(b)(6) or its counterpart dismissal motion.

Mr. Utrecht: Our... our primary position is that issue preclusion does not apply for the same reasons that this Court found that issue preclusion did not apply in England when you were required to do two separate litigations.

The question of whether the Ninth Circuit correctly applied issue preclusion law... we also raise that as our last argument in our opening brief, but our primary argument here today is that issue preclusion should not apply at all to Federal--

Justice Ginsburg: And if it did... if it did apply, what issues would be precluded?

Mr. Utrecht: --In our position no issue should be precluded because under California law, which the Ninth Circuit was obligated to apply, only identical issues that are resolved under a different set of laws can be precluded in the second proceeding, and there was no identical issue finding by the Ninth Circuit.

Instead, the Ninth Circuit applied its equivalent determination finding.

But I think that the... the real issue before this Court is not the California preclusion law question, but the real issue is whether this Court's decision in England should... or the rationale of this Court's decision in England should be applied to the very similar circumstances raised by--

Justice Kennedy: Is... excuse me.

Is... is it your position that there is an exaction here?

Mr. Utrecht: --Yes, Your Honor.

Justice Kennedy: It... are... are you bound by a finding in the State court that there was no exaction, or was there no such finding?

Mr. Utrecht: I don't believe there was such a finding.

I think that the California Supreme Court decided that the exaction met the State law compensation requirements and did not--

Justice Kennedy: Was the... was the Ninth Circuit wrong in indicating that there was no exaction?

That's the way I read its opinion.

Mr. Utrecht: --I... I don't read the Ninth Circuit's opinion as saying there was no exaction.

I think the Ninth Circuit held that the exaction was imposed by legislation rather than by an administrative proceeding, and because of that, it was subject to a different standard than exactions imposed in administrative proceedings.

But I think there's no question in this case that an... an exaction was imposed and was actually paid.

This is not a... this is not a case where there's an issue about whether the exaction was imposed.

The issues were what standard was used to review that exaction and whether the exaction was constitutional.

Justice Kennedy: But... but the Ninth Circuit seemed to think that Dolan doesn't apply, and I take it that you would say that it does.

Mr. Utrecht: Well, I think this Court has not decided whether exactions imposed by legislation are treated differently than exactions imposed by administrative proceedings.

The State court in this case determined that under State compensation law that mattered.

But this Court has not decided that.

The Ninth Circuit seemed to indicate that it was in general agreement with the California Supreme Court, but again, because it didn't actually decide the merits, it just decided that there was an equivalent determination under State law, it didn't get to the final question of whether this was an exaction and what the proper standard was.

Justice Scalia: And you don't want us get that... to that question either, whether Dolan applies or not.

Mr. Utrecht: I did want this Court to get to that question, but when this Court rejected question 2, I think this Court decided that it did not want to get to that question.

But we... and we did not brief that question because this Court did not grant certiorari on question number 2.

But we definitely did want this Court to decide that question, and obviously, if... since the Court can't decide it in this case, we would, obviously, want the Court to decide it in some other case, hopefully before this case is finally resolved in the courts.

Justice Ginsburg: Mr. Utrecht, if I understand the respondents' brief correctly, there is on pages 10 and 11 a whole list of issues that they say were determined... raised, litigated, and determined in the State court.

So, for example, that the HCO's housing replacement fees bear a reasonable relationship to loss of housing, the use of a defined historical measure... measurement point reasonably related to the HCO's... and it goes on for a paragraph, citing issues that respondents say that were raised, litigated, and decided in the California Supreme Court.

Mr. Utrecht: I think that technically what the California Supreme Court decided was that our facts did not state a cause of action under State law.

What they cite here as findings are actually discussions of the legal issues raised by the State court complaint under State law.

They don't amount to a factual finding.

There was no trial.

There was no summary judgment motion.

There was no evidence presented on any of these points.

These are--

Chief Justice Rehnquist: How did the case go up?

On a motion to dismiss?

Mr. Utrecht: --The case in State court went up on a motion to dismiss, which was granted by the trial court, reversed by the State court of appeal, and then affirmed by the California Supreme Court.

Justice Souter: So, in effect, then maybe... are you saying this, that there is no issue preclusion here because the... the ruling that there was no statement of a cause of action was, in fact, a disposition of the claim without there being any resolution of any fact issue upon which the claim might depend.

Is that what you're saying?

And therefore... and... and that is the reason why there is no issue preclusion?

Is that your argument?

Mr. Utrecht: That's not the argument that we made in this Court.

That is an argument that we made in the lower courts.

The argument that we're making in this Court is rather that under the England case... or rather, the rationale of the England case, there shouldn't be any issue preclusion whether or not the State courts made any factual findings.

I don't think that the question as framed by Your Honor is presented by the briefs.

I mean, obviously, that was a contention of ours.

We think that's a correct statement of how the case should have been resolved by the Ninth Circuit, but the Ninth Circuit instead chose not to look at that issue or not to decide the case on that issue, but instead to decide under its prior precedents of Dodd and Palomar, that issue preclusion applied and then applied its own formulation of the equivalent--

Justice Ginsburg: But... but isn't there an essential step to find out that there were issues?

Because I think the way you're phrasing the question, it says, if there were issues decided, they weren't precluded.

But if there are no issues, that's... that's not what's involved in this case.

The simplest ground on which you could knock out issue preclusion is that no issues were decided.

Mr. Utrecht: --That would be a simple route to knocking out the case.

The Ninth Circuit rejected that argument.

That question did not seem cert-worthy and--

Justice Ginsburg: What... what were the issues that the Ninth Circuit thought were decided?

Mr. Utrecht: --I can't quite tell.

I think what the Ninth Circuit said was that because State law and Federal law on this question was similar, at least in the Ninth Circuit's understanding, that the State court determination was an equivalent determination.

Once they made that finding, that there was an equivalent determination under State law, the Ninth Circuit decided that the claim must be precluded by issue preclusion.

Justice Ginsburg: Well, issue preclusion does extend to questions of law, as well as fact.

Mr. Utrecht: It does extend to questions of law.

The problem, of course, is that the State court question of law that was decided was whether our... we were entitled to compensation under State compensation law.

The State court did not decide whether we were entitled to just compensation under the Fifth Amendment.

Justice Scalia: I thought they said that their... their compensation law was congruent with ours?

Mr. Utrecht: The California Supreme Court did say that its compensation law--

Justice Scalia: What do you... what do you think that means?

Mr. Utrecht: --I think that means that the California Supreme Court would like to believe that its law is congruent with this Court's decisions.

I think that, in fact, the California Supreme Court does not follow this Court's precedents in this area of law, and I think we actually argued the first time that we were in front of the Ninth Circuit, that it was futile to go to State court precisely for that reason.

That argument was also rejected by the Ninth Circuit.

I think that it cannot be that the State courts are going to be the... our final arbiter of whether their law is in fact congruent with Federal law or not.

It left either to this Court--

Chief Justice Rehnquist: What do you understand the word congruent to mean?

Mr. Utrecht: --I think congruent means that it's equivalent.

I think... I think the Ninth Circuit's view of an equivalent determination is that it's close.

It's close enough for government work, perhaps.

[Laughter]

Justice Breyer: What... what is the claim you want to make?

That is, my reading of the California State court opinion says you came into their court and you said, look, this ordinance in San Francisco violates the Fifth Amendment, I guess, because it doesn't make any sense.

The... there's no good basis, no sound basis for requiring us to pay a fee in order to convert rooms.

Anyway, the room isn't a house.

Anyway, it makes no sense as applied to us.

Anyway, they admit they just want to raise revenue.

Anyway, we're going to give the tenant a place to live for the rest of his life.

All right.

Those were the claims.

And in each case, the California Supreme Court said you're wrong.

You're wrong because it does help preserve rooms, because it does have a reasonable purpose in a city that's crowded, because the tenant who's there for life might move out, and we want to keep the room even if he moves out because he dies.

And anyway, it's not an issue of whether your case is special.

This makes sense as a general rule.

All right?

They decided it.

You raised it.

They decided it.

Now, what else is it you want to raise in Federal court?

Mr. Utrecht: I think that what's important is the very beginning of your question.

You said that we said in State court that it violated the Fifth Amendment.

Justice Breyer: I don't know if you said it.

I just said that that is what I read in the California Supreme Court opinion that Justice Werdegar wrote.

And so what I'm asking you is whether they should have or whether they shouldn't have, they did seem to decide those five issues.

And so my question to you is, what else do you want to raise?

Mr. Utrecht: The California Supreme Court decided whether those legal propositions were relevant under the State constitution and the State compensation--

Justice Breyer: I thought it decided a different thing.

I thought that it decided that in part that was the reason for their decision.

But the reason they reached their decision is they thought on each of those five matters that the City of San Francisco had a reasonable legislative purpose for its ordinance.

Mr. Utrecht: --And they made that decision under State law.

They... they--

Justice Breyer: Just as, suppose, for example, they had decided that the hotel clerk or the temporary manager did speak English, and in fact, he was a scholar of English.

And suppose that that had been the key matter for its decision of State law.

I take it, if you came into Federal court, even if the issue were quite different, you would be bound by that factual determination.

That's why I'm asking you.

It seems to me here they have decided matters of whether there was a reasonable purpose or not for this particular ordinance and as applied to you.

Now, what else do you want to raise in Federal court that was not encompassed by what I just described?

Mr. Utrecht: --In the hypothetical that Your Honor gave of a factual determination that the clerk spoke English well, that fact under the England case and under England's rationale would be subject to relitigation in Federal court in the Pullman context.

And we believe that there's no significant difference between our context and the Pullman context.

I do recognize that that is contrary to the normal rules of res judicata.

The normal rules of res judicata are designed to prevent exactly what this Court decided should be... should happen--

Justice Breyer: No, but am I right?

I'm just trying to narrow the issue in my mind.

Am I right you want to raise one, two, three, four, or five of those issues that I just described and nothing more?

Mr. Utrecht: --The factual claims--

Justice Breyer: Am I right about that?

Mr. Utrecht: --Yes, Your Honor.

The factual claims that we're making in Federal court are the same factual claims that we made in the State court--

Justice Kennedy: Well, but is there precedent that what is reasonable for the State constitution is always reasonable for the Federal Constitution?

Mr. Utrecht: --That--

Justice Kennedy: I mean, this is somewhat different than simply a specific factual finding.

Mr. Utrecht: --Well, in this particular case, they found that the facts that we alleged did not give rise to a right to compensation under State law.

And this Court in Williamson said once you've been denied compensation in State court, once it's certain that the State courts will not provide you relief under State law, you have a ripe Federal takings claim.

At that point, the Federal courts must be able to look at the factual questions underpinning the Federal takings analysis, so that the questions of whether in fact this law substantially advances a legitimate government interest or it interferes unduly with the reasonable investment-backed expectations under Penn Central, which requires a detailed ad hoc factual analysis, that that must be done by the Federal courts and cannot be precluded by a State court determination that is not considering the Federal questions at the time or... and it cannot even under this Court's decision in Williamson County... cannot consider the Federal question that's at issue.

The... the city... the city contends that... that a decision in our favor would result in--

Justice Stevens: May I interrupt?

Because I'm just not following one part of your argument.

Are you saying that the Pennsylvania analysis, the ad hoc analysis, was not made in the State court?

Mr. Utrecht: --No, I'm not saying that it was not made.

I'm saying that a State court disposed of that claim without doing a factual trial, but simply based on the allegations in the complaint.

Justice Stevens: Why... now, why should that not be binding on you if your allegations were, in fact, insufficient under Penn Central?

Mr. Utrecht: The court did not find that they were insufficient under Penn Central.

The court found that under State compensation law, which it believed was congruent with this Court's decision in Penn Central--

Justice Stevens: Well, I can understand how you should be free to argue that in fact the two rules are not congruent, that there's broader recovery under the Federal system.

But if we decided that the two... if we agreed with them that they were congruent, then why should not issue preclusion apply?

Mr. Utrecht: --Issue preclusion should not apply because it prevents the Federal courts from deciding the Federal takings questions.

If--

Justice Stevens: Yes, but... but it's just a conclusion from issues that have... have been resolved on which normally we would defer to the State court.

Now, why... why shouldn't we defer here again?

Mr. Utrecht: --You shouldn't defer here because in Williamson County, you required that parties go through two litigations.

Justice Stevens: Right.

Mr. Utrecht: And all the rules of res judicata are designed to prevent two litigations and to require a single litigation.

It makes no sense, in the context of a two-litigation system that this Court set up, to then impose issue preclusion.

Otherwise, Federal--

Justice O'Connor: But it isn't--

Justice Stevens: That doesn't make sense.

Justice O'Connor: --It isn't clear from Williamson County that this Court envisioned two... two separate determinations of fact issues: one in State court and one in Federal.

That isn't clear from the face of Williamson County.

That was a case where it was thought, at least, by members of the Court that the claims in that case just weren't ripe yet.

Mr. Utrecht: --Correct.

Justice O'Connor: And I don't... I didn't understand it to set up parallel systems of factual determinations.

Mr. Utrecht: It clearly set up parallel systems of litigation.

It did not discuss the question of what happens in the second litigation, but I think that this Court in England decided the proper solution to a situation where the Federal law requires--

Justice O'Connor: Well, England was an abstention case and had to deal with the effect of 28 U.S. Code 1738, the Full Faith and Credit Act.

But I didn't think that the England case just totally destroyed the notion of full faith and credit--

Mr. Utrecht: --The England case--

Justice O'Connor: --as... as applied section 1738.

Mr. Utrecht: --The England case held that when you're required to do two separate litigations, the first in State court and the second in Federal court as a result of Pullman abstention, that in the second case there would be no factual or legal issues that were decided in the State court that would be preclusive in deciding the Federal claims--

Justice Breyer: My--

Justice O'Connor: This is not a... a Pullman abstention case here.

Mr. Utrecht: --As it comes to this Court, it is not a Pullman abstention case.

Justice O'Connor: No.

Mr. Utrecht: It is a case where Williamson County has held that before you can bring your Federal takings claim, you must first go to State court and obtain a determination of whether you're entitled to compensation.

Chief Justice Rehnquist: I don't think that Williamson County ever contemplated that you would have to take your case all the way to the supreme court of the State.

Now, it may be that you had no choice once you got into the State court.

Mr. Utrecht: I think that's correct, Mr. Chief Justice.

The Williamson County case says that you have to go to State court and use the State procedures available for State compensation.

You cannot do that without going through the appellate procedure provided by the State courts--

Chief Justice Rehnquist: Do you think Williamson County by its terms spoke of going to State court and... rather than just a State administrative proceeding?

Mr. Utrecht: --As... as I read the Williamson County opinion, it says that you have to use the State procedures that are available to obtain compensation.

And the State procedures in California are an inverse condemnation claim under State law, i.e., a State compensation claim, which, as I read Williamson County... and I think all the other practitioners of takings law read Williamson County... means that you have to go to State court and ask for compensation before you can proceed to Federal court.

Now, it is possible that a State could have an administrative procedure instead of a judicial procedure in order to decide takings claim... rather, to decide State compensation claims.

If there were such an administrative procedure for obtaining State compensation, then that perhaps is what Williamson County envisioned that you would follow.

But I think Williamson County says whatever procedure is provided by the State, you have to exhaust that and obtain a denial from the State of your right to compensation before you can proceed to Federal court.

Justice Scalia: If you... if you disagreed with the resolution of an issue by the State court, which issue would be determinative of your Federal claim, if we hold against you here?

Do you think you would have a right to appeal that State court... State supreme court resolution of that issue to this Court?

Mr. Utrecht: No.

Justice Scalia: What... what strikes me as strange about this... this system is... is not leaving it to the State courts to make these decisions.

That's perfectly fine.

We do that all the time.

But these are decisions that are going to be conclusive on... on a Federal claim, and yet there's no way to... to appeal from the State supreme court here.

Mr. Utrecht: I think that's exactly the problem.

That was the problem we faced when the California Supreme Court did not decide our Federal claims.

I think because they only decided our State claims, we were not able to seek certiorari on the merits from the State supreme court decision, and then I think the procedure contemplated by this Court in Williamson County was that you could return to Federal court with your Federal claim once the State compensation claim--

Chief Justice Rehnquist: Didn't you seek to reserve the Federal question in the... in the State court litigation?

Mr. Utrecht: --We did reserve the Federal question in the State court litigation.

I'd like to reserve the balance of my time.

Argument of Seth P. Waxman

Chief Justice Rehnquist: Very well, Mr. Utrecht.

Mr. Waxman.

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

The respondents had a full and fair opportunity to litigate every issue relevant to their Federal claims.

When they came to Federal court, they agreed that, with one exception, all of the relevant issues, both the ultimate issue of a reasonable relationship and all of the predicate issues that we recited, as Justice Ginsburg noted, at pages 10 and 11 of our brief, had already been litigated.

They said that they... there was one difference, which is that they claimed that under the Fifth Amendment, the level of scrutiny under a substantially advances claim, which is what they were litigating, was the Nollan/Dolan test of rough proportionality, not the more deferential standard of review that the California Supreme Court applied in its decision.

And as to that issue, they received a full litigation and adjudication on the merits in the courts below.

They petitioned this Court on that substantive question.

Chief Justice Rehnquist: You say the courts below.

Are you talking about the California State courts or the Ninth Circuit?

Mr. Waxman: Mr. Chief Justice, here I was referring to the district court and the Ninth Circuit following the California Supreme Court's decision.

They came to the courts and said there's one thing that's different.

There's one element that's different, and that is Nollan and Dolan.

Heightened scrutiny should apply to a financial exaction of this sort.

The California Supreme Court disagreed under California law.

We want to litigate that issue here, and they did.

The district court ruled against them on the merits.

The Ninth Circuit ruled against them on the merits.

They petitioned this Court in question 2.

This Court denied review.

In all other respects, their claims... their case under their Federal claims, which were not claim-precluded, were, as the district court found, quote, based on the exact same facts and circumstances argued before the State courts.

Now, they... their case here boils down... and it's quite clear from their reply brief, and Mr. Utrecht has reaffirmed it... to an argument that this Court's 1963 decision in England ought to be extended to the Williamson County context.

Now, I believe that England is distinguishable... highly distinguishable from the facts or the circumstances of a Williamson County remand for any number of reasons that I can explain.

But ultimately my point is this.

England is fatal to them.

If England were extended to this circumstance, they would lose, and that is because in England, the Court was entirely clear that as to the State law issue that the Supreme Court said should be presented to the Louisiana courts first for determination, there was no doubt that issue preclusion was going to apply to that.

The question was whether or not principles of preclusion would bar them from coming back to Federal court otherwise.

In other words, in England, the question... there was a challenge by chiropractors to a State law that said chiropractors have to go to medical school or something like that.

A Federal complaint was raised under 1983, saying that violates our Fourteenth Amendment rights.

That's wrong.

The Supreme Court said, well, wait a minute.

We're not sure that the Louisiana law covers chiropractors, and if it doesn't, we can avoid the Federal constitutional question.

So we're going to, in effect, certify to the Louisiana courts the question, the State law question, whether chiropractors are covered.

Now--

Chief Justice Rehnquist: Well, I mean, they didn't really certify it.

Mr. Waxman: --No.

They used... they... they abstained under the Pullman doctrine which, as this Court has explained, is a procedure that is akin to the certification process where States use it.

But in any event, no one... when... no one would have thought for a moment that having gone to litigate that State law issue in State court, if they had lost, England... the chiropractors could come back and say, okay, we think that we shouldn't have to comply with this law for two reasons: one, because we're not covered by the law even though the Louisiana courts thought so; and two, if we were, the Fourteenth Amendment would prohibit it.

They... the question on which you granted review is limited to those issues, and there is a fair question on the record in this case whether any of those issues are really before the Court now.

But as to those issues, for which Williamson County requires that a party resort first to State procedures, whether issue preclusion applies, and the... the extension of England by analogy to this would dictate the answer yes.

It may not apply if... if you extend England to all other types of issues that a party may litigate along with their Williamson County ripening exercise.

But the very determination that Federal law requires them to obtain under State law, prior to stating a ripe Federal constitutional claim, of course, gets issue preclusion.

Now, the question was asked--

Justice O'Connor: Do you think it's open to us to reconsider aspects of Williamson County in this case?

Mr. Waxman: --I don't think... well, I would have to take a very deep breath before I told the Court that it was not open to the Court to reconsider just about anything that touched on it.

I think it would be--

Justice O'Connor: It... frankly, it isn't clear to me that the Court ever contemplated just cutting off any determination in Federal court of takings claims in the way that it seems to work out by application of Williamson County.

Mr. Waxman: --Let me explain why I think it would be imprudent for the Court to resolve it and then explain why I think it's fair to say that the Court didn't consider one way or the other principles of preclusion in application of the Full Faith and Credit Act in Williamson County.

Justice O'Connor: Well, it's clear we didn't.

So now we're faced with the consequences of that, and it looks to me like the lower courts have run pretty far with Williamson County.

So what's a takings claimant supposed to do?

Mr. Waxman: Well, I think it would be imprudent to decide... I... I think that the Court will have to elaborate on the Williamson County requirement and how the procedures work.

I hope, after all the preparation for this argument, I'll be able to participate in some way in that debate because it's a really interesting question.

But it's not presented here because even if you were to reconsider Williamson County, even if you were to overrule it, it wouldn't affect the outcome here.

We know two things are true in this case, whatever Williamson County means doesn't mean or shouldn't mean.

Every issue relevant to the Federal constitutional claims was fully and fairly litigated in this case, and we also know that under--

Chief Justice Rehnquist: Well, now, wait a minute.

You don't mean that the Fifth Amendment question was fully and fairly litigated in the Supreme Court of California.

Mr. Waxman: --No.

The Supreme Court of California said that it was not deciding the Federal... the Fifth Amendment Federal constitutional question.

But they... they concede that all of the issues that make up the... the Federal constitutional question were fully and fairly litigated in the California courts except the question of whether the Fifth Amendment, as opposed to the California takings provision, is entitled to--

Chief Justice Rehnquist: Well, what--

Mr. Waxman: --to Nollan and Dolan.

And that was litigated here.

Chief Justice Rehnquist: --What preclusion law do you apply?

The Ninth Circuit apparently applied Oregon preclusion law.

Mr. Waxman: The... it's... the Full Faith and Credit Act requires that you... requires that you apply the preclusion law of the State that rendered the judgment to which--

Chief Justice Rehnquist: Which would be California.

Mr. Waxman: --Which would be California.

And I do think, with respect, Mr. Chief Justice, that the California Supreme Court... I'm sorry... the Ninth Circuit made clear that it was applying California preclusion law.

It cited the California Supreme... a... California authorities, and it correctly recited the elements of the California preclusion law in this regard.

It did make reference to its prior determination in Dodd v. Hood River, which was an Oregon case, in which the Ninth Circuit decided that an England reservation in the Williamson County context was effective with respect to claim preclusion but not issue preclusion.

And in that respect... and this I think goes back to Justice O'Connor's question about, you know, what... what could we have been thinking or not thinking in Williamson County... the... the Dodd case provides a pretty good example.

At the time this Court decided Williamson County, many, probably most States did not have a substantive takings jurisprudence that was akin to the Federal standard.

For example, California itself, New York didn't provide compensation for regulatory takings at all.

In those States, there would be no question of either claim or issue preclusion because in the course of deciding whether or not compensation was due under State law, there would be few, if any, common issues decided.

Now, as the Ninth Circuit explained in Dodd v. Hood River, Oregon recognizes... in the context of regulatory takings, recognizes an Agins type claim, that is where you are completely denied all economic value to your... I'm sorry... a Lucas claim, but they don't recognize the Penn Central standard.

They don't provide compensation unless you are denied all economic value.

Justice Stevens: Mr. Waxman, can I ask you this question?

Supposing the California court had decided the Federal... the Federal Fifth Amendment question or in the... the England supposing the Louisiana State court had decided the Fourteenth Amendment question, would there be issue preclusion on that issue in... in that... in that sequence?

Mr. Waxman: Issue preclusion or claim preclusion?

Justice Stevens: Either one.

Mr. Waxman: I think the answer is there... if England... if the England decision were extended to the Williamson County context, there would not be claim preclusion.

We think it shouldn't be extended, and therefore if they litigated both their State claim and their Federal claim in State court, we think they would be barred both by issue and claim preclusion.

Justice Scalia: Of course, they could have come up here, though.

I mean, maybe that was their mistake in not making their Federal claim in the California court.

The California court would have denied their State claim, presumably denied their Federal claim, and... and both could have come up here I suppose.

Or... or would the California's... would California's determination of the State questions preclude a separate determination of the Federal questions?

Mr. Waxman: I... I don't... I don't think so, Justice Scalia.

I think it was certainly open to them and the... the Ninth Circuit, in its first opinion, made clear that it was open to them, when they went... when they did their Williamson County ripening, to also litigate the Federal constitutional question.

And in that instance, if they lost in the California courts, of course, they could have petitioned.

They couldn't... if they lost on the State constitution, the court would have had to reach the Federal constitutional question as well.

But I think, Justice Scalia, more to your point about what actually happened here, I think that a very good argument... I... I don't think that there's really much doubt that if they had petitioned for certiorari from the California Supreme Court decision, you could easily have granted review under Zacchini and Michigan v. Long and Ruiz because the California Supreme Court said, to be sure we are deciding only the State constitutional question.

We are not ruling on the Fifth Amendment.

But they made very clear that, whatever congruent means... they made very clear that they looked to this Court's statements and expositions about the meaning of the Fifth Amendment to construe the claims the same.

And as this Court said in Ohio v. Reiner, I think 2 years ago, when a State court's interpretation of State law has been influenced by an accompanying interpretation of Federal law, we may review.

And in fact, if you think about it, think of almost every takings case that you've decided since Williamson County.

With the exception of the Tahoe compact cases, they are all from State court decisions.

Lucas, Palazzolo, First English, Nolan and Dollan, Yee, Pennell, McDonald, San Diego, they are all--

Justice Kennedy: Monterey... Monterey Dunes was from the United States district court.

Mr. Waxman: --Yes, because that was a case... that's the other one that I was thinking of this morning.

That was a case that was filed in the district court and litigated in the district court.

And it raises a real anomaly about whether or not this case even really presents the question on which you granted review because their... the theory that they have pursued in State court and at this round in Federal court is that there is a takings violation under both the State and the Federal Constitution under the so-called substantially advances prong.

Their complaints allege a Penn Central violation, but their briefs in the lower court... in the lower Federal courts in this proceeding and in the State courts don't discuss Penn Central at all, as the California Supreme Court in footnote 14 of its opinion explained.

So if this is just a substantially advances claim, it raises the question, number one, whether in the context of legislation, there is a substantially advances prong in the Fifth Amendment, a question that you're... you're asked... that you are presumably addressing in Lingle v. Chevron.

If there is, it raises the separate question posed by this Court's decision in Yee whether that is a claim for compensation.

In other words, what this Court said in Yee is when you challenge, under the Fifth Amendment, legislation on the grounds that it doesn't substantially advance a legitimate government objective, this Court said, that's not a claim for compensation.

That is a claim that the ordinance be struck down and not applied.

And that's what they're litigating here.

Now, they have... and so the question is if it's not a claim for compensation, is it subject to Williamson County ripening?

Why should you have to go to State court?

So there are a lot of this... the Conference of State Chief Justices have filed an amicus brief in support actually of us in this case, saying we don't see that the facts of this case present the question on which you granted review.

I think it's fairer to say it's not clear because the petitioners did challenge this ordinance not only on its face, but as applied.

And although the district court below found that it wasn't a real as-applied challenge because they couldn't in any meaningful way distinguish themselves from the other 500 residential hotels in San Francisco, all of whom are concededly subject to the hotel conversion ordinance.

At least I suppose in theory, there is some claim for compensation for the temporary period in which they were subject to the hotel conversion ordinance.

So I... I don't know.

I... you granted cert in the case.

We'd like to get the... the question answered, but I think the reason this long disquisition, Justice Kennedy, about Del Monte Dunes is in Del Monte Dunes, it was a substantially advance claim, and I think it was thought that there was no need to engage in Williamson County ripening.

Justice Souter: Let's take a... may I... may I, in effect, approach it with a simpler example, which... which is not this case, but I... I just want to know how... how the... the systems work together.

Let's assume that, in fact, a... a Lucas kind of claim had been involved, and the... the State courts said we understand Lucas.

We're applying Lucas.

And in point of fact, following the Lucas standard, there are plenty of uses that are still left on this land, so that there's no taking under... under Lucas.

And let's assume that they... they go through the State system.

They lose.

They don't petition here for cert. Instead, they go into the... the district court with a Fifth Amendment claim.

Is it open to them in the district court to make this argument?

Don't apply issue preclusion to our Lucas claim.

The Lucas... to... to the... to the determinations, the reasonable use determination in... in Lucas.

Don't do it because although the State court purported to be applying Lucas, it really was not.

It was not following the Lucas standard.

It was applying something much more favorable to the State.

And therefore, any determination on that issue should not get preclusion here.

We ought to be able to litigate de novo even though, on the face of it, we seemed to have litigated the Lucas issue and the State court decided it.

Could they make that argument?

And... and if it were sound, would... would preclusion principles give way?

Mr. Waxman: At most... I mean, they could certainly make the argument.

At most, preclusion would give way on the ultimate Lucas question, not all of the subsidiary issues that were resolved en route to that determination, issues akin to the ones that we recited at pages 10 and 11 of our brief.

That is, if the district... if the State court finds, you know, that the property is in such and such a place and on such and such a year, this thing happened or that the ordinance, as it applied, had this effect or that effect, there certainly would be no possible argument that issue preclusion wouldn't apply because they... those were necessary determinations and they had a full and fair opportunity to determine it.

As to the ultimate issue, this would be... the Full Faith and Credit Act directs the Federal court to ask what would the law of California say about this.

If they tried to then bring their Federal constitutional Lucas theory in State court, would issue preclusion or claim preclusion principles bar a second bite at the litigation apple?

The answer ordinarily... and you've asked me to assume that the tests that they have... they purport to be stating the Federal standard.

Ordinarily the answer would be no if the argument simply is they made a mistake.

I mean, that's... that's what happens in issue preclusion.

That's what in Allen v. McCurry and... and all of the cases in which this Court has applied full faith and credit, Kremer and... and... I'm forgetting the names of the other cases.

The argument was, yes, they thought they were adjudicating rights under the Fourth Amendment, but they were wrong, and issue preclusion shouldn't apply.

I'm... I'm qualifying my answer a little bit because I do think that if you came to Federal court and said, look, this was a sham or they... they... their analysis was so skewed that it can't fairly be said that they were really applying the Federal standard, something like, you know, the... the AEDPA standard now that... that you get review if it's an... not just an incorrect determination, but a wholly unreasonable application of law or fact.

Then I think you would look and see, well, would a State court say, well, that's right.

I mean, if your allegation is that they were so far off the reservation that it really wasn't a determination of that issue, I think you get a new review.

I mean, I do think--

Justice Kennedy: Well, was there an allegation--

Justice Souter: I guess in the--

Justice Kennedy: --at any point here... was there an allegation at any point here that the State procedures were inadequate to protect property rights?

Mr. Waxman: --No, to the contrary.

Not only... there's no Pullman issue presented in this case, but the procedural posture of this case demonstrates, if anything, a full-throated appeal to the State courts.

Justice Kennedy: Well--

Mr. Waxman: They--

Justice Kennedy: Well, it's not so much that weren't appellate procedures, but that the procedures and the variance procedures and... and a multiplicity of agencies here were just so complex that it amounted to an... inadequate remedies to protect against a taking.

Mr. Waxman: --There have been absolutely no such allegations made in this case.

And I think a... I think that the San Remo would have to concede that although there was a plethora of litigation in the State courts and in the lower Federal courts about the zoning determinations and whether a conditional use permit was or wasn't required, the... the hotel conversion ordinance, the ordinance that requires the payment of this in lieu fee, applies across the board to all residential hotels based... wherever they're located in the city, whether they're in a historic district or not and whether they have to be rezoned or not.

It was a simple, straightforward question about whether an ordinance that says if you run a residential hotel or you have residential rooms that you have certified as of the date the ordinance was enacted and you want to change them permanently to full-time tourist use, you have to bring an equivalent number of units on line or you have to pay an in lieu fee to the city's building fund.

And they made a challenge, like many people have, that substantively that violates the Federal and State takings clause.

That is a taking of private property without just compensation.

But it applies to all the residential hotels in the city wherever they're located, regardless of whether they need variances or... or anything like that.

Now, in this case they went first to the Superior Court in San Francisco and they filed an administrative mandamus claim challenging the zoning determination that was made in their case because they're in a historic district.

And at the same time, they went to the Federal court and they raised all of their takings claims with respect to the ordinance and the zoning issues.

They got a preliminary injunction in Federal court which was then... but then lost a summary... they had summary judgment issued against them on all the substantive... all the claims in their case.

When they came to the Ninth Circuit, they asked the Ninth Circuit to abstain under Pullman because they had this municipal law question pending in the superior court.

It had been pending for 5 years, and that might somehow obviate or change the constitutional question.

And they then went to... they... the... the Ninth Circuit noted that it was rather unusual for the plaintiff to be invoking Pullman abstention and certainly to be doing so for the first time on appeal after losing in the district court, but nonetheless, the Ninth Circuit said fine.

And they then went to State court, and they pressed not only their pending municipal law question, but they also made their takings claims under Penn Central and under the substantially advance prong both as applied and both facial under the State constitution.

And they received a full and fair hearing on those claims in the superior court, in the court of appeal where they won, and in the California Supreme Court where they ultimately lost 4 to 3.

There... I don't believe there is any argument made or available in this case that there was a denial of a full and fair opportunity to litigate those issues as to which preclusion is required.

Justice Ginsburg: But they said there was no litigation because it was just decided.

They didn't plead enough to state a claim for relief.

Mr. Waxman: Well, the... the California Supreme Court decision makes clear at page 113a of the petition appendix that it decided the takings claims, the substantially advance claims, on a demurrer and that they decided it, therefore, based on the factual allegations of the complaint, matters subject to judicial notice, of which there were many, and facts and circumstances that were not disputed.

I mean, it... there's no such thing, I don't believe, as the resolution of a legal claim in which no issues are decided.

There were plenty of issues decided in this case.

Justice Souter: --Decided but not litigated.

I mean, the... the problem is that... that claim preclusion normally assumes that the issue is, in fact, litigated.

Mr. Waxman: Well--

Justice Souter: And his... he's arguing it was not.

Mr. Waxman: --The... the issue of whether or not the hotel... whether or not the... San Francisco's hotel conversion ordinance was reasonably related to the city's objective was litigated with a vengeance.

It was litigated to the point of dozens, if not hundreds of pages in the State court.

The State court... the State courts made a number of subsidiary findings leading to their conclusion that, both on its face and as applied, the hotel conversion ordinance was reasonably related to the city's legitimate objective of retaining low-cost rental housing for the elderly, the disabled, and the poor.

Justice Souter: Tell me how that statement that you just made, fully litigated, squares with the fact that... I thought you said a moment ago it was decided on a demurrer.

Mr. Waxman: It's--

Justice Souter: I'm... I'm confused here.

Mr. Waxman: --It's the application of law to fact.

What the Court decided... this Court said, I think in Yee--

Justice Souter: But you're... you're saying that the facts were... were independently developed before the demurrer was filed and granted?

Mr. Waxman: --Yes.

The... the courts were asked to take judicial notice of a number of things.

They--

Justice Souter: So it was not decided simply on pleadings.

Mr. Waxman: --No.

Justice Souter: Okay.

Mr. Waxman: I mean, what the court--

Chief Justice Rehnquist: A demurrer--

Mr. Waxman: --I'm sorry.

Chief Justice Rehnquist: --A demurrer is decided on the pleadings, isn't it?

Mr. Waxman: Well, it... what the court said... and I think this is a... what the California Supreme Court said at page... I think it was page 113a and they also reiterate this point at page 139a, footnote 12... is this is a demurrer.

So we take... we accept as true the allegations of the complaint.

Plus, we take judicial notice of all the things that the parties asked us to take notice of, which are matters of public record, of which there were many, many, many in this case, including, for example, the fact that every year from 1990... well, every year from the... from 1983 on, when they took over operation of this property, they filed with the city an annual report that listed that, A, the determination that all 62 of their rooms were for residential use and then explained... and then stated out the exact number of rooms by quarter that were, in fact, used by... for long-term residences and those that, during the summer months, were used for tourist use.

The court took judicial notice of that, as it was appropriate, en route to its decision... this is a subsidiary issue I suppose... that the conversion of this hotel to full-time tourist use would, in fact, cause a loss in the stock of available affordable housing.

That was an issue that was determined in this case.

And the ultimate question decided by the court was a mixed question.

It was the application of law to fact, as this Court explained, I think in Yee, is characteristic of substantially advances claims.

Thank you very much.

Rebuttal of Paul F. Utrecht

Chief Justice Rehnquist: Thank you, Mr. Waxman.

Mr. Utrecht, you have 4 minutes remaining.

Mr. Utrecht: Thank you, Your Honor.

There's no question that Williamson County creates problems.

The Ninth Circuit in this case did not just issue a Pullman abstention order the first time we were there.

They dismissed our as-applied claims as unripe.

It dismissed our facial claim based on economic viability as unripe.

So we're squarely within the context contemplated by Williamson County; i.e., we proceeded in State court with our State compensation claim in order to ripen the Federal claim.

The city acknowledges, as a result of that, that there's no claim preclusion.

And this Court's decision in Migra says that if there's a reason not to apply claim preclusion, there should also be a reason not to apply issue preclusion, that there should be an exception for both or an exception for neither.

In this case, in addition to acknowledging an exception for claim preclusion, Mr. Waxman also acknowledged that if the State court was, as I... my notes show, so far off the reservation, the Federal court could revisit the question.

The problem, of course, with so far off the reservation is that might be a good test for this Court to adopt, but if the city's position is correct, this Court does not have that opportunity.

This Court is stuck with whatever law the State imposes under issue preclusion.

So this Court is not free, if the city is correct, to create some special exception.

I think the only basis for finding a separate exception in this case is the one that this Court set out in England.

I see no reason that it shouldn't be extended to this circumstance.

Unless there are any questions, I have nothing further.

Chief Justice Rehnquist: Thank you, Mr. Utrecht.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Bates v. Dow Agrosciences LLC - Oral Argument

Fri, 09 Jan 2009 14:49:01 +0000

Case:

Bates v. Dow Agrosciences LLC

Media File:

03-388_20050110-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of David C. Frederick

Justice Stevens: We'll hear argument in Bates against Dow AgroSciences.

Mr. Frederick.

Mr. Frederick: Thank you, Justice Stevens, and may it please the Court:

Pesticides are economic poisons designed to kill living things.

Sometimes they do not work as designed.

For more than a century until the 1990's, courts routinely permitted farmers to bring claims against pesticide manufacturers for crop damage caused by pesticides.

In enacting amendments to FIFRA in 1972, Congress did not intend to displace those preexisting State law remedies.

The farmers here allege claims for defective design, defective manufacturing, fraud, breach of warranty, and failure to warn for a brand new product that severely damaged their peanut crops.

I'd like to start with our narrowest theories for reversal and demonstrate for three reasons why those claims survive preemption.

The defective design and manufacturing claims challenge the product's composition, not its label.

The fraud, warranty, and negligence claims involve general legal duties, not pesticide-specific requirements, and the failure to warn and fraud claims are not different from or in addition to FIFRA requirements.

Now, with respect to the first point, Dow concedes at pages 43 and 49 of its brief that defective design and manufacturing claims generally are not preempted.

That concession warrants a remand here, as this case was decided before discovery, enable the farmers to develop their claims.

Justice Ginsburg: But couldn't you make every failure to warn claim a defective design claim?

That is, they didn't warn about the effects, but those effects would not have been present if the product had been designed to assure that there wouldn't be any adverse effect on the peanut crop.

Mr. Frederick: Justice Ginsburg, the way the Restatement of Torts and Product Liability in sections 1 and 2 describe, there are basically three theories that products liability claims can proceed on: a defective design, defective manufacturing, and defective warnings.

The restatement explains that they are distinct legal theories that go to different problems that the manufacturer has caused with respect to the product.

A defective design claim asserts that the composition was inadequate and that a properly designed product could have been put on the market that would not cause the harm.

Justice O'Connor: Mr. Frederick, on the defective design claim, presumably that's based on a factual theory that Dow could have reasonably designed Strongarm to be safe for growing peanuts in high-acid soil.

Mr. Frederick: Correct.

Justice O'Connor: But doesn't that mean your client should have to put forward some evidence establishing a material issue of disputed fact on that point?

Mr. Frederick: Certainly, but here--

Justice O'Connor: And it didn't do that.

Mr. Frederick: --Well here, Your Honor, the motion for summary judgment that Dow filed was not based on the merits of the claims.

It was based on them being preempted, displaced as a matter of Federal law.

They also asserted a limitation of... of remedy provision.

But we never had discovery in this case.

The district court, after finding jurisdiction, considered Dow's motion for summary judgment on preemption and locked us out of the courthouse door before we ever had a chance to prove that a safer design for the product could have been made.

And that's where we think the court's decision below was overbroad and should be reversed.

Justice Kennedy: The... the problem I have with... with the Government's case and with the respondent's case is that... it's really the obverse of what Justice Ginsburg said.

Their problem is that they would recast everything as a warning.

Mr. Frederick: That's absolutely correct.

Justice Kennedy: Does the restatement have some specific provisions that say no matter how good the warning is, you're still entitled to proceed when there's a... I don't know... dangerous product or defective product or something?

Mr. Frederick: Yes.

Restatement sections 1 and 2 address this, and what the restatement says is that if you can show that the product could have been reformulated to be properly designed, then the existence of a warning that might go to certain of its uses would not negate a defective design claim.

The Texas Supreme Court--

Justice Kennedy: Even... even if the warning specifically covered that design defect?

Mr. Frederick: --That... that's... that's correct.

And what the restatement--

Justice Kennedy: So even if this product said, warning: may not be effective in high pH soils, that's not good enough?

Mr. Frederick: --Under the restatement rule, which Texas has adopted in the Uniroyal case, which we've cited in our brief I think at page 47, that is true because the restatement explains that there are certain warnings that could be ignored or not observed or not understood properly and that if it can be proved that a properly designed product would be on the market, there are public policy reasons why that's what we want to encourage manufacturers to do.

I mean, under--

Justice Scalia: At any cost?

I mean, what if it... you know, yes, I can... I can sell you stuff that will... that will work in high pH soil, but it's going to be three times as effective.

Do I have to sell it?

Mr. Frederick: --Well, the--

Justice Scalia: Can't I just sell it for those people who don't need it for... for high pH soil at a third the price with a warning that says, hey, by the way, don't use this in high pH soil?

It's crazy to say you can't do that.

Mr. Frederick: --Justice Scalia, to answer your question in several ways, that's a jury determination to... to ascertain the reasonableness of the alternate design that the manufacturer would be asked to... to do or to market a separate product that was separately designed for high-acid soils.

Justice Kennedy: But it's never a question of the reasonableness or the adequacy of the warning?

Mr. Frederick: I don't think it's a question of warnings in this sense, Justice Kennedy.

If you take their theory, which is that a defective design claim always collapses to a failure to warn, they can put out a defectively designed product that admittedly causes harm, and all they have to do is change the label and say, if used in these particular circumstances, it may cause harm, because that would necessitate a change to the label--

Justice Breyer: Oh, not necessarily.

It wouldn't be always either way.

I would think that if in fact you have a product and the product causes harm in a subset of cases, which you could warn against, then a jury could decide whether the unreasonableness consists of not having designed the super-safe product or the unreasonableness consists of not having had a different label.

Mr. Frederick: --And that... there are... that's why the restatement makes clear that there are distinctive theories for defect--

Justice Breyer: And you're arguing that in this case you have the first.

Mr. Frederick: --That's correct.

Justice Breyer: It seems implausible on... you know,--

Mr. Frederick: Well, we have both actually.

Justice Breyer: --because all they'd have to do is don't use it in pH soil.

Mr. Frederick: No.

We have defective warning too, and... and if I can address that as well.

The statute here prohibits in section 136q(1) any false or misleading statement in the label as to any particular.

Our position is that the 2000 label said, suitable for peanut-growing areas in all places where peanuts are grown.

That was false.

