Cases by Issue - State Regulation of Business

American Trucking Assns., Inc. v. Michigan Pub. Serv. Comm'n - Oral Argument

Fri, 09 Jan 2009 14:49:00 +0000

Case:

American Trucking Assns., Inc. v. Michigan Pub. Serv. Comm'n

Media File:

03-1230_20050426-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Robert Digges, Jr.

Chief Justice Rehnquist: We'll hear argument now in American Trucking Associations v. Michigan Public Service Commission and a companion case.

Mr. Digges.

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

This case is a challenge to Michigan's $100 per truck flat annual fee that is imposed on all trucks that are registered to do point-to-point operations in the State of Michigan.

We submit that this fee, this flat per truck fee, has the same impermissible effects on interstate commerce as the two flat truck fees that were struck down by this Court in American Trucking Associations v. Scheiner.

In the American Trucking Associations v. Scheiner case, this Court looked at the practical effect of these fees and found that because of their unapportioned structure, that the fees had four interrelated types of impermissible effects on interstate commerce.

First, the Court found that these kinds of flat fees were a financial barrier against out-of-state motor carriers even coming into the State that imposed the... the fee.

There's no question in this case that the Michigan flat fee has the same kind of protectionist quality.

Justice Souter: Well, it... it does for trucks that want to deliver things within the State of Michigan.

It doesn't for anybody else.

Mr. Digges: Yes, it... it discriminates and it... it has an exclusory effect on trucks... out-of-state carriers that want to compete in the... and bring their trucks across the... the border of Michigan and compete against local carriers for intrastate hauls.

Justice Souter: It would have that... it certainly has that tendency.

Do we have... do we know in fact what the effect is?

Is it deterring anybody?

How many trucks does it affect?

Mr. Digges: There was not a trial below.

So we don't have that fact.

We believe that as in the Scheiner case, these... these tendencies are inherent there.

Because of the structure of the fee, it not only has this effect, it has what this Court called a hydraulic pressure effect, and that is to... for carriers, once they have paid this fee as an entrance fee, to pull their trucks out of interstate commerce and to concentrate them into... in the State of Michigan in the local activities.

And that... in fact, the State acknowledges that.

Below, the State said that motor carriers should allocate or dedicate their trucks to the State of Michigan in order to avoid these consequences.

And even the Michigan Court of Appeals recognized that, saying a local carrier would be discouraged from operating in interstate commerce.

Justice Scalia: Of course, it also... I mean, you say it... it favors the in-state... intrastate carrier because if you're doing nothing but intrastate carriage, you... you amortize the $100 over many more miles, whereas the interstate carrier, much of whose business is out-of-state, doesn't do that.

On the other hand, you can certainly argue that... that this tax discriminates against intrastate carriers in... in another respect, that is to say, interstate carriers who... who do nothing within the State do not pay it, whereas the... the Michigan carrier that does a lot of interstate business but if he does one piece of intrastate business... interstate business, he still pays it.

Isn't that right?

Mr. Digges: Well, Your Honor, I think what... what that's saying... and I know that was the argument made in the Solicitor General's brief... is that you can discriminate against one component of interstate commerce, those carriers that want to actually compete and do intrastate business in the State, as long as you give a benefit to another component of interstate commerce, those who just wish to operate in the... in the State of Michigan in interstate commerce.

Justice Souter: Well, it's not so much that you necessarily can do it, but it... it sort of interrupts the... the kind of the a priori reasoning and you're thrown back on a... on... on a practical effects analysis under Pike.

Mr. Digges: No, Your Honor.

I think what happens is that... that there are the segment of carriers that would like to compete against intrastate carriers.

The fact that other carriers may be getting a break in terms of regulatory fees... and we don't know that to be the truth, getting the other interstate carriers.

It's the Boston Stock Exchange, and I think it was said again in the Scheiner case that... that you can't discriminate among interstate carriers.

And as we pointed out in our brief, you could set up a situation in which a... a State discriminated in favor of interstate carriers in situations or industries where their locals had no interest in competing, but where their... their locals were interested in competing, they could set up a discriminatory system.

So you can protect timber industry in... in Oregon and--

Justice Stevens: But may I ask this question?

Suppose you have an interstate carrier that does 100,000 miles of business in Michigan and you have an intrastate carrier that does a 100,000 miles of business in Michigan.

They both say the... pay the same tax, don't they?

Mr. Digges: --If they each do 100,000 miles of intrastate business in Michigan--

Justice Stevens: Yes.

Mr. Digges: --they would pay the same flat fee.

Justice Stevens: They would both pay the same tax, both the intra and the interstate.

Now, that doesn't sound to me like discrimination against either one.

Mr. Digges: If... if this... if this tax was apportioned based on mileage, it would not be discrimination, but unfortunately, it is not and--

Justice Stevens: No, but I'm just saying if the intrastate and interstate carriers both have the same intrastate mileage, they both pay the same tax.

Mr. Digges: --And we... we would... and again, if this was a mileage-apportioned fee, it would be... it would be fine.

But the fact is as in Scheiner, the out-of-state carriers, because the interstate carrier is... is operating--

Justice Stevens: Yes, but you might have an intrastate carrier that does a smaller amount of mileage, only 50,000 miles, and an interstate carrier that pays... does 100,000 miles.

They both pay the same tax too.

And everybody is treated alike on their intrastate business.

Mr. Digges: --That would be true but that--

Justice Stevens: And the tax only operates on intrastate business.

Mr. Digges: --The factual situation is going to be that the interstate carrier is just not going to have the opportunity to do as much business in Michigan as the intrastate carrier.

Justice Scalia: Well, it seems to me you should have introduced some evidence on that point.

I mean, it... it really is an assumption of your unfairness argument that purely intrastate carriers do significantly more intrastate business than interstate carriers who choose to do some interstate business.

Now, does that strike you as self-evident?

It does not need any--

Mr. Digges: Yes.

Yes, Your Honor.

Justice Scalia: --demonstration?

Mr. Digges: It does strike me as self-evident.

In fact, to courts below... we have... we've made this argument.

We've seen this argument now.

The cases have called it intuitively obvious.

And from the discussion of... in the Scheiner case and from the discussion in the Nippert case, the very difference between interstate and intrastate commerce means that on average the interstate carrier is just not going to use the State's facilities as much as the in-state carrier.

Chief Justice Rehnquist: Wouldn't we be better able to decide this question after a trial rather than speculation on both sides?

Mr. Digges: I don't think a trial is necessary because, as I say, this... this Court quoted Justice Frankfurter clearly, and I think the Solicitor General in his brief says that on average the out-of-state carrier is not going to get as much benefit from this fee.

This is a variable cost fee.

In effect, the out-of-state carrier is having to pay more than its fair share of the cost of the... of the State's regulatory system.

And again, that's something that was accepted in the Scheiner case, accepted in... in the Nippert case.

And the intrastate carrier... every time that it operates in the State, it is using that privilege.

Chief Justice Rehnquist: Well, Nippert was over 100 years ago, wasn't it?

Mr. Digges: I think the Nippert case was from the 1940's I believe.

In any event, as we've been discussing--

Chief Justice Rehnquist: It seems like 100 years ago.

[Laughter]

Mr. Digges: --It's--

Justice Ginsburg: Mr. Digges, this... the... the... there was a question about the ramifications of the position that you're presenting.

That is, there are many situations in which there is some kind of licensing fee that is imposed on everyone, the same dollar amount, although some people who are licensed will be doing because in other States and have to get licenses there as well.

The example that was featured in the... in the briefs on the other side of the lawyer who is licensed, say, in Massachusetts and also in D.C. does not get any break on his D.C. Bar admission because he is also admitted in Massachusetts, and in fact, does most of his practice out-of-state, out of the District.

Mr. Digges: --Yes, Your Honor.

I know that... that example was given.

I think there are a variety of flat fees that would be unaffected by this.

There are fees that would be administrative charges and... and if all the State is doing is charging, for example, the cost of a background investigation or the cost of a truck inspection, a fixed cost, then it's fair to ask the carrier to pay a fixed fee or to ask the taxpayer to pay a fixed fee.

With respect to the bar fees, they are obviously different than the trucking industry and... and the taxation of an instrumentality in interstate commerce.

But we think that there may be impracticalities in apportioning a bar fee.

You could have an attorney in his office in Virginia that is working for a California customer or California client that is being... for a case that is being tried in the court system of Oregon, and then for transaction work, he could be working for a customer or a client in... in Missouri for... a multi state.

So it may be difficult to apportion fees.

We haven't really examined that.

But we know from this Court's decisions that... that is easy and can be apportioned for truck fees, and truck fees... this Court said in Scheiner that the technology is now available to look at the extent of the activity and the taxpayer in... in... of the truck in the State, and later on in a subsequent decision said that you can easily track large physical objects over States.

So you can apportion these fees on trucks to their mileage in the State, to their loads, to the gross revenue associated with the--

Justice Ginsburg: But the Scheiner case didn't make a distinction based on in-state activity.

I thought that that... that flat fee was applicable to every motor carrier that went on the roads in Pennsylvania.

Mr. Digges: --That is accurate, Your Honor, but... but nominally Scheiner... for instance, the Pennsylvania Supreme Court in the Scheiner case did say that... did uphold the fee because they said only Pennsylvania could charge for the privilege of using Pennsylvania's highways.

So like a lot of... like all interstate commerce, you can always... as... as the Court said in Nippert, you can always find... carve out a local activity to say that this is going to be the focus of the tax.

I think a problem here is with the... the approach taken by the State and the Solicitor General is they suggest that you go back to the days in which you're trying to draw a line between interstate and intrastate activity, this time not because the intrastate activity is going to be immune from the tax, but this time because you're going to have some separate, different kind of test applicable to something that clearly is subject to Commerce Clause protections, but is... is, in their view, subject to a more lenient Commerce Clause protection.

And I don't think this Court wants to retreat back to the days of having to draw a line between interstate and intrastate commerce and... and then having separate tests.

If there are no more questions, I'd like to reserve the rest of my time for rebuttal.

Thank you.

Argument of James H. Hanson

Chief Justice Rehnquist: Very well, Mr. Digges.

Mr. Hanson.

Mr. Hanson: Mr. Chief Justice, and may it please the Court: In contrast to the ATA case, the question before the Court today in the Mid-Con case is whether the fee on vehicles operating solely in interstate commerce is preempted by 49 U.S.C., section 14504.

Justice O'Connor: It's the same fee we're talking about.

Mr. Hanson: It is--

Justice O'Connor: But a different theory of invalidity.

Mr. Hanson: --It is not the same fee.

The... the fee under subsection (1) that ATA is arguing about is an intrastate fee charged only to--

Justice O'Connor: Intrastate.

Mr. Hanson: --carriers that engage in intrastate activities.

Justice O'Connor: Okay, and yours is the interstate fee.

Mr. Hanson: The subsection (2) fee under 478.1--

Justice Kennedy: And your fee applies to all Michigan-plated vehicles.

Am I correct about that?

Mr. Hanson: --That are operating solely in interstate commerce.

Justice Kennedy: Yes.

Justice Souter: Do... do I understand that the two distinctions in what is done with the... or the way the fee is collected and what's done with it is that the... the fee is charged against the... is it the operator as opposed to the owner, if there is a distinction?

Is... is that correct?

Mr. Hanson: All of the fees under subsections (1) and (2) are charged against the motor carrier--

Justice Souter: The carrier.

Mr. Hanson: --or--

Justice Souter: That's the term I should use.

Mr. Hanson: ----motor carrier, not to the owner.

Justice Souter: Which may not be the owner.

And number two, as I understand it, as distinct from the registration fee, this fee goes to a different State department.

Is that right?

Mr. Hanson: That's correct.

Justice Souter: Now, let... that's... that's a premise for a question I want to ask you, and the question is in economic effect, is there any difference really between charging this $100 fee with those differences from the registration fee and simply jacking up the registration fee by $100?

Would there... would there be any economic difference to the... to the public or... or indeed even to the carriers if they simply jacked up the... the registration fee by $100?

Because the... the registration fee is passed on to the carrier, if it's not the owner, and the carrier... it doesn't make any difference to the carrier whether the... whether the State diverts the $100 up front or... or divides the... the registration fee after it's paid.

So is there any economic difference?

Mr. Hanson: Yes, there is and the reason why there is a difference is that the... the fees that are paid for plating are under the... under the International Reciprocity Plan, the registration plan, the IRP.

And that is an apportioned fee.

It is charged to all vehicles, all commercial motor vehicles, regardless of whether it's for-hire or private, regardless of it's in state or... of interstate.

So everybody pays their apportioned amount based on mileage.

Justice Souter: No, but that... that... maybe I don't understand.

That... that tells us what happens to the money after it's paid, but it doesn't make any difference to the person who is paying the money, does it?

Mr. Hanson: Yes, it does.

Justice Souter: Except that he only has to pay in one place, and... and if they--

Mr. Hanson: He pays--

Justice Souter: --increase the registration fee, he'd only have to pay in one place, once.

Mr. Hanson: --But he would only pay the fee based on his mileage in the State.

It is not a flat fee if it is put onto the IRP fees.

Those--

Justice Ginsburg: Who... who sets the fee for the plating?

Mr. Hanson: --The... the State does.

It is administered by the Michigan Secretary of State--

Justice Ginsburg: So--

Mr. Hanson: --but I believe all of those are statutory fees.

Justice Ginsburg: --you could have... unlike the... the fee, the $10 fee, that--

Mr. Hanson: The SSRS.

Justice Ginsburg: --the Federal cap, this would... for plating it could be anything each individual State chooses it to be?

Mr. Hanson: In terms of the plating fee?

Justice Ginsburg: Yes.

Mr. Hanson: Each State is free to charge its... its own amount as the plating fee.

Justice Souter: Sure, but it... so... so regardless of what Michigan does with the apportioned amounts, the amount it charges to the... to the owner, in the case of the... the plating fee, is... is simply set by the State of Michigan.

Mr. Hanson: That is--

Justice Souter: Yes.

Mr. Hanson: --that is correct.

Justice Souter: So what... and... and the... the virtue of the apportionment is that the... that the owner or the... or the owner, I guess in this case, does not have to pay fees in 49 other States.

Mr. Hanson: That is correct.

Justice Souter: But he doesn't... it doesn't matter to... that's the value to him.

It doesn't matter to him how they apportion whatever that fee is that Michigan charges.

Mr. Hanson: If they apportion it, however, it is... it is not... it does not... if they put it into the IRP, it is not part of the registration process.

The thing that the--

Justice Souter: But who... I mean, is... that's... that's fine as a matter of administration, but in terms of the... the end effect on the person who has to pay it and on the consumers to whom it is ultimately passed on, what difference does it make?

Mr. Hanson: --Well, the... the difference for the person who is paying it under IRP is that if only 20 percent of their interstate miles as a solely interstate operating carrier, if only 20 percent are in the State, they would, in fact, only pay $20 per vehicle.

Justice Breyer: Can I ask a quick question?

The... there are three things.

Were... were you finished?

Justice Scalia: No, I don't think he... I didn't--

Justice Breyer: Sorry.

Justice Scalia: --I don't understand your answer.

If you were finished, I don't understand.

Justice Breyer: Okay.

Mr. Hanson: If it's... if it is put into a plating charge as opposed to a registration... part of the registration of a carrier for the privilege or the opportunity to carry on interstate trucking activities in the State of Michigan, that is the flat fee that we're talking about.

Under the SSRS we believe that $100 charge exceeds the $10 maximum and is therefore preempted.

If they put it into the IRP, that... IRP is charged against the owner of the vehicle, paid against the Secretary of... paid to the Secretary of State.

It is not a qualification under... for the privilege of engaging in interstate trucking in the State of Michigan.

The SSRS sets up the standards by which a carrier becomes qualified to operate in the State.

Michigan exceeds those standards.

If you put those fees into the IRP fees, then the carrier... or then the owner of the vehicle pays only the proportionate amount based on his mileage in the State.

Justice Stevens: May I ask this question?

Supposing the... Michigan changed its system and said we're going to charge you $90 for... as a plating fee.

We're only talking about vehicles that are plated in Michigan.

We're going to charge you $90 for a plating fee and now we're going to take 10... what used to part of the $100 and another $10 registration fee.

Would that be permissible?

Mr. Hanson: It would be permissible because the... if the $10 is charged to the carrier as part of the registration process, in order to be qualified to engage in interstate trucking.

The $90 would be charged to the owner of the vehicle and would be paid on an apportioned basis under IRP.

Justice Souter: Okay.

What if he said $20 instead of $10?

Mr. Hanson: If he said $20 was going to be put towards the... the State instead of... instead of $100?

Justice Souter: Yes.

Mr. Hanson: And $80 towards IRP?

Justice Souter: Yes.

Mr. Hanson: In that case, that would still violate the... the SSRS, if it is done as part of the registration process, which is what Michigan does.

Michigan... even though you're properly SSRS registered, Michigan still requires, under its SSRS form... it directs the carrier to specifically identify vehicles by make, model, and serial number to obtain a decal by paying $100 for that fee.

If they pay $20, that exceeds the $10 maximum that Congress set up in the SSRS in order to be qualified to operate in interstate trucking in the State of Michigan, as an interstate carrier in... in Michigan.

Justice Scalia: But that... that assumes it's an SSRS charge, and the State denies that it... it has anything to do with SSRS.

Don't you have to establish that it's part of the SSRS program?

Mr. Hanson: I think what you have to do is you have to look at what the... the standards do.

The... the registration standards in the SSRS are set up as the process by which a carrier has the privilege to enter into interstate trucking activities in Michigan.

When you look at the statute--

Justice Souter: Okay, but what... what if the State says, you can enter... enter into interstate activities for nothing?

We're simply going to increase the registration fee by $100.

Couldn't the State do that?

Mr. Hanson: --The State could do that and that would be perfectly permissible.

Justice Souter: So this is pure formalism.

Mr. Hanson: It is not pure form.

Any... what... what Congress did was say that in order to qualify a carrier... they were concerned about the burdens.

When ISTEA was enacted in 1991, they were concerned about the burdens on carriers of individual State registration requirements.

And they sought to... to alleviate that by making it so that carriers could only... would only have to register in one State so they could do business in all States on an interstate basis.

Justice Scalia: Maybe they sought to but maybe they didn't succeed.

As I read the statute, it... it really applies to the... the limitation of $10 only to those fees that are SSRS fees, and these are not.

So maybe there's... there's a hole in the Federal statute.

Mr. Hanson: And I don't believe that's the case, Justice Scalia.

Justice Scalia: You're trying to make the Federal statute work sensibly, but--

Mr. Hanson: Right.

Justice Scalia: --I hate to tell you, but not all statutes work sensibly.

Mr. Hanson: Right.

I think what you have to do, though, is go back and look at what Michigan does.

Michigan has a... a State statute, 478.7(1), that says in order to operate to carry property on an interstate basis in Michigan, you must register with the PSC and you must pay the required vehicle fees.

The registration standards are what they do as in accordance with SSRS: insurance, service of process, and operating authority.

Then you have to pay a fee, and the fee is limited to $10 per vehicle.

In the case of Michigan, those vehicle fees are set forth in two different sections of the statutes.

One is.7(4), which is the $10 SSRS fee.

The other one is subsection... it's 2(2).

That fee is $100--

Chief Justice Rehnquist: Thank you, Mr. Hanson.

Mr. Hanson: --in order for a Michigan-plated vehicle to engage in interstate commerce.

Chief Justice Rehnquist: Your time is expired.

Mr. Hanson: Thank you.

Argument of Henry J. Boynton

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

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

The petitioner, American Trucking, began its reply brief with the claim that the central reality in this case is that the Michigan intrastate fee places significant burdens on interstate commerce.

The Michigan Court of Appeals rejected this claim squarely, saying that as a matter of... that that was a matter of pure speculation.

There's no evidence in the record before this Court that the trucking companies'route choices are affected by the intrastate fee.

Furthermore, there is no evidence in the record that the intrastate fee keeps anyone out from engaging in intrastate trucking in Michigan.

Justice Scalia: It sure does make sense to me, though.

Surely it's the case that a company that does nothing but intrastate Michigan business will, by and large, log in many more miles intrastate than a company which does interstate business but part of its business is intrastate Michigan business.

I... I just... it seems to me obvious that--

Mr. Boynton: Well, the Michigan Court of Appeals said that that very well may be the case, but they pointed to the fact that there were no facts to support that finding.

And this is completely different than in Scheiner.

In Scheiner you had a... a trial, you had evidence before the court.

This Court noted that the... the cost to an interstate trucker in that situation was five times greater than the cost to a trucker that was in Pennsylvania.

You just simply don't have those facts here.

What you have is a discrete or a distinct local activity that is something that doesn't affect the interstate commerce.

Justice Scalia: --It... it's the case that a company that does only intrastate Michigan business logs all of its miles on... in Michigan.

Right?

No miles outside of Michigan.

Mr. Boynton: That's right.

Justice Scalia: And it seems to me it's obvious that a... a company that does interstate business does not log all of its miles in... in Michigan, and likely... likely... very likely does... does less miles in Michigan than... than a purely intrastate Michigan trucker.

Mr. Boynton: Well, Justice Scalia, that very well may be true, but we don't have any way of... of qualifying or quantifying the burden here because we don't have those facts.

Justice O'Connor: Is it difficult to apportion the intrastate fee based on the number of miles traveled intrastate?

Mr. Boynton: Well, Your Honor, I... I think it is very difficult to do that.

As the United States noted in its brief, they didn't think that mileage would be appropriate because this... this fee doesn't support the maintenance of the highways.

What this fee does is allows trucking companies or allows that truck to operate that truck in intrastate business.

So mileage isn't appropriate.

Our position is that mileage isn't appropriate because it's next to impossible to try and figure out.

What do you compare it to?

Do you... do you compare it to interstate miles?

Do you compare it to a ratio of interstate... intrastate to interstate?

And if you do that, how... how can you come up with a accurate picture of, you know, what the value of that license is in Michigan?

It may be--

Justice O'Connor: Does it make any difference how high the... the fee is set?

If it were $10,000 a truck, does that raise any concerns that are different?

Mr. Boynton: --Well, Your Honor, the Michigan Court of Appeals had taken the position that this was a fee, not a tax, and under a fee... if... if a fee was $10,000, if the expenses matched the... the revenue from it, well, then it... it would be a... could be sustained as a fee.

Now, if were a tax--

Justice Scalia: You... you defend that position, that... that it doesn't violate the Commerce Clause so long as it's a fee not a tax?

Mr. Boynton: --Your Honor, we think that the... if it's a fee and not a tax, the Michigan Court of Appeals applied the correct standard, and that was the standard of Pike v. Bruce Church.

And you would look to the... whether the statute regulated even-handedly, whether it affected a legitimate local--

Justice Scalia: Whenever it's a fee, not a tax, you immediately go to Pike Church.

Mr. Boynton: --I think that... that that was what the Michigan Court of Appeals--

Justice Scalia: I know.

I know that's what they said.

Mr. Boynton: --Yes, and I... I think that's a--

Justice Scalia: I found it very strange.

Mr. Boynton: --I think that's an appropriate manner in dealing with it.

But if you... if you look at the Michigan Court of Appeals opinion--

Justice O'Connor: What makes it a fee instead of a tax other than the court saying so?

Mr. Boynton: --Well, first of all, it provided a direct benefit to the intrastate truckers.

They were able to operate in the State of Michigan.

Second of all, they pointed out that it was in relation to the services granted, being able to do that, and then the third component would be the voluntariness, whether they could agree to... they didn't have to engage in intrastate trucking--

Justice Scalia: You could say the same about a tax.

You could say, you know, you only have to pay this tax if you operate in Michigan.

You don't want to operate; you don't have to pay it.

And you could also say unless you pay the tax, you cannot operate in Michigan.

Does that make it a tax or a fee?

Mr. Boynton: --Well, I think in the Michigan Court of Appeals opinion, it... it was a fee, and I think... I think what we come back to, Your Honor, is the idea is there a specific class of individuals or businesses that are benefitted.

And I think that that's the distinction between a fee and tax.

Also, a tax is a general revenue-raising measure, whereas a fee is not.

And that's another distinction of... of a tax.

And indeed, this Court... in National Cable Industry v. the United States, which we cited in our brief, this Court said as whether an exaction is a tax or a fee depends on whether its purpose is to raise revenue or regulate an industry or services.

One of the things--

Justice Kennedy: I'd like to get back just for a moment--

Mr. Boynton: --Yes, Your Honor.

Justice Kennedy: --to the answer you gave about apportionment because I wasn't quite sure I understood the answer.

You said, well, apportionment is very difficult.

What are you supposed to do?

What are you... what's the base?

Well, and you said, should we apportion against... between in-state and out-of-state, and I would think the answer is yes.

That's the whole point.

Mr. Boynton: Well--

Justice Kennedy: And if we're talking about mileage here, maybe this is something that's eminently susceptible of apportionment.

Now, it may be that administratively this is just too expensive.

That may be... that may be a very valid argument.

But so far as saying that there's no basis for apportionment, I didn't understand your answer.

Mr. Boynton: --Well, I... I... maybe I misspoke myself.

What I really meant to say was it would be very difficult to do.

And in our joint appendix... in the joint appendix--

Justice Kennedy: It would be difficult to do administratively.

But... just because of the cost of collecting all the--

Mr. Boynton: --Well, Your Honor, I think that you got to look at what's the total cost here.

The cost is not only to the administrative aspect by the State, but this imposes another cost on the truckers.

Justice Kennedy: --That... that... I agree that that is expensive.

However, it seems to me that it would be easier to do it with trucks which have miles than with--

Mr. Boynton: But, Your Honor, the problem is--

Justice Kennedy: --than with, say, attorneys or accountants or whatever.

Mr. Boynton: --Your Honor, the problem with that is that this fee, this intrastate fee, does not go to maintain the highways as it was in Scheiner.

They make the argument that it's very easy that the mechanism... they, being American Trucking, makes the argument that it's very easy to just start logging up the miles and... and you have the mechanism there.

But the difference between Scheiner and this case is that in Scheiner you were measuring all intrastate miles, any miles traveled within that State.

And there's a mechanism available administratively to do that.

The IRP requires that.

But here you're not logging all intrastate miles.

You're only logging those miles in the State that involve a point-to-point delivery, from one intrastate point to another.

So you don't... you'd have to get a whole new record keeping or you'd have to keep track of a while different set of miles than you would with respect to the IRP.

And that's the thing that I find striking about this, that the American Trucking Association is basically saying to its members that they want to have them do more record keeping on their part.

Justice Scalia: But the American Trucking Association is... is willing to be thrown into the... into the briar bush apparently.

It certainly involves no... no difficulty for your Michigan intrastate truckers.

All of their miles are intrastate.

And the plaintiffs here say we're... we're willing to... you know, to provide figures showing how much of our carriage was... was exclusively intrastate if you want to apportion.

Mr. Boynton: Well, that may be, Your Honor, but the... the point is... what we're dealing with is a... a fee that has revenues of about $3 million.

And if you have additional record keeping, how much of that $3 million is going to have to be devoted to paying for the administrative costs that are involved?

Justice Stevens: May I ask this question?

Is the fee payable before the... a carrier may engage in business or is it after the carrier has paid?

Is it... is it like a tax that's paid after the year is out?

Mr. Boynton: It's paid before.

They... they have to have--

Justice Stevens: If you had to pay it before, there would be no way to calculate it ahead of time because nobody would have had any mileage.

Isn't that correct?

Mr. Boynton: --I'm sorry.

Justice Stevens: If you have to pay it before the year begins and before you're allowed to engage in the business, you would have no way of measuring the number of miles you're going to travel during the... the ensuing year.

Mr. Boynton: That's correct.

You would have to have--

Justice Scalia: Well, I suppose that's the same thing for the $10 fee for the whatever the acronym is there.

That's paid at the beginning of the year, isn't it?

And it has to be apportioned among the States.

And you don't know how to apportion it at the beginning of the year.

Mr. Boynton: --Now, you're talking about the interstate fee, Your Honor.

Justice Scalia: Right, right.

But I'm saying the same problem arises when you do any apportioning.

Mr. Boynton: Well, it... let me back up.

The reason I asked with you... when you were referring to the $10 fee is because the intrastate fee... we have a $10 component in that as well.

You can obtain a temporary fee for $10 for 72 hours to conduct an intrastate operation.

So the statute in... structurally has some apportionment factor in it.

So you don't have to necessarily buy the $100 intrastate fee decal to conduct intrastate operations.

Justice Scalia: It's like a 3-day fishing license.

Mr. Boynton: I suppose that would be one way--

Justice Ginsburg: How... how does that work in... in practice?

Is it easily accessible?

Suppose the company--

Mr. Boynton: --Well--

Justice Ginsburg: --wants to fill up its truck and... and it said, well, this is going to be... the only haul this season for me, so I want the 3-day permit.

Mr. Boynton: --Yes, Your Honor, you can obtain the permits in advance.

You don't have to have trucks lined up at the border waiting to get a decal or get a permit.

You can purchase them in advance.

So that... that's available to the truckers.

The one thing I should mention, though, is you have to have one... you already have to have one vehicle licensed intrastate.

You already have to have paid the fee on one vehicle, and then you would be eligible to purchase additional temporary permits as the need arose based on seasonal needs or an emergency situation.

So that... that allows the... the statute... I... I would submit to Your Honor, allows some apportioning in and of itself.

Justice Ginsburg: This... this applies only to operations that are both licensed and registered in Michigan.

Is that so?

Mr. Boynton: No.

Your Honor I think is referring to the interstate fee--

Justice Ginsburg: Right, right, yes.

Mr. Boynton: --which is a different fee, which is in the Mid-Con case.

Our position--

Justice O'Connor: Are you going to address the Mid-Con question?

Mr. Boynton: --I'm sorry?

Justice O'Connor: Are you going to address the Mid-Con question?

Mr. Boynton: I was going to do that right now, Your Honor.

The position that the State of Michigan and the Michigan Public Service Commission has is the SSRS does not preempt the interstate fee.

And the reason for that is--

Justice O'Connor: Well, what's the point of the limitation in SSRS to $10 if the State can impose any additional fee it wants just by calling it a different name?

Mr. Boynton: --Well, Your Honor, I think what you have to realize is you have... when you look at the text of the statute, I think what is very clear from reading the text is that the SSRS does not preempt all State fees and charges on motor carriers.

It only preempts those fees and charges that are specifically related to the registration of that motor carrier's interstate authority.

The interstate fee, or the Michigan-plated vehicle fee here, is not preempted because it's a regulatory fee that does not relate to the registration of the motor carrier's SSRS interstate authority.

Justice Kennedy: Of course, it... it does.

Number one, it's somewhat suspect at the outset because it applies only to interstate travel.

Mr. Boynton: Well--

Justice Kennedy: And... and then the... the other vehicles pay $100 for the... for the in-state fees, and so this seems to me that... that on... on its face shows that it's like a registration fee.

Mr. Boynton: --Well, Your Honor, I think a couple things.

Number one, I think that... I believe that if you look at the structure of the Michigan statute, you'll see that under section 2, which contains both the interstate fee and the intrastate fee, virtually all Michigan vehicles that are plated in Michigan... # the effect of it is that all vehicles that are plated in Michigan will have paid this $100 fee.

And furthermore, if you look at section 7 of the Michigan statute, which is 478.7, that involves the registration procedure.

That's specifically applicable to the registration of interstate authority.

And within that section 7, subsection (4) deals with the payment of the $10 fee for... and... and it's to be made by vehicles that are not plated in the State of Michigan.

Justice Breyer: That's... that's the problem.

Mr. Boynton: Well, that's the argument.

Justice Breyer: That's the problem because here we're dealing with the fee to be paid by the people who are plated in Michigan, and it looks like that $100 is the fee for them.

Well, let me... I have a question.

I'm trying to test this.

Suppose that I have a company in Maine.

All right?

And I have... I decide all my... I... I have all Maine plates, by the way.

And I decide I want my... now, let's... one word is license plates.

I'm going to talk about plating.

Another word is the ICC insurance.

Let's call it a decal.

And the third kind of a concept is whatever you refer to in your statute by a fee.

All right?

The $100.

Mr. Boynton: Right.

Justice Breyer: All right.

Now, suppose in Maine what I do with my trucks is I say I want Michigan to be my home State for purposes of... what do you call it?

The SS?

Mr. Boynton: SSRS.

Justice Breyer: Yes.

And so I go to Michigan, and now I pay all the registration fees here.

Do I get a... a certificate of some kind, a decal or something to show I did it?

Mr. Boynton: No.

Your Honor, I... I... you say that you're a Maine company--

Justice Breyer: Yes.

Mr. Boynton: --but your principal place of business is in Michigan?

Justice Breyer: Yes, yes.

So... that's right.

Mr. Boynton: Okay.

And your question is?

Justice Breyer: Do I get a decal after I go through all this procedure?

You have a whole form.

I pay $6 for Alabama.

I pay $2 for Idaho, and... but... but I do it all in one shopping place which happens to be Michigan.

Mr. Boynton: Okay.

Justice Breyer: Then do I get a little certificate to put on the truck to say I did it.

I... I registered my ICC decal everywhere.

Mr. Boynton: If that vehicle... if the vehicle you're registering is plated in Michigan--

Justice Breyer: No, it's not.

Mr. Boynton: --Okay.

You will pay nothing.

Justice Breyer: I know for Michigan.

But I have to pay.

But Michigan is my... I can't ask the question until I get clear on this.

Mr. Boynton: I'm sorry.

Justice Breyer: Don't... when I... when I go under this... this 49 U.S.C. 14504 and I choose a home State--

Mr. Boynton: That's correct.

Justice Breyer: --and I make all the relevant payments to that State, but they distribute, don't I get a piece of paper saying I did it?

Mr. Boynton: I believe so, Your Honor.

Justice Breyer: Fine.

Now, I'm now plated in Michigan, and I make Michigan my home State for this.

And I go and I make... I say, Michigan, I'm going to give you this big check to distribute, but the amount I'm putting here for Michigan, by the way, is zero.

And you say pay me $100.

No.

I'm not going to do it.

So I haven't paid them the $100.

I haven't paid Michigan everything, but I paid $2 for Idaho.

Do I get the decal or don't I?

Mr. Boynton: To get a decal from Michigan, you have to be Michigan-plated and you have to pay the $100.

Justice Breyer: Excellent.

Now, if I don't get the decal, because I didn't pay the $100, then that $100 is a charge that falls within the SSI.

It is a charge for a decal which shows that I registered the ICC and my insurance because otherwise, if it weren't, you'd give me the decal.

Mr. Boynton: Your Honor, we believe that under the... the section 7 of the Michigan law, there is no fee charged for your SSRS.

Justice Breyer: I'm talking about a fee.

I'm trying to... oh, fine.

If there's no fee charged and I didn't pay the $100 and I didn't pay anything else, you'd give me the decal.

But you said you wouldn't.

Mr. Boynton: Your Honor, you have to... you have to... if it's Michigan-plated, that's the triggering mechanism.

It's not the... that's... that's what triggers the $100 fee.

Justice Stevens: Mr. Boynton, may I just... may I just ask this question?

Is part of your position that the Federal statute does not prevent Michigan from waiving the $10 fee on... for this particular purpose?

Mr. Boynton: Our position, with respect to that, Your Honor, is the fact that under section 7 of the Michigan Motor Carrier Act, 478.7, Michigan has no authority to charge a Michigan-plated vehicle any fee at all.

Justice Stevens: Right.

So that... but you're saying to Justice Breyer then is they have waived the $10 and they do it to a narrow class, those vehicles who are plated in Michigan because they've already charged them $100, a very heavy charge for the privilege of being plated.

Mr. Boynton: Well, I don't know if I'm saying that, Your Honor.

I'm saying that the... there's a zero charge, and then there's... there's another charge with respect to a vehicle fee.

The one thing that I need to point out here is that the SSRS is not vehicle-specific.

It talks about numbers of vehicles, but the Michigan decal fee for... or the interstate fee is vehicle-specific.

You have to identify the particular--

Justice Scalia: Is that right?

Let me... let me... I wanted to ask this question to see whether it's vehicle-specific.

Suppose I have nine trucks.

They're Michigan-plated, so I have to pay $100 for each of the nine.

Mr. Boynton: --Interstate commerce.

Justice Scalia: Now, suppose I... suppose I only pay the fee for eight of them.

What happens?

Mr. Boynton: And how do you want to use the truck?

Do you want to use it in interstate commerce?

Justice Scalia: No.

I've paid for eight, but I haven't paid for the ninth.

As I read the Michigan law, it says shall not operate any motor vehicle upon or over the highways of this State while any of the fees imposed by this act remain unpaid.

Now, if... if I can't operate the other eight because I haven't paid for the nine, that sounds to me like a vehicle-specific tax.

Mr. Boynton: Yes, it is.

Justice Scalia: I mean... I mean the opposite.

It's... it's not vehicle-specific.

Mr. Boynton: Oh.

Justice Scalia: I've paid for the eight, and I can't operate at all because I haven't paid for the ninth.

Mr. Boynton: Well, I think administratively that... that wouldn't happen.

I... I think once you go--

Justice Scalia: It seems to me how it reads.

Am I reading the law wrong?

It says, shall not operate any motor vehicle while any of the fees imposed by this act remain unpaid.

Mr. Boynton: --I suppose that if the... for... for nonpayment of fees, a motor carrier risks its authority to operate in the State.

Justice Scalia: At all.

So it's not really vehicle-specific.

Mr. Boynton: Well, I... I think it is.

I would disagree with Your Honor.

Justice Souter: Well, the computation is vehicle-specific, but you're using all the vehicles as hostage for the payment of... of any shortfall.

That's what you're doing, isn't it?

Justice Scalia: So it's carrier-based.

Mr. Boynton: Well, Your Honor, I would have to disagree with Your Honor respectfully.

I think that the... that it is vehicle-specific because it identifies the particular vehicle that's involved here.

And I... I think you have to read the statute, the preemption statute, the scope of what preemption has sought to do here, and not all State fees and charges on motor carrier vehicles are preempted.

Justice Ginsburg: Do you place any reliance in this scheme on the fact that the only people subject to it are people who have their principal place of business in Michigan?

Mr. Boynton: No, Your Honor.

The triggering event for the interstate fee is the plating of the vehicle in Michigan.

Justice Souter: And... and anyone can choose to do that?

I mean, going back to Justice Breyer's example, anybody can say, well, I think I'd like to be plated in Michigan even though I operate in... in other States.

My principal place of business is in another State.

Mr. Boynton: Right.

I think all parties have noted, Your Honor, that the... under the SSRS it's much more stringent, more rigorous--

Justice Souter: No.

I'm just asking about what you do in Michigan.

Mr. Boynton: --Yes.

Yes, you can.

Justice Souter: You really can do that?

Mr. Boynton: You can plate wherever you have contacts with the State.

If your principal place of business is in Ohio but you have trucks going to and from Michigan, that... that would allow you to plate in State of Michigan.

Justice Souter: You... you can plate your whole fleet in Michigan under those circumstances.

Mr. Boynton: You could... you can choose where to plate your feet... plate your trucks, and a number of considerations go into that.

It's not just the license plating fees.

It has everything to do... as we noted in our brief, it could have to do with no fault insurance, the weight limits on trucks.

It's an economic decision and there's a number of different factors that go into that decision of where to plate a vehicle.

In conclusion, I would say that the Michigan Court of Appeals correctly decided this case.

And they... they found that the challenged fees in these cases are regulatory fees, that they serve the critical function of protecting the people of Michigan that use the highways.

And the Michigan Court of Appeals should be affirmed.

Argument of Malcolm L. Stewart

Chief Justice Rehnquist: Thank you, Mr. Boynton.

Mr. Stewart, we'll hear from you.

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

The United States as amicus curiae supports the State in American Trucking and the petitioner in Mid-Con.

With respect to American Trucking, in our view the central question in resolving the constitutional issue is not whether it would be possible to apportion the intrastate fee on a more precise basis.

The question is whether the Constitution requires it.

And in the prior cases that we've cited in our brief, both the older cases dealing specifically with intrastate transportation and the more recent cases dealing with authority to engage in other intrastate businesses, this Court has repeatedly upheld the authority of States and municipalities to charge flat fees for the privilege of engaging in the local business within the jurisdiction during the... the relevant period of time.

And that practice--

Justice Scalia: Gee, that seems to me really to go back on... on Scheiner.

And I thought we tried to get away from deciding Commerce Clause questions on the basis of whether it is interstate commerce or local commerce, you know, the original package doctrine and things that succeeded it.

And you're... you're just dragging back in this... this inquiry into whether it's really interstate or... or rather local.

Mr. Stewart: --Well, with... with respect, Your Honor, I think the Court has certainly abandoned the notion that there is a bright, absolute line between intrastate activities which are subject to plenary regulation by the States without any Commerce Clause inquiry and interstate commerce which is wholly immune from State regulation.

The Court has recognized that the question is more complicated than that.

But in cases like Jefferson Lines, for instance, the Court held that the sales price of a ticket for an interstate bus trip could be taxed in... in its entirety by the State in which the ticket was purchased because the sale of the ticket was regarded as a separate, discrete event properly severable from the underlying interstate transaction.

And the case for severance is all the more powerful here.

That is, here we're dealing not with a... an aspect of an interstate transaction, we're dealing with point-to-point hauls within the State of Michigan.

It's true that those may be undertaken by trucks that also do interstate business, and it's even true that in some instances the intrastate load may be carried on the same truck at the same time that it's also carrying goods between the States.

But the intrastate haul is itself a discrete commercial transaction.

To the shipper it's wholly irrelevant, in most instances, that the... the truck is also doing an interstate business.

And to differentiate this case from Scheiner, one of the things that the Court has looked at in the dormant Commerce Clause inquiry is the risk of multiple taxation.

And the Court doesn't just mean multiple taxation in... in the abstract because it's necessarily going to be the case that an entity that does business in many States will be taxed in many States.

