Cases by Issue - Federal Preemption of State Regulation

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:

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:

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:

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

Media File:

02-1343_20040114-argument.mp3

Related Transcript:

transcript.xml

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:

The Oyez Project

Featured:

Nixon v. Missouri Municipal League - Oral Argument

Fri, 09 Jan 2009 14:49:08 +0000

Case:

Nixon v. Missouri Municipal League

Media File:

02-1238_20040112-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of James A. Feldman

Chief Justice Rehnquist: We'll hear argument next in No. 02-1238, Nixon v. Missouri Municipal League and Missouri Municipal League against Southwestern Bell.

Mr. Feldman.

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

This case concerns 47 U.S.C., section 253(a) which preempts State laws that prohibit or have the effect of prohibiting the ability of any entity to provide telecommunications services.

Now, it's common ground that section 253(a) preempts State laws that keep private firms from the telecommunications market.

The question presented is whether the law also reaches into the structure of State government and invalidating even a State statute that declines to grant the State's political subdivisions the authority to provide telecommunications.

In Gregory against Ashcroft, this Court held that Federal statutes should not be construed to intrude on core areas of State sovereignty unless Congress has made its intent to do so clear.

Now, in our tradition, political subdivisions are creatures of the State and they have the authority and only the authority that the State has granted them.

Under respondents' interpretation, section 253(a) would be a sharp and unprecedented break with that tradition because it would be a grant of power by the Federal Government to political subdivisions of powers that the State, which was hitherto the sole source of their authority...

Justice Stevens: I don't think that's right.

It wouldn't be a grant of power.

It would be... it would preserve power granted by the State itself.

Mr. Feldman: Well, I don't... I'm not even sure whether that's true.

That actually goes into another difficulty in construing the statute the way the court of appeals did.

Some States create their political subdivisions or some political subdivisions and say you have only the authority that we have given you, and it's not... other States create political subdivisions and say you have any authority you want except...

Justice Stevens: The only... the only thing I question is your statement that the statute itself is a grant of power to a local entity.

It doesn't grant any power to anybody.

The statute doesn't.

Mr. Feldman: Well, I think...

Justice Stevens: It preserves power from being preempted.

Mr. Feldman: Well, perhaps it's a question of semantics, but...

Justice Stevens: It is.

Mr. Feldman: but... but the... but the... the issue here is that in Missouri political subdivisions do not have the authority to provide telecommunications services.

Under the court of appeals' ruling, the statute that... that reaches that result is preempted, and therefore they do have that authority.

In any event, that would be a sharp break with the tradition that because it would be Congress specifying what the authority of a political subdivision is even when a State has chosen not to give it that authority.

Justice Kennedy: Is it your view that in all instances we must interpret this statute so that any entity... that phrase... does not include a local subdivision of the State?

Mr. Feldman: Yes, because under the Gregory rule, if you... if the Court were to construe the statute so that it did include political subdivisions, it would be a intrusion into State sovereignty.

Justice Kennedy: It would be under the circumstances of this case.

Are there other circumstances in which it would not intrude on the right of the State to allocate powers between itself and the localities so that this statute... so that this interpretation would have an effect in some other instance?

Mr. Feldman: The other... I can't imagine cases... and I'm not aware that any have come up in the cases that have addressed the... the question presented here... where there are some other restriction that a State has passed that has nothing to do with political subdivisions.

And the question might arise whether a political subdivision could challenge that... that provision of State law as well as a private party.

And... but, however, since the Court is in the business here of construing the statute and the question is what is the meaning of the word any entity, I think under the Gregory rule, that... that term has to exclude political subdivisions.

And if it excludes it here, I think it... there's no...

Justice O'Connor: Mr. Feldman, do we need to apply the clear statement rule of Gregory v. Ashcroft for you to prevail?

Mr. Feldman: I think it's our understanding... it's our understanding that the rule would apply here.

I guess the rule applies for the reasons I've already given, which is this is an intrusion on State sovereignty.

If that were not the case, the question would be whether a general term like the term, any entity, is whether that would just naturally be construed to extend so far or whether it wouldn't.

Justice O'Connor: Exactly.

Mr. Feldman: And I would say that it raises the question that I was... the... the problem that I was referring to before in responding to Justice Stevens, which is State... the application of 253(a) would depend on the form in which a State chooses to give or not give its power to its political subdivisions.

If it was a State... a home rule State where the cities have all the powers except what's expressly denied them, then a State that tried to pull back the power to provide telecommunications... that would be preempted.

In another State...

Justice Scalia: Are those home rule States established in that fashion by the State constitutions?

Mr. Feldman: I think so sometimes.

Justice Scalia: In which case the language of section 253(a) which says no State or local statute or regulation or other State or local legal requirement may prohibit or have the effect of prohibiting.

I'm not sure that... that would reach a constitutional question.

Mr. Feldman: It would at least be a difficult question to try to figure out whether there is still something that prohibits or has the effect of prohibiting rather than something which just never granted the authority before.

You could consider a political subdivision of a State that's a special purpose water district or fire prevention district that just doesn't have the authority, was never intended to have the authority, and nothing in State law suggests that it should have the authority to provide telecommunications.

It would be hard to find something that should be preempted in that case.

Justice Breyer: Suppose you didn't give that very broad meaning to any entity, but you included State entities that had been in the business and were otherwise authorized by State law to go into this business and then the State changes its law and without having a section (b) requirement, because you have loads of power under section (b), so we assume the entity meets section (b)'s test, but it passes another law which says, by the way, the municipality can't go into it.

And previously they had.

So... so we're not... we're... we're talking about only entities that have proved themselves fit, willing, and able to offer the... the... to offer the business.

Mr. Feldman: I... I don't...

Justice Breyer: Now, why... why would that not be included?

Mr. Feldman: I... I don't think it... because I... I think that there is... it's very difficult to imagine that Congress intended that the... the scope of this statute should turn on the exact historical steps...

Justice Breyer: No, no.

Mr. Feldman: that they once had or...

Justice Breyer: But what we want... we want... we have implicitly there and it would be necessary in the State case but not in the private entity case an entity that is fit, willing, and able.

And... and an entity that is fit, willing, and able can include a municipality.

So what this statute is after is the State passing a new law changing the status of an entity that was previously fit, willing, and able.

Mr. Feldman: But I guess what I was responding to was it's not... the... the definition of what a political subdivision is fit, willing, and able to do is something that... it is a creature of State law.

It's defined by State law, by the State laws that have...

Justice Breyer: That... that's correct, but it's defined by State regulatory law in respect to those entities at least that have previously offered the business.

Mr. Feldman: I think there's actually very few... before 1996, I think there were very few... and I'm not aware of examples.

There may be a few in the amicus briefs.

There are very, very few entities in this country of these political subdivisions that offered telecommunications services.

This is a question that has only arisen...

Justice Breyer: You see, in other words, but your argument here is coming down to the difficulty of trying to draw the distinction I'm suggesting.

Mr. Feldman: I think that... I think part of my argument is the difficulty of drawing that distinction, but the most important part of it is that this is an intrusion into a State's understanding of its government and what it wants to do with its authority.

And where a State...

Justice Ginsburg: If the... if the statute were clear, if it said public... it said any entity, public or private... but you're... you're making an argument now that seems to say no matter how clear this was, there would still be a vulnerability.

Mr. Feldman: No.

I don't... I don't think so.

I think there would be interpretive problems that would arise in the statute if it had said... specified any public... any governmental entity or something like that that really would have clearly referred to States and political subdivisions.

Justice Breyer: Well, wouldn't... wouldn't any...

Mr. Feldman: That would have been...

Justice Ginsburg: any entity, public or private, wouldn't that do?

Mr. Feldman: I think it's likely that that would do.

The problem here is that any entity is just the kind of general term without the... the reference to public or private or without specific references to State governments and political subdivisions.

It's just the kind of general term that this Court referred to in Raygor and said that where there's a clear statement rule, that kind of general term is not sufficient to overcome it.

And here, there's nothing in the statute that suggests that Congress thought about, considered, and intended to put into question the issue of State sovereignty that would be... that... the intrusion on State sovereignty that would be raised by construing 253(a) the way the court of appeals did.

Beyond the statute itself, in the legislative history there's... there is a... the committee report repeatedly refers to the private sector deployment of advanced telecommunications as what the bill is designed to achieve.

Not only that, the floor debates... they're cited in, I think, Southwestern Bell's reply brief... show also people consistently referring to the private sector development of advanced telecommunications.

Justice Souter: May I ask you...

Isn't it also the case...

Justice Stevens: May I ask you this one more sort of general question?

As I understand your theory, you read the statute as an anti-monopoly statute.

No State shall grant any exclusive privilege.

Isn't that... you say that's really what it does.

And my question is if that were the purpose, why wouldn't they write it that way that no State shall grant a monopoly or grant exclusive privilege?

Mr. Feldman: It actually is broader than that.

There is another provision which says... I don't remember the number... which says that there can't be exclusive franchises.

This is intended to get at laws not only that would by terms give an exclusive franchise or keep a particular company out of the telecommunications business, but also that would have the effect of doing that by imposing high taxes on one category of... of participants rather than on another category.

There... there's the... in fact, in the Texas case that came before this, the Federal Communications Commission found a couple of provisions of Texas law preempted because they did just that.

And the statute was designed... it is an anti-monopoly law, but it is a little bit broader than just granting exclusive franchises.

It's also favoring one... at one... one company or one class of company or the incumbent telephone company over other new entrants into the field.

Respondents cite the... Lead-Deadwood case as the closest that they can come to this, and I'd just like to point out that that case has a dramatically different question than the one here.

In that case, there was no question of the Federal Government giving authority to local... to political subdivisions that the State itself had not... had not given.

That case would be much closer to this case if, for example, the State there had said we don't want our political subdivisions to be providing education because we do that at the State level, and then the political subdivision had taken the Federal money that was at issue there and said we want to open up a local university or something.

At least that would have presented the question that's presented here of an intrusion of that sort on State sovereignty, but that wasn't before the Court there and therefore the Court didn't apply a clear statement rule.

Justice Ginsburg: What is the United States' position about utilities, public utilities, electric companies?

Mr. Feldman: I'm not sure what you mean.

If you mean by public utilities companies that are in the business...

Justice Ginsburg: To enter this business.

Mr. Feldman: Yes, they certainly can.

Privately owned companies that are in the utility business...

Justice Ginsburg: Suppose it... suppose it's mixed ownership, city and private.

Mr. Feldman: The Federal Communications Commission's position is if, under State law, it's treated as a private entity, the fact that stock, some or even all of the stock, is owned by the political subdivision wouldn't be... it would still be an entity.

It would be... if it's treated under State law as a private company.

In this case, the FCC looked at Missouri law and determined, I think, correctly... it hasn't been challenged here... that this is simply a law that prevents political subdivisions as political subdivisions from providing telecommunications services, and therefore, since it's really operating on the political subdivision itself and not on some other corporation, it's not preempted.

I'd like to reserve the balance of my time.

Argument of Ronald Molteni

Chief Justice Rehnquist: Very well, Mr. Feldman.

Mr. Molteni, we'll hear from you.

Mr. Molteni: Mr. Chief Justice, may it please the Court:

The Eighth Circuit interprets entity to include political subdivisions of the States, and that would mean that Congress has... it would have the effect of Congress giving Missouri's political subdivisions authority that the... the very State that created them has withheld.

And that would intrude drastically on the structure of State government.

A general language term like entity is too broad to meet the Gregory test because it doesn't clearly and unmistakably include State subdivisions.

If... if the general term entity, without a contextual compass, as it appears in 253(a), satisfies the clear and unmistakable test, then clear and unmistakable really has little meaning.

But that standard is important to the States because it gives the States some notice and opportunity to react to proposed legislation that may intrude on State sovereignty, and it requires Congress to be clear in the wording that it uses and to demonstrate cognizance of the impact of legislation on State sovereignty.

Justice Scalia: Why isn't any entity clear?

I mean, what...

Mr. Molteni: Justice Scalia...

Justice Scalia: What do they have to say to make any... any entity clear?

Paren, and we really mean it?

Unidentified Justice: [Laughter]

Justice Scalia: Or it has to say any entity whatsoever?

Would that be clear?

Mr. Molteni: Justice Scalia, there are no magic words, and we're not asserting that there are magic words that need to be there.

There has to be some terminology within the statute that... that demonstrates that Congress was cognizant it intended to intrude on State government.

There are other instances... and I think Southwestern Bell's brief does a nice job pointing out that entity is used 600-and-some times in various statutes.

It's used multiple times even in the Telecommunications Act, oftentimes with a modifier, sometimes without, and oftentimes with a definition, and sometimes the definition is one... it includes just a business context, and sometimes the definition is one that includes government and public and State, private, political...

Justice Stevens: But it's perfectly clear that this statute does intrude substantially on the... on the State's ability to regulate.

Just even if it just does what you say, it's a significant impairment of the State's ability to run its own affairs.

Mr. Molteni: It's a... Justice Stevens, it's a significant restriction on the State's ability to... to impact commerce.

Justice Stevens: To regulate private companies.

Mr. Molteni: But this Court has held in the Gregory v. Ashcroft case that Congress has to use more than the general language.

It has to be clear and unmistakable.

And, Justice Stevens, in... in the... the Leadwood case that... that Mr. Feldman brought up, your... the dissent that... that you wrote affirms some of the principles that... that we've cited in our brief regarding Hunter and... and the City of Trenton case that the States control the... the creations that they have, that they've made, all their political subdivisions, and... and that is... is something that this Court has always honored.

Chief Justice Rehnquist: You're saying that it's one thing for the Federal Government to supersede State regulation substantively, but another thing to say... to tell the State not only do we do that, but we're going to change the relationship you have with your local subdivisions.

Mr. Molteni: That's exactly right, Mr. Chief Justice.

That's exactly right.

Justice Breyer: Suppose they... they did... is it totally Ashcroft you're relying on?

Gregory v. Ashcroft?

The... suppose you looked at the statute as saying it doesn't prohibit States from enacting all kinds of laws that have the effect of prohibiting people to enter the business.

Tax laws, for example, might leave them without money to do it.

It's only talking about specific laws aimed at saying you can't enter.

And if it's aimed at specific laws saying you can't enter this business, then couldn't you say where a State's entity otherwise would have the authority to enter, then the State cannot pass a law that says in those circumstances you cannot enter telecommunications such as municipality as well as private company?

Now, what's wrong with that interpretation?

What I'm doing is I'm trying to deal with what I thought of myself and they confirm is the major objection that this can't be administered once we start down the path I'm just starting down.

Mr. Molteni: Justice Breyer, I think it would create an anomalous situation where if a State's political subdivisions had been providing telecommunications prior to 1996, they would be treated differently under the... under 253(a).

Justice Breyer: No, no.

It would be... the question would be whether they had the authority to do it.

If they had the authority to do it, then the State... what it could not do is it could not pass a law which aims at primarily... aims at primarily their authority to enter telecommunications.

They could do all kinds of other things including removing authority as long as it were general, and then there would be middle cases where the authority, you see, is...

Mr. Molteni: But I... I still think, Justice Breyer, that what that does is it make... it divides the States into two categories and makes the Federal statute treat the States in two different ways so that if a State had granted authority prior to 1996, the... they... they may never... that State is never allowed to change its mind about...

Justice Breyer: It's a one-way ratchet.

Mr. Molteni: about the scope of authority that it grants its own political subdivisions.

Justice Scalia: I... I suppose it would also allow States to adopt a... a system of chartering corporations which charters the corporations according to various categories, mining, manufacturing, and it just does not happen to name the category of telecommunications.

And that would not be touched by... by this type of an interpretation enabling the State to create a monopoly... well, to... to exclude any... any telecommunication company.

Mr. Molteni: Justice Scalia, I believe that I agree with you, although I think the more and more we talk about what States authorize and don't authorize their political subdivisions do... to do, the more and more that becomes really the... a State issue and... and really what I... what I would call an intramural issue that would... that would be a matter litigated between the States and their political subdivisions at the State court level.

And what... what I really think this case is about is an application of 253(a) that, because of the general language that... that Congress used, won't be presumed and cannot meet the clear and unmistakable standard in Gregory to... to allow or at least have the effect of... of Congress' intruding into the structure of State government.

Justice Kennedy: So suppose that a State says that no political subdivision in this State shall have the telecommunications facility that does interactive television unless the carrier that it contracts with pays the city a fee of $1 million.

Could the State do that?

Mr. Molteni: I believe...

Justice Kennedy: And you'd say... in other words, it's conditioning the ability of its subdivisions to engage in this by demanding that it extract certain financial consideration, and suppose that this is prohibitive.

Mr. Molteni: If... if the State were addressing that in terms... through the private sector, I don't think there would be... I'm not sure I understand exactly where your question is going, Justice Kennedy.

But the... could... the State can't create barriers to entry to private sector competitors.

Justice Kennedy: Well, suppose... suppose...

Mr. Molteni: That's clearly preempted by the Commerce Clause and... and it's prevented specifically by 253(a).

And I think what... what that derives from, if one looks at the purpose of the Federal Telecommunications Act of 1996 and you look at the... the history of what was going on, huge swatches of the country were provided service by regional Bell operating companies and they were granted the exclusive franchise in... in areas.

And the whole purpose of the '96 act was to accelerate private sector deployment and... and to... to take these... these swatches of territory that regional Bell operating companies maintained monopolies on and encourage private sector deployment and people would come in and utilize either those... the... the facilities that... that were provided... that... that exist that the regional Bell operating companies had or unbundle network elements or to... to resell and... and hopefully even the encouragement of... of building their own facilities base.

But that's all... that all ends up being a red herring discussion in terms of the clear language of 253(a) because 253(a) uses those general terms.

Now, the FCC's reading of entity won't bar States from entering commercial phone business through their... through their political subdivisions because the FCC's reading allows that States who want to go into the phone business... they'll be able to do that.

But States like Missouri that want their political subdivisions focused on core missions will be able to make that choice if this Court allows the FCC's reading.

Justice Ginsburg: Do we know how many States allow their municipalities to enter this business?

Mr. Molteni: How many States allow their own...

Justice Ginsburg: Yes.

In other words, you're arguing for a position it's up to the State.

They can let the municipalities enter or not if they choose.

So in... in fact, what has happened across the country?

Mr. Molteni: Justice Ginsburg, I... I do not know that.

I have not surveyed which States allow their political subdivisions to... to enter the commercial phone business and... and which, like Missouri, have made that choice to have... made the choice to have their... their political subdivisions focus on their core missions.

Another problem that's created with the respondents' reading of... of entity is that it literally means the State cannot regulate itself, and that... that creates an anomaly and... and it doesn't make a lot of linguistic sense or a lot of public policy sense.

The clear and unmistakable standard requires more of Congress than this use of general language and where there is doubt, States are entitled to the benefit of that doubt.

If the Court has no further questions, Missouri would respectfully request that the Court reverse the Eighth Circuit and preserve the ability of the State of Missouri to determine the functions of its own political subdivisions.

Argument of David A. Strauss

Chief Justice Rehnquist: Thank you, Mr. Molteni.

Mr. Strauss, we'll hear from you.

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

Our position in this case is straightforward and I can state it very simply.

Gregory against Ashcroft applies in circumstances where the statutory language is ambiguous.

The Court has said that three times, including in Gregory itself.

And the language of 253(a), any entity, is not ambiguous.

It's not... it's not as if Congress had said, for example, any corporation, which might leave some doubt whether Congress meant only private corporations and not municipal corporations.

Justice Breyer: But it doesn't mean any fish, for example.

I mean, there are a lot of things it doesn't mean.

Mr. Strauss: I... I wouldn't... I wouldn't... I guess it doesn't mean any fish, Justice Breyer, but of the... I think it has a very broad meaning.

I think it means any entity and...

Chief Justice Rehnquist: When you... when you say the statute has to be ambiguous, the Gregory rule as put forth in the opinion is that there has to be a clear statement covering the Federal... Federal aspect of the thing.

And it seems to me that that cuts away from the idea it has to be ambiguous.

Mr. Strauss: What the Court... the Court said in Gregory that the statute has to be ambiguous and it reiterated that in Salinas and more recently in Yeskey.

Justice Scalia: It depends on what you mean by... by ambiguous.

What... what... the... the language in Gregory was... was employees, wasn't it?

Mr. Strauss: Well, the unambiguous language in Gregory was employee.

The ambiguous language was at the policymaking level.

In Gregory itself... it's a... it's an important point, Justice Scalia.

In Gregory itself, the Court thought it was unambiguous that employee, State employee, included State judges.

Now, it seems to me linguistically to say that State employee includes State judges is more of a stretch than saying any entity includes local governments, but that's what...

Justice Scalia: In your view does...

Of course, you're... you're into State already.

I mean, the... the State versus non-State was not at issue in Gregory.

It was just how far into the State you go.

I mean, it... the whole thing applied to State... State employees, but not at the policymaking level.

What about Atascadero?

The... the language there was any recipient of Federal assistance.

Mr. Strauss: Yes.

Atascadero, Justice Scalia, I think the Court has applied a different, stronger, much stronger, form of a clear statement rule in the State sovereign immunity cases where it has required specificity in the Court's words.

Justice Scalia: I think there are various levels of... of clear statement rules.

Mr. Strauss: Well, I think the... the best illustration of that is the contrast between the Court's decision in Raygor and the Court's decision in Jinks which have the advantage of focusing on exactly the same statutory language, any claim asserted in a supplemental jurisdiction statute.

In Raygor, the issue was whether that language overrode State sovereign immunity, and the Court said no.

In Jinks, the question was whether that language overrode a State's decision to immunize its subdivisions, and the Court said, yes, it did.

The same language.

Jinks is the case like this.

In fact, Jinks is more of an intrusion because the Congress was taking away a power that the State wanted to confer and the locality wanted to have, and the Court just very unanimously and with no difficulty said Congress can do that with the language, any claim asserted.

Raygor was a State sovereign immunity question.

The Court analyzed it differently.

And I think that makes the point that the kind of rigor the Court expected in cases like Atascadero does not apply in Gregory cases.

In Gregory cases, if it's unambiguous, that's the end of the case.

Justice Kennedy: Does the word, any entity, cover the State itself?

Mr. Strauss: Yes, I think it covers the State itself.

Justice Kennedy: So if the Governor is about to sign a contract to... to allow the State to enter into communications facilities and the legislature instructs him not to, that statute is void?

Mr. Strauss: No, that statute is not void, Justice Kennedy.

I think that statute... analytically that situation is exactly the same as if a board of directors of a private corporation decided not to go into the telecommunications business and the CEO defied it.

And the solution is the State can say under our neutral principles of corporate governance, the CEO can't do that not because the corporation is not an entity.

Justice Kennedy: Why don't neutral principles of corporate governance apply to the relations between the State and its subdivisions?

Mr. Strauss: They...

Justice Kennedy: Suppose there's a constitutional provision.

Mr. Strauss: They absolutely do if they are truly neutral principles.

If it's a provision of State law that says, for example, subdivisions may not engage in any commercial activity and there's no argument that that's just a subterfuge to keep them out of telecommunications, it's a truly neutral provision, States can absolutely enforce that.

Justice Kennedy: But you say that it can't be made precise to telecommunications.

Mr. Strauss: That's right.

Justice Kennedy: That was my example in the State hypothetical, in the first hypothetical.

Mr. Strauss: Well, the... what's... what's operating there is the general rule that Governors have to do what the State legislature tells them to do.

Justice Kennedy: Well, here it was operating as a general rule that subdivisions have to do what the State tells them to.

Mr. Strauss: Well, when this...

Justice Kennedy: I don't see why the general rule applies in one instance and not the other, given your definition of entity.

Mr. Strauss: Because in the... in the case like this one, what the State has done is to enact a specific, targeted rule not competitively neutral... that issue is, strictly speaking, not before the Court yet... a targeted rule that keeps an entity out of the telecommunications business.

And a municipality is an entity in the same way that a private firm is an entity.

Congress' language was any entity.

That language is simply not...

Chief Justice Rehnquist: Yes, but Raygor had any entity too and we said that was not conclusive there.

Mr. Strauss: Raygor said any claim.

That's right.

That's right, Mr. Chief Justice.

But Raygor was a case decided in the shadow of State sovereign immunity.

The Court said a constitutional doubt was created by principles of State sovereign immunity.

As I... as I said to Justice Scalia, Jinks interpreted exactly the same language, any claim, to be sufficient to allow Congress to deprive local governments of an immunity that States wanted to grant them.

Justice Scalia: Well, that was not the only difference.

Chief Justice Rehnquist: No.

Justice Scalia: I mean, there were other factors in Jinks besides... besides just the language, any claim.

Chief Justice Rehnquist: And also the fact that sovereign immunity had never extended... a State Eleventh Amendment immunity had never... had never been extended to counties.

Mr. Strauss: Well, that's of course right, Mr. Chief Justice.

And in fact, that is the reason I want to take exception with the picture painted by petitioners that what... our position would here would lead to some dramatic, unprecedented intrusion on State authority.

It's actually quite familiar for Federal law to interfere, quote/ unquote, with the relations between State and local governments.

Section 1983 imposes liability on local governments.

Justice Kennedy: But those are all under the Fourteenth Amendment where the Thirteenth... Fourteenth Amendment altered the Federal balance with reference to those.

That's not what's involved here.

Mr. Strauss: Well, I understand that the Fourteenth Amendment has special significance for purposes of State sovereign immunity.

I've never known the Court to say that the Fourteenth Amendment has special significance for purposes of Gregory against Ashcroft.

I don't... I don't think that... that is a... a...

Justice Breyer: If... if for purposes of... will you assume with me... and I may be the only one who thinks this.

But I think when you use words like any entity or the word any, that there's an implicit scope, and since I think there's an implicit scope, I'm trying to define that scope.

So I don't want to... I mean, it's not going to help me for you to say, well, it's clear because I don't think it's clear.

But at that point, I now want to... to find out whether... explore what you said that, well, if we did apply this to the States and their municipalities, all we would really be doing is targeting laws.

Now, I did my best to pose some questions along those lines, but I was met with the answer which strikes me as a pretty good answer.

There's just no way to do what you're suggesting.

It's going to be a nightmare.

Justice Scalia suggested one reason it was a nightmare.

And I'd add that in the case of private companies, this statute is designed to give the private company the right to enter or the right to quit.

Once you apply it to a municipal entity, it has the right to enter, but it could never quit.

Now, that would be bizarre.

Mr. Strauss: No.

Justice Breyer: So given the... the sovereign immunity... you know, the sovereign... all... all the things we've been talking about in general, given the difficulty of drawing a line, which seems virtually impossible or very hard, and given the one-way ratchet I just described, it can't be that Congress intended to include municipal entities within the scope of the word, any entity.

What... what is your... that's... I'm trying to get to the merits.

Mr. Strauss: Yes.

Justice Breyer: What's your response to that?

Mr. Strauss: Yes.

I don't agree that there's a one-way ratchet at all, Justice Breyer.

I think the... the purpose of 253(a) is to eliminate barriers to entry.

It's not to force anyone, private or governmental, to go into the telecommunications business or stay in the telecommunications business.

And if a... if a local government unit decides of its own accord to enter and then decides of its own accord to leave, it is not prohibited anything.

Justice Scalia: The State... the State cannot tell it not to enter.

Mr. Strauss: The State cannot tell it not to enter by a targeted, non-competitively neutral provision.

Justice Scalia: I don't understand.

Why does it matter whether it's targeted or not?

Suppose it lists counties can enter into the following commercial businesses.

It lists seven or eight.

It does not list telecommunications.

Mr. Strauss: It... the reason why it's targeted... targeted is what I'm using to embrace the notion stated in 253(b) which preserves an enormous realm of regulatory authority to the States.

States may enact competitively neutral regulations that satisfy certain other criteria.

And that's an important part of this picture because if you had 253(a) in isolation, that would... that would certainly be draconian.

That would certainly be a... a remarkable...

Justice Scalia: Well, what... what's your answer to the hypothetical I give you?

Is that targeted or not?

Mr. Strauss: Well, I think that would be... if it... if it specified certain commercial activities but not others, I think that would be a difficult question.

The question would be is that a gerrymander...

Justice Scalia: That's why I asked it.

I mean...

Mr. Strauss: Well, the question... the question would be a 253(b) question for the FTC in the first... FCC in the first instance.

Justice Scalia: Well, it had nothing to do with whether it's competitively neutral.

It's competitively neutral.

Nobody can enter except these fields.

Justice Kennedy: I mean...

Mr. Strauss: If it... if it were a gerrymander designed to keep... really just designed to keep entities out of telecommunications, it would be unacceptable.

Justice Scalia: So we're going to have to get into inquiring into whether State legislatures... well, of course... of course, they didn't want it.

It was designed to keep them out of telecommunications because it said these are the only fields you can get into.

Mr. Strauss: That's... that...

Justice Scalia: If your question is whether it was designed to keep them out of telecommunications, the answer is unquestionably yes.

Mr. Strauss: This... I agree...

Justice Scalia: But... but if you say it's okay if they not only keep them out of telecommunications, but they keep them out of a lot of other stuff as well, does that make it okay?

Mr. Strauss: This is the question that would have to come up when the FCC applied 253(b) to a public or a private entity...

Chief Justice Rehnquist: But why should we...

Mr. Strauss: public or private.

Chief Justice Rehnquist: Why should we interpret a statute in that awkward way, that the FCC has to make this kind of factual inquiry in every case?

Mr. Strauss: I think the FCC is in that business with respect to private entities anyway.

A State...

Justice Scalia: What is the... I don't even understand what the factual inquiry is.

Justice O'Connor: What is it...

Mr. Strauss: Well, the inquiry...

Justice Scalia: that the FCC would be looking for?

Mr. Strauss: The inquiry... it's 253(b).

It says States may enact measures that are competitively neutral and necessary to promote certain public objectives.

That's a savings clause.

It's not...

Justice Scalia: So the FCC is going to decide what is necessary to promote...

Mr. Strauss: That's...

Justice Scalia: Missouri's public objectives?

Mr. Strauss: That is the business... that is unquestionably the business Congress put the FCC in with respect to private entities.

There is no disagreement about that.

Justice Breyer: I see the answer to that part, which is you're saying they have to do it anyway, and I understand that.

Whether... I'm not sure I agree, but I understand it.

What about the part that it's a one-way ratchet?

And there I think that local governments unlike local private businesses act through regulation, at least normally.

And so the statute talks about a requirement, a local requirement or a local regulation, and therefore, a State, State A, that does not permit its municipalities to go into the business, then passes a statute that does permit it, then the local council passes a regulation that says we'll do it, which is now a requirement, and when either tries to repeal either, they run right straight into your... to this statute forbidding it as you interpret it.

And now, that's why I say it's a one-way ratchet in respect to municipalities, but not a one-way ratchet in respect to private businesses.

Mr. Strauss: The reason it's not a one-way ratchet, Justice Breyer, I think turns on the word prohibit.

This isn't... the statute 253(a) says State and local regulations that prohibit the entry.

If... if I decide not to go skiing, I've not prohibited myself from going skiing.

I've simply made a decision not to do something.

If a local government decides not to enter the telecommunications business, it hasn't prohibited itself.

It simply made a decision.

Justice Breyer: But the State could not repeal the statute.

Mr. Strauss: The State could not repeal the statute unless it were part of a competitively neutral reorganization of local government or something like that.

Then it could repeal it, but it couldn't enter a targeted repeal of it without running afoul... it seems to me without running afoul...

Justice Scalia: Why... why would Congress design such a strange system where... where the municipality can get in and then get out, but the State can't allow the municipality to get in and then decide, no, we want to allow them to get out?

Mr. Strauss: I...

Justice Scalia: It's just bizarre.

Mr. Strauss: I think it applies... I think for these purposes, municipal corporations and private corporations are simply on a par as, of course, they were for large parts of our history.

That's why municipalities don't have many immunities.

And Congress, for these purposes, simply saw municipal corporations as another source... implicitly saw... and the words, any entity, implicit in that sense, in the... in the ordinary meaning of those words... saw them as another source of competition.

Justice Scalia: Just so I understand you, a State can... can grant certain powers to municipalities, does not have to grant them the power to enter into... into telecommunications activity.

Right?

Mr. Strauss: Yes.

Yes, that's right.

Justice Scalia: It does not have to grant them that power.

Mr. Strauss: Well, the... the restraint is the competitively neutral language which will ordinarily allow municipalities to say... the States to say, look, here's what you can do and here's what you can't do...

Chief Justice Rehnquist: Right.

Mr. Strauss: provided they aren't acting in a way that is competitively non-neutral with respect to telecommunications.

Justice Scalia: Right, but... but once they have let them get into telecommunications, it's... it's only the municipality that can decide to get out of it.

Mr. Strauss: No.

The State could repeal the authority if it does it, again, in a competitively neutral way.

If a State decided, for example, to abolish all units of local government or if a State decides to say, okay, we are assigning special functions to municipal governments.

Justice Scalia: Okay, but... but the municipality itself can say we're going to get out of telecommunications.

Mr. Strauss: Yes.

Justice Scalia: The State cannot say no... no municipality shall do telecommunications.

Mr. Strauss: That's right.

The municipality can decide for itself because then it's not prohibiting anyone from doing anything.

It's simply making a decision.

Justice Souter: Mr. Strauss, may I go back and ask a variant on Justice Breyer's question, assuming that there is some implicit limitation on... on the scope of any entity?

And it relates to what, if I have my facts straight, is the... is the drafting history in this case, and I'd like you to tell me whether I have got the facts straight because I didn't look them up myself.

I just got this out of the briefs.

And if so, what you think the significance is.

As I understand it, at least the Senate version of the original bill had a provision in it that affirmative... expressly provided that any existing utility, whatever its object of service, could go into the telecommunications business.

And this, as... as you point at one point in your brief, this would be... this would be good for your argument because a lot of those utilities are municipal utilities.

As I understand it, in the... in the conference committee, that language was, in fact, removed entirely, and subsequent to its removal in the conference committee report, there were references to any private entity being able to go into the telecommunications business but not the old, pre-conference committee references to... to any... any public as well as private entity.

That suggests to me, the... the combination of the drafting change and the conference committee report, that the implicit scope they were getting at was an implicit scope that says any entity is a reference to private, not public.

What... are my facts straight, and if so, what... what's your response to that argument?

Mr. Strauss: Two points, Justice Souter.

First, I think it is common ground that Congress did envision utilities as among the any entities.

And the... the likely reason Congress didn't spell that out was that it was already included in the notion any entity, and Congress didn't want to begin spelling out specifics and run...

Justice Souter: So you say the... the excision was a redundancy excision.

Mr. Strauss: Yes, that's right.

And I think there is no dispute that not only that utilities are among entities, but that Congress really saw utilities as a primary source of... of competition.

Justice Souter: Okay.

The answer to that I think is in... in part a response to something in your brief.

You mentioned that the original House and the original Senate reports were speaking, among others, expressly of... of public entities.

As I understand it... and again, I didn't look myself.

I just got this from... from one of the briefs.

As I understand it, the conference committee report... after this excision, which is arguably just a redundancy excision, the conference committee report started using the adjective private entities rather than public entities as being subject to this kind of universal preemption.

Doesn't that nix the theory that it was merely a redundancy excision?

Mr. Strauss: The conference committee report, I believe, Justice Souter, used the word private to describe... in describing the sort of competition it believed would be brought about.

That passage from the conference committee report was then incorporated almost verbatim in the preamble to the statute, but the word private was left out when it was transferred to the statute so that the word private that does occur prominently in the conference committee report... I agree with that... dropped out of the statute, which simply talks about encouraging competition.

Justice Scalia: Okay.

Justice Souter: What we're left with, it seems to me, is... is at least... maybe let's call it tension between the conference committee report and the preamble language which was then inserted.

And isn't that a perfect situation to provide... to... to apply a Gregory kind of rule, saying when we're not sure what they meant, we want them to spell it out more clearly before we conclude that they, in effect, are... are limiting the... the power of a... of a State to determine what its municipalities can do?

Isn't this a good situation for a Gregory rule?

Mr. Strauss: I think the ambiguity to which Gregory refers... I mean, I don't think.

I mean, I think it is clear the ambiguities to which Gregory refers is ambiguity in the statutory language.

Justice Souter: I... I think so too.

Mr. Strauss: And...

Justice Souter: And... and maybe what I'm saying is we... we ought to... those of us who would look into the... the legislative history, as I would, maybe ought to take advantage of a slightly broader Gregory rule.

Mr. Strauss: Well, the... the case I think that would stand in the way more than any other perhaps... well, many would I think, but the clearest example I can think of is Yeskey where the... the question in Yeskey whether the ADA, the Americans with Disabilities Act, applied to inmates of State prisons.

The Court assumed that prisons were special and that the Gregory rule applied to legislation that assertedly reached prisons.

The Court also assumed that Congress never specifically contemplated that prison inmates would be covered, and it said, nonetheless, unanimously that if the language... the language is something like State instrumentalities... if the language included prisons, Gregory was satisfied.

Justice Souter: Isn't the difference, though... and I... I see your argument.

But isn't the difference that in that case we didn't have anything in the history either of the drafting or of the legislative consideration of the statute that suggested that there really was an... an argument each way as... as to whether they... they were... they were intending to... to cover the... the prisoners.

They simply didn't deal with... with that situation at all, and they used absolute kind of... of language.

Here, there is an argument to be made because the drafting changed.

The drafting certainly could have significance for... for public utilities.

There is a tension between the... the conference committee report and the preamble.

In other words, we've... we've got a... a question sort of affirmatively raised by the history of the drafting and enactment of the statute, whereas there was simply silence in the Yeskey situation.

Mr. Strauss: Justice Souter, I guess the difficulty I'd have with that approach in general would be it has to be common for there to be this sort of uncertainty in legislative history with feints in a certain direction and withdrawals for reasons that are difficult to... to fathom.

Justice Souter: Well, I... I grant you that, but when... when the... when the issue relates to the kind of State sovereignty issue that... that Gregory addresses, that's a good reason for having a Gregory rule.

Mr. Strauss: Well, but as to the legislative history, I think that sort of uncertainty is going to be easy to generate, and what we do have here... in addition to any entity, what we do have here, not just in the legislative history, but on the face of the statute, is, as I said, agreement I think all around that utilities are prominent among the entities that Congress envisioned.

I think that's completely clear.

Justice Stevens: But would you also say that the legislative history makes it pretty clear that there's a distinction in meaning between the term private entity on the one hand and the term entity on the other hand, and the statute used the term entity?

Mr. Strauss: Well, that's true, Justice Stevens.

Of course, they could have said private entity had they meant that.

That's not... I mean, our argument is any entity means any entity.

Justice Breyer: So what does... what does...

Is there any argument for putting... leaving this up to the commission?

That is, can it be done?

Because I can see a complex interpretation that may be workable that you're suggesting and may be helpful competitively, frankly.

And I also can see some good arguments against, assuming Congress intended that complex interpretation.

But under those circumstances, maybe Congress purposely leaves it somewhat ambiguous permitting the commission to go one way or the other, and although you've lost it in the commission so far, maybe in the future, the commission would say, well, we think we want to Chevronize this, in other words.

Mr. Strauss: Well, I think... I think that...

Justice Breyer: What do you think about that?

Mr. Strauss: I think that is the scheme although not under 253(a).

What the commission... we know the commission's views with unusual clarity here.

What the commission said is we think we've got to say the statute is not preempted.

But as far as the purposes of the... of the act go, this is a terrible State law.

All the purposes the State wants to be accomplished can be accomplished in less restrictive ways.

The commission has said that over and over again as emphatically as it can.

And the way to Chevronize, Justice Breyer, to use your term, is by saying that these... that municipalities are entities, but these admittedly somewhat difficult issues about what special problems do municipalities pose, those should be handled under 253(b), which is what Congress had in mind.

That's... of course, the States can enact laws so that there can be licensing requirements and basic fitness requirements and various kinds of regulation...

Justice Scalia: You say... you say that that's... I... I could... I could understand that there's no ambiguity if you simply say any entity means any entity.

But... but to say that the statute... but you're not willing to say that it says that.

You're not willing to say that... that the State cannot prohibit its... its counties from entering into commercial activities.

That would certainly have the effect, which is all this requires... have the effect of prohibiting the ability of counties to provide interstate or intrastate... you're not willing to say that.

You... you insist that we derive this very subtle distinction between the State initially granting it and then taking it away or the county taking it away itself.

I don't think that that is unambiguously within the statute at all.

What's... what the unambiguous choices are are that the States are not included or that the States are included, and that means that... that the States cannot exclude counties or, for that matter, even departments of the State government itself from entering into the telecommunications business.

That would be unambiguous.

But if you're not willing to embrace that, it seems to me you are arguing that the statute is ambiguous.

Mr. Strauss: As... as to 253(a), Justice Scalia, I am absolutely embracing that.

I am absolutely embracing the notion... and maybe I disagree with Justice Breyer about this... that any entity means any entity, and I will go down the line with that.

The reason that doesn't lead to absurd results like the maverick Governor entering the telecommunications business against the will of the legislature is because of 253(b).

Now, 253(b) is filled with ambiguities and complexities and... and problems that the commission will have to take the first crack at.

Justice Souter: impact upon (a).

Justice Scalia: You... you can't use (b) to explain (a) and then say, oh, yes, (b) is ambiguous.

Mr. Strauss: I...

Justice Scalia: If you're using an ambiguous (b) to explain (a), (a) itself is ambiguous.

Mr. Strauss: (b) does not explain (a).

(a) has a very... I agree with you, Justice Scalia.

It has a very clear meaning.

Any entity means any entity, and if... it... it would trivialize Gregory to say that Congress has to say, and we mean any entity whatsoever.

Congress has to come up with a... a definition.

Any entity means any entity.

In answer to the charge that that produces absurd results, I say no.

Congress left a broad scope for State regulation, broad enough not only to deal with absurdities, but broad enough so that these claims about incursions on State sovereignty are, I think, grossly overstated.

I mean, let me draw the comparison to Gregory directly.

In Gregory, Congress passed an anti-discrimination law, an age discrimination law.

The claim was that that law required States to give their judges... their judges life tenure, a major structural issue.

And the Court said, well, if they had stopped at employees, maybe they would be giving judges life tenure, but they said employees at the policymaking level and that's just too ambiguous for us to think Congress was doing such a dramatic thing to the structure of State government.

This is nothing like that.