Under the statute, that is a misbranding, and that is actionable as... both as a failure to warn, as a fraud claim, and as a breach of warranty.

Now, the Medtronic majority made absolutely clear that that kind of claim is not preempted, and in fact all nine Justices agreed that when the State law claim is parallel to the Federal requirements, the existence of a State law remedy is not an additional requirement.

Justice Kennedy: So on... on that aspect of the case, you put in your pleadings that this was a violation of FIFRA.

Mr. Frederick: We don't necessarily need to say a violation of FIFRA is... so long as the requirement is the same, although we can certainly--

Justice Kennedy: Well, that's a... that's a bit different.

You were... you were asserting a moment ago I thought... please correct me if I'm wrong... that this was a violation of FIFRA because it was misbranded.

Mr. Frederick: --I--

Justice Kennedy: So it seems to me that you then have a suit under FIFRA, but I don't think that was the theory of your complaint.

Mr. Frederick: --No.

The theory of our complaint was a failure to warn both for negligence and as a defective product.

Justice Souter: But the reason for that, I take it, is that FIFRA does not... I mean, I think you agree FIFRA does not provide an independent private right of action.

Mr. Frederick: That's correct.

Justice Souter: So you've got to sue under State law, but you would... you would kind of have a slam dunk for your position, I suppose, if your pleading said, the failure to warn only to the extent that in fact the... the warning given in compliance with FIFRA was an inadequate warning.

That would... that would keep you within the... the... in effect, the... the Federal limit, and it would also make clear that you had a State law cause of action, not a Federal cause of action.

Mr. Frederick: That's correct, and because--

Justice Souter: And... and that's in effect what you're arguing.

Mr. Frederick: --Yes.

And... and because of the preliminary of this suit, Justice Kennedy, we certainly should have the opportunity to amend our complaint.

There are counterclaims that this is done at the motion for declaratory judgment.

Justice Breyer: In your view... in your... your opinion, if you were to follow that, would EPA... suppose EPA does the following.

EPA looks into this and they publish a reg that says in this case or in this subset of cases, or some kind of description that fits yours, we think that the labeling should be thus and so and we think that State tort suits will interfere with our ability to promote the uniform labeling and therefore they're preempted.

Can the EPA do that on your theory?

Mr. Frederick: Yes, it can and the... the interesting aspect of this, Justice Breyer, is that of course EPA hasn't done that.

EPA has made very clear it never tested for efficacy.

It never even gave notice and comment so that--

Justice O'Connor: Well, EPA has... has waived efficacy data requirements.

Right?

Mr. Frederick: --Yes.

Justice O'Connor: Now, is it your position that a State can pass a law requiring labels to have efficacy claims?

Mr. Frederick: They have to do it pursuant to their powers under 136v(a) which is the regulation of sale or use or under 136v(c) which says that when a State designates a particular locality requirement and a special need, it can impose a label... it can impose requirements that the manufacturer has to comply with.

Now, the EPA importantly... and this is in their regulations at 163.152... has specifically said that States have labeling authority.

The States can impose labeling requirements.

Now, there's no reason why--

Justice O'Connor: But you're not relying on that in this cause of action.

Mr. Frederick: --No, Justice... no, Justice O'Connor, except to the extent that if the State can affirmatively do it through a positive regulation, their theory has to be wrong that the... that any incidental effect that induces a change to label is preempted.

That theory has to be wrong, and that's what the Fifth Circuit relied on.

Justice O'Connor: Well, does... does FIFRA require the manufacturer to say on the label what the item can be used for?

Mr. Frederick: Yes, but I want to address--

Justice O'Connor: So how... how does an express warranty claim escape preemption--

Mr. Frederick: --As the--

Justice O'Connor: --where... where Dow just says the federally mandated statement is included on my label and it's true?

Mr. Frederick: --A warranty claim, Justice O'Connor, as this Court made clear in the Cipollone case, is not a requirement under State law because it's a voluntary contractual arrangement between the parties.

The Court I think has made clear that what has to be ascertained here is does the State cause of action or the State law create a requirement.

That's not true in the warranty case because FIFRA doesn't speak to requirements in... as to warranties.

It speaks to requirements in other ways.

So what Dow did here with its warranty was completely voluntary, and the fact that it breached that warranty by putting on the market a product that was not suitable for the use in all areas where peanuts are grown is a breach of a warranty that it voluntarily undertook.

Breach of that is not a requirement imposed under State law.

And that has been, I think, verified by seven Justices of this Court in the... in the Cipollone case.

Now, if I could speak to the fraud claim, it is important to understand that in both Cipollone and in a footnote in Medtronic, the Court made clear that where there are general legal duties that are not observed by the manufacturer that don't go to the specific product itself, those claims are not preempted.

Here our assertion is that Dow put on the market a... a product that was mislabeled and that they went out and told people fraudulently was suitable for their uses.

We acted in reliance on that and we suffered damages.

Those are general legal duties, not pesticide-specific ones.

And the existence of the preemption clause of 136v(b) does not displace us from the opportunity to try to prove to a court that fraud was committed here.

Now, if I could briefly address two points.

One is that the inducement to change theory should be rejected.

That was the basis on which the Fifth Circuit decided this case and it is an overly broad theory for several reasons.

First, it's not supported by the text of 136v(b) which says requirements for labeling.

It doesn't say requirements that induce a change to the label.

And that's how many of the courts have gone off track since the Cipollone decision was announced by this Court.

They have read FIFRA as saying just because the word requirements is 136v(b), thereby any State law claim that imposes a requirement that might induce a manufacturer to change the label is thereby preempted.

We think that's overly broad because it confers way too much discretion on manufacturers to decide what to put on labels, and they can claim immunity for any overly broad claim of efficacy so long as when they are sued, they can say we're induced to change the label.

Because EPA does not evaluate the specific contents with respect to efficacy or the claims that are made on... on a label, if a manufacturer makes an overly ambitious statement as to efficacy, all the manufacturer has to do under the inducement to change theory is go to court and say we would have to change the label and thereby 136v(b) preempts it.

Now, I'd also like to stress that the other side's theory creates a huge regulatory gap.

As your question, Justice O'Connor, noted, the EPA does not evaluate efficacy on the front end.

And in fact, the history behind these provisions is that EPA understood from the very beginning that common law claims would serve an important incidental regulatory effect.

If we could review the history for a moment.

Prior to the 1972 changes to FIFRA, for decades farmers had brought claims against manufacturers for design defect, for failure to warn, for the kinds of common law claims that we have asserted in this case.

It was so well established by 1972 that there was a huge section in the American Law Reports that annotated all the cases and explained what the common law duties of pesticide manufacturers were.

Yet, notwithstanding that, when Congress enacted the 1972 act, despite thousands of pages of hearings, committee reports, legislative debates, there is not one mention of any effort to displace those preexisting common law claims.

And when EPA, in discharging its responsibilities under the 1972 act, got overwhelmed by the requirement that it re-register products that were already out on the market, pursuant to the 1972 act's standards, it very promptly went to Congress and said, you should waive efficacy requirements because we simply can't do this.

Congress responded, but importantly in the administrations on both sides, EPA has always understood except until just a couple of years ago when the Solicitor General changed the position of the Government, that these kinds of incidental common law suits would have an important regulatory effect.

If we could just take the case of DDT.

For 30 years, manufacturers were sued for DDT and awarded damages until it became clear that the groundswell over the course of decades that DDT needed to be banned, and it was only at the back end that the expert agency regulators determined that in fact the product needed to be banned, but that was only after a very long history in which common law suits had provided remedies to farmers and others who were harmed by that product.

Now, in 1982, the Reagan administration's EPA expanded the efficacy waiver and it included far greater products than had been done in the Carter administration in 1979.

And in the Federal Register notice announcing that it was intending to expand that efficacy waiver, the EPA in 1982 said the reason why we think this can be done is because suits can be brought against manufacturers who put on the market ineffective products.

We cited that on page 31 of our brief.

Justice Kennedy: But do you take the position that juries can do what a State regulation cannot do, or are they much... are they on a par?

Mr. Frederick: Well, our broadest theory, Justice Kennedy, is that the word requirements in 136v(b) doesn't include common law claims at all.

Justice Kennedy: Suppose we disagree with that.

Mr. Frederick: If you disagree with that, then they would have to be the same, and that's why our point about the existence of the parallel requirements is the same.

I want to address the point of the discordance between what State juries can decide and what State regulators can decide because Dow and the Government have featured that in their case.

The Government in the Medtronic case at page 27 of its amicus brief there said there was no problem to be had with juries rendering supposedly inconsistent decisions so long as they were following one Federal standard.

The Federal standard here is clear: falsity.

Tell the truth.

That's what manufacturers are obliged to do under the statute and under the regulations.

Justice Breyer: Yes, that's their strong point.

So what is the response to that?

Because you can easily get two juries in different parts of the country to decide absolutely opposite things as to what the label should say, and in those circumstances, they say, well, they're in an impossible situation and that's why Congress passed the statute, to be sure it would be EPA and not two juries in different places.

Mr. Frederick: First, the juries... unlike a... a declaratory judgment or an injunctive type remedy, Justice Breyer, a jury for a common law damages claim is not saying what affirmatively should be on the labels.

Justice Breyer: I'm speaking practically.

And I don't have to go into all the argument.

Mr. Frederick: Sure.

Justice Breyer: You know the argument.

It's a very familiar argument.

Mr. Frederick: Sure.

The answer is that... that Congress was prepared to accept a certain level of disuniformity when it enacted 136v because it made very clear in sandwiching the preemption provision of 136b... surround... by (a) and (c) that it was prepared to allow States to depart in significant respects from what was nationally uniform.

And the way it did so was to say States can regulate sale or use and they can also impose extra requirements for special locations.

Now, what Dow did here I think illustrates the way the system is supposed to work, which is that when a problem was identified with their product in the States of Texas, Oklahoma, and New Mexico, within 7 months it petitioned the EPA to append to its national uniform label a supplemental label.

And that supplemental label says it is for distribution in those three States only and it provided 10 important changes to the label that it otherwise had as a nationally uniform label.

That's how the system is supposed to work.

If the incidental regulatory effect of jury verdicts or common law claims induces or causes some kind of change to the label, that can be done without an adverse effect to national uniformity through the supplemental labeling process.

And what Dow did here was it has its label and then it attaches the supplemental label that addresses the particular conditions that exist in the State.

And the EPA has recognized that as a perfectly appropriate and valid way to address the geographic, environmental, and climatic conditions that exist in the different regions of the country that engage in agriculture.

There's nothing that is uncertain about that if you accept the premise of the Government's argument in Medtronic, which is that juries can be properly instructed, if it came to that, so that they could follow the appropriate Federal standard.

Now, I would like to turn... sorry.

Did you... no, go ahead.

I would like to turn briefly to the... the requirements aspect of the case because we do think that, under our broadest theory, this is a different situation than Medtronic and Cipollone, and because of the important statutory indications that are in the provision 136v.

Unlike in Medtronic, there is an explicit provision that is a non-preempted provision, and that is different from Medtronic.

Where in Medtronic there was a provision that allowed the FDA to impose its own decisions as to requirements and whether or not the States should be displaced, here Congress made the determination in 136v(a) and in (c) that those kinds of requirements can be imposed.

They're in addition to what the Federal standard is.

That means that you have to look at requirements in a somewhat different way because the States have this authority that they did not have under the Medical Device Amendments.

There's a textual indicator under (b) also which refers to (a) in the sense that (b) says such State that shall issue these requirements.

Such... the meaning of it in Webster's means what has been already described... is in (a), and in (a) the States are authorized to promulgate regulations.

So we think that there is a textual basis for distinguishing the word requirements that this Court... five Justices in this Court in Medtronic said would encompass common law claims.

If there are no further questions at this time, I'd like to reserve the balance--

Justice Breyer: Let me ask one because I think you'll hear some variation of this, and you have a minute, which is the... the statute sets up a perfectly good way of keeping this branded stuff off the market.

All any complaining farmer has to do is to go to EPA and ask them to pull it, and pulling it is an unbelievable sanction.

It's like the atomic bomb on the company.

And so that's very strong.

And the only thing that leaves out is the possibility of damage remedies, but if you want your damage remedy, just go to EPA and tell them to give it to you because they can write the rule the other way that I was suggesting.

Mr. Frederick: --Well, I don't think that EPA could write a rule requiring damages to be done.

It doesn't have the statutory authority--

Justice Breyer: They would just say it doesn't preempt.

Mr. Frederick: --Well, there's no indication here that EPA can do that kind of thing.

In FIFRA, it certainly doesn't have that kind of provision.

I mean, certainly there are different ways that the statute could have been written.

That isn't the choice that Congress made.

Thank you.

Justice Stevens: Mr. Waxman.

Argument of Seth P. Waxman

Mr. Waxman: Justice Stevens, and may it please the Court:

FIFRA's preemption provision, which Congress specifically amended in 1978 to add the title uniformity, preempts by its terms, quote, requirements for labeling different from those required under FIFRA.

Justice Souter: Why... why doesn't the other amendment limit your argument?

Because Congress has also passed an amendment to the effect that unless EPA chooses to get in to the business of... of passing on efficacy, it... it need not do so.

And in fact we know it is not doing so.

Why, therefore, doesn't the uniformity argument go to those subjects that EPA does review for and why doesn't the subject of efficacy, in effect, drop out of... of the... the whole preemption claim?

Mr. Waxman: There are... there are two fundamental reasons.

The first is that it is a principal requirement of FIFRA, and has been since 1972 and remains, that a manufacturer may only sell a registered pesticide with the precise labeling to the word and font size that EPA has approved, and that requirement applies whether the wording relates to human safety, environmental protection, or efficacy.

Now, the specific amendment in 1978 was, as Mr. Frederick indicated, represented a representation by EPA to Congress... and Congress'... the... the committee report plainly indicates this... that the EPA was not saying we are no longer regulating efficacy, we are no longer concerned with efficacy.

What they said was because the Department of Agriculture and the extension services and the State universities are all involved in this and, in particular, are involved in the statutory requirement that before a manufacturer can even apply for registration, even submit a registration application, the manufacturer must do extensive, rigorous efficacy testing, which Congress has indicated correctly is very expensive--

Justice Ginsburg: But it's not monitored at all.

The... the manufacturer can say... make up reports and EPA is never going to look at them.

Mr. Waxman: --If the manufacturer makes up reports, it has committed a felony.

EPA can enforce it.

It can refer it to the Attorney General.

It's just like the--

Justice O'Connor: But maybe it isn't a labeling violation.

I mean, there are claims made here that I have trouble shoehorning into your theory.

For instance, why does a claim that Dow negligently failed to field test its product on peanuts on acid soil impose a label requirement?

Mr. Waxman: --Justice--

Justice O'Connor: I... I just don't understand that.

Mr. Waxman: --Justice O'Connor, I think... I will address the negligent testing and, of course, the design defect--

Justice O'Connor: Yes.

Mr. Waxman: --discussion that's figured so prominently in my colleague's argument.

It's very, very important to understand that unlike in Sprietsma and Medtronic and so many of the... and, for that matter, with respect to the preempted claims in Cipollone, the claims that were preempted below, we didn't file a rule 12 motion to dismiss.

We couldn't have with respect to at least one of those two claims.

We filed a motion for summary judgment that said with respect to... let me take design defect first.

With respect to design defect, it is possible under Texas State law to state a claim for products liability under defective design without impeaching the labeling.

And there is a brief filed in this case by Dean Powers, the University of Texas Law School, for the... the Texas Chemistry Council who's an expert on Texas tort law, and he goes through the Texas torts in detail to show why they are all preempted and all invalid under independent and adequate State grounds.

But what we did is we didn't move to dismiss.

We filed a motion for summary judgment, and in that motion for summary judgment, we pointed the respondents in this case to this Court's decision in Celotex v. Catrett, and we said, in effect, we know that you can allege a design defect claim without impeaching the labeling, but we think that what you are complaining about does impeach the labeling.

Therefore, show us what you have.

Now, under rule 56, they had two alternatives.

They could have filed an affidavit or a request under rule 56(f), as this Court referenced in Anderson v. Liberty Lobby, and said, hey, we don't know how this was made.

We don't know how this was tested.

We don't know how this was manufactured.

We're entitled to discovery, and district courts recognize that all the time.

What they did--

Justice O'Connor: And they didn't do that?

Mr. Waxman: --They did not do that, and what they did was to submit affidavits and documentary evidence, including expert affidavits.

Justice Stevens: Mr.... Mr. Waxman, you said they didn't file a motion to dismiss.

I thought you brought the lawsuit.

Mr. Waxman: We brought the lawsuit and we--

Justice Stevens: But then they couldn't file--

Mr. Waxman: --No, no, no.

I said we didn't file a motion to dismiss--

Justice Stevens: --You didn't file a motion to dismiss your own complaint?

Mr. Waxman: --No, no.

Their counterclaims.

Justice Stevens: Oh, okay.

Mr. Waxman: In other words, this wasn't decided... Mr. Frederick's reply brief talks over and over and over again about how this was decided on the pleadings, and you know, there was no discovery allowed.

Under rule 56, they could have asked for discovery when we basically said, okay, let's show our hands.

We got two jacks.

What do you got?

And what their expert said and what their response said was if the 2001 amended label had been on it, we wouldn't have been injured.

Now, rule 56(c) says that when you oppose a summary judgment motion with affidavit evidence, the burden is on the adverse... the adverse party must by affidavits, or otherwise provided in this rule, set forth specific facts showing that there is a genuine issue for trial, and they didn't do that.

Now, the classic design defect... let me... let me give you an example.

Justice O'Connor: Well, let's just try to boil it down a little bit for my purposes.

Do you concede that there could be a claim based on no testing--

Mr. Waxman: Well--

Justice O'Connor: --that there could be a claim based on design defect, that there could be a claim saying there were off-label oral statements made that amounted to fraud or misleading--

Mr. Waxman: --I'll take them in your precise order.

Justice O'Connor: --Okay.

Mr. Waxman: Under Texas law... and the court of appeals opinion, the Grinnell opinion cited by the court of appeals opinion, says this, as does Dean Powers.

Under Texas law, negligent testing is not an independent tort.

It is of necessity a subset of inadequate warnings.

It is an element of a... the tort... the claim of product defect related to warnings.

And so it is not possible under Texas law, settled Texas law.

Other States are different, but Texas in its sovereign capacity has chosen to make claims of negligent testing an element of the tort of defective product by failure to warn, and that--

Justice Ginsburg: And the way you proceeded in this case, you made it clear that it would be impossible for the Texas court itself to weigh in on this because you jumped the gun.

They wanted to proceed in Texas court, and then we would have known what Texas law was on these subjects.

You said, no, we want to be in the Federal forum.

Mr. Waxman: --We want... as the... as the Fifth Circuit found and the district court found, we filed a declaratory judgment in Texas after we received their demand letters because we wanted this to be adjudicated in a single forum, which the Texas venue rules would not have allowed, and we... we actually filed this in Lubbock, Texas, which is the geographic center of where these 29 farmers operate.

Now, with respect to defective design, yes, under Texas law if they had a... they have to allege and they have to prove that there is a safer alternative design for this product, which they never even introduced one quantum of evidence about.

But--

Justice Stevens: It seems to me you're... you're arguing the merits of the tort claims rather than the preemption issue.

Mr. Waxman: --Well, what we said was your claims are preempted if they impeach the labeling that we are required by Federal law to use.

Justice O'Connor: But they now say they don't.

They ought to be able to proceed on those claims.

What do we do with that?

Mr. Waxman: Well, what this... what... what happens under rule 56--

Justice O'Connor: And also the... also the claims of false, misleading statements outside the label.

Mr. Waxman: --Yes.

I'm going to get to the false and misleading statements outside the labeling in a minute, but just to finish the design defect point, they filed a complaint... a counterclaim which had as a count this was defectively designed.

It is possible under Texas law to prove that something is defectively designed.

If they had come in and said, but we filed a motion for summary judgment that says here's our evidence and we don't think that you can satisfy... that you are, in fact, complaining about a defective design--

Justice Stevens: But if they did allege a defective design claim under Texas law, would that have been preempted?

Mr. Waxman: --No.

If... if they had said, look, the problem with this, which as footnote 9 of our brief indicates, it's not a--

Justice Stevens: It seems to me your argument is not whether there's preemption.

It's whether there's a State cause of... State law cause of action.

Mr. Waxman: --No, no, no.

It's... it's both.

With respect to defective design, what we said is, your claim is preempted because you aren't going to go to the jury on defective design without impeaching the label.

If we're wrong, prove it in response to our summary judgment submission.

Justice Souter: But you can--

Justice Scalia: Is that their burden?

Mr. Waxman: It is--

Justice Scalia: Is that their burden or is your burden to show--

Mr. Waxman: --It is... it is absolutely their burden in... as the responding party to a motion for summary judgment, to show that there are material facts that are either in dispute or there are material facts that would allow them to go to the jury.

Justice Souter: --But on your theory there is no material fact, it seems to me, because your... you say they cannot make good on that claim without impeaching the label.

Mr. Waxman: And they--

Justice Souter: Every time they sue on the... on the ground that... let's say, that... that the... the actual use was inconsistent with what the label described, you could say, gee, if their theory is correct, we'd have to change our label to say that what's on the label now is in fact not properly descriptive of the product.

So it's not a... a question of needing more fact.

On your theory, whenever they, in effect, sue on the basis of what you say, your response is going to be, as a matter of law, well, if they're correct, we'd have to say something else.

That impeaches the label.

Therefore, preemption.

Mr. Waxman: --That is exactly right.

What they could have done in response to our motion for summary judgment is to say this product assertedly harms... when it is applied before the seed is planted, will harm the product it is... the plant that it's supposed to protect if the soil pH is too high.

They could have easily have come back and said if they had a... a design defect claim that didn't impeach the label to say you should have... there was a way to manufacture this product.

You could have it in pellet form rather than in the soluble form or if the problem was the alkalinity of the soil, there is a way to design this so that it is dissolved in a more acidic solution.

The classic case, which is referenced in the NRDC brief, which has many, many examples of true design defect claims that don't impeach labels, is a case involving rat poison.

It's a case called Banks v. ICI America.

It's a Georgia Supreme Court--

Justice Breyer: So you quite clearly have both.

I understand that.

Let me ask you a question about the... the preemption point because what I think they're saying is go read the red brief, your brief, pages 6 and 7, and there you see a statutory requirement and you see regulatory requirements, regulation.

And I think one of their claims is we are arguing that that statutory requirement, without any change in the regulatory, that... that it was violated.

These are false.

They're misbranded.

So we are not imposing a requirement different from or in addition to the requirement of Federal law.

We are enforcing a requirement that is the same as the requirement of Federal law, and if, by the way, the EPA were to think that tort suits in those circumstances in practice are too disuniform, let them promulgate a regulation to that effect.

But they haven't.

Now, what... what is the answer to that argument?

Mr. Waxman: --The answer is threefold.

Number one, a challenge to a... the wording of a statement on the label on the grounds that it is false and misleading is... does impose a requirement different than Federal law, not the requirement that... that labeling not be false and misleading, but the fundamental requirement that a... unless and until the EPA says otherwise, the manufacturer can only sell this product with the precise labeling that EPA has approved.

And it... if you look at page 63a--

Justice Ginsburg: Mr. Waxman, do I--

Mr. Waxman: --of the joint appendix--

Justice Ginsburg: --Mr. Waxman, do I take it from what you have just said that there is no... even though the statute prohibits misbranding, that there is no way that that can be privately enforced, that misbranding is something strictly for EPA to deal with, that the statute has a prohibition on misbranding?

I can see the argument that all we're doing is enforcing the provision that says no misbranding.

So is EPA the only the player in the misbranding league--

Mr. Waxman: --Insofar as labeling is concerned, the answer is yes, and that's because the statute... the statute has many, many instances in which it makes it clear that in service of the objective of a nationally uniform label, the expert agency that approves and dictates the language of that label be the one to decide what is or isn't--

Justice Stevens: Mr. Waxman--

Justice Breyer: Where does it say that?

Justice Stevens: --can I ask you one question here?

Justice Breyer: Because you were just going to point out where it says that--

Justice Stevens: It goes to your--

Justice Breyer: --which I think is--

Justice Stevens: --Excuse me.

Justice Breyer: --I'm sorry.

Justice Stevens: Just let me ask this one question. Supposing the label says, this product contains vitamin A.

Period.

And it doesn't contain vitamin A, and they prove that in court.

And you say you would have to change the label.

I suggest you could change the product by putting vitamin A in it.

Mr. Waxman: --Well, you can... you're--

Justice Stevens: Why isn't that an answer to the misbranding?

You change the product not necessarily the label.

Mr. Waxman: --Because the difference between a... that would be a... a manufacturing defect, which are cases that have been decided--

Justice Stevens: It would be a false statement in the label.

The label happened to be false, a misrepresentation in it.

Mr. Waxman: --If... if the... if it contains... I'm sorry.

Was it vitamin A?

If it contains vitamin A because that's what the manufacturer intended and that's what the manufacturer produced--

Justice Stevens: No.

The manufacturer knew it didn't contain it.

He falsely put that in the statement--

Mr. Waxman: --Oh, I see.

Said that--

Justice Stevens: --and... and it's... it's a misbranded, false statement.

Now, does he have to change the label or could he change the product?

Mr. Waxman: --Well, I believe that you have... you would have to... I mean, would it be efficacious with vitamin A?

I don't know, but if it... if it requires a change in the label, it has to be done by EPA because the manufacturer commits a Federal law violation if it sells the product with any different label.

If you... if I can just direct the Court's attention to--

Justice Stevens: No, but I'm suggesting he could sell the product with the same label if he just changed the product to correct the misstatement.

Mr. Waxman: --Well, the test, as the Fifth Circuit stated, Justice Stevens, is whether a judgment against Dow... I'm quoting.

Quote: whether a judgment against Dow would cause it to need to alter the Strongarm label.

I'm... and that's the... those are... that's the test that was applied here and is always applied.

Justice Souter: Okay, but why--

Mr. Waxman: That is, does the State law cause of action... is it premised on a State law duty that there... that different labeling be used--

Justice Souter: --No, but neither--

Mr. Waxman: --that is, a little bit different than what Federal law requires.

Justice Souter: --The problem that I think some of... several of us are having is that both the... as I understand it, the Fifth Circuit test in your argument draws no distinction between the two following kinds of situations.

Situation A: there's something that the manufacturer should have told you, should have put on the label, but the manufacturer didn't.

Situation B: the manufacturer puts something on the label which in fact is wrong and in Justice Stevens' example is in fact false and it causes harm.

It makes sense, it seems to me, for preemption purposes to say if the person who sues sues simply on the ground that I bought it in reliance on the label, the label was false, I should get damages for... for whatever harm was caused, that situation should be dealt with for preemption purposes differently from the situation in which the... the manufacturer made no false statement.

He simply should have said more.

And if... if you don't distinguish between those two situations, then the... the prohibition against mislabeling means absolutely nothing because... because it can never be enforced, in effect, except with respect to some prospective user.

It can never be enforced with respect to the actual user.

Mr. Waxman: Justice Souter, that is a choice that Congress could have made.

It is plainly not a choice that Congress did make because it applied the preemption provision to requirements that are either in addition to or different than.

And whether a label is assertedly misleading because it fails to include something on the EPA-approved label or--

Justice Scalia: --Requirements for labeling or packaging--

Mr. Waxman: --Yes.

Justice Scalia: --that are in addition to or different.

Mr. Waxman: Yes.

I... I--

Justice Scalia: Requirements for labeling or packaging.

Mr. Waxman: --Yes, and... and if it... if the--

Justice Souter: Yes, and the argument that's being made is that we ought to... we ought to read... we ought to read the limitation, which Justice Scalia has just described, with respect to labeling and packaging, in a relatively narrow way to allow the suit to go forward and, therefore, we ought to make a distinction between the two kinds of situations.

Mr. Waxman: --The allegation in this suit... the claims in this suit... and I... I see that my time has expired.

Justice Stevens: Ms. Blatt.

Argument of Lisa Schiavo Blatt

Ms Blatt: Thank you, Justice Stevens, and may it please the Court:

It would entirely destroy the uniformity contemplated by... contemplated by the statute if the EPA-approved and mandated label were subject to jury-by-jury invalidation based on a jury's determination of whether a label is false.

Justice Scalia: This is a new position for the Government, isn't it?

Ms Blatt: Yes, we have--

Justice Scalia: You used to take the opposite position.

Ms Blatt: --That's right.

Justice Scalia: And we're dealing here, as... nobody has mentioned it, but there... there's a clear statement rule for preemption, isn't there?

Doesn't the preemption of... of traditional State powers have to be clear in the statute?

Ms Blatt: We... we think subsection (b) is unambiguous in preempting any statement.

Justice Scalia: It's... it's ambiguous enough that the Government... the... the chief beneficiary of the... of the supposed preemption didn't see it.

It used to come out the other way.

How can you possibly say it's clear?

Ms Blatt: Well, the agency is allowed to change its position and we realize--

Justice Scalia: I understand.

It's... it's welcome to change it, but it... it's one thing to change it.

It's another thing to change it and come in to say that the question is clear.

Ms Blatt: --Well, we think that... we realize that our position was inconsistent with not only the Court's decision in Cipollone and in Medtronic that recognizes that requirement extends to common law duties.

But more importantly, a system where a jury by jury on the same facts could come up with completely different reasons why a label is false--

Justice Breyer: All right.

So... so if you have one administration thinking the one thing and the other thinking the other thing, why isn't the answer that the agency can promulgate the reg it wants?

And therefore if the reg... if the agency comes to that conclusion, let them promulgate that reg.

And if a different one thinks it can work with the tort suits, let them promulgate that reg.

Ms Blatt: --Well, unlike Medtronic where preemption occurred by virtue of the FDA's regulation, under FIFRA there's preemption by virtue of the statute itself.

And I just want to give one--

Justice Souter: Yes, but why isn't there a big difference, for purposes of your argument, between the Medtronic situation and this one for the simple reason in this case you've got a statute that authorizes EPA to do absolutely nothing on the subject of efficacy?

And EPA does nothing on the subject of efficacy.

Ms Blatt: --Well, that's just not true, with all due respect.

I mean, they... the... we don't verify the accuracy of the efficacy labeling, but the requirement, both in the preemption provision and in the requirement to use the EPA label, clearly extends to efficacy.

And you can have disuniform context whether it's safety or efficacy.

Imagine a label that directs a product to be mixed for 20 minutes.

One jury could find the label was false because the product should have only been mixed for 10 minutes.

Another jury in the same courthouse could find the label was false because the product should have been mixed for at least 30 minutes.

And this case is another really good example.

Now the petitioners are saying the label says that the soil only should be a 7.2 level.

Their expert says--

Justice Stevens: Yes, but the remedy to that would not necessarily be to change the label.

It might be to change the quality of the product that requires how much time for mixing.

Ms Blatt: --And we think it's critical that our position is that this statute only operates in the area of labeling, and it preempts only those State labeling requirements--

Justice Stevens: What do you say about my vitamin A example?

Ms Blatt: --I think your vitamin A example is an excellent example of a non-preempted claim.

If a manufacturer says that this is a pesticide and he puts Clorox in the bottle, the plaintiff wants to get to the jury on the theory that a reasonable manufacturer would not have used Clorox.

He would have used the pesticide.

If the argument, on the other hand, is Clorox was fine.

I don't have a problem with Clorox, I just wish I would have been given a warning, but that's not the way a plaintiff would frame his complaint.

We think it's critical that our theory is if the plaintiff's theory of recovery is necessarily... necessarily predicated on a requirement that the manufacturer used a label different than the EPA-approved label the Federal law required it use--

Justice O'Connor: Well, let's... let's be specific here.

If it's a failure to test, if it's a... a design defect requirement, if it's an off-labeled, false misrepresentation, why are they preempted?

Ms Blatt: --On the face of the complaint, we agree that they're not preempted.

Our only position is by the time it got to summary judgment, the courts decided that they had no evidence on what would have been non-preempted claims.

If another farmer wants to bring an expert that says Strongarm can be manufactured--

Justice Stevens: But then do you endorse the theory of the court of appeals in this case?

Ms Blatt: --Well, we think the court of appeals took it claim by claim and read the affidavit... or at least the district court did--

Justice Stevens: And you think just mere inducement to change a label is sufficient to create preemption.

Ms Blatt: --Mere inducement only to the extent that that's a shorthand way of saying the label was... necessarily had to be required.

Let me give you an example.

Justice Scalia: If Congress wanted that, surely it could have stated it more clearly than simply saying the State shall not impose or continue in effect any requirements for labeling or packaging.

A tort suit because of... of mislabeling is not a requirement for labeling or packaging.

Ms Blatt: If the--

Justice Scalia: And if Congress wanted to say that, they could have said it.

Ms Blatt: --Well, I think they did say if a common law duty is necessarily premised on the requirement that the manufacturer used a different label than Federal law required him to use.

In this case, the common law duty of a failure to warn is saying the manufacturer should have put something on--

Justice Scalia: You have... you have that provision which talks about requirements for labeling or packaging in conjunction with another provision that authorizes the State to regulate the sale or use.

Ms Blatt: --The--

Justice Scalia: I mean, you... you have to make sense of the two.

Ms Blatt: --Right, and that's--

Justice Scalia: And it seems to me that means the State can impose certain requirements upon the seller to the consumer--

Ms Blatt: --Not on labeling.

Justice Scalia, every day--

Justice Scalia: --Well, every change... virtually every change... virtually everyone... if... if you believe the respondent's theory, virtually any State regulation of the substance of the sale will require a change in the label.

Ms Blatt: --That's just not true.

Every day States and localities around the country are imposing use restrictions.

They tell... they tell applicators and users when and where to apply the pesticide and what types of--

Justice Scalia: Sale... sale or use is what it says.

Ms Blatt: --That's right and they--

Justice Scalia: Say... if they regulate the sale or use.

Ms Blatt: --That's right, and they do that every day without imposing labeling requirements.

Imagine... imagine--

Justice Scalia: Give me sale examples.

Ms Blatt: --They require the manufacturer, in order to sell the product, be registered with the State, and they can impose whatever sale restrictions they want--

Justice Kennedy: And can they--

Ms Blatt: --that don't go to the labeling.

Justice Kennedy: --Can they do the same thing by... through jury verdicts?

Ms Blatt: Absolutely not.

It would be bad enough if a manufacturer had to shop his label around 50 States and had each--

Justice Kennedy: So now... so now you say a State can do something by regulation that a jury can't do.

Ms Blatt: --No.

A State absolutely cannot impose labeling restrictions on a manufacturer.

Justice Kennedy: I'm asking if the... if juries can do anything that the... are... are prohibited under your view from doing anything that the State could do by a State regulation.

Ms Blatt: Right.

I'm sorry.

Right.

Under... it... the alternative theory would give more power to the jury to impose labeling restrictions than the State, and we don't think the State can do it.

And it would be far more pernicious if a label were subject to jury-by-jury invalidation.

No one would read the label, much less understand it.

Justice Ginsburg: Ms. Blatt, there's a brief in this case... there's a brief in this case that just shows hundreds, if not thousands, of crop damage claims.

And your theory is that with this ambiguous provision Congress wiped all that out.

It's hard to believe.

Ms Blatt: No.

Congress just wiped out labeling and only those labeling requirements--

Justice Ginsburg: But everything becomes... but every... every time... my crop was stunted.

Okay.

You have to change the label so you can't bring that suit.

Ms Blatt: --Justice Ginsburg, it's just not true.

The lower courts well understand this distinction, and they... they let go all the time claims as not preempted that are true manufacturing defect or true design defect claims.

This is not a complete immunity.

This is a narrowly targeted one as to labeling.

There is a famous example of the Benlate--

Justice Ginsburg: He says their claim is... is very simple.

You didn't tell us that using this in our kind of soil would stunt the crop and wouldn't kill the weeds.

Ms Blatt: --Right.

Justice Ginsburg: But you're saying that kind of claim can't be brought anymore.

Ms Blatt: It can be brought if there's State law and evidence to support the State law that doesn't attack the labeling.

And our--

Justice Ginsburg: I've described a set of facts which your position I think you have to say affects the label.

The... the farmer says I bought this bottle.

It said okay for all peanuts.

My crop grew and it was stunted and the weeds stayed alive.

Ms Blatt: --If they found an expert that said if you had manufactured this differently or if you had designed it differently and there was evidence to support that, our view is that those claims aren't preempted.

And the alternative to let juries--

Justice Ginsburg: No.

I'm not giving you that case.

I'm giving you exactly what happened.

Ms Blatt: --This case... they didn't have any evidence other than saying that the label was inaccurate.

But the next... another jury could rely on the respondent's evidence to say the label was inaccurate because it works better on high pH soil, and another jury could say, well, we need a margin of safety and the label should have said 6.8 instead of 7.0, which is what their expert says.

And you can have this time and time again with how often the pesticide has to be applied, when it has to be applied.

And to... and the... the whole point of section 136v(b) was to have reliability--

Justice Ginsburg: Was that happening when EPA took the opposite view?

Was there this tremendous disparity with juries going every which way--

Ms Blatt: --Well, there's... there's been preemption at least since the late '80's, and I don't know of cases where juries... or the theory for recovery was invalidating the label.

There are lots of cases that are true manufacturing defect claims, and I direct your attention to the Benlate where the manufacturer contaminated his product.

If I'm the plaintiff, my theory... the theory was you mismanufactured this product.

A reasonable manufacturer would have taken practices to prevent contamination, and it destroyed a lot of crops and EPA actually took enforcement action against that manufacturer.

The rat poison example... a 9-year-old kid died of rat poisoning because it tasted like a candy bar.

The theory of recovery was all the manufacturer had to do was put a bittering agent in it that would have made the kid throw up and the rats still would have loved the poisoning.

That has nothing to do with the label.

Justice Stevens: Thank you, Ms. Blatt.

You have about 4 minutes.

Rebuttal of David C. Frederick

Mr. Frederick: I just have two points to make.

With respect to the summary judgment posture of the case, the way this unfolded was that on one day the district court decided the motion for jurisdiction, that it had jurisdiction.

On the very next day, Dow rushed into court with its motion for summary judgment.

And what Mr. Waxman cites as the Celotex invocation merely says that on... on this point it is neither unfair nor premature to require defendants to produce evidence in support of their claims now as the Celotex trilogy requires.

I'm reading from their motion for summary judgment.

That was filed before the counterclaims.

The only thing that they knew about was the deceptive trade practices notice letter that the farmers had filed pursuant to State law.

So they didn't know what our claims were, and they were requiring or saying that the district court could throw us out of court without giving us any opportunity to file counterclaims, much less try to develop evidence that would prove them.

Now, with respect to the disuniformity point, when Congress amended the statute in 1988 to add the word uniformity, it said in that public law that it was a technical amendment.

We don't know why Congress put the word uniformity in.

The legislative history is barren.

It just says this is a technical amendment.

It didn't change the substantive provisions that empowered States to impose regulations that would have the effect of disuniformity.

Now, at the end of the day, we've got claims that have been brought historically since the late 19th century.

Until EPA had a sudden change of heart, there were decades in which juries made these decisions with respect to these kinds of products, and those preemption decisions really didn't take hold until after this Court announced Cipollone in 1992.

And it was only at that point that the courts began to have preemption, but for the previous 2 decades, juries routinely decided these kinds of cases.

The sky did not fall.

EPA didn't come in and say there's labeling disuniformity as a result of this.

There simply were no problems.

But what did happen was that the farmers who used products were able to get compensation when pesticides damaged their crops.

Thank you.

Justice Stevens: The case is submitted.

Attribution:

The Oyez Project

Featured:

Gonzales v. Raich - Oral Argument

Fri, 09 Jan 2009 14:49:04 +0000

Case:

Gonzales v. Raich

Media File:

03-1454_20041129-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Paul D. Clement

Justice Stevens: We will now hear argument in Ashcroft against Raich.

General Clement.

Mr. Clement: Justice Stevens, and may it please the Court:

Through the Controlled Substances Act, Congress has comprehensively regulated the national market in drugs with the potential for abuse.

And with respect to Schedule I substances, like marijuana, that have both a high potential for abuse and no currently accepted medical use in treatment, Congress categorically prohibits interstate trafficking outside the narrow and carefully controlled confines of federally approved research programs.

Justice O'Connor: Well, Mr. Clement, the... I think it is reasonably clear that Congress spoke very broadly in the Act, and the question, for me, turns on whether Lopez and Morrison dictate some concerns with its application in this context.

Mr. Clement: Well, with respect, Justice O'Connor, I don't think either Lopez or Morrison casts any doubt on the constitutionality of the Controlled Substances Act, and I think, in particular, that's because the decisions in Lopez and Morrison cited, with approval, cases like Darby and Wickard, and preserved those cases.

And, of course, the concurring opinion of Justice Kennedy did so, as well.

Justice O'Connor: Well, but in Wickard, of course, you had a wheat grower, a small farmer, and his wheat did, in part, go in the national market.

You don't have that here.

As I understand it, if California's law applies, then none of this home-grown or medical-use marijuana will be on any interstate market.

And it is in the area of something traditionally regulated by states.

So how do you distinguish Morrison?

And how do you distinguish Lopez?

Mr. Clement: Well, Justice O'Connor, let me first say that I think it might be a bit optimistic to think that none of the marijuana that's produced consistent with California law would be diverted into the national market for marijuana.

And, of course, the Controlled Substances Act is concerned, at almost every step of the Act, with a concern about diversion, both of lawful substances from medical to non-medical uses and from controlled substances under Schedule I into the national market.

Justice O'Connor: Well, in looking at this broad challenge, do we have to assume that the State of California will enforce its law?

I mean, if it turns out that it isn't and that marijuana is getting in the interstate market, that might be a different thing.

Mr. Clement: Well, with respect, Justice O'Connor, on this record, I don't think that there's any reason to assume that California is going to have some sort of almost unnatural ability to keep one part of a fungible national drug market separate.

And I think Congress, here, made important findings that you've alluded to, not just that there's a national market, not just that the intrastate and the interstate markets are linked, but that drugs are fungible, and that because drugs are fungible, it's simply not feasible, in Congress' words, to regulate and separately focus on only drugs that have traveled on interstate commerce.

Justice Stevens: Well, General Clement, what if we were to assume... I'm not saying this is... that the District Court could find that there is a narrow segment of the market in which they could prevent diversions, and they had... say they made such findings.

Would we have to disregard them, or say they were irrelevant?

Mr. Clement: I think you would say they were relevant, Justice Stevens, and that's because--

Justice Stevens: But then why do you need to rely on the possibility of diversion?

Mr. Clement: --Well, because I think it is a reality, in responding to Justice O'Connor's question... I think that in... obviously, in all of these commerce--

Justice Stevens: Yeah, but in my hypothesis, it's a nonexistent reality.

Mr. Clement: --Well, in your hypothetical... and if I could turn to that... I still think the analysis would not turn on whether or not the truth of the supposition that diversion could be prevented, because this Court, in a series of cases, including Darby, Wickard, Wirtz, and Perez, has made clear that the relevant focal point for analysis is not the individual plaintiff's activities and whether they have a substantial effect on interstate commerce, but whether the class of activities that Congress has decided to regulate has such a substantial effect.

And, in this case, there's no question that the overall production, distribution, and possession of marijuana and other Schedule I substances has a profound effect on interstate commerce.

Justice Scalia: But it's not an interstate commerce that you want to foster.

I mean, in these other... in these other cases, Congress presumably wanted to foster interstate commerce in wheat, in Wickard v. Filburn.

Congress doesn't want interstate commerce in marijuana.

And it seems rather ironic to appeal to the fact that home-grown marijuana would reduce the interstate commerce that you don't want to occur in order to regulate it.

I mean, you know, doesn't that strike you as strange?

Mr. Clement: Well, no, it doesn't, Justice Scalia, but let me respond in two ways.

First of all, I think it's been clear, at least since the lottery case, that Congress' authority to regulate interstate commerce includes the authority to prohibit items traveling in interstate commerce and to declare something contraband in interstate commerce.

Justice Scalia: Absolutely.

Mr. Clement: And I would suggest that it is a perfectly rational exercise of Congress' judgement to treat marijuana and other Schedule I substances not just as contraband in interstate commerce, but as contraband simpliciter, as contraband for all purposes.

Justice Scalia: But that's quite a different rational than Wickard v. Filburn.

