Cases by Issue - Consumer Protection

Koons Buick Pontiac GMC, Inc. v. Nigh, Bradley - Oral Argument

Fri, 09 Jan 2009 14:49:03 +0000

Case:

Koons Buick Pontiac GMC, Inc. v. Nigh, Bradley

Media File:

03-377_20041005-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Donald B. Ayer

Chief Justice Rehnquist: We'll hear argument next in No. 03-377, the Koons Buick Pontiac v. Bradley Nigh.

Mr. Ayer.

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

This is a straightforward case of... of statutory construction in which the words, context, purpose, and history of the statute in question all point to a single meaning that is contrary to the conclusion reached by the court below.

The case concerns the Truth in Lending Act's basic statutory damages provision, 1640(a)(2)(A)(i), or little (i) I'll call it here, which since the statute's enactment, has allowed individuals to recover from lenders who violate the act an amount equal to twice the finance charge, but limited to a range of $100 to $1,000.

This statutory damage recovery is available under the act without regard to actual injury or intent or fault by the lender.

In addition to statutory damages, the act provides for actual damages to be available, administrative agency enforcement, and criminal penalties.

I want to just talk briefly about the history of the act because I think it's... it's critical to understanding the issue before the Court, and I'll refer to places where we've quoted it in the blue brief.

As enacted in 1968... and this provision appears at the bottom of page 5 of our brief up to the top of page 6.

The provision I've described was the only statutory damage provision, and it was followed by language that indicated... and I should say it appeared... and this is important... at that time, in section 1640(a)(1) and began right there after the (1).

And the limitation of liability that appears there says the words that liability under this paragraph shall not be less than $100, nor more than $1,000.

That section was first amended in 1974, and the amended language appears at the top of page 7 of our brief.

And what happened in 1974 was that this provision... the actual words of the provision were not changed except for one, but it was moved because other things were added to the statute.

And it now became... instead of 1640(a)(1), it became section 1640(a)(2)(A).

The only change in the provision, the only word changed was the change from the word paragraph... liability under this paragraph... to the... to the word subparagraph.

The next amendment... and then the... the statute after this then stood for nearly 20 years unchanged at all.

Justice Stevens: Can I interrupt you right there?

Mr. Ayer: Yes, Your Honor.

Justice Stevens: What did the word subparagraph describe in the 1974 statute?

Mr. Ayer: It... it described subparagraph (A).

Justice Stevens: Subparagraph (A).

Mr. Ayer: Yes.

Justice Stevens: Okay.

Mr. Ayer: And I'll explain--

Justice Stevens: That's the small (a), isn't it?

Justice O'Connor: Capital (A).

Capital (A)?

Mr. Ayer: --That's capital.

Justice Souter: Which had... which had two... two subparts--

Mr. Ayer: Not in '74, Your Honor.

In... the next--

Justice Souter: --Oh, I'm sorry.

Okay.

Mr. Ayer: --In 1976--

Justice Souter: After the amendment in '76--

Mr. Ayer: --Correct.

Justice Souter: --it described the--

Mr. Ayer: Precisely correct.

And what was done in '76 was Congress passed the Consumer Leasing Act, and it added a second, I'll call it, (ii).

I'm sorry.

It added an (i) in front of the original provision, so it was then 1640(a)(2)(A)... capital (A), little (i).

And then in '76, (ii), and the (ii) was a provision not really relevant here except that it's in the middle of what we're talking about.

It dealt with leases and had a formula with regard to leases.

It is uncontested by any court certainly that from that time forward to 1995, the cap that appeared then at the end of... of little (ii) applied to both sections... I'm sorry... clauses (i) and little (i), and that limitation--

Justice O'Connor: Was it ever challenged or was this just a common assumption?

Was that ever--

Mr. Ayer: --Well, there are--

Justice O'Connor: --Was that issue litigated?

Mr. Ayer: --Your Honor, there are a number of... of cases that applied it presumably to plaintiffs if they thought they had an argument, would have liked to argue they could have gotten more than $1,000, but there... there are a bunch of cases we've cited in our brief that... that show that that was the consistent interpretation.

Justice Stevens: Let me just be sure.

You're going a little fast, and I want to be sure I follow you.

During the period between 1976 and 1995, in your view the term subparagraph still referred to capital (A) and to both subparts of that subparagraph.

Mr. Ayer: Correct, actually clauses, Your Honor, but that's correct, yes.

Justice Stevens: All right.

Mr. Ayer: What then happened in 1995... and this... the actual enactment appears in the blue brief at page 10, footnote 6, and this is also I think important.

What Congress did... and they were in the midst of a series of amendments relating to mortgages that was made necessary... the range of them necessary by a court of appeals decision that created quite a crisis of threatened liability to the mortgage industry.

In this respect here... they enacted a lot of other things, but with regard to this provision, as footnote 6 indicates... and it's mostly over on page 10... all they did... they did not even reenact the preexisting provision.

They simply said move the or from the middle of that provision to the end and insert the following language, and the following language was the expression of an intent to increase the cap on a class of loans that had actually previously been included in the... in the overarching provision that relates to loans, which is the original one that we're talking about here that deals with twice the finance charge, capped at $1,000.

They added the language that essentially says, relating to a credit transaction not under an open end credit plan that is secured by real property, i.e., a mortgage, not less than $200 nor greater than $2,000.

And in that respect, they clearly acted to provide a higher cap with regard to mortgage transactions and to pull those out of the first section and into the last.

Justice O'Connor: Well, Mr. Ayer, if I just read the statutory language as it appears now, the impression I get is that the language in capital (A), little (ii), except that the liability, just applies to little (ii).

You have to rely on kind of a... a word of art in the use of subparagraph to reach a contrary result it seems to me.

Mr. Ayer: Well, Your Honor, we... we have... and... and your reasoning... and I'll... and I'll expand on it slightly.

The reasoning of the court below... and it's essentially a syllogism I think, and it's... it's not far from what Your Honor has just said.

It is essentially that, well, the reference to subparagraph formerly did refer to subparagraph (A).

Now Congress has added clause (iii) which... with its own cap.

So the limitation to $1,000 clearly cannot apply to clause (iii).

Therefore, it can no longer apply to all of clause (A).

Therefore, it must refer to something.

What does it refer to?

It has to refer to clause (ii) only.

And the problem with that is essentially threefold, and I'll... I'll go through them quickly and then expand upon them, if I can.

The first is that, as... as Your Honor has stated, the word subparagraph... I won't call it a term of art, but it has a very clear, specific meaning in the context of this provision.

That's the first point.

The second point--

Justice Ginsburg: May... may I stop you at that point?

Because you did introduce this neat drafting, the set of words, section, subsection, paragraph, subparagraph, and clause.

Mr. Ayer: --Correct.

Justice Ginsburg: Had you introduced... have you argued before the Fourth Circuit those drafting manuals?

Mr. Ayer: No, Your Honor.

We did... we did not.

And let me... let me just explain what... we've been trying to think about how to understand those manuals, and the best... the best idea I've heard from anyone is to refer to them as a sort of a Rosetta stone.

They're not really dictionaries.

They're not really, I... I wouldn't say, authoritative statements of the way words are always used in Federal statutes because in fact you can find exceptions.

You can find mistakes.

You can find departures.

But they are a tremendous aid in... what... what it tells you is that the folks who are drafting legislation as technicians have in mind a hierarchy of these terms, and they try very hard to use them in a consistent manner, and they have for the last 50 years because we have books that go back to 1954 that do this.

And so the question becomes, with that in mind, when you look at what else you know, does that help you understand what the word means?

Justice Scalia: The problem I have, Mr. Ayer, is I don't... I can accept your belief that... that subparagraph refers to all of (A) and yet still agree with the respondent here or with the court below because what... what limits the... the phrase, shall not be less than $100 nor greater than $1,000... what limits it to subpart (2) is not the word subparagraph but rather the fact that it is an exception only to (2).

The liability under little... what you've called... what... (ii)--

Mr. Ayer: Right.

Justice Scalia: --The liability under (ii) is a liability under this subparagraph, and the exception to little (ii) is only an exception to little (ii).

So I can read under this subparagraph to mean perfectly, exactly what you say it means, in the case of an individual action relating to a consumer lease the... the liability would be 25 percent, except that... that is an exception from what we've just said... liability under this subparagraph, which includes (ii)--

Mr. Ayer: Well, now, that was a bit... all of that was true prior to 1995.

Justice Scalia: --Well, that may be, but now you're... now you're relying on... on the... on the statutory history argument rather than on the mere meaning of the word subparagraph.

What I'm suggesting is I can... I can concede that subparagraph means what you says... say it means.

Mr. Ayer: It refers to a section with a capital (A).

Justice Scalia: Refers to all... all of (A).

Mr. Ayer: Okay.

Justice Scalia: But when that phrase is used in an except clause that only applies to little (ii), it... it still says the... the foregoing liability under this subparagraph, that is, the liability contained in little (ii)--

Mr. Ayer: Let me go--

Justice Scalia: --which is a liability under this subparagraph.

Isn't it?

Mr. Ayer: --Well, it is, Your Honor.

I... I'm having trouble following that, Your Honor.

And let me go back, if I could, to 1974 which... and let... and let me say one more thing about 1974.

The last time this limitation was actually enacted by Congress, was actually put into words and put into a piece of legislation, as opposed to adding ornaments to it or things in between, or this or that, was in 1974.

In 1974, all they did with this provision was move it into a new section that had an (A) in front... a capital (A) in front of it and out of one that had a (1) in front of it.

And they changed the word from paragraph to subparagraph.

And I would suggest the Rosetta stone or the stones in these manuals that tell us what they tend to want to have in mind when they're doing this tell us exactly what they were thinking about when they put the word subparagraph--

Justice Souter: --But even if we don't accept that... and I... if you're going to reach this, I... I don't want to spoil your sequence, but even if we don't accept the Rosetta stone, in order to get to the... to the position below, you've got to read subparagraph to refer to what we would normally call a clause.

Mr. Ayer: --Absolutely, Your Honor.

Completely correct.

I... that... I can't say it better, and I won't.

The... a couple things I will say that are important are that when you go through the true... a standard way of reading legislation, if you want to know what a word means, is you read the rest of the legislation in issue.

When you read the rest of the legislation in issue and you find that there are a total of 37 references to the word subparagraph, and 36 of them, without any ambiguity at all, refer to a letter... a... a provision that starts with a capital letter.

If you read the entire United States Code, you can find some instances where there are departures from this standard way of speaking.

A number of them, frankly, are in statutes back to the '40's and '30's, but some are still... there are mistakes in various places.

But again, the convention that's laid out in these manuals is the one that the courts tend to follow.

Justice Scalia: But that convention, it seems to me, is much less strong than the fact that you don't read a word to mean one thing for purposes of one part of the... of the whole paragraph and another thing for the purposes of the rest.

If... if you read it the way you want us to read it, it would apply to little (iii) as well.

Mr. Ayer: Well, I mean, I think that that's the next thing--

Justice Scalia: And that is simply a flat contradiction.

Mr. Ayer: --Well--

Justice Scalia: And... and the... the reading given by the court below produced no flat contradiction in the terms of the statute.

Mr. Ayer: --Well, it... it flatly contradicted the standing meaning of the word subparagraph.

It ignored the standing meaning.

Justice Scalia: No... no contradiction within... within the statute itself.

Mr. Ayer: Well--

Justice Scalia: It may have given what you call the Rosetta stone a different meaning, but it did not produce a... a contradiction in the terminology of the statute, whereas yours does.

You want us to read subparagraph to mean all of (A) except not for purposes of (iii).

You want us to do it for purposes of (ii) but not for purposes of (iii).

Mr. Ayer: --Well, Your Honor, I think that the principle or the canon that the specific controls the general is one that... that Your Honor set forth in the... in the Casey case, and many other cases have asserted it.

What went on here in 1995 I think is easy to discern.

What it... what it was was they wanted to have a higher cap on mortgage loans than on other kinds of loans, and so they glued a provision on the back.

Was it done elegantly?

Was it done as clearly as it might have been?

No, but as the Court said in... in the Lamie case, it's awkward but it's still straightforward in terms of meaning.

Justice Scalia: It isn't straightforward.

The... the specific controls the general where there is an unavoidable conflict.

There is no unavoidable conflict here.

You--

Mr. Ayer: Only if--

Justice Scalia: --you're urging that one interpretation is better than another, and if there were an unavoidable conflict, I would agree that (iii) would... would overrule (ii), but it is not necessary to read (ii) that way.

Mr. Ayer: --What you have to do, Your Honor, to take the approach that the court below took is ignore the established meaning of the word subparagraph.

I say established because when it was enacted in 1974, it's perfectly clear why the word subparagraph was put in there.

And then what one has to do is... is hypothesize that the 1995 amendment, which did not reenact the original provision, but simply added something else to it... and it wasn't something else that said we've just gotten rid of the cap on (i).

It was something else that said, as to mortgages, do the following.

That that by inference changed the meaning that was put in the word subparagraph in 1974 because it hasn't been reenacted since.

Justice Scalia: I don't want to have to go through the... the legends of the... of the legislative process every time I read a statute.

If Congress wrote it this way--

Mr. Ayer: I thought Your Honor was--

Justice Scalia: --it seems to me that I should interpret it the way it is written.

Why... why do I have to go back and say, oh, this is what it used to be?

And when they added this word, if they made a mistake, they made a mistake, but the language reads the way it reads, it seems to me.

Mr. Ayer: --Well, I mean--

Justice Scalia: It's not my job to correct their mistakes.

Mr. Ayer: --Again, I... I... all I can say is that it... it seems to me that we really do need to look at the meaning of the word subparagraph at the time it was enacted by Congress.

That meaning in 1974 is utterly clear.

And what... the only way you can get to the conclusion of the court below is by saying in 1995 Congress somehow or other changed the meaning that was put in the statute in 1974, and they did it without ever saying they were doing it.

Justice Stevens: May I ask you, Mr. Ayer, does your opponent agree that prior to the 1995 amendment, the word subparagraph in the (ii) part of (2)(A) referred to (i) as well as (ii)?

Mr. Ayer: I am not positive if they do agree with that.

The only thing I can say for sure is that every court that has ever addressed the issue does agree with that.

And I... and I... I think they may have said something in their brief to question that.

Justice O'Connor: Could we talk about the facts of this case?

Would... would your client fall under little (i) as a result of what happened?

Mr. Ayer: Yes, Your Honor.

Justice O'Connor: And the limit there would be twice the amount of any finance charge in connection with it--

Mr. Ayer: Correct.

Justice O'Connor: --Unless the except provision applies.

Mr. Ayer: That is correct.

Justice O'Connor: And what would that dollar amount be here?

Mr. Ayer: Well, that... that dollar amount in this case... and... and the judgment as it now stands is over $24,000.

So we--

Justice O'Connor: And you argue that the limitation is $1,000.

Mr. Ayer: --Correct, Your Honor.

And... and the... the last major reason... the... just to summarize, the... the two... first two reasons I think I've given now for why the decision below must be wrong are, first, that for all the reasons I've tried to point to, the word subparagraph really has quite a specific meaning, thankfully, in the place we're talking about it appearing.

And... and it refers to a section starting with capital letter.

Second point--

Justice Ginsburg: What about the argument that this drafting manual that you're relying on for the meaning of paragraph, subparagraph, clause wasn't... what was the year it was published?

Mr. Ayer: --Well, there... there are two, Your Honor.

One was published in the... I believe the House manual was published in 1995 and actually was published a month after the enactment of the statute.

The Senate manual... but there... but there was a prior version of it, and this version was in fact in draft form at the time.

But the... but the real... the point I want to... and... and the Senate manual was in fact--

Justice Ginsburg: Because the argument is that these manuals came out after this TILA statute.

Mr. Ayer: --Right, Your Honor.

But... but we also in footnote 15 and in the text on that page refer to a whole collection of books, drafting books, mostly dealing with Federal legislative drafting, and all uniformly saying... and again, we're not trying to say that these are binding authority.

We're simply trying to say that in the... in the process of Federal legislative drafting, this is what the legislative draftsmen try to do, and then you look at the statute and you look to see what they in fact have done.

And you see that this provision is there for a very particular reason.

And so we're not trying to trump up these manuals as... you know, as part of the code or anything else.

We're simply trying to say they... they give you a real good guidance on what it means.

And then when you look at the statute and you see that the statute consistently uses them in that way, uses the word in that way, you've got a good start on understanding what it means.

The... the last thing I want to say deals with, as I guess in the order I should be talking about it, legislative history.

And there are two points on that.

One is in 1995 by adding clause (iii), Congress added... created a provision.

Again, I want to emphasize what they did is they pulled out of part (i), or clause little (i), which dealt with loans in general and said twice the finance charge... it pulled out the category of loans that were mortgage loans, and it said we want to impose a higher cap on those loans.

And there is legislative history that we cite in our brief that indicates that that was what they were thinking about.

If they had intended to eliminate, entirely eliminate, not... not increase from $1,000 to $2,000, but entirely eliminate the cap on the entire category of... of loans, two things would be true.

Number one, somebody would have said something about it surely.

This is the dog that didn't bark, as this... many members of this Court have... have observed.

And there's not a breath of a thought in any legislative history that anybody meant to do this.

And the second point, which is even perhaps more telling, is that if they had done that, they would have contradicted the clear purpose of what they did.

They wanted a higher cap on mortgage loans than on loans in general, and it's clearly the case that if they had eliminated the cap on loans in general, they would have a lower cap on mortgage loans.

Justice O'Connor: Would there be any conceivable reason why Congress would have wanted a higher damages award for hard-to-detect misconduct of the type under little (i)?

Mr. Ayer: Your Honor, I mean, there's a lot of speculation in a number of the briefs.

You know, there's speculation about, you know, inflation and... and there's all sorts of things that one could talk about endlessly if one wants to talk about policy.

I... I think the answer is basically no.

I think there's really no good reason to distinguish between, you know, no cap on (i) and a cap on (ii).

And I'm prepared to argue this, but I think it's way down in the noise level in terms of what... what is relevant here.

The... the last point that I think I would... I would like to make is just that if the Court decides to reverse and if the Court were to decide that... that $1,000 cap is in fact... has always been and continues to be the law, we would simply ask the Court also to remand with regard to the attorney fee award.

The situation in this case would then be that the plaintiff, or the respondent, will have recovered $5,000.

The petitioner will have recovered affirmatively the other way $3900.

It's a net... a net of $1,100.

And the court below reduced the fees at a time when the recovery for the plaintiff was $29,000, reduced them by 40 percent on the ground that plaintiff's counsel had... had raised 40-some claims, all of which failed, except for 2, and basically indicated that that was a strong reason for reducing the claim.

I would submit if they essentially recovered $1,000 in this case, that that would be a reason to submit it back to the trial court.

If there are no further questions, I will reserve my time.

Argument of A. Hugo Blankingship

Chief Justice Rehnquist: Very well, Mr. Ayer.

Mr. Blankingship, we'll hear from you.

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

Petitioner's starting point is not the starting point established by this Court.

The starting point in this case established by this Court in the Lamie decision and those prior is clearly the statute before you.

He talks of history.

He talks of what happened in the past.

The issue before this Court is what does the statute we have mean.

Justice O'Connor: Well, what... what do you think the term, this subparagraph, meant before 1995?

Mr. Blankingship: Justice O'Connor, I'm not certain what it meant.

What I first read it--

Justice O'Connor: Do you agree that the courts had interpreted it to apply to both little (i) and (ii)?

Mr. Blankingship: --I agree that that's what the opinions in the Dryden and the Mars case said, but I would point out that in both of those cases that was not the issue before the Court.

In those cases, the plaintiff had lost down below.

There wasn't an issue of damages, and when the circuit court sent them back, they told them what the measure of damages was without any discussion.

I personally, when I read the statute and first started this practice, thought that it was limited to (ii).

I then did some research--

Justice Souter: Well, isn't the difficulty with that... that the point that I raised with Mr. Ayer?

To take that position before the most recent amendment and now, you've got to say that the word subparagraph refers to the section of one sentence which, regardless of legislative drafting manuals, I... I think anybody would say, well, it's a clause, and to call a clause a subparagraph is a stretch, at least in the absence of a very clear provision somewhere in the statute that says when we use the word subparagraph, we include clause.

That... there's a basic implausibility, I guess I find, in using subparagraph at any point in the statute to refer to a mere clause.

Mr. Blankingship: --Well, the answer is this subparagraph.

It's not just subparagraph.

It refers to this subparagraph.

Thus, it is much clearer or more precise as to where it's located.

Justice Souter: Well, no.

It... it... that... that completely leaves... even in your view, that leaves open the question whether this refers to a clause or a set of three clauses.

It... it doesn't answer the question before us whether subparagraph means clause.

Mr. Blankingship: Well, the... the answer I believe is in... is in the context of the statute.

You must look to the context of the entire statute and... and look and see that there's obviously a conflict between (ii) and (iii).

Justice Souter: Well, the... you can look at that either way, it seems to me.

One way is to see it as a conflict.

There's no question about that.

Another way is to see it... I think the term that has been used is carve-out.

In other words, the... the cap on damages will be such and such provided that.

If you got a mortgage, the cap is going to be higher.

You can read it either way.

Mr. Blankingship: I would disagree with you because of the language, the word or.

You see, when you see or that appears after (ii), after the... after the damages--

Justice Souter: That's... that's the argument for your reading.

There's no question about it.

But it... I don't see it as an argument that excludes the proviso kind of reading.

Mr. Blankingship: --You have to understand that... that all three of these are very, very different.

They have different rules.

They have different requirements, and they have different elements.

They all have different--

Justice Stevens: Well, but wait a minute on that.

Was that true before 1995?

Mr. Blankingship: --Before 1995, there weren't... there was not the section regarding the home mortgages.

Justice Stevens: I understand, but it was my understanding... you correct me if I'm... you say there are just two cases.

My understanding is there are hundreds of lawyers who have practiced under statute... under this statute, and it was generally accepted that the cap in not subparagraph but clause (ii) did apply to cases under clause (i), that everyone accepted that.

And you're... you're saying... should we accept that as a starting point or not?

Mr. Blankingship: I don't think you should accept it as a starting point because of the history.

If you look at those cases, they were never litigated.

That issue was not litigated--

Justice Stevens: You don't think this issue would... if there was a serious question about that, you don't think that there would have been a single case that would have arisen between 1974 and 1995 that made the... that gave this interpretation to... I want to call it... clause (i) and clause (ii)?

It seems to me most improbable.

Mr. Blankingship: --History suggests that most of those cases that came up... and if you look at them... in the early years were the technical cases.

They were not cases that involved a lot of money.

They were simply very technical, minor wording--

Justice Stevens: They couldn't have involved more than $1,000 if people read the statute the way I read it.

That's correct.

But if they read it the way you read it, it seems to me there would have been a lot of cases making the point, and they all would have had to assume that the word subparagraph in the statute, as then written, merely referred to clause (ii).

Mr. Blankingship: --That... that was the assumption that was made at that point, and the Fourth Circuit followed that assumption.

Justice Stevens: That that applied only to clause (ii)?

That there was no cap on (i)?

Mr. Blankingship: No.

No, I'm sorry, Justice Stevens.

That... that it was applying to both of them.

Justice Stevens: Right.

Mr. Blankingship: But that was an assumption, and as... and as Judge Luttig pointed out, that was the assumption of the Fourth Circuit at the time, but when it got a new piece of evidence, when the statute was amended and added (iii), it explained clearly that the assumption was debunked.

Justice Stevens: Do you think your position would have even been plausible before (iii) was added, if the word subparagraph meant only clause (ii)?

Mr. Blankingship: Yes, I do.

I do think it... it is possible because--

Justice Breyer: So, in other words, if that's right, I guess when I go get a mortgage... this is before.

I get a mortgage and say it's a half a million dollars, and the finance charge is over 30 years.

It's probably $600,000 or so.

And some technical mistake is made and Congress would have wanted me to collect $1,200,000 in damages.

That's what you're saying?

Mr. Blankingship: --No.

That's... that's not correct.

It would not have happened that way because there is a cap under (i).

Justice Breyer: No, no.

Under (i) there's a cap?

Mr. Blankingship: Under (i) there's--

Justice Breyer: Before.

The older statute?

Mr. Blankingship: --That's correct.

Justice Breyer: What was it?

Mr. Blankingship: It's $25,000.

The maximum amount financed.

If you finance a car for $26,000, there are no remedies--

Justice Breyer: So the maximum amount financed on my house was $1,000,000.

I'm saying if I got a mortgage before they added paragraph (iii), how did it work?

I get a mortgage on my house.

There's a finance charge.

It's over 30 years.

It's a huge amount of money.

And before, I... I guess on your reading of it, I could have collected millions.

But nobody thought that was possible.

Mr. Blankingship: --No.

It... it... prior to that, it did not apply.

Justice Breyer: Didn't apply to mortgages at all?

Mr. Blankingship: No.

No, Your Honor, and--

Justice Breyer: Okay. That's the answer.

Fine.

I got the answer.

Now we have a mortgage because (iii) brings mortgages in.

Mr. Blankingship: --Correct.

Justice Breyer: And closed-end mortgages fall under (iii).

Mr. Blankingship: Second mortgages.

Justice Breyer: Second.

What about an open-ended mortgage?

What about... what about a home equity mortgage?

Mr. Blankingship: Well, it's a closed-end.

Justice Breyer: All right.

So home... home equity mortgages, do they fall under (i)?

Mr. Blankingship: They... no.

They would be... they would fall under (iii).

It says or.

Justice Breyer: No.

It says closed.

It says non-open-ended.

It says under an open end... not under an open end credit plan.

Mr. Blankingship: That's correct--

Justice Breyer: So if it's under an open credit plan, i.e., a home equity mortgage, it's under (i).

Mr. Blankingship: --Correct.

Justice Breyer: Correct.

Okay.

So I can just replicate my example.

Right now, we have finance charges on those things.

They can be hundreds of thousands of dollars.

And you're... you're saying that I guess we could.

Am I right?

That's why I'm asking it.

Mr. Blankingship: No.

I... I believe that's incorrect--

Justice Breyer: Because?

Mr. Blankingship: --in that it would not have applied to over $25,000 at the time.

Justice Breyer: Under (i).

So we're talking about the range of $25,000, $50,000 doubled.

Mr. Blankingship: Right.

Justice Breyer: Okay.

Mr. Blankingship: Subsection (iii) was a completely different set to deal with the--

Justice Breyer: I'm trying to figure out what the range is on your reading under (i), and what I... I've been telescoping my questions.

But I've come away with the impression that we're talking finance charges, if your reading is correct, in the range of $25,000, which would mean the damages would be $50,000, if you double it.

Mr. Blankingship: --No, no.

Justice Breyer: No.

Okay.

What is it?

Mr. Blankingship: The amount financed.

I'm sorry.

I misspoke.

The amount financed.

It's not the finance charges.

It's the amount financed is $25,000.

As a result, you're looking at obviously much less during that period of time.

Also under (i), you have a limited statute of limitation of 1 year.

So you're not going to be able to come back 10 years later and say, gee, I want all my finance charges back.

Justice Breyer: Okay.

Thank you.

You've answered my question.

Mr. Blankingship: Petitioner argues that the term subparagraph, as used in TILA, always... always... means the capital letter.

That is not correct.

If the Court looks at the brief filed by the petitioner on page 23--

Justice Ginsburg: I don't believe they said always.

They said Congress sometimes doesn't use this.

Sometimes they make mistakes.

I thought they said this is generally the way it is, not that it's always this way.

Mr. Blankingship: --That's correct, Justice Ginsburg.

Generally throughout the... the U.S. Code, they... they argue that specifically within TILA that it has never been used to mean something else.

There is an example that they have cited that... that supports their position, and that's 1637a(a)(6)(C).

And if you look at that portion of the Federal Truth in Lending Act, it only has the following language.

Under the capital letter C--

Justice Scalia: Does this appear somewhere in the papers?

Mr. Blankingship: --No.

This was cited by them in their footnote.

Justice Scalia: But you're citing them.

Okay.

You're going to read it.

I'll close my eyes and listen.

[Laughter]

Chief Justice Rehnquist: What are you reading from?

Justice Scalia: He's... nothing.

Mr. Blankingship: From... from the statute itself, 1637a.

Chief Justice Rehnquist: And where is that in the briefs?

Mr. Blankingship: It is not in the... it is cited in a footnote to support the proposition that--

Chief Justice Rehnquist: Where is the footnote?

Mr. Blankingship: --It is on page 23.

Chief Justice Rehnquist: It's just cited.

It's not set out in haec verba?

Mr. Blankingship: No.

No, Your Honor.

It... it's set out as... as a string of cites to support the proposition that Congress, in enacting TILA, never used the term, this subparagraph, in an improper way.

And if you look at that section, the only language in that section is capital (C)... retention of information is the identifier.

And the language says, a statement that the consumer should make or otherwise retain a copy of information disclosed under this subparagraph.

Period.

That's it.

That's all that appears under (C).

Justice Breyer: All right.

Can I... maybe you can help me with this because--

Justice Scalia: Wait.

I... I want to hear more.

What does... what does this prove?

Mr. Blankingship: It proves that it clearly could not be referring to the capital letter (C).

It must be referring to--

Justice Scalia: No, because (C) doesn't do anything.

Mr. Blankingship: --(C) doesn't have any requirements.

Justice Scalia: Just read it... read it once more, would you?

Mr. Blankingship: Certainly.

A statement that the consumer should make or otherwise retain a copy of information disclosed under this subparagraph.

Justice Scalia: It couldn't be under (C).

Right?

Mr. Blankingship: It couldn't be possible.

Correct.

So there are examples when Congress drew--

Justice Stevens: Yes, but it is true if you look at that footnote... is it not correct, though, looking at that footnote, that the statute does repeatedly use a capital letter to describe what is clearly a subparagraph?

Mr. Blankingship: --Well, there are... I agree with that.

Yes, it does a number of times.

But you also see down in the bottom of the footnote, some of them, under subparagraph (A)(iii) where it's being more specific.

The problem in this case is that the term, this subparagraph, doesn't have anything to modify it to explain exactly what it's supposed to mean.

Justice Stevens: In other words, you're saying the... we should read this as though it said, under this subparagraph (2)(A)(ii).

Mr. Blankingship: If it said that, I don't think we'd have a dispute here.

That would be clear.

Justice Breyer: --The difficulty that I'd like you to... for me.

I'm not speaking for anyone else.

But when I read a statute, I first read it usually with what I call the approach of an English-speaking Martian, a person who doesn't know any of the context.

I just read the language.

And if I were just reading the language, I would think you have maybe the better of the argument.

But the language does support their position in the sense that theirs is a possible reading, not maybe the most natural for our English-speaking Martian, but nonetheless a possible reading.

And then they bring in all these other claims.

First, it really doesn't make sense to have a cap on everything and not (i).

Second, that isn't obviously what anybody thought was the case before this.

Third, there was nothing in the legislative history.

Fourth... I mean, you know, fifth, sixth, seventh.

And by the time I'm finished with it, I'm ready to abandon my English-speaking Martian point of view and ask what was the human purpose underlying the statute and does the language support it.

Now, that's what I'd like to hear your answer to.

Mr. Blankingship: Well, the Fourth Circuit looked at that, and they looked at the language on how it was going to work together.

And they found that it was the only way to put a square peg in a square hole.

Petitioner argues that we should put a round peg in a square hole.

We should ignore the conflict with (iii).

We should ignore the fact that it has completely different requirements and completely different limits, and we should then try to treat it as a carve-out of (i), but the problem with that language is the or.

It doesn't say and.

It doesn't say an alternative.

It says or.

Justice Scalia: You're--

Justice Breyer: --thinking it's--

Justice Scalia: --you're getting back to the language.

Why don't you talk about some of the other points that Justice Breyer was raising?

What about the purpose?

What purpose would there be not to have a limit on little (i) and have it on the other two?

Why... why would it make sense?

Mr. Blankingship: Well--

Justice Scalia: Is there no reason why it would make sense?

Mr. Blankingship: --There's only one limit.

If... if you read the statute our way, there's only one limit in... in (ii).

There is no limit on (i).

There's no limit on (iii).

The fact that Congress decided to treat leases somewhat differently does not necessarily mean--

Justice Breyer: --What do you mean there's no limit on (iii)?

I thought it said $200 or $2,000.

Justice Scalia: Right.

Mr. Blankingship: --Right, but it's not a limit to anything.

That is the damage.

It's not a limit.

It's not you get the finance charge or something else.

You see, there... there's only one that has two options, and that's (ii).

All the rest have one option.

It's very clear.

Under (i), it's two times the finance charges.

One of the things--

Justice Breyer: Yes, but he's asking what the purpose of this would be for these mortgages, you know, which is a pretty big deal, a mortgage, you know, really putting a lot at risk when you get into a mortgage.

There's a limit of $2,000.

Indeed, it's only $2,000, or whatever it is.

No... no... you can't get more than that.

And as to (ii), there's the limit we're talking about, and why would anybody want (i) to be limitless?

That's the question.

I'm not saying there's a no answer to it.

I want to hear the answer.

Mr. Blankingship: --Okay.

In (iii), the amount of $200 to $2,000 is simply the icing on the cake.

It is not the cake.

The cake is the ability to rescind the transaction within 3 years and get all of your money back, which is not an option under (i).

(i) has only the cake, which is the two times the amount of the finance charges.

It's the only damages you get there.

Under (iii), it's just an additional bonus damage.

Justice Ginsburg: May I stop you there?

I thought you could get actual damages.

Isn't that the first thing, if you could prove actual damages, you get actual damages?

Mr. Blankingship: Yes, Justice Ginsburg, you can.

It does say that... that it's the sum of, and all of them are added together.

Justice Ginsburg: So all... all these cases are cases in which you couldn't prove any actual damages.

Mr. Blankingship: Well, the problem is that it's very difficult to prove actual damages under the Federal Truth in Lending Act because there is that requirement that you go and show that you could have gone somewhere else and gotten a better deal, which by the time the consumer comes to the lawyer, that time has passed.

It never happens.

And as a result, there are almost no cases that involve actual damages under (i).

The only damages you can get under (i) are the statutory damages.

Justice Souter: All right.

But let's... I mean, start--

Justice Stevens: Didn't you get actual damages in this case?

Mr. Blankingship: I'm sorry.

Justice Stevens: Didn't you get actual damages in this case?

Mr. Blankingship: No, Justice Stevens, we did not.

We only got the statutory damages.

Justice Souter: --Start from your own analysis.

There's something very odd about saying that when there has been a violation involving a mortgage transaction, you can only get $2,000, but a violation in a conventional bank financing or a finance company financing or a dealer financing of a chattel transaction, the sky is... is the limit.

There's just something very strange about that.

Most houses cost more than most cars.

It is odd that you would have the limitation on the potentially larger damages and no limitation... or, let's say, recovery just as a... a generic term... but no limitation on the damages in what normally is... is a smaller transaction.

How do you explain that oddity?

Mr. Blankingship: I disagree that there are no limitations.

There are a number of limitations under (i).

(i) is the hardest of all of the three to prove and succeed.

The first limitation is the amount financed cannot be more than $25,000.

In the case of somebody who buys a car with good credit, they have 0 percent, 0.9 percent financing.

Their damages would be very small.

Justice Souter: Well, they do... they happen to be right at this moment in the business climate, but that is not the characteristic climate in which this act has operated over the years and presumably will operate again as interest rates start their way back up.

Mr. Blankingship: But the... the cap is the amount of the finance charges, the total amount of the finance charges.

So if you start with a principal balance of $25,000, even if you have a very high interest rate like Mr. Nigh's, over 20 percent, the damages are not going to be even half of... in this case, it was $12,000.

It's less than the half of the maximum.

So there is a cap.

There are a number of caps.

Justice Souter: Well, but there's a cap, but he's still going to get more money than he would be if exactly this same kind of behavior had taken place with respect to the financing of a mortgage on a half a million dollar house.

Mr. Blankingship: I... I disagree.

Justice Souter: That's strange.

Mr. Blankingship: I... I disagree with that analysis because under subsection (4), you're going to be able to go back and demand rescission.

You're going to be able to get all of your money back.

You will get much more under the home mortgage situation.

Justice Souter: Well, but getting all of your money back is... is presumably going to make you whole so far as the transaction is concerned, and we have to assume that allowing the transaction under (i) is going to keep you whole so far as the transaction is concerned.

The... the issue is what do you get in addition to remaining whole or steady with respect to the value of the transaction.

And when we ask that question, the potential for recovery under (i) is significantly greater than the potential for recovery under (iii), even though (i) tends to be a smaller transaction, (iii) a bigger one.

Mr. Blankingship: Well, in... in this case, in Mr. Nigh's case, he was not made whole.

In this case, he had two cars that were repossessed from him, and that was not something that the Federal Truth in Lending Act could... could resolve.

When he came out of this case, he was much worse than he was when he went in.

He now has two repossessions on his credit.

So I... I wouldn't suggest that he's--

Justice Souter: No.

Your... your... there's no question that... that in... in this... in the case of your client, he's got problems that this act really does not address.

But the question what we've got is what does the statute normally address, and I still find something anomalous in the normal operation as you describe it.

What am I missing?

Mr. Blankingship: --Well, under the Truth in Lending Simplification Act of 1980, Congress came back and put a number of limits on (i) that did not apply to (iii), but do apply to (i).

And you can't get violations for technical wording, misuse of the wording.

Under (i), the only one... the only way you can get damages is to prove that one of the magic numbers, the amount financed, the finance charge, the APR, or that they failed to give you the disclosures altogether.

Only under those situations, do you even qualify to get the statutory damages.

It's very limited and it's very difficult.

It's not a simple mathematical error, which is what happened prior to the Simplification Act.

In the Mars case and the other... in the Dryden case, those were simple mathematical errors.

They were... or just misrepresentations as to the wording of the... of the disclosures under the Federal Truth in Lending Act.

That's not the case now.

Those will no longer provide statutory damages.

You must prove that they have done something wrong.

And in this case, the proof was that they added a silencer that Mr. Nigh never wanted, that he didn't want, and in fact, they had packed this into the loan 3 days before they brought him back in.

Justice Scalia: Mr. Blankingship, I thought that part of your response to Justice Souter would have been that there's nothing anomalous about imposing a dollar limit on massive transactions and not imposing a dollar limit on smaller transactions, that that is precisely what you would expect Congress to do.

The... the need for a dollar limit on... on home mortgages is... is obvious, and the need for a dollar limit on... on smaller loans is less obvious.

Mr. Blankingship: I would agree.

Justice Souter: But if that is the answer, you're still left with the situation, as I understand it, in which the recovery under the small loan is going to be potentially in, I suppose, many cases practically bigger than the recovery under the large loan.

And that still seems cuckoo to me.

Mr. Blankingship: It... it is possible there are, but there are so many different variables.

It can be that way.

In a 0 percent financing chance, it will not.

Justice Breyer: Of course, in (ii), it's... it's covered.

You have a... on your theory of it, small (ii), (ii), is also limited.

And that's only $25,000, I gather, as well.

Mr. Blankingship: Of the amount due on the lease, yes.

Justice Breyer: Yes.

Mr. Blankingship: It's a little bit different.

Justice Breyer: So it... so it's... so you'd have to say Congress wanted to impose a limit on these small (ii) $25,000 or less transactions, but they didn't want to impose any limit on the small (i) $25,000 or under transactions.

Is that right?

Mr. Blankingship: Well, I think that's... that's potentially right.

And there's a big difference between (i) and (ii) also.

Under (ii), the statute of limitations is 1 year after the lease expires.

Thus, if you were to lease a car for 4 or 5 years, you have a 5 or 6-year statute of limitations.

Under (i), it's much more limited.

You have a 1-year statute of limitations.

It is the most difficult.

Justice Souter: Let me... let me ask you a question which you are free to decline to answer because it... it rests upon an assumption that you don't make but the Fourth Circuit did make, and if you say, look, I don't want to defend the Fourth Circuit on this, okay with me.

Justice Scalia: Don't answer.

[Laughter]

Justice Souter: The--

Mr. Blankingship: I think I know where you're going too.

Justice Souter: --the Fourth--

Justice Scalia: I've never heard counsel refuse to answer.

I would just like to see it happen.

[Laughter]

Justice Souter: --The... not refuse to answer.

Exercise an option not to answer.

[Laughter]

The Fourth Circuit made the assumption that prior to the addition of (iii), the... the $100,000 minimum and... and cap applied to... to both little (i) or little (i) and little (ii).

And you... you have argued that that really isn't a sound assumption.

But if you... if you start where the Fourth Circuit did in making that assumption, then there being no reenactment of (i) and (ii) when (iii) was added, the Fourth Circuit position has got to, I think, encounter the... the general presumption against repeals by implication.

And on the Fourth Circuit's theory, the... the threshold cap applied to... to Roman little (i), and without any reenactment or anything, suddenly it no longer did.

There was no express provision to that effect.

There was nothing in the legislative history to indicate that that was intended, and it seems to me that there is a... a difficult repeal by implication problem here.

Is... is there an answer to that problem?

Mr. Blankingship: Well, I... I think in the United Bank v. Wolas case, where the Court held that the fact that Congress may not have foreseen the consequences of a statutory enactment is not a sufficient reason for refusing to give effect to its plain meaning, is... is probably the answer to the question.

Congress may not have intended or maybe they did intend.

Justice Scalia: That's not the answer.

The... the answer is that it is not implication, that there is a new statutory text which, if it means what you say it means, has expressly repealed the earlier one.

Now, if it doesn't mean what you say it means, then I guess it's by implication.

But if it means what you say it means, there's no implication.

There's a statutory text which means something different from what the prior text meant, and that's a repeal.

Mr. Blankingship: And that's... I absolutely--

Justice Souter: If this is an express repeal, you win.

[Laughter]

Justice Stevens: Let... let me just make sure I understand.

You seem to have taken two different positions.

Do you think subparagraph (i)... I mean, clause (i) and clause (ii) mean the same thing or something different than they did before 1995?

Mr. Blankingship: --I'm not sure I understand the question.

Justice Stevens: Did the... did the 1995 enactment, which added clause (iii), did that change the preexisting meaning of (i) and (ii)?

Mr. Blankingship: Yes, by its... by its language, by its introduction.

Justice Stevens: So then you're agreeing that prior to the 1995 amendment, your opponent's reading of... of (i) and (ii) would have been correct.

Mr. Blankingship: I would agree that that's what the law was and that's what had been stated before.

I think if you go back and... and the other problem with these... these statutes or these... these prior cases--

Justice Kennedy: Is it relevant that all that Congress did was added (iii)?

It didn't reenact (i) and little (i)... (i) and (ii)?

Mr. Blankingship: --No.

The statute then becomes what it is.

I think that... that the Fourth Circuit did precisely what it was instructed by this Court to do, which is to look at the statute the way it is enacted in front of it today and to read that statute and to try to find a way to make a fit.

And in this case they found that it was a square peg in a square hole, that everything fit, as Justice Scalia--

Justice Kennedy: So Congress basically left (i) or (i) and (ii) alone.

Mr. Blankingship: --They did leave them alone, as they have in... in a lot of these amendments.

They come and add different things.

They don't necessarily change them.

But in this case, you have to look at the statute we have before us, and under that particular statute, it's clear that it can't work where the... the limiter on (ii) applies to (i) and (ii), but not to (iii).

If it applies to all of (A), then it must apply to (i), (ii), and (iii), not just to (i) and (ii).

And thus, that's why the Fourth Circuit said we cannot apply it this way.

It does not make sense.

If it is... subparagraph is all of (A), then there's a clear conflict with (iii), and which petitioners then go and argue, well, now we'll explain it as a carve-out, but the carve-out argument loses, I submit, because of the or.

Justice Breyer: No, because of the or.

Because of little (iii), (iii).

Take out (iii) and it all makes sense.

What it says is to the whole subparagraph damages are limited to $1,000 or if it's the special real estate thing, they're limited to $2,000.

And if that little (iii) weren't there, it would be clear.

But the little (iii) is there, and you say, well, maybe sometimes we can say a little (iii) is superfluous.

It's not a word, after all.

Justice Kennedy: And... and all Congress did was add (iii), it didn't reenact the whole section.

Mr. Blankingship: It did not reenact the whole section.

That's correct.

If there are no further questions.

Rebuttal of Donald B. Ayer

Chief Justice Rehnquist: Thank you, Mr. Blankingship.

Mr. Ayer, you have 7 minutes remaining.

Mr. Ayer: Thank you, Your Honor.

I just have a short list of things I'd like to address.

The first is just to repeat that the last time Congress enacted the word subparagraph in this provision was in 1974.

I don't understand why the 1995 amendment is not simply subsequent legislative history.

It tells us nothing about what Congress meant in 1974.

The second point is, Justice Scalia, I'd like to... I wasn't quick enough to think when you said before that if you read the way the Fourth Circuit did, there's no inconsistency.

Indeed, not.

There is still an incongruity between clause (i) and clause (iii) because contrary to what Mr. Blankingship has said, ever since the beginning of TILA, mortgage transactions have been covered by the Truth in Lending Act, I can assure you.

And prior to this addition in 1995, they were dealt with in clause (i).

And so what... what you've got here is a provision that says, with regard to loans in general, the cap is... you know, it's twice the... the finance charge, and... and then whatever we--

Justice Breyer: Oh, so I was... I'm sorry.

That was the one thing I was trying to clarify in this that I thought I had... that I didn't understand--

Mr. Ayer: --Right.

Justice Breyer: --is before this (iii) came about, where was my normal home mortgage?

Was it covered or not?

Mr. Ayer: It was in (i), Your Honor.

Justice Breyer: If it was in (i), then how... but he says at 1603, there's a $25,000 limit on what's in (i).

Mr. Ayer: 1603, Your Honor, specifically says that credit transactions, other than those in which a security interest is or will be acquired in real property.

Justice Breyer: Are limited to $25,000?

Mr. Ayer: Correct, Your Honor.

Justice Breyer: Oh, so then... then I'm back the opposite of what I was thinking.

In other words, you're saying that... that prior to... prior to the reenactment... I'm sorry.

This is the one thing I was trying to clarify in this oral argument.

Prior to the... prior to the enactment of the new amendment, your secured mortgage transaction is up in (i).

Mr. Ayer: Correct.

Justice Breyer: Okay.

And then after, although the non-open-ended one is in (iii), my home equity loan is in (i).

Mr. Ayer: You bet, Your Honor.

Justice Breyer: And so, in fact, if I have, say, a balance of a couple hundred thousand dollars of home equity borrowing over, say, 10 or 15 years, I could have a total finance charge of hundreds of thousands.

Mr. Ayer: Absolutely.

That's correct.

I want to just say a word about the facts, although frankly I think they're utterly irrelevant.

But the facts here are that summary judgment was entered against Mr. Nigh on 40 or so claims.

Three went to trial.

Among the claims on which summary judgment was entered were claims for fraud and claims for breach of contract.

The reason that no damages... no actual damages were not given was not because they weren't available.

They were available.

They just weren't proven.

There were no actual damages proven.

Actual damages are always available even for technical TILA violations, technical in the sense that they're within the group that are said to give rise to a violation under 1640(a).

I do want--

Justice Ginsburg: Mr. Blankingship said that as a matter of fact, it's rare that under TILA people are able to prove actual damages.

Is that so?

Mr. Ayer: --That may be true, Your Honor.

I... I think there's a question of how one goes about doing that, and you have to actually show harm.

And so, you know, the question is how do you prove that and in what kind of a case.

I do want to say and be clear... I think I said earlier that in 36 of 37 uses in TILA, the meaning is clear and refers to... subparagraph is used to refer to a capital letter.

The 37th is not clear.

In fact, I would agree with Mr. Blankingship's reading of it.

But 36 out of 37 ain't bad, particularly when we know in 1974 exactly what they meant to do.

The... the last point I guess I just want to sum up by saying is that I think this case really has a lot in common with the parable of the elephant and the blind man.

And when a blind man examines an elephant's leg and decides that it's a tree, maybe it's because he hasn't been able to... to discern what else is out there and consider what other considerations there are.

And in this case I think clearly what we have is a case where simply reading a single sentence of a statute and thinking you know what it means and militantly refusing to look anywhere else will very likely lead you to the wrong answer in many cases.

Thank you very much.

Chief Justice Rehnquist: Thank you, Mr. Ayer.

The case is submitted.

Unknown Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.

Attribution:

The Oyez Project

Featured:

Household Credit Services v. Pfennig - Oral Argument

Fri, 09 Jan 2009 14:49:10 +0000

Case:

Household Credit Services v. Pfennig

Media File:

02-857_20040223-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Seth P. Waxman

Chief Justice Rehnquist: We'll hear argument now in No. 02-857, Household Credit Services v. Sharon R. Pfennig.

Mr. Waxman.

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

This case involves a regulation promulgated by the Federal Reserve Board to govern the disclosure of fees imposed for exceeding a credit limit.

It does not involve any challenge to the fees themselves or any contention that the fees were not disclosed.

Unquestionably they were.

This case concerns only how such fees should be characterized when they are disclosed.

Justice O'Connor: Would you enlighten us on just how this transaction gets authorized in the ordinary course of events and in this event?

Is there any special call made, or is the credit card just submitted to the store and the store processes it and if it's not rejected, it goes through?

What happens?

Mr. Waxman: Well, as the Solicitor General has explained in his brief for the Federal Reserve Board, ordinarily the arrangement between banks... that is, the banks that issue the cards and the banks that do the corresponding relationship with the merchants... have an agreement between the merchants and the banks where the merchant will be liable for fraudulent use of the card or the other unless it obtains authorization to process the charge.

And so in the ordinary practice, the board has explained, a merchant may or may not, is not required to, but may well call in the charge or submit the account number to the issuing bank via the correspondent bank and get an approval, yes or no, to process the charge.

Now, the board has explained that when the issuing bank authorizes the merchant to process the charge, that two important things don't happen.

One, it does not in any way represent a renegotiation between the consumer and the issuing bank, and it says nothing about the overall credit limit.

And two, the issuing bank often will have no idea whether the charge being authorized will or will not trigger a credit limit of the consumer for a variety of reasons, not the least of which is that, as the board explains, credits and payments aren't instantly reflected, merchants often don't put the true amount of the charge in.

They may, as hotels and... and rental car companies do... often block very large amounts because they don't know what the ultimate charge will be.

And there is also a recognition in the industry, the board explains, of a certain tolerance.

That is, the merchant... the credit card company won't always want to cut somebody off whenever it has a suspicion that they may have hit their credit limit because the merchant has a relationship with the customer.

And since the system of information is so imperfect, the issuing bank also has a relationship with its consumer and doesn't want to embarrass the consumer.

So the short answer to that... the short version of the very long answer is in the ordinary course, merchants have an incentive to seek authorization, but they're not required to, and the authorization that's given doesn't reflect knowledge by the issuer that a credit limit will be exceeded.

Justice Stevens: But, Mr. Waxman, is it not true that there are many occasions on which the credit limit will, in fact, be exceeded and there will, nevertheless, come back an approval, and that the customer in those cases may or may not know that his... that, A, his limit was exceeded, and B, that he's going to be charged for it?

Mr. Waxman: Well, the creditor... the consumer may or may not know that his or her credit limit was exceeded, but of course, that information is entirely within the knowledge of the... the potential knowledge of the consumer because the consumer does know what or... what charges he or she has made and what payments he or she has made.

Justice Stevens: Well, not necessarily.

You can have a card owned by two or three people in the same family and maybe the husband spent some money that the wife didn't know about while this was going on.

So it's at least possible that they would exceed the credit limit without the credit cardholder knowing it, their not being aware of it, not keeping track of it.

Mr. Waxman: Well, the...

Justice Stevens: And... and I'm just asking you, is it not true that it is possible that he will receive an affirmative answer to using the card without knowing whether or not he exceeded the limit and therefore is going to be... be charged for it?

Mr. Waxman: It's possible either because he doesn't keep good track or he doesn't... he's not accurate or he's allowed a child or a spouse to use the card and isn't keeping track or control of that.

But one thing that you said, Your Honor, that is not true is the issuing... the credit card issuer is not giving permission directly to the consumer to do anything, and most particularly if...

Justice Stevens: Well, but I'm not sure that's right.

If the... if the credit card issuer is informed of the overcharge, that it's over the limit, and decides this is a good customer, well, let's not charge him for it or let's okay it anyway, he gives that information to the merchant and the merchant may not tell the customer anything about it.

Mr. Waxman: The merchant...

Justice Stevens: Isn't that true?

Mr. Waxman: The merchant won't know.

The merchant isn't going to tell the customer anything.

Justice Scalia: No.

Mr. Waxman: And the credit card issuer may not know.

Justice Kennedy: But he may know.

Mr. Waxman: But you're positing...

Justice Stevens: That's my point.

Mr. Waxman: Yes.

Justice Stevens: The credit company may know and he will not pass that information on to the consumer.

Mr. Waxman: There is a credit... there is an agreement that must be accepted...

Justice Stevens: Well, am I correct on my facts?

Mr. Waxman: You're...

Justice Scalia: Is it not possible?

Mr. Waxman: You are correct that it is possible that the consumer won't realize it and the issuer may know.

And in that instance, the issuer, which has no relationship directly with the consumer, doesn't tell the merchant to tell the consumer.

Justice Kennedy: Correct.

Mr. Waxman: But, Justice Stevens...

Justice Stevens: And so the consumer may end up paying a charge that he didn't realize he'd incurred.

Mr. Waxman: Well, the...

Justice Stevens: Is that correct or not?

Mr. Waxman: That is only partially correct.

It's correct factually given the hypothetical that you've articulated.

It's incorrect legally because the credit agreement... it must...

Justice Stevens: If he has... if he knows two things.

He knows the fine print on the credit agreement and, two, he knows the status of his balance.

Mr. Waxman: I...

Justice Stevens: But if he doesn't have either of those in mind, it could occur... it could occur that he would run an overcharge and be charged $15 or $20 or whatever it is without realizing he's incurred the charge.

Mr. Waxman: It is true with the following caveats.

I'm not trying to fight the hypothetical.

I just want to make sure...

Justice Stevens: It seems to me you're unwilling to give me a categorical yes answer when the answer is yes.

Mr. Waxman: And I can't, and here's why, Justice Stevens.

I... I mean no disrespect.

But many, many credit card issuers do not imply an over-limit fee on a transactional basis.

They apply it, for example, if at the end of the month the balance exceeds the limit as opposed to whether a particular transaction sort of spikes it over the limit one time.

And so I'm just trying to be completely accurate.

Now, the term... I think it's very important...

Justice Stevens: Well, you've given me lots of examples where the charge would not be incurred.

I'm merely trying to get you to acknowledge there will be some cases in which a person who is not fully familiar with the... with the balance in his account doesn't realize he's gone over the amount and is being charged for an extra credit charge.

Mr. Waxman: I think that must... there must be instances in which that is true.

But the term, credit limit, Your Honor, is a term of art that is recognized in the industry, that is reflected in the Federal Reserve Board regulations, and it draws an important distinction between increasing a credit limit, an established credit limit, upon an application and authorizing a point-of-sale transaction.

Chief Justice Rehnquist: Well, now, Mr. Waxman, exactly what happens when a point-of-sale transaction is authorized?

The merchant is then off the hook?