This... this statute simply says that among the universe of entrants that we want in this robust, wide-open, newly competitive field of telecommunications, if municipal corporations, true to their roots as corporations, want to get into this business, the States can't keep them out except if they're doing the kinds of regulation that States can reasonably do to private and public corporations alike.

That seems to me not only a coherent reading of the statute, not only one that is consistent with what everyone agrees is the very dramatic pro-competitive turn that the 1996 Telecommunications Act took, but also one that really is not a significant incursion on State sovereignty, certainly not an unprecedented incursion on State sovereignty.

When decisions of this Court have held municipalities liable under the antitrust laws, notwithstanding State efforts to immunize them, liable for damages, notwithstanding States' efforts to immunize them, have withdrawn from municipal governments States' efforts to grant them sovereign immunity against State claims in the State court, Congress...

Justice Scalia: It has nothing to do with their authorities, all of those instances you mentioned.

It has nothing to do with their authority.

Mr. Strauss: I'm sorry, Justice Scalia.

With their?

Justice Scalia: Authority under State law.

Mr. Strauss: Well, it has to in a sense... I agree with you, Justice Scalia, it doesn't.

In a sense, those are more intrusive because what we have here are local government bodies who say we want to do this in order to serve the needs of our citizens.

We don't have a situation in which Congress is thwarting the will of both the States and the localities.

We have a situation in which localities want to do this, in some cases desperately want to do this, believe that Congress, when it said any entity shall be free from barriers, believe that Congress gave them the power to do it, subject of course to reasonable regulation by the State, only to find that Gregory against Ashcroft, the decision that is supposedly designed to ensure that decisions... that government decisions are made at a level responsive to the people... Gregory against Ashcroft is thrown up as an obstacle to their doing what they think is needed to serve their citizens' interests.

And given what seems to me to be the unambiguous language of section 253(a) and the very limited circumscribed focused nature of what Congress has done in this circumstance, it seems to me to be an unwarranted conclusion for the... for the commission to reach.

If the Court has no further questions.

Chief Justice Rehnquist: Thank you, Mr. Strauss.

Mr. Strauss: Thank you.

Rebuttal of James A. Feldman

Chief Justice Rehnquist: Mr. Feldman, you have 2 minutes remaining.

Mr. Feldman: I'd like to contrast this case with the Yeskey case, which came up during Mr. Strauss' argument.

In the Yeskey case, the Americans with Disabilities Act referred to public entities, I think, and then it defined them as including any department of the State.

Once... that meant that in that act, Congress had specifically considered that it was going to intrude deeply, as Justice Scalia said, in State government, and it had made the decisions of how to do it and the whole... in fact, title II of the act is designed to... to tailor that, exactly how Congress wanted to.

In this statute, there's no indication that Congress crossed that initial dividing line and wanted...

Justice O'Connor: Well, Mr. Strauss points to subsection (b) of the statute as indicating Congress did contemplate giving some leeway.

Mr. Feldman: Yes, Congress did contemplate giving some leeway to the States when it was competitively neutral, but the question of what competitive neutrality means in this context is not an easy one.

And... and I'd like to add that if Congress had had to take the... do what it did in Yeskey and... and decide yes, we do want this to apply to the States, it might have occurred to Congress that they were going to have to think about exactly what that means, applying a statute like this to State governments that grant their political subdivisions different kinds of powers in different kinds of ways.

Congress didn't... never made that first choice that it consciously wanted to intrude on State... State sovereignty the way the Eighth Circuit held, and therefore it never answered those other questions.

Justice Ginsburg: What is the rationale for saying a municipal utility, a wholly owned electric company, wholly owned by the city, that's okay?

That doesn't matter... the State can't stop that from going into the telecommunications, but it can stop the municipal corporation.

Mr. Feldman: Well, I mean, that is an issue in this case, but the FCC's rationale is that insofar as under State law you have a thing that is treated just like a private corporation, it's... it's an entity.

That's exactly who Congress was clearly and directly and most importantly targeting this law at.

It's... it's where the... if it's a municipally owned utility that is really treated like the political subdivision of the State, as they are in Missouri, then that would be different because that would raise these other questions, and Congress had never made the decision that it wants to intrude on... really in an unprecedented way, on the authority of the political subdivisions.

States decide to give...

Chief Justice Rehnquist: Thank you, Mr. Feldman.

The case is submitted.

Unidentified Justice: The honorable court is now adjourned until tomorrow at 10 o'clock.

Attribution:

The Oyez Project

Featured:

Entergy Louisiana, Inc. v. Louisiana Public Service Comm. - Oral Argument

Fri, 09 Jan 2009 14:50:38 +0000

Case:

Entergy Louisiana, Inc. v. Louisiana Public Service Comm.

Media File:

02-299_20030428-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of David W. Carpenter

Chief Justice Rehnquist: We'll hear argument next in Number 02-299, Entergy Louisiana versus Louisiana Public Service Commission.

Mr. Carpenter.

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

In multistate power systems, each retail rake... ratemaking body has incentives to impose cost allocations that benefit its residents, and the only way to assure that the power pool recovers a hundred percent of its generating costs is for a neutral body to referee disputes among the States and to fix the allocations.

This case arises in the energy system where five subsidiaries provide retail service in four different States, where FERC has found that Entergy's cost allocations generally can't affect its net revenues and where FERC has thus approved a tariff that gives Entergy authority to calculate the inter-company equalization payments that allocate costs with a FERC complaint as the sole remedy if the rates and allocations are believed to be unlawful.

Though we...

Chief Justice Rehnquist: What is... what is the source of the rule that this is the sole remedy?

Mr. Carpenter: It's the sole remedy under the tariff itself, Your Honor.

Chief Justice Rehnquist: The... so the tariff itself provides that.

Mr. Carpenter: Yes.

Under the tariff itself, the only right that is reserved to the... this is section 4.12, joint appendix 11a.

The only right that is reserved to the operating companies is to seek amend... if there's a dispute over the rates, is to seek amendments in the tariff or changes in the rate from the regulatory body that has jurisdiction.

There's no question here that the LPSC doesn't have jurisdiction to order amendments to the service schedule or changes in the rates.

Their claim is only that they can disallow the costs that were incurred.

Chief Justice Rehnquist: Is... is the tariff provision meant to preclude any sort of a judicial remedy?

Mr. Carpenter: Yes, it would preclude a judicial remedy.

It operates as a... as a... as, obviously, a limitation on the operating companies' remedies and as a forum selection clause in the event of a dispute.

Justice Scalia: Well, there would be a judicial remedy if they disagreed with the... with... with FERC's determination.

They could... they could appeal to the court.

Mr. Carpenter: Oh, absolutely, Your Honor.

I'm sorry.

I...

Justice Scalia: They just couldn't go straight to the court.

Mr. Carpenter: Yes.

No, I'm sorry, Your Honor.

I... I meant that they can't go... they couldn't go straight to court, and it means that... for the same reason that a State retail ratemaking body can't disallow the costs because under... under this rate schedule, the rate calculated by the energy system is the filed rate and binds everybody unless and until a complaint is filed with FERC and FERC holds otherwise.

And in fact, the Louisiana commission here brought a complaint for the period ending in August of 1997, and FERC denied relief on the ground that although the tariff didn't authorize it, it was just and... nonetheless just and reasonable for Entergy to calculate equalization payments by including certain units that were in extended reserve status because FERC found that those units benefited Louisiana and the entire system.

Justice Breyer: Can I ask?

The... the section of the... of the agreement that you... you referred us to, 4.12.

It says each company reserves the right to unilaterally seek amendments or changes from any regulatory body having or acquiring jurisdiction thereover.

Why didn't they just say from FERC?

Mr. Carpenter: Well, at the time this...

Justice Breyer: I mean, if as you say it's only FERC, why didn't they just say from FERC?

Mr. Carpenter: Well, it was... it was fairly prescient because this... this language I think dates from 1953, when there was the Federal Power Commission.

So, it...

Justice Breyer: Oh, I see.

I see.

Yes.

Mr. Carpenter: But the... the key thing here is that it's undisputed that the LPSC can't amend the service agreement.

Justice Breyer: Got you.

No.

I was just wondering whether...

Mr. Carpenter: Yes.

Justice Scalia: that was so clear to the parties at the time, and you say it is and... and what they... what they were anticipating is a change in the Federal...

Mr. Carpenter: Yes.

Justice Breyer: body that had jurisdiction.

Mr. Carpenter: Right.

Justice Breyer: Okay.

Mr. Carpenter: But... but in the aftermath of the FERC order that found that these charges were just and reasonable, despite a finding of the tariff violation, the Louisiana commission entered an order that said that FERC's determination bound it only for the precise period that FERC had addressed, and then entered an order that prohibited the petitioner, Entergy Louisiana, ELI, from recovering the same wholesale costs in retail rates for the immediately succeeding period, beginning August 5th, 1977.

Justice Souter: Could... could you explain one thing to me?

And that is, why was the period so defined?

Is it simply that it was, with respect to that period, that actual figures were introduced before FERC?

Mr. Carpenter: That became the period because that was the date of the FERC order.

Justice Souter: The date of the...

Mr. Carpenter: Yes.

Justice Souter: And so, in effect, that... FERC was done with it at that...

Mr. Carpenter: Yes.

That was the... that was the... the theory...

Justice Souter: But... but was there...

Mr. Carpenter: of Louisiana Public Service Commission.

Justice Souter: Was there any question in the terms of the order that the order was intended to operate prospectively until FERC changed it?

Mr. Carpenter: Oh, no.

No question at all.

Justice Ginsburg: So the difference is unlike a filed rate, which is a number, here is not a precise number.

Mr. Carpenter: That's right.

Here the filed rate is a formula that is...

Justice Ginsburg: And it... and it's going to change constantly.

Mr. Carpenter: That's right.

It can change... it can change I believe monthly, or the... the rate calculated under the formula can change monthly.

And... and FERC approves formula rates, you know, in circumstances where it believes that it will better promote the overall goals of... of the act, and it imposes terms and conditions that will assure that the overall goals of the act are promoted.

And here a critical term and condition was that the determinations of the amount of the payments is centralized at FERC and the only remedy, if there's a disagreement, is to go to FERC and file a complaint.

As I point out, that's clear from the terms of the tariff, and that's what FERC said in each of the orders in which it authorized the formula rates.

Justice Ginsburg: But it... from the point of view of the public service commission, they have to approve the local rates periodically, and how does the timing of the thing work?

If the public service commission has to go to FERC and then there's a proceeding, and by that time the year is over.

Mr. Carpenter: Yes.

But the... if FERC were to agree with the public service commission that we violated the tariff, that the result was unjust and unreasonable and a refund was appropriate, all the interests would be protected because the... they would order a refund at the wholesale level with interest that the Louisiana Public Service Commission could flow through to retail rate papers... rate payers.

Justice Scalia: Well, wait, wait.

How would... how would the Louisiana Public Service Commission have standing to come to FERC?

I mean, to come back to the agreement, it says each company... the companies who are parties to the agreement... reserves the right to unilaterally seek amendments or changes.

Mr. Carpenter: Yes.

Well, they have standing under the act itself.

Section 305 I believe it is.

Justice Scalia: So this provision doesn't govern what they can seek then.

Mr. Carpenter: No.

But... but they... but... but what it does mean is that they cannot premise a... a prudence disallowance on the ground that... that ELI could have refused to pay the costs or... or required that the equalization payments be calculated on a different basis.

Justice Scalia: Well, sure, they can.

They could say the company was at fault for not going to FERC.

Mr. Carpenter: Yes.

But... but... sure, they could say that.

It was imprudent not to go to FERC.

But they can't speculate about what FERC would do in the event a complaint was filed.

That's clear from the Arkansas Louisiana Gas case of this Court.

So while it's theoretically possible they could say that it was imprudent not to go to FERC, no remedy could be predicated on that finding of imprudence because they can't speculate about what FERC would do if a complaint were filed.

Justice Scalia: But can they go to FERC as an intervenor?

I...

Mr. Carpenter: Yes.

Justice Scalia: I take it that was their status.

Mr. Carpenter: Absolutely, absolutely.

Justice Scalia: So they could go in and say, look, they should have complained...

Mr. Carpenter: Yes.

Justice Souter: and therefore you should do what you would have done if they had complained.

Mr. Carpenter: Absolutely.

They can do that.

And the point I was trying to make to Justice Ginsburg is it... when that procedure is followed, all legitimate interests are protected because if FERC agrees and orders a refund, it will be... it can then be flowed through by the Louisiana Commission to the retail ratepayers.

Conversely, under their procedure in which they can disallow costs pending a FERC determination on the precise... on the precise issue, you have exactly the... the interference with commerce that the Federal Power Act was designed to prevent.

You've got duplicative litigation of this issue.

Here in... could be in five different retail ratemaking bodies.

And the effect can be a trapping of costs that we never get back because if FERC... you know, they... they trap the costs pending the FERC order.

FERC then says... reviews it and says what we did was fine, just and reasonable.

Then obviously FERC doesn't do anything at the wholesale level.

In the meantime, our costs have been trapped at the retail level, and we can't get the money back under the general rule barring retroactive ratemaking unless an exception were somehow made to that rule.

Justice Kennedy: Well, what is the function and province of the State commission's prudence review?

What... what can they do that's proper?

And I assume they can do a number of things that increase costs and therefore change rates, or am I wrong about that?

Mr. Carpenter: Well, what they... what they can do is they can regulate the... the prudence of... of decisions that the... the utility had to make.

So in circumstances where a FERC tariff provides a choice to the... to the retail utility, which was the situation in the Pike County case, then... then the... the State commission can find that it was imprudent to exercise the choice in one fashion or another.

But the point here is there was no choice.

The equalization payment bound the... bound ELI unless and until it was found to be unlawful by... by FERC.

So this is a situation where under the filed rate doctrine and under this Court's decisions in MP&L and Nantahala, the... the State commission was required to treat the resulting expense as a retail... as a just and reasonable expense and pass it through to retail ratepayers unless and until FERC ordered otherwise.

There's obviously a range of other issues that aren't... aren't governed by FERC rate schedules at all, as to which State utility commissions can examine the reasonableness of the decisions of the... of the retail body.

But they can't say that... that following your duties under a FERC tariff is unjust and unreasonable.

That's a question for FERC.

Justice Kennedy: In... in the course of that regular examination that they... that they do, can they find certain actions that require refunds to the... to the consumers?

Mr. Carpenter: Oh, absolutely, Your Honor.

Absolutely, Your Honor.

They can disallow... they disallow charitable expenses.

They disallow expenses all the time.

There's a citation...

Justice Kennedy: But never if it's in violation of a tariff or a FERC policy?

Mr. Carpenter: Right.

They cannot, consistent with the Federal Power Act, say that it was imprudent to do... to... to do what the FERC tariff required the utility to do.

That's the clear teaching of MP&L and Nantahala and... and other decisions.

Chief Justice Rehnquist: Would the State commission have authority to argue that the formula was incorrectly applied?

Mr. Carpenter: In the context of the retail ratemaking proceeding?

Chief Justice Rehnquist: Yes.

Mr. Carpenter: No, Your Honor.

That's an issue exclusively for FERC because, as I pointed out before, if the rate is believed to be too high, under the tariff, the... the only remedy the operating company would have would be to go to FERC and... and complain, and the operating company has... has no... no right to refuse to make a payment on the ground that there's an allegation that the equalization formula was improperly implied.

But as I... as I just said, the filed rate doctrine clearly, you know, prohibited the order here, and even if it didn't apply, this is an issue that... the issue of the... the reasonableness of rates and the practices affecting rates is an issue that the Federal Power Act clearly allocates to FERC.

So even if the tariff here didn't, you know, clearly preclude ELI from doing what the LPSC found a prudent company would have done, the... the filed... the Federal Power Act preempted the... the State from addressing the issue.

And the facts of this case sort of illustrate why States shouldn't get involved in... in this because the decision that was made here sort of exemplifies the parochialism that the Commerce Clause and the Federal Power Act was designed to prevent.

It was acknowledged by the Louisiana Public Service Commission that the... the units in question, the out-of-state units in question, benefited Louisiana and the entire system, increased the efficiency of the entire system.

But it said that was irrelevant.

In fact, it said that was evidence of imprudence because the effect was to increase the costs that ELI incurred and thus to increase retail rates, and that's a... the kind of parochialism that the Commerce Clause prevents and the Federal Power Act was designed to draw a bright line that would eliminate any need to even adjudicate questions whether the conduct violates the Federal...

Justice Stevens: Well, what's left of public service commissions then, if... if you're right, so far as policing imprudent acquisitions and that sort of thing for a multi... multistate company?

Mr. Carpenter: Well, they... they can't regulate issues involving, you know, the exchanges of power within power pools, but there are a range of other issues that, as I said in response to Justice Kennedy's question, that the States can... can decide.

Justice Stevens: Such as.

Mr. Carpenter: Well, the... you know, whether... whether expenses not dictated by a FERC... FERC rate schedule are just and reasonable.

There's a whole range of other expenses that...

Justice Stevens: The cost of... the cost of power is just one of the... one of the...

Mr. Carpenter: Yes, just one of the expenses that a retail utility would incur.

And... and so there's a range of issues that they can decide.

What they can't do, though, is... is decide that it was imprudent to incur a cost that a FERC rate schedule required the utility to incur, and that's the issue here.

Justice Souter: Am I... am I correct in assuming, as I have throughout the... reading the briefs here, that the... the costs that a given operating company incurs within its power pool is essentially the same issue as the wholesale rate that a... that a totally independent company might pay when it... when it bought wholesale off the... the grid?

Is... is that a... it seems to me in... in each case, the operating company is buying power at wholesale, whether it does it within its group or whether it does it on an open market, and that's what in each case FERC is regulating.

Is... is that fair?

Mr. Carpenter: Well... well, FERC regulates the transactions within power pools...

Justice Souter: And when one of those transactions is the... is the... in effect, the acquisition of power by a local operating company, that transaction is economically, I guess, the equivalent of buying wholesale by an independent company that is not part of a power pool.

Mr. Carpenter: Yes, but FERC's jurisdiction depends on the fact that... jurisdiction depends on the existence of wholesale sales which... which exist in the context of a power pool because each retail utility is simultaneously, you know, providing power to the pool at the set rate.

So it's...

Justice Souter: Oh, no, I understand that.

And... and... but FERC also has general authority over wholesale interstate sales.

Mr. Carpenter: Absolutely, Your Honor.

Absolutely, Your Honor.

Justice Souter: So that... so that in relation to what a... the reason I'm getting at it is, in relation to what a State utilities commission can do, the State utilities commission, I take it, is in the same position vis-a-vis ELI that it would be if ELI were a totally independent company buying wholesale off the grid.

Is that correct?

Mr. Carpenter: That's right.

If it were... if it were subject to the identical rate schedule.

If there are no further questions, I'd like to save the balance of my time for rebuttal.

Argument of Austin C. Schlick

Chief Justice Rehnquist: Very well, Mr. Carpenter.

Mr. Schlick, we'll hear from you.

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

Under Nantahala and Mississippi Power & Light, the regulation of wholesale rates for electric energy in interstate commerce is exclusively within the jurisdiction of the Federal Energy Regulatory Commission.

Federal jurisdiction is necessary to ensure that multistate utilities, like Entergy and other utilities, are able to carry out their FERC-regulated transactions, to plan and carry out those transactions without the interference of potentially conflicting State regulation.

The facts of this case highlight the need for exclusive Federal regulation.

The dispute in this case involves the correct allocation of costs incurred for the common benefit of five utilities in four different States.

The Louisiana commission believed that the costs allocated to Entergy Louisiana were too high, but the consequence of the Louisiana commission's rate decision would be to reallocate those costs to ratepayers in Texas, Arkansas, and Mississippi or else to render them trapped and entirely unrecoverable.

Justice Stevens: Well, does that... is that a death sentence, so to speak, if you find that the costs are trapped and unrecoverable?

May not that ever happen to a utility legitimately?

Mr. Schlick: That's correct, Your Honor.

Under this Court's decision in Nantahala, a charge that is federally approved or that is within FERC's exclusive jurisdiction to approve may not be trapped and disallowed by the... by the State regulatory...

Justice Stevens: You're... you're not talking about costs... trapped costs generally.

You're just talking about this particular kind of trapped costs.

Mr. Schlick: That's right.

I'm... I'm talking about costs that contribute to the wholesale rate that... that is within FERC's jurisdiction.

Justice Souter: So the... the problem is that... not that the costs would be trapped, but that FERC has said it's not trapped.

That's... that's the point.

I mean, lots of utilities lose money because costs are trapped.

Mr. Schlick: That is... I... I think that... that...

Justice Souter: So the real point is here FERC has said they can do it.

That's... that's the only point that you're making, isn't it?

Mr. Schlick: There are two points.

There... there is the general prohibition on trapping, but also in this case we have a FERC-approved rate schedule that determines how the allocation should be carried out.

There's a question whether or not Entergy complied with that rate schedule, but the resolution of that question involves what the wholesale rate is or should be, and that's a question within FERC's jurisdiction.

Justice Souter: And that's a FERC question, period.

Mr. Schlick: That's right.

Only FERC can decide that question.

Unlike the cases on which respondent relies, this case does not involve a State contract action about a matter that is within the State's concurrent jurisdiction.

In the first place, there is no contract dispute between the parties in this case, the Entergy operating companies and the holding company.

Rather, this case arose in the same context as Nantahala and Mississippi Power & Light, a retail rate setting.

And the dispute involves the correct division among the operating companies in multiple States of costs of operating the system.

Just like Mississippi Power & Light, that's a cost... that's a... a question that only the FERC can determine.

It's worth mentioning that...

Chief Justice Rehnquist: Could... could this be characterized as a question of a reasonable interpretation of the tariff, or you couldn't characterize the issue that way?

Mr. Schlick: There... there is a... an interpretation, an underlying question of interpretation, of the tariff, but beyond that, there's the question of whether the resulting charge was just and reasonable.

And that's the important reasonableness question.

That's the question that only FERC can decide.

Here the Louisiana commission assumed both that there was a procedural violation of the system agreement in... in the documentation of the operating committee's decision...

Justice Scalia: But...

Mr. Schlick: and that the resulting charge was unjust and unreasonable.

Justice Scalia: But what Louisiana is saying, they... they're conceding that FERC has the authority, the exclusive authority, to prescribe what the division would be.

However, they're saying if, in fact, there's a violation of that division, the States ought to be able to adjudicate the violation.

They're still giving FERC all of... all of its power.

They're saying FERC decides what the division will be, but the State agency can determine that the division has not been carried out the way FERC prescribed.

What is there in the act that... that says that FERC is the exclusive adjudicator of whether its directives have been complied with?

Mr. Schlick: In the context of what the wholesale charge is or should be, the provision of the act is section 824d and... and 824e.

The underlying principle was established by this Court's decision in Attleboro, which is that States are entirely disabled from regulating wholesale rates.

That was implemented through the Federal Power Act in 1935.

It was confirmed in this Court's decision...

Justice Scalia: They're not regulating the wholesale rates is what... is the argument that will be made by the State.

They're... they're leaving it to FERC to regulate it, but they're adjudicating whether the rates prescribed by... by FERC have, in fact, been the rates charged.

Mr. Schlick: Justice Scalia, in fact, they were regulating the wholesale charge.

The necessary determination of the Louisiana commission's order was that the costs pass through under the Federal rate schedule to Entergy Louisiana.

The specific costs allocated on the rate schedule were too high.

It was imprudent in the Louisiana commission's judgment for Entergy Louisiana...

Justice Scalia: I thought the Court said in Mississippi Power & Light that once FERC sets a wholesale rate, a State may not conclude in setting retail rates that the FERC-approved wholesale rates are unreasonable.

Mr. Schlick: That... That's correct.

The...

Justice Scalia: So I guess that's the law, isn't it?

Mr. Schlick: the only additional step that need be taken in this... in this case is to determine whether the fact that there is a dispute as to whether or not the FERC rate schedule was violated somehow puts the case within the State's jurisdiction.

That was the question that only FERC can answer.

Justice Breyer: But how is that different from the State determining that a retail rate is unreasonable?

Mr. Schlick: We believe it's precisely the same.

Justice Breyer: So then there is nothing extra.

Mr. Schlick: Our... our answer to that question is there is no difference.

Justice Breyer: So I have to see what the other side would say.

Mr. Schlick: That's correct, Justice Breyer.

Justice Souter: I... I take it you agree with Mr. Carpenter that the State can be heard on this issue as an intervenor who may raise the issue before FERC.

Is that correct?

Mr. Schlick: Not just as an intervenor.

Under section 825e of the act, the State could actually bring a complaint...

Justice Souter: I see.

Mr. Schlick: to FERC.

It could bring the issue directly to FERC.

And...

Justice Souter: In any case, it can get to FERC if it has a gripe.

Mr. Schlick: The order 415 proceeding in 1997... that was resolved in 1997... shows exactly how this should happen.

The...

Justice Souter: No, but the answer to my question is yes, isn't it?

Mr. Schlick: Oh, yes, absolutely.

Justice Souter: That's all I'm... that's all I'm...

Justice Scalia: Well, it seems to me it's quite a different question.

Question one is whether the allocation was unreasonable, and the State here is saying we're... we're not questioning the reasonableness of the allocation.

That's up to FERC.

But we don't think that we were charged that allocation that... that was given to us.

And that's... that's not challenging FERC's decision of what the allocation should be.

It's challenging the factual question of whether the allocation was carried out the way FERC prescribed.

Mr. Schlick: Justice Scalia, the order 415 proceeding shows precisely the problem with that.

In that case, FERC said that there was a violation of the system agreement, analogous to the one that's being claimed here.

But it also said that the resulting charge was just and reasonable.

In fact, ratepayers benefited overall from what was done by Entergy.

Justice Scalia: Must be a section of the FERC rules or regs or tariffs which says the company may... must... or must pass over to the company that has the higher number of generators a charge equal to the amount, da, da, da, that this particular thing we have before it gives the allocation for.

Mr. Schlick: Well, the... the rate schedule has been approved...

Justice Scalia: Yes.

Mr. Schlick: by FERC and...

Justice Scalia: All right...

Mr. Schlick: there's a requirement...

Justice Scalia: it says that in the rate schedule.

Mr. Schlick: and there's a requirement to the comply with rate schedule.

Justice Scalia: So the rate schedule of FERC says charge a rate...

Mr. Schlick: That's right.

Justice Scalia: based on this allocation.

Mr. Schlick: That's right.

Justice Scalia: All right.

All right.

I'll ask the other side.

I don't see any room for the question that was just raised.

Mr. Schlick: If the Court has no further questions.

Justice Scalia: I... I do.

I mean, what... what happens if the... the State says, they haven't charged it according to that allocation?

Then Mississippi...

Justice Breyer: Well, let counsel answer.

Mr. Fontham: [Laughter]

Mr. Schlick: Justice Scalia, what... what happens is then the question becomes was the resulting charge just and reasonable.

In order 415, FERC determined the resulting charge after a violation of the rate schedule was just and reasonable.

In fact, ratepayers in Louisiana benefited from what Entergy did, notwithstanding that it wasn't in compliance with the terms of the rate schedule at that time.

Argument of Michael R. Fontham

Chief Justice Rehnquist: Thank you, Mr. Schlick.

Mr. Fontham, we'll hear from you.

Mr. Fontham: Thank you.

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

The issue in this case is the following.

The FERC approved a contract amendment that established conditions, procedures before a utility could bill an affiliate for units in mothballs.

The utility failed to follow the procedures, failed to consider the conditions, and failed to record the decision in its minutes, as it was required to do, and then said to the LPSC...

Chief Justice Rehnquist: We're... we're within about 15 feet of you, Mr. Fontham.

You don't have to speak up.

Mr. Fontham: [Laughter]

Mr. Fontham: Thank you, Your Honor.

And then said to the LPSC, you must take the charges anyway.

Justice Scalia: Yes, I think that's right under the law, isn't it?

Mr. Fontham: No, it's not, Your Honor.

Justice Scalia: Because?

Mr. Fontham: Because the issue in this case is a drastic departure from what this Court held in MP&L or in Nantahala.

In that...

Justice Scalia: Because?

Okay, that's exactly...

Mr. Fontham: In those cases...

Justice Scalia: Yes.

To get the question very precise, that is the question.

In MP&L, it said once FERC sets a rate, which means, I take it, that they have the terms that we've just described in the tariffs, a State may not conclude in setting retail rates that the FERC-approved rates are unreasonable.

Mr. Fontham: That's correct.

Justice Scalia: All right.

Now, what's the difference between that and what you just said?

Mr. Fontham: The... the difference is that the FERC set the rate.

The utility couldn't bill for the units because it hadn't gone through the procedure under the FERC rate.

The utility billed anyway.

It says if the rate said 5, the utility sends a bill for 10.

10 shows up in the retail rate case.

The question is, can the State agency, looking at the FERC tariff and looking at what the utility billed, make the decision, instead of the utility making the decision, in the State proceeding that it's wrong.

Justice Souter: That's the question...

Justice Scalia: Maybe... maybe it can if FERC has not previously adjudicated that very question.

Mr. Fontham: And it hasn't.

Justice Scalia: I mean, here what... what they're contending is that FERC not only prescribed the formula, but that in order 415, it adjudicated that the formula had been properly applied or, if improperly applied, close enough for Government work is what they said.

And once they decided that, their contention is, it's not up to the State to second-guess them.

Mr. Fontham: Well, Your Honor, I don't... that may be what they're saying, but that's not what happened in the case.

The... in the case the FERC did refuse to order refunds.

It held that the utility had invalidly exercised its, quote/ unquote, discretion to violate a clear and ambiguous tariff for 10 years.

Then it said, we're going to have a new tariff.

We're going to curb the utilities' discretion.

We're going to require the utility to have a procedure.

We were saying it is too... it was too vague, but no, no.

The utilities said, our discretion will be curbed.

The FERC said, their discretion will be curbed.

The Court of Appeals for the D.C. Circuit said their discretion will be curbed.

Justice Souter: Didn't FERC... didn't FERC also say that the rates that had resulted during the period prior to the amendment were just and reasonable rates?

Mr. Fontham: The FERC said that looking retroactively, in effect, retroactively...

Justice Souter: Absolutely.

They're looking retroactively.

Mr. Fontham: Yes, sir.

Justice Souter: And having done so, and having set the rate, how then is a State utilities commission, in effect, able to go behind that determination?

Mr. Fontham: Because the costs that were incurred and are at issue here... actually, I lost that issue before the LPSC.

The LPSC, as to all the charges up until August 1997, said since the FERC retroactively effectively changed the filed rate... I don't know how they can do that, but they did... they retroactively approved a new filed rate.

You... we can't touch that.

Then the LPSC said, okay, now we've got a new contract amendment that operates prospectively.

And what does it require?

Take a look at what it requires.

This was in... litigated issue.

And the LPSC says, well, they didn't follow the conditions again.

Justice Scalia: But wait.

Can you please go back and explain to me my question?

Mr. Fontham: Yes, Your Honor.

Justice Scalia: To use your example...

Mr. Fontham: Yes, sir.

Justice Scalia: we have, I mean, it sounds to me that what you're saying is a revolution in rate conditions or setting in the United States.

I've always understood it to be, because of the sentence of MPL that I read to you, that if FERC says we have a piece of paper here that either directly or through a formula makes clear that $5 of your cost, your total cost for the consumer, is correct way to determine an interstate part of it, then when the local commission looks at the $10 rate to the consumer, it can do what it wants, but it has to take that $5 as a given.

Mr. Fontham: We did that.

Justice Scalia: Now, if the commission thinks that the $5 that the company put on its line as part of the interstate payment did not comply with every condition, did not satisfy the law because it was unjust and unreasonable, their remedy is to go to FERC and to say, FERC, they didn't comply with your conditions.

They let... got an unreasonable rate.

That the commission's remedy... the local commission... is not to readjudicate that itself.

And the... the legal authority for what I've just said I've always thought was the sentence I read to you out of MP&L.

Now, where am I wrong in that?

Mr. Fontham: You are wrong, Your Honor, in this.

MP&L says that the State commission has to take the 5.

If the tariff says 5, it has to take the 5.

Justice Scalia: That's what I said.

Mr. Fontham: We're dealing with the extra 5 here.

We're dealing with the overcharge, the overbilling, the violation of the contract.

Justice Scalia: The extra 5.

Now, I thought what we were dealing with here was a formula set out by what I used to call the FPC, which... which formula said that the 5 is made up of many things.

One of those things is a charge that the Louisiana company is to pay to a company in a different State to reflect the fact that that company in the different State has generators in reserve capacity that serve everybody, and among those generators are generators that were put in mothballs provided that they noted in the minutes of the joint company, et cetera that this is a mothballed generator available for reserve capacity if necessary.

All right, and if I understand it correctly and I've said it correctly, then the cost at issue here is part of the 5, not part of the other 5.

Mr. Fontham: I'll give you that, Your Honor.

The... but the... but the problem and the difference is that... there was a little more in the tariff condition.

It said you have to have a plan to return the unit to service.

Justice Scalia: Yes.

Mr. Fontham: Did they have that?

No.

It said...

Justice Scalia: No, but now we're repeating because I... I just said that if you think that the minutes were not filled, if you think one of the other conditions that was put forth in that particular tariff, which I guess is... what is... page 57 or something of the... of... but if you think one of those was not fulfilled, then your remedy is to go to the FPC... the FERC rather.

Mr. Fontham: And then... and that poses the question beautifully because we're in a State ratemaking proceeding and now we know the question.

Does the State get to interpret the tariff and decide what it means and what it says, or does the utility?

Because the FERC is not here to tell us.

So the question is, what goes into rates today?

The utility's decision based on a violation of the tariff which was litigated through the Louisiana courts?

They got to eat the cake, but now they're back because they didn't like the taste of the cake, to put it...

Justice Ginsburg: Mr. Fontham, I'm a little confused on who is the they because my understanding was that the Louisiana company, ELI, had no say in this, that it was the Entergy, the... the holding company... the... for all of these five companies, that gave the instructions.

And it wasn't as though ELI could say, well, we think you allocated too much to us.

You're making us pay too much.

The... each unit is bound by what Entergy says.

So the they seems to me to be Entergy, but the Louisiana Public Service Commission has only ELI before it.

Mr. Fontham: That's true, Your Honor.

Justice Ginsburg: So how can it say that ELI was at fault for something that ELI is locked into by virtue of being part of this multistate...

Mr. Fontham: What... what the commission says is that ELI is at fault in the sense of any utility, going back to... to Justice Souter's reference to two independent companies in a wholesale power transaction.

Now, we all know you can go to court to enforce a wholesale tariff, and that's where most people go.

In the case of a parent-subsidiary relationship, well, obviously the parent gets to tell the subsidiary what to do.

That's true in everything.

It's true of many cost allocations that we see.

We see hundreds of millions of dollars of cost allocations coming into Louisiana based on Entergy's decisions under innumerable types of allocation schemes, including the Federal tariff.

And ELI has an obligation, even though it's owned by a parent, to make sure the parent follows the terms of the tariff, just as the wholesale buyer of power...

Justice Scalia: I'm beginning to understand your argument.

Is this what it is?

That you'd... imagine we have a Federal FERC rule, and it says you can include in your... in your charge to the wholesale company the charge of sending a salesman to the foreign State to tell him about your product.

All right?

And now we have... now we have... you go before the State commission and the company says, and it costs me $117 to send Mr. Smith to do that.

And you want to say, I, of course, am forbidden from arguing to you, the State commission, that they violated the tariff.

But I can tell you that this salesman, named Murphy, actually spent most of his time in a chicken restaurant, and therefore, what he did for that 117 fell outside the tariff.

It didn't violate the tariff.

It fell outside the tariff.

And similarly, you want to say here that the cost of the generator in mothballs did not violate the tariff to include it, but rather fell outside the tariff because they never had the minutes, et cetera.

Is that what you're arguing?

Mr. Fontham: I'm arguing both, Your Honor, because...

Justice Scalia: Well, what's both?

If you say...

Mr. Fontham: Well...

Justice Scalia: If you say you're arguing it violated the tariff, you have an additional problem which is that the Louisiana Public Service Commission itself said that the staff wants us to say this violated the FERC tariff, but we have no power to do that.

Mr. Fontham: No.

That... that was as to the refunds.

That was as to the period going up to 1996.

Justice Scalia: No.

No.

Mr. Fontham: But... but, Your Honor, let me... let me take this and put it in... in context here.

When a State commission decides issues of intrastate ratemaking, it decides all kinds of questions of Federal law.

It has to decide what the Internal Revenue Code requires.

It has to decide what the consolidated tax return provides for.

It has to decide SEC allocations that are filed with the SEC.

So along comes a situation that's completely within its expertise.

What does a FERC tariff require?

And it makes so many decisions involving millions and millions of dollars in which it... it decides as... as any other State court.

You apply Federal law, you apply State law.

It's the whole body of law that you're dealing with.

Justice Kennedy: Except that FERC specifically addressed this question.

Mr. Fontham: No, Your Honor.

The FERC did not address this question.

This is tariff 2.

Tariff 1 the FERC did address and it said the utility violated the tariff.

Now we're on tariff 2, and tariff 2 was designed, according to the FERC, to curb the utility's discretion.

And... and that tariff 2, designed to curb the utility's discretion, the utility then immediately proceeded to ignore.

And even in their reply brief, they say, we did nothing more than we ever did before.

That's on the first page of their reply brief.

Justice Souter: But isn't the way to look at the problem this way?

FERC says you may charge a certain tariff.

We're not coming up with the actual number now...

Mr. Fontham: No.

Justice Souter: because it depends on facts that will vary over time.

You may... we... we are approving a tariff.

You supply the number and you must supply the number according to certain conditions.

And what the Louisiana commission is now saying is, the number that you supplied was a number that violates those conditions.

Mr. Fontham: Right.

That's true.

Justice Souter: The fact remains that on the face of it, FERC has said, if you come up with the number, that's the tariff.

So if you are going to challenge that number, aren't you, in effect, challenging a FERC determination?

And to do that, don't you have to go back to FERC and say, they didn't follow your conditions, and therefore you, FERC, should tell them that that number is, in fact, wrong and they can't charge it?

Mr. Fontham: Your Honor...

Justice Souter: What's wrong with that analysis?

Mr. Fontham: I... I don't think that's correct.

I do think that your predicate is correct.

They... they... the FERC gave them a tariff.

That's the tariff.

The utility's decision doesn't become the tariff.

It's like any contract case.

If I have a contract with you, and I can charge you 5, and I send you a bill for 10, that doesn't... my 10 doesn't become the tariff.

Justice Souter: Right, except that in this case... and... and maybe this is where I'm going wrong.

Tell me if I am.

In this case, I thought FERC did not say the number is 5.

Mr. Fontham: Yes.

It said... what it said was... is, you go through this process, step 1, step 2, step 3...

Justice Souter: Right.

Mr. Fontham: step 4.

The utility did none of that.

Justice Souter: No, but... but at the end... but what FERC is saying is, if... if you go through that process, the number you get at the end of the process is what our tariff guarantees you to charge.

Mr. Fontham: Yes, that's true.

Justice Souter: And in this case, you're saying... so that... so that the... FERC is not saying what the number is in advance.

It's setting the process in advance.

Mr. Fontham: Right.

Justice Souter: And what you're saying is, sure, they came up with the number, ostensibly what FERC told them they could do, but they didn't go through the right process to get it, and therefore the number is no good.

But in order to say the number is no good, you're still challenging something which, at least on its face, has been authorized by FERC.

And therefore, why isn't the appropriate action for you to take, to go back to FERC and say, the number they're claiming under your authority is the wrong number, tell them it's the wrong number?

Mr. Fontham: Okay.

I'll... I'll answer the last question first.

The reason the appropriate action for the LPSC to take is not to go to FERC is because the LPSC has the authority as part of its State ratemaking authority, as part of State law to make...

Justice Breyer: Yes, but that's the question here.

Justice Souter: That's the question here.

Mr. Fontham: That's the question.

Justice Souter: Do they have it or is it preempted?

Mr. Fontham: Well, it wasn't preempted...

Justice Souter: And one question as to whether it's preempted, I would think, would be can they go back to the Federal ratemaker and... and, in fact, get the relief that they want.

That's something we ought to consider.

Mr. Fontham: And, Your Honor, the... our position is... and I believe it's correct... that there's nothing in the Federal Power Act that preempts the State from doing this, that the only FERC jurisdiction to decide enforcement issues didn't even... they created it in 1980 approximately.

They were told in 16 U.S.C. 825m that if they found a violation of a tariff, they had to go to United States District Court.

And there's nothing in the Federal Power Act.

In fact, the Senate had a provision in the Federal Power Act that the FERC can award remedies for violations of its orders.

It was pulled out.

Justice Souter: In other words, they...

Okay.

You're talking about the condition today, and what you're saying today is, whenever FERC sets a tariff that leaves the bottom line number to be filled in later, a State utility commission in a ratemaking proceeding may challenge that bottom line number in its own bailiwick.

Mr. Fontham: No, Your Honor.

We're saying that if there's a tariff...

Justice Souter: I thought that's what you were doing.

Mr. Fontham: and it sets forth objective requirements, and it... and the utility doesn't follow those objective requirements, then they're not entitled to bill for the units.

That's all we're saying.

We're not... this is not...

Justice Breyer: All that you're saying is that Justice Souter was wrong to limit it to places where the Federal tariff is open.

It's just as applicable to instances where the Federal tariff is specific.

And you're saying that Congress in the Federal Power Act set up an act where you have a single central Federal body to provide tariffs for, let's say, the billions and billions of kilowatt hours made every year, but that each State... 50 or 51 different local service commissions are going to adjudicate whether or not those millions of words are, in fact, violated and what we will have is 51 separate decisionmaking bodies to determine when a FERC tariff has been violated.

Now, I grant you Congress did not say in the act, and we don't mean to do that.

But it would be an awfully surprising thing for them to want to do.

Mr. Fontham: They did say we don't want to do that.

It's in... it's in the introduction.

Justice Breyer: Well, if they said they don't want to do it, then why are you arguing to the contrary?

Mr. Fontham: I'm saying that they... well, maybe I misunderstood what they don't want to do, Your Honor.

Justice Breyer: I mean, don't want to do that is... means that they don't want 51 bodies...

Mr. Fontham: Okay, they didn't...

Justice Breyer: adjudicating the correctness of the application of rules for wholesale rates that are contained of thousands or millions of words filed before the Federal Power Commission.

Mr. Fontham: They... they...

Justice Breyer: I've always thought that the Federal Power Act did not want to have 51 adjudicative bodies, but rather wanted to have one centralized body that States were free to use.