Rather the question is whether there's an undue risk of multiple taxation on the same transaction or the same conduct or the same activity.

And that was at real risk in Scheiner because if you imagine a truck that's delivering cargo from Maine to Florida and passing through several States on the way, and it's required to pay a fee that is, in essence, a fee for entering the State, has nothing to do with the mileage traveled within the jurisdiction, it's entirely reasonable to say that the imposition of those cumulative trips... cumulative taxes for a single haul of goods from Maine to Florida is an instance of multiple taxation of the same event.

Here we don't have a problem with that.

The tax is being levied solely on point-to-point hauls within the State of Michigan.

If a particular truck also makes point-to-point hauls in some other State within the calendar year, it may be subject to two taxes, but they can't be characterized as two taxes on the same conduct or the same transaction.

The second aspect of... of Scheiner--

Justice Scalia: Yes, it could.

I mean, if... if this... this truck is making one... one haul, it's carrying some goods from Texas to... to Maine, but some other goods it picks up along the way within Tennessee and just carries it to another place within Tennessee, and then it picks some other goods in New Jersey, carries it elsewhere to New Jersey, you're going to be taxed.

It seems to me it's... it's one trip.

We never used to... used to divide railroads on the basis of well, the ICC has jurisdiction over just the interstate portions and... and the two stops within a State can be regulated by the State.

Mr. Stewart: --I mean, I think you're right that it wouldn't be reasonable to regard the within-Texas segment or the within-Oklahoma segment of a transfer of goods between States as a discrete, separable event.

But if the truck is picking up goods at one point in Texas and depositing them at another point in Texas, again from the shipper's point of view, that's clearly a discrete transaction.

The shipper is unlikely to have any interest in whether the same truck is simultaneously carrying goods among the States.

And it's reasonable to regard that as a discrete event that is taxable by the State in which it occurs.

The other point to make about Scheiner is that even if we assume, as the petitioner argues, that the average interstate truck that makes some point-to-point hauls within Michigan will do so less frequently than the average truck that does business solely within that State, there's still a whole different class of interstate truckers that makes substantial use of Michigan's roads that could be charged taxes on the basis of mileage traveled and they're being let off the hook because the State has chosen to focus this tax on intrastate activity.

Petitioners'response to this is that you can't discriminate against one class and then make up for it by... by discriminating in favor of a different class.

And if this were, to use title VII terminology, a disparate treatment case, we would agree.

That is, if a State overtly discriminates against one class of interstate or out-of-state activities and on the face of the law those people are treated less favorably, then we would entirely agree that the State couldn't make up for it by giving more favorable treatment to a different class of out-of-state entities.

But here the petitioner is making what amounts to a disparate impact claim, and the essence of a disparate impact claim is not that any particular individual has suffered unfair treatment.

The way you prove a disparate impact claim is to show the effect cumulatively upon the class, upon interstate truckers in this case in the aggregate.

And there's really no way to feel any kind of confidence that interstate truckers won't do better as a group by virtue of Michigan's decision to focus this tax on intrastate activity rather than on the basis of mileage, which would sweep in a lot of out-of-state truckers that are not currently covered.

I'd like to speak briefly at least about the... the Mid-Con case.

And in our view the best way of understanding... to... to return to the historical antecedents of the current SSRS provision, in its original form, as enacted in 1965, the statute said it's not an unreasonable burden of... on interstate commerce to require an interstate carrier to register its Federal certificate so along as you do so in accordance with the standards of the ICC.

If you go beyond those standards, it's an unreasonable burden on commerce.

Justice Scalia: I'd like to know the text you rely on.

Mr. Stewart: That was--

Justice Scalia: For... for preemption, the text of the current statute that you rely on.

Mr. Stewart: --The text of the current statute is set forth at page 82 of the appendix to the certiorari petition in Mid-Con, and it's now 49 U.S.C. 14504(b).

And the statute says, the first sentence, the requirement of a State that a motor carrier providing transportation subject to jurisdiction under subchapter 1 of chapter 135... and that refers to interstate transportation... providing interstate transportation and providing transportation in that State must register with the State is not an unreasonable burden on transportation referred to in section 13501.

Justice Scalia: 13501 deals just with SSRS.

Mr. Stewart: No. 13501 is the provision that... that defines the general regulatory jurisdiction of the Department of Transportation and the Surface Transportation Board.

And it basically says these agencies have general regulatory jurisdiction over transportation between points in one State and points in another State and... or between points in the same State passing through another State.

So in... in using that shorthand reference, the Congress just means interstate transportation.

Justice Stevens: May I ask this question?

Because I know your time is short.

Supposing Michigan imposed a new $10 fee per... and it identified it precisely as in order to comply with that statute and then reduced its present plating fee from $100 to $90, would that be permissible?

Mr. Stewart: Well, as long as the... again, to... in our view the distinctive and disqualifying feature of the current statute is that subsection (2) is imposed specifically on vehicles that operate entirely in interstate commerce.

And if Michigan reduced to $90 the extra--

Justice Stevens: I'm not saying... they reduced to $90 the plating fee, but then they enacted a new $10 fee specifically designed to comply with the statute.

Mr. Stewart: --As long as--

Justice Stevens: Could they do that?

Mr. Stewart: --As long as they were still imposing that additional... again--

Justice Stevens: The $90 is for plating.

It said only... only Michigan-plated vehicles pay the $90.

Everybody else... everybody... and everybody also pays the $10.

Mr. Stewart: --As long as that $90 fee was imposed not just on Michigan-plated vehicles generally, but specifically on Michigan-plated vehicles that operate entirely in interstate commerce, we would say that's preempted because our reading of the statute is that basically Congress has said there's a severe limit on what you can do to interstate carriers that you don't do to intrastate carriers.

Justice Scalia: Where does it say that?

Let... let me come back to the... to the section of the statute you're quoting.

You didn't finish the sentence.

It says that it's not an unreasonable burden when the State registration is completed under standards of the Secretary under subsection (c).

Subsection (c) is entitled SSRS, Single State Registration System.

Mr. Stewart: May I answer, Mr. Chief Justice?

Chief Justice Rehnquist: Briefly.

Mr. Stewart: The State doesn't argue that this registration was completed in accordance with this standard.

It argues that the provision doesn't apply at all because this is not the sort of registration requirement that the statute speaks of.

We think it is because it's imposed strictly on interstate carriers.

Rebuttal of Robert Digges, Jr.

Chief Justice Rehnquist: Thank you, Mr. Stewart.

Mr. Digges, you have 4 minutes remaining.

Mr. Digges: Thank you.

I'd like to just briefly cover three points.

First, I believe that... that is accurate to say that the Solicitor General's position is returning us to the pre-Complete Auto days of line-drawing, but more than that, the Solicitor General's position is ignoring the practical effect of these fees on taxpayers.

I think the... the citation to the Peddler v. Drummer line of cases illustrates that.

The only difference between the Peddler cases and the Drummer cases was that in the... in the Nippert case and... and the Drummer case, they looked at the practical effect on an out-of-state salesman and whether that salesman would be discouraged by the $50 fee that was being imposed from coming into the State.

In the Wagner case, they simply said that the fee fell on an essentially local event, didn't look at the form of the fee, didn't look at the form of the fee on the out-of-state salesman.

I don't think it can be disputed that to out-of-state... that out-of-state salesmen would be equally discouraged from coming into a State because a $50 fee or a $100 fee, whether or not they're carrying the goods with them in at that time or whether the goods are later mailed in.

So, again, it is returning to the line-drawing issues, and really there is no test that is made as to, after you... you draw these lines, what the appropriate test should be.

The second point is it... with respect to the administrative practicality of apportioning these fees.

The purpose of apportionment would not be, as in a highway tax, to... to show the amount of highway damage that was done by a truck.

The purpose of apportionment here is simply to show the extent of the taxpayer's level of activity in the State.

It would be like a general revenue tax in which we're trying to allocate the taxpayer's activity to particular States, make sure that that taxpayer is paying its fair share of the State's costs with respect... of the State's generic costs, in this case, generic regulatory costs.

So, again, I think that apportionment would be very easy.

As Justice Scalia said, the trucking industry is willing to take the onus of this.

We bill by the mile.

You could do it on number of loads.

You could do it in a lot... a lot of ways.

And by apportioning the fee, you eliminate the burden and you make the out-of-state carrier, who would be otherwise prohibited from only hauling a load or two... he would then have the ability to haul that load and... and not be discriminated against.

The final area I'd like to talk about a little bit is the need for additional... the need for evidence in this case.

Again, in the Nippert and the Scheiner cases, there... they... they... it was expressly said that there was no need for evidence in the cases because in the general average of instances, the out-of-state trucker will always pay more than the in-state trucker.

And in answer to your question, Justice Stevens, I think it was recognized in those cases that there would be some exceptions to that rule.

There would be a few out-of-state carriers that would operate more heavily in the State than in-state carriers.

But that exception wasn't... wasn't what was going to happen and the most often, and that the average of instances, it would always work to the disadvantage of the out-of-state carriers.

And... and the final point is that with respect to evidence, you have here also a failure of internal consistency test, and this Court has said a number of times that failure internal... of internal consistency is not a test related... it doesn't rely on specific facts but it relies on hypotheticals.

And in this instance, I think there's a very clear failure of internal consistency.

Like in Scheiner, there's a cumulative burden on an out-of-state trucker.

If a trucker wants to operate in intrastate commerce around the country, it has to... and just haul one load in every State, it has to pay 48 times a $100 fee or pay $4,800 in eligible... in order to be eligible to haul in all of those States.

So that illustrates how that's going to balkanize commerce, that that carrier is not going to be able to pay that kind of entrance fee nationwide.

So that carrier will operate in less intrastate activities in... in only a few States or maybe none.

And again, we think that that defeats the purpose.

When Congress passed economic deregulation of the trucking industry, that they wanted to open it up to out-of-state carriers to be able to augment their interstate loads.

Chief Justice Rehnquist: Thank you, Mr. Digges.

Mr. Digges: Thank you.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The Oyez Project

Featured:

Granholm v. Heald - Oral Argument

Fri, 09 Jan 2009 14:49:00 +0000

Case:

Granholm v. Heald

Media File:

03-1116_20041207-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Clint Bolick

Justice Stevens: We will now hear argument in Granholm against Heald and two related cases.

Mr. Bolick.

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

For 124 years, as state power over alcohol has ebbed and flowed, one principle has remained virtually constant, that states may regulate alcohol by one set of rules, not by two.

New York and Michigan consigned out-of-state wine, and only out-of-state wine, to the three-tier system for closing the market to thousands of small family-run wineries and their customers for the benefit of a liquor distributor oligopoly.

Discrimination is the core concern of the Commerce Clause, and it sends a powerful signal that the state is engaged, not in legitimate regulation, but in economic protectionism.

The states and the liquor distributors make a sweeping argument that this Court has consistently rejected, that the Twenty-First Amendment creates plenary state authority.

Justice Kennedy: Well, under your view, could the three-tier system, itself, be challenged by a New Jersey wholesaler wanting to sell in New York, or a New York wholesaler wanting to sell in New Jersey?

Mr. Bolick: Yes, Justice Kennedy.

Justice Kennedy: So, under your view, the whole three-tier system has to go down?

Mr. Bolick: No, Justice Kennedy.

So long as the state does not discriminate against out-of-state entities, it is free to, as this Court--

Justice Kennedy: Well, under my hypothetical.

I don't know exactly how... the way it works, you have to be a New York wholesaler to sell to a New York retailer.

Under your view, a New Jersey wholesaler could sell to a New York retailer.

Mr. Bolick: --That is... or a challenge, as you ask the question, Justice Kennedy, could be mounted to that, under the same theory that we're advocating here.

The state may have a different set of defenses that it doesn't have here.

But--

Justice Kennedy: But so far as... the rationale is the same.

Mr. Bolick: --The--

Justice Kennedy: It seems to me that, under your rationale, that that in-state licensing system has to fall if there's a New Jersey wholesaler.

Mr. Bolick: --It has to pass constitutional muster.

Justice Breyer: And when you say there is no precedent... I mean, I think a much more modest claim than you're making, the claim simply that a state cannot discriminate against out-of-state liquor... i.e., the physical liquid... which is really more modest and keeps the three-tier effect... now, your... that claim, that they couldn't do that, was really what was advanced in Young's Market.

I read the briefs in that case.

The briefs presented that Court... you could have written those briefs.

And the difficulty for you is, it articulated that more modest version very clearly, made a tremendously strong case, that was not forbidden by Section 2 of the Twenty-First Amendment.

And this Court squarely rejected it.

Mr. Bolick: Your Honor, Young's Market... the result in Young's Market was correct--

Justice Breyer: The result, I understand, you could put on the basis of there being no discrimination.

Mr. Bolick: --Exactly.

Justice Breyer: Reading Justice Brandeis' opinion, I can't believe that that was the basis for his result.

Mr. Bolick: The... the cases that followed Young's Market and purported to apply its reasoning took a very sweeping view of the Twenty-First Amendment.

The Court began trenching on that very broad view immediately in 1939.

Justice Ginsburg: But why wasn't that broad view appropriate, given the difference between the language of the Wilson Act, which has had the words

"to the same extent and in the same manner. "

and the Webb-Kenyon Act, which became the second section of the Twenty-First Amendment, leaves out

"to the same extent and the same manner. "

It just says that

"alcoholic beverage so that the state can bar importation for delivery of, or use therein, in violation of laws thereof. "

It doesn't say "nondiscriminatory laws".

Mr. Bolick: Yes, Justice Ginsburg, the... there was no need for the Webb-Kenyon Act to repeat the language of the Wilson Act.

The Wilson Act dealt with the question of discrimination.

The Webb-Kenyon Act dealt with questions that arose subsequent to the enactment of the Wilson Act.

And as this Court has held in Craig versus--

Justice Ginsburg: Well, maybe that's the Act, but when they put it in the Constitution, why didn't they adopt the language,

"to the same extent and in the same manner? "

Mr. Bolick: --I think the reason for that is because it was so obvious that the state could not, prior to prohibition, discriminate.

It was not only embodied in the Wilson Act, but it was embodied in at least three cases of this Court.

Justice Souter: But it was not obvious to the person who at least drafted the Webb-Kenyon in the first instance, because as I... as I understand it, there was an anti-discrimination provision, and that was then dropped.

And do we know why it was dropped?

Mr. Bolick: It was dropped essentially because it was redundant.

Justice Souter: Well, but is that a... is that on a legislative history record somewhere?

Do we know that?

Mr. Bolick: No, Justice Souter, that is not expressly on the record.

What is on the record, however, is that the Court was aiming... or, excuse me, the Congress was aiming at specific Supreme Court decisions.

There... and it... and the one case that was clearest on point on discrimination was Scott versus Donald, applying both the Commerce Clause and the Wilson Act to forbid discrimination.

And there was... there is nothing in the legislative history to indicate that Congress intended to overturn that decision.

And as this Court has held in Craig versus Boren, and elsewhere, by enacting the Twenty-First Amendment, Congress clearly intended to incorporate both the Wilson Act and the Webb-Kenyon Act and to restore to the states the police power that they had before prohibition.

Emphatically, discrimination was not a part of that police power.

It was a very accepted context.

So, too, is it today.

When the... when the liquor distributors in the states asked this Court to overturn the Bacchus decision and to adopt a plenary view of the Twenty-First Amendment, it is not just asking you to overturn the Bacchus decision; it is asking you to overturn cases starting with the Midcal decision in 1980, the more recent Healy decision, and others, that have held that the core purposes of the Commerce Clause and the Twenty-First Amendment must be harmonized, that the Commerce Clause was never intended to be obliterated.

And when you look at the core values of the two clauses, they do not clash.

The core purpose of the Commerce Clause is nondiscrimination.

The core purpose of the Twenty-First Amendment is temperance.

And if you have a discriminatory statute, it sends a very strong signal that, in fact--

Justice Kennedy: Well, it's not only temperance, but it's control over revenues.

Can you tell me, is the... is there a New York State excise tax on alcohol?

Mr. Bolick: --Yes, Your Honor.

Justice Kennedy: And is it collected by the wholesaler?

Mr. Bolick: Yes, it is.

Justice Kennedy: All right.

What is it, ten dollars a gallon, or what?

Mr. Bolick: It's... it turns out to--

Justice Kennedy: Is it on one--

Mr. Bolick: --a few cents a bottle, yes.

Justice Kennedy: --It is on one--

Mr. Bolick: It's on... it's... and all alcohol.

Justice Kennedy: --Under our cases, can the California winery be required to remit the tax to the New York State revenue authorities?

Mr. Bolick: We believe so, Your Honor.

Justice Kennedy: Is that consistent with Quill?

Mr. Bolick: It is consistent with Quill.

The way that the states... there are 26 states that allow direct interstate shipment of wine, and the FTC has examined their record to see if they are doing okay.

And one of the things that they do... are able to do is tax collection.

New Hampshire, Louisiana, and Nevada do collect taxes.

The way they do it is by requiring a permit in order to ship wine into the state.

That takes care of a number of problems, including all sorts of accountability concerns that the state may raise.

Justice Souter: What--

Mr. Bolick: Under--

Justice Souter: --what do you make of the argument that there's no practical way, except at great expense, to audit compliance if they're out of state?

Mr. Bolick: --Justice Souter, this is one of the most regulated industries in America, of course, and the model legislation that has been adopted by a number of states includes record-keeping provisions, it requires that wineries--

Justice Souter: Well, I will grant that's required, but the argument, as I understand it, is, to find out whether they're doing what they are required to do, you've got to drop in unexpectedly and make an audit.

And that's one thing in the state; it's another thing across the country.

Mr. Bolick: --No, it's important to recognize, Justice Souter, that under the three-tier system, which is... which is where the states of New York and Michigan are saying that the other state wineries have to go... the three-tier system does not do that.

The states already rely on the Federal Government and the other states to police the wineries.

Justice Souter: So you're--

Mr. Bolick: Should they--

Justice Souter: --saying they are not dropping in to local wineries to do audits, in fact?

Mr. Bolick: --They may, in some instances.

It is primarily a federal... a federal activity.

Justice Souter: What do we have in the record on that?

Mr. Bolick: There is not... there is not a great deal on the record, either way, on that, Your Honor.

Justice Scalia: I don't know what you mean by "it's primarily a federal activity", that the Federal Government polices compliance with the state tax laws?

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

Under the--

Justice Scalia: How does that occur?

Mr. Bolick: --under the Federal Alcohol Administration Act, any violation of a state law is a federal offense and it is a violation... so basically, whether it's under-age access, whether it's taxation, whatever--

Justice Kennedy: But does the federal authority make a routine audit to see that the state tax has been paid?

Mr. Bolick: --Basically, every single time that there is a transaction, it is recorded by the U.S. Trade and Tax Bureau.

And if it may please the Court, I'd like to reserve the rest of my time--

--for rebuttal.

Justice Ginsburg: I have just one further question.

Justice Kennedy asked you,

"What about the wholesaler? "

"What about the retailer? "

What about alcoholic beverages other than wine?

Mr. Bolick: Justice Ginsburg, very important question.

We are here today because a majority of states have chosen to regulate wine distinctively.

And a handful of them, including Michigan and New York, have chosen to do so in a discriminatory manner.

So long as states do not discriminate, in terms of direct shipping with regard to other alcohol... and they don't; there's a flat prohibition across the United States, in terms of beer and other types of spirits... we will not be here, because there would be no discrimination; there would be a single rule, and that rule would be, no one gets to do it.

Justice Ginsburg: Thank you.

Justice Stevens: Ms. Sullivan?

Argument of Kathleen M. Sullivan

Ms Sullivan: Justice Stevens, and may it please the Court:

Nothing in today's case, Justice Kennedy, requires you to take on the three-tier system, for the issue that is presented here is a very narrow one.

Justice Kennedy: Well, it's very narrow, but the rationale is sweeping, and that's why I asked.

I just don't know if the in-state licensure system, which is the cornerstone of the three-tier distribution system, can survive under your rationale, assuming the hypothetical where a New Jersey wholesaler has all of the... you know, the physical facilities and so forth that the New York wholesaler does.

Ms Sullivan: All that we ask in this case, Justice Kennedy, is that you strike down Michigan and New York's decision to apply the three-tier system to everyone except their own in-state--

Justice Kennedy: Well, I know, but what--

Ms Sullivan: --producers of wine--

Justice Kennedy: --but you're... all you're asking is for a rationale that's sweeping.

Ms Sullivan: --Justice Kennedy, in our case, we want to suggest that it is... just as in Healy and Bacchus... that a law that discriminates in favor of in-state producers and against out-of-state producers loses its immunity afforded by the Twenty-First Amendment.

As Justice Scalia said in concurrence in Healy, a liquor law's discriminatory character eliminates the immunity afforded by the Twenty-First Amendment.

It's really the state's position, aided by their wholesaler allies, that it is the sweeping one.

Their position is that every state law that regulates the importation of liquor is, per se, valid if it has any conceivable rational connection to a state purpose.

So, for example, if Michigan wanted to simply bar all California wines, facially exclude California wines, saying,

"There are too many of them, it interferes with orally market conditions-- "

Justice Ginsburg: Your answer to Justice Kennedy, I glean from what you said, that if New York took away the direct-sale privilege that in-state wineries get, then out-of-state wineries wouldn't be any better off, but they'd have nothing to complain about.

Ms Sullivan: --That's exactly correct, Justice Ginsburg.

As you've said in the context of gender discrimination, you can cure an equal-protection problem by leveling up or leveling down.

In this case, we would suggest that the principle of free trade that was the reason, the principal reason, for the framing of the Constitution and has been reflected in over a century of dormant Commerce Clause jurisprudence, suggests that you should... the remedy should be to open the markets to out-of-state producers--

But that's an issue that can be addressed on remit.

Justice Ginsburg: But that's a decision for the state to make.

I mean, the... what--

Ms Sullivan: --Correct, Your Honor.

Justice Ginsburg: --Not for this Court.

Ms Sullivan: That's correct, Your Honor.

Justice Stevens: You don't deny that a state... that Michigan could bar all out-of-state wine... not just... not just California, but they could bar all out-of-state wines?

Ms Sullivan: That's correct, Justice Stevens, if it were in aid, and only if it were in aid, of the states... and necessary to serve the state's internal purposes.

Justice Stevens: The only reason being given to give a monopoly to local producers, that's their--

Ms Sullivan: That's--

Justice Stevens: --whole purpose.

But could they do that?

Ms Sullivan: --The state can have a monopoly if it's, itself, a market participant.

What the state may--

Justice Stevens: No, I'm saying just to look at the... just limit to the market to... the only market participants would be Michigan wine--

Ms Sullivan: --Private--

Justice Stevens: --wineries.

Ms Sullivan: --Justice Stevens, a state may not discriminate against out-of-staters for the sole purpose of economic protectionism.

Justice Breyer: Well, I'm trying to think of what Brandeis could have been thinking.

Ms Sullivan: In Young's Market.

Justice Breyer: Yes, that's right.

And this is a reconstruction, because I have no doubt, and you have no doubt, that Section 2 was meant to end that part of the dormant Commerce Clause that would come under the name of original package doctrine--

Ms Sullivan: Correct.

Justice Breyer: --which meant that the foreign liquor has to be treated better than domestic liquor.

Now, he's thinking,

"Why is that? "

"What is that package doctrine? "

And the answer is, the dormant Commerce Clause... it's part of the dormant Commerce Clause... the dormant Commerce Clause is the implication from the existence of the commerce power in the Constitution.

So if we have an amendment that says

"that aspect of the dormant Commerce Clause doesn't apply. "

that means the dormant Commerce Clause doesn't apply, because you can't divide the dormant Commerce Clause into six different parts, or even two.

Ms Sullivan: But Justice--

Justice Breyer: Now, maybe... I think that's how he's reasoning.

Ms Sullivan: --But--

Justice Breyer: And if he is, and even if he isn't, why isn't that right?

Ms Sullivan: --Justice Breyer, the Young's Market language permitting state discrimination is, indeed, broad, but it's been superceded by 40 years of this Court's jurisprudence harmonizing the Twenty-First Amendment with the rest of the Constitution.

Remember, Justice Brandeis, in Young's Market, didn't even think the Equal Protection Clause applied to liquor imports, a position that's inconsistent with Craig against Boren.

And nobody would suggest today that equal protection permits a state to import only from male-owned wineries or only import wine from white-owned wineries.

So there... the 40 years of jurisprudence--

Justice Stevens: But Craig against Boren was--

Ms Sullivan: --has been--

Justice Stevens: --had nothing to do with the Commerce Clause.

Ms Sullivan: --Correct, Your Honor, but if... if there were a law... the states are claiming that any law governing--

Justice Stevens: Nothing to do with importation, either.

Ms Sullivan: --But the dormant Commerce Clause reflects a fundamental structural principle that is every bit as much a part of the Constitution as the Equal Protection Clause upheld in Craig v. Boren.

Indeed this Court, in cases from McCulloch to the Eleventh Amendment cases and state sovereignty cases, has recognized that a principle of the Constitution is no less fundamental because it is a structural implication of the text.

So the dormant Commerce Clause stands on the same footing as the affirmative power of Congress and on... it's the same footing as the Equal Protection Clause at issue--

Justice Stevens: Do you think Congress--

Ms Sullivan: --in Craig v. Boren--

Justice Stevens: --could enact a statute authorizing the states to do just what they've done here?

Ms Sullivan: --Absolutely, but it has not.

And the Wilson Act... to go back to Justice Souter's question and Justice Ginsburg's question... Congress could authorize it as it has done, for example, in the McCarran-Ferguson Act, allowing the states to discriminate against out-of-state industry with respect to the industry of insurance.

It has not done so here.

Webb-Kenyon did not authorize discrimination, and the Wilson Act forbade discrimination for just... reasons Justice Ginsburg described.

It said you may regulate imports of liquor in the same manner as local liquor laws.

And, of course, the purpose of Section 2 was to allow to the dry states to keep dry by preventing all those original packages from piling up in the railway stations and being open to bootleggers throughout the state, undermining the dry policies of the state.

Wilson forbade discrimination.

Web Kenyan didn't authorize it.

And in Congress' most recent articulation of its view of the harmony between the Twenty-First Amendment and the rest of the Constitution, the Twenty-First Amendment Enforcement Act, passed in 2000, enacted in 2000, Congress has a rules-of-construction section that says,

"We view any state plea to the federal courts to enforce their laws as reflecting the jurisprudence of this court. "

And, in fact, floor debate on that rules-of-construction section reflected allusions to Bacchus, Healy, and the other cases that said dormant commerce... the negative implications of the Commerce Clause, no less than the Equal Protection Clause or the Due Process Clause or the Establishment Clause, constrain the states in their regulation of importation of liquor.

So with all respect to Justice Brandeis, Justice Breyer, the Young's Market statements about discrimination have been superceded.

What New York and Michigan have done here is say that one set of exceptions apply only to in-state producers, just as Connecticut, in Healy, said,

"If you just sell beer within our state, you don't have to face price ceilings that you have to face if you do business over in Massachusetts or Rhode Island. "

Just as in Bacchus, the... you struck down a decision... an excise tax exemption that said,

"If you're an importer of liquor, you have to pay an excise tax, but if you're a local producer of locally produced wine and spirits, you get out of that restriction. "

Justice Souter: Okay, we've got one difference from Bacchus, because the claim that's being made here, which I gather was not made, or made seriously, in Bacchus, is there really is a need for differential treatment for purposes of enforcement.

Go back to the enforcement of the tax law.

Ms Sullivan: Justice--

Justice Souter: How are we supposed... what standard are we supposed to use to judge that argument?

And, by that standard, how good is the argument?

Ms Sullivan: --Justice Souter, we believe the standard should be strict scrutiny, though there must be a necessity to serve--

Justice Souter: Because--

Ms Sullivan: --a legitimate--

Justice Souter: --it's facial discrimination.

Ms Sullivan: --Because it's facial discrimination.

It's absolutely undisputed.

Michigan... in fact, Michigan state concedes that they have flatly banned out-of-state wineries from shipping directly to consumers.

There's no question that this is facially discriminatory.

But even if the standard were a more deferential one in which all the state needed to show was a reasonable need for discrimination, it can't come close to doing that here.

Neither Michigan nor New York has shown that the facial discrimination here is necessary to protect minors or to protect the collection of taxes.

Let's start with minors.

The Michigan claim that it's protecting against under-18 sales is belied by the fact that Michigan is allowing 40 Michigan wineries and, at last count, 7500 Michigan retailers to deliver directly to consumers.

The way to protect my... so just as in Craig v. Boren, the exception for young women to drink 3.2 beer, as opposed to young men, belied the state's interest in temperance.

So the pattern of exceptions here that Michigan has created belies any notion that it's protecting under-18-year-olds from drinking.

And, of course--

Justice Souter: But what about audits for revenue--

Ms Sullivan: --On revenue, the nondiscriminatory means that's available to the state that Michigan and New York have not shown any reason to reject... 26 states have adopted some version of this... is to require an out-of-state winery to get a permit.

And that's a... Justice Breyer, one thing that's still left of Brandeis.

You can require a permit from an out-of-state winery, which would be unusual to acquire from widgets or milk.

But you can require a permit, and, as a condition of the permit, Justice Souter.

The out-of-state winery has to agree to submit to the state's jurisdiction, to submit to the state's tax jurisdiction.

And, Justice Kennedy, whether or not Quill would permit taxation if you were simply sending by common carrier, our clients want to... want to pay taxes, want to sign up for permits, want to play on a--

Justice Kennedy: Well--

Ms Sullivan: --level playing field--

Justice Kennedy: --well, they do today, I'm sure, but--

[Laughter]

Ms Sullivan: --But, Justice Souter, to... look at the experience--

Justice Souter: --They... you say they don't want to go to California to do an audit.

Ms Sullivan: --They certainly don't, Justice Souter, but New Hampshire is a state that has actually... your own state is a state that has on its Web site a set of out-of-state wineries.

It requires that they keep and supply sales records on a monthly basis, that they keep those records for three years--

Justice Souter: Maybe we're getting ripped off.

Ms Sullivan: --I--

[Laughter]

--think New Hampshire's done very well collecting taxes from out-of-state producers, Justice Souter.

It's a leader--

Justice Kennedy: Ms. Sullivan--

Ms Sullivan: --in the field.

Justice Kennedy: --may I... may I... I just want to clarify one point.

It was just... the question Justice Stevens asked.

It's your position that if Michigan allows Michigan wines to be sold and possessed and consumed, that it must also allow out-of-state wine to be sold, possessed, and consumed.

Would--

Ms Sullivan: That's correct.

Justice Kennedy: --That is your--

Ms Sullivan: That's correct, Justice Kennedy.

But to go back to the physical-presence question, Justice Souter, Michigan is not now... Michigan officials are not now traipsing up to the upper peninsula and all around the state to inspect wineries.

The record is clear on that.

What Michigan does is require that wineries in Michigan send samples and records to their offices.

And the Internet actually, if anything... the states say that the Internet increases the danger, but the Internet also increases, in parallel, the power of the states to police out-of-state wineries without an in-state presence.

Just as, Justice Stevens, the Internet may make every speaker with a PC a town crier, as you said--

Justice Souter: Could--

Ms Sullivan: --in Reno versus ACLU--

Justice Souter: --could a state--

Ms Sullivan: --so it makes every interstate--

Justice Souter: --could a state require an out-of-state winery to keep its books online, subject to a password, so that, with a password, they could go in and audit the books across the country, by wire?

Ms Sullivan: --Yes, Justice Souter, if it were part of a... an agreement to a permit that the... that the out-of-state winery is willing to make, then there's no extraterritorial regulation there, that would be just fine.

So, yes, the state can, through Internet, so to speak,... Internet monitoring, through virtual monitoring... do all the work it needs to do to make sure that the out-of-state winery is paying taxes.

And, by the way, Michigan does not collect taxes, Justice Kennedy, through the distributors.

Michigan collects taxes from the wineries, whether they're in-state or whether they're out-of-state wine shippers.

So Michigan can give no justification for why out-of-state wineries have to go through the distributors for tax purposes.

They're not using the distributors as their tax-collection agents now.

Justice Kennedy: --Commerce Clause, in effect, protects consumers in states from entrenched business interests that want to have protectionism, and you're... you object to that and invoke the Commerce Clause to do it.

Under that rationale, aren't all the California reciprocity laws invalid, as well?

Ms Sullivan: Justice Kennedy, reciprocity laws... yet... possibly.

They may be a necessary requirement now that so many states are closed to states.

They may be a necessary mechanism for some states trying to get wines to market in the way that the framers envisaged.

It may be a necessary, for now, to get into closed states.

In a world that we hope that you create, in which discrimination is not allowed, they would be completely unnecessary and possibly unconstitutional.

But to return to the key point here, Michigan and New York may not facially discriminate in favor of their own producers unless they can show that reasonable nondiscriminatory alternatives are unavailable.

And here, Justice Souter, on any standard of heightened scrutiny, they have not come close to making that kind of showing, because there are all these other means... means that have been recognized by the 26 states that don't discriminate, means that have been proven in states from New Hampshire to Virginia, means that are not based on facial discrimination.

It's the discrimination that has to be shown to--

Justice Stevens: Let me just--

Ms Sullivan: --be necessary here.

Justice Stevens: --be sure I heard your answer to Justice Kennedy correctly.

You'd concede that the reciprocity laws are all unconstitutional?

Ms Sullivan: Not... they are subject to heightened scrutiny because they discriminate against out-of-staters in a way that you could not... for example, in New Energy, you said that you can't have a preference for... you can't have a discrimination in Ohio in reciprocity for Indiana.

Reciprocity laws normally do violate the principle of dormant Commerce Clause invalidation.

Justice Stevens: And you contend that they do... the liquor reciprocity laws, all of them are unconstitutional.

Ms Sullivan: Not... we contend that they would be subject to strict scrutiny, and they could be upheld if the state could show that they are closely tailored in a--

Justice Stevens: They can... that they can be--

Ms Sullivan: --way that these laws are not.

Justice Stevens: --upheld by making a showing that you say is virtually impossible to make.

Ms Sullivan: Your Honor, that's not before, and if there were other reasons--

Justice Stevens: No, but I think it is--

Ms Sullivan: --the state could--

[Laughter]

Justice Stevens: --it is an interesting question as to whether that's a... that's a... you know, that's a necessary consequence of this decision, in your view.

Ms Sullivan: Nothing in this decision requires you to reach the question of whether there are other state defenses in other cases.

The justifications the states have given here are so terribly weak in relation to their discriminatory laws that you should strike down these laws, you should invalidate them, you should affirm the judgement of the Sixth Circuit and reverse the judgements of the Second Circuit.

Thank you very much.

Justice Stevens: Thank you, Ms. Sullivan.

Mr. Casey.

Argument of Thomas L. Casey

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

For more than 70 years, the Twenty-First Amendment has permitted states to restrict the importation and delivery of alcohol by out-of-state vendors.

There are substantial differences between licensed in-state vendors of alcohol and out-of-state vendors that are not subject to the full extent of state regulatory and taxing powers.

Because of those differences, Michigan requires that sales, including direct shipment of alcohol, be performed only by licensed, strictly regulated, in-state vendors.

This importation regulation is a power expressly conferred by the text of the Twenty-First Amendment.

It's consistent with the entire history of alcohol regulation in this country, and it's consistent with this Court's jurisprudence interpreting the Twenty-First Amendment--

Justice O'Connor: Now the Bacchus case cuts against you, to some extent.

Mr. Casey: --The Bacchus case was a very unique situation that we believe is not in any way controlling in the present case.

It was not an importation case; it was an exemption from a state excise tax on wholesalers for alcohol that was already within the state's stream of commerce.

Justice Kennedy: Well, but I think what's fairly implied in Justice O'Connor's question, you have to look at the language of Bacchus, and the language of Bacchus, in effect, restored the anti-discrimination component of the Commerce Clause to liquor control.

I think that's a fair and necessary reading of the case.

Now--

Mr. Casey: I disagree that that is a necessary reading--

Justice Kennedy: --And I know it--

Mr. Casey: --of the case.

Justice Kennedy: --involved pineapple wine and all that.

I know that, but--

[Laughter]

--what we're talking about is the language of the Court in that case.

Mr. Casey: Correct, but you're... you have to understand that language in light of the actual context.

There, the state did not even assert a Twenty-First Amendment defense.

Justice Kennedy: Well, then you have to understand Young in the light of its context, where there was no discrimination--

Mr. Casey: There was discrimination in Young, Your Honor, and I'd like to get to that.

But to focus on Bacchus for a moment, the state never asserted the Twenty-First amendment, and it was undisputed--

Justice Stevens: No, but the question was before the Court, because the dissent certainly raised the question.

Mr. Casey: --Correct.

And we have suggested, in our brief, that the Bacchus case is distinguishable and not controlling here.

We have also suggested that Bacchus was incorrectly decided.

We can prevail in this case without overruling Bacchus, but we have suggested that--

Justice O'Connor: Well, why don't you focus on that?

Because it's a little hard to plan on overruling that case.

[Laughter]

Mr. Casey: --Well--

Justice O'Connor: So why don't you at least address how you would distinguish Bacchus?

Because there is a lot of language in there that cuts against your position.

Mr. Casey: --The only justification for the statute in Bacchus was what the Court characterized as "mere protectionism".

That's not the situation with the Michigan statute.

Again, the Michigan statute involves the paradigm... or the quintessential Twenty-First Amendment power of regulating importation; it's not an... attacks on alcohol that's already an exemption from a tax for two particular products.

Justice Scalia: Well, no... I mean, that--

Mr. Casey: Do you--

Justice Scalia: --that rather lengthy statement you made earlier, that the Bacchus case didn't involve the importation of alcohol.

But it did.

I mean, the only reason that the in-state exemption was held to be unconstitutional was because you were treating out-of-state sellers differently.

How can you possibly say that--

Mr. Casey: --It was treating--

Justice Scalia: --the case didn't involve it?

Mr. Casey: --it was treating two particular items of in-state production differently than all other in-state items and out-of-state items; but it was a taxation issue, not an importation issue.

And as the Court said in Bacchus and in Capital Cities, the correct analysis in the... in evaluating this kind of case is to determine, first, whether the activity of the regulation at issue is an exercise of a power conferred by the Twenty-First Amendment--

Justice Ginsburg: Well, why don't we focus on the Court's rationale, which was stated very concisely by Justice White.

He said, "Hawaii's discriminatory tax cannot stand".

And then he said,

"Whatever you can say about the Twenty-First Amendment, one thing is certain, the central purpose was not to empower the states to favor local liquor industries by erecting barriers to competition. "

That was this Court's explanation for ruling the way it did, even though there was this infant industry of pineapple whatever.

Mr. Casey: --That was the first stage of the Court's analysis.

The Court went on to say it was not supported by any clear concern of the Twenty-First Amendment in combating the evils of an unrestricted traffic in liquor--

Justice Souter: Well, your opponents have said that there isn't any clear countervailing interest here.

They're saying you can't claim you're protecting kids, because you're selling to the kids at home; there's no serious audit-collection problem; and the other regulatory interests... they didn't say this, but are, sort of, gauzy the way they're stated.

I mean, they're saying that, by a process of elimination, what you get down to is nothing but discrimination and protectionism.

What is... what is your answer to that?

Where is--

Mr. Casey: --We--

Justice Souter: --the substantial interest?

Mr. Casey: --we disagree wholeheartedly with that.

The Michigan--

Justice Souter: I know, but--

Mr. Casey: --the Michigan regulations do promote the state's interest in temperance.

They do give the state a better--

Justice Souter: --Well, you... I mean, you say that, but how?

The very activity that you don't want them to engage in, you're engaging in, or your local wineries are engaging in, for example.

Mr. Casey: --But the key is, with an in-state licensee, the state has the ability to enforce against that licensee, to inspect, to punish the licensee--

Justice Souter: Do we--

Mr. Casey: --to hold them accountable.

Justice Souter: --do we have a record of what the state is doing with respect to its in-state licensees, indicating what it could not do effectively to out-of-staters?

What do we have in the record?

Mr. Casey: The record in this case consisted of a small number of affidavits, answers to interrogatories, some surveys that were submitted as exhibits to motions for summary judgement.

Both sides submitted that type of evidence.

The District Court decided this was a question of law, and specifically said that he did not consider any of the factual evidence.

So the record--

Justice Souter: Well, should--

Mr. Casey: --was not fully developed.

Justice Souter: --should we send it back for... if we disagree with the rationale, should one or the other of these cases go back for evidence on what, in fact, the state is doing in relation to its in-state licensees and evidence that it could not effectively do the same with respect to out-of-staters?

Mr. Casey: Yes, if--

Justice Souter: And what would you show?

What do you, in effect... make an offer of proof.

Mr. Casey: --We would show that the Michigan requirement limiting sales and direct shipping to in-state licensees is required because the state only has effective enforcement authority over in-state licensees.

But--

Justice O'Connor: Well, but wait a minute.

You... it was suggested that the state could require a license of an out-of-state supplier, and that that license could be conditioned upon submission to Michigan's jurisdiction in all respects.

Is that not feasible?

Mr. Casey: --Michigan does have a current license for out-state seller of wine.

You know, these players--

Justice O'Connor: But could you not require submission to--

Mr. Casey: --We--

Justice O'Connor: --Michigan's jurisdiction for all purposes of enforcement?

Mr. Casey: --Certainly, we could pass a law to that effect.

The problem is--

Justice Souter: And if you... if you did that, could you require, as I suggested of Counsel on the other side, that you... that, as a condition of the licensing, that the business records of these companies be placed in some secure online fashion, that, with a password, you could get into and do an audit across the continent just as readily as you could do an audit next door?

Could Michigan not do that?

Mr. Casey: --But there is no guarantee that such an audit would be just the same as an audit of an in-state--

Justice Kennedy: --Well, let me ask, once we accept the proposition... I think this is the necessary reading of Bacchus... that the Commerce Clause applies to liquor and prevents discrimination, it seems to me it's just like any other commodity... food, milk, et cetera... and, in this case, you have a very substantial burden to show that this discriminatory treatment is justified... maybe strict scrutiny, maybe heightened scrutiny.