Mr. Waxman: The merchant has a safe harbor, Your Honor.

The merchant is told, if you pay this charge and it turns out not to be collectible for any reason, we will hold you harmless.

And that's the reason that this business... contractual relationship is established between issuers and merchants, as a way to encourage merchants to allow use of the card.

Now...

Justice Souter: Mr. Waxman, is... I'm sorry.

Mr. Waxman: No.

Justice Souter: Is the... is the event of exceeding the... the limit defined in these agreements characteristically as an event that can occur at any time during the billing period, or is it an event that is defined as... as occurring only at the end of the billing period when all the credits and... and all the debits are... are accounted for?

Mr. Waxman: My understanding, Justice Souter, is it varies depending on issuer and card, but that is, some... some cards will... all... all... well, there are some credit cards and charge cards that don't have limits, but when they have a limit, the limit is required to be explicated in the initial disclosures.

And in the solicitation, the disclosure, and all periodic statements, the lender, the credit card issuer, is required to identify the credit limit and specify that fees that are charged for exceeding a credit limit will be the following amount.

Justice Ginsburg: Mr. Waxman, will you explain what the consequence is?

It's... this is not a question of disclosure or not because either it will be part of the finance charge and disclosed as such or the... whatever you call OCL.

What difference does it make?

It's not notice.

If it goes... if it's part of the finance charge, how is the consumer benefitted?

Mr. Waxman: Well, I don't... I will explain what difference it makes.

No one has yet explained, neither the respondent in this case nor the Sixth Circuit, how the consumer is benefitted by the rule that she's advocating or the Sixth Circuit's rule, but here's how it works.

In the open-end credit relationship, the credit card or charge card relationship, there are three relevant events.

One is the solicitation or advertisement to invite someone to enter into a relationship.

That's called the solicitation.

The...

Chief Justice Rehnquist: Are you talking about solicitation for a purchase of a credit card or for purchase of merchandise?

Mr. Waxman: For a purchase of a credit card.

You get a letter in the mail saying buy a... open a Citibank card, and there are certain disclosures that are required in those solicitations.

If you send back something that says, yes, I want to have a... I want one of your credit cards, the act and the regulations require that certain disclosures be made at that point, and that's called the initial disclosure.

And then the third event is the periodic statement, when you get your statement every month or so.

Now, with respect to the solicitation and the initial disclosure, the consequences of calling this a finance charge or a component of the finance charge versus an other charge are zero.

That is, in both of those instances, the lender, the issuer, must disclose that there will be charges paid... fees assessed for exceeding a credit limit and how much it is.

And they're not characterized there as part of the finance charge or otherwise.

The... on the... those documents require a statement of what the APR, the annualized percentage rate, is, but the APR in those statements refers only to the periodic rate, the interest rate that's going to be charged to all... applied to all charges.

In the...

Justice Souter: That's the only thing it could occur to.

Mr. Waxman: Yes.

Chief Justice Rehnquist: Yes.

Mr. Waxman: Because you don't know whether there will be late charges or over-limit charges.

Justice Souter: Is... is it a consequence of... of the other position that they would somehow have to try to do the impossible?

Mr. Waxman: Not at those two stages, but at the third stage, that is, the periodic statement, when you get your bill every month, there is a difference there.

In both instances, there will be a specification of over-limit charge, but if the Sixth Circuit is right, in those instances in which the issuer actually knew that the charge it authorized the merchant to process resulted in the consequence of an over-limit charge, it would be called over-limit charge finance charge.

That is, there would be a line item that specifies what it is, just like any other charge or any other purchase or payment, and the amount.

But it would affect the annual percentage rate, what's called the historical annual percentage rate, in the periodic statement.

Justice Kennedy: Are there any other... other instances in the act where the APR, calculated retroactively on the monthly statement, is higher than what was the APR that was disclosed?

Mr. Waxman: Yes, there... yes, there are, Justice Stevens, because there are certain types of charges that may or may not occur.

For example, if you use your card to get cash at the cash machine or something that will be... will... that are charged in the finance... that are part of the finance charge and will, therefore, affect the APR on the monthly statement, but won't be disclosed to the...

Justice Kennedy: So... so then the respondent's theory could... and that's consistent with the act, I take it.

So then respondent's theory could work.

My concern was that respondent's theory couldn't work because you had... couldn't hypothetically calculate an annual percentage rate not knowing whether charge would be made.

Mr. Waxman: Well...

Justice Kennedy: But if you can and... and do have an adjustment of the APR that's permitted under the act, on the disclosure statement, then her theory at least can work.

Mr. Waxman: Well, her... I'm not saying that her theory or the Sixth Circuit's rule couldn't work.

It would require a great deal of additional rulemaking by the Federal Reserve Board because the APR is a... is a fraction, is a percentage, the numerator of which is the component of all the individual charges and the denominator is something that, in the context of an over-limit fee, is unclear.

Does it apply to the transaction that it was applied to?

Is it the average monthly balance?

Is it for the whole month or part of the month?

It's not impossible.

But what it... what it is is directly contrary to the two objectives of TILA.

The purpose of TILA is to come up with bright line classifications that are readily complied with by issuers and that help consumers compare competing costs of credit.

That is manifest in Congress' purpose, and a rule that requires the treatment month to month, charge to charge depend on what the issuer knew at the time it authorized some charge that may later be determined to have triggered at... the... allowing the borrower to exceed the credit limit would cause these monthly APR's to vary widely and, it seems to me, can only create confusion and inability to say, well, gee, I just got an application or a... a thing in the mail from, you know, Citibank saying 17.3 percent, but I just looked at my statement and it's 79 percent.

Justice Ginsburg: Mr. Waxman, I don't think you finished the answer to the question I asked, and what I wanted to know is if it's labeled a finance charge, then there won't be interest on it; whereas, if it's treated as a debit like any purchase, then the interest would run on it in the future.

So could... it could be a difference for the consumer, could it not?

Mr. Waxman: Well, yes, in the month in which it has occurred because, with respect to the next month, whatever finance charge was applied and... and continues as a balance will also have applied to it the finance charge, that is, the interest rate that would apply.

So, but with... there is a consequence in the month in which it is applied; that is, for whatever days it's outstanding, up until the... the end of the... the card's grace period, a finance charge could be applied to that other charge.

Justice Ginsburg: So it could be... it could be...

Justice Kennedy: Why isn't it carried over from month to month?

In other words, I... I get a late... this... this special charge, but I just pay the minimum, so I'm really carrying part of the special charge over to the next month.

I pay interest on that too, I take it.

Mr. Waxman: These cards typically have a grace period in which you can pay off your balance and you don't have to pay any finance charge, but if you don't, whatever charges are carried forward, whether they derive from purchases or over-limit charges or late fee charges or... or finance charges in the previous month, something is charged against it.

May I reserve the balance of my time?

Argument of Barbara B. McDowell

Chief Justice Rehnquist: Very well, Mr. Waxman.

Ms. McDowell, we'll hear from you.

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

Congress has given the Federal Reserve Board broad authority to implement the Truth in Lending Act.

The regulation at issue here is the permissible exercise of that authority.

The board has addressed the disclosure of fees for exceeding a credit limit with a clear bright line rule which requires all such fees to be disclosed clearly and conspicuously but separately from the finance charge and APR.

To use the Court's own terminology, that approach is neither obviously repugnant to the statute nor demonstrably irrational.

To the contrary, the rule is a sensible one that, in the view of the expert agency, provides meaningful disclosure to consumers and clear guidance to creditors.

There's no merit to the court of appeals' and respondent's contrary approach which would only impose exorbitant compliance costs on creditors without any meaningful benefit in terms of disclosure to consumers.

The board's rule is not foreclosed by the statutory text.

The act does not speak expressly to whether over-the-limit fees are or are not finance charges.

Nor is that question resolved by the act's generally phrased definition of finance charges as charges imposed as an incident to the extension of credit.

That phrase is ambiguous as to whether it encompasses charges that are imposed not as the cost of the credit that the creditor has contractually obligated itself to provide, but instead as a penalty for the consumer's obtaining some additional credit that she had no contractual right to obtain.

The board's rule is rational.

As the board recognized over-the-limit fees...

Justice O'Connor: Ms. McDowell?

Mr. McDowell: Yes.

Justice O'Connor: Would you... as I understand the respondent's brief, it asks us to draw a line between the over-the-limit fees that are imposed for acts of default and those that are imposed for extension of the credit limit and says that Regulation Z draws such a distinction.

Would you comment on that argument?

Mr. McDowell: That argument is incorrect, Your Honor.

The relevant provision of Regulation Z, which is at page 2 of the petitioners' brief, contains no limit of that sort.

It speaks of charges for actual unanticipated late payment for exceeding a credit limit and for delinquency, default, or similar occurrences.

It thus speaks in a categorical manner of charges for exceeding a credit limit.

It doesn't condition them on whether it was unanticipated or whether it's tantamount to a default.

The board has acknowledged that there are hypothetical situations at least in which a... a charge might be labeled an over-the-limit charge when it actually is not, when there actually, for example, is no contractual credit limit and... and a charge is simply, in that context, labeled inaccurately an over-the-limit fee.

However, when a charge is, in fact, imposed by the creditor as a consequence of the consumer's exceeding the contractual credit limit, it is validly within this regulation.

Justice Ginsburg: Was this an account that carried a finance charge?

Because the regulations describe something called charge card that doesn't have finance charge, but could have an over-the-limit charge.

Mr. McDowell: That's... the particular account at issue in this case was a credit card.

Justice Ginsburg: Which did have a finance charge, or you don't know?

Mr. McDowell: Yes, it does impose a periodic charge if charges that are run up during a particular month are not paid within the grace period.

Justice Stevens: If I understand the other side, they make kind of a plain language argument.

They... they talk to the merchant.

The merchant sends in... they want approve a $200 purchase and they get back, well, it'll go over the limit and is it okay.

And they say, yes, let them go over the limit, and so they've extended additional credit.

And... and they, if they're going to charge them $15 to do it, that would be a finance charge... I mean, that would be a charge for an extension of credit.

Why doesn't it fit the plain language?

Mr. McDowell: We don't disagree with you, Justice Stevens, that it is, at some general level, a charge imposed incident to the extension of credit.

There was necessarily an extension of credit here.

Justice O'Connor: In... in exchange for the higher credit limit, yes.

Mr. McDowell: The... but... but the term, incident to the extension of credit, is an ambiguous one.

The Court construed similar language in the Holly Farms case and recognized it to be ambiguous.

It doesn't address precisely the nature or... or the extent to which a particular charge has to be connected to an extension of credit.

And here, the board has reasonably viewed over-the-limit fees like late payment fees and other default fees as being imposed for a violation of the terms of the credit agreement rather than as...

Justice Stevens: And then the... but wouldn't the customer say, well, I didn't violate anything?

You told me I could do it.

Why is it a violation?

Mr. McDowell: In the first place, there was no communication in this case, and there typically is no communication when we're speaking only of the authorization process.

Justice Stevens: But what if there were... what if there had been a communication?

Would it be different?

Would it be a different case if the merchant put the bank officer on the phone and said, you're over your limit, and the... and the customer said, is it okay for me to pay the extra 15 bucks for this... go over the limit $15?

He says, yes, we'll... we'll okay it.

And then they hang up.

At the end of the month, he gets a $15 charge for that.

Would that be... that would not be an extension of credit in your view if they talked on the phone and agreed to it instead of having to just go through these anonymous communications.

Mr. McDowell: It would look more like an extension of credit, I... I might grant you, but the board is still entitled to draft categorical rules by virtue of its authority under section 1604(a) to make classification adjustments and exceptions.

Justice Stevens: There's no duty on the... on the part of the bank to say, of course, if we okay it, you have to pay an extra 15 bucks.

Mr. McDowell: Well, Your Honor, you're raising a policy question that Congress or the board could address whether additional disclosures are required at the point of purchase.

Here we're talking about disclosures that occurred later, days or weeks later, when the customer receives her periodic statement.

Justice Stevens: Just a bill that said, you didn't realize it, but you just earned a... you just... you owe us $15 that you should have realized.

Mr. McDowell: Well, and whether it's imposed as a finance charge or... or as an other charge, the consumer is still going to have the... the kind of surprise that you referred to.

And in the board's view, it doesn't make any meaningful difference whether, at that point when the customer receives her periodic statement, it is identified as one or the other.

Indeed, it could confuse the consumer to have the over-the-limit fee included in the historic or actual APR on her periodic statement.

If she were, for example, comparing that statement with a solicitation that she received by direct mail, she might be inclined to think that... that the solicitation offered better terms when it really did not.

Justice Ginsburg: Would you agree that... that it would be to the consumer's advantage to have this categorized as a finance charge because then she wouldn't have to pay interest on that in... in future charges?

Mr. McDowell: No, Your Honor.

She would still have to pay interest on it.

Whether it's labeled a finance charge or not makes no difference in that regard.

It only has to do with how it's labeled and whether it's included in the actual APR on the... the customer's periodic statement.

Even if it's labeled a finance charge, in other words, she can be charged additional interest.

The periodic rate can be applied to it.

So, in fact, the board has concluded that... that there's no benefit to consumers to treating over-the-limit fees generally as finance charges, and the Sixth Circuit's rule, in particular, would make no sense because it would depend on the creditor's subjective knowledge whether a particular charge was or was not included in the APR in the particular month.

That would impose significant compliance costs on creditors and would not tell consumers anything that's particularly meaningful to them.

When the board revised Regulation Z in the 1980-81 period, after the TILA Simplification Act, the board sought to focus on legally enforceable relationships, not on unenforceable understandings that a consumer might have as a result of a course of dealings with the credit card company.

And understanding this particular provision, consistent with its plain terms, as applying to all charges imposed or exceeding a credit limit is consistent with that approach.

It provides the meaningful disclosure and it avoids imposing unwarranted compliance costs.

If there are no further questions...

Argument of Sylvia A. Goldsmith

Chief Justice Rehnquist: Thank you, Ms. McDowell.

Ms. Goldsmith, we'll hear from you.

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

This case has come full circle.

It started 4-and-a-half years ago with the filing of a complaint, a complaint that says if you authorize the request of a consumer to have more credit and you tie a fee for that authorization, that fee is a finance charge.

The question presented here is whether or not the Sixth Circuit has the right or should have invalidated a provision of Regulation Z with respect to the exclusion of certain over-limit fees, and we believe that resolution of that question brings us back to the complaint.

What does the complaint say in that regard?

Chief Justice Rehnquist: Are... are you fully defending the decision of the Sixth Circuit, Ms. Goldsmith?

Mr. Goldsmith: We... yes.

We believe that the Sixth Circuit's decision is that this fee, the fee in this case, is a finance charge, and we stand behind that decision 100 percent.

We have stated in our complaint that this fee... and... and it's important to remember that...

Justice Ginsburg: Ms. Goldsmith, before you continue, the Sixth Circuit said a portion of Regulation Z is invalid because it's incompatible with the statute.

Are you defending that invalidation?

Mr. Goldsmith: In theory, yes.

We... we feel that...

Justice Ginsburg: How about in practice?

Unidentified Justice: [Laughter]

Mr. Goldsmith: We feel that perhaps the court did not need to go there, that... in... in looking at the situation now, we... we have always...

Justice Ginsburg: But you asked... you asked the court to do that.

Mr. Goldsmith: Yes, we did.

Justice Ginsburg: When you argued the case before the Sixth Circuit, you made it very clear that you were seeking a holding that a portion of Regulation Z was incompatible with the statute.

Mr. Goldsmith: I think to the extent that Regulation Z says that anything you call an over-limit fee as excluded from the finance charge, that is incompatible with the regulation.

And we stand by our lower court argument that if that is the case, then that regulation cannot stand.

And... and once the Government stepped in, we realized... a significant part of their argument is that the... that the Federal Reserve Board could say that.

The Federal Reserve Board could say that all over-limit fees are excluded from the finance charge and we took that as a... as a tacit concession that the... the Federal Reserve Board didn't actually do that.

What they said, within the context of section 226.4(c)(2), is that fees, penalty fees, fees for unilateral acts of default, need not be disclosed as part of the finance charge.

And so while we support the Sixth Circuit's decision, this is a finance charge... no matter how you get there, you have to get to that point... alternately, as an alternate basis to support the decision, we realize that the regulation is not necessarily triggered in this instance.

Justice Ginsburg: But that's an argument you didn't make before the Sixth Circuit.

The Sixth Circuit... you told them that this regulation was incompatible with the statute.

Mr. Goldsmith: That is correct.

And I... I have to fall on the sword in that regard, that honestly, until the Government stepped in and helped clarify that issue for us, we did... we were fighting a battle we didn't need to fight.

And ultimately...

Justice Ginsburg: But they clarified it in the Sixth Circuit.

So why didn't you say, oh, Sixth Circuit, we've now seen the light and we... we don't want the regulation declared invalid?

Mr. Goldsmith: I don't believe that the Government clarified that for us in the Sixth Circuit.

What... what clarified it for me was the Government's brief, the merit briefing in this case, where they said, I believe 28 pages into a 30-page brief, if the Federal Reserve Board wants to exclude all over-limit fees, they could, and that's sort of when the light bulb went off.

They didn't.

And that... that's sort of what took us where we are.

And ultimately, I think there's precedent for this Court to review the ultimate basis to support this decision based on making sure that the...

Justice Ginsburg: Well, you used the word review.

We wouldn't be reviewing it.

We would be taking a first view of it.

Mr. Goldsmith: I'm sorry.

Justice Ginsburg: But you didn't... you... we would not be reviewing anything that the court below determined.

We would be accepting a new argument that has not been aired below, and that's not review.

Mr. Goldsmith: I think that in Connecticut v. Door, for instance, this Court acknowledged that there are circumstances that this Court wants to make sure that the right rule of law is handed down.

And if the questions are intertwined, the... the issues that were raised below and an alternate argument in support of the decision is raised before this Court, if it's a matter of importance, if it's a matter that the lower courts need direction on, if it's a matter that has been...

Chief Justice Rehnquist: Usually if we're asked to affirm on an alternate ground, it's a ground that the court of appeals passed on as kind of an alternate ground.

Here, the court of appeals didn't pass on this at all.

Mr. Goldsmith: I agree.

And like I said, I... I believe in the Connecticut v. Door case, this Court acknowledged that alternately we cannot put form over substance, and we need to make sure that the right rule of law is passed down.

And I believe Justice Scalia, as a concurring comment in U.S. v. Burke, said there's got to be play in the joints, that even if it is not something that came to the Court procedurally, if it is something that... that meets the three factors I was enumerating from Connecticut v. Door, the Court will entertain an argument.

Chief Justice Rehnquist: It isn't just a procedural point, Ms. Goldsmith.

We do better if we have an opinion of the court of appeals on the subject than if we're just launching it into... for the first time ourselves.

Mr. Goldsmith: And I would agree, and... and the only defense that I have to that is that this is a matter that has been fully briefed and argued by counsel before this Court.

And when... when the case got taken in by this Court, everyone said to me, you have to remember why they took it in, and... and my understanding is is because the regulation has been challenged.

And...

Justice Breyer: What other argument is there?

Justice Souter: I don't understand.

Justice Breyer: I thought... and I'm just mixed up about this.

I thought that there is a Z regulation.

It's called Regulation Z.

Unidentified Justice: And I thought Regulation Z says the following is not part of the finance charge, a charge for exceeding a credit limit.

Justice Breyer: Now, are we talking about something in this case that is not a charge for exceeding a credit limit?

Mr. Goldsmith: I believe so.

Justice Breyer: What?

Mr. Goldsmith: I think that a fee denominated an over-limit fee that is actually an anticipated cost for approving an extension of credit is in fact a finance charge.

Justice Breyer: Does it say on the paper this is a charge for exceeding a credit limit?

Mr. Goldsmith: I believe they called it an over-limit fee assessment.

Justice O'Connor: All right.

Justice Breyer: And so it's called an over-limit fee assessment and you pay it if you exceed the credit limit.

You don't pay it if you exceed the credit limit, or do you?

Mr. Goldsmith: I think that's a factual question.

I... I think...

Justice Scalia: Oh, okay.

Justice Breyer: Well, what is the answer to the factual question?

Do you pay for exceeding the credit limit or do you not pay it for exceeding the credit limit?

Mr. Goldsmith: I believe the facts of this case... this is not a fee that was imposed for the unilateral act of exceeding a credit limit.

Justice Breyer: Okay.

Justice Scalia: So...

Justice Breyer: It depends, doesn't it, on...

there's a new argument, the first time in this Court, that this is not a fee for exceeding a credit limit.

Was it made below in any form?

Mr. Goldsmith: I believe the allegations of our complaint have always been clear.

Justice Breyer: Oh, yes, but, I mean... that may be.

I'm just asking, have you ever told any court before today that this is not the... I'm not... it sounds sarcastic, but I don't mean it to be sarcastic.

I want to know.

Have you ever before argued in this case, told a judge and... that this is not a fee, quote, for exceeding a credit limit?

End quote.

Mr. Goldsmith: No.

Justice Breyer: No.

Justice Scalia: Ms. Goldsmith, we wouldn't resolve a whole lot in this case, however, if we didn't reach that question, would we?

Mr. Goldsmith: I don't believe we would.

Justice Scalia: We... we'd just have another case a little bit down the line, perhaps with the same parties before the Court, arguing this... this follow-on question.

Right?

Mr. Goldsmith: I believe absolutely.

I think that what we realized is that the arguments that we were making in the court below, which... which we stand by, were premature.

Justice Scalia: If we don't resolve it, we've essentially wasted our time.

What... what... doesn't it depend upon what the regulation means by credit limit?

It could mean that limit set forth in the... in the agreement with the credit card company, past which there is no obligation on the part of the company to extend you any further credit.

It could... it could reasonably mean that.

Indeed, that... that's what I would normally think it does mean.

Or it could mean what you want it to mean, whatever limit the company later places upon your desire to... to go ahead.

Now, why should we accept your interpretation of it rather than the interpretation of the agency?

We usually do accept the agency's interpretation of its own regulation.

Mr. Goldsmith: I don't believe that our interpretation conflicts with that of the Federal Reserve Board.

If... if we look at the plain language of the regulation...

Justice Scalia: We wouldn't be arguing here.

I mean...

Mr. Goldsmith: I believe what the... what the Federal Reserve Board has said is that when you have a fee for a unilateral act of default, that that fee is properly excluded from finance charge.

I believe in the...

Justice O'Connor: Well, don't we have to accept the Government's position?

It's representing the agency, is it not?

Mr. Goldsmith: Absolutely.

Justice O'Connor: So it is the agency position.

Mr. Goldsmith: I don't believe that you will find in the Government's brief an argument that the fee alleged in this case necessarily fits within the terms of section 226.4(c)(2).

In fact, I believe several times, pages 17, 18 of the Government's brief, they talk about how over-limit fees were included as a penalty fee in that portion of the regulation.

That gets us back to the complaint.

Was the fee charged here a penalty fee or was it a fee for an anticipated, approved extension of credit?

Justice Breyer: I didn't think that was the Government's argument in my... as I read it.

I thought there are some words here.

For exceeding a... it says, for exceeding a credit limit.

And as I understood the argument... I might not have perfectly well... is... I thought that their argument is basically when you exceed a credit limit, the company doesn't want you to do it.

Okay?

So it says, no.

And if you do it, we're not going to cancel you out, but we will charge you a penalty.

Now, sometimes it's what you say.

Sometimes the company would love you to do it and get the extra money.

In fact, they might make profits on that.

So they'd love you to do it.

But trying to distinguish between those two instances is too difficult, and because it's too difficult, we are going to have a blanket rule, and the blanket rule is if you fall within these words, exceeding a credit limit, this is not a finance charge.

Now, that's what I understood it to be, a typical administrative agency argument.

And they say Chevron, Mead, et cetera, we win.

Justice Kennedy: All right.

Justice Breyer: Now, suppose let me... for the purpose of answering, please assume that you do have a charge here that falls within the term, exceeding a credit limit.

What is your response to the argument that I just made?

Mr. Goldsmith: I think if we assume that this fee is a fee for exceeding a credit limit, then we need to look at the nature of the fee and determine whether or not that is obviously repugnant to the statute.

And I think part of... of what we have been accused of doing is creating an impossible factual distinction.

Some would be disclosed as a finance charge, some would not.

And I direct the Court to the regulation itself that draws that factual distinction as to late fees.

The... the Federal Reserve Board went out of its way, in both the language of the regulation and the commentary, to say if this is a unilateral act of default, you have paid late or not in the amount that you were supposed to pay and we absolutely did not authorize that, that must... that would be excluded from the finance charge.

But if the creditor acquiesced in that in any way, that is a finance charge.

And what our position is is that a late fee...

Justice Scalia: I mean, you say the agency said this?

Where... where did the agency say that?

Mr. Goldsmith: In both the regulation itself and the commentary.

In the commentary...

Justice Scalia: What... what portion of the regulation says that?

Mr. Goldsmith: That's in 226.4(c)(2) in the portion that says actual unanticipated late payments.

And in the commentary, the... the board has defined actual, and it's the qualification of actual unanticipated goes to the question is this a unilateral act of default or is this something that the creditor acquiesced in.

So our... our point is is that if you look at...

Justice Scalia: I suppose that depends on what... what time period unanticipated refers to.

Mr. Goldsmith: I believe that the commentary helps explain that for us.

Justice Souter: Okay.

Justice Scalia: What does the commentary say?

Mr. Goldsmith: The commentary says if this is truly a late fee because you have paid and the creditor could do nothing about it, then that is going to be an actual unanticipated late fee.

But if this is something that month after month after month you paid late every month and they could be deemed to have acquiesced in that late payment, that must be disclosed as part of the finance charge.

Justice Scalia: Where... where is that in... in your brief?

Mr. Goldsmith: The portion of the commentary... to be perfectly honest, I don't know if the... if the commentary is reprinted in the appendix.

The regulation language is...

Justice Scalia: Gee, if it's that central, I would have thought it ought to have been there.

It's new to me.

Where... where is it?

Mr. Goldsmith: I don't know, Your Honor.

Chief Justice Rehnquist: You don't know what you just said?

Mr. Goldsmith: I don't know where in the appendix it is is what I don't know.

I know that section 226.4(c)(2)... the commentary specifically outlines the fact that there is a distinction between acts of default and... and acquiesced... oh, thank you very much.

What counsel was handing me is the actual C.F.R..

I mean, the commentary that follows C.F.R. section 226.4(c)(2).

What I don't believe is that is reprinted in full anywhere in the appendix or in the briefing.

I thought that's what your question was.

Justice Scalia: Yes, sort of.

I... I'd like to know what it is that you're... you're saying makes your case.

I... I don't have the text in front of me and you say it's nowhere to be found in all of these voluminous materials that we have for this case.

Mr. Goldsmith: I was trying to give an analogy as to late fees which is somewhat tangential to the issue.

What the point is is that a late fee... you have to start with what the concept of an extension of credit is.

And... and we do outline this in our brief, that we're talking about each and every time a consumer seeks to make a purchase, they're essentially saying may I have an extension of credit to cover the purchase.

Justice Souter: May I ask you a question about that?

If... if you are correct in your analysis, why isn't the answer to the problem that you raise here is simply that they are not entitled to charge you any fee at all, no matter what you call it?

Because if I understand your... and I may not, but if I understand your argument, your argument is they agreed to my charging beyond the limit in the agreement as we originally negotiated it.

They said it's okay.

And if that is the case, why isn't your argument and your remedy simply they can't charge me any penalty at all for that?

They agreed to it.

And we never even get into the question that we've got in this case.

Mr. Goldsmith: I think the answer to the question is is that this is really no different than a request to... to... a request to make a purchase below the credit limit versus a request to make a purchase above it.

Either way, they could charge you a fee.

I mean, that's... that's what...

Justice Breyer: No.

Mr. Goldsmith: credit is.

Justice Souter: But if your point... and I think I'm not getting your point, but if your point is that they approved this in the sense that they said, yes, we will honor this... they're telling you in... in effect... we will honor this charge and that that, in effect, is a renegotiation of your credit limit with the bank, then it would follow that they can't charge you any penalty at all.

The only thing they can make you do is pay what you have charged.

And if that's the case, we don't need to get into this... this complicated question about Regulation Z.

Unidentified Justice: All you have to say is, I don't owe you a cent for exceeding the credit limit.

Justice Souter: Why isn't that the answer to your question or to your problem?

Mr. Goldsmith: I think two things.

First of all, we have never claimed that this is a renegotiation of the credit limit.

We have always taken the position that there is a distinction between renegotiating your credit limit and getting an extension of credit that happens to take you over your credit limit.

So that... that's the first issue.

The second issue is...

Justice Souter: So you're saying, yes, it violates the contract, but it's okay to violate the contract because they... they approved in advance this charge.

Mr. Goldsmith: We do not feel that it's a violation of the contract if they allow you to do it.

Justice Souter: Then if it's not a violation of the contract because they allowed you to do it, why do you concede that they can charge you any fee at all for doing that?

Mr. Goldsmith: I'm not conceding that they can charge you a penalty on top a finance charge, but what I'm saying is that anytime a creditor extends credit, they may charge a fee and...

Justice Breyer: Okay.

Mr. Goldsmith: as a credit.

Justice Souter: They may, but in the original contract with you in the... the... at the... at the beginning of your relationship with the bank, they didn't spell out the particular situation that you're describing here.

They said, in... if I understand it, if you go over the limit, we charge you X dollars, and... and that was the extent of it.

You're fighting about whether the X dollars should be classified as a finance charge or something else, but your argument now is a different kind of argument.

Your argument now is they, in some sense, approved my going over the limit.

If that does not change the original agreement, then what difference does it make?

If it does change the original agreement, then why isn't your remedy simply to say you can't charge me a fee at all for going over the limit?

Mr. Goldsmith: I believe what we have always said is that this extension of credit was like any other extension of credit on the card.

Whether Ms. Pfennig goes in 2 weeks before her... her credit limit was exceeded and says, may I have enough credit to make this purchase, and they say, yes, and contractually we know...

Justice Souter: Yes, but your... your argument is that the extension of credit in this case is an agreement to exceed the credit limit.

Isn't that your argument?

Mr. Goldsmith: I don't think so.

Justice Scalia: I thought your argument, Ms. Goldsmith, was that the contract provides that any extension of credit over the credit limit shall be subject to the regular percentage plus the $15 penalty.

Justice Stevens: Right?

Justice Scalia: I mean, you acknowledge that there is an agreement at the outset as to what the finance charge will be for this added extension of credit.

It'll be the regular rate plus the penalty.

Mr. Goldsmith: I don't...

Justice Scalia: If that's not your argument, then... then I think Justice Souter has to be correct.

Mr. Goldsmith: I think at this stage of... of the litigation, since we have not conducted any discovery, we have not seen the actual cardholder agreement to know what it says with regard to over-limit fees.

So I don't think I can answer the question in that regard.

Justice Ginsburg: Didn't... didn't Ms. Pfennig get a copy?

I mean, the... isn't it on her monthly bill?

Mr. Goldsmith: On her bill it will tell her what her contract rate is, but the initial disclosures... I believe she had this card 7-8 years before this happened and it is not in the record.

Justice Ginsburg: I thought... I thought the terms have to be disclosed monthly in addition to when the credit card is new.

Mr. Goldsmith: What has to be... and... and I believe that... that Mr. Waxman explained this, but you have your initial disclosures that come with the card when you originally get it.

What has to be disclosed on a periodic basis is an itemization of each extension of credit that you've received, a total that you've received, plus your... your APR.

Those types of terms of what the cost of credit is on a monthly basis are going to be on your periodic statement.

I believe what... what Justice Scalia's question was is what does the credit card agreement say as to is she going to be charged a flat fee, is she going to be charged a flat fee plus the finance charge, and that is not in the record.

We don't have that.

Justice Souter: And if that's not in the record, how can you make the argument you're making?

Because the argument you're making depends on whether, in effect, the... the agreement is Justice Scalia's suggestion or my suggestion.

And if that's not in the record and you don't know, how do we get into this at all?

Mr. Goldsmith: I think the confusion is coming in because ultimately what is or is not labeled in an over-limit fee may not be a fee for exceeding a credit limit as that term has been used in the regulations.

Justice Souter: And the only way we can tell that is to look at the contract, isn't it?

Mr. Goldsmith: I don't believe so.

Justice Souter: No?

Mr. Goldsmith: I believe that if you look at section 1637(b)(2) that describes how each and every extension of credit needs to be itemized, we're talking about a singular event, an extension of credit.

She says may I make this purchase.

May I have an extension of credit to cover this purchase, and they say yes.

And in everyday experience, we all know that means you're going to be charged something for that extension of credit.

It's going to be charged a finance charge.

Chief Justice Rehnquist: Are you talking about just an ordinary credit card transaction where you go in and say, look, I'm buying a pair of gloves and I want to put them on my credit card?

This you're describing as a request for an extension of credit?

Mr. Goldsmith: Absolutely.

Chief Justice Rehnquist: Okay.

So we're starting back that simply.

Then how did we get so complicated?

Mr. Goldsmith: I'm not quite sure.

[Laughter]

Justice Stevens: Well, one reason it's complicated, if I understand your position, you're objecting both to the fee and to the later statements imposing an interest charge on the fee, aren't you?

Mr. Goldsmith: I think it's triple dipping, yes.

I think that, as Justice Ginsburg pointed out, they... they charge you for the extension of credit.

You get a finance charge on your actual extension of credit.

They impose a penalty fee, and then they charge a finance charge on the penalty fee...

Justice Scalia: If that's in the contract, so what?

A deal is a deal.

If you agree, I pay 10 percent up to this amount, if I go over that amount, I pay 10 percent plus $15, if that's in the contract, isn't that perfectly fair?

Mr. Goldsmith: I think...

Justice Scalia: And you don't know whether it's in the contract.

So you can't say it's unfair.

Mr. Goldsmith: But this is not a breach of contract case.

This is a Truth in Lending Act case, and the only thing the Truth in Lending Act...

Justice Scalia: Whether it is or not, you shouldn't call it unfair if you don't know.

Mr. Goldsmith: I don't recall using the word unfair.

I'm sorry.

I... I believe that Truth in Lending is about disclosure as to whether or not they have to...

Justice Stevens: Could I interrupt with this one question?

I want to be sure I get it out before the argument is over.

Would you explain to me what difference it makes, in terms of notice to the consumer, whether one calls it a... an other charge or a finance charge?

In either event, doesn't the consumer get exactly the same notice?

Mr. Goldsmith: I don't believe so because when it is charged as a flat fee as an other charge, besides the fact that there's interest charged on top of it, the consumer is in a position that they then need to compare cost of credit, one, as a dollar figure, the other as an APR.

And while I believe Ms. McDowell said that the primary purpose of TILA is to create bright line rules for the credit card industry, I think there is significant support, as this Court has stated, that one of the primary objectives is making sure the consumer can understand the cost of credit.

And... and Congress has said we...

Justice Stevens: But why would the consumer understand the cost of credit any better by labeling it a finance charge rather than an other charge?

That I haven't... you haven't explained to me.

Mr. Goldsmith: Because Congress said we want that to be an apples-to-apples comparison.

So Ms. Pfennig can know that the extensions of credit she received up till now were charged at 18.49 percent.

She knows that the extension of credit she received over her credit limit was $29...

Justice Breyer: So how does that work?

I... I exceed my credit by $15.

My colleague exceeds his credit by $42.

Each of us is charged a $15 late fee.

What's the interest rate?

And, of course, there are an infinite number of possibilities.

So I guess I'd get a... a statement that would be every conceivable possibility of how much I go over with interest rates ranging from like .2 percent to 48,000 percent.

So, I mean, how... how is this supposed to work?

Mr. Goldsmith: The simple answer is I don't know.

Ultimately I think the Federal Reserve Board does have to offer the direction of how this will be disclosed, but I think the important thing... and I believe...

Justice Breyer: I think that's why Justice Stevens might have thought it's going to confuse the consumer if you win, not help the consumer.

Justice Scalia: I would think it's much more informative to the consumer to know that my interest rate for all of the things up to the... my credit limit has been this past month so much, and... and then see a separate charge, God, I got socked 15 bucks for going over my credit limit.

You think you're helping the consumer by... by taking that $15 separate charge and just mushing it into the general overall credit limit so that instead of thinking he's being charged 10 percent, he thinks he's being charged 11... 11 percent, and he doesn't know anything about the late... about the... the going over his over limit fee?

I don't think that helps him at all.

Mr. Goldsmith: But I don't believe that that's necessarily how it would be done.

I believe that, Justice Breyer, you had said earlier about how certain... there are instances where certain fees are disclosed differently.

You can have a situation where a cash advance is calculated at a different APR than the contract rate of the finance charge.

An ATM fee might be charged at a different... a different APR than something else.

And those are itemized at the bottom.

You wouldn't necessarily not let them know that this was a charge incident to something over the credit limit, but you would put it in apples-to-apples comparison, which I believe...

Justice Breyer: But, of course, the difficulty for you is all you have to say is that the view I was taking somewhat by argument is a reasonable one, and if it's a reasonable one, I guess it's a reasonable interpretation of the statute.

And therefore, Regulation Z doesn't violate it.

Now... now, you haven't been able to show us how we'd get on the opposite interpretation.

We didn't even know what the statement would look like.

So it's very hard for me to say it's not reasonable what the... what the... that Regulation Z, isn't it?

Mr. Goldsmith: I think that ultimately depends on... on the construction of the regulation.

We... we seem to want to parse out for exceeding a credit limit without looking at the context of the regulation that these are acts of default.

And what we have alleged in the complaint, which ultimately is controlling here, is not an act of default.

So in that instance, the regulation is not triggered and it's premature for us to decide whether or not it was rationally based.

Justice Ginsburg: The one thing that the... the board has said is we don't want these individual to make every extension of credit or what... to do this kind of thing on a case-by-case basis.

That's why we're establishing these categories.

And your interpretation was making the credit card company has to know and every one is going to be a knock-down, drag-out, specific facts of the case.

And that's exactly, it seems to me, what the board didn't want to have happen.

Mr. Goldsmith: And I think that gets back to Justice... Justice Kennedy's question of quite some time ago.

Where I was trying to go is that there is a distinction in the nature of a late fee and an over-limit fee.

And the... the Federal Reserve Board went out of its way to create that factual distinction as to late fees.

And late fees, by nature, are on the periphery of the cost of an extension of credit.

While the total has to be disclosed and your late payment is associated with whether or not you paid toward the total, an over-limit fee by its nature is tied to a specified extension of credit.

May I have this extension of credit, which happens to take me over the credit limit?

Yes, you may, but we are going to charge you a fee for that.

And I think that's the distinction, is that to the extent we have to get to... let's just assume the regulation controls here.

Does it make sense?

Is it rationally based to create a factual distinction as to late fees which are on the periphery of the cost of an extension of credit and not do so for an over-limit fee that goes to the very core of what the finance charge is supposed to disclose?

Justice Ginsburg: Now you're going back to the regulation itself is no good.

Mr. Goldsmith: To the extent that it controls here, which I'm not sure it does, I think yes.

And that... that decision comes down the nature of the fee and whether or not it is so integrally tied to the cost of an extension of credit that it has to be disclosed as part of the finance charge, and we think that it does.

Justice Ginsburg: Ms. McDowell said that... that in dollars and cents, there's no difference to the customer using... there is a dollars and cents difference, I take it, and would you explain what it is?

Mr. Goldsmith: Yes.

With all due respect, I believe she said... may I finish the question?

Rebuttal of Seth P. Waxman

Chief Justice Rehnquist: I think you've answered it.

Mr. Waxman, you have 3 minutes remaining.

Mr. Goldsmith: Thank you.

Mr. Waxman: The question of whether or not we disclosed this fee properly within the regulation was passed on by the lower court.

It is the law of the case.

The lower court held, as the second part of its ruling, that, quote, unequivocally the regulation required us to disclose this fee as an other charge.

Now, Justice Scalia is correct that how you interpret the Fed's bright line regulation which says, at page 2 of our blue brief, the following charges are not finance charges.

Charges for exceeding a credit limit, of course, depends on what credit limit means, and credit limit is a term of art.

Everybody in the industry understands it.

Even the respondent at page 1 of her brief, she says, quote, in the middle of the page, a credit limit represents the amount of credit the card issuer has preapproved the consumer to obtain.

There's no possible allegation in this case that she ever asked for an extension of her credit limit or received an extension of her credit limit.

And there is a reason that the board came up with an absolute bright line rule, and the reason is that before 1980, when Congress mandated classifications in order to simplify things for creditors and consumers, the Federal Reserve Board confronted... confronted questions like many of the hypotheticals that Justice Stevens and others have asked here.

Well, what if... what if they knew that it was going to exceed it and what if somebody actually called and asked permission.

I don't want to be embarrassed in the store.

Will you authorize this?

The board literally... and some of... many of these letter interpretations are cited in the briefs in this case, although not all of them.

The board drove itself crazy trying to answer all of these hypotheticals and came up with a set of letter rulings, exacerbated by the Federal courts also trying to come up with their own interpretations, that made it impossible for issuers to come up with formulaic disclosures that would prevent them from being socked with huge class action awards and allowed them to present information that consumers could compare.

And so Congress said in 1980 we want bright line classifications, and that's exactly what the board did.

In 1980, the board said that it was amending its regulations to, quote, substitute where possible precise, easily applied rules for principles that create ambiguity and...

Chief Justice Rehnquist: Thank you, Mr. Waxman.

Mr. Waxman: Thank you, Your Honor.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The Oyez Project

Featured:

TRW v. Andrews - Oral Argument

Fri, 09 Jan 2009 14:50:25 +0000

Case:

TRW v. Andrews

Media File:

00-1045_20011009-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Glen D. Nager

Chief Justice Rehnquist: Mr. Nager.

Mr. Nager: Thank you, Mr. Chief Justice, and may it please the Court: In this case, the Court of Appeals for the Ninth Circuit held that the statute of limitations on a claim of improper disclosure under the Fair Credit Reporting Act does not commence until the plaintiff discovers her injury, as opposed to the... the date of the improper disclosure.

In doing so, the Court of Appeals for the Ninth Circuit did not parse the language of the statute of limitations that is in the Fair Credit Reporting Act, but rather said that language was not sufficiently expressed to overcome a presumption in favor of a discovery rule that the Ninth Circuit held is read into that statute and all Federal statutes.

Justice O'Connor: When did the injury occur here to the respondent?

Mr. Nager: The... the injury for each alleged improper disclosure would have occurred on the date of the alleged improper disclosure, Justice O'Connor, although some of the damages--

Justice O'Connor: Disclosure to who?

I mean, when... when exactly did the injury--

Mr. Nager: --Well, there were four allegedly improper disclosures at issue in this case.

The first was in July of 1994, and when that disclosure was made, it revealed--

Justice O'Connor: --Disclosure to some third party.

Mr. Nager: --To the third party.

And the first one here was to a bank.

Justice O'Connor: And... and the person injured may never know about it.

Mr. Nager: They... they might not know about it, although the... the way these reporting systems work, if they ever actually apply for credit themselves and they're denied, they will automatically know about it, which of course is what happened to the respondent in this case.

She didn't know about the--

Justice O'Connor: But it... it's a 2-year statute of limitations.

Mr. Nager: --That's correct, and the statute expressly states that the action must be filed within 2 years of the date upon which liability arises.

Justice O'Connor: Is this the type of statute that... that depends largely on private enforcement to implement it?

Mr. Nager: It does have private causes of action.

The Federal Trade Commission, of course, also has authority to enforce the statute through cease and desist orders, through civil penalties--

Justice O'Connor: But in general, I think you would look at this as one that envisions private enforcement.

Mr. Nager: --Absolutely, Justice O'Connor.

We don't dispute that.

But what is does envision is private enforcement within 2 years of the date of disclosures.

That's what the statute expressly says on its face.

It says the action can be brought, but if it's going to be brought, it has to be brought within 2 years from the date upon which liability arises.

And in plain English, as well as under the terms of this statute, if there is liability, it arises upon the date of the improper disclosure.

We know that in plain English, the term arise means come into existence, originate.

And we know under this statute, section 616 and 617, which specify what a defendant's liability can be, the statute equates liability with a failure of a defendant to comply with a requirement of the section.

Justice Ginsburg: What about the argument that the plaintiff isn't harmed... the plaintiff may not be harmed by the disclosure?

So, there may have been a violation of the statute, but no claim for damages, because nothing bad has happened to the plaintiff.

So, you have to wait until something bad happens to the plaintiff.

Mr. Nager: I don't think that's what the statute says, Justice Ginsburg.

The statute says that liability arises upon an improper disclosure.

Justice Ginsburg: Liability for what, if you're not damaged?

Mr. Nager: Well, in this case, the plaintiff sought injunctive relief, punitive damages, and actual damages, as well as, if they prevailed at trial, for attorney's fees.

Justice Scalia: Can you get nominative... a... nominal damages and punitive damages?

Mr. Nager: Well, it's unclear under statute whether you can get nominal damages.

Certainly the statute expressly states that in the case of an alleged, willful violation of the statute, which is what the plaintiff in this case alleged, you can get punitive damages.

And the case law also allows for a plaintiff to seek injunctive relief.

Let me clarify what the injury is, Justice Ginsburg.

Maybe this will assist both you and Justice O'Connor.

What this statute does is... the credit reporting companies have computer databases that compile information about credit reporting histories of individuals.

And it makes that database available to subscribers, banks, insurance companies, and the like.

And a creditor can go onto that database, just like your law clerks can go on Westlaw, and pull off information.

And when they pull that information off, if there weren't reasonable procedures in place to prevent them from improperly pulling information off, that would be an improper disclosure, which would injure the person because it would invade their privacy and reveal confidential information about themselves.

Under State law, they possibly would have a claim for invasion of privacy, or if there was inaccurate information in the database, for defamation of character.

What this statute did was it created a Federal right against improper disclosure in the absence of reasonable procedures of people's credit history.

Justice Scalia: Just out of curiosity, what... what are the statute of limitations applicable to State actions for, let's say, trade liable I suppose?

Somebody gives out inaccurate information about... about the financial standing of a particular person or company.

Mr. Nager: I don't know--

Justice Scalia: How do the statutes run?

Do they--

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

Justice Scalia: --normally run from... from the date of the liable or from the date that... that the person finds out about it?

Mr. Nager: --At the time of enactment of this statute, the... the statutes of limitations of which I'm aware of at State law, ran from the date of the... of the disclosure, not from the date of discovery.

That was typical in the 1969-1970 time frame for invasion of privacy claims and for defamation claims.

And we also know that this statute is one of six titles of the Consumer Credit Protection act, and we know that each of the statutes of limitations in those other five titles run from the date of alleged violation.

Justice Ginsburg: We would have been sure about that if the language in the initial bill, which was the date of the occurrence of the violation... if that language had been used.

Since Congress chose not to use that language, which would have been clear, it seems to me that the phrase that they did use, when liability arises, is ambiguous.

Mr. Nager: Well, I understand the... the point, Justice Ginsburg, but let me make the case for why that's not a correct conclusion to draw from the premise.

It obviously would have been simpler if they had used the language from the date of violation, but they used a phrase that means the same thing.

And when they made the change--

Justice Ginsburg: How do we know it means the same thing?

Mr. Nager: --We know it means the same thing because every time this Court has had a case that has used the term arise, it has said that means the date upon which the event happens, not the date upon which someone discovers it later.

And we know in section 616 and 617 of this statute that liability is defined by reference to the acts of the defendant.

And we also know that there is an explicit exception in section 618, the statute of limitations provision, which does expressly refer to a discovery rule, but it says the discovery rule is applied in the case of a willful and material misrepresentation of a disclosure required by the statute.

And the strong implication from the inclusion of an express reference to the discovery rule and the exception is that the general rule doesn't include a discovery.

Justice Kennedy: Well, our previous cases haven't looked at when liability arises.

Mr. Nager: You're absolutely right.

Justice Kennedy: There's some other noun before the arise.

Mr. Nager: The... the other cases that the Court have said cause of action arises.

Justice Kennedy: Do you think anything turns on that?

Mr. Nager: No, I don't.

And I... I would point you to the Court's decision in the Bay Area Laundry case, which was dealing with the Multi-Employer Pension Plan Amendments Act.

That statute, like that statute, although it used the phrase, cause of action arise, had a 6-year limitation period from the date the cause of action arose or, alternatively, 3 years from the date of discovery of the cause of action.

And this Court, looking at the primary statute of limitations provision, said that reflects the standard rule of statute of limitations law, that the statute of limitations commences when the cause of action is complete, not upon discovery.

Justice Kennedy: Let... let me ask you.

The case is a little bit difficult because we're not quite sure of... of the boundaries and dimensions of the negligence cause of action that was alleged here.

And I assume you're, of course, contesting liability.

I... I take it you... you do concede you must concede, because of the statute, that there is a general duty on the part of the reporting agencies and TRW not to be negligent in the performance of its statutory obligation.

Mr. Nager: Yes.

Justice Kennedy: So, we can, I guess, then consider the case based on a supposed cause of action where there is negligence and there is injury.

Mr. Nager: Yes, Justice--

Justice Kennedy: Even though in this case, I'm... I'm sure you would contest it.

You would say there was no negligence.

Mr. Nager: --That is correct.

The Court can also assume, since these are the allegations in this case, for purposes of considering this issue, you could consider that the failure to maintain procedures was in fact intentional because they've, in fact, proceeded under the... under the provision of the statute which prohibits intentional noncompliance with the statute because they've alleged a right to punitive damages and an intentional noncompliance with the Ninth Circuit remanding this case to the... to the trial courts.

The claim is not barred by the statute of limitations, and they should have the right to proceed on their allegations, including their claim for punitive damages.

So, you could consider under either section of the statute.

We would say, as they themselves conceded in their briefs to the Ninth Circuit, they said Mrs. Andrews was per se damaged when her privacy was invaded by the disclosures.

Now, they've made an actual damages argument in this Court.

That's not the argument they were making in the court below.

What they were saying in the court below is what would be assumed from their complaint and would have been assumed in any action at common law where someone was alleging invasion of privacy or defamation, that their injury occurred upon the date of the alleged improper disclosure, although they may have suffered some additional damages or more damages or all of their damages at a later point in time.

Justice Souter: But you're saying in that respect it's just like common law defamation.

The minute the... the defamatory statement is out, your... your injury is... is complete for purposes of a cause of action.

Mr. Nager: For purposes--

Justice Souter: That's your only point there.

Mr. Nager: --That is correct.

Let... let me move for a second and... and explain why the Ninth Circuit's importation of a discovery rule into this statutory scheme makes little sense.

It's in the nature of this statutory scheme and the subject matter that it's dealing with that the claims that this statute can give rise to become stale very quickly.

The reason is, is all of the information that's critical to presenting one of those claims is not in the hands of the plaintiff.

It's either in our computer database or in the records of the creditors who in the crediting reporting agencies give the information to.

And that's why when Congress passed this statute, it said that there were going to be certain disclosures that it was going to require either the credit reporting agencies to make or the creditors to make.

But it also specified, because of concerns about the burdens of record keeping, quite finite periods of time by which those records would have to be kept.

So, at the time the statute was passed, a credit reporting agency only had to keep a list of who a disclosure was made to for 6 months, and now, as amended in 1996, they only have to keep it for a year.

And at the time the statute was passed, there was no requirement placed upon a subscriber to our database, one of the creditors, for any time period they had to keep their own records.

Now, in 1976, the Equal Credit Opportunity Act was passed, and the Federal Reserve Board promulgated regulations requiring that a creditor keep records of any action it takes to deny credit for up to 25 months.

But the fact of the matter is, because of... of the enormous amounts of information that are retained, the record retention policies of credit reporting agencies and creditors, pursuant to guidance received from the Federal Reserve Board and the Federal Trade Commission... record retention... we... we get rid of those records at the end of 2 years as a credit reporting agency, and the banks get rid of them after 25 months.

So, the claims--

Justice Kennedy: I don't understand.

You mean if I apply for credit and TRW checks me out, they're only interested in the last 2 years?

Mr. Nager: --The underlying credit information is preserved, as long as it's not negative, forever.

If it's negative, the statute prohibits the credit reporting agencies for retaining it for more than 7 months.

But remember what the... the claim is is an improper disclosure.

So, what you have to know is, is who was the information disclosed to and when.

And this... the... that's a separate data field.

And under the statute, that list has to only be maintained for a year after 1996 by the credit reporting agency.

So, the only way to find out that a disclosure has been made is either within a year... or we actually keep it for 2 years because, in the case of an employment application, you have to keep it for 2 years, or from the creditor, and they only keep it for 25 months.

What that means is, is that claims that aren't discovered within 2 years that would be preserved under this statute... the underlying records that would... would reliably prove whether a disclosure has been made and contained an inaccuracy won't exist.

Chief Justice Rehnquist: Well, but if we affirmed the Ninth Circuit, you might change your policies, might you not?

[Laughter]

Mr. Nager: No.

As a matter of fact, Mr. Chief Justice, I don't think we would.

And the reason we wouldn't is... for example, California has already, under its State consumer code, changed its statute of limitations to be a discovery rule, but the credit reporting agencies haven't changed.

And the reason is we... we have no desire to facilitate the bringing of causes of action.

And I'm going to be honest... candid with the Court about it.

And the information is expensive to retain.

So--

Justice Ginsburg: How many other States have changed the way California has?

Mr. Nager: --I don't know the answer to that question, Justice Ginsburg.

I do know from my client and partners who practice in this area regularly that their impression is no State has a statute of limitations that is longer... I'm sorry.

No... no State has a record keeping requirement that exceeds the Federal record keeping requirement.

Justice Ginsburg: But one of the arguments you make, if I remember correctly, was the Ninth Circuit is... is a large area, so we... whatever they say is going to govern for the Nation because we can't keep our books one way for California and another way for someplace else.

But California is a pretty large State.

If... if you're saying, well, California has done it, it doesn't bother us, we go our merry way, why wouldn't you do the same thing under the Ninth Circuit's decision?

Mr. Nager: Well, we would go... in response to the Chief Justice's question, as long as the Federal law or State law doesn't require us to keep the records any longer than the present 1-year requirement, we're not going to keep the records for any longer--

Justice Ginsburg: So, then this... this... whether it's a discovery rule or whether from the date of the violation doesn't matter, as far as your record keeping is--

Mr. Nager: --As far as the record keeping.

What I would suggest is it would leave the courts and our clients... to the extent that claims are asserted after the records are gone, it will be left... we will be left defending against claims that are based upon quite unreliable evidence, and the courts will be left adjudicating claims that are based upon quite unreliable evidence because the underlying documents won't exist.

And the reason that I would like to make that point to the Court, Justice Ginsburg, is because the very most fundamental purpose of a statute of repose... of the repose aspect of a statute of limitations is to prevent society and its courts from being burdened with claims that can't be reliably proved.

And--

Justice Stevens: --But that's an argument that you really save those records; you shouldn't throw them away.

Mr. Nager: --No, I don't think so, Justice Stevens, because no one disputes in this case what Congress contemplated in the record keeping requirements.

And my point to the Court--

Justice Stevens: No, but I'm talking about your exposure to State cause of action where they have a discovery rule that your exposure runs beyond the 2 years.

