Cases by Issue - Commodities

Gonzales v. Raich - Oral Argument

Fri, 09 Jan 2009 14:49:04 +0000

Case:

Gonzales v. Raich

Media File:

03-1454_20041129-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Paul D. Clement

Justice Stevens: We will now hear argument in Ashcroft against Raich.

General Clement.

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

Through the Controlled Substances Act, Congress has comprehensively regulated the national market in drugs with the potential for abuse.

And with respect to Schedule I substances, like marijuana, that have both a high potential for abuse and no currently accepted medical use in treatment, Congress categorically prohibits interstate trafficking outside the narrow and carefully controlled confines of federally approved research programs.

Justice O'Connor: Well, Mr. Clement, the... I think it is reasonably clear that Congress spoke very broadly in the Act, and the question, for me, turns on whether Lopez and Morrison dictate some concerns with its application in this context.

Mr. Clement: Well, with respect, Justice O'Connor, I don't think either Lopez or Morrison casts any doubt on the constitutionality of the Controlled Substances Act, and I think, in particular, that's because the decisions in Lopez and Morrison cited, with approval, cases like Darby and Wickard, and preserved those cases.

And, of course, the concurring opinion of Justice Kennedy did so, as well.

Justice O'Connor: Well, but in Wickard, of course, you had a wheat grower, a small farmer, and his wheat did, in part, go in the national market.

You don't have that here.

As I understand it, if California's law applies, then none of this home-grown or medical-use marijuana will be on any interstate market.

And it is in the area of something traditionally regulated by states.

So how do you distinguish Morrison?

And how do you distinguish Lopez?

Mr. Clement: Well, Justice O'Connor, let me first say that I think it might be a bit optimistic to think that none of the marijuana that's produced consistent with California law would be diverted into the national market for marijuana.

And, of course, the Controlled Substances Act is concerned, at almost every step of the Act, with a concern about diversion, both of lawful substances from medical to non-medical uses and from controlled substances under Schedule I into the national market.

Justice O'Connor: Well, in looking at this broad challenge, do we have to assume that the State of California will enforce its law?

I mean, if it turns out that it isn't and that marijuana is getting in the interstate market, that might be a different thing.

Mr. Clement: Well, with respect, Justice O'Connor, on this record, I don't think that there's any reason to assume that California is going to have some sort of almost unnatural ability to keep one part of a fungible national drug market separate.

And I think Congress, here, made important findings that you've alluded to, not just that there's a national market, not just that the intrastate and the interstate markets are linked, but that drugs are fungible, and that because drugs are fungible, it's simply not feasible, in Congress' words, to regulate and separately focus on only drugs that have traveled on interstate commerce.

Justice Stevens: Well, General Clement, what if we were to assume... I'm not saying this is... that the District Court could find that there is a narrow segment of the market in which they could prevent diversions, and they had... say they made such findings.

Would we have to disregard them, or say they were irrelevant?

Mr. Clement: I think you would say they were relevant, Justice Stevens, and that's because--

Justice Stevens: But then why do you need to rely on the possibility of diversion?

Mr. Clement: --Well, because I think it is a reality, in responding to Justice O'Connor's question... I think that in... obviously, in all of these commerce--

Justice Stevens: Yeah, but in my hypothesis, it's a nonexistent reality.

Mr. Clement: --Well, in your hypothetical... and if I could turn to that... I still think the analysis would not turn on whether or not the truth of the supposition that diversion could be prevented, because this Court, in a series of cases, including Darby, Wickard, Wirtz, and Perez, has made clear that the relevant focal point for analysis is not the individual plaintiff's activities and whether they have a substantial effect on interstate commerce, but whether the class of activities that Congress has decided to regulate has such a substantial effect.

And, in this case, there's no question that the overall production, distribution, and possession of marijuana and other Schedule I substances has a profound effect on interstate commerce.

Justice Scalia: But it's not an interstate commerce that you want to foster.

I mean, in these other... in these other cases, Congress presumably wanted to foster interstate commerce in wheat, in Wickard v. Filburn.

Congress doesn't want interstate commerce in marijuana.

And it seems rather ironic to appeal to the fact that home-grown marijuana would reduce the interstate commerce that you don't want to occur in order to regulate it.

I mean, you know, doesn't that strike you as strange?

Mr. Clement: Well, no, it doesn't, Justice Scalia, but let me respond in two ways.

First of all, I think it's been clear, at least since the lottery case, that Congress' authority to regulate interstate commerce includes the authority to prohibit items traveling in interstate commerce and to declare something contraband in interstate commerce.

Justice Scalia: Absolutely.

Mr. Clement: And I would suggest that it is a perfectly rational exercise of Congress' judgement to treat marijuana and other Schedule I substances not just as contraband in interstate commerce, but as contraband simpliciter, as contraband for all purposes.

Justice Scalia: But that's quite a different rational than Wickard v. Filburn.

I mean, it seems to me you're not... you're not appealing to the fact that it has a substantial impact on interstate commerce.

You're appealing to the fact that the power which Congress has to prohibit the use of goods carried in interstate commerce cannot effectively be implemented without this law.

Mr. Clement: Well, I think there's some truth to that, Justice Scalia, but let me say this.

I think what I'm saying is, I'm taking the rational that this Court accepted in Wickard, and I'm applying it to a different regulatory regime.

Here, Congress--

Justice Stevens: But you're applying it to the opposite kind of regulatory... you're applying it to a regulatory regime in which the government wants to prohibit this subject... substances from being sold or... in interstate commerce.

And if you just follow the litter... the letter of this law, this marijuana won't get into interstate commerce.

In fact, it would reduce the demand for marijuana, because it would supply these local users and they wouldn't have to go into the interstate market.

Mr. Clement: --Well, with respect, Justice Stevens, if you took a look at the Controlled Substances Act, itself, and read it literally, you'd assume that there was absolutely no market, period, in Schedule I substances.

But the reality is, there's a $10.5 billion market... illegal market, albeit... but market in marijuana in the United States, on an annual basis.

So--

Justice Stevens: But to the extent that this statute has any impact, it will reduce the purchase in the interstate market and confine these to locally grown marijuana.

Mr. Clement: --Well, first of all, Justice Stevens, that's only true if there will be no diversion, to get back to--

Justice Stevens: Then I'm assuming... my hypothetical is that California could pass a law that would prevent diversions from occurring.

Mr. Clement: --Well, in the same way that the Federal Government has had trouble stamping out the marijuana market entirely, I think California is going to have parallel problems in absolutely preventing diversion.

But just--

Justice Kennedy: I suppose some... one answer to that case is the Perez case, with loan sharking.

Mr. Clement: Oh, absolutely, Justice Kennedy.

And, in that context, what this Court said is, even though it was focused on what was going to be an... both in that case and generally, an interstate activity, Congress did not have to just look at the particular plaintiff's effect on interstate commerce, but, rather, the effect of the entire class of activities.

And if I could--

Justice Ginsburg: But, as Justice O'Connor brought out earlier, all those cases... Wickard, Perez... they all involved a commercial enterprise.

And, here, we're told this is different, because nobody is buying anything, nobody is selling anything.

Mr. Clement: --Well, with respect, Justice Ginsburg, I think the whole point of the Wickard case was to extend rationales that it applied previously to commerce to activity that the Court described as economic, but not commercial.

And I think the production and distribution and possession of marijuana is economic in the same way that the production of wheat was in the Wickard case.

Justice Souter: But you're... no, I was going to... your whole point, I take it, is that the two particular patients in this case are simply... simply cannot be taken, for our purposes, as representative in the fact that they are getting the marijuana by, I think, growing it themselves or being given it.

You're saying, you cannot take that fact as a fact from which to generalize in deciding this case.

Mr. Clement: That's exactly right, Justice Souter, and that is the logic, not just of me, but of this Court's cases, in cases like Darby and Wickard and Wirtz and Perez.

And I point to the Wickard case, in particular, only because it, too, involves a non-commercial enterprise or a non-commercial production of--

Justice O'Connor: Well, I do take issue with that.

As I read the record in Wickard, it involved a small farmer.

A portion of his wheat went on the interstate market.

It also was fed to cattle, which, in turn, went on the interstate market.

He used some of it himself, but part of it was commercial.

I think Wickard can be distinguished on the facts.

Mr. Clement: --Well, Justice O'Connor, it could be... I mean, any case can be distinguished on the facts, of course, but I think what's important is, this Court, in Wickard, itself, recognized that the case was... it was only interesting because a portion of the regulated wheat involved wheat that was going to be consumed on the farm.

And--

Justice O'Connor: The other portion is a matter of xxx interstate commerce.

Mr. Clement: --Well, that's true, Justice O'Connor, but this Court, basically, in its opinion, Justice Jackson, for the Court, put aside... to one side all of the grain that was going to go in interstate commerce, since that's easy under our existing precedents.

This case is only interesting, he said, because it involves wheat that's going to be consumed on the farm.

And he specifically talked about both the wheat that would be fed to the animals, but also the wheat that would be consumed by the family.

And what he said is, the intended disposition of the particular wheat wasn't clear from the record of the case.

And, by that, I take him to mean that it wasn't relevant to the Court's analysis in upholding the Agricultural Adjustment Act to the wheat at issue there.

And it's important to recognize that the way the Agricultural Adjustment Act worked is, it applied to all the wheat that was grown in excess of the quota, and so it applied to the wheat that was used by the family for consumption of their own bread.

And, nonetheless, this Court upheld that as a valid Commerce Clause regulation.

And so I think, by parity of reasoning, all of the marijuana that's at issue and covered by the Controlled Substances Act, whether it's lawful under state law, whether it's involved in a market transaction or not, is fairly within the Congress' Commerce Clause--

Justice Kennedy: And is--

Mr. Clement: --authority.

Justice Kennedy: --this a harder or easier case than Wickard when we know that, in Wickard, it was lawful to buy and sell wheat, and, here, it is unlawful to buy and sell marijuana?

Mr. Clement: Well, Justice Kennedy--

Justice Kennedy: Does this make your case easier, in a sense, or--

Mr. Clement: --I think it does, Justice Kennedy, because, as I said earlier, in responding to a question from Justice Scalia, I think if you're talking about a context where Congress has the undoubted power to prohibit something in interstate commerce entirely, and has exercised that power, so it treats something as effectively contraband in interstate commerce, and then takes the complementary step, especially in light of the fungibility of the product, and says,

"We're just going to treat this as contraband simpliciter. "

I think that judgement by Congress has a very definite link to interstate commerce and its unquestioned authority to regulate interstate commerce.

And I do think there's a sense in which when Congress is regulating the price of something, there's certainly a temptation to excise out relatively small producers and for Congress to say,

"Well, we can still have effective regulation if we regulate the vast majority of production. "

But with respect to something that's unlawful to have and is... and has very significant risks precisely because it's unlawful, any little island of lawful possession of non-contraband marijuana, for example, poses a real challenge to the statutory regime.

It would also, I think, frustrate Congress' goal in promoting health.

And I think the clearest example of that is the fact that, to the extent there is anything beneficial, health-wise, in marijuana, it's THC, which has been isolated and provided in a pill form, and has been available as a Schedule III substance, called--

Justice Ginsburg: But there's--

Mr. Clement: --Marinol.

Justice Ginsburg: --but there is, in this record, a showing that, for at least one of the two plaintiffs, there were some 30-odd drugs taken, none of them worked.

This was the only one that would.

And it... Justice Souter asked you about these two plaintiffs.

The law can't be made on the basis of those two plaintiffs.

But let's suppose that you're right, generally.

If there were to be a prosecution of any of the plaintiffs in this case, would there be any defense, if there were to be a federal prosecution?

Mr. Clement: Well, Justice Ginsburg, I think we would take the position, based on our reading of the Oakland cannabis case... and, obviously, different justices on this Court read the opinion differently and had different views on the extent to which the medical-necessity defense was foreclosed by that opinion... I would imagine the Federal Government, in that case, if it took the unlikely step of bringing the prosecution in the first place, would be arguing that, on the authority of Oakland cannabis, the medical-necessity defense was not available.

But I think, in any event, what is important, at this point, is that we don't have a prosecution; we have an affirmative effort to strike down the Controlled Substances Act in an injunctive action.

And I think, in that context, certainly Justice Souter is right, that this Court's precedents make clear that one doesn't consider only the individual's conduct, but the entire class of activities that's at issue.

I think, in this regard, it's also worth emphasizing that a deeper flaw in the Respondent's argument, that California law is somehow relevant here or the fact that their conduct is lawful under California law, is that there's a mismatch between what California law makes lawful and what might be considered relevant for arguing that there's an attenuated effect on interstate commerce.

Because the California law makes the possession of marijuana for medical use lawful under state law, without regard to whether that marijuana has been involved in a cash transaction or has crossed state lines.

And so, if Respondents are right on their Commerce Clause theory, I don't see how they can be right because their conduct is lawful under state law or because their... that marijuana use is medical.

If they're right, then I think their analysis would extend to recreational use of marijuana, as well as medical use of marijuana, and would extend to every state in the nation, not just--

Justice Stevens: --Well, I think--

Mr. Clement: --those states that made it lawful.

Justice Stevens: --Doesn't it depend on how you define the "relevant class of activities"?

Is it the entire class that Congress ought to regulate, or is it a narrower class, in which the Plaintiffs contend that the statute cannot constitutionally be applied to a particular very narrowly defined class?

And is it ever permissible to define the class narrowly to escape a... the broad argument that you make?

Mr. Clement: Well, I don't think that is permissible, Justice Stevens.

I think that's what this Court's cases in Wirtz, in Darby, in Wickard--

Justice Stevens: So you're saying that this statute could never have an unconstitutional application.

Mr. Clement: --Under the Commerce Clause, I... that's exactly right, that would be our position.

It is constitutional on its face, and it... and because of that line of authority, an as-applied challenge can be brought, but the legal test that's applied in the as-applied challenge is one that considers the constitutionality of the statute as a whole--

Justice O'Connor: But, in Morrison, did the Court's opinion not say that Congress cannot justify Commerce Cause... Clause legislation by using a long but-for causal chain from the activity in question to an impact on interstate commerce?

I mean, the Court certainly made that statement.

Mr. Clement: --Oh, absolutely, Justice O'Connor, but--

Justice O'Connor: Which cuts against what you're saying.

Mr. Clement: --Well, with respect, I don't think so.

And I'd say two things about it.

One, this Court, in Morrison and Lopez, was very important to emphasize... thought it was very important to emphasize two things: one, that the activity there was non-economic in a way that differentiated it, even from Wickard; and, second, the Court also made it clear that the regulation that there... there was not essential to the effectiveness of an overall regulatory scheme.

And I think, on both points, this case is on the constitutional side of the line that separates the Lopez and the Morrison case.

Justice O'Connor: The argument on the other side is that this limited exception is a non-economic use... growing for personal use, under prescription--

Mr. Clement: I understand that... I understand that's their argument, Justice O'Connor, but I don't understand how this Court, in Lopez, could have said that Wickard involved non-economic activity if this activity is not also covered.

You're talking about--

Justice Scalia: Involved economic activity.

Mr. Clement: --I'm sorry if I misspoke.

Economic activity.

Because what you're talking about here is the possession, the manufacture, the distribution of a valuable commodity for which there is a ready... unfortunately, a ready market, albeit an illicit market.

Justice Kennedy: --If we rule for the Respondents in this case, do you think the street price of marijuana would go up or down in California?

Mr. Clement: I would be speculating, Justice Kennedy, but I think the price would go down.

And I think that what... and that, in a sense, is consistent with the government's position, which is to say, when the government thinks that something is dangerous, it tries to prohibit it.

Part of the effort of prohibiting it is going to lead to a black market, where the prohibition actually would force the price up.

And there is a sense in which this regulation, although not primarily designed as a price regulation... the Controlled Substance Act, I think, does have the effect of increasing the price for marijuana in a way that stamps down demand and limits the... and in a way that reduces demand.

And I think that's all consistent with Congress' judgement here.

And if I could return for a second to the point about Marinol, what's important there is that the process of manufacturing of Marinol, and isolating the one helpful component, does two things.

One, the manufacturing process allows there to be a safe use for one of the components in marijuana.

But it also provides an unambiguous hook for Congress to exercise its Commerce Clause authority.

And yet the overall regime of trying to get people to use more healthful substances, and not use things like crude marijuana that have harmful effects, is undermined if Congress can't also address that which is more harmful, but is distinct only because it is capable of being locally produced.

And that's exactly what crude marijuana is.

Justice Stevens: In other words, the statute is... it trumps the independent judgement of the physicians who prescribe it for the patients at issue in this case.

Mr. Clement: Well, I think, in responding to that, Justice Stevens, I would say, obviously, for purposes of federal law, the idea of medical marijuana is something of an oxymoron, because the Federal Government treats it as a Schedule I substance.

Now, notwithstanding that, some doctors may make a different judgement about a particular patient; but that's something that this Court, I think, has previously understood, that the federal regulatory regime does not allow individual patients or doctors to exempt themselves out of that regime.

Justice Stevens: Right.

Mr. Clement: I think that's the import of the Rutherford decision with Laetrile.

Justice Stevens: Do you think there could be any state of facts on which a judicial tribunal could disagree with the finding of Congress that there's no acceptable medical use?

Say they had a... say there was a judicial hearing on which they made a contrary finding.

Would we have to ignore that?

Would we have to follow the congressional finding or the judicial finding if that happened?

Mr. Clement: Well, it depends on the exact hypothetical you have in mind.

I think the... the judicial finding that I think would be appropriate, and this Court would not have to ignore in any way, is a finding by the D.C. Circuit that, in a particular case where there's a rescheduling effort before the FDA, that the underlying judgement of the FDA refusing to reschedule is invalid, arbitrary, capricious.

That's the way to go after the finding that marijuana is a Schedule I substance without a valid medical use in treatment.

This is not a situation in... and your hypothetical might respond to a different statute that raised a harder question, where Congress made such a medical finding, and then just left it there without any mechanism to adjust the finding for changing realities.

But, here, Congress made it clear that a process remains open to reschedule marijuana in a way that gets it onto Schedule II or Schedule III.

And I think it's wrong to assume that there's any inherent hostility to the substances at issue here.

I mean, the FDA, for example, rescheduled Marinol from Schedule II to Schedule III in a way that had the effect of making it easier to prescribe and more available.

But I think what's going on with the FDA is an effort to try to counterbalance the risk for abuse, the risk for diversion, with these other considerations of getting safe medicine--

Justice Ginsburg: Have there--

Mr. Clement: --available to patients--

Justice Ginsburg: --have there been any applications to change the schedule for marijuana to the FDA?

Mr. Clement: --There have been a number of those petitions that have been filed.

There was one recently rejected, I think as recently as 2001; it may be 1999.

There was also a series of, kind of, a four or five-iteration effort to change the rescheduling that culminated in a D.C. Circuit opinion in the early '90s.

So there's definitely been these efforts.

But on the current state of the... of the record, there just is not a justification for changing the schedule.

And I think both of the briefs talked a little bit about the Institute of Medicine's study about the medical efficacy of marijuana.

And I think one thing that's important to keep in mind that that study comes to a conclusion about is, whatever benefits there may be for the individual components in marijuana, that smoked... smoked marijuana itself really doesn't have any future as medicine, because... and that's true, I think, for two reasons.

One, there's something like 400 different chemical components in crude marijuana that one would smoke, and it's... it just, sort of, belies any logic that all 400 of those would be helpful.

And a big part of the process of medicine, generally, is to take raw, crude material that somebody could grow in their garden, and actually have people who do this for a living get involved in a process of synthesizing and isolating the beneficial components, and then manufacturing and making that available.

The second reason that smoked marijuana doesn't have much of a future as medicine is, as I think people understand, smoking is harmful; and that's true of tobacco, but it's also true of marijuana.

And so the idea that smoked marijuana would be an effective delivery device for medicine, I think, is also something that really doesn't have any future as medicine.

What does have a future for medicine, of course, is an effort to synthesize and isolate the beneficial component.

That's been done with Marinol.

It is true that some people have difficulty tolerating the pill form that Marinol is available in.

And there's ongoing research to try to figure out different ways to deliver that substance.

But there is, in a sense, a little bit of a... and the Institute of Medicine's study has about five pages discussing Marinol, and it makes the point that there's something of a tradeoff.

Because one of the downsides of Marinol, as opposed to marijuana, is that it takes longer to get into the bloodstream.

But that's also one of the reasons why the FDA has made a judgement that Marinol is less subject to abuse, because it takes longer to get into the drug-stream, and so it doesn't have the characteristic of street drugs that tend to be abused, which is a very quick delivery time between the taking of the substance and the time that it has an effect on the system.

Justice Souter: May I go back to your point a few minutes ago about... it was, sort of, a categoric point... you, in effect, said,

"If this argument succeeds with respect to medical use of marijuana, the next argument is going to be recreational use, and there's no real way to distinguish between them. "

Wouldn't this be a way to distinguish between them?

That in deciding what class you are going to... or what subclass you're going to consider from which to generalize, you simply ask the question,

"What good reasons are there to define a subclass this way? "

In this particular case, the good reasons to define a subclass of medical usage are the benefits... whether you accept the evidence is another thing... but the benefits which the doctors say that, under present circumstances, you can get from smoking it, as opposed to taking the synthesized drug.

There's no such argument, I would guess, in favor of recreational marijuana usage as a separate category.

And, for that reason, isn't there a... isn't there a good reason to categorize this as narrowly as the Respondents are doing here, just medical usage, without any risk of generalizing the recreational usage?

Mr. Clement: With respect, Justice Souter, I don't think that it would be a good idea for this Court to get on a path of starting to second-guess Congress' judgement about defining a class of activities--

Justice Souter: That may... oh, that may be, but it seems to me that that's a separate argument, because you're... you were arguing before that if you recognize medical usage, you don't have any way of drawing the line against private recreational usage.

And I'm suggesting that you do have a reason for drawing that line, and it's the benefit for medical usage, if you accept the evidence; whereas, there is no reason to categorize recreational usage separately, and that seems to me a category argument, rather than a respect-for-Congress argument.

Mr. Clement: --Well, Justice Souter, I have no doubt that this Court could draw a line.

I think it would find it very difficult to police that line over the broad variety of cases.

I think it would find it every bit as frustrating as policing the line in Hammer against Dagenhart that this Court abandoned in Darby.

With that, I'd like to reserve my time for rebuttal.

Justice Stevens: Mr. Barnett?

Argument of Randy E. Barnett

Mr. Barnett: Justice Stevens, and may it please the Court:

I have two points to make.

First, the class of activities involved in this case are non-economic and wholly intrastate.

Second, the federal prohibition of this class of activities it not essential... is not an essential part of a larger regulatory scheme that would be undercut unless the intrastate activity were regulated.

If you accept the government's contrary contentions on either of these two points, Ashcroft v. Raich will replace Wickard v. Filburn as the most far-reaching example of Commerce Clause authority over intrastate activity.

Justice Kennedy: Well, on your first point, can't we infer from the fact that there's an enormous market, commercial market, for any given commodity, that simple possession of that commodity is a form of participation in the market?

Mr. Barnett: It can be, or it might not be.

If you possess an item that came from the market or is going to the market, simple possession could easily be a part of the marketplace.

But if you're in possession of an item that you've made, yourself, that is disconnected from the market... it didn't come from the market and it's not going to the market--

Justice Kennedy: Well, but it's fungible.

Mr. Barnett: --That... the fungibility issue is in this case, but the... but a... the fact that a good is fungible does not make it a market good, and it does not make the possession of that good an economic activity.

Or--

Justice Scalia: Well, you know, Congress has applied this theory in other contexts.

One is the protection of endangered species.

Congress has made it unlawful to possess ivory, for example.

It doesn't matter whether you got it lawfully, or not; or eagle feathers, the mere possession of it, whether you got it through interstate commerce or not.

And Congress' reasoning is,

"We can't tell whether it came through interstate commerce or not, and to try to prove that is just beyond our ability; and, therefore, it is unlawful to possess it, period. "

Now, are those... are those laws, likewise, unconstitutional, as going beyond Congress' commerce power?

Mr. Barnett: --Not if they're an essential part of a larger regulatory scheme that would be undercut, unless those activities are reached.

Justice Scalia: Well, why is that different from this?

Mr. Barnett: Because this class of activities... because it's been isolated by the State of California, and is policed by the State of California, so that it's entirely separated from the market--

Justice Scalia: Isolated and... I understand that there are some communes that grow marijuana for the medical use of all of the members of the communes.

Mr. Barnett: --That class of activities is not before the Court.

That is actually before--

Justice Scalia: No, but it's before the Court when you... when you raise the policing of the problem by California, and saying it's not a... it's not a real problem, you brought it before the Court.

Mr. Barnett: --But that class of activities could be... could be... if this Court limits its ruling to the class of activities that is before the Court, that class--

Justice Scalia: Which is... which is what?

Mr. Barnett: --Which is--

Justice Scalia: An individual grower?

Mr. Barnett: --An individual who is growing it for her... him or herself, who has... or has a caregiver growing it for her--

Justice Scalia: Gee, what basis--

Mr. Barnett: --for--

Justice Scalia: --what basis is there to draw it that narrowly? I mean, I guess if we... we could say people whose last name begins with a Z.

You know, that would narrow the category, too.

But why does... why does that make any sense?

Mr. Barnett: --Justice Scalia, we believe it makes sense because we are talking about a classification of activities that has been identified by the State of California, and which is rational to distinguish from--

Justice Scalia: Oh, but California hasn't identified individual growers.

Communes are okay, as far as California law is concerned.

Mr. Barnett: --Well, it's not entirely clear whether communes are okay, as far as the California laws are concerned.

Justice Scalia: Why wouldn't it be?

Mr. Barnett: Because if, in fact, commercial activity is taking place, if buying and selling is taking place--

Justice Scalia: No, no, they're not buying and selling.

I mean, you can't prove they're buying and selling.

There are just a whole lot of people there, with alleged medical needs.

Justice Breyer: I mean, I don't understand. Is there any authority in the commerce cases for... an X, which is there in the middle of a state, and it doesn't move one way or the other... now, Congress' power does extend to the X if the state doesn't say something about the X.

But if the state says something about the X, then Congress' power does not extend to it.

That's hard for me to accept, because I don't see... whether it's commerce or not commerce, whether it affects something or doesn't affect something, doesn't seem to me to have much to do with whether the state separately regulates it, and I can't find any support at all for that in any case.

Mr. Barnett: --The support would come from the exception to Lopez and Morrison that the government is urging that the Court adopt, that the Congress can reach non-economic activity that's intrastate, that's wholly intrastate, if doing so is essential to a larger regulatory scheme that would be undercut if they can't reach it.

Justice Breyer: Well, here, they say... look, I take it you're using this because I was going to ask you.

You know, he grows heroin, cocaine, tomatoes that are going to have genomes in them that could, at some point, lead to tomato children that will eventually affect Boston.

You know, we can... oil that's never, in fact, being used, but we want an inventory of it, federally.

You know, I can multiply the examples--

Mr. Barnett: Well--

Justice Breyer: --and you can, too.

So you're going to get around all those examples by saying what?

Mr. Barnett: --By saying that it's all going to depend on the regulatory scheme, what the--

Justice Breyer: Yeah.

Mr. Barnett: --purpose of the--

Justice Breyer: So now what you're saying is, in a Commerce Clause case, what we're supposed to do is to start to look at the federal scheme and the state scheme and see, comparing the federal scheme and the state scheme, whether, given the state scheme, the federal scheme is really necessary to include this.

That's a task, and I'm trying to make it as complicated as I can in my question.

[Laughter]

But I see it very well.

Here is what they say.

They say that,

"By the way, a hundred-thousand people using medical marijuana in California will lead to lower marijuana prices in the nation. "

"Bad. "

"And, second, when we see medical marijuana in California, we won't know what it is. " "Everybody'll say, "Mine is medical"."

"Certificates will circulate on the black market. "

"We face a mess. "

"For both those reasons, it does have an impact. "

they say.

Now, what's your response?

Mr. Barnett: --Well, you've raised at least two different practical issues.

One is the fact... the number of people who are in the class, and the second is the ability to identify whether they properly belong in the class.

As for the number of people, we are talking about a very small number of people.

They say a hundred-thousand.

They get their figures from the National Organization from Reform of Marijuana Laws.

Our figures in our brief come from the government.

The figures show it's a very small fraction of persons that would be involved.

And their argument is basically... and the logic of your hypothetical is premised on... the more people that go into the illicit market, the better for federal drug policy, because that will drive the price up.

You have to... what we're take... we're doing is, we're taking people out of the illicit drug market, which then, under your hypothetical, would lead to a reduction... and Justice Kennedy's suggestion... would lead to a reduction in the price of the illegal market, which, the opposite would be, they're... it's good for federal policy to have more people in the illicit drug market, because that's going to drive the price up.

Justice Breyer: No, no, we don't want more people--

Mr. Barnett: Of course not.

Justice Breyer: --in the illicit drug market.

[Laughter]

Mr. Barnett: Of course not.

Justice Breyer: And we don't want low prices, either.

[Laughter]

Mr. Barnett: But the... but the... but the scheme of... but the class of activities that have been authorized by the State of California will take people out of--

Justice Breyer: So, normally I would have said, it's up to Congress to figure out how to... the way that... you have one going one way, one going the other way, and balancing those factors would be for Congress.

That's what we'd normally say.

Mr. Barnett: --Well--

Justice Breyer: And you say all that stuff is not for Congress; that's for us.

Mr. Barnett: --Well, within this exception... the threshold issue... I do want to make sure that I focus on this... the threshold issue, which is the issue that has occupied most of our time so far, is whether the activity here is economic or non-economic.

The government claims it's economic, we claim it's non-economic.

Justice Breyer: Well, what it is, is, it's non-economic, and it affects the economic.

Mr. Barnett: Right.

So the threshold issue that is... that... upon which Lopez and Morrison terms... turns is whether it's economic or non-economic.

Justice Kennedy: Well, I should have thought that regular household chores of... say, performed in an earlier time mostly by women, was classically economic... washing dishes, making bread.

And now you say growing marijuana isn't?

Mr. Barnett: If you accept the government's definition of economic, then every... then washing dishes, today, would be economic, and that--

Justice Souter: No, but even--

Mr. Barnett: --would be within the... within the power of Congress to reach.

Justice Souter: --But even if we accept your definition of economic, I don't see that it is a basis upon which we ought to make a category decision.

You say it's non-economic because one of these people is a... is a self-grower, another one is getting it from a friend for nothing.

But I don't see what reason that you have given, or any reason that you haven't given, for us to believe that, out of... now I'm going to assume, for the sake of argument, a hundred-thousand potential users... everybody is going to get it from a friend or from plants in the backyard.

Seems to me the sensible assumption is, they're going to get it on the street.

And once they get it, under California law, it's not a crime for them to have it and use it.

But they're going to get it in the street.

Why isn't that the sensible assumption?

Mr. Barnett: Well, they have an... they have a very strong incentive not to get it on the street, because getting it on the street is going to subject them to criminal prosecution, under both California and federal law, as well as the--

Justice Souter: Yeah, but the... it's also the case that approximately 10 percent of the American population is doing that every day, if I accept the figures in the government's brief, and they're not getting prosecuted.

Mr. Barnett: --But we're talking... in that case, we're talking about people who are using it for sport, for recreation.

We are talking about a class of people here who are sick people, who don't necessarily want to violate the law.

Justice Souter: And if I am a sick person, I'm going to say,

"Look, if they're not prosecuting every kid who buys, what, a nickel bag or whatever you call a small quantity today, they're not going to prosecute me, either. "

I mean, there's not going to be any incentive, it seems to me, to avoid the street market.

Mr. Barnett: The government, in their brief, asserts that the... that the possession statute that currently exists provides a deterrent effect, which is why they... which is their explanation for why they failed to enforce the possession statute that they say is so essential to the--

Justice Ginsburg: If one--

Mr. Barnett: --regulatory scheme.

Justice Ginsburg: --if one takes your view, that this is non-economic activity, so it's outside Congress' commerce power, then explain to me why, if you have someone similarly situated in a neighboring state, somebody whose doctor says,

"This person needs marijuana to live. "

but that state doesn't have a compassionate-use act... it's just as isolated... no purchase, no sale, grown at home, good friend grows it... and yet you say Congress could regulate that, if I understand your brief properly.

Mr. Barnett: Yes, Your... yes, Your Honor, because there's the... that's the second step of the analysis.

The first step of the analysis is the economic/non-economic.

If you don't... if the Court stops there, then they could also apply in these other states.

But then if the Court adopts--

Justice Ginsburg: But if you... if you buy that... so your first answer is, yes, on your first argument, it would be equally impermissible for the feds to regulate medical use anywhere.

Mr. Barnett: --Yes, Your Honor.

Justice Ginsburg: All right.

Now you're going to have some limiting--

Mr. Barnett: But a limiting principle is the one that I... was identified by the Court in Lopez in which the government is asserting that if it's an essential part of a broader regulation of economic activity to reach this activity, then it may be reached.

And the difference between states in which there is a state law enforcement that's confining the class, and that there is a discrimination between legal and non-legal use, is completely different from a practical enforcement standpoint than a state in which there is no differentiation.

Just think of the existence, for example, of identification cards, which the State of California is going to be issuing, like driver's license cards.

Justice Ginsburg: --Yeah, but it doesn't right now, and that doesn't make the scheme less valid, in your view.

Mr. Barnett: Well, because... but this is the sort of regulation... the sort of effectiveness of the regulation that will be at issue and which is, in fact... I believe the Court should be in the position of trusting the State of California to be able to administer its regime.

There is no regime in other states to trust, and, therefore, the argument that it is necessary to reach that activity, and a lot of other activity in states in which the states are not attempting to pursue the health of their citizens... the goal of preserving the health of their citizens this way, that would fall under the exception which this Court suggested in Lopez--

Justice Breyer: So this is a new framework, I take it, and it's very interesting.

And one of the things that interests me... I guess, on your framework, Lopez should have come out my way.

[Laughter]

Mr. Barnett: --Well--

Justice Breyer: Because it's essential to regulate guns in schools as part of a national gun-control regulatory scheme.

Mr. Barnett: --Justice Breyer, that's the reason why that exception has to be narrowly treated, so it doesn't reach your result.

[Laughter]

If that exception were treated as broadly as you suggested that it should be in your dissent in Morrison, then the game is up, the exception will swallow the rule, and Lopez and Morrison will be limited to their facts.

Justice Breyer: Well, I thought we didn't need to reach all that here, for the reason that the connection here, which is an enforcement-related connection and a market-related connection, is actually, I have to confess, a little more obvious and a little more close than what I had to... what I had to say in Lopez to... was the connection between guns, education, communities, and business.

So I would have thought, given the... and I believe that, you know... but, I mean... but that was far further than this, which is just direct.

Mr. Barnett: But this case is completely unlike those cases.

This case is completely isolated.

In Lopez, that gun probably did come through interstate commerce, not that I believe it should have made any difference, but it probably did.

Here, we're talking about substances that don't.

So there's just no literal connection between this class of activities and this interstate market.

Justice Scalia: Well, we didn't decide that, in Lopez, on the basis of whether the gun had come in interstate commerce.

If the statute in question had applied only to guns that had been transported in interstate commerce, the case might have come out differently.

Mr. Barnett: I... no doubt, Your... I... and I wasn't suggesting otherwise, Justice Scalia.

I'm just suggesting that, here, we have... exactly, that if there had been that interstate connection in Lopez, the case might have come out different.

There is no interstate connection whatsoever in this class of cases.

None.

The only way to make it an interstate connection is through some sort of hypothetical economic substitution effect in which somebody who's doing something over here is going to have an affect on somebody else who's doing something over there.

There is no connection.

Justice Scalia: Sounds like Wickard to me.

Mr. Barnett: Well, Wickard, Your Honor--

Justice Scalia: I always used to laugh at Wickard, but that's... that's what Wickard said.

Mr. Barnett: --Wickard--

Justice Scalia: Had he not eaten the wheat, it would have been in interstate commerce.

Mr. Barnett: --Had that case been about eating wheat, that case would never have arisen.

Justice Scalia: Well, that's what it was about, as far as the Court's analysis was concerned.

To be sure, there were a lot of... there was a lot more use of the wheat on his farm, other than just human consumption, but it seems to me the analysis of the case said,

"You take it... you take it out of the stream of commerce by growing it yourself, you make it unnecessary for your... to buy it in interstate commerce. "

Mr. Barnett: It's... the entire analysis... the entire proof that the court relied upon in Wickard was proof of the economic impact of home-consumed wheat on the farms.

And by "home-consumed", it did not mean eating at the family... at the family table; it meant feeding to your livestock and then putting it... your livestock--

Justice Scalia: Strange phrase, to mean "feeding to livestock"?

Mr. Barnett: --But the--

Justice Scalia: "Home-consumed" is feed it to your pig?

Mr. Barnett: --But, yes, that's exactly what--

Justice Scalia: I don't think so.

Mr. Barnett: --that's exactly what that general term... how that general term was used in this case.

Justice Breyer: But what the Court said, I take it... and I have quoted a lot of the language there... it says that the wheat farmer's consumption of home-grown wheat, not the part that went in... quote,

"though it may not be regarded as commerce-- "

Mr. Barnett: Yes, Your Honor.

Justice Breyer: --end quote, still can be regulated, quote, "whatever its nature", so long as, quote,

"it exerts a substantial economic effect on interstate commerce. "

Now, that's the language, and I take it that Justice Scalia is exactly right, I thought, from that language, it's about the analysis, home-grown wheat, which is not economic, having an effect on something that is.

Mr. Barnett: With all respect--

Justice Breyer: Which is not commerce.

Sorry, not commerce.

Mr. Barnett: --With all respect, what... that's... I was about to make that--

Justice Breyer: Well, the Commerce Clause speaks in terms of commerce.

Mr. Barnett: --Right.

Right.

What the Court was using here was the narrower... the traditional definition of "commerce" that Justice Thomas has been urging this Court to adopt.

And they were saying that,

"We are not going to limit ourselves to that narrow definition of "commerce". "

It would include, for example, agriculture and production.

That's all going to be reachable, even though it's not commerce, in the traditional sense.

But what we would call it today, and I believe what the Court correctly called it, in Lopez, was "economic activity".

Production is economic activity.

Manufacturing is economic activity.

But... it's not commerce, but it's economic activity that can be reached.

And that is the activity... that's not only the activity that Farmer Filburn was engaged in; that was the activity that the statute was aimed at.

The statute--

Justice Scalia: Well, why is this not economic activity, if you use the term in that broad sense?

This marijuana that is grown, just like the wheat that was grown, in Wickard, since it's grown on the farm, doesn't have to be bought elsewhere, and that makes it an economic activity.

Mr. Barnett: --What made it an economic activity in Wickard was the fact that it was part of commercial enterprise, that it was being used on the farm... not in interstate commerce, but part of the commercial enterprise of the farm.

Justice Scalia: Again, I don't think that's... that faithfully represents what the opinion said.

I think the opinion covered... including the amount that he consumed himself, and his family consumed.

Mr. Barnett: The... look, I... for whatever it's worth, it's worth remembering that the statute exempted small commercial farms.

People who had backyard gardens weren't even included within the regulatory regime.

The regulatory regime was about regulating or stopping or restricting the supply of wheat that got into the market, or that could have--

Justice Scalia: Did the opinion make a point of that?

Mr. Barnett: --Pardon me?

Justice Scalia: Did the opinion make a point of that?

Mr. Barnett: It... it was mentioned in the opinion.

It was not... it was not a major point of this opinion.

But--

Justice Scalia: I don't think it was a point of the Court's analysis at all.

Mr. Barnett: --This--

Justice Scalia: Could I... could I--

Justice Stevens: Let me ask this question.

What is your view with respect to the impact of the activities concerned in this case on the interstate market for marijuana?

Is it your view that it will have no impact, that it will increase the interstate demand, or decrease the interstate demand?

So there are three alternatives.

Which is the one we should follow?

Mr. Barnett: --Can I pick "trivial impact"?

[Laughter]

Justice Stevens: No, but if it... "trivial impact", is it a trivial impact that enhances the price of marijuana or decreases the price of marijuana, in your view?

Mr. Barnett: The only effect it could have on the price would be a slight trivial reduction, if it has any effect at all, because it's going to withdraw users from the illicit drug market.

And to the extent that they are now in the illicit drug market... and we don't know whether they are or not--

Justice Stevens: Well, that would reduce demand and increase price, it seems to me.

It's the other way around.

Mr. Barnett: --Well, it would reduce demand and reduce prices, I think.

But--

Justice Stevens: If you reduce demand, you reduce prices?

Are you sure?

Mr. Barnett: --Yes.

[Laughter]

Justice Stevens: Oh, you're right.

You're right.

Okay.

Yeah.

Justice Souter: Your whole argument for triviality, though, goes... your whole argument for triviality, though, goes back to your disagreement with the government about how many people are involved, because I take it you accept the assumption that the more people who are involved... if there are millions and millions, it is unlikely that this licensed activity is going to be without an effect on the market.

So the whole argument boils down to how many people are going to be involved.

You don't accept the government's 100,000-dollar figure.

Let me ask you a question that would... that would get to, maybe, a different number, and that is, Do you know how many people there are in California who are undergoing chemotherapy at any given time?

Mr. Barnett: I do not know the answer to that.

Justice Souter: Isn't that number going to be indicative of the demand for marijuana?

Mr. Barnett: It could be, Your Honor, but that also illustrates--

Justice Souter: But if you... if you accept that, then there's nothing implausible about the government's hundred-thousand number, is there?

Mr. Barnett: --But whatever... I don't know, because I don't know the number of people using chemotherapy.

But whatever the number--

Justice Souter: How many people are there in California?

What's the population?

Justice Kennedy: Thirty-four million.

Mr. Barnett: --Thank you, Justice Kennedy.

Justice Souter: Lots... lots--

[Laughter]

--lots and lots.

They... a hundred-thousand cancer patients undergoing chemotherapy does not seem like an implausible number.

And, in fact, if that number is a plausible one today, its plausibility reflects, among other things, the fact that there is a controversy as to whether California's law, in fact, is enforceable, or not.

And the reason... there is reason to assume that... if we ruled your way, that that number would go up.

So, if you accept that line of argument, then your argument, that the effect, whatever it may be, is going to be trivial, seems to me unsupportable.

Am I missing something?

Mr. Barnett: Well, two things.

First of all, whatever number it is, it's going to be confined to people who are sick, who are sick enough to use this.

That is not an infinitely expandable number, the way, for example, recreational activity is, where lots of people could just decide to do it.

We're talking about people who qualify, on a physician's recommendation, for this particular activity.

That will limit the number.

But the amount of the people... the effect on commerce only matters if the Wickard v. Filburn aggregation principle applies to the class of activities in this case, and it does not apply to the class of activities in this case if they are non-economic, as we assert that they are.

Justice Souter: Well... but that is circular reasoning, because the whole... your whole argument that it's non-economic is based on the claim that there are... the numbers are so few... the number of people involved, from what you could generalize, are so few that it would not be reasonable to infer an effect on the market.

If there would be a large market effect, it makes no more sense to call this non-economic than Filburn's use, non-economic.

Mr. Barnett: Lopez and Morrison stand for the proposition that activities that simply have an effect on the market are not necessary... that does not make them economic.

This Court rejected that proposition, that just because an activity has an effect... an economic effect makes the activity, itself, economic.

It adopted a principle that's less than--

Justice Scalia: --Remote, remote, remote economic effect.

Justice Souter: It was inference upon inference upon inference.

That's not what we're talking about here.

Mr. Barnett: --But just... just have it... just... whether an activity is economic, you have to look to the activity, itself, and an economic activity is one that's associated with sale, exchange, barter, the production of things for sale and exchange, barter.

This whole Court's jurisprudence since The New Deal has been premised on the ability to tell the difference between economic activity, on the one hand, and personal liberty, on the other.

Justice Souter: Your whole jurisprudence in this case is premised on the assumption that we have got to identify the entire range of potential effect based on the particular character of two individuals in their... in their supply of marijuana.

And the whole point of this argument is that that does not seem to be a realistic premise on which to base constitutional law.

Mr. Barnett: The premise of our... the premise of our economic claim is the nature of the activity involved, not necessarily its effect, but the kind of activity it is.

The idea... for example, you... prostitution is an economic activity.

Marital relations is not an economic activity.

We could be talking about virtually the same act.

And there is a market overhang for... from private sexual relations to prostitution, but we don't say that because there is a market for prostitution, that, therefore, everything that is not in that market is economic.

We look at the activities, and we--

Justice Breyer: I'd like to ask you one question about the activity--

Mr. Barnett: --Yes.

Justice Breyer: --which was brought up before, and I just... I've never understood this.

I'm not an expert.

I don't honestly know, if I really think about it, despite all the papers and so forth, whether it's true that medical marijuana is helpful to people in ways that pills are not.

I really don't know.

So I would have thought that the people, like your clients, who have a strong view about it, would go to the FDA, and they would say to the FDA,

"FDA, take this off the list. "

"You must take it off the list if it has an accepted medical use and it isn't lacking in safety. "

The FDA will say yes or it will say no.

If it says yes, they win.

If they say no, they can come right into court and say, "That's an abuse of discretion".

The Court says yes or no.

If it says yes, they win.

If it says no, it must be because it wasn't an abuse of discretion, in which case, I, as a judge, and probably as a person, would think it isn't true that marijuana has some kind of special use.

So that would seem to me to be the obvious way to get what they want.

That seems to me to be relevant to the correct characterization.

And while the FDA can make mistakes, I guess medicine by regulation is better than medicine by referendum.

Mr. Barnett: Well--

Justice Breyer: So that's... I just want to know why.

Mr. Barnett: --Well, Your Honor, first of all, that whole process wouldn't dictate what the power of Congress is to reach this activity--

Justice Breyer: That's all true, but as long as that hasn't been done, don't I have to take this case on the assumption that there is no such thing as medical marijuana that's special and necessary?

Mr. Barnett: --I would--

Justice Breyer: If has been done, maybe I shouldn't make it.

Mr. Barnett: --I would simply ask Your Honor to read the amicus brief by Rick Doblin, in which it describes the government's obstruction of scientific research that would establish the safety and efficacy of cannabis by denying supplies of cannabis... of medical... of cannabis for medical experimentation.

And then I'd ask Your Honor to read the Institute for Medicine's report, that both the government and I... and we have relied upon in our briefs.

There has been no impeachment of this report by the National Academy of Sciences on the medical effect.

And what they say is that the... that what information we have is that cannabis does have a substantial medical effect.

Smoked cannabis does carry with it harms associated with it, as the... as General Clement correctly pointed out.

It does carry with it these ancillary harms.

But when people are sick and people are suffering and people are dying, they may be willing to run the risk of these long-term harms in order to get the immediate relief, the life-saving relief that cannabis has demonstrably been able to provide.

I'd just ask Your Honor to look at that, which is in the record.

Justice Kennedy: Are prescriptions, under California law, limited only to those people with life-threatening illnesses?

Mr. Barnett: They are limited to a list of illnesses that are in the statute.

Justice Ginsburg: Some of the illnesses--

Mr. Barnett: Some of which are life-threatening and some of which are not, Your Honor.

Justice Ginsburg: --In one... in one plaintiff's case, I think, there isn't a life-threatening--

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

She has... she has severe back spasms and pain that cannot be controlled by conventional medicines.

She's a law-abiding citizen.

This goes back to the issue of what the... incentives there are that are created by this.

This is a law-abiding woman, who has never been interested in the illicit-drugs market.

Justice Ginsburg: --May I just ask you one procedural question?

Mr. Barnett: Yes.

Justice Ginsburg: And this is... this is a suit for an injunction.

And it... basically an injunction against a criminal prosecution.

Mr. Barnett: And seizure--

Justice Ginsburg: And--

Mr. Barnett: --of these plants.

Justice Ginsburg: --and there's an old saying, in equity, that courts don't enjoin criminal prosecutions.

So how is your injunction suit appropriate, given that old saying there that you have to make your defense in the criminal proceeding and not enjoin this operation?

Mr. Barnett: Well, it is... it is an... we're seeking an injunction to prevent the enforcement of the statute against these two persons, which includes forfeiture, which has already happened in this case.

We've already had Diane Monson's plants seized by the Drug Enforcement Authority.

That is not something that we... that we... that has anything to do with criminal prosecution, and yet that puts at risk her supply of medicine, the supply of medicine she needs to get by, to relieve her suffering.

I see my time--

Justice Stevens: Thank you.

Mr. Barnett: --is up.

Justice Stevens: Thank you, Mr. Barnett.

General Clement, you have four minutes.

Rebuttal of Paul D. Clement

Mr. Clement: Thank you, Justice Stevens, and may it please the Court:

As I understand Respondents' position, it's effectively that their clients, and clients like them, in their use of medical marijuana, is somehow so hermetically sealed from the rest of the market on marijuana that it has no effect on that market on marijuana and no effect on the government's overall regulatory regime.

And I understand that to be true largely because of state law.

And one of the many problems with that mode of analysis is that the state law is not designed only to carve out those transactions that have no effect on interstate commerce or no effect on the federal regulatory regime.

Proposition 215 was not tasked as an exercise in cooperative federalism; it was passed as an effort to make medical marijuana lawful to possess, whether you bought it in interstate commerce, whether you bought it with the marijuana having traveled in interstate commerce, whether you bought it, whether you grew it yourself.

There's a fundamental mismatch with their theory that really, I think, undermines their theory.

Now, there's the question now about what kind of impact this would have on the federal enforcement scheme.

Now, we, in our reply brief, try to use the numbers from one of Respondents' own amici, and we suggest that there's a hundred-thousand people that might be lawful medical users, if their position prevails.

Now, obviously, this is all an effort in, sort of, counter-factual speculation, so the numbers may be a bit off.

But they suggest that our own government numbers are somehow better, and they cite them on page 18 of the red brief.

But the only numbers on the red brief for California suggest that, in the four counties for which there are data, there was....5 percent of the people use marijuana.

Now, if you extend that out statewide to the 34 million people in California, that gives you 170,000 people.

So their numbers... using the government numbers actually give you more potentially affected people.

I think in trying to figure out how many people would be affected, it's worth considering what medical conditions are covered.

And this responds to Justice Kennedy's last question, Is this just limited to AIDS or people with terminal cancer?

And it's not.

And if you want to look at what is covered as serious medical condition under the statute, you can turn to page 7(a) of the red brief, in the appendix to the red brief, and it suggests that a serious medical condition... there's a catchall at the end that includes subsection 12...

"Any other chronic or persistent medical system that, if not alleviated, may cause serious harm to the patient's safety or physical or mental health. "

Now, I think that is an exceedingly broad definition of a serious medical condition for which somebody could be... get a recommendation for marijuana for medical uses.

Another point worth considering, in considering the impact on the federal regulatory regime or the effectiveness of California in preventing any diversion, is to take a look at two cases we cite in our reply brief.

One is the People against Wright.

There's somebody who's arrested with 19 ounces, over a pound, of marijuana.

They're packaged such that he has one small bag in his pocket, six other small bags wrapped with a scale in his backpack, two other larger bags in that backpack, and then a pound wrapped in a shirt in the back of his truck.

And yet the Appellate Court in California said that he was entitled to go to the jury with the theory that that was for medical use.

The fact that he had a scale, and the fact that it was packaged the way it was, could be explained to the jury because he had just boughten it, and that he used the scale to make sure he wasn't ripped-off.

I think that shows that it's going to be very hard to enforce the regulatory regime.

The other case in the reply brief worth mentioning is the Santa Cruz case, because that's a case where a Federal District Court, after Raich came out, said that it could not enforce the DA and the Controlled Substances Act against a 250-person cooperative.

And that just shows that this is not something that will be limited to one or two users at a time, but will have a substantial impact on the government's ability to enforce the Controlled Substances Act.

Thank you.

Justice Stevens: Thank you, General Clement.

The case is submitted.

Attribution:

The Oyez Project

Featured:

American Insurance Association v. Garamendi - Oral Argument

Fri, 09 Jan 2009 14:50:40 +0000

Case:

American Insurance Association v. Garamendi

Media File:

02-722_20030423-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Kenneth S. Geller

Chief Justice Rehnquist: We'll hear argument now in Number 027-22, American Insurance Association versus John Garamendi.

Mr. Geller.

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

58 years ago almost to the day the United States and its allies defeated Nazi Germany and World War II came to an end in Europe.

Ever since that time, the United States Government has been actively engaged in a series of initiatives to obtain just compensation for victims of the war.

These efforts continue to the present day.

Beginning in the mid-1990s, the Federal Government has been engaged in extensive negotiations with other Governments concerning claims of Holocaust victims.

The President himself has stated repeatedly that it's in the foreign policy interests of the United States to have these claims resolved exclusively in an international forum and through nonadversarial means, rather than through costly, time-consuming and contentious litigation.

To achieve these goals in the context of unpaid insurance claims, the President has taken three actions.

First, the United States has facilitated and encouraged the establishment of the International Commission on Holocaust Era Insurance Claims, or ICHEIC.

Second, the United States, with the personal intervention of the President himself, has negotiated agreements with Germany and Austria under which those countries and their insurance companies agreed to provide hundreds of millions of dollars in compensation for unpaid insurance claims and to follow procedures worked out with ICHEIC to process insurance claims in a nonadversarial manner and under relaxed standards of proof, and--

Justice O'Connor: Mr. Geller, I... let me mention a couple of things that I find troubling about the case, and one is that when Congress passed a law in this area it didn't include any language preempting State laws such as California has, and when the President put out his executive order or agreement it doesn't expressly do so, either.

How does that affect our analysis, do you think?

Mr. Geller: --Well, the statute that Congress passed was the Holocaust Assets--

Justice O'Connor: Yes, right.

Mr. Geller: --Commission Act, which clearly gave authority to the President to take control of this issue, and didn't provide any role for the States whatsoever.

Justice O'Connor: But it didn't preclude a role.

Mr. Geller: But in the area of foreign affairs, under this Court's decision in Zschernig, and in the area of foreign commerce under many of this Court's decisions--

Justice O'Connor: Well, Zschernig has never been cited since it was written.

It's kind of a troublesome thing to hang your whole--

Mr. Geller: --Our whole case does not depend on Zschernig--

Justice O'Connor: --case on, and we have in the meantime decided, for instance, Barclay's Bank, which has some language in it that speaks against recognizing the kind of--

Mr. Geller: --I don't--

Justice O'Connor: --authority you talk about, and we have the Breard case, that criminal case, Breard versus Greene.

Now, how do we deal with those?

Mr. Geller: --Well, to begin with I think Barclay's is completely distinguishable, Justice O'Connor, on at least three grounds.

First, Barclay's concerns solely the Foreign Commerce Clause, and the Court said in Barclay's that Congress has primacy under the Foreign Commerce Clause, and it read the record in that case to conclude that Congress had acquiesced in or approved what California was trying to do in the area of taxation, so there was no suggestion that what California was trying to do in that case prevented the Federal Government from speaking with one voice in the area of foreign commerce.

There's nothing, to begin with, comparable in this case to suggest that Congress has done anything to authorize California to engage in regulation of foreign insurance policies involving foreign companies and foreign beneficiaries.

Secondly--

Justice Ginsburg: But the United States must have been aware that the California legislation existed.

Mr. Geller: --I--

Justice Ginsburg: And the... part of the story is that this State legislation was on the books before the executive agreement with Germany and Austria that you've just applauded, so when California acted there wasn't any such accord.

Mr. Geller: --Well, several things, Justice Ginsburg, and then I want to get back to answer Justice O'Connor's question.

First, the Holocaust Act, the Federal Holocaust Act was passed before the HVIRA, so it could not in any way be read as acquiescing in or approving anything that California was doing in this area.

Secondly, and Mr. Kneedler will, I think, speak to this, the executive agreement did not expressly preempt any claims, because these were claims largely by foreign nationals against foreign companies, and the President did not believe it would be appropriate to extinguish all of those claims, but we're not dealing in this case with claims by individuals.

We're dealing with actions by a State which interfere with what the President himself has said are his goals in an area, a very sensitive area of foreign affairs.

And this case is not like... this case is much stronger than Zschernig, because in Zschernig, the Federal Government had done nothing in the area.

Nonetheless, this Court said that the States cannot enter into an area where it has the potential for embarrassment, or to interfere with the--

Justice Ginsburg: Zschernig involved criticism of a foreign government.

Mr. Geller: --So does this statute.

This statute criticizes--

Chief Justice Rehnquist: Is that really a sound basis for a decision like Zschernig, to say Oregon probate judges were inquiring about the policies of Eastern European countries?

I mean, I... I don't regard that as a very strongly reasoned opinion.

Mr. Geller: --But this case, Chief Justice, is much stronger than Zschernig because this is not a case, unlike Zschernig, where the President has done nothing in the area.

Here, the President has aggressively entered the area and tried to impose a solution which he has concluded is in the best interests of the foreign policy of the United States, so it's not a question of field preemption.

Zschernig could be looked at as a case of field preemption.

What the Court essentially said, I think, in Zschernig is that there is a field of foreign affairs where, even if the United States Government has done nothing, the States cannot enter.

This is a case that I think gets much more clearly analogous to conflict preemption.

Here, the President, with the acquiescence of Congress, has aggressively moved to try to solve a very serious international problem, and--

Justice Ginsburg: But Mr. Geller, said in that very agreement there is to be no preemption.

The President said that when California law was already on the books.

Mr. Geller: --I don't think it specifically says there's to be no preemption.

We're not dealing here, to begin with, Justice Ginsburg, with claims by individuals.

We're dealing here with State legislation, and in the executive agreement the President... the President promised to use his best efforts to prevent the States from interfering with the executive agreement.

He has concluded on many occasions that what California has tried to do here is a direct interference, a direct interference with the foreign policy position of the United States, which is to funnel all of these claims through an international commission.

Justice Kennedy: Well, if we can look just at the agreement, isn't this what is usually called an executory agreement, rather than a... than a fully executed agreement?

In other words, it says the United States, recognizing the importance of the objectives of this agreement, shall in a timely manner use its best efforts in a manner it considers appropriate to achieve those objectives.

That's... that's something yet to be done.

That's not--

Mr. Geller: No, I think, Justice--

Justice Kennedy: --It sounds to me like executory, rather than fully--

Mr. Geller: --I think what the agree... Just... Mr. Kneedler is probably better equipped to address the meaning of the executive agreement, but it seems to me what... what the President has chosen to do there is to promise to use his best efforts to look to see whether any States or localities are taking actions which interfere with the promises that the President has made to foreign countries and foreign insurance companies to try to achieve legal peace in the United States, and in those instances where the States have taken action which interferes directly with that... with that promise, the President has promised to use his best efforts, such as to file briefs in this Court and others, arguing that these... these State statutes are preemptive, so it's... there's no... I think in the lingo of a statute there is no express preemption here, but there's clearly implied preemption under the Supremacy Clause.

Justice Stevens: --Mr. Geller, I may have misheard you, but didn't you describe the agreement a little more broadly than its terms?

The President's agreement, as I understood it, was to funnel all the claims through the... the... this... this new body, and I don't understand that producing the information that's sought in this case would preclude that from being done.

Mr. Geller: Well, the... the international commission not only set up a claims resolution process, it also has procedures for the disclosure of information which take into account European privacy laws, Justice Stevens.

It was a very--

Justice Stevens: But that's a different argument.

I mean, that's not based on the text of the executive agreement.

Mr. Geller: --Well, the executive agreement chose the... the President chose through the executive agreement and through his negotiations with foreign countries to use the ICHEIC system, rather than any parallel system, in part because of the concern about violating European privacy laws.

The California statute would be a blatant violation of European--

Justice Stevens: Well, but as I understand it, the California... one of the purposes of the California statute is to... to uncover claims that might not be known about.

It produces the information that would then allow the claimant to go to the... the--

Mr. Geller: --But the international commission has a separate... separate policy for divulging information that... and right now the, it's in the process of finalizing that.

Under the international commission, all of the insurance companies are producing their data bases in private--

Justice Ginsburg: --But all, Mr. Geller, would you clarify all, because I had the impression from the briefs that there were only five companies, and that they cover something like a little over 35 percent--

Mr. Geller: --No, that's... that's--

Justice Ginsburg: --of the universe of... of claims?

Mr. Geller: --false, Justice Ginsburg.

It's based on outdated information.

In light of the agreements that the United States has reached with Germany and Austria, all the insurance companies in those countries have agreed to follow the ICHEIC procedures so that with the inclusion of all the German insurance companies, all the Austrian insurance companies, all the Dutch insurance companies, and many of the Swiss insurance companies, I would say that the ICHEIC system now covers at least double the percentage that the--

Justice Ginsburg: It's still a wholly voluntary--

Justice Kennedy: --How... how specifically does the... does the California statute interfere with the operations of the commission?

Mr. Geller: --It interferes in a number of different ways, Justice Kennedy.

It interferes, to begin with, because it presents the possibility that these companies will have to pay twice, and it was a specific promise on the part of the United States that they would not have to pay twice.

Justice Kennedy: Well, that's assuming there's a suit brought later, but--

Mr. Geller: That's assuming, that's... this is all a part of the California system.

The only purpose--

Justice Kennedy: --And that doesn't meet Justice Stevens' point that this is just a disclosure--

Mr. Geller: --Well, that's... I want to get to that as the second reason, but I want to make sure the Court appreciates the first reason.

It was very important that these companies not be made to pay twice, and the President--

Justice Souter: --I... I don't understand.

Why would that be?

Why is there a risk?

Mr. Geller: --It would be because under the international commission these companies have already made a substantial payment, over $100 million, to settle their claims, but if the California process is allowed to continue, it's possible that people will be able to bring suit in California and recover separate--

Justice Ginsburg: This case is about a disclosure statute--

Mr. Geller: --It's--

Justice Ginsburg: --there's other legislation that is not before us.

Mr. Geller: --I under--

Justice Ginsburg: We are talking about a statute that doesn't authorize anybody to bring suit.

It simply requires disclosure.