And this trial has occurred.

You have had that opportunity.

I don't see why you have a right to go back.

Mr. Casey: --Despite the lack of evidence in the record and the fact that District Court did not consider that evidence, the Sixth Circuit dismissed all of those claims of the state and remanded for entry of judgement on the Plaintiffs without giving us an opportunity to develop that record.

I also want to say--

Justice Scalia: See, I don't... I don't understand.

Didn't you have an opportunity to develop the record?

I mean, this was--

Mr. Casey: --There was--

Justice Scalia: --a discriminatory matter.

It was your burden to show that whatever discrimination existed... assuming that we find the law the way Bacchus seemed to say it is... it was your burden to show that there was some justification for that discrimination.

Mr. Casey: --There--

Justice Scalia: You had your chance to show it.

Mr. Casey: --there was evidence in the record.

There were affidavits from Michigan enforcement officials about stings, about problem with enforcing--

Justice Scalia: All right, well--

Mr. Casey: --against Internet--

Justice Scalia: --tell us what those... what that material is, and if we find that material sustains your burden, that's fine, you win; and if it doesn't, you lose.

I don't know why we have to let you go back and--

[Laughter]

--and retry the case.

Mr. Casey: --Our key position is that before you get to that kind of evidentiary burden, the legal question--

Justice Scalia: That's what I'm interested in.

You win, either way.

If it... maybe if the Commerce Clause... dormant Commerce Clause discrimination principle applies, you win, if we scrutinize strictly and say you have a good justification.

Whether you do or not, I guess I'll find out from reading the record, but I'm more interested in the first half, which is... doesn't apply at all.

Now, your opponent said, in response to my pointing to Brandeis on this, that to support you, as to precedent, Bacchus.

Young's Market isn't any good anymore.

As to concept, you can divide the dormant Commerce Clause into a... you have to favor out-of-state principle, which was the original package doctrine, which has long since disappeared, and the anti-discrimination principle, which hasn't disappeared.

And her third part, implicit, is, historically, this whole Section 2 was aimed at the original package part; there is not a word in any brief I saw that suggests any motive in Section 2 to get rid of the anti-discrimination principle.

I haven't found a word in support on your side on that.

So she says,

"Put those three things together, and we win. "

That's her point.

Now, what's your response?

Mr. Casey: --We disagree with that entire position.

The text--

Justice Breyer: I know you do.

[Laughter]

Mr. Casey: --the text of the Twenty-First Amendment... the text of the Twenty-First Amendment gives states the right to control imports.

The history of the Twenty-First Amendment in the Webb-Kenyon Act clearly demonstrate... the purpose of the Webb-Kenyon Act was to eliminate alcohol shipments from--

Justice Kennedy: Do you think--

Mr. Casey: --the Commerce Clause.

Justice Kennedy: --that Michigan can prohibit the importation of any wine, but still allow its own wine to be produced, sold, and consumed?

Mr. Casey: Yes.

That's precisely what the situation was with--

Justice Breyer: I know you do, but the principle of Webb-Kenyon, which was enacted when the Wilson Act was already there... very clear... is to stop the original package doctrine, stop favoritism of the out-of-state liquor shipment, which meant, in a dry state, you had to sell less.

I mean, that's what it's there for.

I didn't find a word, in other words, contrary to what I've just said; and if there are such words, now is the time to point them to me... to point them out.

Mr. Casey: --The title of the Webb-Kenyon Act is,

"It is in... an act divesting intoxicating liquors of their interstate character in certain cases. "

"The clear intent of the Webb-Kenyon Act was to remove alcohol from the Commerce Clause. "

"The Constitution... the Twenty-First Amendment constitutionalized that Commerce Clause framework. "

That's what this Court said in Craig v. Boren.

Craig v. Boren also said,

"The Twenty-First Amendment creates an exception to the operation of... the normal operation of the dormant Commerce Clause. "

Justice Ginsburg: Well, then you are asking us, I guess, not only to reject Bacchus, but who was the first one that said that the Commerce Clause remains alive and well?

Was it Justice Stewart?

And I forgot which case it was.

It was--

Mr. Casey: That may be.

The Commerce Clause remains alive and well, but the Commerce Clause--

Justice Ginsburg: --In the context of alcoholic beverages.

Mr. Casey: --In the context of powers expressly conferred upon the states by the Twenty-First Amendment, that's an exception to the operation... the normal operation of the dormant Commerce Clause.

Commerce Clause has to be read in light of the Twenty-First Amendment, just as the Twenty-First Amendment has to be read in light of the Commerce Clause and other provisions of the Constitution.

Justice Ginsburg: But that's a different argument than the one you made before, which seems to be saying the Twenty-First Amendment trumps, not that the two have to be harmonized.

Mr. Casey: When you read the two in light of each other, the purposes of each, it is clear that the purpose of the Twenty-First Amendment was to remove alcohol from interstate commerce as a constitutional matter, to prevent Congress from tampering with it in the future, to give the judgement to the states as to--

Justice Kennedy: Well, you--

Mr. Casey: --the necessity for--

Justice Kennedy: --you say further than that; you say the purpose was to allow that the states discriminate in favor of home industry, if it chooses.

Mr. Casey: --That is one of the purposes, yes.

In that... in the case that was decided immediately after the Young's Market, Mahoney, and Indianapolis Brewing, the Court said,

"Discrimination is permissible in this narrow context, where the state is acting pursuant to its Twenty-First Amendment powers and regulating importation of alcohol. "

Justice O'Connor: But that gets us back to Bacchus and what to make of that.

Mr. Casey: I... as I indicated, I don't believe Bacchus overrules those cases; it didn't even cite most of those cases.

But--

Justice O'Connor: Well, the dissent seemed to think so--

[Laughter]

--didn't it?

Mr. Casey: --That's correct.

But, as I said, we believe Bacchus is distinguishable, because that was mere protectionism, the state does have other justifications here--

Justice Kennedy: Well, we've also said that mere protectionism is permitted.

Mr. Casey: --Mere protectionism is permitted.

In this case, if we have to present other justifications, we have, and there are other justifications, unlike the situation in Bacchus.

So even if the Bacchus rationale is good law, we still prevail on that.

Thank you, Your Honor.

Justice Stevens: Ms. Halligan?

Argument of Caitlin J. Halligan

Ms Halligan: Justice Stevens, and may it please the Court:

In answer to your question first, Justice Breyer, the Twenty-First Amendment does not impose a nondiscriminatory ban.

The Court rejected that position, not just in Young's Market and Mahoney in Indianapolis, but also in Clark Distilling, the case in which the Court upheld the constitutionality of the Webb-Kenyon Act, itself.

It held that the Webb-Kenyon Act operated to remove any immunity that had been conferred by the dormant Commerce Clause.

Bacchus is not to the contrary.

In North Dakota, which follows Bacchus, the Court relied again on Young's Market to say that the states could impose different rules on out-of-state vendors where they were necessary to protect the integrity--

Justice Kennedy: Do you... do you take the position that your colleague on your same side takes, that a state can permit only the sale, consumption, and... of its own wines, and bar all out-of-state wines?

Ms Halligan: --The express terms of the Twenty-First Amendment would allow that if... particularly if it were necessary to advance the concerns of the Twenty-First Amendment.

For example--

Justice Scalia: No, no, don't--

Justice Kennedy: No--

Justice Scalia: --don't put in the qualifications.

Justice Kennedy: --just for local protectionism.

Ms Halligan: --Simply for mere protectionism?

Justice Kennedy: It's just for local protectionism.

We want to promote our wines, and not anybody else's.

Ms Halligan: The terms of the amendment would allow that, but I don't think the Court needs to explore the outer parameters of the Twenty-First--

Justice Kennedy: Well, I'm trying to understand what your--

--what your theory is.

And so you are in agreement with your colleague that this could be done, if New York chose.

You can only drink New-York-grown wines in... sell and consume... in the state of New York.

Ms Halligan: --It could be done, but that question really isn't presented here, because--

Justice Breyer: But could Congress pass a law forbidding it?

Ms Halligan: --That's a difficult question, because--

Justice Breyer: Yeah.

All right.

But I need an answer to it.

[Laughter]

Because, you see, what's going to come next is, if you say yes, I'm going to say,

"Well, didn't it pass that law with the Wilson Act? "

Ms Halligan: --Let me answer both of those questions, if I can, Your Honor.

Certainly, this Court has held, repeatedly, that the Twenty-First Amendment did not, in any substantial way, completely repeal Congress' affirmative power under the Commerce Clause.

It said that in Midcal and Capital Cities.

But we would argue that if Congress acted in a way which completely removed state authority to determine whether or not alcohol could be sold and the terms under which it could be sold... for example, if Congress said all states must be dry... then we would argue that the Twenty-First Amendment wouldn't allow that, because that would completely eviscerate any state authority.

Justice Scalia: How can that be?

I mean, if this is a constitutional elimination of the Commerce Clause, how can Congress bring it back in simply by enacting a statute?

Ms Halligan: The legislative history makes clear that the Twenty-First Amendment was intended to eliminate the impediments posed by the dormant Commerce Clause and authorize states to regulate it.

Justice Scalia: But you... you want us to read it by its terms.

It doesn't say anything about the dormant Commerce Clause.

If we read it absolutely the way one of your arguments wants us to do, surely it excludes Congress.

Ms Halligan: By terms of our--

Justice Scalia: So you don't want us to read it absolutely.

Ms Halligan: --Your Honor, I don't think that... again, I don't think that you need to decide those questions in this case.

This case goes to what's at the very core of the Twenty-First Amendment, whether states can decide who can sell liquor to their citizens and whether or not states--

Justice Kennedy: But it also goes to the very core of the Commerce Clause.

And there are really two classifications of dormant Commerce Clause cases.

One is... and I think it's an improper use of the term "dormant clause"... is where there's discrimination.

Only the Congress can allow discrimination against out-of-state products.

That's one whole classification.

And that's what's... and that's what's involved here.

Ms Halligan: --North Dakota indicates otherwise, I believe, Your Honor.

In North Dakota, this Court said that, because, when alcohol flows across the border, it poses unique risks to the regulatory regime, because the state can't bring the alcohol within the full extent of its regulatory and supervisory powers, that it may be appropriate and necessary for states to impose unique rules on out-of-state vendors.

In North Dakota, the Court did not say--

Justice Scalia: Well, but that's fine.

And the other side isn't denying that here, that if, you know, they're... discrimination means treating out-of-state people differently without good reason.

Ms Halligan: --But there is good reason--

Justice Scalia: Now, if you're willing to... okay, if you're willing to acknowledge that, then we're halfway there and we're just arguing about whether there is good reason here or not.

Ms Halligan: --There is good reason here, Your Honor.

What's critical about New York's law, as well as Michigan's law, is that it requires that any alcohol vendor have a physical presence in the state.

And that's important for a couple of reasons.

The state can't meaningfully oversee traffic in alcohol with an out-of-state entity.

Petitioner suggested--

Justice Souter: What is it doing with the in-state entities?

I mean, one of the claims is that nobody is posting officers outside the in-state wineries, no one's making substantial physical audits of in-state wineries.

Is that wrong?

Ms Halligan: --It is wrong, Your Honor.

It's certainly not the case that we have an SLA inspector outside every entity that sells liquor.

That would not be possible.

But it is true that the state liquor authority can, and does, physically inspect the premises.

They do so to determine whether--

Justice Souter: What do they inspect them for?

Their books, I suppose.

Ms Halligan: --Well, more than that, and this is why the physical presence is important and why the Internet hypothetical that Your Honor raised would not... would not satisfy the state's concerns.

What the state can do is, it can go onto a premises, and it can count whether the bottles on the shelves of that premises match the records.

That's the best way to detect whether or not there is evasion.

Because if you have--

Justice Souter: And is there a record that the state is doing that?

Ms Halligan: --There is not clear evidence in the record with respect to that... to that level of detail, but that--

Justice Souter: Well, isn't that the end of that issue, then?

I mean, it is your burden, isn't it?

Ms Halligan: --Your Honor, there is material in the McKeon affidavit, which is in the Joint Appendix... Mr. McKeon is the Chair of the state liquor authority... but it's also the case that to suggest that because there is some option out there... and there's no firm evidence that a less prescriptive rule would, in fact, satisfy the state's concerns in preventing diversion and tax evasion... but the possibility that's there's some rule out there, because other states have adopted more lax rules, is to treat alcohol like any other product.

And the Twenty-First Amendment reflects a consensus by this nation that alcohol is unique, that it should not be open to--

Justice Souter: Well, the Twenty-First Amendment at least recognizes that alcohol can be treated as unique, and the issue here is whether you're really doing that in a way that supports your claim of interest.

Ms Halligan: --Yes--

Justice Souter: And, so far, the one specific thing I've heard from you is that state inspectors do go on winery premises, and they count bottles, and they see if they match what's on the written record.

Ms Halligan: --They also draw on the assistance of local law enforcement.

And this is also--

Justice Ginsburg: But if that's--

Ms Halligan: --set forth--

Justice Ginsburg: --if that's really what New York's concern is, then why does New York say,

"Ah, but out-of-staters, if only you establish an office here... not a winery; an office... you can operate, and you can make the direct sales from that office, and even in. "

--I think your brief told us that, well, these small wineries, out-of-state wineries, haven't got all that much to worry about, because, after all, they could join together... a group of them could open an office.

Now, that office, owned by a group of out-of-state vintners is not going to have bottles on the shelf, is it?

Ms Halligan: --Yes, Your Honor, it would.

That's... the state laws requires that any licensed winery have a government-bonded storehouse or ware-room... storehouse... storeroom or warehouse, pardon me--

Justice Ginsburg: Well, isn't the--

Ms Halligan: --The reason for that is because physical products--

Justice Ginsburg: --How do you envision this combination of small wineries?

You said that in-state establishments might be jointly maintained by out-of-state wineries.

Ms Halligan: --Yes, Your Honor.

The state liquor authority has not issued any regulations on this, but presumably what they would say is, you could share a space, provided that the physical property of each winery, the bottles, is segregated so that the states can come in and check whether or not each winery's products conform with their records.

There are other reasons why a physical presence is important, as well.

First of all, the state draws on local law enforcement extensively to identify illegal activities, and that would not be possible with any entity located out-of-state.

Additionally--

Justice Souter: What illegal... I'm sorry... you've got to be specific.

What illegal activities?

Selling to minors?

Ms Halligan: --It could be selling to minors, but it could also simply be sale out of an unlicensed premises, where you are selling outside the proper hours of sale, or sale outside of the three-tier system--

Justice Souter: Yeah, but if licensed premises don't serve a state interest, then you can't require a licensed premises, so that argument doesn't get too far.

Ms Halligan: --But, Your Honor, the principle that having entities that sell liquor be licensed, is one that is at the heart, not just at the--

Justice Scalia: How does... how does requiring them to have an in-state office somehow prevent them from shipping to minors from out of state--

Ms Halligan: --It--

Justice Scalia: --or from shipping to consumers from out of state without paying you their tax?

Ms Halligan: --It--

Justice Scalia: How does the opening of an--

Ms Halligan: --Right.

Justice Scalia: --an office in New York State at all prevent that?

Ms Halligan: It can't prevent it a hundred percent, but no--

Justice Scalia: It can't prevent it at all.

Ms Halligan: --Your Honor, it can deter it, and it can deter it significantly, because, first of all, there is a much more significant opportunity to identify the illegal activities; and, secondly, if a retailer or a wholesaler or a manufacturer knows that, that operates as a powerful deterrent--

Justice Breyer: What did--

Justice Souter: We seem to be talking... may I just ask one... we seem to be talking about two different things.

Justice Scalia was assuming that, if you have the license and some in-state warehouse, you can ship from outside.

And I... is that the assumption?

Or is your argument that New York can require... does require the in-state warehouse, and you can ship into... in New York, you can ship only from that warehouse?

Ms Halligan: --To be clear, the state has not issued regulations that specifically address that point, because--

Justice Souter: So the... we don't know yet.

Ms Halligan: --We don't know.

But in talking with the state liquor authority, they have made it clear that their intent would be to require that the liquor come first to the in-state premises--

Justice Scalia: Well, even if... I'm willing to assume that.

How does that guarantee that the out-of-state winery will not, in violation of New York State law, ship directly to minors or ship directly to consumers, just simply bypassing its cache of wine in New York?

Ms Halligan: --There is no guarantee, Your Honor, but there is never any guarantee--

Justice Scalia: There's no guarantee.

Ms Halligan: --that people won't--

Justice Scalia: It doesn't... it doesn't enable you to enforce your law any more rigorously than without having a requirement for a local office.

Ms Halligan: --That, I would respectfully disagree with.

It does operate as a powerful deterrent and--

Justice Souter: Well, your argument there is that--

Ms Halligan: --as an investigative aid.

Justice Souter: --if they break the law, you can shut down the warehouse; whereas, you can't effectively do that if the warehouse is in California.

Isn't that your point?

Ms Halligan: That's one of the points, but also that we're much more likely to be able to identify the illegal activities in the first place.

The suggestion that we would send inspectors to California or any other place to look at books and count bottles is completely infeasible.

And the Twenty-First Amendment was intended to allow states to deal with the regulatory challenges that are posed when liquor comes across the border.

If we had to demonstrate that there was a hundred-percent compliance, then we couldn't have any regulation at all.

That's not, I would submit, a--

Justice Ginsburg: Well, to what--

Ms Halligan: --reasonable measure.

Justice Ginsburg: --to what extent does New York take account of, say, the rigorous regulation in the states from which this wine is coming?

You say we must do this to police for all kinds of things.

But don't other states... California, Virginia... don't they have laws that their local wineries must meet?

Ms Halligan: They--

Justice Ginsburg: And is New York just saying,

"We're going to treat this thing as though it's totally unregulated, anyway? "

Ms Halligan: --We're not suggesting that, Your Honor.

What we are suggesting is that relying on other states to enforce law violations in New York State is not a very feasible alternative.

Additionally, there are 33 states that have agreed with New York, a number of whom are states that have either reciprocal or unrestricted shipping statutes, and said to this Court,

"Please do not prohibit the kinds of laws that are at issue in New York and Michigan. "

So it's obviously important to the regulators in those states, as well.

Justice Scalia: What about the states that do a allow shipment from out of state?

They don't care about their--

Ms Halligan: I can't--

Justice Scalia: --How many are there that allow shipment from out-of-state wineries?

Ms Halligan: --I believe that the current number is 26 states.

I certainly can't speak to the regulatory motivations of each of those states, or the reasons why those laws might have been passed.

Justice Scalia: It certainly suggests that what... that what you're arguing is not essential to the state's enforcement of its alcohol laws.

Ms Halligan: Well, a number of those states have, in fact, joined New York and Michigan in asking the Court not to--

Justice Scalia: States don't like federal regulation--

Ms Halligan: --restrict that.

Justice Scalia: --of any sort, of course.

I know that.

[Laughter]

Ms Halligan: Your Honor, I think that all the Twenty-First Amendment requires the states to demonstrate is that the regulatory regime that they have chosen has some relationship to their goals of protecting the integrity of the state's system.

And that's certainly what the Court suggested in North Dakota.

Justice Scalia: Well, I'm not sure.

When you have facial discrimination against out-of-state products, I think you're... the bar is a little higher than that.

Ms Halligan: Well, that was the case in North Dakota, as well.

In North Dakota, the state imposed regulations on out-of-state vendors that were extremely onerous, so onerous that some vendors said they wouldn't ship products at all.

That was alcohol that was not even destined for consumption within the state; but on a federal enclave.

And the mere risk of diversion into unregulated and unlawful channels was enough to allow the state to impose those discriminatory rules.

The same is true here.

Justice O'Connor, you also asked about Bacchus, as well, and I would like to take a moment to address that.

Bacchus is distinguishable in several ways.

First of all, Bacchus was a tax.

And while we would argue that taxes could be used to further states' interest in suppressing consumption, for example, it is certainly not at the heart of the... of the Twenty-First Amendment in the way that the direct regulation of alcohol across the border is.

Justice Stevens: No, but if you can't grant a tax exemption... and it seems to me, a fortiori... you can't grant a prohibition about importing at all.

Ms Halligan: I, respectfully, would disagree with that, Your Honor.

If you can't address the alcohol that flows across the border, which was precisely why the Twenty-First Amendment was enacted, as well as Webb-Kenyon, because the--

Justice Stevens: No, I'm suggesting a tax on imports is less restrictive than a prohibition on imports.

Ms Halligan: --Well, we would certainly, you know, welcome the authority to do both, but importation is what is at the heart of the Twenty-First Amendment.

Bacchus is also different, because, there, the state made no effort whatsoever to defend the statute with reference to any concerns related to the Twenty-First Amendment.

And Bacchus--

Justice Ginsburg: And according to the District Court, in this very case, the State Attorney General conceded that New York's measure allowing direct sales by in-state wineries was designed to benefit local farmers.

Ms Halligan: --That was an off-the-cuff remark by a single attorney, Your Honor, and that can't be taken as dispositive, given the state's vigorous defense of this statute.

It also was regarding a provision that is not even directly before the Court right now which confers no different shipment privileges than are conferred on any winery, whether in-state or out-of-state, that would obtain a license to sell in New York.

Justice Stevens: Thank you, Ms. Halligan.

Ms Halligan: Thank you, Your Honor.

Justice Stevens: Mr. Bolick, you have, let's see, about four minutes left.

Rebuttal of Clint Bolick

Mr. Bolick: Thank you, Justice Stevens.

Three very brief points.

There his a panoply of tools available to states to police out-of-state wineries in direct shipping, as the Federal Trade Commission has recognized.

They can, if they issue a permit, revoke that permit.

And New York has authority to issue such permits under Section 105-9.

The Twenty-First Amendment Enforcement Act, for which the liquor distributors and states lobbied very hard, gives injunction authority in the home federal courts.

And, of course, the federal agency, the Tax and Trade Bureau, can revoke a permit if state law is violated.

In the--

Justice Scalia: Who's going to count the bottles?

[Laughter]

Mr. Bolick: --Your Honor, the state... the Federal Government is able to count those, but the evidence is that they don't.

And that goes back to a question, I believe, Justice Souter asked.

In the Michigan case, a question was posed in an interrogatory,

"What enforcement by... is done of in-state wineries. "

In that regard, the answer was, "None".

Justice Breyer: How do you count bottles?

I would have thought the consumers have all the bottles.

[Laughter]

Mr. Bolick: That's exactly right.

And, certainly in the directly shipping context in-state, that is emphatically the case.

Justice Scalia: I think they were referring to full bottles.

I guess--

[Laughter]

Mr. Bolick: With direct shipping--

Justice Stevens: They've all been drinking--

[Laughter]

--to arbitrators.

Mr. Bolick: --With direct shipping, Justice Scalia, we can personalize things.

In terms of the Bacchus case, as Justice Ginsburg pointed out, New York, like Hawaii, conceded protectionism.

It is very rife in the legislative record in 1970, when the direct shipping was extinguished.

In 1995, when Governor Pataki vetoed a bill that would have solved this problem, he said, and I quote... and this is in the record, the Joint... the Second Circuit Joint Appendix, at 442... he said, and I quote,

"Since the vast majority of this country's wines are produced in California, I believe that this bill would inevitably lead to a significant increase in mail-order wines from that state into New York. "

"This increase could, in turn, lead to a decrease in sales for New York liquor stores and their distributors, and shrink New York wineries' market share. "

"That is protectionism. "

And, finally, the notion that small winemakers could go to all 50 states and open offices in order to do this... if you could drive out to Middleburg and visit Juanita Swedenburg's winery... and she invites you to do so--

[Laughter]

--you will find Mrs. Swedenburg selling wine, harvesting grapes, and bottling.

This is a ban on... this is market foreclosure, sure and simple... fewer than 600 wineries are represented on the stores of New York's shelves, out of over 3,000 wineries--

Justice Stevens: The question--

Mr. Bolick: --in the United States.

Justice Stevens: --really is whether the plain language of the Twenty-First Amendment allows that very protectionism.

Mr. Bolick: And I would refer you, in my brief time remaining, to the brief, the Carter-Phillips brief for the Napa Valley Vintners Association, the DKT Liberty brief, which go into the history of the Twenty-First Amendment, which was intended to restore the police power, which did not include the power to discriminate.

Our clients cannot compete with the liquor distributors in the political marketplace in their... in their... in their home states.

They can, however, compete in the economic marketplace.

The Commerce Clause protects that right, that level playing field.

The Twenty-First Amendment was never intended to take it away.

We ask this Court, respectfully, to honor 124 years of precedent in the National Economic Union.

If there are no further questions, thank you.

Justice Stevens: Thank you, Mr. Bolick.

The case is submitted.

Attribution:

The Oyez Project

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Fitzgerald v. Racing Association of Central Iowa - Oral Argument

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

Case:

Fitzgerald v. Racing Association of Central Iowa

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Argument of Thomas J. Miller

Chief Justice Rehnquist: We'll hear argument next in No. 02-695, Michael Fitzgerald v. Racing Association of Central Iowa.

Spectators are admonished, do not talk until you leave the courtroom.

The Court remains in session.

We'll wait just a minute, Mr. Miller.

General Miller.

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

The Iowa Legislature, consistent with the Equal Protection Clause, can charge different tax rates for its riverboats and its racetracks for a number of legitimate State interest reasons, including and especially the one highlighted by the district court judge here, the promotion of the development of river communities.

In 1983, Iowa broke ground and got more friendly with gambling and allowed horse racing and dog racing in our State.

Justice Scalia: It's called gaming if... if you favor it.

Mr. Miller: I... is there a neutral term, Your Honor?

In... in regard to gaming, one of the main purposes of having horse and dog racing was to develop a new subset of our agricultural economy, the breeding, training, and raising of horses and dogs.

And that succeeded.

It turned out to be about a $50 million industry.

Six years later, with visions of Mark Twain in the background and the two incredible rivers in America surrounding our State, the Mississippi and the Missouri, the legislature authorized riverboat casinos, riverboat gambling.

And one of the main purposes there was tourism, economic development for the river communities and riverfront development.

In a very short time, there were $17 million worth of investment along the various riverfronts.

A few years later, though, neither gaming enterprise was... was doing as well as they would like, indeed, not doing... not doing well at all.

In regard to the riverboats, the problem was, well, Iowa had this sort of, in a way, naivete maybe about betting.

They restricted the amount of bets on riverboats.

It could only be a $5 bet and one couldn't lose more than... more than $200 in one setting.

Well, Illinois had a different view and had no limits and were starting to succeed competitively.

The... the situation with the racetracks was more severe, that economically it just wouldn't work to have racing, either horse racing or dog racing alone.

So Iowa became the first State in the Nation to allow the sort of the... the golden goose of gambling, slot machines, at racetracks.

Justice O'Connor: So now the bulk of the earnings are from slot machines rather than the races.

Is that right?

Mr. Miller: That... that's right, Your Honor.

Indeed, really the slot machines support the... support the racing.

Justice O'Connor: But under your scheme, I take it the highest tax rate for slot machine income at racetracks is 36 percent versus 20 percent for slot machines on riverboats.

Mr. Miller: That... that is correct, Your Honor.

And that was provided on a... on a graduated basis.

Actually in next year it's... the 36 percent would be... would be reached.

Justice O'Connor: And you want to offer a rational basis for that scheme?

Mr. Miller: Yes.

Yes, we do, Your Honor.

And what... what we say is that the development of the... of the riverboats could be rationally preferred by the... by the legislature because of riverboat development, because of economic development on the... on the rivers.

Additionally, the... the district court found that the additional rational basis could be sort of supporting the riverboat enterprises as a... as an industry, promoting riverboat history.

Also, we argue that there was a problem of riverboats leaving the State, that three out of six in the previous... previous to 1994, the legislation year, had... had left the State.

Justice Kennedy: Well, because of that legislation, the Delta King left the Sacramento River and it's gone up to the Mississippi.

Mr. Miller: Well, that was the next purpose, Your Honor, to try and get other boats to... to come to Iowa, and apparently...

Justice Breyer: They're... they're saying... and maybe there's... I take it from their brief that, look, there's never been a tax scheme like this.

Obviously, a State very often would... would tax at a different rate a handsaw and a screwdriver, but we've never heard of a State that said when you sell a screwdriver, you pay 5 percent tax if you sell it in Des Moines and a 3 percent tax if you sell it in Dubuque, and if it's sold by one kind of a person, they sell 8 percent tax, and it's all the same screwdriver.

So they're saying there's never been a... really a tax system like this anywhere, and... and they better have some pretty good reason or... or something.

I mean, now... so is all that true, that there never has been a system like that, saying the same screwdriver, everything identical, all it is is it's sold in different parts of the State or by different people, and... and you have to pay a different tax?

Mr. Miller: Well, I think there's been many times where the... the taxpayer has been... been treated differently even if... even if the transaction is the same.

Justice Kennedy: Like what?

Chief Justice Rehnquist: Like what?

Mr. Miller: Sort of the... the enterprise zones, for instance.

Communities are... are given favorable tax rates all the time for economic development purposes and that's what's here.

And...

Chief Justice Rehnquist: Typical... typical sales tax.

You know, the State may tax a barber's income at a different rate than a hairdresser's and yet they may use the same stuff.

Mr. Miller: Yes.

Yes, Mr. Chief Justice, that... that would... that would be another example.

And, you know, the State has great latitude in the taxation area and justifiably so because there are so many complexities that... that that be available to the State.

Justice Ginsburg: Do... do you agree, at least to the extent the respondents say, that there's no other State in which slot machines are taxed at a different rate depending on their location, that this is unique to Iowa?

Mr. Miller: I... I think as far as I know, that's... that's the... that's the case.

Slot machines typically are not in multiple purposes... not multiple places like Iowa.

Typically they're in... they're in casinos.

So there's not... not a lot of apt comparisons.

But you know, this is... this is a... a question for the legislature.

When there's no suspect category or fundamental right available, the legislature has... has a great deal of... of discretion.

And the enterprise... the purpose of the enterprise is different.

The economic development as opposed to the agricultural, for instance.

When that... when that is the case, the... the legislature really has... has a great deal...

Justice Breyer: So I push their argument or am I imagining... I'm trying to put it the strongest way.

Look, cosmetologists and barbers do different things, and moreover an enterprise zone is a special part of the State that's not exactly the same.

Something different is going on there.

Here it's slot machine income.

Nothing different is going on.

Nothing.

Mr. Miller: Well, there is difference...

Justice Scalia: I... I... yes, go ahead.

Mr. Miller: There is difference in... in the enterprise.

One has slot machines and table games.

The other has slot machines and... and racing.

But here you have a... a series of communities in... in eastern Iowa and then in western Iowa along the rivers that had suffered loss of manufacturing jobs.

This was... this was an effort, a legitimate effort, on the part of the legislature to advance a new industry, a tourism industry, on the two rivers.

Justice Stevens: As I understood it, didn't... didn't the tax on the... the higher tax on the racetracks come later?

Mr. Miller: It was... it was phased in, Your Honor.

That...

Justice Stevens: And I can't quite understand how imposing an extraordinarily high tax on racetracks is suddenly going to provide a benefit for riverboats.

Mr. Miller: Well, the legislature, of course, had the... had the discretion to... to have them both at 36 percent.

The... the benefit of the... to the... to the riverboats was that... that they didn't go to the higher rate that... that the... that they did for the... for the racetracks.

It's sort of a chicken and egg problem, but... but they're spared that... that higher rate and... and that's... and that's an appropriate benefit.

Justice Ginsburg: It's across-the-board rate for everything that goes on at the riverboat, right?

It's a 20 percent rate, whether its roulette or card games or dice, it's all 20 percent.

Mr. Miller: That's it.

The...

Justice Ginsburg: For the race, there's a great disparity between the parimutuels.

It's only what, about 5, 6 percent?

Mr. Miller: That's right, Your Honor.

There's a... there's a very favorable rate for the... for the racing at the... at the racetrack.

So it's a... in a sense it's a... it's a blend of rates between the two.

Again, understandably so...

Justice Kennedy: Is the rate... is the rate for taxing other gaming activities on the riverboats different from the slot machines on the riverboats?

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

It's... it's the same.

It's the same rate.

So you have... you sort of have 20 percent there as opposed to, say, as was just pointed out, 4 or 5 percent for the racing at the... at the racetrack.

Justice Kennedy: So it's administratively easier to calculate if you have all one rate for the riverboat?

Mr. Miller: It would be... it would be more easily to... to calculate and more efficient.

Chief Justice Rehnquist: You say the riverboats, obviously, are located on the rivers which bound Iowa on the east and on the west.

How about the racetracks?

Are they scattered throughout the State?

Mr. Miller: They are scattered throughout the State.

Two of them are on the... turned out to be on the rivers.

But the largest one, the premier one, Prairie Meadows, is in the Des Moines area in... in central Iowa.

Justice Breyer: Add that if we looked into this at any depth at all, we'd discover this originated from a legislator who hated racetracks and loved riverboats and was trying to kill the whole thing.

And then they say that besides that, there was a report of a committee that said all this enterprise zone... we don't think that's so, et cetera, et cetera.

Mr. Miller: Well, I mean, shocking that... that a legislator on... on... in riverboat country would try and help the... help the riverboats.

I mean, that's, for better or worse, part of the... part of the legislative process, always was and always will be.

And... and courts can't be sort of cops to... to make sure that... that they... that they do not do that.

Justice O'Connor: Well, under...

Justice Scalia: If we ever look to the real reasons for things, it would be a disaster, wouldn't it?

Mr. Jones: [Laughter]

Mr. Miller: Yes.

Well, it's, you know, the old adage about sausage, making sausage, that you shouldn't watch it, that...

Justice Ginsburg: But the Iowa... the Iowa Supreme Court seems to think it could look to what was the real purpose, not the purpose that we could conceive.

Lots of nice purposes like the riverboat drifts away and the racetrack is...

But you said something in your reply brief that... that really surprised me.

It seems to me that if we say... if you're talking about Federal equal protection, this is an area in which the leeway for the legislature is the widest that there is.

But couldn't Iowa then say, okay, we're just doing this under Iowa equal protection, and we can make that whatever we want?

And for us, the real purpose counts, not the conceivable purpose.

Mr. Miller: Yes.

The... you know, the... the legislature... the court could have said that they were diverging from... from the standards of this Court.

Justice Ginsburg: But you said they couldn't do that on remand.

On page 6 of your reply brief, you said that the Iowa Supreme Court cannot reconsider the State court decision in order to subsequently establish an adequate and independent State ground.

Why couldn't it?

Mr. Miller: Well, our argument is... is, Your Honor... and we know we're... we're into sort of a little bit new territory here.

But our argument is that... that the court has made a decision that the... the analysis... a clear decision that the analysis is the same under the Federal and the State constitutional provision.

If that analysis, judged by a higher court, is determined to be wrong, then that would... would seem perhaps to settle it.

But more significantly, the... the respondents didn't argue below that there was a separate analysis, that... that they should look at it separately.

Justice Ginsburg: But they could.

I mean, nothing would foreclose them on remand or the Iowa Supreme Court itself.

Mr. Miller: Yes.

It's... it might not, but we argue that... that they sort of waived that argument, that they didn't argue that in... in the first time through, that they... it was a different analysis.

They conceded, like everybody else, and assumed that it was the same analysis.

Chief Justice Rehnquist: All our opinion would say, if we reverse the Supreme Court of Iowa, was remand it for further proceedings not inconsistent with this opinion.

And so certainly, so far as our remand order is concerned, the Supreme Court of Iowa is free to do whatever it wants so long as not... as it's not inconsistent with our opinion.

Mr. Miller: I understand, Mr. Chief Justice.

Maybe I'm making my argument too soon and... and will...

Chief Justice Rehnquist: I doubt if you'll have any better luck with it before the Supreme Court of Iowa.

Mr. Jones: [Laughter]

Mr. Miller: Well, we... we will... we will try I... I assume.

What... what we're saying here is that... that there are multiple legitimate State purposes available that are well within the zone of Nordlinger and the related cases that have been before this Court, that... that this is comfortably a legitimate State interest, a number of them, most specifically the development of the... of... of the river communities.

And that's... that's consistent...

Justice Stevens: Would it make any difference in your analysis... I don't know if this is true or not... but if the legislative history, if you had a complete record of all the debates and everything else, and it was perfectly clear that the hypothetical reasons you advance were definitely not the reasons that motivated the particular tax rates, that they did it just, say, to get even with the racetracks because somebody was unhappy with something they had done in the past or something like that, would that make any difference?

Mr. Miller: Well, I... I don't think that there's... there would be sufficient legislative history to foreclose rational speculation.

Justice Scalia: No, no.

Take his hypothetical.

There is.

Justice Stevens: I'm assuming that there is, that... that there's a reason out there that... that... none of the reasons that you advance were, in fact, considered by any of the legislators.

In fact, they rejected them.

They thought, we really don't want to help the riverboats.

What we want to do is do something to really penalize the racetracks because they're an immoral business, they're even worse than gambling on the rivers.

Justice Kennedy: And that's why they're doing it.

And they put that right in the preamble to the act.

Justice Stevens: Would that make any difference in your analysis?

Mr. Miller: I... I think that that kind of... kind of history would not, in a rational speculation case, that... that...

Justice Stevens: I guess my question is, is it rational speculation when you know it's not true?

Mr. Jones: [Laughter]

Mr. Miller: Well, I... I suppose not.

Justice Scalia: Well, it's usually not true.

I mean, usually these things are done for the self-interest of... of legislators from various districts, and... and as long as there could be a rational... I... I would have... I'm surprised it took you so long to answer that question.

Mr. Jones: [Laughter]

Mr. Miller: I wanted to be thoughtful, Your Honor.

But like... we get back to... to the... the rough and tumble of the legislative process as... as you suggest, Your Honor, is such that the courts don't... don't review that, don't... don't...

Justice Souter: But isn't... isn't that exactly really the point?

The courts just don't review it.

And unless you get to... to some fact pattern that... that gets you a... a higher level of scrutiny, it's not so much that we're engaging in rational basis scrutiny.

We're just saying we can't touch the political process unless you get yourself into a suspect class.

Isn't that really what we're saying?

Mr. Miller: That's... that's pretty much... pretty much what's... what's being said here and... and how the cases have been interpreted.

And is... and it makes... makes a lot of sense because like you... like you suggest, Your Honor, when there's... there's not a fundamental right or a suspect category, that's the pure legislative authority and that's where democracy kicks in our... in our country, for better or for worse, and the assumption is that if they make a mistake, democracy later will... will catch that mistake.

Your Honor, I'd like to... to now turn it over to... this has been my first argument, so I refer to him as my safety net.

[Laughter]

Kent Jones from the Solicitor General's office, and reserve what time is remaining after he is done.

Argument of Kent L. Jones

Chief Justice Rehnquist: Very well, General Miller.

Mr. Jones.

Mr. Jones: I'd like to thank counsel.

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

Taxing decisions are like spending decisions because they affect the State's economy, as well as its balance sheet.

In recognizing that fact, this Court has consistently upheld the... the... has consistently held that a State's desire to promote or foster one type of business over another or even to promote or foster one mode of doing a business over another is a rational basis that supports taxing the one and exempting the other.

For example, in State Board v. Jackson in 1931, this Court held... upheld a tax differential, a different tax treatment, of chain stores versus single enterprise retail stores.

Even though these businesses did essentially the same commerce, the Court held that in the State's exercise of its broad authority to govern the economy of the State, it can prefer one mode of doing the same business over another.

And that same rationale has been applied by this Court in numerous contexts involving tax distinctions between, for example, warehouses located near railroads and warehouses not located near railroads, between laundries that are operated by hand and laundries that are operated by machine, and even between individuals and corporations that are conducting identical businesses.

Justice Stevens: What about... what about slot machines owned by Republicans versus slot machines owned by Democrats?

Mr. Jones: [Laughter]

Mr. Jones: Assuming that we're still talking about State laws...

Chief Justice Rehnquist: No, that's exactly... I'm serious about...

Mr. Jones: Assuming we're still talking about State laws, I would have to ask myself what would be the rational basis.

The rational basis...

Justice Stevens: The rational basis is the Republicans have a majority in the State legislature.

Mr. Jones: [Laughter]

Mr. Jones: Well, that might explain... the difference I think between your hypothetical and... and where I'm trying to come from is that the rational basis has to be related to a legitimate State purpose.

There's a... a legitimate State purpose in fostering certain kinds of commerce and suppressing others.

Justice Stevens: What about... what about slot machines owned by farmers and slot machines owned by city dwellers?

Mr. Jones: It's... it's hypothetically conceivable and that's the question that this Court asked itself under... under FCC v. Beach.

Is there a conceivable State interest that would justify that distinction?

And obviously, that... the fact that there has to be one doesn't mean there always is one, and I'm not standing here saying, well, every imaginable distinction is justifiable.

The distinction in this case is simply between... is whether the State could conceivably have preferred riverboats over racetracks.

Justice Scalia: What... what have we held wasn't justified outside of a suspect category situation, such as... I don't mean Republicans and Democrats.

You're into First Amendment suspect categories I suppose.

What... what have we ever held was... was irrational that didn't involve race or... or, you know, political discrimination or something like that?

Mr. Jones: The... there's a case that Justice Ginsburg could tell us about.

She argued a case where this Court... I think it was called Weinberger v. Wiesenfeld, a case... not a tax case.

It was a Social Security benefits case, and the Court held that the distinct treatment of... of the surviving spouse's ability...

Justice Scalia: It's a suspect category, and I mean, we're into sex discrimination.

Mr. Jones: Well, it... it was described by the Court as... as a rational scrutiny case, and it said there was no legitimate State interest because in... in the context between treating differently male and female surviving spouses, in light of the objective of that statute, which was to protect the... the children of the couple, there was no rational basis to prefer one rather than the other.