I mean, it seems to me you're not... you're not appealing to the fact that it has a substantial impact on interstate commerce.

You're appealing to the fact that the power which Congress has to prohibit the use of goods carried in interstate commerce cannot effectively be implemented without this law.

Mr. Clement: Well, I think there's some truth to that, Justice Scalia, but let me say this.

I think what I'm saying is, I'm taking the rational that this Court accepted in Wickard, and I'm applying it to a different regulatory regime.

Here, Congress--

Justice Stevens: But you're applying it to the opposite kind of regulatory... you're applying it to a regulatory regime in which the government wants to prohibit this subject... substances from being sold or... in interstate commerce.

And if you just follow the litter... the letter of this law, this marijuana won't get into interstate commerce.

In fact, it would reduce the demand for marijuana, because it would supply these local users and they wouldn't have to go into the interstate market.

Mr. Clement: --Well, with respect, Justice Stevens, if you took a look at the Controlled Substances Act, itself, and read it literally, you'd assume that there was absolutely no market, period, in Schedule I substances.

But the reality is, there's a $10.5 billion market... illegal market, albeit... but market in marijuana in the United States, on an annual basis.

So--

Justice Stevens: But to the extent that this statute has any impact, it will reduce the purchase in the interstate market and confine these to locally grown marijuana.

Mr. Clement: --Well, first of all, Justice Stevens, that's only true if there will be no diversion, to get back to--

Justice Stevens: Then I'm assuming... my hypothetical is that California could pass a law that would prevent diversions from occurring.

Mr. Clement: --Well, in the same way that the Federal Government has had trouble stamping out the marijuana market entirely, I think California is going to have parallel problems in absolutely preventing diversion.

But just--

Justice Kennedy: I suppose some... one answer to that case is the Perez case, with loan sharking.

Mr. Clement: Oh, absolutely, Justice Kennedy.

And, in that context, what this Court said is, even though it was focused on what was going to be an... both in that case and generally, an interstate activity, Congress did not have to just look at the particular plaintiff's effect on interstate commerce, but, rather, the effect of the entire class of activities.

And if I could--

Justice Ginsburg: But, as Justice O'Connor brought out earlier, all those cases... Wickard, Perez... they all involved a commercial enterprise.

And, here, we're told this is different, because nobody is buying anything, nobody is selling anything.

Mr. Clement: --Well, with respect, Justice Ginsburg, I think the whole point of the Wickard case was to extend rationales that it applied previously to commerce to activity that the Court described as economic, but not commercial.

And I think the production and distribution and possession of marijuana is economic in the same way that the production of wheat was in the Wickard case.

Justice Souter: But you're... no, I was going to... your whole point, I take it, is that the two particular patients in this case are simply... simply cannot be taken, for our purposes, as representative in the fact that they are getting the marijuana by, I think, growing it themselves or being given it.

You're saying, you cannot take that fact as a fact from which to generalize in deciding this case.

Mr. Clement: That's exactly right, Justice Souter, and that is the logic, not just of me, but of this Court's cases, in cases like Darby and Wickard and Wirtz and Perez.

And I point to the Wickard case, in particular, only because it, too, involves a non-commercial enterprise or a non-commercial production of--

Justice O'Connor: Well, I do take issue with that.

As I read the record in Wickard, it involved a small farmer.

A portion of his wheat went on the interstate market.

It also was fed to cattle, which, in turn, went on the interstate market.

He used some of it himself, but part of it was commercial.

I think Wickard can be distinguished on the facts.

Mr. Clement: --Well, Justice O'Connor, it could be... I mean, any case can be distinguished on the facts, of course, but I think what's important is, this Court, in Wickard, itself, recognized that the case was... it was only interesting because a portion of the regulated wheat involved wheat that was going to be consumed on the farm.

And--

Justice O'Connor: The other portion is a matter of xxx interstate commerce.

Mr. Clement: --Well, that's true, Justice O'Connor, but this Court, basically, in its opinion, Justice Jackson, for the Court, put aside... to one side all of the grain that was going to go in interstate commerce, since that's easy under our existing precedents.

This case is only interesting, he said, because it involves wheat that's going to be consumed on the farm.

And he specifically talked about both the wheat that would be fed to the animals, but also the wheat that would be consumed by the family.

And what he said is, the intended disposition of the particular wheat wasn't clear from the record of the case.

And, by that, I take him to mean that it wasn't relevant to the Court's analysis in upholding the Agricultural Adjustment Act to the wheat at issue there.

And it's important to recognize that the way the Agricultural Adjustment Act worked is, it applied to all the wheat that was grown in excess of the quota, and so it applied to the wheat that was used by the family for consumption of their own bread.

And, nonetheless, this Court upheld that as a valid Commerce Clause regulation.

And so I think, by parity of reasoning, all of the marijuana that's at issue and covered by the Controlled Substances Act, whether it's lawful under state law, whether it's involved in a market transaction or not, is fairly within the Congress' Commerce Clause--

Justice Kennedy: And is--

Mr. Clement: --authority.

Justice Kennedy: --this a harder or easier case than Wickard when we know that, in Wickard, it was lawful to buy and sell wheat, and, here, it is unlawful to buy and sell marijuana?

Mr. Clement: Well, Justice Kennedy--

Justice Kennedy: Does this make your case easier, in a sense, or--

Mr. Clement: --I think it does, Justice Kennedy, because, as I said earlier, in responding to a question from Justice Scalia, I think if you're talking about a context where Congress has the undoubted power to prohibit something in interstate commerce entirely, and has exercised that power, so it treats something as effectively contraband in interstate commerce, and then takes the complementary step, especially in light of the fungibility of the product, and says,

"We're just going to treat this as contraband simpliciter. "

I think that judgement by Congress has a very definite link to interstate commerce and its unquestioned authority to regulate interstate commerce.

And I do think there's a sense in which when Congress is regulating the price of something, there's certainly a temptation to excise out relatively small producers and for Congress to say,

"Well, we can still have effective regulation if we regulate the vast majority of production. "

But with respect to something that's unlawful to have and is... and has very significant risks precisely because it's unlawful, any little island of lawful possession of non-contraband marijuana, for example, poses a real challenge to the statutory regime.

It would also, I think, frustrate Congress' goal in promoting health.

And I think the clearest example of that is the fact that, to the extent there is anything beneficial, health-wise, in marijuana, it's THC, which has been isolated and provided in a pill form, and has been available as a Schedule III substance, called--

Justice Ginsburg: But there's--

Mr. Clement: --Marinol.

Justice Ginsburg: --but there is, in this record, a showing that, for at least one of the two plaintiffs, there were some 30-odd drugs taken, none of them worked.

This was the only one that would.

And it... Justice Souter asked you about these two plaintiffs.

The law can't be made on the basis of those two plaintiffs.

But let's suppose that you're right, generally.

If there were to be a prosecution of any of the plaintiffs in this case, would there be any defense, if there were to be a federal prosecution?

Mr. Clement: Well, Justice Ginsburg, I think we would take the position, based on our reading of the Oakland cannabis case... and, obviously, different justices on this Court read the opinion differently and had different views on the extent to which the medical-necessity defense was foreclosed by that opinion... I would imagine the Federal Government, in that case, if it took the unlikely step of bringing the prosecution in the first place, would be arguing that, on the authority of Oakland cannabis, the medical-necessity defense was not available.

But I think, in any event, what is important, at this point, is that we don't have a prosecution; we have an affirmative effort to strike down the Controlled Substances Act in an injunctive action.

And I think, in that context, certainly Justice Souter is right, that this Court's precedents make clear that one doesn't consider only the individual's conduct, but the entire class of activities that's at issue.

I think, in this regard, it's also worth emphasizing that a deeper flaw in the Respondent's argument, that California law is somehow relevant here or the fact that their conduct is lawful under California law, is that there's a mismatch between what California law makes lawful and what might be considered relevant for arguing that there's an attenuated effect on interstate commerce.

Because the California law makes the possession of marijuana for medical use lawful under state law, without regard to whether that marijuana has been involved in a cash transaction or has crossed state lines.

And so, if Respondents are right on their Commerce Clause theory, I don't see how they can be right because their conduct is lawful under state law or because their... that marijuana use is medical.

If they're right, then I think their analysis would extend to recreational use of marijuana, as well as medical use of marijuana, and would extend to every state in the nation, not just--

Justice Stevens: --Well, I think--

Mr. Clement: --those states that made it lawful.

Justice Stevens: --Doesn't it depend on how you define the "relevant class of activities"?

Is it the entire class that Congress ought to regulate, or is it a narrower class, in which the Plaintiffs contend that the statute cannot constitutionally be applied to a particular very narrowly defined class?

And is it ever permissible to define the class narrowly to escape a... the broad argument that you make?

Mr. Clement: Well, I don't think that is permissible, Justice Stevens.

I think that's what this Court's cases in Wirtz, in Darby, in Wickard--

Justice Stevens: So you're saying that this statute could never have an unconstitutional application.

Mr. Clement: --Under the Commerce Clause, I... that's exactly right, that would be our position.

It is constitutional on its face, and it... and because of that line of authority, an as-applied challenge can be brought, but the legal test that's applied in the as-applied challenge is one that considers the constitutionality of the statute as a whole--

Justice O'Connor: But, in Morrison, did the Court's opinion not say that Congress cannot justify Commerce Cause... Clause legislation by using a long but-for causal chain from the activity in question to an impact on interstate commerce?

I mean, the Court certainly made that statement.

Mr. Clement: --Oh, absolutely, Justice O'Connor, but--

Justice O'Connor: Which cuts against what you're saying.

Mr. Clement: --Well, with respect, I don't think so.

And I'd say two things about it.

One, this Court, in Morrison and Lopez, was very important to emphasize... thought it was very important to emphasize two things: one, that the activity there was non-economic in a way that differentiated it, even from Wickard; and, second, the Court also made it clear that the regulation that there... there was not essential to the effectiveness of an overall regulatory scheme.

And I think, on both points, this case is on the constitutional side of the line that separates the Lopez and the Morrison case.

Justice O'Connor: The argument on the other side is that this limited exception is a non-economic use... growing for personal use, under prescription--

Mr. Clement: I understand that... I understand that's their argument, Justice O'Connor, but I don't understand how this Court, in Lopez, could have said that Wickard involved non-economic activity if this activity is not also covered.

You're talking about--

Justice Scalia: Involved economic activity.

Mr. Clement: --I'm sorry if I misspoke.

Economic activity.

Because what you're talking about here is the possession, the manufacture, the distribution of a valuable commodity for which there is a ready... unfortunately, a ready market, albeit an illicit market.

Justice Kennedy: --If we rule for the Respondents in this case, do you think the street price of marijuana would go up or down in California?

Mr. Clement: I would be speculating, Justice Kennedy, but I think the price would go down.

And I think that what... and that, in a sense, is consistent with the government's position, which is to say, when the government thinks that something is dangerous, it tries to prohibit it.

Part of the effort of prohibiting it is going to lead to a black market, where the prohibition actually would force the price up.

And there is a sense in which this regulation, although not primarily designed as a price regulation... the Controlled Substance Act, I think, does have the effect of increasing the price for marijuana in a way that stamps down demand and limits the... and in a way that reduces demand.

And I think that's all consistent with Congress' judgement here.

And if I could return for a second to the point about Marinol, what's important there is that the process of manufacturing of Marinol, and isolating the one helpful component, does two things.

One, the manufacturing process allows there to be a safe use for one of the components in marijuana.

But it also provides an unambiguous hook for Congress to exercise its Commerce Clause authority.

And yet the overall regime of trying to get people to use more healthful substances, and not use things like crude marijuana that have harmful effects, is undermined if Congress can't also address that which is more harmful, but is distinct only because it is capable of being locally produced.

And that's exactly what crude marijuana is.

Justice Stevens: In other words, the statute is... it trumps the independent judgement of the physicians who prescribe it for the patients at issue in this case.

Mr. Clement: Well, I think, in responding to that, Justice Stevens, I would say, obviously, for purposes of federal law, the idea of medical marijuana is something of an oxymoron, because the Federal Government treats it as a Schedule I substance.

Now, notwithstanding that, some doctors may make a different judgement about a particular patient; but that's something that this Court, I think, has previously understood, that the federal regulatory regime does not allow individual patients or doctors to exempt themselves out of that regime.

Justice Stevens: Right.

Mr. Clement: I think that's the import of the Rutherford decision with Laetrile.

Justice Stevens: Do you think there could be any state of facts on which a judicial tribunal could disagree with the finding of Congress that there's no acceptable medical use?

Say they had a... say there was a judicial hearing on which they made a contrary finding.

Would we have to ignore that?

Would we have to follow the congressional finding or the judicial finding if that happened?

Mr. Clement: Well, it depends on the exact hypothetical you have in mind.

I think the... the judicial finding that I think would be appropriate, and this Court would not have to ignore in any way, is a finding by the D.C. Circuit that, in a particular case where there's a rescheduling effort before the FDA, that the underlying judgement of the FDA refusing to reschedule is invalid, arbitrary, capricious.

That's the way to go after the finding that marijuana is a Schedule I substance without a valid medical use in treatment.

This is not a situation in... and your hypothetical might respond to a different statute that raised a harder question, where Congress made such a medical finding, and then just left it there without any mechanism to adjust the finding for changing realities.

But, here, Congress made it clear that a process remains open to reschedule marijuana in a way that gets it onto Schedule II or Schedule III.

And I think it's wrong to assume that there's any inherent hostility to the substances at issue here.

I mean, the FDA, for example, rescheduled Marinol from Schedule II to Schedule III in a way that had the effect of making it easier to prescribe and more available.

But I think what's going on with the FDA is an effort to try to counterbalance the risk for abuse, the risk for diversion, with these other considerations of getting safe medicine--

Justice Ginsburg: Have there--

Mr. Clement: --available to patients--

Justice Ginsburg: --have there been any applications to change the schedule for marijuana to the FDA?

Mr. Clement: --There have been a number of those petitions that have been filed.

There was one recently rejected, I think as recently as 2001; it may be 1999.

There was also a series of, kind of, a four or five-iteration effort to change the rescheduling that culminated in a D.C. Circuit opinion in the early '90s.

So there's definitely been these efforts.

But on the current state of the... of the record, there just is not a justification for changing the schedule.

And I think both of the briefs talked a little bit about the Institute of Medicine's study about the medical efficacy of marijuana.

And I think one thing that's important to keep in mind that that study comes to a conclusion about is, whatever benefits there may be for the individual components in marijuana, that smoked... smoked marijuana itself really doesn't have any future as medicine, because... and that's true, I think, for two reasons.

One, there's something like 400 different chemical components in crude marijuana that one would smoke, and it's... it just, sort of, belies any logic that all 400 of those would be helpful.

And a big part of the process of medicine, generally, is to take raw, crude material that somebody could grow in their garden, and actually have people who do this for a living get involved in a process of synthesizing and isolating the beneficial components, and then manufacturing and making that available.

The second reason that smoked marijuana doesn't have much of a future as medicine is, as I think people understand, smoking is harmful; and that's true of tobacco, but it's also true of marijuana.

And so the idea that smoked marijuana would be an effective delivery device for medicine, I think, is also something that really doesn't have any future as medicine.

What does have a future for medicine, of course, is an effort to synthesize and isolate the beneficial component.

That's been done with Marinol.

It is true that some people have difficulty tolerating the pill form that Marinol is available in.

And there's ongoing research to try to figure out different ways to deliver that substance.

But there is, in a sense, a little bit of a... and the Institute of Medicine's study has about five pages discussing Marinol, and it makes the point that there's something of a tradeoff.

Because one of the downsides of Marinol, as opposed to marijuana, is that it takes longer to get into the bloodstream.

But that's also one of the reasons why the FDA has made a judgement that Marinol is less subject to abuse, because it takes longer to get into the drug-stream, and so it doesn't have the characteristic of street drugs that tend to be abused, which is a very quick delivery time between the taking of the substance and the time that it has an effect on the system.

Justice Souter: May I go back to your point a few minutes ago about... it was, sort of, a categoric point... you, in effect, said,

"If this argument succeeds with respect to medical use of marijuana, the next argument is going to be recreational use, and there's no real way to distinguish between them. "

Wouldn't this be a way to distinguish between them?

That in deciding what class you are going to... or what subclass you're going to consider from which to generalize, you simply ask the question,

"What good reasons are there to define a subclass this way? "

In this particular case, the good reasons to define a subclass of medical usage are the benefits... whether you accept the evidence is another thing... but the benefits which the doctors say that, under present circumstances, you can get from smoking it, as opposed to taking the synthesized drug.

There's no such argument, I would guess, in favor of recreational marijuana usage as a separate category.

And, for that reason, isn't there a... isn't there a good reason to categorize this as narrowly as the Respondents are doing here, just medical usage, without any risk of generalizing the recreational usage?

Mr. Clement: With respect, Justice Souter, I don't think that it would be a good idea for this Court to get on a path of starting to second-guess Congress' judgement about defining a class of activities--

Justice Souter: That may... oh, that may be, but it seems to me that that's a separate argument, because you're... you were arguing before that if you recognize medical usage, you don't have any way of drawing the line against private recreational usage.

And I'm suggesting that you do have a reason for drawing that line, and it's the benefit for medical usage, if you accept the evidence; whereas, there is no reason to categorize recreational usage separately, and that seems to me a category argument, rather than a respect-for-Congress argument.

Mr. Clement: --Well, Justice Souter, I have no doubt that this Court could draw a line.

I think it would find it very difficult to police that line over the broad variety of cases.

I think it would find it every bit as frustrating as policing the line in Hammer against Dagenhart that this Court abandoned in Darby.

With that, I'd like to reserve my time for rebuttal.

Justice Stevens: Mr. Barnett?

Argument of Randy E. Barnett

Mr. Barnett: Justice Stevens, and may it please the Court:

I have two points to make.

First, the class of activities involved in this case are non-economic and wholly intrastate.

Second, the federal prohibition of this class of activities it not essential... is not an essential part of a larger regulatory scheme that would be undercut unless the intrastate activity were regulated.

If you accept the government's contrary contentions on either of these two points, Ashcroft v. Raich will replace Wickard v. Filburn as the most far-reaching example of Commerce Clause authority over intrastate activity.

Justice Kennedy: Well, on your first point, can't we infer from the fact that there's an enormous market, commercial market, for any given commodity, that simple possession of that commodity is a form of participation in the market?

Mr. Barnett: It can be, or it might not be.

If you possess an item that came from the market or is going to the market, simple possession could easily be a part of the marketplace.

But if you're in possession of an item that you've made, yourself, that is disconnected from the market... it didn't come from the market and it's not going to the market--

Justice Kennedy: Well, but it's fungible.

Mr. Barnett: --That... the fungibility issue is in this case, but the... but a... the fact that a good is fungible does not make it a market good, and it does not make the possession of that good an economic activity.

Or--

Justice Scalia: Well, you know, Congress has applied this theory in other contexts.

One is the protection of endangered species.

Congress has made it unlawful to possess ivory, for example.

It doesn't matter whether you got it lawfully, or not; or eagle feathers, the mere possession of it, whether you got it through interstate commerce or not.

And Congress' reasoning is,

"We can't tell whether it came through interstate commerce or not, and to try to prove that is just beyond our ability; and, therefore, it is unlawful to possess it, period. "

Now, are those... are those laws, likewise, unconstitutional, as going beyond Congress' commerce power?

Mr. Barnett: --Not if they're an essential part of a larger regulatory scheme that would be undercut, unless those activities are reached.

Justice Scalia: Well, why is that different from this?

Mr. Barnett: Because this class of activities... because it's been isolated by the State of California, and is policed by the State of California, so that it's entirely separated from the market--

Justice Scalia: Isolated and... I understand that there are some communes that grow marijuana for the medical use of all of the members of the communes.

Mr. Barnett: --That class of activities is not before the Court.

That is actually before--

Justice Scalia: No, but it's before the Court when you... when you raise the policing of the problem by California, and saying it's not a... it's not a real problem, you brought it before the Court.

Mr. Barnett: --But that class of activities could be... could be... if this Court limits its ruling to the class of activities that is before the Court, that class--

Justice Scalia: Which is... which is what?

Mr. Barnett: --Which is--

Justice Scalia: An individual grower?

Mr. Barnett: --An individual who is growing it for her... him or herself, who has... or has a caregiver growing it for her--

Justice Scalia: Gee, what basis--

Mr. Barnett: --for--

Justice Scalia: --what basis is there to draw it that narrowly? I mean, I guess if we... we could say people whose last name begins with a Z.

You know, that would narrow the category, too.

But why does... why does that make any sense?

Mr. Barnett: --Justice Scalia, we believe it makes sense because we are talking about a classification of activities that has been identified by the State of California, and which is rational to distinguish from--

Justice Scalia: Oh, but California hasn't identified individual growers.

Communes are okay, as far as California law is concerned.

Mr. Barnett: --Well, it's not entirely clear whether communes are okay, as far as the California laws are concerned.

Justice Scalia: Why wouldn't it be?

Mr. Barnett: Because if, in fact, commercial activity is taking place, if buying and selling is taking place--

Justice Scalia: No, no, they're not buying and selling.

I mean, you can't prove they're buying and selling.

There are just a whole lot of people there, with alleged medical needs.

Justice Breyer: I mean, I don't understand. Is there any authority in the commerce cases for... an X, which is there in the middle of a state, and it doesn't move one way or the other... now, Congress' power does extend to the X if the state doesn't say something about the X.

But if the state says something about the X, then Congress' power does not extend to it.

That's hard for me to accept, because I don't see... whether it's commerce or not commerce, whether it affects something or doesn't affect something, doesn't seem to me to have much to do with whether the state separately regulates it, and I can't find any support at all for that in any case.

Mr. Barnett: --The support would come from the exception to Lopez and Morrison that the government is urging that the Court adopt, that the Congress can reach non-economic activity that's intrastate, that's wholly intrastate, if doing so is essential to a larger regulatory scheme that would be undercut if they can't reach it.

Justice Breyer: Well, here, they say... look, I take it you're using this because I was going to ask you.

You know, he grows heroin, cocaine, tomatoes that are going to have genomes in them that could, at some point, lead to tomato children that will eventually affect Boston.

You know, we can... oil that's never, in fact, being used, but we want an inventory of it, federally.

You know, I can multiply the examples--

Mr. Barnett: Well--

Justice Breyer: --and you can, too.

So you're going to get around all those examples by saying what?

Mr. Barnett: --By saying that it's all going to depend on the regulatory scheme, what the--

Justice Breyer: Yeah.

Mr. Barnett: --purpose of the--

Justice Breyer: So now what you're saying is, in a Commerce Clause case, what we're supposed to do is to start to look at the federal scheme and the state scheme and see, comparing the federal scheme and the state scheme, whether, given the state scheme, the federal scheme is really necessary to include this.

That's a task, and I'm trying to make it as complicated as I can in my question.

[Laughter]

But I see it very well.

Here is what they say.

They say that,

"By the way, a hundred-thousand people using medical marijuana in California will lead to lower marijuana prices in the nation. "

"Bad. "

"And, second, when we see medical marijuana in California, we won't know what it is. " "Everybody'll say, "Mine is medical"."

"Certificates will circulate on the black market. "

"We face a mess. "

"For both those reasons, it does have an impact. "

they say.

Now, what's your response?

Mr. Barnett: --Well, you've raised at least two different practical issues.

One is the fact... the number of people who are in the class, and the second is the ability to identify whether they properly belong in the class.

As for the number of people, we are talking about a very small number of people.

They say a hundred-thousand.

They get their figures from the National Organization from Reform of Marijuana Laws.

Our figures in our brief come from the government.

The figures show it's a very small fraction of persons that would be involved.

And their argument is basically... and the logic of your hypothetical is premised on... the more people that go into the illicit market, the better for federal drug policy, because that will drive the price up.

You have to... what we're take... we're doing is, we're taking people out of the illicit drug market, which then, under your hypothetical, would lead to a reduction... and Justice Kennedy's suggestion... would lead to a reduction in the price of the illegal market, which, the opposite would be, they're... it's good for federal policy to have more people in the illicit drug market, because that's going to drive the price up.

Justice Breyer: No, no, we don't want more people--

Mr. Barnett: Of course not.

Justice Breyer: --in the illicit drug market.

[Laughter]

Mr. Barnett: Of course not.

Justice Breyer: And we don't want low prices, either.

[Laughter]

Mr. Barnett: But the... but the... but the scheme of... but the class of activities that have been authorized by the State of California will take people out of--

Justice Breyer: So, normally I would have said, it's up to Congress to figure out how to... the way that... you have one going one way, one going the other way, and balancing those factors would be for Congress.

That's what we'd normally say.

Mr. Barnett: --Well--

Justice Breyer: And you say all that stuff is not for Congress; that's for us.

Mr. Barnett: --Well, within this exception... the threshold issue... I do want to make sure that I focus on this... the threshold issue, which is the issue that has occupied most of our time so far, is whether the activity here is economic or non-economic.

The government claims it's economic, we claim it's non-economic.

Justice Breyer: Well, what it is, is, it's non-economic, and it affects the economic.

Mr. Barnett: Right.

So the threshold issue that is... that... upon which Lopez and Morrison terms... turns is whether it's economic or non-economic.

Justice Kennedy: Well, I should have thought that regular household chores of... say, performed in an earlier time mostly by women, was classically economic... washing dishes, making bread.

And now you say growing marijuana isn't?

Mr. Barnett: If you accept the government's definition of economic, then every... then washing dishes, today, would be economic, and that--

Justice Souter: No, but even--

Mr. Barnett: --would be within the... within the power of Congress to reach.

Justice Souter: --But even if we accept your definition of economic, I don't see that it is a basis upon which we ought to make a category decision.

You say it's non-economic because one of these people is a... is a self-grower, another one is getting it from a friend for nothing.

But I don't see what reason that you have given, or any reason that you haven't given, for us to believe that, out of... now I'm going to assume, for the sake of argument, a hundred-thousand potential users... everybody is going to get it from a friend or from plants in the backyard.

Seems to me the sensible assumption is, they're going to get it on the street.

And once they get it, under California law, it's not a crime for them to have it and use it.

But they're going to get it in the street.

Why isn't that the sensible assumption?

Mr. Barnett: Well, they have an... they have a very strong incentive not to get it on the street, because getting it on the street is going to subject them to criminal prosecution, under both California and federal law, as well as the--

Justice Souter: Yeah, but the... it's also the case that approximately 10 percent of the American population is doing that every day, if I accept the figures in the government's brief, and they're not getting prosecuted.

Mr. Barnett: --But we're talking... in that case, we're talking about people who are using it for sport, for recreation.

We are talking about a class of people here who are sick people, who don't necessarily want to violate the law.

Justice Souter: And if I am a sick person, I'm going to say,

"Look, if they're not prosecuting every kid who buys, what, a nickel bag or whatever you call a small quantity today, they're not going to prosecute me, either. "

I mean, there's not going to be any incentive, it seems to me, to avoid the street market.

Mr. Barnett: The government, in their brief, asserts that the... that the possession statute that currently exists provides a deterrent effect, which is why they... which is their explanation for why they failed to enforce the possession statute that they say is so essential to the--

Justice Ginsburg: If one--

Mr. Barnett: --regulatory scheme.

Justice Ginsburg: --if one takes your view, that this is non-economic activity, so it's outside Congress' commerce power, then explain to me why, if you have someone similarly situated in a neighboring state, somebody whose doctor says,

"This person needs marijuana to live. "

but that state doesn't have a compassionate-use act... it's just as isolated... no purchase, no sale, grown at home, good friend grows it... and yet you say Congress could regulate that, if I understand your brief properly.

Mr. Barnett: Yes, Your... yes, Your Honor, because there's the... that's the second step of the analysis.

The first step of the analysis is the economic/non-economic.

If you don't... if the Court stops there, then they could also apply in these other states.

But then if the Court adopts--

Justice Ginsburg: But if you... if you buy that... so your first answer is, yes, on your first argument, it would be equally impermissible for the feds to regulate medical use anywhere.

Mr. Barnett: --Yes, Your Honor.

Justice Ginsburg: All right.

Now you're going to have some limiting--

Mr. Barnett: But a limiting principle is the one that I... was identified by the Court in Lopez in which the government is asserting that if it's an essential part of a broader regulation of economic activity to reach this activity, then it may be reached.

And the difference between states in which there is a state law enforcement that's confining the class, and that there is a discrimination between legal and non-legal use, is completely different from a practical enforcement standpoint than a state in which there is no differentiation.

Just think of the existence, for example, of identification cards, which the State of California is going to be issuing, like driver's license cards.

Justice Ginsburg: --Yeah, but it doesn't right now, and that doesn't make the scheme less valid, in your view.

Mr. Barnett: Well, because... but this is the sort of regulation... the sort of effectiveness of the regulation that will be at issue and which is, in fact... I believe the Court should be in the position of trusting the State of California to be able to administer its regime.

There is no regime in other states to trust, and, therefore, the argument that it is necessary to reach that activity, and a lot of other activity in states in which the states are not attempting to pursue the health of their citizens... the goal of preserving the health of their citizens this way, that would fall under the exception which this Court suggested in Lopez--

Justice Breyer: So this is a new framework, I take it, and it's very interesting.

And one of the things that interests me... I guess, on your framework, Lopez should have come out my way.

[Laughter]

Mr. Barnett: --Well--

Justice Breyer: Because it's essential to regulate guns in schools as part of a national gun-control regulatory scheme.

Mr. Barnett: --Justice Breyer, that's the reason why that exception has to be narrowly treated, so it doesn't reach your result.

[Laughter]

If that exception were treated as broadly as you suggested that it should be in your dissent in Morrison, then the game is up, the exception will swallow the rule, and Lopez and Morrison will be limited to their facts.

Justice Breyer: Well, I thought we didn't need to reach all that here, for the reason that the connection here, which is an enforcement-related connection and a market-related connection, is actually, I have to confess, a little more obvious and a little more close than what I had to... what I had to say in Lopez to... was the connection between guns, education, communities, and business.

So I would have thought, given the... and I believe that, you know... but, I mean... but that was far further than this, which is just direct.

Mr. Barnett: But this case is completely unlike those cases.

This case is completely isolated.

In Lopez, that gun probably did come through interstate commerce, not that I believe it should have made any difference, but it probably did.

Here, we're talking about substances that don't.

So there's just no literal connection between this class of activities and this interstate market.

Justice Scalia: Well, we didn't decide that, in Lopez, on the basis of whether the gun had come in interstate commerce.

If the statute in question had applied only to guns that had been transported in interstate commerce, the case might have come out differently.

Mr. Barnett: I... no doubt, Your... I... and I wasn't suggesting otherwise, Justice Scalia.

I'm just suggesting that, here, we have... exactly, that if there had been that interstate connection in Lopez, the case might have come out different.

There is no interstate connection whatsoever in this class of cases.

None.

The only way to make it an interstate connection is through some sort of hypothetical economic substitution effect in which somebody who's doing something over here is going to have an affect on somebody else who's doing something over there.

There is no connection.

Justice Scalia: Sounds like Wickard to me.

Mr. Barnett: Well, Wickard, Your Honor--

Justice Scalia: I always used to laugh at Wickard, but that's... that's what Wickard said.

Mr. Barnett: --Wickard--

Justice Scalia: Had he not eaten the wheat, it would have been in interstate commerce.

Mr. Barnett: --Had that case been about eating wheat, that case would never have arisen.

Justice Scalia: Well, that's what it was about, as far as the Court's analysis was concerned.

To be sure, there were a lot of... there was a lot more use of the wheat on his farm, other than just human consumption, but it seems to me the analysis of the case said,

"You take it... you take it out of the stream of commerce by growing it yourself, you make it unnecessary for your... to buy it in interstate commerce. "

Mr. Barnett: It's... the entire analysis... the entire proof that the court relied upon in Wickard was proof of the economic impact of home-consumed wheat on the farms.

And by "home-consumed", it did not mean eating at the family... at the family table; it meant feeding to your livestock and then putting it... your livestock--

Justice Scalia: Strange phrase, to mean "feeding to livestock"?

Mr. Barnett: --But the--

Justice Scalia: "Home-consumed" is feed it to your pig?

Mr. Barnett: --But, yes, that's exactly what--

Justice Scalia: I don't think so.

Mr. Barnett: --that's exactly what that general term... how that general term was used in this case.

Justice Breyer: But what the Court said, I take it... and I have quoted a lot of the language there... it says that the wheat farmer's consumption of home-grown wheat, not the part that went in... quote,

"though it may not be regarded as commerce-- "

Mr. Barnett: Yes, Your Honor.

Justice Breyer: --end quote, still can be regulated, quote, "whatever its nature", so long as, quote,

"it exerts a substantial economic effect on interstate commerce. "

Now, that's the language, and I take it that Justice Scalia is exactly right, I thought, from that language, it's about the analysis, home-grown wheat, which is not economic, having an effect on something that is.

Mr. Barnett: With all respect--

Justice Breyer: Which is not commerce.

Sorry, not commerce.

Mr. Barnett: --With all respect, what... that's... I was about to make that--

Justice Breyer: Well, the Commerce Clause speaks in terms of commerce.

Mr. Barnett: --Right.

Right.

What the Court was using here was the narrower... the traditional definition of "commerce" that Justice Thomas has been urging this Court to adopt.

And they were saying that,

"We are not going to limit ourselves to that narrow definition of "commerce". "

It would include, for example, agriculture and production.

That's all going to be reachable, even though it's not commerce, in the traditional sense.

But what we would call it today, and I believe what the Court correctly called it, in Lopez, was "economic activity".

Production is economic activity.

Manufacturing is economic activity.

But... it's not commerce, but it's economic activity that can be reached.

And that is the activity... that's not only the activity that Farmer Filburn was engaged in; that was the activity that the statute was aimed at.

The statute--

Justice Scalia: Well, why is this not economic activity, if you use the term in that broad sense?

This marijuana that is grown, just like the wheat that was grown, in Wickard, since it's grown on the farm, doesn't have to be bought elsewhere, and that makes it an economic activity.

Mr. Barnett: --What made it an economic activity in Wickard was the fact that it was part of commercial enterprise, that it was being used on the farm... not in interstate commerce, but part of the commercial enterprise of the farm.

Justice Scalia: Again, I don't think that's... that faithfully represents what the opinion said.

I think the opinion covered... including the amount that he consumed himself, and his family consumed.

Mr. Barnett: The... look, I... for whatever it's worth, it's worth remembering that the statute exempted small commercial farms.

People who had backyard gardens weren't even included within the regulatory regime.

The regulatory regime was about regulating or stopping or restricting the supply of wheat that got into the market, or that could have--

Justice Scalia: Did the opinion make a point of that?

Mr. Barnett: --Pardon me?

Justice Scalia: Did the opinion make a point of that?

Mr. Barnett: It... it was mentioned in the opinion.

It was not... it was not a major point of this opinion.

But--

Justice Scalia: I don't think it was a point of the Court's analysis at all.

Mr. Barnett: --This--

Justice Scalia: Could I... could I--

Justice Stevens: Let me ask this question.

What is your view with respect to the impact of the activities concerned in this case on the interstate market for marijuana?

Is it your view that it will have no impact, that it will increase the interstate demand, or decrease the interstate demand?

So there are three alternatives.

Which is the one we should follow?

Mr. Barnett: --Can I pick "trivial impact"?

[Laughter]

Justice Stevens: No, but if it... "trivial impact", is it a trivial impact that enhances the price of marijuana or decreases the price of marijuana, in your view?

Mr. Barnett: The only effect it could have on the price would be a slight trivial reduction, if it has any effect at all, because it's going to withdraw users from the illicit drug market.

And to the extent that they are now in the illicit drug market... and we don't know whether they are or not--

Justice Stevens: Well, that would reduce demand and increase price, it seems to me.

It's the other way around.

Mr. Barnett: --Well, it would reduce demand and reduce prices, I think.

But--

Justice Stevens: If you reduce demand, you reduce prices?

Are you sure?

Mr. Barnett: --Yes.

[Laughter]

Justice Stevens: Oh, you're right.

You're right.

Okay.

Yeah.

Justice Souter: Your whole argument for triviality, though, goes... your whole argument for triviality, though, goes back to your disagreement with the government about how many people are involved, because I take it you accept the assumption that the more people who are involved... if there are millions and millions, it is unlikely that this licensed activity is going to be without an effect on the market.

So the whole argument boils down to how many people are going to be involved.

You don't accept the government's 100,000-dollar figure.

Let me ask you a question that would... that would get to, maybe, a different number, and that is, Do you know how many people there are in California who are undergoing chemotherapy at any given time?

Mr. Barnett: I do not know the answer to that.

Justice Souter: Isn't that number going to be indicative of the demand for marijuana?

Mr. Barnett: It could be, Your Honor, but that also illustrates--

Justice Souter: But if you... if you accept that, then there's nothing implausible about the government's hundred-thousand number, is there?

Mr. Barnett: --But whatever... I don't know, because I don't know the number of people using chemotherapy.

But whatever the number--

Justice Souter: How many people are there in California?

What's the population?

Justice Kennedy: Thirty-four million.

Mr. Barnett: --Thank you, Justice Kennedy.

Justice Souter: Lots... lots--

[Laughter]

--lots and lots.

They... a hundred-thousand cancer patients undergoing chemotherapy does not seem like an implausible number.

And, in fact, if that number is a plausible one today, its plausibility reflects, among other things, the fact that there is a controversy as to whether California's law, in fact, is enforceable, or not.

And the reason... there is reason to assume that... if we ruled your way, that that number would go up.

So, if you accept that line of argument, then your argument, that the effect, whatever it may be, is going to be trivial, seems to me unsupportable.

Am I missing something?

Mr. Barnett: Well, two things.

First of all, whatever number it is, it's going to be confined to people who are sick, who are sick enough to use this.

That is not an infinitely expandable number, the way, for example, recreational activity is, where lots of people could just decide to do it.

We're talking about people who qualify, on a physician's recommendation, for this particular activity.

That will limit the number.

But the amount of the people... the effect on commerce only matters if the Wickard v. Filburn aggregation principle applies to the class of activities in this case, and it does not apply to the class of activities in this case if they are non-economic, as we assert that they are.

Justice Souter: Well... but that is circular reasoning, because the whole... your whole argument that it's non-economic is based on the claim that there are... the numbers are so few... the number of people involved, from what you could generalize, are so few that it would not be reasonable to infer an effect on the market.

If there would be a large market effect, it makes no more sense to call this non-economic than Filburn's use, non-economic.

Mr. Barnett: Lopez and Morrison stand for the proposition that activities that simply have an effect on the market are not necessary... that does not make them economic.

This Court rejected that proposition, that just because an activity has an effect... an economic effect makes the activity, itself, economic.

It adopted a principle that's less than--

Justice Scalia: --Remote, remote, remote economic effect.

Justice Souter: It was inference upon inference upon inference.

That's not what we're talking about here.

Mr. Barnett: --But just... just have it... just... whether an activity is economic, you have to look to the activity, itself, and an economic activity is one that's associated with sale, exchange, barter, the production of things for sale and exchange, barter.

This whole Court's jurisprudence since The New Deal has been premised on the ability to tell the difference between economic activity, on the one hand, and personal liberty, on the other.

Justice Souter: Your whole jurisprudence in this case is premised on the assumption that we have got to identify the entire range of potential effect based on the particular character of two individuals in their... in their supply of marijuana.

And the whole point of this argument is that that does not seem to be a realistic premise on which to base constitutional law.

Mr. Barnett: The premise of our... the premise of our economic claim is the nature of the activity involved, not necessarily its effect, but the kind of activity it is.

The idea... for example, you... prostitution is an economic activity.

Marital relations is not an economic activity.

We could be talking about virtually the same act.

And there is a market overhang for... from private sexual relations to prostitution, but we don't say that because there is a market for prostitution, that, therefore, everything that is not in that market is economic.

We look at the activities, and we--

Justice Breyer: I'd like to ask you one question about the activity--

Mr. Barnett: --Yes.

Justice Breyer: --which was brought up before, and I just... I've never understood this.

I'm not an expert.

I don't honestly know, if I really think about it, despite all the papers and so forth, whether it's true that medical marijuana is helpful to people in ways that pills are not.

I really don't know.

So I would have thought that the people, like your clients, who have a strong view about it, would go to the FDA, and they would say to the FDA,

"FDA, take this off the list. "

"You must take it off the list if it has an accepted medical use and it isn't lacking in safety. "

The FDA will say yes or it will say no.

If it says yes, they win.

If they say no, they can come right into court and say, "That's an abuse of discretion".

The Court says yes or no.

If it says yes, they win.

If it says no, it must be because it wasn't an abuse of discretion, in which case, I, as a judge, and probably as a person, would think it isn't true that marijuana has some kind of special use.

So that would seem to me to be the obvious way to get what they want.

That seems to me to be relevant to the correct characterization.

And while the FDA can make mistakes, I guess medicine by regulation is better than medicine by referendum.

Mr. Barnett: Well--

Justice Breyer: So that's... I just want to know why.

Mr. Barnett: --Well, Your Honor, first of all, that whole process wouldn't dictate what the power of Congress is to reach this activity--

Justice Breyer: That's all true, but as long as that hasn't been done, don't I have to take this case on the assumption that there is no such thing as medical marijuana that's special and necessary?

Mr. Barnett: --I would--

Justice Breyer: If has been done, maybe I shouldn't make it.

Mr. Barnett: --I would simply ask Your Honor to read the amicus brief by Rick Doblin, in which it describes the government's obstruction of scientific research that would establish the safety and efficacy of cannabis by denying supplies of cannabis... of medical... of cannabis for medical experimentation.

And then I'd ask Your Honor to read the Institute for Medicine's report, that both the government and I... and we have relied upon in our briefs.

There has been no impeachment of this report by the National Academy of Sciences on the medical effect.

And what they say is that the... that what information we have is that cannabis does have a substantial medical effect.

Smoked cannabis does carry with it harms associated with it, as the... as General Clement correctly pointed out.

It does carry with it these ancillary harms.

But when people are sick and people are suffering and people are dying, they may be willing to run the risk of these long-term harms in order to get the immediate relief, the life-saving relief that cannabis has demonstrably been able to provide.

I'd just ask Your Honor to look at that, which is in the record.

Justice Kennedy: Are prescriptions, under California law, limited only to those people with life-threatening illnesses?

Mr. Barnett: They are limited to a list of illnesses that are in the statute.

Justice Ginsburg: Some of the illnesses--

Mr. Barnett: Some of which are life-threatening and some of which are not, Your Honor.

Justice Ginsburg: --In one... in one plaintiff's case, I think, there isn't a life-threatening--

Mr. Barnett: That's correct, Your Honor.

She has... she has severe back spasms and pain that cannot be controlled by conventional medicines.

She's a law-abiding citizen.

This goes back to the issue of what the... incentives there are that are created by this.

This is a law-abiding woman, who has never been interested in the illicit-drugs market.

Justice Ginsburg: --May I just ask you one procedural question?

Mr. Barnett: Yes.

Justice Ginsburg: And this is... this is a suit for an injunction.

And it... basically an injunction against a criminal prosecution.

Mr. Barnett: And seizure--

Justice Ginsburg: And--

Mr. Barnett: --of these plants.

Justice Ginsburg: --and there's an old saying, in equity, that courts don't enjoin criminal prosecutions.

So how is your injunction suit appropriate, given that old saying there that you have to make your defense in the criminal proceeding and not enjoin this operation?

Mr. Barnett: Well, it is... it is an... we're seeking an injunction to prevent the enforcement of the statute against these two persons, which includes forfeiture, which has already happened in this case.

We've already had Diane Monson's plants seized by the Drug Enforcement Authority.

That is not something that we... that we... that has anything to do with criminal prosecution, and yet that puts at risk her supply of medicine, the supply of medicine she needs to get by, to relieve her suffering.

I see my time--

Justice Stevens: Thank you.

Mr. Barnett: --is up.

Justice Stevens: Thank you, Mr. Barnett.

General Clement, you have four minutes.

Rebuttal of Paul D. Clement

Mr. Clement: Thank you, Justice Stevens, and may it please the Court:

As I understand Respondents' position, it's effectively that their clients, and clients like them, in their use of medical marijuana, is somehow so hermetically sealed from the rest of the market on marijuana that it has no effect on that market on marijuana and no effect on the government's overall regulatory regime.

And I understand that to be true largely because of state law.