Mr. Geller: --But the only purpose of the statute, and this is as clear as can be from the face of the statute, is to provide information so that Californians can bring suit in California, but the second way in which the California statute, Justice Kennedy, interferes with the ICHEIC process is that all of these companies agreed to the ICHEIC process on the assumption that European privacy laws would be respected.

That's... that is one of the principal reasons why the United States has negotiated this alternative system.

Under the--

Justice Ginsburg: Mr. Geller, one... would you explain one thing that is troubling?

The privacy interest that is being asserted, one can understand an insured doesn't want the insurance company to divulge the insured's records, but we are dealing with a unique situation here in that many of these insureds, the insureds that were concerned, were killed in the Holocaust, and it seems to me to raise a privacy interest with respect to those people and their beneficiaries is... is kind of ironic.

Mr. Geller: --But Justice Ginsburg, this is very important.

Under... we're dealing with tens of millions of insurance policies here.

Only a small percentage of those policies has to do, have to... relate to Holocaust victims.

California would require, and this is a critical point for the Court, California would require disclosure of the intimate details of all 10 million of those policies, 99.9 percent of which have nothing at all to do with California, and nothing to do with any victims of the Holocaust.

Under the ICHEIC system, under the ICHEIC system, the only policies that will be publicly disclosed on a data base are policies held by... by possible victims of the Holocaust.

Justice Ginsburg: How does one know that?

Mr. Geller: It... it know... under I... under the ICHEIC system, all of the policies written during this era that are on electric data base are to be... are to be put into a system, and independently ICHEIC has done a census of all of the possible Holocaust victims in Germany during the pre-war period through various records and come up with several hundred thousand names which will be matched against the list of policyholders, and when there is a match, that list will be put out on a public data base.

The German--

Justice Ginsburg: There was a list--

Mr. Geller: --The German--

Justice Ginsburg: --There was a list that was due out in April.

Has--

Mr. Geller: --That will... I'm told that list will be out by the end of this month, and the German insurance authorities have concluded that publication of that list would not violate any privacy laws because it would be for the benefit of the people who are trying to recover on these unpaid Holocaust era insurance policies.

California, by contrast--

Justice Kennedy: --I take it you could make that argument even absent the claims commission.

Mr. Geller: --Absolutely.

Absolutely.

What California has tried to do here would violate the foreign affairs power as well as the Commerce Clause, even absent the... the personal intervention of the President himself to seek an alternative solution to this vexing international problem, that's right.

For California, which has absolutely no relationship to any of these policies, to insist that they all be made public is, we think, a clear violation of the Commerce Clause.

Justice Kennedy: How... how does it relate to the... suppose we want to link the harm that this does under the privacy laws to the operation of the commission.

How do we do that?

Just, the... the burden and the cost to the companies that might better be expended on the claim--

Mr. Geller: It's simply that California has no relationship to any of these policies.

These policies were all policies written in Europe by European companies, and California's--

Justice Kennedy: --But that's a separate argument from the operation of the commission.

Mr. Geller: --It is a separate argument from the... I think the... the--

Justice O'Connor: Tell us briefly the principle of Federal law that you say governs this.

All of the sudden you're talking about the Foreign Commerce Clause.

Mr. Geller: --Yes.

We made three arguments--

Justice O'Connor: And I thought earlier in the argument you had said, oh, that really isn't our case, we don't need that, and that's what Zschernig--

Mr. Geller: --No, I... that's not true, I was... I was trying to distinguish the Barclay's case... the Barclay's case.

Justice O'Connor: --All right.

Well, at do you--

Mr. Geller: In addition--

Justice O'Connor: --What do you say is the principal flaw?

Mr. Geller: --There are... there are three arguments that we have made to attack this California statute.

One is, is that it is, under many decisions of this Court, including the recent decision in Crosby, in clear conflict with United States foreign policy.

The President has set out a particular policy to try to resolve the last remaining issue from World War II.

It involves channeling all of these foreign claims into an international commission in a way that respects European privacy laws.

California has set up a--

Justice O'Connor: And what case... what case establishes that principle, clear conflict?

Mr. Geller: --I would submit, United States versus Pink, United States versus Belmont are two cases in which the President issued executive agreements and the Court found that they preempted State law.

I would--

Justice Ginsburg: Yes, but here you... that's the big difference between those.

They preempted State law.

There's no pretense by... the executive says I'm going to use my best efforts.

Mr. Geller: --Those case... those executive agreements, I do not believe, had any express preemption provisions in them.

The Court simply concluded--

Justice Ginsburg: But when you take what the President undertook, which was just to use best efforts, that doesn't sound like--

Mr. Geller: --Under the Supremacy--

Justice Ginsburg: --this Court would have much to--

Mr. Geller: --Justice Ginsburg, I think it's the operation of the Supremacy Clause.

Here, the President has set out a policy for the United States, and has issued an executive agreement with foreign countries to try to implement that policy, and I think it is clear under the Supremacy Clause that the States cannot do anything that would frustrate or interfere with the operation--

Justice Ginsburg: --With full knowledge, when the President did that, that there were these laws in California.

Mr. Geller: --And at the time that the... that these laws were in the process of being passed, the President's personal representative, Stuart Eizenstat, wrote a letter to the Governor of California saying, please do not pass this law because it will interfere with what the United States is trying to do in the area of foreign policy, and I think it would be a shame if this law went into effect because of the disastrous impact it would have on the ICHEIC system, which the President of the United States... which two successive Presidents of the United States have concluded is in the best foreign policy interests of the United States, and the best interest of Holocaust victims in order to get money into their hands quickly.

But secondly, Justice O'Connor, in addition to the foreign affairs power, we think this is a blatant violation of the... of the Foreign Commerce Clause, which once again is not within the power of the States to interfere with.

Here we have foreign insurance policies that have absolutely no nexus to the State of California.

They are regulated by foreign--

Justice Stevens: Why do you say they have no nexus to California?

Is it not true that there are 4 or 5,000 residents of California who may or may not be beneficiaries of policies that they don't know about?

Mr. Geller: --Yes, but this... first of all, this Court has held that the fact that someone--

Justice Stevens: Am I right on that assumption?

Mr. Geller: --You're right on that assumption, but to begin with, Justice Stevens, we're talking about 10 million policies that you're trying to regulate, and at the maximum they say they may--

Justice Stevens: Well, you have to go through a big data base to find the 5,000.

Mr. Geller: --Well, I don't... I don't think that there, that under this Court's decisions that the fact that there may be a few thousand people in the State gives--

Justice Stevens: But if they do nothing more than identify policies people don't know about, how will that interfere with the basic program?

Couldn't they then require those claims be prosecuted in the tribunal that they're setting up?

Mr. Geller: --Because ICHEIC has set up an alternative disclosure system and the... which respects European privacy laws and secondly because the... the State of California simply has no power to exert its influence, even in the form of a disclosure obligation, on contracts that have no... absolutely no nexus to the State.

Justice Ginsburg: Mr. Geller, as I understand it, this ICHEIC system is wholly voluntary.

There's no law that enforces it.

And update me on something else that you did earlier.

You said many more insurance companies that were in it than 35, 40 percent.

As I understand it, 80 percent of the claims that were made to ICHEIC were turned down because the claimants were not able to identify sufficiently their heirs themselves--

Mr. Geller: I think most of the information in the record, Justice Ginsburg, and the information that the State relies on relates to several years ago, not to the current ICHEIC process before the German foundation and the Austrian foundation and a number of the Dutch companies had decided to participate fully in that process.

Justice Souter: --Is this in the record?

Mr. Geller: These are all events that... they're in the public record.

They're not in the record of this case, Justice Souter, but there are public documents from ICHEIC and from the President describing all of this.

If the Court has no further questions, I'd like to reserve the balance--

Argument of Edwin S. Kneedler

Chief Justice Rehnquist: Very well, Mr. Geller.

Mr. Kneedler, we'll hear from you.

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

The California statute at issue here is not a statute of general application that happens to have an incidental impact on foreign Nations, foreign countries, or foreign transactions.

It is a statute that is written exclusively and specifically with respect to a category of foreign insurance transactions occurring in foreign countries between foreign companies and foreign nationals more than 50 years ago, and it concerns a subject matter, the settlement of claims arising out of international conflict, that has... has always been understood by this Court to be the responsibility of the national Government, as reflected most recently in Dames & Moore.

Justice Ginsburg: Mr. Kneedler, I thought that the only requirement is put on a company licensed to do business in the United States.

The... California isn't reaching out to grab a foreign insurance company that isn't doing business in the United States.

It is asking questions of a company licensed to do business in the State of California.

Mr. Kneedler: But disclosure is a form of regulation.

This is true, this is obvious from our securities laws, it is... it is evident from this Court's decision in the BMW case of several years back, where the Court... which had to do with disclosure, and the Court said that one State may not try to enforce its policies with respect to the disclosure of information in other States, and we think that--

Justice Ginsburg: Did we do that?

Does the United States do that, or States under blue sky laws in the securities area?

Do we require disclosures of, say, affiliates that are set up in--

Mr. Kneedler: --Under blue sky laws, under the, I believe it's the Hall decision, the Court said that a State could require disclosures... with respect to in-State transactions it could require disclosures about issuance of securities out of State that are related to in-State transactions.

We have no in-State transaction here.

California has claimed two possible connections to the State to justify this statute.

The first is that the companies, the insurance companies, certain insurance companies do business in California.

Those are not the ones that issued these policies, but they do business in California.

Under this Court's decisions, I think most notably the Connecticut General case that is cited in the petitioner's brief, is a case where the Court said the fact that insurance companies do business in the State is not a sufficient basis for a State in that case to tax transactions, insurance policies that are entered into outside of that State, so it's clear that the fact that certain insurance companies do business in the State does not give California a right to regulate through disclosure transactions and policies that happened outside the State and, a fortiori, that's true with respect to foreign transactions.

The other interest that California has been... has asserted, which I think Justice Stevens referred to, is the fact that some number, a very small percentage of Holocaust survivors are in California, and with respect to that, this Court's decision in Shutts make, and other decisions make clear that moving to the forum State an adjudicatory jurisdiction is not a sufficient nexus, or... or legislative jurisdiction is not a sufficient nexus for a State.

What we have here, again, is one State of the Union trying to establish its own foreign policy, in the words of the Zschernig suit--

Justice Ginsburg: --Mr. Kneedler, suppose there were no Federal efforts in this area, which there weren't for sometime, and as I said, the executive agreements we're talking about post-dated this California disclosure law, suppose there was nothing, would you still say that because of the potential for interference there could be no State disclosure legislation of this character?

Mr. Kneedler: --Yes.

This, in our view, is... is a violation of the Constitution.

We think that the... that the longstanding efforts by the National Government to work out cooperative agreements with Germany and... and other countries in Europe arising out of the Holocaust underscores vividly why this is a matter of national concern, but we would be making the same argument irrespective of that.

The... the structure of our Constitution assigns to the National Government the resolution of foreign policy issues, and this is a... this is a very major and longstanding foreign policy issue about how foreign countries should resolve claims about their own nationals.

These policies were issued to European nationals.

It may be that there are beneficiaries or policyholders in California now, but this is... this is exclusively a matter for the National Government--

Justice Stevens: Mr. Kneedler, could I ask you to comment on one aspect?

As I understand it, one of the big insurance companies is an Italian company here that had... wrote policies throughout Europe.

Does this... does the executive agreement with Germany and Austria have any bearing on that... on that?

Mr. Kneedler: --Not, not directly, but... but we do think that the executive agreement manifests the executive branch's policy with respect to the resolution of Holocaust era claims, and there are, I think, two principal conflicts with respect to the United States policy.

One is the one, and I want to underscore this, the one that was mentioned with respect to the... to the lists.

ICHEIC is establishing essentially a registry, the very thing that California wants to do, but in a much narrower sense that has been negotiated specifically to avoid conflict between German privacy laws and... and United States law, and what... what... through this matching exercise and through use of various lists of... of Holocaust survivor organizations, Jewish organizations, and census lists in Germany will be putting together a pretty comprehensive list of Holocaust survivors and insurance policies issued in Germany to disclose in a way that German authorities believe that list will not violate German privacy laws.

The California statute, Germany takes the firm position would violate German... German privacy laws.

The other conflict is the whole thrust of the United States policy has been voluntary and cooperative, not mandatory and regulatory.

Justice Kennedy: That's... that's part of the problem I have with the executive agreement argument.

It seems executory.

It seems like something further is to be done, in that case will use its best efforts.

Mr. Kneedler: Well, but the best efforts was, it will use its best efforts with State and local governments, in other words in direct communications, and... and Assistant Secretary... Secretary Eizenstat and others communicated--

Justice Kennedy: Well, it could sign a supplemental agreement saying that we now agree that these laws should be superseded, just like we did in Pink.

Mr. Kneedler: --But this... this agreement says that... says two things, that it would be in the interest of the... this is on page 155a of the... of the petition appendix, that it would be in the interest of the two countries for the foundation to be the exclusive remedy for the forum of the resolution of claims, and on page 156a the agreement provides for the resolution of claims through ICHEIC and supplemental procedures to be developed through ICHEIC, which includes the development of this... of this list.

Justice Ginsburg: Mr. Kneedler, how does that relate to the litigation that was ongoing in the Eastern District of New York that I think involved a slave labor question?

Did the United States take a position that that litigation, which involved people who moved here, or their survivors moved here after, that that was improper litigation?

Mr. Kneedler: No.

Those... that did not involve State regulation, that involved private lawsuits, and there was a settlement which the United States encouraged.

Again, this was part of the overall approach of the United States Government.

Justice Ginsburg: But you were... one branch of this was that the... the United States people who moved here after, there was no connection with them.

Mr. Kneedler: Right, and if... if--

Justice Ginsburg: Well, those plaintiffs were all people who were certainly not in the United States when this happened.

Mr. Kneedler: --Right, and if... if there are sufficient adjudicatory connections to the United States, that would be fine.

I wanted to mention--

Justice Ginsburg: What were they in that case?

Mr. Kneedler: --Well, if the, if the... if the defendant was doing business in the United States, if a... if a suitable class action--

Justice Ginsburg: Was that so of the companies that were defendants in that case?

Mr. Kneedler: --It wasn't... it wasn't entirely, but there was a settlement there.

Some of these issues were not definitively resolved.

Justice Ginsburg: My only question was, did the United States take the position--

Mr. Kneedler: I don't--

Justice Ginsburg: --to stop that litigation--

Mr. Kneedler: --I... I don't believe so.

Justice Ginsburg: --because it was interfering with the executive--

Mr. Kneedler: I don't... I don't believe so specifically, but that was early in the... in the... in this settlement effort.

I want to make two important points about the United States, the... the Constitution's assignment of responsibility.

The Constitution assigns responsibility to the National Government for foreign relations and foreign commerce because any retaliation or any adverse impact will be felt by the Nation as a whole, not by the State that... that triggers it, and this is a point that the Court has made in Japan Lines and numerous cases over the years, and this case illustrates that, because what is going on here is complicating.

It is an impediment with our relations with European countries at a very sensitive time, when you have one State who... that is not participating in all of those efforts and doesn't have to balance the... the insult that might arise from a statute like this against all of the other issues that are on the United States' plate in dealing with foreign Governments at a particular time.

This is the very reason, that the States don't have enough information and the full responsibility and the National Government has to look out for the interests of the Nation as a whole, why one State may not thrust itself into foreign policy like this.

The due process and foreign commerce arguments are very complementary of that because they impose independent limitations on a State thrusting its regulatory power outside of not only its own borders but in this case outside the Nation's borders to, again, regulate through disclosure information about insurance policies in other countries.

The very fact that Germany and California insurance regulations generally maintain privacy of insurance information shows that questions of privacy and disclosure are matters of regulation.

Justice Souter: --Mr. Kneedler, would your argument be different if California, instead of providing this registry in public disclosure said, we want this information in order to decide whether we will allow these companies to do business in California?

Mr. Kneedler: May I... may I answer?

Yes, that would present a different question.

We don't think that California could require this blanket disclosure.

I think under international comity analysis, under this Court's decision in Aerospaciale, there may be some ability for the State to request certain relevant information--

Chief Justice Rehnquist: Thank you, Mr. Kneedler.

Mr. Kneedler: --to investigate the suitability.

Argument of Frank Kaplan

Chief Justice Rehnquist: Mr. Kaplan, we'll hear from you.

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

California's reporting statute addresses a despicable practice by insurance companies.

That practice is the deception of elderly Holocaust survivors in the refusal to provide them with basic policy information.

That stonewalling has occurred for decades, and it continues today, and it continues in California.

California responded to this insurance--

Justice Kennedy: Was the United States unaware of this problem when it negotiated an executive agreement?

Mr. Kaplan: --Absolutely not, Justice Kennedy.

The United States was well aware of California's efforts in this regard.

The 1998 statute that was referred to earlier that was passed by Congress occurred about 4 months after there was substantial testimony at a congressional hearing in which several State insurance commissioners--

Justice Kennedy: No, my... my question was, was United... the United States unaware of... of the wrongdoing that you're describing to us, or the... or the inappropriate corporate response, and the answer is, I assume that they were, and they did nothing about it in the executive agreement, other than to have this very specific claims procedure.

Mr. Kaplan: --That... that's correct, Your Honor.

Justice Kennedy: It's not as if California has uncovered something the United States didn't know about.

Mr. Kaplan: That's right.

There were... there were numerous hearings held by the National Association of Insurance Commissioners that are matters of public record in 1997 and 1998.

There was a congressional hearing in 1998, again in the year 2000, 2001, 2002, all of which described in extensive detail the stonewalling that had been committed by survivor... against survivors.

Justice Breyer: I... I don't think... the problem, at least for me, doesn't concern the desirability of the insurance company practice.

I'll concede, absolutely it's totally undesirable.

The problem, I think, for your side in my mind is letters, for example, from the Deputy Under Secretary of State Eizenstat to California, the insurance commissioner and the Governor, about this very statute, where he's speaking in an official capacity to say that the statute has the unfortunate effect of damaging the one effective means now at hand to process quickly and completely unpaid insurance claims from the Holocaust period, that this law has already potentially damaged and could derail the settlement, et cetera, so the record is full of the Deputy Under Secretary of State who negotiated the settlement, Eizenstat, Ambassadors, the President, lists of... in treaties, or executive agreements anyway, and you the... and you know what I'm referring to.

All right.

Why doesn't all of that, taken together, constitute what Justice Harlan in dissent in Zschernig called a Federal policy in the foreign affairs area, so that if we take the dissent in Zschernig it would seem, hypothetically, for... I'm trying to get your answer... that that long list of things shows a Federal policy such that Harlan and Stewart and the others, Harlan being at the extreme there, would have to say that California's statute is contrary to the Federal policy in this area, has an impact on foreign affairs of a negative nature through the conflict with the privacy statutes of Switzerland and Germany, and therefore is contrary to the foreign affairs power given to the executive branch by Article 2 of the Constitution.

All right, that's a long question, but those are the things that I'd like you very much to focus on from my point of view.

Mr. Kaplan: I will, Justice Breyer.

Thank you.

We're dealing here with a State commercial regulation, and... and, in fact, we're dealing with a... an area of State regulation that is a quasi-public business, insurance.

It's long been regulated by the States.

Congress delegated that authority to the States 60 years ago, and the States have been in that business ever since.

We believe that it's Congress, not the executive, that deals with matters of foreign commerce.

Justice O'Connor: Do you think that the... the President cannot effectively preempt on foreign policy grounds by his action an agreement?

Do you take that position?

Mr. Kaplan: I... I take the position, Your Honor, that in limited circumstances such as this Court dealt within the Pink and Belmont case, where you... you had the recognition of a foreign Government, or in the Dames & Moore situation where you had a foreign policy crisis and you--

Justice O'Connor: I think you could answer yes or no.

Mr. Kaplan: --I apologize, Your Honor.

Would you repeat the question?

I apologize.

Justice O'Connor: Well, do you take the position that there can never be a preemption on foreign policy grounds by action of the President alone?

Mr. Kaplan: No.

I think it's possible that the President could do that in some limited circumstances that I've indicated, but those circumstances do not exist here.

You have an expressly nonpreemptive executive agreement entered into after our law was passed.

The... the agreement was entered into after--

Justice Breyer: Well, of course... of course, if there were a preemptive... I'm trying to bring you back to my question.

Mr. Kaplan: --Sure.

Justice Breyer: I mean, if, in fact, we had a preemptive statute, or if we had a preemptive treaty, and I think, but I'm not sure, that an executive agreement is a kind of treaty, we would be dealing with the Supremacy Clause.

We wouldn't be dealing with the foreign affairs power of the President.

But the argument here is not the Supremacy Clause.

Nobody claims that there is preemption.

What they are claiming is, is that there is interference with, in Harlan's words, a Federal policy in the foreign affairs area, so if you're taking the position it has to be preemptive under the Supremacy Clause, then you're saying that all this material is totally irrelevant.

Now, that's a possible position, but I want to know what your view is.

Mr. Kaplan: Our view is that where the executive simply expresses an aspiration where... which is the situation here, where he's indicated he'll use his best efforts, it's no different than--

Justice Breyer: Oh, no, it's... what I've read to you is not an aspiration.

What I read to you were statements by the Deputy Secretary of State--

Mr. Kaplan: --Yes.

Justice Breyer: --that said the California statute is totally contrary to the efforts that they were trying to make.

I would... of course, it's not legally saying California is illegal, and that's why I'm... that's what I want you to explore.

Mr. Kaplan: The response, Justice Breyer, is this.

Under the Barclay's decision, Congress is the primary authority when... when dealing with--

Justice Breyer: I thought Barclay's had to do with the Commerce Clause.

Mr. Kaplan: --It dealt with both the Commerce Clause and the foreign affairs power.

The Zschernig case was taken for review by the Court.

The Court did not dispose of that, and we believe that the foreign affairs issue is subsumed within the Barclay's decision when you're dealing with matters of State commercial regulation.

Justice Ginsburg: The... Barclay's dealt with the Foreign Commerce Clause, and it made the point that the one voice in that area was Congress, not the President.

It wasn't dealing... that case did not deal with executive agreements, as I recall it, and I think I have a pretty good memory of that case.

Mr. Kaplan: Yes.

Justice Breyer: And that being so, you see, the... this is not the same for that reason, and also what we're talking about here is, the Governments of Switzerland and the Governments of Germany, not private people, saying that if California enforces this statute, 98 percent of which has nothing to do with Holocaust victims, that is, the insurance policies don't, that is, what we're worried about under our privacy statutes is Gwendolyn finds out that Uncle Harry in England left all the money to Cecily instead of Gwendolyn and, of course, Cecily doesn't want that to occur.

That's her private affair.

That's why Germany and Switzerland have laws that say these matters are quiet, silent, private, and those Governments are telling us that your statute violates their privacy law because of its overbreadth.

Mr. Kaplan: Foreign Governments were extraordinarily upset about the... the tax that was the subject of the Barclay's case.

In fact, the British Government passed retaliatory legislation, and this... this Court found that that was not sufficient when there was no specific indication by Congress of an intent to bar the State law.

Here, you've had testimony by Deputy Secretary Eizenstat before Congress--

Justice Kennedy: Yes, but... but that's... the Congress has principal concern with revenue and fiscal policy.

It doesn't have principal concern with foreign policy.

It's very different.

Justice Ginsburg: And that was the reason that Barclay said you... yes, you're right that the executive branch was in there saying look, all these foreign countries are upset, and we think that they have a good case.

That was the executive position, and this Court said, but you're dealing in an area where Congress has the lead, holds the lead rein and not the President.

That's the only point that... we... when we were talking about the Foreign Commerce Clause authority, that's a different question than the executive authority.

Mr. Kaplan: --I... I believe, Justice Ginsburg, the issue here is whether the President, by engaging in some negotiation, or expressing an aspiration as to what the President thinks the foreign policy ought to be, can trump a State regulation, and I think the consequence of that being so would be dramatic for matters of State regulation, because State regulation often has some sort of foreign implication to it, since we're dealing with a global economy and there are often foreign affiliates that are called upon to report on information, and if... if that law was overturned because a foreign Government or the executive branch complained about that conduct, State regulatory law would effectively be thwarted.

Justice Scalia: Well, we can... we can distinguish those cases.

As... as pointed out by... by your adversary, the difference in this law is that it is only directed at foreign Nations.

Mr. Kaplan: No... no, Your Honor--

Unknown Speaker: The... the only... the only disclosure required is... is by affiliates abroad, isn't it?

Mr. Kaplan: --Justice Scalia, that's not correct.

The disclosures are required by California licensees, including companies that wrote insurance who were California licensees.

Justice Scalia: What disclosures are required by those licensees?

Mr. Kaplan: Disclosure of the name of the policyholder, where the policyholder lived, and the name of the beneficiary--

Justice Scalia: Yes.

Mr. Kaplan: --and the status of the policy as to whether it's paid--

Justice Scalia: Of policies written by them?

Mr. Kaplan: --Yes, or their affiliates.

Or their affiliates.

You have a situation, for example, where Generali has been licensed to do business in California since 1935--

Justice Scalia: Policies written anywhere in the world?

Mr. Kaplan: --Written in Europe.

Justice Scalia: Ah.

In other words, it's only directed at the regulation of foreign matters.

Mr. Kaplan: It's... it's direct--

Justice Scalia: We can... we can easily distinguish those... those California's laws that... that are general laws which have some indirect effect upon foreign affairs.

This... this thing is directed at foreign operations.

Mr. Kaplan: --It's directed at a concern that California has by reason of the migration of... of a large number of Holocaust survivors to the State and, in fact, the numbers that we've indicated in our submissions, Your Honor, are that there are at least 20,000 Jewish Holocaust survivors, and we don't know how many non-Jewish Holocaust survivors there are in the State.

Justice Kennedy: And to that... and for that reason California candidly made specifically reference to Nazi-controlled Germany, to present-day Germany, and to Europe, and to the Holocaust, none of which are of California's concern when it conflicts with the President's power to deal with those matters.

Mr. Kaplan: Justice Kennedy, I... I guess I disagree.

I think California has a substantial concern.

It has a concern about people in the State who don't have basic policy information that they're seeking.

Justice Breyer: Why don't they, because you see, as... as it's been argued to us anyway, there are two ways of achieving this result.

Way number 1 would have privately people whom you select, or trust, to go through the 10 million policies that were sold, pick out all those that might have to do with Holocaust victims, and make them public.

I take it that's the route that Secretary Eizenstat negotiated.

The other way is California's way, which is, you make the whole 10 million public, so Gwendolyn and everybody else finds out everybody else's information, which happens to be a way that would violate the privacy laws of Switzerland and Germany.

Now, what interest does California have in doing it the second way, rather than the first way?

Mr. Kaplan: California has an interest in obtaining information that companies doing business in the State have so far exhibited they're unwilling to provide.

By requiring the information that the law asks for, we will be sure that there's no further stonewalling occurring in the State, and that companies that want to do business in the State will not engage in that conduct in the future.

It will also assure that people--

Justice O'Connor: Well, it looks like the way this scheme is written is, the... the companies doing business in California have to provide the information even if they're unable to do so, even if when they go to an affiliated, or company related somewhere down the line, let's say in Germany or Austria, and ask for the information, and German or Austrian law prohibits that from being disclosed, then the California company will have its license yanked.

Now, what kind of law is that?

Mr. Kaplan: --It's the same kind of law, Your Honor, that the Europeans practice, too.

We've cited something in the record.

It's the European directive that appears at 2 E.R. 2747 to 2748.

European regulators, just like State regulators, deal with situations all the time where there may be a conflict with a foreign law or the law of another State, and if States are... are able to effectively regulate the business that... that is going on in the State and the companies doing business here, they have to have the right to be able to apply their law.

Otherwise, there could be a law established in... in the Cayman Islands that established a privacy right for companies doing business in the State, and a... a company could assert that the law of a foreign country precluded that company from... from complying with a State regulatory law, and we don't think that's how the law works.

Justice Souter: Well, are... are you saying that there is no way that the United States could act that would, in fact, have that effect?

Mr. Kaplan: I'm sorry--

Justice Souter: I mean, if... if Congress passed a statute in effect condemning what California had done, not repealing McCarran-Ferguson but simply condemning it, or... or authorizing the President specifically to make what the... the agreements that the President has made on an executive basis now, are you saying that neither of those acts in effect would preclude California from doing what it is doing under this statute?

Mr. Kaplan: --No, Justice Souter.

I think you'd have a serious preemption problem there under the--

Unknown Speaker: Okay, so it... it boils down, them, to an argument about the executive power alone, is that correct?

Mr. Kaplan: --Yes, it does.

It boils down to a separation of--

Justice Souter: Well, is... is your argument... and I... I will be quiet after this question and let you say whatever you wanted, but what I want you to focus on is--

Mr. Kaplan: --Yes.

Justice Souter: --do you take the position that whenever the executive, let's say, agreement by executive... action by executive agreement is, in the opinion of a State regulator, inadequate to address the regulatory problem as the regulator sees it, that the regulator is free, in effect, to disregard the policy in the executive agreement?

Do you take that position?

Mr. Kaplan: I do unless the executive agreement is preemptive and unless there's something else about the executive agreement that would give it preemptive quality.

Clearly, the executive agreement--

Justice Souter: Well, are we talking about form of words?

If the President and executive agreements had in effect said, and no State can do anything which is inconsistent with this policy, would your position be different?

Mr. Kaplan: --It might be, because I think you'd be dealing with a situation there where arguably it would be a preemptive executive agreement which might carry the same status as a... a statute by Congress.

Justice Scalia: Why does he have to--

Chief Justice Rehnquist: --What if Congress had... had ratified what the President did so that it's no longer just an act of the President but an act of the President approved by Congress?

Would your position be any different?

Mr. Kaplan: Your Honor, then you might have a situation like Dames & Moore, where there was a pattern of congressional acquiescence in the kind of executive agreements that occurred there.

Chief Justice Rehnquist: Well, but this isn't... this isn't just acquiescence in a... in an executive agreement.

This is Congress saying, we approve and ratify it.

Mr. Kaplan: Then... then you might have the kind of specific disapproval of State action that this Court talked about in the Barclay's case.

You don't--

Justice Souter: Well, why would it be any more specific than this is?

If the executive agreement is not expressly preemptive, and Congress passes a statute saying, we agree with it; we think the executive agreement is right on the money, it wouldn't, in fact, be any more restrictive or less restrictive than it is now.

Mr. Kaplan: --I... I think the difference, Your Honor, is then you have Congress acting, you have Congress speaking, which is what this Court in Barclay's thought was the appropriate actor to speak in matters of foreign commerce.

Justice Scalia: Congress makes laws.

The President doesn't make laws.

I'm not sure that the President can make an executive agreement preemptive which is not preemptive in its nature.

I mean, all... all he can say is, is there any... any State action which is inconsistent with our foreign policy expressed in this agreement is invalid, but that's not... not something that occurs by reason of his pronouncement.

It occurs, if it occurs at all, by reason of the Constitution, automatically, so it really doesn't matter whether he says that or not.

His saying it cannot make it happen, and his not saying it, I think, cannot not make it happen.

Mr. Kaplan: I agree.

Justice Scalia: You shouldn't agree.

Unknown Speaker: [Laughter]

Mr. Kaplan: Then I won't.

[Laughter]

Justice Stevens: May I ask you whether you think that--

Justice Breyer: --I mean, if you agree... the problem is, if you agree with that, that you're then going to say on the tough kinds of things that you raised, how do we know if this is a Cayman Island situation fake, or how do we know if it's a really genuine important policy of a foreign Government, say, the privacy policy?

There are one of two people who can decide that, the Secretary of State or, say, the Governor or Insurance Commissioner of California and the problem for you, I think, is that the Constitution seems to give the authority to decide that to the Secretary of State and not the Insurance Commissioner of California because it's a foreign affairs matter.

Mr. Kaplan: I... I think actually the... the Constitution gives that authority to Congress, and if the executive branch--

Justice Breyer: You mean, Congress is supposed to run foreign affairs on every... all of these matters?

Mr. Kaplan: --Congress is supposed to run foreign... matters of foreign commerce, including objections by foreign Governments about the way States are behaving.

If they... if they think they're behaving badly, then the executive can go to Congress, lodge a complaint, and if Congress is so inclined, Congress can do something about it.

Clearly, here, Congress has done nothing about it.

In fact, Congress has... has encouraged the State statute.

There was testimony before Congress.

Congress didn't say stop doing that.

Congress said, we bless what you've done, we think you're doing a good job, keep doing it.

Chief Justice Rehnquist: In what way did Congress say this?

Mr. Kaplan: Congress said that in--

Chief Justice Rehnquist: I mean, was it a committee report, or an act of Congress?

Mr. Kaplan: --There were statements made by... by Members of Congress in response to testimony that was given, including the 2002 hearing--

Chief Justice Rehnquist: Well, you're... you're saying that is the voice of Congress?

Mr. Kaplan: --No, I'm not.

I'm saying the McCarran-Ferguson Act is the voice of Congress, the--

Chief Justice Rehnquist: Well, but you just said a moment ago that Congress had... had approved this.

Mr. Kaplan: --Yes.

Congress has approved it either implicitly or directly through the McCarran-Ferguson Act, which gives the States authority to act in matters of insurance.

In the Holocaust Commission Act Congress, in effect, endorsed State action to deal with Holocaust insurance matters.

Justice Ginsburg: Is it not true that the... what the Congress endorsed there was presidential leadership, not State action?

Mr. Kaplan: But in... but in that statute Congress recognized that States were acting in this area.

The statute said that the commission there should coordinate its activities with the States, and it asked the National Association of Insurance Commissioners to pass... to prepare a report, rather, on the activities of foreign and domestic insurance companies doing business in this country, and the Ninth Circuit found, and we believe it was reasonable for it to find that Congress anticipated, understood, and... and knew that... that the States would be acting pursuant to State law and might have to seek information from entities located outside the borders of this country.

Justice Scalia: Mr. Kaplan, there... there was a reason, I think, why the Federal Constitution gave the power to conduct foreign affairs not to the Congress but to the executive, and the reason was that Congress is not a very good instrument for that purpose, that there are all sorts of matters that come up where... this being one of them, where it is very difficult for a Member of Congress to cast a vote against Holocaust victims.

That's what we're talking about.

Why... why should the situation exist that, although the President has the responsibility without Congress for conducting foreign affairs, his conduct of foreign affairs can be frustrated by the States unless Congress comes to his assistance?

Why... why should that follow?

It would seem to me it should follow that he can protect this foreign affairs field on his own, and does not have to call for the assistance of Congress.

Mr. Kaplan: We believe that that would lead to... to a situation where, any time the executive decides that there's a matter of... of foreign policy concern to him, legitimate State regulation would have to take a back seat to that, so you have, in essence, presidential lawmaking without any--

Justice Scalia: Well--

Mr. Kaplan: --any sort of accountability that you normally have--

Justice Scalia: --It just shifts... it just shifts the inertia, really.

Congress is the 900-pound gorilla.

If it doesn't like what the President is doing in the field of foreign affairs, it can stop him as quickly as it likes.

All it has to do is pass a resolution cutting off any funds for that purpose, cutting off any funds for this... for further negotiations about this institution.

Congress always has the trump card.

But why should we... should we require Congress to protect the President from the States?

Why shouldn't he have an automatic protection from it?

Mr. Kaplan: --Because except in limited areas such as Zschernig, in Belmont, in Pink, and in Dames & Moore, where you have a foreign policy crisis or a recognition, ordinarily I don't believe that this Court wants the executive to go off and announce foreign policy issues that will have effect on State regulation.

It affects issues of federalism and separation of powers.

Here, in fact, it was the State regulators that formed ICHEIC.

This was a creature of the State regulators, and after 4 years of not having done anything, the State regulators decided that enough's enough, these people are not getting the information.

There were 77,000 claims submitted.

Only 700 offers were made, less than 1 percent.

These people are in a line to nowhere, because without this information they can't make a claim to ICHEIC.

They can't even call the insurance company, because they don't even know which insurance company--

Justice Ginsburg: Mr. Kaplan, we've been told that that... that's past history--

Mr. Kaplan: --It's not.

Unknown Speaker: --as a result of these recent efforts, that there's much more disclosure coming out of ICHEIC.

Mr. Kaplan: There's not, Your Honor.

There... there's been... there's expected to be some disclosure from German companies.

We don't know what that's going to be.

The... insurance was written all over Europe.

The German market was only a small part of this European market.

Generali wrote insurance all over Eastern Europe, and all the countries in Eastern Europe.

They have a list now sitting in Trieste, Italy, with 340,000 names on it.

They could turn that list over tomorrow.

They've refused.

There's no privacy issue involving Generali.

There's no Italian law that precludes it.

They've simply refused to turn it over.

These survivors do not have access to this information.

They do not know whether their policies were written by Generali or some other country... company because they simply don't have the information that enables them to even think about making their claim.

This is not a claims-paying statute.

We're not asking these companies to pay twice.

Survivors would be grateful if they paid once.

There's nothing whatsoever in this statute that... that deals with the legitimacy of these claims, whether they're rightful or not.

It simply gives these people information that allows them to make a decision as to whether they want to pursue a claim.

They don't have that ability now.

If there are no further questions I would--

Justice Stevens: Yes, I have one question, if I might.

Mr. Kaplan: --Yes, sir.

Justice Stevens: I would draw a distinction in my question between Eizenstat's letter, which in effect says, please don't enforce these subpoenas because that will louse up our negotiations and so forth.

Put that to one side, and... and I ask you if you would agree or disagree with the suggestion that if you do enforce the subpoenas you will violate a... a provision of one of the two executive agreements?

Mr. Kaplan: I don't think there's any violation of the executive agreements.

Those agreements simply provide, with respect to State regulatory action, that the United States will use its best efforts.

To me, that's a recognition and an understanding that the Federal Government knew that insurance is a State matter, a State regulation.

That's all that the Federal Government was doing.

It said, we'll try our best to get the States to back off, we're making no promises to you because we don't think we have the authority.

We believe in matters of insurance it's the States that have that authority.

Justice Scalia: Or it could be an acknowledgement by the President that this is a matter that ultimately depends upon whether his foreign affairs power is... is... trumps the State action in this field, and... and it could be a commitment by him to come to this Court to ask us to make that declaration, which is not a declaration that he can authoritatively make.

Mr. Kaplan: On... on page 17 of the Solicitor General's brief in this matter the Solicitor General takes the position that even as to the executive agreements it only would have some preemptive effect, if it has any at all, as to the companies and the countries where the agreements were made, so I believe the Solicitor General acknowledges it wouldn't have any preemptive effect whatsoever for the Italian companies, the Swiss companies, or companies anywhere else in Europe.

Justice Breyer: What about the letter?

I... I... that's why I asked the question at the beginning.

Eizenstat's letter... it's on 99a of the appendix.

I... I didn't know whether that's limited to the subpoena part or whether it had to do with the disclosure, or whether it's referring to the statute as a whole.

When I read it, honestly, I thought it was the, probably the statute as a whole, but I don't know.

Do you have any light to shed on that?

Mr. Kaplan: I... I do not, Your Honor.

I don't recall the--

Justice Breyer: You think it could be the statute as a whole he's talking about?

Mr. Kaplan: --It could well have been.

Justice Breyer: Yes, all right.

Chief Justice Rehnquist: Thank you, Mr. Kaplan.

Mr. Kaplan: Thank you very much.

Chief Justice Rehnquist: Mr. Geller, the marshall says you have 5 seconds left, and under the principle of--

[Laughter]

--de minimis non curat lex the case is submitted.

Attribution:

The Oyez Project

Featured:

Crosby v. National Foreign Trade Council - Oral Argument

Fri, 09 Jan 2009 14:50:16 +0000

Case:

Crosby v. National Foreign Trade Council

Media File:

99-474_20000322-argument.mp3

Related Transcript:

1999_99_474_argument.xml

Transcript:

Argument of Thomas A. Barnico

Chief Justice Rehnquist: We'll hear argument now in Number 99-474, Andrew S. Natsios v. The National Foreign Trade Council.

Mr. Barnico.

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

The Massachusetts law challenged in this case is similar to the selective purchasing policies adopted by many States, cities, and private institutions in the 1980's regarding South Africa.

Through the 1980's and 1990's, Congress addressed both South Africa and Burma, but took no action to expressly prohibit to the States or individuals the right to make choices about their vendors taking into account matters involving a foreign country.

We think that Congress has not expressly denied to us the right to make this choice, because it believes, as we do, that these laws serve important national and local interests.

There is a national interest in vigorous debate over important questions of foreign policy.

There is a local interest as well, the interest in disassociating States and State tax funds from the indirect support of brutal regimes abroad.

Justice O'Connor: Mr. Barnico, would you take the same position if Massachusetts decided it didn't like another State's death penalty policy and wanted to discourage it and said, we're not going to let anybody spend State money to buy anything if the seller has anything to do with the other State?

Mr. Barnico: Not if the law regulated our citizens in that way, but if it were expending our own funds, as it is in this case, we would consider that to be proprietary as well under our definition.

We quickly add that we don't think it would be a usual case at all, given the comity and respect each State ordinarily shows each other.

Chief Justice Rehnquist: Well, isn't the Gould case somewhat against you on this point, or the Wisconsin Department of Labor?

It said that Wisconsin is not going to buy from anyone who has violated an NLRB order and they said, we're just expending our own money, and this Court said, you may be spending your own money but that's... what they said was, tantamount to regulation.

Mr. Barnico: Well, we think there, and the difference with Gould and this case, is the fact that the Court saw a nexus between the regulatory scheme imposed by Federal law and the State action that was at issue.

To give the Court an example of what might be closer to Gould than our case would be if Massachusetts had somehow tied its purchasing decisions to violation of the Federal ban on new investment in Burma.

There, there might be more of a nexus between the regulatory scheme on the one hand... we think it was the close connection between the Wisconsin scheme on the one hand and the Federal complete scheme of regulation of the labor field that made the Court decide that we were regulatory in nature.

Justice Ginsburg: Mr. Barnico, would it make any difference in your analysis if the country with which we were dealing were not Burma but, say, Austria, or Switzerland?

Mr. Barnico: The country wouldn't matter, Your Honor, except insofar as some Federal law or treaty established relations between the United States and the country...

Justice Ginsburg: So that a State would be free to decide what country it believed is violating some human rights norm, be it Austria, be it Burma?

Mr. Barnico: That's right, except insofar as a plausible argument could be made that we were preempted by a Federal law or treaty on the point.

That really is the heart of our case, that absent the force of enacted law through the Supremacy Clause, such a choice by a State should not be displaced by the Foreign Commerce Clause or the dormant foreign affairs power.

Justice Ginsburg: Do you think that Congress...

Justice Kennedy: Would your answer be the same if two States had different policies?

One State says, we will buy not from mainland China but Taiwan, and the others state just the opposite.

Absent Federal legislation on the point, States are free to do that, and to have differing policies?

Mr. Barnico: That's right, Your Honor.

At some point the differing policies becomes to the attention of Congress, and Congress, which has the preeminent voice in foreign affairs, would decide whether the national interest requires a rule of uniformity, but absent that action, or absent some question of a treaty, the States would be free to act indirectly in this way.

Justice Kennedy: I'm not sure it's realistic to expect the Congress to exercise this ongoing supervision over every local ordinance, over every State statute, and it certainly is inconsistent with what the Federalist Papers explain was the purpose of forming the Union itself.

Mr. Barnico: Well, if I might address both of those points, Your Honor, the first is on the question of the proliferation of these laws.

We have to keep in mind that we're acting against our own economic interest here.

Massachusetts is paying the price, bearing the burden to speak out on this question.

Since that's the case, our principle will be limiting, because it will limit those instances in which a State or local government which is to act against its own interest and act in the way that's challenged here.

Furthermore, Congress will be aware, presumably, in the event that a controversy arises due to the conflicting actions of the States as you mentioned, and it's also worth noting, finally, on the proliferation question, that even at high tide in the eighties with South Africa it was 20 States, approximately 100 cities, so I think the parade of horribles that's raised by the other side here about the numerous jurisdictions isn't realistic.

Justice O'Connor: Well, here Congress has actually enacted a law dealing with this precise problem, an area of trade with Burma, has it not?

Mr. Barnico: It has enacted a law imposing Federal sanctions on Burma...

Justice O'Connor: Yes.

Mr. Barnico: Restricting new investment by American nationals in that country.

It says nothing, however, about State and local action, and we think the question of preemption...

Justice O'Connor: Oh, but isn't that kind of similar to what happened in the Hines v. Davidowitz case back in '41, when Pennsylvania had a law dealing with what resident aliens had to have to be in that State, and it was possible, certainly, for a resident alien to comply both with the Federal law and the State law, and yet that was stricken, wasn't it?

Mr. Barnico: Yes, Your Honor, but we think that the key phrase from our point of view and Hines would be the reference to a complete scheme of regulations that was in issue there in Hines.

That is, the inference that the field has been occupied by the Federal action, that the Federal action here must be read in light of the experience of the 1980's.

Our point is that Congress knew well that State and local actions of this type were enacted throughout the country in the 1980's.

Then, when the question of sanctions against Burma arose in 1996, it acted against that backdrop.

It had tolerated these types of laws and, in fact, and we think this very interesting evidence, in 1993, when Congress repealed the sanctions against South Africa, it merely encouraged the States to act as to their own laws.

Justice Breyer: Well, think of California, with 30 million people, probably a major textbook buyer, probably buys a lot from Massachusetts.

Suppose the State system said, we won't buy any textbooks from Massachusetts because we don't like their environmental policy in that State.

We don't like their criminal law policy.

We don't like this, we don't like that.

We don't like their labor policy.

How could you run a Federal Government if States, when they're huge buyers, could refuse to buy from some other State because they don't like the State law in something and want it changed.

I mean, is that constitutional?

Mr. Barnico: Well, the Federal Government would be run by Congress stepping in in the event...

Justice Breyer: No, no, I mean, the Federal... in other words, in your view, California could say, we will not buy any textbooks from Addison-Wesley for the reason that we don't like Massachusetts policies in respect to the environment, or we don't like their policy... they have no death penalty.

We think they should.

Mr. Barnico: The action's still proprietary, Your Honor.

It's still a choice by the State acting...

Justice Breyer: But your answer's yes.

Your answer is that the Constitution would permit that under the Commerce Clause.

Mr. Barnico: That's right, because of the safeguard included in the document to allow Congress to act in the event the national interest required.

Justice Scalia: I assume California could, under our decisions, decide to buy textbooks only from California manufacturers.

Could it do that, in its purchasing?

Mr. Barnico: That's right, Your Honor.

Justice Scalia: Yes.

Yes.

So that's just as destructive of national unity in a way, isn't it?

Mr. Barnico: Right, but the holdings of the Court regarding market participation say that whatever the effects of such a law, whatever the question of national interest or uniformity, the dormant Foreign Commerce Clause in that case is not displacing of that type of State choice.

It resembles that consumer choice.

Justice Kennedy: Well, surely there's a difference in those two cases.

In the hypothetical Justice Scalia proposes, California doesn't propose to regulate activity and policies of other States.

Mr. Barnico: That's right.

Justice Kennedy: So that's different from Justice Breyer's hypothetical.

Mr. Barnico: It is different to the hypothetical, but the underlying point, of course, both as to the dormant Commerce Clause in the hypotheticals and the Foreign Commerce Clause that's at issue here, is that those dormant clauses don't reach a certain limited sphere of State activity in which the States can speak and act as they have here.

That's really the point of our case.

Justice O'Connor: Do you concede that there is a dormant Commerce Clause principle in the international area under the Foreign Commerce Clause?

Mr. Barnico: We concede that the Court has recognized in cases such as Barclays some foreign effect.

Our point here is that it must be considered and applied with extreme caution in this case.

That's because, to return to the historical point, the Framers specifically identified those actions of a State that pose dangers in their view to the national interest, so...

Justice Ginsburg: Mr. Barnico, you mentioned before that this case is different from Massachusetts, preferring itself as an economic actor, that here it is acting for reasons of foreign policy, and there's no doubt that Congress has the control power, but why shouldn't the assumption be that unless Congress says, States, you can do this, that States can't once Congress has occupied the field at least to the extent of having its own Burma law?

Why shouldn't the presumption be exactly the opposite, that is, no State action unless Congress gives them permission?

Mr. Barnico: I think this case shows why that presumption goes too far.

That's because, although I acknowledge the national interest in the control of foreign policy that's at the heart of your question, this case demonstrates why such a presumption would go too far.

There has to be a sphere of State activity so important to the States to speak, to act, to disassociate their funds from this type of regime that the Framers intended to be protected, so as you come to the question of presumption, it seems to me a similar question to the effect of the dormant foreign affairs powers.

That is, is there a sphere of State activity such as a resolution, such as a selective purchasing law, so close to the boycotts that the Framers knew so well, that ought to be protected?

The presumption would go too far, just as it would operate in this case.

It would simply be the fact that Federal Government has acted as to Burma with Federal sanctions, and that's the end of the story, and this particular case also is a demonstration why the presumption would be dangerous.

Chief Justice Rehnquist: Mr. Barnico, you mentioned the historical approach a few minutes ago.

Is there a historical basis for... say, prior to the 1980's for States taking this sort of position with respect to foreign Governments?

Mr. Barnico: You'd have to go back under our research only to the revolutionary times.

In the interim there were no such actions.

I think the eighties...

Chief Justice Rehnquist: Until the 1980's?

Mr. Barnico: The eighties is what we have in mind.

Justice Scalia: Oh, but there were in the revolutionary times, weren't there?

Mr. Barnico: That's right, and they included...

Justice Scalia: Virginia passed laws that prevented the collection of British debts, and there was litigation over that.

Mr. Barnico: And... but we have a different approach, though, as to the boycotts in particular.

There's such a strong match here between the boycotts of the revolutionary times and...

Chief Justice Rehnquist: When you say revolutionary times, do you mean before the Constitution was adopted?

Mr. Barnico: Absolutely, Your Honor, and before...

Chief Justice Rehnquist: I mean, I don't know that that's a terribly satisfactory basis for analyzing the thing after the Constitution was adopted.

Mr. Barnico: Well, it goes to the intent of the Framers in adopting the foreign affairs clauses, Your Honor, and the question would be, since the Framers enumerated a number of prohibitions regarding treaties and engaging in war and so forth, we'd have to ask ourselves the question, do the affirmative grants of power to the executive and legislative branches in the Constitution have a nullifying force implied?

That is, to what extent does the grant to Congress and the President nullify other State actions that affect foreign affairs, and there we come to the revolutionary times, because the Framers, who knew boycotts well, who held them dear, did not enumerate them as prohibited, and we say it would be highly unlikely to deny to the States the rights that they knew were useful and they knew were so bound up with questions of speech and choice.

Justice Souter: Mr. Barnico...

Chief Justice Rehnquist: If you're right, Mr. Barnico, why were there... have there been no Barnic... no boycotts...

Unidentified Justice: [Laughter]

Chief Justice Rehnquist: between the time the Constitution was adopted and the 1980's?

Mr. Barnico: Well, I think that has to do with the fact that there was very limited global trade for those years.

There was limited information available to State governments about other activities in foreign States.

This is a...

Chief Justice Rehnquist: How about the activities of Stalin in Russia and Hitler in Germany and Mussolini in Italy?

Mr. Barnico: Well, I don't know why, Your Honor, but of course once... in times of war the Federal Government does act to establish a rule of uniformity.

Whether that has to do with neutrality or aiding a resistance group, there's a new set of rules that would kick in which aren't disturbed by our rules.

That is, you need not be concerned that actions of this type would be aid of one side or another in a war, because there is a specific prohibition in Article I, section 10, that the States may not engage in war.

So, too, Congress often acts.

The President sometimes declares that countries are in a State of war, and so neutrality is preserved through the action of the Federal branch with authority to determine the national rule of uniformity, but of course we argue here that branch hasn't acted.

Justice Souter: Mr. Barnico, may I go back to an answer that you gave both to Justice Ginsburg and to the Chief Justice a moment ago in which you emphasized the expressive nature of the boycott activity which Massachusetts is engaging in.

Why doesn't that suggest that the proper way to draw the line is to allow States to express themselves, to express their views solemnly any way they want to, so long as they do not go beyond the point of verbalizing?

Massachusetts or any State could pass, for example, on this theory, resolutions condemning the regime in Burma and, indeed, condemning those who do business with it, but it would be left to the United States to go beyond the expression of views and to regulate actual relationships, including economic relationships.

Wouldn't that be a sensible way of having a theory behind our preemption doctrine under the Foreign Commerce Clause?

Mr. Barnico: Well, of course we agree that we ought to be able to speak in that way, but we don't think the rule is sufficient for this reason.

We think that it leaves us open to the indirect support, through the use of our money, the companies that are doing business in the country.

Justice Souter: Well, it does that, but that is a judgment of the United States that it is not at least inappropriate for that result to occur.

On my proposal, you would get to engage in expression.

You would clear your conscience, and any fault would lie, I suppose, at the door of the national Government that was either permitting or at least refusing to block this kind of trade.

Mr. Barnico: Well, I'm not sure that it would clear our conscience, because our conscience is based on so much history.

To allow us to feel that we were indirectly supporting what's going on in Burma would be so contrary to the principles that underlie our own State constitution, which refers to unalienable rights, the point of view of Massachusetts that it has universal rights at stake here...

Justice Souter: I think I understand your point.

It leads to a second question, and it anticipates a question I was going to ask your friends on the other side, but let's assume for the sake of argument that we accept the position of the other side and we say that the Massachusetts statute is preempted.

What will Massachusetts do then?

Will it start, in fact, trading with companies that do business with Burma, or, conversely, will it continue to follow the policy that it has now, even though that policy is not, as a matter of law, enforceable against anyone because of the preemption?

I guess I'm saying, will you continue to find ways to express yourselves and your conscience, even if there is a preemption or some other source of invalidity in the statute found so that the statute is not, as such, enforceable?

Mr. Barnico: Well, it will always depend on the circumstances in the foreign country.

Justice Souter: Well, I'm assuming the circumstances in the foreign country remain as they are now.

Assume that today you have the statute on the books, tomorrow the statute is preempted.

What does Massachusetts do in fact, if it is preempted?

Mr. Barnico: Well, as a matter of State law we would be bound to accept the proposals of bidders for State contracts.

Justice Souter: So you would go ahead and trade with them?

Mr. Barnico: As a matter of State law, we wouldn't have a choice, provided that the people otherwise qualified for the bid.

Justice Souter: But it's a matter of State law that would bind you, in other words?

Mr. Barnico: The State law governing procurement.

Justice Souter: Yes.

Justice Scalia: But even if that State law didn't exist, I presume that if we said that Massachusetts can't do this by action of its legislature, we would also say that Massachusetts can't do it by action of its Governor, the Governor simply deciding, oh, you know, yes, the Supreme Court has said that the legislature can't bar these companies from our contracts, but just as my... in my capacity as Governor I'm not going to let any contracts to these people.

That would be invalid as well, wouldn't it?

Mr. Barnico: We'd still be here.

We'd be here in the event that an executive official had decided that State law was broad enough to take into account the fact the companies were doing business in Burma.

Chief Justice Rehnquist: Well, you'd be here on a contempt citation.

Unidentified Justice: [Laughter]

Justice Ginsburg: Mr. Barnico, you mentioned globalization, and you say that's why there's been no action since the colonial times up until now, but one feature of at least the U.S. Burma law is concern with the reaction of our neighbors in the world community, the desire to have multilateral action, and you know that sanctions have been a controversial subject.

Mr. Barnico: Right.

Justice Ginsburg: So for Massachusetts to go it on its own when the United States is saying, we want to get together with our world neighbors on that, isn't there a clash with the authority that the Founders wanted the national Government to have to speak with one voice on matters of foreign policy?

Mr. Barnico: There's no clash in the preemption sense, Your Honor, because, of course, the U.S. sanctions are both unilateral and multilateral.

The State sanctions don't clash in that respect.

Justice Ginsburg: But this sanction was considered and deliberately not done by Congress.

Mr. Barnico: By Congress, in its choice as to the Federal sanctions, but the 1996 Federal statute cannot be looked at outside the context of the 1980's and the law I referred to in 1993, that essentially what we're urging here, Your Honor, is, it's unreasonable to conclude on this question of conflict that we have been preempted in light of the history that's gone before.

Justice Stevens: May I ask this question...

Justice Breyer: The word you used previously was, you didn't want to be associated with the regime that seriously interferes with human rights, which is a worthwhile, obviously worthwhile objective, and I can understand that, but the SG says in its brief... you use the word disassociated, all right.

If you're right that you have that right to disassociate yourself, why would we extend that to what is in effect here a secondary boycott?

That is, market participants in many situations cannot engage in secondary boycotts.

Massachusetts is saying, we won't do business with a Swedish firm that buys $15 worth of whatever from the Burmese Government, and why doesn't the secondary boycott just go too far, given Justice Ginsburg's concerns, in respect to the need to disassociate yourself?

Mr. Barnico: Well, we need to disassociate as a practical matter because of the financial interconnections among the companies, but beyond that, we need to disassociate through the boycott of that type because the question of boycott would entail action both against the country that you hypothesized and people who do business there.

Under the Court's precedent in Zschernig, in other words, the secondary boycott as you describe it is less indirect, so we think in the area of law in which we're operating, to the extent that the Court is concerned about effects on international affairs, a secondary boycott is a reasonable means because it's indirect.

Justice Kennedy: Well, we're proceeding on the assumption in the last 10 minutes or so of the argument that Massachusetts has a right to speak on foreign affairs, to dissociate itself from certain actions.

Is there any opinion from this Court which says a State has the same First Amendment rights as a citizen?

Mr. Barnico: No...

Justice Kennedy: Can we have 50 States passing resolutions denouncing different Governments?

I know of no such principle that's been established.

Maybe we'll establish it in this case.

Mr. Barnico: It's not a First Amendment right per se, Your Honor.

I don't know of such a case that you mentioned, but it has to do with the values that underlie the nature of the action here, which...

Justice Stevens: May I ask this question?

You would concede, would you not, that Congress could pass a statute prohibiting this policy?

Mr. Barnico: We assume so.

Justice Stevens: What about the President?

Could the President, by executive order, preclude this type of an activity?

Mr. Barnico: I'd say no, Your Honor, absent a clear delegation from the legis...

Justice Stevens: You don't think his foreign affairs authority would be sufficient for that?

Mr. Barnico: No.

There needed to be a clear statement from Congress to act in that instance, although Congress has delegated to the President important powers in foreign affairs in the past.

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

Argument of Timothy B. Dyk

Chief Justice Rehnquist: Very well, Mr. Barnico.

Mr. Dyk, we'll hear from you.

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

The first thing I think to make clear is that the purpose of the Massachusetts law is that the district court explicitly found, based on Massachusetts concessions... and that's reflected at page 81 of the appendix to the petition... was to condemn Burma and to change the domestic policies of that nation, and the mechanism that Massachusetts has chosen to accomplish that, as Justice Breyer mentioned, is a coercive secondary boycott, the kind of action which no private individual would engage in, and that's undisputed in the record if you look at pages 32 and 560 of the appendix in the court of appeals.

Massachusetts has $2 billion in purchasing power every year.

If it joined together with the other States and municipalities, the estimates in the briefs are that there's $700 billion...

Justice Stevens: Well...

Justice Souter: May I ask...

Justice O'Connor: without enacting something with the purpose, can it just spend its money the way it wants and buy from the suppliers that it wants?

Mr. Dyk: Well, Justice O'Connor, I assume that that question is is it compelled to do business with Myanmar if it's not attempting to...

Justice O'Connor: Right.

Mr. Dyk: communicate a foreign policy?

Well, there's no obligation to deal with any particular country, but if it tries to make foreign policy by saying, we're doing this to condemn Myanmar to change its policies...

Justice Stevens: Mr. Dyk... oh, excuse me.

Go ahead.

What if it was just the opposite?

Instead of trying to discourage something, they want to encourage the change in policy in a different State.

Could they offer extra purchases from that community in order to encourage...

Mr. Dyk: Justice Stevens, I think it would be the same thing.

It makes no difference whether it's...

Justice Stevens: And what if the motivation was, for example, disaster in a particular country?

Could they try to promote recovery from the disaster by fostering purchases from a company that went through a bad famine or hurricane, something like that?

Mr. Dyk: I think it could do that.

The question is, is it trying to influence the Government of a foreign country, and that's the essence of foreign affairs.

Justice Stevens: It all depends on trying to influence their policies?

That's the key to it?

Mr. Dyk: Trying to influence it and attaching consequences to it, in the sense that they're using one of the tools of foreign policy.

Justice Scalia: Do we have to undertake this subjective inquiry in every case, what was the purpose of... let's assume a State has a law against bigamy, and the king of some Muslim country is visiting the United States.

He wants to stay in that State, and the State says, I'm sorry, you know, you can't bring your... you know, any more than one of your wives...

Unidentified Justice: [Laughter]

Justice Scalia: and he takes umbrage at this, and it's going to seriously impede our relations with this foreign country.

Mr. Dyk: Well, Justice...

Justice Scalia: Can the State enforce its law?

Mr. Dyk: Justice Scalia, if it has a neutral law like that and it's not designed to target a foreign country...

Justice Scalia: So we have to look at the motive.

Mr. Dyk: that's a very different question.

Justice Scalia: The...

Mr. Dyk: No.

Justice Scalia: The State's motive can't be to influence...

Mr. Dyk: No, I don't think it's a question of motive.

I think it's a question of objective, and what you have with these selective purchasing laws is an objective.

They only work if you communicate disapproval, or communicate a desire to change.

It's not...

Justice Scalia: Well, this is quite neutral, just like the bigamy law.

We don't buy from anybody who violates human rights.

Mr. Dyk: Well, I think that that... if they said, we don't buy from anybody who violates human rights, that again looks like a foreign policy decision.

That's exactly the kind of foreign policy decision that the United States Government makes repeatedly.

Justice Scalia: What is it that prevents the States from making foreign policy decisions, in the Constitution?