That is... that is the only case that I can cite to you where this Court has applied a rational basis test to strike down a Federal statute.

There may well be others.

Justice Breyer: There are others, but it's... it's the... it's quite interesting, is... is there a... there are two sets where they're struck down.

One is what you might call the heightened rational basis which are normally not economic regulation, but there was the mental... the mental... the building, you know, the... of the home for the mentally disturbed or whatever.

And then there are the ones that are out-of-state, which are Dormant Commerce Clause cases.

But is there any which is a pure rational basis in an economic area?

You think the answer to that is no, and I can't think of one.

Mr. Jones: I... I can't think of one, but it's not because there is no rational basis test.

It's because in applying this test, the Court is very deferential in recognizing that States have intentionally been given this authority over regulating State commerce, and that these kinds of choices are left to the legislative branch.

Justice Ginsburg: Mr. Jones, when you talked about Federal tax, I thought you were going to say the one that you have in your brief, Martz against Commissioner.

Mr. Jones: Well, I... we understand that to have been a case where the... which you also argued I believe, unless I'm remembering the wrong case...

Justice Ginsburg: That was... that was... you left out that cert was denied.

Mr. Jones: Ah.

[Laughter]

I made another mistake in the brief that I'll get to later if I have a chance.

But that was...

Justice Scalia: These are all cases she won or lost?

Mr. Jones: I'm afraid...

[Laughter]

Justice Scalia: You didn't... you didn't make the mistake of citing one that she lost, did you?

Mr. Jones: [Laughter]

Mr. Jones: No, I don't think so.

Justice Stevens: There are no such cases.

Mr. Jones: [Laughter]

Justice Ginsburg: Oh, yes, there is and it was a tax case.

Justice Breyer: It was a State tax case.

Mr. Jones: [Laughter]

Mr. Jones: But... but the... it was... it was a tax case.

But in that case, the Court... you were... the Court was persuaded that the distinction was invidious.

The Court didn't say that a different treatment of unmarried men and unmarried women in this particular deduction context was irrational.

The Court said it was invidious.

So I believe that the only tax... Federal tax case that has... well, I don't believe there is a Federal tax case that this Court has decided that violated... failed to meet the rational basis test.

The... the court below made... the Iowa Supreme Court... where it went wrong was looking to only one of the purposes of the statute.

There were many purposes.

They looked to just the purpose of whether it aided racetracks, which just kind of strikes me as an unrealistic way to look at what the purpose of a legislation that imposes a tax on racetracks would be.

But to answer a question that Justice Stevens raised earlier, when... in applying the rational basis test, the courts are to look to any plausible or conceivable theory.

And... and in FCC v. Beach, as well as other cases we've cited, in applying that test, the Court has said that you don't look... you're not bound by the facts of the particular case.

And indeed, you're not supposed to make fact findings as to what these legitimate interests might be.

Instead, you're supposed to allow the State any rational legitimate interest that the Court might... might be able to perceive and... and nail down that point in that case by saying that... and I'm quoting... it is entirely irrelevant whether the conceived State purpose actually motivated the State's decision.

So you don't have... the State doesn't have to show that these rational, legitimate State interests, in fact, motivated the decision.

It doesn't have to show that they are, in fact, the basis for the decision because this is a Federal constitutional question.

This is not a question of interpreting the State law.

If we wanted to interpret the State law, we'd want to know what its purpose was, but that's not this task.

In looking at the constitutional limitation, it only... it only takes effect if the State has no conceivable or plausible legitimate interest in the classification.

One other point to mention briefly is they say Allegheny Pittsburgh points another direction.

Allegheny Pittsburgh was the rare case that this Court said in Nordlinger... was the rare case where there was a West Virginia State constitutional provision that said all assessment... all property taxes will be levied based on market value.

A local assessor in that State didn't like that and he... he assessed taxes based on acquisition, which is prices, which is the last sale price of each property, and that resulted in... in a differential treatment of each taxpayer.

And what this Court held in... in Allegheny Pittsburgh was that because the State constitution prohibited any taxation other than market value, there was no legitimate State interest to justify the... the distinguishing tax rates.

Well, that case doesn't have any application here because there's no provision in the Iowa constitution that says that the Iowa Legislature cannot, in regulating commerce, prefer or promote riverboat traffic and riverboat...

Justice Kennedy: Do you read Allegheny as saying that the... if the State had enacted exactly the scheme that was being administered there, that it would pass equal protection review?

Mr. Jones: It... well, in Nordlinger, the Court... if I understand your question right, in Nordlinger, the Court upheld an acquisition... last sale price tax scheme I think in California where there was no constitutional provision in California that required market value taxation.

Justice Stevens: Would the answer in this case be different if the Iowa Supreme Court told us that the Iowa constitution requires that all slot machines be taxed alike?

Mr. Jones: I think that you would make... I think in that... in looking for a legitimate State interest, you would make an inquiry into whether the Iowa constitution prohibited preferring riverboats... preferring riverboat commerce because a legitimate State interest for Federal purposes... and the Court made this very point in response to a dissent of yours in... in the opinion by Justice Brennan in the Minnesota v. the Clover Leaf Creamery case.

Argument of Mark McCormick

Chief Justice Rehnquist: Thank you, Mr. Jones.

Mr. McCormick.

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

I think the Iowa Supreme Court in this case, as this Court will determine as it reviews the opinion, addressed two questions, not merely one question, in this equal protection challenge.

The first question the court addressed is what did the legislature have in mind in enacting this legislation.

In doing so and in answering that question, the State court was doing what State courts routinely do, interpreting State law.

Once having determined the meaning of State law, as was its prerogative, the court then moved to the second question which is the only question that the State and the United States have argued here, really, which is the equal protection issue.

We think the first question has to be answered before you jump to the second.

Chief Justice Rehnquist: Well, what about the... our decision in FCC v. Beach, which was just referred to earlier, where it says it really doesn't make any difference what the actual facts were?

Mr. McCormick: The... the decision in Beach, as I understand it, did require the establishment of a legitimate State purpose under the FCC provision that was at issue.

In fact, the court of appeals had sent the case back to the FCC: Tell us what you had in mind, and the court of appeal... or the FCC said, we can't think of a better reason than was given by Judge Mikva in his concurring opinion, and this Court accepted that as being a plausible basis then for the distinction that was at issue in that case

Justice O'Connor: But we have said that any conceivable rational basis is enough.

We don't care what Iowa really had in mind.

Mr. McCormick: I think you do, Your Honor, and I think the case that was mentioned earlier, the Weinberger case, is an illustration of how it makes a difference.

In that case, as the Court ultimately found, there was gender discrimination which was inappropriate in dealing with the issue of survivorship benefits as to spouses, and the argument that was being proffered by the Government in that case was, this is okay because this statute was intended to take care of women who have trouble, when they are widowed, getting by in the work place.

Justice Scalia: If you think gender discrimination cases aren't different, you're just wrong.

Mr. McCormick: No, Your Honor.

I... I am not saying that the analysis was the same, but I am saying that the Court looked to the actual intent as it was shown by legislative history.

Justice Scalia: Some legislatures... some legislatures don't have legislative history.

What is to be done in those cases?

What, do you... you convene a trial court to take testimony from legislators and others to find out what was the actual intent of the legislators?

Mr. McCormick: What is routinely done in Iowa is what we did in this case, which is... and what courts routinely do at the State level, at least what's done in Iowa, is that the court looks at any available materials that would bear on the concerns...

Justice Scalia: There are no materials.

I mean, some States don't have legislative history.

They just don't keep it.

Mr. McCormick: That's right.

Justice Scalia: What do you do in that case?

Mr. McCormick: I'm telling you.

Justice Scalia: Do you call witnesses?

Mr. McCormick: We don't have... we do not have records or transcripts of legislative debates at committee hearings.

Justice Scalia: So were... were... was testimony taken from legislators asking why did you vote for this bill?

Mr. McCormick: No, Your Honor, but...

Justice Stevens: Why not?

Mr. McCormick: affidavits... excuse me.

But affidavits were obtained that explained what the concerns were that were being addressed.

We have a full record.

This was a summary judgment motion in which we put in information that was available to the legislature.

Chief Justice Rehnquist: Affidavits from legislators?

Mr. McCormick: Yes, Your Honor, but not saying why they voted as they did, but explaining the legislative history.

And the Iowa court routinely, in dealing with the meaning of State law, has accepted the kinds of materials that we put in the summary judgment record.

Justice Scalia: Why didn't they explain why they voted as they did?

If, as you say, the... the intent of the legislature is the criterion, why didn't you ask them, why did you vote the way you did?

Mr. McCormick: Because Iowa, like this Court, suggests that an individual legislator isn't competent to say that, but Iowa, like this Court, will permit legislators to explain legislative history, which is what was done here.

That's what we did with these legislator affidavits.

The Iowa court used the kinds of materials that States use when they...

Justice Scalia: The whole is the sum of its parts.

If you're really interested in why the legislature did it, you ought to get affidavits from every legislator saying this is why I voted for it, and if 51 percent voted for it for a certain reason, that was the reason.

Mr. McCormick: In a State like Iowa, where we don't have the kind of information that's available from Congress, what we do is we ask our court to determine what the legislature intended as it must in many, many cases, including this kind of case, and offer the court the kind of information, the background information that's available.

Justice Ginsburg: If that's how it's done in Iowa, it can be done that way.

This Court, when it's dealing with tax cases, it doesn't do it that way.

It doesn't look for the actual purpose.

And in... and in the Wiesenfeld case, the whole thing was driven by it being a gender classification, and the Government's argument was this was pure favor to women.

And the argument is, no, that was not the actual purpose.

Mr. McCormick: This Court has said in several cases... it has said in the Nordlinger case and also in Heller against Doe... that even in a rational basis case, to be plausible, a justification must not be precluded by the record.

And, for example, that is how Nordlinger distinguished Allegheny Pittsburgh because Allegheny Pittsburgh had determined that the West Virginia property tax scheme was a market value valuation or appraisal system.

And in Nordlinger, the position was being advocated, well, this case is governed by Allegheny Pittsburgh.

You can't have an acquisition value system like California.

The Court distinguished Allegheny Pittsburgh by saying that the record in Allegheny Pittsburgh precluded the legislative goal of having a market value... excuse me... having an acquisition value tax system.

That's how the case was distinguished.

Justice Ginsburg: But if you're looking at what... what the legislature did, they did one thing great for the racetracks.

They gave them permission to have these slot machines, which they didn't before, so they're preferring the racetracks by giving them this, but they say not too much because we're going to let you make money from these slot machines, but not too much.

We're going to take a piece of it.

So you like what they did, the permission to have the slot machines, but then say, ah, but once... they have to give us as sweet a deal as they gave the riverboats.

They didn't have to give you anything.

They didn't have to let you have the slot machines.

Mr. McCormick: Well, Your Honor, our argument about that is that they... they threw us a lifeline when we were faced with economic disaster, just as they were throwing a lifeline to the riverboats, but it had an anchor attached to it.

What they did, of course, was have a 2-year moratorium before the first escalation of tax occurred and they provided for a total of 10 years before the 36 percent is effective.

It will be effective next year.

Justice Ginsburg: But it was... it all came in in the same legislation, didn't it...

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

Justice Ginsburg: So they gave you something you never had before and it was pretty good, but you didn't...

Mr. McCormick: The Iowa Supreme Court said what they did by that legislation was put us in a class the same as the riverboats with respect to slot machines, which was the main activity at both... both venues, and that they treated us differently by imposing this draconian...

Justice Ginsburg: Well, then to treat you the same, I think that they would have to raise the parimutuel betting from 5 percent, whatever it was, to 20 percent.

Mr. McCormick: Your Honor, the record here shows that parimutuel betting has invariably been a losing proposition at the tracks, and the legislature, when it passed this statute, specifically and expressly required that the riverboats use the revenue first to pay their debt, because they were in terrible circumstances, but secondly to subsidize the purses at the parimutuel betting and to promote the... the horse industry.

And such... these are mandated goals which were... which the legislature required.

Justice Scalia: That the riverboats do that or that the tracks do that?

Mr. McCormick: No.

That the racetracks do that.

Justice Scalia: Oh, okay.

You said the riverboats.

Mr. McCormick: I'm sorry.

I meant the racetracks are required by the statute to... to do those things.

Parimutuel betting has... has never been a source of net revenue in... at least since the bankruptcy of the main racetrack in 1992.

Justice Ginsburg: As I understand, the riverboats wouldn't make money either if they didn't have the slot machines.

Mr. McCormick: Well, that's certainly arguable.

They've had them since they were initiated.

Their problem in 1994 was getting rid of the betting and loss limits.

But the... the Iowa court... and it's our contention that this was a matter that was within the prerogative of the court... in ascertaining the legislative intent in this case, said it was not the intent of the Iowa Legislature to benefit riverboats at the expense of the racetracks.

Justice Breyer: So how does this work?

I mean, I thought there was a distinction between your trying to show in a case like this that the rational purposes that are advanced simply are not served... that's a factual matter.

And I take it that's Allegheny.

They showed that the... that this wasn't a way to bring about what they claimed.

Mr. McCormick: Yes.

Justice Kennedy: All right.

Justice Breyer: But it's not open to you to show that the legislature didn't really have that motive for the reason that if the courts permitted you to show it, there would be no end to that.

People would be arguing about legislative theories in State cases like this forever.

So if that's right... I... I mean, you're not... I don't think you can show the first.

Maybe you can.

Mr. McCormick: Well, our contention is that...

Chief Justice Rehnquist: Yes... is you can.

Mr. McCormick: this Court left that open to us in Allegheny Pittsburgh.

Justice Breyer: Yes.

I think it did leave it open, but you see, they come in with some rational purposes, and you think you've showed here that... that they don't... that this... this particular statute could not serve those purposes as a matter of the world of fact?

I mean, one is, for example, they say if we don't have a lower rate... you've heard it... they'll go off to some other place, and they have one that went to some other place.

And you don't deny they went to some other place.

Mr. McCormick: Well, the question is not only legitimacy of a goal, but whether there is a rational relationship and whether the classification involved is reasonably related to any differential treatment.

As in Allegheny Pittsburgh, our complaint here is a comparative one.

It's the comparative treatment for the same activity essentially in the same place because we've got racetracks in two of the cities that... that are the cities where two of the three riverboats were in fact, and... and on the same activity, which is what the Iowa Supreme Court found when it determined that for classification purposes, it saw no difference except that one was a facility that was fixed and the other floated.

And then having... having made that determination of the equal situation, the court looked at differential treatment too and said...

Justice Ginsburg: But there was another factor that... that was part of it, isn't it?

There was a 20 percent rate across everything, all the kinds of games that they have on the riverboat.

So that's nice and administratively convenient.

You don't want to have one rate for the slot machines and another one for blackjack.

Mr. McCormick: Yes, Your Honor.

And that rate was in place in 1994.

There wasn't any change in the tax paid by riverboats.

The legislation imposed for the first time, because it authorized for the first time, a tax on slot machine usage and activity at the racetracks.

Justice Souter: May... may I address a... a slightly different argument that you were making, I think you were making a minute ago?

And that is, now... it had two premises.

Number one, you said our own cases show that a... a conceivable rational basis cannot be relied upon when the record indicates that in fact that was not the basis for the legislation.

So fact limits what is... what can be considered as conceivable.

Number two, you said a moment ago that the Iowa Supreme Court made a determination about the... the purpose of the statute, and... and at least they determined that the purpose of that statute was not to aid riverboat gambling.

So I take it your argument is you can't argue that this differential treatment is rationally related to the promotion of... of riverboat development or river development because the Iowa Supreme Court has definitively determined that that was not the case.

Justice Scalia: Is that a fair statement?

Mr. McCormick: That's certainly part of our argument, yes, Your Honor.

Justice Souter: All right.

My... my question I guess is this.

There is no question that the Iowa Supreme Court in the construction of the Iowa constitution can approach matters that way.

If this Court approaches matters that way, then in effect we're going to have two different methodologies, one for Federal cases, I guess, and... and one for... for State cases.

And we're going to have to take every State case subject to fact determinations made by the State courts, and that's going to limit the application of this conceivable rational basis test.

Why would it not be wiser for us to say, just to keep the systems running smoothly, look, we are not going to be bound by State court determinations of legislative intent or purpose?

The State courts are perfectly free to do that under their own constitutions, but when it gets to us, we will not accept, for example, the determination in a case like this by Iowa that the purpose was not to aid riverboat gambling.

Why wouldn't that be a sensible way for us to... to go, leaving the State courts to run their systems any way they want to?

Mr. McCormick: We think, Your Honor, that the question of the meaning of State law has always been within the domain and prerogative of... of the State courts.

Justice Souter: But this isn't a question of State law.

It's a question of State fact in applying a Federal law, i.e., the... the rational basis scrutiny under the Federal... the Equal Protection Clause.

Mr. McCormick: Yes, Your Honor.

I'd invite your attention to Metropolitan Life Insurance Company against Ward, which came out of Alabama, dealt with burdensome taxes placed on out-of-state insurers that wanted to do business in Alabama.

That case, like this one, involved a summary judgment proceeding where information was put into the State court record.

The State in that case advanced, as I understand it, something like 17 reasons as rational bases for that differentiation.

Now, this Court reviewed two of them because the State court held that they were valid justifications under that summary judgment record.

This Court reversed, finding that those justifications were not valid or supportable.

They were not rational.

But this Court did not go further than to look at the other proffered justifications by the State.

The Court sent the case back for completion of the summary judgment proceedings.

And what was being done in that Alabama case is exactly what we did in this case by looking at the summary judgment record.

Justice Ginsburg: I thought that was... involved interstate discrimination against out-of-state actors.

Mr. McCormick: That was the... that... that was the issue that was being reviewed on equal protection...

Justice Ginsburg: But here you have everybody internal in the same... the same State.

So I think that's a different case.

Mr. McCormick: Excuse me, Your Honor?

Justice Ginsburg: Well, you're not discriminating against out-of-staters, which is a Federal concern.

Mr. McCormick: Yes, Your Honor.

I'm not talking about the... the equal protection issue there.

I'm talking about the manner in which the record was determined and the State court was given the prerogative of telling this Court what it determined the purposes were of the law.

Justice Ginsburg: But if you're... if you're right about how Iowa goes about doing things, then you go back and tell the Iowa court, the Supreme Court has this any conceivable purpose test.

You have what's the real purpose test.

So now say we'll apply our own State notion of what equal protection is and... and that's the end of it.

Mr. McCormick: We're going to say that we thought the... this Court would say if the record showed, whatever the record was, in this case our summary judgment record, that the rational speculation by the Government is not supported by the realities of the situation, then that the court... that sort of justification is not plausible.

We thought that's what this Court's view was.

We certainly will argue to the Iowa court that it is within its prerogative initially first to decide what the legislative purposes were, as it does in many cases and as this Court has in many cases respected when it is doing Federal constitutional review where the meaning of a State law is a threshold issue.

We'll be then inviting the Iowa court, if this Court remands the case, to reconsider the case under the Iowa constitution.

Justice Scalia: Mr. McCormick, why isn't there a categorization problem in this case?

I mean, there is no Iowa law pertaining to slot machines in particular.

There is a law taxing table games at... the revenues from that, at 20 percent.

Justice O'Connor: Right?

Mr. McCormick: Yes, Your Honor.

Justice Scalia: Why isn't it perfectly reasonable to look upon these laws this way: Iowa is taxing a business which has nothing but table games at 20 percent on all the table games

It is taxing a business which has parimutuel betting plus slot machines at 5 percent for the parimutuel betting and 34 percent for the slot machines.

I mean, you certainly wouldn't be complaining if they taxed racetracks at a combined rate of 15 percent or... or a combined rate of... of 30 percent for that matter.

Now you... you would have no complaint.

So why does it make any difference if they simply, instead of picking one percentage, charge 5 percent on the parimutuel and 34 percent on the slot machines?

But they're two different businesses.

One is just table games.

The other one is horse... horse racing and slot machines.

They're... they're different businesses.

They're taxed differently.

Mr. McCormick: Well, the... at least the view of the Iowa court was that these two enterprises, the riverboats and racetracks, are engaged in the same business.

They are in the same class.

And singling one of those taxpayers out for differential treatment violates equal protection in the view of our court.

The... the...

Justice Scalia: Your court is entitled to... to view it that way from State law, but they were... they've said that State law mirrors Federal law, and just because they choose to look at it that way, that doesn't mean I have to look at it that way.

Mr. McCormick: No, Your Honor.

That's... that's certainly correct.

But in terms of the classification here, we think that the State court was warranted in finding that these two taxpayers are in the same class.

Parimutuel revenues have... have not, from 1994... actually immediately preceding that and subsequently, ever been a factor in the revenues of racetracks except a negative factor.

The table games... that's an advantage that the riverboats have over racetracks, not a justification for differential treatment for putting a heavier tax on the same activity at the racetracks.

Justice Ginsburg: It's an odd position when you say there was no obligation whatever for the State to allow slot machines at racetracks, but if they allow it, they have to be as generous to the racetrack as they were to the riverboats.

What didn't come in as a discrete item came in as part of the whole gambling operation.

It is strange to say not only... once you give it to us, you have to give us the best deal.

Mr. McCormick: We're not... we're not really saying that.

We're saying that... that any differential treatment cannot be of the magnitude that exists here and be consistent...

Justice Ginsburg: But you'd have no equal protection argument at all if they didn't let you have the slot machines.

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

Justice Souter: Iowa... the Iowa court made the statement, as I understand it, that the Iowa Equal Protection Clause and the national Equal Protection Clause had identical requirements at least for the purposes of this case.

Mr. McCormick: What they said was that they applied the same analysis as this Court.

Justice Souter: Okay.

Now assume, for the sake of argument, that we don't accept the analysis for purposes of Federal equal protection.

Do you understand the Iowa decision to be that there is... despite that finding on our part or that conclusion on our part, that there is no question that what they said in that opinion does reflect the Iowa Equal Protection Clause and the result that they reached will be and... and can be found on the basis of this opinion to be the result under the Iowa clause?

Mr. McCormick: Yes, Your Honor.

We...

Justice Souter: So that what we do will make no difference in the... in the ultimate result in this case.

Mr. McCormick: If the Iowa Supreme Court, if this case were remanded, determines through the use of the same analysis, the same result...

Justice Souter: Unless they change their rationale, there is no question, as I understand it, on the basis of this opinion what the result will be.

Is that correct?

Mr. McCormick: Well, it... I sure hope so.

Justice Souter: I mean, you're going to... yes.

Justice Breyer: I mean, that's what I...

Justice Scalia: They can't blame it on us.

Justice Breyer: No, that's quite right.

Justice Scalia: I mean, right now they're blaming it on us, and if they want to take the blame themselves... how... how are they appointed?

Are they appointed or elected?

Mr. McCormick: They're through a Missouri Plan appointed, Your Honor.

Justice Souter: Missouri Plan appointed.

Chief Justice Rehnquist: Well, the Supreme Court of Iowa in... in its opinion in this case said that the Iowa Equal Protection Clause and the Federal clause were the same or subject to the same analysis, didn't they?

Mr. McCormick: Yes, Your Honor.

Chief Justice Rehnquist: And I suppose if we decide that it's wrong on the Federal section, it goes back to the Supreme Court of Iowa, they could just as easily say, well, our... our State equal protection follows Federal equal protection.

If the Supreme Court of the United States says the Federal is one, we're going to follow the Federal.

Mr. McCormick: We think that the court has...

Chief Justice Rehnquist: It's not foreordained what they will do.

Mr. McCormick: No.

You're... you're right, Your Honor.

I'm just...

Justice Souter: So you think... you think that is open to them...

Mr. McCormick: I think that...

Justice Souter: the way... the way they wrote it.

Mr. McCormick: Oh, I think so.

I think it would be available to the Iowa court.

Justice Scalia: Well, they'd have to eat their words.

Mr. McCormick: Yes, Your Honor.

Justice Scalia: I mean, they'd have to say we're changing our law.

Mr. McCormick: That's right.

Justice Scalia: And I doubt that this is the first... is this the first case in which they've said we... we follow Federal law on equal protection?

Mr. McCormick: No, Your Honor.

Justice Scalia: I didn't think so.

Mr. McCormick: In fact, there are cases where our court, in applying exactly the same analysis that this Court has done, has reached different results.

We have Bierkamp against Rogers in our brief in which our court invalidated the Iowa...

Justice Scalia: Judges don't like to eat their words.

Mr. McCormick: We're hopeful.

Justice Souter: But as I understand it, they didn't say, we follow the Feds.

They said, they are identical.

Mr. McCormick: Well, what they said is the scope and the import of the two constitutional provisions are the same.

Actually part of that... if one looks at the history in Iowa, there's an old case, 1911 case, State against Fairmont Creamery.

The Iowa court for years in interpreting the Iowa equal protection provision never made any reference to Federal law.

And that case, for the first time in 1911, cited a couple of cases from this Court and said our decisions are in harmony with the decisions of the United States Supreme Court.

I believe the evolution shows and history shows that what the court has done since then is for convenience, because of the availability of the precedent of this Court, said we use the same analysis.

And we... we do the same thing in antitrust law.

We do the same thing in civil rights law, even though we have some statutory differences.

But the court is still free to arrive at a different result under that analysis, and in this case certainly the court arrived at the decision that it did not only under the Federal Constitution but the State constitution.

Justice Scalia: It would mean they were wrong twice, both in their interpretation of Federal law and also in their interpretation of Iowa law, right?

Mr. McCormick: I don't believe so, Your Honor, because I think what they have said is that they use the same analysis.

They don't say the same result is foreordained.

This... our court, for example, doesn't follow the Lyon case on the issue of the good faith exception to the exclusionary rule.

The court has been independent, treated State grounds as being adequate and independent in appropriate cases, even though generally, as it said here, it tracks with the Federal cases under similar provisions.

One thing I'd like to mention to you because I think it is a little bit of a misinterpretation of reality to suggest that these riverboats were created in Iowa to... to sit on our border rivers.

The statute involved and the implementing regulations will allow a riverboat in Iowa on any river in Iowa, on any lake in Iowa, or on any reservoir.

And... and there is, in fact, as the record shows, a riverboat on a landlocked lake in southern Iowa such that for comparison purposes, comparing these racetracks, two of which are in river cities, and... actually all three of them in river cities, but two of them in river cities where there were also riverboats at the time of this...

Chief Justice Rehnquist: How do you get the boat to the landlocked lake?

Mr. Jones: [Laughter]

Mr. McCormick: It's an interesting process.

One either builds it there or carries it with...

Justice Breyer: Humphrey Bogart.

Humphrey Bogart gets it there I think.

Mr. Jones: [Laughter]

Mr. McCormick: Yes.

It's African Queen.

And the notion that there is any particular navigation or... or sailing involved with these... with these methods of housing gambling activities is... is more imaginary than real.

I appreciate very much your attention.

We believe that this Court in reviewing past State court equal protection decisions and more recently in the... in the tax area in Williams against Vermont and Hooper against Bernalillo County has... has respected the... the determinations that have been made by the State courts as to what legislative intent was, as we ask the Court to do in this case, and in those cases, and applying... after that threshold determination, applying equal protection analysis, found the statutes under a rational basis analysis did not comport with equal protection.

We think this is a case where the record will support this Court in finding that the Iowa Supreme Court got it right and that the State and Solicitor General have it wrong under this record.

Thank you.

Rebuttal of Thomas J. Miller

Chief Justice Rehnquist: Thank you, Mr. McCormick.

Mr. Miller... General Miller, you have four...

Mr. Miller: I would just point out that Minnesota v. Clover Leaf Creamery Company is the... is the case where this Court decided that in... in a case before this Court that comes from a State court, that the Federal process, the Federal analysis applies, and that the total work, the total decisionmaking done by the State court is reviewable here, so much so that in that case they reversed a factual finding in... in the court.

I would emphasize too that... that the Iowa Supreme Court has said that... that the analysis is... is... always is the same between the State provision and... and the Federal provision, and it's only departed, as a matter of result, only one time, the Bierkamp case, in the 130 years that the two provisions existed at the same time.

With that, I would respond to any questions that you might have or... or conclude by asking you to uphold the constitutionality of this... of this act because there are multiple legitimate State interests developed by rational speculation to support the legislation.

Thank you.

Chief Justice Rehnquist: Thank you, General Miller.

The case is submitted.

Justice O'Connor: The honorable Court is now adjourned until tomorrow at 10 o'clock.

Attribution:

The Oyez Project

Featured:

Hillside Dairy Inc. v. Lyons - Oral Argument

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

Case:

Hillside Dairy Inc. v. Lyons

Media File:

01-950_20030422-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Roy T. Englert

Chief Justice Rehnquist: We'll hear argument next in Number 01-950, the Hillside Dairy, Inc. v. William J. Lyons, Jr., and a companion case.

Mr. Englert.

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

This is a case of inventive statutory interpretation by the Ninth Circuit.

The statute at issue directs the courts how to construe this act or any other provision of law, yet the Ninth Circuit interpreted the statute rather inventively as an exemption from a provision of the Constitution.

The statute protects California statutes and regulations regarding two aspects of California's composition regulation of packaged fluid milk, yet the Ninth Circuit interpreted the statute, rather inventively, as an exemption for all aspects of California's economic regulation of raw milk.

Inventiveness may have a role to play in some cases of statutory interpretation, but not when the governing legal standard requires that Congress has made its intent unmistakably clear.

The Ninth Circuit's statutory holding should be reversed.

There is also a constitutional issue before the Court involving the Privileges and Immunities Clause of Article 4.

The Ninth Circuit should be reversed on that issue as well, but not because it was overly inventive.

The Ninth Circuit simply ignored, with no explanation at all, binding precedent from this Court requiring that courts look beyond the face of the statute to determine whether, in practical effect, it draws a distinction based on citizenship or residency.

The California statutes and regulations at issue in this case draw a distinction based on where milk is produced, and 93 percent of dairy farmers live on their farms.

To draw a distinction based on the State of production is, in effect, to draw a distinction based on the State of residency, and the distinction should be subject to scrutiny under the Privileges and Immunities Clause.

We do not--

Justice Ginsburg: But as far as that clause is concerned it wouldn't help you with the corporate, if you had a corporate farmer.

It would only work for individuals.

Mr. Englert, Jr.: --Only the individual petitioners are entitled to invoke the Privileges and Immunities Clause, yes, and there are individual petitioners.

Justice Ginsburg: There are two individual petitioners I think in this group, is that so?

Mr. Englert, Jr.: A... a husband and wife, Darrel and Diane Kuiper, yes.

Let me return to the statutory issue.

This act or any other provision of law in section 144 means statutory or regulatory law, not the Constitution.

Why do I say that?

Number 1, section 144 is phrased as a directive to courts about how to construe particular bodies of law.

Congress doesn't have the power to tell courts how to construe the Constitution.

It does have the power to tell courts how to construe congressional silence or inaction, and the McCarran-Ferguson Act is a good example of the kind of phraseology Congress uses when it wants to enact a Commerce Clause exemption, but section 144 is a poor candidate from the outset.

Number 2, the canons of construction applied in numerous decisions of this Court, most recently the Keffler case in February, required that a general phrase like, other provision of law, be construed by reference to the phrases that came before.

Federal statutory and regulatory law is naturally paired with this act, but would be very odd to throw the Constitution in as an afterthought through use of the phrase, other provision of law.

Number 3, the legislative history is devastating to respondents' position.

The absence of a single reference to the Constitution anywhere in the legislative history is quite significant, but it's not the strongest refutation of respondents' argument in the legislative history.

Rather, the very first paragraph of explanation of section 144 in the conference report describes it as, quote, an exemption from the preemption provisions of any Federal law respecting standards of identity and labeling for fluid milk, close quote.

That can be found on page 33 of the blue brief.

Number 4, and this is merely the clincher that builds on the first three points, the standard is whether Congress has been unmistakably clear in passing a Commerce Clause exemption.

The evidence is so strongly the other way that one might call it unmistakably clear that Congress did not pass a Commerce Clause exemption, but it--

Justice Kennedy: This argument's probably better addressed to the respondents than... than you, but do you understand the respondents to argue that the percentage of... of milk solids which is one, and labeling, which is the second part of the statute, simply will cease to exist if... if this pricing regulation is not upheld?

Mr. Englert, Jr.: --No, that... I don't understand that to be their contention.

Justice Kennedy: I... I thought that that was going to be... when I got into the case I thought, well, they're going to say that it's just impossible to have the labeling, but I... I don't understand them to argue that.

I can ask them, of course, but--

Mr. Englert, Jr.: I... I don't understand them to argue that either, Justice Kennedy.

I think the strongest form their argument takes is, there is a relationship between economic regulation of raw milk and compositional regulation of packaged fluid milk, and any relationship is enough to satisfy this statute.

Justice O'Connor: --Well, is it true that the pricing and pooling laws were adopted to help the milk producers comply with the fluid milk content provisions?

Mr. Englert, Jr.: I... I don't think that's factually accurate, Your Honor.

Justice O'Connor: That was what the attorney in the Shamrock case conceded.

Mr. Englert, Jr.: Not... not--

Justice O'Connor: You don't agree?

Mr. Englert, Jr.: --I'm sorry, Justice O'Connor.

He did not concede that.

What he did concede was that the fortification allowance--

Justice O'Connor: Yes.

Mr. Englert, Jr.: --which is a particular provision of the stabilization plan, that is the pricing plan, not the pooling plan, was adopted to help compliance with California's composition standards.

Justice O'Connor: And section 7254 does use the word indirectly.

Mr. Englert, Jr.: It does, Your Honor, but it's very interesting to look at the parallel phrasing of section 144 of the Farm Bill, 7 U.S.C. 7254, and the preemption provision of the Nutrition Labeling and Education Act, which is 21 U.S.C. section 343-1.

Both use the phrase directly or indirectly.

Justice O'Connor: Yes.

Mr. Englert, Jr.: In the preemption provision of the NLEA, Congress was talking about was... what was preempted, and it was saying anything a State does directly or indirectly to have labeling requirements different from Federal law is preempted.

What section 144 of the Farm Bill does is, it unpreempts California's standards for milk.

Justice O'Connor: Right.

Mr. Englert, Jr.: Now, unless California is prepared to say that it's entire pooling and pricing plans were preempted by the NLEA in 1990, which I don't think you're going to hear from Mr. Urban, the entire pooling and pricing plans weren't unpreempted by section 144 of the Farm Bill, either.

Let me turn to the Privileges and Immunities Clause issue.

Justice Kennedy: Just... just before you get there... well, maybe it's a part... does... do Nevada producers have a... a Federal marketing order?

Mr. Englert, Jr.: Nevada, yes.

Justice Kennedy: And Arizona as well?

Mr. Englert, Jr.: Yes.

Justice Kennedy: They... they... do they opt out of it if they want to sell the milk to... to California producers, or--

Mr. Englert, Jr.: The sales to California... or, to California processors, excuse me, are not regulated by those milk marketing orders.

The... the seller and the buyer would both have to be within the marketing order for it to be governed by the Federal milk marketing order, I believe.

Justice Kennedy: --I see, and... and so far as the Nevada and Arizona dairy farmers are concerned, they can sell to California without implicating any mechanisms under the Federal marketing order?

Mr. Englert, Jr.: That's correct.

Justice O'Connor: Now, the court below didn't deal with the Privileges and Immunities issue, right?

Mr. Englert, Jr.: Oh, it did actually, Justice O'Connor.

Justice O'Connor: It did.

Mr. Englert, Jr.: It affirmed the Rule 12(b)(6) dismissal.

Justice O'Connor: Okay.

Mr. Englert, Jr.: It's on page A14--

Justice O'Connor: Okay.

Mr. Englert, Jr.: --of the petition appendix.

Justice O'Connor: All right.

Mr. Englert, Jr.: And its only reasoning was, the statutes and regulations do not, on their face, refer to citizenship or residency.

The controlling precedent that absolutely precludes that reasoning is the Chalker case from this Court in 1919, and respondents frankly have not even made an argument for why Chalker should be overruled.

Our own submission is that the 84 years since Chalker was decided have strengthened its underpinnings a great deal, rather than undermining them.

The Camden case from 1984 reinforces Chalker by rejecting a formalistic approach to the threshold question of discrimination, and the Lunding case from just 5 years ago stresses the concern with, quote, practical effect, close quote, in this Court's Privileges and Immunities Clause jurisprudence.

There's just nothing to justify the Ninth Circuit's disregard of this Court's cases.

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

Argument of Barbara B. McDowell

Chief Justice Rehnquist: Very well, Mr. Englert.

Ms. McDowell.

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

Section 144 does not indicate with unmistakable clarity that Congress meant to exempt from the Commerce Clause any California laws, much less to exempt the particular raw milk pooling regulations at issue here.

Indeed, section 144 is most naturally read as protecting only a narrow set of California's fluid milk composition and labeling laws from invalidation only under Federal statutes and regulations, not under the Constitution.

First, Congress did not state or even imply that the Commerce Clause is among the provisions of law from which section 144 provides protection.

Section 144 directs how those provisions of law shall be construed, and Congress ordinarily does not direct this Court and the Federal courts how to construe the Constitution, and under the canon that general words are known by their more specific companions, the words, any other provision of law is understood to refer to the preceding words, this act, to refer only to Federal statutes and regulations implementing them.

Section... second, section 144 protects only California laws regarding two specifically defined subjects, the percentage of milk solids, and solid not... solids not fat in fluid milk products sold at retail, and the labeling of those products.

The laws challenged here do not concern either subject.

They instead concern how California handlers account to the California equalization pool for purchases of out-of-State raw milk which may or may not ultimately be processed into fluid milk products subject to the composition and labeling requirements.

Justice Ginsburg: Ms. McDowell, as to the exemption from the National... from the Nutrition and Labeling Act, is this... is this a special exemption that California has, or do a number of States have congressional exemptions from the Nutrition and Labeling Act?

Mr. McDowell: Well, this specific provision, section 144, applies only to California.

Justice Ginsburg: Yes, but are there similar exemptions in... in effect in other States?

Mr. McDowell: Well, the Nutrition and Labeling Act does contain an exemption for maple syrup composition and labeling that might have been designed to benefit the particular States where maple syrup is produced.

I'm not aware of the particular background of that provision.

There's also an adjoining provision of the 1996 Farm Bill that provides further indication that Congress didn't intend section 144 to apply to all of the pricing and pooling laws.

That's section 143(b) on page 17 of the joint appendix, which authorizes the promulgation of a Federal milk marketing order for California if California dairy farmers approve of one.

Such a Federal milk marketing order would have contained its own separate Federal pricing and pooling provisions.

It would necessarily have superseded the California pricing and pooling provisions at issue here.

It seems unlikely that Congress intended in section 144 to preserve the very pricing and pooling laws that section 143(b) and the Federal marketing order would supersede.

The legislative history reinforces--

Justice Kennedy: But there... but there was no... but there is no Federal marketing order that supersedes it, or am I wrong there?

Mr. McDowell: --No, it authorized the promulgation of one if California dairy farmers approved.

California dairy farmers have not asked for a Federal marketing order at this point.

Under a Federal marketing order, by the way, handlers are required to treat milk from sources inside and outside the marketing order, marketing area similarly, so the same minimum pricing requirements that would apply to a dairy farmer within the marketing area would also apply if milk came in from... from outside that area.

Justice Breyer: Is the Federal--

Justice Kennedy: --Why doesn't that resolve this case?

Mr. McDowell: Because there... there is no Federal marketing order that applies to California, and of course the--

Justice Kennedy: Oh, I... I see.

In other words it would have to be a California marketing order treating Nevada milk, not... not a Nevada marketing order saying what happens when you go to California.

All right.

Mr. McDowell: --Well, if there was a Federal milk marketing order for California, milk from Nevada would be treated the same as milk from California.

Of course, Federal milk marketing orders aren't subject to the constraints of the Commerce Clause, as are the California orders.

Justice Ginsburg: Has Congress ever provided a... an exemption for anything that looks like this California pricing and pooling scheme?

Mr. McDowell: Not that I'm aware of, Your Honor.

And this is a particularly unusual Commerce Clause exemption because it does benefit only one State.

It seems particularly appropriate in that circumstance to apply the clear statement rules and... and to require an affirmative indication that Congress wanted to allow California and only California to burden out-of-State interests.

Justice Scalia: I thought the only thing Congress had ever... maybe there's something else.

Justice Stevens: I thought it was only insurance that Congress had performed the extraordinary act of waiving the Commerce Clause.

Isn't that right?

Mr. McDowell: That's certainly one of the most familiar instances of this--

Justice Scalia: It's the only one I... only one I know of.

Is there another one?

Mr. McDowell: --There are other instances in which Congress has affirmatively authorized particular action by States.

For example, the Northeast Bancorp case involved a... an authorization for States to essentially discriminate against interstate commerce to prohibit acquisitions of local banks by out-of-State holding companies, and when Congress enacts an affirmative authorization one would think that then Congress is removing any impediments that Congress can remove from State regulation, but that's not the forum of the provision at issue here.

Rather, it applies only to this act and other provisions of law which are naturally understood to be Federal statutes and regulations.

With respect to the Privileges and Immunities Clause, we agree that the court of appeals erred in suggesting that a statute can violate that clause only if it discriminates on its face based on citizenship and... or residency.

In Chalker, the Court recognized that a statute could also violate that clause if it discriminates based on some factor closely related to citizenship, such as the location of a person's chief business office.

The distinction drawn by the California regulations are somewhat similar.

The lower courts didn't consider whether that distinction is closely enough related to State citizenship to implicate the Privileges and Immunities Clause.

Accordingly, we would ask that the judgment of the Ninth Circuit be reversed with respect to both the Commerce Clause and the Privileges and Immunities Clause question, and that the case be remanded.

Justice Stevens: May I ask just one just one factual question?

Mr. McDowell: Yes.

Justice Stevens: Am I correct in thinking California is the only State that does not have a Federal order?

Mr. McDowell: That's not entirely correct, Justice Stevens.