And one of the many problems with that mode of analysis is that the state law is not designed only to carve out those transactions that have no effect on interstate commerce or no effect on the federal regulatory regime.

Proposition 215 was not tasked as an exercise in cooperative federalism; it was passed as an effort to make medical marijuana lawful to possess, whether you bought it in interstate commerce, whether you bought it with the marijuana having traveled in interstate commerce, whether you bought it, whether you grew it yourself.

There's a fundamental mismatch with their theory that really, I think, undermines their theory.

Now, there's the question now about what kind of impact this would have on the federal enforcement scheme.

Now, we, in our reply brief, try to use the numbers from one of Respondents' own amici, and we suggest that there's a hundred-thousand people that might be lawful medical users, if their position prevails.

Now, obviously, this is all an effort in, sort of, counter-factual speculation, so the numbers may be a bit off.

But they suggest that our own government numbers are somehow better, and they cite them on page 18 of the red brief.

But the only numbers on the red brief for California suggest that, in the four counties for which there are data, there was....5 percent of the people use marijuana.

Now, if you extend that out statewide to the 34 million people in California, that gives you 170,000 people.

So their numbers... using the government numbers actually give you more potentially affected people.

I think in trying to figure out how many people would be affected, it's worth considering what medical conditions are covered.

And this responds to Justice Kennedy's last question, Is this just limited to AIDS or people with terminal cancer?

And it's not.

And if you want to look at what is covered as serious medical condition under the statute, you can turn to page 7(a) of the red brief, in the appendix to the red brief, and it suggests that a serious medical condition... there's a catchall at the end that includes subsection 12...

"Any other chronic or persistent medical system that, if not alleviated, may cause serious harm to the patient's safety or physical or mental health. "

Now, I think that is an exceedingly broad definition of a serious medical condition for which somebody could be... get a recommendation for marijuana for medical uses.

Another point worth considering, in considering the impact on the federal regulatory regime or the effectiveness of California in preventing any diversion, is to take a look at two cases we cite in our reply brief.

One is the People against Wright.

There's somebody who's arrested with 19 ounces, over a pound, of marijuana.

They're packaged such that he has one small bag in his pocket, six other small bags wrapped with a scale in his backpack, two other larger bags in that backpack, and then a pound wrapped in a shirt in the back of his truck.

And yet the Appellate Court in California said that he was entitled to go to the jury with the theory that that was for medical use.

The fact that he had a scale, and the fact that it was packaged the way it was, could be explained to the jury because he had just boughten it, and that he used the scale to make sure he wasn't ripped-off.

I think that shows that it's going to be very hard to enforce the regulatory regime.

The other case in the reply brief worth mentioning is the Santa Cruz case, because that's a case where a Federal District Court, after Raich came out, said that it could not enforce the DA and the Controlled Substances Act against a 250-person cooperative.

And that just shows that this is not something that will be limited to one or two users at a time, but will have a substantial impact on the government's ability to enforce the Controlled Substances Act.

Thank you.

Justice Stevens: Thank you, General Clement.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Aetna Health, Inc. v. Davila - Oral Argument

Fri, 09 Jan 2009 14:49:08 +0000

Case:

Aetna Health, Inc. v. Davila

Media File:

02-1845_20040323-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Miguel A. Estrada

Chief Justice Rehnquist: We will hear argument next in No. 02-1845, The Aetna Health Care v. Davila and Cigna HealthCare v. Calad.

Mr. Estrada.

Mr. Estrada: Thank you, Mr. Chief Justice, and may it please the Court:

The issue in these consolidated cases is whether participants and beneficiaries of ERISA plans may seek consequential and punitive damages in state court under state tort law for the allegedly wrongful denial of ERISA health care benefits.

The Fifth Circuit answered that question yes, reasoning that completely... that the complete preemption under the Federal statute applies to contract claims that essentially duplicate what's available under Section 502 of the Federal statute, but not to tort claims, which give supplemental remedy for consequential and punitive damages.

For two principal reasons, the judgment of the Fifth Circuit should be reversed.

First, this Court has consistently held that all challenges to the propriety of benefit determination, whether couched in tort or in contract, are completely preempted by Section 502 and therefore are removable and governed solely by Federal law.

Second, the fact that the welfare plans at issue in these cases provide benefits for medical care, as opposed to disability, death, or some other welfare benefit, does not alter the analysis under the Federal statute or give the states any more power to supplement the remedies that Congress included in Section 502.

Justice O'Connor: Now just to be clear, Mr. Estrada, you take the position that ERISA Section 502(a) completely preempts the Texas scheme here?

Mr. Estrada: Yes.

Justice O'Connor: And we don't have before us any conflict preemption under Section 514?

Mr. Estrada: That is... that is right, Justice O'Connor.

That is our position.

Justice O'Connor: Okay.

Mr. Estrada: And turning to Section 502(a) and to the--

Justice Stevens: Mr. Estrada, can I just raise a question?

I'm sure you'll cover it in the argument and I want to get it on the table.

On your first point, that our prior cases have said that 502 is the exclusive remedy for actions to acquire benefits, is there a distinction?

Some of your opponents argued between denials based on the terms of the plan, that this just doesn't qualify for some reason, on the one hand, that you just should get the answer out of the plan, and denials based on a discretionary decision as to whether the medical treatment was appropriate or not, which would require the exercise of some kind of professional judgment.

The nurse might think he doesn't need an extra day in the hospital or something like that.

Is that a valid distinction or not?

Mr. Estrada: --No.

And let me turn to that... that was my second point, but I'll turn to it now.

The use of medical criteria, whether discretionary or not, is inherent in health care coverage and usually is also inherent in... in disability coverage.

Yet, last Term, in the Black & Decker case, this Court held that the... that a claimant's treating doctor gets no special deference in a claim for the benefits where the issue is whether the medical factors warrant a disability finding.

Under the theory being advanced by Texas and the respondents in this case, however, Black & Decker needn't, and maybe even couldn't, be an ERISA case because a state of the union could regulate the medical component of the disability finding under the guise of regulating the practice of medicine and could give tort remedies and consequential and punitive damages whenever the plan disagreed with the... with the claimant's doctor.

Justice Stevens: Yes, of course they could, but the fact that if we held there was no preemption, it wouldn't necessarily mean they would win on the merits.

I mean, you are... your drug formulary may be absolutely defensible, even though it could be tested in a state court proceeding.

Mr. Estrada: Well, I didn't understand the claim as to the Aetna case necessarily to be a challenge to the promulgation of the formulary, which is expressly authorized by the prescription drug writer of the plan.

I understood the challenge to be to a particular benefits decision that was made when Aetna, the insurer and plan administrator, concluded that the benefit was not covered in the circumstances because of the step therapy requirement.

Justice Kennedy: I don't want you to go too long on point two without getting back to point one, but as long as we're here, it does seem to me that the dichotomy, the duality you propose between a decision about benefits and medical treatment might, at the edges, blur into each other.

If I say, as Aetna or CIGNA, you're not authorized to seek this treatment and the person has no other funds, basically, that is a treatment decision, in a sense.

Mr. Estrada: No, it is not, Justice Kennedy.

The purpose of employee benefits plan... benefit plans is to cover some things for the employees.

If the plans in these cases said that the benefit was $100 for each hospital stay or that you got $20 for your drugs, whatever they may be, no one would deny that that was a... that that was a benefit determination.

As I said earlier, with respect to medical care, it has always been the case that in determining the scope of coverage, medical factors have always been used and that factor is imbedded into the background understandings of how this very statute works.

For example, Section 503 of the statute allows the Department of Labor to promulgate regulations to deal with how claims are made and the like.

One of those regulations by... by the Department of Labor expressly contemplates that if a claimant has a proposed treatment turned down, he may appeal to a named fiduciary who is required, under the DOL regs, to consult with an... with an appropriate medical hair... care professional and--

Justice Kennedy: I guess my point was, at some time, and even in these cases, there... that there was a component of what we might call medical judgment involved.

Mr. Estrada: --That is undisputed, Justice Kennedy, and I think that our position is that there is a fundamental difference between a claimant who has a doctor patient relationship with his doctor and a claimant who had an insuretal coverage relation with his insurer.

Just to put it into context of legal practice, if the person reading the plan documents and denying a claim... the claim, excuse me, uses medical training to conclude that the plan documents did not cover a treatment, I think few people would think that that entitled the claimant to sue the person who turned it down for legal malpractice.

And the same is basically true here, too, because the plan's... the plan's role, as is very clear in the express, for example, in the... in the text of the Monitronics opinion, is to deal with the question, shall we pay or shall we not pay.

And that's actually precisely what Texas has targeted here.

If I could direct the Court's attention to the petition appendix in the Aetna case, 02-1885, the relevant parts of the Texas statute are set forth in page 59a and--

Chief Justice Rehnquist: 59a of what?

Mr. Estrada: --Of the Aetna petition appendix, 02-1885, Mr. Chief Justice.

And as... and there are three that are relevant here.

Two of them are on page 59 and one of them is on 58a.

The first one that I want to point out is close to the top of the page.

It is an affirmative defense under the Texas statute that the managed care entity did not deny or delay payment.

This is not about treatment.

It is a defense that it did not deny or delay payment.

And of course delay may be a bid for... of what a... of what the role of the administrator is.

The second aspect of the statute is that the statute makes very clear, once again on page 59a, that the managed... that the liability... oh.

This is subsection d, Mr. Chief Justice, which is the next following--

Chief Justice Rehnquist: Oh.

Mr. Estrada: --you know, the one that I read.

And it says the act creates no obligation on the part of the health insurance carrier, moving down a little, to cover a... to provide a treatment which is not... which is not covered by the health care plan or entity.

Once again, this is targeting the coverage aspect, not the treatment.

Justice Stevens: Yes, but let me just focus on the case involving the woman who may have needed a second day in the hospital.

Is it correct that they... an agent of the HMO had discretion to grant that second day if the nurse thought it was really medically required?

Mr. Estrada: I don't... I don't know if there's anything in the record about that.

What is clear from the record and from Federal law, Justice Stevens, is that somebody in the plan would have discretion to hear her appeal, even if the nurse that... that turned the request down--

Justice Stevens: So the decision as to whether she would have the second day in the hospital would depend on a medical judgment made by an agent of the plan.

Is that correct?

Mr. Estrada: --It would... it would ultimately... it would ultimately turn on... on a coverage decision that may include medical criteria.

Justice Stevens: But the coverage is if it's medically needed, it would... she would get the second day.

But whether or not it's covered then turns on a medical judgment, does it not?

Mr. Estrada: But the question of medical necessity is a coverage term.

It is not a medical term, Justice Stevens, and--

Justice Stevens: Yes, but is not correct, to make the coverage decision, one has to make a medical decision?

Mr. Estrada: --It... one has to make... one part of the coverage decision is the medical decision.

In the Aetna case, for example, the plan sets forth a definition of medical necessity which... which sets forth, I do point out, is that you have to need it... to need the care--

Justice Stevens: Well, I was focusing on the CIGNA case, because it seemed to me that it's a little clearer there that there would be a medical judgment required.

Mr. Estrada: --Well, once again, Justice Stevens, we do not contend that health insurance does not involve the consideration of medical factors.

And, as I said, it is almost inherent in the nature of the product that it would, just as I never had car insurance before I actually owned a car.

Justice O'Connor: But it's a little... it's a little like... if you're telling doctors what's medically necessary under the plan, it's in effect maybe defining the basic standards of medical care, in a way.

Mr. Estrada: That is not right, Justice O'Connor, for the following reason.

The plan documents here, and the background understanding of all of the parties, is that it is for the treating doctor to chart the course of treatment for the patient and, in fact, under the AMA's old code of ethics, which we cite on page 6 of the Aetna reply brief, a physician is not allowed to sway his judgment as to treatment by the existence or non-existence of coverage.

In many cases, unfortunately, there will be people who have no coverage or no insurance, or may be under-insured.

But just to bring back the case to what the statute is about, this statue is about encouraging employers to make hard choices to give coverage to employees to the extent they can.

There is no requirement in Federal law that requires employers to give... there are very few requirements in Federal law that require employers to give particular benefits if they choose to have a plan.

And, as this Court has said, most recently in the Rush case, this is about a bargain with employers that seeks to encourage the formation of these plans and the provision of benefits to the extent possible by assuring employers of limited liabilities under predictable standards.

Justice O'Connor: If you are correct that Section 502(a) preempts, is it possible that under ERISA 502(a)(3), that the plaintiffs might recover some money, for example, for pain and suffering and things like that?

Mr. Estrada: I would think not, Justice O'Connor.

Our amicus, the Department of Labor, may take a slightly different view of that.

Our reading of the Mertens case and the Great West case, which seemed very clearly, to us, at least, to stand for the proposition that equitable is to be determined by reference to an historical examination of all that is available in equity--

Justice Ginsburg: Yes, but if you make an analogy to a trustee in equity, I think this is a different case than Mertens or Great West, because here, let's see, Aetna and CIGNA are fiduciaries, are they not?

Mr. Estrada: --Aetna is... and CIGNA is for purposes of claims processing.

Justice Ginsburg: Yes.

And so, as a fiduciary they're... they are analogous to a trustee, at least, the government said, if I read their footnote 13 right, that back in the old days when there was... was a division of the bench, that one of the remedies available against a trustee would be in the nature of make whole relief that would put the beneficiary in the position he would have been in if the trustee had not committed the breach of trust.

Mr. Estrada: That was the view to which I refer earlier, Justice Ginsberg, and it is possible that it may be right.

It seems to me, based on Great West and Mertens, that it would be a tough case to make, but it is not the issue in this case.

Now--

Justice Breyer: No, but the whole thing would work if we could do that, wouldn't it?

I mean, if we could get Mertens consistent with what Justice Ginsberg just read, then you would provide people who are hurt, in the way these plaintiffs were hurt, with a remedy.

It wouldn't be punitive damages, but they would be made whole.

So, if you are right in that this is basically a... this is basically a claims decision and you shouldn't give punitives and others for the incorrect making of a claims decision.

But the hole in this is that then the woman gets nothing or virtually nothing and, if we could reconsider that part, it would all work, wouldn't it?

Mr. Estrada: --Well, it might, but it also works in the way it currently is for the following reason.

The interaction of the structure of Section 502 and Section 503 is intended to set forth a mechanism, under the DOL regs under Section 503, to encourage the expedis... the expeditious resolution of claims disagreements.

And this is... the statute contemplates litigation but is not about litigation.

This is all about giving the benefit when it is needed and not about waiting until it no longer helps you, having bypassed all avenues you had at the time, external review, plan appeals, or maybe an action for an injunction and then suing for relief, make whole or otherwise.

If I could, Mr. Chief Justice, I would like to reserve the remainder of my time.

Argument of James A. Feldman

Chief Justice Rehnquist: Very well, Mr. Estrada.

Mr. Feldman, we'll hear from you.

Justice O'Connor: Mr. Feldman, will you tell us what the government thinks can be recovered under 502(a)(3) in the way of damages or other recovery?

Mr. Feldman: Yes.

As Justice Gin... as Justice Ginsberg said, our position, I think, is in footnote 13 of our brief, and it's a position the Department of Labor has taken in cases and number--

Justice Scalia: Pretty big point to be in a footnote.

Mr. Feldman: --Well, it's... it really isn't the issue in this case because our position in this case is that the claims are preempted by 502(a)(1)(B).

But, in a case where there was a fiduciary involved, in the days of the divided bench, when a beneficiary sued a fiduciary, they weren't... they couldn't... weren't able to get make whole relief.

And the... by the same--

Justice Scalia: Lest we be too sanguine about the application of that law in this context, I don't know any equitable cases that would consider make whole relief to be giving... where what is at issue is merely the payment... the failure to pay money, refusal to pay money.

Make whole relief would give you what you would have done with that money if you had gotten it.

That's very strange.

Mr. Feldman: --You get... there were... there are cases that I... I don't want to get too deeply into 502(a)(3)(B), because I don't think it's what's at issue in this case.

But there are cases in which, for example, a trustee doesn't buy an insurance policy that they're supposed to buy and then the beneficiary can get, as relief, whatever the value of that insurance policy would have been and--

Justice Scalia: Sure. But all that's going on here is that the claimant was perfectly able to buy Vioxx with his own money, but when it was said by the insurer that they wouldn't pay for Vioxx, the claimant went and... went with the drug that was covered.

I have serious doubts whether we can take comfort in the fact that even if we deny relief here it'll all be okay because under traditional equity law, in a situation like that, you can... you can get whatever you would have done had you been given the money.

I don't know that that principle washes.

Mr. Feldman: --Well, 502(a)(3)... I mean, ERISA does head up a beneficiary trustee... a beneficiary fiduciary type of relationship that does have analogies in traditional equity.

But in any event--

Justice Ginsburg: And the government has taken position... this is... the footnote is not the easiest to read, but I take it the Department of Labor has taken the position, in some ERISA cases, that there would be just the kind of relief that Justice Scalia mentioned.

Would this case fit that pattern?

Mr. Feldman: --I... it's not clear to me whether it would, because it's not clear to me whether there was a fiduciary involved in this case.

Neither of the claimants in this case, neither they... the people who denied the benefits on behalf of the plans may or may not have been fiduciaries.

Justice Ginsburg: But, as Mr. Estrada just told us that, for these purposes, both Aetna and CIGNA would be fiduciaries.

Mr. Feldman: They... well, whether the... you know, I frankly haven't thought about whether the plan itself would be a fiduciary.

Ordinarily, the way the ERISA scheme is supposed to work is, if you have a denial of benefit, you have a right to appeal to an appropriate named fiduciary, and at that stage, departmental regulations give you kind of very substantial procedural rights to make sure that benefits determination gets made very quickly and appropriately, in light of the medical exigencies of the case.

Justice Kennedy: I would like to hear your arguments on the preemption issue.

Mr. Feldman: Thank you.

Our argument is that the Texas law provides an additional remedy to that in Section 502(a)(1)(B), because respondents' right to recover compensatory and punitive damages in this case depends on their showing that they had a right to the benefits under the plan... under the terms of their plan.

The state law provides that plaintiffs must prove that the plan's failure to exercise what the state law says is due care, that their failure to exercise due care is the proximate cause of the plaintiff's injury.

The only way that that could be true is if the plan didn't pay benefits that it was obligated to pay under the terms of the plan.

The plan--

Justice Stevens: Yes, but in the situation in the hospital case, there was no time to get relief.

How could they... how could they get relief from the denial of the extra day in the hospital between midnight and the next morning?

Mr. Feldman: --Well, I... in the first place, she was told before... I think the complaint says she was told before she entered the hospital that she would have only one day in the hospital.

But in addition--

Justice Stevens: Unless it was medically necessary to stay an extra day.

Mr. Feldman: --Right.

And I would just say there's about three backstops there.

One is Department of Labor regulations say you have to make determ... these determinations as soon as possible considering the medical exigencies of the case and she didn't--

Justice Stevens: And what does that mean in the hospital setting?

And what... was she going to file a complaint with the Department of Labor?

Mr. Feldman: --These claims can be made orally, again, if the exigencies require, and she could... she didn't try... as far as we know, no one made a phone call to the insurer and said can I get the extra benefits; she needs it.

We don't know what the results of that would have been.

Justice Stevens: Well let's assume the case... because your preemption item would cover even the most extreme case.

Assume the case in which the patient and the doctor both called the agency and appealed and they said we're too busy, we can't handle it and it later determines they were... did not exercise due care.

Mr. Feldman: But then--

Justice Stevens: Why are you preempting the state providing a remedy for that situation?

Mr. Feldman: --That would have been itself a denial of their obligations under the Department's claim processing... claims processing procedures.

But let me say there's also--

Justice Stevens: It would have been a denial, but it wouldn't have given her the extra day in the hospital?

Mr. Feldman: --Right, but there are other backstops for her getting the extra day in the hospital.

She is, at that point, in the same position as anyone else who can't pay for another day in the hospital but they need it.

Justice Stevens: I understand.

Mr. Feldman: It's up to her doctor, with whom she has a doctor patient relationship that's a consensual relationship for providing medical treatment.

It's up to her doctor to decide when she should be discharged from the hospital and when she shouldn't.

Justice Ginsburg: But she can't--

Justice Stevens: --But the question we really are facing is whether the State of Texas is denied the authority to provide a remedy in that situation.

Mr. Feldman: Yeah, but the State of Texas has many remedies to make sure the hospitals don't discharge people who need an extra day in the hospital and medical ethics provides additional reasons why doctors have... cannot discharge patients who need an extra day in the hospital.

Justice Ginsburg: I take it you... the drug case, the man couldn't pay for the more expensive drugs.

He didn't have the means and so he took the drugs that the HMO approved with disastrous results.

There was no... window... there was no time.

He was in intense pain.

He had to take something to deal with the pain.

Mr. Feldman: There was... he took the drug, I think that... the record actually shows, I think, that he took the drug for several weeks before he had... before he had the problem with it.

He could have been pursuing the plan remedies all throughout that.

In addition, Texas law, like the law of 44 other states, provides for an independent review mechanism which is also designed to decide at the front end whether... what benefits you're entitled to.

And under that mechanism he could have sought independent review from somebody who's independent of the plan, not subject to any bad incentives he might have thought the plan might have, to make an accurate determination of what is... what he's entitled to and what he's not entitled to.

It's... there are... there are a number of remedies that people can... that people have in order to make sure they stay in the hospital.

What the ERISA plan is doing here is simply making a benefits determination.

It's a pure determination under ERISA and it's not based on the formation of a doctor patient relationship which the patient has with their doctor.

It's based on their determinations under ERISA, under Section 502(a)(1)(A)... Section 502 of ERISA, Congress drew a very careful balance between the needs for a prompt and quick claims processing procedure that would be effective and to decide in advance whether you get benefits and the public interest in encouraging the formation of employee benefits plans and encouraging the provision of benefits under those plans.

To allow states to essentially say, as the state has said here, well, we're going to provide an additional remedy that Congress rejected when it drew that careful balance, would be an... as the Court said in Pilot Life, to completely undermine Congress's decisions about how this system should be structured.

The state has ample authority to address medical malpractice in the state in between... between doctors and patients where that doc... consensual doctor patient relationship has been formed.

What it doesn't have authority to do is to take its... that medical malpractice law and extend it, not to the normal doctor patient situation, but to a situation that is governed by Federal law under Section 502 and by the remedies that Congress chose where appropriate.

Justice Scalia: Is there any indication in the record whether these individuals did not have the funds to stay in the hospital another day or to buy Vioxx?

Mr. Feldman: There's... I don't think there's any indication of whether they did or not.

And, in fact, I don't... I think that under the co-payment of the Aetna plan, Vioxx wouldn't have been terribly expensive because Aetna would have picked up some of tab for that.

But all of those would be facts relating what's in the plan.

I think they all just point out that the question in this case is what the plan provided and did the plaintiffs get what the plan provided.

And this Court decided, in Pilot Life and in Metropolitan Life against Taylor, and it reaffirmed two terms ago in the Rush Prudential case, that those questions are ERISA questions and Congress decided that... set in place a set of remedies that allow for very substantial rights to determine whether you're entitled to the benefit, but limited your rights to sue for pun... for compensatory and especially punitive damages afterwards, because there's also, on the other side of the balance, the need to encourage employers to provide healthcare and to create ERISA plans.

And, as I said, to allow states to interfere in that balance and, as Texas has done here, to create a cause of action which is essentially for the denial of a plan benefit, and that's something that the plaintiffs, I think, have to prove in order to prevail, is to directly interfere with that decision of Congress.

Justice Stevens: But isn't that correct that those cases did not involve treatment decisions, Pilot Life and Metropolitan?

Mr. Feldman: Those cases involved disability insurance, but they were... they had a medical element in those... in those decisions.

That's--

Chief Justice Rehnquist: Thank you, Mr. Feldman.

Mr. Feldman: --Thank you.

Argument of George Parker Young

Chief Justice Rehnquist: Mr. Young, we'll hear from you.

Mr. Young: Mr. Chief Justice, may it please the Court:

I'm going to focus on the narrow Federal jurisdictional issue because this case... these two cases come to the Court based on the Federal removal doctrine that goes under the rubric of complete preemption.

In each of this Court's cases on complete preemption, the plaintiff's cause of action, while not citing to the Federal statute, almost exactly duplicated the Federal remedy.

Here we don't have that.

Here, what Texas has done is to fill a vacuum and say we are going to set out a professional medical standard of care when HMOs make medical necessity decisions.

Under the HMO's position, they would be free to say we're going to use the medical necessity standard of a witch doctor or whatever we decide it is on today's basis without any reference to objective medical standards.

Now, their medical necessity statement doesn't say that, but under their argument today, they would be free to do that.

Justice Scalia: What do you mean free to do it?

They would be subject to... to an appeal and an appeal to an independent authority.

Mr. Young: Yes, Your Honor.

They... yes, Justice.

Justice Scalia: And if they didn't pay up, they would be... would be liable for damages.

Mr. Young: If there is time for an appeal and if the circumstances would permit an appeal.

An appeal is a great thing in these cases.

Independent review is a great thing--

Justice Scalia: No.

What I'm... I'm just speaking to your point of whether they're Scott free to do whatever they want.

They surely aren't, you know.

Even if the appeal comes afterwards, the claimant can get the money that's owed and the relief provided by 502(a).

Mr. Young: --But, Justice Scalia, in these two cases, the patients did what the HMO wanted and when, under their argument, if the patients do what the HMO wants and it turns out those were bad medical decisions, there is no remedy.

ERISA--

Justice Scalia: They don't do what the HMO... all the HMO said is, look, under the plan, as we understand it and as we judge medical necessity, we don't have to pay for Vioxx.

Now, if you want to have Vioxx, buy it yourself, and I gather there was some co-payment that would have been given, and if their doctor thought that Vioxx was really essential, surely the doctor would have abided, you know, pony up the money.

Mr. Young: --Well--

Justice Scalia: But to say that the plan condemned them to not using Vioxx is simply not true.

All you're talking about here is money.

The claimant didn't want to lay out the additional money for the Vioxx.

Mr. Young: --Well, the truth is, Your Honor, that neither of these claimants would have needed health insurance if they had the independent means to just whip out gold card and pay for the drug.

Justice Breyer: See, that's why I'm thinking that Vioxx is not that... you know, on your argument you were just making, and I'll only lead you into this red herring once.

Mr. Young: Okay.

Justice Breyer: But it would all work, you see, if I have a trust, the trust is supposed to buy me an insurance policy, and through total fault of the trust it doesn't, and the house burns down, the equitable relief appropriate would be consequential damages of the value of the house.

Now, if that were an appropriate case, other equitable relief, this whole thing would work and you wouldn't be having to fill a vacuum.

Mr. Young: But under this Court's opinions previously under 502, that remedy and those kinds of relief are not available.

Justice Breyer: So you see then the logical point where I'm... I'd like to say modify those perhaps, but, well, the very fact that you're trying to fill this hole here proves the point, because if there is a hole, it's because the court has interpreted this statute perhaps wrongly as the Federal relief being A, B, and C. Maybe it should be A, B, C, and D, and so what the state's trying to do here, is add D.

And the one thing they can't do, is add D to A, B, and C.

Mr. Young: It's true, Your Honor, that there is this whole, but that is not the reason that we should prevail on this narrow jurisdictional issue, because it's the source of the duty.

The duty that arises here is not based on what is in the plan document on medical necessity.

It comes from the external duty that is imposed by Texas statute to meet the professional medical standard of care.

Chief Justice Rehnquist: Well, how different is the question of the merits here, whether you should prevail and the question of complete preemption which is raised in the removal issue?

Mr. Young: Mr. Chief Justice they are different.

Because, in this narrow issue, the complete preemption issue, especially when one looks at Pilot Life and Taylor.

Those two decisions relied very heavily on section 301 cases, the Labor Management Relations Act cases.

But if you look at those cases since Pilot Life and Taylor, every time the duty arose from something separate than the collective bargaining agreement, every time this Court has said that there is no complete preemption.

Chief Justice Rehnquist: So your view is you could prevail on the propriety of removal, because there's not complete preemption, and yet go back and lose on the issue of whether your claim is in fact preempted?

Mr. Young: Yes Your Honor, that is the way complete versus conflict preemption can work and the way that this Circuit said it could work.

Now I want to be clear, we don't think that we lose on Section 515 preemption either.

And in fact every time this Court has gone through an ERISA analysis and found Section 502 preemption, every time, it first goes to through the Section 514 step.

Now that brings me to something that may be sensitive in light of one of the opinions issued today.

But I want to talk a little bit about the insurance savings clause under Section 514, because it's very important.

This Court, in Rush Prudential said, that when a state regulates medical necessity, as Texas does here, that falls within the insurance saving clause.

Clearly this statute falls withing the insurance saving clause, especially as applied in these two cases.

Chief Justice Rehnquist: Well that's contrary to Pilot Life, isn't it?

Mr. Young: No, Your Honor, and for this reason.

While Pilot Life has a statement in there, that--

Chief Justice Rehnquist: A very definite statement.

Mr. Young: --that 502, might trump and probably according to Pilot Life could trump the insurance saving clause, the Court also found very clearly that the insurance saving clause was not met in that case.

And this Court has never faced what this Court, the majority in Rush Prudential called the forced choice, between an insurance saving clause and Section 502.

And it's very important to look at the plain text of Section 514.

Because Section 514 (b) the insurance saving clause, says very clearly nothing in this sub-chapter can be construed to preempt.

Justice Souter: The strangeness of your argument is that you said all right, Pilot Life faced that issue, and says the savings clause doesn't apply in the complete preemption situation.

Your argument is that in effect by defining the... the benefit... by Texas' act of trying to define the benefit denial as equivalent to the practice of medicine, it therefore gets us back into the insurance savings clause.

It seems to me an irrational logical leap.

502 says we get out of the insurance savings clause because of complete preemption, Texas says by saying what you're really doing in denialing... denying a benefit, is practicing medicine.

We get back into the business of insurance, and the insurance savings clause applies.

I just can't follow that.

Mr. Young: Your Honor, the confusion arises because we don't write... we don't write the terms of the HMO's coverage if you will.

They're the ones that say, in determining what we will pay for, if you will, we are going to make medical decisions.

Justice Souter: Well they're the ones that--

Mr. Young: They're the ones that can--

Justice Souter: --is there any insurer that does not at some point incorporate some issue of medical judgement in it's coverage?

Mr. Young: --Yes.

Justice Souter: If it does not, then in effect it is giving carte blanche to any medical decision by a doctor without right of review.

Mr. Young: Yes, Your Honor, in fact, some HMO's in the last two or three years have abolished this second guessing of the physician, this medical necessity step.

Justice Scalia: But let's... but suppose they don't, do the agents of the insurers who make these determinations do they have to be admitted to the practice of medicine in Texas?

Mr. Young: Not in Texas, but they have to be medical professionals according to the Texas statute.

And the Texas statute says, when you make these deci--

Justice Scalia: What is a medical professional?

Mr. Young: --Well, in the case of a nurse, nursing judgment.

In the case of a--

Justice Scalia: But they don't have to be doctors?

Mr. Young: --They do if they're making a medical decision that a doctor would make.

Under Texas law they do, and they're held to that standard.

And that's all we're doing here.

Is we're holding them to that medical standard.

ERISA says nothing, Justice Scalia, about what standard the HMO's or deciders have to meet.

Justice Scalia: But you talk about the standard of care, but they're not giving care.

They're giving out money.

Mr. Young: Your Honor.

Justice Scalia: They're not giving care at all, the caregiver was the individual's doctor who said stay in another day or take Vioxx.

They care... all this company was doing was looking at the contract, do we owe any money.

Mr. Young: Justice Scalia--

Justice Scalia: That's not giving care.

Mr. Young: --Justice Scalia I think it would be very helpful to look at when a payment decision could be made and when it is made in these cases.

You start an episode of care here, you finish it.

The bill comes due to make the payment.

Here the HMOs don't wait until the bill comes due to make the payment decision.

They make the decision as part of a medical necessity determination, in here, earlier in the middle, concurrent review, or prospective review is the technical term.

Chief Justice Rehnquist: But it's a decision to pay money?

Mr. Young: It is a decision that may--

Chief Justice Rehnquist: Or not to pay money?

Mr. Young: --Not exactly Your Honor, because it is a decision that could result in not paying money, but it is first foremost done here, or here to influence the medical decision--

Justice Breyer: It's both.

It's both and the trouble with it is, if you... you could have marvelous laws in Texas governing pension trustee behavior, governing all trustee behavior.

But Congress says well you can't apply your marvelous rules to ERISA plan trustees.

And now it seems to have said, and you can't apply your marvelous medical rules, even to a doctor, where what the doctor is doing in that instance is not acting as a doctor for treating the patient, but rather acting as a determiner of whether he will get the ERISA plan payment.

And what we have in your case I guess is a person who does both.

He does something of both.

But where they are inextricably mixed and where there is a very large share of making the benefit determination, is it fair to say that Congress would have wanted the Texas law to apply?

Mr. Young: --Yes, because of Pegram, this court in Pegram said very clearly--

Justice Souter: In Pegram you were dealing with the doctor who was the treating physician, that is precisely what Justice Breyer has just defined as not being the case here.

Mr. Young: --Your Honor, in Pegram this court said... the majority said there's no basis to distinguish an HMO where the decision's made--

Justice Souter: When we were dealing with a treating physician, we're not dealing with a treating physician here.

Mr. Young: --But here Your Honor, you're dealing with a medical judgment that's not made at the end when the bill comes due, it's made early on with the sole purpose of influencing the medical treatment, the course of treatment.

If this were only about payment--

Justice Scalia: Why do you say that?

I don't think AETNA cares whether this individual took Vioxx, or whether this patient stayed in the hospital for another day.

I don't think AETNA cared a bit.

All AETNA cared about was whether it had to pay for it.

Mr. Young: --Justice Scalia, if that were true then they would make these decisions at the end.

Because by shifting--

Justice Scalia: It's important to the patient to know.

Because the patient when... when the patient finds out that if you take Vioxx, you'll have to pay for it yourself, the patient can then ask the doctor, look doc, is it really important that I take Vioxx or is this other stuff in your judgment as the treating physician, is this other stuff good or not... good enough.

It seems to me you want that decision to be made early.

Mr. Young: --Well, the truth is that making the decision here shifts the risk.

If it's made at the back end the risk is shifted to the pharmacy, or the doctor, or the hospital.

When it's made here, it puts the risk squarely on the patient.

Justice Souter: Well except that you say when it's made here it is the choice of the doctor, the pharmacy or the hospital to seek that judgment early, isn't it.

In other words in the... the doctor could have gone ahead and prescribed Vioxx, and sent the bill in.

The doctor could have kept the patient in the hospital another day, and sent the bill in.

The insurance plan didn't force an early decision.

It gave an option of an early decision, so they would know where they stood.

Mr. Young: According to the documentation the HMO has, Your Honor, the two HMOs require that those decision be sought from them before or in the middle of treatment--

Justice Souter: If you don't get it then, they automatically deny it later?

Mr. Young: --It's not just that they could deny it, they... there could be consequences to the provider.

They could be deselected from the network, they could be told you're not going to get to see anymore of our patients.

Justice Souter: So, they do force it.

My premise was wrong.

Mr. Young: They do force it, Your Honor.

And that's the reality.

Justice O'Connor: Well, I really thought the train left the station in Pilot Life.

I guess you don't agree with Pilot Life.

Mr. Young: Well no, Your Honor, we are not here to disagree with Pilot Life.

Pilot Life works in the narrow circumstances in which it's been applied.

Justice O'Connor: Well I thought that this was that circumstance of benefits.

Mr. Young: I was afraid you might.

I was really afraid you might.

Unknown Speaker: Yes.

Mr. Young: Then could we talk about Taylor a little more, because that's really the complete branch--

[Laughter]

I guess I come back to the Chief Justice's point which is we could have a situation where Pilot Life preemption could occur, but the Taylor holding is the one we're most concerned about, and here we are not trying to duplicate a claim that would be made under ERISA, under an ERISA duty.

And that leads me back to something else that's come up.

The ERISA and it's regulations say nothing about setting a medical standard of care, when these medical judgments are made.

That's an indication that it was left to the states, and should be left to the states.

But this Court could certainly indicate, well this may still be preempted, but it shouldn't be removed to Federal court, under complete preemption doctrines.

Chief Justice Rehnquist: Well how would that advance the general law at all?

I mean, if the merits are decided against you, you know, I don't think we took this case to decide some question of removal jurisdiction, but I... perhaps my colleagues don't agree with me.

Mr. Young: Well, that is the very narrow issue that in fact certiorari was granted on.

And it is an issue that this Court last ruled on in the Anderson case last Term, and that case is illustrative of why complete preemption shouldn't apply here.

There the majority found that the claim, while not citing to Federal usury law duplicated precisely and exactly Federal usury law.

And it was in essence, a Federal usury claim.

Here our claim is not one for benefits.

It couldn't be, there's no claim for benefits to be made.

But more importantly we are not relying on a term--

Justice Souter: It's a claim that depends on a denial of benefits, and isn't that the touchstone under Pilot?

Mr. Young: --In fact Your Honor, you could have a situation where the medical necessity decision is made prospectively or concurrently and that's not a payment denial, in fact that's what we have in most circumstances of these kinds of cases.

Justice Souter: But it is the predicate for payment denial, or a payment granted.

Mr. Young: Really Your Honor, in truth these decisions are never expressed by the utilization nurse at the hospital as a payment issue.

She says you've got to go home now.

Justice Souter: Well let's go back to my question... I didn't mean to go off on a tangent.

My question was, doesn't Pilot Life, turn on a determination which governs the payment or non payment of benefits?

Mr. Young: Yes, Your Honor.

Here--

Justice Souter: Then this it seems to me is such a determination.

Mr. Young: --But here Your Honor, you could have a payment determination that complied completely with their internal document... documents.

Their definition of medical necessity, what they say they will or won't do.

And still violate the Texas standard for medical judgments and that's the problem.

Justice Scalia: It is indeed.

That's why it's preempted.

Mr. Young: Well--

Justice Scalia: You've described it very clearly.

Mr. Young: --Well... Your Honor, we're confusing remedies, and duties.

The Texas duty is found no where in ERISA.

Justice Stevens: May I ask this question.

Could you ever recover under the Texas statute without proving that you were entitled to have the benefit paid?

Mr. Young: It would not--

Justice Stevens: It wouldn't be phrased in those terms.

Wouldn't it be part of... wouldn't it be a necessary element of your claim, that part of what you're... that you did have an entitlement to have that benefit paid.

Mr. Young: --It would be an undisputed fact.

It would be for example in these two cases.

It's undisputed that Ruby Calad could get unlimited days in the hospital.

The only issue is the medical judgment that she had to go home.

Same with Mr. Davila.

The medical judgment was that he would not get the Vioxx; he would get the cheaper generic drug.

And--

Justice Stevens: But for you to prevail in Texas, it seems to me you have to be able to prove that they had a duty to pay for... to provide him with the payment for Vioxx.

Justice Scalia: But the statute says this, it says that it shall be a defense to any action that one... neither the health insurance carrier is... didn't control the health care treatment decision.

Which it wasn't here.

And two, the health care insurance carrier did not deny or delay payment for any treatment prescribed, or recommended by a provider.

Mr. Young: --But that doesn't... that's--

Justice Scalia: So it is clearly a condition of recovery that you show that they were in violation of the ERISA plan.

Mr. Young: --It's an affirmative defense they may be able to come in with.

It's not a prerequisite to my case.

CIGNA admits it is free.

Justice Scalia: Oh I see.

Well that's a matter of who has to prove it.

I mean if--

Mr. Young: But that's very important especially Your Honor when we're talking about a complete preemption issue.

Is the Federal statute a prerequisite to my claim?

All I have to prove and show Your Honor, is a medical judgment was exercised by a nurse, at CIGNA, or a physician or medical director at AETNA, and that they violated the Texas standard for those kinds of decisions.

Justice Scalia: --As long as you frame it as an affirmative defense, rather as part of the cause of action, you can avoid preemption?

Mr. Young: No I'm not saying that Your Honor, but the gravamen of my case for purposes of looking at complete preemption, the issue you were concerned about in Anderson, is what are the elements of my claim.

They do not duplicate an ERISA claim, they don't even duplicate an ERISA duty.

Now it may be at the end of the day Section 514 kicks in.

We don't think it does for a lot of reasons, most importantly the insurance saving clause.

Which clearly the Texas--

Justice Ginsburg: Which... This is one item I meant to ask.

On the other side they said that you never made any noises about the savings clause in the Fifth Circuit, that it entered the case just at this level, Is that so?

Mr. Young: --No Your Honor, that's not correct.

While it was not a feature argument with a heading in our briefing, we clearly pointed out to the Fifth Circuit the Moran decision by the Ninth Circuit, and that the Moran decision relied on the insurance saving clause.

Then after oral argument--

Justice Ginsburg: That's in your brief before the Fifth Circuit?

Mr. Young: --Yes it's a footnote in our brief.

And then Your Honor, in... after this Court decided Rush Prudential which occurred after oral argument in the Fifth Circuit, both sides submitted extensive letter briefs.

And those are documents, 18 through 20 in the Fifth Circuit record that was recently transmitted to this Court, where both sides talked about what is the impact of Rush Prudential in terms of the insurance savings clause.

But more important... Thank you.

Argument of David C. Mattax

Chief Justice Rehnquist: Thank you, Mr. Young.

Mr. Young: Mr. Mattax we'll hear from you.

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

The Texas legislature has imposed a duty of ordinary care on managed care entities that insert themselves into health care treatment decisions by exercising medical judgment to decide medical necessity.

It is important to recognize at the outset as this court recognized the managed care entity is not the ERISA plan.

Our statute does not impose liability on the ERISA plan.

Our statute does not impose liability on an employer.

As Mr. Estrada said in his argument, the whole point of the complete preemption and the exclusive remedies provision Section 502(a), is insuring employers that will have limited liabilities.

Our statute explicitly excludes employers from liability.

And therefore the concerns of Section 502(a) are not at play in the Texas statute.

The reason the Texas statute was passed was because managed care entities, HMOs and other varieties and forms, had decided to exercise medical judgment.

And it is that duty that the state is regulating.

Which is what I think distinguishes this case from Pilot Life.

Going back and looking--

Justice Breyer: How does it distinguish it from Pilot Life?

I mean Pilot Life is talking about the insurance part, wasn't it.

Mr. Mattax: --Yes, Chief Justice.

Justice Breyer: And then they said that even though apparently on it's face had to do with insurance and you'd think it would have been taken out, it wasn't taken out because of the fact that it interfered with the basic purposes of the act.

Mr. Mattax: Pilot Life was based on the Court's complete preemption decision in Allis-Chalmers versus Lueck.

Justice Breyer: Uh-huh.

Mr. Mattax: And in that case the Court recognized that the tort claim that was being alleged was derived from the general proposition to perform contracts in good faith.

And the duty that the Court was looking at in Allis-Chalmers, and also Pilot Life, was the duty to enforce the contract that was the ERISA plan therefore implicating complete preemption.

However the Court explicitly said in Allis-Chalmers, that Congress did not intend to give the substance of provisions the force of Federal law, ousting any inconsistent state regulations, because such a rule would allow labor unions, and unionized employees the power to exempt themselves from whatever state labor standards they disfavored.

And again the Texas statute is not imposing any duty on the plan.

Justice Stevens: Yes, but is it not true that in order to recover under the Texas statute, not only do you have to prove a violation of the duty to use the due care and so forth.

But you also have to prove a violation of the plan?

Mr. Mattax: No I disagree.

The revision in the act is setup such that if a managed care entity were to come in and say well I did not exercise any medical judgment, or I did not make any decisions that affected the treatment, they could come in as a defense and say, the reason I did not make any medical judgment was because the plan did not allow me to.

The plan simply excluded that completely in a pure eligibility decision in the court's words in Pegram.

So the cause of action that's alleged in the state statute is that particular managed care entity, exercised medical judgment.

And that medical judgment resulted in an injury to me, and I think--

Justice Scalia: But it's also a defense that I did not fail to make any delay, I did not delay or fail to make any payment due.

Mr. Mattax: --And if--

Justice Scalia: Isn't that a defense?

Mr. Mattax: --The statute provides that as a defense.

Again to make a reflection of, to show that in that particular case, I as a managed care entity did not exercise any medical judgments, because that's the defense--

Justice Scalia: But you make a medical judgment when you refuse to make a payment.