Mr. Dyk: Well, Justice Scalia, I think first of all the... to go back to the questions that you and the Chief Justice had, before the Constitution was adopted, States went their own way on sanctions, and that was a severe problem.

I think there's a consensus that that was one of the things that led to the adoption of the Constitution, that that was an intolerable situation, and that was designed to be dealt with by the Constitution.

Justice Scalia: Well, it is dealt with.

Congress, everybody concedes, can pass a law.

If the horrible occurs that you have 50 States doing these things and upsetting foreign relations, Congress can pass a law and stop it.

Isn't that enough to solve the problem that they were concerned about?

Mr. Dyk: No, I think it is not enough, because if Congress had to intercede every time there was a problem here, as the briefs suggest, it's just not capable of doing that, and that kind of institutional concern was addressed by the Framers.

They were concerned about that.

Justice Scalia: Where?

Where was it addressed?

I don't see any... in fact, I see provisions in the Constitution prohibiting the States from entering treaties with foreign countries, from engaging in war, from... let's see, entering into any treaty, alliance, or confederation.

All of these things would have been unnecessary if there is some overriding, unexpressed principle in the Constitution that the States cannot get involved in foreign affairs.

You wouldn't need these things.

Mr. Dyk: Justice Scalia, I think it was an attribute of sovereignty and, indeed, if you go back and look at the Articles of Confederation, you find that the Articles of Confederation was much more explicit about the things that States could not do in the area of foreign policy.

For example, the Articles of Confederation denied the States the power to send ambassadors.

There's no such prohibition in the Constitution as adopted.

There are other examples, the power to deal with captures, to punish piracies.

If you look, if you compare the Articles of Confederation with the Constitution, you find that the articles were much more explicit.

The working assumption, we suggest, and it's reflected in the Federalist Papers and in the debates in the Constitution, was that that kind of specificity was not necessary, that the Constitution was designed to give the foreign policy power to the United States as a sovereign nation.

Justice O'Connor: Well, Mr. Dyk, how does your theory play out in the context of the eighties, when a number of States were adopting investment policies designed to encourage a change in South Africa from its apartheid Government to a more democratic society?

These were widespread practices by States then, were they not?

Mr. Dyk: They were.

There were...

Justice O'Connor: Now, how does that play... the very purpose of it was to change something going on in South African Government...

Mr. Dyk: Well...

Justice O'Connor: to affect foreign policy.

Mr. Dyk: My answer to that, Justice O'Connor, is, to the extent that those States and municipalities used selective purchasing against South Africa, they were unconstitutional and, of course, this Court never ruled on that.

Justice Scalia: Now, the Solicitor General takes a different view, I gather, in the brief about that.

Mr. Dyk: I don't think on the selective purchasing.

Now, what they had in connection with South Africa was two kinds of laws, the selective purchasing law, such as the one we have before the Court today, and I've just said that our view is that was clearly unconstitutional.

They also had divestiture laws, such as came before the Maryland Court of Appeals in the Board of Trustees case.

What the Solicitor General suggests is that divestiture laws, that is, we're not going to invest in companies, we're going to sell our stocks and bonds, could present a different question.

They don't...

Justice O'Connor: You think it turns on purpose.

Mr. Dyk: Well, purpose plus effect.

We don't agree.

Now, we think the divestiture laws are unconstitutional, but we recognize they're quite different.

Justice O'Connor: What happened during the Civil War years, if you know?

Did States take action to try to not deal with people who were using slaves?

What did they... weren't there actions taken by States in those years along the lines that Massachusetts is taking now, or do we know?

Mr. Dyk: Against the rebellious States?

Justice O'Connor, I'm not sure, but I... what I do know is that the briefs of the petitioners and all their amicus briefs who go into this long history about this have not found a single instance between the time the Constitution was adopted and the next 150 years in which States asserted the right to exercise a concurrent authority in the area of foreign policy...

Justice Scalia: Mr. Dyk...

Mr. Dyk: and under the Printz case...

Justice Scalia: what about Ware v. Hilton, which involved the Virginia laws that I mentioned earlier, that erected obstructions to the collection of debts by English creditors, and hostility towards England after the revolution?

A Federal case, involved a challenge to those laws.

No one asserted that the laws were invalid because Virginia had no authority to muck around in foreign affairs.

The entire case was argued and decided on the basis of whether the treaty with England forbade this, and it was accepted that if the treaty did not forbid it, the Virginia laws were okay.

Mr. Dyk: Well, I can't speak to what issues were raised in that case and weren't raised in that case.

What I do know is that the practice of refusing to honor debts to British citizens was a central concern of the Framers of the Constitution.

They did not want the States to be able to go their own way on that issue, on the issue of sanctions, those were the things that concerned...

Justice Scalia: They handled it by a treaty... by a treaty, which the Constitution expressly says the States must respect, but there's no provision there that the States can't do anything that affects foreign affairs.

Mr. Dyk: You could... Justice Scalia, a treaty depends upon the agreement of the United States and a foreign power.

I cannot believe that the Framers of the Constitution intended that if there were no treaty, that the States could go their own way, and I believe that the constitutional history, the Federalist Papers, and the debates in the Constitution, support the view that they did not intend that...

Justice Scalia: There's also Article VI, of course.

Without a treaty, Congress, if it passed a law, could pass a law that would be the law of the land that would prevent the States to do it, but certainly those two protections are entirely adequate to prevent all of the horribles that we're concerned about, that the States are going to go running off with our foreign affairs power.

Mr. Dyk: Justice Scalia...

Justice Scalia: If that's a problem, the remedy is there.

Mr. Dyk: Justice Scalia, as this Court made clear in Curtiss-Wright and in other cases, the President has an important role to play in foreign affairs.

It seems quite unlikely that the Framers intended to say that Congress had to step in and eliminate these State laws, otherwise the President's conduct of foreign affairs could...

Chief Justice Rehnquist: Well...

Mr. Dyk: be hampered just as much as the States wanted...

Chief Justice Rehnquist: you're not talking just about States, either.

I take it you're talking about the possibility of cities adopting this policy.

Mr. Dyk: 39,000 municipalities, and this Court... and we're not just relying on the Zschernig case, as important as that is, but in the Pink case, in the Belmont case, in the Sabbatino case, this Court has assumed again and again and again that State action may be precluded without the necessity of a formal congressional...

Justice Stevens: But that's why affirmative action by the President... I asked your opponent.

He thinks affirmative action by the President wouldn't be enough, but perhaps affirmative action by the President would be, but the question is, with or without either congressional action or presidential action, is this foreclosed, and I'm curious to know, if it all turns on the motive to impact on the foreign country, would it also prevent the State from making its own direct decisions?

It just would refuse to buy anything itself from Burma.

Mr. Dyk: Oh, I think that would be a very different case, Justice Stevens.

Justice Stevens: It would be different, but would it not be decided the same way under your analysis of motive?

Mr. Dyk: If they're intending to communicate a message...

Justice Stevens: Yes.

They say, we're not going to buy from you because we don't like your policy toward certain minorities, or something of that kind.

Mr. Dyk: That would be forbidden, but Justice Stevens, it's not a question of motive, it's a question of objective.

It's not trying to get into the minds of the legislators.

We have here a situation in which these things only work if you communicate disapproval.

That is the objective of the statute, and they do it through this very coercive secondary...

Justice Kennedy: Do we have...

Justice Souter: So in effect, in... the only case in which it would be true on your theory that the State could, as you said a moment ago, decide who to deal with, would be the case in which the State says, we are simply going to deal with domestic companies.

We're going to keep the money within the State borders.

Because the moment the State said, well, we'll deal with people outside the State, but we're not going to deal with California, or we're not going to deal with Burma, there will always be a policy reason behind that, and it will always, as I understand it, be forbidden on your view.

Mr. Dyk: I don't think, Justice Souter, that there'll always be a policy reason behind that.

I think that States and municipalities constantly make purchasing decisions based on price and...

Justice Souter: Oh, exactly, but I'm assuming that... I mean, I think the whole assumption of the case is that there is a departure from the usual purchasing regime of generally accepting the lowest responsible bid, and if there's going to be a departure from that regime, and it's going to be for any reason other than merely favoring domestic producers, I presume there's always going to be a noneconomic policy reason for it and it will always be unconstitutional, in your view.

Mr. Dyk: If they announce that they are trying to change the policies of a foreign Government, to condemn the policies of a foreign Government, and they take action, yes, in our view it would be unconstitutional, but that is a different case.

Justice Souter: When you say condemn, I... would it be condemnation if the State simply said, look, we realize we're not running the foreign affairs of the United States, and we realize that we're not running Burma, but we do have responsibility for keeping our own hands clean, and we are not going to buy any goods derived from Burma.

Would that be a condemnation sufficient to violate the Constitution, in your view?

Mr. Dyk: In our view it would, but we would say that's a very different case.

This is not... this is not limited to goods coming from Burma.

Justice Souter: I realize... I realize...

Mr. Dyk: It's highly doubtful that Massachusetts buys anything from Burma.

What they're trying to do...

Justice Souter: Well, let's... we want super hands clean so we're not going to deal with any... anyone who does deal with Burma, and so on.

Mr. Dyk: Right.

We're not going to buy computers from a German company because they sell pencils to Burma.

That is highly coercive, and it has nothing to do, in our view, with the notion of disassociation.

Justice Scalia: It shouldn't turn upon the coercion.

I mean, if we can't... if States cannot muck around in foreign affairs, I assume that you would have to say that the Governor of New York could not condemn the policies of South Africa, or the policies of Nazi Germany.

Mr. Dyk: If he coupled that with a remedy, with a coercive sanction, no, he could not do that.

Justice Scalia: Why do you need the coercive sanction?

Justice Souter: Yeah.

Justice Scalia: Doesn't it interfere with our foreign affairs to have 50 State Governors going around, you know, condemning Adolph Hitler as a fiend if, indeed, the Federal Government is trying to... I don't know, accommodate him, or whatever?

Rehabilitate him.

Mr. Dyk: If...

[Laughter]

I think it's highly undesirable.

It may possibly, under some circumstances, cause foreign policy problems that could create an issue.

That could never come before this Court, and our view is that...

Justice Souter: Why?

Why?

Mr. Dyk: A mere speech by the Governor?

I don't see how that...

Justice Souter: Well, if that cannot be the subject of legal action, then it seems to me that this is not an expressive case, as I... as you implied a moment ago.

It's a case about dollars and cents.

Mr. Dyk: No.

I think it's a question of making foreign policy, Justice Souter.

If you say, this is our position with respect to Burma, we're trying to change the Burmese policies, and here's the remedy that we're imposing, we're doing something which has a consequence.

Justice Souter: But... right, but you're saying it only becomes foreign policy subject to cognizance in a court if, in fact, there is a dollar figure attached to it.

Mr. Dyk: If the... well, I don't know dollar figures is what... I would accept it, that it has consequences.

There's something behind there.

If you take...

Justice Scalia: 50 State legislatures, not just the Governors.

50 State legislatures with the signature of the Governor pass a bill saying Taiwan is independent from China.

50 State legislatures.

Mr. Dyk: Justice Scalia, let me use a homey analogy, if I could.

If we look at the States as though it were a dog that is barking, what the Constitution intended to do was to take the teeth away from the dog, and if the dog continues to bark, if the States and municipalities continue to say things on the issue of foreign policy, there is not the same danger of interfering with Federal policy if there are no teeth to enforce it.

Justice Kennedy: Well, I'm not sure... I don't... I agree one case is justiciable, the other isn't.

The hypothetical would be, you are the legal advisor to the Governor.

He asks you, may I, in my official capacity, make this foreign policy announcement, and I would think your answer would be no.

Mr. Dyk: I think that from the point... that it is highly undesirable to do that, and that may constitute the impermissible making of foreign policy.

Chief Justice Rehnquist: Well, but...

Mr. Dyk: But I think as far as the Constitution is concerned, what it was intending to do was to strip the enforcement mechanisms from the States, and if you go down the lists in Article I, that's what it did.

Justice Kennedy: Don't you think that under your theory of this case, if the legislature and the Governor together come to you as their counsel and say, may we constitutionally, not because we're going to be sued, but just to obey our constitutional constraints and duties, join 50 other, or 49 other legislatures in condemning Taiwan, or mainland China, or something?

What is your answer?

Mr. Dyk: Well, I think that my answer would be that raises a very significant...

Justice Kennedy: Why?

Why?

Mr. Dyk: It may be unconstitutional, but the core purpose here in allocating foreign affairs to the Government was to say... to the Government of the United States was to say, if you're going to speak on foreign policy, and you're going to try to enforce that foreign policy, that's something that's forbidden to you.

Chief Justice Rehnquist: Well, Mr. Dyk, certainly a good part of your argument is based on the Commerce Clause, and no one could suggest that the resolution hypothesized by... involves commerce.

It's just speech.

Mr. Dyk: Right.

Under the Commerce Clause that would not be an issue, and under the Commerce Clause the primary issue is whether the action of the State of Massachusetts is proprietary, and it seems to us that it can't possibly be proprietary.

It has no economic benefit to Massachusetts and its citizens.

It's admittedly not something that any private purchasers of goods and services...

Justice Kennedy: In our negative Commerce Clause cases, do we have statements to the effect that we look to the purpose of the legislation?

Mr. Dyk: My...

Justice Kennedy: It's usually the purpose to just prefer your own goods.

Is there anything else?

Mr. Dyk: Well, as I understand the Commerce Clause jurisprudence, you look to purpose and effect, but in these market participant cases, my understanding is that the line the Court is trying to draw is between regulation and proprietary action.

And under cases like Gould, which, while it's not a Commerce Clause case, is highly relevant, if you find that this looks like regulation through market participation, then it's invalid, and we think if you look at this Massachusetts law, it doesn't look anything like... for a number of reasons it doesn't look anything like purchasing.

It looks very much like regulation accomplished through purchasing, and therefore it's invalid.

Justice Ginsburg: Mr. Dyk, may I ask you about one case of ours that's said to be very close to this, that is, the Barclays case?

This Court said, it's okay for California to go its own way, to have its worldwide income tax measure, even though the Feds didn't, and even though most States didn't, and that was okay.

It has been argued that this is the same, that there's no difference.

Mr. Dyk: But the difference between the combined reporting in the California case was... first of all was nondiscriminatory from the point of view of the Commerce Clause and, most important, it had no foreign policy objective.

Massachusetts didn't care what the consequences were.

The question was whether, even though Massachusetts didn't care what the consequences were, that nonetheless made it unconstitutional.

Argument of Seth P. Waxman

Chief Justice Rehnquist: Thank you, Mr. Dyk.

General Waxman, we'll hear from you.

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

Chief Justice Rehnquist, I'd like to follow up on your suggestion and talk first about the Foreign Commerce Clause, because I think that what... the effect of what Massachusetts has done here in many ways exemplifies precisely what the Framers of the Constitution were trying to accommodate and to accomplish and avoid in enacting the Foreign Commerce Clause.

The problem that the Framers were addressing was first and foremost the refusal by States in the Union under the Articles of Confederation to honor debts that they owed to British sympathizers and British citizens notwithstanding the treaty of 1783, and what Massachusetts has done here, and the purpose therefore in the clause, was to keep other States and the Union from being held accountable for decisions and unilateral actions for which they didn't have the responsibility, and what Massachusetts has done here is precisely the same.

The United States has had for a long time, at least since 1990, a policy with respect to Burma... and I want to emphasize here that this is a case about means, not goals with respect to the Burmese regime.

We have had a policy that has emphasized in resolutions, in executive orders, in the Federal Burma Act, and in the President's 1997 executive order, the importance of a coordinated, multinational effort, because in the view of the national Government it's the only way we can have an effective voice with respect to Burma.

But Massachusetts, by choosing to extend sanctions to foreign companies, has created a considerable source of irritation with our trading partners and our allies, and has directly hampered our efforts to achieve multilateral action.

Instead of our conversations with the EU and ASEAN and other countries that had been taking place about what to do about Burma, our conversations now are what to do about Massachusetts, and we have been treated to the spectacle of delegations of EU officials and other foreign officials writing to and visiting along with our trade representatives, Boston, Massachusetts in order to decide what the best means is to accomplish reform in Burma, and I think that that's just what the Framers were trying to avoid in enacting the Foreign Commerce Clause.

Justice O'Connor: General Waxman...

Justice Scalia: The question is whether they were trying to avoid it by giving Congress the power to prevent it, which everybody concedes they have here.

If this is indeed a big deal, a big problem, nobody questions that under Article VI Congress can pass a law which Massachusetts would have to obey, but the question is, what is there in the Constitution that suggests that the President, by snapping his finger, can make Massachusetts...

Justice O'Connor: Well, General Waxman, Congress has passed a law, hasn't it?

Mr. Waxman: Indeed it has passed a law, and I guess rather than choosing favorites I'll try and...

Justice O'Connor: Is there preemption?

Mr. Waxman: We think that there is preemption under the Hines-Boyle international paper articulation because, as I was starting to suggest, the Federal law... the Massachusetts act stands as an obstacle to... I'm quoting now from many, many opinions of this court.

The test is, stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, and I've pointed out one of three ways, and I will elucidate the other two, if I may, in which what Massachusetts has done has interfered.

Now, Justice Scalia, your point, if I recall it, was that, well, that's fine, we were really concerned about it and we gave Congress the power to say, no, we don't like that, you can't do that, and I have... I think that's incorrect for two reasons.

First of all, the Foreign Commerce Clause of its own force preempts State laws surely... and this Court has decided it many times... that discriminate on their face against a particular country.

That was a principle that was elucidated as... by this Court as far back as Cooley v. Board of Wardens, where the Court pointed out that one of the main objects of the Constitution was, quote, preventing discriminations favorable or adverse to commerce with particular foreign nations that might be created by State laws, and I know that there is considerable uncertainty about the scope of the operation of what has been called the dormant Foreign Commerce Clause, but in essence the scope, the preemptive scope of the Commerce Clause itself, absent positive legislation.

But there has never been a question from the start that... with respect to a law like this that singles out and punishes and sanctions commerce with a particular foreign country, that there is preemption by the Foreign Commerce Clause of its own force.

Now, secondly, it would be a regime that would be highly inimical both to the national Government and to our States and the Federal system to require Congress or the Federal executive to expressly keep track of and preempt each one of these actions, and I'd like to just explain...

Justice Stevens: No, but the answer to that, it seemed to me... Mr. Dyk made the same point... couldn't they pass a general statute making into positive law the very position you're asserting here today?

Mr. Waxman: Yes, I think they could.

I believe that they could.

I don't think that they could do the converse, or I'd question whether they could do the converse...

Justice Stevens: Will you state... what I'm suggesting is...

Mr. Waxman: but they... if I can just...

Justice Stevens: that the constitutional rule that you advocate today could be enacted by Congress as a statute.

Mr. Waxman: Yes.

In fact, I mean, our position is that at least with respect to Burma, where there is one voice, and the voice has spoken, and the voice has spoken quite clearly with respect to means, it is preempted in any event, either by operation of the Foreign Commerce Clause or by the Federal action.

But if I can just go to the point, Justice Scalia's point about what's so bad, what would be so bad about requiring the national Government to act, I would just say first of all, with respect to the national Government's ability to regulate foreign commerce and conduct foreign affairs, it is well-known that... first, that effective diplomacy often, probably usually requires that things be done and not be done publicly, and expressly, and the Austria example that I think Justice Breyer gave is, I think we are being treated to a vision of that point precisely.

Secondly, as this Court recognized in Curtiss-Wright, and as the IEPA statute recognizes, fast action is required by the time... the problem may have festered and come to a head by the time the national Government can go through the processes necessary to preempt.

And I also would say with respect to Federalism and the comity that our system requires, that it is a wholly unnecessary irritant that would constantly come up in the context of our political system if, in the area of foreign affairs and foreign commerce, the national Government in order to pursue its... the objectives that the Constitution gives it, were required to single out, now, Massachusetts, we... you know, we preempt what you have done, and the Village of Takoma Park, we preempt what you have done.

The question was raised earlier about the South Africa sanctions which is, so far as we know, since the beginning of the Republic, the only instance, and not only the amicus brief citing the petitioner, but all of the scholarly articles that are cited in those briefs, we reviewed, and there are not instances of Governments acting in their procurement capacity to do this.

But in the South Africa example, I think it's important to recognize first that in 1986... the South Africa case was decided by the Maryland Court of Appeals in 1989, and I believe it's the only decided case... that the... there was a congressional resolution, the national Congress, explicitly allowing States to do this, and there was a provision in the South Africa law that was passed that granted an exemption to States engaging, and localities engaging in procurement with Federal dollars from the general Federal rule that required that the lowest bidder, the lowest responsible bidder get it.

So I think the South Africa example, to the extent that it consists of the only precedent that we have, is highly distinguishable, because here, in addition to the point I made about the frustration of the national Government's objective to pursue a multilateral strategy, the Massachusetts law is also inconsistent, and therefore frustrates the objectives of the Federal law in two other respects.

First of all, and the legislative debates about this couldn't be clearer, Congress considered much more stringent sanctions.

It considered precisely what Massachusetts has done, and it deliberately chose what it called a middle path, what Massachusetts... that is, not to prohibit precisely what Massachusetts has.

Chief Justice Rehnquist: Thank you, General Waxman.

Mr. Waxman: Thank you.

Rebuttal of Thomas A. Barnico

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

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

First, I would like to go to the question, or the reason why foreign officials have visited Boston in the last few years, and I must point out a Federal statute not previously mentioned in the argument today, which is the Federal law adopting the Uruguay Round agreements under the GATT.

We, through the United States, has now been... we have been purported to have been held to a new round of international trade agreements.

The foreign complaints that you've heard described are complaints under that agreement.

Our point is simply that in this new world of global trade and new international agreements, this type of contact will be common.

This type of complaint against Massachusetts and the other States that the procurement laws violate GATT will be all the common.

There will be contact.

It's not a realistic approach that...

Justice Ginsburg: Mr. Barnico, are you suggesting that times have changed so that the national unit is no longer responsible under international law for its subunits, that the rest of the world will target their retaliation to Massachusetts, and the rest of the United States will remain unaffected?

Is that what you're suggesting?

Mr. Barnico: I'm suggesting, Your Honor, that as the... if the focus is on the effects of our law, the Court should not give great weight to the fact that foreign countries have objected to the Massachusetts law under a trade agreement that's been ratified by Congress.

We take that agreement to mean, and the congressional action to mean, that Congress knows full well that States will have complaints made against them of this type.

Justice Breyer: That's what I thought perhaps... I thought maybe you agree on this, I'm not sure, that whatever it requires, we should treat the Foreign Commerce Clause the same as the dormant Commerce Clause vis-a-vis States and if, in fact, they could do this vis... give us a... you'd have a regular body of law, we'd know how to apply it, and what the... what Massachusetts could do vis-a-vis Texas, it can do vis-a-vis Austria, et cetera, at least for purposes of this case.

Is that your view?

Mr. Barnico: Yes, Your Honor, and that means... that's why we urge the Court, under both of those constitutional provisions, to recognize what we've described as a market participation exception.

That's why we've argued that the boycott, so close in nature to that type of State activity, was not within the thought of the Framers as to either of those dormant clauses.

That's the way to handle this, to preserve to the States a limited sphere of activity which has speech components and consumer components.

Justice Breyer: Of course, what I'm thinking of is a kind of nightmare, where all the right-to-work States pass laws stopping procurement in the unionized States, and all the unionized States pass laws trying to stop procurement in the right-to-work States, and that's... that kind of, sort of chaos is what's worrying me under the dormant Commerce Clause.

Mr. Barnico: Well, those questions will remain for Congress.

Under our rule they would be proprietary.

We can only hope, though, as I mentioned earlier, that there is a comity owing between sister States that's not owing to the Government of Burma, certainly, and Massachusetts has the right in this instance to exercise that proprietary power, that limited sphere of power cabined as historical basis for assuming that the Framers did not intend to take the boycotts out of the hands of the States, just as we know the power of boycott remains in the hands of every American citizen.

Justice Ginsburg: Mr. Barnico, you said there's comity among the States and there's not comity with Burma, but it isn't Burma.

As you yourself recognized, Massachusetts has been visited by an ASEAN delegation, by an EU delegation, so it's the rest of the world of which we are a part that may disagree strongly on the efficacy of sanctions.

Mr. Barnico: I acknowledge that, Your Honor, and I point to the '94 law and the GATT simply to say that this will be common in our view.

State and local laws, not of human rights dimension, but all kinds of laws will be subject to attack by foreign Governments under these...

Chief Justice Rehnquist: Thank you, Mr. Barnico.

The case is submitted.

Attribution:

The Oyez Project

Featured:

North Dakota v. United States - Oral Argument

Fri, 09 Jan 2009 14:49:22 +0000

Case:

North Dakota v. United States

Media File:

88-926_19891031-argument.mp3

Related Transcript:

1989_88_926_argument.xml

Transcript:

Argument of Nicholas Spaeth

Chief Justice Rehnquist: We'll hear argument next in Number 88-926, North Dakota versus the United States.

General Speath, you may proceed.

Mr. Spaeth: Thank you.

Chief Justice Rehnquist, members of the Court, and may it please the Court:

It is a special privilege for me to be here because it is only two ways shy of the State of North Dakota's hundredth birthday.

The question presented in this case is whether the state, in an effort to prevent bootlegging of liquor from military enclaves, may impose a requirement on the suppliers of that liquor to the bases that requires them to put a label on each bottle destined for the military enclave indicating it is to be consumed only on the base.

Unknown Speaker: Well, that isn't all the law says, is it?

You can avoid putting that label on if you do something else.

Mr. Spaeth: If you buy it from a local distributor, that is correct.

Unknown Speaker: Oh yeah, yeah.

[Laughter]

Mr. Spaeth: That is correct, and pay the tax.

Unknown Speaker: All right, all right.

Mr. Spaeth: We don't have a bootlegging problem with that, because there isn't a price differential.

And that is in fact--

Unknown Speaker: Well, why would that... don't you want to keep the... you don't want... you can't even use the liquor off the base--

Mr. Spaeth: --That is correct.

Unknown Speaker: --under this law.

Mr. Spaeth: That is correct.

Unknown Speaker: But if you... if it is bought from a local distributor--

Mr. Spaeth: That is correct.

Unknown Speaker: --you may take it off the base.

Mr. Spaeth: That is correct, because the taxes have been paid.

And--

Unknown Speaker: Well, what's the purpose of the North Dakota requirement?

Mr. Spaeth: --To prevent bootlegging of the liquor off the base.

There is a price differential between liquor sold on the base and off the base, because off-the-base liquor sales are subject to the distribution system and the state taxation.

On-base sales are not.

Unknown Speaker: What sorts of diversions constitute the evil or the problem?

Mr. Spaeth: Well, if I can confine myself to answer your question, first of all, solely to the record.

In North Dakota the state treasury became aware of liquor being shipped off base and used by people off the premises and being distributed to other individuals who are not authorized to have it.

In the State of Hawaii one enterprising person managed to get enough liquor off the base to actually supply a complete liquor store within Hawaii.

In the State of Washington, enough liquor was shipped to one particular military enclave where, if it were to be consumed on base, each individual would have had to consume five bottles per day, every day of the year.

And anyone who has ever been around--

Unknown Speaker: Is that supposed to tax our credibility?

[Laughter]

Mr. Spaeth: --Well, anybody who has been around military bases knows that there is a little bit of drinking that goes on, but I think that is more than... than its share.

And that is precisely what this regulation is designed to do.

Unknown Speaker: Does the record show that the labeling requirement is what caused the out of state suppliers to stop supplying liquor to the government?

Mr. Spaeth: No, it does not.

There is, however, of course, a chronological link because once the labeling requirement went into effect, several suppliers indicated that they would prefer to supply through the regular distribution system.

Others said that they would go ahead and supply it anyway, and others said we are going to supply it, but it is going to cost you more.

Unknown Speaker: Do you think you could require the federal government to affix the labels?

Mr. Spaeth: That would be certainly more problematical then, because that would be an effort to directly regulate within the military enclave, and prior cases of this Court have not allowed states that kind of discretion.

Although this is a special case in the sense that the Twenty-first Amendment interacts in this particular situation.

So although the Court hasn't tread on that ground before, it would be a, certainly a more difficult case for me were I to argue that.

I brought some labels with me so that the Court could see what they are.

These are 16 labels.

They are crack-and-peel kind of labels, like bumper stickers.

Peel them off and then you affix them to the bottle like that.

They cost about three cents or five cents, in that range, to produce.

The state generates no revenue from them--

Unknown Speaker: Can they be... may I just ask, you're worrying about the... having somebody... an officer buy so much liquor he could open his own liquor store, he could peel off these labels pretty easily, couldn't he?

Mr. Spaeth: --No, you can't.

I don't know--

Unknown Speaker: Can you peel it off the podium there?

[Laughter]

Mr. Spaeth: --My apologies to the Marshal.

I don't think I can.

[Laughter]

But if there is anybody who has ever participated in a political campaign knows, as I have, the worst... the hardest thing to get people to put on, or to identify with you, is a bumper sticker, because it is very difficult to get off.

And the same thing here.

You can't tear it off without leaving at least part of it on.

And that is why this particular kind of label was chosen for this purpose.

Unknown Speaker: Do you take the position that it is not a burdensome requirement?

Mr. Spaeth: No.

Excuse me, yes, I do take the position it is not a burdensome requirement.

Unknown Speaker: Well, then why couldn't the state just require all of the liquor sold in its stores to have the sticker that it was sold in the stores?

And then the federal government would not be impeded and you could accomplish your goal.

Mr. Spaeth: Well, that wouldn't help us with respect to identifying liquor that is sold on the base versus liquor that might be brought in from Minnesota.

In other words, it is possible, in a border state like North Dakota, that liquor could wind up in the state that was purchased in Minnesota.

And while the position you... offer just has some merit, it wouldn't enable us to distinguish liquor brought in from Minnesota or Montana or South Dakota from liquor that was brought off the bases, where tax was not collected.

So, I don't think approaching it the reverse way would help us.

Unknown Speaker: Does the state have any regulatory interest in liquor brought in from Minnesota?

Doesn't it have the same regulatory interest, or is the tax... or is that not a problem because the price is high?

Mr. Spaeth: It is not a problem because the prices are roughly equivalent, because again they go through their regular state distribution system and taxes are collected on that liquor.

Unknown Speaker: Well, what you are saying is you don't need the stickers because the market takes the place of it there.

I don't understand... now I don't understand your answer to the hypothetical.

If you... if you required labels on all liquor that was sold through your own distributors, that would take care of all the problem, because it is too expensive to bring it in from Minnesota.

Mr. Spaeth: I am sorry, Justice Stevens.

I don't quite understand your question, but I'll try to answer it.

There is a substantial price difference between liquor sold on the bases in North Dakota--

Unknown Speaker: I understand.

Mr. Spaeth: --and liquor sold in North Dakota, in Minnesota, in Montana and in South Dakota.

Unknown Speaker: I understand, but there is no similar price differential between the Minnesota liquor and the North Dakota liquor.

Mr. Spaeth: That is correct.

Unknown Speaker: And therefore, if you required all North Dakota wholesalers and retailers to spend the three cents for these stickers on their liquor, anything that didn't have it would either be from Minnesota or from the base.

Mr. Spaeth: That is right.

Unknown Speaker: And presumably, it wouldn't be from Minnesota because it doesn't save any money to get it from Minnesota.

So you would then identify the base liquor because it wouldn't have a sticker on it.

Mr. Spaeth: The difficulty we have, though, is one of the two military enclaves we are talking about here is located in Grand Forks, North Dakota, and I am not... I don't know your familiarity with North Dakota geography, but that sits squarely on the border with Minnesota.

And we would have liquor in North Dakota from Minnesota, and we'd have lots of it, because of sales or whatever features that may cause people to purchase across the... the border.

So there still is a bootlegging problem that is dealt with by using these labels.

Unknown Speaker: I'm really, I don't... aren't there Minnesota tax stamps on the Minnesota liquor?

Mr. Spaeth: No, there are not.

Unknown Speaker: There are not.

Mr. Spaeth: Only the federal tax stamp exists on both North Dakota and Minnesota liquor.

And so we do have an identification problem.

In any event, if you look at it simply from the standpoint of practicalities, this is probably the least intrusive thing the State of North Dakota could have done to deal with what it perceived to be a major problem.

Unknown Speaker: General Spaeth, one of the affidavits submitted on behalf of the government indicated that one out-of-state wholesaler said he was going to have to raise his price something like $20 a case if this requirement went into effect.

Are there more costs connected with it, the putting on the label, than we might guess, or is this just a rather extravagant estimate, in your view?

Mr. Spaeth: I think it is a rather extravagant estimate.

I mean, the labels themselves only cost a couple of pennies each.

And unless their labor costs are enormous, it is hard to believe it would cost that much money to affix these labels.

Unknown Speaker: Let me ask you one more question.

The posture of the case is that the district court granted summary judgment for the state; the Eighth Circuit reversed and granted summary judgment for the United States.

Mr. Spaeth: That is correct.

Unknown Speaker: So if there were any triable issue in fact in the case, both courts were wrong, in effect.

Mr. Spaeth: That is right, although both sides stipulated to most of the essential facts in this case.

So it... it's really not a case where there is a real quibble over the factual record.

It is rather the inferences to be drawn from the factual record.

Unknown Speaker: Well, I think there is a disagreement among you as to whether there is a "burden" or not.

Mr. Spaeth: That is correct.

Unknown Speaker: And I am not so sure that isn't a factual question.

Mr. Spaeth: And, it could be, in some sense of the word, because obviously the federal government is arguing that it is extremely burdensome to comply with this requirement, and the state is arguing to the contrary.

Unknown Speaker: I... I take it the $20 a case figure could include also the substantial cost of having to keep separate inventories in the warehouse of the stickered and the non-stickered liquor.

Because the stickers are put on, I assume, before it is put in the box and well before it is shipped.

Mr. Spaeth: That's correct.

It could account for some of that cost to go, again--

Unknown Speaker: And of course, if your view prevails, you can have every state requiring stickers and then the distiller would have to keep 49 separate inventories.

Mr. Spaeth: --Unless the states got together and agreed on a sample labeling procedure, that is correct.

The state doesn't attempt, of course, to regulate sales on the base in any other way.

None of this liquor is taxed.

The bases operate at different hours than liquor stores within the state, and sell to any classes, individuals, it wants to on the base, and at different ages.

You can buy liquor on the Air Force bases in North Dakota when you are 18.

You have to wait until you are 21 within the state.

The state believed it had the authority to impose this labeling requirement because of its inherent police powers, and also because of its core powers within the Twenty-first Amendment.

Indeed we thought in doing this we were doing exactly what this Court suggested that we do in United States v. Mississippi Tax Commission, when the Court alluded to the fact that the states were free, of course, to regulate the shipments of liquor en route to bases in order to prevent diversion.

But notwithstanding what we thought to be a fairly innocuous regulation, and our belief that it was firmly rooted in prior cases of this Court, the federal government chose to challenge it.

And as the Court has already noted, the Eighth Circuit overturned the regulations on a two to one vote.

The court of appeals found the regulation invalid, I believe, because it mischaracterized it.

It saw the regulation as a direct effort to regulate sales of liquor on the base, and that is clearly not the case.

The regulation only applies to the suppliers.

It is really like a host of other state regulations that indirectly affect federal procurement: safety regulations, minimum wage regulations, environmental regulations, even the highway speed limit.

Unknown Speaker: xxx I gather, if the... if you don't comply with the labeling, then you have to be... work through the state wholesalers--

Mr. Spaeth: That is right.

Unknown Speaker: --and you have to pay the tax, and inevitably, the price of liquor then delivered to the base will go up.

Mr. Spaeth: That is correct.

Unknown Speaker: Every bottle will be... will cost more.

Mr. Spaeth: That is right, because the tax will be--

Unknown Speaker: And in the long run the people on the base will be paying the same price as... as people pay off the base at local stores.

Mr. Spaeth: --That assumes that they are going to go through the distribution network, and many of the stores--

Unknown Speaker: Well, I know, but if they don't label they go through that.

Mr. Spaeth: --That is correct.

But of course, they are free to label it and the Air Force is free to buy, of course, from whomever it wants.

There is no requirement for the Air Force purchase through the distribution system.

And many suppliers will supply the liquor with the sticker on it, and that... the record does show that.

Unknown Speaker: General Spaeth, you say it is like a lot of other state regulation.

Well, in one significant respect it differs from other state regulation, and that is it explicitly applies only to sellers to the United States government.

Mr. Spaeth: That is correct.

But that is because--

Unknown Speaker: That is a big difference.

Mr. Spaeth: --Well, it is a difference, but it is a discrimination in favor of the federal government, because every other distributor has to pay the tax and go through the whole distribution network, be licensed and be bonded.

It is exactly like the situation this Court endorsed in United States v. Washington, where the state of Washington imposed a tax on federal contractors that was different than the tax imposed on other contractors within the state.

The tax was lower.

And this Court said there was no problem with that.

That is constitutional because you are not discriminating against the federal government.

Unknown Speaker: Well, how does this, how does this in favor of the government in any respect?

Mr. Spaeth: Because it doesn't require... we are not attempting to tax the distributor or the supplier or purveyor of liquor to the base.

The tax isn't collected; the suppliers don't have to go through the state distribution system.

Unknown Speaker: They just have to label.

Mr. Spaeth: They just have to label.

It is far less onerous than what other distributors have to do within the state.

Unknown Speaker: Do you think you could do that, you could go the other route?

Mr. Spaeth: Go which route?

Unknown Speaker: Re... impose the tax, require the base to buy it from your... require the federal enclaves to buy it through the distributor system?

Mr. Spaeth: I don't think that the state could require the federal enclaves to buy it through the distribution system, but I do think the state, if it wanted to, could tax those suppliers before they sell the liquor to the base.

Indeed, the court in the United States v. Mississippi said the states could do that, and in the case I just cited to you, United States v. the State of Washington, the Court said you could do that.

You could tax contractors or suppliers to the federal government, as long as you don't do it in a discriminatory way.

We are doing far less than that here--

Unknown Speaker: Is that true if the supplier... that's not true if the suppliers are out of state.

Mr. Spaeth: --Well, they are in state, though, for the purpose of doing business, in the sense that they are selling to locations within the state.

I mean, that, just as Sears and Roebuck is in the state in the sense that it sells within the state.

And I don't think it is any different than situations this Court has endorsed in other cases.

The court of appeals also thought in this case that there might be federal preemption.

It relied on a statute that requires the federal government to purchase liquor from the most competitive source, price and other factors considered, and a regulation that basically parroted the statute.

It is difficult for me to see how that could be preemption.

First of all, there is no express statement in either the statute or regulation that any state rules or regulations are preempted.

Certainly this is not an area where Congress has occupied the field, indeed the Twenty-first Amendment would arguably prevent that.

And third, there is no frustration of the federal purchasing objection here.

Unknown Speaker: Well, one gets the impression, General Spaeth, from reading about what Congress did, that the intent was to require the bases to purchase locally when they are talking about beer and wine, but to allow liquor to come in from out of state as well as locally, and be competitive, when you are talking about hard liquor.

Mr. Spaeth: That is correct.

That is precisely what Congress intended.

And, obviously, it is our position, what the State of North Dakota does here doesn't interfere in any way with what Congress intended, because--

Unknown Speaker: xxx liquor at the lowest prices available.

Mr. Spaeth: --That is right.

Unknown Speaker: No matter what the price is, it is the lowest price that is available.

Mr. Spaeth: That is right, and they are free... the bases are free to buy from whatever source they want.

And the only thing that North Dakota requires is this little label to be affixed to those bottles.

So again, it is difficult to see where the preemption comes here, given the language of the statute and the regulation, and I doubt very much if that is what Congress intended to do when it enacted this particular legislation.

Unknown Speaker: General Spaeth, do you have any comment on the milk case of Paul against United States, and how it bears on this?

Mr. Spaeth: Yes, Justice Blackmun.

I don't think it applies.

In Paul we are dealing with a situation where California had a minimum price law with respect to milk.

And, obviously, any time you set a minimum that tends to be where the price falls, if you understand the marketing in milk.

And that totally frustrated the federal objective of buying from the most competitive source available, because every quart of milk sold in California was priced at exactly the same price.

That's not the situation here.

We are not attempting to fix the price of liquor that is sold on the base.

All we are doing is imposing a requirement that according to the federal government raises its cost of buying.

Unknown Speaker: To cure a danger to your own economy.

Mr. Spaeth: That is right, bootlegging of liquor within the state.

We think what we did here was probably the least intrusive thing we could have done, and the case is important in North Dakota, and in other states as you might guess from the volume of amicus support for the state.

We also felt we did what the Court invited us to do in prior cases dealing with this area.

And, if the state can't do this, I am not sure what we can do to prevent bootlegging.

And it is for that reason I urge this Court to reverse the court of appeals before, below, and reinstate the regulation--

Unknown Speaker: How much liquor are we talking about?

Mr. Spaeth: --Being supplied to the base?

Lots.

There are very large enclaves, they have... there are very large Air Force bases.

Both have bombers and missiles, and there are something like 10,000 people on each base.

In addition to that, of course, there are a host of other people who are eligible to buy, retirees, dependents.

Unknown Speaker: They drink a lot at Minot and Grand Forks to keep warm, I suppose.

Mr. Spaeth: That's right.

And they do also restore, or bestow honorary privileges on others.

I have honorary privileges at the Minot Air Force base, for example.

I can go up there and drink, too.

Unknown Speaker: You have an interest in this litigation.

[Laughter]

Mr. Spaeth: It cuts both ways.

If I want to bootleg too--

Unknown Speaker: Of course, what I am concerned about is your, you show no comfort for the Minnesota bootleggers who need all the help they can get.

[Laughter]

Mr. Spaeth: --Well, the State of Minnesota's economy is doing so much better than ours these days that I have no sympathy whatsoever for it.

Notwithstanding the problems the Vikings have been having lately.

Unknown Speaker: General Spaeth, I didn't understand the last statement you made.

You said if we don't let you do this you don't under... you don't know what you can do.

I thought you said earlier that you could... you could readily impose a sales tax on the sales at the base.

Mr. Spaeth: Yes.

I think I misstated myself, Justice Scalia.

We probably could--

Unknown Speaker: Readily.

Mr. Spaeth: --enforce some sort of tax, and that would lessen the price differential and help alleviate the bootlegging.

Unknown Speaker: But not cure it.

Mr. Spaeth: But perhaps not cure it because the military enjoys a tremendous purchasing advantage as well because of the volumes it buys.

Unknown Speaker: Thank you, General Spaeth.

Mr. Spaeth: Thank you.

Unknown Speaker: Mr. Lazerwitz.

Argument of Michael R. Lazerwitz

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

The military's procurement of alcoholic beverages has generated its share of controversy ever since the Congress, in 1802, included one gill, which is four ounces, of rum, whiskey or brandy in a soldier's daily ration.

Before this Court today the issue is whether the federal government, consistent with federal law, may remain free to purchase its alcoholic beverages for resale in military base clubs and package stores from the most convenient and inexpensive sources, regardless of whether those sources are located in a base's home state.

In our view the states regulations are constitutionally invalid for three principal reasons.

First, Congress has made clear in Section 2488 of Title 10 that the military must remain free to buy its alcoholic beverages at the lowest available price, regardless of where the suppliers and/or distillers are located.

Here the record shows that North Dakota's regulatory efforts conflict with this federal scheme, actually thwart it, and thus violate the Supremacy Clause.

The regulations would in effect require the military to obtain its liquor for its North Dakota facilities from less competitive in-state sources, and on this record, at an increased annual cost of more than $200,000.

Unknown Speaker: Well, now... but that is basically an issue of fact, don't you think, Mr. Lazerwitz?

Mr. Lazerwitz: That is clearly an issue of fact, and in this case there was an uncontroverted affidavit from Kim Keltz, that would be found at the Joint Appendix 25 to 28, and she... her affidavit stated that these regulations would in effect require the government to pay more money.

And the reason isn't that hard to find.

She testified that--

Unknown Speaker: That these regulations would require the government to pay more money?

Mr. Lazerwitz: --Yes.

And the reason isn't... isn't that difficult.

Unknown Speaker: But more money than what?

But... I don't see how that is dispositive of a basic factual question.

If... supposing out-of-state suppliers required to put on this sticker if, what Mr.... General Spaeth, says is true, they cost three cents, they will have to pass that along to the purchasers.

But I don't see, so long as the other state shippers are willing to keep shipping to these bases and simply add on the cost of this, I don't see how the government plan for, you know, competitive purchasing, is defeated.

Mr. Lazerwitz: Well, Ms. Keltz's affidavit, she testified or explained that five of our prime source suppliers said, in light of these regulations, we are no longer going to sell directly to you.

Unknown Speaker: Okay, but do we know how many source suppliers you had?

Mr. Lazerwitz: No, we don't.

The record doesn't say that.

Unknown Speaker: So that proves five wouldn't do it.

If there were 20 suppliers, maybe five not doing it would make no difference.

Mr. Lazerwitz: Mr. Chief Justice, the Court, in the liquor business, with both liquor that is manufactured, distilled, in this country and out of the country, there are exclusive distributors.

You can only buy, for example--

Unknown Speaker: But is this all in the record?

Mr. Lazerwitz: --The only record support, or the record that bears on this aspect, is in the Kim Keltz affidavit, and that is not contradicted.

Unknown Speaker: And you... but, you're defending a summary judgment on the basis of a statement that five out-of-state suppliers said they would no longer supply.

The record doesn't say how many potential out-of-state suppliers there were.

Mr. Lazerwitz: The affidavit further states... no, it doesn't, that is clear.

But the affidavit further states that because of these prime source suppliers would no longer sell us liquor, we would have to buy those supplies from the in-state sources, the distributors.

Unknown Speaker: Suppose that all suppliers would go ahead and put the labels on with the inevitable result that the price would go up.

If that were the case, there would be no interference with getting the lowest competitive price.

Mr. Lazerwitz: In that respect, if in fact every state in the country had one of these... had a labeling requirement, yes.

We would have a much different case.

But there is a second aspect to this case.

Unknown Speaker: But somebody has to be, some suppliers have to say no, and the base would want to... nevertheless, to purchase from those suppliers.

We don't even know whether they would want to continue to purchase from them if they had to pay this higher price.

Mr. Lazerwitz: Whether the government would want to.

Unknown Speaker: Yes.

Mr. Lazerwitz: The government--

Unknown Speaker: They would say okay, so long, friend.

If you don't want to sell under this basis, why, that's... take your business some place else.

Mr. Lazerwitz: --The government, at least in the liquor field, the government... there are only certain entities that sell particular brands.

That's the problem here, one of the problems.

But there is a second aspect--

Unknown Speaker: You don't need to have a... you don't need to have a full line of whiskey to make--

Mr. Lazerwitz: --Well, the whole point of these enterprises on military bases, they are twofold.

One is to provide a service to the servicemen.

And another... and in providing a service you have to provide those products that the consumers demand.

Unknown Speaker: --We are arguing about something that really there are no findings about, so--

Mr. Lazerwitz: Well, there is a second aspect to this case that's equally important in terms of its constitutional invalidity.

And that is, look at the regulations themselves.

The state tells you it cannot regulate the military's procurement practices, but that is precisely what it is regulations seek to accomplish.

And under the Supremacy Clause, the state is not at liberty to take that step.

And the final problem with these regulations is that since the state is otherwise engaging in regulation over the military's procurement practices, the Twenty-first Amendment in those circumstances, doesn't save the state's regulations from constitutional invalidity.

At the outset, Justice Scalia mentioned before, well, what can a state do if there is this problem.

Seven states in this country actually use the most efficient method, which is a tax stamp system.

The state could require all licensed wholesalers in the state to affix tax stamps, which would actually be seals on the bottle, on every bottle of liquor that they sell.

The state could then readily determine whether any retailer, or any other person for that matter, were selling untaxed liquor.

And in that respect, the states that do that... Minnesota in fact doesn't do that if that is at all relevant, but in that respect there would be no burden on the federal government whatsoever, and how the federal government went about buying its liquor wouldn't affect the efficiency of that system.

Unknown Speaker: --But they wouldn't--

--But General Spaeth says that doesn't work at Grand Forks because it is on the border.

Minnesota doesn't require a tax stamp, so you can't tell.

Mr. Lazerwitz: Well, he says that, we don't know.

Unknown Speaker: Well, that is one of the many things we don't know in this case.

Mr. Lazerwitz: Well, the... there is no doubt that because this case was decided on cross motions for summary judgment the record is quite minimal.

But we have... there is more here than just--

Unknown Speaker: Excuse me, as far as the Minnesota liquor is concerned, I assume it is a violation of the states law to bring in untaxed liquor, untaxed by North Dakota, whether it is taxed by another state or not.

Can you--

Mr. Lazerwitz: --There are allegations--

Unknown Speaker: --I mean, I assume they would want to find all liquor that hasn't paid the state tax, whether it is federal liquor or non-federal liquor.

So, the system you suggest would... would be even better than the system that North Dakota has applied.

It will enable you to identify not only the bootleg federal liquor, but the bootleg Minnesota liquor.

Mr. Lazerwitz: --That is true.

And there is another aspect to this case.

In terms of the diversion of liquor, and the government again, because of the limited record, will assume that there is a problem.

And the problem is, as Mr. Spaeth said, bootlegging, the sale... the resale of untaxed liquor.

Assuming that's a problem, liquor on military bases, whether it is bought from out-of-state sources or whether bought from licensed wholesalers in the state, will always be cheaper from liquor off the base in North Dakota.

And that is not only because of the source, but because liquor sold to the servicemen on the base is not subject to a retail tax.

Therefore, under the state's own terms, there is always going to be the potential... potential for diversion, of bootlegging, from the liquor on the base.

But what happens here, the state doesn't impose any labeling requirement for liquor sold from the local wholesalers.

Unknown Speaker: I suppose that also there is probably not as high a mark up on the base either.

But, Mr. Lazerwitz, has the federal government ever required the bases to label the stuff, or to require the supplier to but a base on it... a label on it indicating it is tax-free liquor?

Mr. Lazerwitz: Not that I know of, although the military, the Department of Defense, has a specific regulation telling the servicemen that you cannot... we will sell you the liquor on the base, but if you take it off the base you are subject to state law.

And they are certainly told and it's enforced, not to resell this to unauthorized personnel.

You and your wife can have a drink, but you can't sell it to your buddy off the base, or to anyone else.

Unknown Speaker: No, but you can take it home.

Would it be impossible for the federal government to affix the... spend the three cents and fixing these labels on.

Mr. Lazerwitz: Oh, of course not.

We could easily do it, but there, but the state can't tell us to do it.

Unknown Speaker: The state can't make you do it.

Mr. Lazerwitz: And the state has told us in its brief that it can't tell us to do it.

Unknown Speaker: But you could presumably satisfy... if you were willing to go to that burden, you could probably get the liquor.

If the supplier won't sell it because of the burden, you could probably get it by paying a three cents a bottle.

Mr. Lazerwitz: Actually, no.

In this case we couldn't, because the state regulation, as explained to the distillers, requires them to put the label on before it comes into the state.

And that is what scared off the distillers and the suppliers.

If in fact the regulation were any liquor... I mean, the problem with the state, the state's difficulty is, if they want us to put the label on once it gets into the state, they can't tell us to do that.

And it also won't accomplish what in fact is going on here, which is to change the way the military buys its liquor.

And that's... that is our second point.

It is not simply the problem with the increased cost.

What the state is doing here is the Paul case, is the Leslie Miller case, is the Public Utilities Commission case.

It doesn't matter that the regulation by its terms doesn't apply directly to us.

In fact, this regulation is even worse than the regulations at issue in those cases because those cases, in Leslie Miller, Paul, and the Public Utilities Commission cases, those were general regulations that applied to anyone, any firm.

And there, those firms got caught up in the net because they did business with the government.

This regulation, on its face, tells us who it is seeking to regulate.

It is seeking to regulate the transaction between the federal government and its suppliers.

It is limited just to the people that do business with us.

So, a fortiori it is even more suspect in terms of those cases.

Unknown Speaker: Could the state impose a general sales or use tax on these sales?

Mr. Lazerwitz: They could not.

That is the Mississippi case, the Mississippi cases.

And so I disagree with Mr. Spaeth when he suggests that he... they could readily do this another way.

If they... if the state wants to increase local tax revenue they cannot do that at the expense of the government's procurement of liquor.

That is precisely what this Court held in the two Mississippi tax cases.

What... my point at the beginning with the problem, we... this case is not about the United States trying to disable North Dakota or any other state from policing a legitimate problem.

But there are ways to do it that have nothing to do with interfering with what states can't do, and that is regulate military procurement.

In terms of the dollars, the practical effects are we wouldn't bring lawsuits if the dollars didn't matter.

But here the legislative record, and I mentioned before Title... Section 2488, Congress considered all these... this precise matter.

Congress has told the military, look, we want you to buy beer and wine for the bases only from in-state.

But when it comes to liquor, we want you to buy it from wherever you can get it at the cheapest to save money.

And we need the money because Congress doesn't fund what the profits of these sales go for.

And it is things like child care centers, libraries, photo labs, bowling alleys, the things on the military bases that are for the servicemen's benefit.

And so this is important in that respect.

This money is important.

Going back to the suggestion that is made in the brief, and it was mentioned here, that perhaps the military can just absorb the cost; we could just raise our prices if it costs us more to buy liquor.

In fact, there is a Department of Defense regulation in deference to states and local... and other local liquor sale... entities, we will not sell liquor below 10 percent of the shelf price in any local market.

So, the military works with an effective 10 percent profit margin.

Obviously we can't sell above the local price, one, because it makes no economic sense and, two, the entity that runs these shops now, the Army and Air Force Exchange Service, by regulation, its mission is to provide cheaper goods to servicemen.

Unknown Speaker: And you... that is a 10 percent profit margin, assuming you had to pay the same rent for stores and everything else.

I mean, you're leaving out of that the fact that you are not only selling lower, but you have... you have fewer costs.

Mr. Lazerwitz: Oh, I don't want to downplay the competitive advantages of military procurement, but I just don't want to leave the Court with the impression that we had a simple option of just raising prices.

The fact of the matter is, the military got very smart.

It used to buy liquor, a lot of liquor, in-state from the distributors and paid the additional mark up that is the result of the local tax.

Well, the military became smarter, and said look, if we can buy this in bulk quantities we are going to save a lot of money, and that is what the military does.

And it saves a lot of money.

And regulations like this, that effectively take out certain source suppliers of a market, affects us.

And it ruins the way we do our business.

And that is the problem.

Unknown Speaker: Yes, but it is also true, I suppose, that they... to the extent that there is liquor bootlegged off the base in large volumes, you get the benefit of that by increased sales and increased profit to support your day care centers.

Mr. Lazerwitz: Well--

Unknown Speaker: So you actually have a financial interest in having the state law violated, in the way they are complaining about it.

Mr. Lazerwitz: --Well, no, we don't, Justice Stevens, and there are some practical concerns.

One is, we have rules, and we don't want... and military bases are in communities and in states, and the last thing the military wants is for state governments to yell and complain that the military is running a bootleg operation, because that is going to affect how it does its business.

It makes... it's no... it doesn't make any business sense--

Unknown Speaker: It may not, but if its, if the figures he has given us are correct--

Mr. Lazerwitz: --Well, the--

Unknown Speaker: --it is apparently a serious problem that the Commander of the base should have been able to see was going on out there.

Mr. Lazerwitz: --Well, the example in Hawaii was, I believe it is Hawaii, it is so silly, but the money, the liquor was stolen from the military.

I mean, there are instances where people, the truckers, stop off at a highway before getting to the base and sell the liquor.

Now that is, we don't like that either.

That is something we call in the FBI about.

There is no doubt that there is always going to be the chance of someone buying liquor on the base for $9, and it sells in the local store for $11, becoming an enterprising serviceman and sell it to his buddy for $10.

That is, that is always going happen.

And what we do, and this is what the court of appeals suggested, and I think there is a lot of sense to it, he said instead of litigating these things, and instead of thinking up ways to try to travel through the cases and spend all these years litigating, why don't we just cooperate.

And there are ways to cooperate without litigating something like this.

And the fact that the military, by its regulations, says look, we will cooperate with state authorities.

We don't want bootlegging; it is not in our interest.

We... and there are also other things the military can do.

If, in fact, someone is known to be a bootlegger... that's sort of an odd word, but his privileges can be lifted.

He can certainly be punished by the military if he is a serviceman if he is breaking--

Unknown Speaker: Who's supposed to read these labels, do you suppose?

Who does the state want to read those labels?

Mr. Lazerwitz: --Well, I think the way the regulations are set up, they don't, they could care less.

Because in fact--

Unknown Speaker: Yeah, but they... so, do they think this is really going to be an effective way of curing their problem?

Because, after all... all the label does is repeat what is in the military law--

Mr. Lazerwitz: --Well, I--

Unknown Speaker: --don't sell off the base, don't use off the base.

Mr. Lazerwitz: --Well, one curious aspect of this case, and I am not sure it's my province to get into, but the only, if you read North Dakota's laws, there is no law that says it's illegal to consume liquor off the base.

The only law cited in this case, and it is actually by the amicus briefs, is that provision of the administrative code saying that all liquor imported into the state must be imported through a licensed wholesaler.

Now, the state tells us that it is illegal for a serviceman to have untaxed liquor off base.

We can't dispute that, if that is what the state is now saying.

But there are no penalties if--

Unknown Speaker: Well, do you think there... I would think, I would think if this... putting on this label is not an effective way of curing the problem they want to cure, that you would argue that.

Do you think this is... let's assume there is a problem.

Do you think the labeling is an effective way of curing it?

Mr. Lazerwitz: --The labeling would be... no, it is an incomplete way, and it is an incomplete way for the reason I gave before.

The state doesn't require any labeling for those... we do buy, just for the Court's information, in North Dakota we do buy some liquor from in-state sources.

We don't buy all of it from our warehouse, it is not all shipped to our warehouse.

And so the reason it is an ineffective requirement is there is no label on those... on those, first of all, on the beer and wine.

There is no label on the beer and wine.

And it is always going to be cheaper on the base.

Unknown Speaker: But for the state to think this is going to cure their problem, somebody has to read the label and say gee, I had better obey what this label says.

Mr. Lazerwitz: Well, the servicemen are told--

Unknown Speaker: But that is no different than what the military already requires.

Mr. Lazerwitz: --We tell the servicemen that we'll sell it to you, but if you take it off the base you are subject to state law.

Unknown Speaker: Well, I guess the state wants to be able to identify these bottles off base, if they should come across a cache of liquor in a barn.

Mr. Lazerwitz: Oh, sure, or--

Unknown Speaker: For example, say ah ha, this is untaxed liquor, I see these little orange labels on it which you can't get off.

I assume that that is the purpose of it, isn't it, to identify the bottles--

Mr. Lazerwitz: --Yes, and also... I mean, the example cited in Washington where someone was essentially selling to another liquor store.

You could... a state liquor inspector could walk through a liquor store, go through the inventory and say well, there is no label on this, where did you get it from?

Unknown Speaker: --Well, I suppose it is also not implausible to assume that the sticker requirement is so burdensome that you will have to buy through the local wholesaler.

Mr. Lazerwitz: It certainly... anyone who knows the liquor business would know that you would.

And I'll... I can explain to the Court... I mean, this is the reason, and Justice Kennedy alluded to it before.

The labels, of course, are so innocuous looking and they are so cheap, but it's breaking down the packaging.

A lot of liquor comes directly from overseas.

It is packaged overseas.

If the... if the distiller, it's actually the importer, has to break down the liquor once it comes here... he doesn't care about the labels.

It's the labor of doing this, instead of the way he normally does his business is just ship it to whichever state or ever local distributor he is going to.

And so I don't think it takes any leap of faith to understand why five of our prime source distributors said we are not going to do business with you any more.

And one said well, we'll still do business but we are going to raise our prices.

And another curious aspect of the case is we will... the distributors and why they don't file their amicus brief, or why they are not here, we are going to still buy their liquor.

We are still going to be buying Johnnie Walker Black from Somerset Importers; we're just not going to be buying it directly from the shop.

We're going to be buying it from Somerset Importers outlets in North Dakota.

So Somerset Importers says fine with us.

And that is the problem, because under federal law the price differential from a distiller to a local importer is uniform.

Unknown Speaker: Do you feel you may need amicus briefs to win this case?

Mr. Lazerwitz: At times I did, but I don't think... the government can stand on its own briefs and its own arguments.

Just one final point because the state does rely principally on the Twenty-first Amendment.

Again, we have no quarrels with the idea that the state can take all sorts of measures to police trafficking of liquor within their borders.

But that is not this case because, even as Mr. Spaeth suggested, what they really concerned is what happens on the base.

And that is not something the Twenty-first Amendment gives them the authority to do.

Off the base, that's a different matter.

But on the base and the federal procurement is something that they can't do, and those are the Mississippi cases.

So, no further questions.

Thank you.

Unknown Speaker: Thank you, Mr. Lazerwitz.

General Spaeth, do you have rebuttal?

Rebuttal of Nicholas Spaeth

Mr. Spaeth: I think the Court understands the case, but I thought I would follow up on a couple of points that came up and perhaps the Court is also in doubt about the answer.

The labels, which I showed to you before, are fairly effective because of their bright color in identifying someone who is accumulating large quantities of liquor for bootlegging, and they are subject, in that case, to--

Unknown Speaker: But you don't think it is going to add... be a deterrent effect to... I mean, somebody reads that label and says I should--

Mr. Spaeth: --No.

If they want to, if they are going to bootleg it off the base this isn't going to help.

And it is not going to help in typical situations where someone takes one or two bottles off the base.

Unknown Speaker: --Well, is it... what is the penalty for possessing liquor in North Dakota which has not been purchased through a wholesaler?

Mr. Spaeth: It depends on... on how we find them.

If we found someone with simply one or two bottles, we'd... we would not prosecute.

My office--

Unknown Speaker: Well, is there a violation?

Mr. Spaeth: --There could be.