Mr. Fontham: Not... not at all.

Justice Breyer: No, okay.

Mr. Fontham: What the Federal Power Act says is there's one central body to make the rate, to establish the reasonable and just terms of the rate.

All the courts in the United States can decide whether a tariff is violated, including the State courts, and that's the way it always has been.

In fact, the FERC wouldn't hear the cases until 1979.

If there was a case of a tariff violation pending in State court, you had the potential, this potential of possible loss of uniformity, which never really happened.

As a matter of fact, this is a high-profile case.

Where are the conflicting decisions?

And the reason is we have an objective tariff.

They violated the objective tariff.

Nobody can really dispute that.

It was litigated in the lower courts.

Justice Ginsburg: Mr. Fontham... Mr. Fontham, there are five States in this and there could be more in a regional organization.

Mr. Fontham: Yes, Your Honor.

Justice Ginsburg: If each State's public service commission can do what the Louisiana commission has done, you could have chaos.

Mr. Fontham: No.

Justice Ginsburg: One will say, my utility was underpaid.

Another one will say, ours was overpaid.

And each one could do exactly what the Louisiana commission has done.

It... it seems to me that that just cries out for having the one decisionmaker, FERC.

Mr. Fontham: Well, Your... Your Honor, I... I will respectfully disagree that this as big a problem as... as you are suggesting.

And I'll... I'll tell you that literally billions of dollars of costs are split up by Entergy among its companies, only a very small sliver under the Federal Power Act.

Now, they split up these costs from Energy Operations, which is a nuclear company; Energy Services, which is a service company, by allocating them into the jurisdictions.

Anytime there would be a conflicting decision, you could have... supposedly you could have chaos.

What really happens is the utility tries to shove as much costs as it possibly can into the jurisdictions which are reviewing the rates frequently.

Justice Kennedy: But... but your answer to Justice Ginsburg and your earlier answer to Justice Breyer, with reference to whether there is a preemptive effect in the, what we might call, the enforcement...

Mr. Fontham: Right.

Justice Kennedy: or interpretation phase of the... of the tariff, it seems to me is contrary to what we said in Mississippi Power.

We... we actually were quoting Nantahala.

There we said the Mississippi Supreme Court erred in adopting the view that the preemptive effect of FERC jurisdiction turns on whether a particular matter was actually determined in FERC proceedings.

Justice Stevens: We have long rejected this sort of case-by-case analysis of the impact of State regulation upon the national interest.

Mr. Fontham: Yes, Your Honor, and... and bear in mind what Justice Stevens was addressing there.

The issue of prudence... and the Court were addressing, but the issue of prudence is an issue is that comes up in making the rate.

The FERC in the Federal Power Act is... is authorized to establish just and reasonable rates.

If you're going to raise prudence, you raise it in the proceeding where the just and reasonable rate gets established.

We admit they have that.

Then you have the next question.

If they start violating their contract, is that something that the States can't look at?

And there's nothing in the Federal Power Act that suggests that States...

Justice Stevens: Well, but it was violating the contract in... in a context where FERC had... had looked at that... that specific violation, and it... and it announced the remedy.

Mr. Fontham: No.

The prior violation.

This is the second tariff, Your Honor.

This is a new tariff that sets conditions which were supposedly designed to curb their discretion.

But going back to MP&L, this Court's decision affirmed the decision of the Mississippi Public Service Commission.

It reversed the Mississippi Supreme Court.

It affirmed the Mississippi Public Service Commission.

In... in that decision of the Mississippi Public Service Commission, 327 million will be incurred under the FERC tariff.

They... they had to actually estimate what would be incurred.

Now, if you hand the utility the right to tell the State public service commission that, oh, it will be 500 million, do they have to pass it through?

If this Court is going to give the sword of preemption to utilities, and basically, there's a test, you know.

We've got concurrent jurisdiction.

The test for concurrent jurisdiction or exclusive jurisdiction is unmistakable intent of Congress.

Congress had it in there, pulled it out of the... in the Senate report.

The FERC can... can hear violations.

It was in the Senate version of the bill in 1935.

If you look on page 6 of our brief, you'll find that the Senate pulled it out.

The FERC had no... no... jurisdiction to hear tariff violation cases.

It could go to court.

That's 16 U.S.C., section 825m.

In about 1980, the FERC said, well, you know what?

We're going to infer the power to do that.

And for the first time ever, because up until then, the FERC had been refusing to hear cases that were pending in State court, wouldn't even exercise primary jurisdiction.

Now, obviously, if you have exclusive jurisdiction, there's no need for a primary jurisdiction doctrine.

They wouldn't even exercise primary jurisdiction.

They left it to the State courts, all the State courts.

Now, if you leave it to the State courts, what is... how can you possibly say a State ratemaking agency, which decides issues of Federal law, contracts, all the time, has to interpret allocations, has to decide if they're right... how could the Federal Power Act have taken away their power when the Federal Power Act was passed...

Justice Breyer: Well, I want to be sure I get a response to this, though, because you said before... and this very interesting argument might be cut short if the paragraph that I read to you is applied to the 19... post-1965 costs, which I... aren't they the costs that were at issue when... when the staff was talking about disallowing costs?

Mr. Fontham: The post-1997...

Justice Breyer: No.

The post... the... there's the post-'65 or... what...

Mr. Fontham: August... it's August 5th, 1997.

Justice Breyer: But... yes.

Mr. Fontham: You have... you have costs incurred in '96, which interestingly enough, were incurred in violation of a FERC tariff as determined by the FERC.

Justice Breyer: Yes, yes, that's right.

I understand that.

Mr. Fontham: As determined by the FERC.

Justice Breyer: But they are... but it's... it's the '97 costs we're talking about here.

Mr. Fontham: Going forward.

That's correct.

Justice Breyer: And... and when they're talking about this, it seemed as if they're talking about post-August 5th, 1997 costs on page 64a, 65a.

Mr. Fontham: Right.

That's when the new tariff...

Justice Breyer: Are you sure they're not?

Mr. Fontham: That's when the new tariff became effective.

Justice Breyer: Yes.

But you know what I'm thinking of on page 64a and 65a of your appendix.

Mr. Fontham: I don't, but I'll be happy to look.

Justice Breyer: I'm a little puzzled by your reference to the new tariff.

I thought the...

It's... it's... they have a... B, is this committee precluded from determining whether the operating committee's decision was in compliance with the amended section 10.02 of the system agreement?

Mr. Fontham: It's the amendment.

Yes.

The amendment took effect August 5th, 19...

Justice Scalia: Yes, and they're talking about the post-August 5th, aren't they?

Mr. Fontham: That's correct.

Justice Scalia: All right.

Then they say, LPSC staff argues that the MS-1 overpayment should be disallowed because the decision violated the FERC tariff.

As ELI argues, this commission is preempted from determining whether the terms of a FERC tariff have been met, for the issue of violation or compliance with a FERC tariff is peculiarly within FERC's purview.

Any allegation of a violation of a FERC tariff should, therefore, be brought before FERC.

All right.

I read that and thought they seem not to have decided this on the basis that you've been arguing it.

Mr. Fontham: Your Honor, I believe they did decide it on the basis that I've been arguing, but I'll concede that that language is sitting in there.

It's wrong.

And...

Justice Scalia: You mean it's wrong as a matter of law?

It's wrong at describing what they thought?

Mr. Fontham: It's wrong.

I think it relates to the refunds, but it's wrong as a matter of this Court's law, the fact that there was a primary jurisdiction doctrine, the fact that the States have always had the power to decide this, the fact that the FERC had to infer jurisdiction to decide tariff violations in the... in around 1979 or 1980.

The FERC has never had exclusive jurisdiction to decide if a contract has been violated.

The Arkla against Hall case.

That case is a case that came through the... this... the Louisiana courts.

This Court held there's a difference between establishing the just and reasonable rate and enforcing the contract.

And if you go back to the... the Pan American case decided by this Court, this Court held that with regard to contract enforcement issues, which somebody was arguing need to be decided by the FERC, there was a State proceeding pending.

Justice Ginsburg: Why is this a contract enforcement proceeding?

I don't follow.

Mr. Fontham: Because, Your Honor, the... it's a contract.

This is one of the sections of the contract.

This is the section that... it's an amendment to the contract that was approved by the FERC.

It's a contract between the parties...

Justice Ginsburg: A contract between whom?

Mr. Fontham: Pardon?

Justice Ginsburg: Who is the... who are the parties to this contract?

Mr. Fontham: The parties to the contract are the five operating companies, plus...

Justice Ginsburg: But you agreed with me earlier that the operating companies have to follow the instructions of Entergy.

Mr. Fontham: Only by virtue of the fact that Entergy... not under the contract, not because the contract says so.

They don't have to take an illegal charge.

But as a matter of practice, I admit that the big boss of Entergy can tell the operating companies what to do, and they're not going to lose their jobs over it.

So they'll take the charge if it's an overcharge.

You're darned right.

But not because the contract says so, Your Honor.

Not at all.

Justice Souter: Is this contract the contract that has been accepted by and approved by FERC and, in effect, incorporated into the tariff?

Mr. Fontham: Yes, Your Honor.

Justice Souter: So that we're not talking about a freestanding contract.

Mr. Fontham: We're...

Justice Souter: We're talking, in effect, about a term which the tariff incorporates by its reference to the contract.

Mr. Fontham: We are... we are really... the contract itself...

Justice Souter: Well, isn't...

Mr. Fontham: more or less becomes the tariff, Your Honor.

Justice Souter: Right.

That's...

Mr. Fontham: There is no separate tariff.

It's just a contract.

It becomes a rate schedule filed with the FERC.

But in Pan American, this Court said, you know, in... in its nature... by its nature, a contract like that is a State court contract.

And the... and the Court made the statement by the fact that everybody knows there's a scheme of Federal regulation doesn't change that.

And the State courts... and I think it implicitly means this...

Chief Justice Rehnquist: Thank you, Mr. Fontham.

Mr. Fontham: Yes, Your Honor.

Rebuttal of David W. Carpenter

Chief Justice Rehnquist: Mr. Carpenter, you have 4 minutes remaining.

Mr. Carpenter: Unless the Court has any further questions, I have nothing else I need to add.

Chief Justice Rehnquist: Thank you, Mr. Carpenter.

The case is submitted.

Justice Ginsburg: The honorable court is now adjourned until tomorrow at ten o'clock.

Attribution:

The Oyez Project

Featured:

Pharmaceutical Research v. Walsh - Oral Argument

Fri, 09 Jan 2009 14:50:36 +0000

Case:

Pharmaceutical Research v. Walsh

Media File:

01-188_20030122-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Carter G. Phillips

Chief Justice Rehnquist: We'll hear argument next in Number 01-188, The Pharmaceutical Research and Manufacturers of America v. Kevin Concannon, et al.--

Mr. Phillips.

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

Under 42 U.S.C. section 1396a, in subsection (a)(19), which is found on page 244 of the joint appendix, Congress made absolutely clear, as a singular precondition of all Medicaid plans, that they must assure that care and services will be provided in a manner consistent with simplicity of administration and the best interests of the recipients.

This statute does not allow Maine to use Medicaid recipients as pawns in its effort to reduce health care costs for those individuals who are not eligible for Medicaid.

Chief Justice Rehnquist: Was this statute... was the statute discussed in the First Circuit opinion?

Mr. Phillips: The Medicaid statute?

Chief Justice Rehnquist: The... the provision you just read.

Mr. Phillips: Oh, absolutely, Mr. Chief Justice.

Justice Scalia: Mr. Phillips, that... that provision is... is in the portion of the statute dealing with the approval of the State plan, a State plan has to have that consequence.

It has to serve the interest of the Medicaid recipients.

Mr. Phillips: That's true, Justice Scalia.

Justice Scalia: It doesn't say that each... each... each feature enacted by a State has to be judged individually under that standard.

It seems to me, why isn't it the case that if... if a State adopts some provision which does not comply with that provision, its plan is no longer a conforming plan, and the Secretary has explicit authority under the statute to... to repeal the Secretary's prior approval of the plan.

Why isn't that the way this thing should work?

Mr. Phillips: Well, the way this operates is that this is not adopted as a part of the State's plan that's subjected to review by the Secretary of HHS.

What this is, is a completely separate program that's been adopted independently, and all it does is reach out and hold the recipients of Medicaid as hostages in order to extract money from out-of-state manufacturers--

Justice O'Connor: Yes, but do you--

Mr. Phillips: --but it's not a part of the plan.

Justice O'Connor: --but is it... is it the case, if we were to, let's suppose, affirm here, that the Health & Human Services head could nonetheless call a halt to it and say, you no longer conform with our understanding of what's required, you're holding hostage our Medicaid recipients and it's having a negative effect on them because of the prior approval requirements of drugs that otherwise wouldn't be required?

Is... would... would the Secretary have that power?

Mr. Phillips: I believe the Secretary might have that power, although I would ask you to ask Mr. Kneedler when... when he's arguing.

Justice O'Connor: Well, I probably will.

Unknown Speaker: [Laughter]

Mr. Phillips: But over and above that, that doesn't... but that's not an exclusive remedy, that's all.

Justice Scalia: But how can the authorization provision and the requirements attached to the authorization provision, how can that conceivably not be part of the State plan, as you say?

I mean, it seems to me it's central to the--

Mr. Phillips: Well, I mean--

Justice Scalia: --there's an authorization--

Mr. Phillips: --there's a... there's a formalistic way of looking at it, which is that they have a State plan, and this is not incorporated as part of the State plan.

What this has been... what has been done here is to adopt a completely separate program which simply reaches out, as I said before, and seeks to hold hostage certain elements of it.

Justice Souter: --But if you take that position, the State plan could be rendered meaningless.

I mean, the State plan simply becomes a kind of formal Open Sesame.

The... there's got to be power to look, as Justice Scalia suggests, or the State plan means nothing.

Mr. Phillips: Well, no, there has to be a State plan.

The question is whether or not (a)(19) reflects congressional intent that the State has to act in a particular way.

If it acts contrary to that way, the only question then is, are there multiple remedies available to respond to it?

I think, Justice O'Connor, the answer to your question is yes.

I think the Secretary does have that authority to go forward, although I would ask Mr. Kneedler--

Justice Stevens: Can I ask this question: Could the State, if it just... without adopting a Maine Rx program, just decide, we want to take a good, hard look at every sale of drugs that comes into our State, so we're going to subject every drug manufacturer to prior approval pursuant to 1396r-8(d), could they do that?

Mr. Phillips: --I... there's an open question as to whether they could do that.

Certainly, if you take the most expansive reading of 1396r-8(d) you could make that argument.

The alternative argument would be to what extent that violates or interferes with the formulary formulations that are embedded in the statute.

Justice Stevens: But if they do have that authority, and you say that's an open question, doesn't it follow, a fortiori, that they can do what they're doing here?

Mr. Phillips: No, it doesn't follow a fortiori, because what they're doing here is imposing the prior authorization with respect to, you know, to serve purposes that are completely unrelated to the Medicaid program.

Justice Stevens: Well, maybe my hypothetical was completely unrelated.

They just want to be sure you can open the caps on the drug containers, or whatever it might be, some idiocentric... I don't think that the... as I read it, I don't see anything in that provision that says it must serve a Medicaid purpose.

Mr. Phillips: Well, I think you'd have to read that provision in the context of the entirety of that provision providing for coverage of drugs, and I think you have to do it in that context, and I think there are broader issues there, but the singular problem here, obviously, is that if you interpret the statute as broadly as the State of Maine does to say that we can impose prior authorization requirements, then what they can say is, we want to extract money from manufacturers solely for the purpose of building schools or roads or anything else that we want to, and there's no restriction on that, and it seems to me that if what you're saying is you want to have prior authorization as a mechanism to deal within Medicaid, to provide generally for a balance of interest between Medicaid recipients, that's one thing.

But what... what... what Maine is doing is using Medicaid recipients to further completely unrelated purposes of the State, then it seems to me what you've done is essentially ask the Federal Government to subsidize a program that... that's not an appropriate one to subsidize.

Justice Souter: Okay, what about the halfway measure, and the halfway measure has been described by the Government as... as some instances of prior approval that, that it would authorize that go beyond what the... the... the... the very strict enforcement of Medicaid in a limited sense would require.

Do you think what the Government has... excuse me.

Do you think what the Government has suggested is also beyond the authorization of the statute?

Mr. Phillips: I think it is.

I think the better way to read the statute is to recognize that this is designed to benefit Medicaid recipients, and the problem is, once you get past programs that are designed to benefit recipients themselves, it's very difficult to see where you draw the line after that in terms of where it goes.

Justice O'Connor: Well, is it correct that the Secretary has approved a few plans in other States that do go beyond, technically, the direct Medicaid recipients, for instance, the people who are very close to the line and might well become eligible soon?

Mr. Phillips: Justice O'Connor, that is correct.

They have approved those programs.

Justice O'Connor: Yes.

Mr. Phillips: Those programs are in litigation as we stand here--

Justice O'Connor: Uh-huh.

Mr. Phillips: --as I stand here today, and--

Justice Breyer: Is that possible... I mean, as I'm seeing this at the moment, if the State uses the authorization program for any purpose at all, we know that some... that some Medicaid recipients will be hurt.

Mr. Phillips: --Yes.

Justice Breyer: If a Medicaid recipient walks into a drugstore and asks for drug X, that recipient can get it more easily if it's not on this prior approval list than if it is, and that being so, it must be impermissible under Federal law, unless the object of the program achieves a Medicaid-related purpose, so the question in front of us is, does it?

Now, what's bothering me about that is that the Secretary thinks some programs like Maine's are okay, and others maybe not.

Mr. Phillips: Well--

Justice Breyer: So in my mind the words, primary jurisdiction, suddenly flash red.

How can I decide this case without knowing what the Secretary thinks, and how can... I mean, after all, if the Secretary says this one is okay, that would have a big leg up under Chevron, and if the Secretary says no, it wouldn't, so why isn't the correct principle primary jurisdiction, which we can apply whether the parties like it or not, and why isn't the correct result here to send it back to the district court and say, district court, Maine cannot put this into effect until they ask the Secretary about it?

Mr. Phillips: --Well, I don't have any particular problem with sending it back to the district court enjoined subject to approval by the Secretary of HHS, I mean, if that's the way the Court wanted to resolve this case.

Justice Breyer: Well, I'm really... that's not what I want.

Justice Kennedy: I want to have--

Justice Scalia: --Is that the way primary jurisdiction works?

I thought there has to be in place some mechanism for getting the agency to pass upon the question, a mechanism that the person who is dismissed from Federal court is entitled to use, and I'm not sure that exists here.

Mr. Phillips: I don't know, Justice Scalia, that you need to be dismissing it from Federal court.

I think it's quite possible for the--

Justice Scalia: Well, even if you sit on it until it's done--

Mr. Phillips: --Right, stay your hand pending--

Justice Scalia: --you still have to assure that there's some... some mechanism.

I mean, all the primary jurisdiction cases I know of, there... there was a means to file a case before the agency.

Mr. Phillips: --Well, I don't disagree with that, Justice Scalia.

Justice Breyer: Well, I disagree with it, so we'll have to work it out.

Justice Scalia: You can't just send them off and say, you know, ask the Secretary, by the way, and have the Secretary write us a letter.

I don't know that we've ever done that.

Mr. Phillips: Well, I'm not sure that there isn't a mechanism for asking the... to petition the Secretary for review.

I think if Maine wanted to get approval of this particular program, it certainly had it available to do that.

It didn't seek that particular course.

And Justice Breyer, I think it's important, in the context of trying to figure out primary jurisdiction, we know the views of the United States with respect to this particular program.

There may be other programs, as Justice O'Connor identified, that come close to the line where the Secretary would have a different view, and I think it's appropriate in--

Justice Breyer: Is their views the Secretary's view?

Justice Kennedy: That's what I--

Justice Breyer: --I'll... fine, I'll ask them.

Mr. Phillips: --I believe it is the Secretary's view, but--

Justice Scalia: Mr. Phillips, as I understand your position, so long as it benefits Medicaid recipients, any... any authorization scheme is okay?

I mean, a State can say, we'll authorize your drug if you pay $5 to each Medicaid recipient?

Mr. Phillips: --That is not my position.

My basic position is that the Court doesn't need to figure out precisely what prior authorizations are permissible in order to decide this case, because the one thing that should be absolutely clear is, you cannot use this mechanism in a Federal program in order to disadvantage the primary recipients of that program without serving any Medicaid, sort of, related purpose.

Justice Scalia: You... you... you may be up in a... in a later case arguing that the... that the reasonable reading of the authorization requirement is... is to assure the safety of the drug, or the necessity of the drug for the particular illness?

Mr. Phillips: That... that's absolutely correct, Justice Scalia.

We'd... we... I mean, I think we would take that position, and that we... that you cannot read (d)(1) completely in isolation, and... and to the fullest extent of the language of that, without regard to the rest of the provisions of (d)(1) through (d)(6), and you... and for sure, you cannot read them without regard to the more fundamental requirement in subsection (a) and (a)(19), that the primary consideration must be the beneficiaries of this program.

They are the most needy people in our country, and the notion that you use them as a mechanism for trying to simply lower health care costs for the Steven Kings of the world strikes me as... as an outrageous position for the State of Maine to take.

Justice Breyer: No, but they may not be doing that.

They may think that the object of this is to lower the health care costs for the moderately poor not yet on Medicaid, and thereby prevent people from falling into the Medicaid category.

Mr. Phillips: Justice Breyer, that would be a persuasive argument if this statute had any kind of a tailoring mechanism to it whatsoever.

It is open to all residents who are otherwise not covered by--

Justice Breyer: Maine says those are never caught--

Justice Ginsburg: --Administrative regulations, one of the things that Maine said was, you've stopped us at the threshold.

We could have regulations that say, for example, people who are covered by insurance will not have access to this benefit, but on the question... you said would... you would be content if the Court said, the Secretary has to look at it, until then it's no good.

Would you have... this is the... your lawsuit.

Could you have gone to the Secretary and say, said, Secretary, we want you to look at this, the Secretary says, I'm busy with a dozen other things and I don't want to look at it?

Mr. Phillips: --I don't know of any statutory mechanism for a third party to come in and ask the Secretary to review a State plan.

I don't know that... I don't know that there's anything that prevents anyone from sending a letter to the Secretary to ask him to take, to undertake that.

That said, the Secretary obviously knows about this particular scheme.

Justice Ginsburg: Yes, and the Secretary, you said that the... at least the SG supports your view that this... that this program of Maine's is impermissible, but the SG also told us, essentially, that this case wasn't ripe, so we shouldn't have granted cert. I mean, that was the SG's first position, that this is a... we don't know what, in fact, the Maine scheme is, because it was never... it never went into effect, because you got an injunction.

Mr. Phillips: But the one thing that we absolutely know about the Maine scheme, and it... Justice Breyer described it, is that every Medicaid recipient is placed at risk by the prior authorization scheme.

Justice Stevens: Yes, but Mr. Phillips, are there any findings that any Medicaid recipient has actually been harmed by this program?

I... this is a--

Mr. Phillips: Well, because there was a joinder--

Justice Stevens: --one of the things that bothers me, I don't know that we have any findings by the district court as to what the real impact will be.

I know your... your... the Government says this is going to happen--

Mr. Phillips: --Well, if--

Justice Stevens: --but if everybody agreed, for example, to join the Maine program, maybe it may work out fine.

Mr. Phillips: --The... I don't have to go to the United States.

The State of Maine concedes in its brief at page 25, Maine Rx can be expected to trigger prior authorization more often than previously.

Justice Stevens: Yes, but it may well be that prior authorization would, in turn, lead to some solution between the drug companies and the State as to how this will all be handled.

I don't think the fact they agreed that it would trigger prior authorization necessarily proves the conclusion that the Medicaid recipients will be harmed.

It may well be true, but I'm just not sure--

Mr. Phillips: Well, but--

Justice Stevens: --the record supports that--

Mr. Phillips: --Well--

Justice Stevens: --as of this stage of the case.

Mr. Phillips: --Well, but there'd be no way to enjoin the program before going into effect, which means that you essentially have to wait until actual Medicaid recipients are deprived of drugs in order to be able to implement... to stop a program that on its face does nothing to benefit Medicaid beneficiaries, and clearly poses a serious threat to them.

I... if we go back to the Hines v. Davidowitz language, it talks about the full achievement of Congress' objectives.

Justice Stevens: But it only opposes the very threat that the statute by its own terms authorizes.

That's the threat.

Mr. Phillips: Well, but it only authorizes--

Justice Stevens: The threat of prior approval which the statute authorizes.

Mr. Phillips: --Sure.

It... to serve Medicaid-related purposes.

Justice Stevens: But the statute doesn't say that.

Mr. Phillips: I... I understand that, Justice Stevens, but the point is that if you read the statute, and it's essentially six, those six words, to say that the State has unlimited authority to do that, it strikes me as inconceivable that Congress would have allowed this entire mechanism to be available for the State to come in and simply to raise revenue from out-of-State manufacturers.

There is no rational basis for that kind of a conclusion.

The much more sensible way to narrow the statute is to say, if it serves other Medicaid purposes, then that's an appropriate way to proceed.

If it doesn't, then it seems to me the... the Court has to conclude that the best interests of the beneficiaries ultimately has to trump here under these circumstances.

Justice O'Connor: Mr. Phillips, do you also rely on the Commerce Clause as somehow prohibiting what Maine has done--

Mr. Phillips: I--

Justice O'Connor: --and if so, how do you make that argument?

Mr. Phillips: --Well, Justice O'Connor, we have sort of three components to that argument.

The thing that is... I concede at the outset that there is no case of this Court that directly controls in either direction.

This is a unique scheme that's been adopted here, and... and--

Justice O'Connor: Is there anything in the Commerce Clause that prevents a State from addressing within its State boundaries requirements for dispensing prescription drugs?

Mr. Phillips: --Well, when the entire burden of the program falls out of State, it seems to us that this creates at least a serious question about what's going on here.

The--

Justice Kennedy: Well, any State regulation, a State wants to have a special rule for a bicycle, you could say, well, that increases the cost to the manufacturer and the other States have to pay for it, so I'm... I'm not sure that that reasoning, which was in your brief, carries the day.

Mr. Phillips: --Well, I--

Justice O'Connor: Like a special fuel requirement for automobiles?

Do you think California can set certain standards, that of course it affects the auto manufacturers?

They don't make them in California.

Mr. Phillips: --Yes.

There's no question that States are free to create certain types of regulations that are different from other States, and that's... and that's not the full sweep of the argument that we're making here.

What... what--

Justice O'Connor: That's not what happened here.

Mr. Phillips: --No, that's--

Justice O'Connor: I don't understand the Commerce Clause argument.

Mr. Phillips: --I wouldn't presume to try to teach you about the Commerce Clause, Justice O'Connor, but the reality of what's happening here is much more like the West Lynn Creamery case, where what you're talking about is the payment of a subsidy, all by out-of-state entities, in order to benefit... in that case it was to benefit in-state competitors.

There are no in-state competitors in this case.

Justice Kennedy: Oh, I've got quite--

Justice Souter: --Isn't that a--

--a problem with the argument.

Justice Scalia: That was the problem.

Mr. Phillips: I'm sorry.

Justice Souter: I'm sorry.

Mr. Phillips: I didn't hear--

Justice Souter: Well... no, let me yield to Justice Kennedy.

Justice Kennedy: I had thought you might make the argument... I didn't see it in your brief, maybe I missed it... that this is just so burdensome on manufacturers to go from State to State to State that it's just an... it's an undue burden on an interstate transaction, period.

Mr. Phillips: --Under Pike v. Bruce Church.

Justice Kennedy: And... and Southern Pacific v. Arizona.

Mr. Phillips: Yeah.

The reason we didn't raise that argument is that we thought that we would require... in order to make that argument we would require more factual findings by the district court--

Justice Kennedy: Right.

Mr. Phillips: --in order to get into it, because there's a balancing component to that--

Justice Kennedy: The other thing I wondered about is, if you've come over Vermont or New York you can't have the advantage of this.

I suppose it's not necessarily in your interest to argue that it has to be expanded to other States, but I... it seems to me that also was a questionable part of the program.

Mr. Phillips: --Well, I do think one of the real problems with this program is that some States will adopt this kind of a scheme and other States won't adopt this kind of a scheme, which means that you're going to have inherent discrimination with respect to consumers.

Some consumers will benefit to the detriment of other consumers, and it does seem to me that... that the theory of West Lynn Creamery was designed to say that you don't just look at the competitors and the relationships between them, you have to look more broadly at the manufacturers, the wholesalers, all the retailers, and all the way down to the consumers, and if you have the kind of discriminatory effects here where Maine seizes for itself all the economic benefits and imposes on... on everyone else the economic burdens, that in that circumstance this runs afoul of the core--

Chief Justice Rehnquist: The... wasn't this--

Mr. Phillips: --command of the Commerce Clause.

Chief Justice Rehnquist: --one of the reasons the First Circuit vacated the injunction, the fact that there just hadn't been any factual development here as to what was happening?

Mr. Phillips: Well, that was part... yes, to be sure, Mr. Chief Justice, that's part of what they said.

On the other hand, if you accept our basic theory about the clear discriminatory implication of the way the scheme operates, that kind of an operation is per se invalid.

That's what the Court held in... in West Lynn Creamery.

Justice Souter: But isn't the West Lynn Creamery difficulty in your argument that here, unlike West Lynn, there are no entities within the same category, manufacturers, e.g., producers, for example, some of whom are being discriminated in favor of others?

What's going on here is not discrimination by the State within a given class to benefit the members of the class within the State.

What is going on here is a scheme which happens to fall on certain individuals in a manufacturing class who, incidentally, are out of State, for the benefit of people in a different class, that is, the consumers, who are in-State, and West Lynn doesn't govern that.

Mr. Phillips: No, it doesn't directly cover that, and I conceded that at the outset.

On the other hand, the point here is that there are entities out there in the stream that are within Maine, and on whom this burden is not imposed.

It was chosen to impose the burden strictly on the manufacturers, and it is done in a way that will create disparate impacts with respect to consumers in Maine versus consumers in other... in other States--

Justice Souter: But that is... I mean, that's a... that's a necessary consequence of the prior approval scheme.

That... you're going to have that argument no... no matter how... no matter how prior approval--

Mr. Phillips: --Well, and... and if it operates within Medicaid, it seems to me that there's no... there's no significant argument to be made there, because Congress has basically taken it over.

Justice Souter: --Simply because you've got to have it.

Mr. Phillips: But otherwise... and one last point I'd like to make, which is simply that the Commerce Clause issue does not need to be addressed in the event the Court holds that the, that the Maine statute is preempted.

If... I'd like to reserve the balance of my time.

Argument of Edwin S. Kneedler

Chief Justice Rehnquist: Very well, Mr. Phillips.

Mr. Kneedler.

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

The Department of Health & Human Services has articulated a position on two issues that are directly relevant to this case, and those positions are set forth in the letter to the State Medicaid directors that is set forth in an appendix to our brief at page, I believe it's page 45a it begins.

The first of those--

Justice Kennedy: Well, does that lead to a conclusion as to its view as to this program that we're considering?

Is it valid, or isn't it?

Mr. Kneedler: --If I could... there are two problems--

Justice Kennedy: As far as the Secretary is concerned.

Mr. Kneedler: --There are two problems with the... with the State program under this Medicaid director's letter that the Secretary sent out.

The first is that it's the position of the department that a plan such as this, which imposes a prior approval requirement for Medicaid patients, if the drug manufacturer does not pay rebates with respect to sales to nonMedicaid patients, that sort of change is a material change in the State's plan which requires the approval of a plan amendment.

There is a regulation that we cite in our brief at page 28, and quote, that requires that, and that, by the way, I think could be the... the mechanism effectively for a prior jurisdiction sort of approach.

Justice Breyer: I see that, but I... I mean, I'm a little bit at sea.

I absolutely wouldn't call it primary jurisdiction.

The label doesn't matter, but the... the... but... now, where I'm... where I'm... where I'm at sea is at figuring out whether it's possible to say, and you don't say this in your brief, that... that a program like Maine's, which is arguably, arguably wrong, or arguably right, that it can't go into effect without the prior approval of HHS.

Now, that's going to require me to look up the approval statutes, a whole lot of things that weren't briefed.

Mr. Kneedler: Well, it's... the... the... we have cited this regulation in our brief, and the... and under Allens v. Robbins the Secretary's, or the... the Secretary's interpretation's set forth in the brief.

It's also set forth in the Medicaid director's letter.

Justice Scalia: Why hasn't the Secretary acted under it, then?

What are you bothering us for?

If the Secretary has power under this... under this regulation to stop this plan from going forward because it amounts to an amendment of the... of the plan, and an amendment that hasn't been approved, the... the Secretary has the power to stop it.

Why... you know, why--

Mr. Kneedler: Well--

Justice Scalia: --do we have to get involved?

Mr. Kneedler: --Well, if I could just answer that and then move to the second question, because I think it's related, the regulation identifies what... that material changes in the plan have to be submitted for an amendment.

The Secretary's enforcement authority comes from a different source, which is in 42 U.S.C. 1396c, which allows the Secretary to cut off funds in whole or in part if a State is operating under a plan that requires an amendment because of those changes, so... but I--

Justice Souter: Well then, why doesn't the Secretary do it?

Mr. Kneedler: --I think it was... it's entirely reasonable... first of all, that's a matter of enforcement discretion under Heckler v. Cheney, and at least for the time being, why this... while this case is under... is under submission, the Secretary has not... has not proceeded.

Justice Souter: Well, but I think the Secretary is ignoring one serious problem, and I suspect it's behind Justice Scalia's question.

It's certainly in my mind.

It's one thing for the Secretary to act within enforcement power.

It's one thing for the Secretary to interpret the regs by, the statute by regulations that are subject to Chevron deference, but if the Secretary does neither one of those things, and from one side of the Secretary's mouth we hear, well, yes, some prior approval beyond what is strictly necessary for the direct benefit of Medicaid recipients is okay, but this goes a little bit goes too far, courts are then placed in the position of saying, well, can we read the statute so precisely as to say that the Secretary's position of what is okay is okay and, by going this step further, there's a violation of the statute?

We are placed in a very difficult position, in effect by the Secretary, by you, in being asked to draw a line with a very fine pencil, whereas if the Secretary wants to act under administrative authority, presumably that's the end of it.

Mr. Kneedler: Well, in going forward, I mean, the Secretary issued this Medicaid director's letter in September, after the Court had granted review--

Justice Souter: Ah.

Mr. Kneedler: --because this was an area that required attention.

Going forward, we... we expect that... that States will submit their proposals to the Secretary as plan amendments--

Justice O'Connor: Well, is there some--

Justice Scalia: --And if--

Justice O'Connor: --Is there some mechanism by... or authority by which we could somehow refer this back to the district court to seek some kind of information from the Secretary?

Mr. Kneedler: --Well, here's the way I think that it could proceed.

Justice O'Connor: How... how could we do it?

I don't know of a doctrine but--

Mr. Kneedler: I... I think the procedural posture of this case would allow that, and let me explain why.

The Secretary's second position in this case, which I wanted to also make sure I articulated, which was that a... that a proposed, or a plan such as this, which provides for rebates for nonMedicaid patients, still must serve some Medicaid purpose.

In the district court, when the district court entered what is only a preliminary injunction at this stage, at page 71 of the petition appendix, the district court pointed out that the State had not argued that its proposal served any Medicaid purpose.

As the preliminary injunction was entered, it was entered on that premise.

The court of appeals then speculated that perhaps it does serve a Medicaid purpose, but looking back at when the preliminary injunction was entered, it was entered on the premise that it served none, and we think, and the Secretary believes that a plan must at least serve some Medicaid purpose.

Justice Stevens: --But as I understand it, Mr. Kneedler, it is... it is at least theoretically possible that the Secretary could approve this very plan.

Mr. Kneedler: If... on the proper showing.

The rationale--

Justice Stevens: Right, of course.

It needs more facts.

Mr. Kneedler: --Yes.

The rationale adopted by the district court was the rationale that some--

Justice Stevens: Yes.

It may have now advanced a Medicaid-related purpose that may or may not be sufficient.

Mr. Kneedler: --That's... but we believe that the purpose that has been advanced does not save this statute.

The purpose that has been advanced and was identified by the court of appeals was a purpose that some people who were close to being Medicaid-eligible will be forced to spend more on drugs, may become Medicaid-eligible, and therefore cost the Medicaid program more money.

That's a Medicaid-related purpose.

The problem is, the State statute is not tailored to people who are close to the poverty line.

Justice Breyer: So is the procedure--

Justice O'Connor: --Would you... would you finish your response to me--

Mr. Kneedler: Yes.

What--

Justice O'Connor: --to tell me--

Mr. Kneedler: --Yes.

Justice O'Connor: --what it is that you think we could do?

Mr. Kneedler: If the Court reversed the court of appeals decision, in effect affirmed the district court's injunction, which was entered on the basis that the plan serves no Medicaid-related purpose, the State program would be enjoined.

At that point the State of Maine could submit the program to the Secretary of Health & Human Services along with any justifications for the plan, such as those... there are two additional ones that have been raised in its brief in this Court for the first time, and we think that's how it should play out.

This is a... right now, the case presents a very narrow issue on a preliminary injunction.

Justice Stevens: Why couldn't that procedure be followed by affirming, and saying there should be a hearing in the district court on these very issues that you're raising, and both sides would present the facts?

Mr. Kneedler: We don't think it would be a hearing in the district court.

We believe it should be submitted to the Secretary, because a plan amendment is required, but we do believe that... that the petitioner has made a sufficient showing based on the, on what the district court said, that this plan, that Maine had offered no justification, no Medicaid justification for the plan.

Justice Stevens: Do you read the statutory authorization for prior approval to mean prior approval only if there's a Medicaid-related benefit?

Mr. Kneedler: We... we do.

The legislative history of the prior approval position--

Justice Stevens: You rely entirely on legislative history for that?

Mr. Kneedler: --No, and also there are two other provisions of the act which we think are relevant, on the one hand, a19, which talks about the best interests of the patients, but on the other hand, a(30)... this is 1396a(30)(A), which says that a State plan must provide for methods of payment that advance efficiency and economy in the Medicaid program.

We think both of those speak to interests within the Medicaid program and require in the prior approval process, as well as in the administration of the plan generally, weighing the interests of the Medicaid beneficiaries against the broader institutional interests of the Medicaid program.

If there was no Medicaid-related purpose requirement at all, then a State could impose a prior approval requirement if the drug company contributes money to the art museum or to the State highway program.

We think that under this Court's decision in Dublino, the State must be pursuing a purpose in common with the Federal Government, a Medicaid-related purpose.

What... what the scope--

Justice Ginsburg: Mr. Kneedler, it... it was the Government's first position that this Court ought to let the case ripen, and now you... you are necessarily taking a position in this lawsuit because we granted cert, but the Government made a pretty good argument essentially that this case wasn't ripe.

Mr. Kneedler: --Well, ripe for this Court's review, but we now... we now believe that, given that the director's letter that was sent out in September, that there is a basis, there's an articulation of the Secretary's position both on plan amendments and the requirement of a Medicaid-related purpose that... that this Court could properly dispose of this case in the narrow... in the narrow way I suggested which, of course, would also obviate any requirement to consider the Commerce Clause question.

Things have evolved in the Secretary's evaluation of this and, as Justice O'Connor, I think pointed out, the Secretary has since approved a Michigan plan amendment under this same general approach.

Argument of Andrew S. Hagler

Chief Justice Rehnquist: Thank you, Mr. Kneedler.

Mr. Hagler, we'll hear from you.

Mr. Hagler: Mr. Chief Justice and may it please the Court:

People without insurance are charged more for prescription drugs than any other purchaser in the market, often much more.

Patients who are forced to pay cash at the pharmacy are those least able to absorb these high prices.

To ameliorate this hardship, the Maine legislature will embrace a market-based approach used by other large third party purchasers to leverage its purchasing power under... as a third party purchaser in Medicaid to obtain price relief for the uninsured in Maine.

Justice Scalia: And you think that's one of the valid uses of the authorization provision?

You think that's why it was included in the statute, so that a State could... could shake down drug companies to lower prices to other people?

Mr. Hagler: I concede that... that Congress never thought that Maine might use prior authorization in the way that Maine Rx anticipates it.

However, what Congress said--

Justice Scalia: You can use it for anything at all?

Could... could you use it to... to say, we... you know, you... you have to pay each member of the Maine legislature $100 a year?

Could... could you put that in there?

Mr. Hagler: --As you get further and further for the purposes of... of providing health care, you approach uses a... of prior authorization that might offend Congress and this Court, but preemption is a question for Congress.

Justice O'Connor: Well, did Maine offer in the district court, in the hearings on whether a preliminary injunction should issue, a justification for how the Maine Rx program benefits Medicaid patients?

Mr. Hagler: We did not so argue in the district court.

Justice O'Connor: Okay.

Justice Breyer: When you say... who does it apply to?

That is, the statute says it applies to qualified residents.

They define that as people with a Maine Rx enrollment card, and now I don't know who those people are.

Is it virtually everybody in the State?

Is it a small subclass, those who don't have insurance?

Who is it?

Mr. Hagler: Well, it's... it's those without insurance.

Justice Breyer: So that's a fairly small group.

What percentage of that... it's 15 percent of the people of Maine?

Mr. Hagler: If... we anticipate 22 percent.

The AARP has a different--

Justice Breyer: Okay, so 15, 22 percent.

Now, if that being so, it sounds to me like it could be like the one that was approved, or maybe it's not like the one that was approved.

Mr. Hagler: --And you don't know--

Justice Breyer: It sounds like a case, to me, that has to go to the Secretary, whose job it is to approve it, rather than having us fly blind.

Mr. Hagler: --Well, here's the difference between what the Secretary approved and what the Maine... and... and what he's proposing with respect to Maine Rx and the plan amendments.

What the Secretary approved was a program that's a demonstration project, a waiver program, allowing more people into Medicaid notwithstanding the fact that they're ineligible.

Justice O'Connor: That has been approved for Maine?

Mr. Hagler: Approved and struck down by the D.C. Circuit on Christmas Eve.

The Secretary and the Solicitor General, the Secretary and the Solicitor General identified the fact that that program helped people up to 300 percent of poverty.

Without the Healthy Maine program, the demonstration project, Maine Rx is now the only program that helps those people.

Justice Breyer: That isn't an answer to my question.