Mr. Nager: --The... the--

Justice Stevens: And it seems to me you would have an interest in keeping records that would disprove unmeritorious claims.

Mr. Nager: --Well, the... the... I think the answer to that is... is no.

Justice Scalia: Except that they would also prove meritorious claims.

Mr. Nager: That's... that's true.

Justice Stevens: Well, that's right, and the question is which... which is the greater number.

[Laughter]

Mr. Nager: And I think the... the... I can't tell you that I have actual empirical information, and my client would tell you that the number of inaccurate disclosures is de minimis relative to the number of accurate, proper disclosures.

That's why we maintain reasonable procedures.

But I can tell you this... and I think this is the issue in this case... is... how long did Congress contemplate that we would keep those records for, and what statute of limitations did Congress correlate with those record keeping requirements?

Because when asking what could Congress have intended through this statute of limitations rule, when it only said that we had to keep the records for 6 months in 1970 and for a year in 1996, it couldn't possibly have been contemplating that it would create a statute of limitations that would produce unreliable claims for the court, that the more... much more--

Justice Ginsburg: But the statute of limitations I thought was 2 years.

Mr. Nager: --The statute... yes because the--

Justice Ginsburg: So, that's more than 7 months or a year.

Mr. Nager: --It understandably gives the plaintiff some time to commence their lawsuit.

Justice Ginsburg: Even though you can say, we don't have the records after whatever is... the... the time periods... the statute of limitations is longer than the required record keeping.

Mr. Nager: That's correct.

Justice Ginsburg: But there's nothing that prevents you from keeping the records.

Mr. Nager: Nothing other than lots of expense.

Justice Ginsburg: Do we... we do have a Federal agency in this picture, the FTC.

They know something about credit.

Do we owe them any kind of respect?

Mr. Nager: I... I think the answer is you plainly do not owe them deference in the Chevron sense because they don't have rulemaking power and they're not the only agency charged with that administration of this statute.

And I don't think that you owe them Skidmore level respect because the fact of the matter is the first time they've articulated this position is in their brief in this case.

They don't address the language of the statute other than to say, well, other words in other statutes have been... haven't foreclosed the importation of a discovery rule, and so perhaps it would be appropriate for the Court to import one here.

And we would suggest to the Court that the language of this statute is very clear.

It may not be perfectly clear, Justice Ginsburg, but the phrase, liability arise, has a plain English meaning, which corresponds very naturally with the liability provisions of section 616 and... and section 617.

And the overwhelmingly strong negative implication of the misrepresentation exception, which has an express reference to a discovery rule... and as you noted, Justice Ginsburg, both the Senate and the House bills had a date of violation language.

And the conference committee report, which changed that language and added the misrepresentation exception, commented that its action was taken only for the purpose of adding the misrepresentation exception, not for changing the underlying meaning of the basic statute of limitations--

Justice Kennedy: And... and the... at common law, as I recall, I think under California statute in defamation actions, the statute began to arise from the date of the statement, from the date of the defamation.

Mr. Nager: --That's correct.

Justice Kennedy: And I assume that one rationale for that was because if the injured party doesn't discover the statement for... for 2 or 3 years, it's necessarily diminished and any remediation is minor.

Is... is... and assume that is the rationale.

Does that apply to you or not?

Does... does the fact that the erroneous credit information was given 2 or 3 years ago in most cases diminish its... its injurious nature?

Mr. Nager: I think that in some--

Justice Kennedy: I'm not sure I can say that.

I'm... I'm just trying to think--

Mr. Nager: --With respect to just a pure improper disclosure, it may.

I'm not sure I know the answer to the question.

What I can say... and I think this may not answer your question, but I think it's important for you to know... is that if a case of identity theft has occurred here, the... our individual consumer who isn't aware of the disclosure... they will find out.

They may not find out in a month.

They may not find out in 6 months, but once the... a report is issued in a false... to... to a person who isn't the consumer, if... if the consumer later applies for credit and they're denied credit, they have to be told by the creditor that denies them credit why they're denying them credit and where they got the consumer credit report from, and then they can go check on our database as to what actually is on the database.

Justice Souter: --But I take it what's implicit in your argument is that if they are not given notice that they have been denied credit within 2 years, chances are not very great that they're going to get that notice after 2 years.

Isn't that--

Mr. Nager: No, no.

They may because they may not apply for credit within 2 years.

Justice Souter: --Well, I know.

But in terms of probabilities, isn't... I... I thought that's what you were assuming.

Mr. Nager: No, no.

What I'm... what I'm suggesting to the Court is that there are improper disclosures that might not be discovered within 2 years.

But if there is a disclosure which adversely impacts an individual's credit rating and their desire to obtain credit, they will find out about the fact that their credit has been impaired when they do apply for credit, whether it's within the 2-year period or not.

Now, they won't know, because the records won't exist any longer, who that credit information... what other creditors that... that information was given to, but the underlying data about... will be in the database about what their credit is and why their credit is being adversely impacted.

That... that was the point--

Justice Souter: Well, I know.

But going back to Justice Kennedy's question, I mean, you're saying that there certainly are going to be cases in which the 2 years will have passed and then specific injury will arise.

Mr. Nager: --And they'll have a claim about that specific injury if the specific injury is in year 3 I was denied credit, because in order for that credit to be denied, there's going to be a new credit report that's requested.

That will be a new disclosure, and if the new request for credit is denied because of something in the credit record reflecting the... the fact of earlier multiple applications for credit that have been denied, they have to be told that and they have to be told who gave it to them.

That's what I'm saying.

If you look at the claims in this case, the two claims that are subject to this Court's review right now are the oddball claims.

They're the improper disclosure claims, not the inaccuracy claims.

There's no doubt the respondent had a... had the... found out within the 2 years and thus had the ability to timely bring a claim about when she was actually denied credit herself.

That was the point I was trying to make.

Justice Breyer: What happens to a person, if you're right, who finds out 3 years... 3 years later she's denied credit, and the reason was because 3 years ago the company Sears got a report that had all kinds of incorrect information in it or whatever?

Is that person without any remedy totally?

Mr. Nager: I'm not sure I--

Justice Breyer: Well, happens is--

Mr. Nager: --She finds... she finds--

Justice Breyer: --Let's suppose--

Mr. Nager: --When does she apply for credit?

That's--

Justice Breyer: --She... in year 1 you do a credit report.

You have 19 things you're not supposed to disclose: old arrest records, old bankruptcy records.

You do everything wrong.

All right.

You send it off to Sears.

She doesn't actually apply until year 8 to get credit from Sears.

Sears goes to its files, looks up this old report, says no credit.

Now, does she have any remedy at all?

Mr. Nager: --If she applies in year 8, she'd have a... a remedy for the credit that she was denied in year 8.

She--

Justice Breyer: She can sue who?

She can sue you?

Mr. Nager: --She could sue the... the credit reporting agency for inaccurately disclosing.

If I'm understanding you correctly, there's a new report that's issued.

Justice Breyer: The... your... your client deals with Sears in year 1.

Justice Scalia: He didn't say there was a new report.

Mr. Nager: Oh, I'm... I misunderstood.

If there's not--

Justice Breyer: In year 1 and they never see Sears again.

In year 8, the credit is denied.

Is there any remedy for the person who was denied the credit?

Mr. Nager: --In the absence of a willful misrepresentation, not... not under this statute.

Justice Scalia: It's unlikely, of course, that Sears is going to be using an 8-year-old report without asking again, and you'd probably give the same information again.

Mr. Nager: It's almost inconceivable that they wouldn't ask again, and it's also probably slightly less inconceivable but still relatively inconceivable they would still have the records because it's in their interest and I'm sure they have the record retention policies to abandon them as well.

Thank you, Justice Scalia.

Let me move quickly to the presumption that the court of appeals applied.

It's... it's wrong and it's wrong for two reasons.

First, insofar as they--

Chief Justice Rehnquist: What... precisely what presumption is it you're talking about?

Mr. Nager: --I'm sorry, Mr. Chief Justice.

The Ninth Circuit in this case said that in the absence of an express statement by Congress, it would imply a discovery rule into this statute... into this statute irrespective of the particular words this statute chose to use.

And so there's a basic... there are two aspects to the Ninth Circuit's ruling.

One is that a default rule will be a discovery rule, and secondly, that they'll apply that default rule in every case under every Federal statute unless the statute expressly refers to discovery for the basic statute of limitations rule.

With... with respect to the... their clear statement rule, this... neither this Court nor any other court of appeals that I'm aware of has equated a statute of limitations with a retroactive law with a waiver of sovereign immunity, or with any of the areas of law in Anglo-American jurisprudence where this Court has said that it will require a specifically clear statement from Congress in order to accept the proposition that Congress had a particular intent.

All of the courts of appeals that have embraced a discovery rule as a default rule have said in the silence of Congress, not in the ambiguity of Congress.

Justice Ginsburg: So, you're not asking us to say, no, there's no discovery rule.

But what you're saying is you can find Congress otherwise intent... intended from something that's not an express negation.

Mr. Nager: Our primary position in this case is that this statute, when you look at the term, liability arise, when... when the Court looks at the misrepresentation exception, when it looks at the definitions of liability in sections 616 and 617, the only reasonable construction of this statute is that the basic statute of limitations rule is the traditional complete cause of action.

Justice Ginsburg: But... but all that the Court must do to hold in your favor is to say you've got an express misrepresentation exception.

Then that's it.

Mr. Nager: That's correct.

We would also say if the Court chose to decide what kind of default rule should be applied in... in this... in this case or in Federal cases generally, that the Ninth Circuit's opinion vastly overstates the support and authority for using a discovery rule as a default rule.

This Court for 150 years at least has said that the traditional rule is the complete cause of action rule.

This Court has made exceptions to the complete cause of action rule in the cases of fraud, in the case of the Federal Employer's Liability Act, and in... in the context of medical malpractice claims in the Federal Torts Claims Act.

But both... in Kubrick, dealing with the Federal Torts Claims Act, both the majority and the dissent in that case said that the general rule is an injury rule, not a discovery rule.

And as Justice Stevens pointed out in his dissent, an injury rule would be the thing that makes the most sense in the commercial context and the debate in that case was simply about in the peculiar context of medical malpractice claims, what should the discovery... the United States in that case didn't contest that... that a discovery rule shouldn't apply.

And the question was what kind of discovery rule should apply.

Now, it is true that a number of... of courts of appeals... and, Justice Ginsburg, when you were on the D.C. Circuit, you wrote one of the opinions... said that in the late 1980's in the wake of Kubrick, a number of Federal courts of appeals had, in fact, adopted discovery rules as default rules in... in statutory silence.

I would suggest to you that... that Congress has written reams of United States code against the traditional rule, not against the discovery rule, that once you enter into the debate... into the notion of using a discovery rule as a default rule, you run into exactly the kinds of problems that the Court faced in Klehr and in Rotella where then this is, well, which discovery rule do we use now?

Is it--

Chief Justice Rehnquist: Thank you, Mr. Nager.

Mr. Nager: --Thank you, Mr. Chief Justice.

Argument of Andrew R. Henderson

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

Mr. Henderson: Thank you, Mr. Chief Justice, and may it please the Court: Looking at the statute at issue, there are two parts to it.

The first part is the main part that provides that under the Fair Credit Reporting Act, the 2-year limitation begins when liability arises.

Justice Kennedy: I... it is quite correct for you to begin with the statute, but just a carryover of the very last point.

The Ninth Circuit was wrong, wasn't it, when it said the general Federal rule is that a Federal statute of limitations begins to run when a party knows or has reason to know the injury?

I mean, that's... that's just not the general Federal rule, is it?

Mr. Henderson: That... that is the rule that's been adopted by many circuit courts of appeal around the country, in Cada and in the Connors case.

Justice Ginsburg: Including the D.C. Circuit.

Mr. Henderson: That's correct.

Justice Ginsburg: Yes.

Justice Kennedy: But it's certainly not the rule of this Court, is it?

Mr. Henderson: I don't know that it's the rule of this Court.

That's what we're here to answer today in part.

Justice O'Connor: Well, it's not what we said in Holmberg.

That was a much more limited case--

Mr. Henderson: Holmberg--

Justice O'Connor: --than the Ninth Circuit gave it credit for.

Mr. Henderson: --That's correct, and I... and I'm not here to defend the articulation of the judgment by the Ninth Circuit.

I... I believe that the judgment was correct, but for reasons that can be much better explained.

Justice Kennedy: But I sidetracked you on the statute, and I think that is the right place to begin.

Mr. Henderson: Thank you.

And there are the two parts.

The first part is the liability arises language, which generally applies--

The second part is an estoppel provision, and a very liberal one at that, in that it calls for a complete renewal of the limitations period, not merely suspension, which is the normal rule at Federal law.

So, it is a very liberal estoppel provision enacted by Congress that should in no way derogate the application of the normal provision, the liability arises language.

Justice Kennedy: That to me is one of the hard parts of this case.

It's not quite expressio unius, exclusio alterius, but it's close.

And Congress did consider whether or not the... the rule that the statute begins when the injury arises ought to be modified and it did modify it for a misrepresentation but not otherwise.

And that's, it seems to me, a very difficult problem for you to overcome.

Mr. Henderson: Well, Justice kennedy, I believe that when you consider the misrepresentation exception, what... what it is is it is a very additive provision that says that if there is an intervening misrepresentation by a credit reporting agency, during the running of a... of a normal limitations period, then there is complete renewal upon discovery of that intervening misrepresentation, not merely suspension, which is the normal Federal rule, as this Court has recognized, at least members of this Court have recognized, for example, in Jordan Chardon v. Soto in 1983 in the dissent.

But the... the fact that Congress went out of its way to say if... if this particular type of... of egregious misconduct arises, which is not the normal misconduct that the statute is meant to address, but this particular new type of egregious misconduct arises, then we're going to have a complete renewal when that is discovered.

That really is an--

Justice Ginsburg: Where does this statute say this during thing?

It just... you put a lot of words into it, but all that it seems to say is that... that if there's a misrepresentation, the statute doesn't run.

Period.

Mr. Henderson: --No.

It says that the... that the limitations period shall begin from and shall run from... for 2 years from the discovery of the misrepresentation.

Justice Ginsburg: Why don't we take a look at it?

Where is this provision that--

Mr. Henderson: It's shown on page 1 of the blue brief, for example.

And it's... it's a very long provision that takes up the bulk of statute at issue.

Justice Stevens: --It does but still is an exception from the basic prohibition.

Mr. Henderson: It... it uses the word except, but it is clearly an additive provision that... and the odd thing about this is that the four courts of appeals that have misconstrued the statute in my view have looked at this and have said, that which is clearly additive should be read so as to subtract from the main provision in... in a substantial way.

And it makes no sense that when Congress intended to simply add something, that is clearly for the benefit of consumers, and that provides 2 full years upon the discovery of an intervening deception, should how... somehow be read to truncate the normal provision.

Justice Breyer: Well, the reason that I think I'm having such difficulty with it is because on your theory, the statute doesn't begin to run till discovery anyway.

So, you have to imagine a case where the only way... the thing didn't begin till discovery.

Then this proviso is supposed to be doing some work?

What could it be?

I mean, it seems you have to think of very weird cases, very unusual cases before you could imagine a situation where the proviso would serve any function at all on your theory, which is it doesn't run till discovery anyway.

Mr. Henderson: Justice Breyer, they are discovery of two different things.

Just as, for example, the Seventh Circuit's Cada decision, which was written by Judge Posner, clearly makes a distinction between the injury discovery rule, which is an accrual rule, and equitable estoppel, which... which is used normally to suspend the running of a statute of limitations after it has begun, well, the injury accrual rule has to do with the discovery of the injury commencing the limitations period.

Equitable estoppel has to do with discovering the deception or the wrongdoing on the part of the--

Justice Breyer: That, of course, is true, but it's very hard to see how a... a deception could be a material deception where the person is fully aware of the underlying liability.

Mr. Henderson: --Fully aware is correct.

Justice Breyer: Well, and if he is not fully aware on your theory, the underlying statute didn't begin to run.

Mr. Henderson: That... I beg to differ, Justice Breyer.

It's... full awareness is the kind of full awareness that the dissent in Kubrick argued for, which is full awareness of all the elements, including the breach of the duty.

We do not argue that the breach of the duty need be discovered--

Justice Breyer: Strike full aware.

Mr. Henderson: --I'm sorry?

Justice Breyer: I'm looking for the example on your theory of the case and at the heart of the statute which has to do primarily with two things.

You've got to have reasonable procedures, et cetera, when you have your agency, and then in the few cases, comparatively, where somebody wants the information about them, you have to give it to them.

Okay?

That's basically what it's about.

That heartland of the statute on your theory... it's hard for me to find examples that would be significant in number where this proviso would be doing any work.

Now, that's my problem, and you can respond to that by giving me obvious examples where it would be.

Mr. Henderson: Gladly, Justice Breyer.

The best example would be the facts in this case, and I'll add some facts to show you how the misrepresentation exception would work.

The facts in this case are that the plaintiff's privacy was breached four times between July 1994 and January 1995, and she had no reason to know that until she went to apply for credit in the normal course of her business in May of 1995.

Now, immediately upon--

Justice Scalia: And had no cause of action before then.

Mr. Henderson: --She had no cause of action because she had not suffered any injury as a result of these completely latent privacy breaches, and in fact, she could have gone to her grave never knowing about them.

But because she went out and applied for credit, she found out about them, and she immediately asked for and received her... a consumer file disclosure from TRW, the defendant.

Now, TRW, the defendant in this case, did not misrepresent any facts, did not, for example, conceal those four privacy breaches.

Had they done so, however, had they sent back to here a letter, in which they had concealed the four privacy breaches, then she would still be perhaps... well, she might not even be aware of the injury at that time, but she would certainly... the... the misrepresentation exception at that point in time would be invoked if, in fact, the misrepresentation--

Justice Breyer: But what you just swallowed... the words you just swallowed are my problem.

If those misrepresentations were material, then she wouldn't have discovered the underlying harm anyway.

So, you wouldn't have needed the proviso on your theory of the case.

Mr. Henderson: --Well, there may be... there may well be other misrepresentations that could be made by a credit reporting agency, however, that was... that went to the... their... that were material to their liability, and the fact that... that they might not--

Justice Breyer: But those were the examples I was looking for.

You see?

That... you put your finger right on where I'm having the problem.

Mr. Henderson: --Well, perhaps they could give a misrepresentation to the effect that the Federal Government requires us to use the procedures we use, and they've been deemed reasonable by the Federal Government or in some other way reasonable--

Justice Ginsburg: Mr. Henderson, you have, from I think your answer to Justice Breyer, pretty well indicated that there would be, even under your view, a large overlap where you'd never get to the misrepresentation exception because the claim never arose in your... in your view of the case.

You stopped yourself in the middle of your answer to him and gave an answer that suggested that the claim wouldn't accrue anyway.

So, you'd never get to the misrepresentation exception.

And... and I think that a lot turns on that.

So, I would like you to give... I have exactly the problem that Justice Breyer has.

I couldn't think of something that wouldn't be covered by your main rule, which is nothing... no liability arises until the person suffers the injury, knows that she's suffered the injury.

Now, give me an example where she knows she suffered the injury and would have the benefit of the misrepresentation exception.

Mr. Henderson: --As I sit here, I'm trying to come up with one, but I think that any misrepresentation by the credit reporting agency in response to a consumer demand--

Justice Ginsburg: But you had time when you wrote your brief to think about this.

Mr. Henderson: --yes.

Justice Ginsburg: And if... if the misrepresentation exception is superfluous on your reading of the statute, that is a powerful reason for us not to agree with you.

Mr. Henderson: No, I don't believe it's at all superfluous any more than I believe equitable estoppel is superfluous from the injury discovery rule.

Justice Ginsburg: Well, then give us a concrete example where it would have any work to do.

Mr. Henderson: Well, I... I believe that, for example, if a consumer were to inquire of a credit reporting agency saying give me everything in your file, which includes all the credit accounts, all the disclosures for up to 2 years for employment purposes and lesser amount of time for other reasons, and if there was any disclosure in there or any representation in there by the credit reporting agency that was intended to deceive the... the consumer about the... about the extant liability, then it could be, for example, as I said, a... a... some message from the credit reporting agency saying that we are... we are required by law to have the procedures we have or to do that which we did, which would be a falsehood and intended to deceive the consumer from bringing a claim for... for... to determine whether or not the procedures were, in fact, reasonable.

Justice Souter: Yes, but if there were anything wrong in what it disclosed to her, presumably the consumer would know, and that would start the period running.

And there would be no need for the consumer to invoke the exception.

Mr. Henderson: How would the consumer know that the misrepresentation is--

Justice Souter: Well, I assume it's a misrepresentation about the consumer.

Mr. Henderson: --It would be a misrepresentation about the behind-the-scenes activity of the credit reporting agency.

Justice Souter: Well, if the... if the behind-the-scenes activity of the credit reporting doesn't, in fact, result in a misrepresentation about the consumer, where is there going to be any cause of action ever at any time?

Proviso or no proviso.

Mr. Henderson: Are you talking about a misrepresentation to a user of the credit report?

Justice Souter: A false... false statement about the consumer in a matter that would be material to a decision to extend credit to the consumer.

Mr. Henderson: I think you're confusing a misrepresentation made to a user of a credit report from a misrepresentation made to the consumer who inquires of a credit reporting agency.

Justice Souter: But doesn't... I guess what I was assuming was that when the consumer inquires, the consumer is told all those facts which are in the credit reporting company's file which bear on the consumer's credit worthiness which are the sorts of things that the... that the credit rating service discloses when a credit inquiry is made.

Am I wrong about that?

Mr. Henderson: They should be the same given... except that there might be differences in time.

Justice Souter: Well, is there any reason to... I mean, I... I'm not following you.

Are you saying that in some cases they won't give the consumer the entire file?

Mr. Henderson: They... that's the problem.

That's what Congress was intending to address.

The way it's set up is that, for example, if I apply for credit and it's denied, the credit... the creditor, potential creditor, is supposed to notify me that it was based on a report from, for example, TRW.

I am then put on notice--

Justice Souter: Okay.

So, you're saying that if the credit reporting service lies to the consumer when the consumer says, tell me what you've got and who you've been telling, then the proviso would have some work to do.

Mr. Henderson: --Exactly.

Justice Souter: Okay.

Justice Breyer: Why?

Why?

I mean, the... I still don't see it.

Maybe you need an example.

My simpleminded thinking of it is the consumer... the credit people make a misrepresentation.

Mr. Henderson: To whom?

Justice Breyer: To the consumer and it's either material or it isn't.

If it is material, that must be because, at least in most cases, it's hidden, some fact that is relevant to showing liability, in which case you don't need the special exception because the person didn't know all the facts.

They hadn't discovered it.

Or it's not material, in which case it doesn't fall within the exception anyway.

Now, that's my simpleminded thought, and what I started with and I think I'll continue with is you produce an example that proves my simpleminded thought is simplemindedly wrong.

Mr. Henderson: And let me give you one.

For example, if in the initial credit report that's given out that is erroneous to a user, there are trade accounts that do not belong to the consumer, they belong to someone else and they are negative trade accounts, and yet... and on that basis the... the user writes to the consumer and says, you don't credit, we've got a credit report from TRW, and on that basis we're denying your credit.

So, the consumer turns to TRW and says, please give me a credit report, and they look at it and they go, oh, there's all this derogatory information in there that does not belong to this consumer, let's get it out of there and give it to the consumer.

So, they take out these... these trade lines that are derogatory and... and in so doing misrepresent information to the consumer in such a way as to be material and to deceive the consumer such that the consumer is then misled about the status of the files.

And... and presumably all this is done with the intent of deceiving the--

Justice Souter: Yes, but under your theory, the consumer is never put on notice.

Justice Breyer: Yes.

Because the question is simply this.

Imagine there were no proviso.

Think of the example you just gave.

Are you going to admit on your theory that the statute began to run against your consumer, or are you going to say, of course, it didn't run?

He didn't discover what was going on.

Mr. Henderson: --I think under--

Justice Breyer: Which are you going to say?

Mr. Henderson: --under the injury discovery rule or the actual injury occurrence rule, either one which we favor, the injury occurs when the credit is denied, and then immediately thereafter the consumer is put on notice.

Justice Breyer: All right.

I understand.

Mr. Henderson: And so, yes.

Justice Kennedy: It is true, though, that under what I think is the prevailing rule in most circuits at least, there would be an equitable estoppel there, and the statutory proviso need not have covered that unless it meant to indicate that there was a... an injury-based statute of limitations.

Mr. Henderson: Well, I think the... it's true that the equitable estoppel might apply even if they had not added the misrepresentation exception, but as members of this Court have recognized, for example, when... when this Court declined the opportunity to apply a Federal rule to class action in civil rights cases, that the general rule under Federal law is suspension not renewal, which means that normally you would just toll the running of the limitations period for such amount of time as there is... as there is a deception in place.

However, Congress went out of its way to say that's not the rule here.

We want complete renewal.

We want 2 full years of unadulterated knowledge in which to go about considering whether to bring a claim.

And it... and it's odd to think that the Congress would want that 2 full years in the situation where a... when a misrepresentation had sprung up but not allow the same 2 full years in the normal case after discovery of an injury.

Justice Scalia: Mr. Henderson, your... your response to Justice Breyer's question leaves me with... with some confusion as to what you mean by injury discovery rule.

I assumed it meant at the time the consumer knows, one, that he's been injured, number two, by the defendant.

And the example that Justice Breyer was given, you say it's enough he just knows he was injured because he was denied credit.

Is that the rule you want?

Mr. Henderson: Well, this Court in Kubrick seemed to settle upon an injury and causation accrual rule, but I believe that--

Justice Scalia: And causation.

And... and you don't... it's enough that he knows he was denied credit and... and the statute runs then even if he doesn't know that the reason he was denied it was... was the... the inaccurate reporting.

Mr. Henderson: --Based on my understanding of the law that has developed in the courts of appeals in Cada and Connors, that it is... injury alone is enough to set the... to set the plaintiff on a course of diligence towards the potential presentation of a claim.

I think obviously the injury and causation accrual rule is... is more liberal and more fair in many ways.

It's the rule in Germany, for example.

But... but--

Justice Scalia: It destroys... it destroys the exception, so you don't want to use it here.

Mr. Henderson: --But if I could, Your Honor, I want to just talk also about the actual injury occurrence rule.

In Hyde v. Hibernia National Bank in 1987, I believe it was, the Fifth Circuit looked at this statute and said in the case of negligence violations, you have an actual injury occurrence rule.

In the case of willful violations, you really need to discover the fraud.

It was somewhat of a... an elegant theory that... that was derived by the Fifth Circuit, but it's been argued throughout this case at all levels, in the district court.

In fact, in the petition at page 24a is a discussion of... in the appendix at page 24a is a discussion of Hyde v. Hibernia National Bank.

Justice Scalia: Why isn't the release of... of confidential information an injury?

That... that does not count as an injury.

Mr. Henderson: I don't believe so.

If it is an injury, it is the most metaphysical type of injury, such as underground trespass where some mining company burrows beneath someone's land that is, by its very nature, undiscoverable, unnoticeable.

And if it is an injury, it is so metaphysical and so unreal that it cries out for the application of the injury discovery rule, which by the way, does not require actual discovery in all cases, but can also be invoked by constructive discovery.

And yet, where you have an injury, if it is an injury, of this nature that is by its nature undiscoverable, unnoticeable, then of course, you would have to have the injury discovery rule at hand.

I want to also point out that there is... there was some question about the meaning of liability arises.

Congress more recently has indicated that the phrasing... the phraseology used in this statute, the liability arises language, is synonymous with accrual language.

And I ask the Court to look at 49 U.S.C., section 32710, and the case of Carasco v. Fiori Enterprises, the site for which is 985 F. Supp. 931 at pages 934 through 935.

And in that case, the Court recognized that when Congress amended the odometer--

Chief Justice Rehnquist: This is a district court decision?

Mr. Henderson: --It is, and it... and it analyzes what Congress did with respect to the odometer--

Chief Justice Rehnquist: Thank you, Mr. Henderson.

Mr. Henderson: --Thank you.

Argument of Kent L. Jones

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

Mr. Jones: It's really the second question, of course, whether if the statute has an injury discovery rule, that would be negated by the misrepresentation exception.

But the Court is focused on that and there is a direct and simple answer to it.

In this Court's own opinion in Rotella, at page 555, the Court said, in applying a discovery rule, we have been at pains to explain that discovery of the injury, not discovery of the other elements of the claim is what starts the clock.

Justice Breyer: Well, the difficulty... the difficulty I'm having with that, though I see that now, is basically what you've done there is you've taken a statute that doesn't discuss any of these things, and you take what would be a full discovery rule, and then you break it into bits.

Now, you say... you say, well, we're taking a bit out of it and that's the work that the proviso will do.

Mr. Jones: The injury discovery rule starts the clock in the sense that once you become aware of the injury, you have a duty of inquiry to find out the cause of the injury, who caused it, whether it violated your... a standard of care that was owed to you.

If in making that inquiry, the... the defendant lies to you about one of those aspects... for example, he conceals what he actually disclosed... the statute then gives you 2 years from the date you discover the truth.

Justice Scalia: Suppose I find that a credit reporting agency has given incorrect information to... to somebody who's inquired.

I haven't been denied credit.

In fact, they give me credit anyway.

But I find that they have given inaccurate information.

Is that injury discovery?

Mr. Jones: Well, you're... you're mixing, I think, two points.

One is what is disclosed to you as the... if the consumer.

Justice Scalia: No, no.

Mr. Jones: If you think that they violated your rights and you ask them something, what they tell you.

That's what the misrepresentation--

Justice Scalia: No.

I... I discover that the credit reporting agency, in... in its information to Sears, included erroneous information.

Sears has given me credit anyway.

Mr. Jones: --Right.

Justice Scalia: Have I had any injury?

Mr. Jones: It's just erroneous information?

Justice Scalia: It's erroneous information.

Mr. Jones: I don't--

Justice Scalia: And it's detrimental.

It's detrimental but Sears gives... Sears gives me the credit anyway.

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

Justice Scalia: Have I suffered any injury under this statute?

Mr. Jones: --I don't see that you would have, but--

Justice Scalia: Wow.

Justice Kennedy: You might, if there were a higher interest rate charged and you didn't know about that.

Mr. Jones: --That's possible, but if you were charged a higher interest rate, you'd probably be on a duty of inquiry to... reasonable diligence to find out whether that was injury to you.

Justice Stevens: You don't think that you could then get the relief against Sears doing the same thing all over again?

You don't think you could tell them to straighten out the record for future requests?

Mr. Jones: I didn't say that you wouldn't be able to ask them to correct the record.

Justice Stevens: If you haven't been injured, how can you get the relief?

Mr. Jones: You'd be entitled to ask them to correct the records, and you'd be entitled to have them do so.

But--

Justice Scalia: You mean they'd be liable.

They'd be liable in a suit.

Mr. Jones: --They'd be required to correct the--

Justice Scalia: For an injunction.

Mr. Jones: --Here's the way that would work, as I understand it.

If I asked them to correct the records and they failed to do so without a reasonable cause, I could bring a suit to require them to correct the records, and if they willfully refused to do so, I might be able to prove both actual damages and punitive damages.

But I would still have to have some actual damages before I got a monetary recovery.

Justice Scalia: Do you think the word liability in the statute refers only to monetary recovery?

Mr. Jones: I think that... well, I think the word liability in this statute, like any statute that uses cause of action accrues, cause of action arises... these are ambiguous terms that the court has to interpret based on the purpose of the statute.

Justice Scalia: Don't they include injunction and refer not merely to monetary damages, but to an action for injunction?

Mr. Jones: There is not a statutory action for an injunction.

There is a statutory action for damages when the... when the defendant either acts negligently--

Justice Scalia: Where does the action for injunction come from if not from the statute?

Mr. Jones: --It comes from the invocation of the common law when--

Justice Scalia: I don't believe in Federal common law.

If there's... there's a cause of action, it's a cause of action under the statute.

Mr. Jones: --Well, it's... it's a cause of action that perfects the rights created by the statute.

I wouldn't call it an implied right of action, but I would think that a Federal court sitting in equity would be able to give an injunction to enjoin repeated violations of a statute.

Justice Scalia: Before there's any liability, but you can't get money damages before there's any liability.

Mr. Jones: That's doesn't strike me as a startling idea, that the... that an injunction can be given in a situation when you're not able to obtain money relief.

Justice Stevens: But you do have to assume that there's a violation for the injunction to lie.

Mr. Jones: That's correct.

You have to... you have to determine that for an injunction to be given.

But this... the question here... I mean, the second half of the question I think is easily answered, and if the Court has more questions on that, fine, but if not, I'd like to address the first question, which is does the phrase, liability arise, suggest an interpretation that... that... from which we would conclude that the injury discovery rule applied as opposed to the injury accrual rule.

And Congress often creates remedies for... for injuries that are latent or hidden, and... and it's improbable to assume that when Congress does so, it intends to curtail that remedy before even a diligent plaintiff could be expected to learn of it.

And so, the injury discovery rule has been applied by the courts in interpreting these kinds of vague provisions like liability arises and cause of action accrues to give them meaning in the context where there's a hidden or latent claim that wouldn't be expected to be discovered in the ordinary course.

Justice O'Connor: But it is odd in the context of a statute that has the other language in it where Congress spells it out.

Yes, here we think there has to be discovery.

I just find the juxtaposition in this statute difficult to overcome.

Mr. Jones: There... there is nothing odd.

In fact, it's ordinary, as... as it was pointed out, for this kind of fraudulent concealment or equitable estoppel rule to be applied to a statute that has an injury discovery provision.

Justice Scalia: No, that isn't odd.

What's odd is... what is odd is how it's expressed.

If... if the first part was expressed in intending to have a discovery rule, the way it was, you would expect the last part to have been expressed, the action may be brought at any time within 2 years after the misrepresentation because--

Mr. Jones: The... Justice--

Justice Scalia: --Of course, you would imply 2 years after discovery of the misrepresentation.

Mr. Jones: --Justice Scalia, the misrepresentation is... is of any fact material to the violation.

The discovery rule is only of the injury, as this Court said in Rotella and as the other courts have also held.

If... you... you can know of the injury and not know what caused it or who or whether they were liable for it.

And if they... the defendant lies about that, when you're trying to inquire, during this 2-year period from discovery of the injury... if they lie about that, the statute can... comes in and says, we're not going to let them profit from their lie.

They're going to be... you're going to get another 2 years from the time you discover the injury.

Justice Kennedy: But that's always true under equitable estoppel.

Mr. Jones: I'm sorry.

Discover the lie.

I'm sorry.

Justice Kennedy: That's always true under equitable estoppel.

Mr. Jones: That is... that is--

Justice Kennedy: You have that... now, it's true that the whole... the statute doesn't run, but you don't have 2 years.

Mr. Jones: --Right.

This statute does not... is not a codification of the entire doctrine of equitable estoppel.

It's a specification of the doctrine of equitable estoppel in the specific context of these kinds of claims.

And it's focuses on these... these specific types of claims.

So, I don't know whether it intends to preclude any broader equitable estoppel doctrine, but I do know that what Congress has provided is simply a application of the equitable estoppel rule in the specific context of this statute.

Justice Breyer: Well, I'm a little nervous.

Perhaps Congress... I don't know if I would have written the statute this way, but I assume that the credit companies were arguing, look, if you have a discovery rule here across the board, even discovery injury, what will happen is 45 million Americans who never ask for their report, 2 million do.

All right?

20 years later, it turns out that we used an unreasonable procedure 20 years ago.

And lawyers for the 45 million others will start combing the records to find out how there was an invasion of privacy or some other injury, and before you know it, will proliferate lawsuits about things that happened 20 or 30 years ago and created only minor injuries that people didn't even know about then.

Mr. Jones: Well, you have the... under the injury discovery rule, you have the requirement that the plaintiff act with some reasonable diligence.

Justice Breyer: They... they don't know.

They don't know who was... you know, there's no way to know if it was an unreasonable procedure, who was told what.

Mr. Jones: Well, if they don't... if they don't make any inquiry at all over 20 years, I think a court could conclude that they didn't act with reasonable diligence.

I certainly don't know of any decision applying the injury discovery rule that refuses to apply it simply because it may have applications.

I mean, I've never seen a court say that when these kinds of hidden harms are... are remedied by Congress, Congress meant to let them go unremedied if they weren't discovered.

I mean, it's just the opposite.

It's because as... as petitioner says, yes, you can have injuries that aren't discovered.

Justice Scalia: But you... you can discover the misrepresentation, that... that is, the... the erroneous credit information.

You can discover that and you can sue indefinitely after that.

That doesn't start anything running.

It's only when you find that that misinformation has caused a denial of credit that your cause of action arises.

You can just leave it there.

Mr. Jones: The... there are two different aspects of this case.

One is the inaccurate... inaccurate reports, which is I believe what you're talking about, but then there's the thing that can never be discovered, which is the improper disclosure.

When I say can never be recovered, I mean is not ordinarily going to be likely to be discovered.

This case actually only involves the improper disclosure.

And the Court's analysis of this statute of limitations issue should appropriately focus on the fact that these kinds of improper disclosures are inherently hidden and not going to be known by the... by the plaintiff.

Chief Justice Rehnquist: Thank you, Mr. Jones.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

FDA v. Brown & Williamson Tobacco Corp. - Oral Argument

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

Case:

FDA v. Brown & Williamson Tobacco Corp.

Media File:

98-1152_19991201-argument.mp3

Related Transcript:

1999_98_1152_argument.xml

Transcript:

Argument of Gen Seth P. Waxman

Chief Justice Rehnquist: We'll hear argument first this morning in Number 98-1152, Food and Drug Administration v. Brown & Williamson Tobacco Corporation.

General Waxman.

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

Following the most extensive rulemaking in its history, the Food and Drug Administration concluded that nicotine in cigarettes and smokeless tobacco is highly addictive and has three other strong pharmacological effects on the body as a sedative, a stimulant, and an appetite suppressant.

The FDA found that the manufacturers know this, that they know that consumers predominantly use their products to obtain these effects, and indeed that they engineer their products to deliver the precise doses of nicotine that consumers need to obtain its powerful effects.

The question presented in this case is, whether given those findings, the FDA validly concluded that these products are drug-delivery devices under the Food, Drug and Cosmetic Act.

The Act defines drugs and devices to include, quote,

"articles... other than food... intended to affect the structure or any function of the body. "

and the FDA found that nicotine is intended to do so in four quintessentially drug-like ways.

Like No Doz, nicotine acts as a stimulant.

Like Valium, it acts as a sedative.

Like Dexatrim, it suppresses appetite, and like Methadone, it's used to satisfy an addiction.

The FDA also found that cigarettes and smokeless tobacco have the classic characteristics of articles subject to regulation by the FDA.

They are taken within the human body.

They deliver a pharmacologically active substance to the bloodstream.

Justice O'Connor: Although they're not marketed, are they, as products to treat or prevent disease or cure disease and so forth?

Mr. Waxman: Traditionally, they are not, and it is our submission that that does not in any way...

Justice Kennedy: Well...

Mr. Waxman: affect the definition of whether they...

Chief Justice Rehnquist: Okay, but...

Mr. Waxman: are drugs or devices.

Justice O'Connor: then the statute goes further and contemplates that devices, if approved by the FDA, have to be safe and effective, and is it the position of the Government that the use of tobacco is safe and effective?

Mr. Waxman: The... the FDA is...

Justice O'Connor: I take it not.

So, you know, it just doesn't fit.

Mr. Waxman: Well, I... may I respectfully dissent...

Justice Scalia: Okay.

Mr. Waxman: and explain why?

Justice O'Connor: Yeah.

Mr. Waxman: The Act requires that with respect to devices... and what we're talking about here is a combination product which the FDA, beginning with the 1990 amendments, was authorized to regulate, that is, a product that... that combines drug components and device components, but this combination product regulated under the agency's device authorities must be found and marketed under conditions, distributed under conditions that the FDA finds to be reasonably safe and effective for its intended uses.

With respect to devices that preexisted the enactment of the 1976 device amendments and the 1990 combination product amendments, the Act contemplates and requires that after the FDA asserts jurisdiction and regulation over a particular device, but not before, the FDA will engage in a classification process for the devices which is explained in great detail in the Act at Section 360(c), 360(d), and 360(e), and in that classification process, which will take place with respect to these products, the agency will be required to determine what controls and under what conditions these articles may be marketed and distributed with reasonable assurances of safety and effectiveness.

Now, at this point... we have not gotten to the classification point yet, but at this point, where the agency has determined in response to petitions and in response to the overwhelming scientific data that it can and should assert certain regulatory controls, it has determined to... to regulate these products as restricted devices under its authority given to it in 1976 and reflected in Section 360(j)(E).

Justice Scalia: So your answer is we don't know yet.

Mr. Waxman: The answer is the agency...

Justice O'Connor: We don't know.

Mr. Waxman: The agency...

Justice Breyer: That's basically what you're saying.

Mr. Waxman: The agency has made... and the agency is required to make...

Justice Scalia: I understand that.

Now, do you... but the question, as I understood it, was do you think there is any prospect of the agency being able to make such a statement...

Mr. Waxman: The agency...

Justice Scalia: under any classification that this stuff is safe?

Mr. Waxman: The agency not only thinks, but the agency has explained in very considerable length in its Final Rule that it... it believes at this point that it will be able to make determinations with respect to both effectiveness and safety.

With respect to effectiveness, it has found that for at least one of the four known pharmacological effects, that is, addiction, that cigarette smoke and the nicotine in cigarettes is in fact quite effective for sustaining addiction, and it may also find through the classification process that it is effective for the other chemical effects, that is, to... to provide sedation, stimulation, and weight...

Justice Scalia: It does have all of the harmful effects that... that is the purpose of... of its distribution.

Mr. Waxman: There... there is no question.

Justice Scalia: Right.

Justice Kennedy: What about the second?

Mr. Waxman: No question.

Justice Scalia: What about the safety?

Mr. Waxman: Now, with respect to safety, the Act requires that safety or, with the case of device, the reasonable assurance of safety be determined in the classification process by means of a weighing process that is specified in the statute and was outlined by this Court in Rutherford in which the agency weighs not with respect to the world at large, as the Respondents claim, but with respect to the... the public that consumes these products, the risks versus benefits of using... of making these products available versus taking them off the market.

Now, in its rulemaking, the agency was careful to say that it was not making a final determination about this, but based on all of the evidence that it had reviewed to date, both the scientific data with respect to the properties of nicotine and the properties of these devices and the epidemiological and behavioral science data about why people use it and at what stage they use it, it made a determination that on balance, the appropriate means of regulating this product was twofold.

One, because almost all people who become addicted smokers or addicted users of smokeless tobacco begin when they are children or adolescents... and the data is overwhelming on this... the... the distribution or sale to those people should be prohibited.

They are likely to be unsafe for those people for all purposes...

Justice Scalia: I want to know to whom...

Mr. Waxman: and second...

Justice Scalia: to whom it should not be prohibited...

Mr. Waxman: I'll... I...

Justice Stevens: because it would be safe.

Mr. Waxman: I thought you would, and I'm coming...

Justice Scalia: That was my only question.

Justice Breyer: I didn't...

Mr. Waxman: I'm coming right to it.

Justice Breyer: Okay.

Chief Justice Rehnquist: You really take an awful long time to answer that.

Mr. Waxman: Well, with... with... I apologize, but with all due respect, Mr. Chief Justice, the agency made a determination with respect...

Justice Breyer: Well, yeah, but...

Mr. Waxman: to two categories of people.

Chief Justice Rehnquist: But when... when a member of the Court asks you a question, it's better to give the answer first and then explain, rather than give the answer after a fairly long explanation.

Mr. Waxman: The... the short explanation is that for a portion of the population, that is, those under 18, the agencies made a preliminary safety-ness or reasonable assurance of safety-ness determination that a ban was required.

With respect to persons over 18, the majority of whom the agency found are in fact addicted to these products, the agency concluded that a ban would be more dangerous to these people than allowing these people, most of whom are addicted, to continue to use the products pending a...

Justice Scalia: But it's...

Mr. Waxman: final review.

Justice O'Connor: It... it just... it... it strains credibility to say that these products can be safe in light of the findings.

I just don't understand how anybody could stand here and say fine, they're safe, so we'll permit them to be used.

I think the conclusion under the statute is if they are covered, they have to be... it has to be banned.

Mr. Waxman: Well, but with all respect, Justice O'Connor, the agency, first of all, has made only a preliminary determination with respect to safety, and it has made it clear that if during the classification process, which requires the convening of panels, including representatives of the manufacturers and the scientific industry, that there are no controls or restrictions that could make it safe, taking into account the balance, a ban may be required of these products, and you may have the result that the agency, which has concluded that that might...

Justice O'Connor: And do you think... do you think it's clear that Congress intended that under this Act?

Mr. Waxman: What I...

Justice O'Connor: I mean, we certainly operated for a long time with the understanding that it wasn't covered...

Mr. Waxman: Well, the...

Justice O'Connor: and this is a very recent phenomenon, and it just... it doesn't fit very well under the structure of the statute.

Justice Scalia: An understanding, I might add, that... that had been conveyed to Congress by... by the heads of the FDA on numerous occasions when Congress had various pieces of legislation dealing with tobacco before it.

It seems to me Congress enacted these statutes on the assumption of the state of the law that... that they had been assured by the agency itself existed at the time.

Mr. Waxman: Well, with respect to the prior statements and the long assumption or assumption that didn't exist, I think in order to go back and understand what the Congress may or may not have concluded in 1938... and this Court has said many times that this is a statute that was not directed at particular articles, but rather laid out general principles and definitions and intended the agency to apply its regulatory authorities to those definitions where appropriate... the agency, to be sure, has stated repeatedly before Congress and in the courts and in the public many times for a long period up until 1995, that it did not believe that it had sufficient jurisdiction to regulate tobacco products absent claims made about the effects that those products would have on the body, and in order to understand why that was so, I think it's... it's probably best to look at what caused the agency to change its mind.

This is an agency that is required to act on the basis, first of all, of scientific data, not general understandings, and, second of all, an agency that is required to act with respect to not uses, but intended uses, and since 1938, the agency has had in place a regulation that explains that... that the manufacturer's intent is to be determined based on the totality of the circumstances and it is the intent that a reasonable fact-finder would impute to the manufacturer based on all of the objective evidence.

Now, in 1995, the agency heard overwhelming evidence and concluded, number one, that there was an absolute scientific consensus that nicotine is a highly addictive substance.

Chief Justice Rehnquist: That certainly wasn't the first time that that scientific consensus evolved, was it?

Mr. Waxman: Well, it... it actually...

Chief Justice Rehnquist: The Surgeon General's warning date... dates back to the early '60s.

Mr. Waxman: Mr. Chief Justice, in 1994, the chief executive officers of virtually all of the Respondents sat 500 yards from this courtroom and testified under oath that... that nicotine in cigarette products and smokeless products was not addictive and that they did not engineer their products to manipulate nicotine levels and...

Justice Scalia: As far as the former is concerned, nobody believed them.

Chief Justice Rehnquist: Nobody believed them.

I mean...

Unidentified Justice: [Laughter]

Mr. Waxman: At the... with all due respect, at the time the Surgeon General issued his report in 1994, the Surgeon General found that there was not sufficient evidence to conclude that nicotine was addictive.

It was only in 1988 that the Surgeon General did find that it was addictive, and it was largely in the early and mid-'90s that there became a consensus that this product was addictive.

The agency also found and acted in 1996...

Justice Souter: Excuse me.

Justice Scalia: What... why is the addictiveness alone necessary for the FDA's jurisdiction?

Wasn't it clear from the early '60s?

Indeed, wasn't it clear in 1938?

Wasn't it clear much earlier than that?

States began... some States had... a number of States banned cigarettes as early as 1900, and... and those other harmful effects, whether the addiction was obvious or not, were surely well known, and wouldn't they alone have been enough to require the FDA to come in?

Do you need addiction as well?

Mr. Waxman: No, no, no.

What you need, Justice Scalia, are intended effects.

It's just not... it's not just effects on the structure or function of the body.

It would have been unfair and implausible to charge the manufacturers with the intent that people use cigarettes and smokeless tobacco to get cancer and die from emphysema.

Justice Souter: Not to get cancer, but to have an effect on the body and the very same effects on the body that are now being described in detail by the addictive mechanism.

People have always smoked to get relaxation or to keep going under pressure.

We... we may have hit some question about the strict chemical mechanism by which the effect is achieved, but certainly from the beginning, there couldn't have been any doubt that people were taking these things for their effect on the body and that they were being sold for people for that purpose.

Mr. Waxman: Well, I... with all due respect, Justice Souter, there were... I... I... I can't place myself back in... in 1938, but reading some of the materials that the Respondents have submitted and others, there were... it was generally understood that people smoked because it was soothing or because it gave them status or...

Justice O'Connor: That's an effect on the body.

Mr. Waxman: Yes.

Justice Souter: It's an effect on the body.

Mr. Waxman: And with respect to that, again,...

I... without repeating myself, this is an agency that is mandated and expected to act on the basis of scientific evidence.

That's just the way the FDA works, and I think... you know, in fact, the easiest way, at least for me, to see what's different now than... than was... than was then... then... and it is not our submission that all of a sudden in 1996 something changed.

Maybe the agency could reasonably have regulated this in 1985, but if you look at actually the case that...

Justice O'Connor: Well, Mr. Waxman, can the agency regulate the movie industry that produces horror movies because so many people go to it to get scared and get the adrenalin pumping?

Suppose the studies show that?

Mr. Waxman: Well, Justice O'Connor...

Justice O'Connor: I mean...

Mr. Waxman: no... no one has ever seriously suggested that the FDA exercise regulatory jurisdiction over horror movies or guns or bayonets or...

Justice O'Connor: Well, 30 years ago...

Chief Justice Rehnquist: But why not?

Thirty years ago...

Mr. Waxman: But...

Chief Justice Rehnquist: no one would have suggested they exercise jurisdiction over cigarettes.

Mr. Waxman: And... and they would not reasonably have done so.

What the... and the reason... what the agency does in response to a petition when deciding to exercise its regulatory controls, is to look at the language of the statute and see whether it's covered and then to do what all other administrative agencies and indeed courts do...

Justice Kennedy: When... when...

Mr. Waxman: which is to look...

Justice Kennedy: When in your... when in your view, what year, what time, could the agency reasonably have regulated cigarettes as a drug?

Mr. Waxman: That's a... that's a... that's a particularly hard question, Justice Kennedy, because I'm... I'm really not conversant with when the data became what.

I... one of the things I've struggled with is the agency's 1980 determination that is included as the last document in the Joint Appendix in which...

Justice Kennedy: Well, I interpreted your remarks as saying it would not have... I think I heard you right that it could not reasonably have regulated tobacco as a drug in 1938.

Mr. Waxman: '8.

Oh, for sure.

I... I don't think there's any dispute about that.

The agency... in response to the horror movie question and the gun question, the agency looks first to the language of the Act, the definitional sections and the operative provisions, to see whether or not this is something that with respect to subsection (c) is intended to affect the structure or any function of the body.

It then does what all agencies do and what all courts do, which is to look at the practice, that is, does this article and do its intended effects resemble the kinds of articles and intended effects that have always been regulated, the same process that this Court 150 years ago explained in Trinity Church.

Justice Scalia: Well, that's fine, but addiction is not the only one.

There are other effects that were clear, at least from the Surgeon General's report, harmful effects upon the body.

You did not need addiction in addition to that, and the only novel scientific findings you've brought to our attention that antedate the Surgeon General's report are the scientific findings of... of addiction, although frankly most people suspected that before then anyway.

So why at the time of the Surgeon General's report, which, you know, resulted in a requirement to be posted on cigarette packages... Caution: The Surgeon General has determined it to be harmful to your health... why wasn't that fully enough at that point for the FDA to... to regulate

Mr. Waxman: The agency...

Justice Scalia: although they claim they could not?

Mr. Waxman: Right, and they still claim that based... that the fact that cigarette smoking is known to cause cancer and emphysema and other dread diseases, does not give it jurisdiction to regulate a product.

There are many products that are very, very dangerous to health that the FDA does not have jurisdiction to regulate.

It has jurisdiction...

Justice Ginsburg: For example...

Mr. Waxman: It may be wrong, but it's...

Justice Ginsburg: For... General Waxman, what... I was trying to see if there was an analogy to something else that the FDA regulates, that is, something that is purchased for its pleasurable effects that has these dreadful, harmful effects, and is... is there anything that isn't being put forward as a cure?

Mr. Waxman: Well, the... the answer is yes, there are.

I'm sure I can't recite anywhere near all of them, but if you look at a recent example, the FDA had regulated and permitted to be marketed a drug, I think, called fenfluramine, which was used to reduce weight in obese persons for a short period of time, and when it became known to the FDA that it was commonly being used with another drug that also starts withand was producing an alarming incidence of mitral heart valve failure, the FDA contacted the manufacturer, undertook certain studies.

The manufacturer withdrew it from the market.

Many of the drugs that either are now or at some point have become listed as controlled substances, were regulated by the FDA long before they became controlled and are still regulated by the FDA...

Justice Kennedy: But... but... but...

Mr. Waxman: to the extent that they have accepted medical uses, but...

Justice Scalia: Butwhatever it was, was marketed as a means of altering your body chemistry.

The... the manufacturer said take this and your body chemistry will be altered, so you... you can eat just as much and not... and not gain weight.

Mr. Waxman: That...

Justice Scalia: The difference here is that... that this is not what... what the cigarette makers advertised.

So what you really need is an example where it... you know, it isn't advertised on that basis, but... but people enjoyed using it, and the reason they enjoyed using it happened to be that chemical change which was not advertised.

Mr. Waxman: Justice Scalia, we have cited in our brief... and I can recount them here... many, many instances of products that the FDA has regulated based on their intended effects to the... on the body that aren't claimed, and it has been the FDA's consistent interpretation since 1938 that intended use does not equate to claimed use.

It is certainly true that most manufacturers claim the uses that they intend their products to be made for, but it would be the highest irony if you had a product like tobacco that every... and everyone knows what it is used for... and today everyone knows that it has intended effects on the body that completely escape regulation... a claims requirement would allow a manufacturer, for example, of Prozac, just to sell Prozac and not make any claims about it, or sell any drug as a generic drug and make no health claims, or sell Valium and say it... it's soothing...

Justice Souter: General...

Mr. Waxman: and there would be no regulation.

Justice Souter: I mean, I accept your argument, and...

I... I guess it would be fair to say that I accept your argument on every one of the technical points that has been raised here, but it still does not resolve the case in my mind because I have, I guess, a Chevron Level II basic question.

I agree with you.

I think this is a Chevron case, and I agree with you that... that the... that the... the... the agency has a potential role here in... in completing or clarifying a statutory scheme that is not totally clear.

Where I have my trouble, when we get to Chevron II and... Part II, and say, is this reasonable, is not with respect to any one of the technical problems that have been raised and I think in... in large part answered by you, but in the totality of them.

Number one, there's... there's no question that the paradigm examples of FDA regulation is regulation of substances that are put forward for purposes of... of health or... or curing disease or whatnot, even though there are exceptions.

Number two, it seems to me the paradigm way that the FDA goes about it is on a claims-made basis.