If we were to prove that that person took... intended then to redistribute it or resell it, that would be in violation of a host of state laws which impose criminal penalties as well as civil penalties.

The criminal penalty is a Class A misdemeanor.

Unknown Speaker: So the penalties we are talking about is possession of liquor for resale?

Mr. Spaeth: That is correct.

We would have to prove, of course, in the case of a single bottle, that they intended to do that, and undoubtedly we wouldn't prosecute in that case.

But that is not what we are concerned about.

We are concerned more with the situation where its large quantities being moved off base, and we can identify them through the use of these labels.

Unknown Speaker: Isn't there some rule you're not supposed to be in possession of untaxed liquor in--

Mr. Spaeth: No, we don't have a possession rule.

But we do have a rule, a law that prohibits possession with intent to resell.

And that is what we're, that is what our regulations are designed to do.

Unknown Speaker: --General Spaeth, I had two questions.

First, in view of the colloquy with your adversary, and you mentioned this, three cents a label, it is fairly clear, is it not, that if the wholesaler has to un, open up all these cartons and stick the labels on individual bottles, it is a substantial burden in labeling.

Mr. Spaeth: I don't know if it is substantial, but it is more than three cents a bottle.

Unknown Speaker: It is a lot more if you have to open... I mean just opening a liquor case takes a little work, you know, and it's... and then getting each bottle--

Mr. Spaeth: I don't know, I don't buy it by the case, but it could be more burdensome.

[Laughter]

Unknown Speaker: --And so that is what we are talking about, is that?

Mr. Spaeth: Yes.

That is what we are talking about.

Unknown Speaker: And the second thing, is there... maybe you have answered it, I just wasn't entirely clear.

Does North Dakota require any kind of stamp on the bottle on which the tax is paid?

Is there anything... evidence it does?

Mr. Spaeth: No, there is no labeling requirement.

Unknown Speaker: Don't many states do that?

Mr. Spaeth: Some states do, but many states do not.

Unknown Speaker: Yeah.

Mr. Spaeth: The last point I wanted to address, and then if there are any questions I will answer them, is the dispute we are having with the government about whether we could tax or not.

And I know the Court doesn't like to listen to quotes, but if you look at your case United States v. Mississippi State Tax Commission, 421 U.S. at 613-614, the Court does say that nothing in the language of the Twenty-first Amendment leads to the extraordinary conclusion that the amendment abolished federal immunity with respect to sales, but it does, certainly does not say anything... excuse me, I am misreading it.

There is the ability to tax, and I think, you know, that is clear based on a whole line of cases that this Court has declared.

Are there any more questions?

Unknown Speaker: Thank you General Spaeth.

Mr. Spaeth: Thank you.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The OYEZ Project

Featured:

324 Liquor Corp. v. Duffy - Oral Argument

Fri, 09 Jan 2009 14:48:26 +0000

Case:

324 Liquor Corp. v. Duffy

Media File:

84-2022_19861103-argument.mp3

Related Transcript:

1986_84_2022_argument.xml

Transcript:

Argument of Bertram K. Kantor

Chief Justice Rehnquist: We will hear arguments first this afternoon in No. 84-2022, 324 Liquor Corporation doing business as Yorkshire Wine and Spirits versus Thomas Duffy.

Mr. Kantor, you may proceed when you are ready.

Mr. Kantor: Mr. Chief Justice, and may it please the Court, this afternoon I would like to establish three points in my argument.

The first is that the New York statutory scheme for resale... for retail liquor pricing constitutes resale price maintenance, in violation of Section 1 of the Sherman Act.

The second point I would like to establish is that the New York statutory scheme is not saved by the state action exemption.

And the third proposition is that the statutory scheme is not saved by the 21st Amendment.

Just some brief background to begin with.

Appellant is a neighborhood liquor store located in Manhattan who was suspended by the state liquor authority for alleged violation of Section 101(b)(b) of the New York Alcoholic Beverage Control law in that the appellant had made two retail sales of liquor below the minimum resale price for such items which had been set by the wholesaler for those items in the month in question.

It is noteworthy that the appellant was found to have violated a statute which ostensibly requires a 12 percent markup over what the statute calls 18 percent markup on the sales in question.

Now, the explanation for this curious phenomenon which I have described is that Section 101(b)(b) does not require a minimum markup over the retailer's actual cost, but rather over something called the bottle price, which is able to be set by the wholesaler freely without any state supervision or control.

However, the economic reality is that the bottle price is not a good proxy for the retailer's actual cost because retailers rarely purchase liquor from wholesalers by the bottle.

They rather purchase by the case.

Unknown Speaker: The bottle price is a real price.

It is the real price at which the wholesaler would have to sell it if he sold it by the bottle.

Mr. Kantor: Yes, Justice--

Unknown Speaker: In which case he wouldn't be a wholesaler, I suppose.

Mr. Kantor: --Well, yes, Justice Scalia.

Unknown Speaker: Who do you charge the bottle price to, anyway?

Who does the wholesaler charge the bottle price to?

Mr. Kantor: He would charge the bottle price to the retailer in the event that the retailer sought to acquire his liquor in less than case lots.

Unknown Speaker: If he buys one and a half cases he gets half a case at the bottle price.

Mr. Kantor: Yes, I believe so.

The example that comes to mind is the rare bottle of 40 or 50 year old Scotch that a retailer may purchase one bottle from a wholesaler or let's say a very exotic brandy or something like that.

The products that were involved here were something called Chatham Gin in a 1.75 liter bottle, which is not an item you would acquire by the bottle.

Unknown Speaker: But it is still not theoretically just a made up resale price that the wholesaler can impose without any real world consequences to himself.

It is a real price, the price at which he will sell less than case bottles.

Mr. Kantor: I would accept the first portion of your proposition.

I will not accept the second.

It is a real price in that it is available should the retailer want to buy by the bottle in the unlikely event.

The second portion of the proposition is that the real world consequences of setting a high bottle price is that you lose very few sales because the bulk of your sales are made at retail.

What we have here, and the record demonstrates this, is the ability of the wholesaler to control the bottle price and the case price and the relationship thereto and thereby to confer in some cases supercompetitive profits of over 30 percent on retailers.

The record further contains actual advertisements which are placed by wholesalers in liquor trade journals in which the wholesaler traders the fact to the retailer as a selling point that we are going to confer upon you markups of 20 percent, 28 percent, 30 percent.

In fact, one ad says we have a whole line of liquor that can give you a 30 percent markup.

So something is awry here.

You do not have a normal situation.

This clearly is not a statute that mandates a 12 percent markup on a real retailer cost.

Now, under the New York statutory scheme that I am referring to, 101(b)(b), the New York Court of Appeals held below as a matter of state law that the statute does not mandate a correlation between the case and bottle prices filed by the wholesaler.

The Court of Appeals also held below that the state does not actively supervise the wholesaler's price filings.

As a result, under the New York statutory scheme, as I said a moment ago, a wholesaler is free to set a high bottle price in relation to his case price, and thereby confer supercompetitive profits upon retailers.

Now, why this is a violation of the Sherman Act is that the Sherman Act clearly condemns resale price maintenance.

Further, this is a combination in unreasonable restraint of Section 1 in that the wholesaler under the statute is given the power to set price with no state involvement, and the retailers are compelled by state enforcement of the statute to adhere to the retail price, minimum retail price fixed by the wholesaler.

Thus you have the same kind of a combination that was struck down in Parke Davis or in Schwegmann, indeed in Midcal.

In fact, the state's opinion does not... the opinion of the state court below does not even discuss whether this is a price maintenance scheme.

It assumes it.

It states clearly this is a price maintenance scheme.

Indeed, in the portion of the opinion below that deals with state action in determining that it was not state action holds that this price maintenance scheme is not actively supervised by the state.

The only reason that we are here is because the state court below found that the statute was consistent with the 21st Amendment.

And I will perhaps address the temperance and 21st Amendment questions to save some time.

In justifying the statute under the 21st Amendment, again, the state court below was silent on the issue of temperance.

This is because there is no legislative history which indicates that the statute was based on temperance.

Unknown Speaker: Mr. Kantor, is it your position that the 21st Amendment will never justify a state interest in the protection of retailers?

Mr. Kantor: Justice O'Connor, it is not my position.

It is my position that in this case the conflict between state law as represented by 101(b)(b) and the federal law as represented by the Sherman Act was needlessly created by the state.

There are many ways in which the state presumably could properly address the question of protecting small retailers under the 21st Amendment.

Unknown Speaker: Under the 21st Amendment you would concede that a state could properly protect retailers?

Mr. Kantor: Yes, I would concede that if the state, for example, were to put in place a mechanism whereby the state determined the liquor prices, that would not cause my problem.

I would further concede that if we had a statute here that sought to concern loss leaders or predatory pricing of some sort, that that would not cause a problem.

I further concede that if you had a statute here which sought to prohibit sales below actual cost, that would not create a problem.

What we have here is that the state has created a retail price maintenance scheme under the guise of protecting small retailers, and thus has needlessly offended the Sherman Act.

If the state sought to approach this some other way, that would be a different case than I believe the case we have here.

I would submit that what we have here is Midcal.

All that has changed is the means--

Unknown Speaker: Well, there is much more of a record here than in Midcal of an effect of helping retailers.

There just wasn't that kind of a record in Midcal, was there?

Mr. Kantor: --I don't know that I would agree that there is more of a record here about preservation of small retailers.

In fact, the state's claim that this statute preserves small retailers is totally unsubstantiated.

The record here is that in 1971, when 101(b)(b) was passed there were approximately 5,000 retailers in the state of New York.

As of July, '86, there were approximately 3,000 retailers.

Therefore it would be very hard to make an argument that this statute has protected small retailers.

In addition, even assuming arguendo that it had, and I think we have established it had not, it is the state that is needlessly creating the conflict here between state and federal law.

It is our position that if the state could address the subject of protecting small retailers in a way that did not violate the Sherman Act that would be a different case than this case.

Unknown Speaker: But if it didn't violate the Sherman Act you wouldn't have any trouble anyway, would you?

I mean, the question is whether the state can do something that does violate the Sherman Act on the grounds of the 21st Amendment.

Mr. Kantor: Presumably the state might be able to do something that might otherwise violate the Sherman Act if it actively supervised what went on.

The Court below stated as a matter of fact, and I believe correctly, that there is no state supervision or control over the prices determined by the wholesalers.

What we have here is the gauzy cloak that the Court talked about in Midcal.

In other words, the state statute creates a gauzy cloak of state involvement in a private price-fixing scheme without any state supervision or control of that.

Unknown Speaker: But that may be a sufficient argument, and I gather the Court of Appeals agreed with you, to dispel the state action exemption, the Parker against Brown, but that still doesn't answer, by itself doesn't answer the 21st Amendment question, does it?

Mr. Kantor: No, but there are two parts to a 21st Amendment question, Your honor.

One is temperance and the other is protection of small retailers.

The court below did not in any way seek to justify this statute on the basis of temperance.

The state comes in here now in the Supreme Court and argues that somehow temperance is involved because by allowing wholesalers to fix prices and to set high minimum resale prices this somehow would encourage temperance.

The fact of the matter is that the legislature in passing this statute in 1971 said that the evidence on the relationship between liquor prices and liquor consumption was very foggy, and we have no reason to believe that the price for liquor is elastic.

Indeed, it appears, and we have lodged studies with the Court in this case, that the price for liquor is inelastic.

That is one of the reasons why the wholesalers are content to set high bottle prices which result in high minimum resale prices, because they don't lose anything.

Unknown Speaker: Surely they lose business to other brands.

It isn't a system that prevents interbrand competition.

You have to have brand loyalty or somebody else can take up the slack by having a lower bottle price, right?

Mr. Kantor: Well, they don't... they clearly don't lose any business to other brands because apparently everybody engages in parallel behavior.

In other words, we are not attacking the statute on the ground that it was a horizontal arrangement, but the record indicates that certainly this vertical price-fixing arrangement certainly has horizontal overtones.

For example, in the instance of Smirnoff Vodka, the product which is one of the two sales involved in our case here, there were three wholesalers, and all of them, while having somewhat different case prices, had the same bottle price, so the fact of the matter is that there is plenty of--

Unknown Speaker: On Smirnoff in particular?

Mr. Kantor: --Because--

Unknown Speaker: Yes, but what about other vodka?

People don't have to buy Smirnoff.

You know, Smirnoff is priced too high, people buy another vodka.

Mr. Kantor: --Well, the answer to that, Your Honor, is that the wholesaler of let's say Gordon's Vodka when he sets his minimum resale price through setting the bottle price, obviously casts an eye over what his rivals are doing vis-a-vis Smirnoff Vodka.

Unknown Speaker: There has to be some smart fellow who figures he will sell a lot more at a lower price.

I thought that's the way the thing works.

Mr. Kantor: Well, Your Honor, many of these dealers don't, have one brand of vodka, they have numerous brands of vodka, so there is an element of horizontality here.

In other words, the wholesaler when he is setting the bottle price of a panoply of vodkas that he is selling is in effect determining the minimum resale price for, let's say, Gordon's, Fleischman's, and Smirnoff, because he is the wholesaler of all three of those.

Unknown Speaker: Anyway, I gather resale price maintenance is per se invalid, whether or not it in fact restricts trade.

Is that right?

Mr. Kantor: That is what this Court has said, and that is what I understand to be the law.

I would like to reserve the balance of my time for rebuttal if I could.

Argument of W. Stephen Cannon

Chief Justice Rehnquist: We will hear now from you, Mr. Cannon.

Mr. Cannon: Mr. Chief Justice, and may it, please the Court, in Midcal this Court confronted a state statutory scheme it found to be a per se violation of the Sherman Act.

The statute could not be saved by either the state action doctrine or the 21st Amendment.

The United States submits today that the faults this Court found with the California wine pricing statute in Midcal are equally present in the New York statute before you.

As In Midcal, the New York statute creates a resale price maintenance scheme.

Liquor wholesalers control the retail price of liquor.

Both the Court of Appeals and the New York legislature specifically recognized that the state sanctions resale price maintenance.

As in Midcal, the real question posed by this case is whether such resale price maintenance is protected from invalidation by the state action doctrine or alternatively the 21st Amendment, rather.

We believe it is saved by neither.

As for the state action doctrine, clearly the first prong of Midcal is met.

Just as clearly, the second prong is not.

We think the New York Court of Appeals was absolutely correct in finding that the State of New York does not actively supervise the setting of retail prices.

To the contrary, the state has abdicated that function to private wholesalers.

To respond to Justice Scalia's question on this point, in fact, the bottle price is not an actual price.

It beers no relationship to the actual price that the wholesaler purchased the liquor from the manufacturer and in fact bears no relationship to what the wholesaler is actually going to sell to the retailer.

So, to--

Unknown Speaker: Are you denying that if the wholesaler sells to the retailer in less than a case he has to charge the bottle price?

Is that what you mean?

Mr. Cannon: --Justice Scalia, no.

The statute surely says that the wholesaler--

Unknown Speaker: Okay.

You are just saying he doesn't sell in less than cases?

Mr. Cannon: --Pardon me?

Unknown Speaker: You are just saying he doesn't in fact sell in less than case lots.

Mr. Cannon: Well, it is certainly possible, as Mr. Kantor said, in rare situations to sell in less than cases.

Certainly in this case the purchases in question were on cases.

Unknown Speaker: The only purpose of my question was distinguishing this case from the normal resale price maintenance, where the price established is simply a price at which the retailer will sell to the customer, and it has no other independent validation whatever, whereas here the bottle price is really in theory, at least, the price at which the bottle will be sold by the wholesaler to the retailer.

Mr. Cannon: But only in theory, Your Honor, and the problem with the statute here is by allowing the wholesaler to independently set the bottle price as opposed to the case price, there is no necessary correlation.

You have to think of the bottle price as merely the mechanism by which this statute allows the wholesaler to engage in resale price maintenance, and that is the crux of the case.

Your Honor, this Court has recognized on many occasions the importance of our strong federal policy of promoting competition.

New York's stated interest in protecting retailers from competition is directly contradictory to and cannot be reconciled with the Sherman Act.

New York's resale price maintenance statute is not protected by the 21st Amendment for several reasons.

First, the state's interest in protecting small retailers from competition is not within the core of 21st Amendment interests this Court described in its Crisp decision.

The time, place, or manner of the importation or use of liquor is not directly implicated here.

Secondly, even the tenuous connection with the 21st Amendment that this statute is supposed to have has not been substantiated.

The Court of Appeals made no finding that the statute has actually protected small liquor retailers.

Third--

Unknown Speaker: Is that essential, Mr. Cannon, for us to conclude that there may be at least some connection between protecting small retailers and the New York statute.

Is it essential that the Court of... New York Court of Appeals had made such a finding?

Mr. Cannon: --Well, Your Honor, I assume it is not absolutely essential.

However, the problem here, as this Court stated in Midcal, when one is balancing or trying to reconcile the strong federal interest in competition against a state's stated interest in protecting retailers, and in this case in protecting them from all competition, then as the Court said in Midcal the state interest must surely be substantiated before you can even attempt to reconcile the two.

In this case there is absolutely no indication, no evidence that in fact this particular statute has preserved small retailers.

Unknown Speaker: The legislature... supposing this appeal were brought a month after the statute was passed, regardless of anything conceivable you would surely make the same statement.

The statute hasn't preserved small retailers because it hasn't yet been in operation long enough to tell.

Mr. Cannon: Your Honor, it is important to recognize here that the interest of the state is effectuating a private price-fixing scheme.

No more and no less.

While it may say it is doing this to protect private retailers, we must know that this in fact flies directly in the face of the Sherman Act.

That being the case, the state has a very heavy burden in order to reconcile the statute, and it cannot do that.

Unknown Speaker: Why is it that the state has a heavy burden, because the statute, as you put it, flies directly in the face of the Sherman Act?

If it flew more laterally would the state have a lighter burden?

Mr. Cannon: Well, Your Honor, if in fact, the state chose to protect small retailers in another manner such as the law in New York which prohibits any retail liquor store owner from having more than one outlet.

That doesn't... that is not a Sherman Act violation, at least that this Court recognizes, and we wouldn't be here today.

Unknown Speaker: The state needn't worry about the situations where it doesn't have a Sherman Act violation.

But is it your position that no matter what the state interest under either Parker against Brown or under the 21st Amendment, if there is a Sherman Act violation the state interest can't prevail?

Mr. Cannon: Well, Your Honor, again, it depends on the type of statute or the type of manner in which the state is trying to advance the interest in protecting small retailers.

Again, here we have a per se violation of the Sherman Act.

Now, as I say, there may be other types of protection that the state may offer such as are in this statute of prohibiting discriminatory discounts or gift allowances or loss leader prohibitions.

But that is not the case here.

We are addressing or looking at a per se violation of the Sherman Act.

And given the federal interest, the strong federal interest in promoting competition we have a state statute that achieves the very opposite, which is to eliminate competition on the retail level.

Unknown Speaker: I take it you say this is really no different than if the state didn't have a statute and the wholesalers just made agreements with retailers.

Mr. Cannon: Your Honor, yes.

The problem with this case, of course, or the statute is that the state has abdicated the responsibility of pricing at the retail level for the wholesalers.

Unknown Speaker: Yes, and it would be no different... this case is no different than if the state had merely authorized the... but not required the wholesalers to set the retailers' price.

Mr. Cannon: Authorized but not required?

Well, Your Honor, of course, if in fact the state itself had attempted to set prices--

Unknown Speaker: I understand, yes.

Mr. Cannon: --That would be quite a different thing.

The problem we have here is this abdication of the state's ability... setting prices.

Unknown Speaker: So a law that permits the wholesaler to set the retailer's price establishes a--

Mr. Cannon: Oh, yes, Your Honor.

I mean, this quote in Parker and in succeeding cases, this clearly said the state does not have the ability to authorize private price-fixing agreements among private parties.

Unknown Speaker: --What would you say to a state statute that simply provided a minimum markup of 12 percent over what the retailer paid the wholesaler?

Mr. Cannon: Justice Stevens, that is quite a different matter in that the discretion afforced to the private parties would be far less, and in fact the parties would have no--

Unknown Speaker: I understand it is different.

I am just curious to know whether you think it would be valid or invalid.

Mr. Cannon: --I think it certainly comes much closer to being protected under the state action doctrine, much closer.

Unknown Speaker: I understand it comes closer.

I just wonder whether you think it is valid or invalid.

0 [Generallaughter.]

If you don't know you can say so.

Mr. Cannon: I don't know, Your Honor, but I would simply say that it would come much closer to state action.

Unknown Speaker: 0 xxx.

Mr. Cannon: Because, Your Honor, in a minimum markup statute a private party would not have the discretion as it has in this case to set prices, and a minimum markup statute such as the statute, the Connecticut statute that the Second Circuit upheld in the Morgan case recently--

Unknown Speaker: In a minimum markup statute all that means is that you must mark your resale price up a certain amount over what you bought it for.

Mr. Cannon: --That is exactly right, Your Honor.

Unknown Speaker: Well, I know, but then the wholesaler always sets a... always determines what price he is selling it to the retailer.

Mr. Cannon: In this statute, Your Honor, in this statutory scheme the State of New York has not required the wholesaler to set its price to the retailer based on what the wholesaler bought the liquor for.

There is absolutely no requirement of any relation--

Unknown Speaker: You mean based on what the retailer bought it for.

Mr. Cannon: --No, sir, what the wholesaler bought it for.

When the wholesaler buys from the manufacturer--

Unknown Speaker: Yes?

Mr. Cannon: --that is when the state supervision breaks down.

The wholesaler then is not required to determine its price to the retailer on any basis of cost.

It can make it up literally out of thin air.

On the other hand, in a minimum markup statute then usually--

Unknown Speaker: Why would it be any different there?

Mr. Cannon: --In a minimum markup statute?

Unknown Speaker: Yes.

Mr. Cannon: Well, in that--

Unknown Speaker: The wholesaler can set his price as high as he wants, as he can sell it for.

Mr. Cannon: --Your Honor, in the Connecticut case, the Connecticut statute, the Morgan case, for instance, there, once the liquor crossed the Connecticut state line, the state then said Mr. Wholesaler, before you are able to... the price that you must sell your liquor to the retailer is a certain amount based over your cost, and that is the key difference here, is the state action controls the price.

In this case the wholesaler is allowed to make up its own price.

Thank You.

Argument of Christopher Keith Hall

Chief Justice Rehnquist: Thank you, Mr. Cannon.

We will hear now from you, Mr. Hall.

Mr. Hall: Mr. Chief Justice, and may it please the Court, the question before the Court is whether New York may impose a statutory minimum markup on retail liquor prices when that statute which prohibits below cost pricing operates entirely within the state and involves no concerted action between independent entities.

There are three separate reasons why this Court should reject appellant's facial attack on the below cost statute and its as applied attack on that statute which is limited to the anticompetitive effects of the Bulletin.

First, there is no contract combination or conspiracy.

Second, the state's direct imposition of the price restraint is ipso facto immune under Hoover v. Ronwin.

And third, the state was acting pursuant to its core constitutional power under the 21st Amendment to structure its liquor distribution system to address perceived flaws in its local market.

Last term in Fisher this Court reiterated that when a statute is challenged on its face under the antitrust laws this Court will strike it on preemption grounds only if it mandates or authorizes conduct which necessarily constitutes a violation of the antitrust laws in all cases or if it places irresistible pressure on private parties to violate the antitrust laws.

As the Chief Justice explained in Norman Williams, such facial condemnation follows only if the conduct contemplated by the statute is in all cases a per se violation.

If it is not, this Court will analyze it under the rule of reason and will not condemn it in the abstract.

In Fisher this Court faced an identical facial challenge to a rent control ordinance in the City of Berkeley under which the landlords claimed that the ordinance formed a combination between the city and its officials on the one hand and landlords on the other, or a horizontal combination among landlords.

As Justice Marshall explained, even though the economic effect of that ordinance was exactly the same as a horizontal combination among landlords, a restraint imposed unilaterally does not become concerted action simply because it has a coercive effect on parties who must obey the law.

New York's statute here operates exactly the same way.

It directly imposes the 12 percent markup on retailers.

Unknown Speaker: But does it depose the 12 percent... does it decide what the 12 percent markup shall be imposed on?

Mr. Hall: Under the statute, yes, it provides a--

Unknown Speaker: It fixes the bottle price?

The state fixes the bottle price?

Mr. Hall: --The state set forth a detailed statutory scheme for establishing the bottle price in which the wholesaler has very limited ability to change and can only change in accordance with those statutory commands.

Unknown Speaker: That mainly governs the time when he makes the change or the announcement.

He can raise his bottle price 50 cents one month after another, can't he?

Mr. Hall: Under the statute he can only raise his price if the manufacturer's price to the wholesaler changes or if its labor costs or other operating costs go up and it secures the permission of the state enforcement agency, the SLA, to make that change, but the wholesaler has no freedom under the statute to change--

Unknown Speaker: What about setting it initially?

Mr. Hall: --Well, for the bulk of the prices under the statute those prices were set by the state in 1967 when it froze the percentage markup over manufacturers' prices.

It is true that with new items or a new wholesaler coming onto the market it has freedom to set that initial price.

At that moment, however, that ceases to be a free market price, and that price is controlled from then on under the statute under rigid statutory controls.

Unknown Speaker: You say he can't change it after that except?

Mr. Hall: Except in accordance with the provisions of the statute, for example--

Unknown Speaker: Which is what, that he is charged a higher price by the manufacturer?

Mr. Hall: --If the manufacturer raises its price to the wholesale--

Unknown Speaker: Right.

Mr. Hall: --then the wholesaler can raise its price by an equivalent percentage.

That is one instance under the statute.

Another instance, with the SLA's permissions, it can raise in response to increased labor operating costs, but only with the permission--

Unknown Speaker: Well, how did the promotional situations that are at issue in this case arise?

Mr. Hall: --Two years after the statute was enacted, the state enforcement agency, the SLA, promulgated a bulletin which permitted the wholesaler to conduct temporary sales as an exception from the normal operation of the statute as construed by the SLA and Rule l6, which mandates that the case and the bottle price under the statute be linked lockstep with only that breakage charge differentiating.

Unknown Speaker: What prices have we just been talking about that can't be altered, the case price or the bottle price or both?

Mr. Hall: Both, under the statute, as opposed to the bulletin.

Unknown Speaker: Yes, but you can't say the bulletin doesn't interpret the statute, do you?

Should we disregard the bulletin or assume it is a correct interpretation of the statute?

Mr. Hall: Well, we are faced here with a facial attack on the statute.

Unknown Speaker: I understand.

Would you answer my question?

Mr. Hall: Under the--

Unknown Speaker: Would you answer my question?

Mr. Hall: --Yes.

Unknown Speaker: Should we assume that the bulletin is a correct construction of the statute or an incorrect construction of the statute?

Mr. Hall: It is a correct application of the SLA's power to make exceptions in the statute, and that is... from the normal operation, and that is exactly how the court below construed it.

It is simply an exception from... it construed... it construed the statute in Rule 16 as linking the two prices.

That is--

Unknown Speaker: Well, you can say that a statute that allows such exceptions is facially invalid.

I mean, you know, if you insist that we do it on the face.

I assume that the ability to make exceptions is part of the face.

Mr. Hall: --It is true that the SLA on the face of the statute has the power to make exceptions, yes, from the statute.

That is true.

Unknown Speaker: Including an exception of this sort that would allow you to fix whatever price you want for bottles.

Mr. Hall: That's correct, but in construing a facial attack on the statute on the antitrust laws this Court has made clear that it will strike it on preemption grounds only if that statute mandates or authorizes conduct which is going to be a per se violation in all cases, and the statute doesn't permit violation of the antitrust laws.

Unknown Speaker: In your view what was it that violated the antitrust laws in Midcal?

Mr. Hall: In Midcal, in Midcal the Court focused on California's statutory requirement that parties enter into fair trade contracts.

That was the first--

Unknown Speaker: They didn't need to do that.

All the... they could either do that or they could post their wholesale prices.

They didn't need to enter into fair trade contracts.

Mr. Hall: --That is correct, but the--

Unknown Speaker: And all the retailers did was post their prices, and that became the wholesale price.

And why was there a retail price maintenance scheme there that was illegal and not here?

Mr. Hall: --The aspect of the resale price maintenance scheme in Midcal that was a per se violation was the fair trade contract.

Unknown Speaker: I just suggest to you that the wholesalers didn't need to enter into fair trade contracts.

They could just post their prices.

Mr. Hall: That's correct.

But if this Court were to face the issue squarely, which it did not in Midcal, of whether a unilaterally imposed price schedule violated the antitrust laws because it formed a meeting of the minds between the manufacturer and the wholesaler in that case, it would decide it differently in light of its reaffirmation of the Colgate doctrine in Monsanto, in Copperweld, and in Fisher.

If the government were not involved a wholesaler under the Colgate doctrine would be perfectly free to announce that it was going to establish a retail... a resale price, and the retailer is free to acquiesce in that price, and the wholesaler is free to terminate that--

Unknown Speaker: What you are suggesting is that Midcal was just wrong.

Mr. Hall: --To the extent that Midcal is read to apply as well to the price schedules this Court would decide it differently today.

Unknown Speaker: Well, that is what... isn't that exactly what the fact was in Midcal?

Mr. Hall: In Midcal there was, according to the state court--

Unknown Speaker: The wholesaler could either bring in these contracts or post a schedule of resale prices.

Mr. Hall: --That's correct.

However, a holding that a filing of a price schedule constitutes a meeting of the minds between the manufacturer and the wholesaler in that case would not be squared with this Court's reaffirmation of the Colgate--

Unknown Speaker: So you are suggesting that we just went off the deep end in Midcal.

Is that it?

Mr. Hall: --I would suggest that that, if it is read, Midcal is read that broadly, this Court would, squarely faced with the issue, would decide it differently, and that is exactly what this Court has made clear in Monsanto and Copperweld and in Fisher itself, that in order to establish a violation of the Section 1 you must have a meeting of the minds.

You must have concerted action.

You must have combination.

You must have a conspiracy, and the Solicitor General has expressly stated in his brier that under New York's--

Unknown Speaker: Mr. Hall, do you think we have also overruled the Schwegmann case?

Mr. Hall: --No.

Your honor, because--

Unknown Speaker: There is no meeting of the mind there.

It was all done by state power on the nonsigners.

Mr. Hall: --Well, as Justice Douglas's opinion makes clear, there was concerted action by the distributors together using their fair trade contract which had been exempted under the Miller-Tidings law as a club to coerce the retailer.

There was concerted action in Schwegmann.

There was concerted action among the distributors.

There was concerted action among the distributors and--

Unknown Speaker: All you needed in Schwegmann was one resale contract that bound the whole trade, and that was the coercive power of government was part of what was at stake, just as it was in Midcal.

But you say we should ignore the governmental power and just look for a private agreement.

That is your understanding.

Mr. Hall: --But in Schwegmann the entire... well, the entire enforcement was by private parties.

It was not... it was not enforced by the government.

But even assuming that this Court were to interpret Schwegmann as not involving any concerted action between the distributors or between the distributors together with the signers, it cannot be squared with the Colgate doctrine.

Unknown Speaker: Well, Mr. Halls do you thinks for instance, a state could pass a law telling all steel producers that they had to charge the price as set by U.S. Steel and just conduct a complete end run around the Sherman Antitrust Act?

Mr. Hall: There would be--

Unknown Speaker: That seems to be the thrust of your argument, and I am not sure that an agreement by private parties is necessary.

How can a state enact a law that tells everybody else they have to charge the price fixed by one individual out in the marketplace.

Mr. Hall: --Section 1, according to its plain language, as this Court found in Copperweld, addresses only concerted action, action which involves a meeting of the minds between... where the state there is unilaterally imposing that price requirement on private parties, even though that may be a gap in the Section l's coverage of restraints of trade, nothing in Section 1 reaches out to cover that.

Unknown Speaker: In order to find that a state law is preempted by the Sherman Act and is incompatible with the Sherman Act, do we have to find that the state law violates the Sherman Act?

Isn't it enough to find that the scheme that it sets up so frustrates the purposes of the Sherman Act, as Justice O'Connor just described, that it is invalid.

We don't have to find that it violates the Sherman Act in and of itself, do we?

Mr. Hall: Yes, you go, Justice Scalia.

That is exactly what this Court said in Fisher.

That was the argument raised by Mr. Smock in the oral argument in Fisher, and as Justice White pressed him on that point, is a conflict with the policy sufficient, because he was not arguing a violation.

This Court squarely rejected it and said in its central language in Fisher there must be a violation of Section 1.

Unknown Speaker: The conduct that it authorizes or requires must be.

Mr. Hall: That's correct.

Unknown Speaker: Not the law violates the Sherman Act.

Mr. Hall: The conduct... here there is no... under the statute--

Unknown Speaker: But the statute ends up being unenforceable because the conduct violates the Sherman Act.

Mr. Hall: --But there is no such conduct here.

There is, as the Solicitor General recognized--

Unknown Speaker: If we disregard Midcal you are right.

Mr. Hall: --To the extent that Midcal was read to apply to the price schedules, but if you look at the language in Midcal, Page 102, this Court was addressing the effect of the repeal of Miller Tidings Act on fair trade contracts, and that is exactly the language it was using in--

Unknown Speaker: On Midcal all you needed was one fair trade contract, too, wasn't it?

Just one, and that bound everybody.

Mr. Hall: --That's correct, but there was at least some concerted action under that aspect of the statute which would--

Unknown Speaker: By one... at most by one retailer, even if they went the fair trace contract route.

Mr. Hall: --That's correct, but looking at the New York statute here there simply is no agreement between wholesaler and retailer.

Unknown Speaker: No, but the difference between this case and your Berkeley rent case is, there a public decisionmaker made a decision that affected the entire market.

There was no enforcement... marketwide enforcement of a private decision.

Here you have got private decisions on what the bottle price shall be to which the statute gives marketwide enforcement effect.

You have got a mixture of the private and public decisionmaking power which you did not have in the Berkeley case.

Mr. Hall: Well, the entire--

Unknown Speaker: And you had that in Midcal, and you had that in Schwegmann.

Mr. Hall: --But in Berkeley the entire ordinance was based on privately set prices which the ordinance--

Unknown Speaker: Has been for themselves.

One landlord didn't fix another landlord's rent.

The only marketwide effect of any decision was a public decision by the municipality, but you don't have that here.

Mr. Hall: --Under the statute we do.

We have the state unilaterally requiring retailers to impose a 12 percent markup.

There is simply no concerted action between any parties, and indeed throughout the argument by both appellant and by the solicitor general they have pointed to no agreement, to no concerted actions, to no combinations between the private parties.

The second independent ground to affirm is that the state legislature's direct imposition of the price restraint is Ipso facto immune under Hoover, and a third ground to affirm is that the state acted pursuant to its core constitutional power under the 21st Amendment to structure a liquor distribution system to meet its perceived local needs.

Liquor--

Unknown Speaker: Do you think that Midcal decided that the conduct authorized in the California statute violated the Sherman Act?

Mr. Hall: --In Midcal the Court did assume a violation when it was discussing the Sherman--

Unknown Speaker: Assumed, assumed, but did it decide it?

Mr. Hall: --discussing the 21st Amendment.

Unknown Speaker: Did it decide it or it just assumed it?

Mr. Hall: No, it reached a decision that there was a violation of the Sherman Act.

when it was discussing the 21st Amendment it was discussing it in the context of a violation.

Liquor is different.

Liquor is different from any other commodity, because it is the only commodity singled out by the Constitution for special treatment.

It is a specific, express grant of constitutional power to states to regulate liquor.

There is one basic theme that runs through every... has run through every 21st Amendment case since adoption, which is, the state has wide latitude, indeed, virtually complete control over how to structure its liquor distribution system within its borders.

There is no need in this case to balance the state's exercise of its core constitutional power against any other federal interest, because there is no conflict with any other part of the constitution.

There is no violation of the antitrust laws, and--

Unknown Speaker: What if we think there is a violation?

Mr. Hall: --If this Court does consider that there is a violation then it would engage in balancing under the method set forth in Justice Brennan's unanimous opinion in Capital Cities where the state's interests are closely related to its 21st Amendment power.

The state's regulation may prevail, notwithstanding that its requirements directly conflict with express federal policy, and that is exactly what we have here.

We have an exercise of the state's core power under the 21st Amendment, as this Court has reiterated--

Unknown Speaker: Well, Midcal didn't seem to treat it as part of the core power in its discussion, did it?

Mr. Hall: --In Midcal this Court gave great weight to the state court's conclusions about state law and the state interest as well as great deference to the factual findings of the California court because that is what it does in the absence of exceptional circumstances.

Here the state, contrary to the situation in California, New York State's highest court, has found that the minimum markup statute advances an important public policy.

It pointed to legislative findings.

The state acted in response to 21st Amendment concerns to structure its liquor distribution system, and the state balanced that important public policy being served by the statute against the federal interest under the antitrust laws and came to the directly contrary conclusion, and applying the same method of analysis that this Court did in Midcal this Court would come to the same conclusion that the state court was correct in its interpretation of its state interest.

It is quite different from Midcal, Where the California court came to a completely different view about the importance of its statutory scheme, because there it found that the statute was contrary to public policy.

It found that there were alternative means such as below cost statutes.

That is exactly what we have here to achieve the same goal.

It found that it would not... that the method that California chose would not advance its purposes, but here it is a completely different situation.

And the Court--

Unknown Speaker: Could the state have met its goal of helping retailers by having simply a minimum markup statute in place?

Mr. Hall: --The state can meet its statutory goals under a simple minimum markup.

It could choose a variety of means, but it doesn't--

Unknown Speaker: Is there anything in the record then to justify the additional provision in New York for the price maintenance scheme as opposed to a minimum markup?

Mr. Hall: --There is nothing directly in the record on the necessity for the bulletin.

The bulletin introduced a... perhaps a needed element of flexibility at the wholesale level in what would be otherwise a rigid pricing system, but that is well within the state's core powers under the 21st Amendment to structure a liquor distribution as it sees fit.

It can choose a monopoly.

It can choose to sell liquor by the drink.

It can sell it in package stores.

It can choose the places and the times.

It can limit the number of locations or provide unlimited, or it can choose a system, as New York did here, of small retailers coexisting with large ones.

Unknown Speaker: Mr. Hall, why don't you argue that this is just a minimum markup law?

what else is it?

Mr. Hall: That is exactly what the statute is, and that is exactly what we did argue in our brief, that this is exactly like minimum markup laws in other states, which have never been held to be per se violations.

Unknown Speaker: It requires a minimum markup on the bottle price but it is still just a minimum... is still just a requirement for a markup on whatever price the wholesaler sets.

Mr. Hall: Exactly and that is exactly the argument we--

Unknown Speaker: Yes, but a markup usually means a markup on what he pays, not on what he says.

I mean, the problem here is, it is not a markup on what he pays.

He pays the case price and charges the markup on the bottle price, which is not the price he pays.

That is not a markup.

I mean, you can call it a markup, but it is not.

Mr. Hall: --Under the statute it is directly related to the price that he pays with the only difference the $1.92 per case breakage charge, but that is a statutory formula that New York used under its markup law, just as each state with a minimum markup law has chosen its own statutory formula for defining cost and which factors go into it.

All are equally artificial.

There is nothing--

Unknown Speaker: No, they are not equally artificial.

This bears no relationship to what he paid for this bottle that he sold.

He bought the bottle at a case price.

He has to charge the markup over the bottle price, even though he didn't buy it at the bottle price.

That is just no relationship.

It is not a markup.

Mr. Hall: --Under the statute it bears a direct relationship as distinct from the bulletin.

It prepares an--

Unknown Speaker: The statute as distinct from the bulletin?

Mr. Hall: --Under the statute the bottle price and the case price are the same except for the imposition of a breakage charge.

Unknown Speaker: Fine.

Mr. Hall: Which is a charge for opening a case to sell by--

Unknown Speaker: Why aren't we dealing with the bulletin?

Mr. Hall: --Well, the bulletin and the statute should be considered distinctly because we have a facial attack on the statute and we have an as applied attack.

The as applied attack is simply based on the anticompetitive effects of the bulletin, which is an entirely separate issue.

It is true that under the bulletin the wholesaler does have some ability to effect the component of the price.

It is different from the statute, which is a simple minimum markup.

Unknown Speaker: I take it your argument, you would make the same kind of an argument if the wholesaler... if there wasn't any state imposed minimum markup but the state just permitted wholesalers to set the resale price that retailers had to sell at.

Mr. Hall: That is exactly what this Court did in Colgate.

Unknown Speaker: Yes.

Yes, so that is... and that is what you are arguing.

Mr. Hall: That's correct.

Unknown Speaker: And there is no difference between that situation and this minimum markup situation.

Mr. Hall: None at all.

Unknown Speaker: And so again we get back to Midcal and Schwegmann.

Mr. Hall: The result below was correct for three reasons.

The result below was correct because there was no meeting of the minds under the statute or the bulletin.

The result below is correct because the state directly imposed its price restraint as an act of the sovereign, and the result below is correct because the state acted pursuant to its core constitutional powers over which... to structure a liquor distribution system to address what it perceived as flaws in the market and correcting its failures and aiding its victims.

Thank you.

Rebuttal of Bertram K. Kantor

Chief Justice Rehnquist: Thank you, Mr. Hall.

Mr. Kantor, do you have something more?

You have five minutes remaining.

Mr. Kantor: Unless the Court has further questions, I have no further argument.

Chief Justice Rehnquist: Very well.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Allenberg Cotton Co. v. Pittman - Oral Argument

Thu, 23 Aug 2012 18:27:02 +0000

Case:

Allenberg Cotton Co. v. Pittman

Media File:

73-628_19741017-argument.mp3

Related Transcript:

73-628_19741017-argument

Transcript:

Argument of John Mcquiston Ii

Chief Justice Warren E. Burger: We'll hear arguments next in Allenberg Cotton Company against Pittman.

Mr. McQuiston, you may proceed whenever you're ready.

Mr. John Mcquiston Ii: Thank you Your Honor.

Mr. Chief Justice and may it please the Court.

What this case involves is whether the State of Mississippi can require foreign corporations to obtain a license to buy cotton in Mississippi and ship it from the state.

My client, the Allenberg Cotton Company, buys cotton in the State of Mississippi without having any employees in the state, without an office in the state, without owning any warehouses in the state, and without even paying for the cotton in the state.

And he buys that cotton for the purpose of shipping every bale of cotton that he buys out of the State of Mississippi.

Allenberg made the contract that's involved here following an industry pattern which has been established over the last 100 or more years, like almost every other cotton merchant in the sale.

Allenberg bids for the cotton over the telephone in a prior year, they did this over the telegraph and it submits those bids to local cotton brokers all over the south and makes contracts in that manner without qualification to do business in the various states where bids are submitted and contracts are made.

This pattern of activity follows a pattern which has been protected under the Commerce Clause, particularly in the agriculture merchandizing industry as shown in the decisions of Dahnke-Walker Milling Company, Lemke versus Farmers Grain Company and Shafer versus Farmers Grain Company.

All of which established the rule that making purchases to back commodities for shipment out of a state is an activity which is exempted from state licensing and qualification requirements by the Commerce Clause.

This principle was articulated recently by this Court in the Eli Lilly decision.

In that decision, all men of the justices recognized the principle that Commerce Clause guarantees free access to all markets in the United States and that as long as a foreign corporation limits it since activities in a state to those essential activities which a necessary to transact business in interstate commerce, that corporation should be free from local licensing of qualification requirements.

Justice William O. Douglas: What case is that?

Mr. John Mcquiston Ii: The Eli Lilly decision Mr. Justice Douglas.

Justice William O. Douglas: Eli Louis?

Mr. John Mcquiston Ii: Lilly.

Justice William O. Douglas: Lilly.

Mr. John Mcquiston Ii: I'm sorry I have a very bad cold.

Justice William O. Douglas: Do you cite it in your brief?

Mr. John Mcquiston Ii: Yes, I do.

The principle we cite it for is the principle that --

Justice William O. Douglas: Yes I see it, thank you.

Mr. John Mcquiston Ii: Thank you.

What Allenberg did in this case fits into a very well established industry pattern and in of the pattern of existing law.

In January 1971, Pittman, a substantial Mississippi cotton planter went to a local cotton broker and I asked him to get a certain price for his cotton.

The local cotton broker picked up the phone and telephones the Allenberg Cotton Company in Memphis.

And after some negotiations over the telephone, a contract was entered into it.

As is the costume in the trade, Allenberg immediately might off setting sales of cotton on the New York Cotton Exchange and to its mill customers outside the State of Mississippi.

Justice Potter Stewart: Whose agent if any by is the broker?

Mr. John Mcquiston Ii: The broker is really a joint agent.

The broker has a clientele like all of these brokers across the south.

They are the local cotton producers.

They come to him or he may go to them and the broker puts the buyer and sell it together and he's paid a per bale commission which is added to the price of the cotton.

Sometimes, it comes out of the farmer's pocket.

Sometimes the commission comes out of the buyer's pocket that in all cases, it's added to the price of cotton.

Justice Potter Stewart: And the title is never in the broker's name isn't?

Mr. John Mcquiston Ii: The title is never in the broker's name.

Justice Lewis F. Powell: This broker hack it for others also?

Mr. John Mcquiston Ii: Yes he did in prior years in the particular year involved in this case, he did not buy any cotton for any other company, but we didn't restrict him.

He was -- it was his own choice.

He actually acted as a merchant himself.

He was buying cotton for his own account during that year and acting -- it running his own little small cotton merchandizing business.

And on the side, he was contracting cotton for Allenberg.

Justice Potter Stewart: But he acted for several producers always --

Mr. John Mcquiston Ii: He acted for a number of different farmers in that year.

Justice Potter Stewart: But only for you as the buyer in that year?

Mr. John Mcquiston Ii: Only for us, but that was his own choice.

It was just a coincidence.

Justice Potter Stewart: He wasn't -- you didn't have any --

Mr. John Mcquiston Ii: We have no control of what he did and did not act of the --

Chief Justice Warren E. Burger: Who paid the commission here?

Mr. John Mcquiston Ii: In the commission here was added to the invoice price of the cotton and Allenberg paid the full price of the cotton including the broker's commission.

Chief Justice Warren E. Burger: You indicated that sometimes it was either divided or --

Mr. John Mcquiston Ii: Fully --

Mr. John Mcquiston Ii: Farmer abated?

Yes, Your Honor.

In some cases where the farmer invoices his cotton directly to the merchant himself by attaching his negotiable warehouse for seeks to a draft and forwarding in directly to the buyer's bank, he may receive the cash and have to go to the broker and pay him his commission.

In this case, the transaction was handled through the broker's office and so what the broker did was he advance his own money to the farmer and then attached the negotiable warehouse receipts to a draft and drew on Allenberg's bank in Memphis, and that draft included his commission.

Under this contract that Pittman and Allenberg made, Pittman was obligated to follow the normal industry practice of warehousing his cotton after it was harvested.

Justice William H. Rehnquist: Mr. McQuiston, before you get to the harvest point, what control did the contract give Allenberg over Pittman's course of cotton collaboration?

Mr. John Mcquiston Ii: The contract specifies that he would follow normal good forming methods.

It's a contractual farmers' that he didn't -- if he didn't leave up to, he would be subject to breach of contract suit.

The only actual controlled that Allenberg had over, but they had no control over his farming methods except insofar as he was obligated to use normal good farming methods.

If the ginning process, some farmers from time to time have taken wet cotton and ginned it at a two high, a temperature went ruin the cotton, and so the contract specifies that the buyer will have the option to control the ginning temperature.

Justice William H. Rehnquist: Would Allenberg either by contractor by Mississippi law have a lean at any point on Pittman's land or --

Mr. John Mcquiston Ii: On the going crop -- no Your Honor.

Justice Potter Stewart: When was the contract made?

Mr. John Mcquiston Ii: The contract was made in January before Pittman ever planted a single seed.

Justice Potter Stewart: And what is the cotton you seized in that that part of this?

Mr. John Mcquiston Ii: The planning is the spring in April.

Justice Potter Stewart: April?

Mr. John Mcquiston Ii: And then the harvest would be September, October anywhere from -- it begins at the point depending on the weather and end as late of March -- I mean sorry, as late as December, January.

If weather is wet last year, we didn't get cotton out of the fields until March.

Justice Potter Stewart: And the contract was -- for what so many bales or --

Mr. John Mcquiston Ii: It was for all --

Justice Potter Stewart: For the entire product --

Mr. John Mcquiston Ii: -- they produced on a 700 acres of land.

Justice Potter Stewart: Whatever was produced --

Mr. John Mcquiston Ii: Whatever was produced.

Justice Potter Stewart: At so much per bale, was that it?

Mr. John Mcquiston Ii: At so much depending on the quality of the cotton.

They're had so much a bale.

Chief Justice Warren E. Burger: There were several grades, were there not?

Mr. John Mcquiston Ii: There were several grades.

Now, the -- when the -- after the cotton is put in the warehouse, a sample is cut from the cottons and sent to the Department of Agriculture.

The US Department of Agriculture grades the cotton and since they are independent, that's used to determine how much the farmers paid for his cotton.

Another sample is cut from the bale of cotton and is mailed by the farmer to Memphis.

Now, once the cotton merchant has the sample in Memphis and the negotiable warehouse receipt, he uses those samples to make up shipping lots.

Now, the ultimate consumer of cotton is cotton mills and they use it in -- traditionally 100-bale lots.

Each bale in a 100-bale lot has to match that another 99 bales in grade, staple and color.

Otherwise, it's just not useable.

Now, the cotton does not come out of the fields in 100-bale even-running lots.

One of the primary functions of the merchant performs is grouping the cotton together in the even-running lots.

Chief Justice Warren E. Burger: You speak of the merchant now who --

Mr. John Mcquiston Ii: The cotton merchant in Memphis, Allenberg.

Chief Justice Warren E. Burger: Memphis.

Mr. John Mcquiston Ii: It perceives the samples in Memphis, uses them to make up 100-bale shipping lots of even-running cottons.

It's all the same.

And at that point and not before then, is anybody in the industry able to determine where that cotton is to be going?

It can't be taken from the fields and put on railroad cars.

It has to go into the warehouse, a sample has to be cut, group with another like bales, and then shipping orders issued.

The shipping orders are issued from Memphis and they're a long list of the bales by number.

Each bale is treated individually and the warehouseman takes the list and mechanically pulls the bales out and puts them on the railroad car down from North Carolina to port of New Orleans web.

The point of that is that the cotton cannot move out of the State of Mississippi until it's been warehoused and classified in the manner that's -- that Allenberg does in this case.

Now on the existing law, the activities that Allenberg performed in this case who making this contract as a commodities merchant are recognized as essential and integral parts of the National Commodities Merchandising System and of interstate commerce.

The Commodities Exchange Act, 7 U.S.C Section 3 states that a transaction in respect to cotton shall be considered to be an interstate commerce, if the transaction is a part of the current of commerce usual in the commodity's trade including all cases where the purchase is for shipment out of the state.

The Commodities Exchange Act follows the definition of commerce, interstate commerce which was established in the leading agriculture marketing cases of Dahnke-Walker Milling Company, Shafer versus Farmers Grain, Lemke versus Farmers Grain.

This case that's before the Court today is stronger than those cases.

In Shafer and Lemke, the Supreme Court held that purchases to buy wheat were made in interstate commerce and not subject to local licensing of qualification requirements, eventhough the buyers in those cases were located in the state had employees in the state, offices in the state, paid for the wheat and the state received delivery of the wheat in the state, and eventhough in local grain elevators in the state.

And in the Dahnke case, the contract between the selling farmer and wheat purchaser in that case was held to be an interstate commerce, eventhough the farmer did not know he was making a contract within out of state company.

And in here, Mr. Pittman knew from the beginning that he was making a contract with Allenberg Cotton Company, a Tennessee Corporation.

Justice William H. Rehnquist: In Dahnke, the sale was FOB, wasn't it?

Mr. John Mcquiston Ii: The sale was FOB course in Dahnke, but the sale in the Shafer and Lemke cases was delivery at the grain elevators which served the same function in the wheat industry that the cotton warehouse is doing in car industry.

Allenberg's purchased -- well, the facts of this case are also strong within this wheat cases because in the wheat cases, they said it's approximately 90% of the wheat left the State of South Dakota.

The 10% was use locally in Mississippi.

Every bale of cotton or virtually ever bale that's produced in the state is shipped from the state.

There is just no significant amount of milling in the State of Mississippi.

Cotton is one of the nation's most important exports.

In 1973, there was seven million bales of cotton exported by companies just like my client.

Out of a total US cotton crop of 12 millions bales, that 12 million bales in 1973 of that 12 million bales, 1.8 million bales were raised in Mississippi alone.

And in 1973, the time this decision was rendered by the Supreme Court of Mississippi, one million bales of cotton in the State of Mississippi were under forward contracts identical to the one before the Court in this case.

For this reason, the decision on the Mississippi Supreme Court in this case hit our industry like a bombshell.

In 1973, the United States Department of Agriculture had mounted an intensive campaign to convince everybody in the cotton industry to enter into forward contracts.

That is contracts that are made in the early part of the year for the farmer producers of plants this cotton.

This campaign was so successful in 1973.

The three out of every four bales of cotton raised in the country was subject to contracts like this one in this case.

The decision in this case which held in the middle of the year that a foreign cotton buyer could not enforce his contract in the Mississippi court, literally threatened to ruin our entire industry.

If this decision has stood in just Mississippi alone which it did not, thanks to the innovation of the federal District Courts there.

A large part of our industry would have been destroyed and I believe the entire nation would have suffered.

Justice William H. Rehnquist: Why would you not have gone ahead and qualify it if the Supreme Court of Mississippi decision have stood?

Mr. John Mcquiston Ii: We did qualify immediately thereafter, but under the decision below, subsequent qualification does not cure the defects.

You can never sue on a contract made in Mississippi.

Justice William H. Rehnquist: But your contract -- I would think you could sue on contracts made after your qualification in Mississippi?

Mr. John Mcquiston Ii: Yes we could, but this in 1973 where made before this decision was announced.

Justice William H. Rehnquist: But I mean as to the future.

I don't see why would have any grade impact.

Your contracts are annual ones aren't they?

Mr. John Mcquiston Ii: Well, it has an impact in this manner Mr. Justice Rehnquist.

Under present Mississippi law with this no cure or statute, there's a market barrier raised around the boarders of the state.

A cotton company that's not qualified to do business in the State of Mississippi cannot mail even submit a bid to buy cotton there.

Justice William H. Rehnquist: But you have qualified?

Mr. John Mcquiston Ii: We have, yes.

And companies that -- large companies of course will qualify and establish themselves in the markets, but they won't be the free competition.

They won't -- a farmer in Mr. Pittman's position today can't pick up the phone and shop his cotton with any cotton merchant in the country.

He's limited to those who previously qualified to do business from Mississippi.

Justice Byron R. White: Well, isn't the burden of qualifying is nothing as vague isn't it?

Mr. John Mcquiston Ii: The burden is a -- these are small companies Mr. Justice White and they are 500 to a thousand of them and the administrative cost in our industry are very significant factor in determining what areas of competition we operate in.

The essential tools of the cotton merchant are desk and a telephone in a good bank line of credit.

And we --

Justice Byron R. White: And not a lawyer?

Mr. John Mcquiston Ii: And not a lawyer.

No, I wouldn't say that because the Allenberg Cotton Company is a matter of fact is headed by Yale lawyer.

These companies are not qualify --

Justice Byron R. White: Free traders?

Mr. John Mcquiston Ii: A free trader, absolutely under the decisions of this Court in the Dahnke-Walker case and Lemke and Shafer.

This administrative cost I know when after this decision, we have to qualify Allenberg in every state.

Justice Byron R. White: I wonder if what you really worried about was not disqualification, but other burdens that this might fore tend, might threatened.

Did you use like taxation?

Mr. John Mcquiston Ii: We're not worried about it at all.

As a matter of fact, I'd be happy to pay whatever Mississippi taxes were due because they're non-due.

The state of tax --

Justice Byron R. White: What if the Mississippi designs a tax, put an excise tax on cottons store in Mississippi, in warehouses in Mississippi, even if it's owned by Allenberg?

Mr. John Mcquiston Ii: That would be all --

Justice Byron R. White: You would think they have jurisdiction to do it?

Mr. John Mcquiston Ii: Yes.

Justice Byron R. White: But you -- so you think the tax cases and the qualification cases are --

Mr. John Mcquiston Ii: They have to be separated and they always have been for this reason.

Chief Justice Warren E. Burger: I suppose the economic basis for your response is that Mississippi must remain competitive with the other states on the cotton market?

Mr. John Mcquiston Ii: Yes, sir.

We supposedly a common market in this country and --

Justice Byron R. White: But you don't think storing cotton in a state is intrastate business?

Mr. John Mcquiston Ii: We don't store the cotton there Your Honor.

The farmer that places it there --

Justice Byron R. White: Would you take title to it, it's in a warehouse in Mississippi.

Mr. John Mcquiston Ii: That's exactly right; warehouse --

Justice Byron R. White: And you get the warehouse receipts and are you saying there's no -- there's no --

Mr. John Mcquiston Ii: There's a small --

Justice Byron R. White: No substantial period of time that the lapses between that -- could be the warehouse receipts to you in the shipment are the same?

Mr. John Mcquiston Ii: Not in relation to the industry practice.

It's a --

Justice Byron R. White: Well how long?

How long was the cotton stored in Mississippi?

Mr. John Mcquiston Ii: The cotton crop begins to come in, in September and October, and as soon as those receipts have began to be received by the cotton merchants, it's moved down if the -- in it's a continuous milling --

Justice Byron R. White: What's the average length of time?

What's the average length of time --

Mr. John Mcquiston Ii: Well, there's nothing in the record indicating that.

Justice Byron R. White: Well, for all we know then, the cotton stored there in your name for quite a while?

Mr. John Mcquiston Ii: Well, for all that you know, I might replay the cotton losses immediately in an --

Justice Byron R. White: Well, I know, but do why do we do invalidate state statute on some assumption like that?

Mr. John Mcquiston Ii: Well, I don't think this case turns on how long the cotton stays there.

Justice Byron R. White: Well, that's what I mean when we get to.

So your answer to my question awhile ago is it wouldn't make any difference if you stored the cotton in -- warehouse the cotton in Mississippi for a long time?

Mr. John Mcquiston Ii: No, it would not Your Honor because the purchase contract, the making of the purchase contract is the protected activity here.

It's entering in to this contract.

Justice Byron R. White: You mean eventhough -- eventhough it was contemplated that Allenberg would not take the cotton on the state for a long time, but only when its future's contracts matured, even if you were planning --

Mr. John Mcquiston Ii: Even if you made that assumption, I would say that this contract was an interstate commerce when it was --

Justice Byron R. White: Well, what if you're wrong on that -- how about this case?

Mr. John Mcquiston Ii: In this case, the cotton was never delivered, so there's no evidence in the record is to how long it would've stay.

Now as industry practice see is that --

Justice Byron R. White: Well, who gets the benefit of that without knowing, the state or you?

Mr. John Mcquiston Ii: I believe that we would be -- we know from the industry practice as describe in this record that the cotton moves out of the state all during the succeeding weeks after it's harvested.

It moves out just like the wheat crop did in the Shafer case and the Lemke case.

Justice Byron R. White: Well those cases, are they when the farmers sold it, put on a common carrier and headed out of the state?

Mr. John Mcquiston Ii: No, the farmer sold the wheat in Shafer and Lemke to a grain elevator operator who stored it there and then when he made a carload lots and shipped that out afterwards.

In 1973, the price of cotton back unhappy coincidence rose to highest levels since the civil war.

And at the very same time, the decision in this case below was announced which cut across all the existing contracts in our industry and literally faced our industry with bankruptcy.

Disaster was avoided because of the honesty of most cotton farmers in the south and also because of the decisive action of the federal District Courts in Mississippi and Alabama held in the middle of the delivery season that these contracts were made in interstate commerce and they maintain the pre-flow law of cotton out of those states under court order and under injunctions.

Despite the fact that this case is typical of the industry practice and despite the fact that Dahnke-Walker Milling Company case rejects the title passage analyst, Pittman seizes on one aspect of this case and builds his entire argument around it, and that is the fact that title passes to Allenberg, and for short period of time as Mr. Justice White pointed out, we have title to cotton which is located in a compress and warehouse.

Justice Byron R. White: And would you think it might be subject to a local taxation?

Mr. John Mcquiston Ii: Which I -- I think that's an open question.

And I think if this Court gets in to decide in qualification cases on the basis of whether or not the goods are taxable, you really open up a Pandora's box.

Justice Byron R. White: Or in accordance we put there, it might be subject to service or processing the state?

Mr. John Mcquiston Ii: Yes sir and that too.

Cotton, as I've tried to point out is not fungible and the warehousing step is absolutely essential to buying cotton in the State of Mississippi and shipping it from the state.

Cotton cannot leave the State of Mississippi until it's gone through this process.

This case raises the question that was post in the Robbins versus Shelby County Taxing District case, and that is if the Commerce Clause guarantees a buyer of cotton access to Mississippi market to make its contracts to back cotton and remove it from the state, and how is the Allenberg Cotton Company to go into the Mississippi market in buy cotton and move it out of the state without qualifying to do business?

Another answer to this argument of the -- of appellee is that it proves too much.

The appellee's argument would mean that cotton buyers and buyers of wheat and other foreign products that are stored for which negotiable warehouse receipts are now freely transferable could not just buy or make a contract to buy any negotiable warehouse receipt in the country.

They would now have to look behind the receipt to determine whether they will qualify to do business in the state where the goods were stored, which would mean that negotiable warehouse receipts would not longer be freely negotiable.

Under the decision below, a very substantial trade barrier has been erected around the State of Mississippi.

No buyer who is qualified to do business in the State of Mississippi could now submit a bid to buy cotton there because if he submitted the bid and made a contract, a one-way contract would be created, which could be enforced against the buyer, but if the farmer's option but the buyer could not enforce it against the farmer.

Justice Potter Stewart: What is involved in the registering to do business in Mississippi?