There are portions of other States that are not included in Federal marketing orders, either, I... I believe, and perhaps the entire State of Maine is not.

California is unique, however, in, to the extent that it has its own freestanding marketing program and, of course--

Justice Stevens: Of its own, yes.

Mr. McDowell: --California is the largest economy.

Justice Stevens: And my other question is, do you... does the Government think we have to reach the Privilege and Immunities issue to decide the case?

Mr. McDowell: Well, the Court granted certiorari on the Privileges and Immunities question.

It's a narrow question.

Ultimately, on remand, the Privileges and Immunities claim may not have to be decided because a ruling in petitioners' favor on the Commerce Clause issue would provide them all of the relief that they're seeking.

Justice Ginsburg: And it wouldn't take care of the... the ruling on the statute would take care of everything, but not Privileges and Immunities, because that covers only individual persons, not corporations.

Mr. McDowell: That's correct.

What we're saying is that the entire case needs to be remanded for consideration of the Commerce Clause claim on the merits, as well as the Privileges and Immunities Clause claim, and if the Commerce Clause question is decided in petitioner's favor, all of the petitioners would benefit from that ruling, so there might not be occasion to consider the Privileges and Immunities Clause as well.

If there are no further questions--

Argument of Mark J. Urban

Chief Justice Rehnquist: Thank you, Ms. McDowell.

Mr. Urban, we'll hear from you.

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

There are two distinct and separate inquiries in construing section 7254.

First, does it create a Dormant Commerce Clause exemption for any California law, and second, what laws are within the scope of section 7254?

As regards the first step, it is unmistakably clear that Congress in adopting section 7254 intended to provide a Dormant Commerce Clause exemption for at least California's milk content and labeling laws.

As regards the second step, the scope of section 7254 encompasses not just the milk content and labeling laws themselves, but also the various means that California uses to continue those laws in effect.

Chief Justice Rehnquist: How do you respond to your adversary's contention that when you use the word construe, Congress does not ordinarily tell this Court how to construe a provision of the Constitution?

Mr. Urban: First of all, in the McCarran-Ferguson Act statutes the Court found that there was a Dormant Commerce Clause exemption.

In that case they used the term construe.

Second of all, I don't know that Congress is aware of the niceties of the difference between construe and interpret--

Chief Justice Rehnquist: Well--

Mr. Urban: --or it would have used both of those words.

Chief Justice Rehnquist: --Well, certainly, looking over a large group of statutes that Congress has enacted, there may be something to what you say.

[Laughter]

But I... I do think the... the word construed is simply out of place when Congress is saying something to this Court about how to... how to interpret the Constitution.

Mr. Urban: But beyond that, Your Honor, the... they then say, construe to preempt, prohibit, or otherwise limit.

If they want to delimit the scope of the protection of section 7254 merely to preempt, they wouldn't have added two additional phrases, and in addition to that, many of the preemption savings statutes use the term, this act or other... any other act of Congress, or lists a set of acts or regulations.

They don't simply have the statement of one act and then a... a general term like, any other provision of law.

Justice Scalia: Of course, Congress is sort of at a loss for words, because it... it's only the Commerce Clause... that's the only provision of the Constitution that Congress can instruct us not to apply, so it's understandable.

Maybe out of respect for the rest of our body of law they... they might use the word construe, right?

I mean, we don't have any other examples of where... unless it was the... the Religious Freedom Restoration Act, which... which we did not uphold.

Mr. Urban: That's... that's correct, Your Honor.

There's two ways the Congress can act to save State laws.

One is by a preemption savings statute, and the other is by a Dormant Commerce Clause exemption.

And beyond that, Congress can't affect the State exercise of authority through any means that involves the Constitution, and that, the... the first question then is, does section 7254 create a Dormant Commerce Clause exemption.

And then, as I indicated, the choice really is, is it preemption only or something more and the statute itself, by using the terms, prohibit or otherwise limit, suggests that it is, or states directly that it is something more.

If they just simply wanted to have this as a preemption savings statute they would have stopped at preemption.

And again, the argument was raised, well, why didn't they mention the Constitution directly.

None of the two areas where there have been cases in which the Court has found a Dormant Commerce Clause exemption, one of which is the McCarran-Ferguson Act and the other of which is the Northeast Bancorp case, was there mention of the Constitution.

They... they looked at... at the total, at what the statute said, at what the context was in which those statutes were adopted, and... and from that concluded that Congress had intended to fully regulate in those areas or to provide a Dormant Commerce Clause exemption.

The petitioners have tried to use a doctrine of adjustum generis, the laws are interpreted in the company they keep.

I've never seen an application of that doctrine where all you have is one statute or one item mentioned, and then you say any others.

Usually that doctrine's applied when you have three or four items.

Justice Stevens: Mr. Urban, the problem, as I see it, is not whether they... you might construe the language as broad enough to cover the Dormant Commerce Clause, but the thing it saves is, legislation regarding milk solids and fats and so forth, and doesn't say anything about saving pricing legislation.

Mr. Urban: That... that's true, Your Honor.

That's the second inquiry, what is the scope of the statute, and they are distinct inquiries, and it would be possible for the Court to determine that the statute doesn't cover pooling and pricing laws--

Justice Stevens: Right.

Mr. Urban: --and still protect the Dormant Commerce Clause exemption from milk content and labeling laws.

Justice Kennedy: In... although you would not prevail if we so held.

Unknown Speaker: [Laughter]

Mr. Urban: We... if you so held, we would be back to the district court on the question of whether there's a Dormant Commerce Clause violation for the milk pricing and pooling laws, but the core intent of Congress in enacting section 7254, which was to protect and allow State milk content and labeling laws to have full effect, that would be protected, because we have the Shamrock Farms case from the Ninth Circuit that held that there was a Dormant Commerce Clause exemption created for those laws.

I want to--

Justice Ginsburg: I thought those laws weren't directly before the court in Shamrock.

I thought the fortification provision was.

Mr. Urban: --What was directly before the Court in the Shamrock case, Your Honor, was a challenge to the milk content and labeling laws, and then the... the other item that was before the court that was specific was the fortification allowance, which is a small part of the milk pricing and pooling laws, and then there was a general allegation involving milk pooling and pricing that, upon which there was an admission made about the laws being... I think it was something, interwoven.

Justice Kennedy: But... but surely we're not bound by Shamrock if... if we consider it not to be sound, not to have sound reasoning.

Mr. Urban: That... that's correct, Your Honor.

If the Court believes that there's no Dormant Commerce Clause exemption at all--

Justice Kennedy: And I... I... and I must say, without knowing many of the details of... of the pricing scheme, it seems to me that the labeling and... and requirements for fortification with, I guess, nonfat solids can exist perfectly well without your pricing scheme.

Mr. Urban: --Your Honor, as a general matter, you can have composition and labeling laws without a pricing scheme.

California's composition standards are unique because they require fortification.

That produces several features.

One is that there's not a ready market to sell into California with complying milk.

If you didn't have pricing and pooling laws and you went back to the free market, you'd be subject to the same boom-bust cycle that led to the creation of these pricing and pooling laws in the first place, and when you'd reached the point where the prices were very high and supplies were low, I think the... the inevitable result of that would be that the composition standards would be undone and they'd simply revert to the Federal standards.

Justice Kennedy: But... but if that's so inevitable, it seems to me it would have been in 7254.

Mr. Urban: I... I don't agree with that, Your Honor, because I think that what Congress did in 7254, and this goes to the scope of the statute, is that they protected the composition and labeling laws themselves, and they also, by using terms like, directly or indirectly, establish or continue in effect, regarding rather than regulating, referred to something more, and that something more are the means that California uses to enable the laws to continue in effect.

Justice Breyer: That's an ingenious argument, but I mean, if I understand it what you're saying is that if we... if you didn't have the price controls, then competition would break out, and competition breaking out would mean in... if we were back in the thirties, that eventually everybody would go out of business but for one giant milk seller who then would raise the price so high that the people really getting angry at him, as opposed to only paying $18, which is considerably above the market level, they might have to pay $24, even more.

They'd really get angry, and this time, though they don't get angry at the $18 price, they'd start really shipping milk in from Arizona, and once they shipped in milk from Arizona, maybe that wouldn't have the fortified stuff in it and they'd... they'd amend the law so that you could bring it in from Arizona and down would go the labeling requirement as it stands today.

Do I understand the argument correctly?

I've parodied a little, but I don't think I've parodied it that much.

Mr. Urban: You did, Your Honor.

[Laughter]

Justice Breyer: I did.

Yes, I did.

Mr. Urban: The... milk is an... is an unusual commodity because it can't be stored, and like any commodity, it's subject to periods, and we have this a lot with agricultural pricing, where you have periods of low... you have high supply and therefore you'll have a low price.

People leave the industry and then the cycle will reverse, and it's when you reverse the cycle... and that's... that is what happened with... with milk that led to the--

Justice Breyer: I thought that's--

Mr. Urban: --formation of those laws, and it's also what occurs frequently with agricultural commodities.

I mean, they're... they're subject to a boom-bust cycle, and at some point in that cycle you're going to have prices that are very high, and we... we've had that happen in California to some extent for other--

Unknown Speaker: --Like--

Mr. Urban: --other reasons, and... and you... and at that point, and it did happen in California in '99, as we've cited in the brief, there is a lot of pressure to undo the standards because they are... they are more expensive and you'll have limited supplies.

I mean, that's... that's the connection.

Justice Stevens: --May I ask, though, are the... the percentage of solids in the... in the milk, is that something... that's something that's not determined by the farmer.

That's determined by the processor, isn't it?

Mr. Urban: The raw milk that comes to a... a processing plant varies to some extent in the amount of fat and solids not fat.

Justice Stevens: Right.

Mr. Urban: Then the processor... this is how California's processors are different from other States'... adds in solids not fat in order to meet the standards, and they have... you know, this is all mechanized.

Justice Stevens: And that is done even if the milk when it left the farm was deficient in fat solids.

Mr. Urban: Correct.

Justice Stevens: Yes.

Justice O'Connor: Generally speaking, what percentage of the raw milk comes in from out of State to California, of the total?

Mr. Urban: My recollection is somewhere around 10 to 15 percent, most of which comes to fluid milk plants, which are the class 1 plants.

Justice O'Connor: So it's generally a small percentage.

I'm... I'm not sure that I think that you're dire consequences scenario would play out.

Do milk prices tend to rise and fall over a wide region of the United States at the same time, or does it tend to be very spotty?

Mr. Urban: California's prices rise and fall as an independent market.

I don't know what happens in other parts of the United States, and I want to... aside from the sort of economic theory of the boom-bust cycle, it is a fact that California's own laws say that the purpose of the pooling and pricing laws is to provide supply and price stability in order to allow for adequate supplies of fluid milk at... at prices that are reasonable to consumers, and that the purpose of--

Justice Breyer: How... how does the latter part come in?

I mean, if we have to write this, as I understand it, and I'd just as soon you correct, because I don't want to say something if it isn't right.

This is actually a simple system, it's not so complicated, and at the heart of it is simply, we could pretend that they want to pay the dairy $16 a hundredweight indefinitely.

That's stable.

And now the problem is, although you can say to everybody, pay, a handler is paid $16, when they do that they're going to discover cheese coming in from Wisconsin, and the cheesemakers are not going to be able to compete and still pay $16, so they figured out in California, here's how we keep our cheesemakers in business.

We subsidize them.

We pay them $2 because they can only sell at $14.

Where do we get the money from?

Unknown Speaker: We get it from the milk sellers.

Justice Breyer: So they pay $18 to pay the cheesemakers $14 so that all can pay $16 to the dairies.

That way, the cheesemakers stay in business despite Wisconsin, and the milk sellers, unfortunately the retailers have to charge more and the mothers have to pay more for their milk, but that in a way helps the people who want to eat a lot of cheese.

We don't know what happens to them if they eat too much cheese, but--

Unknown Speaker: [Laughter]

Justice Breyer: --there we are.

But I mean, that seemed to me the essence of the system, and since that's the model that's in my mind, and since it could become relevant, I'd like you to correct me if I'm not right.

Mr. Urban: --That... that's... that is the wrong model.

Justice Breyer: All right.

[Laughter]

Mr. Urban: The--

Justice Breyer: And what is the right model?

Mr. Urban: --The right model is that the... the prices are generally set, and they're recalibrated regularly, based on certain free market markers, like various cheese exchanges, et cetera, and then there are ways for each of the prices to be adjusted, the class 1, class 2, class 3, class 4 prices to be adjusted so that they're... they reflect in a sense an... a open market, and there's also a desire to have these prices be comparable to the prices that are being paid on the, in the Federal marketing orders so that that doesn't produce problems, so there's not a subsidy from one class of use to another class of use.

What there was was then a blending when you come to the producers of their revenues, and that's the pool, and that blending of revenues, they adopted a two-tiered system.

One was a quota system, and one was all other prices, and that really was set up because the quota-holders had contracts and commercial dealings with class 1 dealers which... for which they got a higher price, and the goal was to protect those... those rights and reflect those rights in the difference between a quota price and an everything-else price.

Justice O'Connor: Is it true that in-State producers of raw milk are guaranteed a minimum price for their milk under the California scheme, but out-of-State producers are not?

Mr. Urban: That... that's exactly right.

The in-State producers are regulated.

They get a guaranteed minimum price.

Out-of--

Justice O'Connor: Yes, and the out-of-State producers are not.

Mr. Urban: --Right.

Justice O'Connor: They're at a disadvantage to that extent.

Mr. Urban: They're at both an advantage and a disadvantage.

They're not regulated, so they have the disadvantage that they don't have a guaranteed minimum price, but they have the advantage that they can compete on price, so if they want to be efficient and undersell California producers they can do that, so they have both a benefit and... both sides have a benefit and burden.

One is of regulation versus nonregulation.

I want to go into the legislative history of section 7254, which was mentioned.

When section 7254 was adopted, the Federal law NLEA preempted California milk content standards, but that law only applied to fluid milk in interstate commerce.

The House conference committee report which petitioners cite not only described the preemption issue, but it also said that the purpose of adoption of 7254 was to allow California to fully enforce and apply its... its standards.

It would have made little sense, in light of that congressional intent, for Congress to on the one hand allow for a exemption from preemption but at the same time allowed the exact same body of law to be subject to a Dormant Commerce Clause challenge, which is, in fact, what happened in the Shamrock case, yet that would occur, that undermining of Congress' intent to have California be able to fully enforce its own milk content standards, if section 7254 were held to be only a preemption savings statute.

We've touched on the issue of the scope of section 7254, and we're not claiming that the unmistakable clear standard applies to the scope, and we're certainly not claiming that it's unmistakably clear that section 7254 applies separately to pricing and pooling laws.

What we're claiming is that section 7254 not only covers the laws themselves, but the means to keep those laws in effect, and in answer to questions--

Chief Justice Rehnquist: Who's your authority for that, for the extension of the unmistakably clear principle?

Mr. Urban: --That it doesn't extend to--

Chief Justice Rehnquist: Yes.

Mr. Urban: --First of all, we couldn't find a single case where the Court has come back, after it's determined there's a Dormant Commerce Clause exemption, for example with the business of insurance, come back and each time it decides what is the business of insurance, that it says this is a Dormant Commerce clause exemption so we have to use an unmistakably clear standard.

The Court has interpreted, after it's found a general area of law that... in which there's a Dormant Commerce Clause exemption, that it's interpreted then what is within that area of the law using standard rules of statutory construction, and... and--

Chief Justice Rehnquist: And the cases would be what, Benjamin, something like that?

Mr. Urban: --Yes.

Yes, Prudential Insurance v. Benjamin, but then when the Court's come back, for example, in Royal Drug to look at what's the business of insurance, they've used standard... you've used standard rules of... of statutory construction.

And you know, that... that makes a certain amount of sense here, because you know, you have both a preemption savings statute and a Dormant Commerce Clause exemption in the same statute, which is the case... if you have a Dormant Commerce Clause exemption you'd have to essentially have two sets of rules as to how you interpret the, what is being affected by that... that exemption, one for preemption and one for a Dormant Commerce Clause exemption.

That... that doesn't... doesn't seem logical.

They should... whatever Congress intended be covered by the law should be interpreted the same, whether it's a Commerce Clause exemption or a preemption exemption.

The second issue before the Court is the Privileges and Immunities Clause, and when this issue was considered by the Ninth Circuit they ruled that because the out-of-State dairy producers were not being regulated based on their residency, but that the regulatory scheme involved place of production, that the... that the Privileges and Immunities Clause didn't apply.

That is fairly unexceptional, because the purpose of the Privilege and Immunities Clause is that it applies when a State law deprives a nonresident who enters a State to engage in some protective privilege, that they're entitled to the same privilege and immunities as a resident of that State.

There's no entry into the State by... by the dairy farmers from Arizona... if they came into the State to produce milk, they'd be treated exactly the same as--

Chief Justice Rehnquist: What do you do with the Chalker case?

Mr. Urban: --The Chalker case is a case where there's... there was different regulation when you came into the State.

There was a tax if you did business in... you came into Tennessee and did business.

There, the question was, they... they didn't say residency per se.

They said--

Chief Justice Rehnquist: Chief office.

Mr. Urban: --place of... yes, chief office of business, and I think the Court correctly found, based on their common experience and knowledge, that that was simply a pretext or a surrogate or a proxy for residency.

That's not the case here.

Here, it's a shipment of goods, milk into a State.

It's... it's a State regulatory... economic regulatory scheme, essentially, that's affecting the goods themselves, and that's nothing like what's happened in Chalker.

Justice O'Connor: Well, do you support the Ninth Circuit's view that to be covered by the Privileges and Immunities Clause it has to be facially discriminatory?

Mr. Urban: In the... in the context of the statutes that they had before them, yes.

Whether that is a--

Justice O'Connor: I... I would have thought that broad statement was not accurate in light of Chalker, that it doesn't have to be facially discriminatory to be covered.

Mr. Urban: --The distinction in Chalker, what was the discrimination was facial.

It was based on where your place of... of business was.

If the Ninth Circuit opinion is being interpreted, or would be interpreted to say that if you had some transparent proxy for place of residence, like they did in Chalker, that that would somehow be foreclosed by the Ninth Circuit's decision, I think that would be a misreading of what the Ninth Circuit did.

They took a statute that, as they indicate, merely regulated based on place of production, not on residency.

Justice Breyer: The two sentences... I hadn't understood that.

They wrote two sentences on this in the opinion, and you're saying it's really the first sentence that is the holding, that there is no violation with respect to the individual dairy owners because the classifications the pooling plan amendments create are based on the location where milk is produced, and the next sentence is sort of a throw-away, and there's nothing in the statute to the contrary.

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

Justice Breyer: That's how you... I see.

Mr. Urban: In... in summation, there... the two issues involving the section 7254 before the Court are first whether it establishes an exemption and second, its scope.

On the first issue we believe it's unmistakably clear that there is an exemption established by 7254 to the Dormant Commerce Clause.

As to the second issue, we believe that California's milk pooling and pricing laws are within the scope of section 7254.

Chief Justice Rehnquist: Thank you, Mr. Urban.

Mr. Urban: Thank you.

Rebuttal of Roy T. Englert

Chief Justice Rehnquist: Mr. Englert, you have 11 minutes left.

Justice Kennedy: It... it seems to me, Mr. Englert, it make... does make a certain amount of sense to say that you should have one rule of construction for preemption and for Dormant Commerce Clause, and you don't have two different rules for interpreting congressional intent with the same statute.

Mr. Englert, Jr.: Well, Justice Kennedy, the Court has said very consistently in its Dormant Commerce Clause jurisprudence that the intent of the Congress must be unmistakably clear.

Justice Kennedy: Were... were those statutes preemption statutes as well?

You see, here you have a preemption statute--

Mr. Englert, Jr.: In... in some instances, they were.

Justice Kennedy: --and... and the argument is that... but let's say that it was simply a preemption case that, well, directly or indirectly Congress doesn't want have to spell out everything, so it says indirectly, so this... so this is not preempted.

Then you have a Dormant Commerce Clause and you say, well, we have a different rule for that.

That seems a little odd.

Mr. Englert, Jr.: Well, that's what the Court did in New England Power Company v. New Hampshire, and the statute being construed, the provision of the Federal Power Act being construed in that case, like the statute being construed in this case, was not so much a preemption clause as an unpreemption clause.

The typical statute that comes before this Court alleged to be a Dormant Commerce Clause exemption is one that says certain State laws are protected, or are allowed, and in many of those cases the Court has said, and New England Power v. New Hampshire is a good example, the Court has often said yes, those State laws are not subject to preemption under Federal law, but there is no unmistakably clear Dormant Commerce Clause exemption.

So the... the Court's jurisprudence as I read it is really rather consistent in setting a higher standard for exemptions for the Dormant Commerce Clause, and there's a reason for that, and the reason for that is that the Commerce Clause is part of the... is one of the structural provisions of the Constitution and, as this Court pointed out in the South-Central Timber case, the particularly strong rule of construction ensures that all States know what's going on and have their say in Congress before the protections the States have vis-a-vis one or another... vis-a-vis one another are altered.

Justice Breyer: What is the answer to the last point on privileges and immunities?

I hadn't taken that in, and I... I think it's been argued on... on your side as if what the Court had said was, well, the statute doesn't create a classification on its face, doesn't create a classification based on an individual's residency or citizenship, which certainly it doesn't, and then you say quite right, but of course a statute nonetheless could do that in effect, and... and thereby have the same violation that it would have had if it had been on its face, but that isn't their point, and as I reread this they're saying... I think it does say what they say it said.

What the judge was saying is, wait a minute, there... there's no... nobody here could say they're... they're discriminating on the basis of residency or citizenship.

That's not what the statute says.

It's discriminating on the basis of where the milk is produced.

We don't care if he's a California resident or a... or an Alaska resident, it's where the milk is produced, and there's nothing in the statute as I read it, says the judge, i.e. on its face, that says anything to the contrary.

Now, what's the answer to that argument?

Mr. Englert, Jr.: It's all true.

It's... it's... but it was just as much of a sin for the Ninth Circuit to ignore the 93 percent correlation between where dairy farmers reside and where milk is produced as it was to say, we don't look beyond the face of the statute.

Justice Breyer: I see, you're saying it might violate the Privileges and Immunities Clause even if... or, why?

Mr. Englert, Jr.: It's... it's exactly--

Justice Breyer: The... what... it's a violation of the Privileges and Immunities Clause for a State to discriminate against out-of-State commerce, because after all, out-of-State commerce is mostly produced by out-of-State residents?

Mr. Englert, Jr.: --I... I'm not making that broad an argument, Justice Breyer.

Justice Breyer: Then what is--

Mr. Englert, Jr.: I'm saying that in this case, as in the Chalker case, there is an extremely high correlation between place of business and residency or citizenship of individuals, and just as this Court said, we don't care that someone from Alabama could have a principal place of business in Tennessee, because most people from Alabama don't have a principal place of business in Tennessee--

Justice Breyer: --Yes.

Mr. Englert, Jr.: --so too, here, the Ninth Circuit should not have cared that Nevadans could have... could produce milk in California when 93 percent of all dairy farmers do produce milk in the State and, indeed, on the very farm where they reside.

Justice Breyer: So if Massachusetts passes a statute... you know this area better than I at the moment, but if Massachusetts passes a statute and it says, we're fed up with nectarines from California, they're too woolly, and therefore no more nectarines from California coming into Massachusetts, it's absolutely true, every nectarine farm down there is owned by a California resident, none by Massachusetts residents.

That violates the Privileges and Immunities provision, in your opinion, as far as individuals own the farms?

Mr. Englert, Jr.: I... I certainly suspect it's a violation, but we're we're not asking this Court actually to hold that there's any--

Justice Breyer: No, no, I know that.

Mr. Englert, Jr.: --Privileges and Immunities violation.

Justice Breyer: I know that, but there's nothing to the contrary--

Mr. Englert, Jr.: Just that there should be--

Justice Breyer: --Okay.

Mr. Englert, Jr.: --substantive constitutional scrutiny.

Justice Breyer: Yes.

Mr. Englert, Jr.: The Ninth Circuit didn't give this case any substantive constitutional scrutiny.

Justice Breyer: Yes, well, that's primarily the Dormant Commerce Clause.

I'm more familiar with the Privileges and Immunity Clause argument.

I'm less familiar with how courts in this area--

Mr. Englert, Jr.: Right, but on... on both issues, Justice Breyer, the Ninth Circuit declined to engage in any substantive analysis--

Justice Breyer: I know.

Mr. Englert, Jr.: --with respect to the Dormant Commerce Clause on the erroneous ground that it was unmistakably clear that there was a Commerce Clause--

Justice Breyer: Yes, I... I understand.

Mr. Englert, Jr.: --exemption, and with respect to the Privileges and Immunities Clause on the ground that location is not the same as residency or citizenship, and we need not look behind location of production to ask whether it is so closely correlated with residency or citizenship as to create an improper... a classification that must be scrutinized under the Constitution.

Mr. Urban pointed out that the McCarran-Ferguson Act uses the verb construe, and rightly so, but what it says the Court is not to construe as forbidding State regulation is Congress' silence.

It is not a directive how to construe the Constitution.

It is a very proper statute, perhaps the model for how a Dormant Commerce Clause exemption should be written.

Don't construe our silence to mean we want to stop the States from doing something.

The statute here is very different.

The statute here says, construe this act or any other provision of law in particular ways.

Mr. Urban, in talking about section 7254, said at one point, the use of three different verbs, only one of which is preempts, suggests that Congress' intent was something more than merely to negate Federal preemption.

I respectfully submit that suggesting that Congress had more in mind is not enough to meet the unmistakable clarity standard.

Under Gregory v. Ashcroft, an unmistakable clarity standard means it would be plain to anyone reading the act what Congress had in mind, and merely saying the use of three verbs suggests something does not make it plain to anyone reading the act.

I do think... Justice Stevens asked Ms. McDowell if the Court needs to reach the Privileges and Immunities Clause claim.

I... I believe the Court does need to reach the Privileges and Immunities Clause claim in the limited way we have suggested and that is because, although Ms. McDowell correctly said the petitioners might prevail on remand under the Commerce Clause and, indeed, I hope we will, and if we do that will give all of my clients the relief that they need, we also might not prevail under the Commerce Clause, and I think we're entitled to pursue both the Commerce Clause claim and, with respect to the individual petitioners, the Privileges and Immunities Clause claim on remand.

The... Justice Kennedy asked me some questions in my opening argument about the Federal marketing orders in effect in Nevada and Arizona, and I... I perhaps didn't speak with sufficient clarity about two aspects of that.

The Federal milk marketing orders cover parts of Nevada but not other parts.

Some are and some are not covered by Federal milk marketing orders, but in any event, it's worth making clear that the marketing orders fundamentally operate on the processors of milk, not on the producers of milk, so when we say the Federal milk marketing orders operate in parts of Nevada, we're really talking about Nevada processors.

If you ship your milk to a California processor it... it is at no point governed by a Federal milk marketing order.

Whatever... with respect to the unmistakably clear standard, Mr. Urban made the argument that once you've found an unmistakably clear Dormant Commerce Clause exemption, the unmistakably clear standard has no more role to play and it's just a matter of ordinary statutory interpretation.

This Court's cases, I believe, do not support that proposition, but he spoke specifically about the McCarran-Ferguson Act cases in which the Court has construed the phrase, business of insurance, without any particular thumb on the scale.

Well, that is how the Court must construe the phrase, business of insurance, because Congress has delegated authority over an entire business to the States.

That's very different from this very precisely drawn statute that speaks about two particular aspects of California's compositional regulation of raw milk and saying, well, let's just resort to ordinary principles of statutory interpretation to determine whether that also reaches economic regulation of fluid milk.

The unmistakably clear standard is still in effect, and ingenious arguments about the relationship between economic regulation of fluid milk and composition regulation of raw milk are not enough to meet that standard.

In particular, it cannot possibly be the case that the 1997 amendments to California's pooling plan are somehow necessary to effect composition regulation.

The main thing the 1997 amendments did was not negate the possibility that out-of-State milk would flood California to such an extent that there would be price effects that ultimately would have... would have sanitary effects.

What the 1997 amendments did essentially was say, we're going to intercept some of the revenue that would otherwise go to out-of-State processors at California's border and redistribute it just to in-State interests.

We're going to take some of the money that they would otherwise get in their milk transaction and say, it must go to Californians, not to you out-of-Staters.

That's the essence of the Commerce Clause violation in this case, and it's also inconceivable that that kind of regulation could be protected by this statute.

If that kind of regulation is protected by this statute, then a regulation that says 100 percent of every milk check that would be written to a Nevadan must instead go to a Californian is protected by this statute, i.e., no out-of-State milk, and that can't possibly be the unmistakably clear intent of Congress in section 7254.

One last detail, and it is just a detail.

Mr. Urban said that 10 to 15 percent of the milk that comes into California is from out of State.

I understand from a publication that's cited at page 39 of our opening brief called Dairy Profit Weekly that the actual number is closer to 3 percent.

When Congressman Bill Thomas spoke at a field hearing... thank you.

Chief Justice Rehnquist: Thank you, Mr. Englert.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Pharmaceutical Research v. Walsh - Oral Argument

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

Case:

Pharmaceutical Research v. Walsh

Media File:

01-188_20030122-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Carter G. Phillips

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

Mr. Phillips.

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

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

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

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

Mr. Phillips: The Medicaid statute?

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

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

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

It has to serve the interest of the Medicaid recipients.

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

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

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

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

Mr. Phillips: Well, the way this operates is that this is not adopted as a part of the State's plan that's subjected to review by the Secretary of HHS.

What this is, is a completely separate program that's been adopted independently, and all it does is reach out and hold the recipients of Medicaid as hostages in order to extract money from out-of-state manufacturers--

Justice O'Connor: Yes, but do you--

Mr. Phillips: --but it's not a part of the plan.

Justice O'Connor: --but is it... is it the case, if we were to, let's suppose, affirm here, that the Health & Human Services head could nonetheless call a halt to it and say, you no longer conform with our understanding of what's required, you're holding hostage our Medicaid recipients and it's having a negative effect on them because of the prior approval requirements of drugs that otherwise wouldn't be required?

Is... would... would the Secretary have that power?

Mr. Phillips: I believe the Secretary might have that power, although I would ask you to ask Mr. Kneedler when... when he's arguing.

Justice O'Connor: Well, I probably will.

Unknown Speaker: [Laughter]

Mr. Phillips: But over and above that, that doesn't... but that's not an exclusive remedy, that's all.

Justice Scalia: But how can the authorization provision and the requirements attached to the authorization provision, how can that conceivably not be part of the State plan, as you say?

I mean, it seems to me it's central to the--

Mr. Phillips: Well, I mean--

Justice Scalia: --there's an authorization--

Mr. Phillips: --there's a... there's a formalistic way of looking at it, which is that they have a State plan, and this is not incorporated as part of the State plan.

What this has been... what has been done here is to adopt a completely separate program which simply reaches out, as I said before, and seeks to hold hostage certain elements of it.

Justice Souter: --But if you take that position, the State plan could be rendered meaningless.

I mean, the State plan simply becomes a kind of formal Open Sesame.

The... there's got to be power to look, as Justice Scalia suggests, or the State plan means nothing.

Mr. Phillips: Well, no, there has to be a State plan.

The question is whether or not (a)(19) reflects congressional intent that the State has to act in a particular way.

If it acts contrary to that way, the only question then is, are there multiple remedies available to respond to it?

I think, Justice O'Connor, the answer to your question is yes.

I think the Secretary does have that authority to go forward, although I would ask Mr. Kneedler--

Justice Stevens: Can I ask this question: Could the State, if it just... without adopting a Maine Rx program, just decide, we want to take a good, hard look at every sale of drugs that comes into our State, so we're going to subject every drug manufacturer to prior approval pursuant to 1396r-8(d), could they do that?

Mr. Phillips: --I... there's an open question as to whether they could do that.

Certainly, if you take the most expansive reading of 1396r-8(d) you could make that argument.

The alternative argument would be to what extent that violates or interferes with the formulary formulations that are embedded in the statute.

Justice Stevens: But if they do have that authority, and you say that's an open question, doesn't it follow, a fortiori, that they can do what they're doing here?

Mr. Phillips: No, it doesn't follow a fortiori, because what they're doing here is imposing the prior authorization with respect to, you know, to serve purposes that are completely unrelated to the Medicaid program.

Justice Stevens: Well, maybe my hypothetical was completely unrelated.

They just want to be sure you can open the caps on the drug containers, or whatever it might be, some idiocentric... I don't think that the... as I read it, I don't see anything in that provision that says it must serve a Medicaid purpose.

Mr. Phillips: Well, I think you'd have to read that provision in the context of the entirety of that provision providing for coverage of drugs, and I think you have to do it in that context, and I think there are broader issues there, but the singular problem here, obviously, is that if you interpret the statute as broadly as the State of Maine does to say that we can impose prior authorization requirements, then what they can say is, we want to extract money from manufacturers solely for the purpose of building schools or roads or anything else that we want to, and there's no restriction on that, and it seems to me that if what you're saying is you want to have prior authorization as a mechanism to deal within Medicaid, to provide generally for a balance of interest between Medicaid recipients, that's one thing.

But what... what... what Maine is doing is using Medicaid recipients to further completely unrelated purposes of the State, then it seems to me what you've done is essentially ask the Federal Government to subsidize a program that... that's not an appropriate one to subsidize.

Justice Souter: Okay, what about the halfway measure, and the halfway measure has been described by the Government as... as some instances of prior approval that, that it would authorize that go beyond what the... the... the... the very strict enforcement of Medicaid in a limited sense would require.

Do you think what the Government has... excuse me.

Do you think what the Government has suggested is also beyond the authorization of the statute?

Mr. Phillips: I think it is.

I think the better way to read the statute is to recognize that this is designed to benefit Medicaid recipients, and the problem is, once you get past programs that are designed to benefit recipients themselves, it's very difficult to see where you draw the line after that in terms of where it goes.

Justice O'Connor: Well, is it correct that the Secretary has approved a few plans in other States that do go beyond, technically, the direct Medicaid recipients, for instance, the people who are very close to the line and might well become eligible soon?

Mr. Phillips: Justice O'Connor, that is correct.

They have approved those programs.

Justice O'Connor: Yes.

Mr. Phillips: Those programs are in litigation as we stand here--

Justice O'Connor: Uh-huh.

Mr. Phillips: --as I stand here today, and--

Justice Breyer: Is that possible... I mean, as I'm seeing this at the moment, if the State uses the authorization program for any purpose at all, we know that some... that some Medicaid recipients will be hurt.

Mr. Phillips: --Yes.

Justice Breyer: If a Medicaid recipient walks into a drugstore and asks for drug X, that recipient can get it more easily if it's not on this prior approval list than if it is, and that being so, it must be impermissible under Federal law, unless the object of the program achieves a Medicaid-related purpose, so the question in front of us is, does it?

Now, what's bothering me about that is that the Secretary thinks some programs like Maine's are okay, and others maybe not.

Mr. Phillips: Well--

Justice Breyer: So in my mind the words, primary jurisdiction, suddenly flash red.

How can I decide this case without knowing what the Secretary thinks, and how can... I mean, after all, if the Secretary says this one is okay, that would have a big leg up under Chevron, and if the Secretary says no, it wouldn't, so why isn't the correct principle primary jurisdiction, which we can apply whether the parties like it or not, and why isn't the correct result here to send it back to the district court and say, district court, Maine cannot put this into effect until they ask the Secretary about it?

Mr. Phillips: --Well, I don't have any particular problem with sending it back to the district court enjoined subject to approval by the Secretary of HHS, I mean, if that's the way the Court wanted to resolve this case.

Justice Breyer: Well, I'm really... that's not what I want.

Justice Kennedy: I want to have--

Justice Scalia: --Is that the way primary jurisdiction works?

I thought there has to be in place some mechanism for getting the agency to pass upon the question, a mechanism that the person who is dismissed from Federal court is entitled to use, and I'm not sure that exists here.

Mr. Phillips: I don't know, Justice Scalia, that you need to be dismissing it from Federal court.

I think it's quite possible for the--

Justice Scalia: Well, even if you sit on it until it's done--

Mr. Phillips: --Right, stay your hand pending--

Justice Scalia: --you still have to assure that there's some... some mechanism.

I mean, all the primary jurisdiction cases I know of, there... there was a means to file a case before the agency.

Mr. Phillips: --Well, I don't disagree with that, Justice Scalia.

Justice Breyer: Well, I disagree with it, so we'll have to work it out.

Justice Scalia: You can't just send them off and say, you know, ask the Secretary, by the way, and have the Secretary write us a letter.

I don't know that we've ever done that.

Mr. Phillips: Well, I'm not sure that there isn't a mechanism for asking the... to petition the Secretary for review.

I think if Maine wanted to get approval of this particular program, it certainly had it available to do that.

It didn't seek that particular course.

And Justice Breyer, I think it's important, in the context of trying to figure out primary jurisdiction, we know the views of the United States with respect to this particular program.

There may be other programs, as Justice O'Connor identified, that come close to the line where the Secretary would have a different view, and I think it's appropriate in--

Justice Breyer: Is their views the Secretary's view?

Justice Kennedy: That's what I--

Justice Breyer: --I'll... fine, I'll ask them.

Mr. Phillips: --I believe it is the Secretary's view, but--

Justice Scalia: Mr. Phillips, as I understand your position, so long as it benefits Medicaid recipients, any... any authorization scheme is okay?

I mean, a State can say, we'll authorize your drug if you pay $5 to each Medicaid recipient?

Mr. Phillips: --That is not my position.

My basic position is that the Court doesn't need to figure out precisely what prior authorizations are permissible in order to decide this case, because the one thing that should be absolutely clear is, you cannot use this mechanism in a Federal program in order to disadvantage the primary recipients of that program without serving any Medicaid, sort of, related purpose.

Justice Scalia: You... you... you may be up in a... in a later case arguing that the... that the reasonable reading of the authorization requirement is... is to assure the safety of the drug, or the necessity of the drug for the particular illness?

Mr. Phillips: That... that's absolutely correct, Justice Scalia.

We'd... we... I mean, I think we would take that position, and that we... that you cannot read (d)(1) completely in isolation, and... and to the fullest extent of the language of that, without regard to the rest of the provisions of (d)(1) through (d)(6), and you... and for sure, you cannot read them without regard to the more fundamental requirement in subsection (a) and (a)(19), that the primary consideration must be the beneficiaries of this program.

They are the most needy people in our country, and the notion that you use them as a mechanism for trying to simply lower health care costs for the Steven Kings of the world strikes me as... as an outrageous position for the State of Maine to take.

Justice Breyer: No, but they may not be doing that.

They may think that the object of this is to lower the health care costs for the moderately poor not yet on Medicaid, and thereby prevent people from falling into the Medicaid category.

Mr. Phillips: Justice Breyer, that would be a persuasive argument if this statute had any kind of a tailoring mechanism to it whatsoever.

It is open to all residents who are otherwise not covered by--

Justice Breyer: Maine says those are never caught--

Justice Ginsburg: --Administrative regulations, one of the things that Maine said was, you've stopped us at the threshold.

We could have regulations that say, for example, people who are covered by insurance will not have access to this benefit, but on the question... you said would... you would be content if the Court said, the Secretary has to look at it, until then it's no good.

Would you have... this is the... your lawsuit.

Could you have gone to the Secretary and say, said, Secretary, we want you to look at this, the Secretary says, I'm busy with a dozen other things and I don't want to look at it?

Mr. Phillips: --I don't know of any statutory mechanism for a third party to come in and ask the Secretary to review a State plan.

I don't know that... I don't know that there's anything that prevents anyone from sending a letter to the Secretary to ask him to take, to undertake that.

That said, the Secretary obviously knows about this particular scheme.

Justice Ginsburg: Yes, and the Secretary, you said that the... at least the SG supports your view that this... that this program of Maine's is impermissible, but the SG also told us, essentially, that this case wasn't ripe, so we shouldn't have granted cert. I mean, that was the SG's first position, that this is a... we don't know what, in fact, the Maine scheme is, because it was never... it never went into effect, because you got an injunction.

Mr. Phillips: But the one thing that we absolutely know about the Maine scheme, and it... Justice Breyer described it, is that every Medicaid recipient is placed at risk by the prior authorization scheme.

Justice Stevens: Yes, but Mr. Phillips, are there any findings that any Medicaid recipient has actually been harmed by this program?

I... this is a--

Mr. Phillips: Well, because there was a joinder--

Justice Stevens: --one of the things that bothers me, I don't know that we have any findings by the district court as to what the real impact will be.

I know your... your... the Government says this is going to happen--

Mr. Phillips: --Well, if--

Justice Stevens: --but if everybody agreed, for example, to join the Maine program, maybe it may work out fine.

Mr. Phillips: --The... I don't have to go to the United States.

The State of Maine concedes in its brief at page 25, Maine Rx can be expected to trigger prior authorization more often than previously.

Justice Stevens: Yes, but it may well be that prior authorization would, in turn, lead to some solution between the drug companies and the State as to how this will all be handled.

I don't think the fact they agreed that it would trigger prior authorization necessarily proves the conclusion that the Medicaid recipients will be harmed.

It may well be true, but I'm just not sure--

Mr. Phillips: Well, but--

Justice Stevens: --the record supports that--

Mr. Phillips: --Well--

Justice Stevens: --as of this stage of the case.

Mr. Phillips: --Well, but there'd be no way to enjoin the program before going into effect, which means that you essentially have to wait until actual Medicaid recipients are deprived of drugs in order to be able to implement... to stop a program that on its face does nothing to benefit Medicaid beneficiaries, and clearly poses a serious threat to them.

I... if we go back to the Hines v. Davidowitz language, it talks about the full achievement of Congress' objectives.

Justice Stevens: But it only opposes the very threat that the statute by its own terms authorizes.

That's the threat.

Mr. Phillips: Well, but it only authorizes--

Justice Stevens: The threat of prior approval which the statute authorizes.