There are exceptions to it, and you're entirely right under... under intended use, but most of the time what's going on is a response to a claims-made kind of scheme.

Number three, for a long period of time, the agency, for whatever reason, said we have no jurisdiction over this.

It said that despite, at least in my judgment, the fact that they could certainly bring cigarettes within the definition ofeven if they weren't sure of the mechanism.

Number four, the agency at this point at least is saying we will regulate, but right now it seems to us that there is a balance of goodness in favor of cigarettes, so we're not going to ban, and that seems in traditional practice to be a kind of unusual analysis.

And finally, given this... this, in effect, absence of FDA jurisdiction, the Congress has gone in, not with a global regulatory scheme, but with a lot of congressional statutes that attack various parts of the cigarette problem.

When you take all of that together, what bothers me about the Government's position is that it does not seem to me that it is reasonable at this point for the Government to construe its statutes in a way that asserts regulation.

It's the... it's the global problem, not the technical problems, that bother me.

Mr. Waxman: Justice Souter, I think in the time remaining, I guess the best way that I can answer the question is to posit the following.

The tobacco company's principal submission is that their product, contrary to the testimony they gave a few years ago, is so dangerous, that if the FDA has to regulate it... and they concede that there is nothing in... in the statute or in any of these later specific statutes that either precludes or preempts the FDA from exercising the authority that it has, but it is now so dangerous that if the FDA regulates, it will have to ban, and that is a ridiculous public health result that Congress never could have intended.

Now, first of all, the FDA has construed and it is in the rulemaking...

Justice Scalia: Why is...

Mr. Waxman: what...

Justice Scalia: Why is... why is that?

I... I don't... what do you mean,?

ll it has to be is dangerous, harmful to human health.

Mr. Waxman: It is... it... there are...

Justice Scalia: That may well be... that may well be the result with respect to alcohol, too, and, you know, we tried a ban of that and decided forget about it.

Mr. Waxman: The FDA regulates alcohol in every respect except in which it appears as a food.

I... I won't characterize.

I'll let... Mr. Cooper can characterize his own argument very ably, but the question that the FDA put is in light of all of this evidence and in light of the plain language of the definitions and the... the striking similarity and the characteristics of this...

Justice Souter: But we know we can't just go with the plain language of the definitions because they would lead infinitely out.

You'd be regulating clothing...

Mr. Waxman: And...

Justice Souter: if you simply went by the... the definition alone.

Mr. Waxman: Justice Souter, when... when one is talking about a drug or a device that delivers a drug to the body, like a cigarette or a syringe, there is no problem applying the literal meaning, but in any event, the FDA went way beyond applying a literal meaning and looked at great length to the extent to which these devices... and their intended effects resembled things over which they already regulated.

But my point is if they are right, if these products, because they are dangerous, must be banned, and the FDA cannot work with Congress to... to accomplish an amendment to the statute that would, like so many other product-specific amendments, like saccharine, that have been enacted to enable the FDA to continue to regulate in accordance with its public health mandate, then two things will happen.

One, we will have an inability of this agency with the pragmatic responsibility to, for example, require them to use a filter or add a substance that would make these things less causing... less able to cause cancer or less addictive, and, number two, we would have them remain as if not the only... virtually the only finished product that is ingested in the body that is regulated and inspected by no Federal agency and yet is so dangerous.

May I reserve the balance of my time?

Argument of Richard M. Cooper

Chief Justice Rehnquist: Very well, General Waxman.

Mr. Cooper, we'll hear from you.

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

The Solicitor General was not entirely accurate in stating our position.

We do contend that the tobacco-specific statutes preclude FDA from exercising jurisdiction, and that's an argument independent of the Food, Drug and Cosmetic Act arguments.

I want to pick up on the answers to the questions from Justice O'Connor and Justice Scalia.

As to the scope of FDA jurisdiction and the need for addiction, I'm going to read from the passage in the Final Rule, page 44678, FDA speaking.

The nature of a product's effect on the structure or function of the body, therapeutic or nontherapeutic, beneficial or adverse, thus, does not determinate FDA's jurisdiction.

The relevant inquiry is simply whether a product has an effect on the structure or any function of the body.

So they don't need addiction.

Their position is that any effect, even an adverse one, brings a product within the Food, Drug and Cosmetic Act.

Justice Stevens: But only if there's an intent.

Isn't the key...

Mr. Cooper: Yes, has to... yes.

There has to be an intent, but for them...

Justice Stevens: And isn't that the key question in the case?

Mr. Cooper: Yes.

Well, it's one of the key questions, Justice Stevens, but for them...

Justice Stevens: But would you concede there is an intent?

Mr. Cooper: I do not...

Justice Stevens: Would you lose if you did concede there's an intent?

Mr. Cooper: No, there's not an intent here.

Justice Stevens: But if you did concede there was an intent, would you not lose?

Mr. Cooper: I think not because the... because, again, the tobacco-specific statutes would preclude FDA jurisdiction.

Justice Stevens: So you think there had been a partial repeal of the FDA?

Mr. Cooper: No.

I think when the... I think the... as in Estate of Romani, the issue of FDA jurisdiction had not been determined favorably... in favor of jurisdiction prior to the enactment of the tobacco-specific statutes.

So it's a question of harmonizing the statutes, reading them together, and these statutes cannot be harmonized consistent with FDA jurisdiction.

Justice Scalia: Your position, if I understand it, is that although there may have been Chevron play in the joints originally in the statute after there's other legislation which has to be taken into account, step one of Chevron is no longer passed.

Mr. Cooper: Yes, with an addendum that there are then multiple statutes, most of which are not administered by FDA, so that deference under Chevron would not be appropriate, and even at Chevron step one, before the enactment of the tobacco-specific statutes, we still have the Food, Drug and Cosmetic Act not being able to accommodate these products.

Justice Stevens: But I still want to know.

Do you think that those statutes amended the Food, Drug... the Food Act?

Mr. Cooper: They did not amend it.

Justice Stevens: So your basic position is that even if none of those statutes had been passed, you would still not be subject to the statute because you did not have the requisite intent because you didn't advertise the cigarettes as being addictive.

Mr. Cooper: Because when you...

Justice Stevens: That's really your basic position.

Mr. Cooper: Well, there's more... there... that... that's part of our position.

There's more to it than that.

These products simply, as Justice O'Connor noted, don't fit into the Food, Drug and Cosmetic Act.

There's an array of health and safety statutes in this country.

The Food, Drug and Cosmetic Act is unique among them in that it requires, as the drugs and devices, the weighing of benefits to health against risk.

Justice Breyer: Well, but, again, if...

Mr. Cooper: There's no...

Justice Stevens: that's your basic argument, you don't need all these... these later statutes.

Mr. Cooper: We don't need them, but they're very helpful to us.

Justice Stevens: Well, I don't think they're...

Unidentified Justice: [Laughter]

Justice Stevens: It seems to me, they're totally irrelevant...

Mr. Cooper: No.

I...

Justice Stevens: because they don't directly answer the question...

Mr. Cooper: I would...

Justice Stevens: and you may be right on the basic question because they didn't advertise this product the way they... the way they claim you intended it to be used, but I thought the heart of your argument was that there's no intent because there's no claim that had these... these positions.

Mr. Cooper: Our argument has multiple parts.

I would submit that the tobacco-specific statutes are the most relevant because they're the ones that tell us how Congress has dealt with tobacco and health, how Congress wants these products...

Justice Stevens: Yes, but the problem with that... let me just get it right on the table.

The problem with that is it seems to me at least theoretically possible that until 1990, say, you had no intent to make this stuff addictive and there was no evidence, objective evidence of such an intent, but in 1994 or '95, such evidence... you changed your minds, and you then decided on a new marketing strategy with this intent, and then... and then for the first time became under the statute.

It seems to me, that's at least theoretically possible.

Mr. Cooper: It's... it's contrary to the facts, however.

Let me read a passage from the 1964 Surgeon General's report.

Justice Stevens: Well, that's just to the addiction.

Mr. Cooper: Yeah.

Justice Stevens: I'm only focussing on intent, the intent of the companies marketing the product.

Is it not possible that the intent was different in 1985 than it is today?

Mr. Cooper: The intent is derived from the claims in the marketplace...

Chief Justice Rehnquist: Well...

Mr. Cooper: which have been essentially...

Chief Justice Rehnquist: All right.

Mr. Cooper: the same, and there's a reason for that.

Justice Stevens: If you rely entirely on claims in the marketplace, it's an easy case.

You win.

You don't need all these statutes.

Mr. Cooper: Well, we can win without them.

Justice Scalia: Well, but you don't really respond to my question.

Why don't you... why don't you... why don't you answer his question which relates not to claims in the marketplace, but to what... I know some... some of the literature talks about objective intent.

I have no idea what objective intent is, but let's assume...

Mr. Cooper: That's in the FDA regulation.

Justice Scalia: We are...

Mr. Cooper: I'm trying to answer the question.

Justice Scalia: Well, as I understand the question... is never mind what the claims were.

Mr. Cooper: Right.

Justice Scalia: Has... isn't it possible that there was an... a change in the subjective intent of... of those who marketed the cigarettes, that only at a more recent date was it clear that it was their intent to make physical alterations...

Mr. Cooper: Is it possible that there was a change...

Justice Souter: in the... in the bodies...

Mr. Cooper: in subjective intent?

Justice O'Connor: Yes.

Mr. Cooper: Yes.

Is there an FDA finding on that?

No.

Is subjective intent relevant under the statute?

I would submit not.

The FDA regulation, as you point out, Justice Scalia, requires an objective intent.

That's a very unusual term.

It didn't say objective evidence of intent.

It says an objective intent.

Justice Stevens: Let me just change it.

Supposing the evidence of objective intent didn't surface until 1995.

Mr. Cooper: Object... evidence of objective intent by its very nature must surface in the marketplace.

The evidence of objective intent is claims and representations in the marketplace...

Justice Breyer: Or you could have...

Mr. Cooper: and it's public.

Justice Scalia: Could you have aspirin?

Justice Breyer: Couldn't you have aspirin?

Everybody knows what it does and you don't need a claim.

All you have to say is the word.

verybody knows what it does, and would you say there is no intent there to cure headaches?

Mr. Cooper: But there...

Justice Breyer: I mean, isn't claim evidentiary of intent...

Mr. Cooper: No.

Justice Breyer: rather than the other way around?

Mr. Cooper: I would... the... the claim establishes the objective intent.

In the case of aspirin, it was established by claims of pain, but...

Justice Scalia: Fine.

Justice Breyer: If a claim establishes objective intent, hear what they have now, but not previously, is every smoker, no longer being able to kid themselves... knows that this nicotine through chemical effect, metabolized in the body, creates feelings of tranquility and calmness and satisfies a craving created by chemical addiction.

They know it, the smokers.

The manufacturers know it, and nobody can kid themselves anymore, though maybe they could have kidded themselves before 1965.

Now, I take it that under those circumstances, the FDA says this falls right within the language, the purpose, the precedence, and everything else in the statute.

Mr. Cooper: But it... no, it does not fit within everything else in the statute, Justice Breyer.

The... the approval process, for example, for drugs and devices requires a finding of effectiveness, and effectiveness, even before the 1962 drug amendments, was an element of safety.

If a product does not purport to provide a benefit to health or body functioning or structure, there is nothing to evaluate for effectiveness.

There is nothing to weigh against risks...

Justice Breyer: Sure there is.

Mr. Cooper: in evaluating safety.

Justice Breyer: Sure there is.

What there is, is there's risk.

That is to say, is the wordin this statute supposed to stop the FDA from looking at the real world?

What they say is that overall we get more safety by letting people smoke for a while because of the addiction in the country, the risk of black market.

In other words, suppose aspirin turned out to have a chemical that was very harmful, but it was also addictive.

If they discovered that for the first time, wouldn't they have the power to treat these other sections of the statute, looking to safety overall for the public rather than suddenly withdrawing an additive substance?

Mr. Cooper: But we are bound on this record by FDA's findings, and FDA found these products unsafe.

And indeed, it said in the... in the proposed rule at Page 41348 that if these were to be regulated as drugs, they would have to be found safe or found generally recognized as safe and... and I quote,

"Neither of these outcomes can be viewed as a realistic possibility. "

close quote, no realistic possibility of finding these products safe.

Justice Breyer: For an individual, but, I mean, can't they have a remedy that creates safety overall rather than a remedy that will in fact lead to a lot of people being hurt?

Mr. Cooper: I submit not.

The... there... there is no general public health standard under this statute.

Section 903 21 USC 393 requires FDA to ensure that drugs are safe and effective, and under Section 360(c)(A)(2)(a), that means for the people who use them, and the statute also requires that there be a reasonable assurance that medical devices are safe and effective.

This Court reviewed the standard for medical device approval in Medtronic.

It's a rigorous standard.

It relates to the health of the individuals who will use the product.

Justice Ginsburg: I guess...

Justice Scalia: So if it...

I guess on the theory that Justice Breyer is inquiring about, the FDA could... could approve the... the sale of... of cocaine, and in effect adopt the... the theory of many people who want legalization of drugs; that the overall social benefit of legalizing them will... will outweigh the individual harm.

You'll have much less crime and so forth and so on.

I suppose if the FDA has... can do this kind of a thing with cigarettes, it could do it with... with marijuana, with any of the other drugs that... you know, overall it would be better to have a free market in this stuff, and some people would be hurt, but the society at large would be helped.

I guess this is the theory we're talking about.

Justice Kennedy: Yes.

Justice Scalia: You don't disagree with that, do you?

Justice Breyer: Yes, yes.

I thought Methadone... I thought... sorry... cocaine and these drugs are the Controlled Substances Act, a different act.

I also thought that Methadone in fact does involve such a theory.

Mr. Cooper: But I don't... I... I... that's not the way the Food, Drug and Cosmetic Act requires drugs and devices to be regulated.

Justice Ginsburg: But, Mr. Cooper, suppose... suppose that heroin, it wasn't unlawful.

Suppose, as in the case of cigarettes, it's lawful.

Are you saying if... if heroin were legalized that the FDA then could not regulate it?

Mr. Cooper: If it does not purport to have a health benefit, it's not subject to regulation under the FDCA, but that doesn't mean it escapes regulation.

It could be regulated under the Controlled Substances Act, as in fact it is.

Justice Ginsburg: But not by the FDA.

Mr. Cooper: But not by the FDA.

Justice Ginsburg: So, if a product is simply harmful to one's health, then it falls outside of the FDA.

Mr. Cooper: There are thousands of products that are potentially harmful or injurious that are... that's why Congress...

Justice Ginsburg: But one that's ingested in the body.

Mr. Cooper: Even ones that can be ingested into the body.

Household cleaning fluids, for example, can be ingested by children, for example.

Justice Ginsburg: Yes, but where the... where the core use of it is ingesting it into the body...

Mr. Cooper: Well...

Justice Ginsburg: not an accident.

Mr. Cooper: Street drugs.

Street drugs.

If somebody puts out a street drug and says this will... is for pleasure, that's not regulated by FDA.

That's regulated by the Drug Enforcement Administration.

Justice Stevens: Well, you're saying then if we legalize marijuana on the theory it has some health benefits for people with certain disease and so forth, you say the FDA could not regulate marijuana?

Mr. Cooper: Oh, no.

If there's a theory that it's for health benefits, then certainly FDA does regulate it.

That's where FDA comes in, where there is a claim of health benefit.

Justice Stevens: But if the intent of the manufacturers of cigarettes is to provide certain health benefits, why is that different...

Mr. Cooper: Well, there's...

Justice Stevens: if there is the intent, which, of course, you dispute?

Mr. Cooper: There's no finding by FDA that any cigarette manufacturer has intended to provide a health benefit.

Justice Scalia: What about some of these so-called...

Justice Stevens: What... not the suppressant, the suppressant of... appetite suppressant and the three or four things they mentioned, relaxant and stimulant and so on?

Mr. Cooper: FDA has said that those are effects.

It has not said that those are significant enough to be beneficial.

There's no such finding.

Justice Stevens: Well, suppose they made that finding.

Mr. Cooper: We'd have a different case.

Justice Stevens: But they then regulate if... if they had the same evidence on intent?

Mr. Cooper: They would have to have legally sufficient evidence of intent, and...

Justice Stevens: They say they do.

Mr. Cooper: that requires a claim.

Justice Stevens: They say they have such objective evidence, and I didn't understand you to disagree with that finding.

Mr. Cooper: Oh.

FDA says at page 45194 in the Final Rule that they are not relying on any claims, anything on the package labeling...

Justice Breyer: Not claims.

Mr. Cooper: any representations made.

They're relying entirely on other kinds of evidence.

Justice Kennedy: Are you saying that if the requisite intent as hypothesized by Justice Stevens were found, that FDA could regulate despite the existence of the congressional statutes that have been enacted?

Mr. Cooper: No.

I think... I think those statutes...

Justice Kennedy: So the statutory argument stands on its own?

Mr. Cooper: Yes, it does, and I think it... technically, you would say it precludes a finding that a... that a tobacco product is within the jurisdiction of FDA under the definitions.

Justice Breyer: Could I ask one other question which is... I mean, I seem... to me, underlying your basic food and cosmetic argument... food... the... that Act, there were two really basic points, and one you've dealt with, which is the question of, well, what remedy.

It doesn't foresee a sense of a remedy, and that's a question of flexibility.

And the other thing is what I thought Justice O'Connor asked earlier, which is it will produce a whole lot of bizarre results such as, if you could regulate tobacco, then they could regulate thermal gloves.

Have I focussed you on what I'm thinking of?

Mr. Cooper: Yes.

Justice Breyer: Okay.

Now, in thinking about that, I wanted to ask you, suppose you got the thermal-glove effect, you know, warm hands, through a pill.

You know, somebody said take this pill, it will toughen your skin and bring gloves... bring blood to your hand.

Well, now we're taking it through a pill and now it's going to affect our metabolism and change the chemistry of the brain or something.

Well, is it absurd that the FDA could regulate that kind of stuff if you got it through a pill?

Mr. Cooper: With a claim of the type you describe?

Justice Breyer: Well, that's what I'm interested in.

When is the claim part?

And I think we've dealt with that.

Leave the... I mean, not that you've... I'm saying, let's put that to the side for a minute and come back to it if you'd like, but is there anything other than the claim?

You know, what they do is they say take this pill, it's metabolized, it affects your brain, creates an addiction, and lo and behold, you've got warm hands if it gets cold in the winter.

Mr. Cooper: Sounds like alcohol.

Justice Breyer: Yeah... or no.

Well, it's... yeah, maybe it is, and so could they regulate that if it's not a food?

Mr. Cooper: As a drug?

Justice Breyer: Yeah.

Mr. Cooper: No.

I would... I would say they could not.

Justice Breyer: They could not?

Chief Justice Rehnquist: Why not?

Mr. Cooper: There are other statutes.

There are other statutes.

If I put out...

Justice Breyer: Why... why... why not in terms of the words of the Act, the purpose of the Act, the limitation which has gotten... see, I got the limitation by working backwards from the device statute.

Do you see what I mean there?

Mr. Cooper: Yes, because...

Justice Breyer: You know, if the device is not, well, this is.

Mr. Cooper: I think I understand.

Chief Justice Rehnquist: Yeah.

Mr. Cooper: The purpose of the Act, separate from other health... there are many other health and safety statutes.

The purpose of this statute is to regulate products that purport to provide benefits to body structure or functioning.

If all...

Justice Breyer: This does it before.

Mr. Cooper: If all a product does is present risks and some other kinds of benefits, non-health benefits, then you can regulate it under the Consumer Product Safety Act and...

Justice Breyer: Well, what about Marmola?

I mean, why... why would a pill that keeps your hands warm be different from a pill that makes you look slim and trim?

Mr. Cooper: Unless there's a claim that it keeps your hand warm, nobody would know.

Justice Breyer: Or... but is then that... is it only the claim that makes the difference?

Mr. Cooper: Yes.

Justice Breyer: Only the claim?

Mr. Cooper: It's the... it's the... and the nature of the claim.

Justice Breyer: Right, if it's only... okay.

Mr. Cooper: There's got to be a claim, and it's got to be of a... of a benefit.

Justice Breyer: Is it good enough to say the claim... the claim, in our case of the hand-warmers, it keeps your hand warm with Marmola, it keeps you thin, and with cigarettes, what it does is it makes you feel tranquil, stimulated, and cures a physical craving that it created through addiction.

That's the claim, okay?

Now, under those circumstances, aren't those three things the same?

Then we can get to whether there is a claim.

Mr. Cooper: If there is a claim of a non-trivial...

Justice Breyer: No, but I'm... I'm trying to leave the claim out of it for the moment.

I'll... have we got three similar cases?

Marmola, the hand-warming pill, and let's call it the cigarette.

Mr. Cooper: And all of which, just so I have the question clear...

Justice Breyer: All of which you're saying in the one case, we keep your hands warm, in the second case, we keep you slim and trim, and in the third case, we keep you tranquil, stimulated, and we cure an addiction, i.e., we satisfy an addictive craving that we ourselves created.

Mr. Cooper: I don't think that satisfying addiction is sufficient.

Justice Kennedy: Okay, we got...

Mr. Cooper: But if you... if... if you have a product that... that makes a claim to stimulate or to sedate, that's within FDA's jurisdiction.

Unidentified Justice: Okay.

Justice Breyer: Now, if that's so and all we're left with is a...

Mr. Cooper: It's not a tobacco product.

Justice Kennedy: No, no.

Mr. Cooper: We don't have the tobacco-specific statutes.

Justice Breyer: Okay, got all that out.

All... if all we've got left is the claim, now, why isn't it the same as making a claim that everybody who buys the product knows that you want it to do that and you do want it to do that, and so they don't have to read words on a package, they've got the point once you say it's a cigarette?

Mr. Cooper: Because the way the Food, Drug and Cosmetic Act has always worked is that the initiative for defining the purpose, the use of the product is with the manufacturer.

It's done through the approval process.

When the manufacturer submits the application to FDA, it covers not only the product.

It covers the proposed labeling for the product, which specifies what the product is to be for... is to be used for, and thereby specifies the dimension of efficacy that's to be assessed by FDA.

Justice Kennedy: All right.

Justice Souter: What... what do you make of the regulation which has apparently been on the books for decades which we have referred to or the FDA has referred to as objective intent?

That seems to be an alternative to a claims-made scheme.

Mr. Cooper: No, I say it's the same.

It's not objective evidence of intent.

It's objective intent, and I say it's a strict analogy to congressional intent.

Like congressional intent, it's not what's in somebody's mind.

It's what's written on public documents that everybody can see and everybody can know about.

We talk about the intent of...

Justice Souter: It is certainly a very obscure way of referring to an express claim.

Mr. Cooper: If you... if you go through the various sentences in the regulations, FDA says objective intent is determined by the representations of the manufacturer or other vendor.

In the absence of such representations, we can look to objective circumstances.

FDA very easily...

Justice Souter: And the objective circumstances are the subject of Justice Breyer's question.

Why are not these objective circumstances subject to FDA notice even though there is no express claim?

Mr. Cooper: They come into play only where there is no intended use established by other representations.

When the case of...

Justice Breyer: You mean it's a default rule?

Mr. Cooper: It's a default rule.

In the case of tobacco products, we have had for decades, time out of mind, representations that their intended use is for smoking pleasure...

Chief Justice Rehnquist: Okay.

And what... what is the...

Mr. Cooper: and taste and so on.

Justice Souter: What... and I... I think this has passed over me because I didn't know it was coming.

What is the textual basis for your saying it is simply a default rule?

Mr. Cooper: Just reading it.

I mean, it's in the regulations.

Justice Kennedy: Well, you were just referring... you were just referring...

Mr. Cooper: It's in... it's in the regulations.

Justice Breyer: to the text.

Justice Souter: What is... what is the textual phrase, if you can give it to me?

Justice Stevens: It's not statutory text.

It's regulatory text.

Justice Breyer: That's... yeah.

Mr. Cooper: This is... it's in the regulations.

The wordsor words of similar import refer to the objective intent of the persons legally responsible for the labeling of the drugs.

Next sentence.

The intent is determined by such persons' expressions or may be shown by the circumstances surrounding the distribution of the article.

Justice Souter: Well,does not sound to me...

Mr. Cooper: Right.

Justice Souter: like a default rule.

It sounds like an alternative.

Mr. Cooper: I'm just... I'm... that's how it has been understood for decades.

That... there are many drugs, for example...

Justice Souter: You're saying it's been understood is the default.

Mr. Cooper: Well, there are many drugs and devices, some of the most important in all of medicine, that have off-label uses, that are not covered by the representations by the manufacturer, that are widespread, common, foreseeable, and medically necessary...

Justice Kennedy: So your...

Mr. Cooper: to save lives.

Justice Souter: your... your argument, I guess, is if you're going to preserve the... the concept of off-label uses, you've got to take this default.

Mr. Cooper: Yes.

Otherwise, all of those products become unlawful... unlawful.

Justice O'Connor: Okay.

Justice Scalia: The primary purpose...

Justice Breyer: Well, but then the...

primary purpose would serve the same thing.

It's the primary purpose of the cigarette manufacturer to produce this satisfaction or tranquility or stimulation through an addictive mechanism.

It is not the primary purpose of the drug manufacturer to produce the off-label use.

Mr. Cooper: It may well be.

In the case of...

Justice Breyer: Oh.

Well, if it is, then why...

Mr. Cooper: In the case...

Justice Breyer: shouldn't they go...

Mr. Cooper: Well...

Justice Breyer: through the process?

Mr. Cooper: take a concrete example.

Children's aspirin is... is virtually... has virtually no use for children these days because of Reye's syndrome, is widely used by adults on the advice of physicians.

Justice Stevens: And on your view, the FDA could not regulate the use of baby aspirin for adults.

Mr. Cooper: Except if... if FDA finds...

Justice Stevens: Under the way they now advertise it, they could not regulate it; isn't that right?

Mr. Cooper: Well, they can.

They can.

FDA can always determine that overall it is an unsafe product, taking everything into account.

Justice Stevens: Even though there are no claims involved?

Mr. Cooper: You... you can take the adverse... yes.

You can take adverse effects...

Justice Stevens: Provided, though, it has to be intended for... for use on the human body.

Mr. Cooper: No, no.

FDA's safety assessment is with respect to whether the benefits of the intended use outweigh the risks from... from all uses of the product.

Justice Stevens: Yes, but...

Chief Justice Rehnquist: Most... most children's aspirin says on it, also for adult aspirin regime.

Mr. Cooper: Yes, but without specifying what it's for.

Justice Breyer: Well, it's not the end of the world if they can regulate children's aspirin.

I mean...

Mr. Cooper: They do regulate it.

Justice Breyer: so they should.

Justice Scalia: Right.

Justice Breyer: So I thought the claim, of course, is always present with almost all drugs because drugs normally by their name don't explain themselves, but the unusual thing here is that we do have a product that everybody knows what it does, and that's why I ask whether claim isn't really indicative of intent rather than the other way around.

Why do you need the wordwhich isn't in the statute...

Mr. Cooper: You need...

Justice Breyer: when in fact you have the product that the manufacturer wants it used for X and everybody knows it?

Mr. Cooper: You need the wordin order to make the statute workable.

You need it for several reasons.

You need it to avoid the... making all drugs and devices with off-label uses unlawful and depriving the medical community of those products.

Second, you need...

Justice Breyer: Why the... the way around that... the way around that was primary purpose.

Mr. Cooper: But that... that's got no textual basis either, with due respect.

Justice Breyer: Well, it would avoid the problem that you have.

Justice Scalia: A lot of this...

Mr. Cooper, are you going to talk about your statutory argument?

You say you have a whole separate basis that... that exists separately.

Frankly, my... my whole concern with this thing is... is that even assuming that originally the Food and Drug Act could have been interpreted to... to apply to cigarettes, there's a lot of water over the dam since then, including representations by... by commissioners which have been the basis for other Federal legislation.

Now, do you want...

Mr. Cooper: Let me say...

Justice Scalia: to discuss what that other Federal legislation is...

Mr. Cooper: I'd say two... two things.

Justice Scalia: and why you think it's inconsistent with... with the Food and Drug Act?

Justice Kennedy: Just as a preface to this same subject, I... I had the same concerns with the case, and they were addressed by Justice Souter when he asked about the global position of the case with reference to the statute, and I wasn't quite sure that the Solicitor General was able to... to focus in on it either.

As part of your discussion, perhaps you could tell me... tell us, Section 1331, does this repeal the... the original FDA in part and... or... or is it an indication that Congress is now taking away jurisdiction that once the FDA would have had?

Mr. Cooper: Let me... it's not a repeal, but I... it's... it's analogous methodologically to Estate of Romani and to U.S. v. Fausto.

You have multiple statutes and you need to read them together to make sense.

What I would say 1331 shows, that there's more at stake here than health.

Health problem is obviously critical, but Congress in 1331 made it clear that it's balancing and making tradeoffs among a number of interests in addition to health.

Economic interests, interests in informed adult choice, those are beyond the ken of FDA.

As Commissioner Kessler said, the regulation of tobacco raises, in his words, societal issues of great complexity and magnitude.

Those are not for FDA.

Those are for Congress.

Congress addressed them in the Federal Cigarette Labelling and Advertising Act, and it told how it was going to do it and how... how these products are to be regulated in 1331.

Chief Justice Rehnquist: What you're saying basically, there's kind of a legal stenosis going on here; that because of everything that has happened, the original grant to the... to the FDA has been somewhat narrowed?

Mr. Cooper: I... I would say there was no original grant to FDA.

The possibility of an original grant, the theoretical possibility has been eliminated... was eliminated in 1965.

Give you one other example.

FDA acknowledges that the cigarette and smokeless statutes prevented from requiring health information on packages of tobacco products.

These are products sold over the counter.

Health information on drugs and devices sold over the counter is the predominant way that FDA ensures that these products are safe and effective.

If you take that away from FDA, as Congress did with respect to tobacco products, there's no way to ensure as a practical matter that these products be safe and effective.

It would make no sense for Congress to delegate to FDA authority to regulate tobacco products as over-the-counter drugs and devices, but disable FDA from using the primary tool to ensure the safety of these products.

You go into a drug store.

You pick up a drug or a device.

It will tell you in great detail how to use it safely and effectively, and FDA is disabled from using that core power with respect to these products.

Justice Kennedy: Do you read 1331 as saying... as being a congressional determination that tobacco is a lawful product?

Mr. Cooper: Yes, I do, and... and... and that determination existed even in 1938.

In the Agricultural Adjustment Act of 1938, which is cited on page 10 of the Philip Morris Lorillard brief, Congress in Section 311, which today is 7 United States Code 1311, found that the marketing of tobacco is one of the greatest basic industries of the United States, and further found that stable conditions therein are necessary to the general welfare.

That finding is absolutely incompatible not only with a ban, but with a delegation to an agency of authority to ban.

Justice Scalia: Which is conceivable.

I guess downhill skiing is not good for your health either, and... and we do allow that, don't we?

Mr. Cooper: We permit adults...

Justice Breyer: Yeah.

Mr. Cooper: and others to do that.

I would submit that FDA's assertion of jurisdiction here is lawless, and however admirable its intentions, its motive, it is setting aside established principles of law.

It is doing real harm to the Food, Drug and Cosmetic Act, potentially expanding the agency's jurisdiction beyond limit, and severely weakening the consumer protection provisions of the Act in the interest of enhancing the Agency's discretion.

That Congress provided for the way these products are to be regulated, and if there are new facts, the precedent of 1964 should be followed when the Surgeon General made his report to Congress and went and testified and Congress enacted a new statute.

That's what should happen here, and FDA's assertion of authority should not stand.

Thank you.

Rebuttal of Gen Seth P. Waxman

Chief Justice Rehnquist: Thank you, Mr. Cooper.

General Waxman, you have 2 minutes remaining.

Mr. Waxman: Lawless.

The agency has made a reasoned determination about a statute that this Court has always given it great deference to, and this... which this Court has uniformly said must be given a broad reading to effectuate its purposes.

It has found without dispute that pharmacological effects are produced, they are intended, and that the manufacturers secretly for years have engineered their products to sustain those particular uses.

The... the notion that this somehow exceeds the bounds of the law, I suppose, depends on either a notion that although this statute is careful in different sections to talk about intended use versus claims... and we've cited many of the instances in our... in our brief... nonetheless, intended use has to be meant to read... to read claim.

That... if this Court were to construe the FDCA to have intended use mean market claims would revolutionalize the way this agency has done business for more than 60 years, and it would create the largest regulatory hole in existence by allowing anyone, no matter how dangerous or benign their product, to market it simply by saying that it provides satisfaction, or it's ibuprofen, we're not going to tell you what it... what it regulates.

Justice Scalia: What do you do about... about the doctors using... using medicines for non-prescribed uses?

What... how do you explain that?

Mr. Waxman: As we've explained in our brief at page 5 and with specific reference to the aspirin example, which is the only example that they've given, the FDA does not regulate off-label use by... may I finish my answer?

does not regulate off-label use by physicians, but it provides... and there is a 1972 notice that was published in the Federal Register that when it determines that an off-label use becomes widespread or common, it will inquire, ask the manufacturer to come in and may require it to label it, which it has done with respect to baby aspirin itself.

Chief Justice Rehnquist: Thank you, General Waxman.

Mr. Waxman: Thank you very much.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The Oyez Project

Featured:

Beach v. Ocwen Federal Bank - Oral Argument

Fri, 09 Jan 2009 14:50:04 +0000

Case:

Beach v. Ocwen Federal Bank

Media File:

97-5310_19980302-argument.mp3

Related Transcript:

1997_97_5310_argument.xml

Transcript:

Argument of Bruce S. Rogow

Chief Justice Rehnquist: We'll hear argument now in Number 97-5310, David R. Beach v. the Ocwen Federal Bank.

Mr. Rogow.

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

Ocwen Bank agrees that there is a right of rescission in recoupment after 3 years.

Ocwen, however, says that that right in recoupment is a State safety net, that one can rescind in recoupment only if there is fraud or duress or coercion under State law principles.

Unknown Speaker: Is right of rescission in recoupment, is that a term peculiar to Florida law, or is that how we speak of it generally?

I always thought it... recoupment as simply being offset to damages, but rescission is an action of an equitable nature.

I don't... and your brief talks in the same way.

You seem to conflate the two terms.

Mr. Rogow: Justice Kennedy, rescission in this situation is statutory rescission, and I think it's important to note, too, that the right to rescind within 3 years is not an action in rescission under the truth-in-lending law.

It is merely sending a notice of rescission within the 3 years.

Unknown Speaker: Well, can't we say that without coupling it with the term of recoupment, or does that somehow help your case to talk about recoupment?

Mr. Rogow: It helps our case to talk about recoupment and, indeed, 1635(i)(3) talks about rescission in recoupment, a statute that the supreme court of Florida absolutely ignored in this analysis.

Unknown Speaker: The statute itself talks about rescission in recoupment?

Mr. Rogow: Under State law, but the caption of (i)(3) is the right to recoupment under State law, and then the statute says, nothing in this section shall affect the right to rescission in recoupment under State law.

Ocwen suggests that that only means State law rescission for fraud, duress, or coercion, and our position is, is it means more than that.

It means the Federal Truth-in-Lending Act right to rescission, and several reasons support our position.

The first is the notion that, when one looks at this statute, the word rescission used throughout the statute is Federal TILA rescission, and this Court's decision last week in National Credit Union reasserted a principle that, when one looks at statutes and the same words are used throughout the statute, then the word has the same meaning, and here the word rescission is used throughout section 1635 and it is referring to TILA rescission, Truth-in-Lending Act rescission, so under that--

Unknown Speaker: Mr. Rogow, under the statute I guess, regardless of the timing of the discovery of a failure to comply with TILA, that the homeowner, your client, in effect, could in any event obtain damages that result from whatever failure to disclose was involved, is that right?

Mr. Rogow: --That is--

Unknown Speaker: Without any time limit on that.

You can get actual damages.

Mr. Rogow: --You can get actual damages, Justice O'Connor, and statutory--

Unknown Speaker: And also twice the amount of any finance charge.

Mr. Rogow: --A statutory penalty with a maximum... in this case it was $1,000, and there was $1,000, in effect a penalty under 1640, plus the overcharge, and plus another amount of--

Unknown Speaker: So that's available without time limit.

Mr. Rogow: --That is available.

Unknown Speaker: But your client asserts in addition a right to rescind and recover all of the interest paid for the period of time that the mortgage was in effect and payments were made on it, is that right?

Mr. Rogow: That is right, Justice O'Connor, recover the interest paid, on the other hand have to pay back the principal.

The rescission--

Unknown Speaker: Yes.

I mean, it could have been 20 years of payment under the mortgage, presumably--

Mr. Rogow: --It could be--

Unknown Speaker: --when you discover there's some $7 deficiency here.

Mr. Rogow: --Well, a $7 deficiency--

Unknown Speaker: I mean, that would be enough, wouldn't it--

Mr. Rogow: --No, it would not--

Unknown Speaker: --under your theory?

Mr. Rogow: --It wouldn't be enough, Justice O'Connor, because under Congress' construct it would have to be more, but I think the answer to this is... because I understand--

Unknown Speaker: Well, no matter how small the failing, and this was pretty small, and no matter how much time has elapsed, it's your position that there's this indefinite right of rescission to get back all of the interest paid, in addition to the damages and in addition to the statutory penalty, right?

Mr. Rogow: --Yes, Justice O'Connor, because Congress has said that is right, because the remedy--

Unknown Speaker: Well, that's what we're here to decide.

I'm not a bit sure that's what they said, but that's your position.

Mr. Rogow: --That is our position, Justice O'Connor, but we think it's informed by how one construes these statutes.

Beginning with the first point that I make, Congress certainly has said rescission in recoupment, nothing in this section, which would be--

Unknown Speaker: Mr. Rogow, can I ask just one other detailed practical question?

You do have to tender back the amount of the loan to principal, don't you?

Mr. Rogow: --Yes.

Unknown Speaker: And your client is here in forma pauperis, as I understand it.

Mr. Rogow: Yes.

Unknown Speaker: Does he have the money to do that?

Mr. Rogow: Well, at this moment, of course, he doesn't have the money to do that and what happens in these cases generally is, is that if the right to rescission is invoked, then the borrower is entitled to the return of the interest, but the borrower has to pay the principal back.

Unknown Speaker: Right.

Mr. Rogow: And in some situations, indeed, if one's house has appreciated in value, you can then refinance your house and pay back the principal.

But I think the important thing here, Justice Stevens, is is that whatever the remedy is, is a remedy that Congress has constructed not as a penalty to the lender, but to force the lender to conform to the truth-in-lending law.

The truth-in-lending law, its purpose is to protect consumers.

Unknown Speaker: Mr. Rogow, you are so stressing the word rescission... you say that's used over repeatedly, and yet Congress used such distinctly different language in dealing with the 1-year time limit for damages.

It says no action should be brought, traditional statute of limitations.

Here, it talks about the right to rescind shall expire.

One sounds like it's simply a typical statute of limitations and you can raise... and defensively you can recoup.

The other, it sounds like expire, dead, over, after 3 years it's gone, and you make... how do you explain that Congress picked this word expire to describe the right of rescission, and then talking about the 1-year limitation, used traditional statute of limitations language?

Mr. Rogow: Two ways, Justice Ginsburg.

The first is the right that expires is the right to affirmatively rescind.

That right that they're talking about is the right within 3 years to say to the lender, I am rescinding this transaction.

That is the right that expires.

Unknown Speaker: Well, you say so, but what is there in the statute that indicates that, and anything that indicates that it's only... the same thing... what you're saying is, it is the same thing as the extension of the statute of limitations, which doesn't count if you're seeking only to recoup.

Mr. Rogow: Justice Ginsburg, (i)(3) says the right to rescission in recoupment shall not be affected and is available under State law, so even if one looks at 1635(f), the shall expire language, that is revived by (i)(3).

Unknown Speaker: Mr. Rogow, can I ask you about that?

Do you want us to determine what Florida law says?

I mean, let's assume we agree with you as to the meaning of (i)(3), should we determine that there is such a right of rescission in recoupment under Florida law?

Mr. Rogow: No, Justice Scalia.

Unknown Speaker: You would want us to remand--

Mr. Rogow: Yes.

Unknown Speaker: --to let the Florida supreme court decide that?

Mr. Rogow: Yes, because--

Unknown Speaker: So is that the most you're asking for?

Mr. Rogow: --It is.

Unknown Speaker: A right to remand to let the Florida court decide whether, under Florida law, there is such a right?

Mr. Rogow: To let the Florida court decide whether or not, under Florida law properly applying Federal law.

The difficulty with the supreme court of Florida decision was--

Unknown Speaker: Well, wait, wait, wait.

That's not what it says.

It says, under State law, affects a consumer's right of rescission and recoupment under State law.

Mr. Rogow: --It says the right to... the caption of it says, the right to recoupment under State law.

The question then becomes whether or not Florida permits recoupment under State law and whether or not it would permit rescission.

Florida, in--

Unknown Speaker: But I mean, Florida may decide that this is a peculiar sort of an action, this rescission action, for which it will not allow recoupment.

Is that not within the realm of permissibility?

Mr. Rogow: --It is not if it misapplies Federal law.

The supreme court of Florida--

Unknown Speaker: Well, why would it say under State law, then?

Mr. Rogow: --Well, because--

Unknown Speaker: I mean, if it's a matter of Federal law they could have left out the phrase in (i)(3) nothing... it could have just said, nothing in this subsection affects a consumer's right of rescission and recoupment, period.

Mr. Rogow: --In (i)(3), the caption, I come back, that says the right of recoupment under State law--

Unknown Speaker: I don't care about the caption.

I'm talking about the text.

We don't go by captions.

We go by the text.

Mr. Rogow: --And the right of rescission, Justice Scalia, is the right of rescission... TILA rescission and State law rescission.

What Ocwen is... Ocwen agrees there is a right of rescission.

They're claiming that that right of rescission is strictly a State law right of rescission, and when one reads a supreme court of Florida opinion, it is driven by its view that Congress has said that there shall be no right of rescission under Federal law.

That's the heart of our argument, that was a mistake.

Unknown Speaker: I understand that.

They say that under Federal law there can be no State law of... right of rescission, and you say that's wrong, but can't we... if we send it back, couldn't they still find that under State law, regardless of what the Federal law said, we don't think this is the kind of matter on which there should be recoupment?

Mr. Rogow: Not if they applied neutral principles of Florida law, because Florida law permits rescission in recoupment--

Unknown Speaker: Okay--

Mr. Rogow--

--But it's a question of Florida law.

Mr. Rogow: It's an ultimate question of Florida law applying--

Unknown Speaker: And what you say is neutral principles of Florida law may not be what the Florida supreme court thinks are neutral principles.

Mr. Rogow: --And they would not be if the Florida supreme court properly addressed 1635(f).

By misconstruing 1635(f) and 1635(i)(3) the supreme court of Florida came to the conclusion really on two foundations, 1) that 1635(f) is a statute of repose.

The right shall expire.

It failed to address... indeed, it said that (i)(3) is not even relevant to this inquiry, and clearly--

Unknown Speaker: May I clarify one thing, Mr. Rogow, because I think we lost a piece of this that's essential.

I think... you said at the very beginning that the bank agrees there is a right to rescission in recoupment, whatever you--

Mr. Rogow: --Yes.

Unknown Speaker: --But solely under State law.

That is, as Justice Scalia asked the question, the... there is a concession, whatever, that whatever Florida law would be apart from TILA, TILA doesn't exist, if there's a right to rescission under State law that would apply here, but I think you're urging the double... the two things.

That is, you must get TILA into it, otherwise there's no difference in your position.

Mr. Rogow: That is exactly right.

Our position is, is that 1635 (i)(3) embraces TILA rescission and State law rescission.

It leaves the door open--

Unknown Speaker: But if you're right about TILA having this right of rescission in recoupment, then why do you need the provision that talks about State law?

You've got... you say that under TILA in 3 years or 10 years, it doesn't matter, you can rescind if you're sued.

Now, what extra does this add?

If you have your right under Federal law, then what does the addition of the State law--

Mr. Rogow: --It makes it clear that Federal law is not preempting the field, but rescission in recoupment under State law would also be available for fraud, duress, or coercion.

Unknown Speaker: --It's not a matter of preemption.

It's a matter of ultimate source.

You're saying, I think, that the obligation to make these disclosures and to make these calculations correctly arises under Federal law.

Mr. Rogow: It does, Justice Kennedy.

Unknown Speaker: And it's for that Federal law Congress has provided a remedy for breach, rescission, but it says it can only be for 3 years.

Mr. Rogow: It says it can only be--

Unknown Speaker: So it seems to me, as Justice Ginsburg is indicating, you're trying to have it both ways, but that's quite different from saying that there is simply a State law cause of action.

Mr. Rogow: --Well, what we're saying, Justice Kennedy, is... and the supreme court of Florida came to the conclusion that there is no Federal right to rescission after 3 years.

If they are wrong about that, then their decision is not properly informed, and that's what we're arguing, that they are wrong about that.

Unknown Speaker: But certainly section... subsection, or double subsection (3) of 1635(i), which says nothing in this subsection affects a consumer's right of rescission in recoupment... that does not give any Federal right.

Mr. Rogow: It leaves open the door to the Federal right.

Unknown Speaker: It leaves... well, it leaves open the possibility that the State may give you a right.

Mr. Rogow: It certainly leaves open the State giving you a right, but it does not preclude, and I think that's the key to this case, is it does not preclude the use of the Federal right.

Unknown Speaker: No, but it seems to me that your Federal right of rescission goes when it says an obligor's right of rescission shall expire 3 years after the date of consummation.

Mr. Rogow: That's 1635(f).

Unknown Speaker: Well, and that is your right of rescission under this statute.

Mr. Rogow: That is your right to affirmatively--

Unknown Speaker: What do you mean, affirmatively rescind?

Mr. Rogow: --By--

Unknown Speaker: It doesn't say affirmatively rescind.

Mr. Rogow: --When one reads 1635(a) and 1635(b) in that section, they're talking about sending a notice of rescission within 3 years, affirmatively rescinding.

We are talking about rescinding in recoupment, something that happens after 3 years when one has been sued in foreclosure.

Unknown Speaker: And that's a State law right.

Mr. Rogow: That is, if State law permits recoupment, then there is a right to rescission and the question is, which right to rescission, State law rescission, or State law rescission and the Federal TILA rescission?

Unknown Speaker: Mr. Rogow, did the petitioner ask for a rescission remedy as a matter of State law in the proceedings below?

Mr. Rogow: As a... the petitioner raised 1635 rescission, which was Federal rescission.

Unknown Speaker: But not State law--

Mr. Rogow: At the... that's right.

Unknown Speaker: --rescission.

That was not raised.

Mr. Rogow: It was not, and at the time (i)(3) was not in existence when the petitioner filed his... his and her affirmative defenses, so they were relying upon the right to rescission, which every court that had addressed this since 1984 found that there was a right to rescission in recoupment after 3 years.

Unknown Speaker: Why is--

--May I... no, please.

May I go back, though, to an earlier question.

Leaving aside the fact that the word affirmative does not appear in 1635(f), how do you explain the distinction between the shall-not-be-brought language with respect to the damages remedy, which sounds like a normal statute of limitations, and the shall-expire language with respect to this rescission right?

What is the reason, in effect, that I think you're telling us we should ignore that distinction?

Mr. Rogow: No.

The cases, Bull, Reiter, Western Pacific, clearly make it plain that Congress... only the clearest congressional language would prevent a statute of limitations from being used in recoupment, and the language here, shall expire, is being read now as something other than a statute of limitations.

I don't think the nomenclature makes any difference in this situation.

Unknown Speaker: Well, but my question is, why shouldn't it make some difference?

The shall... the shall not be brought is standard limitation language.

Shall expire is not, and on its face it suggests that in fact a distinction is being made, and I don't know why we should ignore that distinction in language and find it of no significance, and I don't think you've answered that.

Mr. Rogow: I think, Justice Souter, that the answer lies in (i)(3), that if one views, as is right, as having expired, then (i)(3) revived it by its language that leaves open the notion that there can be rescission in recoupment.

Unknown Speaker: Well, (i)(3) doesn't have to be read that way.

Cannot (i)(3) refer to State law recoupment permissions that do not rely upon this Federal statute?

That is to say, if the same failure to provide information under this Federal statute also constitutes a fraud under State law, this provision can be read to say, recoupment and rescission for that fraud is not affected by our 3-dyear termination of the rescission for violation of this act.

Mr. Rogow: But the question--

Unknown Speaker: Violation of the act is also a fraud.

Mr. Rogow: --But the question, Justice Scalia, is whether or not it can only be read that way.

Congress had the opportunity--

Unknown Speaker: No, it need not only be read that way.

I'm saying, when you put that together with the indication that Justice Souter was just referring to, the indication that they use language different from the statute of limitations, those two go together very nicely.

Mr. Rogow: --But the supreme court of Florida said it can only be read one way, and that, we think, is their error.

It can be read... unless there's clear language that says there is no rescission in recoupment under Reiter, Bull, and Western Pacific, then the Court should conclude that--

Unknown Speaker: But Mr. Rogow why isn't the word expire here?

I mean, I dimly recall learning in law school that there were two kinds of time bars.

One extinguished the remedy, and that's no action shall be brought, and one was supposed to extinguish the right, and that was the right terminates, not just the remedy.

Now, that's what the difference in language triggered in my mind immediately, that expire sounds like the one you've got no more right, and the other is, well, too bad you can't sue on it.

Mr. Rogow: --And (i)(3) addresses that when it says that nothing in this section, which includes the 3-year limitation which is referred to in section (i), shall affect the right to rescission in recoupment under State law, so while that... your reading would be the usual reading, the fact that (i)(3) is added to this changes this from being that kind of statute of repose where the right has expired, died as often is suggested, into something that now has been revived.

Unknown Speaker: No, but your argument, as I understand it, is that the reason (i) revives it is that (i), in effect... or State law looks to... would look to Federal law, and specifically this act, but when Federal... when State law does look to Federal law under this act, what it sees is what Justice Ginsburg just described.

It sees language that seems to say, with respect to the 1635 right, it expires, so whether (i) is there or whether (i) isn't there, you've got to deal with the expire language and I do not see that the formulaic incorpora... or reservation of State law has any bearing one way or the other on the significance of that distinction.

Mr. Rogow: Justice Souter, Congress had the opportunity to make it specific that there will be no rescission in recoupment.

The AARP brief has in its appendix the four different bills, I think it was, that were offered to accomplish what Ocwen is now asking this Court.

Congress rejected that.

Congress did not include that language that made it clear that this right shall--

Unknown Speaker: Did they take a vote on that, the whole Congress said we do not want these statutes?

Mr. Rogow: --No, but by--

Unknown Speaker: Just a committee, right?

Mr. Rogow: --But by rejecting the bill, Justice Scalia, by rejecting the bill--

Unknown Speaker: Did the whole Congress reject the bill?

Mr. Rogow: --Well, in terms of how Congress voted, obviously the end result was (i)(3).

Unknown Speaker: Those bills were never presented to the whole Congress, were they?

Mr. Rogow: They did not come out of committee, but in this legislative process there has been no showing by Congress that this is what it intended, that this right shall expire.

I think it's--

Unknown Speaker: But it says in so many words that it shall expire.

Mr. Rogow: --It does for the affirmative right to rescind--

Unknown Speaker: It doesn't say affirmative, Mr. Rogow.

You've been putting that word in front of rescission all during this argument and the statute simply doesn't say it.

Mr. Rogow: --Justice... Chief Justice Rehnquist, by talking about that right in that section they are dealing specifically with that affirmative right to rescind within 3 years.

I think it's important to note that the lender controls everything here.

If the lender conforms to Federal law, then there is no potential for rescission.

Unknown Speaker: Is the... I'm back with Justice Kennedy.

That is, this seems like such an odd legal animal, rescission in recoupment.

I don't understand what it is, that... is there any other place it exists in the law?

My understanding is that if you give me $2,000... suppose you gave me $2,000, and I was supposed to give it back to you.

I never did, and you forgot about it.

20 years later, I sue you for $10,000 on something else, and even though there's a statute of limitations you could say, wait, Breyer has my $2,000.

Deduct it from the 10.

That's recoupment, isn't it?

Mr. Rogow: That is, Justice Breyer.

Unknown Speaker: All right.

Well, by analogy that would here permit the borrower, the homeowner to deduct, when 20 years later they try to foreclose on the mortgage, the bank tries to get its money back, it would permit him to deduct however much he was hurt by a failure to disclose, but everybody concedes he gets that.

Now what he wants is something more.

He wants something he never gave me.

He wants me not to collect any interest over 20 years, so that doesn't sound like anything to do with recoupment, and it's something else.

It's like a penalty or something.

So is there... if TILA never existed, if you look across all State law, is there any other instance you came across where something like that sounded as if it was part of recoupment?

It just doesn't sound like recoupment.

Everybody's saying, rescission in recoupment.

I know it's written in a statute, but I want to know, is this like a normal legal animal, or is it something they invented out of TILA, or where did it ever come from?

Mr. Rogow: I'm not aware of it anywhere else, Justice Breyer, but--

Unknown Speaker: All right.

So if it's nowhere else in the law, and if it starts out by saying, nothing in this subchapter shall, you know, have any effect on something called rescission and recoupment, then it sounds like, if nothing in this subchapter, then, forget it, it's gone, because there is no such thing.

Mr. Rogow: --Well, then I think those words would be meaningless, the (i)(3) language would be meaningless.

Unknown Speaker: No, but it's possible... you know, you go to Congress, people get all mixed up and somebody comes and tells them there's something called rescission in recoupment under State law, and everybody says well, we don't want to touch that.

I mean--

[Laughter]

Mr. Rogow: Well, this was considered and it was rejected, and I think two points I want to make before I reserve the rest of my time is, is that not only do the lenders have the right to cure this defect, because they can cure it and therefore render them not liable in rescission in recoupment, but they can conform to the law.

And I think the beginning point of this is, this is a unique statute.

It is a consumer protection statute.

It's to inform and project the consumer, and rescission is not a penalty.

It puts the parties back in their original position.

Unknown Speaker: May I ask you just to comment on one thing before you sit down, Mr. Rogow?

It's a point that I came across and I thought I answered it, and then it occurred to me, maybe I didn't.

You've mentioned 1635(i)(3).

What I have in mind is the significance of 1635 (i)(1).

I could read it, but you probably know it.

Does that have any significance for your position?

Mr. Rogow: No.

Those provisions in 1635(i) give the consumer a right to rescind within 3 years in certain conditions and the 1995 amendments actually limited the right to rescission.

This made clear that there was a right to rescind within those 3 years for those reasons.

A mortgage broker fee was not disclosed, those kinds of things.

Unknown Speaker: But it's referring to the right which occurs at the time of foreclosure.

Mr. Rogow: Yes.

Unknown Speaker: So it's a defensive... I assume it's a defensive right which functionally is being employed in the same way that you're arguing the general rescission right should be employed.

Mr. Rogow: It is, within 3 years, but that doesn't address recoupment, and recoupment is addressed in (i)(3)--

Unknown Speaker: Okay--

Mr. Rogow: --and (i)(4) makes it--

Unknown Speaker: --I have a technical question.