The answer to my... my question was, it sounds to me like a program that the Secretary might approve or might not approve, and so why should we fly blind?

Why isn't it the case that you can't put this program into effect, given Federal law, without the approval of the Secretary?

Now, when she approves it or disapproves it, they can argue about whether that was legal.

Mr. Hagler: Well, the Secretary is suggesting that the State of Maine seek a plan amendment, but by definition, a plan amendment allows... a plan amendment is something that, if we sought a plan amendment to run Maine Rx it would necessarily be allowed by the Medicaid statute.

42... the Medicaid statute, 1396 subsection--

Justice Breyer: I'm not following you.

Is your argument that--

Mr. Hagler: --We don't--

Justice Breyer: --even if the Secretary disapproved this, were it a plan, we still could do it?

If that's your argument, I'll answer that question.

That's a legal question.

I think it's an easy one to answer.

In my mind, the answer's no.

Mr. Hagler: --Well, if the Secretary were to--

Justice Breyer: Now, you can explain why it shouldn't be no, but I want to know if that's what I'm supposed to decide.

Mr. Hagler: --It's not what you're supposed to decide.

The Secretary has not acted, other than speaking to this Court through the brief of the Solicitor General.

The Medicaid statute provides a mechanism for the Secretary to tell the State when it is running its Medicaid program in a fashion which violates the provisions of the Medicaid statute.

That is--

Chief Justice Rehnquist: Well, but is this actually a... the... the State... the State of Maine running its Medicaid program, it... it's a freestanding statute, isn't it?

Mr. Hagler: --It's an entirely different... correct, it's an entirely different statute.

We don't believe we need a plan amendment to seek approval to run the Maine Rx program.

Justice Breyer: That's fine.

So then you want me to decide the question of whether it would be possible to have this statute even if the Secretary, were it an amendment to the Medicaid plan, would say no, okay?

I say that's a legal question we can decide.

Mr. Hagler: But you should not decide that now.

Justice Breyer: Is that what you think we should decide now?

Are you following what I'm saying or not?

Am I not--

Mr. Hagler: Not precisely.

Justice Breyer: --I can decide the question if the Sec... you're saying... suppose the Secretary's approval makes no difference.

Let us assume the Secretary would disapprove it.

Mr. Hagler: Okay.

Justice Breyer: There would... a legal question, can you have this statute anyway?

Mr. Hagler: Yes.

Justice Breyer: Okay.

That's what you think we should decide?

Mr. Hagler: I believe that's what I--

Justice Breyer: All right.

If that's what you think we should decide, fine, then why isn't the answer to that question clearly no?

You would have a Federal statute, it uses the Federal program, the Secretary thinks it's contrary to the Federal program, the Secretary's views are within her authority, let's say, under the... under the Federal program, and so a State cannot put something into effect--

Mr. Hagler: --Well--

Justice Breyer: --that is so clearly contrary to the Medicaid program using the Medicaid device.

Mr. Hagler: --The question that this... the first question that this Court certified was, as described in the Secretary's brief, is whether the Federal Medicaid statute allows the use of that authority under the statute to compel... the prior authorization authority--

Justice Scalia: And I assume it--

Mr. Hagler: --And he says yes.

Justice Scalia: --And it would be a waste of time and money for us to send it back to the Secretary, at least if we are convinced on the basis of the briefs submitted here, that even if the Secretary did approve it, that approval would be invalid.

I mean, you would concede that--

Mr. Hagler: If the--

Justice Scalia: --that whatever primary jurisdiction is involved here--

Mr. Hagler: --If the--

Justice Scalia: --it certainly makes no sense to send it back to the Secretary if, when the Secretary approves it, there is then a lawsuit and we say, oh, by the way, he couldn't approve this.

Mr. Hagler: --Right.

Justice Scalia: This goes too far.

We might as well decide that now, no?

Mr. Hagler: You can decide the preemption question now, and I think that the Court should, and the preemption question is whether Congress intended to prohibit what Maine has here done.

When Congress legislates against the backdrop of the preemption doctrine and it give... gave to the State the discretion to subject to prior authorization any covered outpatient drug, it qualified that discretion hardly at all.

The only qualifications are the two provisions, the procedural safeguards that require that if prior authorization is sought--

Chief Justice Rehnquist: Doesn't the Secretary have some discretion in this area as to whether to say it's good or bad, the... the Maine plan, or are you saying it's simply not his business?

Mr. Hagler: --It's Congress' business--

Chief Justice Rehnquist: Well, right.

Mr. Hagler: --to set the line--

Chief Justice Rehnquist: But did Congress in what it enacted leave any room for the Secretary to have some discretion here?

Mr. Hagler: --What Congress enacted was the opportunity for the Secretary to tell the State that when it's begun a program or is operating its Medicaid program out of compliance with the Medicaid statute, that it believes that that's the case, and the provision provides for a fair hearing for the State, we get together with the Secretary, we try to work it out.

If we can't, and if the Secretary... if Maine persists in wanting to run the program, and the Secretary disapproves the program, then his remedy is to withhold money from the State and--

Chief Justice Rehnquist: But if... if it's a freestanding pro... if it's a freestanding statute, not part of Maine's Medicaid, how can the Secretary disapprove a freestanding statute?

Mr. Hagler: --What he can do is look to the effect of what happens once Maine Rx is implemented, and look to the effect on the Medicaid beneficiaries as to whether or not they'll be harmed.

Justice O'Connor: Well, the Secretary theoretically could conclude already that to require prior approval for every prescription drug will have negative effects on Medicaid recipients who otherwise would not have to seek prior approval, because there's quite a bit in the record about the difficulty when prior approval must be obtained.

Mr. Hagler: Oh, I submit there... that there's... I disagree with respect to the record.

I believe that there's very little in the record which demonstrates that there will be any harm to Maine Rx beneficiaries, harm to their health, once Maine Rx is imposed, and should the State ultimately impose prior authorizations under the Maine Rx statute.

You have lodging materials which are untested.

The fact of the matter is, if we were to return to the district court we could demonstrate, based on a vigorous use of prior authorization in the 2 years that have intervened the granting of the injunction and today, that we are imposing prior authorization and we are answering the phone in less than 2 hours, and that Medicaid patients are, in fact, not being harmed.

We... our position is that to survive a facial challenge the petitioner must demonstrate that any use of prior authorization, as contemplated by the Maine Rx--

Chief Justice Rehnquist: Well, I question whether this is correctly described as a facial challenge.

You think of a facial challenge more in terms of somebody who has a... First Amendment implications, or at least criminal law applications.

This... as I read the First Circuit's opinion, although they talked about a facial challenge, I thought what they were saying was, we just don't know enough, since the thing had never gone into effect to uphold the injunction.

Mr. Hagler: --No, and... and what the First Circuit didn't know was how the program would actually be implemented, and there are many ways of implementing the program that not only will not cause harm to Medicaid beneficiaries, but which will affirmatively advance the purposes of Medicaid.

Justice O'Connor: Is the program now in a... being operated?

Mr. Hagler: It is not, and the reason that it's not is because the--

Justice O'Connor: The way you spoke, I thought you had some current experience.

Mr. Hagler: --We do have current experience with the use of prior authorization to save Medicaid money.

Justice O'Connor: For Medicaid, for Medicaid patients.

Mr. Hagler: For Medicaid, correct, and as a result of that experience we know much more about our abilities and would be able to describe to the district court much more about our abilities should the First Circuit--

Justice Kennedy: Why wasn't the plan put into effect if the injunction was lifted?

Mr. Hagler: --The mandate was stayed pending--

Justice Kennedy: Oh, I see.

Mr. Hagler: --for a writ of certiorari, so we've... we've not had an opportunity to implement the program.

Justice Kennedy: But the Federal Government, with reference to Medicaid, certainly thinks prior authorization is an important enforcement mechanism and now you're saying oh, don't worry about it, it doesn't make much difference.

Mr. Hagler: Well--

Justice Kennedy: That's hard for me to accept.

Mr. Hagler: --Well, the Federal Government agrees that prior authorization... prior authorization is undeniably a cost-saving measure.

That's the primary purpose why Congress permitted the States broad discretion to impose prior authorization.

Under the Maine Rx program, what the State is saying to manufacturers is, please negotiate with us, and if you don't negotiate with us, we will review the drugs that you manufacture to see and determine, on a drug-by-drug basis, whether it would be appropriate to subject those drugs to prior authorization.

Justice Kennedy: But the very reason you put that on the bargaining table is because you know it's going to... it's going to slow down the sales of some of these drugs.

Incidentally, I... and you can answer that.

I take it that if Company X has 10 different drugs, and it can't agree with you on the rebate price for just one, that all of those drugs must have prior authorization, or am I wrong about that?

Mr. Hagler: I believe that you're wrong.

I believe that... that the Secretary has the discretion--

Justice Kennedy: I read the Government's brief to the contrary, but I'll take a look at it.

Mr. Hagler: --Yeah, I believe--

Justice Kennedy: You're representing that it's drug-by-drug, so a company can agree with you as to nine of the drugs, and those will not be subject to prior authorization, but only the tenth drug, as to which you can't agree, will be subject to prior authorization?

Mr. Hagler: --I believe--

Justice Kennedy: That's your representation?

Mr. Hagler: --As to the... I believe that our administrative rules demonstrate, proposed administrative rules that the Department hasn't enacted because the injunction has been imposed allow the Department of Human Services of the State of Maine to look on a drug-by-drug basis as to whether any particular drug ought to be subjected to prior--

Justice Kennedy: Does it allow it, if it uses, to look on a company-by-company basis, as I'd first described?

In other words, does it subject--

Mr. Hagler: --What will happen is, if--

Justice Kennedy: --to discretion of the State.

Mr. Hagler: --In other words, if Pfizer were to agree to provide a rebate for some of its drugs but not all of its drugs, must we look to the other drugs--

Justice Kennedy: Yes.

Mr. Hagler: --and determine prior authorization?

The statute contemplates a negotiation.

The Commissioner is to use his best efforts to negotiate with manufacturers in order to--

Justice Scalia: I take that to be a yes?

Mr. Hagler: --The answer is yes.

Justice Scalia: You can keep all of their drugs off unless they give you what you want for some of them?

Mr. Hagler: We could, but the statute also allows us not to.

Justice Scalia: Yeah.

Mr. Hagler: The purpose of that--

Justice Scalia: You could, that's... and... and you say it... that the statute envisions using this authorization as a cost-saving measure.

Does this save any costs... does this statute save any cost to the Medicare recipients?

Mr. Hagler: --To the Medicare?

Justice Scalia: To... to the Medicaid--

Mr. Hagler: Oh, the Medicaid recipients, the Medicaid recipients themselves pay nothing, but it can save money in, and it's probable that it will save money in the Medicaid program, and the reason for that--

Justice Scalia: --I understand, because some people won't come into the program who otherwise would come in.

Mr. Hagler: --Well, that's what the First Circuit picked up on, but the other reason and the other method in which it would save Medicaid money is, it would result in shifting prescribing behavior from more expensive drugs to less expensive drugs.

The Commissioner, under subsection--

Justice Ginsburg: But doesn't that depend on who you make the deals with?

Maybe the more expensive drug... drugs we're willing to make this deal with you, and the less expensive not willing.

Mr. Hagler: --Subsection 13 of the Maine Rx statute gives to the Commissioner the discretion to run the Medicaid program and the maine Rx program in a coordinated manner so as to enhance efficiencies in both, and so I believe that the Commissioner would never impose prior authorization on the cheapest drug in a therapeutic class even if that manufacturer didn't provide a Maine Rx rebate, because it would be silly to do so.

He's got a budget to operate.

Justice Scalia: I've known some silly administrators.

Unknown Speaker: [Laughter]

Justice Scalia: The point is, he could do it.

The point is, he could... you're... you're... you're... you're troubled by a... by a statute which would allow a denial of authorization unless the drug company pays $100 to each member of the... of the legislature.

I... I gather you... you acknowledge that... that the authorization requirement in the statute has some unstated limitation upon it, or don't you acknowledge that?

Mr. Hagler: I believe that... that under the Court's preemption analysis we look to the primary purposes of the Medicaid statute and you seek to determine what Congress intended.

Justice Scalia: Does the authorization provision have some unstated limitation upon it, a limitation that is not in that sole provision alone?

Mr. Hagler: I believe that it doesn't, but even if it does--

Justice Scalia: It doesn't, so $100 to each legislator is okay?

Mr. Hagler: --And... and... and when that offends Congress, Congress has the ability to act.

Justice Stevens: The real question is whether it has an unstated limitation that's sufficiently clear that it preempts the State law.

Mr. Hagler: I'm sorry.

Justice Stevens: The real question is whether the unstated limitation is sufficiently clear to be preemptive of a State statute to the contrary.

Mr. Hagler: That's... that's correct.

Justice Breyer: Well, how is Congress--

Mr. Hagler: The language of the statute is, a State may subject to prior authorization any covered outpatient drug.

Justice Breyer: --Well, how could Congress--

Mr. Hagler: Every--

Justice Breyer: --Sorry.

No, go ahead.

Finish, please.

Mr. Hagler: --Indeed, every outpatient drug could be subjected to prior authorization.

That, too, would be silly, but the power is that broad.

Justice Breyer: Now, that's what I want to know.

Why?

I mean, how could Congress possibly want a statute which would hurt the Medicaid patients at... no argument it wouldn't hurt some of them, and has nothing to be said for helping anyone related to Medicaid?

Mr. Hagler: Well, we... we disagree that--

Justice Breyer: I know you disagree about whether that's the effect.

Mr. Hagler: --that it will not hurt people.

Justice Breyer: I understand that.

Mr. Hagler: Right.

Justice Breyer: So how can I decide this case without knowing whether the people in charge of the statute agree with you about that, as they might, or you might negotiate some implementation of how to have regulations that they can agree to, or, or, or, the possibilities are endless.

How can I decide in your favor, in other words, without knowing, the same question, what the Secretary thinks?

Mr. Hagler: Because the Secretary can act if the injunction... if the First Circuit's decision is affirmed, the Secretary can act, and tell the State of Maine we believe that you will harm Medicaid beneficiaries and we will take your money away.

Justice Ginsburg: But suppose--

Mr. Hagler: But the Secretary hasn't acted.

The Secretary asked this Court to approve his notions of what Maine Rx might look like if it were more limited in scope in terms of the number of beneficiaries, but he hasn't defined for the Court how to set the line.

Justice Scalia: --Suppose the State passes a law that says that each Medicaid beneficiary shall pay an additional tax of $50 a year.

You say that the only way to get rid of that law, which would certainly contravene the... the whole purpose of Medicaid.

The only way to get rid of it is to go to the Secretary and say, since this law is an amendment of the State's plan, you should approve it, it requires your approval.

Mr. Hagler: Now, there--

Justice Scalia: They couldn't strike that down as just being contrary to the--

Mr. Hagler: --No, it's contrary to the statute.

Justice Scalia: --Okay.

Mr. Hagler: Medicaid beneficiaries can't be required to pay more than a nominal co-pay.

Justice Scalia: Okay, so--

Mr. Hagler: Congress thought--

Justice Scalia: --So the only remedy for something that is contrary to the statute is not going through the Secretary, that some things that are contrary to the statute can be attacked directly, as is being done here.

Mr. Hagler: --But... but I'm not convinced that from the text of the statute you can find an intent--

Justice Scalia: Okay.

That's a different question.

Mr. Hagler: --on the part of Congress to prohibit this, and even if it were to... Congress were to prohibit using Maine Rx like prior authorizations for some purpose wholly unrelated to health care, when you get closer and closer to something approaching what the Secretary in fact does approve of, how can a court set the line?

The question really is--

Justice Scalia: That's the merits question, rather than whether we have, you know, power to... to move at all, so long as the Secretary can handle the problem by denying approval.

Mr. Hagler: --The Secretary has indicated that he'll handle the problem, or he's expressed his views about what the program is.

The Court should wait to see whether the... I mean, the Court should allow the Secretary to--

Justice Stevens: Can I ask you this question: I thought you would agree that, if it were clear as a matter of fact that this program was going to harm Medicaid recipients, that we would have power to enjoin the program?

Mr. Hagler: --Yes, but it's not... I do agree with that.

Justice Stevens: So your argument, as I understand it, it's an unresolved factual question whether, in fact, these adverse consequences would follow?

Mr. Hagler: That's correct.

We have... there's no facts in the record, and... and this... this is a facial challenge in which my colleague has to demonstrate that they are in no way... there's no possibility of implementing the program in a way which doesn't cause harm to--

Justice Stevens: Well, I may not agree with that statement, but at least they have to make a showing there in fact will be an adverse effect.

Mr. Hagler: --Some showing.

Justice Stevens: Yes.

Mr. Hagler: And the only showing that the district court seized upon is this notion that, by definition, prior authorization imposes some sort of procedural impediment to free access to all drugs on behalf of Medicaid patients, but the--

Justice Scalia: I thought you... I thought you had acknowledged that the authorization requirement must not merely not harm Medicaid recipients, but that the authorization must serve the purpose of helping Medicaid recipients.

Don't... don't... don't you acknowledge that?

Mr. Hagler: --Our--

Justice Scalia: You were saying it does help them, you know, and you're mentioning the ways in which it helps the Medicaid program.

Mr. Hagler: --Under either test we think we win.

Under the first test, the question should be, did Congress intend to prohibit what Maine has here done?

If the question is, does the Maine Rx program advance the purposes of Medicaid--

Justice Scalia: Right.

Mr. Hagler: --it assuredly does that.

Justice Scalia: But you don't think that's necessary?

Mr. Hagler: I'm... I'm not convinced that that's necessary.

Justice Scalia: Okay.

Mr. Hagler: But even if it were necessary, there's... the... the fact's in the record, and the reasonable expectation of how the program will work will yield Medicaid cost savings both by imposing prior authorization on drugs that are more expensive than their therapeutic equivalents, and also by making Maine... allowing people without insurance in the State of Maine to purchase their prescription drugs and become less likely to become disabled and financially eligible for Medicaid.

Justice Ginsburg: Of the proposed regulations, is anything published?

There was nothing before either court about how this would be implemented, was there?

Mr. Hagler: There were proposed regulations.

They are in the appendix.

They have not been promulgated.

They were drafted, and they're--

Justice Ginsburg: Before the district court?

Mr. Hagler: --Yes.

They were handed up to the district court, and they... they should be in the court file.

They... they are found on page 278 of the appendix, and that provision describes how Maine will go about reviewing the drugs for prior authorization.

If a manufacturer refuses to participate in... in a Maine Rx negotiation, then the Commissioner will hand a list of... of that manufacturer's drugs to a committee of physicians and pharmacists who will determine whether it's clinically appropriate to subject those drugs to prior authorization, guided constantly by the principle that the purpose of Medicaid is to provide necessary medical assistance to those in need.

Rebuttal of Carter G. Phillips

Chief Justice Rehnquist: Thank you, Mr. Hagler.

Mr. Phillips, you have 3 minutes remaining.

Mr. Phillips: Thank you, Mr. Chief Justice.

Justice Stevens, I want to focus on the narrowest basis on which this case can be decided, which is, we have a preliminary injunction that was issued by the district court.

A preliminary injunction was issued on the basis of two bases, 1) the State has not put forward any Medicaid-related purpose to be served by Maine Rx, and 2) that no matter how you want to define it, there is an obstacle to the full achievement of the recipient's primary interest of receiving medicine.

As I said, there's a clear debate as to exactly the extent of the obstacle, but that there could be no question that there is an obstacle, and it seems to me that what this Court can do is simply say, those two findings are not an abuse of discretion on the record in this particular case, therefore there is a basis for affirming.

If the Court wants to go further from that and say, on remand, some guidance might be useful from the Secretary of HHS and propose some mechanism by which to have primary jurisdiction or some other mechanism devised by which to obtain the review by the Secretary, I think there's probably no problem with that and, as I said before, I can't imagine that we would have any complaint about that, but the importance of this is to... is to retain the injunction in place so that the unquestioned harms that are going to happen are not allowed to take place, and then try to undo them after the fact, which was the reason for issuing the injunction.

Justice Stevens: A brief question, I don't... I'm worried about your time, but is it inconceivable to say that there was no showing at the time of the preliminary injunction hearing but now they... Maine says they can make the showing that they should have made before.

Should the judge not listen to that?

Mr. Phillips: Well, I think when you get past the preliminary injunction and you move on to the permanent injunction, if they think that they can show no burden whatsoever, or if they think they can show that there are greater purposes to be served, that's certainly available to them.

But on an abuse of discretion standard this Court ought to affirm that, and nothing that the First Circuit said justifies taking any action in this particular case.

If there are no other questions--

Chief Justice Rehnquist: Thank you, Mr. Phillips.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Kentucky Assoc. of Health Plans, Inc. v. Miller - Oral Argument

Fri, 09 Jan 2009 14:50:41 +0000

Case:

Kentucky Assoc. of Health Plans, Inc. v. Miller

Media File:

00-1471_20030114-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Robert N. Eccles

Chief Justice Rehnquist: We'll hear argument next in Number 00-1471, The Kentucky Association of Health Plans versus Janie A. Miller.

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

When Congress enacted ERISA, it created a Federal regulatory structure for employers and unions to sponsor plans that provide health care benefits for employees and their families.

The vast majority of ERISA plans throughout the country have chosen to provide these benefits through HMO's or other managed care entities that use limited provider networks in order to deliver quality health care at a reasonable cost.

The Kentucky laws before the Court today preclude that use of limited provider networks and require an HMO, and by using that term I mean to encompass a variety of managed care arrangements, require those arrangements to allow into the network any provider willing to accept the network terms.

Because ERISA saves from preemption State laws which regulate insurance, the question here is whether these any willing provider, or AWP laws, regulate insurance.

Justice O'Connor: Now, I take it these laws have become fairly common--

Mr. Eccles: That's correct, Your Honor.

Justice O'Connor: --around the country, so Kentucky's not alone in having such a law.

Mr. Eccles: Kentucky has a relatively broad law, Your Honor.

Many of the laws are pharmacy solely, but they... Kentucky is not alone, that's correct.

Justice O'Connor: Yes.

Justice Kennedy: Can... can Kentucky exclude certain specialties, like they say, we will not have chiropractors?

In... in Kentucky, can the plans do that?

Mr. Eccles: No.

Justice Kennedy: In other words, they have to be open to various subspecialties?

Mr. Eccles: There are... there are different laws about that.

The Kentucky law by itself, in the definition of provider, includes a variety of specialties, including chiropractor, and there's a separate chiropractor any willing provider law also, but the question here is whether that law regulates insurance, and last term, in Rush Prudential versus Moran, the Court said that a law regulates insurance when insurers are regulated with respect to insurance practices.

AWP laws do not regulate insurance practices.

They do not affect the risk of financial loss that's transferred by the HMO policy, they do not change the terms of the policy at all, and they do not change the bargain between the insurer and the insured.

Chief Justice Rehnquist: But they... they do have something to say about who's going to be available as a doctor on the plan.

Mr. Eccles: They... they change the network, that's correct, Your Honor.

They... through a... they potentially change the network.

The law itself creates no change.

If the provider elects to join the network, and is willing to accept the terms--

Justice Stevens: But isn't that a change in the policy?

Doesn't it give the patient a right he otherwise would not have?

Mr. Eccles: --No, Your Honor.

It... it gives the patient no right he would otherwise not have.

If you look at the exemplar policy that's in Exhibit C to the joint appendix, you will see nothing that's changed in the policy terms.

Justice Souter: Well, there's nothing in the policy term that is changed in... in the literal sense of a change in language, but it seems to me that it does mean that under a policy subject to a law like Kentucky's, the person who joins the HMO, in effect the person who obtains the insurance, has a far greater choice, in... in effect, in... in the expenditure of benefits under that policy than he otherwise has.

He's getting something under a policy subject to the Connecticut law... the Kentucky law, that he does not get under a policy without that law, and that is a breadth of choice about who is going to treat him.

Mr. Eccles: Not necessarily, Your Honor.

The choice, you know, exists if the provider elects to join the network, and it's entirely--

Justice Souter: Well... well, sure, but I mean, the point of the statute and the point of the case is that providers do elect, and to the extent that they elect, the... the person subject to the policy has a choice that is a... a breadth of options that otherwise are not going to be available.

Mr. Eccles: --Potentially.

In a--

Justice Scalia: Even... not potentially.

I mean, even... even if nobody elected... even if nobody elected to join, what has happened by reason of this law, is it not the case that the term of the policy is changed, that originally the policy said, we will pay for your treatment by a limited number of individuals whom... whom we... whom we approve, and that policy is now changed to, by reason of this law, we will pay for your treatment by any individuals who want to join our plan.

Isn't... isn't that a different policy?

Mr. Eccles: --Not... the policy does not change in that way, Justice Scalia.

What... what the policy says--

Justice Scalia: It's not rewritten, but doesn't the law have that effect, to... to effectively change the term of the policy?

Mr. Eccles: --No... no, it does not, and the reason is, what the policy provides is, we will pay for care from participating physicians, from network providers, and that is still the policy.

The... before, with or without the AWP law.

Justice Scalia: Well, to use your term, physicians, before the law, is defined as those physicians whom we are willing to accept as part of the plan, and after the law, the definition of participating physician is any physician who wants to join the plan.

Mr. Eccles: It... it has taken away the HMO's ability to select, that's correct--

Justice Kennedy: It's--

Mr. Eccles: --but the definition of who... it is still limited to participating physicians who meet its own--

Justice Kennedy: --In... in your opening remarks, you said it doesn't change the bargain.

It seems to me the thrust of Justice Scalia and Justice Souter's questions is, it does exactly that.

Mr. Eccles: --But the... before or after the AWP law, the participant has no right to choose any particular provider.

The participant has the right to use the network physicians under the terms in the policy.

Justice Kennedy: Yes.

Mr. Eccles: After the AWP law, if a provider joins the network, the participant still has exactly the same right.

The network has a different composition.

Chief Justice Rehnquist: But... but that... that really does not seem to make sense to me.

The purchaser has the same right, in theory, certainly to go to any physician in the network, but the HMO has been required to expand the network.

Mr. Eccles: Under that hypothetical, that's correct, Your Honor, you know, if that's--

Chief Justice Rehnquist: What's hypothetical about it?

Mr. Eccles: --Well, we don't know the effect of the law on the networks--

Justice O'Connor: Well, for instance, here, if it's chiropractic services, and let's assume the HMO did not previously include chiropractic physicians as providers, after this law, if a chiropractic physician in good standing were willing to come in under the HMO, then the HMO would have to take that physician, and then the... the patient would have a possibility, at least, of having paid services seeing a chiropractor that formerly would not have been available.

Mr. Eccles: --That... that would be a significantly different law, Justice O'Connor, and for this reason.

In that case, which is generally referred to as a mandatory provider law, it's very much like the mandatory benefit laws that this Court has held to be saved.

That changes the legal rights to get... of the insured to get that type of care, and it changes the risk under the policy.

Justice O'Connor: No, well, why... why is what I said different from what happens here?

Mr. Eccles: Because the terms of the... the network would already provide for chiropractors.

The only question is how many would come in.

This law would not regulate that.

That's regulated through other aspects of Kentucky law.

Justice Kennedy: Well, it... it's... maybe I'm under a misapprehension as to how the bill... I... I thought that the... one of the examples given in the brief was, a woman is being treated during the term of her pregnancy, she changes her employer, she wants the same doctor to... to treat her, and she is the one that can initiate the request to the HMO, please allow this doctor to treat me, and the doctor then says yes, I'm willing to be bound by the terms of the HMO, and... and she has that doctor.

That seems to me to significantly increase the bargain that she made.

Mr. Eccles: But the... the bargain in that circumstance, if it... if it works out that way, she... she is able to stay with the doctor, but under... only if the doctor can get into the network, and is willing to meet the terms of the network.

It's entirely up to the doctor to come in.

Chief Justice Rehnquist: Yes, but before the law, the network could have refused him categorically, even though he were willing to meet the terms.

Mr. Eccles: That... that's correct, Your Honor.

Justice Ginsburg: I... is--

Chief Justice Rehnquist: --I hear you, I just don't see that... that you... you make much headway in saying that isn't a change.

Mr. Eccles: Because the... the change is the legal right of the insured, which was never to any particular provider, and that's still true after the... the law.

Justice Scalia: I don't... you... you're really asserting that... that two insurance policies are exactly the same, their terms haven't changed, or their terms aren't different, where one says you can get your automobile fixed, we will pay to get your automobile fixed by these companies, blah, blah, blah, blah, blah, and the other one says, we will pay to get your automobile fixed by any company that is willing to do the job up to our standards, and... and you think those two insurance policies are saying exactly the same thing, that there's only a hypothetical difference between the two.

Mr. Eccles: I... I think the difference between that hypothetical and... and mine is, the... the standard with or without the law is still, if the provider comes into the network, and you have the right to the network provider, and that's all.

Justice Stevens: The thing I don't understand is, if your view is correct, why are you objecting to the law?

Mr. Eccles: We believe that the law interferes--

Justice Stevens: Doesn't have any impact on your business.

Mr. Eccles: --Yes, it couldn't, Your Honor, it precludes the plans from limited networks, and what that does, and this is the point made by the FTC staff, which has been writing States objecting to these laws, is it creates an uncertainty in the network, because the bargain that's been made, the noninsurance bargain between the HMO and the providers is, it's altered, although the policy is not, and... and suddenly, the providers who are in the network already, they... they signed up for a different deal, which was a limited network.

They may not want the deal they've got, because they'll have less patient volume than they thought they were getting.

It also adds significantly just administrative costs to deal with more providers, and it's also more difficult to monitor quality with a larger network, so it does have... it's the uncertainty of what the law's effect will be that--

Justice O'Connor: But you're complaining about the... the increase in the number of providers, and it's that increase that is what might be desirable from the patient's standpoint.

Mr. Eccles: --Well, we're really complaining about the uncertainty that's created, that the networks can no longer be selective, which has quality and cost implications, including fee implications.

Justice Ginsburg: The... the any willing provider statutes have been around now for sometime.

I understand the case that you're making in its most dramatic is, this spells the end of HMO's, because the whole thing works only if they have few doctors and lots of patients, so the doctors have a guaranteed patient flow.

Has that happened in States with any willing provider laws, that there are so many doctors who are coming in that the doctors who were in in the beginning now say, the rates have to go way, way up, because we don't have any guaranteed patient flow any more?

Mr. Eccles: I... I can't tell you about the number of doctors, Justice Ginsburg.

The studies that are in... cited in, particularly in the amicus briefs, suggest that there's been about a 15 percent increase in cost arising out of--

Justice Breyer: If that's so, I mean, since... I'm not sure of the relevance of this, but I mean, if it turned out that this law or others like it drove up costs for no advantages, couldn't the Federal Government stop them by... under Medicare and Medicaid, wouldn't they have enough power, or would they, to simply write regulations such that they won't reimburse States for... if these circumstances were quite bad?

Mr. Eccles: --I... I'm not sure they could do it in... in that avenue, through Medicare or Medicaid.

The Federal Government could obviously do it directly with its own law on the books, which would--

Justice Breyer: That would require an act of Congress.

Mr. Eccles: --Yes, that's correct.

Justice Breyer: I want to... you think they don't have the authority?

Mr. Eccles: I... I don't think it would do the--

Justice Breyer: But anyway, as far as the harm is concerned, a) we don't know that there's any harm.

Mr. Eccles: --Right.

Justice Breyer: b) We don't know that the Government could deal with it in some other way, and so it's pretty much irrelevant to our decision, is that right?

Mr. Eccles: Right.

Right.

What is relevant is whether, as the Court said in Moran last term, these are insurance practices, and the Court's--

Justice Breyer: Then we're back at Justice Scalia's question.

Mr. Eccles: --The--

Justice Ginsburg: Is the whole distinction that here the direct beneficiary is the provider?

That is, the effect of the any willing provider law has opened the door to the provider, whereas in Rush and in Ward, it was the insured himself or herself?

Mr. Eccles: --That... that's certainly a major part of our distinction, Justice Ginsberg.

Justice Ginsburg: Is... is there anything more than that that... here, the patient is the indirect beneficiary of opening the door to the provider.

In those two cases, it was the insured.

There... there was no third party involved.

It was just the insurer and the insured.

Mr. Eccles: The... the patient, I would say, is a potential beneficiary, but without rehashing that, those two cases, a legal right was created for the insured.

In Ward, the Court said that was a mandatory contract term that had been added by using the notice-prejudice rule, and Rush added the option of seeking external review and those... and described it as a legal right enforceable against the HMO.

Here, there is no such legal right, and we believe that in order to be an insurance practice under this Court's precedents, the practice must either affect the spreading of risk, which any willing provider laws do not do--

Justice Ginsburg: But that was not true in either--

Mr. Eccles: --That's right.

Justice Ginsburg: --Ward or--

Mr. Eccles: Or, as in Ward and Rush Prudential, must affect the legal rights of the insured.

The... the Court has used a formulation of that phrase in... in many of its Savings Clause decisions, including those two.

We... we also think the Court has approached this through a common sense inquiry.

That's how it begins the Savings Clause inquiry, and on a common sense basis, nobody contends that the provider contracts themselves are insurance contracts, and nobody contends that the providers are part of the business of insurance.

Instead--

Justice Souter: --Yes, but nobody... nobody can seriously deny, on the common sense criterion, that a person who gets HMO coverage... whether it's subject to a law like Kentucky's, is getting a far greater choice, potentially and, I presume, actually, since you're here, than a person who signs up for an HMO without the choice guaranteed.

Mr. Eccles: --But--

Justice Souter: In a common sense way, someone is getting a different kind of coverage, i.e., a breadth of choice under the medical coverage, that otherwise wouldn't be available.

Mr. Eccles: --I... I think the common sense approach can be viewed by looking at this Court's decision in Royal Drug, and particularly if you look at the factual parallels with this case.

If the Kentucky statute, the general any willing provider statute can be disaggregated into a bunch of separate statutes, each about a different provider, that the term, provider, includes podiatrists, physicians, optometrists, and pharmacists, so we have here effectively one part of the statute is an any willing pharmacy statute, that's functionally indistinguishable from the statute that was before the case in Royal Drug.

Justice Souter: Well, considered by itself, if... if you simply narrow to the provider subcategory of pharmacists, I... I assume you're right, but if you look at the... at the broad category that is covered by this statute, there is one, I think, significant difference between this and the... and the limited to pharmacy coverage in Royal Drug.

I think the difference is this.

Pharmacy coverage basically is... is coverage for... for benefits that are fungible regardless of where you get them.

The super-aspirin, the industrial strength Motrin is going to be the same no matter what drug store you get it from.

Medical coverage, however, is not.

It is really important to patients to... to choose a doctor because of the personal relationship, and therefore, I don't see the... the precedential force of Royal Drug in... in a physician coverage; a... a physician option kind of case like this.

Mr. Eccles: But under the Kentucky law, the patient has no right to choose the family doctor.

Justice Souter: Well, the... the patient, in fact, is... is given in practical terms a breadth of option.

It's true the patient can't force a doctor to sign up with the HMO or force the HMO to take on a particular doctor, but in practical terms, there are going to be more doctors available under a Kentucky kind of regime, and in that sense, the patient is given a breadth of options that otherwise wouldn't be available.

That seems to me to be important when one is selecting physician coverage in a way that is not important when one is selecting drug store coverage.

Mr. Eccles: I... I understand the point, Justice Souter, although the... the option and the... the preference don't match up perfectly.

Even if there is a broader range of options, they don't necessarily include a doctor with whom the patient has a prior relationship.

Justice Souter: Absolutely... absolutely right.

Mr. Eccles: But returning to the pharmacy, it's true that the aspirin is all the same wherever you go, but the... the agreements at issue in Royal Drug, besides giving the benefits of pure convenience, the ability to get the drug at the corner drug store, which is not nothing, also gave a very important financial advantage if you... if your pharmacy were participating, and--

Justice Stevens: Yes, but another difference is, there... there is an any willing provider law here.

There's no any willing provider law in Royal Drug.

There was a private arrangement among the--

Mr. Eccles: --That's correct, Your Honor.

Justice Stevens: --with the... the Blue Cross.

Mr. Eccles: That's correct, Your Honor, but the effect that the agreements that were being regulated in Blue... with Blue Shield and Royal Drug, the Court held were not part of insurance.

Justice Stevens: Right.

Mr. Eccles: And we have functionally the same type of agreements here, an agreement between the HMO and the pharmacy or other provider, and they also should not be part of insurance.

They're... they're outside the insurance relationship, and... but it was important... I want to make this point, important potentially to the patients, the insureds in Royal Drug, that... that their pharmacy became a... a participating pharmacy.

It was not inconsequential.

Chief Justice Rehnquist: You mean just as a matter of convenience?

Mr. Eccles: Besides convenience, Mr. Chief Justice.

The example in the Court's opinion was taken from the brief of the United States as amicus.

They posited a 10-dollar drug at retail, and if you got it at a participating pharmacy it cost $2, if you got it at a nonparticipating pharmacy it cost 100 percent more, or $4.

Presumably those numbers are indexed since 1979 now, and... and greater, but it was of great interest to the insured whether the pharmacy was participating or not.

It made a large cost difference, and yet the Court said it is not insurance in part because it was not affecting, was not integral to, was not changing the legal rights of the insured-insurer relationship.

Justice Breyer: It's an antitrust case, then.

Mr. Eccles: That's correct, Justice Breyer.

Justice Breyer: I would think maybe that makes a difference.

Mr. Eccles: That's argued in the briefs that it... that it makes a difference, and we understand it's an antitrust case.

We... we still think besides the direct, factual parallel with the fact that Kentucky has an any willing pharmacy statute, that Royal Drug is still the correct analysis for... it gives the correct analysis as to the McCarran-Ferguson factors really for two reasons.

One is, that's what this Court has applied consistently in its Savings Clause case... cases.

It... it... this Court said in the first Savings Clause case, Metropolitan Life versus Massachusetts, that the Royal Drug analysis was directly relevant to the ERISA Savings Clause, so it has the virtue of familiarity and precedent, and the... the standards, the McCarran factors make sense here.

They're objective factors that give some content to the subjective test, the common sense test.

But the... the second piece of... of the many attacks that have been made on the... the relevance of Royal Drugs in the brief is, it... it's argued in the brief that this Court in Fabe took a broader view, looked to a different clause of McCarran-Ferguson and said it's broader, that insurance regulation can be a little broader, and it's geared to protect the performance of the contract, and we don't shy away from that.

The any willing provider laws have nothing to do with the performance of the HMO policy here.

They just do not add to that policy at all.

It's argued in the briefs through hypothetical examples that they are effectively Kentucky's regulation of HMO's, the adequacy of the networks and so on, and we are accused of wanting to undo all regulation of HMO's.

That's not our position here.

The line we would draw would preserve most of the State's regulation of HMO's, but these laws are not laws that are substantive regulation of insurance, the AWP laws.

They are not adequacy laws.

They are not continuity of care laws.

Kentucky has laws like that on its books.

Justice Ginsburg: How would you characterize them?

Mr. Eccles: I would characterize them as a law that gives a right to a provider and makes it difficult for HMO's and ERISA plans, but gives nothing of enforceable right to the insurers.

Justice Ginsburg: Well, you... you don't like the label, insurance.

Would you call it a health care law?

You said it's not an... an insurance law--

Mr. Eccles: It... it might be considered a health care law, Justice Ginsburg, that's correct, and in that case, it would not come within the Savings Clause, but it's a law that regulates the contracts between the providers and the HMO's.

Now, just to go back slightly over what I just said, we are not here challenging the basic concept of State regulation of HMO's.

Where we think the Court has drawn the line, and where we would urge that it continue to draw the line, is to say that a law regulates insurance if it affects risk-spreading, which this does not.

The risk here is the risk of financial loss from needing medical care.

ERISA actually has a helpful definition that makes that clear.

The definition of an employee welfare benefit plan, which is the kind of plan we're dealing with here, is a plan that provides benefits for medical, surgical, or hospital care, or benefits in the event of sickness.

That's the risk.

Justice Kennedy: --I... I recognize that we have the risk-spreading and the factors, and then we have the common sense test... we can all have tests floating around here.

It... it seems to me that this just does regulate insurance.

Mr. Eccles: But it regulates only the noninsurance relationships, Justice Kennedy.

It... it's exactly what the Court held was not insurance in Royal Drug.

They're external to the insurance relationship, and they don't change the insurance relationship at all.

Justice Breyer: How do you... what about Metropolitan Life?

What about... you have a... you have a contract the State says... I would have thought the harder thing, which I don't think any more, is, is... is an HMO an insurer.

We went over that in that other case, Rush, and it's quite clear that 40 States regulate them as insurers, so we know they're insurers.

Now, if any State tells an insurer, Mr. Insurance Company, when you write that contract, you have to put in it mental health benefits, isn't that... that's part of the business of insurance, or not?

Mr. Eccles: That's absolutely regulation of the business of insurance, and that's--

Justice Breyer: All right.

Now, here what they're saying is, you have to put in, use any physician benefits.

I mean, it's the same question.

Mr. Eccles: --Well, what--

Justice Breyer: How do we... how do you get out of that?

Mr. Eccles: --Sure.

The distinction is, our test is, effect the transfer of the risk, and in that case, there is suddenly a new covered risk, the risk of needing mental health care is covered by the policy and, if that's not at issue, and the Court has had recent decisions where it has not analyzed risk-spreading, found it unnecessary, it's always looked at the second McCarran factor.

It's always considered, you know, whether the legal rights of the insured are being regulated here, are being protected by the State regulation in the insurer-insured relationship, and in that mandated benefit case, they're clearly getting a new legal right which they do not have under any willing provider.

Justice Stevens: But you would not consider the... the benefit of having the selection among physicians as a benefit?

Mr. Eccles: That's... in a colloquial sense, of course, if all these things fall into play.

Justice Stevens: So you say it's purely financial.

As long as you pay the bills, that's the only thing the insurance was intended to cover.

Mr. Eccles: If all these eventualities fall into place and you do have a broader choice, that's obviously, in a colloquial sense, of some benefit, but it's not what benefit means under, and insurance means under the Court's Savings Clause process.

Justice Souter: Well, of course, the... the criteria, the way we refer to that criterion under the McCarran-Walter trio is... is not in terms strictly of legal right, though that will satisfy it.

We ask whether it's integral to the policy relationship, and I suppose something can be integral... integral to the policy relationship even though it is not expressed literally in terms of policy language which grounds a conventional right.