Mr. John Mcquiston Ii: Filing a number of informational papers about the corporation's activities and the basic corporate information and some fees and renewing that each year.

Justice Potter Stewart: It is annually renewed?

Mr. John Mcquiston Ii: It is annually renewed and this is the thing that gets to be such a burden.

For example, when we qualified Allenberg after the decision in this case in the 17 different states where it shops for cotton, it took us about two months and we had the employee in the counting.

It didn't take us two months working everyday, but I mean the period spread out over that long in time.

And we had the CT Corporation sending us forms and we have to get an accountant coming in and fill out the forms for us and we got to do that every year.

Now as a result as a practical matter, Allenberg just going to quit doing business in the couple of state where it has a very manner interest because it's just the administratively too expensive to compete in those states that it has to qualify.

Justice Lewis F. Powell: Is the annual qualification fee at Mississippi, a flat fee or it's graduated in accordance with business or --

Mr. John Mcquiston Ii: I'm not sure Mr. Justice Powell.

I'm sorry, I can't answer that.

And of course in the various states, would -- there are upgraded fee.

And of course, we're talking here not just about qualifying in Mississippi, but in every state in the country.

In other industries that have to qualify -- they would have to qualify at this decision we made at the law of the land, we'd have every variation in the 50 states.

Justice Lewis F. Powell: This can't say in technique of doing business obtains in all 17 in these states with forward contracts and warehousing in the states?

Mr. John Mcquiston Ii: Yes Your Honor.

It's identical for the entire industry.

Justice Potter Stewart: Not every state however --

Mr. John Mcquiston Ii: Not every state has this “no cure statute.”

Justice Potter Stewart: -- that has this no cure of sanction?

Mr. John Mcquiston Ii: The no cure sanction is what is got our industry on the edge because what is happened is when these contracts were made in 1973, they were immediate hedged by off setting sales in the New York Cotton Exchange.

Those hedges are maintained with margin accounts in the New York Cotton Exchange that a bank financed.

Everything in this industry is financed in about a 90% basis.

Now, the whole principal of the National Agricultural Marketing System is that the hedge will be valid, the sale on the cotton exchange and the purchase in the field from the farmer.

In the Mississippi Supreme Court, all of a sudden told us the purchase contracts were no longer valid, and we're looking at huge loses on the New York Cotton Exchange that loses what would have destroyed the industry, a large part of it and cost substantial loses to the banks that financed these purchases.

And --

Justice Potter Stewart: Excuse me.

Mr. John Mcquiston Ii: Excuse me.

Justice Potter Stewart: I just been little untutored and unsophisticated in this business, I'm curious.

Maybe, I won't be able to understand it at all, even after you explain it.

But as soon as Allenberg signed this contract to purchase cotton from Pittman --

Mr. John Mcquiston Ii: Yes.

Justice Potter Stewart: And so in January, even long before any seed that even been planted, it made an offsetting sale of the New York Cotton Exchange.

Mr. John Mcquiston Ii: Yes sir, the same --

Justice Potter Stewart: Of what?

What is -- of cotton futures?

Mr. John Mcquiston Ii: Of cotton futures to be delivered in October or December of the following year when it expected that this cotton --

Justice Potter Stewart: Of the same you year --

Mr. John Mcquiston Ii: Of the same year.

Justice Potter Stewart: And out of the same amount of cotton?

Mr. John Mcquiston Ii: But -- yes sir.

Justice Potter Stewart: Or what certain number of bales of cotton, I guess?

Mr. John Mcquiston Ii: The contracts on the New York Cotton Exchange are in 100-bale lots, so Allenberg made this contract in August in Mississippi decided about how much cotton estimated that's involved.

Justice Potter Stewart: Estimated about the year --

Mr. John Mcquiston Ii: And made an estimated sale on the New York Cotton Exchange at identical same time.

Justice Potter Stewart: And that what price compared to the price, you compared to the agreed purchase price?

Mr. John Mcquiston Ii: That's usually about what we call a 400-point spread.

Point is a penny.

So about $4.00 or $5.00 spread between the price that's -- that spread covers the expected cost borrowing the money to maintain the hedge for the year, shipping the cotton, paying the railroad freight and so on to get it to a point of deliver in the following year when it's delivered.

So if we bought in cotton in 1973 a 30 cents of pound, the hedge would be at 34 or 35 cents a pound.

Justice Potter Stewart: It sells it --

Mr. John Mcquiston Ii: Yes sir.

Justice Potter Stewart: Sell a futures for 34 cents?

Mr. John Mcquiston Ii: 34 or 35 cents.

Justice Potter Stewart: 34 or 35.

Mr. John Mcquiston Ii: And of course, if the price of cotton went up as it did in 1973 to almost a dollar a pound for the first time since the civil war, we're looking at loses that far exceeded the capital of the entire industry.

Justice Potter Stewart: And then when the cotton, let's -- I'm just talking now about industry practice and not about this case.

Mr. John Mcquiston Ii: Yes sir.

Justice Potter Stewart: When the cotton was delivered by Mr. Pittman or somebody else --

Mr. John Mcquiston Ii: It had been --

Justice Potter Stewart: -- to the warehouse, he gins it, he does the ginning?

Mr. John Mcquiston Ii: He takes it to local gin, that's all his business.

He gins it, then brings it to a --

Justice Potter Stewart: Warehouse.

Mr. John Mcquiston Ii: A compress in warehouse.

The compress takes the loose cotton which he delivers to them which is not shippable because it's also loose.

And compress is then to a bale and cuts the sample from the bale.

Justice Potter Stewart: Can you tell us about the cutting the samples, sending one to the Department of Agriculture, another one up to your client and your client has the job of having running what is called a running --

Mr. John Mcquiston Ii: Making even-running lots out of all these hundreds of bales.

Justice Potter Stewart: Hundred of bale, 100-bale lots and then what happens when the time comes due on the New York Cotton Exchange?

Mr. John Mcquiston Ii: The hedge is taken out by an offsetting transaction and if the market has gone up, there's a loss account on the New York Cotton Exchange.

If the market has gone down, there's a gain on the New York Cotton Exchange which hopefully offsets the loss on the purchase with the farmer.

Justice Potter Stewart: Because you say where you're going to this business is with a desk and a telephone and a banker who exchange your credit?

Mr. John Mcquiston Ii: Well, this is true not only in the cotton industry but wheat, soy beans --

Justice Potter Stewart: A lot of it.

A lot of --

Mr. John Mcquiston Ii: The commodities merchandising industry works exactly like the cotton industry does.

Justice Harry A. Blackmun: Mr. McQuiston, before you sit down, let me ask you question.

They're too about the tactics.

This case strikes me as a very precisely issue case, fairly simple, and our Rule 40 readsa concise that there shall be in the brief, a concise statement of the case containing all that is material to the consideration, the questions presented.

Looking at your brief, there are some 30 pages in the statement of the case, do you think that complies with our rule?

Mr. John Mcquiston Ii: Your Honor, we felt that there was no way to this Court to consider the case without considering the industry context.

And the 30 pages that you refer to are pages drawn from well established cotton industry textbooks to gather the court in seeing the context to this particular contract and from Department of Agriculture publications.

Justice Harry A. Blackmun: There are some members of the Court to think we have not to do, you have a 106-page brief and the 44-page reply brief and your friend Professor Blumstein has a 100-page brief, its make a 250 pages on a single issue.

I wonder whether the temptation is enough to have your brief forgo reading when it's at that great length.

Mr. John Mcquiston Ii: Well, I hope that that has not happened Mr. Chief Justice Blackmun and I apologize for burdening the Court with the extra pages.

The case is so important in our industry that perhaps we overdone it, but it didn't want to leave any stone unturned.

We're fighting for our lives.

Thank you.

Chief Justice Warren E. Burger: Mr. Cochran?

Argument of George Calvin Cochran

Mr. George Calvin Cochran: Mr. Chief Justice may it please the Court.

The reply brief referred to in part of the presentation here gives rise to at least one issue, which is non-constitutional, but I think it has to be covered insofar in the light of the reliance placed by appellant on the Curt Flood case.

The argument is that this company has relayed upon this Court oppressment, Dahnke-Walker, Shafer, and what not.

If you'll turn to page 92 of the record in this case, the Secretary of Treasury of the corporation was asked if they had sought advice of counsel as whether or not they should qualify, and the answer was no.

And the reliance by this company on this Court's oppressment is again pointed to by the fact that the Dahnke-Walker case wasn't spotted until a petition for rehearing was filled at Mississippi Supreme Court decide against Allenberg Cotton Company, which brings up the question of jurisdiction.

You have a December the 17 certificate outstanding right now requesting that a full certificate be secured from Mississippi Supreme Court that federal question was raised in adequate state ground on exist their certificates later.

They have not taken any steps to comply with the December 17 order.

Chief Justice Warren E. Burger: Wasn't the certificate signed by the Chief Justice?

Mr. George Calvin Cochran: Yes sir, it was.

Chief Justice Warren E. Burger: Doesn't that comply?

Mr. George Calvin Cochran: Not under Alderson, Footnote 4 in Alderson indicates that a single judge certificate is not sufficient, and your order of December 17 -- sir?

Chief Justice Warren E. Burger: Did Alderson referred to a State Supreme Court, I forgotten --

Mr. George Calvin Cochran: Yes sir it did.

And Footnote 4 in Alderson which you -- this Court cites on December the 17 and sends back to Mississippi Supreme Court for a full court certificate.

Justice Potter Stewart: And our orders -- that was our order of December 17 --

Mr. George Calvin Cochran: December 17.

Justice William H. Rehnquist: It was never complied with?

Mr. George Calvin Cochran: It was never complied with.

So I -- this jurisdictional problem is lurking there and my position is that until that December 17 order is complied with that is giving a full certificate from Mississippi Supreme Court, this Court lacks jurisdiction, but various a serious jurisdiction.

Justice Potter Stewart: Why did we note -- what do we do?

Mr. George Calvin Cochran: Two and in a half months later, you know that probable jurisdiction pending of determination of whether or not there was not jurisdiction.

Justice Byron R. White: The (Inaudible) and probably counselor wasn't there?

Mr. George Calvin Cochran: Yes, a filing was made reprinting the opinion of United States District Court case Cone Mills.

And then after that case arrived here, probable jurisdiction was noted.

Now, Dahnke-Walker is the major case relied upon by opposing counsel.

Well, Dahnke-Walker was a case where delivered was made on board or railroad car.

Here, we have delivery to warehouses with the record showing that these warehouses serves cotton concentration points with -- at the least 25,000 bales by this company being stored in Mississippi for an indeterminate period.

The fact situation is right on all force with Coe versus Town of Errol, and the decision last term in Kosydar.

There are two cases, shaped of the two cases, Chassaniol and Federal Compress, relating to the type of business of Allenberg has engaged in; one allowing taxes on the warehousing business and the other, a license tax for buyers of cotton which Allenberg Cotton Company is.

The last decision by this Court, the Eli Lilly case using taxing cases for determination whether or not qualification is necessary.

The analogy follows that if a company is engage in taxable activities, then, it can be required to qualify.

Any questions?

Chief Justice Warren E. Burger: Do you have any -- do you make any distinction between engaging in taxable activities and the tax who every done the -- on the raise of the company itself?

Mr. George Calvin Cochran: Talking about actual tax being lend or a potential tax?

Chief Justice Warren E. Burger: Either.

Mr. George Calvin Cochran: Well, with respect to Allenberg, there are cases showing that an add vellore and property tax can be apply as well as a tax for engaging in the business, your license tax.

Chief Justice Warren E. Burger: But which kind of a tax where you talking about?

Mr. George Calvin Cochran: Well under Eli Lilly, it had to be licensing.

Eli Lilly breaks the point at licensing.

Then, you get in --

Chief Justice Warren E. Burger: And ad valorem tax would create that problem in, is that your position?

Mr. George Calvin Cochran: No.

Justice Byron R. White: What about Shafer and Lemke?

Mr. George Calvin Cochran: Well, the Shafer and Lemke -- that was Shafer to begin with, you have language in that opinion that buying for interstate shipment is interstate commerce.

And that is the case relied upon appellants.

The case has been distinguished and distinguished since it was handed down by Mr. Justice VanBebber.

To me, it's a preemption case, the Shafer is.

Today, it would a preemption case.

Shafer has not been followed by this Court.

Chassaniol involving cotton buying --

Justice Byron R. White: But Lemke wasn't a preemption hearing?

Mr. George Calvin Cochran: No Your Honor, it wasn't.

Justice Byron R. White: No trace of it?

Mr. George Calvin Cochran: All right.

But in Shafer, Shafer when this Court came down with the decision in Chassaniol relating to whether or not you can license cotton buying, petition for rehearing was filled on the basis of Shafer.

Shafer was a distinguished away in Parker versus Brown purely on the basis that immediate shipment was involved in Shafer, while in Parker versus Brown in this case, they don't have immediate shipment.

Justice Byron R. White: Are you relying in that here, there's no immediate shipment?

Let's assume --

Mr. George Calvin Cochran: No, I'm pointing at the record says that --

Justice Byron R. White: Let's assume Allenberg -- let's assume Allenberg took delivery from the farmer by a way of an interstate carrier.

Mr. George Calvin Cochran: That would do it.

Justice Byron R. White: That would do what?

Mr. George Calvin Cochran: They would not have to qualify.

They would be in interstate commerce delivering this on board.

Justice Byron R. White: So you think it's just a way of taking delivery at the warehouse and then having it loaded on a carrier to warehouse --

Mr. George Calvin Cochran: That was Coe versus Town of Errol.

Justice Byron R. White: So you think it doesn't like the difference --

Mr. George Calvin Cochran: Sure, well the cost of our opinion points out the mechanical test is a test which this Court feels is determinative, and here we have a delay prior the transit.

Justice William H. Rehnquist: Of course the Export Clause doesn't necessarily follow the same guidelines as the interstate commerce?

Mr. George Calvin Cochran: Well you got Richfield Oil and the County of Merced case that both indicates the same test will be use for import, export and Commerce Clause definition in the Coe versus Errol situation.

Of course, Coe versus Errol was interstate commerce and import export.

Justice Byron R. White: Well, I would think you would argue also that the Allenberg has an agent in the state.

Mr. George Calvin Cochran: I don't think --

Justice Byron R. White: That is supervising the execution of the contract.

Mr. George Calvin Cochran: The -- having an agent in the state my not be a critical fact.

The records replete with evidence that Mr. Cummington who is doing the buying was acting on the commission basis for Allenberg, but having an agent to me is not as critical as the fact that this company owns cotton.

Justice Byron R. White: Located in Mississippi?

Mr. George Calvin Cochran: Located in Mississippi and stored there.

Justice Byron R. White: And now on its way in.

Mr. George Calvin Cochran: They're just like a local company.

No difference between Allenberg Cotton Company.

Justice Byron R. White: But Lemke and Shafer say that that's stoppage and transit doesn't -- and still part of the interstate commerce.

Mr. George Calvin Cochran: They stand alike, and you can't reconcile with the Shafer with Coe versus Errol, or this Court's decision last term in Kosydar.

Chief Justice Warren E. Burger: Well, do you think time log in Kosydar has any implications in reference to this?

Mr. George Calvin Cochran: Reference in the opinion has written in such a way that the timeline was not critically important.

The County of Merced case where you got this concrete factory being undone, the breaking for -- there was a time, some minority had been shipped there, but it was the fact that the goods were at rest prior to insertion in the foreign commerce like prior to insertion in the interstate commerce here.

Once that delay is there, then the full power of the state to regulate tax comes into play and that's what we have here.

Justice Potter Stewart: As my Brother Rehnquist has indicated just a moment ago the Export Import Clause is -- not the Interstate Commerce Clause, it's a separate clause in the Constitution.

It has separate laws on it by the decided cases of this Court because I remember in Kosydar, no cases were cited.

They relied on that didn't --

Mr. George Calvin Cochran: Involving interstate commerce.

Justice Potter Stewart: Involving the Commerce Clause.

Mr. George Calvin Cochran: But Richfield Oil says the same test will be applied Mr. Justice Douglas.

When you have the schematic situation in the sense where goods are setting and prior to insertion in the same test.

Chief Justice Warren E. Burger: Well, what about -- what do you have the say about the impact of the Supreme Court -- Mississippi Supreme Court decision?

Mr. George Calvin Cochran: There's nothing in the record.

Nothing in the record.

Chief Justice Warren E. Burger: What are the realities of which we might take judicial notice?

What do you think the realities are --

Mr. George Calvin Cochran: Realities of the industry?

Chief Justice Warren E. Burger: Yes on interstate commerce?

Mr. George Calvin Cochran: Well the reality --

Chief Justice Warren E. Burger: That consistent with the history the interstate -- the Commerce Clause itself?

Mr. George Calvin Cochran: To penalize companies do not qualify by not giving them access to the court systems?

We don't have interstate commerce here.

It's intrastate state.

These are all activities --

Chief Justice Warren E. Burger: (Voice Overlap) Of course, I would --

Mr. George Calvin Cochran: You go down the garden house.

Chief Justice Warren E. Burger: And have to take your conclusion.

Mr. George Calvin Cochran: Well, but this is intrastate commerce.

This is a contract between a Mississippi farmer for delivery to a Mississippi warehouse, activities before interstate commerce begins.

A purely intrastate sequence of defense can be regulated in tax by the state, and obviously --

Chief Justice Warren E. Burger: On your theory then, the only way to escape this situation would be get those bales and --

Mr. George Calvin Cochran: Put them on railroad cars.

Chief Justice Warren E. Burger: Put them on a railroad car, how long could they be there, 24 hours?

Mr. George Calvin Cochran: On the railroad car?

Chief Justice Warren E. Burger: No, no.

The railroad cars are available right away.

Sometimes you got to put them on a loading platform.

Mr. George Calvin Cochran: Well, then you've got cases which I've cited on my brief, if they aren't loaded directly on the car, then there's going to be problems.

This can be to be taxable and it's going to be intrastate commerce.

Chief Justice Warren E. Burger: On a shipping platform?

Mr. George Calvin Cochran: I would say would have to go directly to the railroad carriers with no storage facility between the time that it leaves the field, the time is placed on the interstate --

Chief Justice Warren E. Burger: That you go on a truck or some vehicle from the field right along side of the trucks and then be put on the cars?

Mr. George Calvin Cochran: Yes, I take it.

I'd put on a common carrier, say a truck from the field and delivered to another common carrier and then it's a straight through systematic and out of the Coe versus Errol problem, not taxable, but cannot be regulated by the state and purely interstate commerce.

Chief Justice Warren E. Burger: What if the carrier doesn't have enough cars and holds it for week, but just that do it to worse?

Mr. George Calvin Cochran: Well, you can parallel that situation with the situation where you have goods in interstate transit and there's a stop, and the cot-mill transit test is it for a business purpose.

On Coe versus Errol again, you got the logs that were placed -- that where there because water was down, not taxable.

So taking Coe versus Errol to your analysis that if -- it's just because there's not enough trucks or something; Coe versus Errol not taxable.

Chief Justice Warren E. Burger: I'm not giving you an analysis; I'm just asking a question.

Mr. George Calvin Cochran: That would be the best, the only analysis I could parallel your fact situation with.

Justice William H. Rehnquist: Well of course, you could make provision for many of the hypotheses of the Chief Justice has proposed to you by simply providing that title passes or risk of laws passes FOB, the railroad car -- the cotton, this particular cotton has been in the State of Mississippi for months.

It's just a question when Allenberg takes title to it isn't it?

Mr. George Calvin Cochran: They take title immediately upon placement in the warehouse, right at the point.

Justice Byron R. White: Well, they take when the warehouse certificates should deliver to him?

Mr. George Calvin Cochran: Yeah, the farmer has to get those certificates --

Justice Byron R. White: He gets them, and gives with Allenberg already.

Mr. George Calvin Cochran: But then, I'm into a part of the case.

I with along Mr. Justice Stewart, I'm not exactly sure what happens after the purchase has made.

There's nothing in the record.

Chief Justice Warren E. Burger: I think your friend said that the bill of lading goes to the bank in Memphis for collection.

Mr. George Calvin Cochran: There's nothing in the record honestly.

Justice Lewis F. Powell: Mr. Cochran in your view, what state interest is served by having a no cure sanction for failure to qualify?

Mr. George Calvin Cochran: What state interest?

Justice Lewis F. Powell: Yes.

Mr. George Calvin Cochran: It's a brutal penalty but it provides immediate leverage to companies to ensure that they will qualify and there is a high state interest in the qualification.

Justice Lewis F. Powell: Right.

Mr. George Calvin Cochran: You can parallel the no cure thing as to 60 years for smoking marijuana.

Does the penalty have anything to do with the malfece of issue.

It is a strong pulley but there's no constitutional issue raised on.

Justice Lewis F. Powell: But here, one private party in affect achieved a windfall and the other party advised of their penalty.

It's hard for me to see precisely what the state interest did.

Mr. George Calvin Cochran: Well, the state interest -- they're qualified now.

Justice Lewis F. Powell: Yes, but that could achieve couldn't it with the somewhat less penalty or allowing qualification and the payment of fees before suit can be brought?

Political, but it's not a constitutional proportion.

That's the point I'm trying to -- this is strong penalty, but it doesn't give rights to constitutional issue where I can see.

Plus, it wasn't raised in the court below.

The only point raised was this interstate commerce.

No issue with respect to the penalty -- argue within the petition for rehearing wasn't mentioned.

Now it's mentioned in the reply brief.

Justice William H. Rehnquist: Mr. Cochran?

Mr. George Calvin Cochran: Yes.

Justice William H. Rehnquist: If you permit cure in the situation like this, it's kind of like a one bite type of thing.

Isn't that the company can go along without qualifying for a years until finally it has to bring the suit, then it can qualify so that it really never has to qualify for practical purposes until it's actually involve in litigation?

Mr. George Calvin Cochran: If you have a retroactive penalty, what happen -- say that there is a cure provision but you can sue on honest in deaths, well then what you do is you negotiate with the defendant and say, look -- the defendant can't raise the defense because as soon as the company complies the defenses law, so the state interest and requiring qualification is out the window without the type of provision Mississippi has.

So it is a powerful weapon and it's been used here.

But still, there's nothing in the record as to what the industry situation is with respect to cotton brokers.

This is just part of the on going war when the price of cotton goes down other things occur.

Thank you.

Chief Justice Warren E. Burger: Thank you.

I think you've used all your time Mr. McQuiston.

Thank you gentlemen.

The case is submitted.

Featured:

Pike v. Bruce Church, Inc. - Oral Argument

Thu, 23 Aug 2012 18:12:29 +0000

Case:

Pike v. Bruce Church, Inc.

Media File:

301_19700113-argument.mp3

Related Transcript:

301_19700113-argument

Transcript:

Argument of Rex E. Lee

Chief Justice Warren E. Burger: Number 301, Pike against Church.

You may proceed whenever you're ready Mr. Lee?

Mr. Rex E. Lee: Mr. Chief Justice and members of the Court.

Presented for decision in this case is the constitutionality of certain aspects of Arizona's Fruit and Vegetable Standardization Act.

Once again, we have a very important industry and a very important statute of an important agricultural state.

I believe that the issues which are present in this case can best be appreciated against the background on a brief discussion of the nature and purpose of Arizona's Fruit and Vegetable Standardization Act and the history of Standardization Act in general.

Mr. Justice Brandeis reminds us in Pacific States Box & Basket case which is cited in our brief that Standardization Act, that is acts which prescribe standards for certain types of containers of agricultural produced are among the earliest examples of the exercise of police power by the states.

The case that Mr. Justice Brandeis' cites as authority for that proposition is Turner versus Maryland an 1883 unanimous decision by this Court.

There is some language in Turner versus Maryland which is not cited in our brief, but which I believe definitely warrants the attention of the Court because it answers specifically one of the propositions or one of the contentions that's raised by the appellee in his brief.

Citation of Turner versus Maryland is contained in our brief, it's 107 U.S. 38 and this particular quote appears at page 57.

In that case, this Court ruled as follows: “the state may direct that a certain product while it remains in the bosom of the country and before it becomes an article of foreign commerce or commerce between the states, shall be encased, shall be encased in such a package as appears best fit it to secure the safety of the package and to identify its contents as the growth of the state.”

So that as early as 1883, this Court in the unanimous decision required that it lay within the police powers of the state, to require that the produce of that state prior to the time that it leaves the state, be encased in a certain type of package, and that that package identify the produce as the product of the state.

Involved in that particular case was a standard container known as the hogshead or Maryland tobacco, and that statute required that the hogshead identify the tobacco contained therein is Maryland tobacco.

The Arizona Fruit and Vegetable Standardization Act rests upon consideration similar to those which are approved by this Court in Turner versus Maryland.

The record in this case contains a discussion of the conditions which led up to the enactment of the Standardization Act, and they are as follows.

Prior to 1929 when the Act was adopted, it was up to each individual shipper within the state to set his own standards, both for the quality of the produce that he desired to ship, and the type of container that he desired to ship it in if he shipped it in a container at all.

Consequently, the standards adopted by some shippers were very high, and the standards adopted by other shippers were not so high.

It is abundantly borne out by this record that it is of prime importance to the success of marketing of fruits and vegetables that the shipper maintained a good reputation for shipping quality of fruit.

But the record also bears out, there's not always possible to maintain that reputation separate and apart from the reputation of the district or the state within which he produces and from which he ships his product, particularly where it's produced.

Conversely stated if a state can acquire a good reputation for a certain type of produce, that reputation will inure to the benefit not only of the state as a whole, but also each individual grower and shipper within that state.

And it is not difficult to find examples where a states have been successful in creating such reputation, such as Washington apples, Florida oranges, Arizona grapefruit and frankly we believe Arizona cantaloupes.

This then was the problem for it which the Fruit and Vegetable Standardization Act was directed.

It set minimum standards for a selected number of fruits and vegetables, now 37 within the State of Arizona and those standards have been met by all shippers where the Act so provided and it also provided that they have to meet minimum standards not only of quality, but also a pack, and that it had to be packed in standard containers.

The provisions dealing with cantaloupes as they appear in the statute today are illustrative in this regard.

As set forth in the statute and the statute is cited, the relevant provisions are cited at the outset of our brief, the cantaloupes must be mature, but not overripe.

They have to be free from mold, decays, sponginess, welding, insect damage and a variety of quality defects, but perhaps the most interesting provisions of the statute from the standpoint of this case are those provisions which deal with the individual pack and the appearance of the cantaloupes within that pack.

It's been stipulated by the parties that a prime purpose of the statute was to avoid deceptive packs or a deceptive arrangement, deceptive arrangement and deceptive pack are described similarly by the statute.

They pertain to that situation wherein the higher quality fruit is placed toward the outside of the container with the off quality fruit in the center of the container of the lesser quality fruit in the center cover, so as to materially misrepresent the quality of the entire container.

That particular provision of course can only be enforced if the container itself after it has been packed, has been inspected, and there are other provisions as to which this is also true.

Justice Byron R. White: Well Mr. Lee, what's -- tell me, you cited some prior case, but what would you suppose the justification is for states saying you may not ship in bulk out of the state?

You may not ship in bulk out of the state, are you getting it?

Mr. Rex E. Lee: Well, in the answer to that question Mr. Justice White lies the entire justification of the Fruit and Vegetable Standardization Act.

Justice Byron R. White: I know, but what if the fellow you say that -- he says “Well look, I'm going to ship in bulk out of the state.

It's just a few miles across the line and I'm going to pack them over there and say that their packed in California.”

Mr. Rex E. Lee: There are number of answers to that question.

They are the following; in the first place, if they are packed in California, they will not be identified as Arizona produce.

This --

Justice Byron R. White: And so, you're not going to hurt if they are bad cantaloupes?

Mr. Rex E. Lee: Yes, we are.

There are three principle cantaloupe producing states.

They are Arizona, California and Texas.

There is some value or at least it certainly lies within the state's prerogative to conclude that there is some value to be known as the number three cantaloupe producing state within the United States.

If these cantaloupes are not identified as Arizona produce --

Justice Byron R. White: They won't be counted in --

Mr. Rex E. Lee: Then they won't be counted, that is correct.

Moreover, these particular cantaloupes, and this is in the record as a matter of --

Justice Byron R. White: This has to be the sole basis for them for more preventing bulk shipments where they are not going to be identified upon being packed as Arizona cantaloupes?

Mr. Rex E. Lee: No sir, I submit that it is not, there are additional reasons.

These particular cantaloupes, these particular cantaloupes are as a matter of stipulation, as a matter of stipulation in the record the highest quality of any cantaloupes that are produced within the State of Arizona and therefore, we feel that the state is entitled to have those cantaloupes identified as Arizona cantaloupes.

This is the basic purpose of the statute.

Justice Byron R. White: Well so, it's again, you want them identified as Arizona cantaloupes, and add it up and Arizona will get credit for these, they are bad, you don't want credit for them, do you?

Mr. Rex E. Lee: And pursuant to that, let me proceed with the example that you gave of cantaloupes which are shipped in bulk across the state line.

They come from the field and they're put in to a trailer, everything goes into the trailer.

The good fruit, the bad fruit, it's mixed all up --

Justice Byron R. White: By the way, do you have a regulation that state says how far you may transport cantaloupes and picked up to the packing point?

Mr. Rex E. Lee: No sir.

Justice Byron R. White: Do you know that -- how far they are normally transported when they're picked up in the field -- I suppose that you defined, but maybe they are carried 20 or 30 miles within the State of Arizona to a packing point?

Mr. Rex E. Lee: That is possible.

That is possible.

I don't know --

Justice Byron R. White: And at least as far as they're carried here across the state line.

Mr. Rex E. Lee: I would think that would be possible.

Justice Byron R. White: Okay, go ahead.

Mr. Rex E. Lee: The point that I'm about to be make is that they can be carried a good deal farther.

They go in and there has been no sorting, no sorting of quality fruit from the colors, no sorting of one color from another color, and this as is borne out by the record is also important.

There is no sorting according to variety, everything goes into that trailer.

They are inspected, but they are inspected only for the purpose of determining the presence of pickle worm, which is a quality defect of cantaloupes.

They are given a Pickle Worm Certificate, indicating that they have been determined to be free of pickle worm, and that's certificate is given to the California inspector on the California side of the line.

And from that point, provided that they meet the test, they go right on through the inspection station, presumably on their way to Blight to be packed.

But Mr. Justice White, once those cantaloupes leave the State of Arizona, there is no way that we have of assuring ourselves that they will not go right on through Blight, right on to San Diego, Los Angeles, San Francisco or anywhere else, be sold in bulk lot to a chain store buyer and when asked where that these cantaloupes come from, the answer comes back Parker, Arizona.

Justice Byron R. White: Well, you got the --

Justice Thurgood Marshall: But what about the standards in California?

They sought to protect their people, don't they?

Mr. Rex E. Lee: Well frankly --

Justice Thurgood Marshall: Is there any difference between the fruits standards in California in those in Arizona?

Mr. Rex E. Lee: Yes Mr. Justice Marshall, there are and those are set forth, they're discussed --

Justice Byron R. White: Which way did they operate?

Mr. Rex E. Lee: Well, --

Justice Byron R. White: I mean are they higher or lower than that?

Mr. Rex E. Lee: We feel -- there are, -- you know, that --- though the differences in language of the statute would indicate that Arizona standards are more demanding than California standards.

For example --

Justice Thurgood Marshall: Well, what interest does Arizona have in protecting the people of California?

Mr. Rex E. Lee: None Mr. Justice Marshall.

Our interest just as in the case --

Justice Thurgood Marshall: Protecting the name of Arizona?

Mr. Rex E. Lee: That is correct, that is correct.

Just as this Court said in Sligh versus Kirkwood, the State of Florida has a great interest in protecting reputation of its citrus fruits.

The California statute says that both California and Arizona proscribe serious defects, and both California and Arizona says that it's a serious defect if it affects the edible portion of the cantaloupe.

The California statute stops at that point.

The Arizona statute goes on to say or if it affects the appearance, the California says nothing about it, or the shipping quality of the fruit and the parties have stipulated that these manners of appearance and shipping quality are factors which affect the reputation of the produce but are separate apart the --

Justice Byron R. White: Do you -- of the California inspectors if they want to ship these cantaloupes back into Arizona for retail sale?

Mr. Rex E. Lee: Certificate, but what?

Justice Byron R. White: Well I suppose you -- I suppose you have regulations against to check on the quality of imported cantaloupe?

Mr. Rex E. Lee: Yes.

But Arizona is --

Justice Byron R. White: You don't re-inspect them do you when they shipped back into Arizona?

Mr. Rex E. Lee: I'm sure that we wouldn't.

But the point is --

Justice Byron R. White: Make sure you would accept the certificate of the California inspector if the California law meets what you think is a reasonable standard?

Mr. Rex E. Lee: Yes.

I know of no such certificate, but that's beside the point if there were one.

The point is this, why would suppose that fully 90% of cantaloupes that are grown in the State of Arizona are not marketed in the State of Arizona?

Arizona is cantaloupe producing state.

It's consumption doesn't anywhere near match its production.

What we're concerned about is the reputation and preserving the reputation that our produce has in other states where they are in fact consumed.

Now, Mr. Abramson will tell you that they fully intent to pack it in Blight according to California standards.

We feel that California standards are not exactly the same as Arizona's, and therefore bound and in any event, we feel that it follows inexorably from the proposition that Arizona has the right to enact the standardization law that it can enforce them through its own inspection officers and need not rely upon the application of California law through California officers.

Let's assume that the standards were exactly the same today?

We have no guarantee that those standards are going to be carried out.

We have no guarantee that California will not change his law tomorrow.

We have no guarantee that California inspection officers are going to do their job and indeed, there is some difference; you can read it in the statute.

If a 5% difference will make our statute unconstitutional, would a 10% difference -- than validate it.

At all points, the conclusion is simply inevitable that starting from the premise which we feel is justified as set forth by this Court in Turner versus Maryland, Sligh versus Kirkwood and the Pacific States case that we do have the right to prescribe the standard containers, and we have the right to enforce it through our own inspection officers.

Now, the Bruce Church Co. has said we intend to pack these in California.

They articulated some of the reasons that there's a problem with this.

Even assuming that that is correct, if this appellee allowed to ship them across the state line in violation of the statute, we're going to have to let others and we have no control over how those will be sold or whether they will be packed in standard containers at all.

The only way that we can assure that is to assure -- is to require that before the produce leaves the state, it is packed neatly in a new clean container, arranged orderly, uniform in size, uniform in color, uniform in variety.

So that when the grocer opens that box, he knows that he can take the cantaloupes out of their box, put them on the shelf and they will make a nice, neat, attractive assortment, uniform in color, uniform in size, and up to quality that is guaranteed by the Arizona Standardization Act, and that is what is meant by standardization, and that's what we're trying to preserve.

Chief Justice Warren E. Burger: Does this record show whether when these cantaloupes are marketed in California or any other state, they are identified after the package is broken as Arizona cantaloupe?

Mr. Rex E. Lee: Mr. Chief Justice Burger --

Chief Justice Warren E. Burger: -- markets and sold --

Mr. Rex E. Lee: -- this record does not show anything on that, and I would think it would be a matter of individual choice with the grocer.

He either might or he might not, but we think -- you see, he is our customer, and so are the merchants -- they're not merchants, the jobbers and the wholesalers, and they know that they can depend on the stamp on the outside of these containers, Arizona produce as meaning something because it has been packed according to the Arizona standards.

Justice Byron R. White: Did the District Court -- how do you read the opinion of District Court?

Did it say that these regulations weren't authorized by the state statute?

Mr. Rex E. Lee: I read the opinion of the District Court with the great difficultly Mr. Justice White.

Justice Byron R. White: It implied that, didn't it?

Mr. Rex E. Lee: It certainly did.

It certainly did.

Justice Byron R. White: And to the extent that it did, we aren't very that position to disagree with that, are we?

Mr. Rex E. Lee: I know what you referring to Mr. Justice White.

There are these provisions that say that under normal circumstances, you give certain amount of difference to the District Court.

But, I would submit --

Justice William J. Brennan: It's a little more than that I think.

Ordinarily, we don't undertake seriously to review in such as the state law.

Mr. Rex E. Lee: Mr. Justice Brennan, I submit that under circumstances such as this, there simply is no way that you can read the statute any other way.

The cantaloupe statute in its present form says that all cantaloupes shall be packed in close standard containers approved by the supervisor.

I just can't read that to say anything else than all cantaloupes shall be packed in close standard containers approved by the supervisor.

Justice Byron R. White: That state was the administrator's had been vague and unlawful.

Mr. Rex E. Lee: That is correct.

That is correct.

Justice Byron R. White: They administer the law for a long period of years, quite the contrary?

Mr. Rex E. Lee: And I learned my lesson --

Justice Byron R. White: Is that right?

Mr. Rex E. Lee: Mr. -- yes that is correct, there were individual instances in which the administrator for not obeying the law.

Mr. Justice White, the last time I was before the Court, I learned that that particular principle does not invalidate a statute, and we have cited Lassen versus the State of Arizona on that very point.

That time, Mr. Justice Marshall and I were co-counsel in that case, and I think that has been adequately covered in our brief.

Mr. Pike knows that he did wrong.

That maybe a matter of concern for the officials of the State of Arizona, but it is not something that makes the statute unconstitutional.

I do want to reserve five minutes for rebuttal.

I understand that you still give me about five minutes.

I like to treat just briefly the basic rules of law that had been laid down by this Court which are determinative on this issue.

One of them has already been mentioned in the case that was argued before us, and that is that the judicial function in applying the Commerce Clause to statutes which are checked as allegedly violative of the Commerce Clause is a very limited one.

The case of South Carolina versus Barnwell Brothers clarified once and for all that the test under the Commerce Clause is the same as it is under a substantive due process.

And that under that test, the judicial inquiry stops with a two-pronged inquiry: Number one, is there a legitimate state objective, and number two, is the state regulation reasonably anticipated to carry out that objective?

We submit that under other decisions of this Court, both of those requirements are clearly satisfied.

You have Sligh versus Kirkwood which is discussed extensively in our brief.

That's the case in which this Court upheld the Florida statute prohibiting the sale of immature or citrus or citrus which is otherwise unfit for human consumption.

Now, the appellee has taken --

Justice Potter Stewart: But before you move on --

Mr. Rex E. Lee: Yes.

Justice Potter Stewart: Sligh against -- you kept repeatedly relying on three decisions as I -- my ears have heard it.

Mr. Rex E. Lee: Yes.

Justice Potter Stewart: Sligh against Kirkwood and the Pacific States Box and Basket case --

Mr. Rex E. Lee: Yes, and Turner versus Maryland.

Justice Potter Stewart: In Turner against Maryland, I don't' think it's in your briefs.

Mr. Rex E. Lee: Well, it is but it slips in there -- look on page 31.

Justice Potter Stewart: Alright.

Mr. Rex E. Lee: It is cited in Mr. Justice Brandies' opinion of Pacific States Box & Basket Mr. Justice Stewart.

Justice Potter Stewart: The internal reference.

Mr. Rex E. Lee: That is correct.

It should -- upon -- after seeing the appellee's brief and reconsidering; I concluded we should have given it -- that we gave it too short --

Justice Potter Stewart: -- a little that more star --

Mr. Rex E. Lee: That's correct.

That's correct.

Justice Potter Stewart: Thank you.

Mr. Rex E. Lee: But these three cases, I submit to the Court clearly established the legitimate interest of the state, and that's all we have to show is that the state does have, the legitimate interest in preserving the reputation of its fruits and vegetables by setting these standards of quality and of pack.

Now, the real issue in the case, the dispositive issue in the case is this, it rises in this fashion.

The appellee as I read his brief agrees, demand on certain circumstances be a legitimate interest enforcing standardization, but he says that there is a qualifying consideration in this case because in the context of cantaloupes; they can't be packed except in a packing shed and we agree that under present technology, they can't.

Therefore, in the appellee's view, this case comes within those decisions of this Court which have said that where it is the sole objective of the statute to require packing to be accomplished in the state that renders the statute unconstitutional, [Inaudible] Polar Ice Cream versus Andrews and so forth.

And the appellee takes one more step as indeed he must, and that is to say that the purpose of the Arizona statute is the same and that is to preserve the packing business for the state.

So that really, the ultimate issue, the dispositive issue between these two parties is what is the purpose of the statute?

Is it the statute, is it the purpose which has been testified to on this record?

Is it the purpose that is set forth in the preamble of the statute itself?

Is it the purpose that is been upheld by this Court in Sligh versus Kirkwood, Pacific States and Turner versus Maryland, or is it a purpose which will make it invalid?

Once the case is viewed in that fashion, I submit to this Court that the answer is very clear, because this Court has made it clear in a number of cases that it will not re-examine the wisdom of the state legislative determination.

And that so long as there is a proper purpose that this purpose will be assumed to be the purpose on which the state legislature rely.

I need not recant those cases at this time.

They're set forth in our brief, and I believe that they adequately dispose of this contention.

Unless the Court has any further questions, I would like to reserve the balance of my time for rebuttal.

Chief Justice Warren E. Burger: Thank you Mr. Lee.

Mr. Abramson?

Argument of Jacob Abramson

Mr. Jacob Abramson: Mr. Chief Justice and may it please the Court.

My learned counsel has stated that the dispositive issue in this case is the purpose of the Arizona law, what is the purpose?

It is already been made clear what the purpose is, and this is to achieve credit and to the State of Arizona for a good fruit.

The concern is not about receiving discredit for poor fruit because in this case, the poor fruit is going to be packed in other states.

It's to receive credit for a good fruit.

Now, we submit --

Chief Justice Warren E. Burger: Well, I didn't understand this argument that way.

I understood he had two barrels to his gun: One, to get credit for the good and to avoid the disadvantages of being credited with the bad if somebody sold bad fruit as Arizona fruit?

Mr. Jacob Abramson: Mr. Chief Justice, the argument of appellant is that Parker fruit is good fruit and he wants it to be labeled as good fruit.

This is the main concern and his argument.

He states this repeatedly that it's to enhance the reputation by identifying the fruit as Arizona fruit.

The point I'm getting to is that the determining question here is not what is the purpose of the Arizona law, even if the purpose is to obtain credit.

Although, this Court has never gone so far as to permit what the appellant seeks to do here in furtherance of that purpose, even to achieve credit we say is not an improper purpose.

It's fine we say if one wants to do a good job and to get credit for it, but that is not the issue.

The issue before this Court is how far may the State of Arizona go in trying to achieve this purpose?

In order to achieve this purpose, the State of Arizona through the interpretation of the Arizona law by the appellant is saying three things must occur.

One, the packing must be done in Arizona; Two, the packing must be done in packing shed in Arizona and in the context of this case where the Church Company does not have packing facilities at Parker and indeed, cannot have such facility because there are no railroad lines going in there, must construct packing facilities at Parker.

To be sure appellant states, now the law doesn't in terms say you must do this and therefore, we can't hear you to complain, but this is the necessary effect of his order and in fact, the appellant in its brief expressly states this that this is the dilemma in which the appellee finds itself that in order to comply with the order, it must do these three things.

Now, we submit that this goes too far in its encroachment upon the federal concern with maintaining a free-flow of interstate commerce.

We submit it's contrary to decisions of this Court which we have cited; the Shrimp cases to which learned counsel has alluded to in his statement.

We submit that this is the real issue; how far may the State of Arizona go in obtaining credit for a good fruit or even keeping out poor fruit?

There has been no case cited by appellant in which this Court has gone so far as to say that these three requirements maybe imposed.

Chief Justice Warren E. Burger: Well, I thought the Sligh case certainly --

Mr. Jacob Abramson: Your Honor, the Sligh --

Chief Justice Warren E. Burger: -- was very much to that subject?

Mr. Jacob Abramson: Mr. Chief Justice Burger, the Sligh case involved a statute which stated simply that citrus fruits unfit for consumption shall not be handled.

It had nothing to do with question of intrastate – interstate.

It was purely a criminal statute and imposed a penalty for the handling of such fruit.

The Sligh case would have been a case similar to ours.

If the state in that case had said this citrus fruit must be packed in this state, but that was not the situation in the Sligh case.

Mention has been made of the Pacific Box case.

This involved a law of the state of Oregon which established certain standard containers to be used for packing in that state of raspberries and strawberries.

An out of state manufacture of containers challenged this law saying I want to come into Oregon and sell my containers in Oregon, these were different containers from those provided on the Oregon law, and this Court held that Oregon may within its right prescribe containers, but their case did not involve the situation such as here.

If Oregon statute said raspberries and strawberries must be packed in Oregon, this would have presented before this Court the same issue which it has before it now.

This Court has stated --

Chief Justice Warren E. Burger: Suppose there's a factual difference that you -- you probably can't send raspberries in a bulk in truckloads.

You got to have them in small containers so that that issue wouldn't come up there?

Mr. Jacob Abramson: We submit that the Pacific States decision was correct Your Honor that a state may provide that where commodities are packed within the state certain containers shall be used.

But I submit again Mr. Chief Justice Burger that the statute in the Pacific States Box case did not state that the packing, the processing and packing of raspberries and strawberries shall be performed in the State of Oregon.

Had it done so, it would have presented the same issue which we have here.

Justice Potter Stewart: How about Turner against Maryland --

Mr. Jacob Abramson: Turner against Maryland -- I think this case gets -- this case gets closer.

This was an 1882 case.

Counsel for Western Growers has stated with reference to that case that it's cited a long string of statutes.

These were statutes in a colonial times, much has happened since 1882, advancements in transportation, processing, packing, handling, and of course this Court since that time has rendered decisions in the Toomer v. Witsell, the Heidell cases, the Dean Milk case, and I think we're moving with the times.

This Court has stated on numerous occasions that it will be guarded by practical considerations.

Mr. Justice White has already touched upon one point that I would like to make, namely that the problem which brings us before this Court is one which exists in the border districts which joined the states of California and Arizona; that is to say the districts along the Colorado River.

Here, the same climatic conditions prevail.

Climate, weather atmospheric conditions know no state borders, and that given the same growing conditions, it is not uncommon for the same grower to have growing operations on both sides of the border.

Now, the question was raised; what is the area of production?

It's not too great Mr. Justice White because the crops which are involved are of such a highly perishable nature that they must be taken out of the ground, processed, packed and put in cars on their way within the matter of just a few hours.

So, the distance does not -- you're not -- you don't have the possibility of dealing in large distances, I would say a radius of 30 miles, 40 miles, something of that nature.

The Church Company the appellee here has operations on both sides as you know.

It has operations at Parker under a lease with the Colorado River, Indian Tribes.

This is a distance of 25 miles from the border and has been doing its packing at Blight on the California side, 5 miles over on the California side.

Justice Byron R. White: Did they grow up cantaloupe on the Blight side?

Mr. Jacob Abramson: Yes, on the Blight side and because these are growers who don't enjoy federal subsidies, whose production cost and transportation and costs are among the highest in the nation.

Their success or failure depends on their ability to be efficient, and this means to economize.

So, if a grower of this kind requires packing facilities, he will put them on one side of the line or the other wherever they fit in with his operations.

He's obviously not going to duplicate his facilities.

Now, the same situation exists at Yuma on the Arizona side and at Bard on the California.

These are just opposite to one another, across the river, the short distance of possibly 5 miles and for years, there has been transport of cantaloupes and other commodities from the California side at Bard over to Yuma on the Arizona side where they been processed and packed just as these cantaloupes had been at Blight.

California as you know has a law very similar.

We can draw fine lines about particular words or sentences.

But basically, they're the same.

There's testimony in the record that the California law and inspection, if anything is more stringent than the Arizona law, but we need not to make an issue of this.

In any event, it's been going on from Bard to Yuma for a long time.

California has never raised the question.

They had never attempted to stop this practice.

They reconciled it with their law.

California, the State of California knows about this pending litigation and it has not --

Justice Byron R. White: What -- when you packed at Arizona cantaloupes at Blight, do you put at California -- are you required of California law to say that they are California cantaloupes or just that they are packed at Blight?

Mr. Jacob Abramson: The California Mr. Justice White does have a law similar to that of Arizona which requires some identification on the container.

The record shows that in this particular case where the same containers, very same containers are used both where packing is done in Arizona and in California has imprinted upon it packed in season in Arizona and California, main office Salinas, California.

This is where the main office of the Church Company.

Justice Byron R. White: Packed in season?

Mr. Jacob Abramson: Packed in season in Arizona and California.

Justice Byron R. White: Well, why would it -- that's the label that you put on to your Blight's pack, Arizona cantaloupes --

Mr. Jacob Abramson: That's our trade, yes.

Justice Byron R. White: Why would you say Arizona because they aren't packed in Arizona?

Mr. Jacob Abramson: This is what appears on the crate, packed and seasoned in Arizona and California indicates that packing may go one in each state.

This brings me to another --

Chief Justice Warren E. Burger: But isn't that what Arizona's legislature is claiming or by this statute claim was the right to have Arizona products identified as such?

Mr. Jacob Abramson: In response to this point Mr. Chief Justice, I believe I should explain how these cantaloupes are marketed.

Some question has been raised, I think possibly by the Chief Justice as to whether these commodities are identified at the store level, but they are not.

These cantaloupes are sold by the growers to a small group of buyers who are present right there on the spot.

They're there everyday, they are their representatives.

They are at the point of production, whether it's the packing shed or field, they're inspecting the produce.

They know exactly where it's been grown.

They know who the grower is.

They know the quality or they wouldn't be buying it.

They're there to inspect the quality.

Justice Byron R. White: Who are these buyers?

Mr. Jacob Abramson: These are wholesale jobbers.

They're distributors, receivers, but who have their representative's right there on the spot and they move from place to place as the harvest progresses.

Justice Byron R. White: How about their customers?

Mr. Jacob Abramson: Their customers are in turn are receivers, the car lot receivers all over the country who receive these in car lots.

The sales are in car lots or truckloads.

You see, they are not sold as individual packages.

And eventually, when they reach their terminus, terminal points throughout the nation, the distributors will then distribute them among the chain stores possibly, among retail stores, but once they reach the store, they're taken out of the package and put on a shelf.

The housewife doesn't know where this cantaloupe has come from.

If she likes, if it tastes good, she will come back and buy it.

So, --

Chief Justice Warren E. Burger: I don't know how you can generalize that way on the state of this record.

Certainly, there are housewives who go into stores and having had a good experience of favorable experience with certain types of fruit or other merchandise will say is this California or is it Texas or is it Arizona?

Mr. Jacob Abramson: Yes --

Chief Justice Warren E. Burger: Now, each of those states has an important interest in protecting that, do they not?

Isn't that what the Sligh case really was largely --

Mr. Jacob Abramson: The Sligh case --

Chief Justice Warren E. Burger: -- about and Turner as well?

Mr. Jacob Abramson: The Sligh case Your Honor if I may submit is a case -- is a health and safety measure which seeks to prevent the use of citrus fruits unfit for consumption.

It is not directed to the question which has been raised by appellant and namely the protection or the gaining of credit for good fruit.

Chief Justice Warren E. Burger: Maybe that was the -- maybe that's what the record supported, but the court seemed to go beyond that because this Court's had the protection of the state's reputation in foreign markets, with the consequent beneficial effect upon the great home industry may have been within the legislative intent?

Mr. Jacob Abramson: Yes, to prevent export of poor fruit, but appellant here does not stress this, but stresses rather the credit for good fruit.

We have indicated also that the appellant's order represents the reversal of long time practice.

He states before this Court that he was wrong all these years; that his conduct was unlawful.

When he issued the order to appellant, he gave no reasons, no explanations.

At no time has he stated whether there's been any -- rather his conclusion that he was wrong was the result of any decision.

No mention of any such thing, but he says he was wrong -- had even properly advised, he would have done differently.

Well, we have the State of California same situation.

The State of California has never raised any question and does not raise one at this time.

It knows of this litigation and has not sought to intervene in any way.

In conclusion Your Honor, we submit that in making this three-fold requirement in consequence of appellant's order, namely that the packing be done in the State of Arizona, that this be done in a packing shed in Arizona and that the appellee construct packing facilities in Arizona, goes far beyond and anything this Court has sanctioned in modern time.

We submit that it is not the prerogative of the State of Arizona to say to a grower you must construct your packing plant in this state.

This is an economic consideration which the businessman must make works to his best advantage to establish his facilities.

We submit that the decision of the court below was fully justified both on the law and the facts and should be affirmed, thank you.

Chief Justice Warren E. Burger: Thank you Mr. Abramson.

Mr. Lee, you have seven minutes.

Rebuttal of Rex E. Lee

Mr. Rex E. Lee: Thank you Your Honor.

Significant contention raised by Mr. Abramson, and this of course is been at the heart of disposition throughout this entire litigation, is that the purpose of this statute is to require the packing be done in the State of Arizona.

We simply assert that is not the purpose and under the well established rules of statutory construction in constitutional cases is set forth on page 34 to 39 of our brief.

Court simply don't ascribe improper purpose of the statute.

The statute nowhere says anything about a packing shed.

I would point to the Court that this statute deals with 37 different products; 37 different products, only one of which is cantaloupes.

Most of them don't have to be packed in the packing shed.

Most of them can be packed in the field, and we can inspect them there, and that's fine.

The concern of the statute is not the packing be done in the state, the concern of the statute is that we be able to inspect it in the pack in order to determine that the statutory standards --

Justice Potter Stewart: Isn't it -- is it the effect of the statute?

Mr. Rex E. Lee: In this case Mr. Justice Stewart, that is correct.

Justice Potter Stewart: Not cantaloupes, that is to be packed inside the state?

Mr. Rex E. Lee: There is no question in this case that that is correct.

So the question is, where does it fall?

Is it the Sligh versus Kirkwood, Turner versus Maryland case, or is it a Heidell case?

And I would simply point out that in Heidell, this Court concluded that there was no other possible reasons for the requirement that -- a packing within the state other than the sole requirement that they wanted to keep the packing business for themselves.

Were that the case in this statute, it would be made applicable to lettuce, it would be made applicable to asparagus, it would be made applicable to colliflower and the whole gamut products, it is not.

There is no requirement.

The only reason that they have to pack in the state is because they -- that they have to build a packing shed is that they cannot pack except in the packing shed.

So far as we are concerned, if they want to pack underneath the shade tree, that's fine, we can then carry out the inspection responsibilities with which Mr. Pike is charged under the statute.

Now, with regard to Sligh versus Kirkwood, I simply thoroughly disagree that that was a -- a health and safety measure.

I need not re-read the language that the Chief Justice has read.

That language is significant to two reasons.

First of all, it points out that it is a proper purpose to be concern with the state's reputation in interstate commerce, and secondly, it points out that as long as that could have been the legislative purpose, then the statute will be upheld.

Mr. Abramson as I understand his comments, agreed that Turner versus Maryland was against him, but argues that is too old and therefore, the Court ought not to follow it.

Mr. Justice Stewart, so that you don't think that I'm totally incompetent in having missed it the first time around, let me point out that the language that I found which thoroughly resolves this comes at the end of a very long, long opinion in order to save you the same problem.

Might I point out that is at page 57 of the United States reports.

Finally and in conclusion and I won't need to use my seven minutes, this is an economic regulation.

It's a regulation imposed by a state pursuant to its police powers, and this Court has made it very clear, starting at Nebbia versus New York that there is a heavy burden which rests upon those individuals who seek to upset that police power regulation on the ground that it is unconstitutional.

There is no federal statute with which this is inconsistent, certainly under this Court's decision in Paul and so forth.

On conclusion, --

Chief Justice Warren E. Burger: Before you --

Mr. Rex E. Lee: Yes.

Chief Justice Warren E. Burger: -- before you get to your summary, has this statute involving as you suggest many other products of Arizona been challenged in the state courts at any time?

Mr. Rex E. Lee: Never on these grounds Your Honor.

The – there have been probably half a dozen at the outside, pieces of litigation involving these statutes and most of them have involved bonds that the shippers had put up and -- nothing of this magnitude.

Chief Justice Warren E. Burger: None of the issues involved here?

Mr. Rex E. Lee: None of the issues involved here have ever been passed upon -- have even been passed upon by a state court.

It is agreed on all sides supported by the record, supported by square holdings of this Court that the State of Arizona has a legitimate interest, so long as these fruits and vegetables remain in the language of this Court within the bosom of the State of Arizona in requiring that they be packed according to the standards that the State of Arizona has prescribed.

Once you start from that premise, it is simply inevitable that the state has the right to enforce those standards according to its own inspection officers.

The statutory standards necessarily involve manners of judgment.

Material misrepresentation of the entire quantity, uniformity of quality, uniformity of size, uniformity of color, these are judgment matters.

We submit that the State of Arizona has the right to have these judgment matters resolved by the judgment of its own inspection officers and not inspection officers of someone else outside the state.

In conclusion, when this first came up, Mr. Pike came to me and said well now, what is this law, this federal law that our law violates?

And I said well Mr. Pike, it's the constitution and he said well, it's written in English isn't it?

Can I read it?

And I said well Mr. Pike, the constitutions, you have to understand, have a wealth of decisions behind him.

And then he said nevertheless, it's written in English, let me see it.

I showed to him and he said Congress shall have the power to regulate interstate commerce.

He said has Congress passed a law saying that we can't have a Standardization Act in Arizona?

I of course, replied that Congress had not passed such a law.

I think that it is important to bear in mind because I'm sure this Court well knows, in the absence of congressional legislation, the judicial function is a narrow one, and we submit that this case clearly falls within the bounds of legitimate exercise of state police power and the judgment of the lower court should be reversed.

Thank you.

Chief Justice Warren E. Burger: Thank you for your submission Mr. Lee, thank you Mr. Abramson.

The case is submitted.

Featured:

Hostetter v. Idlewild Liquor Corp. - Oral Argument, Part 1

Wed, 16 Jan 2013 22:47:59 +0000

Case:

Hostetter v. Idlewild Liquor Corp.

Media File:

116_19640323-argument-1

Related Transcript:

116_19640323-argument-1

Transcript:

Argument of Irving Galt

Chief Justice Earl Warren: -- Hostetter versus Idlewild Bon Voyage Liquor Corporation and Number 389, Department of Revenue versus James B. Beam Distilling Company.

Mr. Galt.

Mr. Irving Galt: Mr. Chief Justice and may it please the Court.

This is an appeal by the defendants, the chairman and members of the State Liquor Authority in the State of New York from the judgment of a three-judge statutory court in the Southern District of New York.

The judgment from which the appeal is taken had among other things declared that the application to appellee's resale liquor operations of the licensing -- liquor licensing requirements of the Alcoholic Beverage Control Law impinged upon and were in violation of the Supremacy and Commerce Clauses of the Constitution and the court below also issued an injunction permanently prohibiting the State Liquor Authority from interfering in anywise with the resale operations conducted by appellee.

Chief Justice Earl Warren: (Inaudible) for the information that was present.

I -- I was under the impression that because these two cases were in the same area that they had been consolidated for argument but I just want to announce now that that --

Mr. Irving Galt: No.

Chief Justice Earl Warren: -- is not the fact that it seems to have been has different issue and we'll follow this directly.

Mr. Irving Galt: That's my understanding, too, Your Honor.

Chief Justice Earl Warren: Yes.

Mr. Irving Galt: Now, I want to point out to the Court that first, I should say that I'm going in the interest of saving time since this is on a summary calendar to skip the procedural steps which resulted in this case once before having come before this Court.

I think it's unnecessary to any of the substantive issues now presented to discuss that in anywise.

But what is ultimately at stake in this litigation is no less than the right of the States to license and regulation, the distribution and sale of intoxicating liquors.

And I think I need hardly remind this Court that by now, in the year 1964, there was no question whatever of the unique and special status of liquors.

Now, constitutionally and from the whole history of legislative and judicial decision and development, it's quite clear that liquor is in a class by itself and not to be treated for purposes of the Commerce Clause or otherwise in the same category as such ordinary commodities as oil, milk and anything else that one might think of.

And more specifically, the question here is whether the State of New York may constitutionally apply its liquor licensing requirements to the appellee's resale liquor operations.

And very briefly, I'd like to summarize what those operations are.

The plaintiff -- the appellee is a New York corporation which maintains its office and principal place of business at what was known as the Idlewild and is now the Kennedy International Airport.

It maintained its private office or shop -- its principal shop on the second floor of the arrival's building at the airport.

It also has and that the start of this litigation had selling counters at the Pan American and TWA counters within the airport.

But now --

Justice Potter Stewart: Had the --

Mr. Irving Galt: Pardon.

Justice Potter Stewart: Is that the only place where -- where it deals with customers?

Mr. Irving Galt: No.

Not now.

Since the litigation started, and we've referred to this in our briefs and I'm sure that counsel will not again say the accuracy of my statement.

Since then, they have already opened to our knowledge at least one place in the East Side Airlines Terminal.

That's over in the borough of Manhattan.

And that's a place from which conveyances can bring passengers to the airport.

And that's very important, Mr. Justice Stewart if I may say so because this is not on federal territory, even that portion which is in the airport is not on federally ceded territory, but even more important, since the appellee suggests that it had some sort of federal license or federal authorization from the Customs Department, from the Customs people.

This is a very strange thing.

The opening of this new sales outlet at the East Side Airlines Terminal points to the fact that if they're correct in their contention, what is to stop this plaintiff alone from opening outlets throughout the State of New York absolutely unregulated, unsupervised, unlicensed and untouchable by the State of New York.

Justice Potter Stewart: There's no liquor there, is there?

Mr. Irving Galt: Well, the -- so far as I know, there's no liquor at -- at either the two counters or at the -- at the sales place, the sales counter are now on the East Side Airline Terminal.

There is, however, liquor stored at the --

Justice Potter Stewart: Arrivals building.

Mr. Irving Galt: -- at the arrivals building at its principal office.

Justice Potter Stewart: And presumably, there are no customers there, are there?

Mr. Irving Galt: Yes, customers come in there.

Justice Potter Stewart: Well, I know but this isn't for coming -- for arriving customers, this is for departing customers.

Mr. Irving Galt: Right.

Right.