You're deciding it's not medically necessary.

Mr. Mattax: --Correct.

And if they're making a decision with regards to medical judgment.

And they are exercising that judgment not according to our standard here.

We are imposing that on the managed care entity.

Justice Scalia: No you're not.

You're saying even if it's not according to your standard of care, if it is not due under the plan you're not liable.

Mr. Mattax: And what I'm saying there is--

Justice Scalia: Have you said that?

Mr. Mattax: --That is a defense to the claim.

And under this Court's decision in Caterpillar versus Williams a defense being raised to a claim does not create complete preemption.

Justice Breyer: Back to Pilot Life.

In my understanding of the case, maybe I've got this wrong.

Tell me if I do.

There's a plan that says, an ERISA plan says we pay you for a treatment that's medically necessary.

Then there's a person, it may be an insurance company, it may be a doctor, maybe somebody says it isn't medically necessary.

The Plaintiff thinks it is medically necessary, so the question is whether the plan did what it said.

Now you have a way of... I mean isn't that what this is about?

Mr. Mattax: There's separate duties involved here.

There is a duty under the plan, and the beneficiary can go to the plan and say because you hired this managed care entity to make this judgment, I would like to get the benefits under the plan and that would be a claim against the benefit plan.

What Texas has done has said, when a managed care entity, an HMO goes and sells his products to a plan, or goes and sells its services to a plan and is going to exercise medical judgment, then the state of Texas will regulate the exercises of that medical judgment of that managed care entity.

Justice Scalia: It's not just an HMO, it's also a health insurance carrier.

Here, AETNA.

Mr. Mattax: It is theoretically anyone who exercises medical judgment that influences care.

But I think it is important to recognize that the reasons for managed care as stated by both the Petitioners here, and I would briefly quote from a CIGNA brief, page 44.

Utilization, review techniques are designed to ensure that quality care is delivered as cost efficiently as possible.

The letter to Mr. Davila's doctor, specifically says... this in AETNA's petition or Appendix 88... as part of our commitment to provide access to quality care.

What the Court needs to recognize if I may, is that prior to the rise of managed care, decisions were made on a retrospective basis.

An insurer would say, well we've looked at this, we do not believe it was medically necessary, we're not going to pay for it.

The difference now is, managed care has taken on the rubric of saying, we will manage care, we will determine what is best for the patient and we will do that by dictating what is going to be paid for, and not paid for.

Chief Justice Rehnquist: But it's just... even at the early stage, it's simply a statement, we will not pay for it.

That doesn't mean that the patient can't do it other ways.

It just means that this particular program won't pay for it.

Mr. Mattax: Well respectfully the statement is we don't think it's good for you.

We don't think this care is appropriate for your particular situation.

And there's no reason--

Chief Justice Rehnquist: Well isn't it more a question of medical necessity.

That is the plan says, all right, we'll cover it in case of medical necessity, and the plan says we don't think there's medical necessity here.

Mr. Mattax: --Well the plan itself can put in the term medical necessity, but the plan is not making the determination of whether it's medically necessary or not.

They have hired someone to make that determination for them.

They may--

Chief Justice Rehnquist: Well then it's certainly it's by the plan.

I mean the fact that an agent makes it rather than the plan doesn't make any difference.

Mr. Mattax: --But the reason to make that decision is because the medical necessity decision is a result of a determination by that managed care entity that they are going to manage the care that's provided.

Again the letter that was sent--

Chief Justice Rehnquist: Well how much does that advance the argument.

I mean it's still a decision we won't pay for it.

Mr. Mattax: --But the decision is based on a determination by a managed care entity that in their medical judgment that the care is not necessary.

And what Texas has said, with respect to that managed care entity.

Again not the plan.

Is that when you are going to exercise medical judgment and that is going to... as a matter of practical reality, impact the care a patient receives and potentially cause damage to that patient, then we will regulate that as a separate duty, separate and apart from ERISA.

Justice Breyer: But you could say that in respect to any benefit of a plan.

Let's imagine a plan with millions of different benefits.

Whenever a benefit is turned down, there will always be a human being who told the plan manager it isn't called for.

Now a state could come in and regulate their human being, those human beings in their capacity as professionals and say whenever they make such a mistake, they've made a professional misjudgment and we give you an extra remedy here.

And that seems to be the thing that this statute forbids.

I don't see how to get around it.

I'd like you to tell me how to get around it.

But I don't see it at the moment.

Mr. Mattax: And I believe the answer to that question is what the statute is concerned about is limiting and defining the liability of employers and plan sponsors.

And a statute that regulates the conduct of a third party who sells their services to that plan or plan sponsor, has no impact on the liability of that plan or that plan sponsor.

And in this particular case, in Texas we have made a determination that with managed care entities as an entity, be it an HMO, be it a PPO, exercising medical judgment, we are regulating the medical judgment of that third party.

Justice Scalia: You really don't think... well never mind.

Chief Justice Rehnquist: Thank you Mr. Mattax.

Mr. Mattax: Thank you.

Rebuttal of Miguel A. Estrada

Chief Justice Rehnquist: Mr. Estrada, you have three minutes remaining.

Justice Scalia: Mr. Estrada, you can address what you would like but there are three points that have come up during the Respondent's presentation that I'd be interested with a response to.

Number one, is it true that the people who make the decisions for your client must be medical doctors in Texas?

Mr. Estrada: Well it is true by virtue of DOL regulations which provide that no claim may be turned down, without input from a medical professional in the relevant area.

Justice Scalia: My other two points are, what is your response to the point that the plan is not liable under Texas law--

Mr. Estrada: Well--

Justice Scalia: --just the insurance company here.

Mr. Estrada: --That was going to be one of my points--

Justice Scalia: Just so you can--

Mr. Estrada: --That is consistent with every case, from Pilot Life, Taylor, and Ingersoll Rand.

Because in each of those cases, you were dealing with an insurance company that was acting as a claim administrator or insurer with respect to an ERISA plan.

And if memory serves, the claim was made as well in Pegram, and the Court dealt with at the top of page 223 of 530 U.S., by pointing out that a contract between an HMO and the plan may itself contain elements of a plan to the extent that it governs the circumstances under which benefits may be obtained.

Justice Scalia: --Lastly.

Is there anything to the notion that there is no preemption when the interference with the plan, if there is any, only comes by way of an affirmative defense.

Mr. Estrada: No and in fact it is also not true in this case that that's so.

Because you have been citing subsection (c)(2) of the statute, here under Section (d) it is affirmatively stated that nothing in the act shall be construed to provide... to require the provision of something that is not covered and that is at page... also 59 (a) of the AETNA.

Just let me take one second to make two points.

It is of course open to Texas to have a law that regulates the practice of medicine, by telling hospitals do not discharge somebody who needs care.

And there is nothing in the Federal statute that would keep them from doing that.

In fact we have a Federal statute in PAPA that does something similar with respect to hospitals that take in medicare money.

With respect to how quickly we could do these things Justice Stevens, the DOL regulations say that consistent with the urgency of the situation it must be done as soon as possible.

It can be done informally and the doctor may act for the patient to pursue all of the plan appeals and that is at pages 17(a) and 3(a) of the Appendix to the blue brief.

Brief word about the insurance savings clause, I will not belabor it.

There is a footnote in one of the briefs in the Court of Appeals.

It doesn't raise the clause as opposed to the section 502 issue, but the acid test is that there was no mention of the clause, in the brief in opposition.

Under this Court's rules and Oklahoma City versus Tuttle that is completely reclusive.

Should we need to reach it I will point out that one of the response... the petitioners in this case is a self funded plan, in the CIGNA case, which would be saved by the Deemer clause even if the insurance clause did apply in this case.

And that is to both of them, the question whether the insurance savings clause does apply was conclusively resolved by Pilot Life, has never been revisited by the Court, and that Pilot Life--

Thank you Mr. Chief Justice.

Chief Justice Rehnquist: Thank you, Mr. Estrada.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at 10 o'clock.

Attribution:

The Oyez Project

Featured:

Sabri v. United States - Oral Argument

Fri, 09 Jan 2009 14:49:09 +0000

Case:

Sabri v. United States

Media File:

03-44_20040303-argument.mp3

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transcript.xml

Transcript:

Argument of Andrew Stuart Birrell

Chief Justice Rehnquist: We'll hear argument now in No. 03-44, Basim Omar Sabri v. the United States.

Mr. Birrell.

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

Section 666(a)(2) of title 18 is unconstitutional on its face because it never requires the jury to find an element that the Constitution always requires.

The statute's unambiguous language allows a violation to be proved with entirely local conduct unrelated to Federal spending.

It thus intrudes deeply into an area the Court has recognized as one in which the States possess primary authority.

Chief Justice Rehnquist: Yet there's no doubt, Mr. Birrell, is there, that in some circumstances the statute could be constitutionally applied?

Mr. Birrell: There are no circumstances where 66(a)(2)... 666(a)(2) could be constitutionally applied, Your Honor, because the... because the statute never requires that the jury find a connection between the Federal spending and the offense conduct.

In the same way that there were possibly circumstances in Lopez where there might have been an adequate Federal connection, but because the jury is not required to find it, there are not any circumstances where the statute could be constitutional.

Justice Scalia: Why... why can't it be constitutional under the Commerce Clause?

I know the Government doesn't rely on that, but respondent can be supported here on any... any ground.

Why... why isn't this a commercial transaction as... as, you know, our... our Commerce Clause law is?

So long as the transaction is commercial, we will assume it's interstate commerce.

We'll accept Congress' judgment on that.

Why isn't a commercial transaction when you bribe somebody?

Money for... for whatever the favor he does.

Mr. Birrell: A couple things, Your Honor.

First of all, there is not a requirement that interstate commerce nexus be proved in the statute.

Justice Scalia: That's not necessary.

So long as it's commercial, our cases... our recent cases, say so long as it's commercial, we'll accept Congress' judgment that it's interstate.

Mr. Birrell: Well, if Congress could create commerce... Commerce Clause jurisdiction everywhere that it could spend money, then--

Justice Scalia: No, no, not everywhere it could spend money.

Everywhere there is a commercial transaction.

One of our cases, for example, held that loan-sharking could be covered under the Commerce Clause because it was a commercial transaction, just as illegal as... as the... the bribery here, but if that could be covered by the Commerce Clause, why can't this?

Mr. Birrell: --Because without... without a showing that in each case there was a connection between interstate commerce and the transaction--

Justice Scalia: That's not what our cases require.

Justice Breyer: Is that true of the drug statutes too?

Mr. Birrell: --I'm sorry, Your Honor?

Justice Breyer: I mean, is it true whenever the Feds prosecute a person for a drug transaction, a jury has to determine there was a connection between these drugs and interstate commerce?

I've never heard of that requirement that... that the... that the jury would have to determine whatever facts are necessary for the statute to be constitutional even... even though that's not an element of the offense.

Does that come out of a case or someplace?

Where does it come from?

Mr. Birrell: Well, unless... unless there was an understanding that in every instance there was an effect on interstate commerce, then--

Justice Breyer: I mean, there might be instances where there's no effect on interstate commerce, a home... you know, that... that will be an issue, homegrown marijuana.

So suppose there is some drug somewhere that has no effect.

It just didn't.

There could be such a thing.

We can imagine it.

But does that mean in all these other cases that Congress... that the statute is void because the jury hasn't found... I'd be repeating myself.

You answer.

Mr. Birrell: --I... I think that it is different because the Commerce Clause is... is a regulatory power that permits Congress to regulate.

The Spending Clause power is... is a different sort of power.

It does not make that--

Chief Justice Rehnquist: And you say here Congress does not rely on the Spending Clause because it... it makes conduct criminal against an individual.

Mr. Birrell: --I believe that Congress passed this law under the Spending Clause power.

I believe that's what they intended to do.

All the--

Justice Ginsburg: To spend for the general welfare was the basis in the court below and that combined with Necessary and Proper.

Mr. Birrell: --That's right, Your Honor.

Justice Ginsburg: And that's the position that was taken below, and I think most of the courts of appeals went on that same ground.

Mr. Birrell: It's my understanding that every court that has looked at this has said that Congress attempted to pass this... this particular statute under the Spending Clause.

Justice Scalia: Does... does it matter what they intended to pass it under?

I mean, if they have the power under another... under another head, would... would that not be enough?

Mr. Birrell: That is true, Your Honor.

They could... they could... the statute could be upheld if Congress has the power to do it on any basis.

Justice Ginsburg: The justification sounds like a Spending Clause justification, doesn't it, that the... that they could not by a lesser means safeguard these Federal funds?

They tried narrower statutes and they didn't work.

But what they were trying to do was to safeguard the integrity of the money that they were giving to these units by not having corrupt operations.

Isn't that the case?

Mr. Birrell: That... that's what they said they were trying to do.

They were trying to regulate the integrity of... or... or police the integrity of organizations, agencies, and local and State governments that receive Federal funds.

That's what they said they were trying to do.

Justice Ginsburg: And why is that not satisfactory?

Mr. Birrell: It's not satisfactory because the statute doesn't require any connection between the spending... Federal spending and the criminal conduct.

Justice Kennedy: Suppose that, just to use an analogy in the private sphere, a major corporation has a choice of two subcontractors and one subcontractor is known for engaging in lots of bribery and kickbacks, et cetera.

It's confident that it's got auditors that will be able to protect it in this instance.

But don't you think if you were the CEO of the corporation, you'd rather prefer... rather deal with the subcontractor that was always clean?

It's just a common sense business judgment, and that's all the Government is doing here.

Mr. Birrell: That's not what the Government is doing here, Your Honor.

What the Government is doing here is to criminalize purely local conduct.

They're criminalizing conduct that has no relation to any Federal spending.

Justice Kennedy: Well, it has relation because it wants to give its funds to those entities that it has confidence in with respect to all of their operations.

Mr. Birrell: Well, it can make a choice about giving money or not without criminalizing conduct.

Congress has a number of ways that it can protect its Federal money.

It can protect it under Commerce Clause, Property Clause, not giving money, relying on the States to do... to do what they need to do, False Claims Act, conditional spending.

There's--

Justice Breyer: They really say if we find a city council that takes money and... from us, the city council takes the money for us for some of its programs here.

There's a corrupt city councilman.

We want to prosecute that person.

Why?

Because we want council... members of councils to know that we're not going to tolerate corruption on behalf of the agency that's giving out our money, whether in the particular instance it involved our money or not.

Now... now, why isn't that sufficient connection?

Mr. Birrell: --Because, Your Honor, there is... it may be that what... that is what the Government wants to do, but the question is whether the Government has the power to do that.

Justice Breyer: That's true, but why doesn't it?

Mr. Birrell: It doesn't have the power to do that because there's not an element in the statute that requires there be a connection proved between the Federal spending and the wrongful conduct.

There may be one, but the jury is not required to find one.

Justice Scalia: Suppose the Federal Government had recast the statute and said no State can get... what's the limit... $10,000 or more from the Federal Government unless it agrees to criminalize and impose the same penalty set forth here for any State corruption.

Would that be constitutional under the spending power?

It's a condition to the grant.

Mr. Birrell: It might be if--

Justice Scalia: It unquestionably would be, wouldn't it?

It's take it or leave it.

It's--

Mr. Birrell: --Assuming it wasn't--

Justice Scalia: --it's connected to the grant.

It has some remote connection to it.

That ought to be enough.

It just seems very strange to me that the Federal Government would be able to compel the State to impose such criminal penalties, but it cannot itself do so in connection with its spending.

Mr. Birrell: --In... in Your Honor's hypothetical, it might be coercive, unduly coercive, but other than that, I don't see a problem with your hypothetical.

But there's a... the... the Court... this... the Court has said that Congress can attach conditions to money provided that the four Dole factors are met.

But that is not what's occurring here.

This Court has never said that Congress can use the Spending Clause power to create a criminal law statute.

And the danger with this is--

Justice O'Connor: Well, have we ever said it can't?

Mr. Birrell: --Well, only inferentially by Dole.

So the question is never square with--

Justice O'Connor: I think it's kind of hard to read Dole for that proposition.

I may have missed your response to an earlier question.

You... you bring a facial challenge.

Why should we entertain a facial challenge?

What if we treated it as an as-applied challenge?

Do you say the Government cannot prove the elements that you think are necessary and thereby obtain a conviction?

Mr. Birrell: --I... I say that we... we properly bring a facial challenge because the statute has no element requiring a connection between the Federal spending--

Justice O'Connor: I don't... we don't normally entertain facial challenges to statutes on a ground like that.

If it could be applied properly in an individual case, why would we entertain the broader challenge?

Mr. Birrell: --This statute cannot be properly applied in any case.

It's always unconstitutional because it lacks this connection element.

The statute is like--

Justice Scalia: You say because it lacks the requirement of a jury finding that there was the connection.

Mr. Birrell: --Yes.

Well, there are two concepts, both that there's not an element and that the jury doesn't need to find it.

This statute is... is like the statute in Lopez.

Chief Justice Rehnquist: Well, what if... what if Congress had found that interstate commerce is involved here and did not provide for an individual jury finding in every case, would your argument be the same?

Mr. Birrell: I don't know, Your Honor, but Congress didn't make that finding.

Chief Justice Rehnquist: It's a very candid answer.

Unknown Speaker: [Laughter]

Justice Breyer: Where... where does this... I mean, I've asked you this before, but I'm not sure.

Where does this jury finding thing come from?

It's quite interesting.

But... but where... I mean, suppose that Congress passed a statute under the Patent Clause criminalizing certain conduct in respect to patent, and at the border there might be an... a question of whether it does or does not fall within the Patent Clause, that particular criminal behavior.

But I wouldn't jump from that fact that you'd have a legal argument it's outside the Patent Clause to the conclusion that therefore a jury has to find in every patent crime... a jury has to find that it is within the clause.

I'd have thought that was a question for the judge, not the jury.

So you've been emphasizing the contrary idea, and where do you get it from?

Mr. Birrell: Well, in the... in the... in Your Honor's Patent Clause hypothetical, that is a case where the Court would... or the Congress would have a... an enumerated regulatory power.

This is... this is a different thing.

Now--

Justice Scalia: Well, it has the Commerce Clause power.

I... I don't understand your reliance on Lopez.

You just said just... just as Lopez was bad, whether or not there... Lopez was... was bad because it was not commerce, which is a judgment that this Court will make, whether it's commerce or not, but once it is commerce, you're in a different ball park.

Once it is commerce, we assume it's interstate commerce, and that explains, you know, a whole bunch of our cases, such as our loan-sharking cases.

So Lopez has nothing to do with this case.

Lopez was not commerce.

Now, you... you may argue that... that bribery is not commerce although loan-sharking is, but I'm not sure how strong an argument that is.

Mr. Birrell: --This case is like Lopez because the way I read Lopez... I mean, I understand your point about whether the conduct in Lopez was commerce conduct or not, but the way I'm reading Lopez is that the point is that when you're on the... the fringes of the power, commerce power in that case, that there needs to be a... an element where the jury would find in each case that there was a connection between the exercised power of Congress and the conduct.

So in our case--

Justice Scalia: You think there is such a... such a connection with loan-sharking, good, old, local, you know, break-your-knees loan-sharking.

It's not... not an interstate thing.

Mr. Birrell: --Well, you've... you've told me that... that the Court has said that there is, and I... I accept that.

Justice Kennedy: That's United States v. Perez.

We took a very expansive view of the Commerce Clause.

And it was pretty much of a local transaction in... in the case, but the Court pointed out, you know, the ripple effect that all commercial transactions have.

Mr. Birrell: Well, I would return to my point that I think that if the Congress can create Commerce Clause jurisdiction by spending money and Congress is entitled to spend money under the Constitution anywhere it deems it important for the general welfare, then what would naturally follow, it seems to me, is the general police power that the Constitution denies to the Federal Government.

It seems to me to be an inescapable chain of reasoning that will get us there.

Justice Ginsburg: Have any local law enforcement offices complained about the Federal presence?

Mr. Birrell: There... there's nothing in the record about it, and I don't have anything to offer outside the record of it.

But the... the question whether the local governments or government agents consent to an invasion of their area of authority is... is not dispositive.

Justice Ginsburg: Question whether they regard it as an invasion of their authority or rather a legitimate endeavor by the Federal Government to protect its money.

Mr. Birrell: Well, the... the statute doesn't require the Federal Government to be acting to protect its money.

There... there is not any requirement that this money be the Government's money.

For example, a private citizen offers a... a bribe to an agent.

It could be an agent of a... a corporation.

The offer is refused and 12 months later and for the first time more than $10,000 is given to an unrelated part of the agent's business, the business the agent works for.

Then we now have a Federal crime committed.

There's not any requirement in the statute that there be a connection between the Federal money and the offense conduct.

And furthermore, there's not any requirement that the jury find it.

Chief Justice Rehnquist: Would you like to reserve the balance of your time, Mr. Birrell?

Mr. Birrell: I will reserve the balance of my time, Your Honor.

Argument of Michael R. Dreeben

Chief Justice Rehnquist: Very well.

We'll hear from you, Mr. Dreeben.

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

The court of appeals correctly held that section 666 does not require proof of a Federal connection between the offense conduct and the federally funded program or Federal funds beyond that which the text of the statute itself requires.

Chief Justice Rehnquist: What... what is the basis, Mr. Dreeben?

Under what authority did Congress pass the statute?

Mr. Dreeben: Mr. Chief Justice, the Government has relied on Congress' Necessary and Proper Clause authority to protect its Spending Clause expenditures and programs in this case.

I recognize that the Commerce Clause could also provide a basis for Congress to reach transactions involving criminal activity that affect commerce, but this Court in Salinas v. United States, in describing why section 666 was constitutional, as applied to the facts of that case, discussed that there was a legitimate Federal interest in protecting the particular program that corruption had affected in that case.

And the outgrowth of section 666 historically is of an effort by Congress to improve on previously deficient methods of protecting federally funded programs.

There were--

Justice Scalia: How far does that go?

What if... what if the Federal Government gave the State $1?

Could it make... could it make it... it a crime for any person to bribe any State officer anywhere in any program at all?

You know, the... really is... is there no end to the... to the scope of Congress' purported protection of its funds?

Mr. Dreeben: --Justice Scalia, I think that this Court recognized, as recently as last terms in Jinks v. Richland County, that analysis under the Necessary and Proper Clause is deferential, tracing its roots back to M'Culloch v. Maryland, but there is an attenuation element to the analysis.

The law does need to be conducive and plainly adapted to the end that Congress is seeking to protect.

And in your example of $1 to a State and then protection through criminalizing the activities of hundreds of thousands of agents, there might be an attenuation problem.

Justice Scalia: Do you think $10,000 is... is clearly... what's... what's the... what's the annual budget of New York State, do you know, or California?

Mr. Dreeben: Okay.

The annual budget of California is... at least in 1999, was $242 billion.

Justice Scalia: 242 billion dollars.

Mr. Dreeben: And the Federal Government--

Justice Scalia: And because there's $10,000 of Federal money, a drop of Federal money in this sea of... of California funds, the... the Federal Government can control the whole thing.

Mr. Dreeben: --But there's not a drop.

There's a virtual flood.

There was--

Justice Scalia: No, no.

But for the statute to apply, it takes only $10,000.

Mr. Dreeben: --It does, Justice Scalia, but Congress was well aware that every State is the recipient of billion upon billions of dollars in Federal aid.

There is substantial Federal money flowing to all of the States, and Congress could have dispensed with any dollar limitation whatsoever with respect to State aid and simply made a per se finding that Federal money is so infused into the State's budgetary activities, Federal programs are so pervasive--

Justice Scalia: How much does it give California?

I just... just--

Unknown Speaker: [Laughter]

Justice Scalia: You say it's a big... a big figure.

I believe you, but--

Mr. Dreeben: --As of... as of 1999, California received $35,955,000,000.

Justice Stevens: --But why is California relevant?

This is Minnesota, isn't it?

Unknown Speaker: [Laughter]

Mr. Dreeben: Justice Stevens--

Justice Scalia: It was my fault.

I brought it up as a hypothetical.

Right?

Unknown Speaker: [Laughter]

Mr. Dreeben: --But I have Minnesota too.

[Laughter]

Minnesota received... Minnesota's budget was $36 billion, and it received 4,000,000,496 Federal dollars--

Justice Breyer: What about Massachusetts?

Unknown Speaker: [Laughter]

Mr. Dreeben: --Justice Breyer, I only have 30 minutes and there are 50 States.

[Laughter]

Justice O'Connor: Mr. Dreeben, I am concerned about the breadth of your reliance on the Necessary and Proper Clause and the Spending Clause power here.

It seems to me that Federal funding extends to a huge range of activities, and why, under your theory, couldn't Congress make... take over the entire criminal law scheme because it affects Federal taxpayers?

I mean, I don't see any limit to your theory, and I'm curious why you're so reluctant to rely on the Commerce Clause.

What's going on in this case?

Mr. Dreeben: Justice O'Connor--

Justice O'Connor: Are you trying to overcome the problems of Lopez somehow, get a new thread of analysis that gets you out from under that?

What's... what's happening in this case?

Mr. Dreeben: --No.

I think there are ample avenues for the Federal Government to legislate, when things involve interstate commerce, without worrying about Lopez.

I believe the Court could uphold the statute as a regulation of interstate commerce, but it was clearly not designed with that in mind, and this Court did not so regard it, or at least didn't articulate itself as regarding it that way in Salinas v. United States.

The problem that Congress was trying to solve was a very particularized problem, not the generalized problem of there is crime in America, therefore it will affect federally funded activities.

The problem that Congress was trying to solve was that it would give Federal money to particular entities to... to administer Federal programs, and there would be crime that had the potential to affect those Federal interests, but because of deficiencies or perceived deficiencies in prior statutory law, that crime could not be prosecuted.

In particular, with theft crimes there was a problem because once title had passed with the money to the local entity or State entity, some courts were saying that was no longer theft from the Federal Government and the theft statute didn't apply.

With respect to the Federal bribery statute, 18 U.S.C. 201, lower courts had divided on whether State and local officials who were administering Federal programs could be held accountable as Federal officials.

And to remedy those deficiencies of prior law, section 666, as the court of appeals I think aptly described it, changed the enforcement paradigm, and it said that what we want now is not to focus on particular Federal monies that we have difficulty tracing into federally funded entities or who is a Federal official.

We want to make sure that the entities that we fund to carry out Federal assistance programs are clean, and the way that we are going to do that is to draft a prophylactic statute that ensures that all agents who are involved in the authority to conduct business on behalf of the entity are not engaged in significant acts of theft, embezzlement, or bribery.

It, therefore, included various limitations in section 666 that prevent it from being an all-encompassing, all-devouring statute that sweeps in all related crimes to the entities that are funded.

There's a $5,000 limitation with respect to the transactions that are going to be influenced.

It's not every traffic ticket that is issued by any State agency.

And there is a... a condition, of course, that there be $10,000 of Federal money going into the entity.

Of course, there are going to be cases under this statute where it will be difficult to articulate a clear--

Justice Scalia: $10,000 annually or is it just a... could it be a one-shot deal?

Mr. Dreeben: --It's... could be a one-shot deal.

it's a $10,000 grant during a 12-month period that spans the offense conduct in question.

And as I was saying--

Justice Scalia: If... if the State got... I mean, the way you read it, just because you got $10,000 last year doesn't mean that next year you're still subject to the act.

It has to be--

Mr. Dreeben: --That's right.

Justice Scalia: --during the year.

Okay.

Mr. Dreeben: That's right.

The offense conduct has to be--

Justice Scalia: It says in any 1-year period, but I... I assume that that means--

Mr. Dreeben: --Any 1-year period, but there's another provision in the statute that makes clear that the period can include time before the offense conduct and time after the offense conduct, which is naturally read to mean that it has to span the offense conduct.

And that provision was designed to overcome the difficulty that State and local agents would be bribed for activities that they would have the power to engage in once the Federal money was awarded to their agency.

And in anticipation of Federal money coming into the entity, the officials could engaged in corrupt conduct.

Justice Scalia: --I assume this means that the Federal Government could also criminalize federally robbery or burglary committed against a private individual who has received Federal funds, who has received a Federal subsidy in one way or another.

Right?

Mr. Dreeben: Yes, Justice Scalia, within limits.

I think that there could be a... a point in time at which the Court might say that if the Federal Government passed a statute that said every robbery involves--

Justice Scalia: I mean, that's probably all of us, you know.

Justice O'Connor: All welfare recipients--

Mr. Dreeben: --All money--

Justice O'Connor: --all Medicare beneficiaries, and so forth?

Mr. Dreeben: --Well, the Court... the Court long ago upheld in United States v. Hall a statute that prevented fraud and embezzlement directed at funds going to veterans.

So it has already upheld statutes in which the Federal interest in protecting the beneficiary's use--

Justice Scalia: It was limited to the funds, though.

It didn't say anything you... anybody who gets any money from a veteran is... is... you know.

Mr. Dreeben: --That's--

Justice Scalia: And that's what this says.

Anybody who... who bribes any State official, whether the Federal funds are at issue or not.

Mr. Dreeben: --Well, this... this statute, though, I think rests on a generalization that is less attenuated and more reasonable than statutes that would take the form of the statute Your Honor has described.

This statute basically says if you have corrupt officials in the entity that's getting Federal money, we have reason to worry that you have poor internal controls, that you have a culture of corruption, that you have insufficient mechanisms to root it out, and that the officials that are engaged in corruption today with respect to State money may tomorrow be engaged in corruption with respect to Federal money.

Justice Breyer: So... so call... call this the clean funnel rationale.

The agencies are funnels funneling money to the... and say, look, we have a pretty strong rationale here.

We want clean funnels because a little bit of the money going through is Federal.

Take that as given.

If I were to say you're right, what's the standard where the Spending Clause is at issue?

What words would be used there?

And the reason that this is difficult at the moment for me is because this is not a condition imposed upon spending.

You're not saying to the State, we'll give you the transport money if you... this is really a Federal law protecting the... the spending.

You may be right in this case, but we're going to have to say some kind of standard.

Should we say it's just whatever would be necessary and proper to protect the object of the spending, which is quite far out because you can spend for things you don't have otherwise have the power to do?

Or should we say something else, or should we say we don't have to reach that here because if in fact the power would be there under the Commerce Clause anyway, that at least is good enough and isn't a stretch of the Spending Clause where there's a necessary and proper rationale?

What in your view is the proper way to write those words?

Mr. Dreeben: Justice Breyer, I think the most logical way to write this opinion is to rely on the test that this Court articulated in 1819 through Chief Justice Marshall with respect to the power under the Necessary and Proper Clause.

Here the enumerated power that's being protected is the spending power.

The Necessary and Proper Clause was long ago construed to give Congress substantial deference to past laws so long as they are conducive to the end that Congress is trying to achieve and its legitimate.

Justice Kennedy: The... the M'Culloch language?

Let the end be legitimate--

Mr. Dreeben: That's... that's correct.

That's correct, Justice Kennedy.

Justice Kennedy: --Suppose that... that to... to take the phrase, the clean funnel theory, we thought that that theory is best sustained under the Commerce Clause.

What would be the closest case that we could cite in support of our position if we were writing under the Commerce Clause?

Are there cases in which governmental entities and... and their... the integrity of the operations are protected under the Commerce Clause?

Have we ever talked about that?

Mr. Dreeben: I can't think, off the top of my head, Justice Kennedy, of a Commerce Clause case that was specifically directed at governmental activity.

Of course, this statute is not specifically directed at governmental activity.

It's directed at any fund recipient, be it private, Indian tribe, or governmental.

So the Court could rely on cases probably like Reno v. Condon in which the Court upheld a law that dealt with an item in commerce, be it in the hands of the Government or in hands of private parties.

And of course, United States v. Perez did uphold a very broad view of the Congress' power to regulate transactional conduct.

Justice Kennedy: No governmental entities in that case, as I recall.

Mr. Dreeben: No governmental entities in... in Perez, but of course, this case doesn't focus on governmental entities as such.

What it focuses on them is... it focuses on them in their capacity as administrators of funds that are paid out under Federal assistance programs.

It treats them identically to private entities that also receive Federal funds under Federal programs, which is strong evidence that what Congress had in mind here was ensuring that its purposes and goals under the Spending Clause aren't frustrated by corruption within whatever entity it is that happens to be taking the funds to administer the program.

Justice Stevens: I think some of our--

Justice Ginsburg: --Is the... is the Spending Clause... is it... is it something new or were the statutes that were inadequate, the predecessors of 666... what was the constitutional heading of authority that the predecessors of 666--

Mr. Dreeben: Justice Ginsburg, 18 U.S.C., section 641, which was the Federal theft statute, was really a protection of Federal property, and that probably could be justified under a variety of enumerated powers under Article I.

18 U.S.C., section 201 was the Federal bribery statute that primarily focuses on people who are Federal officials or who are designated to become Federal officials.

And this Court in United States v. Dixson interpreted the statute to cover State and local officials who were administering Federal programs because they were acting on behalf of the United States.

And with respect to that branch of section 201, although the Court did not address the constitutional question in Dixson, I think that the proper grant of authority to analyze it is the Necessary and Proper Clause as applied to the spending power because it, like section 666, criminalizes the activities of non-US persons because they are engaged in an activity that relates to federally funded programs.

So the theory of protecting through criminal law the misdeeds of agents that may impair Federal programs or impair Federal funds is not new.

What was new about section 666 was its removal of the impediments that Congress found in the prior law so that it could have an effective mechanism to ensure the integrity of its programs.

The case that is before the Court today is a facial challenge to section 666, arguing that it is always and everywhere unconstitutional.

That submission is impossible to reconcile with this Court's decision in Salinas v. United States which specifically said that as applied to the conduct in that case, where there was a connection to a Federal program, the statute was constitutional as applied.

What that means is that the court of appeals was clearly correct in holding that section 666 is not facially unconstitutional.

It leaves open whether there is an as-applied constitutional challenge to section 666.

No such challenge was brought in this case, and the United States made a proffer to the district court indicating how the particular bribery in this case would have had an effect on Federal funds and Federal programs, making clear that no such as-applied challenge would have succeeded.

So the only way that petitioner can prevail in this case if this Court is prepared to say that notwithstanding its prior decision in Salinas, holding that section 666 was constitutional as applied, it now turns out that section 666 is facially unconstitutional and can never be applied to anyone anywhere.

We submit that that is incorrect.

Justice Kennedy: --If there were a nexus requirement that we wrote into the statute... the hypothetical gets a little murky at this point... would... would juries have to find that there was a nexus or could the judge instruct--

Mr. Dreeben: Judging from the way that this Court resolved the Salinas decision, Justice Kennedy, it would be a constitutional as-applied challenge to be resolved by the Court.

This Court in Salinas said that the statute was constitutional as applied and there had been no jury finding on any nexus requirement.

Justice Kennedy: --But in subsequent trials, if we found a nexus requirement, would the juries have to determine the nexus?

Mr. Dreeben: I don't think that they would, Justice Kennedy.

Just as in a case like New York v. Ferber where the Court held that child pornography can be outlawed across the board, the statute is not--

Chief Justice Rehnquist: Well, but--

Mr. Dreeben: --It's not invalid on overbreadth grounds.

Chief Justice Rehnquist: --Yes.

Mr. Dreeben: But the Court left open the possibility that there would be as-applied challenges, and it didn't suggest that those as-applied constitutional challenges would raise jury issues.

They would instead raise issues of law for the--

Chief Justice Rehnquist: Well, but if Congress in its... in... in the statute says there must be some connection with interstate commerce, then certainly it's a jury issue.

And Justice Kennedy's question, as I understood it, was that supposing the Court were to read in a nexus requirement, just exactly what Congress might have put in.

You say that would not be a jury question then.

Mr. Dreeben: --I am judging, Chief Justice Rehnquist, by the way that this Court resolved the legal issue in the Salinas case.

The Court would have two options open to it if it decided, contrary to our arguments today, to read in some sort of a nexus requirement.

It could do what the Second and Third Circuits have done, which is, we think incorrectly, superimpose on the statute as an implicit element that has no textual foundation some sort of a Federal nexus.

Now, if the Court did construe section 666 to require a Federal nexus, that's clearly a jury issue under United States v. Gaudin.

Every element, be it implicit or explicit, has to be found by the jury.

But alternatively, I understood Justice Kennedy to be suggesting that there could be a constitutional overlay to ensure that there was no unconstitutional application of section 666, and if it's treated as a pure constitutional question, then I think the better reading of this Court's decisions is that it would be a question of law--

Chief Justice Rehnquist: Do you think this Court's decisions have been consistent on that question?

Unknown Speaker: [Laughter]

Mr. Dreeben: --I think they have been groping towards consistency.

[Laughter]

Justice Scalia: Let me write that down.

Groping towards--

Unknown Speaker: [Laughter]

Justice Scalia: I can... I can use that in--

Unknown Speaker: [Laughter]

Justice Ginsburg: Mr. Dreeben, what answer do you give to the dissenting judge in the Eighth Circuit who said it is now a Federal crime for an auto mechanic to induce a public high school principal to hire him to teach shop class by offering free car repair?

Mr. Dreeben: Well, so long, Justice Ginsburg, as the statutory valuation elements are met, that the transaction involves $5,000 or more, which it probably would, given teacher salaries, then it would be covered by section 666, and the Government would have discretion to prosecute it.

I think what that illustrates is that the broad prophylactic approach that section 666 takes leads easily to the manufacturing of hypotheticals that seem attenuated from core Federal interests.

And the choice that Congress had before it was to draft a statute that would go to that degree of breadth but eliminate impediments that had previously hobbled the enforcement of a law or draft a statute which Congress believed was both under-inclusive and would put to the jury perhaps difficult and murky issues of whether there really was a Federal connection that justified application of the statute.

And let me give an example because it's a very important, classic example of the way that we use section 666.

Suppose that there is a city council person or a mayor or some other official who has responsibilities for some respect... in some respects administering a Federal program or Federal funds, and he turns out to be engaged in corruption with respect to non-Federal monies and non-Federal programs.

The Government wants to prosecute him to ensure that he doesn't begin to widen his field of operation and harm the Federal program, but in the facts that can actually be proved, there's no connection between the Federal program and the offense conduct.

Conceivably could a statute be drafted that would allow the Government to say that's the kind of Federal nexus that's covered?

Certainly, but there are many, many hypotheticals where the potential injury to Federal interests is not necessarily going to be easy to articulate and prove to a jury.

As a matter of discretion, the United--

Justice Scalia: --Who... whose burden is it?

I mean, assume we accept your... your proposition that we should uphold it on its face, at least, and that future as-applied challenges will still be allowed.

Would it be the burden of the defendant to establish that... that this goes too far, that this is not reasonable protection of the Federal monetary interest?

Mr. Dreeben: Yes, Justice Scalia.

If it's a question of law, is the statute unconstitutional as applied, then the defendant should have the burden of establishing that.

But I understood Justice Ginsburg's hypothetical to raise the question what if Congress had drafted a narrower statute that had some sort of an offense nexus element.

Then we'd have to prove it up.

The United States Attorneys Manual does direct prosecutors to use 666 in cases where there's a substantial and identifiable Federal interest.

So what you have here is a combination of Congress saying we need a statute that's adequate to vindicate Federal interests and prior efforts to draft narrower ones have frustrated that goal.

We're going to draft a broader statute.

And then the Federal executive branch uses its discretion to prosecute cases that do, indeed, pose a real threat to Federal interests.

Now, that's as a matter of discretion.

It's not as a matter of constitutional law, and it's not as a matter of what the statute provides.

Chief Justice Rehnquist: Well, then why should we take that into consideration deciding the question before us?

Mr. Dreeben: It's not relevant, strictly speaking, to the constitutional question.

What it is relevant to is why it was rational for Congress to draft a somewhat broader statute without fearing that, by virtue of having given the executive branch this power, State criminal law would be thoroughly swamped, I believe as one of the dissenting opinions said.

Chief Justice Rehnquist: But what if you have a new executive coming in who is really hot on this subject and says we want to prosecute every case we can under it?

Mr. Dreeben: Then I'll have to withdraw this statement.

[Laughter]

Justice Scalia: Or an even more realistic hypothetical is the United States Attorney in Chicago or New York, who are not always, shall I say, responsive to the directives of central justice, bringing a prosecution against a political opponent that has really no connection with a Federal interest.

That might happen.

Mr. Dreeben: Justice Scalia, I often say that the only way that we get uniformity in Federal criminal law enforcement is from a decision by this Court.

If the Court has no further questions.

Chief Justice Rehnquist: Thank you, Mr. Dreeben.

Mr. Dreeben: Thank you.

Rebuttal of Andrew Stuart Birrell

Chief Justice Rehnquist: Mr. Birrell, you have 12 minutes remaining.

Mr. Birrell: Thank you, Your Honor.

Turning first to the discussion about Salinas, Salinas did not decide the issue presented in this case.

The constitutionality of the statute was not before the Court in Salinas.

Salinas was a question of statutory interpretation.

What the Court appeared to do was to conduct a harmless error review because the constitutionality had not been raised in the briefs, was not in the cert petition, and it does not impede our facial challenge.

I think that this... this--

Justice Scalia: You... you think Salinas, had the constitutional been raised, would have... should have come out the other way.

Mr. Birrell: --I think that if the constitutional issue had been raised in Salinas, it would have come out the other way, yes.

I think as well that if I could direct the Court to page 34 of our brief, that this will respond to the discussion about the element, that this is an analysis about the element in Lopez.

We would submit the same would apply here.

There are many noncommercial applications of this statute, for example, bribery regarding civil rights law.

So I don't think the Commerce Clause is... is the answer.

Furthermore, in... 666(a)(2) doesn't even require any actual recipient corruption because the third party to the funding contract under (a)(2) can... can offer a bribe to an absolutely incorruptible official and yet still be charged with a Federal crime.

The... the overreaching question in this case, Your Honors, is that Federal power must have judicially enforceable limits and this statute ignores them and is unconstitutional in every instance.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Birrell.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Tennessee Student Assistance Corporation v. Hood - Oral Argument

Fri, 09 Jan 2009 14:49:06 +0000

Case:

Tennessee Student Assistance Corporation v. Hood

Media File:

02-1606_20040301-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Daryl J. Brand

Chief Justice Rehnquist: We'll hear argument now in No. 82... rather, 02-1606, Tennessee Student Assistance Corporation v. Pamela Hood.

Mr. Brand.

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

This Court's decisions recognize that even in subject areas where Article I grants Congress complete and exclusive authority to make laws, unconsenting States are still immune from suits by private parties.

Justice O'Connor: Well, let's talk a little bit about the notion that's raised in one or more of the amicus briefs, that a bankruptcy proceeding is akin to an in rem proceeding or is an in rem proceeding, such as might be the case in an admiralty suit where we would think the State would be bound.

Now, would you address that argument, which I found possibly persuasive?

Mr. Brand: Certainly, Your Honor.

We would submit that there... there is no authority from this Court supporting the view that there is an in rem exception from sovereign immunity in the bankruptcy context.

The argument instead is made by analogy, as Your Honor referred, to the... the admiralty case of Deep Sea Research, but the Deep Sea Research case is limited to the admiralty context.

It's limited to the special aspects of admiralty law that had developed over hundreds of years, certainly 200 years of... of our Nation's experience.

Justice O'Connor: Well, why doesn't it fit in the bankruptcy context too where the debtor's assets are assembled in kind of an in rem proceeding and the creditors share in it?

It could have very unfortunate consequences certainly if... if your position were upheld.

Mr. Brand: Well, Your Honor, although there certainly are in rem aspects to bankruptcy jurisdiction in the context of dealing with the property of the estate that is before the court and that is in the custody of the court, bankruptcy jurisdiction also embraces other... other aspects of in personam jurisdiction involving the parties and... and personal relationships.

Justice Kennedy: Well, could we just stick with the in rem for a moment?

Suppose there's a $100,000 on the usual free-for-all because there are more... the... the debts exceed that amount.

The State gets notice.

It decides it's not going to appear.

The bankrupt is... is discharged.

At the very least, if the State then later sues on the debt, is the... can the discharge be set up as a defense?

Mr. Brand: Well, Your Honor, there... there is authority from... from the lower courts that... that it could in fact, and that in... in that situation, the... the State might be bound by a general discharge order.

Chief Justice Rehnquist: Well, what... what happened here was something where... where a summons was issued to the State, wasn't it?

It was... the State didn't just remain outside and do nothing.