Mr. Eccles: That... that's correct, Justice Souter, it is phrased in terms of, integral to the relationship.

However, when the Court has described that factor in Pilot Life, in UNUM versus Ward, and Rush Prudential, it's used terms, Rush Prudential, a legal right to the insured enforceable against the HMO.

Justice Souter: No... no question that that certainly is a... an example of something that is integral.

Mr. Eccles: Right.

Justice Souter: But I would suppose that the difference in... in the kind of policy choices that we've been talking about would be regarded as a... by a potential HMO subscriber as... as integral to what he is purchasing when he signs up with... with one HMO rather than another.

Mr. Eccles: Our point... in Pilot Life, the Court described the second factor as not satisfied because the, you know, the cause of action does not define the terms of the relationship, and we would say, you know, that has not... does not occur, either, under any willing provider.

If there are no further questions, I'd reserve the balance of my time.

Argument of Elizabeth A. Johnson

Chief Justice Rehnquist: Very well, Mr. Eccles.

Mr.... Ms. Johnson, we'll hear from you.

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

As a matter of common sense, Kentucky's any willing provider statutes regulate insurance because they are solely directed at the insurance industry.

These statutes apply only to Kentucky insurers issuing Kentucky health benefit plans.

Petitioners are insurers regulated by the Commissioner of Insurance.

The health benefit plans that they offer are exclusively regulated by the Commissioner of Insurance.

These statutes are located in subtitle 17A of the Kentucky Insurance Code.

Justice Ginsburg: But that's... they could just as well have been in something labeled, Health Code.

This is not like... I mean, things that regulate risk, you'd say, oh yeah, I'm going to find that in the Insurance Code--

Mr. Johnson: That's--

Justice Ginsburg: --but here, wouldn't it have been... suppose the law had been written to say that no doctor can join a closed plan.

It would be the same thing, wouldn't it?

Mr. Johnson: --If that law was not in the Insurance Code, first of all it would not be enforceable by Commissioner Miller.

Second of all, insurers are the only entity that builds networks for the benefit of their insured.

When an insurer decides to offer a managed care plan, they tie in the network of providers to the benefit.

Thus, the terms in-network benefit, out-of-network benefit.

Therefore, if that law was on the books and was not enforceable against the insurer, the insurer would create closed panels, and they wouldn't be able to have any doctors--

Justice Ginsburg: Well, there would be the equivalent of disbarment.

A doctor, a rule, a regulation of the medical profession is, doctor, you cannot join a closed plan.

It seems to me that would accomplish the very same thing, but it would be in their Health Code.

Unlike some things... it can't be that everything that the Insurance Commissioner does is therefore regulating insurance within the meaning of this legislation.

Mr. Johnson: --That's correct, Justice Ginsburg, but this Court has found that relevant to the inquiry, and the fact that this is a insurance law that is only directed toward those insurers regulated by the Commissioner of Insurance is very important, and it is relevant, and the fact that these statutes are in subtitle 17A of the Kentucky Insurance Code, which dictates the benefits to be included in a Kentucky health benefit, and the requirements for those insurers offering those plans.

The common sense test is also met because these statutes regulate an insurance practice, and that practice is the practice of insurers offering managed care plans to contract with providers for the benefit of their insureds.

Justice Scalia: I... I would... I would be sympathetic to your case... I... I keep bumping up against the Royal Drug case, where it seems to me all of the practical things you say about this case could have been said there.

The... the contract really is... is altered, the contract of the insured.

Under one situation, he has to go to a certain drugstore, under another situation he has his choice of drugstores which may provide lower cost.

Even if it doesn't provide lower cost, it's a great convenience to be able to go around the... around the corner, and yet we said that, you know, limiting the number of drugstores with whom the insured could deal did not affect the business of insurance.

Mr. Johnson: Your Honor, Royal--

Justice Scalia: How do you distinguish that from this case?

Mr. Johnson: --Your Honor, Royal Drug is both factually and legally distinguishable from the present case.

First of all--

Justice Scalia: I know it is factually.

I don't care about factually.

Tell me why it's legally distinguishable.

Mr. Johnson: --Well, legally distinguishable is that you're... in Royal Drug you were looking at one Federal statute.

In the present case, you're looking at another.

In Royal Drug--

Justice Scalia: Well, now, wait.

You... you want us to abandon the... the proposition that what constitutes the business of insurance is the same under... under the antitrust laws as it is--

Mr. Johnson: --No, Your Honor.

Justice Scalia: --As it is here?

Mr. Johnson: I believe the--

Justice Scalia: Unless you want us to abandon that, then... then what you've just said doesn't make any sense.

Mr. Johnson: --No, Your Honor.

I believe the analysis in Royal Drug was... was appropriate and... and accurate for an antitrust analysis as opposed to analysis under the Savings Clause, which this Court has said--

Justice Scalia: So you say the same analysis does not apply.

You're saying that the McCarran-Ferguson criteria do not necessarily apply to ERISA.

I mean, maybe they shouldn't, but that's certainly new for--

Mr. Johnson: --No, Your Honor, they are relevant, as this Court has said, but they are not required, and in this Court--

Justice Scalia: --They are relevant but not required?

Mr. Johnson: --In this, in Metropolitan Life this Court came up with a... a broader test than the common sense test, and that test is tested by the McCarran-Ferguson factors that were developed in Royal Drug--

Justice Scalia: I see.

Mr. Johnson: --but they are not required.

They are relevant.

They're guideposts.

Justice Scalia: So the very... the very factor that qualifies as... the very same factor.

Let's assume that they were factually the same.

The very same factor that qualifies as part of the business of insurance in our antitrust analysis could nonetheless qualify as not business of insurance under ERISA, is that... is that right?

Justice Kennedy: Vice versa.

Mr. Johnson: In an ERISA case, this Court starts with--

Justice Scalia: Vice versa means the same.

Mr. Johnson: --the common sense test, and under the common sense test this Court looks at whether or not--

Justice Scalia: No, but just answer yes or no to what I just said.

I think you got... I think you... I think you want to say yes.

Mr. Johnson: --Would you please restate your question?

Thank you.

[Laughter]

Justice Scalia: Let's take the very same factor, like the exclusion of certain pharmacies, which... which was the case in Royal Drug.

That very same factor could constitute the business of insurance under ERISA, and yet not constitute the business of insurance under the antitrust laws, because we're applying a different test, a common sense test.

Is that your position?

Mr. Johnson: The common sense test controls in ERISA preemption analysis.

Justice Scalia: So your answer to my question is yes or no?

Mr. Johnson: In your analysis is there a State law that requires, or is it the Royal Drug--

Justice Scalia: Well, in the ERISA case there is, in the antitrust case there isn't.

I mean, that's what makes antitrust different from ERISA, I think.

Mr. Johnson: --Right.

Justice Scalia: But... but they both focus on the very same factor, the provision of... the ability of the insured to select pharmacists.

Now, you say that that could be the business of insurance for ERISA, and yet could not be the business of insurance in antitrust cases.

Yes or no?

Mr. Johnson: Yes.

Justice Scalia: Okay.

I think that's the right--

Mr. Johnson: Yes.

Yes.

Justice Scalia: --That's the right answer.

I mean, for--

Unknown Speaker: [Laughter]

Justice Scalia: For you it's the right answer.

Mr. Johnson: Yes.

Justice Scalia: But I'm not sure it's the right answer for me.

Unknown Speaker: [Laughter]

Mr. Johnson: Yes.

Justice Ginsburg: And may I ask a follow-up question, then?

If the whole difference, then, is this, quote, common sense test--

Mr. Johnson: Yes.

Justice Ginsburg: --I'll tell you frankly what my problem is.

I read the Sixth Circuit opinion, I said, yes, that makes common sense, and I read Judge Kennedy's dissenting opinion and said, yes, that's common sense, too, so what--

Unknown Speaker: [Laughter]

Justice Ginsburg: These... these are rational judges on both sides, they both made good arguments, and they both conformed to some sense of what goes on in the real world, so what is the common sense test?

Unknown Speaker: [Laughter]

Mr. Johnson: Well, Justice Ginsburg, it's a very broad test, and I... I think it... it's looking at the whole picture, and the fact that this law is focused on regulated insurers, risk-bearing entities that are under the control of Commissioner Miller, and it regulates their insurance practices.

20 years ago you might not have had the issue where providers... that insurers were contracting with providers for the benefit of insurers, but that is a... a very prevalent practice in the insurance industry today, and the State Departments of Insurance regulate that practice, and in Kentucky it's heavily regulated.

On page 15 of my brief, I... I set forth many Kentucky statutes that regulate the insurer's relationship with the health care provider for the benefit of the insured.

These statutes were also set forth on page 2 of the Solicitor General's brief.

That is a common practice in... in the insurance industry today, and it's a heavily regulated practice.

The--

Justice Breyer: Also, I guess if you were taking the view that the language business of insurance could mean different things for purposes of section 2(B) of McCarran-Ferguson in here, you'd find support for that in Royal Drug itself, isn't it, which said that maybe the meaning of those words in 2(A) and 2(B), although they're the same words, is different.

Mr. Johnson: --It is different, and... Your Honor, and in Royal Drug was... this Court made it clear that they were trying to decide whether an insurer's practice of entering into provider agreements was... constituted the, quote, business of insurance for the purpose of meeting a very narrow exemption from the antitrust liability.

Justice Stevens: Well, it isn't only that.

I think the statutory language refers to the regulation of the business of insurance, and in the insurance case in Royal Drug there was no official regulation, only private regulation of the agreement, whereas in this case you have public regulation, so it's conceivable that here you have regulation of insurance, and there you don't count a private agreement as the kind of regulation that the statute's speaking about.

Mr. Johnson: That's true, Justice Stevens, and in--

Justice Scalia: That isn't what the Court said though, is it?

Justice Stevens: Yes, it is.

Unknown Speaker: [Laughter]

Chief Justice Rehnquist: You can continue with your argument.

Unknown Speaker: [Laughter]

Mr. Johnson: --The McCarran-Ferguson factors are also met.

As the Sixth Circuit noted, the second factor is clearly met.

These statutes regulate an integral part of the policy relationship between the insurer and the insured.

In managed care plans, provider agreements are essential.

In managed care plans, and under Kentucky law, certificates of coverage cannot exist independently from the provider directory.

These statutes simply prohibit insurers from arbitrarily limiting the number of providers that they contract with for the benefit of their insureds.

These statutes allow insureds greater access to the health care provider of their choice, and I think this is... is clearly seen in KRS 304-17A-505(1)(k), which requires the insurer to disclose that they are willing to contract with any willing provider.

This simply puts more control to the insured in their relationship with their health care provider, which is a very personal and unique relationship.

Justice Scalia: Royal Drug says that the spreading of risk is an indispensable characteristic of insurance.

It then holds that the pharmacy agreements do not involve any underwriting or spreading of risk.

Now, why aren't those two propositions as... as true here as they were in Royal Drug, that the spreading of risk is the essence of... of insurance, and that an agreement between the provider of the goods or services and the insurance company is not part of the spreading of risk?

I mean, maybe Royal Drug is wrong, but I... I don't see... I don't see how you... how you get out of that box.

Mr. Johnson: Well, again, Justice Scalia--

Justice Scalia: And I don't like the, you know, common sense test, I know it when I see it.

What I worry about, the... the common sense test is that we will approve those things that we like, and disapprove those things that we don't like.

I mean, who likes a private antitrust arrangement that... that limits choice, so you just say, common sense, that's not the business of insurance, and who doesn't like something that enables... enables the insureds to... to have a greater selection in... in doctors, so we say, common sense says, that is the business of insurance.

I... I don't trust common sense.

Unknown Speaker: [Laughter]

Justice Scalia: I... I want some rule of law that... that I can adhere to.

I thought we had one in Royal Drug, and I... I'm just not persuaded about why insurance is one thing there, and it's something else here.

I mean, if... if, indeed, the spreading of risk is what insurance is about, then--

Mr. Johnson: --Your Honor, the Sixth Circuit did find that Kentucky's any willing providers transfer or spread policyholder risk.

As the Sixth Circuit noted, these statutes open--

Justice O'Connor: --But how does it spread the risk, actually?

It's hard for me to see that it does that.

Mr. Johnson: --Justice O'Connor, when a... when an insurer sets up a managed care plan and structures their benefits to be in a managed care plan, they have tied in the network of providers to that benefit, and when you have a statute on the books that allows the insured and the health care provider greater control to continue a relationship, and common sense tells us that an... an insured will seek an out-of-network provider in order to ensure continuity of care and that unique relationship, what these statutes do is, they--

Justice O'Connor: I... I don't see how that spreads the risk.

I understand you think there's a practical benefit to the insureds--

Mr. Johnson: --Yes.

Justice O'Connor: --but how does it spread the risk, please?

Mr. Johnson: It... Your Honor, it increases the risk for the insurer that the insured will not have to seek treatment from the out-of-network provider.

However, as this Court has noted, all three McCarran-Ferguson factors are not required to be met.

This Court reiterated that last term in Rush Prudential versus Moran.

Unless there's any more questions, I will conclude by saying that Kentucky's any willing provider statutes are laws that regulate insurance, and therefore are saved from ERISA preemption.

Thank you.

Argument of James A. Feldman

Chief Justice Rehnquist: Thank you, Ms. Johnson.

Mr. Feldman, we'll hear from you.

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

Chief Justice Rehnquist: Mr. Feldman, what would be an example of a measure which did spread the risk, as that term was referred to in Royal Drug?

Mr. Feldman: --Well, I think one example would in Metropolitan Life against Massachusetts, certainly I think everybody... I understand everybody here to agree that a law that required an insurance policy to include insurance against a particular risk would spread the risk, but I think what... in this case also comes right... it spreads the risk at least for purposes of... of ERISA for this reason.

What this law is, is a condition on the spreading of risk, the insurer is saying, we are going to spread the risk so long as you go to an in-network provider, and the State here is regulating that condition, and really it's analogous... it has to do with the performance of the risk-spreading.

Justice Souter: So, you're... you're saying the first McCarran-Ferguson factor includes a provision that determines the way the insurer manages the risk, even though it may not affect the risk as between the insurer and the insured.

Mr. Feldman: I think it does... not quite.

I think it actually does... it does affect that risk, but I think it's a condition--

Justice Souter: No, but I thought that was the argument you were making right then and there.

Mr. Feldman: --It's a condition on the spreading of risk, or a condition on the performance of the insurance contract, and in the Fabe case, which was a McCarran-Ferguson Act case, but involved a different provision of the McCarran-Ferguson Act than at issue in Royal Drug and the Pireno case that followed it--

Justice Kennedy: Well, how, as a practical matter, does it affect the risk here?

Is the... is the risk increased for the insurance company under this law because it... under... under the Kentucky law it has to pay for chiropractic services, where otherwise it would not, so that's an increase in the risk?

Is that... is that your point?

Mr. Feldman: --It would... I guess... for you... it certainly could be... I think semantically it could be said to just increase the risk in just that way.

I think for me, I'm more... it's more comfortable to talk about a... it removes a condition on the spreading of risk.

The risk would be spread under... without this law so long as you go to a provider who the HMO has said we're going to let into our network, whereas here--

Justice Kennedy: That's what... that was going to be my second question.

It seems to me that's the risk-spreading.

Mr. Feldman: --Right, and here the risk-spreading is so long... we're going to spread this... such-and-such a risk, but so long as you go to any willing provider, and that's a different condition.

Justice Breyer: But it doesn't spread the risk.

It doesn't.

I mean, it just doesn't, does it?

I mean, it's simply an ordinary... it's... what it's a regulation of is, if the risk eventuates, the insurer has to carry out his side of the bargain in this particular way.

Mr. Feldman: Right.

Justice Breyer: It's a regulation of the goods or services that an insurer provides.

Mr. Feldman: That... that's correct.

Justice Breyer: Now, if you're going to--

Justice Kennedy: --And the risk is a condition, is a health condition of the patient that will be covered.

Mr. Feldman: Yes, but... but it's really exactly the same as what this Court faced in Fabe, where--

Chief Justice Rehnquist: What's the name of the case?

Mr. Feldman: --Department of Treasury against Fabe.

In that case, what was at issue was a priority statute about how to distribute the assets of an insurance company after it has become insolvent, and it had nothing to do with the contract as to what... what risks the insurer was going to insure, but what the Court said is, it does have to do with the performance of that contract, because if the assets are spread in a certain way, the insurer will actually get paid... the insured will actually get paid if that risk results, and otherwise not.

Chief Justice Rehnquist: What... what if the risk were tied... the risk is that the patient becomes ill and needs--

Mr. Feldman: Yes.

Chief Justice Rehnquist: --medical care, isn't it?

Mr. Feldman: Yes, and this is a condition on that, but I don't--

Chief Justice Rehnquist: So... so how... how does this measure spread the risk, or why does it not spread the risk?

Mr. Feldman: --It... it operates as a condition on the spreading of risk, because without this law, there--

Chief Justice Rehnquist: Well--

Mr. Feldman: --the risk will... it's... the insurance policy says we... you... we will spread this risk among all our insurers.

If you get ill, we're going to pay for it so long as you satisfy a certain condition, and what this law does is, it alters what that condition is.

Justice Breyer: --Which is to say, it doesn't spread the risk, so if the other case means you have to have a risk, then you lose.

Mr. Feldman: Right, but the Court--

Justice Breyer: But it doesn't... I thought that that other case has... since it involves the provision by an insurer of goods and services, and a regulation of how, when the risk eventuates, it is pretty similar, and so the difference is, what they say in footnote 18, I guess, which is probably what was going on here, which is that we're interpreting not the McCarran Act's effort to allow States to regulate insurance.

We are interpreting what they call the secondary purpose, and that purpose was to impose a narrow... narrower limitation on the reach of the antitrust laws.

Mr. Feldman: --Right, and... that is true, and the Court repeated that in Royal Drug, and in Pireno, and in Fabe, in all of those McCarran-Ferguson Act cases it made exactly that point, and it--

Justice Breyer: But is that the key distinction, or is there another one, too?

Mr. Feldman: --Well, I think that's the most important one, but there's a number that are related.

In the ERISA context, for example, the Court has added... the Court said, well, we first look as a matter of common sense at the insurance policies.

It didn't just say, we are going to apply the McCarran-Ferguson Act to ERISA, and it shouldn't be surprising that there are therefore some differences between the two, or otherwise it would have been unnecessary for the Court, as the primary test, to look at the policy as a whole.

Second, in the ERISA context, the Court has specifically said that not all three factors are necessary to be found in order to find that something regulates insurance.

Justice Scalia: This is all very sophisticated, but I... it just seems to me that what constitutes the... insurance in one... in one situation ought to constitute insurance in another, and it--

Chief Justice Rehnquist: --It's just common sense.

Justice Scalia: --it's just common sense.

Unknown Speaker: [Laughter]

Justice Scalia: And... and what... and what we're doing when we... when we deny it is... is exercising policy judgments about whether we think the... the particular thing that's been done is desirable or not desirable.

Mr. Feldman: I... I don't... I don't think that's correct, and I... I don't think it should be surprising that there are some differences between ERISA and the McCarran-Ferguson Act, not only because of the policy differences, but there's a noted difference in language between what... the statute that the Court was construing in Royal Drug and in Pireno, and with the one it's construing here.

Justice Scalia: So you don't think that the... that under ERISA it's important that what is regulated is the business of insurance?

Mr. Feldman: Well, ERISA just says, regulate insurance.

Justice Scalia: I understand that, so you think it doesn't have to be the business of insurance.

It... it could be other aspects of the insurance... of the insurance company?

Mr. Feldman: I think the Court recognized that there can be a difference--

Justice Scalia: Right.

Like what buildings the insurance companies have to be in, and other things?

Mr. Feldman: --No, but I--

Justice Scalia: I mean, once you depart from the business of... the business of insurance concept in the McCarran-Ferguson line of cases, it seems to me, was essential to make sense of it, and it's just as essential to make sense of the ERISA prescription, it seems to me.

Mr. Feldman: --I think it's because of the difference in language that the Court from Metropolitan Life on has adopted a different analysis in ERISA, and there's actually two differences.

One is that in Royal Drug and in Pireno, which involved the antitrust exemption that has to be narrowly construed, you were just talking about a... a law that is... that is in... that is... the business of insurance.

In the Fabe case, which involved the other part of McCarran-Ferguson, which saved State laws in the areas of traditional, in the area of traditional State regulation, it talks about regulating the business of insurance.

In ERISA, you're now one step farther away, because now it just says, regulate insurance, and I think those laws are differently worded, and there's every reason to give them a somewhat different scope.

Justice O'Connor: Have we ever--

Justice Scalia: --Have you--

Justice O'Connor: --analyzed a case that way in solving these problems?

Have we ever relied on that difference in language, Mr. Feldman?

Mr. Feldman: Well, in the... I think the Court in the Pireno case, for... oh, the difference in language?

Justice O'Connor: Of regulation of insurance versus regulating the business of insurance?

Mr. Feldman: I... I don't think the Court has relied on that specific--

Justice O'Connor: No.

Mr. Feldman: --language in any of its cases so far, because most of the cases everything has lined up and it hasn't had to, but I will say that in the ERISA cases, there's now a couple of them where the Court has made clear that all three of the McCarran-Ferguson actors... factors don't have to be applied in ERISA, and the Court has never reached that conclusion under the antitrust exemption in the McCarran-Ferguson Act.

Chief Justice Rehnquist: Well, that would be ridiculous to reach it, since the three factors are what the McCarran-Ferguson Act is.

Mr. Feldman: Right, but by recognizing that they... that they're not all... specifically holding that they're not all necessary in ERISA, I think the Court again recognized that there can be a divergence in... between the two areas.

Justice Souter: And one reason, I suppose, is the presumption against preemption which we are trying to maintain in ERISA.

Mr. Feldman: That's right.

That's right.

And I... I would like to add one other thing about the... what's been called the common sense test, which is, I do think the Court has given substantial content to it in its cases.

It talks about a regulation that homes in on the insurance industry, or is aimed at the insurance industry.

It is relevant how the State codified it because, as the Court said in... as recently as Rush, I think, the term insurance acquires its coloration and meaning from State law, State practice, and State usage, because what Congress was trying to do was preserve State law in an area of traditional State authority, and therefore, the codification in the Insurance Code is of relevance.

And finally, at the very least, a State law that affects the contract between the insured and the insurer, which this one does, has a necessary effect on that contract and, in fact, a substantial one.

That, although what is insurance may be broader than that, something that does satisfy that I think clearly is insurance under the... the common sense--

Justice Stevens: Mr. Feldman, can I ask you a question?

Do you suppose, if, in the Royal Drug situation, there had been an insurance regulation that required the insurance company to give the patient an option between generic and nongeneric drugs, that that would have been the regulation of the business of insurance?

Mr. Feldman: --I think it probably would have been, and I... I think that would, of course, have been analyzed under the other half of the McCarran-Ferguson Act if it was a State regulation of that sort.

That concludes my... Thank you.

Rebuttal of Robert N. Eccles

Chief Justice Rehnquist: Thank you, Mr. Feldman.

Mr. Eccles, you have 2 minutes remaining.

Mr. Eccles: I'll address four points, if I may.

First, as to the argument that a condition is removed in the policy by operation of Kentucky law, that's not true.

Before and after the Kentucky law, the condition on getting payment from a... from a participating physician is identical.

All that's changed is that outside network.

The law, just so I'm clear, does not, by itself, require a network to admit a chiropractor when it has no chiropractic coverage.

That's a different law.

If it did that, we would say that definitely affects the legal rights of the insured and would be a mandated benefit law such as the Court sustained.

Second point, we are not... a comment was made by counsel for the Commissioner about regulations of providers providing benefits to the insurers.

Some do, and those... the line we would draw, say, if it's a regulation of a provider such as a continuity of care, such as a hold harmless provision that prevents the provider from billing for the balance above the network rate, that clearly affects the legal rights of the insured, and would be saved under our test.

Third, Royal Drug, it's this Court's precedents that have said the Royal Drug analysis is directly relevant to the ERISA Savings Clause.

It was the dissent in Royal Drug who said that pharmacy agreement is integral to the relationship.

You can't have it without... you can't have the insurance without the pharmacy agreement, but that was said in the dissent.

The Court rejected that view, and who is in the participating network is not part of the benefit of the insured.

The insured just has no right to decide what doctor to go to, or any legal right.

To address... fourth and finally, to address perhaps more concisely the question of why do we care, if this isn't going to expand the networks, it's... it hurts us even if the network doesn't expand in the slightest because if nothing changes, if no choices or options are expanded, the uncertainty that has resulted is added to the administrative cost.

It's affected the ability to be selective.

You have these networks--

Chief Justice Rehnquist: Thank you, Mr. Eccles.

The case is submitted.

Attribution:

The Oyez Project

Featured:

City of Columbus v. Ours Garage and Wrecker Service - Oral Argument

Fri, 09 Jan 2009 14:50:26 +0000

Case:

City of Columbus v. Ours Garage and Wrecker Service

Media File:

01-419_20020423-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Jeffrey S. Sutton

Chief Justice Rehnquist: We'll hear argument now in No. 01-419, City of Columbus v. Ours Garage and Wrecker Service, Inc.-- Mr. Sutton.

Mr. Sutton: Thank you, Mr. Chief Justice.

May it please the Court: The question presented in this case is whether Congress in 1994 divested the States of their traditional authority to delegate police powers over local safety matters to their political subdivisions.

It would be no small matter for Congress to impose such a restriction on the States, and we submit they did no such thing in this instance.

In making that point, it may be helpful to look at the text of the statute, which is reprinted in full in the appendix to our brief, the blue brief.

And page A-2 of that appendix specifically repeats the language of (c)(2)(A), the operative provision at issue here.

And our first point, as a matter of the language of the statute, is that Congress specifically said that the preemption provision, quote, "shall not restrict the safety regulatory authority of a State."

Now, prior to 1994, Ohio, the State of Ohio, had exercised regulatory authority in this area by delegating its power specifically over tow truck regulations to local political subdivisions.

It's very difficult for us to understand how the court of appeals interpretation does not in fact, quote, "restrict the safety regulatory authority of a State."

That's--

Chief Justice Rehnquist: Well, I think the argument on the other side, Mr. Sutton, is that the first section (a)(1) does say, no State or political subdivision thereof and no interstate agency.

It talks about a political subdivision so that when you come down to the section you've just quoted, and it only says State, there's perhaps a fair inference that only a State and not a political subdivision is included.

Mr. Sutton: --Yes, Your Honor.

And the normal Russello argument is that a litigant like myself is trying to read into another provision a term that is specifically mentioned elsewhere in the statute.

Here the suggestion is that we're trying to read the term, political subdivision, into (c)(2)(A).

That's not what we're trying to do.

What we're saying is the traditional safety regulatory authority of a State was preserved by (c)(2)(A) and traditionally States, including Ohio, had specifically exercised that authority by delegating it in some instances to State executive branch agencies and in other instances, specifically here, to political subdivisions.

Justice Kennedy: Would your argument be the same if the State had not made a specific delegation?

Did it make a specific delegation with respect to tow trucks?

Mr. Sutton: Actually it did, although it's... it's backwards, in the sense that they generally regulate all motor carriers at the State level, but they exempted tow trucks, therefore allowing political subdivisions like Columbus to enact their own tow truck ordinances.

So, in fact, in this case it would be specific, although I wouldn't say our argument rests on that point.

Many States like Ohio are home rule States, which in their constitutions give general grants to political subdivisions to have powers of local self-government.

So, in this case, I... I would say it's a little easier because there was something specific as to tow trucks, but I wouldn't say that our argument rests on that point.

Justice Scalia: Mr. Sutton, would... would you look a little further down in, in the provision set forth in the appendix to your brief?

Look on page A-3.

You were reading from (c)(2)(A)--

Mr. Sutton: Yes, Your Honor.

Justice Scalia: --in which it says, shall not restrict the safety regulatory authority of a State.

And you say that includes, you know, political subdivisions of a State.

Mr. Sutton: No.

That it includes the right to delegate political subdivisions.

Justice Scalia: All right.

Okay.

Just read two... two lines later, (2)(C) where it says, does not apply.

Mr. Sutton: Right.

Justice Scalia: Again, it uses the same... shall not restrict, does not apply to the authority of a State, or a political subdivision of a State, to enact or enforce a law, regulation, or other provision.

Why in that provision does it say does not apply to a State or a political subdivision?

Because you're telling us, when you say State, it includes whatever authority the State has to delegate to a political subdivision.

Mr. Sutton: We're not saying--

Justice Scalia: You wouldn't have--

Mr. Sutton: --We're not--

Justice Scalia: --you wouldn't have needed that language there.

Mr. Sutton: --We're not saying States are political subdivisions.

We're simply saying the preservation of a State, deregulatory authority of a State includes the power to delegate.

But as to (c)(2)(C), keep in mind that was a 1995 amendment.

That was not part of the original legislation.

So, the suggestion would be that Congress's--

Justice Scalia: Well--

Mr. Sutton: --style in 1995 modified the 1994 act.

And no one is arguing--

Justice Scalia: --I think we always look at an act in toto and... and don't try to piece it apart as to what was enacted when.

It seems to me we have to make sense of this statute as a whole.

Mr. Sutton: --That's... that's true, Your Honor.

But I... in O'Gilve, the Court said specifically that a later act cannot modify the terms of an earlier act.

But let me... I think there's another answer that--

Justice Scalia: It doesn't modify it, but it... it can give clear indication of what... of what it meant.

I mean, you're assuming that it modifies it.

Mr. Sutton: --Right.

Well, Your Honor, the... the thing that I think may be helpful in thinking about (c)(2)(C) and the other mentions of political subdivision throughout 14501 is they're all in the context of... context of the enact or enforce language, which is exactly how (c)(1) reads.

(c)(1) says these political bodies may not enact or enforce these particular laws.

That, of course, is not the way (c)(2)(A) or, for that matter, (a)(2)... (a)(2) does exactly the same thing.

It preserves the safety regulatory authority of the State over these various other provisions elsewhere identified in title 49.

When it comes to (c)(2)(C), it's dealing with a topic specifically mentioned in (c)(1), prices.

And it follows the exact same structure of (c)(1), not surprisingly, because it's dealing with a topic that is covered in (c)(1).

(c)(2)(A)--

Justice Ginsburg: Mr. Sutton, are you making the distinction there between the safety regulations which would be covered under (c)(2) and the economic regulation which would be the main prohibition?

Mr. Sutton: --Exactly, Your Honor.

And there was a division of authority, going back to 1966, where the old ICC had regulated all of the economic issues over motor carriers, and the Department of Transportation had regulated all the safety issues.

And what happens in 1994 is they're simply deregulating.

The ICC is deregulating this area.

They wanted to make sure, as this Court said in Morales, that States wouldn't undo that particular deregulatory effort.

But at the same time, as (c)(2)(A) and (a)(2) makes clear, they wanted to preserve the provisions of a separate part of title 49 dealing with safety issues, something that DOT, a separate agency, had always regulated.

And I hope, Justice Scalia, this will help in getting to your... your point.

Justice Ginsburg: There's a--

Mr. Sutton: Oh, I'm sorry.

Justice Ginsburg: --There's a question I think that still would be left open even if you prevail; that is, whether these regulations are appropriately characterized as economic or safety.

You say they're all safety.

Mr. Sutton: Absolutely.

Justice Ginsburg: But that hasn't been adjudicated yet.

Mr. Sutton: Absolutely.

And... and if... if the court of appeals decision would reverse, it would certainly be within the rights of respondents to go back to the Sixth Circuit and say, as to some of these provisions of the Columbus code, they are not in fact safety ordinances or safety provisions, and therefore they could be regulated as a price, route, or service.

But there's another, I think, important point that responds to this issue of the mention of political subdivisions elsewhere in 14501.

I think there is general agreement in the case that as to (c)(2)(A), all of the other words, every single other word in (c)(2)(A) including, for example, the definition of the term safety, is defined not from 1994 on by looking at the difference of... between safety and price, routes, or services mentioned in (c)(1)... in other words, you would not define safety after 1994 based on its contextual comparison to prices--

Chief Justice Rehnquist: Where... where exactly is (c)(2)(A)?

Mr. Sutton: --Excuse me, Your Honor.

It's on A-2 of our appendix, and it's... it's labeled motor carriers of property.

Excuse me.

I should have made that more clear.

The point I was trying to make is that these other terms in (c)(2)(A) I think all would agree would be defined by other provisions in title 49.

For example, the word safety would be defined by the provisions in chapter 311 of title 49, which is a large... a large section of the code dealing with safety provisions.

It would not be within the States' rights after 1994 to suddenly start reinventing new definitions of safety, new definitions of hazardous materials routing restrictions or size and weight routing restrictions.

We would be stuck with all of those definitions, including notably those preemption provisions.

We think it would be a rather odd interpretation of (c)(2)(A) to say that, yes, you determine the meaning of all of these preserved matters by reference to other parts of title 49, but you do not do so when it comes to what the meaning of safety regulatory authority of a State is.

And when you look at those other provisions of title 49, it's quite clear that Congress contemplated in all of them... routing restrictions, safety... that States could delegate their power to local subdivisions.

That's not only in some of the statutory provisions, but it's in the regulations.

Justice Scalia: Well, but it's not defined.

It doesn't... there's not a definition that says, State includes political subdivision of a State.

Mr. Sutton: That's not our argument, Your Honor.

We're not saying a State--

Justice Scalia: I understand it's not your argument.

Mr. Sutton: --We're not saying--

Justice Scalia: It would be a stronger argument if that were your argument.

That... that's my point.

[Laughter]

Mr. Sutton: --I... I disagree, Your Honor.

We're not saying that... Congress... let me put it this way.

Congress has no right to empower a city.

Congress can't create a city.

They can't give it a power.

That's a power the States have.

It made perfect sense in (c)(2)(A) to preserve the safety regulatory authority of a State because it's the State legislature's job to determine what other political bodies, if any, regulate in that area.

Justice Kennedy: Well, in that connection, I was going to ask could this... suppose that you do not prevail in this case and we accept the respondents' interpretation.

Could the State then every year have a cleanup statute in which it says the State hereby adopts... or authorizes cities that are no less than X number of persons, no greater than Y number of persons, obviously referring to the City of Columbus, that... that the State then allows specifically Columbus to regulate, that it have an ordinance and it just tracks the whole ordinance?

Mr. Sutton: Absolutely, Your Honor.

And that we think--

Justice Kennedy: So, then we're not arguing about very much in your view.

Mr. Sutton: --Well, Your Honor, that would strike me as an extraordinary hoop for Congress to ask the States to step through.

We're not aware of a single statute that this Court has ever construed to mean that State legislatures alone, but not their political subdivisions, can regulate a particular area.

I'm not aware of a single statute where that's ever happened.

Justice Breyer: There's a... there's a problem with cities when you get to safety regulation for trucks.

Can you give me an example of a safety regulation that a city might want to have that wouldn't have a negative impact or some impact on routes?

Mr. Sutton: Right.

Excuse me?

The last word?

Justice Breyer: On routes.

Mr. Sutton: Right.

The... and I think the respondents' point is or suggestion is that it would be quite natural for Congress to say, as to routing restrictions, we want uniform laws.

We want them to be the same throughout the State, and we don't want to bother with municipalities establishing different regulations for a routing restriction.

Well, the... the whole point of a routing restriction is to account for differences within the topography or geography of the States.

Justice Breyer: Yes, but I mean, there's a long history in the ICC of trying to create, say, dynamite truck routes.

Well, you can imagine what something like that does once you start talking about it within the city.

And... and every neighborhood in sight says, send it somewhere else.

So, it's not illogical that people who are worried about creating uniformity of routes would say, keep the cities out of this.

It's... it's a nightmare.

And... and... but I have no reason to know whether this is so or not.

And so I ask you, is there any kind of safety regulation that doesn't get into that kind of routing nightmare when you talk about cities?

Mr. Sutton: Well, hazardous... I... I don't think the general rule has been that either the Federal Government or the States have been concerned about heavily populated regions deciding, for example, to route hazardous materials around their beltway as opposed to through the middle.

Everyone thinks that's a good idea, and the cities generally, including Columbus, have been left in control of that kind of decision, which is something obviously one doesn't need to worry about--

Justice Breyer: But I'm looking for specifically--

Mr. Sutton: --In a size and weight situation, of course, you're going to situations where bridges or particular roads in, you know, densely populated areas require different rules than in rural regions of a State where, for example, the roads are bigger and even if they're not bigger, they're not as near to either businesses or heavily populated areas.

Chief Justice Rehnquist: --How about a restriction that on a particular residential street that's, nonetheless, an arterial highway, no trucks over 10 tons?

Mr. Sutton: Could... could a... a... the question, first of all, would be whether that relates to interstate commerce, and if it relates to interstate commerce... that is, commerce between States... then the Department of Transportation is... is going to very heavily regulate that particular route restriction and... and has authority to preempt it, even as a matter of regulation.

If it's purely intrastate, traditionally that's been something that Congress or the agencies hardly regulated at all, and to the extent they regulated them, it was only when there was Federal funding.

But for the most part, the regime has been that a locality makes that decision through a delegation of power from their State legislature.

Justice Stevens: Mr. Sutton, can I ask you, do you regard... just assume the... assume the other side is right on their interpretation.

Would that mean that a city could not fix speed limits in neighborhoods?

Speed limit is a safety regulation, isn't it?

Mr. Sutton: It is, Your Honor, but title 49... I think it's 31147... specifically says that traffic laws... I think a speeding limit would fall under that--

Justice Stevens: It would be a traffic law?

Mr. Sutton: --is something that the Department of Transportation does not regulate and neither does Congress, which to me is one more indicator that you don't, after 1994, start having free-form debates about what safety means.

Justice Stevens: But even if the... if it's not federally regulated, would there, nevertheless, not be preemption under their interpretation of this provision of speed limit rules?

Mr. Sutton: On what ground?

I mean, it would have to be a price, route, or service for there to be preemption.

Justice Stevens: No.

I mean, if... if you read the (c)(2)(A)--

Mr. Sutton: As... I see what you're saying.

Justice Stevens: --as... as saying only States are... can... are... preserve the right to... to regulate safety--

Mr. Sutton: Right.

Justice Stevens: --it seems to me that would preempt a local government's right to fix a 15-mile limit in a school zone.

Mr. Sutton: I understand what you're saying.

I think the position they would take... and maybe they could clarify this... is that if it's not a price, route, or service, you ignore (c)(2)(A), and you simply go to the rest of title 49.

But I'm not... I don't know the answer to that.

If I could make one more point, Justice Scalia, and I hope this responds somewhat to the point you raised earlier.

State laws, even if you think of them as State legislative acts, are being preempted in this case.

Let's ignore the State of Ohio.

New York.

The State of New York says as to populations with more than 1 million people, the cities in... those populations can enact tow truck ordinances.

This interpretation that the court of appeals embraced preempts that State law.

There's no... strictly speaking, there's no such thing as a city law divorced from a State law.

The city power comes from the States and there's just no such thing.

And we think, as the lack of parallelism between (c)(1) and (c)(2) indicates, all they were doing was preserving that traditional safety regulatory authority of a State.

If I could save the rest of my time for rebuttal, I'd appreciate it.

Thank you.

Argument of Malcolm L. Stewart

Chief Justice Rehnquist: Very well, Mr. Sutton.

Mr. Stewart, we'll hear from you.

Mr. Stewart: Mr. Chief Justice, and may it please the Court: The phrase, safety regulatory authority of a State, in section 14501(c)(2)(A) is most naturally read to encompass the State's traditional authority to delegate its powers to political subdivisions.

That view is supported by the larger statutory context in which the phrase appears and by the purposes of the 1994 act.

As Mr. Sutton has explained and as this Court has frequently recognized, one integral component of the State's ability to regulate within its borders is to delegate as much or as little power as it wishes to subordinate political units.

Justice Scalia: We understand all that, of course.

And... and in isolation, that phrase most naturally would... would mean safety regulatory authority of a State, including, of course, its ability to delegate it to municipalities.

But what is sticking in our craw is the fact that elsewhere in the statute, the language is very careful to distinguish between the authority of a State, on the one hand, and the... and the separate authority of political subdivisions of the State.

Now, what... what is your explanation for those other separations?

Mr. Stewart: I guess there are about three responses we would make.

The first is, as Mr. Sutton points out, this is not a case in which the other provisions are identical but for the inclusion of the word political subdivision.

For instance, in subsection (c)(2)(C), which is at the... the top of A-3 of the--

Justice Scalia: Right.

Mr. Stewart: --petitioners' brief, it refers to the authority of a State or a political subdivision of a State to enact or enforce a law.

Now, even though delegating power to municipalities is an integral feature of the State's regulatory authority, it would certainly be less than clear that when a municipality enacted or enforced a law, pursuant to such delegation, it could not necessarily be said that the State had enacted or enforced that law.

And so, if the provision left out political subdivisions and simply said that the preemption rule does not apply to the authority of a State to enact or enforce a law, there would be ambiguity, and Congress... whether it was necessary or not, Congress might rationally choose to eliminate that potential ambiguity through an express reference to political subdivision.

But the phrase that appears in subsection (2)(A) is simply safety regulatory authority of a State, and that, as you say, would most naturally be construed to encompass the authority to delegate power to municipalities.

The second point is that based on the country's traditions, it would certainly be an unusual thing for Congress to interfere with the States' decisions as to the amount of power that should be delegated to subordinate political units.

Justice Kennedy: Has there been any... what's the closest case respondents could cite to show a contrary practice?

Mr. Stewart: I believe the respondents have cited a couple of court of appeals cases which have held--

Justice Kennedy: From this Court?

Mr. Stewart: --None from this Court.

The... the respondents have not cited any case in which this Court has held that any Federal statute had the effect of divesting a State of its authority to delegate power to political subdivisions.

Justice Scalia: Well, there are many Federal statutes that... that make grants to municipalities for various functions and don't make it to the State.

This is a... certainly the Federal Government interfering in the relationship between the State and its municipalities.

And the State has no... no ability to veto whether the municipality is going to accept those funds or not.

And there's... there's been a lot of controversy within the States between the municipalities and the State government as to... as to what money should be accepted and so forth.

It seems to me that has exactly the same effect as what you're talking about here.

The Federal Government has, indeed, indeed, intervened in the relationship between the State and its... and its political subdivisions.

Mr. Stewart: We cited the Lee Deadwood case in our brief as support for the proposition that Congress would constitutionally be authorized to preempt municipal law without preempting State law if it chose.