If they do rescind 30 years later, the borrower, does he actually have to tender the value of the money, or is it that the bank simply has a legal claim to the value of the principal?

Mr. Rogow: --Well, there are equitable principles here, and the court could adjust the--

Unknown Speaker: Well, when you say... in other words, is it possible that 30 years later the homeowner comes back and says, yes, you are entitled, bank, to my original principal, $100,000.

By the way, I'm in bankruptcy, and you don't have any security.

Good luck.

I mean, has that happened?

Is that possible, in your interpretation that would happen?

Mr. Rogow: --There is no record of that happening.

Unknown Speaker: No, ever in the country?

I mean, I'm trying to figure out--

Mr. Rogow: I'm not aware of any, Justice Breyer.

Unknown Speaker: --So they'd actually have to have the $100,000 and give it back to the bank, otherwise they couldn't do the rescission.

Mr. Rogow: The rescission requires a give-and-take.

Unknown Speaker: Is there any reason why a borrower would act within 3 years instead of just sitting back, once he knows there's been a mistake in the original transaction, and waiting for foreclosure?

Meanwhile, he's using the money interest-free.

Mr. Rogow: Because if that were a strategic default, then under equitable recoupment principles and even, indeed, under the rescission principles, the court could take into consideration if there were some bad faith in the way the borrower had addressed this.

Unknown Speaker: And I take it the court could also take into consideration the fact that there's a provision in here that mere computational errors in fact do not support any rescission right at all.

I mean, one of the things that surprises me about this case is what is described as the error here sounds like somebody's adding machine mistake to me, and I presume that if the bank comes forward and affirmatively shows that that's the case, this whole discussion is academic, isn't it?

Mr. Rogow: You would only have the right to rescind if there have been material disclosure errors that the court found were in clear violation of TILA, yes, Justice Souter.

Unknown Speaker: Mr. Phillips, we'll hear from you.

Argument of Carter G. Phillips

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

Given the presentation in the first half-an-hour I'm not sure I'm going to gild this lily at great length, but a couple of points seem to me to warrant attention at this stage.

First, Justice Breyer, in response to your question, the industry amicus brief talks about the problems that arise in the bankruptcy setting and the fact that there are lots of lenders who end up not being able to recover anywhere near the full amount of the outstanding loan in the rescission context, so that's some evidence of--

Unknown Speaker: Why would that be?

I mean, that's... I'm trying to figure out legally why would that be?

If, in order to rescind, the homeowner has to tender back the principal of the loan, why would the bank not get the principal of the loan?

That's what was confusing me.

Mr. Phillips: --As I under... because the principal of the loan is essentially an unsecured debt--

Unknown Speaker: No, but tendering back, I take it, means like you have a certified check and you hand it to the bank, and--

Mr. Phillips: --Well, the question is going to be then, as a matter of equity, whether the tender-back rule has to be applied in the first instance or whether the bankruptcy protections ought to apply in the first instance, and I think a lower court's probably divided with respect to that particular question--

Unknown Speaker: --That's what I found out.

It sounds to me this is an empirical question that should have an answer--

Mr. Phillips: --Well, we know in the Bothelo case--

Unknown Speaker: --and it doesn't sound to me as if people know, particularly.

Mr. Phillips: --Right.

But the Bothelo case was the one case in which that actually happened and they did, in fact, eliminate the tender-back requirement in its full measure.

That's the only one I know about that's cited in the briefs and that's a bankruptcy case, Your Honor.

With respect to where their case stands at this point, we begin with the language of the statute and section 1635 says as plainly as it can that the right that the petitioners seek to assert here expired, and it expired in 1989, and they came in 1991 and they sought to raise it again.

And what they were able to do in 1991, that they were able to do specifically because of section 1640, is they were able to get actual compensatory damages and they were able to get statutory damages, in point of fact, even though the statute of limitations on violations of TILA had already run, and that's because Congress was very careful in devising the remedial scheme that it adopted here.

It recognized that that was an equitable response that frankly tracked this Court's decisions in Bull and Reiter v. Cooper and Western Pacific.

Congress recognized that that was equitable to allow the borrower under those circumstances to come in and to assert that particular right, and they received that, and the question which Justice O'Connor began the argument with I think is really the one that we have to focus on.

Under these circumstances, where you've received full recompense, what sense does it make for Congress to go further and ask you to grant a right of rescission, and the petitioners say that we have to find something in the statute that says you cannot have a right of rescission, and we submit to you that the more reasonable assessment of the equities of the relationship between the parties is, we ought to be looking in this statute for some evidence that a right of rescission in recoupment should exist under the circumstances of this case.

Unknown Speaker: His argument I think was, look at the language.

It says nothing in this subsection affects a consumer's right of rescission in recoupment under State law.

He says, that's an odd legal animal.

The only thing he's ever found that that exists is this kind of a case, so Congress must have had something in mind, and if they didn't have this thing in mind, which distinguishes between affirmative rescissions and rescissions later on in recoupment, what could they have had in mind, so it's either meaningless, or what he says.

That's what I take--

Mr. Phillips: Justice Breyer, I can't improve on your characterization of what probably happened in Congress, which is that somebody identified the possibility of a State law right in rescission and recoupment and the Congress quite rightly reacted negatively and said, wait a second, in this subsection we certainly don't mean to withdraw any of those kinds of State remedies.

Remember, this is a statute that is very solicitous of State law in general, and all of these--

Unknown Speaker: --Florida--

--Do you think there's any possibility that Congress meant rescission or recoupment?

Rescission in recoupment just sounds crazy to me and it would--

Mr. Phillips: --Well, I--

Unknown Speaker: --make perfect sense if it said rescission or recoupment.

Mr. Phillips: --Well, I think it would have made more sense if they had simply said State law rescission and recoupment.

Again, I think all they wanted to make clear of was that State law would be protected.

Unknown Speaker: But is there such an animal in State law as rescission in recoupment?

Mr. Phillips: There is a reference to that language in one of the... actually, one of the earlier Florida cases, where... it's not actually that language, but there is recoupment action, and they do talk about rescission, but you know, our footnote 6 in our brief goes to great lengths... we looked in vain for this to try to figure out where Congress came up with this particular animal and frankly couldn't find it.

Unknown Speaker: Nobody thought of the possibility of a scrivener's error?

Mr. Phillips: Well, I'm always reluctant to press that as the basis for interpretation, Your Honor.

[Laughter]

Unknown Speaker: If it said or--

Thank you.

Mr. Phillips: [Laughter]

Unknown Speaker: --How would the case come out if it said or?

Mr. Phillips: Rescission or recoupment under State law?

It depends on whether State law applies to both.

You see, I think it's clear--

Unknown Speaker: And what's the answer to that?

Mr. Phillips: --Well, I still think that Congress would have meant for State law to apply to both, so it wouldn't have made a difference.

Unknown Speaker: But Mr. Phillips, as I understand your position, you're just saying there's no Federal right here, but I don't think you take the position that if Florida said we're going to treat even a trivial violation of TILA as a ground for State law rescission, you aren't saying that it would be preempted--

Mr. Phillips: No, I'm not arguing it would be preempted, but I do think it's important in that regard, a la Justice Scalia's question about a remand in this case, is that the first half of the Florida supreme court's opinion analyzes the Federal statutory issue.

The second half of it analyzes it as a matter of State recoupment law and conclusively says that in our judgment this kind of a statute is not the kind of a statute in which we would exercise recoupment and therefore, as a matter of State law, there's no basis for recovery.

That's over and above the fact that they've never asked for recovery under State law at any time.

Unknown Speaker: --Well, that's the other point I was going to ask is, when did their claim for a State law recoupment first assert itself?

I didn't find it in the early opinion.

Mr. Phillips: It never asserted itself, to this day.

I mean, there is a single sentence in the reply brief in which they make reference to seeking rescission under State law.

There's no support for it in the citations in the reply brief and there's nothing in the record and actually I heard counsel for petitioner today to effectively concede that the complaint clearly says nothing about State law, and nothing else arose throughout this litigation in--

Unknown Speaker: But you think that nonetheless, as you read the opinion of the Florida supreme court, it rejected any State law recovery, right?

Mr. Phillips: --Absolutely.

Absolutely, because at the end of the--

Unknown Speaker: Even though it wasn't requested.

Mr. Phillips: --That's correct, Justice O'Connor, because the question that was certified to the Florida supreme court was whether or not there was this kind of a right under State law, and if you look at the joint appendix on 164 to 165, the last line of 164 says, after analyzing all of the traditional grounds for statutory interpretation as to why this provision doesn't grant a Federal right it says, but that does not end our inquiry, and then it turns, in Florida, and I take the rest of that analysis really--

Unknown Speaker: And you don't think that the Florida court thought that it was simply not at liberty to confer some State law right of rescission on the theory that TILA had preempted State law.

Mr. Phillips: --I don't see anything in the Court's opinion that remotely suggested that to be the case, Justice O'Connor.

Unknown Speaker: Well, the question presented here is, may an action for the statutory right of rescission provided by TILA be revived as a defense in recoupment beyond the 3-year limit on the right of rescission set forth in section 13... 1635(f).

I'm not sure that even includes that question.

Mr. Phillips: Well, I... no question about it, Mr. Chief Justice, it doesn't include that question, and--

Unknown Speaker: That certainly wasn't... that wasn't the question framed in the petition.

Mr. Phillips: --I'm sorry.

Unknown Speaker: We rewrote the question.

Mr. Phillips: Right.

Yes, Justice Stevens.

Unknown Speaker: So that's not what they present... yes.

Mr. Phillips: Right, but the bottom line is, in terms of I think what is before this Court, is simply a question of Federal law and I think, based on all that's happened today, the question... the Federal question of law is unmistakable.

That is, the right expired.

There is nothing in this statute that remotely revives that right and certainly nothing in (i)(3), which as I think we've discussed now at sufficient length, which simply retains certain protection for State law.

It was a peculiar way, if all you're trying to do is... if what you were really trying to do was to revive a Federal right that you categorically declare to be expired, this is not the way you'd do it, and therefore I don't think that's a fair interpretation of that language of the statute.

If the Court has no further questions, I'll waive back the rest of my time.

Unknown Speaker: Thank you, Mr. Phillips.

Mr. Rogow, you have 1 minute remaining.

Rebuttal of Bruce S. Rogow

Mr. Rogow: Several things.

The Florida supreme court opinion clearly is premised on its view that under 1635 there is no right to rescission, and that informed its view of State law also, and that's at page 171 of the joint appendix.

The courts that have looked at this... Dawes, Colorado, Massachusetts, New York, New Jersey, Illinois... have all decided that there is a right to rescission in recoupment consistent with the Federal TILA right that could be asserted affirmatively within the first 3 years.

This Court has talked generally about recoupment.

It is an equitable remedy.

There is nothing inequitable here.

This is a consumer protection statute, and the lender controls both at the outset the duty to conform to the law and throughout the life of the loan the ability to cure the defect and, in this situation, the... without clear congressional language saying there shall be no recoupment, there is recoupment in rescission, and Florida permits rescission in recoupment and it should have permitted it in this case under Federal law.

Chief Justice Rehnquist: Thank you, Mr. Rogow.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Heintz v. Jenkins - Oral Argument

Fri, 09 Jan 2009 14:49:59 +0000

Case:

Heintz v. Jenkins

Media File:

94-367_19950221-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of George W. Spellmire

Chief Justice Rehnquist: We'll hear argument next in Number 94-367, George W. Heintz v. Darlene Jenkins.

Mr. Spellmire.

Mr. Spellmire: Mr. Chief Justice, and if it please the Court:

The Fair Debt Collection Practices Act should not be read to regulate the conduct of lawyers engaged in the prosecution of litigation even if that litigation is against the consumer for the collection of a debt, and as those terms are defined in the act.

The act, when read as a whole, demonstrates that it was not intended to regulate the behavior or conduct of attorneys when they are performing acts which are uniquely capable of performance by attorneys by reason of their licensure.

The act is ambiguous, and a... by its definition of debt collector, and a literal application of the language of that statute, that act, would result in absurd outcomes, when reviewed with other statutes.

The congressional intent clearly establishes that Congress never intended the act to reach the conduct of lawyers performing the function of lawyers.

Unknown Speaker: Well, Congress certainly did drop the exception that used to be in there for lawyers, didn't it?

Mr. Spellmire: Yes, it did, Your Honor.

It did drop that exception.

Unknown Speaker: And that certainly points in the direction of at least opening the question as to whether the definition of debt collector extends to lawyers who regularly collect or attempt to collect debts owed to another.

Mr. Spellmire: I think there is no question, Your Honor.

Unknown Speaker: And the language literally can cover that kind of an attorney.

Mr. Spellmire: Your Honor, I do... the petitioner does not agree that the language, when read in light of the entire statute, could be interpreted as the Court has suggested its interpretation.

When Congress removed the exception--

Unknown Speaker: On looking at the definition of debt collector, and if you look at that in light of Congress' repeal of any exception for lawyers, it does seem to me that a lawyer could be a debt collector.

Now, it may raise other practical problems, but if you look at that definition, it would appear possible that a lawyer could be a debt collector.

Mr. Spellmire: --Your Honor, the definition, taken in the context of the statute, is ambiguous.

There's no question that an attorney can perform the activities of a debt collector, and when performing the activities of a debt collector would be governed by this act.

I think the phrase "debt collector" is clearly understandable when it is focused to collection agencies who through the mails or through the use of phone contact bring personal pressure and contact to bear upon an individual to pay a debt.

A lawyer, on the other hand, engaged in litigation, applies to a court, and asks a court to find a debt to be due, and asks a court to order the payment of that debt.

There is a difference between the two, and when read in the context of this statute, the definition of "debt collector" unless... unless there is some explanation of what it means to collect a debt, remains ambiguous.

Since it is ambiguous--

Unknown Speaker: Isn't the ambiguity, though, answered by the terms that were repealed, because prior to the amendment the statute didn't merely have a general exception for lawyers, the exception read, any attorney at law collecting a debt as an attorney on behalf of.

That seems to refer to the peculiar functions that lawyers perform, and it would seem that the exception that used to be there is, in its terms, remarkably close, if not identical, to the exception that you want us to find as a way to resolve the ambiguity, and yet that was repealed.

And doesn't the repeal of that language, which referred to lawyers acting as attorneys, cut against you and resolve the very ambiguity that you raise?

Mr. Spellmire: --No, it does not.

Let me explain.

When Congress initially enacted this legislation, it did have the exception, and lawyers, attorneys, in all of their functions when representing a client, were exempted from its coverage.

Following that enactment, lawyers then entered into the debt collection business in competition with lay debt collectors.

Unknown Speaker: Well, that is to say they took on a lot of clients who had debts, and they specialized in debt collection.

Mr. Spellmire: They performed--

Unknown Speaker: They were still representing clients, weren't they?

Mr. Spellmire: --They were... yes, they were still representing clients, but the activities--

Unknown Speaker: So they were doing just what the exception says would not bring them subject to the act.

Mr. Spellmire: --They were representing clients, but in order to understand the meaning of the term "debt collector" within that statute, given its ambiguity, one has to examine the purposes for which the exceptions were removed, and the purpose and the congressional intention in removing the statute was to subject attorneys, when they engaged in the same activities as lay debt collectors, to the same rules.

Unknown Speaker: Well, if that were the case, I don't know why it was necessary, because the exception read,

"an attorney collecting a debt as an attorney. "

That is to say, I suppose, exercising those peculiar functions and powers that lawyers, as attorneys, may exercise, and if Congress meant nothing more than you say it meant, then it would seem to me that the attorneys, to the extent that they were doing something which was not peculiar to their profession, would have been covered by the statute anyway, so it wouldn't have been necessary to repeal the exception.

Mr. Spellmire: Your Honor, it is clear from the legislative history concerning this amendment.

Unknown Speaker: Well, how about... and I don't want to cut you off from getting into that, but how about a... just a comment on the text of the exception itself.

The exception was limited to the exercise of functions as an attorney, i.e., functions which any debt collector in general would not have been able to exercise.

Mr. Spellmire: At the time the exception was enacted with the original enactment of the act, attorneys--

Unknown Speaker: Okay, but isn't that what the text says?

Mr. Spellmire: --That is what the text says.

Unknown Speaker: Okay.

Okay.

Well, does that have to mean only those functions that only an attorney can perform?

Can you not be hired as an attorney for purposes of collecting the debt, and part of what you could do as an attorney is to call up the person that owes the debt and say,

"You owe my client money. "

"I'm the client's attorney. "

Mr. Spellmire: You--

Unknown Speaker: When are you going to pay the debt?

Would that person be acting as an attorney, if he was hired as an attorney?

Mr. Spellmire: --No.

Unknown Speaker: I'm trying to help you here.

No, okay.

[Laughter]

I would think he would be, and I would think that that's... you know, that as an attorney does not necessarily mean doing only those things that lawyers can do.

It could mean doing anything, but doing it in the capacity of having been hired as an attorney.

And isn't that what Congress responded to when it cut out the attorney exemption, attorneys calling up people in the middle of the night doing all the things that bad old debt collectors did?

Mr. Spellmire: That was the purpose, was to include attorneys when they were acting as a debt collector, when they were engaging in the kinds of activities that were forbidden by the act--

Unknown Speaker: You don't want to say when they were acting as a debt collector.

You want to say, when, as attorneys, they were doing the things that debt collectors do.

Mr. Spellmire: --I will accept the Court's statement.

Unknown Speaker: But if you say that, you've got to explain why the text read the way it did, and I haven't heard that explanation yet.

Mr. Spellmire: The text read the way it did when it was originally enacted because at that time attorneys had not invaded the debt collection business as they did in the years intervening.

Unknown Speaker: That explains why they later perhaps wanted to broaden the coverage of the act, but it doesn't explain why they seemed, in the exception, to want to limit the exception by that phrase, which I assume has some meaning, "as an attorney".

Why did they put that limitation in there, if you're going to accept Justice Scalia's argument?

Mr. Spellmire: Your Honor, at the time of the original enactment, inasmuch as Congress was exempting attorneys, Congress was not concerned with the types of activities attorneys were engaged in at that time.

It became... it was later that they became concerned with the types of activities that attorneys were engaged in, that is, attorneys performing debt collecting activities.

Unknown Speaker: I assume they put that language in, or I assume you think they put that language in, to exclude the situation where a fellow who has a law degree is employed by a collection agency.

He is not hired by anyone as an attorney.

He happens to have a law degree.

If you exclude all attorneys from coverage of the act, as opposed to people acting as attorneys, the debt collection agencies would be staffed entirely by people with law degrees, who would not be acting as attorneys.

Yes, but the original exemption was the blanket exemption for attorneys.

It was only when they were acting as attorneys.

Mr. Spellmire: Right, for a client.

Unknown Speaker: Yes.

Yes--

--Well, that--

--and just an attorney-employee of a debt collection agency would not have been exempt under the original act.

Mr. Spellmire: Not by reason of its language.

Unknown Speaker: And you want in... if I understand it, your exception is an exception for lawyers who are acting in the exercise of their peculiar functions as attorneys, as distinct from the functions that any debt collector could perform.

Mr. Spellmire: That is correct.

An attorney should not be regulated by this act when performing the functions peculiar to the--

Unknown Speaker: I think you've just repealed the repealer.

Mr. Spellmire: --No, Your Honor, we are not asking that.

We are asking that the congressional intent be implemented by reason of the ambiguity contained in this statute, and it is clear that Congress did not intend to interfere with or regulate the practice of law by lawyers in their capacity as lawyers in this country.

What they did intend to do was, to the extent attorneys engaged in activities similar to those forbidden by this act, that they should be regulated by the act.

Unknown Speaker: If I understand it, there are three situations:

People who have law degrees are not even hired as attorneys.

They just happen to have law degrees.

They are attorneys, but they're hired as debt collectors, work for a debt collection agency.

There's no attorney-client relationship, whatever.

Situation 2, there is an attorney-client relationship, and the lawyer is doing the things that debt collectors do, not things that only lawyers can do.

And situation 3, there is an attorney-client relationship, and the lawyer is doing things which only lawyers can do.

All right?

And as I understand your position, the original statute, which was repealed, covered situation 1, and the current statute, after the repealer, covers situation 2 but does not cover situation 3.

Mr. Spellmire: I believe that the... I believe--

Unknown Speaker: Did I go too fast?

Mr. Spellmire: --No, Your Honor.

The statute as--

Unknown Speaker: Is that what you're saying?

Mr. Spellmire: --The statute as originally enacted would have exempted situations 2 and 3.

We are... it is our position that in repealing the exemption, Congress meant to include example 2 but did not mean to include example 3.

Unknown Speaker: Well, would you explain example 2, maybe, because I thought in example 2 there was a lawyer-client relationship, and yet the lawyer was not acting in any function, or performing any function peculiar to lawyers, so the relationship seems to be an empty one, because he's doing the same things, and only those things, that he was doing under example 1, isn't that correct?

And if that is correct, then what we're left with is the preservation of a lawyer exception, i.e., example 3, which seems to be the same exception that was in the old exception that was repealed.

Mr. Spellmire: No.

When the act... when the exemption was repealed, it is true that example number 2 then fell within the act.

Harassing phone calls, threats, contacting employers.

Unknown Speaker: How about just writing a letter, which many perfectly legitimate collection lawyers do?

Before you file a lawsuit, maybe we can get this by letter.

Is that covered in so-called 2?

Mr. Spellmire: Since that letter could be written by a person who does not possess a law license, that could be covered, and that lawyer, in that act, would fall within the purview of the Fair Debt Collection Practices Act, according to our interpretation of that act.

Unknown Speaker: So it's only when you file a lawsuit, under your view, on behalf of a client, that a lawyer is exempt?

Mr. Spellmire: The... yes, and when you perform other functions that are incidental and necessary--

Unknown Speaker: What would those be?

Mr. Spellmire: --to the prosecution of that lawsuit.

Unknown Speaker: What would those be, like taking a deposition, request for admissions, that sort of thing?

Mr. Spellmire: Correspondence with opposing counsel that is aimed at bringing the case towards a conclusion.

Unknown Speaker: Why should correspondence with opposing counsel be not covered, but a letter to the potential defendant covered?

Mr. Spellmire: The reason is that in representing a client in a case, only a lawyer can perform the functions of dealing with other counsel that can move the case forward to resolution.

A lawyer has to have a license to represent a third party in a courtroom, and that lawyer then, in the conduct of the litigation, even in the writing of letters to counsel, or in dealing with witnesses, has to have that license to do that.

Unknown Speaker: Well, the--

--Do you draw a complaint line, then, so that a letter written the day before the complaint is filed would be covered, on your analysis, but a letter written the day after would not be?

Because anybody could write a letter, doesn't have to be licensed to be a lawyer, the day before.

Mr. Spellmire: Unless it is a function that is peculiar to the practice of law by reason of the license--

Unknown Speaker: Well, do you draw the complaint line?

Mr. Spellmire: --Yes.

Unknown Speaker: Well, section 1692c(b) allows communication with the attorney for the debtor... I mean, expressly allows it... so it seems to me the statute contemplates that yes, lawyers, when acting as debt collectors, can communicate with the debtor's attorney.

Mr. Spellmire: They certainly can, Your Honor.

Unknown Speaker: I mean, by express provision in the statute, so--

Mr. Spellmire: They can.

Unknown Speaker: --I don't think that's part of the chamber of horrors.

There's an exception for that.

Mr. Spellmire: No, I do not... it is not our position that a debt collector cannot correspond with counsel for a debtor, not at all, but that correspondence has to--

Unknown Speaker: That's not your argument.

Mr. Spellmire: --No, it is not, Your Honor, part of our argument.

Unknown Speaker: Okay.

But some States require that a demand letter be sent before executing on a promissory note, and this is required in the pleadings.

Would the sending of a demand letter be part of the practice of law, in your view, if the attorney sent the demand letter?

Would that be protected?

Mr. Spellmire: Your Honor, I am not familiar with those statutes, and I--

Unknown Speaker: Well, let's assume that under State practice, a demand letter must precede the filing of the lawsuit.

Would a demand letter signed by an attorney be part of the practice of law, in your view?

Mr. Spellmire: --If the law required an attorney to--

Unknown Speaker: No, the law doesn't... the law just requires a demand letter.

Mr. Spellmire: --Then if that demand letter were to violate the statutory prohibitions of the act, then it would be within the act.

Unknown Speaker: It would be helpful to me if you could go back to Justice O'Connor's question and list what would be in this chamber of horrors.

I mean, I did feel that the brief had quite a few, what you called anomalies, but then when I went through the statute, it didn't seem they were quite so anomalous, and that's why I wonder which... what bad things will happen if it does cover attorneys?

For example, the attorney would be liable if it turned out that the debt wasn't real, but there is a good faith exception, I gather, so that the attorney would be liable only when he didn't act in good faith.

Mr. Spellmire: Your Honor, the good faith exception that you have just mentioned has been very narrowly construed by the lower courts.

Consequently, it is basically, as they interpret it in any event, a defense that allows for clerical errors provided the business enterprise has sufficient safeguards within its procedures to prevent such clerical errors.

It is not a defense in the sense that you just... in the sense that it was just described--

Unknown Speaker: Well, that's what I wanted to know.

Mr. Spellmire: --as interpreted by those courts.

Unknown Speaker: All right.

Maybe that's not right as applied to a lawyer.

Mr. Spellmire: That might be.

Unknown Speaker: What it says is, a debt collector may not be held liable if the violation was not intentional, and resulted from a bona fide error, so if in fact the client comes and says, A, B, and C is true, the lawyer thinks that's probably right, puts him on the stand, the jury disbelieves him, the lawyer would not be liable, as long as the lawyer was in good faith.

Is that right?

I mean, doesn't that solve most of the problem?

Mr. Spellmire: As good faith has been described, that would solve that problem.

Unknown Speaker: Then what other problems are in the chamber?

Mr. Spellmire: Under 1962c(c) of the act, a debtor can express the desire to no longer be contacted, and that can bring about a cessation of any contacts with that debt collector by anybody... excuse me, debtor by anybody.

Unknown Speaker: But it says you can communicate to... where the creditor intends to invoke a specified remedy.

Might that not imply that the lawyer can then go ahead and invoke the specified remedy?

Mr. Spellmire: That would permit that, Your Honor.

Unknown Speaker: What?

Mr. Spellmire: That would be permitted.

Unknown Speaker: Oh, then that would get rid of that horror.

What's the next one?

Mr. Spellmire: The verification and disclosure provisions would be applicable to pleadings, to complaints, and to virtually all documents that constituted communications that would be sent.

Unknown Speaker: And what harm does that cause?

Mr. Spellmire: Your Honor, may I return to your prior question for a second?

While the answer that I gave to that question was accurate, in the context, however, of, for example, a deposition, should the debtor take the position that the debt is disputed, that would have to terminate all activities at that time with respect to that deposition.

This would allow for the very serious disruption, if it were utilized, of this act to frustrate the normal rules of procedure.

Unknown Speaker: Well, but there's an exception with the express permission of a court of competent jurisdiction.

Mr. Spellmire: That would still require, Your Honor, an attorney to apply to a court if it occurred at a deposition.

Unknown Speaker: For a deposition order, yes.

I mean, that's not unusual, either.

Mr. Spellmire: It is very unusual, Your Honor, in the normal litigation context, for a deponent party to determine that that party no longer wishes to be communicated with.

Unknown Speaker: Don't you think an ordinary notice of deposition, pursuant to the rules, would imply the permission of the court?

Mr. Spellmire: I'm not sure that that would imply, necessarily, the permission of the court, because very often, such notices may be sent unilaterally.

Unknown Speaker: I realize you don't need a court approval to notice someone's deposition, but the rules provide for the notice, and it seems to me one could argue that is enough to show that the court... court approval under this statute.

Mr. Spellmire: The rules do provide a framework in which the parties may conduct discovery.

This statute, however, also has rules pertaining to communications.

I'm not aware of a case that has answered any question concerning its application in the context of litigation.

I am aware that the Federal Trade Commission, in its view of this statute, considers the application of this statute, for example, in the context of litigation, to be impractical and unworkable.

Unknown Speaker: Mr. Spellmire, what do we make of the express exceptions that Congress did put in, at least one?

They took out a litigation-connected activity, process-serving, and they said that that doesn't apply, that the act will not apply to the... to process-serving, so... but they didn't say, it doesn't apply to other things connected with litigation.

Mr. Spellmire: Your Honor, I believe a fair interpretation of that particular exception indicates the intention of Congress that the act not apply to matters that occur in the litigation context.

Now--

Unknown Speaker: But it says only one function.

There are many things that go on in a litigation after process is served.

Doesn't it imply that since they made an exception for that, they didn't mean to make an exception for anything else?

Mr. Spellmire: --Pursuant to their intention, and their congressional purpose in this law, they didn't need any further exemption, because attorneys from their view, Congress' view, were not within the ambit of this act when they were engaged in litigation and... engaged in litigation, so it is consistent, really, with the congressional purpose and intent that this law... that this act not discuss legal activities following the initiation of a suit.

The only... the only reference in the act to a legal action is section 1962i, which describes the venues in which suit may be brought.

That section was enacted at a time when attorneys remained exempt.

It was enacted originally with the act itself in 1977, and should not be read to indicate that Congress intended to regulate the litigation of cases.

Rather, that was intended to prevent a collection tactic which Congress considered to be abusive, and that tactic was the filing of litigation in locations that were inconvenient to the debtor.

It should not be interpreted as indicating a congressional intent to regulate lawyers as they practice law in the courts of the United States.

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

Unknown Speaker: Very well, Mr. Spellmire.

Mr. Edelman, we'll hear from you.

Argument of Daniel A. Edelman

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

The issue before the Court is whether otherwise illegal conduct by one who regularly collects consumer debts is outside the scope of the Fair Debt Collection Practices Act because that person is acting as a lawyer.

The statute was originally passed in 1977.

At that time, in a number of States, including such large States as California, a collection agency, a lay collection agency, could take an assignment of a debt and bring suit on it, often without the services of any attorney, to enforce it.

As a result, the original version of the FDCPA which contained the lawyer exemption also contained several provisions which deal expressly with litigation conduct.

The most important is the venue restriction, 1692i.

It applies to anyone who fits the definition of debt collector, and prohibits the filing of lawsuits in certain inconvenient forums, even though they are permitted by State law, rules on jurisdiction and venue.

There is in addition an exemption in 1692a(6)(D) for attempting to serve legal process on any other person in connection with the judicial enforcement of any debt.

The phrase "judicial enforcement of any debt" would have no meaning unless it were within the basic scope of debt collection activity.

1692c(b) contains another pertinent exemption.

Unknown Speaker: What was that--

Mr. Edelman: 1692a(6)(D), Your Honor.

Unknown Speaker: --Would you say that again?

Mr. Edelman: 1692a(6)(D) is the exemption for persons attempting to serve legal process.

Unknown Speaker: 1692a(6)(D)?

Mr. Edelman: Yes, Your Honor.

The next exemption that's pertinent is 1692c, subdivision (b), and that provides--

Unknown Speaker: Can I ask, are these different provisions in your paper somewhere?

Mr. Edelman: --Yes, Your Honor.

Unknown Speaker: Where were you reading from?

It's hard to follow the argument with all these subsections.

Mr. Edelman: They are cited in the appendix to the certiorari petition, in the joint appendix.

Unknown Speaker: Also, petition for certiorari appendix 24, 25, 26, 27.

Mr. Edelman: Yes, Your Honor.

The second pertinent exemption is in 1692c(b), and that is an exemption for third party communications reasonably necessary to effectuate a post judgment judicial remedy.

Unknown Speaker: And that's one that is not included in the appendix to the cert petition is it?

Mr. Edelman: I believe that some others were in the joint appendix.

I apologize if anything pertinent was omitted.

In any event, we again have a statutory provision which expressly recognizes that the obtention of a judicial remedy is part of debt collection.

It, for example, would permit the service of a citation of garnishment on the consumer's bank, and to have an express exemption covering certain litigation--

Unknown Speaker: Yes, as long as you're there, 1692c(b), which prohibits communications with third parties, it says that without the prior consent of the consumer--

--Where are you reading from, Justice Kennedy?

I have the statute here... except with the prior consent of the consumer or the express permission of the court, you may not communicate with the debtor.

That seems to me... it seems to me answers the question put by the Chief Justice in which he said, perhaps depositions could be assumed to be with the permission of the court, since they're in the rules.

This requires the express permission of the court to communicate with the client.

Mr. Edelman: --Your Honor, if any deponent refuses to appear for a deposition, or refuses to answer questions--

Unknown Speaker: No, no, but you can't even notice the deposition, under the statute, without the express permission of the court.

Mr. Edelman: --I would believe, Your Honor, that express permission could be construed to encompass a rule or order of general applicability authorizing with specificity a particular activity, such as noticing a deposition.

Unknown Speaker: Well, I think the point is somewhat in doubt.

Mr. Edelman: I'm sorry, Your Honor?

Unknown Speaker: I think the point is somewhat in doubt.

Mr. Edelman: In any event, if there... if there is a question as to a matter, nothing prevents the collection lawyer from applying by motion to the court for permission to take the deposition.

Unknown Speaker: But then you would have to acknowledge that this would require a change in normal litigation practice for a collection lawyer, that most lawyers wouldn't have to do this.

Mr. Edelman: Actually, I don't believe that's correct.

In most States depositions are not permitted unless the amount in controversy is over a certain amount.

Unknown Speaker: Well, but suppose it is over a certain amount.

Mr. Edelman: In that case, it might, if it is construed as Justice Kennedy suggested, require the permission of a court upon application in a motion.

However, in most small collection matters, that would be required anyway.

In Illinois, for example, depositions are not permitted by notice if the debt is less... is up to $2,500, so that a motion would be required in any event.

Unknown Speaker: But if you've got $2,600 at issue, you would have to... unlike most lawyers, you'd have to go to court... if you read the statute literally, you'd have to go to court and get permission to take a deposition.

Mr. Edelman: That might be required, Your Honor.

Unknown Speaker: That isn't what it says.

It says, in 1692c(b), that deals with communications to third parties, not a communication to the consumer debtor himself, and the consumer debtor can be noticed under the provisions of the statute.

This only deals with communications to third parties, and it says that the consumer, the debtor, or the consumer debtor's attorney, are not... you're not prevented from communicating with them.

Mr. Edelman: That is correct, Your Honor.

The restriction--

Unknown Speaker: So I think you're misreading it.

That appears to be correct.

Mr. Edelman: --The restriction would apply only to third party witness--

Unknown Speaker: And even then, express permission may simply... is not necessarily the same as specific permission, individualized permission.

Mr. Edelman: --That is correct.

Unknown Speaker: As long as it's express, you could say.

Tell me, how does a lawyer know when he's covered by these things?

I mean, I guess every lawyer who brings a case for collection of a debt, even if he does things that debt collectors do, is not necessarily covered by the act, isn't that right?

He has to do it on a regular basis.

Mr. Edelman: That is correct, Your Honor.

There might be some room for debate at the lower end of the spectrum.

However, the--

Unknown Speaker: If I'm not a litigator, and generally just give business advice, do a little litigation sometimes.

However, it's trusts and other stuff, family matters.

Occasionally I get a debt collection case.

I might not be covered at all.

Mr. Edelman: --That is correct, Your Honor, but while there might be some debate as to very marginal situations, that's not the reality Congress was dealing with when it repealed the attorney exemption.

Basically, there are law firms and attorneys that specialize in the collection of consumer debts.

One of those attorneys would not have any question in his mind as to whether he's covered, and if there is a question in his mind, he can of course always comply in any event.

Unknown Speaker: In any event, he's not in any tougher position than the nonlawyer.

Mr. Edelman: That is correct, Your Honor.

Unknown Speaker: What about... wasn't it the ABA that took the position in this case that if we read the statute the way you're suggesting, then we're driving clients to the most incompetent, most inexperienced lawyers, because they won't be debt collectors because they're not regularly engaged in the collection of debts?

Mr. Edelman: They would be, Your Honor, if the lawyer then begins to regularly enforce consumer debts.

Unknown Speaker: So it's like a dog is allowed one free bite?

Is that--

Mr. Edelman: In many respects, the statute does embody that principle.

For example, the good faith reasonable conduct defense, if a creditor furnishes false information to the collection lawyer, the collection lawyer, despite reviewing the matter, does not detect that it's false, until the first time that the falsity is detected, he would appear to have a defense.

Of course, once he... once it is brought to his attention that the creditor is not providing accurate information, then he would have further obligations.

All of this was addressed in the... at the time that the attorney exemption was repealed.

The reason that the attorney exemption was repealed was that between 1978, when the organized bar secured the original attorney exemption, and 1986, the Federal Trade Commission received some 1,400 complaints about law firms engaged in collection activities, and the number of law firms that were engaged in collection activities increased dramatically.

Some of them were actually advertising that they were not subject to the restrictions that lay debt collection agencies had.

For example--

Unknown Speaker: --On billboards.

[Laughter]

Mr. Edelman: --That's correct.

I believe, Your Honor, that the statutory history, that there was an attorney exemption, and that it was removed, and that Congress expressly declined to adopt a substitute exemption for attorneys acting in court as attorneys as sufficient to resolve the problem.

Unknown Speaker: Mr. Edelman, what if I'm a lawyer who represents a bank, and the bank, say, has a number of floor plan arrangements with automobile dealers, and so in March I sue one dealer for half-a-million dollars for defaulting on a floor plan arrangement.

In April I sue another dealer on behalf of the bank for three-quarters of a million dollars for defaulting on a floor plan arrangement, and in May I sue still another dealer for a million dollars, am I a debt collector?

Mr. Edelman: No, Your Honor, because the statute only applies to the collection of consumer debt.

Debt is defined as limited to consumer debt.

Those were business transactions, and if those--

Unknown Speaker: And a consumer debt is something incurred by someone who plans to make use of the thing themselves?

Mr. Edelman: --It basically... Your Honor, it basically tracks the definitions found in the other titles of the Consumer Credit Protection Act.

It's normally not difficult to determine whether something is a consumer debt.

For example, if a truth in lending statement was issued in connection with the underlying indebtedness, it's a fair inference that it's a consumer debt.

Debts incurred to corporations would never be considered to be consumer debts.

Unknown Speaker: Well, what if the corporation buys a lot of products to consume them in its manufacturing process?

Mr. Edelman: That is not considered to be a consumer debt.

Unknown Speaker: That's not a "consumer debt"?

Mr. Edelman: Only debts owed by natural... or allegedly owed by natural persons would be covered, Your Honor.

Unknown Speaker: Well, what if Howard Hughes, doing business in his own name, buys a million dollars' worth of stuff, they use them to make airplanes?

Mr. Edelman: That would not be covered, Your Honor.

The term 1692a(5) as an obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services, three dots, are primarily for personal, family, or household purposes, so if we're talking about raw materials for manufacturing, that's not for household purposes.

Again, there might be some gray areas which can be easily dealt with by complying with the statute, but if the debt consists of raw materials for manufacturing sold to a corporation, or sold to somebody using a business title or name, that is quite clearly not a consumer debt, Your Honor.

Unknown Speaker: How does this work, though?

I take it that home mortgages would be covered.

Mr. Edelman: That is correct, they are covered.

Unknown Speaker: So they can be a lot of money, and suppose that the person collects home mortgages, i.e., he brings lawsuits.

That's part of his practice.

I take it he would be covered, that person?

Mr. Edelman: Yes, Your Honor, and in fact--

Unknown Speaker: All right.

Then what happens when they want to bring a suit, and there's a lot of money involved, maybe a million dollars.

That's up there.

And the lawyer would like to depose a witness, indeed, also would like to talk to the... would like to depose the consumer, the borrower.

The borrower writes back and says,

"I will not pay. "

"I don't think I owe it. "

Now, how does it work?

As I read this, it's a little tough for the lawyer to go and talk to the borrower.

In fact, it says you should not.

Mr. Edelman: --Not really, Your Honor.

Unknown Speaker: Why not?

Mr. Edelman: 1692c(c), which is the ceasing communication provision--

Unknown Speaker: Right.

Mr. Edelman: --contains an express exemption for telling the consumer that we're going to invoke specified remedies.

Unknown Speaker: That's right.

Now we say, I'm going to sue you.

Mr. Edelman: And you sue.

Unknown Speaker: Now what the lawyer wants to do is, he wants to go and talk at the deposition to the borrower.

Mr. Edelman: There is nothing which would prevent that.

Unknown Speaker: What about the words that

"shall cease further communication with the consumer? "

What about those words, 1, 2, or 3?

And I didn't see... at least reading it literally, it was rather tough to see where that came in.

Mr. Edelman: I would construe the remedy, Your Honor, as including--

Unknown Speaker: That's what we're... so that's what we would have to do.

You'd have to say the words, to invoke a specified remedy include, to invoke a specified remedy, and then going on to implement that specified remedy, and therefore we would have to read into this silence everything to do with a lawsuit where you talk to the consumer.

Mr. Edelman: --The legislative history indicates precisely that.

The purpose of this c(c) exemption was to bring... was to permit the consumer to bring the matter to a head by in effect demanding that the debt collector sue them, so--

Unknown Speaker: But there is no specific thing that talks about the communications that go on during a lawsuit, I take it?

Mr. Edelman: --That is correct, but--

Unknown Speaker: So we'd have to imply that.

Mr. Edelman: --I don't think it's too much of an implication to say that notification that one is going to invoke a specified remedy would include, for example, notifying the consumer's deposition.

There is the question as to third party depositions, which are very unusual in debt collection cases, even mortgage foreclosures, Your Honor.

Going back to the 1986 repeal of the attorney exemption, Congress expressly stated in the legislative history that its intent was to place attorneys and lay collection agencies, which again at that time had, in a number of States, the right to take assignments of debts and sue, on the same footing, and the principle complaint that... among the 1,400 received by the Federal Trade Commission, concerned attorney contact.

Namely, attorneys filing suit in improper or prohibited venues.

They could be, in fact, permitted by State law, but they were not consistent with 1692i.

Congress responded to this concern by totally deleting the attorney exemption and refusing to enact statutes which were proposed by the Commercial Law League and the ABA, and Representative Hiler, to the effect that there would remain an attorney exemption.

As a result, we have a statute which once contained an express exclusion for the matter at issue here, was amended to remove the express exclusion, and where Congress declined to enact precisely that position which petitioners contend, namely that litigation conduct is not covered.

With respect to the other absurd results, in some 17 years, the statute has been construed in a reasonable and rational manner by the lower Federal courts.

It has never, for example, been held that if a lawyer files a collection action and loses, that that violates the prohibition against... that one cannot take action if it is not lawful to take it.

It has never been construed to permit the debtor to direct the attorney not to file suit against him.

On the contrary, the purpose of 1692c is to require the... is to allow the consumer to force the debt collector to sue.

Some question is raised in the briefs as to whether the 1692g notice has to be attached to a pleading, if that's the first that the debtor hears from the debt collector.

The answer is, it is probably not a communication, but in any event it is a common and, in effect, general practice among collection attorneys to attach a sheet of paper to the end of the first pleading containing the FDCPA warnings.

So that the parade of horribles that was suggested by petitioners and appears to have been suggested by the Sixth Circuit in the one decision supporting their position, Green, is simply not there if the act is construed carefully and in a reasonable manner.

The only other support which petitioners point to are two things.

The first is a very ambiguous statement that Representative Annunzio had inserted in the Congressional Record 3 months after the statute was passed, and when nothing pertaining to the FDCPA was before the Congress.

It's not legislative history, even if one can extract from certain--

Unknown Speaker: He should have inserted 3 months earlier.

Mr. Edelman: --Well, I think the Court has consistently made a difference, a distinction, between legislative history which predates the enactment of a statute, and something which... this wasn't even spoken to Congress on the floor of the House.

It was inserted pursuant to privilege in the Congressional Record one night 3 months afterwards.

It's not permissible legislative history.

Unknown Speaker: Do you suppose he could have been prosecuted under a 1001?

[Laughter]

Mr. Edelman: I won't comment on that.

I don't know enough about 1001, Your Honor.

The other is the commentary by the FTC staff.

It's not the FTC itself.

The FTC staff supported the position of the ABA and the Commercial Law League and Representative Hiler that there should be an attorney exemption in 1986.

Even after Congress rejected that position, the FTC staff came out with this commentary which said, we're not going to enforce the act against attorneys engaged in litigation.

The FTC... not even the Commission itself has rule-making authority under the Fair Debt Collection Practices Act.

It's a fairly unique situation.

There's very broad rule-making authority given to the enforcing agencies under the other eight or nine titles of the Consumer Credit Protection Act, but in this one case, the enforcing authority is completely denied any rule-making authority whatever.

And notwithstanding this, we have a commentary which is read by petitioners to say... to create an exemption.

There is no authority to create such an exemption.

An administrative agency, much less its staff, cannot create statutory exemptions without some basis in the congressional enactment that purports to authorize it.

The staff commentary, incidentally, does not actually support petitioner's position in this case, insofar as it applies to the letter.

The staff says that if an attorney does not engage regularly in consumer debt collection activity, he's not subject to the act insofar as litigation conduct is concerned, but it is now conceded by petitioners that they do engage regularly in consumer debt collection activity, such as sending consumers dunning letters.

So basically, we have a statute which I think is plain on its face, when you consider the sequence of basic definition of debt collection, which even in Black's Law Dictionary covers suing someone for a debt, the original attorney exemption, and the removal of that attorney exemption while all along litigation conduct by collection agencies is regulated, and intentionally regulated, by the statute.

If you look at the legislative history, you find, again, an intent on the part of Congress to subject lawyers to regulation that did not heretofore exist.

Unknown Speaker: What is your answer specifically to the argument that this will chill full adversarial zeal, the best representation of the client, because the attorney will be intimidated by the prospect of liability, so will hold back arguments that might be tenable, but that ultimately fail?

Mr. Edelman: Your Honor, insofar as the issue before the Court is concerned, namely, adding charges to debts which are not expressly authorized, Congress intentionally, and with application to both lawyers and other debt collectors, imposed a strict standard.

A consumer cannot be subjected to any charge that someone might be able to dream up a nonfrivolous argument in support of.

Congress was careful about this, because it realized that the vast majority of collection lawsuits go by way of default judgment.

There is no one there to argue against the lawyer, and accordingly, it made the standard one of whether the debt is expressly authorized, or whether the charge is expressly authorized by the instrument creating the debt, or permitted by law.

It's not an unfair standard, because first, if no one is going to argue against the imposition of the charge, it shouldn't be routinely imposed where it will greatly... as in this case, greatly increase the amount of the debt, and the consumer is not represented and says nothing.

In addition, normally, most collection lawyers are enforcing printed form contracts.

It's very easy for the creditor to solve the problem by simply providing for the charge, and then if it's not prohibited by law, it falls within 1692f(1).

So Congress did tighten the standard, and it would not be appropriate for an attorney to argue that a consumer is liable for insurance or some other charge that a nonfrivolous argument could be made with respect to, but which is not expressly authorized in the instrument creating the debt.

That problem, or that restraint, has nothing to do with the attorney's status as attorney.

The collection agency can't demand such a charge before the matter is in litigation, or during litigation, and the same restraint is imposed upon the attorney.

So the answer to Your Honor's inquiry, Your Honor, is that the act imposes certain restrictions, it imposes them equally upon lawyers and nonlawyers who are collecting consumer debts, and in the 17 years that the act has been applied to collection agencies, these restrictions have not been found to impose an undue burden upon the collection of debts for consumers or the extension of consumer credit.

Congress had a... was faced with a problem in balancing the interests of collection agencies and then collection lawyers on the one hand and the public on the other, it drew that balance very carefully, and I think the judgment of Congress as expressed in the act should be respected.

That judgment does not permit of an attorney litigation exemption.

What the petitioner's argument, I think, really boils down to is an appeal to the reluctance of attorneys to impose liability on other attorneys.

The problem with that position is that Congress did exactly that after an 8-year trial period of an exemption, and specific provisions of the act address explicitly litigation conduct.

There is simply no textual basis for a continued attorney exemption, whether limited to litigation or otherwise.

Unless the Court has questions, that concludes my remarks.

Unknown Speaker: Thank you, Mr. Edelman.

Mr. Spellmire, you have 4 minutes remaining.

Rebuttal of George W. Spellmire

Mr. Spellmire: Within the act, there are no provisions which deal with the regulation of lawyers in litigation.

The focus that is appropriate is, what was the intention of Congress when they enacted this law, and whether the definition of "debt collector" has a fair meaning when read in the context of the entire statute.

It is clear, or should be clear, that it is ambiguous.

Since it is ambiguous, the intention of Congress should be examined, and the intention of Congress is clear, as well as the interpretation of the FTC, although not binding.

Finally, Mr Annunzio, Representative Annunzio, prior to the enactment, stated that the amendment would not affect the practice of law by the Nation's attorneys.

When he filed his supplemental report, he was amplifying on that point that had been previously made.

Unknown Speaker: When you say, his supplemental report, was this something other than just his own individual doing?

Mr. Spellmire: Your Honor, he was the sole sponsor of the act.

When he wrote his explanation, which was included in the record, it explains the sponsor's intention.

Unknown Speaker: You mean, he was the sponsor of the amendment which took the attorney exemption out?

Mr. Spellmire: That is correct.

Unknown Speaker: Yes.

Incidentally, it's an unusual case in another way.

I see Judge Manion and Judge Fairchild agreed with one another.

Mr. Spellmire: Thank you.

Unknown Speaker: Thank you, Mr. Spellmire.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

United States v. Generix Drug Corp. - Oral Argument

Wed, 18 Feb 2009 07:11:15 +0000

Case:

United States v. Generix Drug Corp.

Media File:

81-1222_19821103-argument.mp3

Related Transcript:

81-1222_19821103-argument_transcript.xml

Transcript:

ORAL ARGUMENT OF JERROLD J. GANZFRIED, ESQ., ON BEHALF OF THE PETITIONER

Chief Justice Burger: United States against Generix Drug Corporation will be taken up at 1 p.m..

Mr. Ganzfried, you may proceed whenever you're ready.

Mr. Ganzfried: Thank you.

Mr. Chief Justice and may it please the Court:

This case presents an important question under the federal Food, Drug and Cosmetic Act that will have a profound effect on the public health.

The Court of Appeals' decision permits the sale without FDA approval of a large category of prescription medicines known as generic drugs.

Such products purport to be interchangeable with preexisting or pioneer drugs for treating serious and life-threatening diseases, but they are not identical to the pioneers and they may in fact be unsafe and ineffective.

By way of background, I should explain that drugs are composed active ingredients, which are intended to have a therapeutic effect on the patient, and inactive ingredients, which are not intended to have a therapeutic effect.

The inactive ingredients, however, play an important role.

They may comprise 90 to 99 percent of a product and they often have a significant impact on how the active ingredient does its job.

For example, the inactive ingredients influence how much active ingredient reaches the bloodstream and how quickly this occurs.

So even if two drugs have the same active ingredient, we cannot assume that they will have the same results.

The inactive ingredients may slow down or block the action of the active ingredient altogether, so it's as if the patient took no medication at all.

For a patient who's taking a drug to control high blood pressure, such as most of the drugs involved in this case were, this means he runs the risk of heart attach or stroke.

On the other hand, the inactive ingredients can speed up or increase the effect of the active ingredient, and this is perhaps most apparent in time release drugs, where the result can be a dumping of active ingredients too quickly into the bloodstream, causing toxicity, overdose and other adverse side effects.

It's as if in that case the patient has taken two or three or ten times the appropriate dosage.

By the same token, different manufacturing methods can also affect how the drug works.

If the drug is packed too densely or too loosely into the tablet, the patient may suffer from wholly unintended reactions.

These differences are vitally important for generic drugs.

These drugs are offered as substitutes for preexisting products whose effects and proper dosages are well known.

But unless the generic actually performs the same way the pioneer does, the substitution may be dangerous.

Because the generic company does not know the full composition or manufacturing methods of the pioneer, the only way to be assured that the copy and the pioneer will in fact work the same way is by testing one against the other.

If they perform in a similar way, they are considered to be bioequivalent and substitution will not affect the patient.

But if they do not work the same way, then substitution poses a real danger.

In this case, the district court found that the products Respondent sold were not tested and were not generally recognized by experts as safe and effective for their intended uses, and that was all the Government needed to show for Respondents to be enjoined.

But the Eleventh Circuit held that these untested drugs could be sold with no scrutiny whatsoever.

The court wrongly concluded that the Act's use of the term "drug" refers only to active ingredients and not to the real life drugs that doctors prescribe, pharmacists dispense, and patients ingest, that is drugs as products.

As a result, the court has discarded the carefully crafted statutory scheme that assures that all drugs available for consumption by the public are in advance determined by experts to be safe and effective.

And this holding creates a mammoth exception that would allow untested prescription drugs to reach the public simply because a manufacturer wants to sell them.

Unidentified Justice: May I ask two questions.

First, you don't adopt the position of the district court, do you?

Mr. Ganzfried: As to what the Government needed to show?

Unidentified Justice: Yes.

Mr. Ganzfried: No.

Unidentified Justice: They were wrong, too?

Mr. Ganzfried: That's correct.

The district court tried to adopt a middle ground.

Unidentified Justice: Your position is, even if there's no evidence of dangerousness, that the statute still applies?

Mr. Ganzfried: In essence, that's right.

Unidentified Justice: And also, your position, if you read the statute literally, would apply to over the counter drugs, too?

Mr. Ganzfried: Our position would apply to over the counter drugs, and the FDA treats over the counter drugs in a manner that's consistent with the statute.

Unidentified Justice: Well, but it doesn't require a new drug application every time you put a different coating on a piece of aspirin.

Mr. Ganzfried: Well, two things as to over the counter drugs.

First of all, none of the drugs involved in this case are over the counter drugs.

Second, what the FDA has done in the over the counter drug monograph system is to determine practical working definitions in advance of general recognition.

Unidentified Justice: They just don't read the statute literally.

They just say they don't really have to enforce it?

Mr. Ganzfried: They read it literally, but they understand that in looking at what an expert would need as the requisite evidence of safety for an over the counter drug, which, keep in mind, is not as potent, not as toxic, and has a much wider range in which it can be used effectively before you reach overdose situations.

Unidentified Justice: Well, some of them can be pretty dangerous, I think, over the counter drugs; can't they?

Mr. Ganzfried: They can be, and in fact the FDA does have regulations relating to inactive ingredients of certain over the counter drugs.

The important thing is that in both cases, the prescription and over the counter drugs, the FDA looks at products, and it is the product that must meet the standards, not simply the active ingredient.

Unidentified Justice: Mr. Ganzfried, isn't what the FDA does with over the counter drugs, though, somewhat similar to the test that the district court would have employed, where it said if there is no reasonable possibility that the differences between the excipients will make the product less safe and effective than the recognized product, it would be approved?

Mr. Ganzfried: Well, I think they--

Unidentified Justice: As a practical matter, is that what the FDA--

Mr. Ganzfried: --I'm trying to think that through.

It's possible that the results may be the same, but I think what has happened is very different.

First of all, we are dealing in this case with prescription drugs.

And although the district court did apply the wrong standard, it did find that the Government had shown that there was a reasonable likelihood that Respondent's drugs were unsafe and ineffective, and that they presented no evidence to rebut that.