Mr. Brand: Well, that's... that's exactly right, Your Honor, and it also is a situation in which the State was not making a claim against the... the property of the bankrupt estate.

Justice Kennedy: Yes.

It's hard to think of a debt as part of a res.

I... I can't quite--

Mr. Brand: And that--

Justice Kennedy: --get that.

And I understand, but just on the basic point of whether or not just for a discharge of a debt, the State can be bound, you say you think it might be plausible, but the State would be bound by the judgment if it later sues on the debt.

Mr. Brand: --I don't want to concede that point, Your Honor.

I think there is authority certainly that would... that could support that, and there are decisions from the... from the circuit courts, particularly the Fourth, the Fifth, and the Ninth, which have held that a discharge order under those circumstances would be binding against the State.

But each of those courts has also upheld sovereign immunity as a bar to a suit against a State as the State asserts in this case.

Justice Stevens: But this is not a normal suit against the State.

This is a suit in which the debtor seeks authority to get a discharge, isn't it?

Mr. Brand: That's right, Your Honor, except that--

Justice Stevens: So the proceeding itself is to determine whether or not she's entitled to a discharge on the debt at issue.

Mr. Brand: --Yes.

She is... she has already received a bankruptcy discharge, a blanket discharge from debt.

This is a proceeding to determine if this particular debt qualifies under that.

And the way the statute is written, the way... the way Congress has set this up is that the debt is presumptively nondischargeable.

It is an exception from discharge until such point as the debtor establishes undue hardship, at which point the debt would be absolved and she would... she would, in effect, have a discharge.

But again, the... by... by the nature of the way the--

Justice Stevens: If she... if she prevails in that disputed factual matter, then it will be just like any other discharge case.

If... if the hearing goes forward and she prevails as a matter of fact, then it would be just like any other discharge case, wouldn't it?

Mr. Brand: --No, it wouldn't, Your Honor.

A normal discharge case would essentially not involve at all the adjudication of individual debts.

The discharge is--

Justice Stevens: No.

I'm saying if she prevails on the disputed issues of fact, thereafter it would be just like a normal discharge case.

Mr. Brand: --It... it... yes, if I'm understanding, Your Honor.

Yes, she would have, in effect, a discharge from that debt.

Yes.

Justice Scalia: Moreover, the... the fact that this proceeding had to be brought against the State was purely a result of congressional disposition.

Congress could have treated these debts to the State like all other debts, in which case they would have been automatically discharged.

Mr. Brand: That's exactly right, Your Honor.

Justice Scalia: So... so that the... the argument that the bankruptcy... the in rem nature of the bankruptcy procedure gives... gives her all the protection that the Constitution at least requires, vis-a-vis the State, it seems to me is a strong one.

It's only because of the statute that... that this action had to be brought.

If Congress really wants to discharge her from debts to the State, it could have done so by simply treating the State like all other debtors.

Mr. Brand: I think that's exactly right, Your Honor.

The debt could be treated as a discharged debt, in which case the State would certainly be bound by the operation of that law, but that is not--

Justice Ginsburg: Isn't it... isn't it odd that you are objecting to this proceeding where, if Congress then said, okay, we'll make it dischargeable, you will be worse off?

In other words, Congress is trying to ameliorate the ordinary effect of the bankruptcy law to give the State an advantage.

And your argument is to the effect of, Congress, you can treat us just like all the others, and we'll be worse off than we are now, but once you give us this favor, then you... the... the law is unconstitutional.

You can't give us a favor.

That seems to be the essence of your argument.

Mr. Brand: --No, Your Honor.

I... I would submit our argument... our argument is not that the State is immune from the effect of the statute that would allow discharge upon showing of undue hardship.

We would recognize that that is... that is an appropriate part of the... of the exercise of Congress' bankruptcy power.

Our issue is with the provisions which are there by virtue of the nature of the way that... that exception is written and also by virtue of the bankruptcy rules that require that it be raised in the form of an adversary proceeding in which the State could be summoned into court, in bankruptcy court, anywhere in the country.

Well, could it be adjudicated without an adversary proceeding, just say the debtor comes in and says, I'm giving notice to the State?

If they want to come in, they can, but it's not... it's... I'm not going to call it or the statute doesn't call it a summons and complaint, doesn't call it an adversary proceeding, just a proceeding to establish the status of this obligation.

Your Honor, I think as Justice Scalia suggested, Congress could write a statute that would make a student loan dischargeable, more or less by operation of law, but we would submit that the way this statute is written... and again, if we look--

Justice Ginsburg: I'm not asking about making it totally dischargeable, but Congress wants to achieve this result and sensitive to your concern.

So it says, fine, we're going to make it nondischargeable unless the student shows undue hardship, but because the State doesn't want to receive a summons and complaint, we're going to do it in a nonadversary proceeding.

The student will establish it to the satisfaction of the bankruptcy court or not, and the State will be given notice but not a summons and complaint.

Would that be satisfactory?

Mr. Brand: --Your Honor, I don't believe it would.

I think that in substance that would be essentially the same as the adversary complaint that... that we're talking about here.

And... and under... under Coeur d'Alene and... and the discussion in other similar cases, the question here can't turn on the mechanics of the pleading or on the... the style of the caption.

Justice Scalia: So you... you would have no problem with Congress' amending this statute so that it reads if the State chooses to waive its sovereign immunity, the debtor has to proceed in this manner.

However, if the State refuses to waive its sovereign immunity by appearing in the proceeding, the debt will be automatically discharged.

You... you would have no problem with that, I take it.

Mr. Brand: I'm not... I'm not certain that that would not be the same type of statute that I... I objected to a moment ago.

Justice Scalia: No. I thought you accepted that a moment ago.

I thought you accepted a moment ago that Congress didn't have to provide this special treatment of the States at all.

If Congress didn't have to provide it at all, certainly Congress could say if the State chooses not to... not to take it, not to appear in the proceeding, we'll dispense with it.

I... it seems to me the greater includes the lesser.

Mr. Brand: Well, I... I agreed, Your Honor, and I still agree that... that Congress could fashion a statute that would make student loans dischargeable in the same manner as... as any other debt.

And in... in that case, it... it would take place the same as any other debt.

And of course, if... if the State were to waive its sovereign immunity and enter into a bankruptcy proceeding and... and voluntarily participate, then... then it could do and... and the court could act accordingly without any special enabling legislation by Congress.

Justice Breyer: I... I don't understand what the statute has... how the statute is involved in this.

I mean, the statute just sets a standard for discharging a... a student who has an educational loan.

It says it has to be undue hardship.

What's wrong with that?

I mean, why can't... there are dozens of statutes... dozens of statutes that say... I guess dozens.

I'm not a bankruptcy expert, but statutes that say you get this kind of a discharge if there hasn't been a fraudulent conveyance, but if there has been, you don't get it, and if it's this, you don't get it, and if it's that, you do get it.

All these may involve debts owed to or... the State.

Are... are you saying... what has the statute to do with this?

The statute just sets a standard for getting a discharge.

Mr. Brand: Well, Your Honor, I... I believe that this statute... this particular subsection affecting student loan discharge is really unique within the exceptions to discharge.

Justice Breyer: All right. Let's assume it's unique.

Mr. Brand: There--

Justice Breyer: What is it in the Constitution or the Eleventh Amendment that says Congress cannot set a special standard for discharging a bankrupt from a certain kind of debt?

Mr. Brand: --Congress--

Justice Breyer: What... what in... what in the Constitution says that if that kind of debt happens to be one that is owed to the State, Congress is forbidden to do that?

I don't... I just don't understand it.

Mr. Brand: --Your Honor, we... we do not dispute that Congress has the power to set a separate standard for this type of debt--

Justice Breyer: I know and so why is the State, if it happens to be owed that kind of money, in any sort of a different position?

Mr. Brand: --Well, the... the question is not the effectiveness of the congressional determination regarding how to handle that debt, but rather the constitutionality of the means by which Congress--

Justice Breyer: Now, then what you're quarreling with is, of course, not the statute.

You are quarreling, as Justice Ginsburg pointed out, with a bankruptcy rule that happen to use the word adversary proceeding.

But suppose the rulemakers had simply said, this need not be done in an adversary proceeding.

It can be done in exactly the same kind of proceeding as discharging any other kind of debt.

I, the bankruptcy judge, will follow the congressional mandate as to when it is discharged.

You will notify all debtors, Mr. Bankrupt, including the State, and if they want to come in and protest it, they can.

Now, why... what would be unconstitutional about such a provision that never uses the word adversary proceeding?

Mr. Brand: --Well, Your Honor, our objection is not merely to the bankruptcy rules.

I would... I would repeat that... that--

Justice O'Connor: I read your position to be that the State isn't bound at all, for instance, that the bankruptcy court cannot discharge property liens held by the State.

I mean, I... I read your position as being that the State cannot be forced into any aspect of the bankruptcy proceeding.

Justice Breyer: And so did I.

Justice O'Connor: I guess... I guess the... you would say the State doesn't have to abide by the automatic stay.

Mr. Brand: --Oh, certainly not, Your Honor.

Certainly not.

And I thought that we were clear in our briefing that we... we recognize that the... the State would be bound by the automatic stay because it's automatic.

It is by operation of law and by operation of the Supremacy Clause--

Justice Breyer: I'd rather like to get the answer to the question which is I understand what position you took in the brief.

I want to know why.

I want to know what the logic is.

I can't find anything in the Constitution that says that Congress cannot impose the same standard in respect to discharging a debt owed to the State as it applies to a debt owed to anybody else.

Now, either you agree with that proposition or you don't.

And if you don't... and I think you don't... I'd like to know what the theory is.

Mr. Brand: --Your Honor, I agree that Congress can make those distinctions.

I--

Justice Breyer: Fine.

Once you agree with the proposition, then all your objecting to is the word adversary in the word adversary proceeding, and it takes 3 minutes or less for a good expert simply to get rid of that adversary proceeding and have the same thing done in an ordinary proceeding.

Now, I want to know the answer to what I say, not that you disagree with it.

I know you disagree with it.

I want to know why you disagree with it.

Mr. Brand: --I disagree with it because the... the legislative reports as to that subsection, section 5239(a)(8), strongly point out that the statute... that that subsection is intended to be self-executing and that the creditor, the lender, the guaranteer, the... the guarantee institution, are not required to initiate action but instead can rely on the nondischarge, on the exception from discharge.

So by... by structuring the... the exception that way, we would submit that Congress, as this Court has recognized in other situations, has given elevated status to that creditor's position, has recognized that creditors of those kinds of debts have interests in the payment of those debts that outweigh the normal fresh-start policy that... that underlies bankruptcy.

So our position is that it does turn on the nature of the statute and not merely those bankruptcy rules that require--

Justice Scalia: The statute... the statute doesn't... doesn't require, does it, that that preferred position be established in an adversary proceeding?

Mr. Brand: --Certainly not by express terms, Your Honor, but... but again, the rules... rules made consistent with that statute, together with that legislative purpose, would certainly indicate that... that--

Justice Scalia: And I suppose you're saying this is an adversary proceeding.

Regardless of whether--

Mr. Brand: --Oh--

Justice Scalia: --regardless of how... how it got to be so, whether it got to be so through rule or through anything else, it's an adversary proceeding and the State cannot be hailed in in this fashion.

Mr. Brand: --That's exactly right, Your Honor.

There's no dispute about that.

I mean, this--

Justice Breyer: No, but there is a dispute about whether you could, in fact, call this kind of adversary proceeding, given the underlying standard that all it is is a way of getting to the same result, really not an adversary proceeding for purposes of the Eleventh Amendment, since it has no functional difference whatsoever from a proceeding that isn't labeled adversary but simply gives the State notice of what's going on and permits the State to come in, just as if it worked, which is ordinary proceedings.

Mr. Brand: --Except that ordinary proceedings in bankruptcy, as I mentioned earlier, do not involve the individualized adjudication of debts.

They involve other issues.

They involve martialing the assets.

They involve assessing the--

Justice Breyer: That's a good answer.

Justice Stevens: Mr. Brand, can I ask you--

Justice Breyer: --Now, what about--

Justice Stevens: --May I ask one question?

Did I understand you correctly to say that you did not contest the fact that if... if... that if they had a blanket rule that all student loans are automatically dischargeable, that would be true even if the creditor was a State?

Mr. Brand: --Certainly, Your Honor, and the--

Justice Stevens: And does that mean you also would agree that any ordinary commercial obligation to the State such as paying rent for an... an office suite or something like that could also be dischargeable and there would be no sovereign immunity problem there?

Mr. Brand: --Yes, Your Honor, and the reason... the reason I agree to that is because that does not require an adjudication.

It... it would occur by operation of law by which--

Justice Stevens: Well, but there has to be... there has to be a final order in the bankruptcy proceeding discharging... you know, giving the... the debtor a discharge.

Mr. Brand: --But we would submit in a... in a very real sense that would be surplusage.

Justice Stevens: But the... but the net result is I thought your position in your brief was somewhat different from that.

That's why I wanted to be sure about it.

You do agree that... that the sovereign immunity is not a valid objection to a discharge of a bankrupt estate.

Mr. Brand: That's... that's right when the discharge is by operation of law.

And again, I would analogize to the... the situation of the automatic stay provision that... that Justice O'Connor raised.

Again, that operates automatically when the--

Justice Stevens: So, but the difference in the automatic stay if the... if the debtor had to go in and prove his name, serial number, and rank or something first, so it wasn't completely automatic, then you would say you have a sovereign immunity objection.

Mr. Brand: --Possibly, possibly not.

Again, I would submit that there's authority from lower courts that would... would possibly--

Justice Stevens: Well, I'm really not so much interested in the authority from the lower courts as I am curious about your position.

What exactly does the sovereign immunity defense protect for you?

Mr. Brand: --In this case the sovereign immunity defense protects the State from being made a defendant and from having compulsory process issued against it to appear in a bankruptcy court that could be in any State of the union in this case.

Now, the... the reason I was referring to authority from other courts is to... is to remind the Court that all of the courts that have... that have made the type of holding that Your Honor is referring to have also recognized the applicability of Eleventh Amendment immunity in adversary settings.

Justice Stevens: I know, but it seems to me somewhat anomalous to say that if you want to do it without giving us a hearing, you can go ahead and do it, but if you give us notice and a hearing and an opportunity to respond, then you're protected by the Eleventh Amendment.

Mr. Brand: Well, again--

Justice Stevens: A rather strange position.

Mr. Brand: --again, Your Honor, I think... I think we're talking about very different things there.

There is... there is quite a difference between the general discharge, which again occurs without individualized adjudication of... of debts... that is... that is a distinct thing under the bankruptcy laws from a situation in... in which there's a proceeding involving the dischargeability of a particular debt--

Justice Stevens: Well, you say--

Mr. Brand: --such as we have here.

Justice Stevens: --it could well be that the State filed a claim and proved up its claim and then there's not enough money to pay it, the claim, but there would be some kind of proceeding to establish the claim.

Would that be different then?

Mr. Brand: Well, in... in a case where the State had filed a claim, the State would have voluntarily appeared in the... in the proceeding as relates to the subject matter of that claim.

So there would not be any sovereign immunity situation there at all.

Justice Stevens: So that if the State voluntarily appears, it would automatically waive its sovereign immunity defense.

Mr. Brand: As to that claim, yes.

Chief Justice Rehnquist: Well, that's the Gardner case, isn't it?

The--

Mr. Brand: Yes, I believe so.

Yes, Gardner v. New Jersey.

Justice Kennedy: --Tell me how bankruptcy works.

Is the United States trustee potentially part of any proceeding that the trustee wants to be involved in?

Can the trustee have come into this proceeding voluntarily if... if he or she chose?

Mr. Brand: I... I believe so, Your Honor, but I'm not certain if that is applicable in every... in every district.

And I'm not... I apologize.

I'm not certain as to that.

I know the U.S. trustees have... have those powers and responsibilities in at least... at least a good number of bankruptcy--

Justice Kennedy: Because it does seem that if an action is brought by a U.S. trustee, that's an officer... that's the Federal Government.

Mr. Brand: --Well, certainly that would be a different situation and certainly the State--

Justice Kennedy: Which is another way of solving this problem.

Mr. Brand: --That's right, Your Honor.

That's... that's conceivable.

Certainly the State would have no sovereign immunity from... from an action by the United States.

Justice Ginsburg: In... in a world of limited resources, especially for the U.S. trustee... this is a no-asset bankruptcy.

If the U.S. trustee is going to come into each one of these proceedings, it might be rather impractical.

I was curious about the credit... the creditor class for these student loans.

It's not just States that are creditors when a student tries to get out from under the student's debts.

What... what other entities would be in this situation, not with respect to sovereign immunity, but as someone who has loaned money to a student?

Mr. Brand: Well, certainly any lending institution could... could be involved as a... as a creditor in a student loan.

The... the Federal and... and I guess there are State programs as well, but involve fairly complicated relationships between lending institutions and secondary holders and guarantors at... at various levels.

Justice Ginsburg: Do you know what part of the business the States have, to what extent, compared to other creditors, other lenders?

Mr. Brand: Well, the... I... I can speak for the State of Tennessee.

The State of Tennessee is involved as a guarantor, not as a lender, but merely as a guarantor in conjunction mainly with these... these Federal loan programs.

And the... the State of Tennessee is participating not as a... a business actor, but as a means of... of pursuing the public policy of making it simpler and easier for Tennessee residents to obtain a college education.

So the... the State as a guarantor is... is not in this... in the position at all of an ordinary creditor, really, as far as its... as far as its purpose and... and even as far as its... probably its financial calculations in... in how to deal with that.

Again, it's... it's a matter of pursuing the public policy of making it easier for... for the students, for these debtors to obtain their college education.

Justice Ginsburg: So for... for the primary lender, this procedure would be fine.

The... so the debt wouldn't be dischargeable to the initial creditor, the one who loans--

Mr. Brand: I... I believe... I believe, Your Honor, certainly the... the initial creditor could certainly be involved, would have no sovereign immunity defense.

There would still be the requirement of the undue hardship showing.

Justice Ginsburg: --But if you... if you... Congress was to say, well, too bad, we tried to give them a break, we can't do it, so we're going to make them dischargeable just like any other debt, that would have a very adverse effect on all the other creditors in the picture who are not State actors.

Mr. Brand: It certainly would, Your Honor, but it also could create complications as far as... as far as whether States would choose to participate in... in student loan programs.

Again, it's a policy determination made State by State.

There's no requirement that the States participate in... in such programs.

It... it's part of the balancing of those interests I think that has resulted in this statute and in this statute being written the way it is.

At one point in time not too long ago, student loans were discharged in an ordinary bankruptcy, and then it was... it was cut back to only loans that had been in... in payment more than... more than 5... more than 7 years and more than 5 years, and now, of course, it's cut back all the way to where it's only subject to discharge upon a showing of undue hardship.

So there's... there's definitely a policy of wanting to make student loan repayment more certain and make that a... a different relationship from other debtor/creditor relationships.

If there are no further questions from the Court at this time, I would like to reserve the remainder of our time.

I would ask that the judgment of the Sixth Circuit be reversed.

Argument of Leonard H. Gerson

Chief Justice Rehnquist: Very well, Mr. Brand.

Mr. Gerson, we'll hear from you.

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

The questioning of the petitioner reflected the fact that there is an inherent conflict between the requirements of the operation of the bankruptcy system and the State's sovereign immunity.

This conflict has been recognized in this Court's past opinions.

For example, in Van Huffel v. Harkelrode, a 1931 decision of this Court, it was claimed that the sale of a debtor's property free and clear of... of the State's tax lien was not effective but the State lacked jurisdiction.

This--

Justice Breyer: The State lacked?

Mr. Gerson: --Jurisdiction over the--

Justice Breyer: The State lacked?

Unknown Speaker: The Supreme Court.

Mr. Gerson: --I'm... I'm sorry, Your Honor.

The Court lacked jurisdiction over the State.

And this Court denied that... the State's position.

Subsequent to that in Gardner/New Jersey, which is a case that... that which is noted for waiver, the State also took the position that not... that the property that was a part of the debtor's estate was limited to the debtor's equity and did not include that portion of the property of the debtor that was subject to the State's tax lien.

Again, this Court said, no, all property of the debtor is part of the estate, including that part that's subject to a State's tax lien.

Chief Justice Rehnquist: Of course, in that case the State had come into bankruptcy... the bankruptcy court voluntarily.

Mr. Gerson: That's correct, Your Honor.

But the opinion... that portion of the opinion in Gardner that addresses that issue does not rely upon the fact that the State filed a proof of claim.

Justice O'Connor: If... if we were to analogize bankruptcy proceedings to in rem proceedings in general, nevertheless this dischargeability proceeding is set up under the rules as an adversary one where a notice and a summons is filed on the State.

That's a product of how the rules are constructed.

Now, presumably in time they could be changed, but what about this case?

Mr. Gerson: To allow this case to be determined on the basis that an adversary proceeding had been filed would be elevating form over substance because the jurisdiction of the court with respect to the claim arises from the court's jurisdiction over the property of the estate and claims made against it and the... and the debtor.

They're all part of the res.

So the filing of an adversary proceeding was merely a manner... merely allowing the State to... to be provided with an elevated form of notice rather than being jurisdictional.

In addition, 28 U.S.C. 2075 states that the rules, bankruptcy rules, should not in any way abridge or modify the substantive rights that are granted under the code, and I believe in these circumstances to allow this decision to be based upon the fact that an adversary proceeding had been filed would have the effect of abridging Ms. Hood's rights--

Justice Scalia: Well--

Mr. Gerson: --by denying here an opportunity for hardship.

Justice Scalia: --What happens when you don't show up in an adversary proceeding?

Mr. Gerson: A default judgment is entered.

Justice Scalia: A default judgment.

Mr. Gerson: Yes.

Justice Scalia: So how can you say... I mean, had it not been set up this way, I would assume that the bankruptcy judge would have to make his or her own determination about whether the condition of the statute had been met, but once you have this adversary system set up, I assume the bankruptcy judge is entirely within his or her rights by just saying, hey, the State hasn't shown up, the State loses.

Mr. Gerson: I would... I'd like--

Justice Scalia: Now, that... that doesn't seem to me to be elevating form over substance.

That... that's a big difference.

Mr. Gerson: --Yes, and I... I believe I incorrectly stated what would happen, Your Honor.

It's... even... even in an adversary proceeding, the court would still have to find that Ms. Hood had demonstrated a right to a... to an undue hardship discharge.

Chief Justice Rehnquist: So it wouldn't just go by default then if the State didn't show up?

Mr. Gerson: That's correct, Your Honor.

Justice Scalia: Do you know any other adversary proceedings that work that way?

I mean, I suppose that depends on what the... what the rule means, but when the rule describes it as an adversary proceeding, I... I would take it to mean that if the other side doesn't show up, it loses.

Chief Justice Rehnquist: Well, in a... in a... in an ordinary suit for money judgment, if the defendant fails to show up, he can be defaulted as to liability, but he still has to show the money damages.

He just doesn't get the amount that he says in his complaint.

Mr. Gerson: That's correct, Mr. Chief Justice.

Justice Scalia: Well, is... is the amount at issue here?

Mr. Gerson: The amount is at issue only to the extent that in order to show undue hardship, Ms. Hood has to demonstrate that she can't repay it.

Justice Scalia: Yes, but the... but the... the amount, how much it is, is not... is not in controversy, is it?

Mr. Gerson: No, it's not.

Justice Ginsburg: I thought--

Justice Breyer: --So what is the situation there?

I mean, I don't want you just to drop this.

That is, is an adversary proceeding under the Bankruptcy Code... and there are quite a few.

You've said two opposite things now.

Your first time you said, well, if the other party doesn't show up, the bankruptcy judge can just say, debtor, you win.

Okay?

Without looking at the merits.

And the second time you said, no, that's not really so.

The bankruptcy judge has to satisfy himself that the statutory standard is met.

Now, I guess this isn't the only place where there's a adversary proceeding in the code.

So which is it?

Is it like an... and how do I find out?

If you're uncertain, what do I look up to try to find out the answer to that question?

Mr. Gerson: Well, Justice Breyer, very often adversary proceedings are commenced in bankruptcy court and they're necessary when the kind of action that dispute... in dispute is the equivalent of an action that could have been commenced prior to the establishment of the bankruptcy.

It's just--

Justice Breyer: Yes, I see--

Mr. Gerson: --prior, you know, action now brought into the bankruptcy court.

And then the bankruptcy court could issue a default judgment because--

Justice Breyer: --No, I got that.

Mr. Gerson: --it would be a traditional action.

Justice Breyer: So maybe there are no others.

Are there... are there any adversary proceedings, other than this, one which isn't like what you just described?

Chief Justice Rehnquist: Well, certainly an action by a trustee for... of voidable preference would be quite different, would it not?

Mr. Gerson: With respect to a voidable preference, if... if the defendant did not demonstrate it had any defense, a judgment would be issued in favor of the... the State because there is a presumption for a voidable preference once certain factors are met.

Chief Justice Rehnquist: And there you're getting money from outside the estate too.

You're getting a money judgment against somebody that would increase the assets of the estate.

Mr. Gerson: That's correct, Your Honor, but it is not Ms. Hood's position in this case that a preference action would fall within the traditional in rem jurisdiction of a bankruptcy court and thus the State sovereign immunity would be abrogated.

Chief Justice Rehnquist: So you would... you would say that if the... if there were a suit for a voidable preference against the State, the 11th Amendment rule would prevail?

Mr. Gerson: I... that issue is unclear, Your Honor.

It's certainly not Ms. Hood's position that the Eleventh Amendment would not prevail.

And there's actually a case pending before this Court right now, Massachusetts v. H.J. Wilson, where at issue is the debtor's demand for an income tax refund.

So the opportunity to visit the issue of affirmative money relief against a State and its... and the ramifications of the Eleventh Amendment can be addressed in that case.

It's--

Justice Breyer: We're trying to get... I'm trying to get the answer still to Justice Scalia's question.

Take the question the Chief Justice asked.

It's a preference action.

It's a kind of bankruptcy action.

It's in an adversary proceeding.

Is that right?

Mr. Gerson: --Yes.

Justice Breyer: Okay.

Now, the other side doesn't show up.

Okay, forget this Eleventh Amendment business.

I just want to know the normal thing in bankruptcy.

What's the answer?

If he doesn't show up, is he defaulted like a regular case outside the court, or does the trustee... I mean, does the judge, the bankruptcy judge, look at the matter and make up his own mind independently about whether it was a preference or not?

How does it work in bankruptcy?

Mr. Gerson: It would... it would not be a default judgment, Your Honor.

It would be a judgment on the merits.

Justice Breyer: I have one other technical question.

Suppose we were to say--

Justice Scalia: --Excuse me.

I didn't understand that answer.

It would not be a default judgment.

It would be a judgment on the merits.

Is there a distinction?

Mr. Gerson: It would be a judgment--

Justice Scalia: I thought default judgments are, for all purposes, considered judgments on the merits.

For what purpose is a default judgment not a judgment on the merits?

Mr. Gerson: --Oh, to... to the extent it is... there's greater flexibility of a defendant to come back and ask for reconsideration, I believe, under normal procedures.

Justice Ginsburg: That doesn't make it not a decision on the merits.

It may be subject to reopening, but a default judgment is a judgment.

Mr. Gerson: That's correct.

Justice Ginsburg: I thought that the question we... we were talking about before... that there was a clear and certain answer to the question, that... that if the claim is made that there's undue hardship, even if the State doesn't show up... well, let's take the... because this is written for all creditors and not particularly with States in mind.

If the creditor doesn't show up, the bankruptcy judge still has to find that there's undue hardship in order to make this dischargeable.

Mr. Gerson: That's correct, Justice Ginsburg.

Justice Ginsburg: And where does that come from?

I... that was my understanding about the way it works, but is that a statute, a rule?

Where does... where does that come from?

Mr. Gerson: I think it comes from the natural reading of the statute that such a finding has to be made that there would be an undue hardship for the debtor to have to repay that... that loan.

Justice Ginsburg: You... you could say the same about any default judgment in a case... in a tort action where the tort statute, you know, only imposes liability where the defendant has been negligent.

The defendant doesn't show up.

The court doesn't... doesn't enter into its own independent inquiry as to whether the defendant was negligent.

It enters default judgment.

And the statute, just as clearly, requires negligence there as this statute requires undue hardship here.

Mr. Gerson: The difference... the difference is... Your Honor, is that all of the property of a debtor and claims against that property... they're... they're all under the bankruptcy court's jurisdiction.

So a bankruptcy court has a special obligation to... to protect the interests of all creditors and the estate, and I believe because of that, it would have a heightened responsibility to determine whether there was a basis for an undue hardship discharge because the decision is not solely... is... is affecting everyone.

Justice Kennedy: In the voidable preference case, it's... it's as if we're... the suggestion is is that the bankruptcy court has the authority to order the res brought before it, commanding the State to deliver the res, i.e., the voidable preference.

Mr. Gerson: I... there is a question that--

Justice Kennedy: And... please.

Mr. Gerson: --with... with regard to a voidable preference action whether the funds the debtor would be seeking would be part of the res because it's not in the possession of the estate.

Justice Kennedy: Right.

Mr. Gerson: And certainly that distinction can be made as made in California v.... v. Deep Sea Research, that if the property is in the possession of the... of the State, rather than the debtor, a different result is required with respect to the Eleventh Amendment.

Chief Justice Rehnquist: Well, before the Bankruptcy Act in 1978, bankruptcy courts couldn't try voidable preferences.

That had to be in the district court I believe.

Mr. Gerson: That's correct, Justice Rehnquist.

Justice Breyer: If in fact we assume... let's suppose when we look into this... suppose I was to come to the conclusion that an adversary proceeding in bankruptcy is identical to a case that has nothing to do with bankruptcy in a court.

You say isn't, and maybe that's so and we'll find out.

All right.

Now, if that were so and if that meant under the Court's case law that this particular adversary proceeding were invalid under the Eleventh Amendment, would the bankruptcy judge under section 105 or some other section or would the Rules Committee have the power without going back to Congress to devise a different procedure that would get to exactly the same place, say, a procedure that had the bankruptcy judge adjudicate this under the same standard while notifying the State, like any other creditor, that it could intervene at is choice.

Mr. Gerson: Yes, it could, Your Honor.

And... and the basis for that would be to reconciling the requirements of 28 U.S.C. 2075 and the requirement for the bankruptcy rules because under 105, a court could rule that it would be inappropriate to enforce the requirement of Bankruptcy Rule 7001, which requires an adversary proceeding.

So 105 would give a bankruptcy court that power and I believe it would be an appropriate exercise of that power.

Justice Breyer: And even without 105, could the Rules Committee then devise a different rule?

Mr. Gerson: Certainly, Your Honor.

Justice Ginsburg: Mr. Gerson, you... your position depends heavily on the characterization of bankruptcy proceedings as in rem, and one can understand that about the bankrupt estate, it collects whatever assets there are and distributes them.

But this is a no-asset bankruptcy.

So how does the in rem characterization fit a case where there are no assets?

Mr. Gerson: Because the debtor itself, at least the pre-petition debtor, is also considered part of the res, part of the bankruptcy court's in rem jurisdiction.

That was reflected in Hanover National Bank v. Moyses where the creditor complained that its debt had been discharged, but it had never received... no summons or complaint had ever been filed.

In fact, it complained it had never received notice.

And this Court's response was, no, bankruptcy is a form of in rem jurisdiction, and on that basis the... the claim of that creditor could be discharged even though no adversary... no summons and complaint was filed.

Notice as a motion was sufficient, and it based--

Justice Ginsburg: So what you're saying is the... is the debtor is not a thing, is not a res, but a debtor... this is an adjudication over a status which traditionally is also in rem.

Mr. Gerson: --That's correct, Your Honor.

I know it doesn't entirely fit our traditional notions of what a res is, but it's consistent with how this Court has traditionally understood the in rem jurisdiction of a bankruptcy court and the needs of a bankruptcy court to satisfy its essential functions.

The kinds of contradictions that are being raised in the questioning are reflective of what's happened in the circuit courts of appeal where the Fourth Circuit, the Fifth Circuit, the Ninth Circuit all have recognized and have stated in... in earlier opinions that the Seminole Tribe doctrine applied in bankruptcy but later recognized an in rem exception to allow for the discharge of debts with respect to the Fifth Circuit and the Ninth Circuit and... and the Fourth Circuit, and the Fourth Circuit also recognized that principle with respect to the confirmation of a plan and its binding effect upon a State.

So right now bankruptcy law is in an inconsistent muddle with respect to the applicability of the Eleventh Amendment, and this case allows this Court an opportunity to reconcile that inconsistency as--

Justice Ginsburg: Only a small piece of it, according to what you told us earlier, because you said this doesn't involve the preference question.

Mr. Gerson: --That's... that's correct, Your Honor.

Of course, this Court could rule that given the traditional in rem nature of a bankruptcy and the fact that, particularly under the Bankruptcy Act a preference, as Chief Justice Rehnquist pointed out, was not part of the bankruptcy summary jurisdiction but required a plenary action, that in fact actions requiring any affirmative monetary relief against a State are not part of a debtor's... are not part of a bankruptcy court's in rem jurisdiction, if it chose.

If there are no more questions, thank you.

Rebuttal of Daryl J. Brand

Chief Justice Rehnquist: Thank you, Mr. Gerson.

Mr. Brand, you have 4 minutes remaining.

Mr. Brand: Thank you, Your Honor.

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

The State's position in this case is that a proceeding under the law which requires the State to make a choice between voluntarily entering the proceeding or sitting back and suffering a loss of its... of its rights is every bit as coercive whether it's styled as a motion or an adversary proceeding or... or anything else, is every bit as coercive as a lawsuit similar to the... the situation with the administrative proceedings in the Federal Maritime Commission case.

Justice Scalia: Is that loss of its right automatic?

What is your answer to the question of whether, if you don't show up, a default judgment is entered automatically against you, or does the bankruptcy judge have to make the assessment of whether there's an undue hardship?

Mr. Brand: I am not certain, Your Honor, but I believe that an undue hardship showing would still be necessary.

But in either... in either situation, the State would suffer the consequences of losing its rights subject to an adjudication, not subject to the mere operation of law as with the general discharge at the conclusion of a... of an ordinary bankruptcy proceeding.

As... as far as the preference actions go, this case... I'm sorry... this Court decided in Hoffman v. Connecticut which involved a preference action and even more than that, a turnover action where there actually was property of the estate that the... that the bankrupt trustee was... was entitled to recover, that in either of those types of situations, the Eleventh Amendment applied.

Now, of course, that case turned on whether Congress had... had made a clear statement in the statute, but in any event, the Court, having found that the... that the Congress did not make a clear statement of intent to override sovereign immunity, applied the Eleventh Amendment to that preference action, that turnover action in that case.

Now, in this case we have no property.

The... the debtor is not seeking to... to get property.

The... the creditor is not seeking to make a claim out of the property of the estate.

So we would submit that... that the Court can decide this case, which involves a simple adversary proceeding on its face, the issuance of compulsory process without even reaching the question of whether a similar effect would... would occur in... in a preference action or in any other type of bankruptcy action.

So I'd like to emphasize to the Court that this is an unusual statute, and the question in this case is, does the Eleventh Amendment apply in the bankruptcy context?

But the precise circumstances of this case can well limit a court's holding to the question of whether sovereign immunity protects the State in an adversary proceeding on this particular type of statute for a particular exception from discharge.

If there are no further questions--

Justice Stevens: I do have.

Would you tell me again, what... what's the cite to the case about the turnover that you just cited?

Mr. Brand: --It's--

Justice Stevens: What is the name of the case?

Mr. Brand: --It's Hoffman v. Connecticut.

Justice Stevens: Hoffman, thank you.

Mr. Brand: It's a 1989 case--

Justice Stevens: Right.

Mr. Brand: --in which... in which the... the plurality of the Court found that Congress had not made a clear statement of intent to override sovereign immunity, but in which two Justices found that in any event Congress had no constitutional authority to override Eleventh Amendment immunity in such a setting.

If there are no further questions, again we--

Justice Ginsburg: Yes, I had one.

And it was in... your brief said, well, it's not that the bankruptcy law doesn't find the States so that, for example, if the State as creditor would sue the student after she's been discharged in bankruptcy, she could then as a defense say, I'm not liable on this debt.

It's been discharged.

I got the undue hardship finding from the bankruptcy court.

That... you did say that in your brief that that would be... that... that she could have this as a defense.

Mr. Brand: --Well, we... we did not mean that she would have obtained the undue hardship finding from the... the bankruptcy court, but that she could raise the issue of undue hardship in whatever State proceeding was initiated by the State.

Justice Ginsburg: Why would the State ever initiate such a proceeding when it has much easier... it can garnish wages.

It can intercept tax refunds.

Mr. Brand: Your Honor, may I answer the question?

Chief Justice Rehnquist: Yes, briefly.

Mr. Brand: The answer is, as Your Honor suggests, the primary... the primary means under the student loan program would be through wage garnishments and through tax intercepts, but the Federal regulations and State law would afford the debtor opportunity for administrative proceedings to raise the undue hardship issue and prove that she should be absolved from the student loan debt.

So there are State remedies available in the context not of a State court--

Chief Justice Rehnquist: Thank... thank you, Mr. Brand.

Mr. Brand: --Thank you, Your Honor.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The Oyez Project

Featured:

Hibbs v. Winn - Oral Argument

Fri, 09 Jan 2009 14:49:05 +0000

Case:

Hibbs v. Winn

Media File:

02-1809_20040120-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Samuel Goddard

Chief Justice Rehnquist: We'll hear argument next in No. 02-1809, J. Elliott Hibbs v. Kathleen Winn.

We'll wait just a moment General Goddard.

Very well, General Goddard.

You may proceed.

Mr. Goddard: Mr. Chief Justice, may it please the Court:

The fundamental... the fundamental question in this case is whether the meaning of the term assessment, as used in the Tax Injunction Act, includes Arizona's school tax credit.

As this Court has written on several occasions, the Tax Injunction Act has a very broad reach.

It drastically limits the access to Federal district courts.

The act is relatively simple and... and straightforward.

It's just 35 words, as I count it, and it specifically says the Federal district courts shall not enjoin, restrain, or suspend the assessment, levy, or collection of a tax under State law where there is a plain, speedy, and efficient remedy in the courts of that State.

Justice Scalia: Where is the assessment here that... that supposedly is being enjoined?

Mr. Goddard: Your Honor, the assessment is the calculation of a tax by the... for the taxpayer.

In other words, it's the bottom line.

It's the plain meaning of assessment and the dictionary meaning.

It is what happens after you've done all the additions and subtractions and you get to line 40 on the Arizona tax return form which is--

Justice Scalia: It's... it's a self-assessment?

So you... it's a self-assessment that's being enjoined?

Mr. Goddard: --Your Honor, I'm not talking about a self-assessment.

I believe a self-assessment is a colloquialism that talks about what all of us go through as taxpayers.

The assessment I'm talking about is what the defendant in this case, Elliott Hibbs, the Director of the Department of Revenue in Arizona, does both for individual taxpayers and for all the taxpayers collectively to determine what the State's revenues are going to be from the taxpayers.

And the only way you get to the revenue is that bottom line on the tax form--

Justice Ginsburg: Mr. Goddard--

Mr. Goddard: --after you've done all the credits.

Justice Ginsburg: --Mr. Goddard, I thought that in a self-assessment system, such as the one we have, the Federal Government, Arizona, that assessment is associated with assertion of a deficiency.

In Arizona, is every taxpayer assessed by the government?

That would be quite a different system, wouldn't it?

Mr. Goddard: Your Honor, every taxpayer in Arizona has their form calculated by the government.

We check the math.

Justice Ginsburg: You... you audit everyone in the State?

Mr. Goddard: No, Your Honor.

I'm not trying to say we audit everyone, but technically the assessment, and as it is used also in the Internal Revenue Code to my understanding, is the assessment... and I'm quoting from the Internal Revenue Code... shall be made by recording the liability of the taxpayer in the Office of the Secretary.

Justice Ginsburg: Which the Government does when it wants to assert a deficiency.

And we were told that the assessment just a week ago is nothing more than a bookkeeping entry, and what it does is it triggers certain administrative remedies.

But my understanding was that an assessment is made when the Government wants to assert a deficiency.

Otherwise, there isn't this entry, this bookkeeping entry someplace, that every taxpayer isn't assessed.

Mr. Goddard: Your Honor, it is... it is our position that the State of Arizona under our State tax system assesses all taxes in the State and that--

Justice Kennedy: When... when does that happen?

When the return is received in the office or?

Mr. Goddard: --It... it returns during... excuse me.

Your Honor, the... the activity perhaps is... is somewhat fictional in terms of the... of the director.

He's not going to sit down, as in the old days, with a green eyeshade and write down a number for each taxpayer.

But he does, in fact, and his office does, in fact, calculate the gross revenues in the State, what credits are going to be applied against those gross revenues, various adjustments, and comes up with a bottom line.

And that bottom line is our dictionary... Black's Dictionary definition of what an assessment is.

Justice Ginsburg: But that's not the assessment that you... I mean, you used the Internal Revenue Code provision.

That is an entry.

We were told it's a bookkeeping entry.

And it's made as a prerequisite to levying liens, to extending the statute of limitations.

But it certainly isn't true that that kind of assessment, which is what your brief suggested you were talking about, is made in the case of every taxpayer.

Mr. Goddard: Your Honor, I'm not saying that every taxpayer has a... a specific entry next to their name.

That would... that would certainly be more than we could do.

But our statutes, our tax system in Arizona does, in fact, call for an assessment of the liability of each taxpayer.

And that assessment, the entire plan, scheme fixed upon for charging and taxing, the Webster's definition of assessment, is the bottom line.

And I guess that's the plain meaning that I'm trying to get to.

Justice Souter: Because I... I assume that assessment is... is... the assessment that we're concerned with is... is within the meaning of Federal law.

But let me just ask you this question.

Do you have a statute in Arizona that in effect says what the department does with respect to each taxpayer is to assess that taxpayer?

Does... does that word occur as a statement for some technical function that you go through with respect to every taxpayer within the meaning of Arizona law?

Mr. Goddard: Your Honor, I... I can't say that we have that specific word in our statute.

We certainly--

Justice Souter: Well, then... then isn't your problem this, that... that there... that that specific word is used in the Federal statutes, quite apart from the Tax Injunction Act?

And... and my understanding is the same as Justice Ginsburg's.

It used in... in a way that... that involves a... a predicate to the... the assertion of a lien or... or steps to collect a deficiency.

And... and that doesn't seem to be what is involved here.

Isn't... isn't that a problem for you in your position?

Mr. Goddard: --Your Honor, I don't believe so because the... the first step... and... and the three words in the statute I think are... are certainly helpful: assessment, levy, collection.

What essentially the Congress--

Justice Souter: Well, there's no issue of a levy going on here, and they're not trying to stop you from collecting anything.

I mean, their... their argument is you ought to be collecting more, but they're certainly not interfering in a way that's going to leave Arizona without money while it litigates.

What they're saying is we want to litigate so that you'll get more money, and... and so that I suppose that's why the Ninth Circuit said why... that the closest thing to a word involved here that... that might let the statute apply is assessment.

Mr. Goddard: --Yes, Your Honor, we believe that--

Justice Souter: And it didn't think it did.

But, I mean, it seems to me that that's a basic textual problem in... in your case, and I don't understand how you get around it.

Justice Ginsburg: The technical assessment that's made tied to a deficiency you don't fit.

So you're talking about some other kind of assessment than the one that, for example, the Government was telling us about last Monday in the Galletti case, not that technical... some... if we're talking about property, say, a property tax, then maybe an assessor comes on the land, looks at the house, attributes a value to it.

That wouldn't be a self-assessing system from the taxpayer's point of view.

But... but the income tax is quite different.

You assess yourself.

Sometimes you get audited; sometimes you don't.

And I don't see that anybody here is trying to stop the government from making the assessment that would be a trigger to asserting a deficiency.

No one is trying to stop Arizona from asserting a deficiency against any taxpayer.

Mr. Goddard: --No, Your Honor, but... but what we're asking for is that the... the director, Mr. Hibbs, be able to... as the statute says, to implement the... the tax system under State law.