Our only point is it would be sufficiently unusual that we would expect Congress to address the matter fairly directly.

Justice O'Connor: Mr. Stewart, would you be able to give us any examples of municipal safety regulations that are preempted by this section as it's been interpreted below?

Mr. Stewart: We... I think that as it's been interpreted--

Justice O'Connor: As a practical matter?

Mr. Stewart: --As it's been interpreted below, I believe the types of regulations that have been held preempted are... are fairly similar to the City of Columbus's regulation, namely, a licensing scheme in which the vehicle is inspected, the driver is tested to ensure proficiency in the operation of the vehicle.

And those have been held to be preempted on the ground that they relate to routes--

Justice O'Connor: So, we're really talking about licensing schemes.

Is this anything that the State couldn't undertake to do itself with its State driver's license and so forth?

Mr. Stewart: --I... I think that the licensing scheme, while we would respect Ohio's decision to delegate that to municipalities, it... in truth I think this is something that could fairly realistically be accomplished at the State level.

Now, with respect to some of the other matters that are specified in (c)(2)(A), for instance, route controls based on size and weight or hazardous nature of the cargo, because the determination at issue is whether a particular vehicle or a particular cargo is suitable for a particular stretch of road, those are the sorts of things that can't realistically be expected to be done in their entirety at the State level.

And therefore, it would be a particular disruption of the State's processes--

Justice Stevens: Mr. Stewart, before your time goes out, will you give us your third point too?

You gave us the first two.

Mr. Stewart: --The third point is that to the extent that the provision at issue here is ambiguous and the Court wants to interpret it by reference to other relevant statutory provisions, it is important to examine the larger statutory context.

That is, (c)(2)(A) is not limited to safety.

It specifies these other matters, and as Mr. Sutton was pointing out, the other matters are covered in detail in different provisions of title 49.

In general, those other provisions of title 49 contain their own preemption provisions.

They explain at... at great length what States can and can't do.

At least in the area of safety, State law is specifically defined to include the law of the local governmental unit, and so the... the safety regime in the other parts of title 49 specifically contemplates municipal safety regulation.

And it would be odd to think that Congress, in this oblique way, has superseded that carefully developed statutory framework.

And to put this in larger historical context, to follow up on Mr. Sutton's point, from 1966 to 1995, at the Federal level there was division of regulatory authority between the ICC which did economic regulation and the Department of Transportation which did safety regulation.

And it's no coincidence that State law as to economic matters was preempted at about the same time that the ICC saw its powers diminished and the ICC was eventually eliminated altogether.

This was part of a larger program of deregulating the economics of commercial trucking.

But--

Justice Scalia: Who... who administers this statute?

Is there a Federal agency that... that can be said to be administering this... this statute?

Mr. Stewart: --There... there is no Federal agency entrusted with the administration of this particular statute.

The Department of Transportation administers the related provisions of title 49 that are specifically addressed to these matters, and their implementation of their responsibilities under those provisions would be affected by this Court's decision in this case because if there is no municipal safety regulation at all, that would obviously have an impact on their administration of the scheme for determining when municipal regulation is and is not permitted.

But they are not specifically entrusted with authority over this scheme.

So... so to return to the point about the division of responsibilities, Congress eliminated the ICC, eliminated Federal economic regulation of commercial trucking, and at the same time it preempted State law in order to ensure that the States didn't undo the Federal deregulatory efforts.

But there's been no Federal deregulation in matters of trucking safety.

The prior provisions of title 49 remain on the books.

There's no expression of congressional discontent with the manner in which power in those areas has been divided between the Federal, State, and local governments.

To the contrary, the conference report accompanying the 1994 act refers specifically to those preexisting provisions and expresses the intent that their administration continue unchanged.

Justice Stevens: May I ask this question on the division of responsibility?

Is it your view... your understanding that the cities would not be able in their licensing scheme to regulate the rates that the truckers charge?

Mr. Stewart: That's correct.

If there are no further questions, I have nothing further.

Justice Ginsburg: To what extent, Mr. Stewart, does the Department of Transportation... you said there's no administrator of the statute, but they do have authority under the motor safety... motor carrier safety assistance program that seems to be relevant.

Mr. Stewart: The motor carrier safety assistance program, and they also have authority under other provisions of title 49 to review and declare to be preempted State and local laws... State and local safety laws that apply to transportation in interstate commerce.

Again, those are not provisions of this particular statute.

They are among the preexisting provisions of title 49 that were intended to be preserved by subsection (c)(2)(A).

Argument of Richard A. Cordray

Chief Justice Rehnquist: Thank you, Mr. Stewart.

Mr. Cordray, we'll hear from you.

Justice O'Connor: Mr. Cordray, I hope you'll tell us the practical effects of the decision below.

Mr. Cordray: The practical effect of the decision below, as you uncovered it in your questioning earlier, is that Federal law preempts municipalities and other local governments from imposing their own individual licensing schemes upon motor carriers of property and that is--

Justice O'Connor: Well, it also speaks to routes or weight limitations.

Are there situations where the city or town is particularly aware of traffic problems within the city or a weak bridge or something and that its limitations are needed?

Mr. Cordray: --Size and weight limitations, as the other matters addressed in (c)(2)(A), would be regulated at the State level, not at the local level under the proper reading of this statute.

And the reason is that Congress did not want to open up the trucking industry, where it was attempting to do something new, which is deregulate it nationwide and create an unfettered free market for trucking and transportation services.

Justice Kennedy: So that if a city says no trucks through the park with the public playground between certain hours, that has to be the... the State?

That's the only one that could do that?

Mr. Cordray: That could be done at the State level and it could be done either by going to the State legislature, as you suggested, or it could be done by setting up a very simple administrative scheme at the State level where you would go to the State department--

Chief Justice Rehnquist: Well, why would--

Justice Breyer: --Well, most cities I've been in had--

Chief Justice Rehnquist: --why would Congress choose to... to regulate in that way, say we want the State to do it but not the locality?

Mr. Cordray: --Specifically because they were trying to deregulate this market nationwide.

To leave in place every municipality with the option to license different motor carriers of property is not only--

Chief Justice Rehnquist: No.

I'm not talking about licensing.

I'm talking about the... the example of, say, that no trucks over 10 tons on this particular road.

Mr. Cordray: --Again, I think that petitioners agree and all the courts have agreed that every subsection of (c)(2)(A) has to be read together, and to the extent municipal authority is being preempted in one respect, it's being preempted in all.

And the reason is that Congress was recognizing that schemes directed specifically to motor carriers of property at the local level simply incorporated too much regulation that would interfere with and impede a free market for transportation services and motor carriers--

Justice Stevens: May I ask a similar question?

Supposing that there's a heavy rain storm in a city or something and it becomes unsafe to use a certain street if the truck is over a certain size.

Could... the police would not be permitted to divert the traffic around that particular flooded area, I suppose.

Mr. Cordray: --Certainly they could.

This goes to your question you asked earlier which is whether traffic laws, ordinary, general traffic laws, would be preempted under our--

Justice Stevens: No.

This is for safety reasons.

Mr. Cordray: --statute--

Justice Stevens: They figure it's... it's dangerous because the thing is too deep and the trucks have to over-set... overturn or something like that.

Mr. Cordray: --They... they would be... they would be diverting--

Justice Stevens: It would be preempted, I guess.

Mr. Cordray: --They would be... no.

They would be diverting presumably all traffic that's heavy enough to create a safety problem.

Justice Stevens: Supposing... truck size traffic, yes.

Mr. Cordray: Yes, but... but it's not directed simply to motor carriers of property.

It's directed to all trucks, all oversize vehicles.

It could be private vehicles, RVs that people use to take vacations, whatever it might be.

That would be permissible.

And traffic laws, I want to stress, are not preempted by this statute.

This statute is not limitless.

As this Court has--

Justice Kennedy: Well, then what about the... the answer that you gave earlier to the question that the Chief Justice and I had?

No... no trucks through the playground or... or through a residential neighborhood at a certain time.

I thought you said that would be preempted, but now you're saying it applies only if they're motor carriers of property?

Mr. Cordray: --Let me step back.

If the ordinance related to all oversize vehicles... that would be a general traffic regulation... that would be permissible.

And I'll... and I'll get to that in a moment, why traffic laws are not preempted by the statute.

They... they are not related to price, route, or service of motor carriers of property.

If it was directed specifically to a type of motor carrier of property, as this licensing scheme is... it applies directly, specifically, and only to tow trucks... that would be a different matter.

Municipalities are not permitted to do that, and Congress specifically wanted to do that because although there was a tradition of lots of regulation at the State and local level, Congress was making a policy decision, as it's free to do, to say that all of that is impeding a free market for transportation services and motor carriers that's affecting broad segments of the American economy.

We want to bring down costs, rid us of these inefficiencies--

Justice Breyer: I understand that, but I'm at the same question that I think everyone has asked.

In my mind... and I might be misremembering... there are lots of streets... there used to be in San Francisco and you'd see a sign, and it would say, no trucks over 3-and-a-half tons.

And it seems to me in Boston I can think of seeing signs.

I thought maybe they said, no trucks over such and such.

Maybe they just say no vehicle over such and such.

And my impression is that in many cities there are many such streets, and which streets there are is a matter for the municipality to decide.

And it's a shifting pattern, and typically it's in residential areas.

And there's lots of local regulation of that kind.

That's my impression.

And I want to know, on your reading of this statute, does this change when I'm thinking of those signs on one street after another?

Does that all change because they're preempted, and now each neighborhood has to go to Sacramento, if they're in California, and convince the... the legislature?

I'd be very surprised if that is so, that Congress changed so well established a municipal pattern of behavior without saying anything about it.

And therefore, I think everyone is driving at the same question.

I understand about all the licensing stuff, but I want to know the answer to that question.

Mr. Cordray: --All right.

Again, it's not what's specifically at issue in this case, but I understand the Court wants the answer to the hypothetical.

Absolutely.

Justice Breyer: It has nothing to do with this case.

I'm saying when your... accept the fact that if I accept your position in this case--

Mr. Cordray: Yes.

Justice Breyer: --at the moment I'm thinking all this traditional regulation of what street you can use if you're a truck is being wiped out.

I mean, that's relevant.

Mr. Cordray: It could be dealt with either of two ways, Your Honor.

Either it could be regarded as a general traffic law, like a one-way street, like a speed limit, and the like, in which case we believe that it would not come within the preemption clause ex ante because it has to have a connection with or reference to motor carriers of property to come within the terms of this preemption clause--

Justice Breyer: Motor carriers of property or just motor carriers?

Mr. Cordray: --Motor carriers of property which is what--

Justice Breyer: In other words, if they... if they don't say on the street motor carriers of property cannot use this, then it's not preempted.

Mr. Cordray: --Then it is a general traffic regulation no different from where the speed limit says 55 miles per hour and trucks have to obey it, just as cars do.

And motor carriers--

Chief Justice Rehnquist: Well, does the term, motor carriers of property... does that mean motor carriers of property for hire or any motor carrier that is carrying property?

Mr. Cordray: --Well, it would be those who come within the terms of this specific preemption clause.

Chief Justice Rehnquist: Yes, that's what I want to know.

Which does it mean?

Mr. Cordray: Yes.

I... I believe that this statute is referring to for hire carriers of... motor carriers of property.

Justice Souter: So... so, if a State were to say all prices of all trucks in this State have to be $50... all trucks... and they don't say motor carriers of property, that's not preempted.

Mr. Cordray: No, that is not correct because it's specifically referenced--

Justice Souter: Of course, it's not correct.

And similarly, if they say on a street, no truck can use this street--

Mr. Cordray: --Yes.

Justice Souter: --and they don't say motor carriers of property, it's the same.

Mr. Cordray: The reason is... no.

The reason is that specifically references price.

There are lots of laws that in... tangentially will affect routes.

All right?

A one-way street law, for example, has to be obeyed by trucks, just as it is by cars.

That's not within this preemption clause.

So, that's one way to address it.

All right.

And... and that would be true of all general traffic laws, just as it's true of all general tort laws, general tax laws.

Justice Scalia: Mr. Cordray, on this point, look at on page A-2, (c)(1), the general rule.

It has at the very end of it the phrase, with respect to the transportation of property.

Mr. Cordray: Right.

Chief Justice Rehnquist: Where are you reading from?

Justice Scalia: I'm reading on page A-2, (c)(1), the general rule from which (c)(2) is... is an exception.

And the general rule is, except as provided, blah, blah, blah, blah, no State, political subdivision shall enact any provision having the force and effect of law related to a price, route, or service of any motor carrier.

And then there's a lot of other language.

And then at the very end, with respect to the transportation of property.

Does that phrase at the end go all the way back to related to a price, route, or service with respect to the transportation of property?

Mr. Cordray: I believe it does, Your Honor, and it's just... it's just--

Justice Scalia: Well, that would make it a very narrow provision then, wouldn't it, that... that we're excluding the... the municipalities from?

Mr. Cordray: --I believe it is.

Justice Scalia: They just couldn't say you're not allowed to use this street to carry... to carry moving goods or--

Mr. Cordray: This is a key point.

Justice Kennedy: --But you're... you're asking... you're asking us to... to have a very careful grammatically correct reading of the act, and in your answer that... that you've just given to Justice Scalia, transportation of property is preceded by an or.

It seems to me the first clause is quite independent, related to a price, route, or service of any motor carrier.

That's it.

Mr. Cordray: With--

Justice Kennedy: So, I'm not sure the qualification you urge on us, in order to mitigate the effects of this holding works.

Justice Scalia: Well, I don't know what it would go to if it didn't go to that.

It can't go to the stuff after the or.

Or any motor... motor private carrier, broker or freight forwarder with respect to the transportation of... what is a... what is a motor private carrier with respect to the transportation of... of property?

It has no meaning unless you read it all the way back up to price, route, or service with respect to the transportation--

Mr. Cordray: --And the title of the provision is motor carriers of property.

That's specifically what they're dealing with, as distinguished from motor carriers of passengers, which are addressed earlier in the same section of the statute, 14501(a).

Justice Scalia: --It's not the best statute, is it?

Mr. Cordray: I beg your pardon?

Justice Scalia: It's not the best statute.

[Laughter]

Mr. Cordray: It's... it's clear enough with respect to the things we care about here, which is that--

Justice Stevens: Well, but I don't think it is.

Mr. Cordray: --Congress very carefully attempted to distinguish between a State and a political subdivision of a State.

And it did so repeatedly in the statute for the specific purpose of drawing a distinction between them.

And the only way--

Justice Breyer: There's not a word of legislative history I take it--

Justice Stevens: --If you read (c)(1) as narrowly as you're suggesting, you don't even need the exemption because it only relates to law, regulation, or other provision related to price, route, or service.

So... and it doesn't even reach safety.

Mr. Cordray: --No, that's not true, Your Honor.

And this case is a good example of it.

They are attempting to impose a licensing scheme with respect to tow trucks and could do it with respect to any motor carrier of property, parcel delivery service, or the like.

And their... their rationale for doing so apparently is safety.

But in fact, that is exactly what is preempted by this statute and by this clause.

Justice Ginsburg: But, Mr. Cordray, that's open.

Mr. Sutton said that that question whether these regulations are genuine safety regulations or, on the other hand, economic is not determined by this case.

Here the question is whatever is safety, may the State delegate that authority to the municipalities.

I did want to get your response to a question Justice Kennedy asked Mr.... and it was answered for you by Mr. Sutton.

Suppose the State says, okay, we do business by dealing with municipalities.

So, we will simply take the municipal regulation of Toledo and the municipal regulation of Columbus, and we'll put it all together in one package.

It will say, State regulation of safety, and... and we'll preserve everything.

Would that be permissible under your reading of this Federal statute?

Mr. Cordray: Yes, it would, Your Honor.

It would.

If the State is doing the regulating or enacting the law, under this statute, the way it reads and the... the way it was designed, that would be permissible, even if it's nonuniform.

If we wanted to make it uniform, we'd have to go to the legislature and try to get that package amended or go perhaps to the State department of transportation which also could do this through an administrative scheme.

Justice Ginsburg: So, it's strictly a question of form that we're dealing with, that States, you can delegate to your cities, as you always have, just say, cities, what do you want and we'll give it to you by enacting a State law.

Mr. Cordray: No.

It's not simply a matter of form because Congress made a judgment that if there were 50 different States imposing their own schemes, that would be less impediments and... and tangle of restrictions impeding a free market than if 39,000 municipalities and local governments around the country were free on their own to do what they wished, and that that... that was in fact very much undercutting the desire to get to a free market in transportation services.

But I also want to go back to your comment and your question earlier.

This statute does not itself distinguish between economic regulation that's preempted on the one hand and safety regulation that's not on the other.

The phrasing of the statute is much broader.

It is related to price, route, and services of a motor carrier of property.

That may not only be economic regulation.

And so the notion that that's the divide and we can simply remand, the lower court can sort it out, I believe is not correct.

Now, as we've seen here, the fact that the... the statute is broad does not mean it's all encompassing.

I mean, I could see an argument that truck... trucking companies no longer now have to pay corporate tax because that affects their price.

But that's a general provision.

As this Court has said in construing ERISA and needs to be imported here in the Dillingham case and the like, there has to be a connection with or reference to the specific item at issue.

Here motor carriers of property.

And that's what we have with this licensing scheme here which is directed specifically at tow trucks and will have a very direct relation and... and effect on their prices and services.

I also want to mention the problem of surplusage because it's not been mentioned on the other side, and it's very important here.

What possible reason would Congress have had for including in the statute what obviously is a key phrase?

It shows up seven times in the course of the single statute.

Political subdivision of a State.

Why would that be included at all if the authority of a State is to be read, as petitioners would have it, to always include within it the authority of a political subdivision.

Justice Scalia: Their... their answer is that... that when you speak of the regulatory authority of a State, that naturally connotes the authority to... to delegate that to... to municipalities.

But when you speak of the authority of a State to enact or enforce a law, that... that much less naturally includes the authority of a municipality to enact or enforce a law so that... and all of those other references are in connection with that phrase, to enact or enforce a law.

Are they not?

Mr. Cordray: Two reasons why that does not work, Your Honor.

They agreed that the subsections of (c)(2)(A) have to be read in parallel and the second one with respect to size and weight and the like.

It doesn't say anything about regulatory authority.

It just says authority of a State.

Second, in the preemption clause itself--

Justice Scalia: Wait, wait.

I... I missed that.

Mr. Cordray: --Well, regulatory authority is the phrase used in the first subclause--

Justice Scalia: Right.

Mr. Cordray: --of (c)(2)(A) related to safety.

Justice Scalia: Yes.

Mr. Cordray: But they're not talking about authority to regulate.

They're just talking about authority of a State with respect to the size and weight, hazardous cargo, and then with respect to insurance.

And insurance is an excellent example I'll get to in a moment.

But also in the preemption clause itself, (c)(1), it refers to the authority of a State to enact or enforce a law or regulation.

That is regulatory authority, and it distinguishes it full stop from the authority of a political subdivision of a State to do the same thing.

What?

Enact or enforce a regulation.

So, the regulatory authority is being discussed specifically in the preemption clause itself.

That's the fallacy of starting the analysis here by jumping all the way to (c)(2)(A) and wrenching that text out of context and divorcing it from the preemption clause that it's meant to be a savings subordinate to.

But the preemption clause itself--

Justice Stevens: No, but (c)(1) uses may enact or enforce just as... as (c)(2)(C) does, whereas (c)(2)(A) does not.

The to enact or enforce language applies in every subsection except the one that we're arguing about.

Mr. Cordray: --That's correct, which is a telling point.

In every subsection, Congress went out of its way to add political subdivision of a State.

I've still not heard a single sensible explanation for why they would bother to do that.

Justice Stevens: Well, if... but if you didn't add the political subdivision in those States and if you had a home rule State, then a local government could... would not be affected by it.

Mr. Cordray: No, not correct because their notion is that State includes delegating to its local government as a delegated power from the State.

They want to read the two as being encompassed within one another.

Justice Stevens: When you described the regulatory... regulatory authority in gross as you do in (2)(A), then it would apply to the authority to delegate.

But when you're talking about authority to enact or enforce, then you have to identify the entities that do the enacting and the enforcing.

It seems to me that's a perfectly logical distinction.

Mr. Cordray: Well, I don't believe it is, Your Honor.

And again, there's nothing about regulatory authority that is unique in this statute because (c)(2)(A) does refer to regulatory authority with respect to safety, but it doesn't refer to regulatory authority with respect--

Justice Stevens: Well, don't you agree that if you didn't have all the other subdivisions in here, that would be the normal reading of regulatory authority, which would include the authority to delegate?

Mr. Cordray: --I would agree that if (c)(2)(A) alone were the statute--

Justice Stevens: Correct.

Mr. Cordray: --that would be a sensible reading.

But if you... that... that's taking it out of a context where Congress specifically is dealing with a State and a political subdivision regularly in the statute and then in one instance a special kind--

Justice Stevens: Yes, but in one... but in one provision, they say regulatory authority, which has a plain meaning that you'd be... brings a result you disagree with.

In the other they consistently use authority of a State or a political subdivision to enact or enforce.

Mr. Cordray: --But it doesn't--

Justice Stevens: If you don't refer to political subdivision, it just wouldn't include it.

Mr. Cordray: --It doesn't have a plain meaning.

It doesn't really have any meaning because in the preemption clause itself, they're referring to the authority of a State to regulate, and they're separately referring to the authority of--

Justice Stevens: No.

It says a State or a political subdivision may not enact or enforce.

That's the language of the preemption clause.

Mr. Cordray: --Correct.

That's right.

Enact or enforce what?

A regulation, which is the same thing as to regulate.

Chief Justice Rehnquist: (c)(2)(A) at the bottom of page A-2 in the same sentence uses this shall not restrict the safety regulatory a State... authority of a State with respect... or the authority of a State.

They don't use the adjective regulatory even in the second clause.

Mr. Cordray: That was my point.

I was trying to make it earlier.

I... I didn't make it as clearly as you just did.

But that's exactly--

Chief Justice Rehnquist: Well, obviously, I... I missed it, so say it again.

[Laughter]

Mr. Cordray: --Well, that's exactly right.

Trying to give some special meaning--

Justice Scalia: Where?

What... what section are you talking about?

Mr. Cordray: --We're talking about (c)(2)(A).

Chief Justice Rehnquist: At the bottom of page A-2.

Mr. Cordray: This is a point I tried to make earlier and I did not make it as clearly as the Chief Justice just did.

Justice Scalia: I didn't get it.

Mr. Cordray: But they're attempting to give some special meaning to the phrase safety regulatory authority, but by their own argument, that can't follow because they want to... they have to read all these provisions the same way.

And the second subclause there refers--

Justice Scalia: The authority of a State.

Mr. Cordray: --to the authority of a State, nothing about safety, nothing about regulatory, and has to be read in the same fashion.

I would also point out that the third subclause there, which relates to insurance requirements, they would be saying that municipalities are free to impose their own insurance requirements upon motor carriers of property.

So, FedEx, UPS in different municipalities would have to meet different insurance requirements.

They'd have to do different kinds of filings and have very different kinds of--

Justice Stevens: You're too fast for me.

Where is the insurance requirement?

Justice Scalia: At the very end of that provision.

Mr. Cordray: --It's the third subclause in (2)(A).

Justice Scalia: (2)(A).

Justice Stevens: Oh, in... in (2)(A), okay.

Mr. Cordray: And that is completely at odds with the statute because in 14504, which this Court is going to take up in a case called Yellow Freight next term, it says specifically there... Congress said even 50 registrations by motor carriers of property in different States for insurance purposes is too many for our taste.

We think there should only be one, and they said the single State--

Justice Breyer: Well, what about the middle one?

What about the middle one?

It says, the authority of a State to impose highway limitations.

Mr. Cordray: --Yes.

Justice Breyer: Now, I can't figure out, for the life of me, how... why Congress would have wanted to say the State can impose limitations on the use of highways, but the city cannot impose limitations on the use of streets.

But your reading would lead to that.

Mr. Cordray: That would be one respect, Your Honor, in which either... if it was a general traffic regulation, then it would not be preempted at all.

Or if it were preempted, it would have to be done at the State level and it could be done by the--

Justice Scalia: I thought part of your argument was also that streets are not highways, and I'm surprised you didn't make that point when we were talking about the... you know, no trucks on a school street or something like that.

Isn't the term highways arguably different from... from local residential neighborhood streets?

Mr. Cordray: --Arguably it could be, but I believe for purposes of title 49, it's a defined term to include streets.

But our point there was that it's perfectly sensible for Congress to say that the States shall deal with these issues, but not the municipality.

Justice Souter: And you found not a word... am I right?

There is not a word in the history of this... although there was some human being who wrote these words, there is not a word in any document, hearing, report, debate that casts any light on this one way or the other.

Mr. Cordray: One way or the other.

But again, traffic regulations--

Justice Souter: Is that right?

Mr. Cordray: --generally are not within the preemption clause.

Justice Souter: No, no.

I'm just trying to... it's mysterious to me.

Mr. Cordray: Yes.

The legislative history here--

Justice Souter: And I'm having trouble, and therefore I... I just sometimes look at the legislative history--

Mr. Cordray: --Yes, I understand.

Justice Souter: --to try to figure it out.

And you haven't found anything, nor does the other--

Mr. Cordray: The legislative history here is confused and somewhat unilluminating.

Justice Scalia: --I guess we'll have to use the statute.

[Laughter]

Justice Ginsburg: Mr. Cordray, is there... is there an example... any other example of a Federal statute... I mean, it is unusual to say, States, you can no longer decide how your authority is going to be exercised.

An ordinary mode of a State exercising its authority is to delegate it to localities.

Apart from this statute, is there any other Federal statute that says, State, you may do it but you may not delegate it to a regional or local or municipal unit?

Mr. Cordray: There are two responses to that question.

The first is the example that was already given which is when the Federal Government puts a grant to a municipality full stop and doesn't allow the State to control the use of that grant, that's an example like this.

But the other point I would make is throughout its history, Congress has--

Justice Ginsburg: Well, that's a State... that's... that's--

Mr. Cordray: --May I--

Justice Ginsburg: --Congress giving money to a municipality.

I asked an instance in which Congress says, State, you may do it but you, State, may not delegate.

Mr. Cordray: --I know of none, but this is a new departure for Congress.

They have always taken free markets and sought to regulate them.

Here they're taking a market they had regulated and the States and localities had regulated and they're now trying to deregulate it.

That's a new development and it calls for new measures.

And the measure here was to try to clear away all this underbrush of... of State and local restriction--

Justice Ginsburg: Since it was... since you say it's singular and this is new, wouldn't you expect Congress to make a clear statement that the State may not delegate this authority because--

Mr. Cordray: --Congress did make a clear statement by including the term, political subdivision, whenever it wanted political subdivisions to either have authority or be restricted in that authority, and then specifically speaking only to States here.

There could not be a clearer statement of that.

Why else ever use the term, political subdivision?

That is unexplained.

Justice Ginsburg: --And the State may not delegate this authority to a political subdivision.

Just as simple as that, to negate what has been the assumption all along.

Mr. Cordray: They could have used the term State everywhere alone and then said, State but not political subdivision, here.

Or they could this term, State and political subdivision, everywhere and omit the term, political subdivision, here.

Those are the same meaning and they're the same purpose.

And again, canons of construction have been denigrated in this case, but they have to do with the natural and ordinary reading of statutes.

The baseline that Congress uses to draft laws in some confidence that the executive branch and the courts will interpret them as Congress meant them, and that's exactly what's--

Justice Ginsburg: The executive branch.

Now, you... I know you have said, and I quite agree, that the Department of Transportation has no supervisory authority, it has no Chevron deference.

But doesn't it deserve some respect from the courts simply because it has familiarity with the area of motor carrier regulation that the courts don't?

Mr. Cordray: --That's a... that's a statement I couldn't disagree with more strongly.

The Solicitor General here has conceded they have no authority to administer this statute.

The notion that you have a--

Justice Ginsburg: They've not conceded the Department of Transportation... you... deserves no respect.

Mr. Cordray: --The... the notion that a deregulatory statute that took governmental entities out of an area to create a free market would now be subject to umpiring by the Federal agency, in terms of the scope of preemption, which is an issue this Court has always said is for the courts to determine--

Justice Ginsburg: I didn't say umpiring.

I said its views on the proper construction of this statute.

What weight, if any, should this Court give to the Department of Transportation's view, this is what the statute means?

Not as an umpire, not as a referee.

Mr. Cordray: --Their construction is to leave them as an umpire.

But I would say certainly not Chevron deference.

At most some sort of Skidmore respect, but that's only entitled where there's some sort of reason to think that before they got to their litigation position here, which has migrated in the course of this case... it started off as an argument about repeal by implication.

It's now turned into argument about sort of reading statutes together to import them into this statute... is entitled to really, I think, no respect here because it is not persuasive.

They have not analyzed the statute in detail--

Chief Justice Rehnquist: Well, if... if you lose, you know--

Mr. Cordray: --in any of their prior--

Chief Justice Rehnquist: --If you're changing your argument... you know, if you lost in the lower court, you'd probably be well advised to change your argument.

[Laughter]

Mr. Cordray: --I wouldn't disagree with that, Your Honor.

But again--

Justice Scalia: Mr. Cordray, what... what about the point made that if... if you accept your interpretation, municipalities not only would not be able to enact regulations themselves, they would not be able to enforce regulations adopted by the... by the State, which would be a great inconvenience, that the only enforcement can be by the State police and not by local... local police.

Mr. Cordray: --We agree, but that's not what this preemption clause is about or any preemption clause is ever about.

When they say enact or enforce here, they don't use it in the terms of making law and executing the law.

They use it in the... in the sense of enacting new law or applying... or enforcing and applying preexisting law.

And the point of this preemption clause is to say that municipalities do not have the authority to act in this realm by imposing their own public policies.

It's a matter of either new law or preexisting law.

That's the structure of many of these preemption statutes the Court has dealt with.

Justice Kennedy: If we think this statute is... that there are arguments either way for interpreting it, shouldn't we pay heed to the petitioners' point that it's a very serious matter for the Congress of the United States to tell States how they should govern themselves?

Mr. Cordray: We think the language of the statute is clear here, Your Honor.

They explicitly extinguished the power of the municipality--

Justice Kennedy: Let's... let's say we... we disagree with that.

Is... is that not... let's say we find the statute in... in equipoise, or the arguments.

Should we not give force to the argument petitioner makes that the States should be presumed to have the authority to determine how best to govern themselves?

Mr. Cordray: --No.

There's no substantive Tenth Amendment issue here.

There's no commandeering of States or local governments to enact some sort of program.

This is the same as the Court in Wolens where they said this statute must be read to say the State cannot legislate in this area, but they can enforce contracts through their courts.

There's no Tenth Amendment problem with that.

That's Congress exercising its power under the Supremacy Clause, anything in the laws or constitution of the States notwithstanding.

And as the Solicitor General said in the brief in the Mortier case, the notion that when Congress decided that there could be State regulation but they had to preempt local regulation, that they would somehow have to be forced to preempt State regulation as well, simply turns the Tenth Amendment on its head.

So, we don't think that there's any... any serious constitutional issue here.

Justice Stevens: It seems to me your argument boils down to the point that there are 10 provisions in the statute.

Nine of them are perfectly clear.

The tenth says the same thing, but we're not going to read it the way it seems to read because it's not as clear as the other nine.

Mr. Cordray: No, that's not what it boils down.

Justice Stevens: That's about all it amounts to.

Mr. Cordray: It boils down to the fact that Congress deliberately inserted a phrase here, political subdivision of a State, so that it can preempt--

Justice Stevens: In the... in the nine, right.

Mr. Cordray: --And... and it--

Justice Stevens: If you just read the one all by itself, it's perfectly clear too.

Mr. Cordray: --Well, it's... it is clear, I believe, because it's clear because they said a State cannot... a political subdivision cannot--

Justice Stevens: But the only reason--

Mr. Cordray: --and they state the authority of a State to do certain things.

Justice Stevens: --The only support you have is they're not as detailed and specific in the one in question as they are in the other nine.

Mr. Cordray: No.

I think it is equally detailed and specific.

And... and there's no rationale for Congress legislating in this way or drafting this language or enacting it unless they intended to make a difference.

That's... that's the whole purpose of including that language.

Justice Scalia: Your support is the context of the statute, which--

Mr. Cordray: No.

Text and context.

That's correct.

Rebuttal of Jeffrey S. Sutton

Chief Justice Rehnquist: --Thank you, Mr. Cordray.

Mr. Sutton, you have 4 minutes remaining.

Mr. Sutton: I'd like to respond to a few of the points--

Justice Souter: Mr. Sutton, could you ask one... answer one factual question for me?

Your... your brother made the argument that in... in reading (c)(2)(A), he went to the last clause and said on your theory every political subdivision could enact its own financial responsibility and insurance laws and so on.

Mr. Sutton: --Yes.

Justice Souter: And that would be a crazy scheme.

My... my question is, is there in fact any history of municipalities enacting these kinds of statutes so that it's something that might have been in Congress's mind?

Mr. Sutton: No, Your Honor, not in... in the insurance area.

But there's a... I think a better answer to that concern, and the better answer is, our point is that (c)(2)(A) incorporates all of these preexisting preemption provisions.

They are preemption provisions in other parts of title 49, whether it's insurance, safety, size and weight routing, or hazardous material routing.

So, the problem with Justice O'Connor's point of practical consequences... in reversing the Sixth Circuit, there is no gap here.

Why?

Because for 60 years, Congress and the Department of Transportation have been regulating these very areas, both with respect to State laws and city laws, to the extent they've been enacted.

So, the multiplicity of insurance regulations is a false concern.

I mean, the... Congress has already indicated in 31138 and 39 what the rules are there.

The Department of Transportation has implemented regulations that do get Chevron deference, and they lay out what the rules are.

Justice Breyer: The same problem, you didn't, is... to me anyway, is... is (3)(A).

Do you see what I'm thinking?

I mean, the same human being at the same time wrote the words in... in (c)(2)(A) and he used the word State, and at precisely the same time, he wrote the second exception, which is (3)(A)--

Mr. Sutton: Right.

Justice Breyer: --and he put in political subdivision.

And what I cannot get over is I don't see how a single human being on the same day at the same time could write two exceptions, use the word "State" in one and use the word "political subdivision" in the other, without meaning a difference.

Mr. Sutton: Right.

Your Honor, look... compare (3)(A) to (c)(1).

They follow the exact same enact or enforce language.

(c)(2)(A) does not use the enact or enforce language.

Justice Breyer: That's the answer.

Mr. Sutton: That's the answer, number one.

Number two, remember, (c)(3) is for the benefit of motor carriers.

They want to make sure they could have these rules, whether city or State, apply to them on a city-by-city not State-by-State basis.

Now, the... the regulatory purpose, Your Honor... the landmark legislation in this area was the 1980 law that deregulated interstate commerce.

Everyone agrees that did not divest cities of authority.

The 1994 law at issue here was about intrastate commerce, primarily to put FedEx and UPS on a level playing field, and suddenly respondents are saying that deregulated... regulatory purpose required the divestment of local authority?

Chief Justice Rehnquist: Well, what's... what's Congress's authority to regulate intrastate commerce?

Mr. Sutton: It's at its outer edges, and that to me is what is so odd about this particular interpretation.

They're saying in the intrastate area, you could divest States of their authority to delegate, but they've not done it in the interstate area?

I mean, how absurd is that?

It's... it's got it exactly backwards.

Now, the practical consequences... I want to go back to again... of their interpretation.

(c)(2)(A), they've agreed, has to be construed the same way throughout, and there are countless... as we indicated in our opening brief, every State in the country has delegations to cities that have size and weight controls, size and weight rules that would be eliminated by this particular construction.

Thank you.

Chief Justice Rehnquist: Thank you, Mr. Sutton.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Rush Prudential HMO, Inc. v. Moran - Oral Argument

Fri, 09 Jan 2009 14:50:27 +0000

Case:

Rush Prudential HMO, Inc. v. Moran

Media File:

00-1021_20020116-argument.mp3

Related Transcript:

transcript.xml

Transcript:

ORAL ARGUMENT OF JOHN G. ROBERTS, JR. ON BEHALF OF THE PETITIONER

Chief Justice Rehnquist: We'll hear argument first this morning in Number 00-1021, Rush Prudential HMO, Inc. v. Deborah C. Moran.

Mr. Roberts.

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

ERISA preemption cases can be exceedingly complicated, but our submission this morning is straightforward.

This Court held in Pilot Life that ERISA's civil enforcement provisions were the exclusive remedy for improper processing of a claim for benefits under an ERISA-regulated plan.

The Illinois independent external review law at issue in this case affords a different remedy for a beneficiary dissatisfied with an HMO's denial of benefits.

The Illinois law is therefore preempted.

Just last week, in Great West Life, this Court began its analysis by noting that it was especially reluctant to tamper with ERISA's enforcement scheme, and by quoting prior precedent for the proposition that that enforcement scheme indicated that Congress did not intend to authorize other remedies that it forgot to incorporate expressly.

That same language, quoted in Great West Life, was quoted 15 years ago in Pilot Life.

ERISA's remedies are exclusive, whether we're talking about additional Federal remedies or additional State remedies.

Mr. Roberts: Mr. Roberts, could you help me with one part of the facts I'm a little puzzled about?

Your opponents argue there's a difference between the plan and the HMO, and that he claims that you... what you say would apply to a suit against the plan, but this is a suit against the HMO, and I have been unable to find the plan in the papers.

Is the plan in the record?

Mr. Roberts: The respondent alleged in the complaint, joint appendix page 32 and 38, that the certificate of coverage was the plan, and that is in the record.

It is Exhibit A to the complaint.

Mr. Roberts: The certificate of coverage... who are the parties to the certificate of coverage?

Mr. Roberts: The certificate of coverage is an agreement between the HMO and the employer that extends to particular employees the benefits that are set forth there.

Mr. Roberts: And in your view, you say... are they just hooked by their allegation, or do you think it's clear that that is the correct... that is the plan?

Mr. Roberts: I think they're first bound by their allegation, but second of all, even if other documents also contribute terms to the plan, certainly the certificate of coverage indicates elements of the plan.

There may be other documents that set forth other terms of the plan.

Mr. Roberts: You see, they say that's an insurance policy that is purchased by the plan, in effect.

That's... and that therefore there's a distinction between the plan and the insurance policy, and I know you disagree.

You say the HMO is not an insurance policy, but is there... explain to me why that's totally wrong.

Mr. Roberts: Well, it's totally wrong because the question is not how the State law operates to grant a new remedy to a beneficiary.

We think it's irrelevant whether it operates on the insurance policy or whether it operates on the plan.

The point is, however it operates, it provides beneficiaries, under an ERISA-regulated plan, with a new remedy, and that remedy is one that's not granted by Congress in ERISA, and the Court in Pilot Life said only the remedies that are granted are available.

Mr. Roberts: Of course, one could also say it's not really a new remedy, it's a new protection, sort of like the... see, the question is whether Pilot Life controls or the Massachusetts case controls.

It's an interesting... whether it's something like a compelled benefit or a compelled protection of some kind--

Mr. Roberts: Right.

Mr. Roberts: --that the insurance company provides.

Mr. Roberts: Yes, and I think the difference is, between mandated benefits laws like Massachusetts, those laws provide, as this Court said in UNUM, a rule of decision that is to be applied by whoever the decision-maker is in reviewing a denial of benefits.

Here, it's not a new rule of decision, it's a new decision-maker, and that decision-maker isn't looking to State law to say, well, they've given you mental health coverage and so that has to be provided, he's deciding what... whether the denial of benefits was proper or not, and that can only be characterized as a remedy, whether it's--

Mr. Roberts: Well... no, I didn't mean to interrupt.

Isn't the problem that he's doing two things?

The decision that he makes is necessarily going to have its consequence on whether the benefit denial was correct or not, but he's also making a medical kind of decision, is, in fact, this reasonable medical practice, and so he's not merely in the position which a court is in when a court says, does the evidence show this is reasonable medical practice.

He's in the decision of, in effect, making a kind of practice decision which doctors, as doctors, make, so it's somewhere in between.

Mr. Roberts: --We don't think that's a correct characterization.

There is no element of a treatment component in this decision.

The only thing that is at issue in this independent external review is coverage, for a number of reasons.

First of all, the treatment had already taken place.

There was no question of treatment.

But coverage is all that Rush HMO has undertaken to provide.

It does not provide health care.

It doesn't provide... it agrees to pay for health care.

Mr. Roberts: Well, this particular... I'm assuming in answer to your... from your answer to Justice Stevens, I'm assuming that in this case it is so, but their argument is, you can have HMO's that have nothing to do with ERISA plans, and you can have ERISA plans that don't employ HMO's to provide welfare benefits, and therefore it's appropriate to think of this as a medical decision or as a regulation of medical practice in a particular form, rather than insurance, so once again there's... the problem is that the facts do not place this in a clear category.

Mr. Roberts: Well, I... with respect, I think the facts do place this in a very clear category, because there's no question of treatment at issue.

Even if the State is purporting to articulate its definition of medical necessity, that's not the question.

The question is, is this beneficiary entitled to benefits under this plan, and the judgment about what is medically necessary is something that is addressed in the plan.

The plan provides the broadest possible discretion to the HMO to interpret the plan terms, including medical necessity.

Mr. Roberts: Well, but what if the State law in effect tinkered with how you interpret the plan, and spelled out that in determining what's medically necessary the plan will make use of an independent medical consultant.

Mr. Roberts: Well, the State law can define medical necessity.

I think that's just like a mandated benefit, saying you have to--

Mr. Roberts: And can it not say, and furthermore, if there's any dispute you will use an independent medical consultant?

Mr. Roberts: --That it cannot do consistent with Pilot Life, because that is a remedy for a denial of benefits, and Pilot Life indicated--

Mr. Roberts: Well, not necessarily.

It may be more a definition in the plan, or a provision of the insurance plan itself, and then that in turn is enforceable under section 502.

Mr. Roberts: --Well, that's--

Mr. Roberts: I mean, that's the argument, and I can understand that that, you could view it through that lens, could you not?

Mr. Roberts: --And I think, as Judge Posner pointed out in his dissent, if you do that, then all bets are off.

If you say that this is incorporated by State law into your plan, and so when you enforce that remedy, all you're doing is enforcing a term of the plan--

Mr. Roberts: Well, is that so surprising, in light of the fact that the ERISA law itself excludes regulations of insurance?