Unidentified Justice: --Right.

But I take it both the Government and the Respondents do not support the district court test for the prescription drugs?

Mr. Ganzfried: The Government does not.

My understanding is that the Respondents do not, either.

Unidentified Justice: What is the definitional line between prescription drugs and over the counter drugs?

Mr. Ganzfried: The definitional line is that if the finding is made by the Food and Drug Administration that a particular drug product has sufficient risks or side effects attendant to it that it cannot be sold without a doctor's prescription and under a doctor's care, those drugs require prescriptions.

For drug products that are ordinarily used for minor and self-limiting illnesses, where there is a very broad range in which a product can be used effectively before you reach any dangerous levels--

Unidentified Justice: Do you mean aspirin and bufferin and so forth?

Mr. Ganzfried: --Those are over the counter drugs.

Unidentified Justice: Well, supposing I decided I'm going to go ahead and manufacture something called "Ufferin", which is just like aspirin only it's buffered a little bit differently than bufferin is.

Is there some way I can tell whether I have to apply for a new drug application?

Mr. Ganzfried: Well, if it complies with an over the counter drug monograph... and I'm assuming in that case that you're describing some kind of an analgesic... you would have to check the over the counter drug monograph which defines in advance what the general expert recognition would be, tells you what active products must be in it, what suitable inactive products must be in it, and what dosages are allowable.

And if you satisfy that standard, then it could be marketed as an over the counter drug.

Now, my understanding is that at the present time the analgesic monograph has not yet been completed.

But that is in the works as part of the overall over the counter drug review system.

Unidentified Justice: Does the statute draw a distinction between over the counter drugs and prescription drugs?

Mr. Ganzfried: In the definition of drug it does not.

In other provisions of the statute it does, where it imposes certain restrictions on drugs that can be sold only by prescription.

Unidentified Justice: On some drugs that can be purchased over the counter there is a printed disclaimer or warning,

"Not to be used except under the direction of a physician. "

Now, is that just a case where the manufacturer is being ultracautious, or is that required?

Mr. Ganzfried: Well, I don't know about the specific case, but ordinarily in the over the counter drug situation the understanding is that information can be provided to the patient that will be understood by a layman.

So that if you do have the sort of package insert that you've described along with an over the counter drug, then presumably it either conforms to what the monograph describes as what the packet insert should be for the over the counter drug or it--

Unidentified Justice: But that warning is not something that is required by the FDA, is that right?

Mr. Ganzfried: --Some warnings are, and some a manufacturer would add, I assume as a matter of prudence in particular cases.

I'd like to explain why the decision below should be reversed, by touching on the statutory language and the legislative history, and then turning to the strong public policy arguments that also mandate reversal.

The Court of Appeals went astray from the very first step of its analysis by ignoring crucial portions of the definition of the word "drug".

Section 321(g)(1) has a four-part definition.

If you satisfy any one part, you have a drug.

Now let me draw your attention to subsection (B), which defines a drug as

"an article intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease. "

Unidentified Justice: Counsel, Respondents say that the word "article" as used in the definition is a word of art and refers only to items that are the subject of monographs, and would you deal with that in your discussion?

Mr. Ganzfried: In a word, it's nonsense.

As this Court said in Bacto-Unidisk, the statute is to be read as broadly as its literal language indicates and not narrowly to accord with any particular medical or scientific definition.

So in terms of the way this Court has read the statute, that argument is not correct.

Unidentified Justice: And what about the legislative history?

Mr. Ganzfried: In terms of the legislative history and the use of the word "article" in these formularies that are the reference point, the formularies in fact have monographs of drug products, dosage forms, and finished products.

So the argument is not correct.

It would also not make any sense--

Unidentified Justice: Does it mean something different in the different subsections, in your view?

Mr. Ganzfried: --No, it doesn't.

In any of the subsections, an "article" can refer to an active ingredient, but never to an active ingredient alone.

It can refer to active ingredient and the final drug product.

Unidentified Justice: In your view who has the burden of proof in determining whether a drug product is a new drug?

Mr. Ganzfried: As these cases have come along, the Government has assumed the burden, in an injunction action such as this, of proving that a drug is not generally recognized by experts as safe and effective.

Unidentified Justice: Are you willing to adhere to that position?

Mr. Ganzfried: Excuse me?

Unidentified Justice: Are you willing to adhere to that position, or should the burden be on the manufacturer?

Mr. Ganzfried: I think there are good arguments as to why the burden should be on the manufacturer, because the statute puts it on the manufacturer in the first instance by requiring him to get the NDA.

But as a matter of history and practice, the Food and Drug Administration has sought to meet that burden in the cases.

We're not asking anything different from this Court.

Unidentified Justice: I take it the Administration has not been consistent over the years in its position?

Mr. Ganzfried: Well, the fact of the matter is that the Food and Drug Administration has been consistent on the critical issue that's involved in this case, and that is whether the FDA has regarded the words "drug" and "new drug" as referring to products.

From the very first regulations that the FDA issued under the statute in 1938, it said that differences in inactive ingredients may cause a drug to be a new drug, and that regulation has remained substantially unchanged to the present.

Respondents point to certain practices, some of which are no longer in effect--

Unidentified Justice: But for 30 years it issued these "no new drug" letters.

Mr. Ganzfried: --"Not new drug" letters, that's correct.

Unidentified Justice: And you think that's consistent with--

Mr. Ganzfried: It stopped in 1968.

It is consistent in the sense that, first of all, it provided notice to the FDA that a drug was proposed to be marketed, and such notice is not going to take place under the Court of Appeals' decision.

Second, it was clear that the FDA, even in issuing these advisory opinions, was looking at products because on occasion it rejected the sale of so-called generic products that were copies of the active ingredients of products already on the market.

And third, that practice, which as I said was terminated in 1968 when all the "not new drug" letters were revoked, was in place at a time when the burgeoning generic drug industry was significantly smaller than it is today.

Through the 1960's most of the states had anti-substitution laws, so that if a brand name drug was prescribed it had to be dispensed.

You could not substitute a generic.

Around the end of the 1960's and into the 1970's, the states had shifted their position, in large part because the 1962 amendments to the Act that we're concerned with here called for effectiveness to be demonstrated before a drug could be sold.

And in reliance on that, in reliance on the fact that the Food and Drug Administration was going to be reviewing in advance products that were going to be on the market, the states have moved to the current regime of drug substitution where generics can be substituted when the brand name has been indicated but the doctor allows substitution.

And that points up one of the major problems in this case.

Unless the generics are subject to FDA scrutiny, the doctor is not going to know what product his patient is actually getting.

He's not going to know how the inactive ingredients may differ, he's not going to know how the manufacturing methods may differ.

The patient may end up with results that are altogether different from what the doctor intended.

And because the doctor doesn't what drug--

Unidentified Justice: --Well, if he doesn't know why shouldn't he write his prescription for the pioneer drug?

Mr. Ganzfried: --The fact of the matter is, he will.

And that was what the testimony in this case was, that doctors, as they had experience with generic drugs that simply failed to do what they purported to do and found that when they shifted their patients back to the brand name drugs that the situations were remedied... and that is exactly what is going to happen.

The generic drug industry is going, and the demand for generic drugs is, as the amicus briefs indicate, going to evaporate if there can be no assurance for doctors, pharmacists and patients that they're actually getting the drugs that they think they're getting.

The other difficulty is that the doctor may never know that there was a problem with the drug, in the case of a progressive disease--

Unidentified Justice: Well, isn't it up to him to know?

He certainly assumes that risk with a prescription drug.

Mr. Ganzfried: --He should know, but he often will not know.

Unidentified Justice: Well, he can prescribe and on the prescription write "no substitution".

Mr. Ganzfried: He can do that.

Unidentified Justice: And they often do.

Mr. Ganzfried: And they often do, and they are doing it more and more as the problems with generic drugs are becoming more apparent.

Unidentified Justice: What is left of the exemption provision if your view prevails?

Certainly when the statute was written it appeared as though Congress thought that certain articles that would be drugs, which were widely accepted in the field as being equivalent, would not require the NDA's.

And under your view that kind of an exemption would just disappear, would it not?

Mr. Ganzfried: No, it wouldn't.

It wouldn't for the reasons that this Court described in Hynson.

A drug would come on the market, to take one example, subject to an approved NDA, new drug application.

At some point after there has been significant experience with that drug and enough published in the literature so that that drug comes to have general recognition, it will no longer be actively regulated as a new drug.

And perhaps I should say something here that addresses a problem in the Court of Appeals' opinion.

I think there was the assumption in the Court of Appeals that once FDA approves an application the drug is no longer a new drug.

In fact, the drug is a new drug and is actively regulated as a new drug, including requirements that the manufacturer report to the FDA subsequent evidence of adverse reactions.

Now, once there has been material usage and material time and enough expert recognition to have general recognition of the drug, it will no longer be in a category of new drugs.

Unidentified Justice: But it takes what, 13 years to reach that stage?

Mr. Ganzfried: No, no, no.

I think the 13 year figure that you use is something that Respondents argue as the time it takes from the first concoction of a drug in the laboratory up through the time that you get approval from the Food and Drug Administration.

That's not the time period that would be involved for generic drugs, because the FDA has implemented procedures to expedite and simplify the process of getting approval.

In fact, there have been recent regulations by the FDA in the Federal Register of October 11th, and the Food and Drug Administration is making great progress towards simplifying the process so that it will be a much quicker one.

As I recall, the evidence in terms of those regulations is that it may take approximately two years for an application to be approved from the time it is submitted and filed with the FDA to the time that it is approved.

But the active regulation as a new drug would continue thereafter.

Now, the portion of the statutory definition of the word (B), is something that the Court of Appeals ignored altogether, and its finding that only the active ingredients are covered finds no support in the statutory language.

The Court of Appeals' error is even clearer when viewed in the full context of the Act.

Congress passed this Act in 1938 in the wake of the Elixir Sulfanilamide tragedy, in which more than 100 people were killed by an unsafe inactive ingredient in a drug that had the same active ingredient as another product that had been used safely for years.

The Act was passed to ensure that such incidents never be repeated.

The Congress went about this task with great care.

It established a statutory scheme that we've discussed in some detail already.

Under this scheme all drugs would be subject to expert scrutiny before they could be sold.

And the cornerstone of this legislation is the NDA process.

Now, I should add that in the statute Congress specifically identified the information that was to be supplied in an NDA, and that included, in addition to evidence of testing to establish a drug's safety, all the ingredients in the drug must be listed and the precise methods of manufacture supplied.

So it's clear that from the very start Congress expressed its concern for inactive ingredients and manufacturing methods, as well it should have after the Elixir Sulfanilamide situation.

Now, Congress amended the Act in 1962 following the Thalidomide tragedy in Europe.

At that time it expressed its approval of FDA's efforts in keeping Thalidomide off the market, and it expanded the Act's protection of the public by adding the standard of drug effectiveness, so that now a manufacturer must demonstrate by substantial evidence that its product is both safe and effective for its intended use before it can be sold.

And there was no indication in 1962, or 1938 for that matter, of any Congressional intent to weaken FDA's power to keep unapproved drugs off the market.

Aside from the preclearance program, the Act also provides other means for ensuring that drugs, once on the market, perform as they are supposed to.

While these misbranding and adulteration provisions are important enforcement tools, they address only products already being sold and are not a substitute for premarket review, nor were they intended to be such a substitute, as again the Elixir Sulfanilamide history shows.

That drug was in fact seized as misbranded, but the experience led Congress to conclude that such after the fact remedies alone were not enough.

Now, in totally exempting the generic drugs from the NDA process the Court of Appeals said that they may be sold even though they're not tested, as was the case with the drugs in this case.

And under the decision below, because there will not be an approved NDA for these products, they are also exempt from other safeguards.

Among these is the requirement I mentioned before, that the NDA holder report subsequent evidence of adverse reactions under Section 355(j).

When circumstances warrant, the agency may withdraw its approval and in that event the drug may no longer be sold.

This exemption that the Court of Appeals created was unintended by Congress, and in reaching the conclusion it did the Court of Appeals acted in a manner that was contrary to the way this Court has consistently interpreted the Act.

Dotterweich, Bacto-Unidisk, Rutherford, Hynson, and the Park case in 1975 teach us that the Act is to be read broadly and its exceptions narrowly, in order to give full effect to Congress' effort to protect the public.

I mentioned also the FDA experience of 40 years, the question I had before as to whether we've changed our mind.

We explained in our brief why on the critical issue in this case we haven't changed our mind.

If Respondents contention is right that there has been some agency vacillation, what we are doing now is returning to where we were in 1938.

We are not coming up with something new.

And we are recognizing that the Congressional intent to incorporate ongoing medical and scientific research, which today leaves no doubt and is undisputed that differences in inactive ingredients and manufacturing methods often can cause differences in the way the products react... taking all of this into consideration, the fact is that we're consistent on the main issue, and if in fact we've changed our mind, then as this Court said in the 1978 NLRB versus Iron Workers case, the agency is certainly entitled to change its mind and its interpretation should still stand so long as it's a defensible interpretation of the statute, as this one certainly is.

Unidentified Justice: May I ask one other question.

What is the FDA's position with respect to a pioneer drug that changes an inactive ingredient?

Say they change from the pill from green to blue or something.

Mr. Ganzfried: An approved pioneer drug--

Unidentified Justice: Must it file an NDA?

Mr. Ganzfried: --It must file.

It could be a supplement, depending on how drastic the change might be.

It could be a supplement, it could be an amendment.

Unidentified Justice: Say they just change the coating on it.

Mr. Ganzfried: But the fact is that the manufacturer is making a change in the product that's been approved.

Unidentified Justice: And he must file a new drug application?

Mr. Ganzfried: Or an amendment or a supplement.

Unidentified Justice: Well, it wouldn't be an amendment.

It would be a new drug if you change it from blue to green.

Mr. Ganzfried: It could be.

Unidentified Justice: Well, it could be or would be, under your view?

Mr. Ganzfried: If you change the inactive ingredient--

Unidentified Justice: Yes.

Mr. Ganzfried: --he has a new drug.

Unidentified Justice: And so he would be required, the pioneer drug company, would be required to file an NDA?

Mr. Ganzfried: It could be an ANDA or one of the other.

Unidentified Justice: But at least he has to--

Mr. Ganzfried: He would have to file something to notify the FDA, because he's no longer manufacturing the product that had been approved.

Unidentified Justice: --No matter now minor the change in the inactive ingredient might be?

Mr. Ganzfried: That's correct.

Unidentified Justice: Counsel, if the generic is a bioequivalent of an approved pioneer, is the situation any different?

The legal situation is not, but that is something for the FDA to determine after there have been tests and a submission made.

It is not something that the manufacturers are in a position to determine absent conducting bioequivalence tests.

And all we're saying is that if they... basically what we're saying in this case is that they should be... we're asking them to do what they hold themselves out as doing.

If in fact the drugs are bioequivalent, they're going to be approved and they're going to be on the market.

But if they're not, then that's where the problem exists, and those are the drugs that Congress intended should not be on the market.

FDA is the only agency Congress created for this purpose and is the only central clearing house for this information that can possibly make those conclusions.

It's the only agency Congress has created, but are there not some state agencies that on occasion are even more careful in their administration than the FDA?

I'm thinking of over the counter drugs.

In some states, some that are not bothered by the FDA are prohibited by state law.

Mr. Ganzfried: If I can eliminate the word FDA does not.

But the fact is that the states do not have any premarket clearance system.

Unidentified Justice: After all, though, aspirin is not harmless.

Mr. Ganzfried: When used properly, it should not be.

That's the problem.

None of these drugs are harmless.

They have to be used properly and their effects have to be known, and they have to be known in advance.

I'd like to reserve my remaining time for rebuttal.

Chief Justice Burger: You may lower the lectern if you'd like, Mrs. Greene.

You had a tall predecessor.

Mrs. Greene.

ORAL ARGUMENT OF ROBYN GREENE, ESQ. ON BEHALF OF RESPONDENTS

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

This case does not involve the issue of whether premarket approval of generic products would make those products safer.

The issue is whether generic drug products, both prescription and nonprescription, which contain active ingredients which are generally recognized as safe and effective are new drugs requiring premarket clearance from the FDA before they're sold.

The issue of prescription-nonprescription drugs is very important here, and it wasn't until this case got into this Court that the Government suddenly took the position that only prescription drugs were involved.

In the complaint which was filed against my client, the Government sought to enjoin the distribution of all unapproved drugs.

When the case was argued in front of the Court of Appeals, the issue of over the counter drugs was raised and discussed before the court.

It was only when the Government filed its petition in this case that it suddenly claimed that the issue was only prescription drugs, and it was joined by amicus curiae, The Proprietary Association, which represents the various groups which make over the counter products.

The Government's reason for trying to narrow this case is obvious.

As this Court has recognized in its prior decisions, there are in excess of half a million over the counter products currently on the market.

It is simply impossible for the FDA to approve new drug applications for every over the counter drug, and in fact FDA does not require over the counter products to have new drug approvals, although the statute in question does not distinguish between over the counter and prescription drugs.

In this case both the language of the statute and the very, very clear legislative history show conclusively that Congress has never intended that each and every prescription and nonprescription drug product obtain premarket approval from the FDA before it is sold.

Congress has rejected licensing of products on at least three separate occasions, beginning in the 1930's.

The original Food and Drug Act was passed in 1906 and during the early 1930's Congress began to re-examine it.

Very few of the early drafts of bills before Congress contained any language about premarket clearance.

However, there was one such bill and that was submitted by Representative Coffee, who seemed to be kind of a Ralph Nader of his time.

He was a very liberal man.

His bill was called the Consumer Union Bill.

He believed it was in the interest of consumers to have product by product licensing.

And his bill specifically provided... he used very specific language... each product must get a license.

Congress didn't want to hear from Representative Coffee at that time and his bill died.

The Elixir Sulfanilamide incident occurred, and at that point there was a great hue and cry to have some form of premarket clearance.

The Government has argued in this case that simply because premarket clearance came after the Elixir Sulfanilamide incident, that therefore the premarket clearance that was passed must have been product by product licensing.

It's a non sequitur and it's simply belied by the legislative history, which we cited extensively in our brief.

Representative Coffee and other people got up repeatedly in the legislative history and said, the bill that we have before us that is going to be passed is not a product licensing provision, we are rejecting product licensing.

And it's just clear that the type of bill that Representative Coffee wanted, product by product licensing, was decisively rejected by Congress.

The Government has claimed that we have cited snippets of the legislative history in our brief.

We have devoted at least five full pages to going through portions of the Congressional Record, and it is much more than a snippet that we rely on.

The second time the issue came up in front of Congress was in the 1960's.

In the 1960's Senator Kefauver wanted product by product licensing.

He submitted a bill which provided

"that there would be licenses for the maintenance of establishments for the propagation or manufacture or preparation of products described in subsection (a) of this section. "

And the products for which a license is desired must meet standards designed to ensure the continued chemical structure, strength, quality, purity, safety and efficacy of such products.

Senator Kefauver presented this bill to Congress and it eventually passed, but in a much modified form.

The factory licensing provisions which were contained in the bill originally remained.

The product licensing provisions were taken out.

And this was in the 1960's.

Now, the Court I think is correct in saying that the FDA's position has been anything but consistent.

For at least 30 years it said that what my client was doing, namely selling unapproved generics, which they are not doing any more, as we have pointed out in our suggestion of mootness... they took the position that it was perfectly proper.

And when the FDA last came to this Court in a case involving a similar issue involving generic drugs in the 1970's, it argued before this Court that when it withdrew an approval, a new drug approval for a pioneer drug, that that would automatically require that all unapproved generic drugs be removed from the market.

In the 1970's, this Court recognized in the Hynson decision and other decisions that all of the generics it was talking about had never received approval from the FDA.

It's stated in the opinions.

The Government never argued that these products were not legally on the market because they did not have new drug approvals.

Instead, it argued that the withdrawal of the new drug approval for the pioneer automatically resulted in a determination that the generics could not be sold.

So the FDA's position that it has been consistent is simply incorrect, and the FDA's actual change in position came about some time in the mid-70's.

After the FDA had changed its position approximately in the mid-1970's, the Third Circuit decided the first of the cases which involves the issue here, the Lannett case.

Unidentified Justice: Mrs. Greene, was the FDA's change of position which you described as having taken place in the mid-70's evidenced by any decision or statement, or was it simply something that those in the industry could tell was happening?

Mr. Greene: Well, I think the Government is correct in saying that they always had the regulation on the book, but I think it reflected more in the agency's practice than in anything that was said or done.

They started to file injunction actions and sue people trying to get the generics off the market.

Unidentified Justice: Whereas previous to 1975 they had never done that?

Mr. Greene: Not to the best of my knowledge, not in a reported decision.

Maybe a little bit earlier, there may have been several cases that may not have reached the appellate court level earlier to that, but I'm not aware of earlier decisions involving the generic issue.

Unidentified Justice: But apart from the time, the year, you say that there was a noticeable and sharp change in policy some time in the late 1960's or 1970's?

Mr. Greene: I think probably the change occurred between 1968 when the FDA stopped issuing the mid-1970's.

The stopping of the issuance of the "not new drug" letters was an official policy that could be pointed to.

But the Lannett case is the first case of an appellate court that reflected the FDA's new position in terms of generics.

After Lannett was decided, the FDA went to Congress again in the late 1970's and it told Congress, it said, the Third Circuit has decided that generics do not need premarket approval and we think the Lannett decision is wrong.

And the FDA at that point put before Congress several bills, among them Senate Bill 1075, which would have legitimized every single thing that FDA was doing.

It would have done away with the new drug provisions.

It would have adopted an over the counter monograph system.

It would have legitimized the abbreviated new drug approval process.

Unidentified Justice: Is it possible that Congress didn't act because they thought it wasn't necessary to act?

Mr. Greene: That is a possibility.

But I think that the rejection of Senate Bill 1075, viewed together with Congress' specific rejection of premarket licensing in 1938 and 1962, shows that Congress just didn't want premarket licensing.

That rejection of the statute alone in 1979 I agree would not be determinative.

But I think if it's viewed in the historical context from the thirties through the sixties to the late seventies, it shows a definite pattern on the part of Congress.

Unidentified Justice: What do you call the requirement to have a clearance on new drugs?

Is that some kind of a premarket licensing system?

There are some kind of drugs, I suppose, that need preclearance, don't they?

Mr. Greene: New drugs.

Unidentified Justice: Yes.

What do you call that?

Mr. Greene: Well, I think that what Congress had in mind when it passed the statute--

Unidentified Justice: What is that?

Is that a limited premarket, market licensing system, drug licensing system, product licensing system?

Mr. Greene: --It is not a product licensing system.

What Congress had in mind is that, for example, a manufacturer will develop a brand-new chemical entity.

It will go out, it will test it, it will perform investigations.

Unidentified Justice: And then--

Mr. Greene: And then it will--

Unidentified Justice: --Perhaps approve it for marketing.

Mr. Greene: --Then it will decide whether the product is a good product to sell, and if it thinks it's effective and safe and useful and the company can make money it will then go to the FDA and it will seek a new drug approval for that particular product.

Unidentified Justice: Well, isn't that a kind of licensing?

Mr. Greene: Well, it is not really a license.

It is an approval to sell.

Unidentified Justice: Well, what was it you think the Congress was rejecting in the legislative history that you referred to?

Mr. Greene: Well, I think what Congress was rejecting was the idea that each and every product had to go for an NDA, because after the product gets on the market in terms of an NDA 99 percent of all products, both in the 1930's and today, are patented.

The company which has the original patent is permitted to put the product on the market for a period of 17 years.

It may issue licenses to several other manufacturers to distribute that product, but the product stays on the market for 17 years in more or less of a monopoly situation.

At the end of 17 years when the patent expires, other companies then are free to come in and duplicate the product.

After the 17 years some products, some active ingredients that have been sold, are then generally recognized as safe and effective and can be sold without premarket clearance.

Other products, for example a product like Oraflex, which was on the market for a year, even though it had FDA approval certainly no one would recognize it as being particularly safe today, and in fact it has been taken off the market.

So the 17-year patent period is a period of time during which the community of experts can formulate opinions about whether the active ingredient that is being sold is generally recognized as safe and effective.

And I think that if the statutory scheme is viewed in that way it makes a tremendous amount of sense.

The bioavailability and bioequivalence concerns that the Government raises were dealt with by Congress very specifically in the statute that exists through the adulteration requirements.

It is... under the Act as it has existed since the 1930's, a manufacturer is not allowed to sell a product if its strength, quality or purity falls below compendial standards as recognized in the United States Pharmacopoeia or the National Formulary, both of which are expressly mentioned as guidelines in the statute.

If one opens the United States Pharmacopoeia and the National Formulary, one finds mainly definitions of drug substances, and the drug substances are listed and underneath it will give the percentage of the active ingredient that should be found in the product that is sold, and there are disintegration requirements.

The Formulary and the Pharmacopoeia both in the 1930's and in the 1980's would not tell a neighborhood pharmacist or a manufacturer exactly how to fabricate a product.

Rather, they would set standards, tolerances within which the products had to be made in order to comply with compendial standards.

Unidentified Justice: Mrs. Greene, your opponent says... I haven't looked, of course, at the original documents... but says that these compendia do also contain some drug products as well as active ingredients.

Is that correct?

Mr. Greene: The compendia do not contain any drug products at all.

Unidentified Justice: Not by trade name, but is everything in there limited to active ingredients, according to your submission?

Mr. Greene: What they do contain... if you go back to the 1935 Pharmacopoeia which Congress had before it, most of the items that are listed in the Pharmacopoeia are drug substances.

Unidentified Justice: Well, but "most" seems to imply that there are some that are not.

Mr. Greene: Well, I was getting to that.

The second thing that the Pharmacopoeia in the 1930's had, they had items called official preparations.

And the Pharmacopoeia was more or less at that point like a cookbook for the neighborhood pharmacist for how he would fabricate--

Unidentified Justice: Well, would some of those preparations include inactive ingredients?

Mr. Greene: --The recipe that is in the Pharmacopoeia would include inactive ingredients.

But at the beginning of the 1935 Pharmacopoeia, in the portion we've cited in our brief, it said that pharmacists could substitute a suitable dilutant or excipient for the inactive ingredients which were mentioned in the recipe that was put in the Pharmacopoeia.

Unidentified Justice: Is there anything similar to the Pharmacopoeia, any other book similar to that?

Mr. Greene: Well, the two works referred to in the statute are the United States Pharmacopoeia and the National Formulary, both of which are similar.

Unidentified Justice: They're two separate?

Mr. Greene: They used to be.

In the 1930's they were separate competitors.

In the seventies USP bought the National Formulary and changed its function slightly.

But in no event is any item listed in the Pharmacopoeia or the National Formulary a drug product.

Instead--

Unidentified Justice: Well, but you said they did list some recipes that the pharmacist might use, which would include both active and inactive ingredients.

Mr. Greene: --With the provision that they could substitute--

Unidentified Justice: That you can substitute the equivalent.

But the mere fact that they are listed in there seems to me to be contrary to your basic argument.

Mr. Greene: --Well, I don't think it's contrary.

I think that in terms of the use of the word "articles" in the statute, Congress defined a drug as an article, articles are things listed in the Pharmacopoeia.

And for example, the National Formulary, which is mentioned in the statute today, only lists drug substances.

Obviously there's a kind of dynamism involved, because the Pharmacopoeia and the Formulary referred to in the statute have changed over a number of years.

But the one thing that is definitely not mentioned is drug products, and that's why I think it's important, to the extent that there is an ambiguity in the word "articles", to look at the legislative history in determining exactly what Congress meant when it used the term "articles".

Unidentified Justice: Mrs. Greene, in Code Section 321(g)(1)(D) it also says that "drug" means

"articles intended for use as a component of any article specified in clauses (A), (B) or (C) of the paragraph. "

"Doesn't that indicate that all of these excipients are covered? "

Mr. Greene: Well, I think... but the statute still uses the word "article", and the Government has claimed that "article" should be used in its broad generic sense and not in any way related to its use in the Pharmacopoeia and the Formulary.

If in fact "article" means items in the Pharmacopoeia or the Formulary, it should mean the same thing all the way through the statute, and it shouldn't be changed in that part of the statute.

There are various items recognized in the Pharmacopoeia which are combinations of active ingredients and are specifically listed as combinations in the Pharmacopoeia.

I think that at a minimum the Government has tried to take the position partially that the statute is unambiguous and that this Court should not look at the legislative history.

It's our position in our brief that the statute at best is ambiguous and that any ambiguities in terms of the word "articles" should be resolved by reference to the legislative history.

I think in resolving the issue of what the word "articles" means, one useful thing that I did, I went through the entire statute and I looked at the word "drug", and every time it said "drug" I substituted "active ingredient" versus "product" in order to determine which interpretation made more sense.

90 percent of the time it didn't make any difference at all.

But in a couple of situations it did make a very large difference, and if I can just find the one place where it was absolutely most erratic, Section 502(i) of the Act says:

"A drug or device shall be deemed to be misbranded if it is an imitation of another drug. "

Now, if we take the word "product", which is what the Government says "drug" means, and substitute it into the Act, that portion of the Act would then mean a product shall be deemed to be misbranded if it is an imitation of another product.

Well, of course all generic drugs are imitations of other drugs, and if you use the word "product" in this part of the Act it would effectively outlaw the entire generic drug industry.

And by substituting in other parts of the statute it's clear that Congress could not have intended the word "drug" to be "product", but rather it meant the active ingredient or combination of active ingredients in the product.

And I think again and again in going through the legislative history, Congress has stated that it is relying on the adulteration provisions and adherence to compendial standards to bring... I'm sorry.

Unidentified Justice: Mrs. Greene, in the section that requires a new drug application to be filed, doesn't it require that they list the inactive ingredients of the drug?

Mr. Greene: Yes, it does.

Unidentified Justice: So doesn't that have to be broader than the active ingredients, in that section at least?

Mr. Greene: In that section of the Act.

I think when you are dealing with the original pioneer drug that is first going on the market, that the testing and the items that are required are definitely more extensive than what is required after a product has been on the market for 17 years and achieved a certain amount of general recognition.

I think before the FDA wants something that is brand new on the market it wants to take every possible precaution to make sure that a disaster will not happen, although even the FDA's efforts do not prevent disasters from happening in all instances.

I think that--

Unidentified Justice: --Do I detect that you are about through, Mrs. Greene?

Mr. Greene: Just about, but--

Unidentified Justice: Well, I have a... I thought I would just ask you if you thought the Court was quite wrong in rejecting your suggestion of mootness.

Mr. Greene: --Yes, I did.

Unidentified Justice: And do you think it is even more moot today than before, if that's possible?

Mr. Greene: Well, the government and I are debating on how moot it is, because there was a warehouse full of drugs in Miami, most of which should have been destroyed, but the marshal can't destroy the drugs because he can't burn them, because it would pollute the air, and he can't bury them because it violates the Toxic Waste Disposal Act.

0 [Generallaughter.]

Unidentified Justice: You know that if we had accepted your suggestion, you would have lost your favorable judgment.

We would have vacated it.

Mr. Greene: Yes.

We pointed that our in our--

Unidentified Justice: Exactly.

You did.

Mr. Greene: --What basically happened, and the government has ascribed all manner of bad motives to us, when this issue came to the public forefront, in the media, there were some very unfavorable reports on national television.

As a practical matter, it became almost impossible for someone like my client to sell unapproved generic drug products, and my client was not necessarily interested in the legal issue.

My client was interested in his business.

So, he just stopped selling unapproved drugs.

We told the government we would consent to the entry of an injunction against us to prevent us from selling unapproved drugs, since we weren't doing it any more, and we didn't plan to do it in the future.

Unidentified Justice: Are you still of that persuasion?

Mr. Greene: Yes, and really the only difference that the government pointed out, it suggested that we had to recall everything that we had sold in the past.

In our suggestion of mootness, we pointed out that under the cases, most of the cases that exist today, the FDA did not have the power to recall.

Unidentified Justice: And haven't all the drugs that had been distributed expired in there?

Mr. Greene: We believe that most of them have expired.

Unidentified Justice: Most of them.

Mr. Greene: We thought that all of them had.

It is possible... there are a lot involved.

The government claims that there are perhaps three bottles in Oklahoma that have not expired.

We haven't really resolved that issue, but we still do believe the case is moot, and that any problems along those lines would best be resolved by the trial judge on some type of a remand.

In fact, I checked with my client last night.

They are not selling unapproved drugs as of today, and do not intend to.

Unidentified Justice: Does this mean that the position of your client and perhaps a substantial segment of the industry is that the approval by the government actually enhances the marketability of the generic drug?

Mr. Greene: There is no question about it, and I think that is reflected in the transcript in this case.

The government witness, Dr. Palmer, was asked whether certain drugs were generally recognized as safe and effective, and he said they were, and when asked why, he said, because they have FDA approval.

He said, whenever anything has FDA approval, I recognize it as being safe and effective.

If it is not approved by the FDA, I do not recognize it as being safe and effective.

And I think that the government is correct in a way in saying that a lot of doctors do not have intricate knowledge of pharmacology.

They look at the FDA approval as a stamp of approval.

Unidentified Justice: So your client isn't out of the generic drug business.

It is just that your client will present them for approval.

Mr. Greene: Well, my client will not.

My client is merely a distributor of products manufactured by other people, and there are a great many manufacturers on the market who make approved products, and in light of the adverse publicity and the difficulty of selling the products, and the potential exposure under products liability laws, there is simply no reason to continue in the practice.

Now, the government wanted us to confess error, which we will not do, because we think that the Fifth Circuit was absolutely correct, but what is correct legally and what is correct from a business point of view--

Unidentified Justice: Is two different things.

Mr. Greene: --Correct.

Unidentified Justice: Apart from the particular articles in dispute in this case, your client no longer has a financial interest in winning this case.

Mr. Greene: No.

The last remaining vestige of financial interest was--

Unidentified Justice: Is your lawyer's fee.

0 [Generallaughter.]

You won't collect that from the government, though.

Mr. Greene: --were the drugs that were in the warehouse.

The injunction case was never consolidated with the seizure case, and we received an order requiring the government to allow us to take the drugs out of the warehouse in Miami, and this Court stayed that order requiring the return of the property, and during the passage of time, at least 90 and probably 100 percent of the shelf lives of the products have expired.

That was our last remaining financial interest.

And we really have none today.

But my client said, why do I have to come to this Court, and I said, as long as I am your lawyer, you are not going to not file a brief, you have to come to this Court.

We think the Fifth Circuit was absolutely correct from a legal point of view, and the government may be entirely right in saying that the scheme that they have now with the monograph system and the abbreviated new drug applications is an ideal statutory scheme, but unfortunately, it is not the statutory scheme that Congress passed in 1938 and amended in 1962.

It is a statutory scheme which Congress expressly rejected in 1979, and as good as it may be, perhaps if I were the legislature, I would have passed Senate Bill 1075.

It did get through the Senate, and it was rejected by the House.

It is not the statutory scheme that we have today.

We think that the Fifth Circuit was right for the reasons stated in our brief, and that its decision should be affirmed.

Chief Justice Burger: Do you have anything further, Mr. Ganzfried?

ORAL ARGUMENT OF JERROLD J. GANZFRIED, ESQ., ON BEHALF OF THE PETITIONER -- REBUTTAL

Mr. Ganzfried: Yes, just briefly.

Unidentified Justice: Could you address the distinction, if there is one, under the Act between over the counter and prescription drugs?

Mr. Ganzfried: Yes, there is a statutory provision that does provide the distinction.

It is 21 USC 353(b)(1), that describes the situations in which a drug would have to be sold only under a doctor's prescription.

Basically, as I said earlier, prescription drugs are used for--

Unidentified Justice: Well, does this case involve only prescription drugs?

Mr. Ganzfried: --It certainly does.

The only drugs that were at issue--

Unidentified Justice: Is that the position of the government all through the case?

Mr. Ganzfried: --That is absolutely correct.

The only drugs referred to in the complaint and the request for preliminary injunction were prescription drugs.

The only drugs discussed at the hearing on the preliminary injunction were prescription drugs.

Unidentified Justice: So you think there is a statutory basis for treating the two categories differently?

Mr. Ganzfried: There is a statutory basis for treating them differently.

Unidentified Justice: But the definition is the same, is it not?

Mr. Ganzfried: The definition is the same, that's correct.

Unidentified Justice: In the statute.

Mr. Ganzfried: That's correct, but there is this other provision in Section 353 that does set out a basis for recognizing that prescription drugs used for serious and life-threatening diseases are something other than drugs that can be sold over the counter and used by laymen.

Unidentified Justice: But just recognizing there is a difference is all.

If your position is vindicated as a statutory matter, there would be nothing to prevent the FDA from tomorrow adopting a regulation saying, we are going to require premarket clearancing of all new over the counter drugs.

As a matter of fact, I would think that would be... somebody could easily argue that they would have to.

Mr. Ganzfried: Well, if that were the case, and I disagree with it, it would be something that we would have to take up at that time.

It is not this case, and it never has been this case.

Unidentified Justice: Well, but it might be the consequence of this case, if we read the statute the way you do.

Mr. Ganzfried: I don't agree, but if there will be another case, then so be it.

Unidentified Justice: May I ask this?

Supposing we did conclude that the case was moot on the basis of what has been said, and we vacated the judgment of the court of appeals.

What adverse consequence to the government, if any, would follow from that?

Mr. Ganzfried: The adverse consequences is that this industry of unapproved generic drugs is in large part a creature of dictum in the Linette decision.

It was cited and discussed broadly in the merchandising materials that Respondents put out, and that are in the record in this case.

It spawned an industry.

It was dictum from which the Third Circuit has arguably withdrawn in its review in the Pharmadyne case.

The fact is that without the FDA there to review these drugs before they reach the market, they are going to reach the market.

We have the situation, and I refer you to Paragraph 15 of--

Unidentified Justice: You can still... you could just get after somebody else.

Mr. Ganzfried: --Well, we may not know about them--

Unidentified Justice: Well, how did you find out about this one?

Mr. Ganzfried: --Well, one of the reasons we found out is that there had to be a recall of the pherocemyde that was being distributed.

Unidentified Justice: Well, how will you ever be?

I mean, even if you win, you won't know any more.

Mr. Ganzfried: If people... If there is compliance, we are going to know more--

Unidentified Justice: Well, I know, but there won't be if there isn't.

Mr. Ganzfried: --and if there is not compliance, we have a remedy for going after them.

Unidentified Justice: If there isn't compliance.

Mr. Ganzfried: Well, they referred to the adulteration provisions as a substitute for premarket clearancing.

I suggest that if we--

Unidentified Justice: I don't blame you for wanting to get off the books a decision you don't want to... that you think is wrong.

Mr. Ganzfried: --Well, the holding in the Linette case had nothing to do with the issue in this case.

It had to do with a hearing.

Unidentified Justice: Well, I know, but you would like to get this particular decision off the books that you think was wrong in this case.

Mr. Ganzfried: In this case, that's one of the reasons why the case is not moot.

Unidentified Justice: You want it reversed.

Mr. Ganzfried: The other reason it is not moot is because they did not agree to a recall.

They also did not agree to an injunction as broad as the one that we had sought.

Now, the suggestion that we had from them is that the named Respondents would be willing to agree to an injunction.

What we asked for was something that would be broader than that, and we indicated in our brief in response to the suggestion of mootness that one of the problems it that they have shrouded the corporate relationships of the company in some mystery.

Now, they continue to do so to this date, despite Rule 28.1 of this Court.

Unidentified Justice: Perhaps instead of rejecting the suggestion we should have just vacated and remanded it to the lower courts to consider.

Mr. Ganzfried: Well, or reversed would have been the preferable course.

Unidentified Justice: Not if it's moot.

Mr. Ganzfried: Not if it's moots but they haven't established the strong burden that they have of showing mootness, for the reasons that we described in our brief addressed to that subject.

I was going to talk about the adulteration provisions in which they say that's a substitute for premarket review.

You could get at these drugs after the fact.

I commend to your attention the Secretary of Agriculture's report on Elixir Sulfanilamide in 1937.

It demonstrates beyond any doubt that Congress was concerned with the kinds of issues that this case presents.

The arguments that they have presented in support of their selling their generic copies of other drugs with the same active ingredient was precisely the defense that was made by the manufacture of Elixir Sulfanilamide.

So I commend that Secretary's report to your review.

Thank you.

Chief Justice Burger: Thank you, counsel.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

American Express Co. v. Koerner - Oral Argument

Wed, 18 Feb 2009 06:13:14 +0000

Case:

American Express Co. v. Koerner

Media File:

80-202_19810420-argument.mp3

Related Transcript:

80-202_19810420-argument_transcript.xml

Transcript:

ORAL ARGUMENT OF RONALD J. GREENE, ESQ., ON BEHALF OF THE PETITIONER

Chief Justice Burger: We will hear arguments first this morning in American Express Co. v. Koerner.

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

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

This case turns on what we view as a relatively simple question of statutory construction.

It requires the Court to construe the meaning of Section 104(1) of the Truth-in-Lending Act.

That section provides an exemption from the entire Act for business credit transactions.

The precise statutory language is,

"transactions involving extensions of credit for business or commercial purposes. "

The question before the Court today is whether this language makes the Truth-in-Lending Act inapplicable to the business credit cards issued by American Express to the company for which Respondent works.

Now American Express says that the exemption applies because the cards in question were business cards, obtained by a business enterprise for business purposes.

Respondent counters that the exemption should not apply because he, together with his employer, was jointly liable for any charges on the account and because allegedly, on some occasions he used the card to make personal purchases.

Now, time permitting, there are three basic points that I'd like to cover this morning.

First, I'd like to review briefly the precise statutory language that we feel is dispositive.

It is our position that this language clearly and without any equivocation, exempts all business card systems from the Truth-in-Lending Act.

Second, I'd like to discuss the position that the Federal Reserve Board has taken on the issues before the Court.

Under this Court's decision in Ford Motor v. Milhollin, the rulings of the Federal Reserve Board are, we think, dispositive.

And finally, I'd like to touch on the fundamental policy considerations that we think are reflected in the business credit exemption.

And the Fifth Circuit decision which we've asked this Court to reverse is particularly troublesome because it reflects an insensitivity to these fundamental policy considerations.

And also, because it might lead to the imposition of an exceptionally complicated and convoluted regulatory scheme in an area where Congress and the Federal Reserve Board never thought that it should be applied.

Application of those regulations in this area would impose wholly unnecessary regulatory costs in an area that Congress specifically decided it was not going to regulate.

Now, there are no disputes about the facts in this case; it comes here on a motion for summary judgment that was granted by the District Court.

Mr. Koerner, the Respondent, was an officer of the John E. Koerner & Co. In 1965, the company applied to American Express for issuance of a company card for Mr. Koerner's use.

Other employees also were to receive cards; five cards were ultimately issued on this account.

American Express checked out the company's credit, and issued all five cards.

It also obtained Mr. Koerner's individual signature, and that made him liable together with the company for any charges on his particular card... not on the other four cards, but on his particular card.

Unidentified Justice: Did the company investigate the credit rating of any of Mr. Koerner... or of any of the other four employees?

Mr. Greene: No, Mr. Justice, just the company.

If you look at the application form which is in the joint appendix on page 27a, you will see that there are listed there credit references of the company, Whitney National Bank, Hibernia National Bank, and so on.

International Milling Company.

These are credit references of the company and it was the company's credit that stood behind the account.

You will also see from that application form that it notes in--

Chief Justice Burger: Well, you say that the company stood behind it.

Are you suggesting that American Express was looking only to the corporation, not to the individuals?

Mr. Greene: --Well technically, the individual employees were jointly liable with the company for any charges on their particular cards.

What I was pointing out, Mr. Chief Justice, was that the credit checks that were made and that are made, for company cards, look to the company's credit worthiness as the basis for--

Chief Justice Burger: Well, what I was trying to clarify, because I wasn't sure what you meant, is there any difference in the relationship between American Express and Mr. Koerner, and American Express and the other four men?

Mr. Greene: --No, Your Honor.

Chief Justice Burger: Individually.

Mr. Greene: No.

Justice Rehnquist: How about the relationship between the individual and the company, and the individual and American Express; could American Express have gone after him for the personal charges?

Mr. Greene: It could have, Mr. Justice.

As a matter of practice, it does not, it goes after the company.

In this case, the record reflects that all the bills were sent to the company at the company address.

The correspondence relating to the billing error inquiries were between the company bookkeeper and American Express.

Ordinarily, with these accounts, it is the company that is primarily involved.

There are--

Unidentified Justice: But it could have gone after the individual for all of the charges, couldn't it?

Mr. Greene: --It could have.

It could have.

The purpose for the individual liability is primarily to assure the company, the Koerner Company, in this case, against misuse of the cards by their employees.

There are, under Section 135 of the Truth-in-Lending Act, where you have a business card system where ten or more cards are issued... that wouldn't have applied in this case... but where there are ten or more cards, the credit card issuer and the company getting the cards are allowed by contract to negotiate between themselves any division of liability they want to negotiate without regard to the $50 limit on liability for unauthorized use of credit cards that would otherwise apply.

And what often happens in these company card situations is that American Express will reach an agreement with the company that will allow the company, in the case of an employee who leaves town without paying his bills, the company will inform American Express, cancel the card and then American Express will go after the employee rather than the company.

Chief Justice Burger: What does the record show as to the payment of these accounts?

Payment by the checks of the corporation in all instances, or--

Mr. Greene: No, there were apparently some instances where personal checks of the employees were also sent, as well as company checks.

Chief Justice Burger: --Well, are we to infer from that that sometimes the employees used it for personal purposes, and then paid with a personal check, but when it was for a corporate purpose it was paid for by a corporate check?

Mr. Greene: Well, that's possible, Mr. Chief Justice.

The record does not reflect that.

In our view, that is irrelevant to the case, however.

The question is, in our mind, as far as the application of the business credit exemption is concerned is whether the card was issued for a business purpose, not whether it was used for a business purpose.

A creditor must know when a credit card is opened, whether the account is covered by the Truth-in-Lending Act, or whether it is exempt.

The most important reason is found in Section 127 of the Truth-in-Lending Act which requires initial disclosures to be sent to all cardholders before the first transaction on the account.

So you have to send out these initial disclosures before any charges have been made at all.

And the creditor has to know, at that time, whether the card is going to be covered by the Act and therefore the disclosures have to be sent, or whether it's exempt.

And the Federal Reserve Board has taken precisely this position in its newly issued Regulation Z, which came out just a couple of weeks ago, where it, in its new definition of cardholder, defines a cardholder as a person to whom a card is issued for consumer credit purposes.

The question is the purpose for the issuance of the card, it's a prospective kind of test.

It's very similar to a situation outside the credit card area where you might have a loan that's taken out at the bank.

The lender at the time the loan is taken out must make the decision whether of the Truth-in-Lending disclosures.

And he hands over the loan proceeds and once the customer leaves the bank he could use that money for whatever he pleases.

Justice White: Well, Mr. Greene, there are... do you... does the company make the disclosures every time it issues a new card, every year?

Mr. Greene: Yes, Your Honor.

It makes the initial disclosures before the first use of the card and then American Express, at least, makes new disclosures each year.

Justice White: Must it?

Must it?

Mr. Greene: Well it must make initial disclosures at the beginning--

Justice White: Well I'm asking you how about on reissue?

When... I suppose this card was reissued every year?

Mr. Greene: --A renewal card was sent.

Justice White: Yes.

And there are disclosures then?

Mr. Greene: There are disclosures.

I don't believe they are required, except where there's a change in terms.

Justice White: Well, suppose a card like this is never used for business purposes, as it turns out, it's used completely for personal use.

It never... and the employee makes the payments directly to the company.

Mr. Greene: Well, American Express would have no way of knowing what the card was being used for, or whether those purchases are personal or business; all it gets are copies of the credit card slips from the merchant.

They can't tell whether that's a personal use or a business use; it has to rely upon the representations that are made to it at the time the account is issued.

And in this case, the application form which Mr. Koerner signed and which the company signed as well, clearly labels the application as one for a company account.

Perhaps I could--

Justice White: Even though every payment... the payment for every charge on the card is made by him personally, and not by the company?

Mr. Greene: --Well, that may not indicate that the charges were business charges.

I, for example, have a company American Express card from my law firm, and I often pay for the charges with a personal check and then receive petty cash from the company, from the law firm, in reimbursement.

The nature of the payment doesn't necessarily determine the issue.

Justice White: So it really isn't the purpose, it's what somebody says the purpose is?

Mr. Greene: Well, it's... in this case, there is a contract, Your Honor.

There is a contract between American Express--

Justice White: I'm just trying to find out what your theory is.

It isn't a matter of fact, it's a matter of--

Mr. Greene: --Agreement.

Justice White: --contractual representation.

Mr. Greene: And it's a matter that has to be determined at the outset, before the account is used.

Unidentified Justice: Well, your... that argument depends upon the hypothesis, does it not, that the extension of credit occurs when the card is issued?

Mr. Greene: Well an extension of credit--

Unidentified Justice: Yes.

Mr. Greene: --certainly occurs then.

I wouldn't--

Unidentified Justice: And I thought of a credit card, or at least it can be argued, that a credit card is no more than an agreement to extend credit in the future.

Mr. Greene: --Well, the definition of credit contained in the Truth-in-Lending Act is broad enough so that the opening of an account has to be viewed as an extension of credit.

If it weren't--

Unidentified Justice: Even though the card is put by the cardholder into his desk drawer and never used?

Mr. Greene: --Well certainly--

Unidentified Justice: That's an extension of credit?

Mr. Greene: --an extension of credit is the right to defer payment.

Unidentified Justice: It's not... well, it's an agreement to extend credit in the future, is it not?

Mr. Greene: Yes, and that constitutes an extension of credit.

For example, if American Express were to discriminate against someone in opening accounts, and let's say, refused to open accounts for women, under the Equal Credit Act, the refusal to open an account for a woman would be a refusal to extend credit and would give her a right of action.

The opening of an account is... has to be, an extension of credit.

Unidentified Justice: Well, it has to be to support your argument, does it not?

Mr. Greene: It has to be an extension of credit; I'm not denying that it's used for--

Unidentified Justice: To support your statutory argument?

Mr. Greene: --That's right.

That's right.

Justice Rehnquist: Well what do you make then, of the first clause of Section 104(1), credit transactions involving extensions of credit for business or commercial purposes... are not covered by the subsection.

Mr. Greene: Well, I think that language is crucial to us, Mr. Justice Rehnquist.

It indicates clearly that you can have extensions of credit within an overall transaction.

The language is, transactions involving extensions of credit for business or commercial purposes.

Unidentified Justice: Well Mr. Greene, isn't your position pretty much that the key really is the purpose of the extension of credit... and where the purpose is business and it is established here by the application form itself as being for business... that brings you within the exemption?

Mr. Greene: Precisely.

Precisely, Your Honor.

Unidentified Justice: Even if, as a matter of fact, that's false, the purpose is false?

In the sense that it's never used, and--

Mr. Greene: Well, I could conceive of a case, Your Honor, where if someone were to come into American Express and say, two years later, I got a business card from you but I'd like to change it over into a personal card.

Unidentified Justice: --Well, I can certainly conceive of a situation where someone couldn't get a card of his own but he could get one with the company's name on it and he never intended to use it for business purposes.

Solely personal.

Mr. Greene: I would... that should hardly entitle him to--

Justice White: That wouldn't change your case.

Mr. Greene: --No, it wouldn't.

Because the credit transaction here was a business credit transaction.

I should point out, that American Express issues two kinds of cards: it issues personal cards, and those are the vast majority of all cards that are issued; something like 90 percent of the cards.

And it issues company, or, corporate cards, which are the kinds of cards involved in this case.

Now Mr. Koerner individually, could have applied for a personal card on a different application form and he... if he qualified for credit... could have received it.

And then he would have received all of the disclosures under Truth-in-Lending, and all of the protections.

If he did not, the company applied for a business account, and then the company authorized a card to be delivered to Mr. Koerner and the four other employees.

That changes the nature of the transaction.

The company name was on the card, the company received the bills, the company's credit was at stake; this is a business credit transaction and the agreement between American Express and the Company makes it so.

Perhaps, if I... if we look a little bit at the particular section of the Act that American Express was charged with violating, you will see why an account can't be half fish and half fowl, why it has to be all business or all personal.

Section 161 of the Act applies only to open-end, consumer credit plans, that's the statutory language.

Now, an open-end credit plan by its very nature involves a continual flow of credit extensions, as part of an overall credit plan.

Now, a creditor, in order to comply with the Fair Credit Billing Provisions, has to set up a complete compliance program to assure that the statutory deadlines, that are set in Section 161, are satisfied.

You have to respond within 30 days, and then within 90 days in specific ways, and you have to conduct certain kinds of investigations within certain time periods.

The creditor has to set up these procedures for a category of account, and when it gets an inquiry it has to know whether to assign it the deadline that the statute requires or whether not to assign it a deadline.

The inquiry, the credit card issuer will have no way of knowing whether the inquiry relates to a personal charge or to a business charge.

In fact, it may relate to no charge at all, it may be a use... a charge that appears on the statement where the cardholder had never made any purchase.

It might just be an error on the bill.

Or it might be one of the statutory definitions of the billing error is a mistake in computation.

It might be a mistake in adding up a number of charges, some of which were business and some of which were personal.

So, the creditor has to know, to comply with that Section, whether the account is fish or fowl; whether it is business or personal.

And in this case, this account was categorized as a business account.

Chief Justice Burger: To what extent, Mr. Greene, is that an analogy with a letter of credit?

Mr. Greene: It's very similar, Your Honor; that would involve an agreement by a creditor to make extensions of credit in the future, and if that agreement were between a lender and a business debtor, it would not be covered by Truth-in-Lending.

Section 103(h) of the Act confirms this reading.

That Section defines consumer, and consumer credit in the substantive provisions of the Act, like 161 that I was talking about a moment ago, use the word consumer.

Now Section 103(h) says that consumer credit is credit primarily for personal, family or household purposes.

It has the word primarily in it.

That, in our view, reflects that you can have a mixed purpose account, and that the creditor has to make a judgment at the outset, admittedly at the risk of making a mistake and then being liable under the law.

Unidentified Justice: So Mr. Greene, what's the significance of the last sentence of letter 727,

"however we suspect that few cards, if any, which are issued with a corporation as the cardholder would fall within this category. "

Isn't there an implication in that that there might be some cards?

Mr. Greene: There might be, and I don't--

Unidentified Justice: I mean, although ostensibly a business card, where in fact it is established that it was primarily for personal use, this suggests that while ordinarily that wouldn't happen with a corporate card, it might happen.

Mr. Greene: --It might happen, and I don't disagree with that, Your Honor.

This case arises on a motion for summary judgment.

We put in the record the application forms, it is admitted through discovery that all billing was to the Koerner Company as a business account, that's an admission of the Plaintiff, we have the contract in the record which says it's a company account, and the Plaintiff put in no evidence indicating that this was to be a personal account.

Unidentified Justice: You mean, at the time of the issuance?

Mr. Greene: At the time of the issuance.

I assume that if somebody sent in the same company card application form that's in the record and put a cover letter on the front of it, saying I need this card for personal purposes, that would change the case significantly.