Justice Potter Stewart: As I have the impression from the record that the arrivals building office was where the liquor was stored.

Mr. Irving Galt: That's right.

Justice Potter Stewart: And that the place is where they deal with the customers are in the TWA building, the Pan Am building and since --

Mr. Irving Galt: No, also the arrival building.

Justice Potter Stewart: -- the record in this case disclose to the East Side Terminal.

Mr. Irving Galt: So far as we know, and I believe so far as the record discloses, I believe that the principle place of selling is at the arrivals building.

That's their main office.

Justice Potter Stewart: That's right.

They're in inappropriate place for the nature their business.

Mr. Irving Galt: Well --

Justice Potter Stewart: The Department --

Mr. Irving Galt: I think -- I think the whole business is entirely inappropriate --

Justice Potter Stewart: Well, I understand that (Voice Overlap) --

Mr. Irving Galt: -- illegal and whatever place it would be conducted at would be equally inappropriate.

However, it's -- it's especially inappropriate, I should think, when this is an arrivals building.

However, this does not inhibit them in the slightest from doing what has already at the date of the trial proved to be a substantial business.

Now --

Unknown Speaker: (Inaudible)

Mr. Irving Galt: Who operates the warehouse?

The plaintiff itself.

And I do not concede that it is a warehouse but on the contrary, it is not a warehouse at all.

One of the points we will make is that this sort of three wheeling operation has an informality which is to me, astounding.

This is not, under any known federal regulation, under any known federal formula or any known state statute for that matter or warehouse which -- which complies with any definitions or any requirements of that sort.

This plaintiff purchases its supplies from wholesalers located in Philadelphia, Washington, and I believe Baltimore, and it has these liquors shipped by the case from across state lines to its proprietary place, private proprietary place here in New York.

And it's an unbonded operation.

The plaintiff, admittedly, at the trial, carries no bond of any kind whatever.

And these liquors are sent to it and are stored by the case.

However, they are sold by the bottle.

Complaint had said, "One bottle per passenger".

It developed at the trial that the -- the sales were up to two bottles per passenger.

Justice Arthur J. Goldberg: Mr. Galt, can I interrupt you (Voice Overlap) --

Mr. Irving Galt: Certainly.

Justice Arthur J. Goldberg: -- to see if I can follow the flow of this liquor.

As I understand you, the plaintiff reported this from out-of-state --

Mr. Irving Galt: Wholesaler.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Irving Galt: Right.

Justice Arthur J. Goldberg: At that point, the liquors were found in a warehouse in New York.

And, if I understand it correctly, the ship by bonded trust through the -- to New York --

Mr. Irving Galt: Right.

Justice Arthur J. Goldberg: -- at that point is (Inaudible) is that correct?

Mr. Irving Galt: Well, now, Mr. Tuttle is shaking his head.

This was a point of violent disagreement between us at the trial.

I say absolutely unbonded.

This plaintiff neither by any principle of law, which I can find nor by any statute, in fact, contrary to the statute itself carries no bond.

There is no bond such as required by 1557 (b), I think it's Title XX -- Title XIX, known as 557 (b) when a withdrawal is made from a storage warehouse, when a withdrawal of liquor is made to someone else who was not the exporter or the importer when the transaction is not directly by the party at the warehouse, a bond -- new bond is supposed to be filed, no such bond.

Justice Arthur J. Goldberg: I just mean specifically (Inaudible) that was involved between you and Mr. Tuttle.

I'm just trying to trace the physical progression of the -- of the growth --

Mr. Irving Galt: Right.

Justice Arthur J. Goldberg: -- without reference to the legal effect of it --

Mr. Irving Galt: Right.

Justice Arthur J. Goldberg: -- that when he gets off with this bonded trust and then it's placed in the possession of the --

Mr. Irving Galt: Plaintiff.

Justice Arthur J. Goldberg: Of the plaintiff, places their possession.

Mr. Irving Galt: Correct.

Justice Arthur J. Goldberg: That's your argument, is that correct?

Mr. Irving Galt: Right.

Justice Arthur J. Goldberg: Let's go to the airport, in their premise.

And their -- those premises are not the type of bond this warehouse from which they were withdrawn, that's your point (Voice Overlap) --

Mr. Irving Galt: That is certainly correct, Your Honor.

I don't think Mr. Tuttle will (Voice Overlap) --

Justice Arthur J. Goldberg: Indeed I understand your position of custody.

Mr. Irving Galt: Right.

Justice Arthur J. Goldberg: (Inaudible)

Unknown Speaker: (Inaudible)

Mr. Irving Galt: Pardon.

Justice Hugo L. Black: (Inaudible)

Mr. Irving Galt: To -- no.

What they do is they deliver them to the departing airplanes.

They -- the plaintiff delivers this after a sale is made, customers come in.

Departing airline passengers and I add the word "presumably" because it would be easy for me or anyone to pose as a departing airline passenger, but departing airline passengers come into their place of business, identify themselves as such in some way.

And then the liquor is sent to the plane from which they are to depart and presumably not delivered until the passenger reaches his destination overseas.

Now, I want to make one thing very --

Chief Justice Earl Warren: Do you say presumably --

Mr. Irving Galt: -- clear and emphatic.

Chief Justice Earl Warren: -- do you say presumably not delivered until then.

Mr. Irving Galt: Yes.

Chief Justice Earl Warren: Is there any evidence that they -- that any of this liquor has been otherwise delivered?

Mr. Irving Galt: No.

I must say to Your Honor, first of all, we haven't had the -- haven't had any investigation made of overseas planes, trips and anyway.

We have been under a stay both successive formal stays and informally accepted stays which have prevented us during the course of this litigation from in anywise in investigating or conducting any activities with respect to their operations.

But I point to the fact that this Court itself has said many times, it has noted many times, the tendency of liquor to get out of bounds, language used in cases like Duckworth and the like.

But I think it's clear here that many things could and might be done under an operation of this sort.

And this is what we not only very strongly suggested below but what we certainly suggest here.

However, we don't rest on diversion.

What I want to point out to the Court is that this liquor is stored sometimes for 30 days or more by acknowledgment of the plaintiff's precedent at the trial.

He was admitted that for a period of 30 days and more, this liquor is stored at the plaintiff's private premises before being resold to departing airline passengers.

Now, it seemed perfectly clear to me, the New York statute is printed in the appendix at pages 42 and 43 of our brief.

First, that this plaintiff, beyond question, is purchasing from wholesalers, causing the liquors to be delivered to them in the State of New York across state lines, keeping the liquors, storing the liquors, soliciting sales in New York and selling in New York.

All of that is plainly selling within the clear and explicit language of Section 3, Subdivision 28 of our New York Alcoholic Beverage Control Law.

Justice John M. Harlan: The Court would seem to be very clear that this New York statute did not reach this operation at all.

It all but held that as I read its opinion.

Mr. Irving Galt: Well, the court below, I -- I must say this, the court below took the last phrase of the statute, which is printed at page 42 of our brief, and shall include the delivery of any alcoholic beverage in the State.

As though it read, I must include the delivery of any alcoholic beverage in the State.

Now actually, there is delivery to begin with.

It's delivered from the wholesalers to these people.

That's the first point.

But in addition to that, I want to point out that the -- this is a very broad statutory definition.

New York is protecting itself in the trafficking in liquors.

And therefore, it's very clear that this was not meant to limit the statutory definition and to so narrow, the ordinary concept of selling as to require in every instance for a sale delivery ultimately to be made in the State of New York.

Justice John M. Harlan: This statute --

Mr. Irving Galt: This was the broaden --

Justice John M. Harlan: -- it's never been construed by your courts, I take it by the New York court.

Mr. Irving Galt: The Subdivision 28 --

Justice John M. Harlan: I mean --

Mr. Irving Galt: -- I'm sure it has been on this particular --

Justice John M. Harlan: Well, not under -- in relation to this enterprise.

Mr. Irving Galt: No.

But I will say, I will say that there's a case which is cited in our brief, the Red Hook case in New York Court of Appeals, the case which I argued some years ago, which will show very clearly that the New York courts undoubtedly would construe this and I say this was all due deference to the court below, undoubtedly would have construed this operation is coming within the sales definition.

More important, Mr. Justice Harlan, note -- at no time in the initial stages of this litigation and during and through the trial that the plaintiff suggests that it wasn't within the definition.

What plaintiff's suggestion is and was or was at that time, they may have changed it by now.

But throughout the trial, and after they're going up to this Court and then the trial which followed, throughout the trial, their position was that this was -- this application of New York's laws to its operations where in violation of the Supremacy and Commerce Clauses of the Constitution.

And it's only now possibly with the -- if it is in suggestion from the opinion below that counsel now elaborates have been on the same sort of ideas and Your Honors suggest.

But I think it's very clear and I don't doubt for a moment that -- that the Court will so find it that the New York statute amply covers, clearly and explicitly covers the appellee's operation.

Justice Potter Stewart: How about the case of Rosenblum against Frankel in the appellate division?

Mr. Irving Galt: Well, that was the one I think which followed During against -- During against Valente and there, I can only say of that case this.

That's not New York's highest court --

Justice Potter Stewart: I understand that.

Mr. Irving Galt: -- but it is a pronouncement, a broad pronouncement as to not dealing an international transaction.

Justice Potter Stewart: Right.

Mr. Irving Galt: It must be remembered that Rosenblum followed the During case, During against Valente.

During against Valente was -- would concerns solely with the single free trades on that New York has, the one in Staten Island.

And that whole case was postulated and premised on that concept of the exclusivity of federal jurisdiction and a free trade zone.

And when in -- in Franklin -- Rosenblum rather against Frankel, the Court delivered that rather strange suggestion.

It was done on the basis of the During case which I had nothing whatever to do with any such proposition.

I don't think that that case, by any manner of any means, in anywise determine -- is determinative of this issue, very clearly, I think under any approach to this case.

They are within the -- the physical functional requirements for the New York statute.

Justice Potter Stewart: But truly not for us to decide, I suppose your position is, isn't it?

Mr. Irving Galt: Well, now, if there are any questions of -- of state interpretations, and we wanted to wear it include the trial that there would be, then we would say we have a defense of equitable abstention here.

We were allowed to use that defense.

We are allowed to use it.

We feel that this Court need not be impeded by any such situations as Your Honor has just suggested that they are not truly dispositive of it.

But if it were a case of New York construction, I should very much like the opportunity of going before the New York courts for that construction.

We had not thought it necessary.

We're anxious to dispose of this.

We feel this solicit operation is going on check something like three or three and a half years now.

And we feel that the -- the orderly administration of justice in the State of New York and indeed throughout the States of the country require that this kind of operation be stop in its tracks.

Justice Potter Stewart: So the case the way it's been -- being argued here, as I understand it, is upon the hypothesis that the New York statute does, by its terms, apply to this operation.

And so the issue here is whether it can constitutionally do so, isn't that it?

Mr. Irving Galt: This is our hypothesis and more than that, we think the language of the statute is so clear.

The principle is so obviously applicable that there can be no question that they covered the operation.

The question, as Your Honors suggest, is the constitutional question which originally these people raised in coming in for declaratory judgment and adjunctive relief.

Justice Potter Stewart: And if it hadn't been that question, they couldn't have a three-judge federal court.

Mr. Irving Galt: That is correct.

There would have been no substantial federal question and I assume that that's what this decided --

Justice Potter Stewart: That was this case all about.

Mr. Irving Galt: -- was this Court held, although I did not argue it here on that prior occasion.

Justice Potter Stewart: (Voice Overlap) --

Justice John M. Harlan: I suppose you -- excuse me.

Suppose -- neither of you want us to construe the New York statute.

Mr. Irving Galt: I can't speak for Mr. Tuttle.

Mr. Tuttle has very strong views of his own and I speak only for myself.

I would assume that that should be Mr. Tuttle's view but I -- I would rather leave that to Mr. Tuttle himself.

Justice John M. Harlan: My difficulty --

Mr. Irving Galt: He has three (Voice Overlap) --

Justice John M. Harlan: -- my difficulty is you're asking us to decide the constitutional question on the premise.

If the New York statute does cover this in the lower court and the strongest kind of term has indicated that if it had to decide the question, it doesn't think of New York.

It's a kind of hypothetical question.

Mr. Irving Galt: Well, the lower court just expressed certain doubts based on -- on its own reading, or if I may differentially and I think more accurately say so, misreading of that language which I mentioned before.

They did not go so far as do anything more than expressed opinions on that one.

They were starting to talk about equitable abstention.

However, if there'd be any question of New York interpretation, and I think there is none, I think these operations are very clearly within the New York statute, then I would say this case could not have been tried by a three-judge court and must first go to trial before the New York courts on the question of statutory construction.

Chief Justice Earl Warren: Could the -- could the respondents obtain a license in New York to transact this kind of business?

Mr. Irving Galt: No, they could not have for the reason first, that their premises were not located in the place which would have been licensable under the existing state of law.

And moreover, under the -- under the situation which existed in New York under Rule 17 and Section 17 of the ABC law which have been construed by the New York courts, they -- there were no licenses, no resale licenses or retail licenses being issued.

So they would not have received a -- a license.

Chief Justice Earl Warren: What is there about the premises?

Mr. Irving Galt: If they complied with New York requirements, they -- they possibly could receive them.

Chief Justice Earl Warren: What is there about the premises that would -- that would prevent them?

Mr. Irving Galt: They are located on the second floor of a building.

That premises must be retail -- liquor licenses must be for stores on street level, among other things.So physically, they did not meet the requirements.

Now, the contention here is -- is as to the Supremacy and Commerce Clauses and for the wedge in that respect.

The plaintiffs attempt to use Section 311 of the Tariff Act of 1930.

Now, Your Honors know that's simply a tax exemption statute.

And even assuming these plaintiffs could comply with it, it would have absolutely no bearing insofar as giving any affirmative right on the federal law.

And we've had this question in the case that's cited here, the American Travelers Club, a different three-judge statutory court in the same southern district.

We've cited it in the briefs.

Now, I think that both the plaintiffs and the court below certainly overlooked the unique constitutional status of liquors on the -- the Twenty-first Amendment under such acts as the Wilson, Webb-Kenyon, Federal Alcoholic Administration Act and the like.

Those -- those statues, time doesn't permit it, but there at page 34 of our brief, even if we didn't have the Twenty-first Amendment, I would think both from the judicial history of interpretation of those statutes and from the language of the statutes themselves that it would be inconceivable that this operation could be set up as it has been in New York and with the Twenty-first Amendment.

Of course, the Twenty-first Amendment absolutely prohibits any operations in violation of state law where there is use for delivery of liquor within the State.

Now, there are undoubtedly has been, if we need to go so far as the Twenty-first Amendment.

Unquestionably, there is use in the State of New York.

First, there's delivery, the liquors were delivered to them in the State of New York, sold to them as the sale to them first from the wholesalers.

Then there is use -- they're stored in New York, there is solicitation, there were sales.

If this be not use, then I don't know what this clear and explicit language of the Twenty-first Amendment could possibly refer to.

Now, there are many Supreme Court cases and many decisions of this Court in which it hold that under Section 2 of the Twenty-first Amendment, the State power cannot, when it comes to liquor traffic, be limited by the Commerce Clause.

And there are many cases to that effect beginning with the State Board against Young's case in 1936.

Not long after the Amendment, a series of cases came into this Court.

The Twenty-first Amendment was construed and construed no uncertain terms.

And it -- there were cases later on after these series of cases that we've mentioned State Boards, Ziffrin, Mahoney and the like.

There were cases such as Duckworth and Carter which involve simply transportation through a State where this Court did not find it necessary to reach the Twenty-first Amendment.

Although some concurring justices, like Mr. Justice Jackson and Mr. Justice Frankfurter, thought that the Twenty-first should been -- should have been reached.

But I should think that if there was any question as to the applicability of the Twenty-first Amendment, the situations of the kind we have at bar, they certainly will lay finally to rest by this Court's 1958 decisions in California against Washington and even more appropriate, Gordon against Texas.

It's true those were first, two or three line per curiam opinions but they were -- they cited the Twenty-first Amendment very significantly and they allowed that none of their force by the fact that they were short per curiam opinions.

I --

Justice John M. Harlan: They also say -- they also say (Voice Overlap) --

Mr. Irving Galt: Yes.

But the important and decisive thing, it seems to me, is that they cited, under those state of facts, the Twenty-first Amendment.

And I would say that if need be, if we were deprived of the Twenty-first Amendment's applicability in this case, most assuredly, the other factors -- federal statutes that we've mentioned, that we have to show reasonableness of the regulation, it would be very easy to show it although it's impossible in the one or two minutes I think I have left.

Chief Justice Earl Warren: We'll recess now.

Featured:

Hostetter v. Idlewild Liquor Corp. - Oral Argument, Part 2

Wed, 16 Jan 2013 22:47:59 +0000

Case:

Hostetter v. Idlewild Liquor Corp.

Media File:

116_19640323-argument-2

Related Transcript:

116_19640323-argument-2

Transcript:

Argument of Irving Galt

Chief Justice Earl Warren: Mr. Galt, you may continue.

Mr. Irving Galt: Mr. Chief Justice, I will continue only for a minute or two because I want to reserve five minutes.

I simply want to say first that with reference to Gordon against Texas and its citation both of Carter and the Twenty-first Amendment, I think it's very clear that this indicates not only that this Court is ready to invoke the Twenty-first Amendment.

But that even in situations of this kind, even where a test of reasonableness might be imposed such as in Carter, this Court will also dispose of the issue on the reasonableness of the state regulation under the circumstances.

But what I want most to emphasize is that there is here at this late date an issue of state power.

Now, I should have thought that this issue of state power was disposed of and removed after cases like Young's Market, Mahoney against Triner and Ziffrin.

And there are today, at this late date, nevertheless, attempts not only in this case but you will find in Texas, in California, elsewhere in the State of New York and probably elsewhere in the nation that they are all looking through this case to see whether this Court will permit the erosion of state power under the Twenty-first Amendment.

Chief Justice Earl Warren: Mr. Tuttle.

Argument of Charles H. Tuttle

Mr. Charles H. Tuttle: May it please the Court.

In order to -- in epitome get the facts clearly before Your Honors, I'm going to just read the findings made by the Liquor Authority itself in submitting the question to the Attorney General and by the Attorney General in his opinion.

We go along to those facts.

Now to have said that as it's been said here a moment ago, because of some stays, they -- the Liquor Authority was barred from an adequate investigational facts.

The Liquor Authority has been over our place time and time and time again at all our records.

Now, the Liquor Authority on May 9th, 1960 submitted a letter to the Attorney General asking for his opinion.

And in describing the facts, they referred to this business by the plaintiff under the sanction and in fact, through the use of the United States Government, Treasury Department said, "Traffic in alcoholic beverages having a situs actually or constructively without the State are not intended for use or delivery within the State."

That's the Liquor Authority's own language after its investigation of our business.

Now then, the Attorney General responded to that on June 30th, 1960 on page 17 of the record.

He said the facts are -- and then having described the diameter and so forth of our premises as the Idlewild, he goes on to say a portion of the lease premises, the premises are leased from the by State Agency, the New York Port Authority which by the way has in its lease which is part of the record a provision that no liquor shall be sold in these lease premises except in-bond liquor for export.

Now a portion of -- says the Attorney General, "A portion of the leased space will be use for storage and display of the liquor particularly by the Corporation from suppliers, from stock held by the suppliers in-bond.

And will remain under bond and under supervision of the Bureau of Customs at all times until delivery to the airplane.

The liquor is to be shipped by the lessee from the United States on the plane on which the passenger departs but it's not to be delivered to the passenger until he reaches his foreign destination."

Shipments is to be -- shipment is to be made on documents approved for export by the Federal Government.

The United States Bureau of Customs has indicated that it treats this transaction as an export within the meaning of Section 311, now 1311 of the Tariff Act of 1930.

Now, the practical issue and it embodies the legal issue in this case was stated by the court below in a single sentence.

The plaintiff will be put out of business by the Liquor Authority unless it is accessible in this action.

In other words, this is not a case where the Liquor Authority is trying to invoke some section of the local law for the purpose of supervision or as in some of the cases which have come before this Court in the past where there has been a State requirement of a permit in order to let the State know who is doing the business.

Those have been deemed reasonable.

But here as they claimed throughout the brief and today is that there is to be unconditional elimination not only because of the plaintiff's business but of the Government's sanction, Federal Government's sanction and use of the -- of this method in furtherance of its policies for the regulation of foreign commerce and in the national interest, I'll come to that in a moment.

Now, the Liquor Authority's brief opens with two points, their points, and they're asking this Court to decide it.

The first is on page 25 -- page 11 or rather of their -- of the appellant's brief.

Four pages are devoted to arguing before this Court that appellee's liquor operations are clearly encompassed by the language of the New York's Alcoholic Beverage Control Law.

I dispute that and I've always dispute it.

And they say now that if the matter is to be considered by this Court, they want to fall back on the equitable extension -- abstention doctrine.

Notwithstanding that at the opening of their case in the court below, they said two things, first that we wish to have the Court understand that we withdraw our third affirmative defense, which is the defense of equitable abstention.

They asked to withdraw that.

Justice John M. Harlan: Where is that in the --

Mr. Charles H. Tuttle: I -- I had it on a page --

Justice John M. Harlan: (Inaudible)

Mr. Charles H. Tuttle: No, I'll find it Your Honors.

It's at the opening.

Justice Byron R. White: (Inaudible)

Mr. Charles H. Tuttle: Decided what sir?

Justice Byron R. White: (Inaudible)

Mr. Charles H. Tuttle: Yes.

Your Honors will find that at page 68 of the record.

Mr. Galt, I won't read it, that's his.

Now consequently, we have the Government's -- the Attorney General's case resting on two points, success for both of which is essential to their total success.

The first is that to use their language of their heading, that the local law clearly encompasses what is being done and works a prohibition on it, and why?

The words are directly in the opinion of the Attorney General whose opinion I've already called Your Honors' attention in which he says, "As the predicate for his own conclusion of complete elimination, there is no provision for a license for this type of transaction.

Any suggestion that may have come here that somehow really we can get a license is mistaken."

Here, we have a construction by the Attorney General as the basis of his decision that there is no provision in the local law for this type of transaction.

Now what type of transaction is referred to?

I've already read it from the Liquor Authority's letter to the Attorney General in which it says it's in, "Alcoholic beverages having a situs actually or constructively without the State and not intended to be used or delivered within the State."

Justice Potter Stewart: Where is that in the record, Mr. Tuttle?

What -- what page are you reading from?

Mr. Charles H. Tuttle: The authority's letter is --

Justice Potter Stewart: Yes.

Mr. Charles H. Tuttle: -- from which I have read is page 161 of the record.

Justice Potter Stewart: Thank you.

Mr. Charles H. Tuttle: You'll find that right near the top there.

First full paragraph on page 161.

Now, the second proposition is that having claimed that the local law in -- clearly encompasses this business.

Their second proposition is, and I'll read it from their own language.

While he is taken from their former brief when this case was before the Court, the same language is reflected in their present brief and it's this broad generalization, regulation of the liquor traffic in the State, by the State is paramount to the Federal Government's right to regulate whether under the constitutional provisions concerning commerce, exports and imports and supremacy or under statutory and regulatory provisions of a preemptive character.

I'm unable to find any case in this Court or in any other court that has any such broad general assertion which were deprived the right of the United States as a nation to deal with foreign commerce with the rest of the world and above all to make reciprocal arrangements since it was done in this case without a country.

Now following to this -- matter of these two claims, it goes back to the beginning of their case.

At the opening, they've filed a motion to dismiss our complaint for a failure to state a cause of action.

You'll find that on record 25.

And then they embodied the same claim that we stated no claim on which redress could be given in their second offense, 64.

Now, the time when this case was before this Court previously, that was a question which was raised in defense of the actions below which was -- were raised here.

And this Court said and I quote, 370 U.S, "Assuredly, the complaint at least formally alleges that basis for equitable relief."

Now, the fact is, that the basic facts, the basic facts that are stated in our complaint in which induce that language by the Court, this Court, were all proven at the trial.

Now, the peculiarity of this trial was that the Liquor Authority never put a witness on the stand, never introduced an exhibit, and never disputed the authenticity of the volume of forms by the Customs Bureau which we put in evidence.

And in consequence, the findings of fact below rest upon undisputed documentary evidence showing unquestionably that this is the action of the U.S. Bureau of Customs established under the authorization of the Treasury Department for the purpose of furthering the interest of the United States as stated in the title of the Tariff Act.

An Act to provide revenue to regular -- regulate commerce with foreign countries, to encourage the industries of the United States, to protect American labor, and for other purposes.

Now, this in-bond liquor is sold tax-free and you can readily see the relation point of view of policy to those objectives stated in the title tax-free, which it means a difference -- a differential of about $3 a bottle.

And consequently, there is encouragement to our travelers particularly in the economy class to purchase one or two bottles tax-free, but in-bond for export only.

Now, another thing that is striking, it is the finding of fact by the court below that in all of these because of the fact that this is business conducted in effect by the United States Bureau of Customs itself through us at that one little spot in the arrivals building which is by the way is in the center of the U.S. Customs Bureau headquarters.

As the president of the company says, "We do our business in a goldfish bowl, in the middle of a police station."

And the finding of fact was that there is not only no allegation in the -- in the Attorney General's answer but there isn't a particle of evidence that in the four years that this operation has been running, even a single bottle ever got diverted into the city -- into the State of New York, ever became part of the common mass in the State of New York.

It all moved from bonded warehouse, in-bond, bonded trucker through and the bonded truckers bill of consignment, it was not to the plaintiff.

I can't stop to show or call your attention to the forms but the long series are all exempt in evidence.

The release from the ware -- bonded warehouse is on form 7512, which is in evidence here, and it's a form which requires that the liquor be consigned to the Collector of Customs at this -- to the actual airport.

And the trucker receives a form which require -- he is in-bond requires him to transport that and deliver it to the Collector of Customs.

Now consequently, the perspective here is not at all that presented to Your Honors in the first instance here today.

It is that we are the creature as it were which is being used by the United States Government because somebody has to sell if this policy is operated at all.

We are the creature.

Now of course, Your Honors will recall that from the very earliest times, McCulloch against Maryland, it was decided that where the Congress has constitutional power, it may determine the means.

And it has determined the means as presented in this case.

Now, the procedure -- the procedure is not ours.

We don't lay down this procedure.

And Mr. Galt in the court below stated the fact simply and straightly.

You'll find it on Record 84, they, that is the Customs Bureau set up this procedure.

They set up the procedure.

Chief Justice Earl Warren: Mr. Tuttle, may I ask you?

Is there anytime from the time that the liquor comes in to the State of New York until the time it goes out that the respondent has any control of it for the purpose of disposing of -- any of it to the people of New York?

Mr. Charles H. Tuttle: There -- there is no moment possible.

Chief Justice Earl Warren: No moment?

Mr. Charles H. Tuttle: They -- the Bureau of Customs are -- they check everything we do.

We are required on a form as soon as the liquor comes in to this space.

Now, let me emphasize about this space.

It's a small space.

It's across the hall from the Chief of the Bureau of Customs.

He opens the door, he looks right into our place.

Before we got there, we had to submit to the Bureau of Customs a design for that floor and for the petitions.

And they approved it and they have approved it for four years.

Bear in mind -- and please sirs that whatever letter from the Treasury Department started this whole situation, they have been approving everything we've done for the last four years.

And furthermore, I -- I ask Your Honors to bear in mind that the Liquor Authority has never asked the Treasury Department -- I mean the Bureau of Customs or the Treasury Department to change their regulations, to add something.

They've never been anywhere near them and they have never established that we have violated any of the regulations as they stand.

No such claim was made, no allegations.

They have never shown that the Bureau of Customs itself ever claimed that we have not faithfully performed the assignment that was given.

Justice Arthur J. Goldberg: Mr. Tuttle, how long (Inaudible) at page 105 of the record that the merchandise delivered to this (Inaudible)

Mr. Charles H. Tuttle: It -- it --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Charles H. Tuttle: Well --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Charles H. Tuttle: No, I don't think you are.

The question is what is meant by the word delivery.

We have -- I'm emphasizing the space.

It's called a Customs approved space.

In other words, it's part of the line or stream of export where the liquor comes to the point where somebody comes forward to take advantage of the tax-free policy of the United States Government.

Now, the bonded trucker Your Honor is under a poll which you'll find there and if he is to deliver it to the Collector of Customs, the truck comes in and the Customs people are all around the place.

It's brought up in that sense to ask Custom's approved space, of course we are there.

Now, it's put in the back of -- of this room screened from you by law.

And all that we can put out in front is some dummy bottles so that the customer can see the -- the branch that are available but he doesn't see the liquor.

Now then, he comes to the window and he presents his passage ticket.

An entry is made on our customers' required records that we have received an order for two bottles we'll say.

He doesn't get it.

We are required by the Bureau of Customs to put that in a sealed carton.

And that sealed carton is then moved over to the pusher on the plane.

Nobody gets it, nobody has it.

And then, the pusher has to sign a receipt by the -- of -- of this -- of the contents they sealed to -- to be delivered to the passenger, the man who bought it only when that man is on the ramp in a foreign country.

Now --

Chief Justice Earl Warren: Mr. Tuttle, may I -- may I ask --

Mr. Charles H. Tuttle: Yes, sir.

Chief Justice Earl Warren: -- just one more -- more question.

Assume just for the sake of argument that your client was to dispose of some of this liquor illicitly in -- in New York, what disciplinary action would he be subject to from the United States?

Mr. Charles H. Tuttle: Well, I would assume immediately that the Bureau of Customs would -- could withdraw its cooperation with us altogether.

I had -- I would assume that.

Furthermore, a violation of the regulations of the Bureau of Customs is -- isn't something of a federal offense.

Chief Justice Earl Warren: I see.

Mr. Charles H. Tuttle: Yes.

Chief Justice Earl Warren: And this was -- that would be a violation of the regulation?

Mr. Charles H. Tuttle: That would -- that was -- that would be a violation --

Chief Justice Earl Warren: I see.

Mr. Charles H. Tuttle: -- if we did that.

Now, nobody claims that we ever did it.

Now, let me very briefly deal with the very first point that they asked you to decide.

They believe that the local statute does encompass what is being done here.

Justice Potter Stewart: Is that -- is that issue for us to decide Mr. Tuttle?

Mr. Charles H. Tuttle: All I know is that they put it before you to decide --

Justice Potter Stewart: I know that too but you, what do you think, it's a --

Mr. Charles H. Tuttle: Well, I think this that.

If you should find out that the local statute does not encompass this, then their whole argument about the Twenty-first Amendment might very well become moot.

Justice Potter Stewart: Now, that's the point and it's -- it's for the courts of New York rather than for this Court to say what the New York statute means, isn't it?

Mr. Charles H. Tuttle: Well, all that was before -- if I may respectfully say so, before the Court on its previous occasion because the courts have held there, three of the judges at the District Court and I had held that the matter should be the subject of equitable abstention.

Justice Potter Stewart: But a three-judge court had never held that.

Mr. Charles H. Tuttle: No, the three-judge court simply said they found that they have no jurisdiction as an appellate court.

They were not a three-judge court.

Justice Potter Stewart: Yes.

And I mean that a -- no three-judge District Court had ever abstained.

And what this Court said --

Mr. Charles H. Tuttle: No.

Justice Potter Stewart: -- was that the individual district judge shouldn't do that.

He should convene a three-judge court and then let that --

Mr. Charles H. Tuttle: (Inaudible)

Justice Potter Stewart: -- let that statutory court decide whether or not to abstain.

Mr. Charles H. Tuttle: Well, Your Honors, this doctrine of equitable abstention is certainly a discretionary battle.

This -- the cause of this litigation by my client has been tremendous and the court below has said that they did not think that it would be equitable to send us after all these trudging again into the state court.

Now, let's look at what has -- what is the state statute.

Is there any color for this?

And has the state courts not themselves spoken about it?

If you'll read as I know you will, the statement of purpose in the local statute.

I deal with aspects of it in my first point, I won't -- it's on their first point.

They say it is necessary to regulate and control the manufacture sale and distribution within the State of alcoholic beverages for the purpose of fostering and promoting temperance in their consumption and respect for and obedience to all.

Now, there is no conceivable relation between the export that we are talking of here and their consumption in the State of New York.

This -- the State of New York isn't affected in the slightest adversely by what's being done.

Their argument and it comes down to this as a huge begging of the question.

They say that there is no provision in the local law for a license.

Ergo, what we're doing is illegal.

They overlooked that the legislature is familiar presumably with the constitution and with the relation of the nation to foreign commerce and that the absence of a provision for licensing this, doesn't argue that the legislature intended it to be illegal.

But on the contrary, it argues for the proposition that the legislature never attempted to touch foreign commerce and that's exactly what the courts have said which I'll quote in a moment from our own State.

But then, this introductory statement of purpose goes on to say that it is for the protection, health, welfare and safety of the people of the State.

And it's impossible to see how -- what goes to Europe and never gets into the State can have anything to do with the health and welfare of the people of the States.

Now, they cite a section which says this, "No person shall manufacture for sale or sell in wholesale or retail any alcoholic beverage within the State."

They keep overlooking those words, "within the State."

In other words, the relation of the liquor must be to the common mass in the State because that is the -- first place, the limitation on the constitutional powers of the State.

In the second place, any legislature would certainly have some such policy very clearly in mind.

Now, our courts in the two cases, I'm afraid Mr. Galt has cited those.

They are both liquor cases and they both involved the matter of the Twenty-first Amendment.

When you read the opinions in it you'll see, and the second case citing the holding in the first case puts it in the sentence, neither do the regulatory powers of the State Liquor Authority extend to international transactions, even to alcoholic beverages except sales for domestic consumption in New York State.

Now, I'd tackle the time limitations Your Honor.

I must leave a whole and interesting subject to what the Twenty-first Amendment means to my brief.

And I think that you will find that I have a collection of authorities by this Court saying expressly that where the transportation is solely through the State and not intended to use the Liquor Authorities' own words, for use or delivery within the State that it is not affected by the Twenty-first Amendment.

Because otherwise, it wouldn't be a nation and we'd be at the mercy of every coastal state on the Atlantic and Pacific Seaboard.

Justice Byron R. White: (Inaudible) may I ask you (Voice Overlap) --

Mr. Charles H. Tuttle: Yes, sir.

Justice Byron R. White: (Inaudible)

Mr. Charles H. Tuttle: This Court has held in reference to the Twenty-first Amendment that it does not apply to foreign commerce going through the State only.

I have the authorities here.

But, a State may ask for a permit in connection with that transportation so as to know who is bringing it in, who's carrying it and where it's going.

In other words, to use the language of this Court, there may be a reasonable measure of protection to the State against the possibility of diversion, but here of course is total elimination.

Justice Byron R. White: (Inaudible)

Mr. Charles H. Tuttle: That's it.

Justice Byron R. White: (Inaudible)

Mr. Charles H. Tuttle: That's it and they say that because of that, we're out of business.

Now furthermore, it is an ownership that the local statute unlike those statutes where this Court spoke about the case of permit doesn't provide even that much.

There is no regulatory provisions in here.

The argument is, we are out because there is no provision for a license and they are under no obligation to follow us up with a permit because there is no provision for a permit.

In other words, I say the logic of the whole situation is that the legislature knew what it was doing and they were intended to make this apply.

Rebuttal of Irving Galt

Mr. Irving Galt: I share Mr. Tuttle's dilemma in my own recurring dilemma of much affirmative to say and no time left within which to say it but I want to comment on a few of Mr. Tuttle's suggestions.

First of all, picking up Mr. Justice White's last suggestion, suppose New York State were a dry state?

The question, I -- I meant question.

I beg Your Honor's pardon.

I -- I didn't mean to characterize it improperly.

The -- I suppose New York State were a dry state, is it conceivable that this kind of operation could exist selling liquor to people liquor which is stored within the State?

I think the answer is obvious.

Justice John M. Harlan: Do you think New York --

Mr. Irving Galt: That --

Justice John M. Harlan: Do you think New York could pass a statute making it illegal for this enterprise or enterprise of this kind engage solely in foreign commerce?

Mr. Irving Galt: Absolutely it could do it but --

Justice John M. Harlan: Yes, but I'm just trying to (Voice Overlap) --

Mr. Irving Galt: -- using Mr. Justice Frankfurter's language in that concurring opinion on the Frankfort case --

Justice John M. Harlan: That's really (Voice Overlap) --

Mr. Irving Galt: -- they can have a high barrier, low barrier, no barrier at all --

Justice John M. Harlan: Is that --

Mr. Irving Galt: -- and an insuperable barrier.

Justice John M. Harlan: That's really what this case comes down to, isn't it?

Mr. Irving Galt: In a sense, yes.

As a matter of fact, I -- I was going to say --

Justice John M. Harlan: Because you don't want to regulate, you want to prohibit (voice overlap).

Mr. Irving Galt: No, it isn't a question of not wanting to regulate or not wanting to prohibit.

These are cast in terms which suit the plaintiff's side of the case but it works this way I should say.

It did -- much reference has been made to the fact that it is licensable.

Well, no New York retail license -- no New York retail would be operator is licensable at the moment but there are suggestions that New York at any moment.

In fact, the New York Times has been indicating what the State Liquor Authorities' views are.

Retail licenses will be opened up again.

His position is actually no different than that of any other retail licensee and that purport what Mr. Tuttle suggested about --

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: He -- he sells in foreign commerce --

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: No.

But he -- but that isn't true I think, a true definition of their activities.

They sell right in the State of New York.

This is not export.

Mr. Justice Douglas' opinions in those cases in which he describes exports as being immediate transactions.

This -- this delayed reaction --

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: The delivery to the customer actually constructively is delivered to him on the plane.

He makes his purchase and he -- and he gets tired, "I'll do it right here in New York."

But by this gimmick of delivering it over in Europe, the transaction suddenly takes on a different nature.

It renders it nonetheless, I say to you Mr. Justice White a sale, a clear and explicit sale within the meaning of the New York statute.

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: That's right.

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: It can -- it can certainly --

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: Yes.

It is our position that if they want the one to the Commerce Clause, they can prevent -- they can prevent this type of operation.

Justice John M. Harlan: What it comes down to is saying that the Twenty-first Amendment repeals the Commerce Clause so far as liquor is concern?

Mr. Irving Galt: No.

I -- I don't say that.

I say that the Twenty-first --

Justice John M. Harlan: Well, why don't you --

Mr. Irving Galt: I'd -- I say that the Twenty-first Amendment has made sure that the right of the State to regulate traffic in liquor is paramount to that of the Federal Government but that where the State does not act.

And to the extent that a State does not act, there is no question that -- that Congress does have the right to have export and import operations in commerce in liquors.

Nobody argues to the contrary.

But the point is that the Commerce Clause is subordinate to and only supplementary to the power of the States to regulate traffic and intoxicants.

And that's clearly spelled out in Your Honor's own decision.

Justice John M. Harlan: -- it was -- suppose -- supposing the -- supposing what it -- was done here had been done by the Federal Government by making the Collector of Customs, Federal Collector of Customs a purveyor of this liquor, could New York stop that?

Mr. Irving Galt: Make the Federal Collector --

Justice John M. Harlan: Is the -- leave out Bon Voyage entirely and as the Federal Government just says, "We'll have our local Collector of Customs to furnish this -- this facility to overseas passengers."

Could New York stop that?

Mr. Irving Galt: I would think so in view of the Twenty-first Amendment, that would be traffic.

Justice John M. Harlan: That's what I am suggesting is what your argument ultimately leads to that the Twenty-first Amendment repeals the Commerce Clause so far as liquor --

Mr. Irving Galt: Subordinate --

Justice John M. Harlan: -- is concern.

Mr. Irving Galt: All that the federal people have to do is set up a reservation as they did in the Yellow --

Justice John M. Harlan: I -- I'm leaving out the reservation.

Mr. Irving Galt: -- Yellow Summit.

Justice John M. Harlan: Of course the enclave, then you will be out of this one.

Mr. Irving Galt: Of course.

But -- but those things only emphasize the point that which Your Honor is now driving because, where you have and you do have federal reservations, we have a Federal Free Trade Zone in New York State in Staten Island.

That was the subject of the During case.

Precisely, the point there, we -- we can do nothing, the State can control it.

So I -- the Federal Government can control it.

So I say that the Commerce Clause is not actually repealed.

I think that language is a fit if I may say so, too strong.

But certainly, the Commerce Clause is clearly subordinated and the suggestion as -- as to the -- the reference to the policy of New York temperance in Hawaii, these overlooks a whole host of things.

There are all this economic incidents that we stress in our brief.

This situation of having an operation or resale operation in New York, they buy liquor.

It's delivered to them in New York and then they resell it to other people and it can take substantial periods of time before a bottle of liquor is sold.

All of these which can be done by New York retail licensees, perhaps other licensees under the liquor law all of these without the onerous requirements that are imposed on New York liquor licensees without the minimum resale price regulations, without the other restrictions, without the supervision through books and records.

And New York's statute only goes to a supervision through licensing.

This is the key to supervision.

As far as terminating that business, I refer Your Honors to cases like Mahoney against Triner and all the way back to the last century in the Mugler case and there wasn't the slightest doubt, I'm -- I'm certain there's no doubt whatever that if there is such a conflict and if it's within the domain and power of the State, the State can and need be terminate.

It can and it does do that and its authority has been recognized to do that and this situation is no different.

Justice Hugo L. Black: (Inaudible) located down in the center of the City of New York?

Is that your basis?

Mr. Irving Galt: Yes.

Justice Hugo L. Black: (Voice Overlap)

Mr. Irving Galt: This is no different --

Justice Hugo L. Black: -- is not on an enclave.

Are you (Voice Overlap) --

Mr. Irving Galt: There is no federal enclave here Mr. Justice Black.

Justice Hugo L. Black: Suppose the -- suppose the Custom had send it down to any number of companies down in New York, the customers come in and they had agreed to sell it to him, but it wouldn't be delivered until they get over to Spain.

Wouldn't you -- are you treating those two as the same?

Mr. Irving Galt: I'm not quite sure I follow Your Honor -- I --

Justice Hugo L. Black: They've got it in the center of the City of New York.

Mr. Irving Galt: Yes.

Justice Hugo L. Black: They have a store.

Mr. Irving Galt: Yes.

Justice Hugo L. Black: Man comes in who's going to go off on a plane.

And they say, "We can't deliver it to you here but it would be delivered on the plane for you to get it after you get to Spain."

Is -- would that be any difference of what are you arguing here?

Mr. Irving Galt: I see no difference.

The -- the point is that in New --

Justice Hugo L. Black: If -- would the Government set apart any enclave there of any kind?

Mr. Irving Galt: No.

Absolutely not in the lower court in Footnote 4 of its opinion as you will see, specifically recognized that there was no question at all but that this is not a federal reservation or enclave of any sort.

This is precisely the same as though the operation were conducted in the middle of the State, the middle of the city or any part of New York State.

This is no free zone, no federal enclave, nothing of that sort.

Justice Hugo L. Black: That's a fact.

Why do we not have to treat it as though the company is out in the middle of the State could do the same thing?

Mr. Irving Galt: That's exactly the point.

I -- that was the reference I made when I said they were extending their sales offices now.

Why could not this -- it is not the United States Customs division or department to which has been entrusted the task of regulating and supervising the distribution of sale of liquor in the State of New York without criticizing that agency.

I say it's for the State of New York and in other States, for those States to regulate and supervise liquor traffic and in traffic and intoxicants in those States.

And here, we have precisely the opposite.

I -- why -- were not arguing as far as Section 3 (11) is concern which is only an exemption statute anyway.

We have at pages 27 and the following of our brief showed that this does not apply anyway.

In fact, these plaintiffs don't even comply with Section 3 (11) as Your Honors will see with the argument beginning at page 27 of our brief.

Now, as far as Customs supervision is concern, it's only a paper supervision.

It is not -- there are no Customs personnel and the record shows that as signed to the plaintiff's premises when the liquors are brought in, when the liquors are delivered to the plane, when they're on the plane.

Now, I took the position and Your Honors can see it at page 80 --

Justice Byron R. White: Well, what if there were Mr. Galt, would it make any difference to your argument, is it?

Mr. Irving Galt: No, except this.

The thought of diversion which was raised by Mr. Tuttle, he made quite a point of the opportunity for diversion.

Actually, Your Honors will see from the record that my position was that we weren't bound to offer proof of diversion but I know that there is rich opportunity for diversion.

Suppose -- suppose someone comes in --

Justice Hugo L. Black: What is the relevance --

Mr. Irving Galt: -- and impersonate the passengers.

Justice Hugo L. Black: What is the relevance of that to your argument?

Mr. Irving Galt: Suppose this liquor is put on to the plane and take them right off?

Justice Hugo L. Black: I don't get the relevance here of the diversion to your argument, that you're arguing (Voice Overlap) --

Mr. Irving Galt: No, it isn't.

Justice Hugo L. Black: -- within the State of New York.

Mr. Irving Galt: Right.

Justice Hugo L. Black: They deliver it in the State of New York.

Mr. Irving Galt: Right.

Maybe I'm getting on --

Justice Hugo L. Black: (Voice Overlap) in the State of New York.

Mr. Irving Galt: -- Mr. Tuttle's battlegrounds for that and maybe I had no business stepping in on it by I merely mentioned it because he raised the point.

Justice Byron R. White: Well, if that isn't the basic difference for example, if you made any difference to a legal argument, this made a difference between this seller and some seller (Inaudible) because this liquor, if there's -- if there's no (Inaudible), this liquor can be sold only (Inaudible).

Mr. Irving Galt: Oh well --

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: According to Mr. Justice Black's example, it would be sold -- it would be sold to any departing airline passenger from the middle of the State.

It makes no difference physically --

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: -- where the operations --

Justice Byron R. White: (Inaudible) subsequent to the sale.

Now --

Mr. Irving Galt: It might --

Justice Byron R. White: (Inaudible)

Mr. Irving Galt: So might this be sold for consumption in the State?

The possibility exists.

Justice Byron R. White: Don't you think that would make any difference?

Mr. Irving Galt: No.

It -- it would not make any difference except that it makes our case all the stronger.

Justice Byron R. White: Let's assume it was true, (Inaudible)

Mr. Irving Galt: Yes, yes.

Except that this case is much the stronger because of this added feature.

Justice Byron R. White: Why?

Mr. Irving Galt: Because the possibility of diversion if we -- if we had to go -- for instance we had to do it without the Twenty-first Amendment and we have to go, assuming if the test of reasonableness could be applied here.

This would make the test of reasonableness all the easier to apply.

However, our argument is as -- as you suggested a moment ago Mr. Justice White that with the Twenty-first Amendment, once we have delivery and once we have use of the liquors, for whatever reasons, the Congress has made it paramount, this Court's decisions have made it paramount, the right of the States under the Twenty-first Amendment where it comes into play must be recognized if need be as making the Commerce Clause yield to the extent of the exercise of that power.

Justice Byron R. White: But New York -- New York has such as power to make illegal with the effect in any liquor --

Mr. Irving Galt: Yes.

Justice Byron R. White: -- within the State of New York for any purpose wherever it comes (Inaudible) --

Mr. Irving Galt: Absolutely --

Justice Byron R. White: And it -- that you may close the Port of New York to importation of liquor, does that as you say that -- does make any difference?

Mr. Irving Galt: Yes, New York can be an absolutely dry or semi-dry state.

It could be a monopoly state as Mr. Justice Frankfurter said, you can have defense any way you want it.

Justice Byron R. White: (Voice Overlap)

Mr. Irving Galt: It's superable.

Justice Byron R. White: Is that your position?

Mr. Irving Galt: That's -- that's our position.

Chief Justice Earl Warren: Very well.

Featured:

U.S. v. Georgia Pub. Ser v. Comm'n. - Oral Argument

Tue, 25 Sep 2012 22:37:55 +0000

Case:

U.S. v. Georgia Pub. Ser v. Comm'n.

Media File:

81_19621018-argument

Related Transcript:

81_19621018-argument

Transcript:

Argument of Cox

Chief Justice Earl Warren: Number 81, United States, Appellant, versus Georgia Public Service Commission.

Mr. Solicitor General.

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

This case, which is here on direct appeal from a three-judge court sitting in the Northern District of Georgia, raises two questions, the second and third questions on the merits, which were raised in the previous case.

It comes before this Court on direct appeal from a judgment dismissing the Government's complaint for an injunction.

The Government sought an injunction against the enforcement of the Georgia rate schedules on intrastate shipments of goods being shipped on the federal government's bill of lading.

The facts are in no way in dispute.

They may be summarized as follows.

But there are in Georgia 25 federal military establishments and a number of civilian federal establishments.

It's the obligation of the government, in a considerable number of cases when an employee is transferred from post to post for the convenience of the government, to arrange for the transportation of his goods or to reimburse him for the cost of transportation as the government may choose.

The usual practice, and indeed the historic practice, has been for the federal transportation officers to arrange the shipments of these household goods.

They negotiate a rate or award contracts to the lowest bidder.

The property of all the employees will then be shipped on a single government bill of lading.

And, by government bill of lading, I mean not only one to which the government is a party, but a government form of bill of lading which has in it, as I shall point out in more detail later, a number of clauses which are not contained in the usual uniform bill of lading or other bills of lading of that type.

In 19 -- then, the property is paid for of course or the shipment is paid for by the government check in due course of which incidentally usually involves an extension of credit that would be prohibited in the case of a private shipper.

In 1960, there were about 1,100 carrier shipments within Georgia of the household goods of either military or civilian personnel on these government bills of lading.

The procurement activities are governed either by the Armed Forces Procurement Act in the case of property for civilian employees of the Department of Defense or the property of military personnel.

They are governed by Federal Property and Administrative Services Act, which is substantially the same, in the case of shipments of the household goods of civilian personnel.

I will discuss the Act and the regulations a little later.

It's enough to say that in our view, they require procurement officers to obtain the lowest rates possible without regard to state law.

Now, Georgia has a statute of regulating intrastate truck shipments.

It appears on page -- appears on page 69 in the back of our brief, at the beginning of the appendix.

Under Section 613 of their Motor Vehicle Code, the Commission is given power to proscribe just and reasonable rates, fares, and charges for transportation by motor common carriers.

In another section, the Commission is given power to issue rules and regulations necessary to implement the Act and, pursuant to that power, the Commission -- the Georgia Commission has issued a regulation which appears over on page 85, that is very pertinent here.

It requires all shipments to be made under a uniformed household goods bill of lading.

In other words, if this applies, the government cannot adhere to the usual government form of bill of lading.

And down the last sentence in Rule 15, property of two or more families or establishments will not be accepted for transportation as a single shipment.

In other words, the making of a mass shipment of the household goods of 500 or 600 or more people is prohibited at least to the extent that each must be made as a separate shipment under a separate bill of lading.

In July 1960, there was to be such a mass movement, although perhaps not as large as 500 or 600 employees, of employees of the Department of Public Health from Savannah to Atlanta.

Now, the procurement officers of the federal government invited bids.

They received 15 bids -- 13 bids.

Eight of them simply quoted the Georgia rates on household goods.

Five bids were below the Georgia rates and the government accepted the lowest of those bids from Consolidated Van & Storage Company.

Thereupon, the Georgia Public Utilities Commission threatened to revoke the license of Consolidated Van for -- or the permit of Consolidated Van for violating the Georgia Utilities regulation.

A proceeding was started before the State Commission to revoke the license despite the fact that consolidated immediately broke its contract -- or immediately sought to be excused from its contract with the government, the United States sought to intervene before the Georgia Commission but was denied the leave to intervene, and thereupon, the United States filed this bill in equity seeking to enjoin the state authorities from threatening perspective truckers with prosecution under the state law if they should bid below the state rates on government shippers.

The bill sought to enjoin the enforcement of the state regulation upon two grounds.

First, that it was inconsistent with the procurement statutes and policies.

Second, upon the ground that it violated the implied constitutional immunity of the United States.

Here as in the California case, a three-judge court was convened, the issue in due course was limited to household goods.

Originally, the complaint sought to cover all shipments on government bill.

Georgia took the position that her statute, for some reason that I don't understand, didn't apply to shipments of government-owned property but that it applied only to government shipments of property on behalf of its employees.

As so limited, the case came before the three judges on a motion for summary judgment and judgment was entered dismissing the government's complaint.

The three-judge court said that it had difficulty in distinguishing the California Public Utilities case from the Penn Dairies case but that it thought Penn Dairies case was controlled.

We then brought the cases here by a direct appeal.

The first question raised by the Court's order postponing argument on the question of jurisdiction is whether the Court does have direct jurisdiction on this appeal.

We think it plain that it does for the reasons that I stated in the argument of the California case yesterday, that one of our two grounds for seeking an injunction against enforcement of the state law plainly raised a direct constitutional question.

Justice William J. Brennan: Meaning that this is (Inaudible) case?

Mr. Cox: No.

Justice William J. Brennan: Or an immunity.

Mr. Cox: Meaning, by that, so far as it's an immunity -- implied immunity case, there is a direct constitutional issue and that, whether the Supremacy Clause case would give -- would require a three-judge court or not, needn't be considered because if there's -- a three-judge court is required as it is on the implied immunity ground, then it hears and disposes of all the issues and the direct appeal is proper.

The two questions then which require some discussion are other questions of substance.

First, whether the Georgia rate regulation as applied to these shipments under government bills of lading is inconsistent with the controlling federal statutes regulation, and we submit that it is.

The second question is whether Georgia's attempt to regulate the rates for shipments under government bills of lading violates the implied constitutional immunity of the United States and we submit that it does because it's an attempt to regulate the terms on which the government may contract.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: Yes.

I plan to develop that.

Let me indicate briefly why I say that.

In the first place, so far as the argument based on the procurement regulations is concerned, we think that cost -- if it's inconsistent with the federal statutes, a cost impact is sufficient.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: So far as the employee cost at which --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: The practical -- there are further practical consequences which I would like to explain.

This requires a great deal more paperwork.

It requires a great deal more personnel.

It would slow up, in some respects, the shipments.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: Yes.

I think, in a sense, they are.

Nearly everything in the end could be reduced to cost.

I suppose, as I was going to use this illustration later, that a state building code purports to require iron beams of a certain size, fireproofing of certain types and style, is that cost or is that what we get?

Indeed, a good part of my argument is that the one runs into the other and that, when you're directly regulating the government, no distinction should be drawn.

Justice Arthur J. Goldberg: (Inaudible) isn't that correct?

Mr. Cox: Well, the Public Utilities Commission of California, yes.

And, as to -- also, the court made something of the interference with the shipments in that case, the practical consequences, I submit that from the standpoint of the essential reasoning, that was unrelated because the essential reasoning was that the procurement statute and regulations in the view of the court, and I think quite rightly, called for the government to get goods by methods that involved competition at the lowest possible cost.

And, anything which was inconsistent with that policy declared in the statute had to yield under the Supremacy Clause.

It seems to me, that is just applicable when the only consequence is cost, as it is when it interferes with the physical movement of the goods.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: It's related to cost, personnel, time which could probably be offset by more personnel, trouble, inconvenience and that kind.

There's nothing more.

Chief Justice Earl Warren: Am I right of my recollection, Mr. Solicitor General, that by statute the government does assume itself the obligation of transporting the personal effects of --

Mr. Cox: Yes.

Chief Justice Earl Warren: -- of officers from one place to another when they're transferring?

Mr. Cox: This is the government's responsibility, both in the case of officers and civilian personnel transferred to the convenience of the government.

Chief Justice Earl Warren: Then whatever they pay would be -- would affect the government --

Mr. Cox: Oh yes.

Chief Justice Earl Warren: Wouldn't it?

Mr. Cox: Immediately.

Indeed, the shipments -- historically, these shipments have been handled by government procurement officers under government bills of lading.

Indeed, it has been the historic policy of Congress to have these shipments arranged without regard to utilities regulation.

For example, Section 22 of the Interstate Commerce Act exempts government shipments and government's bills of lading from the regulation of rail carriers, and Section 317 exempts them from the regulation of truck carriers on interstate shipment.

Historically, the procurement -- and I use the word “historically” advisably.

Historically, the procurement has been arranged in these civilian and military household goods have been shipped without regard to state utility regulation statutes.

And, in the very few cases which -- in which there has been any challenge to that, because most of the states have accepted it at least acquiesce, the government has quite uniformly been successful.

The California Utilities case is the most important of those, being the only decision by this Court, and we think that, despite the factual difference that Justice Goldberg calls attention to, that the regulations are the same, the statute is the same, their policy is therefore the same and that this is -- Georgia statute is more of an -- more inconsistent with the policy than the California statute was because the California statute at least opened the door or crack and said maybe you can get our permission to negotiate, whereas this permits no such negotiation at all.

The opinion below, as I said earlier, followed the Penn Dairies case.

Here, as in the California Milk case that we argued earlier, we distinguish the Penn Dairies case partly on the ground that the statute has been changed primarily on the ground that there had been these two very significant changes in the regulations which the Court held to be a decisive distinction in the California Utilities case.

We see no difference between the cases in terms of the ownership of the goods, whether they're household goods or military goods, because in each instance the same statute and procurement regulations control and, each instance, it is the appropriated funds governed by those statutes which as the Chief Justice pointed out, will ultimately bear the added expense.

The statutes -- the comparison between the regulations involved in the California Utilities case and this case is a matter of detail.

It's all gone through in our brief and it seems to me that it would be a useless expenditure of the Court's time to go through those minute points and read them all aloud here.

But we do submit, I'm sure the Court will find it so, that the statutes -- that the statute is the same.

The regulations are substantially the same in each case.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: Well, if I understand Your Honor's question, you are now looking forward to the part of the case where we rely on the implied constitutional immunity.

I was just about to turn --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: I was just about to devote the rest of my argument to that very important point and with Your Honor's permission, I would like to fit it in rather than take it up separately.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: Because we do, in this case as in the California Dairy case, argue that the statute here, the Georgia statute, is unconstitutional because it attempts directly to regulate the terms upon which the United States may contract for the transportation of goods.

And we think that that is under the precedence and reasoning of this Court and under, by principle, a violation of the implied constitutional immunity.

It may be worth recalling very briefly some of the established benchmarks.

It set a law, of course, that the United States does have some degree of implied constitutional immunity.

Congress may expend the immunity by statute, it -- and has done so on occasion.

It may waive some of it by statute, and it has done that on occasion.

If, as I now assume for the purposes of argument, there is no relevant legislation, then it's for the Court to define the scope of the immunity in the absence of and pending in a more legislative declaration of policy on the subjects.

There are two principles which are well set.

The first is that a state may not directly regulate or pass the property, instrumentalities, or activities of the United States.

One of the clearest illustrations would be a general property tax on a courthouse or post office building.

In the field of regulation, as the Court's decision sufficed several illustrations, a state may not restrict the kind of fertilizer that's distributed on the programs of the Department of Agriculture.

It may not, as the Court held in Arizona against California, require approval of a dam to be built by the United States or for the United States.

And, I should emphasize in this connection that the idea of direct regulation does not require that the United States be mentioned by name.

The property tax is on all property.

The statute doesn't mention the United States.

It would clearly be invalid.

In Arizona against California, the statute regulating -- or requiring a license to build a dam and requiring plans and specifications be approved didn't mention the United States, but it was held to be a direct interference.

The second rule that is well established is that a state is not barred from imposing nondiscriminatory tax or regulation upon one doing business with the United States merely because this would add to an -- it would impose an increased economic burden on the United States.

In the tax field, the familiar illustration I suppose are the income taxes that the states levy or a tax upon the articles which a contractor may purchase, such as a bulldozer, shovels, or things of that kind, to perform his construction contract with the United States.

These are cases where the regulation states or the -- states what the contractor may do in relation to his activities rather than in relation to the United States.

For example, examples of valid regulation are the minimum -- state minimum wage and overtime loss which may be applied to one performing work under a government contract, safety measure of the boarding that goes over the girders when a building is being constructed, or I would suppose the type of scaffolding that might be used in doing the brickwork in erecting a courthouse or post office.

Those kinds of state laws are clearly permissible and not a violation of the implied immunity, but I would compress them, and I think this is important, with the direct regulations.

A state can't apply its building code to the buildings of the United States because this bears directly on the kind of building the United States gets.

It can't regulate the size of the iron beam or the fireproof.

It can't, as I suggested earlier, regulate the kind of a dam that may be built by the United States.

All those are direct regulations and, therefore, would be invalid.

Justice Hugo L. Black: May I ask you, Mr. Cox, are you directing this argument to the position that the Interstate Commerce Clause would be violated these things?

Mr. Cox: No, that the implied sovereign -- no, that the implied sovereign immunity would be violated.

No, these shipments are all intrastate shippers and so, there was some suggestion in the government's original complaint that there might be a violation of the Interstate Commerce Clause.

We make no such argument here.

That point has been dropped out of the case, if it had any merit.

We certainly don't press it now.

So, I'm speaking of the implied sovereign immunity without regard to interstate commerce.

Justice Hugo L. Black: The government's power provides the goods on its own terms?

Mr. Cox: Yes.

This case, we think, falls within the immunity, we assert, as a general proposition that a state may not directly regulate a contract of the United States, whether the statute is formally addressed to the United States or not.

If it is formally addressed to the United States, it makes it more dramatic but we think the real point is whether the -- in terms addressed to the United States or otherwise, the state is attempting to regulate a contract of the United States.

Justice Arthur J. Goldberg: Mr. Solicitor General, do I understand you correctly that the (Inaudible) for the state and on the state itself had a minimum wage provided for the workers on the contract that are not -- the contract that is now being served to the United States?

Mr. Cox: I would think that was covered by Stewart & Company against Sadrakula and that it was not a violation of the implied immunity.

Safety equipment, the other things that he does in his relations with the outside work, if I may put it that way, although I include his employees as the outside world, I mean the world other than the United States, are up to him and if we bear -- this would be true even under a cost-plus contract, Mr. Justice Goldberg.

If we choose to do our business in such a way that there is no slack and that the burden of the minimum wage bears directly on us, we can't claim immunity on that ground.

That's the King & Boozer case as applied to a sales tax, and I think the same would clearly be true in this instance with respect to regulation.