Mr. Phillips: --Sure.

It... to serve Medicaid-related purposes.

Justice Stevens: But the statute doesn't say that.

Mr. Phillips: I... I understand that, Justice Stevens, but the point is that if you read the statute, and it's essentially six, those six words, to say that the State has unlimited authority to do that, it strikes me as inconceivable that Congress would have allowed this entire mechanism to be available for the State to come in and simply to raise revenue from out-of-State manufacturers.

There is no rational basis for that kind of a conclusion.

The much more sensible way to narrow the statute is to say, if it serves other Medicaid purposes, then that's an appropriate way to proceed.

If it doesn't, then it seems to me the... the Court has to conclude that the best interests of the beneficiaries ultimately has to trump here under these circumstances.

Justice O'Connor: Mr. Phillips, do you also rely on the Commerce Clause as somehow prohibiting what Maine has done--

Mr. Phillips: I--

Justice O'Connor: --and if so, how do you make that argument?

Mr. Phillips: --Well, Justice O'Connor, we have sort of three components to that argument.

The thing that is... I concede at the outset that there is no case of this Court that directly controls in either direction.

This is a unique scheme that's been adopted here, and... and--

Justice O'Connor: Is there anything in the Commerce Clause that prevents a State from addressing within its State boundaries requirements for dispensing prescription drugs?

Mr. Phillips: --Well, when the entire burden of the program falls out of State, it seems to us that this creates at least a serious question about what's going on here.

The--

Justice Kennedy: Well, any State regulation, a State wants to have a special rule for a bicycle, you could say, well, that increases the cost to the manufacturer and the other States have to pay for it, so I'm... I'm not sure that that reasoning, which was in your brief, carries the day.

Mr. Phillips: --Well, I--

Justice O'Connor: Like a special fuel requirement for automobiles?

Do you think California can set certain standards, that of course it affects the auto manufacturers?

They don't make them in California.

Mr. Phillips: --Yes.

There's no question that States are free to create certain types of regulations that are different from other States, and that's... and that's not the full sweep of the argument that we're making here.

What... what--

Justice O'Connor: That's not what happened here.

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

Justice O'Connor: I don't understand the Commerce Clause argument.

Mr. Phillips: --I wouldn't presume to try to teach you about the Commerce Clause, Justice O'Connor, but the reality of what's happening here is much more like the West Lynn Creamery case, where what you're talking about is the payment of a subsidy, all by out-of-state entities, in order to benefit... in that case it was to benefit in-state competitors.

There are no in-state competitors in this case.

Justice Kennedy: Oh, I've got quite--

Justice Souter: --Isn't that a--

--a problem with the argument.

Justice Scalia: That was the problem.

Mr. Phillips: I'm sorry.

Justice Souter: I'm sorry.

Mr. Phillips: I didn't hear--

Justice Souter: Well... no, let me yield to Justice Kennedy.

Justice Kennedy: I had thought you might make the argument... I didn't see it in your brief, maybe I missed it... that this is just so burdensome on manufacturers to go from State to State to State that it's just an... it's an undue burden on an interstate transaction, period.

Mr. Phillips: --Under Pike v. Bruce Church.

Justice Kennedy: And... and Southern Pacific v. Arizona.

Mr. Phillips: Yeah.

The reason we didn't raise that argument is that we thought that we would require... in order to make that argument we would require more factual findings by the district court--

Justice Kennedy: Right.

Mr. Phillips: --in order to get into it, because there's a balancing component to that--

Justice Kennedy: The other thing I wondered about is, if you've come over Vermont or New York you can't have the advantage of this.

I suppose it's not necessarily in your interest to argue that it has to be expanded to other States, but I... it seems to me that also was a questionable part of the program.

Mr. Phillips: --Well, I do think one of the real problems with this program is that some States will adopt this kind of a scheme and other States won't adopt this kind of a scheme, which means that you're going to have inherent discrimination with respect to consumers.

Some consumers will benefit to the detriment of other consumers, and it does seem to me that... that the theory of West Lynn Creamery was designed to say that you don't just look at the competitors and the relationships between them, you have to look more broadly at the manufacturers, the wholesalers, all the retailers, and all the way down to the consumers, and if you have the kind of discriminatory effects here where Maine seizes for itself all the economic benefits and imposes on... on everyone else the economic burdens, that in that circumstance this runs afoul of the core--

Chief Justice Rehnquist: The... wasn't this--

Mr. Phillips: --command of the Commerce Clause.

Chief Justice Rehnquist: --one of the reasons the First Circuit vacated the injunction, the fact that there just hadn't been any factual development here as to what was happening?

Mr. Phillips: Well, that was part... yes, to be sure, Mr. Chief Justice, that's part of what they said.

On the other hand, if you accept our basic theory about the clear discriminatory implication of the way the scheme operates, that kind of an operation is per se invalid.

That's what the Court held in... in West Lynn Creamery.

Justice Souter: But isn't the West Lynn Creamery difficulty in your argument that here, unlike West Lynn, there are no entities within the same category, manufacturers, e.g., producers, for example, some of whom are being discriminated in favor of others?

What's going on here is not discrimination by the State within a given class to benefit the members of the class within the State.

What is going on here is a scheme which happens to fall on certain individuals in a manufacturing class who, incidentally, are out of State, for the benefit of people in a different class, that is, the consumers, who are in-State, and West Lynn doesn't govern that.

Mr. Phillips: No, it doesn't directly cover that, and I conceded that at the outset.

On the other hand, the point here is that there are entities out there in the stream that are within Maine, and on whom this burden is not imposed.

It was chosen to impose the burden strictly on the manufacturers, and it is done in a way that will create disparate impacts with respect to consumers in Maine versus consumers in other... in other States--

Justice Souter: But that is... I mean, that's a... that's a necessary consequence of the prior approval scheme.

That... you're going to have that argument no... no matter how... no matter how prior approval--

Mr. Phillips: --Well, and... and if it operates within Medicaid, it seems to me that there's no... there's no significant argument to be made there, because Congress has basically taken it over.

Justice Souter: --Simply because you've got to have it.

Mr. Phillips: But otherwise... and one last point I'd like to make, which is simply that the Commerce Clause issue does not need to be addressed in the event the Court holds that the, that the Maine statute is preempted.

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

Argument of Edwin S. Kneedler

Chief Justice Rehnquist: Very well, Mr. Phillips.

Mr. Kneedler.

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

The Department of Health & Human Services has articulated a position on two issues that are directly relevant to this case, and those positions are set forth in the letter to the State Medicaid directors that is set forth in an appendix to our brief at page, I believe it's page 45a it begins.

The first of those--

Justice Kennedy: Well, does that lead to a conclusion as to its view as to this program that we're considering?

Is it valid, or isn't it?

Mr. Kneedler: --If I could... there are two problems--

Justice Kennedy: As far as the Secretary is concerned.

Mr. Kneedler: --There are two problems with the... with the State program under this Medicaid director's letter that the Secretary sent out.

The first is that it's the position of the department that a plan such as this, which imposes a prior approval requirement for Medicaid patients, if the drug manufacturer does not pay rebates with respect to sales to nonMedicaid patients, that sort of change is a material change in the State's plan which requires the approval of a plan amendment.

There is a regulation that we cite in our brief at page 28, and quote, that requires that, and that, by the way, I think could be the... the mechanism effectively for a prior jurisdiction sort of approach.

Justice Breyer: I see that, but I... I mean, I'm a little bit at sea.

I absolutely wouldn't call it primary jurisdiction.

The label doesn't matter, but the... the... but... now, where I'm... where I'm... where I'm at sea is at figuring out whether it's possible to say, and you don't say this in your brief, that... that a program like Maine's, which is arguably, arguably wrong, or arguably right, that it can't go into effect without the prior approval of HHS.

Now, that's going to require me to look up the approval statutes, a whole lot of things that weren't briefed.

Mr. Kneedler: Well, it's... the... the... we have cited this regulation in our brief, and the... and under Allens v. Robbins the Secretary's, or the... the Secretary's interpretation's set forth in the brief.

It's also set forth in the Medicaid director's letter.

Justice Scalia: Why hasn't the Secretary acted under it, then?

What are you bothering us for?

If the Secretary has power under this... under this regulation to stop this plan from going forward because it amounts to an amendment of the... of the plan, and an amendment that hasn't been approved, the... the Secretary has the power to stop it.

Why... you know, why--

Mr. Kneedler: Well--

Justice Scalia: --do we have to get involved?

Mr. Kneedler: --Well, if I could just answer that and then move to the second question, because I think it's related, the regulation identifies what... that material changes in the plan have to be submitted for an amendment.

The Secretary's enforcement authority comes from a different source, which is in 42 U.S.C. 1396c, which allows the Secretary to cut off funds in whole or in part if a State is operating under a plan that requires an amendment because of those changes, so... but I--

Justice Souter: Well then, why doesn't the Secretary do it?

Mr. Kneedler: --I think it was... it's entirely reasonable... first of all, that's a matter of enforcement discretion under Heckler v. Cheney, and at least for the time being, why this... while this case is under... is under submission, the Secretary has not... has not proceeded.

Justice Souter: Well, but I think the Secretary is ignoring one serious problem, and I suspect it's behind Justice Scalia's question.

It's certainly in my mind.

It's one thing for the Secretary to act within enforcement power.

It's one thing for the Secretary to interpret the regs by, the statute by regulations that are subject to Chevron deference, but if the Secretary does neither one of those things, and from one side of the Secretary's mouth we hear, well, yes, some prior approval beyond what is strictly necessary for the direct benefit of Medicaid recipients is okay, but this goes a little bit goes too far, courts are then placed in the position of saying, well, can we read the statute so precisely as to say that the Secretary's position of what is okay is okay and, by going this step further, there's a violation of the statute?

We are placed in a very difficult position, in effect by the Secretary, by you, in being asked to draw a line with a very fine pencil, whereas if the Secretary wants to act under administrative authority, presumably that's the end of it.

Mr. Kneedler: Well, in going forward, I mean, the Secretary issued this Medicaid director's letter in September, after the Court had granted review--

Justice Souter: Ah.

Mr. Kneedler: --because this was an area that required attention.

Going forward, we... we expect that... that States will submit their proposals to the Secretary as plan amendments--

Justice O'Connor: Well, is there some--

Justice Scalia: --And if--

Justice O'Connor: --Is there some mechanism by... or authority by which we could somehow refer this back to the district court to seek some kind of information from the Secretary?

Mr. Kneedler: --Well, here's the way I think that it could proceed.

Justice O'Connor: How... how could we do it?

I don't know of a doctrine but--

Mr. Kneedler: I... I think the procedural posture of this case would allow that, and let me explain why.

The Secretary's second position in this case, which I wanted to also make sure I articulated, which was that a... that a proposed, or a plan such as this, which provides for rebates for nonMedicaid patients, still must serve some Medicaid purpose.

In the district court, when the district court entered what is only a preliminary injunction at this stage, at page 71 of the petition appendix, the district court pointed out that the State had not argued that its proposal served any Medicaid purpose.

As the preliminary injunction was entered, it was entered on that premise.

The court of appeals then speculated that perhaps it does serve a Medicaid purpose, but looking back at when the preliminary injunction was entered, it was entered on the premise that it served none, and we think, and the Secretary believes that a plan must at least serve some Medicaid purpose.

Justice Stevens: --But as I understand it, Mr. Kneedler, it is... it is at least theoretically possible that the Secretary could approve this very plan.

Mr. Kneedler: If... on the proper showing.

The rationale--

Justice Stevens: Right, of course.

It needs more facts.

Mr. Kneedler: --Yes.

The rationale adopted by the district court was the rationale that some--

Justice Stevens: Yes.

It may have now advanced a Medicaid-related purpose that may or may not be sufficient.

Mr. Kneedler: --That's... but we believe that the purpose that has been advanced does not save this statute.

The purpose that has been advanced and was identified by the court of appeals was a purpose that some people who were close to being Medicaid-eligible will be forced to spend more on drugs, may become Medicaid-eligible, and therefore cost the Medicaid program more money.

That's a Medicaid-related purpose.

The problem is, the State statute is not tailored to people who are close to the poverty line.

Justice Breyer: So is the procedure--

Justice O'Connor: --Would you... would you finish your response to me--

Mr. Kneedler: Yes.

What--

Justice O'Connor: --to tell me--

Mr. Kneedler: --Yes.

Justice O'Connor: --what it is that you think we could do?

Mr. Kneedler: If the Court reversed the court of appeals decision, in effect affirmed the district court's injunction, which was entered on the basis that the plan serves no Medicaid-related purpose, the State program would be enjoined.

At that point the State of Maine could submit the program to the Secretary of Health & Human Services along with any justifications for the plan, such as those... there are two additional ones that have been raised in its brief in this Court for the first time, and we think that's how it should play out.

This is a... right now, the case presents a very narrow issue on a preliminary injunction.

Justice Stevens: Why couldn't that procedure be followed by affirming, and saying there should be a hearing in the district court on these very issues that you're raising, and both sides would present the facts?

Mr. Kneedler: We don't think it would be a hearing in the district court.

We believe it should be submitted to the Secretary, because a plan amendment is required, but we do believe that... that the petitioner has made a sufficient showing based on the, on what the district court said, that this plan, that Maine had offered no justification, no Medicaid justification for the plan.

Justice Stevens: Do you read the statutory authorization for prior approval to mean prior approval only if there's a Medicaid-related benefit?

Mr. Kneedler: We... we do.

The legislative history of the prior approval position--

Justice Stevens: You rely entirely on legislative history for that?

Mr. Kneedler: --No, and also there are two other provisions of the act which we think are relevant, on the one hand, a19, which talks about the best interests of the patients, but on the other hand, a(30)... this is 1396a(30)(A), which says that a State plan must provide for methods of payment that advance efficiency and economy in the Medicaid program.

We think both of those speak to interests within the Medicaid program and require in the prior approval process, as well as in the administration of the plan generally, weighing the interests of the Medicaid beneficiaries against the broader institutional interests of the Medicaid program.

If there was no Medicaid-related purpose requirement at all, then a State could impose a prior approval requirement if the drug company contributes money to the art museum or to the State highway program.

We think that under this Court's decision in Dublino, the State must be pursuing a purpose in common with the Federal Government, a Medicaid-related purpose.

What... what the scope--

Justice Ginsburg: Mr. Kneedler, it... it was the Government's first position that this Court ought to let the case ripen, and now you... you are necessarily taking a position in this lawsuit because we granted cert, but the Government made a pretty good argument essentially that this case wasn't ripe.

Mr. Kneedler: --Well, ripe for this Court's review, but we now... we now believe that, given that the director's letter that was sent out in September, that there is a basis, there's an articulation of the Secretary's position both on plan amendments and the requirement of a Medicaid-related purpose that... that this Court could properly dispose of this case in the narrow... in the narrow way I suggested which, of course, would also obviate any requirement to consider the Commerce Clause question.

Things have evolved in the Secretary's evaluation of this and, as Justice O'Connor, I think pointed out, the Secretary has since approved a Michigan plan amendment under this same general approach.

Argument of Andrew S. Hagler

Chief Justice Rehnquist: Thank you, Mr. Kneedler.

Mr. Hagler, we'll hear from you.

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

People without insurance are charged more for prescription drugs than any other purchaser in the market, often much more.

Patients who are forced to pay cash at the pharmacy are those least able to absorb these high prices.

To ameliorate this hardship, the Maine legislature will embrace a market-based approach used by other large third party purchasers to leverage its purchasing power under... as a third party purchaser in Medicaid to obtain price relief for the uninsured in Maine.

Justice Scalia: And you think that's one of the valid uses of the authorization provision?

You think that's why it was included in the statute, so that a State could... could shake down drug companies to lower prices to other people?

Mr. Hagler: I concede that... that Congress never thought that Maine might use prior authorization in the way that Maine Rx anticipates it.

However, what Congress said--

Justice Scalia: You can use it for anything at all?

Could... could you use it to... to say, we... you know, you... you have to pay each member of the Maine legislature $100 a year?

Could... could you put that in there?

Mr. Hagler: --As you get further and further for the purposes of... of providing health care, you approach uses a... of prior authorization that might offend Congress and this Court, but preemption is a question for Congress.

Justice O'Connor: Well, did Maine offer in the district court, in the hearings on whether a preliminary injunction should issue, a justification for how the Maine Rx program benefits Medicaid patients?

Mr. Hagler: We did not so argue in the district court.

Justice O'Connor: Okay.

Justice Breyer: When you say... who does it apply to?

That is, the statute says it applies to qualified residents.

They define that as people with a Maine Rx enrollment card, and now I don't know who those people are.

Is it virtually everybody in the State?

Is it a small subclass, those who don't have insurance?

Who is it?

Mr. Hagler: Well, it's... it's those without insurance.

Justice Breyer: So that's a fairly small group.

What percentage of that... it's 15 percent of the people of Maine?

Mr. Hagler: If... we anticipate 22 percent.

The AARP has a different--

Justice Breyer: Okay, so 15, 22 percent.

Now, if that being so, it sounds to me like it could be like the one that was approved, or maybe it's not like the one that was approved.

Mr. Hagler: --And you don't know--

Justice Breyer: It sounds like a case, to me, that has to go to the Secretary, whose job it is to approve it, rather than having us fly blind.

Mr. Hagler: --Well, here's the difference between what the Secretary approved and what the Maine... and... and what he's proposing with respect to Maine Rx and the plan amendments.

What the Secretary approved was a program that's a demonstration project, a waiver program, allowing more people into Medicaid notwithstanding the fact that they're ineligible.

Justice O'Connor: That has been approved for Maine?

Mr. Hagler: Approved and struck down by the D.C. Circuit on Christmas Eve.

The Secretary and the Solicitor General, the Secretary and the Solicitor General identified the fact that that program helped people up to 300 percent of poverty.

Without the Healthy Maine program, the demonstration project, Maine Rx is now the only program that helps those people.

Justice Breyer: That isn't an answer to my question.

The answer to my... my question was, it sounds to me like a program that the Secretary might approve or might not approve, and so why should we fly blind?

Why isn't it the case that you can't put this program into effect, given Federal law, without the approval of the Secretary?

Now, when she approves it or disapproves it, they can argue about whether that was legal.

Mr. Hagler: Well, the Secretary is suggesting that the State of Maine seek a plan amendment, but by definition, a plan amendment allows... a plan amendment is something that, if we sought a plan amendment to run Maine Rx it would necessarily be allowed by the Medicaid statute.

42... the Medicaid statute, 1396 subsection--

Justice Breyer: I'm not following you.

Is your argument that--

Mr. Hagler: --We don't--

Justice Breyer: --even if the Secretary disapproved this, were it a plan, we still could do it?

If that's your argument, I'll answer that question.

That's a legal question.

I think it's an easy one to answer.

In my mind, the answer's no.

Mr. Hagler: --Well, if the Secretary were to--

Justice Breyer: Now, you can explain why it shouldn't be no, but I want to know if that's what I'm supposed to decide.

Mr. Hagler: --It's not what you're supposed to decide.

The Secretary has not acted, other than speaking to this Court through the brief of the Solicitor General.

The Medicaid statute provides a mechanism for the Secretary to tell the State when it is running its Medicaid program in a fashion which violates the provisions of the Medicaid statute.

That is--

Chief Justice Rehnquist: Well, but is this actually a... the... the State... the State of Maine running its Medicaid program, it... it's a freestanding statute, isn't it?

Mr. Hagler: --It's an entirely different... correct, it's an entirely different statute.

We don't believe we need a plan amendment to seek approval to run the Maine Rx program.

Justice Breyer: That's fine.

So then you want me to decide the question of whether it would be possible to have this statute even if the Secretary, were it an amendment to the Medicaid plan, would say no, okay?

I say that's a legal question we can decide.

Mr. Hagler: But you should not decide that now.

Justice Breyer: Is that what you think we should decide now?

Are you following what I'm saying or not?

Am I not--

Mr. Hagler: Not precisely.

Justice Breyer: --I can decide the question if the Sec... you're saying... suppose the Secretary's approval makes no difference.

Let us assume the Secretary would disapprove it.

Mr. Hagler: Okay.

Justice Breyer: There would... a legal question, can you have this statute anyway?

Mr. Hagler: Yes.

Justice Breyer: Okay.

That's what you think we should decide?

Mr. Hagler: I believe that's what I--

Justice Breyer: All right.

If that's what you think we should decide, fine, then why isn't the answer to that question clearly no?

You would have a Federal statute, it uses the Federal program, the Secretary thinks it's contrary to the Federal program, the Secretary's views are within her authority, let's say, under the... under the Federal program, and so a State cannot put something into effect--

Mr. Hagler: --Well--

Justice Breyer: --that is so clearly contrary to the Medicaid program using the Medicaid device.

Mr. Hagler: --The question that this... the first question that this Court certified was, as described in the Secretary's brief, is whether the Federal Medicaid statute allows the use of that authority under the statute to compel... the prior authorization authority--

Justice Scalia: And I assume it--

Mr. Hagler: --And he says yes.

Justice Scalia: --And it would be a waste of time and money for us to send it back to the Secretary, at least if we are convinced on the basis of the briefs submitted here, that even if the Secretary did approve it, that approval would be invalid.

I mean, you would concede that--

Mr. Hagler: If the--

Justice Scalia: --that whatever primary jurisdiction is involved here--

Mr. Hagler: --If the--

Justice Scalia: --it certainly makes no sense to send it back to the Secretary if, when the Secretary approves it, there is then a lawsuit and we say, oh, by the way, he couldn't approve this.

Mr. Hagler: --Right.

Justice Scalia: This goes too far.

We might as well decide that now, no?

Mr. Hagler: You can decide the preemption question now, and I think that the Court should, and the preemption question is whether Congress intended to prohibit what Maine has here done.

When Congress legislates against the backdrop of the preemption doctrine and it give... gave to the State the discretion to subject to prior authorization any covered outpatient drug, it qualified that discretion hardly at all.

The only qualifications are the two provisions, the procedural safeguards that require that if prior authorization is sought--

Chief Justice Rehnquist: Doesn't the Secretary have some discretion in this area as to whether to say it's good or bad, the... the Maine plan, or are you saying it's simply not his business?

Mr. Hagler: --It's Congress' business--

Chief Justice Rehnquist: Well, right.

Mr. Hagler: --to set the line--

Chief Justice Rehnquist: But did Congress in what it enacted leave any room for the Secretary to have some discretion here?

Mr. Hagler: --What Congress enacted was the opportunity for the Secretary to tell the State that when it's begun a program or is operating its Medicaid program out of compliance with the Medicaid statute, that it believes that that's the case, and the provision provides for a fair hearing for the State, we get together with the Secretary, we try to work it out.

If we can't, and if the Secretary... if Maine persists in wanting to run the program, and the Secretary disapproves the program, then his remedy is to withhold money from the State and--

Chief Justice Rehnquist: But if... if it's a freestanding pro... if it's a freestanding statute, not part of Maine's Medicaid, how can the Secretary disapprove a freestanding statute?

Mr. Hagler: --What he can do is look to the effect of what happens once Maine Rx is implemented, and look to the effect on the Medicaid beneficiaries as to whether or not they'll be harmed.

Justice O'Connor: Well, the Secretary theoretically could conclude already that to require prior approval for every prescription drug will have negative effects on Medicaid recipients who otherwise would not have to seek prior approval, because there's quite a bit in the record about the difficulty when prior approval must be obtained.

Mr. Hagler: Oh, I submit there... that there's... I disagree with respect to the record.

I believe that there's very little in the record which demonstrates that there will be any harm to Maine Rx beneficiaries, harm to their health, once Maine Rx is imposed, and should the State ultimately impose prior authorizations under the Maine Rx statute.

You have lodging materials which are untested.

The fact of the matter is, if we were to return to the district court we could demonstrate, based on a vigorous use of prior authorization in the 2 years that have intervened the granting of the injunction and today, that we are imposing prior authorization and we are answering the phone in less than 2 hours, and that Medicaid patients are, in fact, not being harmed.

We... our position is that to survive a facial challenge the petitioner must demonstrate that any use of prior authorization, as contemplated by the Maine Rx--

Chief Justice Rehnquist: Well, I question whether this is correctly described as a facial challenge.

You think of a facial challenge more in terms of somebody who has a... First Amendment implications, or at least criminal law applications.

This... as I read the First Circuit's opinion, although they talked about a facial challenge, I thought what they were saying was, we just don't know enough, since the thing had never gone into effect to uphold the injunction.

Mr. Hagler: --No, and... and what the First Circuit didn't know was how the program would actually be implemented, and there are many ways of implementing the program that not only will not cause harm to Medicaid beneficiaries, but which will affirmatively advance the purposes of Medicaid.

Justice O'Connor: Is the program now in a... being operated?

Mr. Hagler: It is not, and the reason that it's not is because the--

Justice O'Connor: The way you spoke, I thought you had some current experience.

Mr. Hagler: --We do have current experience with the use of prior authorization to save Medicaid money.

Justice O'Connor: For Medicaid, for Medicaid patients.

Mr. Hagler: For Medicaid, correct, and as a result of that experience we know much more about our abilities and would be able to describe to the district court much more about our abilities should the First Circuit--

Justice Kennedy: Why wasn't the plan put into effect if the injunction was lifted?

Mr. Hagler: --The mandate was stayed pending--

Justice Kennedy: Oh, I see.

Mr. Hagler: --for a writ of certiorari, so we've... we've not had an opportunity to implement the program.

Justice Kennedy: But the Federal Government, with reference to Medicaid, certainly thinks prior authorization is an important enforcement mechanism and now you're saying oh, don't worry about it, it doesn't make much difference.

Mr. Hagler: Well--

Justice Kennedy: That's hard for me to accept.

Mr. Hagler: --Well, the Federal Government agrees that prior authorization... prior authorization is undeniably a cost-saving measure.

That's the primary purpose why Congress permitted the States broad discretion to impose prior authorization.

Under the Maine Rx program, what the State is saying to manufacturers is, please negotiate with us, and if you don't negotiate with us, we will review the drugs that you manufacture to see and determine, on a drug-by-drug basis, whether it would be appropriate to subject those drugs to prior authorization.

Justice Kennedy: But the very reason you put that on the bargaining table is because you know it's going to... it's going to slow down the sales of some of these drugs.

Incidentally, I... and you can answer that.

I take it that if Company X has 10 different drugs, and it can't agree with you on the rebate price for just one, that all of those drugs must have prior authorization, or am I wrong about that?

Mr. Hagler: I believe that you're wrong.

I believe that... that the Secretary has the discretion--

Justice Kennedy: I read the Government's brief to the contrary, but I'll take a look at it.

Mr. Hagler: --Yeah, I believe--

Justice Kennedy: You're representing that it's drug-by-drug, so a company can agree with you as to nine of the drugs, and those will not be subject to prior authorization, but only the tenth drug, as to which you can't agree, will be subject to prior authorization?

Mr. Hagler: --I believe--

Justice Kennedy: That's your representation?

Mr. Hagler: --As to the... I believe that our administrative rules demonstrate, proposed administrative rules that the Department hasn't enacted because the injunction has been imposed allow the Department of Human Services of the State of Maine to look on a drug-by-drug basis as to whether any particular drug ought to be subjected to prior--

Justice Kennedy: Does it allow it, if it uses, to look on a company-by-company basis, as I'd first described?

In other words, does it subject--

Mr. Hagler: --What will happen is, if--

Justice Kennedy: --to discretion of the State.

Mr. Hagler: --In other words, if Pfizer were to agree to provide a rebate for some of its drugs but not all of its drugs, must we look to the other drugs--

Justice Kennedy: Yes.

Mr. Hagler: --and determine prior authorization?

The statute contemplates a negotiation.

The Commissioner is to use his best efforts to negotiate with manufacturers in order to--

Justice Scalia: I take that to be a yes?

Mr. Hagler: --The answer is yes.

Justice Scalia: You can keep all of their drugs off unless they give you what you want for some of them?

Mr. Hagler: We could, but the statute also allows us not to.

Justice Scalia: Yeah.

Mr. Hagler: The purpose of that--

Justice Scalia: You could, that's... and... and you say it... that the statute envisions using this authorization as a cost-saving measure.

Does this save any costs... does this statute save any cost to the Medicare recipients?

Mr. Hagler: --To the Medicare?

Justice Scalia: To... to the Medicaid--

Mr. Hagler: Oh, the Medicaid recipients, the Medicaid recipients themselves pay nothing, but it can save money in, and it's probable that it will save money in the Medicaid program, and the reason for that--

Justice Scalia: --I understand, because some people won't come into the program who otherwise would come in.

Mr. Hagler: --Well, that's what the First Circuit picked up on, but the other reason and the other method in which it would save Medicaid money is, it would result in shifting prescribing behavior from more expensive drugs to less expensive drugs.

The Commissioner, under subsection--

Justice Ginsburg: But doesn't that depend on who you make the deals with?

Maybe the more expensive drug... drugs we're willing to make this deal with you, and the less expensive not willing.

Mr. Hagler: --Subsection 13 of the Maine Rx statute gives to the Commissioner the discretion to run the Medicaid program and the maine Rx program in a coordinated manner so as to enhance efficiencies in both, and so I believe that the Commissioner would never impose prior authorization on the cheapest drug in a therapeutic class even if that manufacturer didn't provide a Maine Rx rebate, because it would be silly to do so.

He's got a budget to operate.

Justice Scalia: I've known some silly administrators.

Unknown Speaker: [Laughter]

Justice Scalia: The point is, he could do it.

The point is, he could... you're... you're... you're... you're troubled by a... by a statute which would allow a denial of authorization unless the drug company pays $100 to each member of the... of the legislature.

I... I gather you... you acknowledge that... that the authorization requirement in the statute has some unstated limitation upon it, or don't you acknowledge that?

Mr. Hagler: I believe that... that under the Court's preemption analysis we look to the primary purposes of the Medicaid statute and you seek to determine what Congress intended.

Justice Scalia: Does the authorization provision have some unstated limitation upon it, a limitation that is not in that sole provision alone?

Mr. Hagler: I believe that it doesn't, but even if it does--

Justice Scalia: It doesn't, so $100 to each legislator is okay?

Mr. Hagler: --And... and... and when that offends Congress, Congress has the ability to act.

Justice Stevens: The real question is whether it has an unstated limitation that's sufficiently clear that it preempts the State law.

Mr. Hagler: I'm sorry.

Justice Stevens: The real question is whether the unstated limitation is sufficiently clear to be preemptive of a State statute to the contrary.

Mr. Hagler: That's... that's correct.

Justice Breyer: Well, how is Congress--

Mr. Hagler: The language of the statute is, a State may subject to prior authorization any covered outpatient drug.

Justice Breyer: --Well, how could Congress--

Mr. Hagler: Every--

Justice Breyer: --Sorry.

No, go ahead.

Finish, please.

Mr. Hagler: --Indeed, every outpatient drug could be subjected to prior authorization.

That, too, would be silly, but the power is that broad.

Justice Breyer: Now, that's what I want to know.

Why?

I mean, how could Congress possibly want a statute which would hurt the Medicaid patients at... no argument it wouldn't hurt some of them, and has nothing to be said for helping anyone related to Medicaid?

Mr. Hagler: Well, we... we disagree that--

Justice Breyer: I know you disagree about whether that's the effect.

Mr. Hagler: --that it will not hurt people.

Justice Breyer: I understand that.

Mr. Hagler: Right.

Justice Breyer: So how can I decide this case without knowing whether the people in charge of the statute agree with you about that, as they might, or you might negotiate some implementation of how to have regulations that they can agree to, or, or, or, the possibilities are endless.

How can I decide in your favor, in other words, without knowing, the same question, what the Secretary thinks?

Mr. Hagler: Because the Secretary can act if the injunction... if the First Circuit's decision is affirmed, the Secretary can act, and tell the State of Maine we believe that you will harm Medicaid beneficiaries and we will take your money away.

Justice Ginsburg: But suppose--

Mr. Hagler: But the Secretary hasn't acted.

The Secretary asked this Court to approve his notions of what Maine Rx might look like if it were more limited in scope in terms of the number of beneficiaries, but he hasn't defined for the Court how to set the line.

Justice Scalia: --Suppose the State passes a law that says that each Medicaid beneficiary shall pay an additional tax of $50 a year.

You say that the only way to get rid of that law, which would certainly contravene the... the whole purpose of Medicaid.

The only way to get rid of it is to go to the Secretary and say, since this law is an amendment of the State's plan, you should approve it, it requires your approval.

Mr. Hagler: Now, there--

Justice Scalia: They couldn't strike that down as just being contrary to the--

Mr. Hagler: --No, it's contrary to the statute.

Justice Scalia: --Okay.

Mr. Hagler: Medicaid beneficiaries can't be required to pay more than a nominal co-pay.

Justice Scalia: Okay, so--

Mr. Hagler: Congress thought--

Justice Scalia: --So the only remedy for something that is contrary to the statute is not going through the Secretary, that some things that are contrary to the statute can be attacked directly, as is being done here.

Mr. Hagler: --But... but I'm not convinced that from the text of the statute you can find an intent--

Justice Scalia: Okay.

That's a different question.

Mr. Hagler: --on the part of Congress to prohibit this, and even if it were to... Congress were to prohibit using Maine Rx like prior authorizations for some purpose wholly unrelated to health care, when you get closer and closer to something approaching what the Secretary in fact does approve of, how can a court set the line?

The question really is--

Justice Scalia: That's the merits question, rather than whether we have, you know, power to... to move at all, so long as the Secretary can handle the problem by denying approval.

Mr. Hagler: --The Secretary has indicated that he'll handle the problem, or he's expressed his views about what the program is.

The Court should wait to see whether the... I mean, the Court should allow the Secretary to--

Justice Stevens: Can I ask you this question: I thought you would agree that, if it were clear as a matter of fact that this program was going to harm Medicaid recipients, that we would have power to enjoin the program?

Mr. Hagler: --Yes, but it's not... I do agree with that.

Justice Stevens: So your argument, as I understand it, it's an unresolved factual question whether, in fact, these adverse consequences would follow?

Mr. Hagler: That's correct.

We have... there's no facts in the record, and... and this... this is a facial challenge in which my colleague has to demonstrate that they are in no way... there's no possibility of implementing the program in a way which doesn't cause harm to--

Justice Stevens: Well, I may not agree with that statement, but at least they have to make a showing there in fact will be an adverse effect.

Mr. Hagler: --Some showing.

Justice Stevens: Yes.

Mr. Hagler: And the only showing that the district court seized upon is this notion that, by definition, prior authorization imposes some sort of procedural impediment to free access to all drugs on behalf of Medicaid patients, but the--

Justice Scalia: I thought you... I thought you had acknowledged that the authorization requirement must not merely not harm Medicaid recipients, but that the authorization must serve the purpose of helping Medicaid recipients.

Don't... don't... don't you acknowledge that?

Mr. Hagler: --Our--

Justice Scalia: You were saying it does help them, you know, and you're mentioning the ways in which it helps the Medicaid program.

Mr. Hagler: --Under either test we think we win.

Under the first test, the question should be, did Congress intend to prohibit what Maine has here done?

If the question is, does the Maine Rx program advance the purposes of Medicaid--

Justice Scalia: Right.

Mr. Hagler: --it assuredly does that.

Justice Scalia: But you don't think that's necessary?

Mr. Hagler: I'm... I'm not convinced that that's necessary.

Justice Scalia: Okay.

Mr. Hagler: But even if it were necessary, there's... the... the fact's in the record, and the reasonable expectation of how the program will work will yield Medicaid cost savings both by imposing prior authorization on drugs that are more expensive than their therapeutic equivalents, and also by making Maine... allowing people without insurance in the State of Maine to purchase their prescription drugs and become less likely to become disabled and financially eligible for Medicaid.

Justice Ginsburg: Of the proposed regulations, is anything published?

There was nothing before either court about how this would be implemented, was there?

Mr. Hagler: There were proposed regulations.

They are in the appendix.

They have not been promulgated.

They were drafted, and they're--

Justice Ginsburg: Before the district court?

Mr. Hagler: --Yes.

They were handed up to the district court, and they... they should be in the court file.

They... they are found on page 278 of the appendix, and that provision describes how Maine will go about reviewing the drugs for prior authorization.

If a manufacturer refuses to participate in... in a Maine Rx negotiation, then the Commissioner will hand a list of... of that manufacturer's drugs to a committee of physicians and pharmacists who will determine whether it's clinically appropriate to subject those drugs to prior authorization, guided constantly by the principle that the purpose of Medicaid is to provide necessary medical assistance to those in need.

Rebuttal of Carter G. Phillips

Chief Justice Rehnquist: Thank you, Mr. Hagler.

Mr. Phillips, you have 3 minutes remaining.

Mr. Phillips: Thank you, Mr. Chief Justice.

Justice Stevens, I want to focus on the narrowest basis on which this case can be decided, which is, we have a preliminary injunction that was issued by the district court.

A preliminary injunction was issued on the basis of two bases, 1) the State has not put forward any Medicaid-related purpose to be served by Maine Rx, and 2) that no matter how you want to define it, there is an obstacle to the full achievement of the recipient's primary interest of receiving medicine.

As I said, there's a clear debate as to exactly the extent of the obstacle, but that there could be no question that there is an obstacle, and it seems to me that what this Court can do is simply say, those two findings are not an abuse of discretion on the record in this particular case, therefore there is a basis for affirming.

If the Court wants to go further from that and say, on remand, some guidance might be useful from the Secretary of HHS and propose some mechanism by which to have primary jurisdiction or some other mechanism devised by which to obtain the review by the Secretary, I think there's probably no problem with that and, as I said before, I can't imagine that we would have any complaint about that, but the importance of this is to... is to retain the injunction in place so that the unquestioned harms that are going to happen are not allowed to take place, and then try to undo them after the fact, which was the reason for issuing the injunction.

Justice Stevens: A brief question, I don't... I'm worried about your time, but is it inconceivable to say that there was no showing at the time of the preliminary injunction hearing but now they... Maine says they can make the showing that they should have made before.

Should the judge not listen to that?

Mr. Phillips: Well, I think when you get past the preliminary injunction and you move on to the permanent injunction, if they think that they can show no burden whatsoever, or if they think they can show that there are greater purposes to be served, that's certainly available to them.

But on an abuse of discretion standard this Court ought to affirm that, and nothing that the First Circuit said justifies taking any action in this particular case.

If there are no other questions--

Chief Justice Rehnquist: Thank you, Mr. Phillips.

The case is submitted.

Attribution:

The Oyez Project

Featured:

Yellow Transportation, Inc. v. Michigan - Oral Argument

Fri, 09 Jan 2009 14:50:39 +0000

Case:

Yellow Transportation, Inc. v. Michigan

Media File:

01-270_20021007-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Charles A. Rothfeld

Chief Justice Rehnquist: The first case this morning in which we'll hear argument is No. 01-270, Yellow Transportation, Inc. v. Michigan.

Mr. Rothfeld.

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

The issue in this case is a narrow one, but it has considerable practical importance for the continuing flow of interstate commerce.

In 1991, Congress enacted a statute that was designed to ease the burdens that State registration fees impose on trucks that travel interstate.

To help accomplish that purpose, the statute provides that a State's registration fee may not exceed the fee that the State collected or charged as of November 15th, 1991.

The question here before the Court is whether that Federal standard precludes a State from now imposing a fee on a category of trucks when the State waived the fee as to that category of trucks and therefore did not actually collect or charge it as of the controlling date.

Justice Stevens: May I ask, did it waive the fee for all carriers or just the carriers involved in this case?

Mr. Rothfeld: It... it waived the fee for all carriers in the category that are involved in this case.

The State had in place a reciprocity policy.

Justice Stevens: But did it waive the fee for all carriers in the State?

Mr. Rothfeld: I do not believe.

There is actually nothing in the record, Justice Stevens, that indicates how many States paid fees... how many trucks paid fees and how many did not.

It's my... our understanding that there were trucks that were not benefitting from the reciprocity policy and therefore they would have paid fees.

So I think... I think that the answer, although not reflected in the record, is that some trucks paid fees and some did not.

Justice Stevens: Thank you.

Mr. Rothfeld: As I say, the question is whether if there is a fee that is waived as to a category of trucks in 1991, whether or not that waiver must continue to remain in place currently because of the--

Chief Justice Rehnquist: You... you say as to a category of trucks.

Why do you add that qualification?

Why shouldn't it be true, if you're right, that if a truck... if a fee was waived as to any truck, it should remain in place?

Mr. Rothfeld: --Well, we think that the inquiry that's posed by the statute is how were trucks of a particular type treated.

And for example, imagine if a State had in place a sliding scale of fees as to different types of trucks at $10 for red trucks, $5 for white trucks, and nothing for blue trucks.

The statute refers to in... in terms... it says that the State's fee must equal the fee not to exceed $10 per vehicle that the State collected or charged as of November 15th, 1991.

Well, what in that... in that circumstance, what is the fee that the State charged when there are these different categories of trucks?

We think it has to be understood to mean the fee that the State charged to trucks of that type, and so, as I say, in 1991 in Michigan trucks of a particular type, trucks that were base-plated in the State of Illinois, were not subject to fees.

We, therefore, think that under the plain language of the statute, the same policy has to apply to trucks in that category now.

Justice O'Connor: Now, was there some change as of 1992 in connection with the fee applicable here?

Mr. Rothfeld: There was a change that was announced for the 1992 registration.

Justice O'Connor: Yes, and I guess that isn't before us--

Mr. Rothfeld: Well, that... that--

Justice O'Connor: --in this case.

Mr. Rothfeld: --To elaborate on... on Justice O'Connor's question, in 1991, the 1991 registration year, there is no question, and it is undisputed, that for the entitlement to operate in the State in 1991, on November 15th, 1991, the date identified as... as crucial in the statute, trucks that were base-plated in States that had reciprocity understandings with... with Illinois did not have to pay fees.

And therefore, Yellow Transportation, the petitioner here, whose trucks were base-plated in... in Illinois did not pay fees.