The law itself took that out of ERISA coverage, in effect.

Mr. Roberts: --Well, now that was the specific question addressed in Pilot Life.

That was... the heavy lifting in the Pilot Life opinion was reconciling the exclusivity of the civil remedies and the Saving Clause.

You can look at it one of two ways.

If you give the Savings Clause full force, then the remedies aren't going to be exclusive in a case involving an insurer.

If you give the exclusivity of ERISA's remedies full force, then the Savings Clause is relegated to a lower status, and--

Mr. Roberts: Well, we had a case, U-N-U-M v. Ward, and held that any statute that effectively creates a mandatory contract term and regulates only insurance companies is an insurance law under the Savings Clause.

Mr. Roberts: --UNUM did not involve a remedy.

It said, the question under Pilot Life and 502 was, quote, not implicated, because it wasn't a State remedy that they were trying to save under the insurance Savings Clause.

It was a rule of decision.

This is not a rule of decision.

It's a different decision-maker, and if this type of State law remedy is allowed, then there's nothing left--

Mr. Roberts: But UNUM--

--But Mr. Roberts, can--

--wasn't a procedural ruling.

UNUM was a question of how late could you file, and the State law said you could file late, and--

Mr. Roberts: --The law--

Mr. Roberts: --why should that be treated differently?

The State is making something timely, giving the beneficiary a chance to collect that the plan itself would not have given.

Mr. Roberts: --I think that's correct.

I... the line is not... and this is what UNUM taught.

The line is not between substance and procedure when you're talking about mandated coverage.

That's not the line we're advocating.

The line we're advocating is between mandated coverage, what does term, what does the plan have to provide, and UNUM said, one thing it has to provide, whatever the coverage is, coverage for those claims that are filed in a timely manner, or, if not, that did not prejudice the insurer.

This is different.

This is not a new term of coverage.

It's a remedy.

If you don't like what the HMO has done with your benefits claim, you get to go to a State law, independent external reviewer, and get it overturned, and--

Mr. Roberts: But it's a different kind of remedy than saying, for example, punitive damages.

It's--

Mr. Roberts: --It--

Mr. Roberts: --And I thought that's what Pilot Life was about.

Mr. Roberts: --The argument is made that this is okay because all you get are the benefits that you're entitled to under the plan.

We think that the Taylor decision, decided the same day as Pilot Life, rejects that argument.

It says that one of the claims in that case was for the benefits due under the plan, not punitive damages, not emotional distress, the plan benefits, and the Court said, that's not only preemptive, that's completely preemptive.

ERISA preempts not only different remedies, but alternative, additional remedies.

Mr. Roberts: Well, under your theory there could be no private arbitration agreement by an HMO plan and people covered by the plan?

Mr. Roberts: No.

I think that's certainly an open question.

The issue there would be--

Mr. Roberts: I don't see how it's open under your view.

Mr. Roberts: --Arbitration... it's the difference between a voluntary agreement between parties, which is what ERISA seeks to enforce, and something that's compelled by State law.

The analogy that the Solicitor General draws to the collective bargaining--

Mr. Roberts: But under your rationale, 502 controls.

It's a remedy.

So how could a private agreement to arbitrate survive under your theory?

Mr. Roberts: --Well, it would survive because it would be regarded as an internal plan procedure, not--

Mr. Roberts: But wouldn't it also conflict... wouldn't it also conflict with the statutory provision?

Mr. Roberts: --No.

No.

I mean, the... ERISA allows internal remedies, appeals within the plan, and again it's an open question, but we don't dispute that the arbitration would be allowed.

The problem with the analogy to the arbitration cases is that the Solicitor General stops too early.

Yes, you can have voluntary arbitration, even where remedies are preempted, but surely a State law that directed that parties to a collective bargaining agreement must arbitrate, and here's how they must arbitrate, would be preempted by the Labor Management Relations Act.

If you pursue the analogy to a situation that's comparable to this case, the conclusion that there's preemption seems to follow inexorably, and the idea that everything is all right because at the end of the day you have to enforce this in a section 502 action really makes a hollow shell out of Pilot Life.

You have to sometimes enforce arbitration in court, but we still think of arbitration as a different remedy.

We don't say, that's a judicial remedy because it has to be enforced.

Mr. Roberts: Yes, but there's another difference with Pilot Life, and that, the only question is whether it related to the insurance.

Here, you have... you admit it's related, but then you get onto the second ball game of whether it's a change in the insurance coverage, and one can look at this, I think... I just need... I want you to comment on this... as not changing a term of the plan, but, rather, changing a term of the insurance policy purchased by the plan.

Mr. Roberts: And we actually go on to the third game which is, if it conflicts with the substantive term of ERISA, and this is what Pilot Life held, it is preempted, and this conflicts with the exclusivity of the remedies.

We don't believe, when you go through the usual insurance Savings Clause factors, that this is the regulation of insurance, but what Pilot Life held, and this was the important part of the decision, which was unanimous, is that when you look at the Savings Clause you have to be informed by an understanding of what Congress was trying to do with the exclusive remedies, that the most important... quote, most important consideration in deciding whether that remedy in that case is covered by the Savings Clause was that Congress said that all the remedies were exclusive.

If you allow them back into this back door of the Savings Clause, then that exclusivity is going to be completely undermined.

That's the issue that's here before the Court.

Mr. Roberts: That is... I'd like to expand just a little, because I'm actually trying to work out what's the framework within which we think of this, and I had thought that that part of Pilot Life was really part of the reason for interpreting the Savings Clause as it was there interpreted, that normally what you do is ask the first question, is this preempted in the first place, and it is if there's field preemption, if there's conflict preemption, and maybe, with ERISA, if there's something more, and ordinarily, if there is such a conflict, the Federal side wins, but the whole point of the Savings Clause is to say, if there's a conflict in respect to insurance, the State wins.

Stop right there.

But then maybe Pilot Life adds something else, which says, but it couldn't just say if there's a conflict that brought you into preemption in the first place, well, the Federal Government wins, because that would be to eviscerate the meaning of the Savings Clause.

Now, that's the framework in my mind, and I'd appreciate anything you could help with that.

Mr. Roberts: And again, that poses sort of a conflict between what the Court in Pilot Life said were the exclusive remedies and the Savings Clause.

That's not a new issue.

That is what this Court unanimously decided 15 years ago in Pilot Life when it said, when we look at the Savings Clause, the most important thing... most important thing... is to keep in mind the remedies are supposed to be exclusive, so that if this is a remedy, it is a regulation of ERISA, it is not the regulation of insurance, and the Court reaffirmed that approach in the John Hancock case where it said, and I'll just quote one sentence, no decision of this Court has applied the Savings Clause to supersede the provision in ERISA itself.

If you apply the Savings Clause to allow this State law remedy to be applied, that would be superseding what this Court said section 502 of ERISA meant in Pilot Life, which was that these remedies are exclusive.

That question was addressed.

That was... and I'll say it again, that was the hard part of the opinion in Pilot Life, and that was reaffirmed in John Hancock, and--

Mr. Roberts: I see that.

Then I'd think what you're saying, I take it, is at least where the conflict is particularly severe, it's perhaps not... the State doesn't necessarily win, and you think this is a particularly bad one.

Mr. Roberts: --Well, I do think it's particularly bad, but I don't think it has to be.

I think if the State law stands as an obstacle to the accomplishment of the Federal objectives, it is preempted.

The Federal objective requires exclusivity with respect to remedies.

This obviously stands as an obstacle to that objective and so is preempted.

Now, they say it's saved because the last stop in this State law remedy is a quick dash into Federal court to get a stamp that says, enforce.

The State law says, if the reviewer says you've got to provide this, the HMO has to provide it, and they say, well, that's okay, because we run into Federal court, we make this a 502 action.

Well, that makes Pilot Life ridiculous, because it says every type of remedy is okay so long as the last stop is a quick visit to the Federal courthouse.

It also raises very serious Article III concerns, because Federal courts are not supposed to be looking at decisions made by... made under State law that they have no authority to review and simply rubber-stamping them, and it gives rise to the bizarre results that the respondent and the Solicitor General support in this case that an action to enforce section 4-10 is completely preempted so that there's jurisdiction, but then it turns out section 4-10 is not preempted at all.

That's a very curious result, but they have to maintain--

Mr. Roberts: What is section 4-10, Mr. Roberts?

Mr. Roberts: --4-10 is the State law, of the Illinois HMO act.

I've been referring to it as the independent external review law.

But they have to maintain that facade.

Mr. Roberts: Would you state the absurd positions again?

[Laughter]

It didn't strike me as that absurd, but--

Mr. Roberts: What is absurd is that they have to maintain that this can only be enforced under a 502 action, that the State law claim... keep in mind this began, of course, as a State law claim in State court.

502 wasn't mentioned at all.

It was recharacterized as a 502 action, they said because it's completely preempted, but the underlying remedy that's being enforced isn't preempted at all.

Now, those are two different questions, jurisdiction and substance, but it does seem odd that if you're going in and all you're doing is getting a rubber stamp from the Federal courthouse saying, enforced, that that's completely preempted, when the law isn't preempted at all.

Mr. Roberts: --Well, what they're... it's not absurd, in their view, anyway, because they're saying they have a human being over here called an arbitrator and this human being tells you what the benefit is, and what your clients are really objecting to, frankly, is not this remedy.

They couldn't care less.

What they're worried about is that that human being called the arbitrator is going to say that this woman has to have a certain treatment that otherwise in their view she wouldn't have to have.

I mean, just imagine the statute that said, instead of what it says, that you have to provide medical treatment whenever there's a 25-percent chance of improvement.

No arbitrator at all in that one, and they'll be even more excited, and indeed, it doesn't take away the Federal remedy in my hypothetical, nor does it in this one.

It just turns out that we know who's going to win.

Mr. Roberts: Well, that's because there's a different decision-maker making the decision on your claim for the denial of benefits, and that's what makes it clear that what's involved is a different remedy.

It's also a remedy that changes dramatically what the plan actually provides, and it does that by taking away from the plan fiduciary the deference that the fiduciary--

Mr. Roberts: Is that fiduciary, a definition of his powers of review and so forth, in the record anywhere?

Mr. Roberts: --I'm sorry, the--

Mr. Roberts: The... you two or three times refer to the fact that the plan gives the fiduciary this standard of review.

Is that in the record?

Mr. Roberts: --No.

The only elements of the plan that are in the record is the certificate of coverage, which--

Mr. Roberts: So for all we know the plan might actually say, whatever Illinois law requires the decision-maker to do shall be done.

Mr. Roberts: --Well, that's what the law provides.

Mr. Roberts: I mean, maybe the plan says that, too, for all I know.

Mr. Roberts: No, because the elements of the plan that are in the record, the certificate of coverage, notes that the HMO has the broadest possible discretion to interpret the terms of the plan in deciding coverage and, under this Court's decision in Firestone--

Mr. Roberts: It says that in the certificate?

Mr. Roberts: --Yes, and... pages 7 and pages 8.

It's Exhibit A to the complaint... and under this Court's decision in Firestone, that means that that decision is subject to a deferential review.

The State law changes that, and the State law gives the decision to the independent external reviewer, who makes his decision apparently de novo, so that the precise thing that the plan participants, parties contracted against, the recognition that this medical necessity is a question of judgment, some people are going to view it differently, we want to make clear that it's our discretion that controls, and that gives us entitlement to deferential review--

Mr. Roberts: Mr. Roberts, some close to 40 States have laws like this?

Mr. Roberts: --Yes.

Mr. Roberts: And there's legislation introduced, at least in Congress, to accomplish what?

Mr. Roberts: My understanding of many of the pending bills is that they have an external review provision but, of course, it's a Federal one, and that is consistent with ERISA's goal of uniformity in claims processing and administration.

Mr. Roberts: Do you know anything about the status of that pending legislation?

Mr. Roberts: No.

Mr. Roberts: Other than at various times passage is imminent, and then it falls apart, but again it's a very different thing to say, this is the uniform Federal remedy, and to have, as Your Honor points out, at present 40 different remedies, if you're running a company that has a health care plan with operations in different States, the health plan can't be uniformly--

Mr. Roberts: Are most of the State law provisions similar to the one in Illinois?

Mr. Roberts: --They all have differences.

For example, in some States the independent external reviewer is an administrative board.

In Michigan, it consists of seven people in certain places.

In some places it's not just one person, it's more than one person.

Some places it consists of employee representatives as well as physicians, but it does change what the parties contracted for, and--

Mr. Roberts: Why is that a more disturbing change than changes in what is the minimum required coverage?

Mr. Roberts: --Well, I don't know that it's more disturbing.

It's different, yes.

The impact on an HMO can be greater if the State law says, you must provide mental health coverage, this, this, and this, but then at least the employer looking at it knows what's at stake, and he knows that the remedy is going to be the remedy that is provided under Federal law, which is that they're going to enforce what I have agreed to provide under this plan, even if what I've agreed to provide is compelled by State law.

You know that you're not going to face all sorts of different remedies and in particular, here, if you contract for the broadest possible discretion, you know that when the review is undertaken your fiduciary decision will be reviewed with appropriate deference.

That is taken away here.

It's taken away by giving the independent external reviewer the authority to make a de novo decision, so that what is set up are two very different remediary regimes.

The Federal regime, the fiduciary makes a decision with the broadest possible discretion.

His obligation is to be faithful to the terms of the plan.

That is reviewed in Federal court.

Mr. Roberts: But it's not the fiduciary's decision, as I understand it.

It's the insurance policy's decision.

Mr. Roberts: Or someone to whom that discretion has been delegated under ERISA, and there's a provision in ERISA that allows them to say, this is the entity that is going to make the final decision.

Under 503, that is a fiduciary decision, the final denial or grant of benefits.

That's the Federal remedy.

The State remedy is, the independent external reviewer makes his or her decision, and that decision is binding and final.

Those are two very different remedies, ERISA's remedies are supposed to be exclusive, and the decision below undermining that exclusivity should be reversed.

Mr. Roberts: Mr. Roberts, before you sit down, would you just give me a moment of your views on whether or not it's appropriate to regard the HMO as an insurance company?

Mr. Roberts: The HMO is properly regarded as an insurance company when it is engaged in the business of insurance.

Just because it's an insurance company doesn't mean that all of its activities, including claims processing, for example, are necessarily the business of insurance.

Mr. Roberts: Very well, Mr. Roberts.

Mr. Albers, we'll hear from you.

ORAL ARGUMENT OF DANIEL P. ALBERS

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

The Illinois section 4-10 is an insurance law that does not conflict with ERISA section 502 or this Court's decision in Pilot Life, and therefore it is enforceable to protect the interests of Illinois Insureds like Deborah Moran.

Mr. Roberts: Does the Illinois law provide for review in Illinois State courts?

Mr. Albers: The Illinois law does not provide one way or the other.

Section 4-10 does not say that.

This case was reviewed and was enforced by the Seventh Circuit as a 502 action.

Mr. Roberts: But the action was originally brought in State court, was it not?

Mr. Albers: I originally brought the action in State court to enforce the independent review because the insurer was refusing to provide any independent review at all, and the two parts of the statute, the requirement that there be medical necessity, this review and then the actual enforcement of the decision, were parsed at the district court level and in the Seventh Circuit.

Judge Conlon initially remanded the case after it was removed, finding that the medical necessity portion of the statute did not offend Pilot Life or section 502.

Back in State court, Judge Kinnaird in Chancery found that medical necessity did not offend 502 and ordered a medical necessity review.

The medical necessity review determined that the procedure was medically necessary.

It was then... I then sought payment of the benefit, and that was removed to Federal court and Judge Conlon found that was a 502 action.

Mr. Roberts: If the Seventh Circuit view is upheld by this Court, in the future would actions lie in State court to enforce this, or just under 502?

Mr. Albers: I think consistent with the Court's 502 ruling in Pilot Life, it would be a 502 action to seek benefits.

I think there's a different question with respect to whether it was just the enforcement of that portion of the statute which requires medical necessity.

I don't think that then you're seeking the benefit, and I submit that it was perfectly appropriate to send this case back to State court for that determination and that ruling, but ultimately, to get the benefit, I would suggest that that would have to come under 502, under the Court's reasoning in Pilot Life.

This case does not conflict with Pilot Life, as petitioner suggests.

In addressing the conflict issue which has been raised, which I think is central to the decision the Court needs to make, I think the Court should consider the burdens that petitioner must meet to show that conflict.

ERISA preemption is a defense.

Mr. Roberts: Could the State provide for liquidated damages, do you think--

Mr. Albers: You mean, damages other than the benefit itself?

Mr. Roberts: --under the reinsurance regulation exception?

Mr. Albers: You mean, other than the benefit itself, Your Honor?

Mr. Roberts: Uh-huh.

Mr. Albers: I would submit, under your... the Court's ruling which you wrote in Pilot Life, that it would probably be inappropriate to go beyond the specific damages that are permitted in ERISA, which is recovery of the benefit, and I think then under the statute you're permitted to recover interest and attorneys's fees, and that is all Deborah Moran has ever sought in this case was the benefit that she was entitled to under the Illinois statute for what was determined to be a medically necessary procedure, which also saved her right arm.

Mr. Roberts: How--

--That's true, but the question is, who is to decide whether she has gotten what she was supposed to get, and what the claim here is that that was supposed to be decided pursuant to one system of review, and the State has substituted a totally different--

Mr. Albers: And under 514(b), the Savings Clause, the State has the right to do that.

That does not offend ERISA in any way.

Section 503--

Mr. Roberts: --Isn't that what Pilot Life was all about?

Mr. Albers: --Pilot Life did not talk about who the decision-maker would be.

Pilot Life talked about the enforcement of the benefit had to be in Federal court under 502.

Pilot Life was a State common law cause of action which was not an insurance law in bad faith and in contract which sought compensatory and punitive damages beyond the benefit.

The Court said, you can't do that, because that offends 502 and, by the way, all--

Mr. Roberts: I see, so you think all it meant was the last shot has to be in Federal court.

Mr. Albers: --I think it--

Mr. Roberts: I assume the State could provide that all of these contract claims would be first reviewed in State court so long as it further provides that the ultimate judgment of the State court would only be enforceable by suit in Federal court.

Would that be okay?

Mr. Albers: --I think that's... if the State law provided for a judicial review in State court, I think that would offend 502.

The State law does not provide for that.

Mr. Roberts: Arbitration is not another means of review?

I mean, I--

Mr. Albers: No, I don't think arbitration is--

Mr. Roberts: --You don't think you change the remedy--

Mr. Albers: --No.

Mr. Roberts: --if you say your remedy is not a lawsuit but arbitration?

I--

Mr. Albers: The remedy--

Mr. Roberts: --I find that a startling proposition.

Sure, arbitration has to be enforced in court, but I've always thought that that's a separate remedy.

You ask, what's your remedy, is it a lawsuit or arbitration?

Mr. Albers: --And this gets down to the issue of what a remedy is, and I looked up remedy in Black's Law Dictionary, and it has two elements.

It has the process, some courts have found, and it also has the result of the process, the enforcement, and I think in Pilot Life this Court was talking about the enforcement, not the means of reaching it.

Mr. Roberts: Okay, consistent with that, in a shorthand kind of way we refer to this as an arbitration, or as an arbitration decision.

Is the independent reviewer acting really as an arbitrator in the classic sense?

I'm assuming that an arbitrator in the classic sense listens to evidence in arguments and decides which of those evidence and arguments is the better according to some legal standard.

I have assumed, contrast, that what the independent review here is doing is not only listening to other people, but making a medical judgment himself, as a physician.

If the latter is true, then it doesn't seem to me that it is a classic example of arbitration, but I may be wrong on that, and I don't want to lead you in the direction of an analysis that ultimately will not pan out.

Am I right in distinguishing true arbitration from this, or should we regard this as true arbitration imposed by State law?

Mr. Albers: I think this is not... I think you're right, and I think this is not true arbitration as imposed by State law.

I think the Court found in Pegram that medical necessity decisions contain both elements of coverage determination and elements of a medical--

Mr. Roberts: What is--

--May I just ask one... they did in that case, but my concern is, is that true here?

In other words, what can you tell me about the terms under which the reviewer acts that says this is, and in part at least, or ultimately, an independent decision by the reviewer about medical necessity as opposed to an adjudication of which side has the better claim, which an arbitrator might make?

Mr. Albers: --The statute itself, 4-10, requires an independent review by a physician in the relevant specialty.

The statute doesn't provide any further guidance with respect to how that review is going to be done.

In this case, it was done de novo.

It was done by supplying the relevant definition of medical necessity to the reviewer from the insurance contract certificate, and providing all the relevant medical records.

Mr. Roberts: Does it matter under Illinois, under this Illinois law, whether there's an adequate treatment that's less expensive?

Mr. Albers: No.

It's de novo review by the independent reviewer.

Mr. Roberts: And there's no element in it of determining whether there's a slightly less effective remedy, but with fewer risks and less costly?

That's irrelevant?

Mr. Albers: The statute doesn't address that.

I think that if that was a part of the definition of medical necessity that was in the insurance contract document, that would be relevant to the reviewer's decision.

Mr. Roberts: It can be in the insurance contract, those provisions?

It wouldn't conflict with Illinois law?

Mr. Albers: Illinois law does not define medical necessity, and so for our analysis we've assumed the only place that the reviewer could go would be to the plan documents and the plan document here is... there is no plan document, but the relevant portion of the plan document is the insurance contract which defined medical necessity, and that's what the reviewer used, and that's my understanding of what they intended.

Mr. Roberts: And how did they define it?

What was the definition?

Mr. Albers: There were a variety of factors to consider.

What are the available treatments?

Are they accepted generally in the medical practice?

Mr. Roberts: But wouldn't the--

Mr. Albers: What are the risks?

Mr. Roberts: --I mean, the word necessity sounds like it means you have to have this, and if you had something that would be equally effective and less expensive, then it wouldn't be a medical necessity.

Is this the general understanding of what necessity is, or... you seemed to be saying earlier that it was something different.

Mr. Albers: I'm not sure I understand.

Mr. Roberts: I thought that--

Mr. Albers: I'm sorry, Your Honor.

I'm trying to--

Mr. Roberts: --You asked whether, suppose... I think Justice O'Connor asked you, suppose there was effective treatment that was less expensive, would this particular treatment still be a medical necessity, and I thought you answered yes to that question.

Mr. Albers: --I think that's up to the judgment of the independent reviewing physician.

He certainly can take into account whether there's an equally efficacious treatment available that's less expensive, and then reach his judgment as to which one he or she believes is medically necessary in that circumstance.

Mr. Roberts: Could I come back to your colloquy with Justice Souter?

The conclusion that you drew is that this is not really arbitration because it's a doctor.

What would it take to make it a remedy of arbitration?

Why isn't it arbitration?

Suppose a lawyer... suppose the Illinois law read just the way it reads now, except it wouldn't be a medical doctor who passes on this but, rather, a lawyer who would hear medical testimony from both sides.

Would that, putting a lawyer in the shoes, convert it to arbitration?

Mr. Albers: My understanding of what Justice Souter asked me was that it had the traditional elements of what we consider an arbitration, which is, you review the evidence from both sides, they have an opportunity to argue, and then you make a decision, and that's what I meant when I said it's not classic arbitration.

It is like arbitration, in that you give it to a neutral third party who then makes their review.

Mr. Roberts: There are no submissions to the doctor in this situation?

Mr. Albers: The Illinois law does not provide... and actually what... for the specifics of that, what it does say is that the HMO must set up the independent review mechanism, and there is no authority in Illinois on what that must contain or not contain.

Mr. Roberts: What does it contain?

I would find it surprising if both sides didn't press upon the doctor there their view of the case.

You mean, he just sort of walks in blind and--

Mr. Albers: All I can tell you is what happened in this case, Your Honor.

In this case, the HMO submitted a series of questions to the doctor, one of which was... and it included a lot of the elements that Justice Ginsburg asked about and Justice Souter asked about with respect to, what are the available treatments, are they less expensive treatments, what are the risks, and so on, and then he was given all of the relevant medical records and given the definition of medical necessity, and he made a determination that this particular surgery was medically necessary.

Mr. Roberts: --And what about your client?

Did you put any questions to the doctor?

Mr. Albers: We did not, because they covered all the questions we thought were relevant.

Mr. Roberts: You mean, you don't actually want to know how the system works in Illinois?

I mean, I'm also quite surprised that in the Illinois system, which has been running for sometime, the patient wouldn't have an opportunity to say to the arbitrator, this is my side of it, and I would be equally surprised if the doctors who think the other way don't have an opportunity to tell the arbitrator what their position is.

Mr. Albers: There's--

Mr. Roberts: Maybe I'm always surprised in a lot of things--

[Laughter]

So tell me I should be surprised.

May I go back to Justice--

--What is the answer, though?

What is the answer?

Do you not... are you not familiar with the system in Illinois?

Mr. Albers: --Your Honor, I'm probably as familiar as any lawyer in Illinois.

Mr. Roberts: Fine, if you're as familiar as anyone, and it's an ongoing system, and I think the--

Mr. Albers: This is the only case.

Mr. Roberts: --This is the only case Illinois has ever had?

Mr. Albers: This is the only legal case that's ever been brought under the medical necessity statute.

Mr. Roberts: No, is this the only case in which the arbitration system has ever worked in Illinois?

Mr. Albers: I have no data on that, and the State doesn't keep data on that.

I did ask--

Mr. Roberts: Do you accept that this is an arbitration system, then?

Do I understand that in your response to these questions?

You think it is an arbitration system?

Mr. Albers: --I think it is an arbitration, and then it goes to a neutral third party--

Mr. Roberts: Well, I would be amazed if people... I mean, am I right to be amazed that you have a system where people can't make arguments--

Mr. Albers: --I--

Mr. Roberts: --or can't present their point of view to the arbitrator?

I've never come across such a thing, and I take it--

Mr. Albers: --There's nothing in the law that precludes either one of the parties from--

Mr. Roberts: --Could I ask you a slightly different question, which is the thing that... I'd very much appreciate, before your time expires, if you could just address for at least a minute or so what I think is a difficult aspect of the case.

Why is this insurance?

That is, what I'm thinking is that, after all, every company that sells a product with a warranty is to that extent an insurer.

Every credit card that says you can return defective merchandise is to that extent an insurer.

Every manufacturer, even without a warranty, who accepts a product back because it's defective is an insurer.

Yet Congress couldn't have meant in this Savings Clause to allow States to win conflicts that broadly, so why does this fall within the kind of insurer that must fall within this Savings Clause?

Mr. Albers: --I think the Court in Pegram... and it wasn't the issue before the Court in Pegram, but said that HMO's act like insurers and transfer risks like insurers, and the Illinois statute defines an HMO as an entity that bears risk.

Mr. Roberts: That's why I gave my example, because I wanted you to see that virtually every manufacturer of the United States is a insurer in that sense, and so is this the kind of thing that Illinois has traditionally regulated?

Is it the kind of thing that other insurance commissioners have tended to regulate?

What makes this an insurer different from General Motors?

Mr. Albers: Yes to both those questions.

The HMO Insurance Act is part of the Illinois Insurance Code, and I think that the insurance law meets all the factors the Court has set forth in its prior decisions with respect to what constitutes an insurer.

Mr. Roberts: What about a law firm that handles all of the client's legal business, just as an HMO handles all of the client's medical business, for a flat fee, and there are firms that do this, especially in the labor field.

Many unions just hire a firm to handle all of the union members' legal business for the whole year.

Is that law firm, like this HMO, an insurer?

Mr. Albers: I don't think so.

That's... it's not a--

Mr. Roberts: What's the difference?

Mr. Albers: --They're not a traditional insurer.

Mr. Roberts: One is providing legal services, and they don't know how much it's going to come to for the year, and the other one is providing medical services and they don't know how much it's going to come to for the year.

Mr. Albers: Well, laws regulating them would not be directed to them as acting as insurers.

They're not traditional insurers.

They don't meet the common sense definition of what an insurer--

Mr. Roberts: I don't think an HMO does, either.

I--

Mr. Albers: --This law is limited to the insurance industry.

It's limited to HMO's when they bear risk.

It does transfer risk by the very operation of the statute.

The Seventh Circuit and the Fifth Circuit agree that this is a statute which regulates insurance, and under this Court's precedents set forth in UNUM, the Court doesn't ordinarily disturb that determination of State law, so I would... I respectfully submit that it is an insurance company for purposes of what regulates insurance under 514(b).

Mr. Roberts: --Well, I think the question of what's insurance under ERISA is a Federal question, not a State.

Mr. Albers: Yes, that's... for purposes of 514(b), but you look at those factors, and one relevant factor is whether it... whether the State considers it to be an insurer or whether it regulates it as an insurer, and in both situations it does here.

In conclusion, I would suggest, in response to Justice Souter's question to petitioner, that this case falls squarely between the Court's two precedents in Massachusetts, Metropolitan Life in Massachusetts and UNUM.

It contains a procedural element of medical necessity, which is the relevant rule decision, just as the UNUM case determined that the notice prejudice rule was the relevant rule of decision, and it contains a substantive element, which is a mandated benefit term.

Once the medical necessity determination is made, that is a mandated benefit, and I submit to accept petitioner's argument this Court would have to reverse its decisions in UNUM, in Metropolitan, and in FMC.

The effect... I think Justice O'Connor raises this issue, what would be the effect of such a ruling on voluntary agreements, and I agree with the proposition that if there's a conflict between independent review and 502, then the parties couldn't even agree to provide independent review, which would change the practice across the country, because it is being provided by self-insured plans and by HMO's.

Under 514(b), I submit that this is a State insurance law which looked to harmonize the effect of that law and affirmed the States can regulate insurance and can regulate insurers' medical necessity decisions by leaving those medical decisions to doctors, who should be making them.

If there's no other questions--

Mr. Roberts: May I just ask, on the question of whether it's an insurance company, does the State insurance agency regulate the... you, in fact, would say the contract between the employer, the sort of unnamed employer that Ray talks about, and the HMO, is an insurance policy?

Mr. Albers: --Yes.

Mr. Roberts: Does the Illinois Insurance Commission regulate the terms of that policy in any respect, other than this 510... this 4-10(c) provision?

Mr. Albers: Yes.

There's an entire statute which regulates the terms, and there are, for example, minimum benefit requirements for breast cancer treatments, for mental health coverage, there are requirements for minimum funding, for reserves, and so on, so there's all the traditional--

Mr. Roberts: Is the policy that this HMO issued to this employer the same form policy it issues to many other purchasers of HMO services from it?

Mr. Albers: --I can only assume it is.

I have no evidence on that, Your Honor.

Mr. Roberts: Very well, Mr. Albers.

Mr. Kneedler, we'll hear from you.

ORAL ARGUMENT OF EDWIN S. KNEEDLER ON BEHALF OF THE UNITED STATES, AS AMICUS CURIAE

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

The claim is made here that the section 4-10 of the Illinois HMO act conflicts with section 502(a).

In considering that claim, it's important to focus on the language of exactly what 502(a) addresses, and it is set out on page 2 of the petition.

502(a) is empowered--

Mr. Roberts: 502 of the petition?

Mr. Kneedler: --Of the petition, yes.

It's entitled,

"Persons Empowered to Bring a Civil Action."

and then it itemizes... it then continues, a civil action may be brought by various persons, and then it goes on to describe the judicial relief that may be granted, awarded in a suit under section 502(a).

In other words, the preemptive scope of section 502(a) has to do with causes of action, civil suits in court, and the judicial relief that may be awarded in court, and that is precisely the formulation that the Court used in Pilot Life itself.

At the conclusion of the Court's opinion in Pilot Life, the Court said in distinguishing Metropolitan Life, the Court said the Court in Metropolitan Life had no occasion to consider the question presented in this case, whether Congress might clearly express through 502(a) an intention that Federal, the Federal remedy provided by that provision displaced State causes of action, and that's what the question was about in UNUM.

Here, section 4... excuse me, in Pilot Life.

Here, section 4-10 of the Illinois HMO statute does not provide a State cause of action in court, and it does not provide any remedy or relief beyond what's available under the plan itself.

Mr. Roberts: Well, you could look at it that way, or you could look at it that it provides, the State law provides a cause of action before this arbitrator.

Mr. Kneedler: I don't think that's the way it--

Mr. Roberts: You have a claim before the arbitrator that you haven't gotten what is medically necessary, and the arbitrator shall resolve that cause of action just as, under ERISA, the court would have resolved what the contract said.

Mr. Kneedler: --I don't think that's the ordinary understanding of what a cause of action is.

A cause of action is ordinarily regarded as something that you would enforce directly in court.

Mr. Roberts: So the only remedies that you can't displace ERISA with are judicial remedies.

You can provide for any other kind of relief?

Mr. Kneedler: Well, I... my point is, that's what section 502(a) addresses, and the analysis in Pilot Life was, what does 502(a) displace, and it's... another important feature of Pilot Life is, the Court went through the various remedies that section 502(a) provides, and tellingly discussed this Court's decision in Russell in which the Court held that punitive damages were not available in a suit against a fiduciary based on claims processing, and the Court said it was not going to allow a State cause of action to displace Congress' judgment about damage remedies to allow and not to allow, or have--

Mr. Roberts: Well, Mr. Kneedler, supposing the State provided for a very elaborate arbitration procedure, you know, with right to counsel, specified the way the hearing should be conducted and so forth, but didn't say what would happen.

It just said the view of the arbitrator would be final.

That would not be preempted, in your view, by 502 because it doesn't contemplate judicial enforcement?

Mr. Kneedler: --Yes, and if it also did not provide for relief beyond that was available in the plan itself.

Mr. Roberts: Well, supposing that after that you could just simply bring an action under 502?

Mr. Kneedler: I think that would not be preempted.

In fact, most States... in this case, Illinois has not tightly regulated the form in which the independent review will occur, and that's consistent with the fact that these are highly judgmental medical judgments that medical professionals are looking at.

Mr. Roberts: That may be, but I want to go back to the Chief Justice's question for a minute.

Just assume the absurd example in which the State provided that there are going to be sort of 10 steps of arbitration and review between the initial denial by the plan fiduciary and the right to sue, so that someone would be tied up for months or years before the person could get into court.

In each instance, I'm assuming that it would not be a provision by the State of a cause of action in the sense that you have been using it, and yet wouldn't you concede in that case that the State scheme was keeping people out of Federal court for enforcement so long that it would, in fact, be in conflict and would be preempted.

Mr. Kneedler: I think the analysis there would be one of exhaustion of remedies under the plan, including those required--

Mr. Roberts: And if the exhaustion was exhausting, wouldn't you say that the--

Mr. Kneedler: --Yes, it could be excused, and the Department of Labor's regulations, and they--

Mr. Roberts: --No, but there would be a preemption in that case.

Mr. Kneedler: --There would be a preemption, but the Department of Labor has addressed that under its claims processing regulations.

Section 503 provides for a fair administrative processing of claims, and a separate--

Mr. Roberts: Okay, but doesn't that mean, then, that your answers to the several questions on this should be, it ultimately is a question of degree, this requirement of one step in a review process doesn't reach the point, in effect, of excluding the Federal remedy?

Mr. Kneedler: --Right.

It does not stand as an obstacle.

Another point that the Court stressed in Pilot Life was that the Congress struck a balance between the prompt and fair processing of claims and suits in court.

Well, but arbitration and independent review, measures adopted by State insurance laws of this sort, are precisely designed to facilitate the prompt and fair and expeditious processing of claims without having to go to court, so it--

Mr. Roberts: Mr. Kneedler, doesn't it give you a very different remedy... I mean, to say that it isn't just a matter of delay, that isn't the problem here.

The problem here is that under the plan, the plan manager's determination was to be given deference by the Federal court in deciding whether the plan had been complied with, whereas under the scheme set up by the State, his determination is not to be given deference.

It's this third party who's been brought in who will have the last word, and unless that's arbitrary, the court will enforce what he says.

How can that possibly be regarded as the same remedy that ERISA provided?

Mr. Kneedler: --Nothing in section 502... and this Court made this clear in Firestone... specifies the standard of review.

The Court therefore looked to background principles of law there, in trust law.

The Court here might look to background principles of arbitration law, and also to the terms of the plan.

State law, as Justice O'Connor pointed out, might well be able to say that that sort of provision for deference to the plan administrator's interpretation of the plan should not be given.

That would be a classic regulation of State insurance law.

I want to mention one other point about the characterization of Pilot Life, and that is this Court's decision in UNUM.

The Court there said, whatever the merits of UNUM's view of section 502(a)'s preemptive force, the issue is not implicated here.

The Court then went on to say why, because Ward sued under 502(a)(1)(B) itself to recover the benefits it was not a displacement of the Federal remedy, it was an invocation of the Federal remedy to recover benefits, and the Court said in that cause of action, the notice prejudice rule of California insurance law supplied the rule of decision.

So, too, here, in the cause of action under section 502(a)(1)(B) the State Illinois HMO law supplies the rule of decision, a procedure for an independent reviewer to give a quick, prompt review of the claim, and that independent reviewer's decision is... then supplies the rule of decision that the HMO must comply with, and that is then subject to review in Federal court.

The claimant's right to go to court is not frustrated.

He can seek review of the arbitrator's decision, or, as we point out in our brief, he can bypass this procedure altogether and can go directly to court, and so 502(a)(1)(B) confers rights on claimants, not on plans.

Nothing in the HMO act stands as an obstacle to the claimant's ability to go directly to court.

Another important point about UNUM is, the Court made clear that the processing of claims under an insurance policy, it is an integral part of that insurance policy, but at the same time States may regulate the process by which claims are adjudicated, and that is precisely what the State has done in this case.

It has provided a familiar mechanism.

40 States now have provided for this external sort of review, and it is common in insurance and medical practice to provide by second opinions by physicians, so what has been provided here is a very familiar sort of approach.

One other point about section 502, it's patterned after section 301 of the LMRA, an arbitration preceding judicial review is a very familiar aspect of judicial review under section 301.

Section 301 itself does not provide for any particular standard of review.

You can have de novo breach of contract suits, as in the Bowen v. Postal Service case we mentioned in our brief, or highly deferential standards of review where the particular issue has been committed to an arbitrable process.

502 has the same flexibility.

It can have a direct de novo cause of action, as the Court contemplated in Firestone, or, where the parties' underlying agreement or contract provides for a separate resolution process, there is deference to that process under section 502.

Mr. Roberts: Thank you, Mr. Kneedler.

Mr. Roberts, you have 4 minutes remaining.

REBUTTAL ARGUMENT OF JOHN G. ROBERTS, JR. ON BEHALF OF THE PETITIONER

Mr. Roberts: Thank you, Mr. Chief Justice.

My friend Mr. Kneedler again drew the analogy to the Labor Management Relations Act, and we are on common ground.

That's a good analogy.

He again stopped one step short.

A State law that compelled the parties to a collective bargaining agreement to resolve their disputes in a particular manner, even arbitration, would surely be preempted under the Labor Management Relations Act and, to the extent this remedy is similar to arbitration, that same conclusion applies.

We heard that there's no interference with 502 because beneficiaries have the option.

They can use the Federal remedy, or they can use the State remedy.

The existence of an alternative remedy is, in fact, an interference with section 502, and that test is that option with the beneficiary is peculiarly inappropriate when you're talking about preemption.

Preemption often is the result of a quid pro quo.

We're going to give, say, employees a Federal remedy, but for the employers we're going to make it exclusive.

To say that additional remedies are okay so long as the employee can still resort to the Federal remedy seems to ignore the typical dynamic of preemption.

And as far as the arbitration analogy goes, the fact that the plans may or may not be able to voluntarily adopt such a remedy doesn't mean the State can compel it.

Nothing prevented the plan in Egelhoff from voluntarily opting the beneficiary designation rule at issue there.

that didn't keep this Court from ruling that it was preempted.

Nothing preempted the plan in Greater Washington Board of Trade from saying, we're going to provide the same level of benefit to people on Worker's Comp as to others, and yet a rule mandating that was preempted.

We're dealing here with a compelled alternative State law remedy that changes completely the standard of review available under the Federal remedy.

It's not surprising the results under the two remedies came out differently.

That additional remedy is preempted.

Thank you, Your Honor.

Chief Justice Rehnquist: Thank you, Mr. Roberts.

The case is submitted.

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Wisconsin Department of Health and Family Services v. Blumer - Oral Argument

Fri, 09 Jan 2009 14:50:23 +0000

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Wisconsin Department of Health and Family Services v. Blumer

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00-952_20011203-argument.mp3

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Transcript:

ORAL ARGUMENT OF MAUREEN M. FLANAGAN ON BEHALF OF THE PETITIONER

Chief Justice Rehnquist: We'll hear argument first this morning in Number 00-952, the Wisconsin Department of Health and Human Services v. Irene Blumer.

Ms. Flanagan.

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

In 1988, Congress enacted the spousal impoverishment protections of the Federal Medicaid Act, 42 U.S. Code section 1396r-5, to accomplish two competing purposes.

First, Congress sought to protect spouses living at home from impoverishment when the other spouse is institutionalized and requires long-term nursing home care.

Secondly, Congress sought to ensure that married couples seeking medicaid bear a fair share of the cost of such care.

This case concerns whether States have the discretion to achieve those competing goals by taking into account at the time medicaid eligibility is determined available income which the nursing home spouse is permitted to use after eligibility to support the at-home spouse.

When the nursing home spouse applies for medicaid, section 1396r-5 permits the community spouse to retain certain income and resources to meet his own monthly maintenance needs.

The statute permits an increase in the standard resource allowance, however, if the at-home spouse can show at a fair hearing that the allowance will be inadequate to provide him with income at the State-protected level once the nursing home spouse qualifies for medicaid.

When making this determination, Wisconsin, like more than 30 other States, first considers whether income available to the at-home spouse from the nursing home spouse will be sufficient to ensure the protected level of income once medicaid eligibility occurs.

This method of determining whether to increase or to substitute the standard resource allowance is called the income-first rule.

Unidentified Justice: And what do the other States do?

Mr. Flanagan: The remaining States use a methodology called resource first, in which they look first to the additional resources above the standard resource allowance.

These cases only arise where the couple has resources above the standard allowance.

In this case--

Unidentified Justice: It would be very helpful to me if, right at this point, you pointed the statutory... pointed out the statutory provision that authorizes the State to transfer income at this stage.

Mr. Flanagan: --The statutory provision, I think, specifically is found in 42 U.S. Code 1396a(a)(17), which deals with State standards for eligibility and the Secretary's authority to set standards for determining availability.

Unidentified Justice: Do you have a handy reference in the brief somewhere to the, where we can see that?