Also, I don't want to tie the two together completely.

Justice Arthur J. Goldberg: Now, does the state regards to this rules on public property (Inaudible) to provide minimum wage to personnel and the carriers as a (Inaudible) property of the state to find a third or to find a form of public service (Inaudible) in order to provide them public service.

Mr. Cox: That's the second -- that comes directly to the United States.

We're no longer one step remote and I would think that it was clearly done, not permissible for the state to do that, unless Congress chooses to waive the implied immunity because the court -- I want to make two points.

I will try to develop each.

One point that I wish to make, and I'll turn to it in a moment, is that this Court has always been careful, except in the Penn Dairies case, to preserve a distinction between regulating the contracts of the United States and regulating the activities of the contractor in relation to his employees or his dealing with other independent businesses.

It is repeatedly said that the contracts may not be taxed or regulated.

Second, it seems to us, and I'm going to develop the argument, that all the reasons that apply to cases like Arizona and California, where it was held that the state could not require that the dam plans be approved for a federal dam, are equally applicable to a case like this Georgia Utilities Regulation case.

Now, if I might deal first with the authorities and then expand to the reasons, the first instance to which this distinction between regulating contracts and regulating the contractors was drawn was in the well-known case of Railroad Company against Peniston in 18 Wallace and in Mr. Justice Bradley's opinion.

There -- from there, he said, “The case differs toto coelo from that wherein the government enters into a contract with an individual or corporation to perform services necessary for carrying on the functions of the United States, such as for carrying the mails, or troops, or supplies, or for building ships or works for government use.

In those cases the government has no further concern with the contractor than in his contract and its execution.

It has no concern with his property or his facilities independent of that.

How much he may be taxed by, or what duties he may be obliged to perform towards his state is of no consequence to the government, so long as his contract and its execution are not interfered with.

In that case the contract is the means employed for carrying into execution the powers of the government, and the contract, and not the contractor, is exempt from taxation or other interference by the state government.”

This passage -- the distinction was not observed in many years, as the Court then began to contract the scope of the implied governmental immunity.

This passage was, quite frequently, relied upon by the Court and always, I think, with the same distinction in mind that I draw here in the landmark case of James against Dravo Contracting Company.

Chief Justice Hughes quoted this passage at some length.

It was quoted in the City of Detroit case, I think in Justice Frankfurter's opinion.

The same role was stated, indeed, laid down as part of the holding by Justice Reed for the court in the curse -- in the cursed Scurlock case in which the -- excuse me, Kern-Limerick Company against Scurlock in which the Court held that a state could not tax the purchases of the United States.

There was a dissent upon the question of whether purchase is made by a contractor as agent for the United States.

The goods that were going to be consumed in the course of his performance as a contractor was really a purchase by the United States, but there was no disagreement with the proposition that a tax on a purchase of the United States would be an invalid tax.

Now, it seems to us they're quite apart from the weight given to this distinction in the courts opinions, that also as a matter of principle or reason, the state should not have the power to regulate the contract of the United States, that is the actual terms of what the government may get from the contractor or what the government has to give the contractor.

I think the reasons that I am going to stress are the same reasons that support the general statement that a state may not directly tax or regulate the property, transactions, or activities of the United States.

Justice Potter Stewart: What if the state had a regulation that every contract -- every building contract for construction of buildings must include the provision signed by the -- by the builder and by the contractor that the contractor pay a minimum wage?

Mr. Cox: I suppose that, in that case, the substance of the contract might control over the form.

I don't think that's my case.

I think that is a problem, is it not, a form in substance.

The substance is that the relations of the contractor with his employees are being governed.

If there were an effort to make the government or the private party in the case of private construction responsible for the payment of those wages in the event that the contractor did fail to do it, then I would say that was invalid.

I've been a little troubled about the reverse case, Justice Stewart, but I think to put it illustrates the distinction I tried to get.

Suppose that the government put into its contract with the private contractor, a stipulation that he wouldn't pay laborers more than $1.50 an hour because it thought the state rates were outrageous.

I think I would have to say then that the substance should control that this wasn't a matter of what the United States gets or what consideration it pays directly but rather was an attempt to expand out into this indirect area.

And therefore, I would not think -- we don't have the case and I don't want it commit anybody for the future but intellectually, I would think that my argument should not extend that far, that I'm really concerned with what we get or what we immediately pay and that, if you can visage these terms in contracts that attempt to control more remote relations that they prop -- that they pose a somewhat different case --

Justice Potter Stewart: My case, my hypothetical case would have a direct impact upon the contract which the government would have to sign.

Mr. Cox: Yes, it --

Justice Potter Stewart: It would increase the cost to the government over what it might otherwise have to pay.

Mr. Cox: The mere increase in cost is, if the impact is indirect, is not alone enough.

That is set.

That is clear from the --

Justice Potter Stewart: And, there --

Mr. Cox: In the minimum wage case that I gave Justice Goldberg.

Justice Potter Stewart: And Penn Dairies itself, isn't it?

Mr. Cox: What?

Justice Potter Stewart: Penn Dairies involved increased cost.

Mr. Cox: Yes, but I think it involves something more than increased cost.

It involved an attempt to regulate the contract of the United States and in a different sense than I think in your case.

For example, suppose that a state provides, by statute, that no construction company within Arizona shall sign a contract for the construction of a dam that does not contain plans and specifications which have been approve by the State Dam Commission.

Clearly, that is just as much an interference with the activities of the United States.

As a statute, it says no one shall build a dam that hasn't been approved.

And, I think this direct and indirect is hard to articulate but the way that I have put it to myself, and I submit that it has merit, is that your case is different because, also in form it has been made a part of the contract between the contractor and the United States, in substance, it really has to do with the contractor's relations with somebody else.

Now, I think perhaps one can put this in words by saying that if the state attempts to regulate what the United States gets or what the United States itself pays out, that then, it is a direct regulation of the contract within my rule that in the other cases may be not.

That's the best I've been able to do in --

Justice Hugo L. Black: I think that the government protects itself against such a situation as that, by doing its own work, paying the wages it saw fit.

As I imagine, that would draw a completely distinct line.

Mr. Cox: It will be perfectly clear that the government was not subject if it does the work itself.

Of course, it has been stated on several occasions that one of the reasons that state regulation of the activities of the government is a violation of the implied immunity, is that it may interfere with the performance of federal functions through independent contractors.

In one case, it -- the language expressly speaks of an invalid statute as being one that would affect or embarrass in any substantial measure the power of the United States to secure aid from independent contractor.

That's not one of the older discredited cases and the point I'm trying to make here is that these -- that a regulation of the contract does embarrass the United States in -- or may embarrass the United States in carrying out its activities it -- through independent contractors.

And, I mentioned earlier I think that it's equally an interference with the government's activities for the state to say “you shall not build a certain kind of building” or “you shall not erect a certain kind of dam” or to say that “no contractor shall contract to build a certain kind of building or to erect a certain kind of dam.”

Now, of course, the degree of interference will obviously vary from case to case.

In the illustrations that I have used, I have been putting cases where what the government actually gets is building a dam or some other public work is affected -- would be affected by the state regulation.

But in the California Utilities case, if one had gone to the general constitutional point that I'm now relying on, there would've been a very clear argument that to apply the state utilities rates to government shipments, government bills of lading, of military paraphernalia would directly interfere with the movement of military traffic.

That's a very dramatic description of that in Justice Douglas' opinion.

Now, that -- on the fact of it, Justice Goldberg, looked as if it was simply rate regulation.

But in fact, it had these other indifferent consequences.

I said here that there were interferences.

Most of them end up in money but they are not immediately money.

For example, if the 50 states are empowered to regulate these transfers of government properties, civilian or military, then it will be necessary for the United States to deal with 50 state Commissions to have numerous, I guess not 50 but, numerous different forms of bill of lading, numerous different tariffs to compute, and it would require a very substantial complication in the already large transportation units in the government.

Take as another illustration, remember we are not dealing simply with the rate here.

We also have this Georgia regulation saying that you must ship on a uniform household goods bill of lading and that only one family's goods may be accepted as a single shipment.

That has a good many consequences.

For one thing, it would make it necessarily, apparently, to weigh each shipment separately, each family's goods separately.

Sometimes, the government arranges terms that don't involve weighing the shipments at all.

Other times, they can be weighed on men.

Here again, there is trouble, expense, and possible delay.

If there must be an individual bill of lading for each family, consider the consequences if you're moving 500 military personnel or civilian personnel in the Defense Department.

Instead of what I'm told, it would be about one hour to prepare a single bill of lading, you would have to prepare 500 bills of lading.

It wouldn't be 500 hours.

I'm told that if we're done on that scale, it would be about 15 minutes per bill of lading but, instead of one-hour's work, you're now in 125-hours work.

And, this is just in preparing the bill of lading, going through for processing it through payment, withdrawing the checks and so forth.

But now I should agree, of course, that in the end those things are money and they usually hire more people from the government, but it's trouble and delay as well.

Second, the bill of lading contains substantive terms and the government bill of lading contains terms that differ from those under the Uniform Bills of Lading Act.

I'll take two as illustrations.

The uniform bill of lading normally contains a time limit, with -- within which, any claims must be presented for damage to or loss of the goods.

That time limit is not -- it's not the same in the government bill of lading and, if my memory is right, there's none there at all.

This is the substantive term that isn't just money.

Justice Arthur J. Goldberg: Well then again, Mr. Solicitor General, will there be variations that are principally illegal or discriminatory?

Mr. Cox: They're -- none of them -- none of them discriminatory, no.

Justice Arthur J. Goldberg: What about unreasonable?

Mr. Cox: Well, it -- no, I don't think that -- well, I don't really -- I can't -- I don't argue that they are unreasonable.

I do argue that they're significant.

Let me give one last illustration.

The government -- you know, the government bill of lading now contains quite uniformly a clause requiring the carrier to stipulate that he won't engage in any kind of discrimination and employment by reason of race and color under the precedent executive order.

Of course, no such clause is in the uniform bill of lading and perhaps we could find some other way of putting it in.

Also, it's not altogether clear to me because most utilities regulation says you can't add to the requirement.

So, this is not solely a matter of money at all.

Now, I submit that there is no distinction between regulating the terms on which the United States may contract and the terms on which one may contract with the United States.

A contract is a relationship.

It's an integral chain.

And I think to face up to it squarely, that the great fault in the Penn Dairies opinion, which is out of keeping with the -- which is contrary to the line of authority that I read, is that it doesn't deal -- not only that it doesn't deal with this difficulty satisfactorily, but it seems to me that it doesn't face up to it at all, that when you regulate the terms on which one party may contract with the other, you necessarily regulate the terms on which the other party may contract with the first.

You can't prevent John from marrying Mary without preventing Mary from marrying John.

The two with -- it's an integral thing.

It's like if you turn over the face, the adverse side of the coin, you necessarily turn over the reverse side of the coin.

And if you -- so here, if you regulate the price the utility must charge, you necessarily and inevitably regulate the price which the government must pay.

Indeed in this particular case, unlike Penn Dairies that I really don't think I understand on this distinction, in this particular case, the government has to have the intrastate shipment made by carrier permitted to do business in Georgia and therefore, by carriers operating under the regulations of the Georgia Utilities Commission, unless there's a sovereign immunity.

In the Penn Dairies case, the Court adverts to the possibility that the federal government might have bought milk outside Pennsylvania and brought it in.

In the California case, that's a practical matter than Pennsylvania.

In the California, that is only a theoretical possibility that they'll bring milk over the Sierras.

And in this case, it's an absolute impossibility because anybody carrying goods in Georgia intrastate is, according to Georgia, subject to the regulation.

Justice Byron R. White: Mr. Solicitor General, Congress may waive this sovereign immunity by sovereign immunity clause.

Mr. Cox: Yes.

You said “may Congress waive.”

Justice Byron R. White: Yes.

Mr. Cox: Yes.

Justice Byron R. White: And, would you say that in effect, in the Penn Dairies case, the Court shall put Congress who waived it in the form of a regulation and statutes for procurement?

Mr. Cox: Well, I haven't thought of that argument, but I'd be glad to embrace it.

I think it's a --

Justice William J. Brennan: Yes, Penn Dairies is a little --

Mr. Cox: I think it's a distinction, but I really think with thrust of Penn Dairies.

Justice William J. Brennan: Penn Dairies is a little troublesome for your --

Mr. Cox: It's against them.

There's no -- I simply -- my main point is that I think that it's -- it just overlooks, at least it doesn't deal with, I shouldn't say overlooks perhaps, the fact that when you regulate one side of the contract, you inevitably regulate the other side.

There's no play in the joints.

I do submit that that has to be dealt with before one can get the -- possibly get the Penn Dairies result.

Now, I've attempted in arguing this point of the implied constitutional immunity this far, I'm afraid it's a somewhat scattered way, to cover three points,first, precedence, second, the argument that a regulation of a contract of the United States does directly interfere with the activities of the United States and, third, that a regulation of the terms on which one may contract with the United States is necessarily and inevitably a regulation of the terms on which the United States may contract with the other party.

There is one final point that I would like to deal with.

I said earlier that the reasons that support the view that the United -- that the state may not directly regulate or tax the property activities or instrumentalities of the United States are applicable here.

The third one comes -- and the third point comes to grips more immediately with this matter of an economic burden.

Part of my answer is that what appears to be only an economic burden is often much more, and that one can't really distinguish between wholly economic burden and those that have to do with what the United States does, as I tried to suggest with the size of the iron beams or the character of the fireproof, but I would urge to the Court that there's an important difference here.

That, the cases contracting the extent of the sovereign immunity, which was recognized in some of the earlier cases like O'Keefe against Graves and the Panhandle Oil case and the Indian Motorcycle case, that the reasons for contracting that are not applicable here and that the usual statement summarizing the net effect of those cases is not inconsistent with the proposition that we espouse here.

But the usual statement is to the effect that a state regulation or tax upon one doing business with the United States is not unconstitutional merely because it imposes an economic burden on the United States.

Now I submit, Your Honors, that that is quite different from saying that if the only effect of a direct regulation of the United States is economic and nondiscriminatory, then the state may do it, but those are two entirely different things.

Something which is not a regulation of the United States but has an economic -- puts an economic burden on the United States because of the economic enterprise is different from something that is a regulation of the United States and puts an economic burden on it or is a tax on the United States and puts an economic burden.

The general property tax is an illustration of that.

I suppose it's purely economic.

Now, the broad immunity which the earlier cases or the middle cases, began to recognize was cut down I suppose, basically, for three reasons.

In the first place, extending it to the activities of everyone who did business with the United States, as the number of people doing business with the United States increased, it began to cut off important sources of state revenue.

State income taxes on any federal employee or -- income tax on a contract with a government would've been invalid.

A second reason, I take it, was that this threatened to create sort of a class of especially favored citizens who because they did business with the federal government, were immune from state regulation.

And a third reason, which I think is important, is that you really didn't know in those cases just who was getting the benefit of this immunity, that in the general run of it, it was quite likely that part of the immunity was really going to the benefit of private persons and not affecting the United States.

For example, in income tax, the immunity from state income tax on a contractor who is doing government work, you really didn't know how much of that had been -- would be passed on to United States or how much he would just pocket the difference himself.

I submit that these reasons are not applicable to a case where the state is attempting to regulate a contract of the United States.

The terms on which the United States may buy or sell the product it gets, the way the goods are carried, things of that kind because, in those cases, there is no play in the joint.

It's -- I don't know whether the -- these analogies are helpful or hurtful but I've thought of this as one often does with direct and indirect like the links of a chain.

If you yank on the contractor by making him pay the tax or by making him pay minimum wages, if it affects the United States, there may be some play or a cost-plus contract, the chain is already tongued.

But, in the general run of cases, this role played the joint.

But if you regulate the terms on which one may contract with the United States, the effect on the other party in the contract is immediate and indissoluble.

It's as if you had only one link.

Justice Arthur J. Goldberg: Solicitor General, (Inaudible) when a carrier who charged your rate would be that and the wages that he pay the workers who (Inaudible) would that be a burden on the United States?

Mr. Cox: I would think that that would be an attempt to regulate the contract of the United States.

I think Your Honor states the question a little too broadly.

I suppose that a state, if it saw fit, could protect the contractor by saying that he shall not pay more than certain maximum wages against the -- protect him against the excessive demands of labor union.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Cox: Well, you might have either kind of law.

I would say that the kind of law I used, is notably, would be valid for the reasons I've stated.

I think, Mr. Justice Goldberg, that the -- my answer to you is correct and I think that one has to face up to the proposition that there are times where the governmental immunity may have consequences which do not seem, in the particular case, to be desirable.

I would concede that that is true.

For example, if the immunity did extend all the way to the producer prices in the California Milk case, I think that the -- I know that the executive branch would consider that as undesirable result and something was done about it in this instance.

In other words, the general -- it seems to me, the general principle that a state may not regulate the activities of the United States is a sound one and a specific problem for the policy making branches of the government to deal with by waiving the immunity or as a matter of policy, insisting on compliance with the state law.

I don't think the court can say that, “Well, we think the rate regulation in the California Utilities case was unsound, but we think it is a sound regulation in the Georgia case.”

I think that, in general, it is a sound principle until Congress acts that these direct attempts to regulate the activities of the United States or contracts of the United States should be immune.

They historically have been immune, and we submit that they should be held immune here.

The few minutes I have left may I reserve, Mr. Chief Justice?

Chief Justice Earl Warren: Mr. Rodgers.

Argument of Paul Rodgers

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

I'd like to begin by briefly recapitulating what I say to be some of the significant facts in this case.

The first fact is that this involves the movement of the household goods of nine families.

This movement of the household goods was from Savannah to Atlanta, Georgia.

The movement was strictly intrastate commerce.

These household goods are owned and used only by employees of the United States Department of Health and they are not, in any way, owned or used by the United States.

This movement originated and terminated at the private dwellings of the employees.

There is no question of session involved in this case or any area over the United States exercise its jurisdiction exclusively like a federal reservation.

Thirteen of these carriers submitted bids.

Common carriers submitted bids in response to an invitation of the federal procurement officer.

Now, each of these carriers was required -- was required to apply under state law the higher Commission tariff.

There are two tariffs in Georgia.

There's a higher tariff and, as I say, the lower tariff.

Each of those was required to apply the higher tariff.

Eight of those carriers did apply such a tariff.

Five of them cut their rates.

The lowest one, insofar as the government was concerned, was Consolidated Van & Storage Companies Incorporated.

Consolidated bid a substantially lower rate.

However, what consolidated bid is approximately the same or lesser rate than prescribed by the lower Georgia tariff.

Now, at the time this movement was made, there was in effect a lower Georgia tariff which was available to the United States which the United States did not use.

And so, because of that fact, I do not believe the government could even make a clear showing of an economic burden on the fact that is presented with this case.

Now, of course, in the argument on the merits, we assume that there is, for the sake of argument, an economic burden and I believe it's a safe assumption because this type of state regulation is permitted then, of course, they will affect to some extent an economic burden upon the United States.

In setting this case for argument, this Court requested that counsels, in addition to the merits of this case, address themselves to the question of jurisdiction.

Now, the complaint that was filed in the District Court attacked the constitutionality of the state law on three grounds.

First of them was direct violation of several clauses of Articles 1 and 4 of the Federal Constitution.

The second ground was an unreasonable burden on interstate commerce.

And, the third ground was the conflict with a federal property and Administrative Services Act of 1949 and supplemental regulations.

Now, obviously, grounds one and two, if they are good grounds, would of course give this Court jurisdiction independently.

Of course, the question I'm addressing myself to is whether or not the complaint alleged a question of unconstitutionality within the meaning of Section 2281 of the U.S. Code Title 28.

Now, the first two grounds would involve direct violations.

However, after the case began and after the Court -- the three-judge court was convened, pursuant to a motion for a more definite statement being granted, the thrust of the Government's complaint was limited or sharpened to where it just involved the carriage of the household goods and personal effects of a personnel of the United States in intrastate commerce within the State of Georgia.

And, of course, the goods involved in this particular case were the goods of employees of United States Department of Public Health.

Now, based upon such a sharpening of the complaint, I do not believe that the clauses which were alleged to be violated in Article 1 and 4 are any longer relevant.

Such clauses are the congressional power to establish host roads to raise and support armies, to provide and maintain a navy, to provide for the militia, to exercise exclusive legislation of a real property held by session, and to make all need for rules and regulation respecting property belonging to the United States.

I believe the sharpening of complaint defeats those constitutional attacks.

The second one is the burden on intra -- on interstate commerce had been abandoned by the United States.

I believe it was somewhat farfetched to begin with.

Now, third ground, which I believe is independently gives this Court jurisdiction, is a conflict between the Federal Property and Administrative Services Act of 1949 and the Georgia statutes.

And, of course, the Georgia statute is -- two of those is 68-613 and 68-614 of the Georgia Code.

613 empowers a state Commission to prescribe rates to motor common carriers and 614 prohibits common carriers from discriminating as to rates and services.

Now, the parties, the United States and Georgia Commission, have resolved between themselves any preliminary questions of statutory construction which would address themselves to a state court.

As between these statutes, there is a clear and definite conflict and, because of that, I believe this case, on that ground, presents a sole immediate constitutional question as defined by this case -- as defined by this Court in Kesler versus Department of Public Safety and, of course, if you recall, that case recently decided that this Court involved an alleged conflict between Utah Financial Responsibility Act and the Federal Bankruptcy Act.

And it's interesting to note that that conflict there -- that no conflict was found to exist, the federal and state regulation was found by this Court to be compatible.

Next, I'd like to turn to the merits.

Now, the United States allows more federal acts.

This movement was made and illustrated by the complaint and illustrated by the clear terms of the statute.

This movement was made on the Federal Property and Administrative Services Act of 1949 and was not made under their Armed Services Procurement Act which was involved in the Public Utilities case, and by Public Utilities case, I mean the California decision -- the California public service decision written by this Court in 1958.

Now, the procurement provisions between those two statutes are quite similar.

Substantively, there's no difference.

However, what is significant is some accompanying provision contained in Federal Property and Administrative Services Act of 1949.

However, before a banning in the Armed Services Procurement Act, our consideration of that, I'd like to call the Court's attention to the 1962 amendments of the Armed Services Procurement Act which is set forth in the appendix to the state's reply brief in Paul versus United States, the case you just heard.

And in the 1962 amendments to the Armed Services Procurement Act, there were some additional safeguards established for federal procurement, and in that, in those additional amendments, the Congress was careful to expressly state that it would not affect rates established by law or regulation, which I believe is consistent with the policy of federal procurement throughout, except where there are definite interferences of the federal function which were involved in the Public Utilities case.

Justice Hugo L. Black: How do you distinguish it then on that case?

Mr. Paul Rodgers: You mean between --

Justice Hugo L. Black: You say that there, there was actual frustration for the federal policy, do you not?

Is that it?

Mr. Paul Rodgers: Yes, sir.

That is correct.

Now, the basis of that -- in the Public Utilities case, I'll cover this more fully later on but, I'll answer your question --

Justice Hugo L. Black: You could wait if you would.

But I just --

Mr. Paul Rodgers: Well, to put it in a nutshell, in Public Utilities, there were involved military movement.

The movement of war material and a state regulation there violated the secrecy requirement and the speed requirement of military transportation.

And, also, you had a state statute there that was formally addressed the United States and said the United States, that you can have law raised only if we submit ourselves to your jurisdiction, and the Court -- this Court has never tolerated that type of state legislation.

I think, on those considerations, there was a direct interference of the federal contract whereas, in this case, the effect, if any, is economic and its indiscriminant and it does not limit the United States in moving these household goods in any way except imposed an indiscriminant economic burden.

Chief Justice Earl Warren: Would the character of the employment involved here make any difference to you?

Mr. Paul Rodgers: Yes, sir.

I distinguished --

Chief Justice Earl Warren: Do you think it was Armed -- Armed Services, family of Armed Services, would that, in your opinion, be different from this which was a housing project?

Mr. Paul Rodgers: You mean on -- in the case of household goods --

Chief Justice Earl Warren: Yes.

Mr. Paul Rodgers: -- in distinguishing the movement of military material?

Chief Justice Earl Warren: Yes.

Mr. Paul Rodgers: Yes.

I think that the nature of the commodity transport is very important as well.

I think a very important distinction is found there.

Now, as to the derivation of the statute, now, I have set forth in Appendix A of brief, the statute -- the federal procurement statute which were in effect when Penn Dairies was decided, now, you -- the Federal Property and Administrative Services Act and the Armed Services Procurement Act were both derived from those provisions in Penn Dairies.

And, subsequently -- I believe the Court will find that, subsequently, there's no difference.

And I think that brings into play an important rule of construction which this -- which is well-recognized, and that is when the highest court has interpreted statutory language which is, again, reenacted in subsequent legislation.

The Congress, the legislative body, is held to know of the construction plates, the one that I believe -- I'm sure they did because of Penn Dairies, the landmark case, and who have adopted that judicial interpretation in the enactment of the subsequent statutes.

Now, the Penn Dairies case is almost tailor-made for disposing this case for this provision of this case.

And, if you will permit me, I would like to read several -- a couple of excerpts.

The Court stated, in Penn Dairies, it is to be noted that while these statutes direct government officials to invite competitive bidding -- that's the federal statute, they direct government officials to invite competitive bidding by contractors undertaking to furnish army supply and also require them to accept the lowest response for a bid, if any is accepted.

They do not purport to set aside local price regulations or to prohibit the states from taking punitive measures for violations of such regulation, that was referred to as the contract -- the prior contractor.

Evidence is warning that Congress, in authorizing competitive bidding, has been so concerned with securing the lowest possible price for articles furnished to the government that it wish to set aside all local regulations affecting price.

On the contrary, Congress has regarded the field of public contracts as one of which to exercise its supervisory -- legislative powers in safeguarding interests which may conflict with the needs of the government used solely as purchase.

An unexpressed purpose of Congress to set aside statutes of the states regulating their internal affairs is not likely to be inferred and ought not to be implied with a legislative command, read in the light of its history, remains ambiguous.

Now of course, that statement there calls into play a comment made by the Solicitor General, and he states that, historically, the government procurement contracts have been immune from any effect of the state regulation, but you have the decision in Penn Dairies in 1942 which is clearly against that.

I do not see how you can -- how you can obtain any historical justifications from the precedence established by this Court.

The Court goes on to say, “It would be no more than speculation for us to say that Congress would consider the government's pecuniary interest as a purchaser of milk more important than the interest asserted by Pennsylvania in the stabilization of her milk supply through control of price.

Now, we find an easy analogy there between the state interest in procuring a pure milk supply, and the state's interest in establishing a sound -- an economically sound transportation system.

Now, as far as deriving the regression you can from other Acts, we find there are many Acts that Congress has adopted which are solitary which have a sound economic effect in this nation but viewed from the government's position strictly as a purchaser.

They may be thought to be adverse when viewed in that limited context, but to view the impact in the national economy, the government's purchasing power, Congress has only used that purchasing power as a -- to have ebullient effect on the national economy.

For instance, you have your Buy American Act, providing for preference in use of American-produced goods on all public works contracts.

As to labor, we have the Eight-Hour Law, the Davis-Bacon Act, and the Walsh-Healey Act which fix sanitary standards, governing the form of labor on public contract.

There's also a long history of legislation whereby Congress authorizes various instrumentality to provide the payment in lieu of taxes.

The Tennessee Valley Authority, the Department of Interior, the Atomic Energy Commission, Saint Lawrence Seaway Development Corporation, and many other federal departments are authorized in their dealings throughout the nation, where if they were a private enterprise, they would be taxed to make payments because it's the law of the tax department to make payments to your state and local governments and there, again, we can see a congressional regard for the needs and the requirements of state and local government and, of course, that philosophy -- that congressional philosophy is consistent with the philosophy that's filed to this Court in its tax decisions.

Justice Arthur J. Goldberg: Mr. Rodgers, (Inaudible)

Mr. Paul Rodgers: Off hand, I do not recall any that's directed to material, Your Honor.

Justice Arthur J. Goldberg: No service?

Mr. Paul Rodgers: No charged services, except of course, at the effect that I think that Penn Dairies plays in construing current federal procurement statutes.

Now -- returning now to Federal Property and Administrative Services Act of 1949, there are various provisions in there which to my mind indicate the congressional intent that federal procurement under that statute would be subject to state economic regulation.

One of them is found in Section 201 (a) which authorizes the administrator, with respect to transportation of the public utility services, for the use of the executive agencies to represent these agencies in proceeding the involvement of carriers or other public utility before federal and state regulatory bodies.

Now, the Solicitor General's brief tends to discount that by saying, “Well, that's up to the discretion of the administrator, so it doesn't really mean anything.”

But, it strikes me as odd that if there was congressional intent that your state regulatory agency would have absolutely no control over federal procurement or no effect on it, I should say, or a federal procurement strikes me as odd, they would have an expressed provision, they are authorizing appearances before a state Regulatory Commission.

And of course, we also have a well-recognized policy that's present in both Acts -- both procurement Acts, and that is that a fair proportion of government procurement will go to small business.

Now, of course, it's a well-recognized economic fact, or at least to begin with anyway that big business can't supply cheaper prices than small business, but yet, the government goes out of its way to favor small business, so that aspect of our economy, the small business aspect of our economy will not become extinct.

And of course, you have the executive devices to stimulate the economy where they are financial set-asides for labor surplus areas, for major disaster areas, and of course also for small business.

Then, Section 203 (g), we find extensive provisions, two sections devoted to the fact that in dispose of the government surplus, that it will in no way impede the government's price support programs in the agricultural area, and the administrator is directed to coordinate his activities with the Secretary of Agriculture in such a manner to where the agricultural price stabilization programs of the federal government would not be adversely affected.

And then, we go on to the next section, Section 502 (d), which I think is very significant and that section reads in Court “Nothing in this Act shall impair or affect any authority of any executive agency,” I refer to federal executive agency, “to any executive agency with respect to any favors of any program conducted for purposes of resale, price support, grants to farmers, stabilization, etcetera, or rehabilitation.”

Now, I believe these provisions of course indicate a very clear desire on the part of Congress to take advantage of economic regulation to not -- to disturb that.

Now, the Solicitor General in his brief says, in effect, well all that may be well and good but that does not apply to state economic regulation.

Well, I believe that the implication is clear that it does.

I believe, if it doesn't, I respectfully submit that Congress is suffering from schizophrenia.

If on the one hand it has a Dr. Jekyll and Mr. Hyde complex, if in one hand it protects federal courts, federal economic regulation but on the other hand, slashes and disfigures state economic regulation.

To me, the two forces are entirely inconsistent and I think the implications from this Act are clear that state economic regulation, where it doesn't impose any direct interference with the federal government, is to be abided by for the welfare of the national economy, and as I hope to show to your satisfaction later, to the welfare providing a strong transportation system in this nation which of course enhances the national defense of this nation.

Now, I believe that the doctrine espoused by this type of -- by the Solicitor General, this doctrine espoused is -- to describe it succinctly, is pennywise and pound-foolish because I do not believe it's the intention of Congress that federal procurement officers should engage in cutthroat competition which has a detrimental effect upon the national economy.

Now, moving on to the effect of Penn Dairies decisions, the Penn Dairies decision and that is, in that case, the State of Pennsylvania, in the interest of protecting its milk supply and in the interest of providing a pure milk supply, promulgated certain minimum rates so that supply would be enhanced.

And of course, this Court held, I think wise and so soundly so, that that regulation should apply to the federal government because all in effect, all it did was imposed an economic burden.

Now, it looks like to me that in this -- what the Solicitor General says that what we're trying to do in this case is to dictate the term of the government contract, I think that that is the language is too strong for this.

I don't think that it's applicable.

I believe that this had just as much effect upon the regulation of the federal contract in that case as it does in this case, and it is -- I do not think it is a regulation of the federal contract.

I believe it has an effect upon it but it does not regulate it.

Now, the Solicitor General relies heavily upon the Peniston case, a case decided -- not upon the Peniston case.

He relies heavily upon the dissenting opinion in the Peniston, Justice Bradley's standing opinion which has received some added dignity because it has been referred to a couple of times in cases fairly recently.

But it is a dissenting opinion.

The holding in the Peniston case, I think, militates against the Solicitor General because it upheld state taxation of the property of a federal instrumentality and also the Peniston case is decided in the last century.

But, I think that this -- that the regulation here in Penn Dairies does not dictate the terms of the federal contract any more than it does say -- where a state law requires the payment of minimum wages.

You could say just as easily there that the state is dictating the terms of the federal contract and for that matter to the tax cases because, of course, in every -- the -- an economic burden is imposed on the federal government, that right there affects the terms of the contract.

So of course, under the Solicitor General's theory, there right there dictates the terms of the contract and that theory is sound by the Attorney General, then he recall for a tremendous realignment of the decisions of this Court, not only the tax field but in these other regulatory fields as well.

And of course this Court, just recently this past month in Illinois' tax case, has again reaffirmed its position as the tax case is about economic burden, incidental and indirect economic tax burden being imposed upon the federal government.

It has upheld that as a result of state taxations.

Now, as to the application to Penn Dairies, I'd like to read a couple of excerpts.

There is no qualm to the Constitution which purport, unaided by congressional enactment, to prohibit such regulations.

And the question with which we are now concerned is whether such a prohibition is to be implied from the relationship of the two government established by the Constitution.

Now, in this aspect of the Penn Dairies opinion, the Court is addressing itself to this Doctrine of Implied Governmental Immunity.

The Court goes on to say the mere fact that nondiscriminatory taxation or regulation of the contract impose an increased economic burden on the government is no longer regarded as bringing the contract within any implied immunity of the government for state taxation or regulation.

The trend of our decisions is not to extend governmental immunity from state taxation or regulation beyond the national government itself and governmental functions performed by its officers and agents.

We recognize that the Constitution presupposes the continued existence of the state's functioning in coordination with the national government with authority in the states to lay taxes and to regulate their internal affairs and policy.

And a state regulation like state taxation inevitably imposes some burdens on the national government of the same kind of those imposed on citizens of the United States within the state's burden.

Since the Congress has -- since the Constitution has left Congress free to set aside local taxation and regulation of government contractors which burden the national government, we see no basis for implying, from the Constitution alone, a restriction upon such regulations which Congress is not seen fit to impose, unless the regulations are shown to be inconsistent with congressional policy.

Even the case of agencies created or appointed through government's work, we have been slow to infer an immunity from Congress which Congress has not granted and which congressional policy does not require.

Now, consistent with the philosophy reflected in Penn Dairies, we find the same philosophy in the tax cases, the Dravo case, where the Court reached the same conclusion even on the assumption that tax burden would be passed upon the federal government.

Again, there's a clearer definition of that doctrine, Alabama versus King & Boozer, that say all of these tax cases are consistent with the case rendered -- the decision rendered by this Court on this past Monday.

Now, Justice Holmes in the Panhandle case, which was subsequently -- the majority decision of which was subsequently repudiated in Alabama versus King & Boozer, Justice Holmes wrote one of his famous dissenting opinions and a couple of excerpts from that opinion, I think, apropos to us in this case.

The first is to come down more closely to the question before us, when the government comes into a state to purchase, I do not see why it should be entitled to stand differently from any other purchaser.

It avails itself with the machinery furnished by the state and I do not see why it should not contribute in the same proportion that every other purchaser contributes for the privileges that it uses.

It has no better or other right to use them than anyone else.

The cost of maintaining the state that makes a business possible is just as necessary in the element of the cost of production as labor or code.

The question of interference with the government, I repeat, is one of reasonableness and degree, and it seems to me that the interference in this case is too remote.

Now, that dissent of Justice Holmes subsequently became the majority decision of this Court and it's continued as such until this day.

Now, another case which I think is significant is the Esso Standard Oil Company case versus Evans.

That's another tax case.

In that case, this Court held that the constitutional doctrine of implied intergovernmental immunity does not invalidate a state privileged tax in (Inaudible) storing gasoline, measured by the quantity of gasoline stored as applied to a contract of the United States who store gasoline owned by the federal government.

I think that these tax cases should logically apply with even stronger effect in the case of regulation, the case that we're presently with anyway, and even in the tax cases, of course the Court, in the tax cases, the money collected by the state goes directly to the State Treasury and, of course, that goes to, ultimately, to strengthening the vitality and soundness of state and local government.

But at the same time, the -- any economic burden sustained by the United States in the case before us goes directly to strengthening the transportation system -- the intrastate transportation system which is used by the United States as well as for private use, and there is a more direct benefit in return achieved in these type of cases, I think, and even in the tax cases.

So I think, logically, the philosophy of the tax cases should apply with even greater force in cases of this nature.

Now, to move on to the Public Utilities case, now, the case there and I think to get the full impact of the decision of this Court in that case, it's well to begin with the decision of the District Court because the District Court wrote a very long opinion in that case.

And, the District Court was very much impressed with the conflict between the interest of national defense and state regulation.

I have quoted that extract somewhat at length, in my brief.

I'll refer to a few on the specific.

The Court said, “In this atomic age, speed in the movement of men and supply is vitally necessary.

It would greatly impeded the discharge by the United States of its constitutional power and responsibilities by inevitably causing delays in such shipments when time is of the essence.

And in many situations, would expose to the public patterns of movement and traffic which would be subject to interpretation by the intelligence agents of foreign powers and might jeopardize the security of the United States.”

Then, of course, the Court goes on and comment upon the fact that the regulation in Public Utilities, this California regulation, California statute was formerly addressed to the United States specifically and sought to bring the United States under the heels, so to speak, of state regulations.

And, it goes on to this unique type of economic discrimination, this unique type of rate discrimination that was inherent in the Public Utilities case.

Now --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Paul Rodgers: No, sir, not to military supplies.

That -- we only interpret our regulation as applied to the movement of household goods and personnel of the United States.

We do not interpret our regulation at all applied to the movement of military supplies.

I believe that question has been foreclosed by the Public Utilities decision and, of course, we do not challenge that at all.

We do not challenge Public Utilities.

We seek to distinguish Public Utilities because we do not think that Public Utilities is designed to govern cases of this nature, the movement of --

Justice Arthur J. Goldberg: A household effect (Inaudible)

Mr. Paul Rodgers: Well, of course that's not involved here but I would think that would be on the same -- that would fall in the same classification of household goods to these employees because, of course, our military defense is not intended upon the rapid movement of the household goods.

In fact, frequently, the servicemen are sent overseas.

We'd have to wait quite a long time before we get the household goods over there, and I don't think the movement of household goods has ever been interpreted as being vitally necessary to the national defense, of course, it makes some contribution to the morale and that I think they should be moved.

But I think then, when you balance these two things in relation to the national welfare, I believe the federal government's interest in having a strong intrastate transportation system is more vital to the economy of the nation and to the national defense than the rapid movement of household goods.

Of course, I think that under our regulation, this household goods can be moved rapidly anyway.

But I would -- I don't see any real justification or distinguish between the household goods or military personnel and to these employees.

Justice Hugo L. Black: Are you basing a constitutional distinction on that?

Mr. Paul Rodgers: Well, I think, on the constitutional as to the implied immunity, it turns upon the degree of interference.

And, I think the degree of interference to a large extent is dependent upon the commodity moved.

Now, of course, it's one thing for state regulation to slow down or to destroy the seeker's requirements, say, on the movement of guided missiles and quite another for state regulation to have an effect upon the movement of household goods.

In other words, I think there has to be a weighing of degree in the constitutional sense.

Justice Hugo L. Black: So that in one case, by a household good be shipped by the government, the Constitution would not give them immunity, but if military goods were shipped, it would.

Mr. Paul Rodgers: Because of the degree of interference, yes.That's correct and that is as to the implied immunity.

Of course, I think that this does not violate the implied immunity.

I think even we assume to say, just for the sake of further consideration, that there is an implied immunity, I think that the federal legislation is such, that it indicates a clear indication that that immunity should not apply in procurements of this nature.

Justice Hugo L. Black: If one should not agree with you on that distinction, what would you then say about the California case?

Mr. Paul Rodgers: Well, if there is no --

Justice Hugo L. Black: How would you distinguish it?

Mr. Paul Rodgers: Well, then I would try -- I would then say, well -- you mean a -- I would say then that you thought that violated the implied immunity of the United States, I would say then that this movement here is on the Federal Property and Administrative Services Act which would cause these related provisions, required on this context, a different result as to household goods and the movement of military supplies under the Armed Services Procurement Act, and that it was the intention of Congress, as reflected by the Federal Property and Administrative Services Act to waive any immunity that the United States might have.

That would be my second line of defense.

Justice Hugo L. Black: That you do not reach a constitutional point there, that you depend on the interpretation of the congressional enactment, is that right?

Mr. Paul Rodgers: Well, that's -- what we say -- we say, first, that state regulation does not conflict with congressional policy.

We say second, that congressional policy is actually on the side of state regulation in this case.

And we say thirdly, that there is no violation of the implied immunity of the United States in this case.

Justice Hugo L. Black: Do you rely on any congressional enactment since the California case was decided?

Mr. Paul Rodgers: Well now, the California case only involved the Armed Services Procurement Act.

This movement here, made in this case, is made on the Federal Property and Administrative Services Act.

So --

Justice Hugo L. Black: Can you draw the distinction and the attitude of Congress in connection -- as shown by those two Acts?

Mr. Paul Rodgers: Well I think of course, the procurement provisions are substantially the same, however, I think there are other provisions in the Federal Property and Administrative Services Act, which indicate much more clearly than the Armed Services Procurement Act, that Congress intended that procurement of this nature be regulated by state regulation.

And of course, even as to the Armed Services Procurement Act, Congress has just passed the 1962 Amendment to that, whereby it set up additional safeguards for armed services procurement and made those safeguards -- made exceptions though as to cases where the prices were set by law or regulation.

But, getting back to the Public Utilities litigation, we find that -- getting back to this economic discrimination that was being suffered by the United States.

Now, your usual commodities in movement -- your usual commodities for transportation in this nation is like household goods and things of that nature, there has been commodity rates promulgated for that, and those commodity rates -- oh, I think my time is up.

Chief Justice Earl Warren: We'll recess now, Mr. Rodgers.

Mr. Paul Rodgers: Thank you, sir.

May it please the Court.

Where we left off involved a consideration of the litigation in the Public Utilities case and I was just getting to the point about the unique economic discrimination that the United States was being subjected to in that case.

Now, we all know that your military supplies, materials of war, are somewhat exotic, they are not the usual items for transportation for which commodity rates had been established for.

Now, your civilian goods, just about always, move at commodity rates, which are somewhat lower than your class rates.

Now, the class rates are devised to satisfy legal requirement.

In other words, every carrier, every regulatory agency promulgates rates which apply to any kind of shipment anywhere at any time.

For instance, I think one illustration used by General Lasher, a witness for the government in the Public Utilities litigation who made the comparison of the shipment of oranges from Maine to Florida when, of course, no movements like that ever occur but there's a rate for it, and that rate is high.

So because they were not commodity rates promulgated governing the shipment of exotic military supplies and war materials, the government, if it complied with state regulation, would be forced to comply -- to pay these higher class rates which you civilian shippers were not subjected to.

Now of course, involved in our case is household goods which is a frequent item of transportation and which all regulatory agencies have promulgated rates for.

And, you do not have that economic discrimination inherent in this case.

Going on reviewing this, General Lasher testified, nothing must be placed as an impediment to the complete flexibility and flow of movement of supplies to our troops in foreign theaters whether it's in peace or in war.

Going on, there are many items which move today, which are not described, some items which are willfully misdescribed in order to hide their identity, and their moving in quantity.

Were we have to go through a regulatory body, we would never be able to accomplish this.

And there's also great emphasis on the testimony of the District Court placed upon the secrecy requirements.

On the subject requiring secrecy in certain cases, Coronel Hall stated that reeling over a period of time every military shipment is in a sense a security shipment.

Coronel Hall added he did not think it would be possible to reveal unnecessary data for logical and reasonable rate approval purposes in connection with many of the shipments, which are secret in nature.

If everything is made public, we might as well publish it in the newspapers.

And the decision based upon this in this, this Court, and I think quite frankly so found a definite conflict because of the requirements -- the secrecy requirements and the speed requirements of transporting military goods, it found that California's regulation for program of regulation seriously interfered with that.

And because of that distinction, I believe, and also this economic discrimination, this Court reached the result it did in Public Utilities.

But, in reaching that result, this Court carefully distinguished Penn Dairies, carefully distinguished Esso Standard Oil Company versus Evans, Dravo, King & Boozer.

It carefully distinguished all of those cases and preserved that policy which has been reaffirmed since then, time established with those cases.

Also, it's interesting to note that on the same day this case -- that this case decided Public Utilities, it decided three more cases -- United States versus City of Detroit, the United States versus Township of Muskegon, Detroit -- and also City of Detroit versus Murray Corporation of America.

And in those cases, taxes were imposed upon individuals having leased government-owned property and revive the leases that any economic burden derived in the state tax may be passed onto the federal government.

But yet, all three of those cases, this Court in the same day decided Public Utilities and handed down those three decisions and also in the City of Detroit case, Justice Black commented approvingly upon the Penn Dairies case.

Now, in the brief, the Solicitor General places great reliance upon Kern Limerick, Inc. versus Scurlock.

Well now, that case right there is entirely consistent with Penn Dairies, with King & Boozer because in that case, by virtue of drawing the federal contract, the tax -- where the state tax was being imposed directly upon the federal government and this Court has never tolerated any such as that and because of that, the Kern Limerick decision falls in line with the rest of these decisions and they placed great reliance upon Arizona versus California.

Well in that case there, the state -- in the construction of a federal dam, the state tended to have a hand in the prescription and specifications for the construction of that dam, but of course, the federal government cannot tolerate that because you cannot tolerate the imposition of state standards on the construction of a dam.

Just in the case of Johnson versus Maryland, the state tried to have a hand in determining the qualification of persons who could drive federal mail trucks.

Well, all of that right there is a direct interference as distinguished from the indirect effect -- indirect economic effect in this case because, in our case, there is no prohibition upon the movement of the household goods.

The federal government move household goods in such volume whenever and wherever it pleases.There's no impediment there, nothing but the indirect economic burden which has been sustained numerous times by this Court.

Now, I would like to devote the next few minutes to a consideration of these noneconomic burdens which the Solicitor General asserts.

Now of course, I believe he places, and I think, a great emphasis on these noneconomic burdens because I believe that the trend of decisions as to the economic burden is quite clear.

He says one thing.

For instance, he refers to the uniform bill of lading.

Now, that tariff provision is at page 85 of the brief for the United States and he says, “Now, state law requires that there'd be a uniform bill of lading on each shipment.”

Then, he moves on from that and he says, “And that's going to take the federal government a great deal of time,” but that's against the clear terms of the tariff provisions.

The tariff provision places the responsibility of making that uniform household goods bill of lading on the carrier, not upon the federal government.

The obligation is placed upon the carrier.

The federal government is not burdened with that.

The carrier must provide the uniform bill of lading.

The government goes ahead and issues its government bills of lading as before.

It doesn't make any difference whether the government issues one or 100.

That's completely unrelated to this requirement of uniform bill of lading that's imposed upon the carrier and not the federal government.

And then, he goes on to say, “Well, there's a conflict between the GBL, the government bill of lading, and the uniform bill of lading.”

He only referred to two things.

First that he said was that the uniform bill of lading specified at the time which claims must be presented, and there's nothing in the GBL.

Well, I don't see any conflict.

I think the provisions -- I think the two bills of lading on that basis are compatible.

He has another one as to discrimination, I believe, he referred to in the GBL.

Well, that's certainly compatible.

There's no state law requiring otherwise, and the two bills of lading are entirely compatible.

The next provision he tried try to assert a noneconomic burden, first, this provision about the property of two or more families or establishments will not be accepted for transportation as a single shipment.

Now, that right there is designed as to rate regulation.

It doesn't mean there must only be the household goods to one founded place at one truck at one time.

That regulation there is designed at the economic -- in other words, you can't combine that with other shipments and, thereby, try to get a lower rate because that's rate discrimination, but that's -- all it means is that each shipment must be considered separately for pricing purposes, for figuring the rate.

Now of course if you're going to move, say in this case like nine families from Savannah to Atlanta, there must be an evaluation of the weight of each family.

In any system of transportation, you've got to have some mechanism for keeping the goods straight.

You can't steer one's household goods together and then try to pick them out of the journey, especially going to nine different places in Atlanta, the goods must be kept separate.

As far as paperwork is concerned, there must be an individual weight determined for each one and when that weight is determined, it's just as easy to apply the state rate as it is a rate achieved otherwise.

So I say that the economic burden -- that the noneconomic burdens asserted by the Solicitor General upon examination of this are nonexistent.

We go on now to this next one about -- in the next one, he says -- he goes onto the next one and he says “Now, if we have to follow the state regulation, we may have to comply with, say, 50 state systems.”

When now, on the other hand, if you have this cutthroat competition, so to speak, that the government desire to stimulate or how the Solicitor General desire to stimulate these cases, then of course, the federal procurement office are going to be continually advertising, formally advertizing.

They are going to continue to be negotiating contracts and renegotiating, and those contracts and the rates they provide for are going to be as (Inaudible) and vary, as there are a number of carriers seeking to do business for the government in intrastate commerce.

Contrasted to that is if you have state regulations.

You have a relatively few number of rates which must be applied.

So actually, the burdens are far less upon federal procurement officers.

This thing about having to apply with state regulatory systems is actually simpler than this process of continually seeking competitive bids and continually negotiating.

Now they go -- he tried to go on to say that -- well, even though we have competition, even though the government procures its transportation and the competition ignores state regulation, well, that's not going to really affect the returns of the carriers anyway because returns have already been sent.

Now, they set that up but that is plainly economically fallacious because once a return is set to give a fair return to a carrier, if he attempts to do business in an unregulated segment and does not follow state rate regulation, if he cuts rate, then clearly that's going to adverse -- adversely affect the return.

And they say -- and of course, in some cases, we may have to pay more than a state rate.

Well, that's entirely hypothetical and I believe that if any group of carriers ever got together and tried to enforce a higher rate upon the federal government than what civilian shippers have to pay, I'm sure then that the Solicitor General would become an advocate of state regulation.

I'm sure they would say then to the carriers “Don't you know you're regulated by state -- the State Commission?

Don't you know you're violating your rates?”

And I believe that -- and of course, furthermore, that's hypothetical.

Also, as far as this talk about exceeding the demand, exceeding the capacity and had to pay more for it, I think it's a practical matter from the very nature of the business.

I doubt if any carrier ever would be in the position, whereby he'd have to go out and buy new trucks because there are large firms in this nation to make a business of leasing trucks of a common carrier.

And so, for a big job, a carrier has available to these companies where he can lease additional trucks, and expand and contract his capacity as the bid increases and decreases.

Now, I hope that I have shown the Court satisfaction.

There is no significant economic burden -- a noneconomic burden to speak of.

However, in the case Davies Warehouse Company versus Bowles, there was a significant noneconomic burden placed upon a federal administrator.

In that decision this Court stated, and I'd like to read a couple of excerpts, “Simplicity of administration is a merit that does not inhere in a federal system of government, as it is claimed to do in a unitary one.

A federal system makes a merit, instead, of the very local autonomy in which complexities are inherent.”

The existence and force and function of established institutions of local government are always in the consciousness of lawmakers, and while they're weight might vary, they may never be completely overlooked in the task of interpretation.

At a time when great measures of concentration of direction are concededly necessary, it may be thought more farsighted to avoid paralyzing or extinguishing local institutions, which do not seriously conflict with the central government's place.

Congress has given no indication that it would draw all such state authority into the vortex of the war power, nor should we rush the trend to centralization where Congress has not.

Now next, I'd like to address myself to this criminal statute facet of the case.

The Solicitor General then says -- now, there's a criminal provision which states that anyone aiding or abetting in the violation of these statutes is subject to a misdemeanor and consequently if our federal procurement officers were caught doing such a thing, we would be -- they would be imprisoned.

But, I think that is clearly fallacious.

I think, furthermore, an examination of the criminal statute and the California criminal statutes, the statutes are quite different.

The California criminal statutes are far more extensive, far more sophisticated in their application.

They actually made -- they actually pointed those statutes to persons involved in non-utility businesses.

The breadth of those statute is much clear than Georgia statute.

Now, I think, interpretation of Georgia statute would be governed by such cases as United States versus Farrar and others, United States versus Gebardi.

United States versus Farrar held that a person who purchased intoxicating liquors under a federal Act was not the one that the Act was designed against.

And the purchaser was not covered by the Act.

It was just the seller.

And, I think that Gebardi versus United States, the Board of Prosecution on the Mann Act held there they federal -- that the criminal statute was not applicable to a woman.

It was the procurer that the criminal statute is aimed at.

I think the same interpretations here can be placed upon the Georgia statutes.

But even if we can see everything that the Solicitor General said as to the breadth of the criminal statute, I think there is a clear distinction between a noneconomic -- I mean an economic -- an incidental economic burden being imposed on the United States, that does not interfere with the federal function.

And in comparison to that, the imprisonment of a federal official, so that right there, very clearly is an interference with the function of the federal government.

And this Court has never tolerated such interference as that and, so long as it sits, I'm sure it never will.

And very clearly, no state has the authority to imprison a federal official.

Now cases like that which were (Inaudible) Johnson versus Maryland, they held the arrest of that postal employee was illegal.

In Ohio versus Thomas where you had the governor of this federal soldier's home, they held his arrest for not displaying a state oleomargarine sign is illegal and also in Neagle, which is a famous case where a federal marshal shot a man, killed the man in self-defense of a Justice of this Court.

But in case after case, it's quite clear that these state criminal statutes cannot apply to federal officials and that no state has the authority to imprison a federal official.

Justice John M. Harlan: (Inaudible)

Mr. Paul Rodgers: Well, that's another -- I'm glad you mentioned that.

The Georgia -- it has never been construed by the courts.

This Act right here was passed, I think, in 1932.

The Georgia Public Service Commission has never construed this thing applicable to the shipper.

I mean this case's problem is you never construe it applicable to the shipper and the prosecution -- there had been many prosecutions under this, they have -- those prosecution, if I had not been involved in many myself, those prosecutions have been directed to the carrier and not to the shipper.

And I think -- and of course, that constitutes an administrative interpretation that the statute is not applicable to shippers.

Justice John M. Harlan: (Inaudible)

Mr. Paul Rodgers: No, sir.

No -- there's no state decision on it but, of course, I think it's clear that that's beyond the power of any state to imprison a federal official.

Now, as to this regulation by Georgia, the regulation of intrastate transportation, this regulation is the type of regulation that's been adopted by just about all the states.

It's not unique.

It's a standard guarding variety type of regulation.

And of course, we have what it affected here, not only Georgia's program of intrastate regulation, we have that of the other states as well.

I see my -- yes, sir?

Justice Arthur J. Goldberg: (Inaudible)

Mr. Paul Rodgers: Yes, sir.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Paul Rodgers: Well --

Justice Arthur J. Goldberg: (Inaudible)

Mr. Paul Rodgers: I don't know.

I was not assigned as counsel at that time to the Commission.

I think it was somewhat -- I think the federal government should've been afforded a hearing, but apparently, they already made up their mind as to what the law was.

I think that's rather the sharp practice.

I think, as you said, I don't believe that's really relevant to this.

Justice Arthur J. Goldberg: (Inaudible)

Mr. Paul Rodgers: But I was not assigned as counsel to the Commission at that time.

And I'm not sure just what the reasoning was behind that.

Now, drawing on to the three basic distinctions between Public Utilities and Penn Dairies -- now, the first one is by the very address of the state legislation itself.

The state -- California State regulation said the State Commission may permit common carriers to transport property with reduced rates of the United States to such extent and subject to such conditions as it may consider just and reasonable.

Well, that is a former address.

That singles out the United States and points to it.

Now in an economic sense, and of course that's how the Solicitor General attempts to push this over, economically, this is really more favorable to the state than Georgia's regulation.

But in the constitutional sense, it's offensive because the United States is singled out, and it's made the expressed subject of state regulation.

The imposition is no longer indirect, indiscriminant, or incidental.

It is then direct and this Court has never tolerated that kind of state legislation.

And of course, I believe I've covered the next distinction already and that is that the difference in the commodity transported, and the third one was the economic discrimination because of the variation between class and commodity rates.

But I would like to say, in closing, that we have here a state regulation on the yard before this Court today.

It has a broad base.

Most of the states have it.

It's a solitary force for providing -- it enhances the national economy.

It's a solitary force for enhancing the national defense.

And Congress has shown no disposition to interfere with it.

Congress has shown the disposition to protect it and I say this nation cannot afford to be -- to have that type of regulation interfered with and it would be substantially because the government is the greatest spender in the nation and the economic force of this government is, of course, tremendous in all the state price support programs which have ebullient effect upon the national economy and the national defense.

Thank you for your attention.

Chief Justice Earl Warren: Very well.

Featured:

Paul v. United States - Oral Argument, Part 2

Tue, 25 Sep 2012 22:33:48 +0000

Case:

Paul v. United States

Media File:

19_19621018-argument-2

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19_19621018-argument-2

Transcript:

Argument of Cox

Chief Justice Earl Warren: Charles Paul, Director of Agriculture of California, Appellants, versus United States.

Mr. Solicitor General.

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

When the Court rose yesterday, I was just beginning to develop the second of the three grounds on which we contend that these purchases were immune from California regulation.

That ground Your Honor's will recall as the California Milk Control law is inconsistent with the federal procurement statutes and regulations and therefore must yield under the Supremacy Clause.

Federal scheme as we read the statute and the regulations directs the procurement officers to acquire goods by a competitive bidding were possible and whereby negotiation, nevertheless, with enough negotiators to acquire the benefits of competition.

In that view, I think appears quite clearly from a review of the statute and also, particularly the regulations that are set forth in the appendices to our brief.

Justice Arthur J. Goldberg: (Inaudible) Solicitor General, if the Department has said is not (Inaudible)?

Mr. Cox: Because the regulations deal with the purchases of the Government and not with the purchases of the private handlers from the farmers.

We're concerned as I sought -- show yesterday, we're getting the benefits of competition at the handler level.

Now, we're not concerned with getting the benefits of competition at the producer level quite contrary.

Justice Arthur J. Goldberg: Do you think that was (Inaudible)?

Mr. Cox: I think I would have an exceedingly difficult case and I think in view in the interpretation put on the regulations by the Secretary of Defense.

At the present time, I would have a virtually impossible case because I should suppose that that interpretation by which is very firmly the view of the Defense Department at this time.

It's been reported to Congress, should be read as a rubric.

But this regulations deal with our purchasers from the distributors where we frankly do seek to get the benefits of competition so far as that margin is concerned.

I might say in that connection it was mentioned yesterday that United States' attorneys were in the California's courts seeking to aid the cause of the handlers with respect to the enforcement of producer price.

I've been able to find no evidence if that's so if theirs some misunderstanding here.

I certainly going to assure the California authorities that there's no doubt in Washington about what our policy is.

And we'll take steps to transmit those instructions if there had been any confusion.

A question was raised in the reply brief about the procurement regulations.

The reply brief states that the Government purports to quote them but the counsel was unable to find them in the code of federal Regulations.

The source of the confusion is that what we print in the back of the brief is the regulations as they appear in the record and those were the regulations enforced at the time the suit was brought.

Subsequently, there was a minor change made which involves some renumbering and the result is that unless you check through the numbers three -- 301 became 302 or 303 and things like that.

It is confusing but these regulations were the once in effect at the time and indeed the ones effect the day also the numbers are different, are substantially the same.

Justice Byron R. White: (Inaudible)

Mr. Cox: Well, I think its -- its certainly helpful to my case and we think that the same two differences that were pointed out in the Public Utilities case still exist today.

At the time of the Penn Dairies case, the old version of the regulation said that appropriated funds might not be used for payments upon awards, upon invitations for bids containing requirement showing compliance to the state price laws.

At least not until there'd been a final and authoritative determination that the state's statutes are applicable.

Unknown Speaker: (Inaudible)

Mr. Cox: That has been -- excuse me.

That's been released.

Then another difference was that the old version of the regulations had declared that competitive bids were not required when the price is fixed by federal, state, municipal or other competent legal authority.

That too has been taken out.

These differences were thought precisely by the court in the California Commission case.

The same differences exist today and we think that the California Commission case therefore rather than the earlier case is controlling.

Unknown Speaker: (Inaudible)

Mr. Cox: Well, I'm -- but, yes clearly.

Now, I don't see that there is any essential difference between milk and transportation in this respect.

I don't think there's any difference between kinds of transportation in this respect.

If we are talking about the policy and the procurement regulation, the same policy is laid down by the regulations in each case and it draws no difference between milk and transportation.

Indeed if there is any, it's that the policy expressed than the regulation is applicable to the procurement of commodity is more emphatic and clearer than the policy declared in relation to transportation.

Justice Byron R. White: What -- suppose there are (Inaudible) there if -- there is exclusive legislative authority in Congress.

It might be an important requirement if Congress has given an intent, the procurement (Inaudible) to accept or to honor minimum prices in the state?

Mr. Cox: I think it might be relevant but hardly decisive because the question that certainly Congress has done nothing it would seem to give its consent to California to apply California legislation --

Justice Byron R. White: Well, but (Voice Overlap) --

Mr. Cox: -- in the federal enclave.

And I think this Section saying, nobody shall prepare to do anything unlawful in the enclave is equivalent as the Court said in the Pacific Coast Dairy case to -- attempting to regulate what happens in the enclave.

Justice Byron R. White: Well, if Congress has said that to do that, if procurement officers do not try to bargain below the statement of the price fix (Inaudible) and then the procurement officer had and one of the distributors had given them a lower price.

Would -- wouldn't you think California could take action against the --

Mr. Cox: I would think if this happened in the federal enclave over which there was exclusive federal jurisdiction that California could not take action that this would be a matter punishable or by reprimand or if it's an offense by an information or indictment by the Federal Government.

Justice Byron R. White: (Inaudible)

Mr. Cox: It's still not the decision of legislative jurisdiction to California.