It is true, Justice O'Connor, that in... towards the end of 1991, prior to November 15th, the State announced a change for the 1992 registration year, and Yellow, being a diligent taxpayer, actually paid for 1992 prior to November 15th.

Chief Justice Rehnquist: What does the term base-plated mean?

Mr. Rothfeld: Base-plated means that plates, license plates, were issued by that State.

So the State... the title for the vehicles were in those States.

Those--

Chief Justice Rehnquist: When you say base-plated in Illinois, then that means the title was issued in Illinois--

Mr. Rothfeld: --The title--

Chief Justice Rehnquist: --and it had Illinois license plates on its truck?

Mr. Rothfeld: --Either Illinois license plates or plates that were issued through Illinois.

There... this goes beyond any issue that's presented here, but there is a understanding between the States, the International Registration Plan, and there are international registration plates that can be provided by... by any State, but it's provided through a single State.

And so the license plates here for Yellow trucks, it is sort of undisputed, were provided by Illinois.

So there is no question that within the understanding of... of the Michigan scheme in 1991, the Yellow trucks were based in Illinois and therefore benefitted from the reciprocity policy in place in... in Michigan.

Justice Kennedy: Your... your test that you propose is that it's the type of truck.

It... I take it there's nothing in... in the statute or in regulatory pronouncements that talk about types of trucks unless it's the number of axles or something.

But type of truck, it seems to me, can be applied in the generic way that Michigan argues.

It's a type of truck because it was within the exemption or without the exemption.

Mr. Rothfeld: Well, let me be clear what I... what I mean by that, Justice Kennedy.

I don't mean type of truck in terms of the number of axles or... or the weight of the truck.

I... I mean the category... the rule that the State applied in 1991... the State had in place a system of rules that applied, different... as we know, different fees to different types of trucks.

Let me give you an example.

Imagine that the State had a scheme in place in which it charged $10 for red trucks, $5 for white trucks, nothing for blue trucks, as I suggested before.

What is the... what is the fee that the State applied?

You have to say the fee the State applied to who and look at the rule that the State would have applied in 1991.

And that means identifying the type of truck in the sense of how would the rule categorize it.

And Congress has frozen in place, we believe, the rules that governed fee levels at the time.

If that were not the approach one took and there were these different--

Justice Stevens: May I ask, under your hypothetical, would that rule have prevented the company from repainting its trucks, paint the blue trucks white or the white trucks red, to get in a different category, which is what happened here?

They moved from one place of registration... one rule where the trucks were licensed to a place of the home office or something like that.

So could they have later repainted their trucks?

Or in this case, could they 2 years later have moved... changed the... the rule on... on which... whether it's a place of licensing or the home office?

Mr. Rothfeld: --Well, if... if the question, Justice Stevens, is whether the... the fee payer could avoid the fee by somehow modifying its trucks--

Justice Stevens: No, no, no.

Whether the State could change its... its... as it did here.

It did it in one year.

Could it have done the same thing, say, 3 years later?

Mr. Rothfeld: --Our... our understanding, Your Honor, is that that... the State could not do that.

We think that Congress has frozen in place expressly by the terms of the statute--

Justice Ginsburg: Locked in permanently to 1991.

So even if... let's say, the reciprocity agreement persists in 1991, but Michigan wants to change it in 1993 and '94.

It cannot.

It's locked in forever to a reciprocity agreement that it made with its sister State only for the year 1991.

Is that your reading?

Mr. Rothfeld: --Yes, and let me explain how we think that applies.

First, the statute went into effect in 1994, although it was enacted in 1991.

So in the intervening years, the State could have done whatever... whatever it wished.

We think that Congress has frozen the fee levels in place.

Now, whether those fee levels were established by reciprocity rule or by unilateral State law or by administrative fiat, it wouldn't matter.

The State had in place in 1991 a policy that said trucks of a certain character, trucks in this instance license plated in a... in Illinois, were not subject to fees.

Fees were not demanded from those trucks.

They weren't collected.

They weren't charged.

Those trucks did not have to pay a fee to entitle them to operate on the State's roads as of the relevant period.

And that being the case, we think Congress, which said the State's fee must equal the fee, not to exceed $10 per vehicle--

Justice Scalia: Well, Mr. Rothfeld, the problem I have with... with your... your argument is how does one go about identifying the category?

Is the category Michigan trucks, or is the category trucks subject to a reciprocity agreement so that if a reciprocity agreement that used to exist with Michigan were canceled, or if... if a... for that matter, a reciprocity agreement that did... that used to not exist with New York were adopted, you come into the category or go out of the category, depending upon whether you have a reciprocity agreement?

What category are... are you urging, and why do you pick that category instead of... instead of another one?

Mr. Rothfeld: --Well, we are picking the category that we think is... was selected by Congress because Congress said the fee in place in 1991 is frozen.

And so if that--

Justice Scalia: For... for the particular truck, or for the particular State as to which there is a reciprocity agreement, or with respect to any State as to which there is a reciprocity agreement?

It's hard to figure out which category they... they were talking about.

Mr. Rothfeld: --Well, I think that it's not complex in practice.

I think that what Congress was asking the State to do is look at how it would have treated a truck of this type in 1991.

Justice Scalia: That's... that's the key word, of this type.

Mr. Rothfeld: Well--

Justice Scalia: But what type?

Mr. Rothfeld: --Well, of whatever--

Justice Scalia: Owned by this company?

Mr. Rothfeld: --No, no.

Justice Scalia: Or from this State, or subject... or from a State that has... that currently has a reciprocity agreement?

Mr. Rothfeld: I think one would consider the rule that was in place in the State just as it did in 1991 and say here's a truck, this truck is base-plated in Illinois.

That is a characteristic this truck has, which is relevant under our rule, because our rule says under our existing reciprocity policy, we will not impose a fee on a truck that has its license plate issued by Illinois.

Therefore, this truck is not subject to a fee.

If such a truck comes along in 1995, after the statute goes into effect... and I should say the statute here is the refreshing acronym, ISTEA, the Intermodal Surface Transportation Efficiency Act.

When the ISTEA statute went into effect, this same... same truck goes into the State of Michigan.

It has characteristics which waive the fee to... as to it, had this truck been there in 1991, those same characteristics make the State waive the fee as to it now, because Congress has... has used the term the State may not charge fees that it was not charging in 1991.

Again, the precise language is the State's fee must equal the fee that the State collected or charged.

Justice Scalia: Well, Mr.--

Justice Ginsburg: --What about new vehicles?

What about a vehicle purchased, say, in 1995 base-plated in Illinois?

Mr. Rothfeld: If such a vehicle is base-plated in Illinois, that is the characteristic that is made relevant by the State's rule in place in 1991.

Justice Ginsburg: So it's not only vehicles that existed in 1991, it's any vehicle thereafter acquired.

So one... one element of this is that Michigan could not, on your reading, go over to the principal place of business, which in this case is... I take it, is Kansas with no... no reciprocity with Michigan... could not change that.

Everything is frozen forever under ISTEA.

Is that your view?

Mr. Rothfeld: That... that is our view, and we think--

Justice Souter: Well that's one of your views.

And may... may I ask you about the... the answer you didn't give to Justice Scalia?

Let's assume the statute isn't as clear as... as you are arguing that it is.

Isn't this the point at which you say, if it's not that clear, Chevron controls the answer?

Mr. Rothfeld: --That... that is absolutely correct, Justice Souter.

And if... it is our view that the... that the statutory language is... is unambiguous, but if we are wrong about that and if there is any opportunity to find any sort of... any wiggle room for the State in the statute, there is no doubt that the statute does not unambiguously require that reciprocity... requires States to... to change their reciprocity rules because the State... the... the statute refers, as I say, only to the fee that was charged.

It certainly doesn't say that States may change rules, particular types of rules.

And that being the case, Chevron deference is mandatory.

Here, in fact, agency deference should be at its height.

The agency here was expressly delegated by Congress the responsibility for promulgating interpretations of the ISTEA legislation.

It conducted notice and comment rulemaking.

It received dozens of comments from all interested parties, including the State of Michigan.

It issued regulations.

It issued formal interpretations of the statute.

It published a closely reasoned explanation for its conclusion.

And in those circumstances, I think every member of the Court has recognized that deference under Chevron principles is at its height, and because I think it... it simply cannot be said that the statutory language is clearly inconsistent with the approach taken by the agency, the agency's approach must be dispositive.

And here, what the agency found, unambiguously and expressly, dealing precisely with the question at issue before the Court now, is that if States had reciprocity policies in place in 1991, they may not amend, change, rescind, modify those policies in such a way--

Justice Stevens: Well, but did they change their reciprocity policy?

They just changed the way of identifying the State that's relevant for determining whether a particular truck has to pay or not.

Mr. Rothfeld: --Well, I... I think that is, in our view, a change in the reciprocity policy.

The reciprocity policy is determined by what... by certain factors.

The State... it could be a principal place of business.

It could be a different rule, place of license plating.

Justice Stevens: Where in the regulations does it say that the State may not do what it did here?

Mr. Rothfeld: The agency issued their interpretations of its regulations, which were published actually at two points.

There... there was a rulemaking proceeding, and along with rulemaking proceeding, it issued, as I said, formal interpretations of the statute and its rules.

There it indicated expressly that in its view reciprocity agreements must be frozen and cannot be modified.

A number of States indicated that they wanted to change their reciprocity rules, and the commission then held a second administrative proceeding--

Justice Stevens: Well, but did they change their reciprocity... did Michigan change its reciprocity agreement with either Illinois or Arkansas in this case?

Mr. Rothfeld: --Well, there is actually some question as to whether there were formal reciprocity agreements in place.

There is no question Michigan had a policy of providing fee waivers to trucks that were based in States that in Michigan view provided equivalent waivers to trucks that were based in Michigan.

Applying that policy in 1991, Michigan was of the view that Illinois provided such a waiver for Michigan trucks, and therefore, Michigan, under its policy announced by its public service commission, provided equivalent waiver for trucks that were based on Illinois.

That was unquestionably the rule that was in place in Michigan at the relevant time, and because of that, we think, that was the fee that was collected or charged.

To identify the fee that was collected or charged or can now be collected or charged from a particular truck that comes from the State, one has to look at the rule that was in place then and say, what was the fee that would have been applied then to this truck?

Under that approach, Michigan cannot now change its... its way of implementing reciprocity policies and therefore charge trucks that would not have been charged at that time.

If there are no further questions now, Your Honor, I'll reserve the balance of my time.

Argument of Austin C. Schlick

Chief Justice Rehnquist: Very well, Mr. Rothfeld.

Mr. Schlick, we'll hear from you.

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

Congress assigned responsibility for implementing the single State registration system to the Interstate Commerce Commission.

The ICC determined that when States apply the statutory fee cap, they must consider the reciprocal fee reductions and reciprocal fee waivers that were in place as of November 15th, 1991.

That interpretation serves the central purpose of the fee cap provision, which was to grandfather the fees that were in place as of 1991, but only those fees.

The Michigan Supreme Court's generic fee rule, on the other hand, would convert Congress's grandfather provision into a provision that would allow new fees.

The ICC's interpretation ensures that the capped registration fee is equal to the fee that the State actually collected or charged as of November 15th, 1991.

Congress did not set the cap at the amount that the States could have charged.

If Congress had wanted to do that, the obvious thing to have done would have been to set the cap at $10, which is the amount that the ICC allowed all carriers to charge as of November 15th, 1991.

Justice Souter: Well, isn't there at least an argument that Congress could have had that in mind by the distinction between charged and collected?

I mean, if there is presumably a difference between them, then the... then the reference to charge would be to a fee that was not collected, which would get you to the point which you said Congress could have but did not provide for by the... by the flat $10.

So, I mean, I... I'm not... I guess what I'm saying is, unless I'm missing something, I don't think your statutory argument compels the conclusion, but your Chevron argument is... is... perhaps takes care of your position.

Mr. Schlick: Certainly the Chevron argument is... is essential to this case.

We think that the most natural reading of charge or... of collected or charged, though, is charged, demanded, collected, received.

Justice Ginsburg: Even though that was not the commission's first view.

The commission's first view of this case is that the States would not be bound by the reciprocity agreements and could charge... whatever they charged anyone, they could charge everyone.

Mr. Schlick: That's right, Justice Ginsburg.

The ICC did, during the rulemaking proceeding, change its interpretation.

As the D.C. Circuit said in NARUC v. ICC, that's what comment periods are for.

And the... the commission ultimately relied not only on the plain language of the statute, but also on the purposes underlying the statute.

The conference report on ISTEA makes clear that there were two purposes in... in Congress's mind when it drafted the statute.

One was ensuring that... ensuring benefit to carriers, ensuring that the overall costs of the... of the State registration requirements were minimized.

The second was preserving existing State revenues.

Michigan's approach, on the other hand, would allow dramatic increases in the fee amounts, in this case an increase from 0 to $10 per truck, that would overwhelm the administrative savings that Congress intended to ensure through the single State approach.

That... that also would be a very odd policy to allow those increases since Congress would, in fact, have been authorizing increases that the States themselves chose not to implement as of 1991.

Justice Stevens: Let me just be sure you agree with your colleague.

You take the position that they could not have changed the... the State to which they give reciprocity by changing from licensing State to State of principal place of business, even if they had done it 2 or 3 years later.

Mr. Schlick: As a general matter, that's correct, but let me explain, Justice Stevens, the particular problem presented here, which has not been addressed by the ICC or the Department of Transportation and that we think is preserved on... on remand.

As of November 15th, 1991, Michigan arguably had two different fee systems in place.

The first was the fee system for 1991.

If Yellow Transportation had come to the State of Michigan and said, we'd like to add an additional truck to... to our registration for this year, effective immediately, Michigan would have... it would have charged and Yellow would have paid under the old reciprocity arrangement, under which the fact that the truck was base-plated, had a license plate for Illinois would have been dispositive.

However, simultaneously, Michigan... Michigan was... was demanding and Yellow paid fees under the 1992 reciprocity approach where the fact that the... the truck had a license plate from Illinois would not be relevant and the fact that Yellow was headquartered in Kansas would be relevant.

The ICC did not determine in its American Trucking Associations proceeding, which... which is the relevant one on this question, whether the... whether that sort of... of conflict would be resolved in favor of the old rule or the new rule.

And that's the question that we think should remain open on remand.

As a matter of fact, right now the--

Justice Scalia: I... I don't understand.

I thought... I thought '91 is the... is the... is the base period that... that's consulted.

Why... why would you use the new rule?

Mr. Schlick: --The new rule would... would be implemented as... as a result of this unusual situation, unique in our... in our experience, where there were two... where there two fee systems in place at the same time.

Justice Scalia: There was only one in '91.

The second one came in after '91.

If you allow a new fee system to... to change things, you should... you should allow a new reciprocity agreement to change things.

I... I just don't see why this is a problem.

Mr. Schlick: Well, the unique feature here is that both were in place and operational as of November 15th, 1991.

And the... that... there's also a question of whether the move to the new fee system--

Justice Scalia: They... they were both operating in '91?

Mr. Schlick: --That's right.

As of November 15th, 1991, both were in place.

Justice Scalia: Okay.

I... I--

Mr. Schlick: And operational.

Yellow might--

Justice Scalia: --I thought the change occurred in January 1, 1992, but that's okay.

Mr. Schlick: --To answer your question, Justice Scalia, the... the change... the new system became effective for the 1992 registration year commencing January 1st, 1992, but the charges were assessed in the fall of 1991.

Justice Ginsburg: So if Yellow Freight hadn't paid early, would this argument be off the board?

In other words, this... this fee was paid.

The 1992 paid... fee was paid before November 15th, '91.

Suppose Yellow Freight had waited till after January 1.

Mr. Schlick: The significance of that, Justice Ginsburg, would be something for the Department of Transportation in a pending proceeding that's... that is open now to consider.

That... that's... that question has not been answered, the significance of... of the date of payment.

Justice Ginsburg: But you're suggesting there's a possibility that somebody would be penalized for early payment, for prompt payment.

Mr. Schlick: No.

I think there would be much more to it than that.

And again, this is... this is a... a unique situation.

There have not been problems with implementing this system, and the Department of Transportation has before it a request for declaratory ruling filed by Michigan, that was mooted by the Michigan Supreme Court's decision which adopted this generic view rule that moots out all these questions.

And that proceeding could be reopened if this Court were to remand to the Michigan Supreme Court.

But the... the specific significance of the date on which Yellow made payment has not been addressed by the ICC or by the Department of Transportation.

The... the fee system here... the actual fee rule of the ICC has been in place for almost 9 years now.

There have not been serious problems of administration.

It's a mechanical process where States simply fill out the... carriers fill out a chart which has the applicable State, the number of trucks in the State.

It's a matter of multiplication and then adding some... the fee for... for each State.

As I was explaining, the Michigan situation is unique and should be left to be resolved by the Michigan courts and by the Department of Transportation.

The ICC--

Justice Ginsburg: Do you say the same thing for the argument that there in fact was no reciprocity in place with Illinois in 1991?

Mr. Schlick: --We do, Justice Ginsburg.

That's a... a subpart of... of this State-specific question.

The facts surrounding that have... have really not been developed before the Michigan courts or even before the Department of Transportation at this point.

The ICC's interpretation of the fee cap is a reasonable implementation of Congress's provision.

It's consistent with the language of the statute and its purposes and we submit that it should be upheld.

The decision of the Michigan Supreme Court should be reversed, and the case should be remanded.

Argument of Thomas L. Casey

Chief Justice Rehnquist: Thank you, Mr. Schlick.

Mr. Casey, we'll hear from you.

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

Before I begin my principal argument, I would like to spend just a moment on this... this point of the changeover in Michigan from base-plating to principal place of business.

We believe it is not present in the... in this case at this point.

This case was litigated on that point throughout the Michigan courts up until the Michigan Supreme Court decision.

Michigan had in place a system called base-plating where we imposed fees based on the State in which the vehicle was licensed.

In early 1991, the system changed from that base-plating system to a system that all the other States used based on the principal place of business of the truck carrier.

Chief Justice Rehnquist: That was what determined reciprocity.

Mr. Casey: That's what determined reciprocity.

That's correct.

And Yellow Freight Company, at that time Yellow Transportation... their trucks were licensed in Illinois, a State with which Michigan has reciprocity, but its principal place of business of the parent company is Kansas, a State with which Michigan does not have reciprocity.

And so when Michigan made this change during 1991, we then switched over and imposed fees for Yellow Freight for the registration year of 1992.

But those fees, as normal industry and State practice, were sent out in September of 1991 for the next registration year.

And Yellow Freight paid them in October of 1991.

Again, that's typical industry practice.

They're assessed and paid in advance of the registration year.

The statute took effect here in December of 1991.

The statutory language that we're dealing with talks about a fee that such State collected or charged as of November 15th, 1991.

Our argument on the... the way it was litigated through the State courts is that Michigan charged Yellow Freight before November 15th, 1991 and we collected from Yellow Freight prior to 19... prior to November 15th, 1991.

Chief Justice Rehnquist: Albeit on a system that didn't go into effect until--

Mr. Casey: For the registration year 1992, we charged and collected.

Yellow Freight disputed that.

That's the way it was litigated up to the Michigan Supreme Court.

It didn't involve this question of whether reciprocity was relevant or irrelevant.

The Michigan... pardon me.

The Michigan Supreme Court decided it on a... a different basis than the other State court opinions had.

And that raised the question which this Court granted certiorari.

In its briefs, Yellow Transportation has implied that we've somehow waived that issue.

We have not.

We did not brief it in this Court because this Court limited the grant of certiorari to the issue that the supreme court did decide.

So we... we believe that the case should be affirmed on the basis that the Supreme Court of Michigan decided it.

If it is not affirmed, however, we agree with the United States that the case should be remanded to the Michigan Supreme Court for consideration of this other issue which is still viable.

So turning now to our principal argument in defense of the Michigan Supreme Court's decision, the statute required the ICC to implement a fee system, to adopt a fee for the States, a fee system for a fee not to exceed $10 per vehicle, that such State collected or charged as of November 15th, 1991.

Beginning with the statutory language, under Chevron, if the intent of Congress is clear, that's the end of the matter.

The precise question that needs to be addressed here is what did Congress intend.

How do you determine the fee?

We believe that Congress's intent is clear.

Under the language of this statute--

Justice O'Connor: --Well, if we think it isn't altogether clear and in fact could be read the other way, don't we have to consider Chevron deference?

Because that's how the agency has interpreted it.

Mr. Casey: --If it... yes, if... if the statute is not clear, then you proceed to the second step of Chevron, which is whether the agency's interpretation is a permissible one.

We believe we don't need to get to the second step of Chevron because the text of the statute is unambiguous.

Justice Ginsburg: But if you're wrong about the text being unambiguous... and you do have an uphill argument there because didn't the two lower courts in Michigan reason the other way?

Didn't they reject the argument that the Michigan Supreme Court embraced?

Mr. Casey: The... I agree the second step of Chevron is always an uphill argument, to overcome an agency interpretation.

It's... but on... on the facts of this case, on the text of this statute, we believe that the agency interpretation is impermissible.

What the... what the agency did here was not just interpret the statute; they have, in fact, rewritten it.

They have imposed conditions in the statute which are simply not there.

Justice Ginsburg: But didn't the lower courts in Michigan say that was a proper reading, that the ICC's reading--

Mr. Casey: Yes.

Justice Ginsburg: --was a proper--

Mr. Casey: Yes, they did.

Justice Ginsburg: --Which makes it harder for you to argue that there is a plain meaning the other way.

Mr. Casey: Yes, it does make it harder.

I agree.

But it... it is still a burden that we believe we can overcome because we believe that, as this Court did in the Whitman v. ATA, it is possible to look at a statute, say a statute is ambiguous, and still say that an agency interpretation is unreasonable.

We believe what the agency has done here is unreasonable.

What the agency has done here is add language to the statute.

They have imposed the requirement in the statute that you look at reciprocity agreements.

There is nothing in the statute about looking at reciprocity agreements.

There's nothing in the statute about looking at particular carriers or how particular carriers are treated.

All this statute... this subsection of the statute requires and permits is to look at what the State collected or charged as of 1991, November 15th.

Chief Justice Rehnquist: Is there anything in the record that indicates what percentage of revenue a State like Michigan gets on the basis of these reciprocity agreements or how much... how much of its revenue from this kind of tax is not affected by reciprocity agreements?

Mr. Casey: The record in this case is very scant.

It was decided on summary disposition right after filing of the complaint.

I do know that in the year 2000, which is 9 years after the enactment of the statute, total Michigan revenue from registration fees was $2.7 million.

There are 38 States participating in the single State registration system.

We have reciprocity agreements with 21 of those States.

Chief Justice Rehnquist: Thank you.

Mr. Casey: But I don't know how those individually break down.

Michigan registers approximately 5,000 trucking carriers each year.

About half of them are from Canada.

But I don't know.

That's intra and interstate carriers.

The fees for intrastate carriers are different.

They're $100 instead of $10.

But the record is very scant in this case because of the way it developed.

Justice Kennedy: Would you tell me again why you think the statute is... is clear and unambiguous in your favor?

Mr. Casey: There--

Justice Kennedy: I see... I see the sense of a generic approach because of the trucks being painted a different color or reincorporation and so forth.

Mr. Casey: --There... there--

Justice Kennedy: But I'm not sure that I can find that under the clear language of the statute.

There's a common sense aspect to it.

Mr. Casey: --There are very few words which are at issue here.

The fee that such State collected or charged as of November 15th, 1991.

We believe that means you look only to what the State collected or charged under its fee system.

That is, what... if... if a State collected or charged its fee... it's $10 in Michigan... from any carrier as of November 15th, that ends the matter.

Justice Scalia: So you're reading in... you're reading in from any carrier.

And... and, yes, that's reasonable to read that in, I suppose.

But it's also reasonable to read in from a carrier of... of this sort.

Or you could read in from this particular truck.

You could read in a lot of... you have to read in something, it seems to me.

Mr. Casey: Well, if... under our interpretation, under... under the plain text, we submit you don't have to read in anything.

The... the words, collected or charged, are in the disjunctive.

They... they're verbs.

They require something.

Charged means sent out a bill or an invoice.

Collected means we received something.

Justice Souter: Let me ask you this.

Did... does Michigan... did Michigan at the relevant time have a scheme in which every truck of every size, weight, class, et cetera was charged the same fee?

Justice Scalia: No.

Mr. Casey: These... these fees deal only with--

Justice Souter: No, but can you give me a yes or no answer to that?

Did Michigan say, we have a law that says if you are a truck, you pay X dollars, no ifs or buts?

Is... was that the Michigan law?

Mr. Casey: --The statute in Michigan imposes a $10 fee but permits a waiver, meaning 0.

Justice Souter: So are you telling me that the answer to my question is yes?

There is only one category known in Michigan and that is the category of a truck?

Mr. Casey: No.

There... there... there's a fee of $10 or 0.

Some trucks were charged 10.

Some were charged 0.

Justice Souter: So there are at least two categories.

Mr. Casey: Yes.

Justice Souter: And if there are at least two categories, don't you have to do just what Justice Scalia said you have to do?

You have to read something into the statute, or you would be reading it in such a way as to charge against a truck in category A what, under the Michigan law, you would have charged against a truck for category B. That can't be right.

So that you've got to... as Justice Scalia has suggested, you've got to read in some kind of a categorization in addition to the plain meaning of the statute.

Isn't that right?

Mr. Casey: I... I disagree.

The... the words, collected or charged, are in the disjunctive.

So if the State either collected the fee as of November or charged it as of November--

Justice Souter: No matter to whom.

No matter to what truck.

Mr. Casey: --No matter to whom.

The fact--

Justice Stevens: May I also suggest that the... when you look at those words in the context of the whole subparagraph (4), which is the part--

Mr. Casey: --Yes.

Justice Stevens: --which begins, shall establish a fee system, so you're talking about collected or charged as part of a system.

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

Well, it's... it's true.

And that... that goes to another part of our argument.

This... this system or this section, subsection (3), is the section in which Congress implemented its goal of preserving State revenues.

There... there are two goals that Congress had in passing the single State registration system.

One is to simplify the whole procedure for the trucking industry and for States, and two was to preserve State revenues.

This subsection (3) that we're dealing with is a section that preserves State revenues.

And when you look at it in that context, the text here deals only with fees that the State collects.

There are other sections that talk about payments by trucks to States.

There are sections that talk about carriers specifically.

Congress didn't use the word carriers in this subsection.

They didn't use the words, payments by trucks to... or by carriers to States.

They could have used those words, as they did in other subsections.

Chief Justice Rehnquist: Carrier in your view signifying the entity that owns the trucks?

Mr. Casey: Yes.

What... you... earlier you mentioned trucks of different weights and things.

We're talking only here about the power vehicle.

We're not talking about the trailer part of the truck.

This is just for proof of insurance.

It's a $10 only.

There are other fees that various interstate agreements have for different axle weights, and that kind of thing.

Justice Kennedy: I... I guess our point is that for you to make the statute work, you are reading something into it that isn't there, which is this generic system and... or this generic theory.

And there's a certain amount of common sense to that, but it seems to me that by your having to do that, you in effect concede the statute is ambiguous and then your clear argument case collapses.

Mr. Casey: Well, I would... I respectfully disagree, Your Honor.

I--

Justice Stevens: The words, fee system, are in the statute itself.

That's... those are the first words in the subsection to which you're--

Mr. Casey: --This... correct.

This... this subsection is part of a fee system, and this... this subsection of that system is the section that deals with ensuring that States receive their revenue.

And when you put it in that context and you look at the specific words of the statute here, when you look at the collected or charged in the disjunctive, the statute--

Justice Scalia: --I don't understand what you get out of the disjunctive.

Mr. Casey: --The statute--

Justice Scalia: How... how does that help you?

Mr. Casey: --The statute--

Justice Scalia: It seems to me that for the trucks that were from reciprocity States, the fee was neither charged nor collected.

So how does the disjunctive help you?

Mr. Casey: --That's what the Michigan Supreme Court said, in essence, that if the... if the State collected or charged the $10 fee, period, then the statute is satisfied.

Justice Ginsburg: Did the State sponsor that--

Mr. Casey: Everything else is irrelevant.

Pardon me.

Justice Ginsburg: --In Michigan you... you helpfully began your argument by pointing out that the case had been decided on a different ground below.

Mr. Casey: Yes.

Justice Ginsburg: And this question of plain meaning or not surfaced for the first time in the Michigan Supreme Court, and that was the basis for its decision.

Mr. Casey: Yes.

Justice Ginsburg: Did you make that argument?

Did the State of Michigan make that argument, or was it something that the Michigan Supreme Court brought up on its own?

Mr. Casey: It was made in a few paragraphs as one alternative argument in a long brief, but the principal thrust of the argument... it was... it was mentioned in the Michigan Court of Appeals opinion and rejected.

It's in the appendix, I believe, on page 29 where they rejected it.

But, yes, it was presented to the Michigan Court of Appeals.

It is still active in the Michigan courts.

Justice Ginsburg: You presented it but not as your main argument.

Mr. Casey: Our argument... our principal argument, the way the case was framed in the State courts was this timing issue.

Did Michigan properly switch over from the base-plating to the principal place of business and could we, therefore, impose the fee and apply the statute to Yellow Freight?

We also argued as one of our alternative arguments that it didn't matter or that the... the statute didn't matter... didn't apply to specific carriers, that it applied broadly to everyone.

The supreme court at oral argument asked... started asking questions about this theory that they ultimately decided it on.

But the... the theory that the Michigan Supreme Court decided the case on was, by no means, the... the principal focus of the... the case that was briefed and argued below.

Justice Scalia: General Casey, you... you say that the purpose of this section was to preserve State revenues, but... but... the consequence of the... the theory that you're espousing is... is not just to preserve State revenues, but to augment them.

It... it allows the States to... to take in significantly more than they took in before.

That is, all of those considerable States that had reciprocity and from whom they collected, from whose trucks they collected nothing, they can now collect $10.

That... that's... it goes far beyond preserving State revenues.

Mr. Casey: Well, the... we... we submit that the fears that have been expressed in our opponents' briefs that these reciprocity agreements will automatically be abrogated is unfounded, for a couple of reasons, principally because those reciprocity agreements were originally entered into by States for economic reasons, totally apart from the... the statute.

It's not as though the... the State is looking at this as a... as a giant money-making event--

Justice Scalia: I understand that.

I'm... I'm not worried about the sky falling, but I'm addressing your argument from the purpose of the statute.

And you say the purpose is to preserve State revenues, but you come up with a theory that goes far beyond preserving State revenues.

It permits the States to augment their... their revenues considerably.

In... in order to preserve State revenues, you need go no further than... than your opponents' theory.

Mr. Casey: --Under their interpretation what has happened, in effect, is that State revenues are at best frozen, but in practical effect, they may really be ratcheted downward because of changing economic circumstances.

Justice Stevens: Would you explain one thing to me that response... it relates to Justice Scalia's question, too.

In this particular case, it clearly augmented State revenues because the place of... principal place of business of this carrier doesn't have a reciprocity agreement.

But it would seem to me that with respect to other carriers, it might diminish the revenue because some of them... it might be just the reverse.

They might have... that change might go from a State with... with a... without a reciprocity agreement to one that does have--

Mr. Casey: Well, when Michigan changed from a base-plating to principal place of business, it resulted in, on balance, no economic benefit.

Justice Stevens: --With respect to some States, it would increase revenues; with respect to others, it would decrease revenues.

Mr. Casey: Correct.

But--

Justice Scalia: But your... your argument is you can charge everybody $10 no matter from what State.

Isn't... isn't that your theory?

Mr. Casey: --Our... the Michigan Supreme... under the--

Justice Scalia: That you can, as far as the Federal statute is concerned, charge everybody $10.

Mr. Casey: --Or the maximum that they were charging at the time that the statute took effect.

It may not have been $10.

Whatever their State maximum that they were charging at the time, and some States don't have $10.

Justice Scalia: No.

I'm... as far as Michigan is concerned--

Mr. Casey: As far as Michigan is concerned.

Justice Scalia: --your argument is that you can charge everybody the full $10.

Mr. Casey: That's correct.

Chief Justice Rehnquist: But Michigan has some interest in getting its own trucks... having lower fees in other States I suppose.

Mr. Casey: Of course.

As we've indicated in our briefs, Michigan has committed that we are not going to abrogate our reciprocity agreements, but as I... as I've indicated, there are economic reasons why States are not going to, in a wholesale, abrogate these... or these reciprocity agreements.

They're not going to cut their own throats by... by doing that.

They... they have to live with these trucking companies.

They have to live with these economic benefits that cause them to enter into these reciprocity agreements in the first place.

And... and there's another factor at work here too.

The... the 1994 ICC Termination Act required Congress... or excuse me... required the Department of Transportation to replace this entire regulatory scheme as of 1997, but it has not happened yet.

Depending on the outcome of this case, it... this may serve as an impetus to replace this entire system with something that could serve both the States and the trucking industry better than the current system.

But the... as... as you indicated, the sky is very unlikely to fall regardless of what this Court does if... if it affirms the supreme court or not.

Justice Stevens: May I ask you a question?

What... how would you come out or how would the case come out if we decided that the statute required every State to maintain existing reciprocity agreements?

It couldn't... they couldn't charge higher fees and they couldn't cancel reciprocity agreements.

Would you win or lose if we interpret it that way?

Mr. Casey: Would Michigan win or lose?

Justice Stevens: Yes, in this case.

As I understand it, you haven't changed any reciprocity agreement.

You've merely changed the method of deciding which State is relevant for the purposes of granting reciprocity to particular truckers.

Mr. Casey: Michigan probably would not win or lose in that.

It would probably be no change--

Justice Scalia: You assert the right to terminate reciprocity agreements.

You... you--

Mr. Casey: --That... under the--

Justice Scalia: --Your basic point here--

Mr. Casey: --Under the theory--

Justice Scalia: --is that despite this Federal statute, you can terminate your reciprocity agreement with Kansas and charge the full $10.

Right?

Mr. Casey: --That's the theory of the Michigan Supreme Court opinion.

Yes, it is, Your Honor.

Justice Stevens: But you haven't terminated the agreement, have you?

Mr. Casey: We... we have an agreement with Illinois, not Kansas.

But we have not.

We have... Michigan has not terminated any reciprocity agreements.

Michigan will not.

Other... under this rationale, other States could as a--

Justice Ginsburg: General Casey I have a question about the response you just gave.

I thought there was lurking in this case as an issue, if there should be a remand, that there was no viable reciprocity agreement with Illinois, that that terminated in 1989.

Are you... are you--

Mr. Casey: --Well--

Justice Ginsburg: --abandoning that argument?

Mr. Casey: --No.

There... in the past, back in the early 1980s, there were formal written contracts of reciprocity.

When Michigan passed its statute in 1989 formalizing the $10 fee, the public service commission terminated those contracts and contacted every State with which it had reciprocity to verify this.

This whole question of reciprocity is somewhat uncertain.

Many States are not sure with whom they have reciprocity because various State--

Justice Ginsburg: Is that a... is that a live issue in this case?

Mr. Casey: --Michigan has a reciprocity agreement with Illinois, we believe.

We... we operate our system as though we... we give reciprocity to trucks licensed in Illinois, and it's our understanding that Illinois gives reciprocity to trucks licensed in Michigan.

Justice Ginsburg: So there would be no point in saying that that's an issue open for a possible remand.

Mr. Casey: That's... I believe that's correct.

Justice Stevens: But that's not right.

You don't give reciprocity to trucks licensed in Illinois.

You give reciprocity to trucks who are owned by companies who have principal place of business in Illinois.

Mr. Casey: That's correct.

I misspoke myself, Your Honor.

Thank you.

For purposes of this case, at the time we had the base-plating system, but now it's... if... if we ultimately lose on that other point and we are stuck with the base-plating method and could not... and the Michigan court rules against us and we are stuck with the base-plating method, that could cause a problem for Michigan.

Let me... let me just close by saying that we believe that the Michigan Supreme Court's decision is faithful to the text, results in a consistent and a coherent interpretation of the Federal statute, that is consistent with the congressional intent, and we believe it should be affirmed.

If it is not affirmed, we urge the Court to remand the case back to the Michigan Supreme Court for consideration of the other issues that were not considered by it.

If there are no further questions.

Rebuttal of Charles A. Rothfeld

Chief Justice Rehnquist: Very well, Mr. Casey.

Mr. Rothfeld, you have 4 minutes remaining.

Mr. Rothfeld: Thank you, Mr. Chief Justice.

A couple of quick points.

First, we think that the key issue in the case has been identified by questions from a number of members of the Court.

Something has to be read into the statute.

Now, we think what we would read into the statute is clearly the correct thing to read into it, but even if we are not absolutely right about that, petitioner should prevail because given the agency's determination here, the... the tie goes to this side of the table and we think that that should be dispositive on that issue in the case.

Second, there's been some discussion about issues that are other issues in the case and... and the proper disposition as to them.

We think that there is no question about the existence of reciprocity agreements or policies that would require remand, in response to Justice Ginsburg's question.

I think Mr. Casey has candidly acknowledged that there was clearly a reciprocity policy in place in Michigan, whether identified reciprocity agreement or simply unilateral policy.

There was no question about the nature of that policy.

There has been no dispute throughout the entire course of this litigation about whether there was such a policy and whether it was consistently enforced.

And therefore, there... I think there is no subject there to be considered further on remand.

The question of whether Michigan's prospective change in its policy for the 1992 registration year and whether Yellow's diligence in paying that early should somehow affect the proper outcome here and require Yellow to pay in the future--

Chief Justice Rehnquist: I didn't understand the last clause that you just spoke.

Mr. Rothfeld: --Well, the... the question whether the fact that Yellow paid in advance of November 15th, 1991 for a registration year that was not going to go into effect until sometime in 1992--

Chief Justice Rehnquist: Well, the statute says collected or charged.

Mr. Rothfeld: --Well, as of 1991, and the question is collected or charged, in our view, for what?

And we think it's for the entitlement to operate on Michigan's roads at the relevant time.

I guess I would take a little bit of issue with what Mr. Schlick said.

The... the ICC we think expressly addressed that point in its declaratory order when States, including Michigan, said--

Chief Justice Rehnquist: Well, but it really hasn't been fully fleshed out here, that particular angle.

I... I think it would be perfectly consistent to agree with your basic position and still feel that was open on remand, as... as the Solicitor General said.

Mr. Rothfeld: --Well, our view is that if that is... if there's to be further litigation on that point, the proper forum for that is the administrative proceeding that... that Mr. Schlick also mentioned.

There is actually pending before the Department of Transportation a proceeding initiated by Michigan which takes issue with the ATA's... with the... the ICC's determination on that point and asks for reconsideration by the agency.

We think that that is the appropriate place to consider that where the agency can exercise its expertise.

We then appeal to the D.C. Circuit if there's to be some... some question about it.

So that... that's what we would suggest is the appropriate--

Justice Ginsburg: But why should we get into an issue that the Michigan Supreme Court didn't resolve?

It is an issue.

You may be right or wrong on the merits of it, but at least we would not... we are here reviewing a determination made by the Michigan Supreme Court.

You are saying that we should, at the same time, strike at an issue that the Michigan Supreme Court didn't reach.

Mr. Rothfeld: --Well, it is true the Michigan Supreme Court did not decide it.

Our suggestion is that the more appropriate place for it to be subject to further litigation, if there is to be further litigation, is in this agency proceeding with an appeal to the Federal court.

But... but you are correct that it was not expressly addressed by the Michigan Supreme Court in this... in this case.

One final point quickly in response to Justice Stevens' question about whether the State terminated reciprocity agreements or... or not, or simply changed its policy.

We think it doesn't matter how you look at it.

Either way, the State clearly changed the rule that it was applying.

It had a clearly articulated rule consistently applied that trucks based in certain places would not be subject to fees.

It is now changing that rule and it's therefore trying to collect and charge fees as to those trucks that it did not charge before or collect before, and we think that is clearly precluded by the statutory language and is certainly decided by the ICC adversely to Michigan.

If there are no further questions, Mr.--

Justice--

Justice Stevens: Could I ask on that question?

The... the point is should not exceed the fee that was charged.

If in the aggregate the change from the place of determining which State applies, if the aggregate were to decrease the collections, which theoretically it could be, then there would be no violation of the statute, as I understand it.

Mr. Rothfeld: --Well, we think it can't be considered in the aggregate.

First of all, the statutory language refers to the fee per vehicle.

Justice Stevens: No, a fee system it refers to.

Mr. Rothfeld: It does, but if I may, Mr. Chief Justice, just respond briefly.

The particular provision which has the fee-freezing provision refers to the fee per vehicle.

So I think that would be precluded.

Chief Justice Rehnquist: Thank you, Mr. Rothfeld.

Mr. Rothfeld: Thank you, Mr. Chief Justice.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The Oyez Project

Featured:

C & A Carbone, Inc. v. Town Of Clarkstown, New York - Oral Argument

Fri, 09 Jan 2009 14:49:52 +0000

Case:

C & A Carbone, Inc. v. Town Of Clarkstown, New York

Media File:

92-1402_19931207-argument.mp3

Related Transcript:

1993_92_1402_argument.xml

Transcript:

Argument of Betty Jo Christian

Chief Justice Rehnquist: We'll hear argument first this morning in No. 92-1402, C A Carbone, Inc., v. the Town of Clarkstown, New York.

Ms. Christian.

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

The issue in this case is whether the Commerce Clause prohibits a municipal ordinance that requires all trash, including trash that originated in other towns and other States, to be sent to a designated local facility for processing before it can be shipped to other States for disposal.

Petitioners operate a recycling facility in Clarkstown, New York.

They receive trash from New Jersey and from points in New York outside of Clarkstown, separate it into recyclable and nonrecyclable components, process and bale or package both components, and then ship them to users or disposers in other States.

The Clarkstown ordinance permits them to ship the recyclables directly to users in other States.