But that--

Unidentified Justice: Well I gather probably American Express would not have issued a card in the name of the company then, would it?

Mr. Greene: --If that, the procedures are if that were to happen, it would issue a personal card, which as I said, is the vast majority of the cards that American Express issues.

Justice Rehnquist: But you won the motion for summary judgment in the District Court, did you not?

Mr. Greene: We did, Mr. Justice--

Justice Rehnquist: So doesn't that mean that all inferences have to be resolved against your client?

Mr. Greene: --Well of course it does, but in this case, we put in the evidence that I've cited, and under Rule 56 the Plaintiff was required to come in with any affidavits to counter that that were required, and he didn't put in any.

Justice Rehnquist: But unless... notwithstanding his failure to produce affidavits, there was a genuine issue as to material fact, in which case you were not entitled to prevail.

Mr. Greene: If there were an issue of material fact, but we don't believe there is an issue of material fact because of the explicit agreement among the three involved parties: the John Koerner Company, Louis Koerner and American Express Company, a contract that this was to be a company account and a stipulation during discovery that all billing was done as a business account.

We think that that's sufficient to support summary judgment.

Summary judgment is really the common mode of proceeding in most of these Truth-in-Lending cases, because in most cases the issues will turn on a construction of contractual agreements or language in a form, and it is not at all unusual for cases to come up in summary judgment contexts.

The Mourning v. Family Publications Services, Inc. case that this Court decided was a summary judgment case.

And most of the cases that we've cited in our brief, the District Court and the Court of Appeals cases are summary judgment cases.

The issue is one of construction of the agreement in question.

I'd like just to mention before my time for my main argument is concluded, the most recent actions of the Federal Reserve Board.

Under the Truth-in-Lending Simplification and Reform Act of 1980, the Federal Reserve Board was required to issue by April 1, '81, a totally revised Regulation Z. And it did that a couple of weeks ago, and we have set forth in our reply brief the crucial sections of that Regulation.

That new Regulation is now in effect, and governs the actions of creditors at this time.

The 1980 statute did not amend any of the sections of the law that we've been talking about this morning.

It did, however require the new regulation and in the new regulation, the Board, in its commentary on the Sections that I've set forth in the brief notes, and we have the quotation... in footnote 10, on page 9, that the new regulation is simply an interpretation of both the old and the new law and not a change in law.

And that new regulation follows the approach that I outlined this morning, it talks about the issuance of a card and defines whether it's a business or a consumer card by the purpose for which the card is issued.

I'll reserve the rest of my time for rebuttal.

Chief Justice Burger: Very well.

Mr. Koerner.

ORAL ARGUMENT OF LOUIS R. KOERNER, JR., ESQ., ON BEHALF OF THE RESPONDENT

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

Your Honors, I am very honored and pleased to be here.

I am also pleased and honored that this narrow and somewhat unique case as important as it is to my family, was important enough to merit the consideration of this Court.

This is a litigation that need never have happened.

This is a case in which a man of principle was embarrassed for no reason by employees of American Express as impersonal as the computers that they served.

This is a lack of... this case arose because of a lack of good manners and proper etiquette and breakdown of proper business practices.

Justice Rehnquist: Although the Truth-in-Lending Act doesn't deal with proper business etiquette, does it?

Mr. Koerner: Well in a way, this... the Fair Credit Billing Act in a way does.

What they've done is, they've imposed as a matter of law, what is ordinarily good practice, which the legislative history suggests that most creditors have done anyway.

That's the reason I mentioned that.

Justice Rehnquist: Well but you wouldn't suggest that an argument over a bill or an argument over a plane reservation or something like that paid for with a credit card would come within the Truth-in-Lending Act simply because it was a violation of good etiquette?

Mr. Koerner: No, not at all.

What happened is--

Unidentified Justice: There's no question here that there was a violation of law?

Mr. Koerner: --That's correct.

What would have happened though, here, is that--

Unidentified Justice: If this was covered by law.

Mr. Koerner: --What would have happened here is... what my father was looking for was an apology, and this suit would never have been brought.

We sent a draft suit to American Express, looking for an apology which never happened, and then like, things got... really grew and grew and grew.

By the way, you'd be interested to know last week my father received three invitations from American Express to join... two corporate and one personal.

John E. Koerner & Company was formed in 1907 by my grandfather, as a flower wholesaler.

In 1965... by 1965, my father and his two brothers, both of whom are now deceased, were the managers of the company.

In 1965, they made a decision to go to credit cards, company credit cards, rather than use individual credit or cash advances.

And this particular card my father signed as a joint applicant, jointly and severally, or under Louisiana law what they call in solido liable.

And there was no restriction on the card at the time to show that it was restricted as to credit or as to use.

Now, there was no credit information requested of the individuals, but it is the policy of credit card companies to investigate the individual's credit reference in a closely held corporation, and there's no evidence in the record either way as to whether that was done.

If you remember Mr. Greene's response to Your Honors' questions indicated, I think, some ambiguity as to whether that was done or not.

So I don't think the record is clear, and if there's any inference to be drawn, it's... the inference would be that they may well have looked to the individual's credit background.

My father is well known to the Whitney Bank and the Hibernia Bank, and to the International Milling Company.

Unidentified Justice: But the credit information was submitted only with respect to the corporation?

Mr. Koerner: Correct.

But it is very simple, particularly in 1965, to simply run a credit check on the mainly liable individuals.

And in addition to that, if they didn't want some credit of the individuals, why make them co-principals and jointly and severally liable?

Now, what happened is that eventually... one other thing that's interesting about this is that the credit card application was in 1965, which is several years predating the Truth-in-Lending Act, so what American Express wishes us to do is to look back to a time in the past when the Truth-in-Lending Act had not been enacted, nor had the credit card amendments been enacted in order to find a manifestation of the will of the parties.

In addition, what's interesting here is that during that intervening period of time in the '70's, American Express did send the company a... let's see, the method by which a complaint could be made and acknowledged.

And that's reported at... in Judge Ball's opinion at 444 F. Supp. at 342, Note 32.

He... we did not contend that was an estoppel on American Express, because that wouldn't affect the statutory construction.

But it is evidence of the will of the parties, that is, one of the only manifestations that the parties have made that there is some will that this should be... considered consumer credit.

Now, in 1975, because of lack of use by Mr. John E. Koerner, Jr. and personal use by my cousin, Ralph, and also the fact that Bankamericards were free and had no fee, they decided to go to Bankamericards primarily.

With regard to my father, he kept his business American Express card because it was convenient to use in Europe on European trips and on trips, whether it was... where Bankamericards were not recognized.

Now, at that time, they sent two cards back but were never credited.

In addition to that, there was flight insurance that was automatically billed to the card.

For a period of time that was a satisfactory arrangement, then it was cancelled.

They continued to bill the Koerner Company, for the personal... for the flight insurance.

My father authorized payment for a while, sending letters saying, do something.

But then it got to the point where he felt that it wouldn't do any good and that the only way to get their attention was just to simply not pay and send them a letter explaining why they would not pay, which is the procedure that is set up under the Act.

Now, in September of 1976, which is the month of the credit card revocation, as late as that month, my father sent in personal checks for personal business... for personal use of the card during that month or the preceding month.

There were numerous personal checks sent over a period of time.

We did not submit an affidavit, but we did answer interrogatories in which we lined out some of the personal uses that he was able to find by going through his cancelled checks.

So, for a period of time, even to the same month involved, the checks individually were sent, by my father on his personal account for personal uses.

Now, in 1976--

Justice Stevens: Mr. Koerner, could I interrupt you for a second?

Mr. Koerner: --Certainly.

Justice Stevens: What is your basic theory here?

Is it that the individual is jointly liable on the account, or is it that the individual made some personal use of the account.

Mr. Koerner: Both.

Okay, first--

Justice Stevens: Do you require both, or... under the statute?

Mr. Koerner: --No, I don't think we require both.

However, we have both.

The first thing is, he's jointly and severally liable, which... I don't know what the common law is, but under Louisiana law, that means he is a co-principal.

So that's one--

Justice Stevens: I understand.

But how does... we have to relate it back to the statute.

Mr. Koerner: --Okay, the statute protects consumers.

He is a consumer, the card was issued to him.

The credit card application talks about joining in the application with the company, but my Uncle John, he was an individual applicant.

So the card was issued to him and to the company, jointly, with his name on it and with the company's name on it.

Justice Stevens: So under that construction, you would win, if all of the transactions were business transactions?

Mr. Koerner: That is one possibility.

Justice Stevens: The other possibility is that if there's any one personal transaction on the account, you would win even if he weren't jointly liable, I suppose?

Mr. Koerner: Correct.

But that's... I think it's nice to have both though.

But what happens here is that there's... in addition to that, on the revocation there were no extensions of credit.

Justice Rehnquist: Can you summarize in about two sentences what you think American Express should have done under the statute here which it did not do?

Mr. Koerner: Acknowledge the dispute.

Justice Marshall: Apologize?

Isn't that the word you used?

Mr. Koerner: Yes sir.

But that... even an apology afterwards would have worked.

But beforehand, this... remember there's a year of correspondence between the company, on behalf of my father and American Express.

Justice Marshall: The statute does a whole lot of things, but it doesn't require apologies, does it?

Mr. Koerner: No.

Justice Marshall: Well, then what does the statute require?

Mr. Koerner: The statute requires that while there is a dispute, and American Express, the issuer is notified of the dispute, that they do not revoke the card until they take certain steps, that's all.

Justice Rehnquist: And that's what you claim was erroneously done here, when the credit card was cut in two?

Mr. Koerner: Correct.

In other words, what happened is that... as a matter of fact, after the date of the revocation there was no further money paid on the account, because the account was credited in full by American Express.

All of the $55 worth of disputed charges were acknowledged and credited out, as having been improper.

There was never any money paid.

So, we have the strongest possible situation.

We have no extensions of credit that were in dispute; merely improper charges by American Express that should never have been made.

Justice Rehnquist: So what's going to happen if you win?

Mr. Koerner: In this particular, what's going to happen--

Justice Rehnquist: In this particular case, if you win?

Mr. Koerner: --Okay.

In Louisiana--

Justice Rehnquist: Well, I mean in... with respect to your client.

Mr. Koerner: --It will reverse the summary judgment.

I don't think there's any money to be involved, because the remedy under the Act is if there is a dispute.

From what I can see, there's a dispute and they don't acknowledge it, whatever is in dispute the company waives.

Justice Rehnquist: And, since there isn't any money involved, what happens?

Mr. Koerner: It's just a matter of principles.

Justice Rehnquist: So it's just kind of a... like they used to say in Michigan, litigation was the winter sport of farmers.

Mr. Koerner: Well, of course what happens is that we have a public interest in this, is that, we are appearing in a way, as a private attorney general seeking to enforce a right of consumers under the Act.

And the Act provides for costs, attorneys fees and certain out-of-pocket expenses, under, I think it's 15 U.S.C. 1640.

And so, it's not... what's happened is that we have undergone a great deal of time... trouble--

Unidentified Justice: Well let's see, the Court of Appeals reversed the summary judgment?

Mr. Koerner: --Correct.

Unidentified Justice: So now you're supposed to go back to the trial court?

Mr. Koerner: Precisely.

Unidentified Justice: What happens in the trial court?

Mr. Koerner: We decide whether we wish to go forward with a certification of a class, or whether at that point the case should be over.

What happened is that there's no dispute that the billings in question were in error, they've been credited out.

So the first prong of the relief was voluntarily granted.

Unidentified Justice: I know, but won't the District Court have to agree with that proposition?

Mr. Koerner: It is stipulated by the parties.

I believe those facts are stipulated.

Unidentified Justice: What's the... what stake does your client have in this controversy now that would qualify as Article III standing?

Mr. Koerner: He's paid me, we've paid costs as we've gone along, in addition, he's incurred attorneys fees.

Justice Stevens: Mr. Koerner, you filed this as a class action, didn't you?

Mr. Koerner: Correct.

And also we have, the class has an interest in the outcome of it also, both retrospective and prospective relief.

Justice Stevens: And has the class been certified?

Mr. Koerner: No, Your Honor.

Justice Stevens: That was because the District Court ruled against you on the merits?

Mr. Koerner: Precisely.

Justice Stevens: So now, I suppose, on remand it would be open to certify a class and recover the ten million dollars or whatever it is you sued for, isn't it?

Mr. Koerner: I think there's a statute of limitation of $100,000.

Justice Stevens: Ten thousand dollars.

Whatever it is, but if there are other members of the class who have a similar claim, I suppose the case is not moot, is it?

Mr. Koerner: Oh no, it's not moot.

As a matter of fact, after the decision of the Court of Appeals we filed for certification of the class, and when the mandate was stayed, we suspended the action in the District Court.

One of the arguments that American Express makes talks about the legislative history.

It's obvious that the Fair Credit Billing Act was part, in a way, in the Truth-in-Lending Act, and that 1603 should not be applicable.

The legislative history of the new amendments is very interesting, because what happens is that there were two titles to it, that's... there were three.

The first title incorporated the 1974 amendments, one of which was the revocation provision.

And there were some technical amendments that were talked about from a year before, from the... and what happened in the legislative history it's S 2616, they said,

"to remove any possible uncertainty relating to the coverage of all credit cards under the Act's credit card amendments Section 135 should be added as follows. "

--and then they exempted from the first three of the '70, but they never ever thought about the '74 Act.

And what happened is, we have an act that was, I don't think anybody ever really considered the effect of what they were doing.

And I think under those circumstances, they really should have thought more fully about the consequences of whether the business exemption might be contended to be applicable to the '74 amendments.

Now, my contention is that the '74 amendment with regard to revocation is like the unauthorized use in that you don't have a credit transaction and that it's only to credit transactions that the exemption would apply under any circumstances.

Unidentified Justice: This was not decided by the District Court or the Court of Appeals, was it?

Mr. Koerner: What was?

I'm sorry?

Unidentified Justice: The inapplicability?

Mr. Koerner: The Court of Appeals said it was... they would not apply it because the man was a consumer.

Unidentified Justice: Yes.

But had it been a business card.

Your present argument as I understand it, is that in any event this particular provision is not applicable.

Mr. Koerner: Correct.

Unidentified Justice: And that was not decided by the Court of Appeals?

Mr. Koerner: No.

What they did was, they termed it an obviously difficult question--

Unidentified Justice: Correct.

Mr. Koerner: --and ducked it.

Unidentified Justice: Right.

Mr. Koerner: That is an available alternative grounds for consideration by the Court.

Unidentified Justice: Did you urge it in the Court of Appeals?

Mr. Koerner: Certainly.

That was the main contention that we urged and it was only as an alternative that the Fifth Circuit took the idea that under the Louisiana law, the man was a consumer because of the in solido provisions, and the agreement between the parties.

American Express' argument at the present time is that you should go all the way back to 1965 to try to decipher, give a presumption of the agreement of the parties.

But it seems like a total fiction.

What happens is that American Express over a period of years, knows that this card has been used for personal purposes because they paid by personal checks.

Why should we use that as a manifestation of the will of the parties?

Chief Justice Burger: When you say that American Express knows, how do they know?

Because personal checks were sent sometime?

Mr. Koerner: Yes.

Chief Justice Burger: Does American Express have an obligation to find out whether the credit was extended for the purchase of perfume in Paris or an airline ticket, or what?

Mr. Koerner: No.

But I think that what we're doing is we're looking for any objective manifestation of the will of the parties, rather than using the fiction.

American Express either has to say you can only use it for business purpose, or we've... somebody has to say something.

Because what happens here is we have an absolute, we have a neutral factual background, except for receipt and acceptance by American Express of personal checks.

The... I think some burden has to be on the card issuer, at the renewal, to make it clear--

Justice Stevens: Mr. Koerner, if you wait till the account is paid, isn't that too late for them to comply with the pre-extension of credit disclosure requirement?

If you rely on the fact that they paid the check personally, that's a little late for them to comply with the statute, isn't it?

Mr. Koerner: --Yes.

In a way, that's true.

But what happens here is we have a relationship that predates the statute, so at some point or other in the relationship, they had to make a decision on whether to comply or not.

Justice Stevens: You're assuming the computer can differentiate between personal checks and other kinds of checks?

Mr. Koerner: Well they... they don't seem to be able to differentiate the correspondence from the company saying something is wrong, I mean if they have that burden, why shouldn't they be able to differentiate between personal checks and not?

What happens here is you have an account where there is the capacity to incur personal obligations.

And we have situation where, as I read, and under the Louisiana law, my father was responsible for every debt on the credit card.

I wonder what the collection agent would have done if the company had refused to pay.

Would they have put it on my father's--

Justice Marshall: I think what they could do, they could have looked to the contract which said you can negotiate that point.

Right?

Mr. Koerner: --No, there's nothing in the contract that says that.

Justice Marshall: It did so.

It said that among the people... you can negotiate as to who should be responsible.

Mr. Koerner: Oh well, that's true.

In other words, what happens is--

Justice Marshall: Yes,--

Mr. Koerner: --they would have gone for my father.

Justice Marshall: --So they could have done this.

Mr. Koerner: Absolutely.

Justice Marshall: Who did they send the bill to?

Mr. Koerner: They sent it to the company.

Justice Marshall: I thought so.

Mr. Koerner: On the other hand, 15 U.S.C. 1637 provides that you're supposed to give individual notice to the consumer.

And I allege that that was violated also.

That's also, I think, one of the administrative interpretations suggest that they should have sent... using the same language, that they should have sent a notice to the consumer.

Justice Rehnquist: If you look at the application on page 27a of the Joint Appendix at the very bottom there, it's in small print

"the undersigned individual and company join in this application. "

and apparently, is that your father's signature there?

Mr. Koerner: That's my uncle's.

My father's is on the following page.

Justice Rehnquist: Your uncle's.

Is there any indication in... either of the... either the District Court proceedings or the Court of Appeals, what American Express would have done if your uncle or your father had refused to sign those portions of the application?

Mr. Koerner: No.

That wasn't something that was important at the time.

What has happened... well, the same thing with regard to, I think we have to look to the... to what happened in 1976, and not looking at 1981 amendments and things of this nature.

What was the relationship of the parties at the time?

They had sent a disclosure statement talking about credit revocation.

That was one objective manifestation of the will of the parties initiated by American Express.

The obverse or converse was the acceptance of personal checks for a number of personal transactions.

Under those circumstances, the burden was on American Express.

American Express... most credit card issuers in my experience comply... whether it's business card or personal card... they comply with the credit revocation statute under any circumstances because it's good business to do so.

It's no more trouble to do so; as a matter of fact, it's easier than as Mr. Greene says... only ten percent of their cards are business cards... are issued to corporations.

The other 90 percent are personal.

It seems to me it would probably be... much easier.

Justice Marshall: Listen, if--

Mr. Koerner: Yes sir?

Justice Marshall: --If the Respondent in this case had taken out a personal American Express card and paid for it then he wouldn't have this problem?

Mr. Koerner: Precisely.

Justice Marshall: And was the only reason for doing this to save money?

Mr. Koerner: No.

Justice Marshall: Well what was the reason?

Mr. Koerner: The reason was to avoid the company advancing, or him advancing his own personal funds to the company, rather than use of the credit card.

Justice Marshall: Well, I don't understand that at all.

Mr. Koerner: Well okay.

What happened--

Justice Marshall: He'd have an American Express credit card, just like he had before?

Mr. Koerner: --Correct.

Justice Marshall: But he would have paid for it?

Mr. Koerner: Correct.

Justice Marshall: Now he's got one for free?

Mr. Koerner: That the company pays for.

Justice Marshall: As to him, it's free.

Mr. Koerner: True, but he's a principal of the company.

Justice Marshall: Well should he give up something for that?

Mr. Koerner: $20, for free?

No, I don't think so.

And the reason he shouldn't, is that for this card... every transaction makes American Express money, whether they choose--

Justice Marshall: About the only way for American Express to make money is for you to pay them.

Mr. Koerner: --Correct.

And on the other hand--

Justice Marshall: Well, and he didn't want to pay, so he goes under the company's, and now he wants to have it both ways.

Mr. Koerner: --Well what happened is, in 1965 that was a distinction without a difference, because it didn't make any difference whether it was a personal card or business card or whatever.

Justice Marshall: I cannot expect to be bound by 1965.

Mr. Koerner: Agreed.

I think that that's American Express' argument; that that's the time when you look to the objective manifestation of the will of the parties.

Justice Marshall: Well did you bill him in 1975?

Mr. Koerner: The company--

Justice Marshall: 1980?

Mr. Koerner: --The company was billed in 1975.

Unidentified Justice: Right.

Justice Marshall: Well, can't we look at that?

Instead of looking at '65?

Mr. Koerner: That's correct, but at that time--

Justice Marshall: And at that time, he was getting a free ride?

Mr. Koerner: --Yes.

Justice Stevens: Well why do you say yes?

Wasn't the individual liable on the account?

Mr. Koerner: Precisely.

But--

Justice Stevens: Wasn't he liable for all of the company debts, not only his own, under the agreement?

So that's--

Mr. Koerner: --That's true, that would be the quid pro quo.

He would not be--

Justice Marshall: --not a free ride.

Mr. Koerner: --he would not be getting a free ride therefore, because he swapped the $20--

Justice Marshall: He wasn't paying... so far, as the annual $20 cost... did you hear me?

Mr. Koerner: --Yes sir.

Justice Marshall: Was that a free ride or not?

Mr. Koerner: That was.

But the--

Justice Marshall: He didn't pay the $20, right?

Mr. Koerner: --He did not play the $20, but--

Justice Marshall: Who paid the $20?

Mr. Koerner: --The company.

Of which he was vice president.

But on the other hand, he swapped unlimited liability for any use by the company.

Justice Marshall: Wouldn't he have had that if he'd have had his own card?

Mr. Koerner: Only for his own use.

But what happens if my cousin Ralph decides to run off with--

Justice Marshall: I can't get involved with your cousin and your uncle.

I'm talking about this case here.

Mr. Koerner: --Well American Express, by the terms of the application, invited him to become liable for any use by other people that they issued the card to.

They issued four cards to the Koerner Company and its employees.

And so my father, under Louisiana law, and the terms of the application, was stuck if American Express chose to do so, for what my cousin Ralph did, my Uncle John, anyone else--

Justice Marshall: Well that's a family affair, let the family work it out.

But don't bother us with it.

Justice Rehnquist: Well that's only if they use an American Express credit card.

It isn't as if some deal not involving a credit card arose.

Mr. Koerner: --Precisely.

This is only American Express credit card.

In other words, what happened is that American Express wished to get the personal liability of each of the cardholders for all of the debts on all of the cards of the whole of the company.

And that is a mighty tough bargain for not having to pay $20.

If there are no more questions, Your Honors?

Thank you very much.

Chief Justice Burger: Very well.

Do you have anything further, Mr. Greene?

ORAL REBUTTAL ARGUMENT OF RONALD J. GREENE, ESQ., ON BEHALF OF THE PETITIONER

Mr. Greene: Just a few minor points.

First of all, this is not from American Express' standpoint, an academic dispute.

We were sued for half a million dollars.

The complaint talked about 10 million or something like that, but--

Unidentified Justice: What happens if you lose, we affirm?

What goes on in the District Court?

Mr. Greene: --It will go back to the District Court and the District Court will have to decide whether to certify the case as a class action.

If it is certified as a class action, then under Section 130 of the Truth-in-Lending Act there are statutory damages of $500,000 for the class; $500,000 or one percent of the net worth of the creditor, whichever is less.

Unidentified Justice: And suppose the Court refuses to certify the class, then what?

Mr. Greene: Then it would go forward as an individual action, as to Mr. Koerner, and there are statutory damages there of $100.

Unidentified Justice: How about the damages for humiliation, ripping your card up, and all that sort of thing?

Is that independently, or is that--

Mr. Greene: Well, there would be arguments as to whether the $100 statutory damages--

Unidentified Justice: --Was all?

Mr. Greene: --would preclude such other damages.

So we were in this case, defending it, not because we didn't want to apologize to somebody, but because we were sued for a half a million dollars.

Now, the second--

Unidentified Justice: But you didn't want to apologize?

Mr. Greene: --Well, I don't know.

On that point, Mr. Koerner said that it was undisputed that we had violated the law.

That's not entirely correct.

This case arises on a motion for summary judgment, and I think the Court has to assume that if the Act applies it was violated.

But if it were remanded for trial, Mr. Koerner would have to put on evidence that would show that we did in fact violate the law, that there was a dispute, that it was properly sent in, there's an extremely technical definition of what has to be a proper written notification of a billing error and whether it was sent in within the statutory--

Justice White: Didn't you... you answered, I suppose, before the summary judgment motion?

Mr. Greene: --I believe we did.

We moved to dismiss.

Justice White: Did you deny the fact?

Mr. Greene: I'll check that.

Justice White: Well that's all right.

I just wanted to--

Mr. Greene: It's in my records.

Justice White: --I would think he alleged the facts and that you either denied them or admitted them?

Mr. Greene: We certainly filed a motion to dismiss, on summary judgment, you have to assume the facts.

Justice Stevens: Mr. Greene, let me just ask you a question about... I think Judge Wisdom's theory.

Why isn't it perfectly clear that the only consideration for the guarantee... it isn't a guarantee... but the joint responsibility for the account on the part of the individual, was that the individual was going to get individual credit for consumer purposes, for non-business purposes.

Mr. Greene: That's not--

Justice Stevens: He's not a surety, as I understand your--

Mr. Greene: --That's not clear at all.

I think the basic problem with Judge Wisdom's contention is that he seems to equate individual liability with the fact that you have a consumer credit transaction covered by the Act.

Justice Stevens: --Well what could the individual possibly be doing for which he would accept individual liability that--

Mr. Greene: Oh, Mr. Justice, that happens all the time.

In all... as pointed out in our brief, that it's a common practice for creditors to require individuals, especially in cases of small businesses, new businesses, unincorporated businesses, to assume liability for business debts.

Justice Stevens: --But that's in the nature of a surety relationship.

Mr. Greene: Well, it could be a joint liability.

That happens as well.

Oftentimes in the case of a new business with--

Justice Stevens: Don't you have this agreement, say somebody like U.S. Steel... a very large corporation, they have cards for literally dozens of people, I suppose, do they assume individual liability too?

Mr. Greene: --Yes.

We made, we have some customers--

Justice Stevens: Then your analogy wouldn't apply there.

It's not because you're concerned about the credit investigations.

Mr. Greene: --No, but it might well with the Koerner Company.

Certainly with U.S. Steel, the purpose for the individual liability is somewhat different, the purpose of control of individual employees' expenditures and the allocation of liability as among the card issuer... card issuing company and the employee,--

Justice Stevens: It seems to me that the most frequent situation where you have an individual on a company card is that everybody expects him to use it for personal purposes.

Mr. Greene: --Well, you might assume that, but in this case, we have a contract that says that it's a business account, and the record doesn't reflect that.

Thank you, Your Honor.

Chief Justice Burger: Thank you, gentlemen.

The case is submitted.

Attribution:

The OYEZ Project

Featured:

Anderson Bros. Ford v. Valencia - Oral Argument

Wed, 18 Feb 2009 06:13:11 +0000

Case:

Anderson Bros. Ford v. Valencia

Media File:

80-84_19810323-argument.mp3

Related Transcript:

1980_80_84_argument.xml

Transcript:

ORAL ARGUMENT OF AARON J. KRAMER, ESQ., ON BEHALF OF THE PETITIONER

Chief Justice Burger: We will hear arguments first this morning in Anderson Bros. v. Valencia.

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

Mr. Kramer: Thank you, Your Honor.

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

This case is here on certiorari from the Seventh Circuit Court of Appeals, and it poses two broad issues.

The first of which is whether the entire credit industry, whose stock in trade is security interests failed to recognize and disclose a security interest required to be disclosed under the Truth-in-Lending Act.

Secondly, this case poses the question of whether even if such a hard to imagine mistake occurred, the ends of justice are served by applying any such decision retroactively to any case other than the one at bar.

Chief Justice Burger: Will these issues all disappear under the new statute that was passed last year?

Mr. Kramer: They will, Your Honor, but not with respect to contracts that were written with respect to the former statute, the present statute, which are now--

Chief Justice Burger: Cases like yours?

Mr. Kramer: --That's right, Your Honor.

Chief Justice Burger: And what is the volume of those contracts, have you any idea?

Mr. Kramer: Well there are... this contract that is before the Court is the paradigm of the industries contract.

It has--

Unidentified Justice: Well are we talking about millions of contracts?

Mr. Kramer: --We are talking about millions of contracts, Your Honor.

This is the industries' form--

Chief Justice Burger: How many cases are pending?

Mr. Kramer: --There are... we have no number as to the precise number of cases which have raised this issue.

There have been, however, 27 decisions of various circuit and district courts on this issue in 15 different cases that have already reached the courts.

Certainly whatever the decision of this Court is on this issue will be the landmark case in this area.

And depending on what this Court holds--

Chief Justice Burger: Well landmark, except for the new statute.

Mr. Kramer: --Except for the new statute, Your Honor.

Unidentified Justice: Which will remove the problem for the future?

Mr. Kramer: Except for those millions of outstanding contracts which presently exist.

Unidentified Justice: Well, as I understand it, under the statute there's a fixed recovery, is there not, $1000 or something?

Mr. Kramer: Well Your Honor, for certain violations--

Unidentified Justice: For this one.

Mr. Kramer: --For this one it is twice the amount... penalty in... twice the amount of the finance charge, up to $1,000 per contract where the Truth-in-Lending Act is violated.

And what the Court has before it now is the industries' form--

Unidentified Justice: What you're suggesting is that affirmance here would encourage lawsuits to recover that penalty, is that right?

Mr. Kramer: --I am most certainly saying that, Your Honor.

As well, an affirmance here would put defaulting debtors in the position of having, even those that are... have a contract that was entered into more than a year prior to the statute of limitations would have--

Unidentified Justice: Is there any limitation of jurisdiction of the federal courts for such suits?

Mr. Kramer: --No there is not, Your Honor.

These actions may be brought in either the federal courts or the state courts.

But most jurisdictions have state laws which provide that even time barred counter-claims for contracts entered into for more than a year prior to the date on which the action was filed can be brought as counter-claims and are revived.

So that any defaulting creditor, rather, any defaulting debtor who is sued by a creditor to collect a deficiency judgment on an amount owed on a car who may have entered into his contract four or five years ago could bring a $1000 plus attorneys fees counter-claim, or action for recoupment under most jurisdictions and that would be greater, in most cases, than the deficiencies in these cases.

Now the Respondents in this case estimate that Ford Motor Credit Company alone repossesses 10,000 cars per year.

The industry of course, repossesses and has to bring deficiency actions in a far greater number of cases.

The fact that this is the industries' form contract presents a very great problem for the industry.

The facts of this particular case are that the Respondents purchase and financed the purchase of a used car in 1977 from Anderson Bros. Ford.

Almost immediately they were disenchanted with their purchase because of mechanical difficulties and sought to rescind the transaction after unsuccessfully pursuing certain state consumer complaint remedies.

Those were unsuccessful, but they... the Respondents did file this Truth-in-Lending action, alleging five separate truth-in-lending violations in this form.

In an opinion rendered on October 31, 1978, the trial court dismissed entirely those truth-in-lending allegations.

In particular, it dismissed the allegation as to the claim that the assignment on the back of the contract which was an assignment of physical damage in unearned insurance premiums by the debtor to the creditor was a security interest, that was the allegation, and that was one of the five allegations which was entirely dismissed by the trial court.

As to this particular allegation that the assignment was a security interest that should have been not disclosed on the back but on the front of the contract under the Truth-in-Lending Act, but the District Court looked at the normal meaning of the term security interest in the Act, and looked at the usual and customary meaning of those words as used in the contract, and found that there was no security interest here in the assignment of unearned physical damage insurance premiums, appearing on the back of the contract.

And therefore, no requirement that that appear on the front of the contract.

Now, developments occurred in the Fifth Circuit where the Fifth Circuit rendered an opinion contrary to that which we called to the attention of the District Court and he reversed his position, eventually that reversal against finding the violation of the Truth-in-Lending Act as to this assignment clause was affirmed by the Seventh Circuit.

There are four uncontrovertible elements which stand as walls that surround the issues in this case, and we respectfully submit that the Court's decision will be made somewhere within the confines of those four walls.

They are: the true nature of the interest, the assignment interest that is before this Court; the purpose of the Act and the specific legislative history of adoption of the Act's security interest provision; the promulgation by the Federal Reserve Board staff in 1981, of... Federal Reserve Board Proposed Official Interpretation 173, which is precisely in point on this issue.

Unidentified Justice: Now is that interpretation of the Truth-in-Lending Act, or is it of the new statute--

Mr. Kramer: That is of the present Truth-in-Lending Act, Your Honor.

Unidentified Justice: --Only?

It has nothing to do with the simplification act?

Mr. Kramer: Only.

It has nothing directly to do with the simplification act, that is right.

Unidentified Justice: That's not too clear, I think.

In chronology, it followed the adoption of the simplification act, didn't it?

Mr. Kramer: It did... in... follow, and indeed, the Federal Reserve Board had the benefit of the intensive Congressional hearings on the simplification act that led to adoption of the simplification act.

And it adopted, after there were these 27 separate decisions and 15 cases raising this issue, the Federal Reserve Board also had the benefit of those conflicting decisions, all before it held in its proposed... and it has not yet been adopted and it was not finalized--

Unidentified Justice: Now what was the gist of 173?

Mr. Kramer: --The gist of 173, Your Honor, was that consumers are not aided by the disclosure of the assignment clause of the physical damage insurance... the insurance premiums on the back of the contract... they would not be aided by putting that on the front of the contract to carry out the purpose--

Unidentified Justice: But it wasn't explicit, was it, that the assignment was not a security interest?

Mr. Kramer: --They held that although... a technical reading, as had been accomplished in certain courts in certain Circuit Courts could support that decision that that would... that such an incidental interest was not intended by the Act, and that the purposes of the Act are better served by not disclosing that provision as a security interest on the front.

Unidentified Justice: Yes, but yes or no... did they interpret a bulletin to say that the assignment was not a security interest for purposes of the statute?

Mr. Kramer: For purposes of the statute they said it should not be disclosed as a security interest, yes, Your Honor.

Justice Rehnquist: Mr. Kramer, I have some difficulty with the various levels of regulations and the weight we should give them.

The 1970 regulation, which doesn't seem to be mentioned in the 1981 promulgation, simply, at the end, says in the event of the customers default, your client would have the right to cancel the policy and apply any premium refund to the unpaid balance of the loan.

Under the circumstances, we think it would be appropriate to disclose the loan company's ownership of the policy as a type of interest under 12 C.F.R. Section so-and-so.

I had some trouble with that, originally, because it didn't seem to me to state flatly it must be disclosed, the words it is appropriate to disclose it simply said may be in an excess of caution... but I was also troubled by the fact that the 1981 promulgation, the new regulation which goes in exactly the opposite direction, didn't seem to refer to the 1970 regulation.

Mr. Kramer: Your Honor, I don't believe that they were exactly the same.

The 1970 unofficial interpretation issued by the Board staff does certainly use the word appropriate.

However, it involved a different kind of insurance than physical damage insurance on a vehicle, where the vehicle is the real security interest in the transaction.

And the only security interest which appears in the 1970 unofficial interpretation by the Board was the lender's security interest in the insurance itself, which he was financing; it is not at all the same as the transaction where the unearned insurance premiums on physical damage insurance are entirely incidental to the real security interest in the transaction as we have here, which is the financed vehicle, which is clearly disclosed on the front of the contract and it's disclosure would be clouded if there were such an incidental interest taken off of the back of the industries' form contract and put on the front, to confuse the issue of what security interest the consumer was giving up in the transaction.

Justice Rehnquist: When you say they were different kinds of insurance, the 1970 letter referred to life insurance?

Mr. Kramer: Accidental death and dismemberment policy where there was a single lifetime premium, Your Honor, and the only thing that the creditor was taking in that case was a security interest in the unearned premiums.

There was no other security interest in that transaction.

Justice Rehnquist: And the 1981 regulation would apply to unearned premiums on physical damage... insurance.

Mr. Kramer: Physical damage insurance on a vehicle which is exactly what we have here.

Justice White: Why hasn't the '81 proposal been finalized?

There just isn't time, or is it--

Mr. Kramer: No, Your Honor, it's very clear that it is out of deference for this Court's authority.

Clearly, the Federal Reserve Board under the Court's opinion in Milhollin had the authority to clear up this matter once and for all, and tell the credit community which is only looking for direction in such matters, and will follow that direction from a central authority... which Your Honors found in Milhollin was the Federal Reserve Board clearly, and its power was to enforce, apply and interpret the Act and the regulation.

That... what the Board has referred to as a deferral of final action, and not a withdrawal at all, came only after this Court granted certiorari in this case.

And in light of the fact that the 172 prior official staff interpretations of the Federal Reserve Board have been adopted without any substantive change, as we indicated in Appendix B to our reply brief, is a factor that the Court ought to consider, because these things were not promulgated as trial balloons, as counsel for the Respondents has argued, but rather as seriously well considered and thoroughly thought-through determinations by the Federal Reserve Board as to interpreting the Act that governs the framework of, in determining commerce and credit in the United States.

Indeed, although 173 is only a proposed agency interpretation, the Courts have held applying this Court's Skidmore v. Swift decision, that even a proposed agency interpretation is entitled to such persuasive weight as is evidenced from such things as the thoroughness of its consideration and the validity of its reasoning.

Petitioners submit--

Justice Rehnquist: --I suppose that's true only with respect to agencies which are not empowered to, in effect, kind of fill in the blanks or make definitions and that sort of thing?

Skidmore v. Swift dealt with an agency which was not expressly authorized by Congress to interpret the Act--

Mr. Kramer: --Yes, Your Honor, but the Federal Reserve Board, of course, is empowered to interpret the Act, just as the Securities and Exchange Commission is empowered to interpret the Securities laws.

And this Court's opinion in 1975, the Court held that even though the... in the Forman case, the securities law of 1934 refers to any stock... the Securities and Exchange Commission had the power to interpret that to exclude stock in a cooperative housing project as not being a security, even though the express words of the language of the statute that the agency was empowered to interpret did use the term any stock, the Respondents in this case, make an argument to the effect that the strict words of the statute should be followed in this case, or the strict words of the regulation, which indeed are not in point as to this type of assignment of an interest unearned premiums, but the Respondent's literal interpretation cuts the heart of the purpose and intent of the Act out of it, does not look at the purpose of the Act, which is to permit informed, comparison credit shopping as this Court held in the Milhollin decision.

And the Board's determination, after having thoroughly considered, in proposing 173, the 27 decisions in the conflicting district and circuit court cases on this matter, who had... the Board had, at the time they proposed 173, the benefit of intensive Congressional hearings on the simplification act, and its own ongoing revision of Regulation Z before it proposed 173, so that it is the position of the Petitioners given those factors which support the validity of the reasoning of 173, and the determination of the Federal Reserve Board particularly backed against the fact that none of the prior official staff interpretations of the Board which were proposed were changed in any way before they became final.

Justice White: --Is it clear that if... that there was something on the back of this contract?

Mr. Kramer: Well, it is clear, Your Honor, that a contract was included with the appendix.

Justice White: There was a... there was a disclosure on the back?

Mr. Kramer: There is no question, no question.

Justice White: And if that disclosure had been put on the front, would that... is it agreed that it would have been adequate?

Mr. Kramer: Well Your Honor, there is a problem with respect to that, because the Courts have held, including our Seventh Circuit, has held that there is a violation of the Truth-in-Lending Act if you overdisclose and claim a security interest where you do not have one.

For example--

Justice White: Well, I know.

But in this particular case if the disclosure on the back had been put on the front would the Seventh Circuit have come out the way it did?

Mr. Kramer: --I don't think the Seventh Circuit would have come out the way it did, Your Honor.

I think--

Justice White: It would have... there would have been no problem then, I suppose?

Mr. Kramer: --That's right.

The point of the Petitioners is that the Seventh Circuit was wrong in its decision.

And indeed, in reading its decision and in reading the very reluctant, two concurring opinions, from Judges Cudahy and Swygert, it is clear that the Seventh Circuit felt it was being dragged along by what it was being required to do in providing a very liberal and very technical construction of the Truth-in-Lending Act.

And I would point out to--

Justice White: What's the source of... what was the source of the Seventh Circuit's decision that the disclosure had to be on the front, rather than the back?

Mr. Kramer: --Your Honor, the Seventh Circuit more or and less looked at the Fifth Circuit's decision, and--

Justice White: Well what did the Fifth Circuit rely on, the statute or the regulation?

Mr. Kramer: --The Fifth Circuit relied on the philosophy that if it was important enough to claim in the contract it was important enough to put on the front.

And that's the rationale of the Fifth Circuit's--

Justice White: Did they say it violated the statute?

Mr. Kramer: --And they said it violated the statute.

Justice White: And, wholly aside from Regulation Z?

Mr. Kramer: They said, the cases that have so held have held that it's a violation of the statute and the regulation.

However, that rationale would put everything that was on the back of the contract on the front of the contract, Your Honor.

It would not, as the Board has noted in 173, promote proper... the purposes of the act or proper comparison credit shopping--

Justice White: Well what if... what is your position if it hadn't been disclosed at all?

Mr. Kramer: --If it hadn't been disclosed at all, even on the back, Your Honor, then the creditor would not have that right to unearned physical damage insurance premiums.

It would not be... part of the contract.

Justice White: Why--

Mr. Kramer: It would not then be part of the contract if you couldn't claim it.

Putting it on the back makes it part of the contract; the issue in this case is whether it was required under the Truth-in-Lending Act to be disclosed on the front as a security interest, along with the vehicle which was the real security interest in this transaction.

Unidentified Justice: --Mr. Kramer, just to be sure I'm right,--

Mr. Kramer: Yes, Your Honor.

Unidentified Justice: --it's this language, is it, that appears on the back:

"buyer hereby assigns to seller any monies payable under such insurance, by whomever obtained, including returned or unearned premiums. "

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

Unidentified Justice: And did you answer my brother White that if that had appeared on the front it would have... it would not have been adequate?

Mr. Kramer: It would have satisfied the Seventh Circuit, Your Honor, but I would point out two important factors with respect to that.

The first of which is, 173 was not available to the Seventh Circuit when it wrote its decision.

If Your Honor looks at footnote 24, I believe it is, in the Seventh Circuit's decision, it is obvious, and that footnote states,

"it may be critical to the credit industry that there is not an official staff interpretation of the Federal Reserve Board on this question, but there is not. "

Unidentified Justice: There still isn't.

Mr. Kramer: And... and there still isn't, Your Honor.

Except, but for... but for this Court's grant of certiorari, it--

Unidentified Justice: One-seventy-three would be operative.

Mr. Kramer: --It would be operative, it would be operative.

And as I--

Unidentified Justice: But I still don't... without regard to what the Seventh Circuit might have held, what would be view whether had what I read you appeared on the front, would that have satisfied any disclosure requirement... do you suggest?

Mr. Kramer: --Your Honor, it would not have satisfied a requirement of the statute or the regulation, because neither the regulation nor the statute require it, and all that must be on the front is what is required of it, and as I've indicated--

Unidentified Justice: I see.

Mr. Kramer: --one of the problems faced by creditors in this field is that if they put on the front such a contract something which is... the state--

Unidentified Justice: Yes, but if this... if we were to say that this is a security interest... not assignment--

Mr. Kramer: --Yes.

Unidentified Justice: --then, I gather, under, the statute and regulation, irrespective of 173 would have had to have appeared on the front, would it?

Mr. Kramer: If Your Honors so state, that's correct.

Indeed, if Your Honors were to so hold--

Justice White: Well I thought your suggestion was, and 173's suggestion was that even if this is a security interest, it isn't the kind that needs to appear on the front?

Mr. Kramer: --It is the... 173 does not state, categorically, that this is not a security interest.

But what 173 says is that this incidental interest--

Justice White: Even if it is, it needn't appear on the front?

Mr. Kramer: --It's not the type of interest that need appear on the front, or--

Justice White: Isn't it awfully hard for you to suggest that this isn't a security interest, if you have the right... you agree that if it weren't either on the front or the back you wouldn't have it?

Mr. Kramer: --I would agree, Your Honor, that if it weren't on the back we wouldn't have the right.

I don't agree that it is a security interest, it does not have the elements that a security interest classically has.

Unidentified Justice: But 173 is to the effect that even if it is it needn't be on the front?

Mr. Kramer: To the effect, Your Honor, that the... it doesn't use those exact words, it says this incidental interest need not be shown on the front, it would not aid the purposes of the Act, in fact, it would retard the purposes of the Act if it were shown on the front.

It would confuse,... in the Milhollin case... I had the opportunity to read the argument that was made before the Court in that case.

And in that case, the argument was made that simply by adding two words to the front of the same contract there could be compliance with the Truth-in-Lending Act.

Respondents in this case allege that by adding five words to the front of this contract there could be compliance with the Act--

Unidentified Justice: Mr. Kramer, may I be sure about this?

Mr. Kramer: --Yes, Mr. Justice?

Unidentified Justice: The reason, if it has to appear on the front, is because the statute says security interests must be disclosed on the front and if this is a security interest that provision of the statute then requires its appearance on the front.

Mr. Kramer: Exactly.

And this is our position and the Federal Reserve Board's proposed position is not such a required Truth-in-Lending security interest required under the Act to appear on the front.

Justice Rehnquist: Mr. Kramer, I think a moment ago you referred to footnote 24 in the Seventh Circuit opinion, District opinion... as I see it now, the last footnote in the opinion is footnote 21?

Mr. Kramer: It is 21, Your Honor, that I'm referring to.

Justice White: Could you give me the statutory citation, what section in the statute that says that the disclosure must be on the front?

Mr. Kramer: Your Honor the statute says that the... I think you will find that the pertinent provisions in our petition for the writ, of both Regulation Z and--

Unidentified Justice: Yes?

Mr. Kramer: --and of the statute itself--

Unidentified Justice: All right.

So what does it--

Mr. Kramer: --Regulation Z would be 12 C.F.R.--

Chief Justice Burger: --What page of the petition?

Mr. Kramer: --We've listed these in the front, Your Honor... on page... pages 1 and 2.

I would point out--

Justice White: Well I still want to know where are the words that say a disclosure must be on the front?

Mr. Kramer: --The requirement, Your Honor, would be with reference to disclosure statements under the Truth-in-Lending Act.

The regulation and the statute uses the term disclosure statement, and for purposes of the Act the front of the contract that's in Court is the disclosure statement.

A disclosure statement may be given as a separate document on... and not as the front of a contract... but in this case, the front of the contract is the disclosure statement.

Justice White: So if you said... if you had just provided that the entire contract should be the disclosure statement, then what about that?

Mr. Kramer: That would not be permissible under the provisions which require that the disclosure statement be on one sheet of paper and I believe, on the front, exclusively.

In conclusion, we have argued in our brief and pointed out to the Court in our brief that the adoption of the original Truth-in-Lending Act, the Act that this case comes under, and its security interest provisions, came from the floor of Congress with the idea of preventing not... and not affecting the type of interest which is before the Court now, but what was referred to on the floor of Congress by Congressman Cahill and Senator Proxmire, as a vicious second mortgage racket that involved the taking of second mortgages on purchasers homes and borrowers homes, unwittingly given by such borrowers... that's what the security interest provision of the Act was adopted... to put in... that's how it came up from the floor of Congress.

The incidental interest which is before the Court at this time, there is no relationship whatsoever to what Congress had in mind when it originally adopted the Act, under the Truth-in-Lending Simplification Act, Chairman Volcker has said in the letter that is attached to our reply brief as an appendix, that this issue disappears under the new Act.

And it's very clear that this disclosure is not required under the new Act.

In conclusion, I would cite to the Court,--

Justice Stevens: Mr. Kramer, under the new Act will you still have to make the disclosure that you did make in this case?

Mr. Kramer: --No, Your Honor, we will not have to make any disclosure with respect to incidental interests, such as--

Justice Stevens: I'm talking about the security interest in the automobile?

Mr. Kramer: --In the automobile, we will, Your Honor.

Justice Stevens: But that's the one you did make in the contract?

Mr. Kramer: That's the one we did make, and--

Justice Stevens: That was not a second mortgage?

Mr. Kramer: --And that was not a second mortgage.

Justice Stevens: So that the security interest requirement is not limited to second mortgages?

Mr. Kramer: It is limited... Congress' intent is limited to significant interests in property, and in knowledge on the part of buyers--

Justice Stevens: But significant interest in property or interest in significant property?

Mr. Kramer: --Both, Your Honor.

Justice Stevens: Because your point is... there's a significant interest in the property, but your point is, it's not... the property is not significant, as I understand it?

Mr. Kramer: That's right.

That's right.

Justice Stevens: That insurance is rather a sort of... a fringe--

Mr. Kramer: That's correct.

As Judge Cudahy said, and he was joined in by Judge Swygert in his concurring opinion, that to require the disclosure of this particular assignment on the face of the contract would merely add virtually inconsequential information; lengthening, complicating and trivializing this disclosure for no apparent reason.

Justice Stevens: --But you said earlier, I think you were interrupted, that only five words would have to be added to this phrase.

Mr. Kramer: That's Respondent's contention, and this Court rejected the contention in Milhollin with only two words having to be added to that contract, because it was not within the intent of Congress.

Justice Stevens: Well, that may be, but just as a matter of whether it's true or not, is it not true that by just adding the words "and insurance policies", or something like that, you would have an adequate disclosure?

Mr. Kramer: It could be done, Your Honor.

It is done on a new form of Ford Credit Contract, however, that form of contract gives up significant interest that is taken under this broader form.

For the reasons that we've stated in our briefs and that I've had a chance to reach in argument today, we ask that the Court reverse on the merits or at the minimum, because of the problems created with respect to this form contract, make any decision on this issue affirming prospective only.

Thank you.

Chief Justice Burger: Mr. Alop.

ORAL ARGUMENT OF ALAN A. ALOP, ESQ., ON BEHALF OF THE RESPONDENTS

Mr. Alop: Mr. Chief Justice--

Chief Justice Burger: Mr. Alop, forgive me, before you start, but where is it... that the requirement that it appear on the face... where is that in the statute?

Mr. Alop: --That's in Regulation Z, Your Honor, at 12 C.F.R. Section 226.8(a).

Unidentified Justice: Now heres's Regulation Z at page 2 of the petition... what's the language in Regulation Z that says the front?

Mr. Alop: The language in 226.8(a)(1) is that all of the disclosures shall be made together on either the note or other instrument evidencing the obligation on the same side of the page and above or adjacent to the place for the customer's signature.

Where the customer signs on the front side of the page and only on the front side of the page, all disclosures must be--

Unidentified Justice: What are you reading from?

Mr. Alop: --I'm not reading from the brief, Your Honor.

The Regulation Z quotation does not appear in either of the briefs.

Unidentified Justice: Where do we find it?

Mr. Alop: Twelve, Code of Federal Regulations--

Unidentified Justice: Isn't that the crux of this case?

No, well, there's no controversy about it, is there?

Mr. Alop: --The other side has not disputed this.

The Petitioners have never claimed that it could be adequately disclosed on the reverse side of the contract.

Unidentified Justice: Yes, but it wouldn't... it would only be because of the regulation?

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

That's at 12 C.F.R.--

Justice White: If there weren't any provision like that, no Court has construed the statute to require that.

Mr. Alop: --That's correct.

The question in this case, whether a creditor's claim to returned insurance premiums has to be disclosed as a Truth-in-Lending Act security interest is disposed of by the fact that both the Act and Regulation Z require the disclosure of any security interest.

The use of the broad language "any security interest" reflects an unmistakable intention of Congress that every security interest retained by a creditor in the course of a credit transaction be disclosed.

This Court, in the cases of Shea v. Vialpando and Harrison v. PPG Industries has indicated that the use of the term "any" precludes limited or narrowed statutory construction.

The broad language in the statute, "any security interest", would also controvert... Ford Credit's suggestion, that only essential security interests need be disclosed.

Unidentified Justice: Well now, the Proposed Official Staff Interpretation 173, which as I understand it has not yet become effective, does say that this kind of interest need not be... need not appear on the face of the statement.

And if it says that, doesn't it necessarily also say that it's not a security interest, if the statute, as you tell us unequivocally requires that any security interest do appear?

Mr. Alop: I would not dispute that, Your Honor.

The proposed FC-0173 does leave one with the implication that it is not a security interest.

Unidentified Justice: Where does the relevant text to that regulation appear?

Mr. Alop: Of 0173?

Unidentified Justice: Yes.

Mr. Alop: I believe it's in the... page 33 of the addendum... no, 54 of the addendum.

Unidentified Justice: Addendum to what, Mr. Alop?

Mr. Alop: To the Petitioners' brief.

It's addendum number 54.

Unidentified Justice: What color?

Mr. Alop: It's a blue brief.

Justice White: Well, let me ask you, you read 228.8(a) is that it, a moment ago?

Mr. Alop: That's correct.

Justice White: And that's the source of the requirement for the disclosure being on the front?

Mr. Alop: That's correct.

Justice White: Now, what if in that regulation it had said except security interests in the unearned premium?

Mr. Alop: If that--

Justice White: And then those may be on the back?

Suppose that that regulation said that?

Mr. Alop: --Then we would not have this lawsuit before the Court today, Your Honor.

Justice White: Well why isn't that... if 173 is adopted, why isn't that in effect an amendment of... it just adds an exception to 228(a).

Mr. Alop: The point is that FC-0173 is an unadopted, mere proposal of the Federal Reserve Board that was issued with the caveat that it may be withdrawn or it may be altered after public comment was scrutinized.

Moreover, the Federal Reserve Board has twice in writing specifically precluded any reliance on FC-0173 and it has deferred any final action on FC-0173 as a result of this Court's granting of certiorari in this case.

Justice Rehnquist: Do you concede that if the Federal Reserve Board goes ahead and adopts the resolution, it will be a valid regulation?

Mr. Alop: If the Federal Reserve Board adopted FC-0173 because it uses the test of incidentalness which is at variance with the plain language of the Truth-in-Lending Act and Regulation Z, and because it is also at variance with longstanding Federal Reserve Board Regulations, or rather, the interpretation in Public Information Letter 377, it would still be entitled to little deference under the traditional test of Skidmore v. Swift & Co.--

Justice Rehnquist: But Regulation Z is, itself, a promulgation of the Federal Reserve Board, is it not?

Mr. Alop: --That's correct, Your Honor.

Justice Rehnquist: Well, to say then that it's contrary to Regulation Z, when the Regulation Z is in effect superseded in part by this new regulation, is rather hard for me to follow.

Mr. Alop: I also said that it is at variance with the language of the Act, which requires--

Justice Rehnquist: That was not hard to follow.

But do you really place much reliance on the fact that the new regulation is at variance with the old regulation?

Mr. Alop: --I place a reliance on the fact that Regulation Z defines security interest to encompass any interest in property which secures payment and that this proposal uses the test of incidentalness which ignores the concept in Regulation Z that any interest in property constitutes a security interest.

Unidentified Justice: Well what if this proposal had been promulgated right after passage of the Act?

Because the Act doesn't contain, as I understand it, any definition of the phrase "security interest".