Justice Byron R. White: A fortiori (Inaudible) do -- have the order which was given to (Inaudible) procurement officers to (Inaudible) California couldn't do it?

Mr. Cox: If my first ground is good I think California no longer could -- I think California could not intervene.

Of course if they had given consent and expressed the policy of complying with state price control laws, then my second ground would be gone.

But it seems to make quite clear that Congress did not give the consent and that the statute and especially the regulations expressly opposing view.

Justice William J. Brennan: Mr. Solicitor General, in that respect, you said to me yesterday that purchases from revolving funds are not governed by the procurement regulations.

Is that by some exclusive provision in the regulations or is that also in the (Voice Overlap) --

Mr. Cox: The statute is applicable to purchases with appropriated funds.

Justice William J. Brennan: And that's the basis upon what --

Mr. Cox: That's the basis on which we rest.

So that really there are three kinds of milk involved here in all candor.

But firstly, the purchases were (Inaudible) branches then as to that my case stands just as I have stated.

At the other extreme are the purchases of officers' clubs, and other activities at that time which remained from a revolving funds and not about of appropriated funds and as to those, I don't think we can fairly argue that the procurement policy is applicable.

In between our certain purchases made for commissaries, purchases for resale.

Now as to those, I think my argument on the procurement policy is somewhat weaker and still think it's a valid argument but there are two points which can be made against them.

One is that Congress has indicated that where things are bought for resale, it is not -- is concerned with competitive bidding.

Now second, it has indicated that a commissary should not be established in areas where goods can be purchased at local stores nearby for the same prices.

Now Mr. Ford argues, I think with some parts that this indicates that -- or may indicate, that the milk bought for the commissaries, Congress wasn't so interested in competitive price.

My reply is that the same regulations apply that what Congress was concerned with was perhaps not having the commissary but once you have them and that determination has been made then they're governed by the same procurement policies as all other case.

Justice William J. Brennan: But in any event, if your enclave argument prevails, these reaches all three --

Mr. Cox: Yes.

Justice William J. Brennan: (Inaudible)

Mr. Cox: (Inaudible) by enclave argument prevails it clearly reaches all three and if the third point which I simply mentioned now so as not to waive it prevails.

This violates the constitutional immunity then it reaches all three.

Accordingly, if it pleased the Court, we ask if the judgment be affirmed with such modification as being -- maybe necessary to reflect the concessions that we made in our brief and that I have made here in the oral argument.

Chief Justice Earl Warren: Very well.

Mr. Fourt.

Argument of John Fourt

Mr. John Fourt: Mr. Chief Justice, if the Court please.

The thrust of the Government's argument we feel is pertains to what has been described as the enclaved position.

That is their claim that the United State has exclusive jurisdiction over these installations.

Our position is that this is indeed a recondite and difficult question, a question of first impression.

We want to illustrate that it is difficult by citation of two different lines authorities.

First, in our brief, we have cited that the (Inaudible) General of the Army has issued two opinions which are inconsistent with the position now taken by the Government.

Those opinions are cited in our brief so that we have inconsistent administrative interpretations by both California and the United States.

And secondly, we want to briefly advert to the case cited yesterday, United States versus Cornell, 25 Federal cases, page 646.

In that case, the Court had before it a 1791 Rhode Island statute.

And this Rhode Island statute was a session statute not a solely a statute, such our 1872 statute but a session statute.

In essence what it provided was that Rhode Island would make a session of exclusive jurisdiction in United States over lands purchased by the United States from the municipalities or private landowners with the consent given by the Government.

Mr. Justice Stewart in this case, then as one of this alternative grounds held that the attempt by Rhode Island to condition that session, jurisdiction to make a reservation of that session was invalid because the consent to a purchase brought the land involved within Article I, Section 8, Clause 17 of the Constitution which was he felt exclusory of state law and therefore this attempted reservation of jurisdiction was invalid.

This case was reviewed by this Court in James versus Dravo Contracting Company in 302 of United States and there the Court expressly disapproved this holding by Mr. Justice (Inaudible) sitting on Circuit that Clause 17 was exclusory to the extent that it would prohibit a state from making a condition to a session of jurisdiction.

Now our point here is that if Clause 17 is construed by this Court was not exclusory so as to prevent a state from conditioning its consent then it is not exclusory at all except as implemented by Congress.

Now, turning then to the procurement argument and particularly the question which Mr. Justice Goldberg --

Unknown Speaker: (Inaudible)

Mr. John Fourt: Yes, sir?

Justice Arthur J. Goldberg: Are you asking (Inaudible)?

Mr. John Fourt: Yes.

Justice Arthur J. Goldberg: Isn't that issue (Inaudible)?

Mr. John Fourt: Yes, yes.

With respect to that point, it is our position that the 1940 Amendment to revise statutes Section 355 which is requires the notice requirement which the United States must give to a state.

First required a notice and if a notice given here by United States was no notice at all because it said, “We accept jurisdictional where all lands owned by United States within California, give no notice at all to California what parcels were involved.”

Secondly, that as construed by the Department of Justice in its brief to this Court in Adams versus United States that the language in revised Section 355, incorporated such applicable notice requirements of the state.

And they actually mentioned that if a state has a requirement for the filing of a plats and meets in bounds then the United States should comply with that recording requirement.

Therefore, (Inaudible) Congress has given that direction.

We feel that in this case United States did not comply with the statutory direction.

Secondly, the implementation by Congress of this power of exclusive legislation has not clearly superseded state law and one implementation of course is the procurement statutes.

There are other regulations for example that a state warrant of arrest shall not be honored on a federal military installation except in the discretion of the Commanding Officer and there are a number of such regulations.

Again, Congress has not come on forth and clearly said that our procurement statutes are invalid as applied to contractors with the Government.

Now in response to your question, the Mr. Solicitor General said that the crux was whether the state can circumscribe to any extent the way which the Government can contract.

Now, we take it here that what the United States is saying that, it is no concern of the governments whether the contractor with United States received so little on his Government contract that he is unable to pay his dairy farmers for his milk, his labor cost in a highly organized industry.

Indeed, the Court has before it a brief of Petaluma Cooperative, a small cooperative in Northern California were on pages 4 and 6.

It describes how it was driven from the market by virtue of this acute competition.

Now, what caused this competition?

Well, the Government is the largest purchaser of milk in California.

And secondly, its contracts are tremendously powerful leverage in the hands of the Government.

For example, the contract at Travis was for the amount of $500,000 worth of milk and that at Travis was for $450,000 worth of milk.

Perhaps distributor was laughing but he said he'd burn his grandmother alive for that kind of money.

Now, inevitably this law situation which the Government in driving a hard bargain will drive upon contracts with the Government will undermine the efforts of the State of California and other states to correct the very situation, the very economic instability which the Government seeks to take advantage of.

In summary then, we feel that California has been rather sharply dealt with here.

We have questions of statutory constructions of state law which were precluded from deciding under state courts.

We feel that the action of the Government here prevents us from protecting our supply of a vital food which is also vital to the Government.

We therefore ask the judgment be reversed.

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Paul v. United States - Oral Argument, Part 1

Tue, 25 Sep 2012 22:33:47 +0000

Case:

Paul v. United States

Media File:

19_19621017-argument-1

Related Transcript:

19_19621017-argument-1

Transcript:

Argument of John Fourt

Chief Justice Earl Warren: Number 19, Charles Paul, Director of Agriculture of California, et al., Appellants, versus United States.

Mr. Fourt you may proceed now with your argument.

Mr. John Fourt: Mr. Chief Justice, may it please the Court.

The Appellant State Officers appealed in this case from a District Court injunction permanently closing the state courts to the state's efforts to enforce its Milk Stabilization Act against independent contractors selling milk to commissary grocery stores, officers' clubs, post exchanges and to troop messes.

Strictly the essentials, there are two basic issues here.

The first is the Government’s request that this Court's decision in Penn Dairies versus Milk Control Commission in 318 of United States be overruled.

That case held that the State of Pennsylvania could enforce its Milk Stabilization Act similar to California's against independent contractors selling to the United States and that it's statute as so applied was constitutional and was consistent with federal procurement policy.

The second issue in this case among many but primary, is whether the Government acquired exclusive jurisdiction over three particular installations in California without complying with the state statutory condition that the Government inform us just which processors were being taken into federal jurisdiction.

Following the entry of this injunction closing the state courts of the state, prices received by dairy farmers in California dropped sharply.

They dropped to the extent that dairy farmers were suffering losses at the rate of nearly $7 million a year based on Federal Government purchases of 29 million gallons of milk in fresh form.

Yes sir?

Unknown Speaker: [Inaudible]

Mr. John Fourt: The District Court held the complete California statutory scheme unconstitutional.

Insofar as the issues in this case are concerned, California establishes the price at which a distributor must pay the dairy farmer for milk received by him and it also fixes the price at which the distributor may sell that milk.

As construed by the California Supreme Court, the statute goes no further than the distributor and does not apply to the United States.

The three installations here involved are Castle Air Force Base, Travis Air Force Base and the Oakland Army Terminal.

The state statute was held unconstitutional on two grounds.

First, that delivery of the milk occurred to these three bases and that these three bases were subject to the power in Congress to exercise the power of exclusive legislation under Article I, Section 8, Clause 17 of the Constitution.

In a second equally pervasive ground holding the state statute unconstitutional was that the state statute imposed a prohibition on the Government and its contracting officers in their purchase of milk.

We believe that both of these constitutional issues were posed in the Government's complaints and adopted by the District Court for the Northern District of California.

There being present, two constitutional issues in the case, it was proper then that a three-judge Federal District Court be convened, a three-judge court being properly convened then this Court has direct appellate jurisdiction.

Both the Government and California agreed to this proposition.

Following the Court's reservation of the question of jurisdiction to the time of oral argument, California filed also a petition for certiorari to the Court of Appeals for the Ninth Judicial Circuit before judgment in that court, if this Court cannot reach the merits of this case by appeal, then we ask and the Government joins us in asking that this Court hear the merits by certiorari.

Turning to the merits, the purpose of the Milk Stabilization Act of California and of the 23 other states who have similar laws is to protect the state supply of a vital food by regulating the prices for milk.

The state establishes minimum prices after public hearings and often after litigation.

This public setting of prices is to be distinguished and indeed was intended to prevent collusive price setting by combinations of sellers.

We think that this then emphasis or legislative objective of the California statute in and of itself shows that there's no conflict with the congressional objectives and the federal procurement statutes which are designed to prevent private collusive setting of prices by its emphasis on pre-competition.

Minimum wholesale prices and the said fixing of it by the state was found necessary by the legislature because of internal and unique competitive problems in the industry which require that distributors be assured of a adequate return and a regular return money which would allow them to cover their own expenses and have enough left to pay the dairy farmers.

And obviously, if the dairy farmers do not receive their cost production in the long run, our supply of a vital food will be impaired.

The Government contends that the California law is unconstitutional because it imposes a direct prohibition on the Government.

Our answer is that the District Court there erred because it should have given deference to the contrary opinion by the California Supreme Court that in the Penn -- Pacific Coast Dairy case in 319 Cal.2d, later reversed on another ground by this Court that the Milk Stab -- California Milk Stabilization Act does not apply as written, not as a matter of constitutional law but as written, it does not apply to the Government nor to its procurement officers.

Justice Arthur J. Goldberg: You mean they can't be penalized, is that it?

Mr. John Fourt: Yes, that is correct.

That once the Government enters into a contract as a matter of the way our statute is written, it is free then to act as it chooses and we have no remedies under our statute against the Government.

Now, to construe our law as did the District Court then, adopts a construction of state law contrary to that made by our highest state court.

Secondly, the state officers involved in this appeal, have administratively construed and agreed with an interpretation of the California Supreme Court that our laws do not apply to the United States.

Therefore, the District Court struck down our law on a hypothetical ground, a ground that could never come up.

Thus, our statute does not impose a prohibition on the Government.

Now, another ground of attack, the Government says that if California regulates the price at which a distributor may sell to the United States, the effect is to regulate the price which the United States buys.

Now, we submitted that this is not true factually nor legally.

The United States is affected only by the terms of its contract with the distributor not by virtue of state statute.

And this element then distinguishes such cases as Kern-Limerick, where the statute, as written encompassed the United States as a purchaser in that case.

Our statute as written here does not encompass the United States.

Justice Arthur J. Goldberg: [Inaudible]

Mr. John Fourt: The economic burden in either case is passed on to the United States.

We understand that an even handed regulation of a contract with the United States which caused a burden which is passed on United States is constitutional.

This Court passed on this identical issue in the Penn Dairies case in 318 of United States.

Now, as specifically applied in our case, the United States purchases milk for a number of different uses.

It purchases milk for resale through officers' clubs, post restaurants and post exchanges.

These activities do not operate from federal moneys, but through private revolving funds.

They are federal activities since they are operated under federal regulation but there is no loss or risk of loss of United States funds, and any increase in the burden is not passed to the Federal Treasury, but to patrons of officers' clubs and post restaurants and post exchanges.

The Government in its brief makes no answer to our contention that this particular activity is constitutional, that is, that the application of our law to independent contractors selling to officers' clubs, post exchanges is constitutional and valid.

Because these particular activities do not use federal funds, their purchases do not come under the Armed Services procurement statutes and therefore there could be no statutory conflict between the state and federal regulations.

The second and major use for which the United States purchases milk is for resale through post commissaries.

At the Oakland Army Terminal which is located in the harbor in the center of the City of Oakland, 78% of the milk purchased by the United States at that base is resold by it through its commissary.

Here, the funds used are revolving funds, but are appropriated by the Congress in a continual and standing appropriation.

The commissaries are operated without cost to the Government because under the army and the federal regulation, the price is charged, must be high enough to have the commissaries operate without cost to the Government.

We think that the Congress in enacting the federal procurement statute specifically intended to accommodate state price fixing laws with respect to commissary sales because they expressly provided that the United States when purchasing for resale, need not go through the formal advertising procurement procedure, but may use non-competitive and negotiated procurement.

By negotiation, this means that contracting officers, an individual supplier and just ordered the goods.

He need not put it out for bids.

He need not contact more than one supplier.

And the reason, given in the congressional reports is that a commissary often as it has been buy by brand name to satisfy the needs of its patrons.

Any increase in cost to the commissary then by the application of our state law to contractor selling to the commissary are not borne by the Federal Treasury but are then -- go back into the purchase price of the patron of the commissary.

The Congress also has stated in the appropriation acts to the Department of Defense that commissary stores may not be established in areas served by adequate commercial facilities.

Again, we think this shows that the commissary stores were not to operate in competition, door-to-door competition with a private retail store which must comply with state law.

The Government maintains 242 major military installations in California.

These installations through their commissary stores sell 20 million gallons of fresh milk.

It is our experience that if this invidious discrimination between the prices of milk purchased by a retail grocery store and a commissary store continues that this will indeed destroy the California Milk Stabilization Act.

Another category is that the United States to a lesser extent purchases milk for use in the troop kitchens, troop issue on the three bases involved here.

The average was 30% of the total milk was used for troop issue.

Here again, we think Congress' intuitive intent that the procurement statutes are to accommodate state price fixing laws.

And then there is, the Court noted that again, procurement officers need not go through formal advertising procedures and procurement but may use non-competitive negotiated procurement because the -- this was a perishable commodity and further that the Government may use negotiated purchase where competition is impractical and one element of competition of course is eliminated when a floor is set on the price at which a contractor may sell milk to the United States.

Further, the Congress through the Department of Agriculture subsidizes the purchase of milk for troop issue over and above the eight ounce basic ration at the rate of a little over 8 cents per quart.

The reason that the Congress granted a subsidy was to ensure a national adequate quantity of milk.

Now, this subsidy on purchases by the Armed Services goes through the contractor and then goes back to the dairy farmer.

We think it's inconsistent for contracting officers utilizing their tremendous bargaining power to drive the prices down to the dairy farmer below the cost production while another agency subsidizes Armed Forces procurement of milk.

Justice Byron R. White: [Inaudible]

Mr. John Fourt: Yes.

Justice Byron R. White: [Inaudible]

Mr. John Fourt: Yes, that is correct.

We have two very large --

Justice Byron R. White: [Inaudible]

Mr. John Fourt: No, it's a minimum price.

Yes, yes, the cooperatives were largely organized in the 1920s and --

Justice Byron R. White: [Inaudible]

Mr. John Fourt: Yes.

Justice Byron R. White: [Inaudible]

Mr. John Fourt: The cooperatives have maintained their position in California.

Roughly, I would say between 18% and 20% of total volume is handled through the cooperative associations and then balanced with conventional distributors and that balance by and large is not changed over the years.

Justice Byron R. White: [Inaudible]

Mr. John Fourt: Yes.

Justice Byron R. White: [Inaudible]

Mr. John Fourt: Yes, I'm not -- yes, in our brief, it discusses the particular conditions of instability in the 1930s particularly in 1935 which caused the California legislature to enact our Milk Stabilization Act.

These were generally a nationwide condition and which led to similar legislation being enacted by the Congress.

Justice Byron R. White: [Inaudible]

Mr. John Fourt: No.

The problem did not arise in California until a surplus of milk developed and that surplus of milk did not become acute until after the close of the Korean War.

And at that time then, both conventional and cooperative distributors sought intense competition, Government contracts, and as the contract price for the Government lowered, the state received the objections of producers asserting they weren't being paid the minimum price.

This led to our enforcement action in the state courts.

The appearance by the United States Assistant Attorney General and assistant attorneys in those actions in the trial court and then when we were initially successful in the trial court then United States filed a -- press its actions in the United States District Court to close our state courts.

I think a second answer is that this particular problem we have thought was settled in 1943 in the Penn Dairies decision and we think that for that reason, the Government asked the Penn Dairies decision be overruled.

The United States relies heavily on California Commission versus United States in 355 of United States reports.

That case involved a non-economic burden on United States primarily excessive delays by which the United States could move all of its secret military traffic.

There, the United States had no choice in intrastate shipments, but to file suit or to subject itself to California regulation.

There was also an element of discrimination in that the kind of shipments the United States wished to make were a type called traffic all kinds which they could ship a whole train load at one rate and California has not recognized that kind of shipment.

And there, there was an invidious discrimination applied against a contractor with United States.

And we think that the Court's discussion in that case of the discretion given to procurement officers were related to this non-economic burden on the United States particularly in a vital military function.

Justice Arthur J. Goldberg: [Inaudible]

Mr. John Fourt: Yes.

Justice Arthur J. Goldberg: Provided the rules from the military base [Inaudible]

Mr. John Fourt: We think that this is a matter of degree and in the sense of the Court, I use it there within the terms California Commission, this meant a matter which is essential to the defense of a nation in the answer to the precise facts, I would say that that is not in the same category as the untold delays of military shipments going forward to eastern hostilities.

Justice Arthur J. Goldberg: In other words, [Inaudible]

Mr. John Fourt: In the sense that this is certainly within the power of commerce, that is recognized.

Again though, we would distinguish between military shipments going forward to areas of hostilities and the sale of milk particularly where the state regulation forwards an even handed burden to United States.

Justice Arthur J. Goldberg: With regard the Government, [Inaudible]

Mr. John Fourt: Yes.

Yes we would.

Turning to the other issue which involves the land jurisdiction, the Government concedes that California has not made a session of exclusive jurisdiction over these three bases to United States and by the term exclusive jurisdiction, we refer to the term derived from international law that when one government makes a session to another that the laws of the old sovereign are completely obliviated in the new area and such laws that are carried forward are carried over as associated laws for the new sovereign.

Unknown Speaker: [Inaudible]

Mr. John Fourt: Yes, that is correct.

My point was that we were eliminating under the Government's theory one way which the Government could have obtained sovereignty.

Unknown Speaker: [Inaudible]

Mr. John Fourt: That's right.

California in 1897 enacted a very broad statute.

The statute covered all lands within the state now held or reserved for the Government -- by the Government of the United States for military purposes or defense or which may hereafter be ceded or conveyed to said United States.

Now, this was in 19 -- 1897 and it clearly covered then all lands purchased or acquired by the Government since 1872, 1872 being the date of the statute relied on by the Government.

It covered all lands which were owned by United States at the time that California was admitted to the Union in 1850 and the statute, 1897 statute covered all lands that United States could possibly acquire after 1897 because it covered all lands obtained by conveyance and by cession.

We take it there's only two ways United States could acquire land.

Since the 1897 statute then we submit, qualifies and controls any land previously acquired to 1897, then – the argument then as to what quantity of jurisdiction United States might have acquired under the 1872 statute is irrelevant.

Now, the United States admits that California can constitutionally condition our cession of jurisdiction and we did just that by requiring that the Government notify California just what lands will be taken into federal jurisdiction, that requirement was that land descriptions and plots be recorded in the appropriate country recorder in California.

Now, the Government relies on an earlier 1872 statute which was not a cession statute, said nothing at all about cession of jurisdiction.

It merely said that California consents to the purchase of lands within the state for federal military purposes.

A similar statutory sequence was considered by this Court in James versus Dravo in 302 of United States, and there --

Unknown Speaker: [Inaudible]

Mr. John Fourt: Yes, yes.

Unknown Speaker: [Inaudible]

Mr. John Fourt: We run into a somatic difficulty here.

First, we assert that the 1897 statute controls the 1872 statute regardless of what the 1872 statute means.

And we say that the 1872 statute did not tender a transfer of jurisdiction of the United States, but if it did, it was qualified by the 1897 statute.

Now in the West Virginia statute considered in James versus Dravo, West Virginia had enacted an 1881 consent statute very similar to in the language to our 1872 statute and in 1931, had enacted a cession statute and in the cession statute, it said that the terms of the cession statute would apply to any lands acquired under the 1872 -- under the 1881 statute.

So in our case, we say that the reference in the 1897 statute to lands acquired by cession or by conveyance applies to any lands acquired by United States in the 1872 statute.

Now turning to our difference with United States for the meaning of the 1872 statute, we assert that in California when granting consent to the purchase intended thereby to give Congress another type of supremacy power over such lands.

It granted power to Congress to legislate and exclusively as the power to exercise exclusive legislation and the term exclusive there modifies legislation not power.

The Government would reverse the context there and would say that this was an exclusive power granted to Congress.

Justice John M. Harlan: [Inaudible]

Mr. John Fourt: No.

We -- this involves the Pacific Coast Dairy case also decided in 318 of United States.

There, as we read that case, California could not apply our Milk Stabilization Act to a situation where the sale occurred within exclusive federal jurisdiction.

The delivery occurred with an exclusive federal jurisdiction and the consumption of that milk occurred within federal jurisdiction.

And California in that case admitted all those facts in the state trial court by filing a demurer which admitted only allegations of the complaint filed in that action.

So that issue was never litigated in the Pacific Coast Dairy case.

Justice John M. Harlan: [Inaudible]

Mr. John Fourt: Yes.

In this case, let's take Castle as perhaps the best example.

The United -- California filed a suit to restrain a distributor from making sales to the Government -- to Castle at less than the state regulated prices and from -- and ordering it to pay its producers, dairy farmers minimum prices where delivery occurred on Parcel 12 which is within the main part of the base.

Ten days later, the Government ordered the contractor to discontinue delivery to Parcel 12 and to commence making deliveries outside of the base to another little parcel called Parcel A, Civilian Housing Project.

And then the Government -- and the Government tractor then picked up the milk at Parcel A and hauled it into to Parcel 12 where the milk was consumed.

Again, at Castle, the contract was not signed there, but was manually approved by higher headquarters so that on Parcel A, the contract wasn't signed there and the milk wasn't consumed there.

All that occurred on Parcel A was the delivery.

We submit then that this small relationship between Parcel A and the Government then would distinguish the Pacific Coast Dairy case from our situation and even if the Court would find Parcel A an exclusive federal jurisdiction that notwithstanding, California should be able to enforce our law against that contractor because of the majority of things that occurred in this entire transaction occurred without Parcel A.

Unknown Speaker: [Inaudible]

Mr. John Fourt: The record does not disclose where that higher headquarters were located but we believe that wherever this higher headquarters occurred where the United States officer who had authority to sign contracts over $25,000 in amount where he executed the contract and accepted the offer of contractor -- of contract tendered by the independent contractor.

Unknown Speaker: [Inaudible]

Mr. John Fourt: Yes, that is correct.

I used the term sale here to mean the contract which made provisions for the subsequent passing of title.

Unknown Speaker: [Inaudible]

Mr. John Fourt: Well -- no, I would not say it's irrelevant.

I would say passage of title occurred at the place of delivery but the -- while relevant, in fact issue alone is not decisive of the case here.

Thus, for example, the record shows that the United States has changed its receiving points of milk both at Travis Air Force Base and Castle Air Force Base so as to take delivery on parcels which have the best jurisdictional credentials.

If the Court prevails of this issue, if they can find one acre tract in California where the Government has exclusive jurisdiction then the Government can take delivery of all of its milk on this parcel and by transshipping itself then, supply its needs throughout California.

Indeed then, this one parcel would be a thorn in the side of California.

Justice Arthur J. Goldberg: What would your reaction be if there was a military base in which you admit there's exclusive jurisdiction that some of the personnel as is often the case lives of the base and the milk was consumed by that personnel off the base.

[Inaudible] that there are a little circumstances that the Government was willing to cover that circumstance?

Mr. John Fourt: No, both because the statute as written and interpreted by our highest state court does not apply to the United States.

And secondly, if the California legislation did change our statute, it would be unconstitutional.

Once the milk is delivered in United States concededly then, it is beyond state control.

Thus, for example, the out of store commissary grocery store price is beyond our control as far as we're concerned to -- as far as our power and our statute, they could give the milk away.

Now, with respect to this question which we believe of first impression as to whether the power of Congress to exercise exclusive legislation of these bases purchased with state consent as to whether that is per se exclusory of state law or is exclusory of state law only as implemented by Congress.

We submit that policy considerations lend themselves to deciding that this is not per se preemptive, but is a power which is effective when Congress implements it.

And we take it -- conceded here that Congress has not exercised this power of exclusive legislation to our state law although we grant that it can do so at any time.

The President's depart -- in a departmental committee in the study of jurisdiction recommended that federal agencies neither acquire nor retain exclusive jurisdiction and this is for the reasons that these areas are no longer part of the states and the residents of those areas, particularly in the defense housing projects in the -- can no longer obtain the benefits of state citizenship, that is, the states have held for example that a resident of an area with an exclusive legislation cannot have as the state probated, cannot secure divorce, his children may not attend the public schools and in many states that such person lose their franchise.

And for this reason the Interdepartmental Committee of the President suggested that federal departments neither acquire nor retain exclusive federal jurisdiction.

And indeed the army regulations point the same fact out and say that it is army policy neither to acquire nor retain exclusive jurisdiction.

Justice John M. Harlan: Do you concede that your case has to stand or fall on whether there is exclusive federal jurisdiction?

Mr. John Fourt: No.

The wholesale price regulations will have to stand and fall on whether enough occurs within these military installations which then would nullify the state's attempt to enforce our statute off of those installations.

But our minimum dairy farmer price regulations apply to the transaction between the distributor and the dairy farmer far removed from the military installation.

And therefore, the land jurisdiction problem is not decisive or dispositive of the whole case.

Now, the United States had suggested that this Court not pass on part of the issues of this case, and that is the -- as to whether the state can apply our law to transaction occurring off the military installations.

And we should like to point out that this is still a burning issue --

Chief Justice Earl Warren: What part was that again please?

Mr. John Fourt: Yes sir.

The District Court held our entire statute unconstitutional both the minimum dairy farmer price regulations and the wholesale price regulations.

The Government suggests that the issue on diary farmer price regulation is moot because as a matter of procurement policy, they've said they will not assert this constitutional immunity.

This does not answer the problem because following the stay granted by Mr. Justice Douglas we repaired to the state courts and the distributors against whom we sought to enforce our law with the assistance of the Government then raised this constitutional issue.

The Government has not waived it.

They merely said they will not assert it and so this is still very much a burning issue.

Secondly, it has been our practical experience that we cannot enforce our minimum dairy farmer price regulations against distributors effectively without the wholesale price regulations.

If competition forces the distributor to sell milk at such a low price that his returns are inadequate to cover anything, but his own cost then there's nothing left for the dairy farmer and this has been our experience.

Well, there are many issues which we have not raised here and which we do not abandon and in our brief, but we wish to summarize that under the State Milk Stabilization Act, the Government receives the lowest wholesale price available to any customer in California.

This price is 12% below any price that a competing retail grocery store can obtain.

The Government does not ask for equal treatment, but preferential treatment.

They do not want to pay roughly 18 cents a quart.

They want to pay 11 cents a quart and the invidious discrimination here against the consumers of California is shown by the fact that the out of store retail price in commissaries is 11 cents a quart, the out of store minimum competing retail grocery store price is 24 cents.

Now, we think then that the preferential treatment that is the allowance, the better treatment given to the United States under state regulation is now consistent with the purpose of our statute and that is it roughly gives the United States 2 cents a quart advantage over any other wholesale customer other than state agencies.

If the Government obtained this preferential treatment, we feel that this will largely undermine and destroy our state's efforts to protect its vital food supply.

Turning to land jurisdiction, we feel that neither the Constitution nor state statutes support the Government's claim to exclusive jurisdiction over these lands and that it asserts this claim to exclusive jurisdiction for the valid purpose of obtaining preferential treatment in this purchase of milk and that it -- in its claim for preferential treatment, it minimizes the considered policy considerations adopted previously by the army and by the President in his report that on balance, state jurisdiction giving municipal laws and services to this land -- to these military installations is preferable to exclusive federal jurisdiction.

Unknown Speaker: [Inaudible]

Mr. John Fourt: Yes sir.

Unknown Speaker: [Inaudible]

Mr. John Fourt: Yes, that is correct.

Unknown Speaker: [Inaudible]

Mr. John Fourt: Yes.

Unknown Speaker: [Inaudible]

Mr. John Fourt: Yes, that is correct.

Justice Byron R. White: And even if we have [Inaudible] you don't have to be [Inaudible]

Mr. John Fourt: Yes, that is correct.

Justice Byron R. White: Namely [Inaudible]

Mr. John Fourt: Yes, that is quite correct.

Justice Byron R. White: And did you do -- did you -- that if there was not [Inaudible]

Mr. John Fourt: Yes, oh, that is quite correct.

If Congress speaks, that ends it.

Justice Byron R. White: [Inaudible]

Mr. John Fourt: We know of no other law which would conflict with our Milk Stabilization Act and no other law --

Justice Byron R. White: [Inaudible]

Mr. John Fourt: Oh yes, of course, that is the issue here and there of course, we stand on Penn Dairies on the ground that the procurement statutes there held not to conflict with the Pennsylvania Milk Stabilization Act are in essence the same as those in effect today.

Justice Byron R. White: [Inaudible]

Mr. John Fourt: Yes, that is correct.

The statute authorizing issuance of implementing federal regulations give no hint or suggestion if those regulations were to supersede state law.

And if you read the regulations they give no suggestion or hint that state law was to be superseded.

Their emphasis is on competition and we think that they fall within the framework of Congress and that Congress in its procurement statute gives no hint nor has it overruled, legislatively overruled the construction given the procurement statutes in Penn Dairies by this Court.

Unknown Speaker: [Inaudible]

Mr. John Fourt: Yes.

That their burden -- this economic burden was not involved -- that involving non-economic burden, interference with a vital military function, transportation function.

Now, I wish to clarify what would occur if California exercises jurisdiction of these military bases.

The Federal Government obviously has physical control of those bases and California statute may not impair the exercise of the federal function of those bases.

But on many of these bases in the housing authorities, the sheriffs of the counties in California are called in to maintain order among the teenagers in the housing districts and the disputes between husband and wife and so on, so that California peace officers do perform their duties and exercise their jurisdiction in most of the installations today in California.

Chief Justice Earl Warren: Mr. Solicitor General.

Argument of Cox

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

I believe it might help to put the legal issues in context if I were to take a moment to summarize the facts of the case and the way it got here.

You will recall that this case involves the procurement of milk at three large installations of the military services in California, Travis Air Force Base, Castle Air Force Base and the Oakland Army Terminal.

The milk prior to the beginning of this controversy was purchased through the normal methods of procurement by the Department of Defense, that is to say bids -- there was an advertisement for bids.

The Government received responses.

It accepted a bid and then in due course, the goods were delivered.

Most of the contracts were for a time at prices below any of the California milk prices which I'll come to in a moment.

In the particular cases with which we deal as of the time of the trial, the officer who advertised for and received the bids was on the area -- in the areas over which we claim exclusive federal territorial jurisdiction and deliveries were made within the areas over which we claim exclusive territorial jurisdiction.

Most of the contracts before he could send out notice that he accepted the bid had to be referred to some higher authority.

The record doesn't show where the higher authority was, he might have been here in Washington D.C. for all the record shows, he would notify the procurement officer at Castle or Travis or Oakland as the case maybe and that officer would then send out from his location within the federal enclave I assume for the description that it is a federal enclave, the notice to the milk company and in due course delivery would be made at that same spot.

Many of these purchases, I say, were at prices below the prices fixed by California law.

Now, California statute provides a system of milk price regulation which authorizes the director of agriculture.

Justice Byron R. White: Mr. Solicitor General, can you tell me about the contract or [Inaudible]

Mr. Cox: Well, to tell the truth, I haven't investigated that particular point.

Justice Byron R. White: [Inaudible]

Mr. Cox: Over certain -- up to certain amounts I believe.

Justice Byron R. White: Yes.

Mr. Cox: Yes.

Justice Byron R. White: You don't [Inaudible]

Mr. Cox: I don't -- I don't really know Mr. Justice White.

I don't contribute any significance to it except that I suppose if it wasn't a two-way contract then it is all the clearer that the sale was made within the enclave, but we would think the sale was made within the enclave anyway regardless because you see, the sale I think means not contract of sell but sale.

And second, I take it if I remember by contracts correctly that a contract would have been made when he mailed the notice of acceptance and he mailed that within the enclave.

Chief Justice Earl Warren: Mr. General, I wonder if this is just the policy of the Government that these three bases we have a number of bases in California with various kind of enclaves, does the Government operate in the same way in all of them or just in these three because of a particular --

Mr. Cox: No, they're --

Chief Justice Earl Warren: -- officers that are involved?

Mr. Cox: Well, there are three -- I think really a correct answer to your question would involve two points. One, the state of the sovereignty over on these bases in California varies considerably because they were acquired at different times and there have been different state statutes from time to time.

The policy of the executive branch of the military is varied from time to time.

So it wouldn't be fair for me to say that these are typical of all the bases in California.

It is true -- two other things are true, however, there are many other installations where we would take exactly the same position with respect to territorial jurisdictions we do here. These are the ones where we felt the interference as I will describe in the moment.

Chief Justice Earl Warren: I see.

Mr. Cox: Second, I should emphasize Mr. Chief Justice that two of the three arguments on which we rely here apply regardless of whether this was territory over which we have exclusive legislative jurisdiction.

So that we assert with respect to the procurement statute regulation and with respect to the implied constitutional immunity that regardless of the question of territorial jurisdiction, California cannot regulate these contracts of the United States.

I was about to describe very briefly the basic California Milk Control Law.

I think the essential parts of it so far as we are concerned are three-fold.

First, it authorizes the director of agriculture by order to establish the prices which handlers or distributors and this would include cooperatives acting as handlers or distributors they must pay to the funds for reasons I will explain later, we are not concerned with those prices any longer in this case.

Second, California authorizes the director of marketing or agriculture to set the price charged by the distributor or handler or perhaps I could call properly the resale price and it is those prices with which we are now concerned in this case, and only those prices with which we are now concerned.

There came a time when the California authorities threatened the handlers who were selling milk to the Government at prices below the California price that their licenses would be taken away that they would otherwise proceed against them under the California law and this led to the handlers no longer bidding in free competition but submitting bids in accordance with the state minimums.

Accordingly, the United States in order to protect this interference with its prospective sellers brought a bill against the California authority to enjoin them from taking steps to enforce the California Milk Control Law.

And as the case was originally tried, it apparently did involve both an effort to stay enforcement generally and a direction not to proceed further with this particular case in the state courts.

As to that particular case, we think there may be some doubt about the propriety of the interlocutory orders of the final orders is simply in the customary form and stays state authorities from taking steps to enforce the law and therefore involved we think no interference with proceedings in a state court which would of course violate the jurisdictional extensions.

That suit was based upon three grounds.

First, the Untied States alleged that these three bases were within its exclusive legislative jurisdiction and that therefore any attempt by California either to apply its laws directly within those bases or to prosecute people for taking steps which would be unlawful only because of what they did later within those bases was an interference with the exclusive jurisdiction of the United States and unconstitutional under the Pacific Coast Dairies case.

Second, we asserted that the California Milk Control Law as applied was in conflict with the Armed Forces Procurement Act and the regulations under it and therefore it was invalid under the Supremacy Clause of the Constitution and for that, the United States relied on the California Public Utilities Commission case.

The third ground which was raised in the lower court and which we still press was that for California to apply its Milk Control Law to these purchases regardless of any question of territorial jurisdiction and regardless of any question of federal statutes was in direct conflict with the implied sovereign immunity of the United States.

And we continue to press all three points.

Now I should emphasize -- I'm getting a little hand of myself, the District Court called in to --

Justice William J. Brennan: [Inaudible] Solicitor General but I gather any one of those three has merit, we don't have to --

Mr. Cox: Then you don't have to decide the other, that's correct.

That's --

Justice Potter Stewart: The District Court --

Mr. Cox: -- not excluded.

Justice Potter Stewart: Excuse me.

Mr. Cox: Excuse me.

That -- I did not give Mr. Justice Brennan --

Justice Potter Stewart: I beg your pardon.

Mr. Cox: -- a 100% accurate answer.

I'd prefer not to get in to the detail now but so far as the procurement statutes go, there was some of the milk bought at some -- one of the bases which would not be under the procurement statute.

This is the milk bought out of the officer's club revolving fund and I suppose strictly that that would -- if you decided first on that ground, it would still remain at X percent of the milk which have to be --

Justice William J. Brennan: I think your second ground wouldn't reach that if your second ground was sustained.

Your second --

Mr. Cox: You would reach that you would have to consider one or three --

Justice William J. Brennan: In order to take care of that.

Mr. Cox: In order to take care of that, yes.

Now, Mr. Justice Stewart --

Justice Potter Stewart: The District Court accepted the.

Mr. Cox: The first two --

Justice Potter Stewart: -- your first two and didn't --

Mr. Cox: First two.

Justice Potter Stewart: -- consider at all.

It didn't mentioned the (Voice Overlap) --

Mr. Cox: It didn't mention the third.

The District Court did issue the injunction on the first two grounds as Mr. Justice Stewart said and we -- and the state brought the case here upon a direct appeal.

The Court postponed the question of jurisdiction until the argument on the merits citing Kessler against the Department of Safety, the Utah case involving the discharge of bankruptcy.

We think it's quite plain that this Court does have jurisdiction on appeal.

The question is of course you will recall is whether a three-judge court was required.

We think it's plain that a three-judge court was required to consider at least the first and third grounds on which we challenged the state statute.

Certainly, the ground that we challenge it because it invaded the direct implied sovereign immunity of the United States raises a direct constitutional issue.

There's no possible question of interpretation.

The first ground maybe a little more complicated, but since California asserts that regardless of whether we have exclusive territorial jurisdiction, she may apply the state law within federal enclave, that too I take, raises a direct constitutional question.

Of course the three-judge court is required where there are such direct constitutional challenges to a state statute even so the state statute is challenged on some other ground such is that the area has been preempted by the federal statute which was our second ground.

The three-judge court being required, the case comes here on direct appeal but even so the three-judge court may base its decision on some non-constitutional ground or as I would put it here, some indirectly involved constitutional ground that I think the Court doesn't have to deal with the problem involved in the Kessler case because there clearly is jurisdictional under any theory.

I turn now therefore to our first ground for sustaining the decision below, the argument that the territory in which the sales were made is under the exclusive territorial jurisdiction of the United States, so this attempted state regulation violates Article I, Section 8, Clause 17 of the Constitution.

The basic elements of the Government's case in that regard are really very simple.

Article 1, Section 8, Clause 17, you'll recall, provides that “Congress shall have power to exercise exclusive legislation in all cases whatsoever over such a district,” this is the district where the Government seated, “and to exercise like authority over all places purchased by the consent of the legislature of the state in which the same shall be for the Erection of Forts, Magazines, Arsenals, dock-Yards and other needful buildings.”

Here we say that the Government purchased the land that's involved in these cases that it was done by the consent of California given by a statute that the United States accepted the exclusive jurisdiction as required by a 1940 federal statute.

And that the result under a long line of decisions by this Court, state courts, lower federal courts, is that did the state lost any power to tax or to regulate in any way conduct within that federal enclave.

Justice Arthur J. Goldberg: [Inaudible]

Mr. Cox: I believe they were all purchased by agreement.

The details are in the record.

I now propose to take the Travis Air Force Base and go through the argument in somewhat more detail.

I was just trying to provide a skeleton on which to put the more complicated points.

Justice William J. Brennan: Mr. Solicitor General, just the fact of the -- these purchases involved in this case, are they all from handlers?

Mr. Cox: Yes.

Justice William J. Brennan: All from handlers?

Mr. Cox: Yes.

I should have --

Justice William J. Brennan: Is it (Voice Overlap) --

Mr. Cox: I think I can answer that a little more.

Indeed, I haven't planned to state the facts at the beginning and I got a little (Voice Overlap) --

Justice William J. Brennan: Well, don't [Inaudible]

Mr. Cox: No.

It's an important point to my case really.

I did want to emphasize and explain the reason for my statement that we were not any longer concerned with the prices received by the farmers, milk producers.

Now, originally I think, as the case was litigated in the lower court, that was to a degree involved and when the case first came up on direct appeal, the question was raised as to whether the Government either could complain of the regulation of those prices or even if it could whether it should and after discussion within the executive branch of the Government, it was decided that the Government should not, whether it could or not, should not seek an injunction against the enforcement of the state prices so far as producers were concerned.

And we've taken that out of the case I think completely, but if we haven't, I do so, so far as I have power now, in three ways.

In the first place, we consented to a partial stay issued by Justice Douglas which modified the original injunction so as to stay such portion of said injunctions which enjoin appellants from enforcing against producers or distributors of milk or milk product, the minimum producer of milk price regulations promulgated by California and so forth.

Second, we stated in our jurisdictional statement that this was our view.

Third, the Secretary of Defense in response to an inquiry from an order really from a congressional committee wrote to the appropriation committees of the House and Senate this summer.

The state law's most concern of this connection is those which establish minimum prices, he was talking specifically about milk prices and only milk prices.

The Department of Defense does not oppose state regulation of minimum prices to be paid by handlers to farmers nor does it oppose milk marketing orders issued by the U.S. Department of Agriculture which likewise regulates the amounts to be paid to the farmers who produce milk.

It does oppose state regulation if the price is to be charged by handlers and others selling milk to the Federal Government.

This leaves -- takes out of the case entirely, so far as I can see, any question of the welfare of the farmers --

Justice William J. Brennan: Well, would that mean at the very least even if there would be an affirmance that there would have to be a modification which in effect was to make permanent --

Mr. Cox: I think the stay -- I think even if there were to be an affirmance, the qualification added by --

Justice William J. Brennan: Justice Douglas said it.

Mr. Cox: -- Justice Douglas should be written into the decree without any --

Justice Byron R. White: [Inaudible]

Mr. Cox: To avoid any doubt -- I'm not sure if the decree really covers it anyway.

But to avoid any doubt, it should be put in.

Justice Byron R. White: It takes care of everything in that area except the economic reality?

Mr. Cox: I would think not.

The Department of Agriculture has now for 23 or 4 years fixed the prices to be paid produced.

Justice Byron R. White: I don't question their -- I don't question their power or their (Voice Overlap) --

Mr. Cox: Well, but if anything [Inaudible] there had been many places where that is the only --

Justice Byron R. White: Now, that the price that -- what level they have to be fixed?

Mr. Cox: They can be fixed at any level --

Justice Byron R. White: Well --

Mr. Cox: -- and enforced.

Justice Byron R. White: Well, I doubt that if the distributors can't pay, and the real question is whether how -- how was the ultimate consumer price for milk that's going to be divided between producers and distributors?

Mr. Cox: I think the way it is worked out under many federal orders has been that the distributor has to charge an amount necessary to pay what he is required to pay the producers or else he goes into bankruptcy.

But the -- as a -- at least in my experience with milk --

Justice Byron R. White: Well, (Voice Overlap) --

Mr. Cox: -- carriers to that result has not been that thing distributors regarding bankruptcy.

Justice Byron R. White: You're suggestion is that the Government would never bargain an amount [Inaudible]

Mr. Cox: That in effect that it wouldn't and couldn't that what we are bargaining over, what we're trying to protect here --

Justice Byron R. White: Even a small dairy begins to take care of themselves.

Mr. Cox: Some of the small dairies would not be as effected, they have been selling -- they would not be able to sell to the army, that's correct --

Justice Byron R. White: That's to the army.

Mr. Cox: That's true.

But that question of policy, I suggest, is not one for -- to be decided in constitutional terms or for California to decide.

Here, coming back now to the question of exclusive territorial jurisdiction, I would like to follow through with the Travis Air Force Base in order to show in a little more detail our argument and try to meet California's contentions.

The lands constituting those parts of the base in which the milk was purchased or delivered in the manner I described before was brought in this case from private owners between December 4, 1942 and March 1, 1943.

There's no question that the land was purchased for the military purposes, forts, arsenals, dock-yards and other needful buildings within the constitutional frame.

We contend that California gave her consent to that purchase by the United States under a statute which is set forth at page 99 of our brief.

The Section 34 of the California Political Code begins down to the last quarter of that page.

Justice Tom C. Clark: What page is that?

Mr. Cox: Page 99 Justice Clark.

Justice Arthur J. Goldberg: [Inaudible]

Mr. Cox: Page 99 of the Government's brief --

Justice Arthur J. Goldberg: [Inaudible]

Mr. Cox: -- which is -- and I'm about to call your attention to Section 34 of the California Political Code.

The legislature consents to the purchase or condemnation by the United States of any tracts of land within the state for the purpose of erecting forts, magazines, arsenals, dock-yards and other needful buildings upon the express condition and then there followed three conditions that civil process issued by the courts of the state shall be effective, the criminal process issued by the courts of the state shall be effective and that the state shall retain certain powers of taxation, but except for those qualifications, the consent to purchase is given by that statute and in unqualified terms.

Now our argument is that under the very words of the Constitution itself, once the state have given consent to purchase the land, the United States then has the exclusive power of legislation which means exclusive jurisdiction and that that then and there automatically excludes any exertion of authority by California.

Justice John M. Harlan: Irrespective of what the Cali -- the United States could exercise its power?

Mr. Cox: On -- since 1940 and therefore in this case, it would be necessary for the United States to state that it accepts such jurisdiction but there are letters from the Secretary of War, Secretary Stimson to the Governor of California stating that the United States does accept jurisdiction over the land in question and it is immaterial whether the Government then enacted any legislation dealing with the territory.

Of course, there many laws were made applicable by the Assimilation Act and other criminal laws had been enacted dealing with conduct within the base.

But it takes nothing more than the purchase with the consent of the state and that consent is given here.

Now the earliest expression of that kind that I have been able to find, goes back to an opinion to Mr. Justice Story in United States against Cornell.

There he said, in summing up to the jury, that's much decided in the Forts case, “when therefore purchase of land for any of these purposes”, that is forts, magazines and so forth, “is made by the national government and the state legislature has given its consent to the purchase, the land so purchased by the very terms of the Constitution ipso facto falls within the exclusive legislation of Congress and the state jurisdiction is completely ousted”.

This is the necessary result where exclusive legislation is -- exclusive jurisdiction is attendant upon exclusive legislation and the consent of the state legislature is by the very terms of the Constitution by which all the states are bound to which all apprise a virtual surrender and session of its sovereignty over the place.

Then he directed himself a few paragraphs later to one of the arguments made by California here to with that they didn't expressly say we cede jurisdiction and they simply consented perjury and referring to that argument as the argument of the prisoner, he said here, the argument of prisoner's counsel is in the first place that the Act of Rhode Island contains no cession of jurisdiction in terms and the consent of the legislature through the Government and the purchase is not a virtual session of its sovereignty over the place.

That argument has been sufficiently considered already from the passage I previously read and stands repudiated by the expressed terms of the Constitution.

Justice Hugo L. Black: Is that cited in your brief?

Mr. Cox: I --

Justice Hugo L. Black: I didn't find it.

Mr. Cox: No, it's quoted at length in several of the cases cited in our brief including the Fort Leavenworth case and the opinion by Mr. Justice Van Devanter in Surplus Trading against Cook.

I thought this was a little clearer statement than some of the others.

The citation, it's to Mason, Mr. Justice Black, I'm afraid I lost the page when I closed the book.

Justice Hugo L. Black: It's alright.

Mr. Cox: There are many other decisions --

Justice Hugo L. Black: United States v. Cornell?

Mr. Cox: Yes.

There are many decisions by this Court and innumerable other courts stating that same proposition.

California's argument, as I understand it, is based upon another California statute, conveniently found at page 98 of our brief, down at the bottom.

This is the California statutes 1897 which was carried forward and was in effect at the time of these purchases.

There it provides, the State of California hereby cedes to the United States of America, exclusive jurisdiction over all lands within the state now held, occupied or reserved by the Government of the United States for military purposes or defense or which may hereafter be ceded or conveyed by the United States for such purpose.

And then there are -- oh, then the next phrase, provided that a sufficient description by meats and bounds and a map or plat of such lands be filed in the proper office of record in the county in which the same are situated.

Now in the case of Travis, we never filed any plat or description of the land under the statute.

It's being our view for reasons I shall explain in a moment that this statute has nothing to do with the case.

We think that it -- there are four objections to California's view.

The first is that as I said before, no session is required under the Constitution.

Purchased with consent under Article I and the authorities I cited, automatically transfers jurisdiction and no cession by the states under the very language of United States against Cornell and later cases is required.

To that, California replies, if I understand it correctly, that Section 34 of the Political Code which I have upheld the consent to purchase, doesn't really consent to purchase within the constitutional sense at all.

It meant consent to purchase -- it meant simply that you can go in and buy the land, the Federal Government but we don't consent you purchasing it for constitutional purposes.

While there is nothing in the statute that suggests that and indeed there is a good deal that shows the opposite for one thing that the United States doesn't need a state's consent to purchase land or to acquire land by eminent domain.

It needs it to purchase it and have the Constitution called into play, but ever since Cole against the United States, it's been clear that you don't need consent just to get a proprietary interest.

Second, the consent to purchase statute shows on its face that it means a consent to purchase which will operate under Article I, Section 8, Clause 17 of the Constitution.

I say that because you will note that the consent to purchase statute, I'm now back at page 99 of the brief at the bottom, contains three qualifications or conditions which would make no sense at all if California were not otherwise contemplating a transfer of jurisdiction under the Constitution because of the consent to purchase.

One condition is that civil process issued under the courts of the state and certain criminal process maybe served and executed within the enclave and now there would be no need to do that if California had reserved all its jurisdiction.

Equally, the third condition is a reservation of the power of taxation.

There would be no need to do that if California supposed that it is reserving all its jurisdiction.

More fundamentally I think, the source of confusion in the argument for California and the reason for its misconstruction of the cession statute is that it disregards the very important fact that there are two methods of acquiring land and exclusive jurisdiction and that one method is dealt with by the consent to purchase statute and the other method is dealt with by the cession statute.

Now, let me explain that in a little more detail.

The first, the consent to purchase is clear enough that the United States buys as the consent of the state either given ad hoc or by a general statute and automatically jurisdiction passes.

The United States may also have title and possession to lands within the territory of the state for reasons other than a consent to purchase within the Constitutional Clause.

For example, in California as in many other Western states, the large areas of retained lands that never passed to the state so far as the proprietary ownership is concerned and many of those were set apart as reservations.

Two excellent illustrations are the Presidio in San Francisco at Golden Gate and Fort Leavenworth in Kansas.

In both of those cases, the United States have the proprietary interest but it didn't acquire it by purchasing it with the consent of the state because it always had it.

Another illustration would be a purchase of land without the consent of the state where you might have the title and possession but not jurisdiction.

And a third illustration would be an acquisition of land for a purpose other than one listed in Clause 17.

For example, an acquisition of land for forest purposes as one of the Arkansas cases cited in the brief.

In all these instances, exclusive jurisdiction would not pass automatically to the United States and if the United States was to get exclusive jurisdiction, it would have to do it in some other method.

Back to Fort Leavenworth Railroad against Lowe which was decided in the 1880s, the Supreme Court then held in an opinion by Justice Field that in the types of cases I've mentioned where Clause 17 was not applicable, the United States might get exclusive jurisdiction by a cession from the state.

And indeed, the State of Kansas had ceded Fort Leavenworth, jurisdiction over Fort Leavenworth to the Federal Government and in another instance, the State of California ceded jurisdiction over the Presidio in San Francisco to the United States.

So that there came to be a second method by which the Untied States might obtain exclusive jurisdiction.

We think it entirely planned that the Act of 1897, the one on which California relies and the one that begins at the bottom of page 98 of my brief is a statute that deals with the session of jurisdiction where the United States had acquired proprietary interest, but the consent to purchase statute was inapplicable.

And it seems to us that Section 34 of the Political Code, the one beginning at page -- at the bottom of page 90 of our brief, is the one that deals with consent to purchase and it is the one that is applicable here because this was a purchase with the consent of California under that statute.

Now, the later California statute of 1939 which is set forth beginning -- it's really the second paragraph of Section 34 of the Political Code, the one I referred to, running over on page 100.

It seems to us to make it quite clear that at the time that was written, California draftsmen realized that there were these two methods by which the United States might acquire exclusive jurisdiction, only one of which required this plat.

The second par -- the first paragraph you'll note, speaks of the consent to the purchase and reserves certain limited jurisdiction thereby implying that the United States gets the rest.

The second paragraph says the authority deserves civil and criminal process and the tax here and above reserve the state.

In the case of the purchase or condemnation by the United States of any tract of land within this jurisdiction shall to any law contrary notwithstanding also be reserved to the state with respect to any tract of land over which any jurisdiction is ceded or granted by the state of the United States.

There, within the very statute that we think is controlling is a reference to there being another method of ceding jurisdiction in cases that don't come under the first paragraph.

I should point out finally that the Attorney General of California did himself recognize in 23 opinions of the Attorney General of California at page 14 that there are these two methods by which the United States may acquire exclusive jurisdiction and that the consent to purchase statute deals with one and is governing in that case and that the session statute which alone requires the requirement of the filing of the plat is -- deals only with the second method sessions and has no application where there is a consent to purchase.

Once this essential distinction is understood, many of the points made by the petitioner in his brief become clarified and dropped by the wayside.

For example, he quotes at some length from the case of Wilson against Cook, a case dealing with forest lands in Arkansas where the question of exclusive jurisdiction was raised and he quotes language saying that since there was no cession by the state, the United States didn't get exclusive jurisdiction.

Well, that's quite true.

The consent to purchase procedure obviously wasn't applicable there.

They were talking about forest lands and the consent to purchase procedure could possibly come into play.

Similarly the references to the acts of submitting Hawaii and Alaska, where some exclusive jurisdiction was expressly retained by the Congress over military installations.

Well, the reason is of course the consent to purchase statute wouldn't have anything to do with it because this wasn't land purchased by the United States.

And if you're going to keep exclusive jurisdiction, it has to be arranged when the states were admitted.

Now, I mentioned the final point earlier, since 1940, the federal statutes have provided that a consent to purchase shall not automatically transfer jurisdiction unless the head of the department, in this case, the Secretary of War or later the Secretary of Defense signifies his assent to the passing of jurisdiction, but this was done in letters to Governor Warren in 1943 and 1944, referring to this land at Travis Air Force Base so that final step was accomplished and indeed accomplished within a very short space after the land in question was purchased.

The situation with respect to Oakland, I'm now done with the general part of the argument and I am done also with the legal details, the situation with respect of them requires a very brief mention.

The District Court's opinion at page 563 speaks of the Federal Government acquiring the land on which the milk was purchased in 1950.

That's an error and an error for which I regret to say the Department of Justice was clearly responsible because it was stated in the brief.

The land was purchased, the land on which the milk was purchased was acquired considerably earlier than that, plot B210 which is the area in question, was purchased on March 2, 1942 and all the argument that I've just gone through with respect to Travis is precisely applicable to it.

It is also true that apparently, we went through the process of getting exclusive jurisdiction again under the cession statute and that's what the District Court refers to in its opinion.

The land at Castle is governed by exactly the same principles.

I should mention just one little point with respect to it.

The land at Castle on which the milk is purchased first came into the possession of the United States under the Lanham Act dealing with housing.

I say into the possession because it was not purchased at that time.

It came into possession of the administrator under the Housing Administrator under the Lanham Act.

Later, the possession was turned over to the Secretary of War and while it was in the possession of the Secretary of War, the United States bought it from private owners.

The argument is made by California that because Section 10 of the Lanham Act provides that the acquisition of the administrator of any real property purchased pursuant to this Act shall not deprive any state of its civil or criminal jurisdiction that this could I suppose he says, the covenant running with the land on this piece of land and it never attached into the exclusive jurisdiction of the United States.

I think it's enough to state the argument surely it kind of contemplated that if the land were later bought from private owners by the Secretary of War that it would still have this burden attached to it.

And therefore, we think Castle is governed by the same rule.

It follows if my argument is sound that the United States did gain exclusive jurisdiction over the territory within which these purchases were made and conversely that California had no power to apply her milk control law to the transactions within the enclave.

California does argue that well, the Constitution although it says the United States shall have the power of exclusive legislation, it doesn't really mean that.

I think it's enough to say that that contention as at adds with 150 years of constitutional history in a mass of decisions by this Court, by lower state courts, opinions of Attorneys General, all, clearly holding that the Constitution is self-operative in this respect.

And they -- by the court -- this Court has excluded state tax powers, it's excluded state criminal laws and other kinds of state regulations.

I just don't know at any point that this is well settled.

Now California's other argument with respect to the territorial jurisdiction is that somehow the California statute was assimilated in the federal law.

The two ways, in which I could dream of that this might happen.

There is a 1948 federal statute, 18 U.S. Code Section 13, the effect of which is to make law within a federal enclave, any state criminal law which is within effect in the state at the time the crime is committed.

This isn't like the old Assimilative Crimes Act that applied only as of the time the jurisdiction was taken of it.

This applies to current criminal law.

California as I understand doesn't rely on that statute if I'll mention it just for clarity for I take it, two reasons.

In the first place even if those -- even if this law were assimilated it becomes a federal crime.

It's not something that California authorities are charged with prosecuting or that the California courts have jurisdiction to deal with.

Second, it seems to me although I can't support any -- cite any cases for the proposition that the Assimilative Crimes Act was not intended to take over a whole regulatory measure resting on state administrative action adherent are quite different from the normal type of criminal offense, the things included in the criminal code.

The remaining argument with respect to territorial jurisdiction is that well, even if we don't apply our state milk control law to the purchases within the enclave, still there is a provision of California law which prohibits anyone to process or handle milk which he is going to sell at a price below the California price.

And as I understand Mr. Fourt in his brief, he is saying, “Well, we can enforce that section anyway.”

Our answer --

Justice Potter Stewart: Against who?

Mr. Cox: Against the handlers.

Justice Potter Stewart: Yes.

Mr. Cox: Our answer to that is that this is the very contention that was made in the Pacific Coast Dairy case and the very contention that was explicitly answered by Justice Roberts in his opinion in that case.

I don't want to take time to read the paragraph but he deals with it very expressively.

And certainly, nothing in that case makes the result turn on what happened to the milk after the Federal Government got it.

What it turns on is that you can't put it in simple terms.

You can't say that no one shall walk on the highways of California who is going to permit what California doesn't want them to do on the federal enclave where it's perfectly lawful for them to do it.

I point that I think clear beyond dispute.

Now, turning to the second --

Justice John M. Harlan: Could I interrupt you a minute?

Mr. Cox: Yes sir.

Justice John M. Harlan: Given your argument, assuming that you accepted what comes to Penn Dairies scenario, the --

Mr. Cox: Penn Dairies remains untouched given my argument on the point I've just made because Penn Dairies did not involve any question of exclusive legislative jurisdiction.

We would have in effect a reaffirmation of the Pacific Coast Dairies case which was decided on the same day as Penn Dairies.

We say that in this case, the Pacific Coast Dairies, and this disposes the matter.

Now with respect to my other points, I have to deal in somewhat more detail with the Penn Dairies case.

Our second main point is that the California Milk Control law is inconsistent with the federal procurement statute in regulation and therefore must deal under the Supremacy Clause.

This was pointed out earlier that the District Court sustained this contention on the authority of the California Public Utilities Commission case.

We think it was plainly right in upholding that contention.

The federal scheme embodied in the statute and regulations as I shall show directs the procurement officers to purchase at the lowest overall cost to the United States usually through competitive bidding on advertised request for bids, but if by negotiation then still in a process of negotiation, it brings back all of the competitive forces that will make sure that the United States receives the lowest possible price.

In this instance, the lowest possible price permitted in the way of markup over the minimum prices required to be paid to California milk producers.

The California law obviously would eliminate that kind of competition which the federal statute contemplates and therefore we say, that we too are inconsistent and that the California law must yield.

The point was squarely adjudicated in Public Utilities Commission of California against the United States and we think the case is controlling here.

In each instance, the case arose under the Armed Services Procurement Act of 1947.

The regulations are somewhat different because one dealt with the procurement of commodities, the other with transportation, but their thrust is indistinguishable.

The California Milk Control law leaves even less scope for competition or negotiation, but in the state clause you'll remember in the Public Utilities Commission case under which California Utilities Commission could permit negotiations, there is none here so the inconsistency is even greater.

The governing statutes are set out -- and regulations are set out in our brief beginning at page 104 for the statutes and then the regulations continue over on page 106 and 107.

I'll deal with those in the morning.

Chief Justice Earl Warren: We'll recess now.

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