Justice O'Connor: Well, is it the case, though, that other courts of appeal at the Federal level have concluded that the Tax Injunction Act does not bar suits that would increase State revenues rather than reduce them, that the purpose of the Tax Injunction Act was to prevent reduction of State tax revenues, specifically by corporations coming in and getting injunctions and preventing the State from receiving revenues, but that it doesn't apply where the effect of the... the suit would be to increase the State's coffers?

Mr. Goddard: Your Honor, if I could deal with... there... there are two questions, one, the legislative history and... and the... as this Court has noted--

Justice O'Connor: First of all, with the courts of appeal, the majority have so held, I guess, who have addressed it.

Mr. Goddard: --No, Your Honor.

I... I would submit that... that that's not the case.

Justice O'Connor: Only the Fifth Circuit has gone the other way.

Mr. Goddard: The Fifth Circuit in ACLU Foundation v. Bridges has... has very convincingly--

Justice O'Connor: Yes, but the others went the other way on it.

Mr. Goddard: --Your Honor, I could--

Justice O'Connor: The Seventh, the Eighth, and the Ninth.

Right?

Mr. Goddard: --Your Honor, there is... is language in the Seventh Circuit opinion which speaks about this, but it is in a very limited sense in... in Dunn v. Kerry.

I don't think it's applicable here.

I'd be happy to discuss that.

I would refer the course also... the Court also, as our brief does, to First Circuit U.S. Brewers v. Perez interpreting the Butler Act which is identical in language to the Tax Injunction Act; to Kraebel v. New York Housing Department in the Second Circuit which talks about a tax benefit.

That's what we have on... at... at stake here is we try... the... the respondents are trying to draw a division between all State tax systems to say anything that involves raising revenue is challengeable only in State court, but if there's a benefit involved, if there's anything else that accrues to the benefit of the taxpayer, that has to go Federal court.

I believe that's--

Justice O'Connor: I don't know about that, but a... a challenge to a tax credit I think is what we're talking about.

Right?

Mr. Goddard: --Well, Your Honor, I don't believe there's any logical distinction between a deduction, an exclusion, an exemption, and a credit.

They all--

Justice Kennedy: Well, I suppose you could... I suppose you could make the argument that it... it's wrong to say the State is only interested in increasing revenue.

The State may be interested in fairness for its taxpayers, giving its taxpayers the... the benefit of the lower rate.

That's certainly a... a sound State policy.

Mr. Goddard: --Thank you, Your Honor.

I... I think that's one of the policies, if not the principal policy, behind the Tax Injunction Act is respect for State procedures and also--

Chief Justice Rehnquist: General Goddard, the... what we've been talking about is this section of 1341 that talks about assessment, levy, or collection of any debt.

Those three words fit perfectly into a property tax scheme.

They really don't fit nearly as well into an income tax scheme.

Are there cases from courts of appeals that say that the... the act does apply to income tax as well as property tax?

Mr. Goddard: --Yes, Your Honor, and that distinction... the cases I'm referring to involve both.

And... and you're absolutely correct.

Many of them are property tax oriented.

That's true of In re Gillis.

That's true of several others.

Colonial Pipeline is another that I would cite showing a tax benefit not a tax deduction to the State.

But the most precisely on point is ACLU Foundation v. Bridges from the Fifth Circuit, interestingly after a couple of other cases which might have... which have been cited by the respondents for their proposition that... that somehow the revenue... I mean, the State revenue... things that give revenues to the State are significantly different from items that benefit the taxpayer.

I would submit that under this scheme and under the scheme that this Court has discussed in the six cases that... where it has discussed the Tax Injunction Act in detail speak about a much broader application.

Justice Breyer: You were going to go to the history or something else.

I... I don't want you to forget that, and the reason I don't want you to forget is I'm thinking yours is a plausible interpretation--

Mr. Goddard: Thank you, Your Honor.

Justice Breyer: --that could be... well, I mean, it could.

I'm about to say maybe it isn't plausible enough.

Unknown Speaker: [Laughter]

Justice Breyer: The... the... but what I'm... what I'm driving at is that the... the Congress might have said that although Federal courts are in the business quite often, along with State courts, of deciding whether a State law is unconstitutional or violates some other Federal law, and although millions of State laws are very important, we're separating out a set of cases here where they can't do it.

Now, one reason for doing that would be we don't want to interfere with States getting money that they need for their business.

And that would limit these words to interferences with collection of revenue.

Mr. Goddard: Yes, Your Honor.

Justice Breyer: Now, you were about to explain to me why--

Mr. Goddard: I... I would--

Justice Breyer: --there's evidence that Congress wanted to do more than that.

Mr. Goddard: --I would greatly appreciate--

Justice Breyer: It wanted to do more than that.

It wanted, in fact, to say you just can't stop them from... you cannot, Federal courts, go and have our tax division here interfered with, even though it doesn't affect collection of revenue.

We... we don't want you to interfere with their rules, with their administration, with anything.

You can do it for the police department, but not the tax.

All right.

Now... now, what's the evidence that's what... what Congress wanted?

Mr. Goddard: --Well, the first evidence is the words of the statute.

They didn't just say collections.

Justice Breyer: All right.

The words... I think they're pretty ambiguous.

Mr. Goddard: They... well, they don't just say collections, though, Your Honor.

Justice Breyer: No, I know.

Mr. Goddard: They say assessment and levy.

Those words are not modified.

Justice Breyer: Let's go beyond these words.

Mr. Goddard: Thank you.

Also, the history of the Tax Injunction Act... it comes from a period when the... the Congress was reacting to this Court's decision in Ex parte Young, and they felt that extensive equitable relief against State officials was inappropriate, and they passed several laws, the Johnson Act and the Tax Injunction Act in the '30's being the most important, which spoke very broadly about keeping in State courts State proceedings.

They did not say anything about just collections, although--

Justice Ginsburg: Mr. Goddard, in that... in that regard, wasn't what Congress had in mind... it was taxpayer suits.

They didn't want taxpayers to avoid going through the whole process.

I mean, most of the cases that come up under the Tax Injunction Act are taxpayers who say please enjoin the tax or don't assess me or don't levy.

But this is not that kind of case.

There's no one here who's trying to stop the State from collecting revenue.

It's an attack by a non-taxpayer, and that at the time of the Tax Injunction Act, I don't think that kind of action was even on the scene.

Do you have any claims where a non-taxpayer was seeking to enjoin the collection of a tax?

What they... what... what Congress was aiming at is that, taxpayer, you've got a prompt, speedy, efficient remedy in your State, you use that, don't rush to the Federal court.

Mr. Goddard: --Your... Your Honor, the... the Congress had several reasons, and... and you're absolutely correct that one of the primary ones was not allowing taxpayers, especially out of State, to come in and interrupt the flow of taxes.

I'm not denying that that was a... a very important reason.

But as this Court has said in Rosewell v. LaSalle National Bank, if that was the only reason that they were concerned about the collection of taxes, they could have said so.

They could have said only diversity jurisdiction cases will be barred from Federal court.

They did not.

They used... they said essentially district courts shall not consider cases to restrain, enjoin, or suspend actions for the assessment, levy, and collection of taxes.

They also--

Justice Ginsburg: That was a taxpayer's case too, wasn't it?

Mr. Goddard: --Excuse me?

Justice Ginsburg: Wasn't the case you just cited... wasn't it... that also a taxpayer's attempt to--

Mr. Goddard: Yes, Your Honor.

Justice Ginsburg: --Yes.

Mr. Goddard: It was an assessment on property.

Justice Ginsburg: So I'm asking you about cases where we don't have a taxpayer who's not trying to stop any assessment of his tax, any... anything else about--

Mr. Goddard: Well, I guess the... the direct collision, Your Honor, is between the decision below in the Ninth Circuit and ACLU Foundation v. Bridges--

Justice Ginsburg: --It's the only one that I know.

Mr. Goddard: --which involves a challenge to a specific tax benefit given to religious organizations in Louisiana.

So I believe that's as close as I can come.

Your Honor, if I could reserve the balance of my time, I would like to do so.

Argument of Thomas G. Hungar

Chief Justice Rehnquist: Very well, General Goddard.

Mr. Hungar, we'll hear from you.

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

The position of the United States is that respondents' suit is barred by the plain language of the Tax Injunction Act because it seeks to enjoin and restrain the assessment of a tax under State law.

And to turn directly to the--

Justice Stevens: May I ask you if you think the language is so plain that we should not even look at the legislative history?

Mr. Hungar: --We think it's... yes.

We think that the... the language is sufficiently plain that there's no need to look at the legislative history, but that if you do, the legislative history also supports the interpretation we advance.

Justice Stevens: And Judge Easterbrook was just dead wrong in looking at the legislative history and he also interpreted it dead wrong.

Mr. Hungar: Judge... the case before Judge Easterbrook, Justice Stevens, was quite different from this case.

That involved not an... a... a suit against tax... the tax collector to affect the manner in which the tax collector administered the tax code, but rather a suit against private plaintiffs who had brought a State court action.

It was a Federal court suit to enjoin a State court action.

And so the considerations applicable in that case were obviously quite different from those what we have... where we have presented here.

The point of the Tax Injunction Act is to... to protect the tax collector against Federal court suits to enjoin or restrain the tax collector's assessment, collection, and levy of tax.

Justice Stevens: Does... does that... were you finished your answer?

Mr. Hungar: Yes.

Justice Stevens: The... the... if you use the word enjoin to mean command, which it can mean, can you say that they are commanding the collection of a tax, contrary to the words of the statute?

Mr. Hungar: Yes.

We think that is also quite correct here.

That was not the issue addressed by the Ninth Circuit, but that is certainly another way to get to the result which we think is the correct result, that the plain language of the statute bars this kind of suit.

Turning to the questions about the meaning of assessment, it is perfectly clear beyond peradventure that under... in the Federal system, the term assessment means the tax collector's recorded determination of the amount of tax due under Federal law--

Justice Ginsburg: Do we have a self-assessment?

Mr. Hungar: --No, Your Honor.

Justice Ginsburg: We don't.

Mr. Hungar: No, Your Honor.

Justice Ginsburg: Is every... every taxpayer is assessed?

Mr. Hungar: Yes, Your Honor.

The... the--

Justice Ginsburg: Every taxpayer is assessed even when no deficiency is sought?

Mr. Hungar: --Yes, Your Honor.

The practice of the Internal Revenue Service is to assess the amount of taxes shown on the return if that is... absent some audit or some reason to think there's an error in the return.

And in fact, the Internal Revenue Code so provides.

Section--

Justice Ginsburg: That every taxpayer is assessed even when there's no deficiency.

Mr. Hungar: --Correct.

Well, if a taxpayer files a return showing a bottom line calculation of how much tax is due after all credits, deductions, and so forth have been taken into account, that amount and... and the tax... and the IRS checks the addition, concludes that it's accurate, and is not conducting an audit, that amount is assessed.

It's... it's recorded in the transcript.

Now, of course, it's on the computer.

Justice Breyer: You don't have to send them a notice of... in other words, I file my income tax.

I thought there's some provisions that say if somebody thinks I made a mistake, they have to send me some special notice.

Some process takes place.

We have some other case on this.

I thought all that involved an assessment, that it was a particular thing under the IRC, not just my filing of a... of the return.

Mr. Hungar: The assessment is a particular thing.

Under the Internal Revenue Code, it's the... it's the tax collect... the IRS's determination of the amount of tax--

Justice Breyer: But you just said to Justice Ginsburg that if nothing happens... like I try to pay my taxes accurately.

So I file these pieces of paper.

And now, nothing happens.

They just take the money.

They cash the check.

And... and you're going to say when that's all that happened, there was an assessment?

I thought it had a particular meaning that wasn't that, that was when you thought I was wrong, you did something and then went after me.

But... but it just... everybody is called an assessment?

Does it say that in the code where--

Mr. Hungar: --26 U.S.C. 6201.

This is not in the... the briefs.

26 U.S.C. 6201 (a)(1) provides, quote, the Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title.

So if the taxpayer has admitted on their tax return that they owe X dollars in taxes, the Secretary shall assess that amount and also has the discretion to conduct an audit.

Justice Ginsburg: --But... but nobody... nobody here is contesting, as far as I can tell, what we were told Monday is a mere bookkeeping entry.

Does it... does it... is a notice and demand sent out to everyone who's assessed?

Mr. Hungar: Not if the taxpayer has conceded the amount of liability.

That's the point.

If the taxpayer concedes on the return that their liability is X--

Justice Ginsburg: So why is anybody trying to enjoin a bookkeeping entry that nobody knows anything about?

Mr. Hungar: --Because assessment is the formal determination by the... by the--

Justice Ginsburg: But I don't see that there's any effort to stop a bookkeeping entry from being made--

Mr. Hungar: --There is, Your Honor.

Justice Ginsburg: --that nobody gets any notice of and doesn't... is... is, we were told, just a mere bookkeeping entry.

That doesn't... doesn't... it's not necessary in order to collect the tax?

Mr. Hungar: But the statute, Justice Ginsburg, doesn't say anything about notice.

It says the... the Federal district courts shall not enjoin the assessment of a tax under State law.

Justice Ginsburg: But nobody is seeking to enjoin any assessment.

Mr. Hungar: They... they are.

The plaintiffs are seeking--

Justice Ginsburg: They... as assessment being a bookkeeping entry that nobody knows anything about.

You just said you don't need any notice and demand.

In the Galletti case, we were told that's what the assessment is.

It's a notation in a book someplace.

It doesn't even have the taxpayer's name on it.

Mr. Hungar: --If I may answer, Justice Ginsburg.

What plaintiffs are seeking to do is prevent and restrain and enjoin the... the tax department from assessing taxes under State law in the manner required by State law, which includes, as part of the assessment, computation and allowance of the credit where it is due.

And the... and the suit in this case would preclude the tax collector from doing that if respondents were to succeed.

Justice Stevens: May I ask you--

Mr. Hungar: That's exactly what the act precludes.

Justice Stevens: --does the Arizona tax code have a provision in it comparable to the one that you read us... to us from the Federal code?

Mr. Hungar: I don't believe so, Your Honor.

I believe what the Arizona tax code provides--

Justice Stevens: Then it's hardly relevant, is it?

Mr. Hungar: --is that the... is that the tax collector there, the Department of Revenue, makes a determination or reviews the returns and ultimately either determines that that amount will be accepted, that... that the amount of tax shown on the return is the... going to be accepted as the amount of tax due from the tax collector, or that they're going to try to require some... you know, assess a deficiency or whatever it may be.

But in either case, within the meaning of Federal law, the tax collector's determination of what the amount is due, either if it's the amount shown on return... on the return or if they think it's a different amount, within the meaning of Federal law, that is the assessment.

And that is what the respondents are trying to change.

They're trying to require the tax collector to assess taxes not in a manner required under State law, which is the... the text of the statute, but rather in a manner contrary to State law.

Justice Ginsburg: Suppose they clarify that they're not trying to stop a bookkeeping entry from being made in Arizona, even though Arizona law doesn't require it, just like the Feds.

Mr. Hungar: Your Honor, the assessment under State law in Arizona includes the tax credit.

The respondents would change that and would preclude the tax collector from doing that.

Justice Scalia: If they couldn't stop a bookkeeping entry, I assume they couldn't stop the acceptance of the tax in accordance with a bookkeeping entry.

Isn't that right?

Mr. Hungar: That's correct.

Justice Scalia: I... I assume it's essential to their case that they stop that ultimate bookkeeping entry which determines how much the taxpayer owes.

Mr. Hungar: Exactly.

And the purpose of the--

Justice Ginsburg: Although we were told that there isn't that bookkeeping entry in Arizona, that they don't have it.

Mr. Hungar: --Well, Justice Ginsburg, I'm obviously no expert in Arizona tax law.

I'm informed that the tax collector looks at the returns when they come in, checks the addition, and in a certain number of cases goes further.

Justice Ginsburg: But that's not what you described as the assessment.

Mr. Hungar: The assessment is the tax collector's recorded determination of the amount due.

Justice Ginsburg: Which we were told they don't have in Arizona.

Mr. Hungar: Well, it... again, I think for purposes of Federal law, it... it is not unreasonable to assume that the tax collector in Arizona decides whether they're going to accept the amount of return shown on the tax as--

Justice Scalia: And keeps a record of it.

Mr. Hungar: --And keeps a record of it.

Exactly.

Justice Scalia: I mean, he must keep a record of it for--

Mr. Hungar: Exactly, exactly.

Now, the Attorney General can address that, but... but that's my understanding of Arizona law.

Justice Kennedy: --Isn't the case just simpler if we say you cannot command the collection of a tax, which is what's happening here?

Mr. Hungar: Yes, Justice Kennedy.

That... that is exactly right.

That is... that is entirely consistent with the United States' view of and interpretation of this act and the Anti-Injunction Act.

And it's also consistent with the legislative history and purposes of the act.

This Court has repeatedly recognized, in Justice O'Connor's opinion for the... for the Court in the Grace Brethren case and in other cases, that the purpose of the act sweeps more broadly than simply a focus on collection and--

Justice Ginsburg: But those were all taxpayers trying to stop the collection of tax from them.

Mr. Hungar: --Yes, Justice Ginsburg, but the Court did not say that the purpose and scope of the act is limited to that context, nor is the language limited to that context.

To the contrary, the Court said this... the act sweeps broadly to prevent Federal court interference in the administration of... of State tax systems.

Justice Kennedy: But wouldn't you agree that the primary purpose of the statute was to protect the State's fisc?

Mr. Hungar: That is certainly a primary purpose of the statute.

Justice Kennedy: And insofar as that purpose is relevant, you lose on that purpose.

Mr. Hungar: It's... it's not applicable here, although I think it is important to recognize that it would be quite extraordinary for Federal courts to be in the business of ordering State tax collectors to collect... to collect taxes from their citizens that the legislature of the State had deemed should not be collected.

Justice O'Connor: It's curious that the Moore's Federal Practice and Wright and Miller and Hart and Wechsler all suggest that the Tax Injunction Act does not prevent a challenge in Federal court to the constitutionality of State tax credits.

They seem uniform in that view.

Mr. Hungar: Well, I think some of those quotes, if I recall correctly, Justice O'Connor, deal with... they say the... the Tax Injunction Act does not apply to suits to collect taxes, which is a different situation than here.

Justice O'Connor: Well, they speak in terms of tax credits.

Has this Court taken some cases that appear to fly in the face of your theory and just not said anything about it?

Mr. Hungar: This Court in two or three cases identified by respondents has not addressed the Tax Injunction Act where it might be... it might be relevant.

Thank you.

Argument of Marvin S. Cohen

Chief Justice Rehnquist: Thank you, Mr. Hungar.

Mr. Cohen, we'll hear from you.

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

I'll begin by stating what our position is.

The Tax Injunction Act and the associated principles of comity only... only... apply when a district court is asked to stop the flow of revenue to the State.

For more than 60 years, the act and the associated principles of comity have been applied only when claimants sought to stop the flow of tax revenues.

The decisions of this Court support this.

In challenges to tax credits, the Tax Injunction Act has been either not considered at all by this Court or in other Federal courts has specifically... they've specifically held, except in Bridges last summer... they've specifically held that the Tax Injunction Act did not apply.

It... this is... also our position is consistent with the revenue protective purpose of the Tax Injunction Act and common sense supports this.

If there's no threat to the flow of State revenue... State tax revenues, then the administration of the State tax laws is the same as the administration of education laws and penal laws--

Chief Justice Rehnquist: Mr. Cohen, going back to the language, assessment, levy, or collection of any tax, which was the subject of questions to your... your opponent, you don't question, do you, that the statute applies to income taxes as well as to property taxes?

Mr. Cohen: --Mr. Chief Justice, we don't question that.

Chief Justice Rehnquist: And would you question its applicability if the... the State could not point to a particular act of assessment or levy or collection in its procedures?

Mr. Cohen: Your Honor, we view the phrase, enjoin, suspend, or restrain the assessment, levy, or collection, as a phrase.

We... we don't believe that any one word there has special meanings.

That phrase has been interpreted by the courts to say that the process of causing a flow of tax revenues to the State will not be stopped.

Justice Kennedy: You mean I... I can't read this statute to say that the district court shall not enjoin the collection of a tax?

I have to read all the other things with it?

That... that's a very strange interpretation of any statute.

Mr. Cohen: Justice Kennedy, the... let's take a... I... I believe the idea was that there is a process.

The... at the time the word assessment was first used, it was 1867 in the Federal Anti-Injunction Act, which was the model for the Tax Injunction Act in 1937, as this Court held in Jefferson County.

And at that time if a... and a... the assessment process which was valuing property... if that had been stopped, then... then they wouldn't get to the collection phase, or if they stopped the levy phase, they wouldn't get to the collection phase.

So it's a... the concept was that it took these three things to make the flow of revenue come to the State.

And that while individuals have an option under the section 1983 and 1343 together to choose either the Federal or State courts in which to vindicate their constitutional rights, the Congress decided that they should not have that option if it could interfere... if it could stop the flow of revenues to the State--

Justice Scalia: Let's assume--

Mr. Cohen: --but it didn't go farther than that.

Justice Scalia: --Let's assume it means just that.

Mr. Cohen: Yes.

Justice Scalia: And... and let's assume that... that you get your injunction in a Federal district court against the Secretary of State's collection of this tax.

What is the Secretary of State to do?

His... his State statute tells him that he should collect less.

This injunction says he should collect more.

He will appeal the case from the district court to the court of appeals.

Meanwhile, what is he to do?

He is not authorized by State law, which he thinks is valid, to collect more.

It seems to me during the whole period while that... that case is on appeal from the district court to the court of appeals to the Supreme Court, if it gets here, the Secretary of State doesn't know what to do, and his collection of the tax is impaired.

Mr. Cohen: Justice Scalia--

Justice Scalia: Why isn't that so?

Mr. Cohen: --The... two... two answers, if... if you allow me.

The first is that the district court, of course, has the power to stay the effectiveness of that judgment until there is a final decision, and he could be asked--

Justice Scalia: Well, then the statute wouldn't apply I suppose.

It just says it shall not enjoin.

We're assuming it has enjoined.

If your reading is correct, it should be able to enjoin because there's nothing wrong with enjoining.

Okay?

Let's assume it does enjoin.

Does that not interfere with the collection, even if you think that that's... that's all that's at issue is the collection of taxes?

How is the State going to collect its taxes?

Mr. Cohen: --Justice Scalia, the statute does not say interfere.

The statute talks about stopping the collection, and this would not stop the collection.

It would... it would allow the collection--

Justice Scalia: You have a much narrower position.

Your earlier position was this whole purpose was just to protect the State's tax revenue and so long as it doesn't impair that.

Now you say it can impair that so long as it does not enjoin it.

That's a much narrower--

Mr. Cohen: --Justice Scalia, I'm not saying that.

I... I... you--

Justice Scalia: --I thought that's what--

Mr. Cohen: --I must have misspoke myself because what I am saying is that they can't stop the collection of taxes and that this would not stop the collection.

Justice Kennedy: --But the statute doesn't say stop.

It says enjoin and enjoin can mean... can mean command.

Mr. Cohen: In Jefferson--

Justice Kennedy: And that's exactly what you're doing.

You're commanding the collection of the tax.

Mr. Cohen: --Justice Kennedy, in Jefferson County, this Court unanimously interpreted the statute to say stop the collection.

That's what this Court said in Jefferson County, and there are a number of cases in which a commandment seeking to command the payment of taxes has been held to be outside the Tax Injunction Act.

Justice Scalia: Can I bring you... can I bring you back to my question which I don't think I got an answer to?

What is the Secretary of State supposed to do?

He has gotten an order from a Federal district court to collect more taxes than he is authorized to collect under State law.

He intends to appeal that district court order, but meanwhile, he has been enjoined from collecting.

What is he supposed to do?

Mr. Cohen: Justice Scalia, he obeys the order of the court and he's... he's only enjoined from--

Justice Scalia: Well, that means--

Mr. Cohen: --He's only enjoined with regard to the tax credit.

He's not enjoined from collecting the tax which includes not honoring the tax credit.

Justice Souter: --And I take that... I take it that's the answer to... to Justice Kennedy's question, that his obligation to collect the tax is an obligation under State law, and once he is enjoined from recognizing the credit, he simply follows State law and collects the tax without reference to the credit.

The Federal court, conversely, doesn't say, you go out and collect the tax.

The State law does that.

Is... is... do you buy that?

Mr. Cohen: Yes, absolutely.

Justice Scalia: He believes the district court decision is wrong, and let's assume it is wrong.

What is he supposed to do while it is on appeal?

Mr. Cohen: Unless it... Your Honor, unless it is stayed, he is to obey it, and--

Justice Scalia: And that does not--

Mr. Cohen: --It does not interfere with the collection... with the flow... it does not interfere with the flow of revenue to the State, and that's what the Tax Injunction Act is basically about.

Justice Souter: --He... he obeys the injunction and he obeys State law except with respect to the credit which he is enjoined from giving.

Mr. Cohen: I agree, Your Honor.

Justice Souter: And the result is that he collects the... the full tax.

That's the way it would work.

Mr. Cohen: That's correct, Your Honor.

Justice Scalia: Suppose... suppose the State law says if these tax credits are invalidated, all other taxpayers shall be assessed an additional 2 percent to make up for... I'm sorry.

If these... if these tax credits are invalidated, other taxpayers shall be... their taxes shall be reduced by 1 percent.

Okay?

I mean, the... the State looks forward to this possibility that there will be an injunction.

What is the Secretary of State to do then?

Is he to assess everybody else at a lesser amount?

Mr. Cohen: Your Honor, I believe--

Justice Scalia: In other words, he is prevented from collecting the additional amount that he would have had to collect from other taxpayers had this tax credit been acknowledged.

The tax credit is struck down, and what the law says is, if it's struck down, you have to collect more from everybody else.

Now, I assume in that situation the district court would not be able to enjoin the collection, would it?

So all you're talking about is whether the State law is... is drafted in a clever way or not.

Mr. Cohen: --Your Honor, if... if the tax credit is struck down, the State gets more money.

It has no need to assess an additional 1 or 2 percent of its taxpayers.

But if... if the State in its wisdom chose to do so, then whoever collects taxes would obey the State law until another case came to court and another judge told them what to do.

Justice Breyer: All right.

So... so there would be some interference.

But what do you do about the word?

I mean, I'm somewhat shaken by the fact that the... the Internal Revenue Code does... as I have just read 6201 and 6203, it does use that word assessment as apparently to refer simply to the record keeping function of the tax division which it says under rules and regulations the assessment shall be made by recording the liability of the taxpayer in the Office of the Secretary.

And therefore, what it seems to have in mind in the IRC is a simple bookkeeping notation of how much money this taxpayer owes which takes place in every case.

Now, the... the act says there shall be no suit that restrains the assessment of that tax; i.e., you cannot restrain the Secretary in noting the amount that the taxpayer owes.

Now, they're saying stop right there.

End of the matter.

Now, what in your opinion overcomes that argument?

Mr. Cohen: Your Honor, Justice Breyer, it's interesting about the Internal Revenue Code and the... the Federal income tax law because there is a corollary to the Tax Injunction Act: the Anti-Injunction Act of 1867.

And it uses the word assessment.

And there are a number of Federal court decisions saying that that does not apply to tax credits.

And in each--

Justice Breyer: That's not an answer for the reason--

Mr. Cohen: --May I--

Justice Breyer: --that they're saying they're wrong, just as they say we were wrong in five cases not to notice this.

So continue, please.

Mr. Cohen: --Yes.

None of them... none of them looked at the word assessment in isolation.

What it looked at... what those cases looked at was the phrase, as... as I've suggested to the Court, that the phrase assessment, levy, and collection is the process of creating the flow of revenue.

Justice Scalia: But it isn't and; it's or.

Isn't it?

Mr. Cohen: The... Justice Scalia, it... it is or for purposes of saying that you can't restrain any of those because if you restrain any of those in the context of creating the stream of revenue, you have stopped the stream of revenue.

And that... that's what history of the act shows, the purpose of the act.

Justice Breyer: So your answer is this.

You say indeed they've got it correctly defined.

Indeed, it says assessment.

It says assessment, levy, or collection.

But that phrase does not refer to every assessment, levy, or collection.

Rather, in context it refers to those assessments, levies, and collections that will have, were they enjoined, the impact of cutting the revenue stream flowing to the State.

Mr. Cohen: That's our position, Your Honor.

Justice Breyer: That's your view.

So we should look at that in context.

That's why you go to the history and these other things.

Mr. Cohen: That's correct, Your Honor.

Justice Breyer: All right.

I understand.

Mr. Cohen: I... I would like to also point out to the Court that this use of a tax credit as a mechanism could also to... that is to funnel money to school tuition organizations could just as well have been an appropriation of dollars and vouchers.

And if instead the State was giving vouchers to school tuition organizations, 93 percent of which went to religious schools, there would be no question about the individual citizen's option to choose to go to the Federal court.

Justice Scalia: But it wasn't done that way.

I mean, it's just like saying it could have been extracted by torture too, and that would have been clearly unconstitutional.

Unknown Speaker: [Laughter]

Justice Scalia: But that happens not to be the way it was done.

Mr. Cohen: That's correct, Your Honor, but in Nyquist this Court particularly pointed out that a tax credit was the same as giving money to the State.

That... that was this Court dealing with a tax credit that... where the money was used to support religious schools, which is just what we're asserting here.

Chief Justice Rehnquist: Mueller certainly distinguished that part of Nyquist.

Mr. Cohen: I'm sorry, Mr. Chief Justice.

I didn't--

Chief Justice Rehnquist: The Mueller against Allen case surely distinguished that part of Nyquist.

I mean, it's much less valuable to... after Mueller than it was before Mueller.

Mr. Cohen: --Mr. Chief Justice, Mueller was a tax deduction case rather than a tax credit case.

In a tax credit case--

Chief Justice Rehnquist: Why should... why should that make any difference to your argument?

Mr. Cohen: --It... generally, it wouldn't, but a tax credit is every dollar that goes to the benefit of the school tuition organization... if it wasn't given to them, every dollar of that would go to the State.

In a tax deduction, a tax deduction is a more generalized... helping to support charity, and only a portion of that money goes to the State--

Chief Justice Rehnquist: Yes.

It may be... it may be a smaller amount, but in both cases it goes to the person who... who claims it.

Mr. Cohen: --Mr. Chief Justice, that's correct, but it's a smaller percentage.

My use of tax credit with Nyquist is that that's an unusual feature of Nyquist is it's dollar for dollar.

In Mueller, there was the... there were a number of considerations when you deal with a tax deduction.

They're a little different than tax credit, and this Court has recognized those.

Generally they are tax benefits and generally they are to be considered outside the Tax Injunction Act according to the cases.

Justice Ginsburg: Is the point you're making is... is it's the taxpayer who's designating a certain portion of money which would otherwise go to the general revenues will instead go to this charitable purpose.

It's kind of like on the Federal return where you can check off and say I want $3... instead of going to general revenues, it goes to fund campaign... to presidential elections.

Mr. Cohen: Justice--

Justice Ginsburg: That's on the... that's what this is, isn't it?

Mr. Cohen: --Justice Ginsburg, that's exactly right.

That's what I'm saying.

And if you have no further questions--

Justice Stevens: I have--

Justice Scalia: --I do.

I do have one.

Unknown Speaker: Don't kid yourself.

Justice Scalia: Go on.

Go first.

Justice Stevens: I just want to make sure I didn't miss something in your argument, Mr. Cohen.

Talking about the history of this statute, did you refer to an earlier statute that used the similar language in the same order, assessment, levy, and collection or collection and levy, whichever it is, and that that statute only applied to real estate taxes?

Was that... did you say that?

I want to make sure I didn't--

Mr. Cohen: --Justice Stewart, I was referring to the Anti-Injunction Act of 1867--

Justice Stevens: --Right.

Mr. Cohen: --in which the word levy was not used.

It was assessment or collection, and I said it was in the context of valuation then because there was no income tax in 1867.

And that could be... for instance, I know there weren't Federal property taxes, but it could be in... in valuation of... of property for tariffs coming in or things of that nature.

The word assessment then was not used in the context of the income tax laws.

That's all I was saying because there were none.

Justice Stevens: And... and it would be perfectly natural in the real estate tax context to use them in that order because the assessment comes first.

Whereas, the argument of your opponents here is the assessment is the last thing in the chain of events, which seems somewhat counter-intuitive if you're... when you're referring to income taxes.

Mr. Cohen: I... I agree, Justice Stewart.

Justice Breyer: See, this... in... in... do you know this in State tax systems?

Apparently in the Federal tax system assessment refers to an official determination of the amount that the individual taxpayer owes.

Now, there are 50 State systems plus the District of Columbia.

Do you know if there are a significant number of States that would not consider that official determination of the amount owed to be an assessment?

Mr. Cohen: Mr. Justice Breyer, no, I do not know.

We haven't done a survey of the States.

Justice Scalia: But the question I was going to put was you... you say that the... the principal purpose of this law was to protect the fisc of the State.

And I... you know, I will concede that, that... that what Congress was most concerned about was preventing somebody from stopping the State from collecting money.

But it's not unusual that Congress drafts its prohibitions broader than is necessary to achieve just the narrow purpose.

And if indeed they... they prohibited not just stopping the collection but also stopping the assessment, it seems to me we have to take the statute for what it says, if indeed this is an assessment.

And the mere fact that it goes beyond what the principal purpose was, I mean, that... that's often the case with statutes.

Mr. Cohen: Justice Scalia, the State contends and the United States both contend that this statute is... the purpose of it was to stop any court... Federal court interference with the tax administration process itself.

And the... the Federal court decisions, other than Bridges, reject that point of view.

And this Court rejected that point of view in Jefferson County when the... the issue there was that the county had sued in the State court against Federal judges to try to get an occupational tax.

And the Federal judges removed the case to Federal court, and the county said, well, the Tax Injunction Act applies here because the Federal judges are going to raise State tax issues and this Federal court will be deciding cases having to do with State tax administration.

And they cited the Kelleher case out of the Second Circuit which it held that the Tax Injunction Act was so broad that it applied to tax... all State tax administration.

And this Court rejected that position, and this Court I believe unanimously overruled Kelleher.

So we--

Justice Scalia: Mr. Cohen, we are ships passing in the night because you're... I don't care what the purpose was.

I care what the language says, and my point is that very often the language goes beyond the narrow purpose that Congress had in mind.

And when... when the language does so, we read the statute as it's written, but you don't... don't agree with that apparently.

We... we have to intuit the purpose and limit the language no matter what it says to that purpose.

Mr. Cohen: --Mr. Justice, I... I'm saying that for 60 years with the Tax Injunction Act and for 150 years... no... I guess 140 years with the Anti-Injunction Act that is the way the Federal courts... the way we're suggesting is the way the Federal courts have interpreted this language.

And we suggest that if there's a problem, as long as the tax revenue is flowing to the State and we're not interfering... we're not stopping that, if there's a problem with... with that system that's been there now for, oh, 60 years for States, 140 years for the Federal fisc, if there's a problem, the States can take that problem to Congress to change this exemption.

This is an exemption from the Federal jurisdiction, which under the Phillips case is to be narrowly construed.

If... if they... if there's a real problem... and I suggest there is not because the money will continue to flow to the State notwithstanding our... the Federal court jurisdiction here.

And we believe that the law should not be changed and we request that the... this Court remain with the past 60 years and 140 years of judicial experience on this issue.

Thank you very--

Justice Ginsburg: Mr. Cohen--

Rebuttal of Samuel Goddard

Chief Justice Rehnquist: --Thank you, Mr. Cohen.

General Goddard, you have 4 minutes remaining.

Mr. Goddard: Thank you, Your Honor.

If... if I may go to the overriding principle here because I think to some extent that's what governs the actions of the State and should be appropriate here.

As this Court said in... many years ago under the principle of comity, which Mr. Cohen referred to, comity refers to the scrupulous regard for the rightful independence of State governments which should at all times actuate the Federal courts and a proper reluctance to interfere by injunction with their fiscal operations.

That's Matthews v. Rodgers.

Justice Ginsburg: What... what happened in... in Nyquist and Mueller?

Is that just the Court overlooked it?

Mr. Goddard: Your... Your Honor, the Court did not deal in any way with the issue of... of section 1341 in either Nyquist or Mueller, and I believe under... under your decision in DeBuono there is... which also deals with 1341 and the failure to raise it, there can be a presumption that the escape clause was exercised.

It is... if there is no plain, speedy, or adequate remedy under State law, obviously jurisdiction in the Federal court is appropriate.

Justice Ginsburg: But there... one sees plain, speedy, and effective--

Mr. Goddard: Efficient.

Justice Ginsburg: --that's a taxpayer who has to go through the system.

But that... that's... how does that fit when it's a non-taxpayer who's stopping... who's... who's trying to declare a credit unconstitutional?

This... this quick, speedy remedy is... is that the taxpayer gets a refund remedy, gets a deficiency, whatever it is, but how does this swift... how does that play into somebody who is not a taxpayer?

Mr. Goddard: Your Honor, in... in the Anti-Injunction Act, that creates a serious problem.

In the... in this issue... and I think that a critical thing is these... these taxpayers have a remedy at State law.

This case was decided by the Arizona Supreme Court in Kotterman v. Killian, and this... this... the Supreme Court denied cert 4 years ago.

The exact same issues that have been brought forward in Federal court by the petitioners in this case were decided by the Arizona Supreme Court under the Arizona constitution and the United States Constitution, and there was not an establishment issue in this case.

And that brings me back--

Justice Ginsburg: I meant within the meaning of the Injunction Act, it seems that swift, whatever, remedy was referring to the taxpayer's remedy under State law--

Mr. Goddard: --Yes.

Justice Ginsburg: --could take care of--

Mr. Goddard: Yes, Your Honor, and under the Federal law there's a problem because you can't pay a tax and get it refunded if you're a third party.

But in Arizona law, there is standing for... for these parties and that's already been exercised.

They're trying to take another shot by going into Federal court and trying to get an... another opinion which will deviate from the Arizona Supreme Court.

And excuse me.

If I could refer--

Justice Ginsburg: --The same plaintiffs?

If it's the same plaintiffs, you would have a... a--

Mr. Goddard: --Your Honor, I... I didn't mean to imply they were the same plaintiffs, but they were exactly the same issues in turning a constitutional violation.

If I could to Justice Scalia's earlier question, as the... as the legal representative of the Arizona Department of Revenue, if there were an adverse decision in the... in the district court of Arizona... and our Supreme Court has already spoken on the same issue... I have a very hard time advising a client as to what they should do going forward in terms of honoring, under Arizona law, the school tax credit.

Justice Ginsburg: --We have that same problem in habeas sometimes too when the State Supreme Court disagrees with the Federal district court.

Mr. Goddard: Yes, Your Honor, but in the situation in habeas, we don't have the Tax Injunction Act.

We don't have a specific legislative bar that says there will not be jurisdiction in the district court if there is a plain, speedy, and efficient remedy at the State court.

And I believe that is... it doesn't tolerate any... any degrees of variation.

As this Court has said, it's... it's automatic.

There is... it is... there are no exceptions.

Chief Justice Rehnquist: Thank you, General Goddard.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at 10 o'clock.

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Engine Mfrs. Assoc. v. South Coast Air Quality - Oral Argument

Fri, 09 Jan 2009 14:49:06 +0000

Case:

Engine Mfrs. Assoc. v. South Coast Air Quality

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Transcript:

Argument of Carter G. Phillips

Chief Justice Rehnquist: We'll hear argument now in No. 02-1343, Engine Manufacturers Association and Western States Petroleum Association v. the South Coast Air Quality Management District.

Mr. Phillips.

Mr. Phillips: Thank you, Mr. Chief Justice, and may it please the Court:

In 1967, Congress enacted section 209(a) of the Clean Air Act, which is reproduced in the petitioners' brief at page 1.

That statute prohibits States and their localities from adopting or attempting even to enforce, quote, any standard relating to the control of emissions from new motor vehicles or new motor vehicle engines.

In this case, a political subdivision of the State of California has adopted fleet rules that prohibit the purchase by certain fleets of various classes of... of vehicles that are otherwise certified for purchase in the State of California and, indeed, have essentially precluded the purchase by those organizations of diesel-fueled vehicles in toto.

Justice O'Connor: Mr. Phillips, this is a facial challenge?

Mr. Phillips: Yes, Justice O'Connor, it is a facial challenge.

Justice O'Connor: Claiming total preemption.

Mr. Phillips: Yes, claiming total preemption.

Justice O'Connor: What if we were to think that at least as applied to the district's own purchases of vehicles, that it could limit itself to what kinds of vehicles it wanted to purchase and therefore is valid at least in part?

Mr. Phillips: Well, the... there are two answers to that.

One, the district doesn't need a statute in order to purchase its own vehicles.

There is no basis for adopting a standard that controls that particular situation.

Justice O'Connor: Well, but let's suppose it wants to establish a standard to apply now and in the future for itself and for any other jurisdiction, public jurisdiction, within its area?

Mr. Phillips: Well, if it goes beyond...

Justice O'Connor: If it's authorized to do that.

Mr. Phillips: Well, if it goes beyond what it wants to purchase itself and imposes requirements on others, then it seems to me that's a standard that falls within the ambit of the preemption.

Justice Kennedy: What if... what if the State... what if the State of California says that all of our officials, including the Governor, shall have a low emissions vehicle?

Mr. Phillips: I think that... that there is a serious question as to whether or not that would be preempted.

I... I don't think it's presented, obviously, by the particulars of this case.

I mean, it still look... sounds like a...

Justice Kennedy: Well, but it seems... it seems to me that... that it is from... from the standpoint of... of governmentally owned and operated vehicles.

Mr. Phillips: Well, I think the answer to the question at the end of the day, Justice Kennedy, would be that you would require a clearer statement from Congress than what you have in section 209(a) to interfere with the kind of purchasing decisions that localities are... are making in contrast to this.

Justice Scalia: Right, but... but it seems to me not... not an answer to Justice O'Connor's concern to say that it goes beyond the particulars of this case because when you make a facial challenge, you are going beyond the particulars of this case.

Mr. Phillips: Well, I understand that, Justice Scalia.

Well, there are two answers to that, one that I was trying to answer before which is I don't think that this provision actually covers that particular situation because you don't need this provision in order to have authority as a local jurisdiction to make purchases on your own as to what you're going to buy.

That's not, I don't think, a standard within the meaning of the statute.

But second of all, I also don't think that the... it must be unconstitutional in all respects as the controlling standard of law in this particular context either.

It is clear that there is a significant component of this... of these fleet rules that is preempted, and perhaps all of them are preempted.

But we were dismissed out at the earliest stages of these proceedings without an opportunity to demonstrate the metes and bounds of the regulations as they would particularly apply at this... at... at this particular juncture.

Justice Breyer: No, but we may...

Justice Kennedy: I'm still not sure... sure where we are.

It... it seemed to me that the regulation talks about some private vehicles, trash hauling and airport shuttles, but it also talks about exclusively governmentally owned vehicles.

And it seemed to me that the State can do whatever it has... whatever standard it wants for its own vehicles.

Mr. Phillips: Well, our... our challenge is not intended, frankly, to interfere with the local jurisdiction's ability to purchase their own vehicles on their own behalf.

Justice Breyer: Local jurisdictions.

I mean, you know, what's that?

Are you saying that it is a standard if the City of Los Angeles has a regulation through the city council that applies to the purchasing of every little local area?

Or suppose the State of California has a general regulation respecting only governmental purchases.

Are you saying right now that all those... in other words, rules, regulations, standards, practices by the State of California or some part thereof... that does nothing more than control purchasing by governmental units of that State is fine?

Justice Scalia: They can do that.

Mr. Phillips: Yes.

That's what we're saying.

Justice Kennedy: All right.

Mr. Phillips: We don't... we don't have any challenge to that.

Justice Breyer: In that case we're now down to the possibility that we're talking about some garbage trucks, I think, and some airport vehicles because I think all the rest of it did just involve the State.

Mr. Phillips: Well, it's difficult to know precisely what the metes and bounds of it is, but the portion of this that offends us and the portion that we think does not require a clearer statement, which is that which goes directly to non-governmental entities.

If... if you're talking about regulating the purchasing choices of pure governmental entities, then you expect Congress to speak with a... with a clearer voice.

But the purpose of these fleet rules is not simply to restrict the purchases by governmental entities.

It is quite clear that the purpose of these fleet rules is to regulate the purchasing choices that are made with respect to a much broader scope of purchasing entities, including private entities, and it is that portion of the regulation, frankly, that we are challenging and challenging on its face.