Mr. Flanagan: It's in the Attorney... the Solicitor General's appendix at... the first thing in their appendix is the codified statute, 30... 1396r-5, the one we are discussing primarily, and... no, I'm sorry, 1396a is in... the first thing in the Solicitor General's appendix.

Unidentified Justice: Page 1a?

Mr. Flanagan: Yes, and (a)(17)--

Unidentified Justice: That's 8a.

8a?

It looks like 7--

Mr. Flanagan: --Yes, Your Honor, it is.

I'm sorry.

It is correct.

Unidentified Justice: --Then where in number (17) is the language that you're answering Justice Stevens with?

Mr. Flanagan: Okay, a(a)(17) provides that the Secretary shall include reasonable standards, and then you skip the one parenthetical, for determining eligibility for and the extent of medical assistance under the State plan, and then under (b), provide for taking into account only such income and resources as are... as determined in accordance with standards prescribed by the Secretary available to the applicant or recipient, et cetera.

Unidentified Justice: Well, and let me ask you a question on this point, if I may.

There is a section, 5(b)(1), r-5(b)(1) of section 1396 that says that pre-eligibility, none of the income of the community spouse shall be deemed available to the institutionalized spouse, right?

Mr. Flanagan: That's right.

Unidentified Justice: And you're talking now about post eligibility?

Mr. Flanagan: We're talking about a determination made at the point of eligibility, but which concerns income available post eligibility.

Unidentified Justice: Well, it says pre-eligibility none of the income of the community spouse shall be deemed available to the institutionalized spouse.

Mr. Flanagan: That's right.

That's right.

Unidentified Justice: And that provision wouldn't make sense if income of the community spouse itself included income of the institutionalized spouse.

Mr. Flanagan: Well, I think, Your Honor, the--

Unidentified Justice: Would it?

It wouldn't make any sense?

Mr. Flanagan: --I think you have to take into account that you're talking about income being calculated at different points in the temporal spectrum for different purposes.

Unidentified Justice: Well, you're... you seem to be arguing that the phrase, community spouse's income in (c)... in (e)(2)(c) includes income from the institutionalized spouse--

Mr. Flanagan: I think--

Unidentified Justice: --and yet it can't under that section I read, I think.

I don't understand how you get there.

Mr. Flanagan: --No, that particular section (b)(1) refers only to prohibiting income of the community spouse from being deemed available to the nursing home--

Unidentified Justice: Right, but Justice O'Connor's point is undoubtedly correct that income of the community spouse there means income of the community spouse alone, not any attributed income from the institutionalized spouse, right?

Isn't that right?

It has to mean only the income of the community spouse.

Mr. Flanagan: --I think you have to look at--

Unidentified Justice: In that section--

Mr. Flanagan: --what's available at that point.

Unidentified Justice: --I understand.

Do you have any other section in the act in which the phrase, income of the community spouse, means not just the income of the community spouse alone, but also income that has been attributed from the institutionalized spouse?

Mr. Flanagan: Under the definition of community spouse, income maintenance allowance, I believe... which is under subsection (d) to (b)--

Unidentified Justice: (d) to what?

Mr. Flanagan: --(d) to (b), refers--

Unidentified Justice: Can you tell us where in the SG's appendix that is?

It's on 59a of your cert petition.

18a?

59a.

Mr. Flanagan: --At any rate, that particular section refers to monthly income otherwise available to the community spouse, and the... our position is that this evidences a recognition of the fact, as medicaid has long recognized, that spouses are required to support one another, and that this is a background rule.

Unidentified Justice: Ms. Flanagan, it might help if... I think one of the main features of this legislation was that income from the community spouse was never to be attributed to the institutionalized spouse, but vice versa, there is no such prohibition.

Mr. Flanagan: That's right, and that's--

Unidentified Justice: None of this makes sense unless you appreciate that that was an absolute prohibition.

Now, tell us where that is in this statute, that says, income from the community spouse is not to be attributed to the institutionalized spouse.

Mr. Flanagan: --It's in subsection (b)(1), 1396r-5(b)(1), and that was referred to--

Unidentified Justice: That was the section I read to you--

Mr. Flanagan: --Right.

Unidentified Justice: --in my question.

Mr. Flanagan: Yes.

Unidentified Justice: Could I have an answer to my question?

The section you just referred me to is still not another section other than the one at issue here in which the simple phrase, income of the community spouse, is used in a sense that means the community spouse's own income plus any income attributed to the community spouse from the institutionalized spouse.

You say that that's the way it's used in the provision at issue here.

My question is, where else in the entire statute is it used in that fashion?

Mr. Flanagan: I don't believe it's used anywhere else.

That's why the difficulty in this case arose, is to try to figure out what that means.

Unidentified Justice: Well, no, I think that rather solves the difficulty, frankly.

Mr. Flanagan: I--

Unidentified Justice: I would normally think that income of the community spouse means income of the community spouse, and you say it means no, the community spouse's income plus attributed income.

I don't know anywhere else in the statute that it's used in that fashion, just in this one section where you say we should interpret it that way.

There are other sections where it clearly means only the community spouse's income.

Mr. Flanagan: --With respect, Your Honor, the medicaid statute has long considered available income as part of the income of the person to which it's referring, and we--

Unidentified Justice: I mean, where it does that, that's all I'm asking for.

If it's long done that, just give me another section where income of the community spouse means what you say it means here.

The phrase is used a lot, I'm sure.

Mr. Flanagan: --That particular phrase is not used frequently in this statute.

That's part of the problem.

It's only used--

Unidentified Justice: And isn't it true that the situation you're talking about we're deeming in the other direction, where they deem the community spouse income to be attributable to the institutionalized spouse, not vice versa?

Mr. Flanagan: --Well, Your Honor, Justice Stevens, the background rule which I referred to which this Court clearly articulated in Gray Panthers case is that spouses are expected to support one another.

That's a two-way street.

Unidentified Justice: That was for purposes of determining how much of the community spouse's income should be deemed to belong to the institutionalized spouse.

Mr. Flanagan: That's right.

I'm just saying that spousal support obligations are a two-way street, and the Court clearly recognized that.

Unidentified Justice: In this case, we have the unusual circumstance where Congress sought to provide additional protection to the community spouse to reverse the prior deeming rule which permitted States to take income from the community spouse and require it to be used for the cost of care.

In this case, in the spousal impoverishment provisions and this provision specifically, Congress is trying to protect the community spouse by making available to the at-home spouse income that is specifically contemplated to be made available as soon as eligibility occurs.

But it is clear, is it not, that the resource-first rule gives greater protection to the community spouse than the income-first rule?

Mr. Flanagan: The result is that it permits the... in general it frequently permits the at-home spouse to retain a greater share of the couple's joint resources than would be the case under the State-defined standard resource allowance, and in that sense, yes, that's definitely correct.

Unidentified Justice: Ms. Flanagan, am I right in thinking that the, neither the act we're talking about nor the SSI actually define community spouse's income?

Mr. Flanagan: No, it doesn't.

That's the exact problem in this case.

There is no definition, and our position is that community spouse's income means income possessed by the community spouse, income that the spouse has a right to, and income that is available to the spouse at the particular point when it's being considered.

Unidentified Justice: Was the income-first rule in Wisconsin adopted by the legislature, or by a State agency?

Mr. Flanagan: It was initially adopted as a matter of policy by the State agency immediately after passage of the statute.

Then in 1993 the legislature amended the statute to have an express income-first requirement.

Unidentified Justice: So then your State court, I take it, under prevailing Wisconsin rules, could not ignore the legislature's determination unless it found that the Federal statute was unambiguous.

Mr. Flanagan: That... well, that is what they did, yes, Your Honor.

They interpreted the Federal statute as being unambiguous.

They concluded that the State law conflicted with the plain terms of the Federal statute and therefore could not be enforced.

Unidentified Justice: Ms. Flanagan, as I understand it, there's a provision... and these have been referred to this morning, but there's a provision that forbids attribution from the community spouse to the institutionalized spouse, period, no qualifications on that.

Mr. Flanagan: During institutionalization.

Unidentified Justice: That's right, yes.

There's also a provision which recognizes the possibility of transferring income from the institutionalized spouse to the community spouse after eligibility has been determined, but does not require any such transfer.

It simply in effect says how you do it, is that basically correct?

Mr. Flanagan: It doesn't explicitly require the transfer.

There are, however, powerful incentives in the statute to basically require them to do it.

Unidentified Justice: But it doesn't, that latter provision doesn't make any reference to the period before eligibility, and I guess my question is, why don't we infer some kind of a negative inference... when the provision refers totally to the post eligibility period, why don't we find some negative implication that it was not expected in the pre-eligibility period?

Mr. Flanagan: Well, the fact is that the calculation that the hearing officers ask to be made here concerns the post eligibility period.

The question is, is the at-home spouse going to have sufficient income in the post eligibility period, or does the resource allowance need to be jacked up in order to provide that additional income, so in that context, the hearing officer is looking at the same period of time when the standard resource allowance goes into effect, the same period of time when the transfer provisions go into effect--

Unidentified Justice: So basically the answer is, the fair hearing has got to take place before eligibility is determined, and that's in effect the answer to my question.

Mr. Flanagan: --That's right.

If the calculation is looking ahead, if there are no--

Unidentified Justice: Ms.... I have one further question.

Mr. Flanagan: --Okay.

Unidentified Justice: And if you can't give me an answer right away, maybe you can when you come back.

It's sort of the flip side of the question I asked earlier.

Do... can you give us at least some other portions of the statute where income of the institutionalized spouse is clearly used to mean the institutionalized spouse's own income plus... plus income attributed to the institutionalized spouse from the community spouse?

Mr. Flanagan: Well, that really doesn't arise because of subsection (b)(1), which expressly precludes that.

Unidentified Justice: Okay.

Thank you.

Mr. Flanagan: Thank you, Your Honor.

Unidentified Justice: Thank you, Ms. Flanagan.

We'll hear from you, Mr. Lamken.

Mr. Lamken, you've heard the questions, and it is difficult, looking at the text of the statute, to figure out what supports the petitioner's view, although, as I understand it, that is also the view of the Federal Government here.

That income-first rule is okay.

ORAL ARGUMENT OF JEFFREY A. LAMKEN ON BEHALF OF THE UNITED STATES, AS AMICUS CURIAE, SUPPORTING THE PETITIONER

Mr. Lamken: Yes, Your Honor.

It's our--

Unidentified Justice: Now, are there proposed regulations of HHS that would allow either resource-first or income-first rules?

Mr. Lamken: --Yes, Your Honor.

There's currently a pending rulemaking before HHS, and the Secretary in the notice of proposed rulemaking has determined that States should be permitted to decide whether to use the income-first methodology or the resource-first--

Unidentified Justice: How far along is that process?

When is that going to be adopted?

Mr. Lamken: --The comment period closed on November 6.

There's been a little bit of a delay because there's concern that many comments might have been quarantined in the Brentwood facility.

However, we are hoping the Secretary can proceed and complete that process with all due speed.

Unidentified Justice: Can I ask what authority the Secretary has to say that the statute is ambiguous, so it can mean either one?

We don't even let Federal agencies do that under Chevron.

I mean, we didn't say in Chevron that a Federal agency can either say that a bubble means this, or say that a bubble means the other, willy nilly.

We said, since it can mean one or the other, we'll go along with whichever one the Federal agency says it means, but here we have a Federal agency that says, we have ambiguous language, so hey, do whatever you like.

I mean, it may be ambiguous, but surely it was intended to mean one thing or the other.

How can the Secretary come off just telling the States, it's ambiguous, you know, do it either way, we don't care?

Mr. Lamken: Justice Scalia, I think the answer comes in two parts.

The first is, one doesn't have to think that the statute means two different things at once in order to accept the Secretary's view.

Community spouse's income can have a meaning, but there may be different methodologies, all of which are reasonable, for determining and calculating what is the community spouse's income.

In addition, this Court has... and the States have liberties in order to decide to choose among those reasonable methodologies, because under section 17 on page 8a of our, of the appendix to our brief they are to establish reasonable methodologies consistent with the Secretary's regulations.

In addition--

Unidentified Justice: You could say that about every ambiguity, I mean, that there are two different methodologies.

You could have said the same thing with Chevron.

Now, could the Secretary in Chevron have... there are two different methodologies of deciding what's... what is it, point of emission, or... point source, yes, point source of emission.

Mr. Lamken: --In fact, Justice Scalia, this Court has upheld precisely that type of regulation issued by the Secretary.

In a case called Batterton v. Francis, and again in a case called Lukar v. Reed, in which you wrote the opinion for the Court, when the statute did not clearly preclude one methodology or another, the Secretary, because the Secretary has quasi-legislative authority to set standards in this area, may adopt standards that permit variations from State to State.

In Batterton v. Francis, it was under AFDC, and the question is, what was unemployment?

Did it include striking workers, or did it not, and the Secretary said, States, you may determine that based on your own State law.

In Lukar v. Reed, the question was whether or not a tort judgment would be considered income or resources.

The Secretary threw guidance to all the States that they had the option of choosing it as income or resources because both are reasonable.

This Court in Lukar v. Reed again held that decision, so in this particular area, where States have the principal responsibility of establishing standards, the Secretary may establish the boundaries, the reasonable boundaries within which those standards may be established, but unless the, and so long as the standards established by the State are not contradicted by the statute, are not contradicted by the Secretary's regulations, and are reasonable--

Unidentified Justice: But Mr. Lamken, isn't this a little different, because in this statute, if I understand it correctly, there is express statutory authorization for the resource-first method, whereas the income-first method is drawn by inference from what you consider ambiguities?

Mr. Lamken: --No, Your Honor.

I believe that neither methodology is particularly compelled or expressly authorized by the statute.

The statute simply does not speak to the issue of whether when a spouse, a community spouse is going to have a shortfall in income you make that up first by paying additional money to the person in the nursing home so that she may support the spouse at home, which is the income-first methodology, or whether first you raise the resource allowance so that she may... so that the person at home has additional income from resources.

I think I should probably go back and answer Justice O'Connor's and Justice Scalia's question about the meaning of community spouse's income in section (b)(1), because there has been a suggestion about necessarily includes only the income paid directly to the community spouse.

It is in our view a subtle legal tradition that the community spouse's income, or one spouse's income may include income from another spouse that is deemed to be income of the community spouse in contemplation of law, and so in (b)(1) community spouse's income could include income from the institutionalized spouse that the institutionalized spouse can make available.

That's consistent with the presumption of spousal support, and it's consistent with, for example, existing regulations such as those in--

Unidentified Justice: Would you go over that a little more slowly for me?

Mr. Lamken: --I'm... I apologize.

Unidentified Justice: How do you read (b)(1)--

Mr. Lamken: (b)(1) says--

Unidentified Justice: --to cover reverse deeming as well as deeming?

Mr. Lamken: --Right.

All it says is that income of the community spouse shall be... shall not be deemed available to the institutionalized spouse.

Unidentified Justice: Correct.

Mr. Lamken: The inference to be drawn from that is that there is no prohibition in deeming income of the institutionalized spouse--

Unidentified Justice: But even if there's no prohibition, where is your authorization for doing this?

That's what I don't find in the statute.

Mr. Lamken: --Your Honor, it was... it's a--

Unidentified Justice: If you start from a background rule of the name on the check as a background rule for the whole SSI program, how can you change that rule without authorization?

Mr. Lamken: --That's the mistake, Justice--

Unidentified Justice: Pardon me?

Mr. Lamken: --That's the mistake, Justice Stevens.

You don't start with the presumption of the name-on-the-check rule.

You start from the presumption that the income of one spouse may be deemed the income of another spouse because the general rule is that spouses may be expected to support--

Unidentified Justice: Where in the statute does it say that?

Mr. Lamken: --The statute doesn't but Congress said it when it enacted the Medicaid Act in the first instance, and that was the established rule under the Secretary's policies at the time that this statute was enacted.

If you look at the Secretary's regulations that existed when Congress enacted this, it said the income--

Unidentified Justice: That was deeming, not reverse deeming.

Mr. Lamken: --I'm sorry.

Unidentified Justice: That was deeming, not reverse deeming.

Mr. Lamken: No, Your Honor.

In fact, deeming did occur... reverse deeming did occur, or could occur under the prior policies, particularly in section 209(b) States.

Now, in those situations... well, first for post eligibility determinations, States did set aside a certain amount of money of the institutionalized spouse's income for the support of the community spouse, and they treated that money as unavailable to the spouse in the nursing home so that it could be available to the spouse at home.

That is this situation which you have called reverse deeming.

Second, even at the eligibility stage, particularly in section 201(b) States, it would be permissible to deem the income of the institutionalized spouse to be income of the community spouse.

Now, it might not often come up, but it would come up when, for example, both were applicants, in which case that would be permissible, so the settled background principle that existed at the time Congress acted is that spouses support each other mutually, and Congress eliminated one of those presumptions on a going forward basis in (b)(1) and said, no, the community spouse's income shall not be deemed available to institutionalized spouses, but left in place the background principle that an institutionalized spouse, if they have the funds, can support the spouse--

Unidentified Justice: You can leave that background principle in place, and we can all concede that it's in place, without thereby coming to the belief that when you say income of the community spouse, you mean, income of the community spouse plus whatever is deemed attributable to the community spouse.

I mean, I don't contest the principle, but I don't... that's just not a reasonable way to use language.

I agree it can be deemed, but you should say... it would have been very easy to say, income of the community spouse including any attributed income.

Mr. Lamken: --Your Honor, it would be the Secretary's... or the regulations that existed at this time, when they discussed what we count as your income, as your applicant for SSI, for example, it said, we count as your income your income plus income from other people, so that it treated it as the individual's income, and that is consistent with the background principle that each spouse's income is income to the other spouse, and when States may establish reasonable standards--

Unidentified Justice: I'm sorry, what did it mean, income from other people?

Mr. Lamken: --The--

Unidentified Justice: Money given you by your children on a regular basis, and things of that sort?

Mr. Lamken: --Well, actually attributed income, Justice Scalia, actual income that's passed over you don't need a deeming rule, because that's actually--

Unidentified Justice: Right.

Right.

Right, you don't mean that.

Mr. Lamken: --But for responsible individuals there were categories, such as spouses, such as parents, such as... there is another category I can't remember the name of, but where somebody had the responsibility for supporting you, their income was deemed to be your income for determining your eligibility.

Unidentified Justice: But I take it the only thing that you've got express in the record anywhere to indicate that really is what Congress had in mind is the statement in the legislative history that is quoted in the briefs that refers to other income attributed, is that right?

That's the only thing in black and white.

Mr. Lamken: That is the only thing in black and white, other than the fact that the settled background principles the Secretary operated under before the enactment would treat the income of one spouse as available to the other.

It was not merely deeming from the to community spouse to the institutionalized spouse, but deeming in the other direction occurred.

Unidentified Justice: Thank you, Mr. Lamken.

Mr. Hagopian, we'll hear from you.

Counsel, would you mind telling us why it matters which rule is followed by a State, resource first or income first, not just in an individual case, but overall?

Who saves what in terms of money if you do one thing or the other?

ORAL ARGUMENT OF MITCHELL HAGOPIAN ON BEHALF OF THE RESPONDENT

Mr. Hagopian: Yes, Justice O'Connor.

Under the resource-first rule the applicant, the community spouse of the applicant, of the institutionalized spouse, is the person who gets the money, and they get the money in the form of an expanded community spouse resource allowance that then generates income that brings the monthly... the community spouse's actual income up to or as close to the monthly need amount that's set by the State.

Under income first, the income is fictionally imputed from the institutionalized spouse to the community spouse, but it doesn't actually go to the community spouse.

That would not ever happen until after eligibility had actually been determined.

So in the aggregate, the resource-first rule allows community spouses who would not adequately be protected by the formula community spouse resource allowance, because that does not generate income up to the monthly need amount and because they have no other income, or not enough income to bring them up to that level, it allows them to actually have resources that will generate that income and protect them even after the institutionalized spouse passes away.

Unidentified Justice: Doesn't it also make possible the payments, the actual payments start earlier?

I mean, the reason this was of such concern is that the institutionalized spouse would not be eligible monthly for checks, so that the immediate effect was she could pay down more rapidly what was her excess resources before she qualified.

Isn't that the primary effect?

It's that the payments under medicaid start earlier?

Mr. Hagopian: Yes.

If I understand your question correctly, Justice Ginsburg, the income-first rule requires that those assets be spent down.

Is that the answer to your question?

Unidentified Justice: Yes, so that... Justice O'Connor asked you what the effect of--

Mr. Hagopian: Yes.

Unidentified Justice: --And I think the immediate effect of, she starts to collect medicaid sooner and doesn't use the spousal resources.

Mr. Hagopian: Oh, now I understand your question.

No, that's not true.

Under income first, the institutionalized spouse does not become eligible.

Only under resource first does the institutionalized spouse become eligible, and then that allows the payments post eligibility to actually occur to the community spouse.

Unidentified Justice: Maybe I am not making myself clear.

I thought the principle of that is to the couple, of using your resource rather than the income first... resource first, is that the institutionalized spouse, it pays down quicker, and is therefore eligible for medicaid money sooner.

That's what your position achieves, is that not so?

Mr. Hagopian: Yes, that's correct.

Unidentified Justice: Yes.

But doesn't that assume your case and not the more typical case, the more typical case, given statistical projections, is that the husband will be the institutionalized person, and so in the typical case it will not work to the advantage of the couple?

Mr. Hagopian: Well, I would agree with you, Justice Kennedy, that the typical case is statistically that is the husband that goes into the nursing home first, and we don't have that case here today, but I believe I disagree with you as to the effect that this has.

First of all the sex of the spouses doesn't necessarily matter, as is indicated by this case.

It's possible for a male spouse to be the community spouse and have exactly what happened here happen.

Unidentified Justice: Mr.... I'm sorry.

Are you finished with that?

I didn't want to cut off your answer.

Mr. Hagopian: I don't think I answered your question, Justice Kennedy.

But the institutionalized spouse, if it is the... are you asking me whether, if the institutionalized spouse has a higher income, that what happened here won't happen?

Is that the question, or--

Unidentified Justice: Yes.

I assume in many cases the husband is the first to be hospitalized, and he is the one with the greater income.

Mr. Hagopian: --That's correct, so in many cases the income first rule will have a worse effect when the husband is the one that goes in first.

Because his income will be higher, there will be more income that will be attributed to the community spouse in this pre-eligibility determination, and that will prevent her from having income of her own that would raise her to the minimum monthly needs allowance.

If resource-first was used in that case, she would be able to retain assets that would generate actual income to her that would meet the monthly need allowance.

Unidentified Justice: Mr. Hagopian--

--Well, if States cannot follow this income-first rule, maybe they would just respond by reducing the minimum monthly maintenance needs allowance and adjust it that way.

Mr. Hagopian: Yes.

Unidentified Justice: Or adjust downward the resources protectable for the community spouse.

Mr. Hagopian: Yes.

Yes, Justice O'Connor, that could happen.

That is where the flexibility in the spousal impoverishment provisions exists for the States.

Unidentified Justice: How many States are using income first?

Mr. Hagopian: We don't exactly know.

According, I believe, to the petition, the State estimated that it's in the neighborhood of 30 to 35 States.

Unidentified Justice: Of course, I suppose a really hard-nosed State could do both, right, could use the income-first rule plus adjust downward the other... I mean, the two don't go with each other.

Mr. Hagopian: That's correct.

Unidentified Justice: You either adjust downward or use the income first.

I have this question.

You maintain that the statute is not ambiguous, if they--

Mr. Hagopian: That's correct, Your Honor.

Unidentified Justice: --do it this way.

What is your burden if it is ambiguous?

If it is ambiguous, do you lose, do you acknowledge that you lose?

Mr. Hagopian: Oh, absolutely not, Justice Scalia.

Unidentified Justice: Do you think the ambiguity has to be resolved, or can the Secretary just leave the ambiguity floating out there?

Mr. Hagopian: Well, that's essentially what they've decided to do in the proposed rule--

Unidentified Justice: Right.

Mr. Hagopian: --is to leave it floating.

I don't think that's the proper method to do it.

Unidentified Justice: By proper, you mean lawful?

Mr. Hagopian: Lawful, that's correct.

Unidentified Justice: They are not permitted to do that?

Mr. Hagopian: That's right.

I agree, actually, with the way you framed it in your questions to the petitioner, and that is that it just is illogical to assume that Congress, when they enacted this particular protection, which we believe is a fail-safe protection for those few couples who would not adequately be protected by the formula resource allowance, that to have these two wildly divergent interpretations spring from the exact same language seems totally unreasonable.

Unidentified Justice: Well, what did it do with a case like Batterton v. Francis, then?

Mr. Hagopian: Well, Your Honor, I believe that in a case like Batterton v. Francis, we have a different set of rules here.

First of all, I believe that was an AFDC case.

Unidentified Justice: Well, but you know, it's still the general same ball park.

Mr. Hagopian: Well, we believe that the enactment in the Medicare Catastrophic Coverage Act of the no-more-restrictive rule under SSI resolved that whole issue for us, and that is that with 1396a(r), which is found at the appendix to our brief... it's the only page in the appendix... that the question is actually resolved by the application of the SSI methodologies.

Unidentified Justice: Well, you say the question is resolved.

Do you mean by that that the Secretary does not have any discretion to decide that a State is free to follow either (a) or (b)?

Mr. Hagopian: Yes, Your Honor.

Unidentified Justice: And how does that follow?

Mr. Hagopian: Well, there's a couple of... first of all, the authority that the Secretary has relied on to issue its proposed rule and apparently from which its authority to develop the rule at all is 1396a(a)(17)(B).

Now, it is our position initially that that... that 1396a(a)(17) was actually superseded by operation of 1396r-5(a)(1).

Unidentified Justice: This is very difficult to take in aurally.

Mr. Hagopian: I believe that.

[Laughter]

Unidentified Justice: But go ahead anyway.

[Laughter]

Mr. Hagopian: It's almost as difficult to say it.

But the spousal impoverishment provisions, one of the main things that they did was supersede the authority that the State and the United States have relied upon to issue the rule and to engage in this so-called reverse deeming, so... and at the same time that they superseded that rule, they also enacted 1396a(r).

Now, this rule... what this rule did, and this rule was actually... I want to back up.

Another provision of the spousal impoverishment enactment was 1396r-5(1)(C), and this provision retained the SSI methodologies, or any existing methodologies that were not specifically overridden by the spousal impoverishment enactments.

Now, the one thing that was left untouched by these spousal impoverishment provisions was the way that income was determined for eligibility purposes.

Now, that brings us to 1396a(r), and that provision is the provision of the Medicaid Act mandates that the SSI methodologies apply to income and resource determinations for all the eligibility groups that were relevant in these cases, and that statute does allow States and HCFA, or CMS or the Secretary to issue rules that deviate from those SSI methodologies, but those rules, if they're going to do a rule that deviates from that methodology, the rule has to have the effect of making more people eligible for medicaid, not fewer people, and this rule, the income-first rule, fails that test.

What it does is... because under the SSI program, if the SSI methodologies were strictly applied, the income of the two spouses is separated and is never commingled, and so because under SSI this would not happen, a rule which allows it to happen in medicaid is considered to be no more restrictive and not... I'm sorry, more restrictive than the SSI methodologies, and is not permitted by that statute.

Unidentified Justice: May I ask you a question?

I know a case is easier if you don't look at the legislative history, and so it's probably easier for my colleague than for me.

[Laughter]

But would you explain to me how you interpret the parenthetical phrase that's quoted on page 18 of the Government's brief, and the... it says taking into account any other income attributable to the community spouse.

I find that kind of a puzzling parenthetical.

How do you read that?

Mr. Hagopian: Well, I've two responses to that, Justice Stevens.

First, within the spousal impoverishment enactment, the term, attribute, or attributable is used in two different fashions.

When it's used in... to describe resources, it has the effect of commingling the resources and pooling them.

When it's used in conjunction with the term, income, it has the effect of separating the income between the two spouses.

So it's my initial position that income attributable to the other... other income attributable to the community spouse merely confirms the way it was done SSI statutes, and that is consistent with the way it is done, where income is talked about at all, in the spousal impoverishment provisions, and I think there is actually a reason for that to be in there, and that is that it would be possible in some cases for a community spouse to attempt to get an expanded resource allowance by coming into the hearing and saying, I have income, and it's in my name right now.

Typical would be, maybe it's from employment, and at this date when I'm trying to establish eligibility, or my institutionalized spouse is trying to establish eligibility, I have that income, but I don't believe you should count that income to me because it's going to end next month when my job ends.

So I think that is what they were talking about, trying to foreclose that type of argument at a hearing, and so I believe that the real effect of that parenthetical phrase is to confirm the separate treatment of the income.

The reason it isn't in the statute and it's in the legislative history is because the SSI mandate under 1396(a)(R) accomplished that purpose precisely.

Every other part of that legislative history essentially becomes 1396r-5(e)(2)(C).

That phrase is missing.

Unidentified Justice: In that particular provision, to retain an adequate amount of resources, all that any other income attributable to the community spouse need mean is income attributable to him from sources other than interest on his resources.

I mean, that phrase could include his actual wages, couldn't it?

Mr. Hagopian: The institutionalized spouse's wages, or the--

Unidentified Justice: The community spouse's wages.

Mr. Hagopian: --Oh, yes, absolutely.

It would... I think it does.

Unidentified Justice: I mean--

Mr. Hagopian: Yes, I believe that it does--

Unidentified Justice: --resource allowance is the resources that provide income, which means, you know, stocks or whatever, and all that phrase there may mean is something, any other income attributable to him from something other than his stocks.

Mr. Hagopian: --Right.

Unidentified Justice: Such as his wages, right?

Mr. Hagopian: Exactly.

Unidentified Justice: You... your argument in the event that we find ambiguity I guess boils down simply to the fact that for a variety of reasons it would frustrate the congressional policy behind the act itself if we held against you, and yet in a way, haven't you provided an answer to that, a counter to that argument in your answer to the question a few moments ago?

You said, and I think have to say, that if the States lose on the particular issue before us here, the States as a practical matter can get to the same kind of rough dollar and sense results simply by adjusting the amount of resources, that is the baseline amount for the community spouse to retain and the amount of income which is thought to be necessary for the community spouse to live decently, so it almost seems as though it doesn't very much matter, necessarily, to the enactment of whatever policy Congress had, whether the flexibility comes in income versus resource first, or whether it comes in setting the allowances for income and assets.

What's your answer to that?

Mr. Hagopian: Well, I think that the answer to that is that the resource-first allowance, resource-first rule was placed in a provision that is what we call the fail safe provision.

This was a provision that was supposed to be applicable to all the States and allow those few couples... and I want to stress that this is not going to affect a lot of people.

A few couples would not be adequately protected by those formula allowances, and so... because the policy of the statute was to defeat spousal impoverishment.

That was certainly one of the primary purposes behind it, and the vast majority of cases the formula resource allowance was going to adequately serve that interest, but in--

Unidentified Justice: So you're saying this is kind of an exceptional case kind of mechanism, regardless of how you set income and resources.

Mr. Hagopian: --Absolutely.

Unidentified Justice: And as an exceptional case mechanism, it's only going to work if it works the way you say, on a resource-first basis?

Mr. Hagopian: That's right, and to stress the exceptional case component of it, you have to remember how you get one of these hearings.

This is not an easy matter.

This is not something that's accomplished by the local agency for every single applicant who walks through the door.

You have to have... know that you're in excess... have resources in excess of this formula resource allowance.

You have to go to your local welfare office.

You have to apply for benefits knowing that your application is going to be denied.

You get denied, and then you have to request a hearing, go to the hearing, prove up the need with all sorts of mathematical calculations for this.

This is not something that people... the faint of heart are going to be doing on purpose, so it is an exceptional procedure.

Unidentified Justice: Have you read the notice of the proposed rulemaking?

Mr. Hagopian: Yes, I have, Justice Ginsburg.

Unidentified Justice: And I suppose your argument is to the effect that that's just not a permissible interpretation of the statute?

Mr. Hagopian: Yes, that's certainly one of our arguments against it.

We also believe, though, that the statutory authority that the Secretary is using for promulgating it, which is 1396a(a)(17)(B) has been superseded in spousal impoverishment, so the rule itself is probably promulgated pursuant to invalid authority.

Unidentified Justice: Do we owe any deference to the agency here in its interpretation?

Mr. Hagopian: Well, because our position is that the position they are taking is totally unreasonable, no, you don't owe any deference to the agency.

Unidentified Justice: Does the income-first rule mean that at the end of the day less Federal money is spent on medicaid care?

Mr. Hagopian: Not necessarily.

In the immediate... the effect of denying an application based on income first would at that moment prevent someone from being eligible for medicaid, but... and so therefore would save Federal dollars, no question about that, but you have to remember that the resources that the couple is required to spend in order to become eligible, there's no requirement that those resources be spent on the nursing home, and so it's possible that those resources could be spent for some other purpose, and then the person could immediately become eligible for medicaid, you know, within a short time after the initial application was denied.

And the important thing about that point is that, if that happens, if those resources are gone, and the income that's generated from them is gone, then when you get to the post eligibility determination, the less of the institutionalized spouse's income is going to be able to be used to defray the cost to the medicaid program, because more of it is going to have to be used to increase the allowance to the institu... or, the community spouse, so in the short run it may be... save the Federal Government.

In the long run, it does not.

Unidentified Justice: Would you comment on one of the questions I asked Mr. Lamken, whether the background rule is the name-on-the-check rule, or as he puts it, the better view is the background rule is one of deeming, and so that we should start from the premise that it's okay to treat one spouse's income as part of the other spouse.

Mr. Hagopian: Well, I beg to differ with Mr. Lamken's presentation of the background rule.

I don't believe that there is any precedent for the reverse deeming that he's talking about in any of the background rules.

The deeming that was permitted was strictly from the nonapplicant spouse to the applicant spouse, and it was for the purpose of denying that person eligibility.

The one rule he talked about where there was some reverse deeming was, was also... was a post eligibility rule.

Under the old rules pre-MCCA, the nursing home spouse could allocate a small amount of money to the community spouse, usually just enough to bring that community spouse above the local welfare threshold so that they wouldn't have to support that person on welfare, but that was a post eligibility deeming, it was not an eligibility, and in the SSI program, which is what... we believe where the methodologies occur that dictate how income is to be determined, there is no deeming from the applicant spouse back to the nonapplicant spouse.

Unidentified Justice: Well, even under this program, as I understand it, in the post eligibility determination income can be transferred from the institutionalized spouse to the community spouse.

Mr. Hagopian: Yes.

Unidentified Justice: Yes.

I might ask one question.

Examples help a lot for me in these cases.

I couldn't understand them without them, and the amicus briefs were filled with them, which was helpful, but the example I'm carrying around in my head is that we have, say, a woman in an institution who has about $200,000 or $300,000 in assets, and maybe a small pension of $8,000 or $10,000, and her husband's at home, and he has a pension coming in, maybe of $10,000 to $12,000, and so he's lacking about $6,000 or $7,000 or $8,000 or $9,000 or $10,000 to bring himself up to the $24,000 level.

Now, if you're right, what we'll do is, we'll take the $300,000 the wife has, and we give it to the husband.

It generates about, I don't know, $10,000, $12,000, and eventually that $300,000 goes to the children, and if you're right, she doesn't have to spend it down, and if you're wrong, by the way, if that money goes to the husband, later on, when her pension comes in, and there's about 8 or $10,000 coming in, that money goes right to the institution to pay for the health care.

She doesn't get to keep it.

So that's one way.

Now, the other way is that she keeps... she spends down the $300,000.

She has to spend down the $300,000, maybe that money goes to the institution, maybe it goes to fix the roof, but then when the income comes in, it goes right to the husband.

So I don't know, you know, I mean, it's sort of what... the Government seems to think that it's better off financially by making her spend the money down, but I guess that depends on whether the alternative is to pay the $300,000 to the doctors or pay it to get the roof fixed, so when I end up thinking that, I haven't a clue.

[Laughter]

And so therefore I'd say, well, if I were writing this statute, I guess I'd leave it up to the Secretary, and if the Secretary wants to leave it up to the States, that's his business, so I look at the language, and the language there seems not to solve the problem, and... okay, what's the response?

[Laughter]

Mr. Hagopian: That was a question?

Unidentified Justice: I was putting the thing because--

Mr. Hagopian: Yes, I--

Unidentified Justice: --I want you to see that at the moment I think, well, I can't figure it out, but I'm working with those examples, and since I can't, I say, leave it up to the Secretary, leave it up to a State, leave it up to somebody else, as long as the statute allows that.

I wanted to expose that to you, because I want you to have a chance to say no, you're wrong, your example is wrong, your reasoning's wrong, everything's wrong, so go ahead.

[Laughter]

Mr. Hagopian: --I concur with everything you just said, Justice Breyer.

[Laughter]

I think your first example was the wrong one, the one that oddly enough is bad for me, and that's because I think you're assuming that the resources that are going to be protected for the care of the spouse will be transferred on death to the children.

That's possible, but if the community spouse outlives the nursing home spouse, that resource pool, because for whatever reason there isn't an independent stream of income available to that community spouse, it's going to be that resource fund that creates the income stream for that community spouse.

If it's protected, and not have to be spent down to medicaid eligibility, that community spouse is much more likely to retain it, not spend it on things that he doesn't need in order to preserve that income stream so that he can take care of himself, hopefully, not in a nursing home but perhaps in some sort of noninstitutional setting that he would prefer over that.

So that's my response to your question.

Unidentified Justice: You make a big point of that.

What happens if you lose and the institutionalized spouse dies, and that is a problem.

I don't know why the Government doesn't, as a matter of policy, make a pretty strong case, but the... I guess the response will be, well, you know, everybody knows this.

Everybody, no matter how well-educated or badly educated, or... they all know, when they get that pension choice, that if you either take it all for yourself, or you say, when I die I want my spouse to get some, and so... they've all made that conscious choice, and if they make it to protect the spouse, that's up to them, and they probably will.

I mean, that will be the response, I think, to that argument.

Mr. Hagopian: It would be.

The problem, when you... my understanding... I'm not a pension expert by any means, but when you exercise an option that protects the surviving spouse, you so deflate the value of the pension that it's economically a poor decision to make.

Unidentified Justice: I would have thought that your response would be the statutory language requires the result you're urging, but you don't make that argument, apparently.

Mr. Hagopian: No, no, we do make that argument--

Unidentified Justice: Oh, you do--

Mr. Hagopian: --Justice O'Connor.

Unidentified Justice: --Okay.

Mr. Hagopian: Yes.

The statutory language definitely does require--

Unidentified Justice: I just didn't hear that in response to the question.

[Laughter]

Mr. Hagopian: --Well, it was in the opening that I didn't get a chance to make, so--

[Laughter]

Unidentified Justice: In your response to Justice Breyer, isn't it so, or am I... counsel, am I--

Mr. Hagopian: Pardon me.

Unidentified Justice: --wrong in thinking that under ERISA there is a requirement to provide for the surviving spouse, it isn't the option of the insured individual?

Mr. Hagopian: Well, I'm no expert on ERISA, but I believe that there is a notice requirement and a sign-off requirement in ERISA.

If the community spouse does sign off for her rights, then it doesn't necessarily happen.

It's not a mandated... it can't be overcome by activity by the surviving spouse.

Unidentified Justice: But it's not the insured's election in the first place.

Of course, if the surviving... if the spouse wants to cooperate and says, I don't want anything--

Mr. Hagopian: Right.

Unidentified Justice: --But it isn't the wageearner's choice--

Mr. Hagopian: No.

Unidentified Justice: --to say, I don't want, usually her, to be any part of it.

Mr. Hagopian: That's right, but I think those decisions are made at a time when long-term care is not necessarily in the immediate offing, and maybe... usually at age 65 or thereabouts, long before nursing home stays may be inevitable, and so the couple is making an informed choice about how best to maximize their income stream.

I mean, nobody is ready for nursing home stays, and to plan for that, you know, based at the time that you make your pension election would be counter to, I think, human nature.

Unidentified Justice: Mr. Hagopian, I want to come back to the snippet from legislative history that is referred to on page 18 of the Government's brief.

I guess if you believe that legislative history, then it would have to be done the way the Government says it need only may be done.

I mean, if you believe the Government's interpretation of that legislative history, it certainly doesn't say the Secretary has the option.

It either says what you think it means, or it requires the Secretary to use the income-first method, no?

Mr. Hagopian: I think I frankly agree with you, Justice Scalia.

Thank you.

Unidentified Justice: Thank you, Mr. Hagopian.

Ms. Flanagan, you have 3 minutes left.

REBUTTAL ARGUMENT OF MAUREEN M. FLANAGAN ON BEHALF OF THE PETITIONER

Mr. Flanagan: Thank you, Your Honor.

I would like to talk about the impact of what the resource-first rule is.

I think there have been questions on that.

The impact of the resource-first rule is to devote limited medical assistance funds to couples who have resources substantially above the Federal maximum set levels and that, in turn, necessarily means, since we have limited pots of income, that that deprives States of money needed to serve--

Unidentified Justice: Why is that?

I mean, he just said on that that... and it certainly was in the briefs, that if you say they have to spend down the $300,000, they're not going to give it to the doctors in the institution.

They'll fix the roof, they'll pay off the mortgage, they'll figure out one of 50 other things, so the State will actually end up with less money, because they won't get that $300,000 as a set-off and, moreover, they lose the income coming in later as a set-off.

Mr. Flanagan: --Well, neither of us have any statistics on that.

I'm sure that people do pay off their long-term financial obligations, but they also have to pay for the nursing home, and that bill doesn't go away after a month, so if they're not eligible, they're going to have to be providing for that in some way, so while the statute doesn't force them to devote their resources to that, there are powerful practical reasons why people are going to do that.

Another part of the impact that I'm concerned about is touched on by Mr. Hagopian, who says that States can just lower their resource standards and lower their income maintenance standards.

Well, what that says is, States, you should serve fewer people.

You should serve fewer elderly so that you can have money to serve people who happen to have resources in excess, and in many cases substantially in excess of the standard resource limits.

The Cleary case, which is cited in the briefs, is a good example of that kind of potential situation.

That was a situation in which the nursing home spouse had something in the neighborhood of a $1/4 million of excess resources, but because of the income of the... set-up of the spouses it would have taken that... those resources to make up that income, even though that particular spouse, as I recall, also would have had money.

Chief Justice Rehnquist: Thank you, Ms. Flanagan.

The case is submitted.

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