Mr. Alop: The Act does not, Your Honor; it is Regulation Z--

Unidentified Justice: And what if 0173 had been promulgated, immediately after passage of the Act, saying security interests means any... does not include an incidental security.

Mr. Alop: --Had that been the case, I believe there would have been a contradiction between the Regulation Z definition--

Unidentified Justice: Well, there would have been no Regulation Z.

Regulation Z, itself, would have, under my hypothesis would have included the present provisions of 0173.

Mr. Alop: --Given that hypothesis... that Section 226.2(gg) that is the security interest definition of Regulation Z would not exist, then of course FC-0173, if it was final action, would control.

But given--

Unidentified Justice: It would control, because the statute... while it does require that a description of any security interests be stated, it doesn't define what a security interest is, does it?

Mr. Alop: --No, Your Honor.

Unidentified Justice: And it doesn't require that it be on the face?

Mr. Alop: The statute does not, Your Honor, it is Regulation Z which requires--

Unidentified Justice: That it be on the face.

Justice White: And if Regulation Z had come out saying that some security interests have to be on the face and it's enough to put some of them on the back, you wouldn't be here?

Mr. Alop: --That's correct.

I would note that the Federal Reserve Board has issued a series of rulings which have required disclosure of a wide range of security interests, security interests which do not fit into Ford Credit's characterization of essential security interest.

The Federal Reserve Board, in their rulings set out at page 9 of our brief, have required disclosure of security interests in bank accounts, credit union accounts, and after acquired property.

The test is not whether the security interest is essential, but whether... but merely that any security interest be required to be disclosed.

The Regulation Z definition, as I indicated, is any interest in property which secures payment or performance of an obligation and thus a two-pronged test is set up by Regulation Z and every Court which has applied that test to the issue in this case has concluded that a creditor's claim to returned insurance premiums is a security interest under the Truth-in-Lending Act.

Although the first test, the first prong of the Regulation Z definition, is any interest in property, Ford Credit attempts to downplay the significance of the interest in property it has retained in this case.

It argues that this is an identical interest and therefore need not be disclosed.

However, a creditor's claim to returned insurance premiums is significant: to Ford Credit, it has meant more than 10 million dollars by virtue of that provision over the last 10 years by our estimate, an estimate Ford Credit has not disputed.

Unidentified Justice: When you say term insurance premiums, you're not talking about the life insurance premiums that... they were talking about in 1970, are you?

Mr. Alop: This case involves physical damage insurance premiums, Your Honor.

Justice Rehnquist: Just what exactly is the property interest; you know, described in--

Mr. Alop: Well in this case, for example, it involved the physical damage insurance premium that exceeded $200.

Given a cancellation of that insurance upon the default of the consumer, Ford Credit would have entitled to that $215 by virtue of its clause.

And in this case, it meant $215 to the consumer.

Justice Rehnquist: --And why would Ford... why would insurance company have cancelled?

Mr. Alop: What happens is, is on default of the consumer the... by virtue of the contractual assignment clause, Ford Credit is entitled to... upon default, the insurance is cancelled because there's no longer any need for the continuation of physical damage insurance since the car has been repossessed, at that moment, Ford Credit is entitled to all returned insurance premiums that would exist at that time.

Justice Stevens: Mr. Alop, do you think the buyer reasonably would have expected to get the premium in that situation?

Mr. Alop: Well, consumers will have no means of having any opportunity to know that they are entitled to these funds unless the matter is meaningfully disclose to them.

Justice Stevens: Well they really would not be entitled to the funds if they are in default on the loan, would they?

Mr. Alop: They are entitled to... without any clause, of course, those funds would go directly to the consumer, if Ford Credit--

Justice Stevens: Well who holds the policy?

Mr. Alop: --The policy is... the insurance company issues a policy directly to the consumer and without--

Justice Stevens: Doesn't there have to be a copy to the dealer or the finance company?

Mr. Alop: --I do not know.

Justice Stevens: I mean, how does the finance company know that the car is being insured, that it's a contractual obligation to get insurance?

Mr. Alop: The contract requires the consumer to give proof of insurance to the dealer.

Justice Stevens: That's some kind of the written document, I assume?

Mr. Alop: That's correct.

Justice Stevens: And then, if there's a default, isn't it fairly clear that whatever money comes back will be paid over to the dealer?

I mean, wouldn't the... how could one not expect that to happen?

Mr. Alop: The money of course, for example, in this case, the consumer purchased the insurance from an independent insurance company and ordinarily, the consumer would tend to think that that money would come back to the consumer, given default or given a cancellation of the insurance policy.

But by virtue of Ford Credit's--

Justice Stevens: Even though he was in default on his loan he would think that?

Mr. Alop: --There would be no reason for the money to go from the insurance company to the dealer, to Ford Credit, absent the clause in the--

Justice Stevens: Oh, I understand that, but wouldn't the buyer of the car realize that that's why he's carrying the insurance, to protect the... his ability to pay off the debt?

Mr. Alop: --No, the insurance protects the automobile from collision.

Justice Stevens: Right.

Mr. Alop: This is collision insurance.

Justice Stevens: Right.

Mr. Alop: And I don't think that consumers have an idea that this insurance is securing the debt, they are not... certainly disclosed, that's not disclosed to them, by virtue of the contract, in the present case.

Justice Stevens: You really think there's a significant potential for misleading the buyers in this situation?

Mr. Alop: It's not so much as an intentional misleading--

Justice Stevens: I don't mean intentional, potential for, do you think the buyers are really apt to be misled in this situation?

Mr. Alop: --The buyer is not given an opportunity--

Justice Stevens: It seems rather unlikely to me.

Mr. Alop: --Under the contract in this case, the buyer really is not given a meaningful opportunity to know that this sum of insurance--

Justice Stevens: He's told he's got to buy insurance to cover this risk and he assumes he can default on the loan, and get the rebate on the premium and put it in his pocket, is what you're saying?

Mr. Alop: --I'm saying that--

Justice Stevens: It seems very unlikely to me.

Mr. Alop: --that the consumer does not know that these refunds will be going to Ford Credit rather than to be coming back to the consumer, absent the meaningful disclosure on the front side of the contract.

I was referring to the significance of the interest to the creditor.

It's... Ford Credit has recovered substantial funds by virtue of this security interest over the last 10 years and this is an attractive--

Justice Stevens: But aren't those recoveries all against a larger, unpaid debt that they weren't able to collect?

I mean, isn't that always when they get the money on these refunds?

Mr. Alop: --There are--

Justice Stevens: They don't make any profit on it.

Mr. Alop: --There are occasionally surpluses, in which the secured property, the automobile, for example, will... the value of that will exceed the outstanding debt.

Justice Stevens: But then the buyer gets the surplus?

Mr. Alop: The buyer is supposed to get that surplus, the buyer will have no means of knowing that this money is coming to buyer unless it is disclosed.

Justice Stevens: No, but isn't it a fact that the 100 million or whatever the big sum money is that Ford has collected is a reduction of losses it otherwise would have suffered?

Mr. Alop: It is applied to outstanding debts, that's correct.

Justice Stevens: They haven't made any money by... on this--

Mr. Alop: They have recovered this money by virtue of that.

With regard to--

Justice Stevens: --And also, it's also clear that the buyers would never have had a legal right to retain any of that... or, I mean, any equitable right to any of that money, because they would have been indebted to Ford for an amount greater than the amount that's in dispute in every one of these cases.

Mr. Alop: --Well, this money would, if there is no deficiency, if there was a surplus, of course, it would go directly to the consumer... even, however, if this Court deemed that the interest in this case to be incidental, it would still be sufficient to meet the test of Regular Z's definition of security interest, which merely requires any interest in property.

The second prong of the Regulation Z test is an interest in property which secures payment or performance of an obligation.

The interest Ford Credit has retained in returned insurance premiums secures payment of this obligation because Paragraph 17 of Ford Credit's contract specifically authorizes Ford Credit to recover returned insurance premiums and to apply them towards the outstanding debt.

Thus, Ford Credit's interest in this returned insurance premium secures the payment of the obligation and both prongs of the Regulation Z test for security interest are met.

Contrary to the assertion of Ford Credit which was made today, the interest it retains in secured premiums would, if properly disclosed to consumers, be understood by consumers--

Unidentified Justice: Incidentally, Mr. Alop, may I ask how much actually is involved here?

Mr. Alop: --The total amount of the premium in this case was $215.

Unidentified Justice: Oh, and the return would be about what?

Mr. Alop: The return would of course depend at the time... on the timing of the cancellation of the insurance.

Unidentified Justice: Do we know here when it was?

Mr. Alop: No we do not, Your Honor.

Ford Credit also has argued that--

Unidentified Justice: May I ask one other question as a matter of history, is it true that before this statute was passed it was customary for the finance companies to buy the insurance themselves, and then they would buy the policy and make the purchase pay the premiums?

Mr. Alop: --The record doesn't reflect that, Your Honor, but I believe it is customary for both mechanics to exist.

Dealers oftentimes do sell this insurance, in other cases, consumer--

Justice Stevens: And there's the provision in the contract here that permits the buyer to buy it elsewhere if he wants to.

Unidentified Justice: I mean, it used to be in the home mortgage business that the real estate brokers would make the money on the insurance.

Justice Stevens: I guess it's probably true in this industry as well, although I don't know.

And so, is this just sort of one of those things that grew out of the fact that buyer was given an option to buy his own insurance and therefore, the security interest was created in that policy?

Whereas, if the older practice had been followed, the dealer would have just owned the policy himself.

Mr. Alop: --Well, in both situations of course, the dealer retains the security interest in returned insurance premiums.

Under both.

I don't think the historical analysis there would explain anything.

Ford Credit argued that this information would create an information overload.

Certainly when the matter is disclosed, as it is in the present contract, buried on the reverse side and clothed in the language of an assignment clause, in one sentence which is 58 words long, it is confusing.

However, the Third Circuit Court of Appeals in the Gennuso decision indicated that a creditor's security interest in returned insurance premiums could be meaningfully disclosed to consumers in a matter of a few words and also importantly, intelligibly and meaningfully.

And we would note that Ford Credit's new contract which it has adopted subsequent to the decision below, does disclose this information to consumers on the front side of the contract--

Unidentified Justice: Well the decision below told it it had to?

Mr. Alop: --That's correct, Your Honor.

Unidentified Justice: That's no... not very surprising.

Mr. Alop: My point is however, that they have, they are now disclosing this information concisely in a matter of five words on the front side of the contract; that's hardly creating an information overload that they refer to.

I would also note that Ford Credit's reliance on the Truth-in-Lending Simplification and Reform Act is misplaced.

That Act is not effective until 1982, and... it is not retroactive, it is not made applicable to pending litigation or is it applicable... or made retroactively applicable, thus by it's own terms, the Simplification Act is not relevant to this case and by virtue of 1 United States Code Section 109, Ford Credit's liability for violations of the existing Truth-in-Lending Act is not extinguished by virtue of the enactment of the Simplification Act.

Unidentified Justice: What does that statute provide, 1 U.S. Code Section 109?

Mr. Alop: Section 1 U. S. Code Section 109 merely indicates that a repeal of the statute or an amendment to that statute does not extinguish liability that may have--

Unidentified Justice: Previously arisen under the statute?

Mr. Alop: --That's correct.

Justice Rehnquist: But this isn't an amendment... or, you're talking about the Simplification Act, not the proposed regulations?

Mr. Alop: I'm referring to the Simplification Act.

Unidentified Justice: And does the Simplification Act in terms... have some provision that would bear on this question if it were in effect now?

Mr. Alop: The point is, Your Honor, the Simplification Act does not bear on these proceedings because it is entirely prospective in--

Unidentified Justice: No, I say, if it were in effect now.

Mr. Alop: --If it were in effect--

Unidentified Justice: Would it have a bearing on--

Mr. Alop: --It would, Your Honor, because I believe it does change the law regarding the disclosure of security interests.

There's no question of that.

The point is that Ford Credit argues that we should look to the Simplification Act because it allegedly interprets the Truth-in-Lending Act, and we would note that there is nothing in the language of the Simplification Act or the Committee Reports which underlie the simplification Act, that interprets or construes the present Truth-in-Lending Act which governs this transaction.

The only thing Ford Credit has relied on, since there is nothing in the language of the Act or in the Committee Reports that underlie it, the only thing Ford Credit has relied on is a statement, an isolated statement of one senator... Senator Garn, to the effect, arguing that... excuse me, that the language... but Senator Garn, we would note, was not a member of the body that enacted the Truth-in-Lending Act, the Congress that enacted the Truth-in-Lending Act, and Senator Garn's statement is not reflected in the Committee Report; instead, it was inserted in the Congressional Record after the Committee Report was issued and it's not reflected in the Committee Report.

Unidentified Justice: --And his statement was to the effect that the new provisions of the Simplification Act were simply clarifying?

Mr. Alop: That's correct.

However this Court in the past, has given little if any, weight to the post-passage remarks of legislators regarding the meaning of previously enacted legislation, particularly where the legislator was not a member of the enacting body.

Ford Credit has argued that the application of the decision in this case should be made prospective only, with regard... except as with regard to the Respondents in this case.

However, by placing the argument in this posture, by conceding that the Respondent should recover, regardless of the application of the decision as given, Ford Credit has destroyed any adversarial relationship between the parties on this issue.

That is, Ford Credit has presented no case or controversy to this Court on the issue of the application this decision is to be given.

Ford Credit on the issue of non-retroactivity, presents no case or controversy in that it seeks no relief that will affect the Respondents in any way, it seeks no alteration in the judgment below, and as a consequence, in essence it seeks an advisory opinion that will affect other litigation, pending litigation in which the Respondents have no interest.

Unidentified Justice: The Court announced a decision this morning with which I am sure you haven't yet had time to familiarize yourself... Kirchberg v. Feenstra, which might have some bearing on this aspect of the case.

Mr. Alop: As it is our opinion that the Court need not reach the issue of prospective application, we will stand on our briefs with regard to the Chevron analysis.

Thank you, Your Honor.

Chief Justice Burger: Do you have anything further, Mr. Kramer?

You have one minute left.

Mr. Kramer: One minute left, Your Honor?

Chief Justice Burger: One.

Mr. Kramer: Thank you.

The purpose of the clause that we've been discussing today is not to gain access to incidental... unearned security interests, but rather to keep the real security interests in these transactions not only for Ford Credit but for the industry insured... and that is, to maintain insurance on the financed vehicles themselves which are the real security interests in the transaction.

We do not only rely upon Senator Garn who is a member of the committee that adopted the Simplification Act, but also the Federal Reserve Board that held that the Simplification Act clarifies this issue as intended by the original Act.

Finally, with respect to this matter, creditors are only looking for clear direction from the Federal Reserve Board which has stated that clear direction in 173, and but for this Court's grant of certiorari that would be the law today.

Respondent should not be permitted to embrace the Federal Reserve Board's decision while at the same time ignoring 173.

Thank you.

ORAL REBUTTAL ARGUMENT OF AARON J. KRAMER, ESQ., ON BEHALF OF THE PETITIONERS

Chief Justice Burger: Thank you, gentlemen.

The case is submitted.

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Argument of Wade H. McCree

Chief Justice Warren E. Burger: We'll hear arguments next in United States against Rutherford.

Mr. Solicitor General.

Mr. Wade H. McCree: Mr. Chief Justice and may it please the Court.

This case concerns a drug or group of drugs variously referred to in the record a Laetrile with a “capital L”, laetrile with the “lowercase l”, amygdalin and Vitamin B17.

Part of the problem with this case is the difficulty of distinguishing just which drug is referred to in a particular context.

Generically, this drug or group of drugs comprised a compound known as a cyanogenetic glucoside.

I understand glucoside to be one of a group of organic compounds found in the kernels and seeds of most fruit that hydrolyzed or breakdown to yield glucose which is a sugar, and in the case of a cyanogenic glucoside, hydrogen cyanide as well which of course is a poison.

Amygdalin is the name of a cyanogenic glucoside that is frequently used interchangeably with Laetrile either with the “capital L” or “small case l.”

One other definition might be useful, one of the chemical definitions of Laetrile or proper definitions of Laetrile has been -- was made in the administered of record as laevo-mandelonitrile-beta-glucuronoside.

I say all of that to suggest the origin of the name Laetrile.

Laevo is the first part which means left as I understand it from the Latin and mandelonitrile is the chemical and if we take lae from leavo and the trile from mandelonitrile, we have Laetrile, and this is the drug with which we are concerned today.

The left business, the Laevo is in contrast to dextro which would be the right rotation and it refers to the way these two drugs show up in polarized light.

The proponents of this drug Laetrile contends that it is a cancer cure and in some instances, a cancer preventive.

The process is change from time to time, but in short it appears to be the following.

It is the theory of the proponents that Laetrile releases hydrocyanic acid, which of course is a poison, and it does so in the presence of an enzyme that allegedly occurs in greater concentration in malignant cells than it does in normal cells.

And therefore, the malignant cells are destroyed by the action of this chemical.

The case comes before us is a consequence of a curious proceeding.

The Federal Food, Drug And Cosmetic Act prohibits the introduction of any new drug as defined in the statute into interstate commerce unless a new drug application, an NDA supported by appropriate evidence of the drug's safety and effectiveness has been approve by the Commissioner of the Food and Drug Administration who is the Secretary of Health, Education, and Welfare's designate, or unless the drug is exempted from the approval requirements by one of the Acts two grandfather provisions, one in 1938 and the other in 1962, both of which are still operative.

Because Laetrile had not been established as being entitled to grandfather status or is having meant the statutory requirements for approval as a new drug, the Food and Drug Administration brought a series of civil and criminal proceedings to prevent the introduction of Laetrile under various names into interstate commerce.

In March 1975, respondents brought a suit in the United States District Court for the Western District of Oklahoma to enjoin the Government from interfering with the sale and distribution to patient suffering from cancer of a substance known as B17, Laetrile and amygdalin.

The District --

Justice Potter Stewart: What was the status of the respondent?

What was their -- what conferred upon them standing to bring this suit?

Mr. Wade H. McCree: That's a question for which I haven't good answer if the Court please of the Government raise the question of the jurisdiction of the court and their standing, but it was decided adversely to the Government and it its present posture, we suggest that on a remand, there probably was jurisdiction.

But at this stage, I cannot answer you Mr. Justice Stewart.

Justice Potter Stewart: Are these -- the respondents' alleged in their complaint that they want to use it or that they move?

Mr. Wade H. McCree: They alleged that they wish to use it.

Justice Potter Stewart: They are not producers or sellers?

Mr. Wade H. McCree: They are not producers.

They alleged that they were patients suffering from cancer and that they were terminally ill cancer patients and they were later certified as a class consisting of terminally ill cancer patients and they wish access to the drug for their therapy to be administered to them by their physicians.

The District Court issued a preliminary injunction forbidding the Government from preventing the purchase in interstate movement of Laetrile for respondent Rutherford and the other members of the class who could show by affidavit that they were terminally ill with cancer.

On appeal by the Government, the Tenth Circuit upheld the granting of the injunction but instructed the District Court to remand the case to the Commission for the development of an administrative record adequate under the Administrative Procedures Act, addressing the issues first whether Laetrile is a new drug within the meaning of the Act, and second if so, whether it is exempt from the premarketing requirements because of either the 1938 or the 1962 grandfather clause.

Upon remand, the Commissioner initiated administrative proceedings to a federal register announcements seeking public comment, and the proceedings which included two days of oral presentation produced more than 400 submissions and more than 5,000 pages of testimony at the conclusion of which, the Commissioner concluded first that Laetrile is a broader generic term for a group of related compounds and that in its various forms, it is a new drug within the meaning of the Food and Drug Act, and that it was definitely toxic when taken orally, that it had not been adequately tested for safety, that is was not generally recognized among experts a safe for use in man, and that distribution prior to meeting the premarketing approval of the FDA would be unlawful unless it qualified for exempt status under either grandfather provision.

He concluded that it was not exempt under the 1938 exemption, grandfather exemption, or the 1962 because the drug that -- with which was she was concerned had not been used commercially under the same or similar label for therapeutic purposes before either the 1938 time or the 1962 time which would've permitted it to continue in commerce.

He concluded that the distribution of Laetrile in interstate commerce is in violation of the Food, Drug, and Cosmetic Act and subject to regulatory action.

Chief Justice Warren E. Burger: Mr. Solicitor General, what evidence did the District Court have before it as a basis for a finding that this was nontoxic?

Mr. Wade H. McCree: If the Court please, the District Court when it initially granted the injunction, I had no evidence before it except --

Chief Justice Warren E. Burger: But he did make a finding that it was nontoxic, did he not?

That's my impression from your -- the summary of your argument or part of your brief.

Mr. Wade H. McCree: Well, the matter went back to the District Court from the administrative hearing and do I understand your inquiring about the second time the District Court looked at it the first time?

Chief Justice Warren E. Burger: That wasn't clear from what I read whether it was the second time or the first time.

At anytime, what evidence did the District Court have of this drug, this material being nontoxic?

Mr. Wade H. McCree: It's my understanding that the District Court did not take evidence in this matter, but relied on the administrative record that was made.

Chief Justice Warren E. Burger: But he did make a finding that it was nontoxic?

Mr. Wade H. McCree: He made a finding when he reviewed this administrative record that I've just related, which is the next step in the proceeding and what the District Court did was to sustain the Commissioner's conclusion that Laetrile was a new drug.

He agreed that it was not exempt under the 1938 grandfather clause, but he concluded that it was exempt under the 1962 grandfather clause, and in doing so, we contend improperly reviewed the evidence that was before the Commissioner, and that was properly within the jurisdiction of the Commissioner to make findings.

And then, he did a curious thing which we contend also was in error.

He held that the Food and Drug Administration had offended that constitutional right to privacy by denying the right to use a nontoxic substance in connection with one's own personal health.

Despite his find -- the Commissioner's finding that Laetrile has a known toxicity when taken orally and that it -- the testing is insufficient to determine its toxicity in any form.

Justice William H. Rehnquist: Well, isn't there an additional curiosity about the District Court's constitutional holding and that he'd already found that it was covered by the grandfather clause in 1962 so it didn't have to reach that question?

Mr. Wade H. McCree: Mr. Justice Rehnquist, we agree that it was a quite unnecessary finding for the District Court to make.

But the District Court did this nevertheless.

The Government appealed it again to the Tenth Circuit and the Tenth Circuit without addressing the grandfather ground or the constitutional ground on which the District Court relied held as a matter of law that the safety and effectiveness terms used in the statute have no reasonable applications to terminally ill cancer patients, and that the Food And Drug Administrator had erroneously applied the Act to these persons.

Nevertheless, it modified the District Court's injunction to limit the use to intravenous injections administered by licensed medical practitioner and only to person certified by a licensed medical practitioner to be terminally ill of cancer in some form, and he directed the Food and Drug Administration to promulgate regulations within this limitation as if the drug was found by the Commission to be safe and effective for the terminally ill cancer patients.

And the matter is before this Court on the writ of certiorari.

We submit that the following questions are presented.

First, whether the safety and effectiveness requirements of the Federal Food and Drug and Cosmetic Act applied to drugs intended for use by the terminally ill which is the issue on which the Court of Appeals decided the matter.

We submit further that if the Court decides that question as we think it should, it would want to consider the two grounds found by the District Court for enjoining the interstate distribution of the drug, and therefore, it would consider whether the judgment of the Court of Appeals barring application of the Act to interstate distribution of the drug for intravenous administration to terminally ill patients is sustainable on the grounds that Laetrile is exempt because of the premark -- from the premarketing requirements because of the 1962 grandfathers clause, and finally, whether the judgment of the Court of Appeals is sustainable underground that the prohibition of the interstate distribution violates a constitutional right to privacy.

I'd like to address the first question now if I may.

Justice Byron R. White: Those last two are really questions for your opposition to propose and I --

Mr. Wade H. McCree: Indeed they are, but he --

Justice Byron R. White: And they have I take it.

Mr. Wade H. McCree: And he's entitled to urge the Court to sustain the judgment on those alternative grounds and --

Justice Byron R. White: And he has presented them?

Mr. Wade H. McCree: And he has presented them, yes sir.

The -- we submit that the Court of Appeals is misconstrued the statute in holding that the safety and effective requirements of the Act do not apply to terminally ill persons.

In the first place, the Act makes no such exception.

There's no language in the Act that says that it does not apply to terminally ill persons and the legislative history does not support this exception that's contended for.

The Food and Drug Administration has consistently administered the Act without recognizing any such exception and the Congress has indicated its acquiescence in the adminis -- the way the Act has been administered because on at least two occasions, it has amended the Act without changing the construction that the Commission placed upon the statute.

We further submit that there's no reliable means of identifying the class except in retrospect.

The administered record teaches that cancer is a disease about which very little is known, that it frequently goes into spontaneous remission for reasons not understood, and that a person designated is terminally ill may surprise his physician by outliving the prognosis that he makes at the time the designation is indicated.

We also suggest that a drug can be unsafe for a dying person contrary to the decision of the Court of Appeals if it poses a risk of shortening the life of the terminally ill person or if it poses the risk of aggravating the symptoms experienced by the so-called terminally ill person.

Chief Justice Warren E. Burger: I suppose you're done to that if it had any tendency of risk of hastening death.

Mr. Wade H. McCree: And of course, if it was toxic, if it hastened death, it would be a fortiori that it would be unsafe for the terminally ill patient.

We also suggest that the drug is ineffective as well as unsafe if it does not produce the effects of prolong life or the (Inaudible) from pain that is claimed for.

And if it's ineffective, then we say the Court of Appeals was erroneous in its determination.

We also submit that the terminally ill have the same right to be protected from ineffective drugs just as other people have, and that the Tenth Circuit by substituting its judgment for that of the agency charge by Congress with the responsibility of keeping unsafe drugs out of the market place was an error and that this Court should reverse its judgment.

The grandfather's clause if I may pass to that and anticipate the argument that's in my brother's brief, that -- we submit and perhaps my brother will answer this that there's no claim that Laetrile was marketed commercially before 1962.

And of course to be within the grandfather's clause, the person contending the exemption must show commercial marketing.

And we submit that there was not and we submit that the brief that the administrative record is very clear about that.

The Commissioner also found that the composition of different substances referred to as Laetrile before and after 1962 very listed their formulations so that no one could state with certainty just what's subject had been grandfathered, and of course, there would be another for the grandfather's clause not to apply.

We also submit that the record supports the Commissioner's conclusion that the drug was not generally recognized as safe as required by Section 201 (p).

He found specifically that there was a hazard of cyanide poisoning and the record shows that when ingested orally, the drug has a very definite toxic effect and that there was insufficient testing of its consequences when taken by injections parenterally.

Justice Harry A. Blackmun: General McCree, in your view, who has the burden of proof on the grandfather clause issue?

Mr. Wade H. McCree: I would think the person who asserted the exemption would have the burden of proof.

Justice Harry A. Blackmun: Are there any cases that so hold?

Mr. Wade H. McCree: I can't think of a case it's specifically addresses that question.

But normally, a person claiming an exemption from a general rule in the ordinary theory of the allocation of burden would have to sustain it.

This case is curious in another respect.

It's not the typical food and drug case, and so the manner of burden -- who bears the burden, takes on an interesting aspect.

Here, we have patients contending that they have a right to use a drug, and it's not the typical case of the manufacturer of a drug seeking of clearance for it when he would understand what he had to show.

We think the contrary to the finding of a District Court that the Commissioner was extremely fair in the hearing that he conducted because he invited persons who were sponsors of the drug, who were not themselves cancer patients to present evidence and he consider their evidence in arriving at his conclusion.

We suggest that there's another reason why the grandfather's clause does not apply because the only labeling of the drug before 1962 was for investigational use only, and not for commercial use.

It was labeled to instruct physicians who were conducting experiments in its use and as such, it did not qualify for the grandfather's clause.

Finally, we say that the District Court employed an improper standard of review by overturning the Commissioner's findings of fact.

There was evidence to support every one of the Commissioner's findings.

We submit that it was his right to do this and that the District Court improperly evaded the province of the administered of agency in making these findings.

Finally, we would address the constitutional issue.

In the first place, we say that the asserted right of privacy which would give a terminal patient the right to use this drug is premised upon something that is not so.

It is premised on the unwarranted belief that Laetrile has been shown to be nontoxic.

And we submit that the record shows clearly that it is toxic.

And if it is, the entire premise for this determination is destroyed and the conclusion should fall.

Justice Byron R. White: Is that true if taken orally?

Mr. Wade H. McCree: It is certainly true taken orally and there is no adequate investigation of its consequences when taken by injection.

Justice Byron R. White: So, you can't say then that it's not toxic?

Mr. Wade H. McCree: You cannot say that it is not toxic.

Justice Byron R. White: Well, you can't say that it is either?

Mr. Wade H. McCree: That's correct.

But the conclusion --

Justice Byron R. White: And this Circuit's order is limited to intravenous?

Mr. Wade H. McCree: It is so limited and we suggest two things from that.

First, the limitation that was gratuitous indicates that the Court of Appeals recognized the toxicity when taken orally.

But we also suggest that it is his premise that a person has a constitutional right to use a nontoxic drug, and it would appeal then that if there is no evidence of toxicity or not, that his conclusion fails.

Particularly when the drug is shown to be toxic in one form and when it is clear that one of its components is a deadly poison, and no one knows whether it is released in the -- when taken parenterally, when injected instead of ingested.

We also suggest that this Court in discussing the right of privacy has not extended it beyond protecting the individual interest in making independent decisions in matters relating to marriage, procreation, family relationships, and childbearing and education.

In Whalen versus Roe, this Court in 429 U.S. page 600 in footnote 26 said expressly that the right to privacy did not extend to the drugs that were involved there that were subject to potential abuse.

It would also suggest that the court has made it clear that even in these protected areas, the right of a person not to be regulated might be restricted in the interest of protecting the health of the person concerned.

Now, we point to the abortion cases, the case that involved the saline amniocentesis method of abortion, where the court said that this wasn't the prohibition there wasn't to protect the health of the woman, but it was for a different purpose, and an improper purpose.

In here, the concern if for the health would not be prohibited.

Also, we suggest that historically, the exercise of the police power to protect people from harmful drugs or improperly labeled drugs is far antedates the Constitution when the Constitution was adopted, this was a common practice.

In fact, we show in our appendix that it began in 1266, I guess that's 200 years after the Norman Conquest and continuously in Anglo-American history, public health has been protected.

I see the -- my time is nearly expired and I would like to reserve any remaining time I might have for rebuttal.

Chief Justice Warren E. Burger: Very well.

Justice John Paul Stevens: Mr. Solicitor General, may I ask you one question.

I read in the press that marijuana is very helpful in relieving pain in cancer patients.

Has the FDA ever addressed that question that arises with respect to marijuana?

Mr. Wade H. McCree: I'm not aware that a new drug application has been filed with the FDA for that.

Justice John Paul Stevens: I've been told that's used for that purpose.

Mr. Wade H. McCree: I've heard that, too.

Justice John Paul Stevens: Yes.

Mr. Wade H. McCree: And I think I have read too that experimental uses has been authorized and I think I read recently that someone who is authorized to use it experimentally have been arrested.

I think in one of the New England states for possessing marijuana that he said was furnished in were authorized by the Food and Drug Administration.

I'm not aware of any litigation.

Justice Lewis F. Powell: Had any state pass a right to that statute?

Mr. Wade H. McCree: I'm not aware of any right.

Justice Lewis F. Powell: A number of such statutes had been introduced in state legislatures.

Mr. Wade H. McCree: I am aware of that, but I'm not aware that any state has does this.

We point out in our reply brief that the only state that's addressed this question of the -- of a right to privacy challenged to self-medication is California in People versus Privitera, which was just decided March 15, 1979.

California found under both the federal and state constitution, no constitutionally protected right to take a particular drug, of course medication.

If I have a moment, I would like to reserve --

Argument of Kenneth Ray Coe

Chief Justice Warren E. Burger: Yes.

Mr. Coe.

Mr. Kenneth Ray Coe: Mr. Chief Justice and may it please the Court.

I think initially it is incumbent upon me to discuss with you briefly the limitations that are imposed inherently in this case by the lower court's rulings.

This case applies only to a class of terminally ill cancers patients which are represented in this case by Mr. Glen Rutherford.

It applies only to the application of the substance known as Laetrile.

It applies to the intravenous application of that particular substance, and it applies to application of that substance only under the care of -- excuse me, by supervising doctor.

This case has nothing at all -- no content other than that what I've just discussed.

Now, the reason I mentioned that is because it has been asserted in the Government's brief to a large extent that this case Bowe (ph) is very ill for the Food and Drug Administration, and I just do not believe that is the case and I do not believe this case when you consider what is happening.

Initially, this case was brought in the United States District Court for the Western District of Oklahoma by several cancer patients who were desirous of using Laetrile were in the terminal state, and almost immediately died.

Mr. Rutherford was brought in as a replacement or supplemental plaintiff and at that point in time, we move the court for temporary injunction so that he wouldn't suffer the same fate as the original plaintiffs.

The District Court granted the injunction just as to Mr. Rutherford which decision of course was appealed to the Tenth Circuit Court of Appeals.

That Circuit made a determination that in fact Mr. Rutherford was entitled to the temporary injunction, but it did not appear to that court that the Food and Drug Administration had the sufficient record upon which to base its new drug determination.

So, the case was remanded back to the District Court and a hearing was held before that District Court.

At that point in time Judge Bohanon asked the attorneys for the Food and Drug Administration what administrative record had been compiled to determine that Laetrile was a new drug or that it was not grandfathered by provisions of the 62 Amendments or the 38 Amendments.

The Government Attorney stipulated in court at that time that's a matter of record that they had no record exclusive of one affidavit which had been prepared by a Food and Drug Administration medical doctor.

Judge Bohanon then remanded the case to the Food and Drug Administration so that the proper administrative record could be compiled upon which he can base some decision and the Tenth Circuit could base some decision as to authenticity of the administrator's findings.

The Food and Drug Administration then held its rule making proceeding, and we've contended throughout this litigation that the rulemaking proceeding that the FDA conducted was not proper under the circumstances.

Justice William H. Rehnquist: How did this case get to the District Court, Mr. Coe?

It was it -- I don't know, originally an application for administrative review?

Mr. Kenneth Ray Coe: No, Your Honor.

It was a complaint filed in the Unites States District Court for the Western District of Oklahoma on behalf of terminally ill cancer patients alleging that the Food and Drug Administration by virtue of the determination that Laetrile was a new drug, had effectively prohibited their use of the drug, and there is authority for that I believe that's Weinberger versus Hynson, Westcott & Dunning, that after the Food and Drug Administration had made its initial determination that a District Court made them review.

Justice Byron R. White: It was just an administrative.

Justice William H. Rehnquist: So, it wasn't the application or administrative review under the Heinemann?

Mr. Kenneth Ray Coe: Well, yes Your Honor, I guess you had to call that.

Justice Byron R. White: But it what forward just on the administrative record?

Mr. Kenneth Ray Coe: Your Honor, it's been backwards and forwards --

Justice Byron R. White: Yes, but I mean as it finally got to -- finally before Judge Bohanon, it -- he proceeded on the administrative record?

Mr. Kenneth Ray Coe: Yes, Your Honor.

Justice Byron R. White: No new evidence in the District Court?

Mr. Kenneth Ray Coe: No new evidence was heard.

The administrative record that was compiled which is ordered by the Tenth Circuit Court of Appeals was ordered to comply with the Administrative Procedure Act Section 554 sub (c).

Within that subsection, it requires that cross-examination be allowed to the proponents and to the other side in the case.

Now, the Food and Drug Administration selected the most informal proceeding of the variety of proceedings it could possibly hold, and in fact allowed witnesses to testify without the administration oath, or without the opportunity of cross-examination to determine the veracity of any of those witnesses.

Now, that was so even though the objection was made to the Hearing Examiner at that time to that particular type of proceeding.

The --

Justice William H. Rehnquist: You said the Administrative Procedure Act prohibits that?

Mr. Kenneth Ray Coe: I'm sorry, Your Honor?

Justice William H. Rehnquist: You say that the Administrative Procedure Act prohibits that?

Mr. Kenneth Ray Coe: No, the Tenth Circuit Court of Appeals required that the FDA conduct the proceedings pursuant to 554 sub (c) of the Administrative Procedure Act.

Justice William H. Rehnquist: So that if you say that 554 sub (c) prohibited the sort of proceedings conducted by the Food and Drug Administration?

Mr. Kenneth Ray Coe: Actually, sir that refers you to 556 which grants the right of cross-examination.

Justice William H. Rehnquist: So, indirectly you say it that is -- what the FDA did here is prohibited by the Administrative Procedure Act?

Mr. Kenneth Ray Coe: By that and as it was espoused by the Tenth Circuit Court of Appeals.

Justice William H. Rehnquist: Well, you know I presume the Tenth Circuit has the right to construe the statute but not to impose its own requirements.

Mr. Kenneth Ray Coe: The FDA also has proceedings in which generally speaking when a court sends a case to it for review and generally speaking, those requirements are for a more formal type of hearings.

That's an addition to the requirements of the Tenth Circuit.

That was not amended in this case.

Now, the --

Justice William H. Rehnquist: Is that a part of the APA?

Is that part of the Administrative --

Mr. Kenneth Ray Coe: No, it's part of the regulations for the Food and Drug Act, I believe it's Section 1060 or 1080 of their procedure, left side in our brief, Your Honor.

At any rate, the FDA did hold its proceedings and the Commissioner did issue findings just as the Solicitor General advised the court.

This was then appealed to the District Court for the Western District of Oklahoma.

Judge Bohanon examined the entire administrative record, and based upon his review of that record made the determination that the entire proceedings were arbitrary capricious and abused of discretion and not in accordance with the law.

He based it upon several things.

First, he made the determination that the Food and Drug Administration by virtue of a notice published in the Federal Register espoused the same continuing view toward Laetrile as it had been espousing for many years since the 1950's, same entrenched position.

Justice William H. Rehnquist: Well what's the matter with that?

Justice Thurgood Marshall: It just could be correct.

Justice William H. Rehnquist: I mean there not just judges, they presumably have some right to decide what positions to take on things.

Mr. Kenneth Ray Coe: Your Honor, I think that that is exactly the point the judge was making.

The FDA has made its decision, has made its decision backed in 1950 before it had any administrative record whatsoever and continues to make the same.

He used that particular item to show that there was a lack of in depth fact-finding in the administrative proceedings.

Justice William H. Rehnquist: That they simply weren't open even to persuasion by new evidence?

Mr. Kenneth Ray Coe: I believe that what the court is trying to make, Your Honor.

The court decided as I have just previously said that the Food and Drug Administration Commissioner's decision should be set aside.

That was set aside.

It was set aside on two bases.

First of all, it was set aside on the basis that Laetrile is subject to an exemption by virtue of the 1962 grandfather provisions of the Act.

He also made the determination that it would not -- that should be set aside based upon the fact that a new violation of the right to privacy guaranteed with the Ninth Amendment of the Constitution.

Chief Justice Warren E. Burger: What was the evidence on its use before 1962?

Mr. Kenneth Ray Coe: Your Honor, there was substantial evidence on use prior to 1962.

The evidence of use prior to 1962 --

Chief Justice Warren E. Burger: Commercial use, commercial use and that's the requirement, isn't it?

Mr. Kenneth Ray Coe: The requirement is commercial use prior to 1962, Your Honor.

The Court cited and I believe its footnote 22, affidavits by Chauncey Lick and several other individuals as to commercial use prior to 1962.

Chief Justice Warren E. Burger: Well, do you need to stop to find it now?

Mr. Kenneth Ray Coe: At any rate Your Honor, the District Court found that it was used prior to 1962 that was used commercially.

The District Court found that the labeling was the same for all practical purposes as it was before that date.

The District Court found that it was not -- that it was safe and that it was nontoxic.

Now, that going into great detail on each and every one of those because the District Court's opinion sets it out in great detail and I've briefed it in my brief and the Government's brief did theirs.

The case law establishes that if there is a difference of opinion upon among experts, for instance such as -- as to safety, and this applies across the board I believe to the 1962 grandfather exemption.

That that is a fact question to be determine by the trial of fact.

In this case, Judge Bohanon was seating as both the trier of law and the trierl of fact.

Justice Thurgood Marshall: What facts did he have before him?

Mr. Kenneth Ray Coe: The facts he had before him were the facts --

Justice Thurgood Marshall: Was it administrative record, that's all?

Mr. Kenneth Ray Coe: That's all he had.

Justice Thurgood Marshall: When you say facts, don't you mean testimony?

Mr. Kenneth Ray Coe: Your Honor, in this case, I do mean testimony and --

Justice Thurgood Marshall: Well, what case that says -- what case that says that he looks at the administrative record droves out to finding of the administrative body and replaces it with his own?

Isn't that what was done here?

Mr. Kenneth Ray Coe: Your Honor, there is --

Justice Thurgood Marshall: Isn't that what was done here?

Mr. Kenneth Ray Coe: I'm sorry, Your Honor?

Justice Thurgood Marshall: Isn't that what was done here?

Mr. Kenneth Ray Coe: That he threw out the findings and superimposed his own.

Yes, Your Honor, that's exactly what he did.

Justice Thurgood Marshall: And the authority for that.

Mr. Kenneth Ray Coe: The authority for that are the cases which I've cited under that particular proposition on our brief.

First of all Your Honor, if I may address --

Justice Thurgood Marshall: Where did he get the fact that the law didn't apply to terminally ill people?

Where did he find that in the record?

Mr. Kenneth Ray Coe: Well Your Honor, he didn't find anything in the record, in the record that the law did not apply to terminally ill patients because that would have been (Voice Overlap) on his part.

Justice Thurgood Marshall: But where did he find it?

Where did he find it?

Mr. Kenneth Ray Coe: He determined -- well, as a matter of fact, I think it was the Tenth Circuit that actually made determination of such Your Honor.

The Tenth Circuit --

Justice Thurgood Marshall: Where did the Tenth Circuit find it?

Mr. Kenneth Ray Coe: I think they found that based along --

Justice Thurgood Marshall: You think?

You don't know, do you?

Mr. Kenneth Ray Coe: Your Honor, I know in my own mind.

Justice Thurgood Marshall: What do you think?

What do you think?

Mr. Kenneth Ray Coe: Alright, I think Your Honor that the Tenth Circuit found that the Act did not apply to terminally ill cancer patients because it would be ridiculous to apply the term efficacy to a terminally ill cancer patient.

Chief Justice Warren E. Burger: Why would it, aren't there pain relieving properties in some drugs that would be used on terminally ill patients?

Mr. Kenneth Ray Coe: Your Honor, many of the drugs that are used on terminally ill cancer patients do in fact have pain killing effects and generally speaking --

Chief Justice Warren E. Burger: Isn't that the function of this agency, this regulatory body to see that any pain relieving drugs are safe and meet all the other standards?

Mr. Kenneth Ray Coe: It is the duty of the Food and Drug Administration to fulfill its congressional mandate, and it is our position before the Court that the congressional mandate which added efficacy in particular to the Food and Drug Act which came out after the thalidomide tragedies does not have application to terminally ill cancer patients.

And the reasoning behind that is very simply that if in fact there were an effective cancer remedy, then you wouldn't have terminal cancer patients, they're be terminal from some other cause entirely.

And as long as you do not have an effective cancer remedy, that to require that of Laetrile is an absurd result from the Act.

Justice William H. Rehnquist: Well, what about the Chief Justice's question that even the terminally ill patient may need relief from symptomatic conditions, not a cure, perhaps not even remission relief from pain.

Mr. Kenneth Ray Coe: I certainly do not disagree with that.

I have no problem with that whatsoever --

Justice William H. Rehnquist: Do you think the Tenth Circuit would exempt that and say go down by a few grains of morphine if you feel you needed to relieve the pain?

Mr. Kenneth Ray Coe: The Tenth Circuit ruled strictly relative to Laetrile intravenous form.

I do not know what the Court will do in some other context.

Justice William H. Rehnquist: What's your position on that?

Mr. Kenneth Ray Coe: My position as it always has been is that we have terminal cancer patients desiring to use Laetrile.

This case is brought that particular issue before the court.

My position is that they should be allowed to use it.

Justice Thurgood Marshall: And that the Food and Drug Act doesn't apply to terminal patient?

Mr. Kenneth Ray Coe: That it does not apply to terminally ill cancer patients designed to use Laetrile under their physician's care.

Justice Byron R. White: What about Heroin?

Justice Thurgood Marshall: When and where do you get that from?

The statute doesn't say it.

Mr. Kenneth Ray Coe: Your Honor, the statute --

Justice Thurgood Marshall: The regulations don't say it.

Mr. Kenneth Ray Coe: Oh, I certainly agree with that.

Justice Thurgood Marshall: Well, did anybody see it before the Court in this case?

Mr. Kenneth Ray Coe: No.

Justice Thurgood Marshall: So it's brand new?

Justice Byron R. White: And you would say that same thing as -- about heroin or cocaine?

Mr. Kenneth Ray Coe: It is my -- no, I do not have a heroin or cocaine case, Your Honor, so I would not discuss that at all.

I do understand --

Justice Byron R. White: No, but you are saying it about oral -- about Laetrile taken orally.

Mr. Kenneth Ray Coe: No, we're just discussing the intravenous --

Justice Byron R. White: I know, but I thought my brother Rehnquist asked you about -- wouldn't you take the same position with respect to Laetrile taken orally?

Mr. Kenneth Ray Coe: I would take the same position.

Justice Byron R. White: Yes, yet the Court didn't decide that did it?

Mr. Kenneth Ray Coe: The Tenth Circuit did not decide that.

Justice Byron R. White: Yes, but you would take the position with respect to the oral ingestion as Laetrile but not heroin, even though it's a terminally ill cancer patient who wants it.

Mr. Kenneth Ray Coe: It is my understanding totally outside of anything I know from this case that in England, heroin and some other opiates are being used for terminally ill cancer patients and the reason it's being used is because they determine that there's nothing that can be done to help them and it will take them off some of the really mind-deadening drugs.

So, to that extent --

Justice Byron R. White: I suggest you stay with microphone, sir.

Mr. Kenneth Ray Coe: I'm sorry.

Justice Byron R. White: When you answer questions.

Mr. Kenneth Ray Coe: I would like to address if I may next the constitutional aspect in this particular case.

The lower court, the District Court found that to deny the use of Laetrile to terminally ill cancer patients violated their right to privacy.

The Tenth Circuit Court of Appeals did not rule upon this issue and as the court has been informed neither did it rule upon the issue of the grandfather clause.

As to the constitutional issue, the argument, the decision of the District Court was made that the -- this Court's decision in Roe versus Wade and likewise in Doe versus Bolton both abortion cases justified the extension of a right to privacy to a healthcare context.

Now, as we've briefed, it is the position of the respondents that the intent and spirit of both Doe versus Wade and Roe versus Bolton established that they are in healthcare context.

For instance, the health of the mother in Doe versus White as mentioned over and over again, and in Doe versus Bolton, Justice Douglas of course, Mr. Justice Douglas in his concurring opinion enumerated the right to careful one's own health as a fundamental right.

It is our position that if in fact the right to healthcare to make a determination as to the care of one's own body under medical supervision is a fundamental right in fact then the petitioner -- well, the respondents in this case plaintiffs below have a right to use Laetrile under the court's orders and within the court's limitations as they previously been enunciated.

Now, in order to overcome this, the Food and Drug Administration must establish a compelling state interest.

And in this case, that compelling state interest has been enunciated as more of a desire to maintain a system than to reach the merits of the issues.

Justice John Paul Stevens: Mr. Coe, you seem to concede that the constitutional right would not exist without the doctor's supervision or do you?

The only constitutional right to take this drug in a particular way of a doctor supervises.

Mr. Kenneth Ray Coe: Your Honor, I have only argued within that context because that is within the context of the lower court's decision and outside of that, I don't think --

Justice John Paul Stevens: If you acknowledge that the state can impose a regulatory control for the safety even if the terminally ill of cancer patient by saying the doctor has to supervise it, why would not the Constitution also give the state the power to say well, certain kinds of drugs, heroin, marijuana, whatever it might be, Laetrile, cannot be use for these people.

What's the difference between a flat rule against a particular kind of drug and the condition that the doctor approved of it in terms of constitutional terms?

Mr. Kenneth Ray Coe: I think it's somewhat analogous to the decision in Roe versus White in which this Court made the determination that during the first trimester of pregnancy, because of the facts and circumstances produced that there was no justification for a compelling state interest, and therefore, then abortion may be have without any interest to the state at all.

And then after that particular point in time, the compelling state interest came into play.

And I think in this case, it's the same thing.

In this case, if you have a patient who is not terminal, who is not been diagnosed as such by his doctor, and to be lead away from possibly useful orthodox therapy to Laetrile --

Justice John Paul Stevens: Just assuming the first of my question, they had been diagnose as terminally ill by the doctor, but then the question is do they -- why did they need doctor supervision to take the drug any more than they need?

Why is that anymore acceptable than FDA prove of the particular drug to be taken?

Mr. Kenneth Ray Coe: Your Honor, that is a -- that was a decision rendered by the Tenth Circuit that they have to have medical care.

I personally and the patients in this case are of the opinion that they should be subject to medical care because they're on very bad condition, they need continuing supervision.

Now as to what actual legal effect that has, as to the constitutional --

Justice John Paul Stevens: What if they live -- what if Oklahoma had a state rule that said that be a doctor be guilty of malpractice if he prescribe Laetrile because I have not been approved by the FDA?

Would that -- I suppose such a rule would be unconstitutional in your view.

Mr. Kenneth Ray Coe: Yes, Your Honor.

Justice John Paul Stevens: Yes.

Mr. Kenneth Ray Coe: As a matter of fact, Oklahoma is one of the 19 states I believe that has now legalizing this Laetrile.

The decision of the District Court is relation to the constitutional issue has been pretty well explained up to this point.

Basically, it is the right to privacy as enunciated Roe versus Wade, Doe versus Bolton, the fact that there is no compelling state interest when the case is considered in the terms of terminal cancer patients who have been declared by their doctors to past the stage where they going through death's door.

In their application, in their instance, there's no possible application of a compelling Government interest that could have an effect.

As to people who have not been designated as terminal cancer patients, as to the those who not have some other help in the compelling state interest might come in and there is no problem in this particular case of rendering a decision to that effect.

I like to address the decision by the Tenth Circuit Court of Appeals before I finish if it please the Court.

Justice Harry A. Blackmun: Mr. Coe, at this point, you always spoken of the doctor.

Do you mean by that a medical physician, would it cover the chiropractor, an osteopath, a naturopath?

Mr. Kenneth Ray Coe: As a matter of fact, Your Honor, the District Court in one of its previous orders in which he instituted the affidavits system which is the system in which an individual to obtain Laetrile has to have an affidavit from his doctor to demonstrate the he has in fact a member of the class.

Judge Bohanon limited to medical doctors M.D.s.

Justice Harry A. Blackmun: What is your position?

Mr. Kenneth Ray Coe: And I do not -- that's my position Your Honor.

The Tenth Circuit's ruling which was made to a certain extent or completely without any authority and support of it made the determination that Laetrile should be used by terminally cancer patients and could be for the reason that the term “safe and effective” do not have any meaning to terminal cancer patients.

As to effective as I've already said, I certainly agree.

There is no efficacious treatment to cancer --

Chief Justice Warren E. Burger: Is the Act to the contrary?

Mr. Kenneth Ray Coe: I'm sorry, Your Honor?

Chief Justice Warren E. Burger: Is there a support in the Act for that?

Mr. Kenneth Ray Coe: That is does not apply?

Chief Justice Warren E. Burger: Yes.

Mr. Kenneth Ray Coe: There is no support in the Act itself or anything in the Act just flat out adds terms requirements for safety and efficacy.

The administrator -- the Commissioner of Food and Drugs just had to apply the Act and therefore has added administrative gloss to it.

But there's nothing in either the Act no where the administrative gloss which gives an exempt -- an exemption for terminally ill cancer patients with the exemption of common sense.

And I believe that what the Tenth Circuit was using when it made its decision.

Justice Byron R. White: You didn't -- this wasn't your position in the Tenth Circuit?

Mr. Kenneth Ray Coe: It was not.

The Tenth Circuit opinion found that safe and effective did not have meaning to terminal cancer patients.

Terminal, it is submitted to this Court does not have meaning or -- if efficacious does not have meaning to terminal cancer patients.

The term safety to terminal cancer patients can in effect have no more meaning than nontoxic, and I think the record amply demonstrates that Laetrile was nontoxic.

I think it demonstrates as nontoxic both as to liquid and to tablets.

But based upon the Tenth Circuit's opinion, their argument is made as this time that is nontoxic only as to the liquid form.

The record is replete with that.

The judges -- the lower court's decision is replete with that.

If there are no questions, I have no --

Justice Harry A. Blackmun: I think the Solicitor General -- part of it was to brief as to --

Justice John Paul Stevens: Mr. Coe, I have one other question, the constitutional argument.

You make the same argument for -- if -- would it apply equally to one who is not a terminally ill cancer patient?

Mr. Kenneth Ray Coe: No.

The reason I said it would not, Your Honor, is because in this particular -- in this particular instance, the state has a legitimate interest --

Justice John Paul Stevens: But if it's nontoxic --

Mr. Kenneth Ray Coe: I'm sorry?

Justice John Paul Stevens: But if it's nontoxic, they don't know why it would be equally.

Mr. Kenneth Ray Coe: I do not disagree and nor does this case disagree, nor does the lower court's opinion's disagree with the Act -- with the Food and Drug Act or the intent of it as to safety and efficacy.

The disagreement is that those two terms have been very rigidly structured by the Food and Drug Administration to not allow what should be a very obvious exclusionary reception from the Act.

In this case, we do not object to the fact that it is limited.

The plaintiff class is composed of terminally cancer patients and that is all the case before the Court.

Justice Potter Stewart: Of course, if it is under the 1962 grandfather clause, then it's permissible for use by anybody, isn't it?

Mr. Kenneth Ray Coe: That's correct, Your Honor.

Rebuttal of Wade H. McCree

Chief Justice Warren E. Burger: Very well.

Mr. Solicitor General, do you have anything further?

Mr. Wade H. McCree: I just have this Mr. Chief Justice in response to Mr. Justice Blackmun's question and I was unable to give him the citation.

In fact, I told him I wasn't aware of it.

On page 163-A of our petition for certiorari, we state that the court in Bentex Ulcerine held at 469 F. 2d at 878 that a party seeking to shows that a drug comes within the grandfather exemptions, “Must prove every essential fact necessary for invocation of the exception.”

Justice Thurgood Marshall: General, I got one question or rather I need some help.

On this limiting it to the terminally ill, why wouldn't that -- I'm not espousing this.

But couldn't an equity court as this Court was just drawn its ability to provide remedy?

Mr. Wade H. McCree: I think it could, but this is a constitutional determination that it may --

Justice Thurgood Marshall: That's worried me.

Mr. Wade H. McCree: Worries me, too.

Justice Thurgood Marshall: Okay.

Mr. Wade H. McCree: If it please the Court, the Government submits its case on its brief.

Chief Justice Warren E. Burger: Thank you gentlemen.

The case is submitted.

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