Justice Ginsburg: Mr. Carter, if these regulations had been adopted by the State of California rather than a regional district as its 246, in... in lieu of the Federal plan, would that have been permissible?

Mr. Phillips: Assuming, Justice Ginsburg, that you... that California took... complied with all of the requirements of section 246, and there are specific requirements in order to get a... in the... in the State action plan that... State implementation plan that need to be satisfied.

But to be sure, the Congress clearly envisioned that for States with nonattainment problems, that they would be able to use fleet restrictions as a mechanism for promoting their overall emissions quality.

Justice Ginsburg: So your objection is to this on a regional basis.

Statewide you say is permissible provided you follow... I guess you need EPA approval?

Mr. Phillips: Yes, providing you comply with the standards of section 246.

Justice Ginsburg: But... so... but the substance of it would be okay statewide.

So... so...

Mr. Phillips: Well, I don't know if the precise terms of this... of these rules would qualify under section 246 or not.

Nobody has actually analyzed that point, but the truth is it's clear that you could have certain fleet rules implemented that are consistent with section 246.

But realize, Justice Ginsburg, that what... by saying all our concern is is that every... every one of thousands of jurisdictions can impose purchase and sale requirements on vehicles...

Justice Souter: Well, it's not sale requirements.

It's a purchase requirement.

Mr. Phillips: Well, under the respondents' theory of this case which limits the term standards to production mandates imposed on manufacturers, then it seems to me that it clearly extends to all purchases and sales and whether it extends to fleets, it wouldn't... it's not limited to fleets at all.

Under the respondents' theory of this case, the field that has been preempted here really is limited to the manufacturers.

And to allow every local jurisdiction to come in and bring forth additional requirements is to make a hash out of a scheme that was clearly designed to create a unitary market for the manufacture, sale, purchase, and licensing of new motor vehicles.

Justice Kennedy: Well, if... if one local jurisdiction affects other governmental jurisdictions, but the latter don't care, then it's just as if, as the hypothetical just posed, the State had the... had... had the rule.

Is there sort of an ultra vires component to your argument that this... that this district here is affecting what other governmental entities can do and that's the problem?

Mr. Phillips: Well, this Court has long recognized that you can't analyze a preemption case solely on the basis of the single action by a single actor, that in fact you have to consider the possibility that all 50 States or, in this case, every local jurisdiction could follow suit.

And remember, it's not just follow suit with respect to this kind of fleet rules under the respondents' theory of this case, which is that all purchase and sale restrictions...

Chief Justice Rehnquist: Well, I... I had not understood your argument to be based on any conception that this particular district would be treated differently than the State as a whole, but I... I... am I wrong in that?

Mr. Phillips: Well, the State of California would have certain prerogatives, obviously, under the entire scheme that are different, but even if California had simply done what the district did here, which is to just announce a set of fleet rules, not made any effort to comply with 246, not made any effort to comply with section 209(b)...

Chief Justice Rehnquist: Well, what... what does... what does 246 provide?

Mr. Phillips: Section 246 provides that in certain nonattainment States, one of the options they have available in order to eliminate the overall... or to... to improve the overall ambient air quality is to adopt certain types of fleet rules.

And the provision is very lengthy.

It's very detailed about... and you have to include that in your State implementation plan.

What California did was it used the substitute route and adopted its LEV rules saying that those would be equally effective.

Chief Justice Rehnquist: So it didn't comply in your view with 246.

Mr. Phillips: Oh, it clearly didn't comply.

I don't think there's any question that California has made no effort to satisfy the Clean Air Act with respect to this.

But this Court...

Justice Souter: Your... your argument, as I understand it, going back to your answer to Justice Ginsburg, is that although there is an avenue for the State, as it were, to get where... where it might want to go on a... on a fleet policy under 246, the district simply does not have that avenue open to it.

Mr. Phillips: Yes, that's absolutely clear.

Justice O'Connor: Yes.

Mr. Phillips: And that's... and that's part of the way this entire scheme operates.

Justice O'Connor: But that gets me back to my question.

If we disagree with you, to the extent we think some application of the district's fleet rules are not preempted, then how does that leave your challenge, which is a facial one?

Mr. Phillips: Well, I... I think the answer is that there are various components of the fleet rules, and I think unlike if you're... if you're seeking pre-enforcement of a statute, where you'd have to find every application of it, the question is are there subcomponents of these rules that are properly challengeable and therefore properly enjoinable rather than being allowed to go in.

I don't... I don't understand...

Justice Scalia: That eliminates the doctrine entirely, I mean, the doctrine that facial challenge has to show the statute is... is invalid in all its applications.

You could always say, well, we're not challenging all of its applications.

We're... we're just challenging this particular set of applications.

I mean, that... that...

Mr. Phillips: Well, no, Justice Scalia, I think it's a little more complicated than that because what you're really talking about is a... is a host of rules.

And if you look at the appendix to the respondents' brief with all of the rules that are laid out there, there are literally dozens of rules.

And in order to challenge the, quote, fleet rules in the sense of recognizing that there are clearly areas of those rules that intrude into preempted Federal activities, it doesn't seem to me that you have to challenge the entirety of the rules.

You should be entitled to pick those rules that you're going after and a complaint and go forward.

And that's...

Justice Scalia: But...

Mr. Phillips: that's what we've done.

I understand if you have a simple unitary statute that you're challenging, the Salerno rule may suggest that the statute has to be unconstitutional in all its respects, but if you adopted a rule that if part A is good and part B is not good, you should be allowed to... to challenge part B facially without worrying about part A.

Justice Souter: But I thought... I thought this was the case in... in which part A applies both to the district, as in Justice O'Connor's question, and to non-governmental entities so that it's not that A applies to... to one kind of buyer and B to another.

There's a... there's a rule that applies to buyers.

And Justice... and correct me if I'm wrong.

Justice O'Connor's question in effect says, if there is a substantial... if there is an application of that rule that in a substantial number of cases at least would not be preempted, then isn't that the end of the facial challenge?

Mr. Phillips: And my answer to you is I don't think that's the proper application of Salerno and I don't... I mean, I recognize...

Justice Souter: I'm not applying Salerno.

I'm... I'm applying a substantial application rather than a one-instance kind of rule.

And... and your answer to that was, well, we don't have to challenge all rules.

We could challenge A but not B.

Mr. Phillips: And my response is the rule that covers the governmental situation and the private situation is the same rule, and if that rule has a substantial number of constitutional applications or... or non-preempted applications, doesn't that, in... in effect, defeat the facial challenge?

Mr. Phillips: Well, except for the fact that if... if we don't get past the ruling of the court below at this stage, which is that none of this is preempted, that... whether it's a facial challenge or a non-facial challenge, we're going to have rules that are out there that are being implemented at this stage and will be upheld as constitutional under the Ninth Circuit's ruling as the... as the controlling rule of law, and we won't be in a position even to get at any portion of those rules that are clearly unconstitutional because they...

Justice Breyer: You can, can you not... I'm just trying to draw this back because it seems to me you're not challenging the public part.

So if you're not challenging the public part, then... I've looked at pages 7 and 8 of the SG's brief where he's listed these rules.

Mr. Phillips: Right.

Justice Breyer: And I take it what you're challenging is rule 1194 insofar as it applies to private operators.

Mr. Phillips: Right.

Justice Breyer: Rule 1193, the same, and rule 1186.1, the same, and nothing else.

Mr. Phillips: I think that...

Justice Breyer: In each of those rules, having looked at them, it does say at the beginning, these apply to public and private.

So I take it it's those two words, and private, written in the text of those rules that you're challenging.

Mr. Phillips: That... that is our... I mean, our primary concern.

The... the problem here is...

Justice Breyer: Well, but that's what you're challenging, nothing else.

Mr. Phillips: Right.

Well, I mean, the question is whether or not... I mean, I'm not sure that is precisely what we're challenging.

It seems to me there is a difference between a public entity deciding on its own...

Chief Justice Rehnquist: Yes.

Mr. Phillips: that it will make a certain purchasing decision as a purchasing decision.

There is a fundamentally different proposition when another entity demands that it must make a purchasing decision based on emissions control.

Justice Breyer: What do you mean?

Another public or private?

Mr. Phillips: A public entity.

Justice Breyer: Oh.

Mr. Phillips: What I was saying is... what... what I meant to answer your question earlier, Justice Breyer, was to say if you're asking me can public entities make purchasing decisions free of the restrictions of the Clean Air Act, I think the answer is yes because I don't think Congress spoke to that.

But if what you're saying is can a... can one governmental entity demand that another governmental entity make a decision for purely environmental reasons and not as a... as a contracting matter, no.

That seems to me is still a standard...

Justice Breyer: Well, now just let's think...

Mr. Phillips: that controls emissions and is unconstitutional.

Justice Breyer: of the complexity of State and central government in light of what you just said.

You're saying that the State of California board A couldn't say all the... I mean, I don't know where to go with this.

Do you see... do you see the problem?

Mr. Phillips: No, but the... the problem is much simpler than that, Justice Breyer, because there's a scheme in place where if you don't like the way the regulatory arrangements are worked out, you can take the issue to California and California can take it to the EPA.

I mean, the whole purpose of this enterprise was to devise a unitary market and make it very simple.

And there's nothing in the... in the suggestion that...

Justice Kennedy: the merits.

Justice Breyer: My problem is to try to figure out what's being challenged.

Mr. Phillips: Well, we're challenging the effort by the district to impose these kinds of requirements, these standards which control emissions.

Justice Breyer: On its...

Justice Kennedy: But if California...

Mr. Phillips: On everyone.

Justice Kennedy: if California accepts that as a matter of its domestic law, who are we to say otherwise?

Mr. Phillips: Well, because that's what the Clean Air Act is all about.

California is free to do that if it complies with section 209(b) which says you can obtain a waiver.

You can make these the Federal standards.

I mean, there's no question that these fleet rules could have been adopted by the State of California and be approved by the EPA and be operating completely tomorrow if they want to go through that process.

That's the specific process Congress had in mind, a process that the district has abandoned.

And all we're suggesting is that's what they ought to do.

Mr. Phillips, I don't want to intrude into your time, but I... I hope you have time to comment on your adversary's argument that the word standards just refers to numerical figures and so forth and that you... you have a... it means the same thing when the government is... Federal Government is implementing its own issues and it is in this provision.

Do you... do you have a response to that basic argument?

So there... there are two answers to that.

One, section 202 is not limited to production mandates, those kinds of numerical standards, even... even within 202.

And second, the language that... that Congress used about standards relating to the control of emissions is inherently broader than 202 in any event, and if you expected 209 and 202 to be read in para materia, you would have expected Congress to cross reference.

Justice Stevens: Because they were enacted at different times, I think, the two sections.

Mr. Phillips: They were enacted at different times.

Justice Kennedy: Yes.

Justice Souter: What about the distinction between standard and requirement?

Mr. Phillips: Well, the use of requirement in the second sentence is simply a recognition that there could be standardless requirements imposed by States requiring a certification or some other kind of documentation that don't have standards.

So the first sentence deals with standards and the second one deals with standardless obstacles to implementation.

If I could reserve the balance of my time.

Argument of Theodore B. Olson

Chief Justice Rehnquist: Very well, Mr. Phillips.

General Olson, we'll hear from you.

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

The South Coast rules prohibit the purchase of certain motor vehicles and require the purchase of others based on explicit emission standards.

Under respondents' reasoning, every other State and local government agency in the United States could adopt its own individual and unique blend of prohibited and permitted motor vehicles.

But...

Justice Scalia: General Olson, does... does the Government take the position that petitioner has just taken, that these rules are invalid even insofar as they apply to governmental subdivisions in California?

Mr. Olson: I think the answer is... is no, but let me explain, that to the extent that agencies of government, the State or subdivisions, are purchasing their own vehicles, we do not contend that that is unconstitutional.

They can purchase...

Justice O'Connor: No, no.

Justice Scalia: I'm not talking about whether their doing of it is unconstitutional.

Whether the State's... whether the State's prescribing that they do it violates the statute.

Mr. Olson: Our... our position... I don't... I'm not sure I know the answer to that because I don't know what authority this agency has with respect to requiring different units of... of the government of the State of California to purchase or not purchase vehicles.

And it hasn't... it's not a subject that was briefed, if at all, extensively in the briefs.

But the... the force... the force of the preemption provision here is that Congress determined that there should be a uniform standard with respect to controls on the emissions of motor vehicles.

California was given an exception provided that certain requirements were met.

This is in section 209(b) that these provisions be submitted to the EPA and approved under a process that's open and transparent and allows the national agency to make sure that there are uniform standards that can be met that also comply with the requirement that the national economy not be disrupted, so that there would be different... by different standards in every little community of the United States.

That's the thrust...

Justice Ginsburg: Has it happened, General Olson?

One pier that you raise is if... that... if this district can have these fleet rules, so can every district in the country, and these... these rules have been in operation now for some years.

Have other districts in other States copied what this one has done?

Mr. Olson: Not that I know of.

They've... they've only been in existence since the year 2000.

The... the district was given the authority to adopt these rules in 1987, if I'm correct, did not adopt them until the year 2000.

The arguments... the principal arguments that are made by respondents that standards are production mandates finds no basis in the statute.

The language of section 202 or section 209 is not so limited.

The... what... what section 202 and 209 do, talk about emission levels or emission standards.

And there should be no mistake about it.

These fleet rules are directly related to emission standards.

One of them, for example, rule 1194, uses the phrase, emission standards, 12 times and it requires all purchasers to be vehicles that meet certain emission standards, adopting by reference the State of California CARB rules.

It picked out a subset, as the respondents put it, of one in column A, two in column B, no diesel.

There must be some clean fuel.

It's another... it's a totally different package.

And Palm Beach County or... or Waco... the City of Waco could do something exactly like what the respondents are contending because they say the controls with respect to emissions don't apply if they're purchasing requirements.

EPA, in fact, enforces the standards that it adopts under section 202 pursuant to the provisions of 203 by restricting the sale or introduction into commerce of motor vehicles and under section 219, under certain circumstances, the purchasers of fleets, bus fleets.

So the implementation of the limitations that... that... the standards that EPA adopts are through purchase restrictions or purchasing restrictions.

They're not production mandates.

It's my understanding and I'm informed that the EPA has never implemented the Clean Air Act with respect to production mandates.

They say what can be sold or what can be purchased.

Justice O'Connor: But... but, Mr. Olson, why can't a local agency or community decide it's going to buy vehicles and will buy no diesel vehicles?

And why is that the imposition of a standard?

Mr. Olson: Well, it is not... we... we are not contending, Justice O'Connor... I want to make it very clear that local agencies, San Francisco or Los Angeles, can put for their own vehicles anything they want.

This district... I... the... the...

Justice O'Connor: Well, does this district have the authority to so provide for its own purchases?

Mr. Olson: For its own purchases.

If it... I don't know whether it does or not.

This is a quality control district.

I don't know how many vehicles they have.

Justice O'Connor: Does it have authority to... to make that requirement for cities within its jurisdiction?

Mr. Olson: We don't think that it has the authority to require other governmental agencies based upon emission standards to do something.

Chief Justice Rehnquist: Well, that's a matter of State law.

Mr. Olson: That is a matter of State law, and it's... and... and what we're talking about here is the requirement by particular agencies to pick out different types of motor vehicles that may or may not be sold.

Justice Kennedy: Well, I suppose the separate States could do that for its own purchases.

Mr. Olson: For their own... for their own purchases, Justice Kennedy.

Justice Kennedy: All right.

Chief Justice Rehnquist: they can't...

Justice Kennedy: And could they also do that for all their governmental subdivisions?

The State of Nebraska says that the State and all of its subdivisions will have some very strict standards...

Mr. Olson: I agree with the... with the way that the Chief Justice put it, that that's their own purchasing decisions, and it's a matter of State law as to whether they can... but that is not what this case is about.

This case is about whether the South Coast district can impose those standards, including Federal Government vehicles, postal vehicles, FBI vehicles, private vehicles that go to the airports and so forth.

And the justification that they say is that we can control the sale of motor vehicles willy-nilly by... by controlling the purchase.

By controlling the purchase, you control what can be sold and thus can what be manufactured.

They are claiming an authority in southern California that they... that they claim the EPA doesn't even have.

Justice Scalia: Maybe, but most of what it covers is simply the... the purchase by governmental units.

If you acknowledge that the State can require its subdivisions to... to purchase only certain kinds of vehicles, as you've just acknowledged, why can't the State create a district as here and allow that district to require...

Mr. Olson: Justice...

Justice Scalia: subdivisions to purchase only...

Mr. Olson: From the standpoint of the United States Government, we're not contending that the State or an individual can choose whatever vehicle he or she or it wants to purchase.

What we're contending is that the whole scheme of the EPA and the Clean Air Act and the... and the preemption provisions prevent different agencies by using the... the mechanism.

The entire argument that respondents advanced here, by using the word... by... by prescribing what can be purchased, they can... they can control what vehicles will exist and what vehicles will be run.

It isn't limited.

The authority that they're claiming isn't limited to their own vehicles.

This same authority... they would make the same arguments if the South Coast District said all persons or all persons that have more than one vehicle or all persons that live in a certain portion of southern California.

The authority that they claim by using the word purchase, which is not in the statute, is not in the preemption provision, and is an authority that the... the EPA specifically uses to a certain extent under section 219...

Justice Ginsburg: General Olson, you mentioned that there are Federal vehicles involved, postal vehicles, but you also are stressing purchase.

Suppose the Federal Government buys its vehicles that it's going to operate in California in Nevada.

These rules wouldn't apply.

So the... the United States is not inhibited in any way in its purchases, is it?

Mr. Olson: Well, A, I think that is an inhibition.

B, I think the respondents will say that these... these purchasing requirements are imposed upon fleet owners that... that requires them to make purchases of certain vehicles.

So I think the premise of your question is not correct.

If southern California or if the State of California wishes to impose fleet requirements, there is a mechanism.

It's a logical, consistent, transparent, open mechanism under... that was thoughtfully put out by Congress.

The whole mechanism is thoughtfully calibrated by Congress to allow the EPA to make judgments.

Does this make sense from a national standpoint?

Will this make sense from other States' standpoints?

Is it... will it impose a dislocation on the marketplace for motor vehicles?

The twin objectives of the Clean Air Act are, one, to produce cleaner air, but two, to do it in a way that does not disrupt the national economy and the marketing of motor vehicles, which is an important part of the economy of this Nation.

Justice Scalia: Just so I have it clear, because it... this is very important to me.

It's your position that the State may require municipalities only to buy certain kinds of cars.

Mr. Olson: To the extent that... yes.

I'm... because I don't know the answer to the State law question that the Chief Justice alluded to.

Assuming that the State of California was one and the same and decided that it owned or had the authority under State law to purchase those vehicles, the answer would be yes.

Argument of Seth P. Waxman

Chief Justice Rehnquist: Thank you, General Olson.

Mr. Waxman, we'll hear from you.

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

The question in this case is whether section 209(a) of the Clean Air Act, which is reproduced at page 36a of our brief, preempts very modest fleet purchase rules which apply only to vehicles that are already commercially available, that is, that cannot have an effect on manufacture... cannot require manufacturers to produce or sell anything, and which were adopted by a unique airshed in which 90 percent of all toxic air pollution derives from motor vehicles.

And the answer to that question is no because the text and the context of the Clean Air Act, title II of the Clean Air Act that deals with motor vehicles, show that Congress intended the word standard in section 209 to be used in the same way that it is used in section 202 and, indeed, throughout the entirety of title II... title II.

It's used 100 times, I'm told by an amicus, in section 202 alone, and every single time that it is used there, it is used to refer to an obligation placed on manufacturers, that the vehicles they produce and sell meet specified emissions characteristics.

No one contends that that definition, the way the word is used in section 202, covers the rules in this case.

Now, express preemption... it requires discerning Congress' intent.

It's not an exercise in definitional possibilities, this Court has reminded us many times.

Now, you can read every brief from our opponents.

Every different brief offers up some other definition, and their briefs in related cases have done the same.

And we've heard no definition this morning.

They look to the dictionary definition of standard or criteria or test, and they're reproduced in their briefs.

But they... they concede that there is no dictionary definition that they offer that coincides with the rule that they seek because they concede that Congress did not intend to cover incentive programs or tax programs even though, like purchase rules, they operate through the market on manufacturers and not directly on manufacturers.

Justice Breyer: Suppose that California passes a law and says no one can sell a diesel bus in California.

Mr. Waxman: Well...

Justice Breyer: Clearly you'd have to go get permission if you want a rule like that.

Right?

Mr. Waxman: A... a rule that...

Justice Breyer: The rule is exactly what I said: no one can sell a diesel bus in California

Mr. Waxman: A... one could... I believe that a good argument could be made that that rule is preempted because it conflicts with the overall purposes of the Clean Air Act.

But...

Justice Kennedy: Yes.

Chief Justice Rehnquist: I mean, you'd have to go to EPA.

Mr. Waxman: But, Justice Breyer, please let me finish.

Justice Kennedy: Yes.

Mr. Waxman: This is a very important point.

The challenge here is that these rules are expressly preempted... it's in the question presented in the petitioners' brief... expressly preempted by the first sentence of section 209(a), and it is expressly preempted because these are standards.

And our submission is...

Justice Breyer: I'm... for purposes of my question, I'm rejecting that argument.

I'm trying to figure out what is the correct way of dealing with the statute.

Mr. Waxman: Yes, and...

Justice Breyer: And where I was going, if you want to see, I'll show you because then you... it... it seems to me clearly you'd have to ask question... nobody can sell a diesel bus in California.

You have to get permission from EPA.

Second, they change it.

No one can buy a diesel bus.

All right?

It's the same.

Third, they say no governmental unit can buy a diesel bus, but it turns out that the only buses anyone has ever bought or sold in California are diesel units.

And it's at that third point that's bothering me because it seems to me whether it's preempted or not turns upon the effects.

Have you, in effect, required the manufacturer to change its assembly line or not?

And I don't know where to go with that.

That's what I'm posing.

Mr. Waxman: Here is my... here is my first effort at an answer.

The word standard, as it is used in 202 and in the other provisions of title II that deal with different types of standards, the standards with respect to fuel, standards with respect to buses, standards... standards in section 243 that deal with the Federal clean fuel purchase program, are all obligations that are placed directly on manufacturers.

The Congress and the EPA recognized when section 246 was enacted, which is the Federal fleet purchase program...

Justice Stevens: Mr. Waxman, can I interrupt you just a moment?

You say there are obligations that are placed on the... which is also true.

But the word standard as used in the statute over and over again refers to things that are express in terms of so many units per mile and so many... so forth and so on.

The term standard, it seems to me, refers to the... the numerical definitions rather than to how they're enforced or implied.

Mr. Waxman: Well...

Justice Stevens: I think it may well be they're... and... and we don't have to worry about the enforced or implied in the terms that a statute because all it has to be that... the only prohibition is against anything relating to a standard.

Mr. Waxman: No, it's...

Justice Stevens: And if the standard is limited to the numerical term... I don't find in the text of the... of any part of the statute here your... your point about enforcement against.

That's... that's what... what is done with the standard.

It's not what the standard itself is.

Mr. Waxman: Justice...

Justice Scalia: I have the same problem, if I could second it.

It seems to me the fact that you use standard 99 times in discussing manufacturing standards doesn't mean that when you use it a 100th time to refer to some other aspect of the whole thing, it must refer to manufacturing.

It just doesn't follow.

Mr. Waxman: I'll try... I'll be efficient and try and answer two questions at once then.

First of all, 209 doesn't refer... doesn't prohibit anything relating to a standard.

It prohibits standards relating to motor vehicle emissions just as section 202 in the very first sentence authorizes the Federal Government to promulgate standards applicable to the emission of motor vehicles.

Now, standards, as the word is used in 202 and throughout title II, refers to emission characteristics or the obligation of manufacturers to sell and produce cars.

If you look at section 202(g) or 202(h) and 202(i), for example, those are instances of subsections where it is used not just to refer to the emissions characteristics themselves, but also the obligation on manufacturers and sellers.

And in fact, if you look at section 203 of the act, which is called Prohibited Acts... it's the enforcement provisions... it is directed at manufacturers and sellers.

Justice Stevens: I agree with you completely that the statute imposes these obligations on the manufacturers to comply with the standards.

But the word standard is... is a different concept from the obligation to comply with the standard.

Mr. Waxman: Well, I think the... the word standard... I'll... I'll say this one more time and then retreat to another... another argument.

The word standard, as it is used, for example, in 202(g), is used both to refer to the emissions characteristics, numerical or otherwise, and an obligation placed on manufacturers and sellers to do something about that.

And the... let me... let me give you my second line of argument here...

Justice Kennedy: Excuse me.

Justice Scalia: Now you say it's not just manufacturers.

It's manufacturers and sellers.

I thought it was just manufacturers.

Mr. Waxman: Well, there are provisions in section 203, which is the Prohibited Acts, that it... it is imposed on the people who make cars and requires them or limits them in what those people can make.

Justice Scalia: I mean, it... it's hard enough to say that the word standards on its own is automatically limited to manufacturers, but it's doubly hard to say it is limited not to just to manufacturers, but to manufacturers and sellers, but not to manufacturers, sellers, and purchasers.

Mr. Waxman: It... it is... Justice Scalia, there is a provision in section 203 of the act, the Prohibited Acts, that deals with the instance in which a manufacturer, for example, produces cars overseas and then tries to sell noncompliant cars through a distributor or some other entity.

Those people are covered.

But when Congress considered in 1990 its own fleet purchase rules, we're talking here about very limited fleet purchase rules that... talking about my rules... have a commercial availability exception.

They do not... they cannot be read to require manufacturers to make anything they don't make or sellers to sell anything they don't sell.

Chief Justice Rehnquist: Yes, but as soon as there's... as soon as there's one commercial vehicle available, that's going to have effect on the manufacturing.

Mr. Waxman: Well, there may be... the... the vehicle has to be... the rules make quite clear that the vehicles have to be available and able to be used by that user in the locality, the fuel...

Chief Justice Rehnquist: And you... and you have to get... apply for an exemption which the petitioner says is very difficult to get.

Mr. Waxman: There... the petitioner does not say it's very difficult to get, and that footnote 7 on page 8 of their brief is truly the 13th chime of the clock in their argument.

The... if we had to establish a factual record in this case... and there is none... I am told by my client that these exemptions are sought for some of these rules never because the vehicles are... are readily available, for example, with respect to street sweepers, and on other vehicles, they are readily given.

If somebody...

Justice Scalia: What's... what's that 13th chime?

I lost you.

I thought you said...

Mr. Phillips: [Laughter]

Mr. Waxman: The 13th chime of the clock is...

Justice Scalia: Yes, I know.

I know what it is.

Where is it?

At page...

Mr. Waxman: It's on page 8, footnote 7 of their reply brief.

Justice Scalia: The reply, all right.

Mr. Waxman: They say that, oh, well, about commercial availability, it's just not true.

The district that promulgated these rules said it only applies when it's commercially available.

The State that enacted a provision that authorized these rules has filed a brief in this case saying it applies only when it's commercially available.

No one in this case or any other case has ever argued that that commercial availability exemption doesn't exist until footnote 7 of their reply brief, and it is simply wrong.

But my point generally about the... the meaning of the word standard in the Federal act, title II, is in 1990 Congress enacted its own fleet purchasing rules, and they are codified in...

Chief Justice Rehnquist: When you say its own, you mean fleets that were going to serve Congress?

Mr. Waxman: No, no.

Congress put into... amended the Clean Air Act to require certain States that have nonattainment areas to include within their State implementation plans either a fleet... a set of fleet purchase rules or some alternative that they would propose that would be equally efficacious in cleaning the air.

Justice O'Connor: Just to be clear on your position, do you think that California as a State could enact a law saying that no purchaser of a motor vehicle in California can purchase a gasoline-powered vehicle?

Mr. Waxman: I...

Justice O'Connor: Is that... is that preempted or not?

Mr. Waxman: It is not expressly preempted by section 209(a).

It would be subject to conflict preemption principles, as this Court went through in Geier v. American Honda, if it could be shown that...

Justice O'Connor: Well, by any theory.

Is that preempted or not in your view?

Mr. Waxman: I think... I think it may well be preempted by... under conflict preemption principles, not express preemption, if it could be shown that this is really a sales or production... this is really an obligation that is masquerading as a purchase requirement.

That would be the analysis...

Justice Breyer: Nobody can buy a gasoline-powered vehicle in California would require the manufacturers totally to dramatically change the kinds of vehicles they produce.

Mr. Waxman: To be sure...

Justice Breyer: So why wouldn't it fall right within the word standard relating to the control of emissions for motor vehicles?

Mr. Waxman: Because standards, as I said...

Justice Breyer: That isn't a standard?

What it says is...

Mr. Waxman: Yes.

Justice Breyer: It's not a standard?

Mr. Waxman: That is correct.

Justice Scalia: Because?

Mr. Waxman: A standard is... is a requirement that is imposed on manufacturers and that distinction is drawn throughout title II...

Justice Scalia: Well, it is a... what... what do you do with 209(b) which says... it... it authorizes EPA to waive application of 209(a) in the case of, quote, any State which has adopted standards, other than crank case emission standards, for the control of emissions from new motor vehicles or new motor vehicle engines?

Now, most of the States do not have automobile manufacturers located within the States.

How could they possibly impose a requirement on automobile manufacturers?

It is obviously referring to State standards that deal with the operators of... of cars... you have to go in and... and have your... your emissions checked... or the... or the purchases of cars.

Mr. Waxman: Justice Scalia, it's... I actually think that 209(b) is important proof for our premise that section 209(a), the word standard, has to be read... it has to be read to be used in the same way as section 202.

And clearly the way that... when I... when we talk about production mandates, I... it's... it's actually the Congress in section 249(h) used the word production or sales mandates.

The EPA in its rules and in its letter that was submitted under a primary jurisdiction referral to the First Circuit talks about production requirements.

It's shorthand.

But I readily agree that when 209(b) or 209(a) or 202 apply... when I'm talking about production mandates, I'm talking about an obligation that's placed on the manufacturers about what they produce and can sell.

It's one and the same.

There was a presumption that they would try and sell what they produced and they would produce the things that they want to sell.

The point is that in... when Congress enacted the Federal fleet purchase program, it drew a... the same distinction that is shot through title II between standards, which has a very limited meaning, and requirements.

It's a distinction that exists in section 116 of the act, which is on page 3a of our appendix, that preserves State authorities.

And what Congress said and what the EPA said and what Senator Levin, who was very ably representing the interests of Detroit in 1990, said is these fleet purchase rules, because they are directed at purchasers may very well have a tremendous impact on manufacturers.

They may cause a race to the top.

But they are different than production standards, production mandates, or requirements placed directly on manufacturers.

Justice Scalia: I... I don't understand your response to my question.

My question is... you just said again, that standards always refer to manufacturing standards.

But in 209(b), they clearly do not refer to manufacturing standards.

Any State which has adopted standards for the control of emissions from new motor vehicles or new motor vehicle engines.

Those standards are... are just not applied to the manufacturer.

Most States don't have manufacturers that they can control.

Mr. Waxman: Justice...

Justice Scalia: Those standards are imposed at the purchase... or at the operations stage.

Mr. Waxman: They are imposed on the people who make the cars when they sell them.

That's because, Justice Scalia...

Justice Souter: Why don't you just say they are imposed upon the sellers?

And that's the way they get imposed upon the manufacturers.

Mr. Waxman: I... I wish that I could have said it that concisely, but that's the point that I'm making.

Justice Scalia: They're not imposed upon the users?

Mr. Waxman: They are...

Justice Scalia: Virginia cannot impose them upon the users of cars in Virginia?

Mr. Waxman: My submission to the Court, Your Honor, is that standards, as the term is used throughout title II, refers to the supply side of motor vehicles, the people who make them and the people who sell them, and that when Congress wanted to make a rule that dealt with purchasers, which applies only indirectly against manufacturers, it used the word requirement.

And that's because...

Justice Scalia: So that this provision in 209(b) does not authorize a State to conduct emissions tests of old vehicles that have already been sold.

It has nothing to do with manufacturers, nothing to do with sellers at this point.

It has to do with whether the user is keeping the emissions system in... in proper operation.

You say that is not covered by 209(b) because 209(b) does... does not say requirements.

It says standards.

Justice Kennedy: No.

Justice Breyer: It's not...

Mr. Waxman: Both 209(a)...

Justice Stevens: covered by 209(b) because 209(b) is a limitation on (a) and (a) only talks about new vehicles.

So you could get around this whole thing if California adopted a rule that said any vehicle 6 years... 6 months old has to meet certain standards.

The whole statute wouldn't apply.

Mr. Waxman: Look, section... subsection (d) of 209 applies to vehicles that are not new.

209(a) and 209(b) apply to new vehicles.

What... 209(b) is the presumptive waiver for California alone of the preemption provision in 209(a).

I... I don't want to be pedantic, but let's... we... we started talking about 1965 and 1967, and I think it's tremendously revealing, in terms of the purposes, what Congress intended by standard in 209, to understand that in 1963 Congress enacted the first version of the Clean Air Act.

And it basically didn't authorize the Federal Government to do anything other than help States do their part in cleaning up the air.

That didn't work very well, and in 1965 Congress enacted the provision that is now 202 that says we are going to take from the realm of a traditional State authority this much for the Federal Government.

They can and will set standards applicable to motor vehicle emissions.

Now, for the intervening 2 years, the manufacturers came to Congress and said this doesn't make things better, it makes things worse because there are a number of States that are promulgating their own mandates on how we build engines and what kind of equipment we have.

And in footnote 7 of our brief, we cite a report by HEW that categorizes what each State was doing.

It's a 1976 report.

And what they were doing was not putting requirements on purchasers.

They were saying to manufacturers, if you want to sell a car in our State, it's got to have a whiz-bang or a doodad, or it has to meet the following characteristics.

And the manufacturers said, we can only engineer and manufacture to one standard.

So in 1967, Congress responded to that by enacting what is now section 209, and it compromised.

It said, well, we're not going to make you manufacture and engineer only to one standard.

We're going to make an exception for California, which was there before the Federal Government was there.

But other than California, which is subsection (b), no State can do what it is that the EPA is doing in section 202.

And there are a number of rules of statutory interpretation, leaving aside the presumption against preemption in this area of historic police... State police power, that require you to read for an express preemption point, not a general, broad conflict preemption argument that is not advanced here, that the word standard is to be read as narrowly as reasonable to preserve as much for the States as possible.

Justice Breyer: Is...

Mr. Waxman: And it has to be... it's only coherent if it means that the States are precluded from doing what EPA was mandated to do, which is to tell manufacturers, if you've got a vehicle over 6,000 pounds, it can't emit more than X, Y, and Z grams per mile.

What the manufacturers cared about was that they not have to make what is... was subsequently called a third car.

They didn't want to have to build different cars and engines for different parts of the country.

And that's why a rule that is directed only at purchasers and has built within it an exception for anything that is not commercially available or can't be used for the purpose that the user wants to use it for is not a standard.

Justice Breyer: All right.

Justice Souter: Maybe that's...

Mr. Waxman: It's a difficult question that...

Justice Breyer: Justice Breyer.

Mr. Waxman: I'm sorry.

Justice Breyer: I want you to finish what you're doing, but I want at some point to get back to this effectiveness... the effect thing.

I don't want to cut you off.

Mr. Waxman: Well...

Justice Breyer: Maybe I'll... do it in the order you want.

Mr. Waxman: I'm here to answer questions, and I apologize.

Justice Breyer: Do it in the order you want and you can just that I've just been off base, and I'll put out the three propositions that... that I'm thinking.

Now, you'll see it in a second.

I'm thinking, one, this case isn't a big deal because all California has to do is go ask EPA and EPA is almost bound to approve whatever they want.

Two, that you can't do it on language, that you have to figure out the purpose.

The purpose is to stop the manufacturers from having to make different cars, and therefore, why don't you, in these circumstances, look to the effect?

And... and if in fact the effect is that they're going to have to make some different cars, it's no good.

But all the examples you give in your brief, all those things are fine.

They don't... they don't involve this and... and they're not commands.

You have to go the command and have an effect.

This is a command.

And I don't think it does have an effect, nor do you, but they think it might.

Mr. Waxman: I think it's...

Justice Scalia: Well, so try it out.

Justice Breyer: That... that's... that's the kind of thing that's going through my mind.

Mr. Waxman: I...

Justice Breyer: And now you've sort of said, no, no, you're way off base, and I want to know why I'm way off base.

Mr. Waxman: Justice Breyer, you are not way off base.

[Laughter]

You're slightly off base, but not way off.

[Laughter]

Justice Scalia: There, there, Justice Breyer.

Mr. Waxman: You've raised... you've raised three points, and I'll try and address them in turn.

They're... the... they're... what they're saying is, look, there's no big deal because... because this airshed, one of 33 in California, could take the concerns of its citizens... even though it's mandated by the State to promulgate these rules, it could go to the bureaucracy in Sacramento and try and get that bureaucracy to include in its list of what it sends to the centralized command and control bureaucracy in Washington permission to enact rules that scientific studies show cause 9,000 premature deaths in the district a year.

Now, it's true, but it would not avail, that is, particulate emissions from motor... toxic emissions from motor vehicles and diesel vehicles.

Now, what about Houston?

Houston... right now the South Coast is the only extreme nonattainment zone in the country, but Houston has been knocking at the door for several years.

The... the waiver provision that they're referring to in 209(b) would not avail Houston.

It wouldn't avail Phoenix which has its own unique airshed problems with particulate emissions.

And therefore, our submission is if it's a standard, yes.

If you say this is a standard, we will go to the State of California and say please sponsor this rule and please ask the EPA to give permission for us to be able to impose these fleet purchasing rules.

Chief Justice Rehnquist: The district could not apply directly to EPA.

It would have to go through Sacramento?

Mr. Waxman: I believe so.

There is a provision in the California Health and Safety Code that says that the California Air Resources Board is the relevant State agency for purposes of 209(b).

But more generally, if the... the point here is do you determine what Congress' purpose is by the effect.

That's fine.

Justice Breyer: It's not determined what Congress' purpose is by the effect.

You have things that you're talking about, standards telling the... the manufacturers what to do, and then you have close-to things, things not quite that, but close to that, selling, purchasing.

So there, where it's a command in this slightly different form, we look to see whether it really has the effect that the statute is aimed at preventing.

And if so, go to the EPA and ask them.

If not, don't.

Mr. Waxman: No.

If... if it is a command to manufacturers with respect to emissions characteristics of the vehicles they make, it is a standard, as that term is used throughout title II.

If it is directed at purchasers and, as Senator Levin and the EPA explained in 1990, only affect manufacturers and sellers through the marketplace, even though it may have a substantial effect, it is no different than the many incentives and differential tax programs that they say aren't covered.

Look, California...

Justice Souter: Mr. Waxman, I think... maybe I'm wrong, but I think the effect that Justice Breyer is thinking about is the effect of... of being forced to manufacture the third car.

Mr. Waxman: Yes, indeed.

Justice O'Connor: Yes.

Mr. Waxman: And... and these...

Justice Souter: And... and I thought your answer to that was because you don't have to buy anything that is not commercially available, that nixes the third car effect argument, and therefore there isn't preemption.

Mr. Waxman: That is absolutely correct.

Justice Breyer: No, but that's completely wrong in principle for the reason that the rules don't talk about commercial availability but in averages.

Mr. Waxman: No.

Justice Breyer: So, in fact, if they're only supposed to make three ZEV's... see, they're only supposed to make three ZEV's.

ZEV is commercially available.

But you could have a rule say buy only ZEV's and that would be a major change in the EPA rule.

Mr. Waxman: With respect, Justice Breyer...

Justice Kennedy: Yes.

Mr. Waxman: Here you are completely off base.

[Laughter]

The rules each... I'm not talking about CARB's statewide standards, but the rules challenged here have an exception for anytime somebody can show that the vehicle they want is either not commercially available or can't be used.

Look at page 50a of the joint appendix.

The rules are all in the joint appendix.

That happens to be the rule that deals with the one that my book opened up to.

It's buses.

And it says on page 50 of the joint appendix that this... an exception... an exemption to these fleet purchase rules where no alternative-fuel engine and chassis configuration is available commercially or could be used.

And so this is the situation that... our submission is that these things can't possibly have... impose a mandate on manufacturers.

And in fact, look... we... we discuss in our brief a little bit that California has a program where it provides, I think, a 75 or 90 percent rebate to school districts if they buy buses that are fueled by alternative-fuel vehicles.

Now, is that going to have an effect on the kinds of buses that school districts buy?

Of course.

And is it going to have a big effect on manufacturers?

Sure.

And therefore, when we're talking about something that is mandatory, as opposed to something that is voluntary, they... on page 7 of their reply brief, they make a distinction between voluntary standards and mandatory standards.

From the relevant perspective, that is the perspective of the manufacturer, they are the same, as Senator Levin and the EPA explained.

They operate on the manufacturers through the market.

Now, to be sure, there... you can come up and I think Justice O'Connor came up with the extreme example of no one in our State can buy a diesel vehicle.

And what I'm saying is that one could argue and one might make a very good argument that if it is a mandate that's imposed on manufacturers or sellers that is masquerading as a purchase rule, where it really has that effect, you may find that substance will prevail over form, or you may find... I think it would be more appropriate... that this simply conflicts with the fundamental objective of the Clean Air Act under the Hines v. Davidovitz test.

But that's not the challenge that was brought here, and that's...

Justice Souter: It would be conflict preemption, not express preemption.

Mr. Waxman: Conflict preemption and not express preemption.

And that will... that analysis and that mode of analysis will allow the courts to deal with this parade of horribles that has never come true and may never come true if the political branches don't.

But if you look at the history of what was going on in 1965 or 1967... this is Congress' purpose... no one was talking about... no manufacturers were concerned about purchase rules.

They were concerned about having to engineer and manufacture a third vehicle.

Justice Kennedy: But if you need... if you need conflict preemption to answer such a basic hypothetical as that put by Justice O'Connor, the statute doesn't mean very much.

Mr. Waxman: Oh, I think... no, no, no.

With... with respect, this... this statute shut down cold, Justice Kennedy, precisely what was going on in 1967.

Chief Justice Rehnquist: Thank you, Mr. Waxman.

Mr. Waxman: Thank you, Your Honor.

Rebuttal of Carter G. Phillips

Chief Justice Rehnquist: Mr. Phillips, you have 2 minutes remaining.

Mr. Phillips: Thank you, Mr. Chief Justice.

Let me start with Justice O'Connor's hypothetical.

We are told in language that I think a 6-year-old would have a hard time understanding that a flat ban on all gasoline-fueled engines in the State of California is not a standard relating to the control of emissions from new motor vehicles or new motor vehicle engines.

Justice Kennedy is absolutely right.

It has rendered the scope of preemption.

There is no field of preemption.

There is not even a divot of dirt of preemption that is created under that interpretation.

It's not consistent with the language of the word standard.

Standard means more than what manufacturers do.

It's not simply how it gets enforced.

It's broader, and Justice Stevens is clearly correct in that regard.

The one provision that seems to have gotten lost in the... in all of this, which I think is terribly important, is section 177 which states that State... and this is at the... the respondents' brief's appendix at 4a... 4a.

The States are not authorized to prohibit or limit directly or indirectly the manufacture or sale of a new motor vehicle or motor vehicle engine that is certified in California.

That is precisely what is being done here, is that vehicles that are certified in California are prohibited by a subagency.

The State can't even do this, which is why I submit the answer to your question, Justice Scalia, is the State wouldn't have the authority to place the kind of restriction on its own subentities without running afoul of section 177.

And the only way California could get approval for that would be to go to the EPA in the way that Justice Breyer has already described.

Justice Ginsburg: Mr. Carter, Mr. Waxman said in his brief that the position he's taking is the position that EPA takes, and EPA is not with us this morning.

Mr. Phillips: Oh, I believe EPA is very much with us this morning because the Solicitor General speaks for the United States, and EPA is clearly a part of the United States Government.

And... and the EPA has made it absolutely clear, Justice Ginsburg...

Justice Ginsburg: So you... you say that's just wrong when...

Mr. Phillips: Oh, absolutely that's just wrong.

There is no... there is no way... I have seen nothing to justify departing from what the Government's brief says.

Chief Justice Rehnquist: Thank you, Mr. Phillips.

The case is submitted.

Attribution:

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