However, it prohibits petitioners from shipping the nonrecyclable trash directly to waste energy plants or landfills in other States, and requires instead that they be sent to a designated transfer station in Clarkstown, which levies--

Unknown Speaker: Ms. Christian, what sections of the ordinance are you attacking?

Ms Christian: --We are primarily attacking section 5.

The respondents have taken the position that this case is governed instead by section 3.

To the extent that section 3 has any bearing on trash that originated outside of Clarkstown, we are attacking that section as well.

But our challenge is limited to the trash that originated in towns outside of Clarkstown.

Unknown Speaker: Thank you.

Ms Christian: The designated--

Unknown Speaker: Excuse me.

Why don't you have any objection to trash that's generated within Clark... you don't have any objection to trash generated within Clarkstown?

Ms Christian: --I think, from the standpoint of constitutional analysis, Justice Scalia, it is also invalid under this Court's prior decisions.

But as a business matter in the lower courts--

Unknown Speaker: You don't care.

Ms Christian: --The... precisely.

[Laughter]

The petitioners chose to challenge only the out-of-town trash, because that's what their business really consists of.

Unknown Speaker: Well, now, Ms. Christian, you started to tell us how the ordinance applies.

Now, does the city prohibit you from shipping the waste on out--

Ms Christian: Yes--

Unknown Speaker: --Or is it a matter of requiring you to pay the charge before you ship it out?

Ms Christian: --The city prohibits petitioners from shipping the trash directly to out-of-State users or landfills.

Unknown Speaker: But after it's sorted and in the city's facility, or processed in the city's facility, and if you pay the charge to the city, then can you ship what remains out?

Ms Christian: As... as we understand the ordinance as it has been interpreted by the city, the petitioners are required, after they have processed and baled the trash, to deliver it to the designated transfer facility.

That transfer facility levies the charge of 81 a ton, and then the transfer facility itself ships the trash to landfills in other States.

So that petitioners themselves are required... instead of taking the trash directly to an out-of-State destination, petitioners are required to take it to the designated facility.

The designated facility then performs whatever processing they perform, and the--

Unknown Speaker: And the petitioners are in the business of disposing of waste and they can do it more cheaply if they don't have to submit it to the town processing.

Is that--

Ms Christian: --It is less expensive for the out-of-State customers of petitioners, and with respect to petitioners the Clarkstown ordinance, in effect, adds an expense of 81 for every ton of nonrecyclable trash.

Unknown Speaker: --Now, does the town impose that if you pick up waste from another... from outside the town and simply transport it through the town without any further treatment?

Ms Christian: Well, petitioners--

Unknown Speaker: Does it apply to that?

Ms Christian: --It apparently does not apply to that, but, in fact, petitioners do not do that.

Petitioners are in the business of operating a recycling facility.

Unknown Speaker: In the town.

Ms Christian: In the town.

Now, the trash itself is brought to petitioners by haulers from other towns or other States.

Petitioners themselves are not picking up trash in the other towns or States.

It is brought to them by private trucking companies, which bring the trash to petitioners.

Petitioners then process and bale the trash, and then load it onto the trucks of independent trucking companies.

Unknown Speaker: Okay, all right.

Well, now the town treats everyone alike, whether you're inside or outside the town, I take it?

Ms Christian: But the... that is correct, but the constitutional flaw is the export ban itself, the local processing requirement.

The lower courts reasoned that there was no discrimination against interstate commerce because it applied the local processing requirement to local as well as out-of-town trash.

Unknown Speaker: Well, are there some municipal functions that the municipality can undertake as a monopoly and impose its will on everyone, like sewage disposal or something of that kind?

Ms Christian: Certainly, Justice O'Connor.

Unknown Speaker: Can a municipality have a monopoly?

Ms Christian: Well, a municipality certainly, if it wished to take on the job of trash collection itself, could take the trash wherever it wants to take it.

And the municipality certainly can impose reasonable health and safety and environmental requirements with respect to the handling of trash.

They also have substantial power under the zoning laws to determine whether and to what extent trash facilities will be permitted in the town.

Now, in this particular case the town had initially denied petitioners' request for a permit to operate the recycling facility.

That was appealed within the New York State courts.

The courts ruled that the town had acted improperly in denying the permit, and directed the town to issue the permit, and the permit has now been issued.

Unknown Speaker: In your view, if the city engaged in the hypothetical function that you were just discussing with Justice O'Connor, so that it owned the trash facility and collected it, could it enforce its monopoly by a criminal sanction?

I mean like something like... approaching the Springfield ordinance.

Ms Christian: I think we have to draw a distinction between a city that merely operates the transfer station itself as a municipal facility, and a city that also collects the trash.

Unknown Speaker: Assume the latter.

Ms Christian: If the city itself collects the trash, then it can take the trash wherever it wants.

We don't think that the city could prohibit petitioner, who holds a license to operate a recycling facility, from transporting trash outside the State.

Unknown Speaker: Well, what if New York law changed the provision that allowed the petitioner to have a license, and New York law said that individual municipalities can operate monopoly trash disposal, or organizations?

Ms Christian: I think the issue there, Mr. Chief Justice, would be whether or not that is an appropriate subject for public utility regulation as a monopoly, and that would bring into play a totally different set of requirements.

But that--

Unknown Speaker: Well, that's not a constitutional question, is it?

Ms Christian: --That would primarily be a question of State law.

It conceivably, I would think, might involve some constitutional issues with respect to its effect on a facility such as petitioners', that previously held a license, but those would be entirely different issues and that's not this case.

Unknown Speaker: Suppose in this case the city had advertised widely for bids for a transfer facility and awarded the transfer facility to an out-of-State company at an out-of-State site?

So you have roughly this case, except the transfer facility is out of State, would you then have a constitutional argument?

Ms Christian: I think that you would for this reason, because it would still prohibit the export of trash out of the State to any other point in interstate commerce, to any point other than the designated transfer facility.

Unknown Speaker: Would you call that protectionism or simply the State exceeding its appropriate jurisdiction?

Ms Christian: I think I would call that protectionism, because it... at least if, as in this case, the result is to confer a direct benefit on the town and its residents.

In this case there is clearly a direct benefit to the town.

At the time that the designated facility was constructed, the town entered into a take-or-pay agreement under which it guarantees the transfer facility a certain volume of trash.

And if that guarantee is not met, then it has to pay for the lost revenues.

So that every ton of out-of-town trash that petitioners can be forced to send to the designated facility, instead of directly out of State, results in a reduction of the town's liability under the guarantee of 81 a ton, and a direct benefit to the town's residents, a direct burden on interstate commerce.

And I would think it would make no difference if the facility happened to be located across the line in another State, as long as that--

Unknown Speaker: Ms. Christian, I don't gather that the Commerce Clause permits a State to favor commerce with one State over commerce with other States.

Ms Christian: --That would be our point exactly.

Unknown Speaker: It's just a matter of favoring your own.

You also can't say New York favors New Jersey, and we don't favor shipping to other States, you can't do that.

Ms Christian: I believe that this Court has struck down reciprocity requirements in the past that were limited in such a way that they are, in effect, prohibiting the export to any States other than the favored State.

Unknown Speaker: Ms. Christian, did I understand your answer to Justice O'Connor was essentially that the town isn't doing enough to escape from this Commerce Clause check?

That is if they handled the entire trash business you would have no complaint, but it's only because they don't haul the trash themselves that you can make this argument.

Is that... do I have it right?

Ms Christian: I don't think that's quite correct, Justice Ginsburg.

Let me see if I can clarify it.

Under the market participant doctrine, the town would be entitled to enter into the trash collection business as a participant in the market.

And if it did that, it would be permitted, like any private business, to choose who it wanted to deal with.

So in that circumstance, it could choose to take all of the trash that it collected to a private facility.

Now if, in addition to collecting trash itself, it also permitted the operation of petitioners' recycling facility, which is licensed by both the town and the State to conduct a recycling operation, then we do not believe that the town could compel petitioners to make use of the designated transfer facility.

I was only suggesting that if the town wished to take on the function of collecting trash itself, then under the market participant doctrine it could take the trash that it collected wherever it wants to take it.

It can deal with whoever it wants to deal with.

We believe that this case is essentially governed by the prior decisions of this Court in City of Philadelphia v. New Jersey and in Fort Gratiot Landfill v. Michigan.

Those cases, of course, struck down laws barring the import of trash into a State.

There are basically only two fundamental differences between those cases and this case.

The first, of course, is that this involves a restriction on the export of trash; those cases involved restrictions on import.

But the Court explicitly pointed out in City of Philadelphia that the Commerce Clause prohibits the movement of the... restrictions on the movement of goods into or out of a State.

And second--

Unknown Speaker: Because there was a discrimination in those cases too, wasn't there?

Ms Christian: --There was a different treatment in those cases of local and out-of-town trash.

But in this case, and in the... as... this case is like the local processing cases or the export ban decisions previously decided by this Court, in which you have a... an overt restriction on the flow of interstate commerce itself.

And as to cases in which you have an overt--

Unknown Speaker: So you're really... you're basically just making... I shouldn't say just.

You're basically making a burden argument, period.

Ms Christian: --I think this is more of a burden on interstate commerce, yes, that is correct, Justice Souter.

And the burden on commerce is created, as this Court has held in the local processing decisions, by the requirement that it undergo local processing at the designated transfer facility before it can go out of State.

Unknown Speaker: You don't--

--And you don't think this is a discrimination case, then, huh?

Is that what you're saying, you don't?

Ms Christian: I think it may be hard to draw the line between--

Unknown Speaker: I'm sorry to hear that, because--

Ms Christian: --Discrimination against and burden on interstate commerce.

Certainly it is a burden on and--

Unknown Speaker: --I know... you've said it's a burden.

Do you think it's discrimination against interstate commerce?

Ms Christian: --I think it's probably a discrimination against petitioners' out-of-State customers who are required to undergo additional processing after their trash has already been processed and baled, at the designated facility.

But the principal focus of the attack has been on the burden that this statute creates on the free flow of interstate commerce.

Unknown Speaker: Well why isn't it a discrimination against exporters?

Yeah.

Ms Christian: I think it is a discrimination against exporters.

I think the... the only sense in which you could say it is not a discrimination is that it discriminates against the export of trash by both local and out-of-town trash.

But we would suggest that it discriminates against the exporters of trash and also is a burden on interstate commerce.

Under either test, we believe it's invalid.

Unknown Speaker: Do you--

Ms Christian: We think it falls within the category of laws that overtly block the flow of interstate commerce and therefore are virtually per se invalid.

Unknown Speaker: --You said a second ago as a factual matter something that I just didn't understand.

You said that the... the... well, I may have you wrong.

You said that those who export trash out of State must subject the trash to a further processing; is that what you said?

Ms Christian: That's correct, Justice Souter, as applied--

Unknown Speaker: I don't understand that as a matter of fact.

What does that consist of?

Ms Christian: --Petitioners themselves process and bale the trash that is brought to them from outside the town.

And when it's loaded onto trucks to leave petitioners' facility, it is then ready for transportation to landfills or to waste energy plants.

Nothing further is needed, and yet under this statute it is required to go to the designated transfer facility for additional processing at the transfer facility.

Unknown Speaker: Okay.

But the fact that your clients do bale their residue is not a requirement of the town ordinance.

In other words, as I understand it, after they separate the recyclables that they take out from what is then going to be ultimately baled and exported, they could just bring that in bulk to the town transfer station, and it would be processed and baled there, wouldn't it, couldn't it?

Ms Christian: I think two points.

First of all, as a practical matter you're talking about 150 tons of trash a week.

The way that the processing is handled, when it comes off the conveyor belts after the recyclables have been separated out, it goes into the processing machines where the processing and the baling occurs.

So as a practical matter--

Unknown Speaker: But isn't that simply a function of the way your clients have set up their plant?

Couldn't they set it up in such a way that they take out the recyclables and what is left gets dumped into a truck and the truck goes to the town transfer station where it's baled?

Couldn't... couldn't that happen?

Ms Christian: --I'm not sure that that would be consistent with the permit under which they operate by New York State, or by the town itself.

Under the permit, for example, the handling of trash is strictly regulated.

One requirement, for example, is that all nonrecyclable trash that goes through petitioners' facility must be moved out within 24 hours.

So you can't have trash piling up waiting to be picked up.

Unknown Speaker: Uh-huh.

In any case, I take it your case does not depend on... really on the answer to my question.

Ms Christian: No, it does not, because even if under... under this Court's local processing decisions, even if there were no local... duplicate processing involved, it would still be an overt restriction on the flow of interstate commerce.

And under that--

Unknown Speaker: You made a point about the tipping charge, I think is what you called it.

Ms Christian: --Yes.

Unknown Speaker: That there was a considerable differential between what was--

Ms Christian: The tipping fee charge by petitioners is 70 a ton.

That charged by the transfer... designated facility is 81 a ton.

And this, of course, to petitioners amounts to an added expense that they are required to bear with respect to the portion of their trash that constitutes nonrecyclables.

That's an expense that would have to be added on and one which they could not bear.

As a matter of fact, after the injunction in this case went into effect, petitioners were forced to temporarily shut down their operations.

Unknown Speaker: --Is there an explanation of the extra 11 cents?

Is it because eventually this plant will belong to the city, so that the--

Ms Christian: There is no explanation other than the fact that the town approved the fee of 81 a ton.

The town was required to approve the fee being charged by the designated facility.

The petitioners set their own fee.

That is the only explanation.

Unknown Speaker: --May I ask, to be sure I'm clear on one question... do I correctly understand, you do not challenge the scheme insofar as it gives the town a total monopoly of the processing and distribution of trash generated within the town?

Ms Christian: In the lower courts, petitioners limited their Commerce Clause challenge to trash that originated outside the town, that is correct.

Unknown Speaker: So that as a factual matter, what you're really complaining about is in order to stay in business you'd have to move outside the city limits?

Because then the ordinance wouldn't hurt you at all, if you were outside the city limits, would it?

Ms Christian: If we were not in Clarkstown, then the ordinance would not apply, because it only applies within the confines of Clarkstown.

Unknown Speaker: It still would have an impact on you because you couldn't get any locally generated trash, but you don't object to that.

Ms Christian: We did not raise a Commerce Clause challenge.

Quite candidly, we believe that as a matter of constitutional analysis, the ordinance also violates the Commerce Clause with respect to locally generated trash.

But--

Unknown Speaker: But that's not at issue.

Ms Christian: --That is not at issue in this case, that's correct.

Unknown Speaker: The only thing that's as issue is whether you can be compelled to move outside the city limits to continue receiving trash from other locations.

That's really what... I suppose that's what... and if you're going to stay in business, you just have to move your plant.

Ms Christian: We are licensed by the town to operate the recycling facility in Clarkstown, that's correct.

Unknown Speaker: But your license doesn't do you any good if you can't get any trash.

Ms Christian: Under this--

Unknown Speaker: You could get the trash if you... if you were located outside the... outside the city.

Ms Christian: --We could... we could get the trash if we were willing to move our facility, but we submit that that is not an excuse to a violation of the Commerce Clause.

Unknown Speaker: But that's the real burden that effects you.

Ms Christian: That would be a major burden on petitioners, since you cannot simply move a trash facility to--

Unknown Speaker: Is this the only facility that they operate?

Ms Christian: --I believe this is the only facility that the Carbone Company itself operates.

There are some related companies located in other States, but C & A Carbone, Inc., I believe operates only the one facility.

Our basic point is that this is an overt discrimination against interstate commerce that could be justified only if the town could show that it is justified by a valid factor unrelated to economic protectionism, and that that factor can't adequate serve... be served by nondiscriminatory means.

We believe that the out-of-town origin of the trash essentially eliminates most of the justifications that the town has sought to offer.

As far as health and safety or environmental justifications are concerned, petitioners are subject to exactly the same requirements as the designated facility, and the town can certainly add more stringent requirements if it thinks that's necessary.

There is no danger that this facility will be shut down in the absence of the flow control ordinance.

The only danger is that the town might have to make good under its guarantee, and that is, by definition, economic protectionism.

Unknown Speaker: One amicus brief has suggested that Congress, in other legislation, has basically directed this kind of a flow control ordinance.

Ms Christian: We think that's clearly not correct, Justice O'Connor.

The only reliance... the only citations that have been made have been to provisions of the RCRA statute, which refer not to flow control laws, but to long-term contracts.

That they're not the same thing.

And, as a matter of fact, we've suggested that one of the nondiscriminatory alternatives that might be pursued is long-term contracts.

Now, as a matter of fact, Congress has pending before it right now several bills that would authorize flow control laws in specific limited circumstances.

The only action taken thus far has been to ask the Environmental Protection Agency to supply Congress with its views by September of 1994.

But clearly nothing that Congress has done to date satisfies the very stringent test for a clear expression of the intent of Congress to authorize action that would otherwise violate the Commerce Clause.

Unknown Speaker: But it is true that in... I think it's the House committee report on that statute, they did specifically refer to this sort of restriction.

I know the text of the statute itself doesn't, but one of the briefs quotes a portion of a House report that does.

Ms Christian: They're referring to these statutes.

There was testimony that referred to these, but there is nothing in the statute itself--

Unknown Speaker: That's right.

Ms Christian: --That refers to flow control laws.

And Congress... this Court has made it clear that in order for Congress... in order for a statute to be interpreted as authorizing action that would otherwise violate the Commerce Clause, there must be a clear expression of intent, and this falls far short of that.

We don't think that you need to reach the issue of nondiscriminatory alternatives at all, because there is nothing here other than economic protectionism.

But simply to complete our point, it is apparent that even if there were some valid nonprotectionist purpose, those purposes could be met adequately by means that do not impose a burden on interstate commerce.

To begin with, there is the simple expediency of the transfer station, the designated facility, competing in the marketplace for trash.

And in this connection, I think it's important to observe that, in the absence of flow control laws, there's no apparent reason why the designated facility would not be able to compete successfully for trash in neighboring towns and States.

The amicus brief of the State of New Jersey, for example, reveals that the tipping fees in New Jersey are substantially higher than the 81 charged by the designated facility.

The reason that they are not permit... able to compete for those now is that under New Jersey law, which also has a flow control law, trash is permitted to leave New Jersey for purposes of recycling, of separating into recyclable and nonrecyclable components, but only on condition that the nonrecyclables are brought back to New Jersey.

Now, petitioners, of course, are placed in the position, by this statute, of being literally unable to comply with the flow control laws of both New Jersey and Clarkstown, because Clarkstown directs that this identical trash must go to the designated transfer facility.

Unknown Speaker: Why didn't you challenge the New Jersey flow control laws?

Ms Christian: I think that might be the next case.

Unknown Speaker: That's next.

That's--

Ms Christian: That may be the next case, Justice Scalia.

[Laughter]

Unknown Speaker: --I must say, the spectacle of all States and municipalities wrestling for control over garbage is really quite wonderful.

[Laughter]

Ms Christian: I think that this simply reflects the changed economics of trash disposal, Justice Scalia.

If the Court has no further questions, I'd like to reserve my remaining time for rebuttal.

Unknown Speaker: Very well, Ms. Christian.

Mr. Brashares.

Argument of William C. Brashares

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

I think the central concept of economic protectionism means the allocation of economic benefits among private parties engaged in commerce on the basis of political geography.

I think the essence of economic protectionism is discrimination.

It means that those who are protected, those who vote within the political process, receive benefits, and those who are outside the political process, who do not vote, do not receive benefits.

I would like to... I make that statement because I think that concept reconciles, certainly, the Philadelphia Chemical Waste, Fort Gratiot, it reconciles the processing cases, it reconciles the so-called hoarding cases.

It has to do with the discrimination between the haves, the represented, and the have-nots.

And that principle applied in this case answers two questions.

First of all, since there is no discrimination, we are outside of the universe of economic protectionism.

Unknown Speaker: Mr. Brashares.

Mr. Brashares: Yes.

Unknown Speaker: I don't understand what you're saying.

If one has a generous and nongreedy motive, it's okay to discriminate against interstate commerce?

I mean, if I am not getting anything personally out of... out of discriminating against interstate commerce, it is not protectionism and therefore it's okay.

Mr. Brashares: Well, Your Honor, I think this is what the Maine against Taylor case is probably all about.

I think there is certainly a very strong presumption that when a State or local law discriminates on the basis of geography, that there is a protectionist purpose.

I think what the Court has said is that that is rebuttable if you can show that there is not... there is, in fact, a rational basis for the discrimination.

And I think in Maine against Taylor, what the Court, in effect, did was to say, yes, there is a rational basis here.

But I think the absence of benefit does not necessarily make the discrimination condoned.

There--

Unknown Speaker: Well, but it has to be reasonable.

It hasn't to be... the point is not that it's not protectionist, but that it is reasonable, right?

Mr. Brashares: --Well--

Unknown Speaker: I mean, I don't know that our Commerce Clause law says that the only invalid restrictions upon interstate commerce are those that are imposed for protectionist purposes.

Mr. Brashares: --Well, Your Honor, I think... I think I am putting together, and I think appropriately so, protectionism and discrimination on a geographic basis.

What I am saying is that it is almost impossible, unthinkable to find a State or local law which allocates or regulates, on the basis of geography, those who are within the political process being treated one way and those outside another way, without there being some element of protectionism.

I would grant that there could be cases where discrimination did not have those benefits, but I think... or allocation.

But I think here, if I can get to this case, first of all, we do not have a law which has a discrimination.

We do not have a law which classifies on the basis of geography, on the basis of whether you're in or outside of the political process.

The law here, which counsel has referred to as an export ban... well, I suppose every law which regulates locally and has the effect of preventing a product from going out of the jurisdiction, in the same sense is an export ban.

And in that same sense, export bans have never been held, as such, to be unconstitutional, and that's why this case is not the flip side, as counsel has put it, of the New Jersey case.

The key there is discrimination.

Is a product kept out because it is from outside?

Is it kept in because it's from inside, and is it kept in, in the case of the processing and hoarding and other cases, for the benefit of local interests.

And I'd like to turn to the question... if I can answer the question that Justice O'Connor asked the counsel, about is this city, is this town essentially capturing... that word has been used in the papers of the petitioners.

Is this town attempting to capture waste that is moving in interstate commerce?

Well, to suggest that there is a capturing conveys the idea that there is truck moving through town and the town is reaching out for its greedy purposes, capturing the truck and making them pay a fee to pass through.

That is not at all what's going on.

I need to remind... I need to state that the petitioners in this case have a permit to operate under New York law as a recycling center.

They have a permit which states that 90 percent of the material they bring to their facility will be recyclable.

In fact, in their permit application they say they are going to recycle cardboard.

That means there would be 10 percent of that total material which would be discarded, worthless garbage, as we put it.

Now, they bring that material into their facility in Clarkstown.

As the... Mr. Carbone specifically testified, they put it on their floor, they separate it out into the recyclables which, as we know, they are permitted to sell and to ship in interstate commerce, and into the residue.

And the issue in this case is that residue.

Mr. Carbone also acknowledged, in an affidavit in lower court, that that material and the local material is all fungible.

And he said, in fact... when he was concerned that the local town might have been mixing the out-of-town waste with the local waste, he said once it's commingled you can't tell which is which.

Now, what the town is saying to Mr. Carbone... and to everyone else in the town, no matter what kind of business they operate, the town is saying if you have garbage that is generated, meaning discarded, in our town, this is the way it needs to be handled.

We believe it's in the interests of this community... we've made the legislative judgment that this is the way it should be handled, just as the City of San Francisco and the City of Detroit did in 1905.

Unknown Speaker: But all of these are legislative judgments.

I mean what you're saying is not for health reasons.

There's no health reason why it has to be taken to this particular plant, is there?

Mr. Brashares: No, there certain is, Your Honor.

Unknown Speaker: So somebody says I want to take it to another plant; it's cheaper, it's out of State.

And you say, no, you can't do that, you must take it to this plant.

Mr. Brashares: Well, Justice--

Unknown Speaker: Why is that not a discrimination against interstate commerce?

Mr. Brashares: --Well, Justice Scalia, first of all, there is no classification which in any way separates interstate commerce from local commerce.

As I said, the material which is regulated--

Unknown Speaker: Dean Milk establishes that that makes no difference.

Just because you discriminate against other intrastate facilities does not enable you to discriminate against out-of-State facilities as well.

Mr. Brashares: --Yes, but, Judge, there's no... there's no city line or county line discrimination involved here.

There is no reference to needing to deal locally with local facilities, except the city.

And there is the classification in this case which brings into discussion the question of monopolization.

In, as I was going to say, the State of California... in the case of California Reduction, which this Court decided in 1905 right at the beginning of the Lockner era, and the Gardner case, considered exactly this situation.

The Court considered whether there was a... not a rational basis, they went into a much more searching inquiry and determined that the town... the city had a legitimate, indeed a pressing interest in regulating in the area of waste disposal.

That the method they had chosen was appropriate in that they had set up a designated facility, they had franchised it.

Indeed, in San Francisco, it was for 50 years.

Unknown Speaker: Yes, but wasn't that just dealing with locally generated waste?

Mr. Brashares: Well, Justice Stevens, the record in that case does not show that any waste was coming in from anywhere or was going out to anywhere.

Interestingly, the district court in the... in that case did note that these were articles of commerce because they were claimed to be of value.

This was material which was going out to feed livestock.

Unknown Speaker: Well, all I can suggest is if it doesn't tell us whether there was any nonlocally generated waste involved, the case really doesn't address the precise issue that your opponent is raising here.

Mr. Brashares: Well, Your Honor, I think... I think it does address it in this sense.

If we don't have economic protectionism, if we don't have a discrimination, which I think I would submit we do not have here, but still... but still the petitioners claim that the use of this power by the city is wrong under the Constitution, I think that analysis is really not a Commerce Clause analysis.

And let me make this point in connection with California Reduction.

If you took California Reduction on its Fourteenth Amendment grounds and just as the Court was about to decide that case the petitioners or the plaintiffs in that case came in and said we wish to amend, we have just discovered that garbage is moving across into Nevada to a farm.

And I make that hypothetical only to suggest how would that change the analysis?

The fact that waste is moving out of the State of California would not change the Fourteenth Amendment analysis.

Unknown Speaker: Well, it isn't the point that it's moving out.

It's coming from a location that's not within the jurisdiction of the community.

That's the... that's the thing, the most troublesome point to me, is the fact... let me give you a little hypothetical I keep thinking about.

Supposing there's another processing plant right outside of town that will pay a tipping fee of 75.

And so the... they've got three choices: 81 to your facility, 71 if these people stay in business, or 75 outside.

Now, if your ordinance is in effect and you drive these people out of business, the business will shift from a 71 figure to a 75 figure, and doesn't that burden commerce?

Mr. Brashares: Well--

Unknown Speaker: If you make the outside people pay more than they otherwise would pay.

Mr. Brashares: --Well, Your Honor, no, I don't think it... I don't... well, whether it's a burden... certainly, everything that raises the costs of parties operating in commerce is arguably a burden.

Whether it is a burden that this Court would take into account and balance it, in the Pike jargon.

Unknown Speaker: See, it can't be justified by your need to control and dispose... have a total monopoly of all locally generated waste.

Mr. Brashares: No, absolutely, Your Honor, I believe it can be justified by the... the town's need.

Now, Your Honor, I have... I have failed to... for lack of time and priorities here, to get into the point of why this overall legal framework of the city's has an environmental purpose.

Now, we have, of course, spelled it out at great length in our brief.

You have 15 amicus briefs here which get into it in great detail.

But the point is that, as a matter of State law, this facility resulted from the fact that this town operated a landfill for many years, it was forced to close it down, and as part of that remedial action it was required to set up this transfer station in order to continue to have responsibility for local waste service.

Unknown Speaker: Well, we'll agree with you that you had to close down the landfill for environmental purposes, but it doesn't follow that you have an environmental purpose for this restriction if you can accomplish the same purpose by health and safety regulations, and I thought you said a moment ago that you could.

Mr. Brashares: Well, Justice Souter, I would submit that those are relevant questions to raise in the context of whether there's a rational basis for the regulation.

And I submit that they would be raised in the context of whether this town is actually constitutionally permitted to regulate in this matter.

But I think that is a due process... substantive due process issue.

I don't think it's a Commerce Clause issue.

Unknown Speaker: Well, it's not a Commerce Clause issue unless you've got a justification for your burden, and this is your only justification.

You're in exactly the same boat if you've got to justify your burden, even though it's a nondiscriminatory burden.

Mr. Brashares: Well, Your Honor, if it is a... if it is a regulation which has passed muster under the... under the Fourteenth Amendment, if it is deemed to have a rational basis, and the question then is does it, nevertheless, violate the Commerce Clause because of a burden that it imposes; I think when you get into weighing that burden against the legitimate purposes of the law, we're going back and reevaluating under the... under the rational basis.

Unknown Speaker: Well, I'm not sure we are.

Every burden that passes due process muster because there is some rational basis is not necessarily going to pass a rational basis test for discrimination, is it?

Mr. Brashares: I agree.

I agree.

That is the additional--

Unknown Speaker: And I thought... but I thought... I thought you were assuming just the opposite in what you said a moment ago.

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

I agree completely with your statement.

I think the next... the Commerce Clause brings to the table the discrimination analysis.

A law which is otherwise passing muster under the Fourteenth Amendment as rationally based, we then move to the Commerce Clause and then we then consider whether it is discriminatory.

Because then we have the aspect of regulating the unprotected interests, which is the essence of economic protectionism.

Unknown Speaker: Uh-hum.

Mr. Brashares: We have the unprotected interests, and they are not participating in the political process that produced that regulation, and therefore they should not be bound by the substantive due process determination that the Court has made in that case.

But when the same parties who are protected then claim the burden... which is this case, of course; Carbone is, of course, a local Clarkstown interest who is within the protected interest... then there's no basis for the claim that we should now go back and reevaluate the burden on commerce in comparison to the local benefits.

Unknown Speaker: I don't understand.

You say because Carbone is in Clarksburg itself, this restriction can be imposed on Carbone.

Does that mean you can--

Mr. Brashares: Well, Your Honor--

Unknown Speaker: --You can prohibit your local citizens.

Since they're part of the voting group, you can prohibit them from dealing in interstate commerce because... I don't understand what you're arguing.

Mr. Brashares: --No, no, Your Honor, I'm not saying that you can prohibit them.

What I'm saying is, though, if you are looking at the benefits and burdens of the law, you are not concerned about the burdens on the local people as much as you are... in a discrimination analysis you're concerned about the difference--

Unknown Speaker: Why not?

That's what you're saying, that you can prevent local people from dealing in interstate commerce.

I don't know--

Mr. Brashares: --No, Your Honor.

No, Your Honor, I'm not suggesting you can prevent local people from dealing in interstate commerce.

Because, I mean, the question would be how... what kind of law would you pass to prevent local people from dealing in interstate commerce?

It would have to be some kind of a discriminatory law that says these people can engage in commerce and these people can't.

What the Clarkstown--

Unknown Speaker: --Every local person has to buy at the Clarksburg shopping mall.

All local people have to take their trade there.

They can't... they can't go elsewhere.

Does that violate the Commerce Clause?

It certainly does, and I fail to see why it makes much of a difference if you say all local people have to get their trash processed at this particular processing plant.

Mr. Brashares: --Well, Your Honor, if I may, I think... I think the hypothetical of all people must buy at the local supermarket, I think that would never get to the Commerce Clause; that would fall under the Fourteenth Amendment.

I think the question of requiring... this requiring local processing... see, that is what exactly... that is the label that the petitioners attempted to put on this case, and it just doesn't fit.

The question is local processing is where a law states that before... as in the shrimp cases, the Foster-Fountain case, before a product may leave this jurisdiction it must be processed by local processors.

The sorting is on the basis of local processors versus nonlocal processors.

That's not what this law does.

This law says the city is on one hand and all other participants are on the other hand, and this law says that this will be done by the city because we have legitimate police power reasons to do so.

So--

Unknown Speaker: And one of the... I think one of our problems is we're still not sure what those police power reasons are.

And I think you deflected the question by saying well that's really a Fourteenth Amendment question, but--

Mr. Brashares: --No, no, Your Honor, I'm sorry, I didn't mean to--

Unknown Speaker: --We assume... we all accept that the city gets an economic benefit.

What are the other police power reasons that could not have been realized by health and safety regs.

Mr. Brashares: --Well, Your Honor, one of the reasons is the ability to monitor... monitor the waste.

In this town, under State law there is a very elaborate requirement for recycling.

There is mandatory local recycling.

The town needs to have the ability to monitor whether the recycling is actually being done.

There are concerns about traffic, as to how--

Unknown Speaker: Wait a minute.

Does New York require this town to monitor recycling in other New York facilities?

Mr. Brashares: --Your Honor, it requires the town to have recycling laws and it... I don't believe it mandates a particular... it certainly doesn't mandate the full control.

Unknown Speaker: Well, but it doesn't mandate... it doesn't mandate the town to go out and inspect other facilities other than its own, does it?

Mr. Brashares: I'm sorry... does it mandate?

Unknown Speaker: This ordinance, or New York law does not require Clarkstown to monitor what happens to its trash in facilities that are outside of its jurisdiction, does it?

Mr. Brashares: Well, the permit granted by the State to the Clarkstown transfer station requires it to make certain that the facilities to which the waste goes from the transfer station are properly permitted and appropriate facilities.

In that sense--

Unknown Speaker: Yes, but that can... that can be handled by other facilities.

So you don't need a local facility to accomplish the end that you're... that you're addressing.

Mr. Brashares: --Well, Your Honor, the basic issue of is there an environmental justification for a city controlled, city monopolized transfer station, again I don't think... I think if that judgment is made under the Fourteenth Amendment that there is a rational basis for the city to use that method to advance a legitimate interest in the environment, the local environment, then I don't... I don't believe we go back and reevaluate that under the Commerce Clause.

But, nevertheless, I don't mean to avoid that with legal argument, and not talk about why there should be this program.

It's the same reason for the program in San Francisco in 1905 and Detroit in 1905.

It's the same reason that cities since... I think it's 1658 in this country, in New Amsterdam, they had flow control laws.

They wanted to make sure all the waste was taken care of in a particular way.

It's the entire idea of control.

If we control it, if we know where it's coming from, where it's going, if we have the ability to actually monopolize and have responsibility, then we will know that the waste is being taken care of.

It's very--

Unknown Speaker: Well, but our civilization has advanced to the point where garbage is valuable.

Mr. Brashares: --Your Honor--

[Laughter]

That is a major point that the petitioners make, but it's wrong.

Some garbage is valuable if it's the part of the garbage that can be pulled out and sold for recycling.

But make no mistake about it, the waste that is left over after the valuables are removed, as they are allowed to be removed and shipped out anywhere under the Clarkstown ordinance, that garbage is worth less today than it's ever been worth, because the cost of getting rid of it is higher than it's ever been.

Unknown Speaker: Well, do you rest your argument in part, then, on the notion that what is left, and what is at issue here, has no value and is not an article of commerce?

Mr. Brashares: Well, Justice O'Connor, I don't rest on that, because I think that the economic protectionism analysis that I've been through I think suffices for an affirmance of this case.

But I do think that those points need to be considered, about whether it is an article of commerce.

What I have suggested in the brief is that there are three doctrines which converge on that.

The doctrine of basically is it in commerce when the local jurisdiction essentially has a separate transaction between the place where it's discarded and the place where it is... comes to the transfer station.

The second, I think the quarantine cases have application here, because the idea of the quarantine cases... and it's a nondiscriminatory quarantine... is basically to say this is something we consider dangerous to the local community.

Certainly, garbage is dangerous if it's not properly attended to, and therefore we are going to take it out of the process of commerce.

And the third is from the Sporhase case, the argument that the Court has recognized, as it did in that case, that you will take into consideration what private rights the State has given to engage in a particular business such as the removal of groundwater.

For those reasons, I do urge the Court to consider whether one approach to this case is to consider that the effect of the city's monopolizing this business, taking over in effect, requiring the waste to be treated in this way is, in effect, removing it or withholding it, if you would, from commerce.

Unknown Speaker: Can you help me with one factual matter?

I want to be sure I understand you correctly.

Is it correct that there would be no violation of the ordinance if the petitioner separated out the recyclable garbage and shipped that out of State and made money out of that, so long as it took the nonrecyclable and shipped it over to your facility and paid 81 a ton for that portion of it?

Mr. Brashares: That's correct.

Unknown Speaker: And they say there's some practical reason why they can't do it, some 24-hour limit and so forth.

Is it practically feasible for them to do it and just pay a little more for that portion of the business?

Mr. Brashares: Your Honor, there's nothing in the record which suggests it's not practically feasible.

Indeed--

Unknown Speaker: And as far as you're concerned, representing the town, that would be perfectly lawful if they were willing to do it?

Mr. Brashares: --Yes, yes.

Unknown Speaker: And then do you draw the conclusion for that... for that reason, after the garbage is separated you are entitled to look at the nonrecyclable residue as locally generated because it was generated within the town?

Mr. Brashares: That's right.

Unknown Speaker: That's your theory.

Mr. Brashares: That's right.

Your Honor, let me give an example of that.

Under the Clarkstown law and under New York law, every business and every resident is now required to recycle.

The city provides each resident, each business with bins in which they will put the different recyclables.

And this is mandated.

The city operates composting facilities.

This is all part of the overall environmental plan that's involved here.

It's not just a matter of a transfer station.

The city picks up white goods, discarded refrigerators and so forth and so on.

And the point is that each business... if you imagine an alley with three entrances and three cans.

You know, one's a supermarket, one's a clothing store, and another is Carbone's recycling center, and each one of them is required to recycle and each one of them is required to put out the residues.

And the city law says that when that happens, those residues will be handled in a particular way that we had determined to be environmentally appropriate.

And that way is that it will be brought to a designated transfer station and that it will then be disposed of as we have arranged it.

It is no difference.

In fact, if the Court were to say that the town needs to differentiate this waste based upon the fact that it originated out of the town of Clarkstown, the Court would, in effect, be doing... requiring the city to do what it has struck down time and time again, as in Philadelphia.

The Court would be requiring the town to impose a geographic classification.

It would be a complete reversal of roles, even though it would be completely arbitrary and irrational.

There's no difference.

As Carbone himself said, it's fungible, it's commingled, and yet if the... if the argument were to be sustained that the town has to treat this waste differently, this would be, in effect, imposing a geographic classification--

Unknown Speaker: But why is this case any different from Dean Milk.

It's just Dean Milk in reverse, it seems to me.

Suppose that the town in Dean Milk had said that all milk sold in the city, for health reasons has to be pasteurized, just as you're saying for health reasons this trash has to be disposed of, and it will all be pasteurized in a city-owned or city-contracted-for plant just outside the city?

Mr. Brashares: --Well, Your Honor, I think--

Unknown Speaker: Would that be allowed anymore than--

Mr. Brashares: --If the law... I believe... I believe if the law said that the town has contracted for a plant--

Unknown Speaker: --To pasteurize milk.

Mr. Brashares: --To pasteurize.

And if there is some rational basis for that action, to carry out some legitimate public purpose, then--

Unknown Speaker: There is.

Pasteurization certainly has a legitimate public purpose, right?

Mr. Brashares: --Absolutely.

Unknown Speaker: And the city says we can be sure that the pasteurization is being done properly if it's being done in this plant which we will supervise.

Mr. Brashares: That's right.

Unknown Speaker: So you think that that's the only problem there, was with Dean Milk, that the--

Mr. Brashares: Well, Your Honor, I think the problem with Dean Milk--

Unknown Speaker: --City didn't require it to be pasteurized in its own plant.

Mr. Brashares: --No, Your Honor, I think the problem with Dean Milk was that there was a sorting of private interest based upon the proximity to the city.

In other words, that there was, in fact... those who were within that protected area were able to do this business, those private economic interests, those who were outside of that area were not permitted to do that business, so we had a model of economic protectionism.

Now, the question in Dean Milk was was there some legitimate basis for that discrimination, and the answer was no, there was... so I don't think that's the same case.

Unknown Speaker: Mr. Brashares--

--No, they... they used the same kind of legitimate basis that you're trying to use.

They said health interests, and we said, well, there are a lot of other ways to preserve those health interests without requiring that the milk be pasteurized within 5 miles of the city.

And we said you have to, rather than discriminate against interstate commerce this way, use those other means.

Mr. Brashares: Your Honor, if the Clarkstown law specified that all garbage had to be processed within 5 miles of Clarkstown, it would be unconstitutional.

Unknown Speaker: Mr. Brashares, before you... your red light goes on, I wanted to be clear that, in bringing up what Justice O'Connor asked your opponent, you are not relying, as some of your amici have been, on congressional permission?

Mr. Brashares: No, Your Honor.

I think there is a... there's an argument there.

I think to meet the unmistakably clear standard is difficult, and I think it's a much less compelling argument than the other arguments in this case.

I would like to close, if I may... refer the Court to a case which we cited in our brief, an opinion by Judge Stapleton of the Third Circuit which... and if I don't finish this by the red light, I invite the Court to finish.

In the... quote:

In the absolute sense, virtually all State regulation burdens interstate commerce.

Where the burden on out-of-State interests is no different from that placed on competing in-State interests, however, it is a burden on commerce rather than a burden on interstate commerce.

In such cases, nothing in Commerce Clause jurisprudence entitles out-of-State interests to more strict judicial review than that to which the in-State interests are entitled, i.e. arbitrary and capricious review under the Due Process Clause and rational basis review under the Equal Protection Clause, neither of which involves the kind of social value balancing that Norfolk Southern urges us to undertake.

And last, I'd like to urge the--

Unknown Speaker: Well, what was... what was that quotation from?

Mr. Brashares: --I'm sorry, Your Honor, that was from Norfolk Southern against Oberly, which is 822 Fed 2nd, page 388.

The quote is on page 406.

I apologize.

It's referred to in our brief.

And last, we did not cite, and I would like to urge the Court to consider in this case the Bryard against City of Alexandria case in terms of the effect of a local regulation on an interstate business.

There the Court said... recognized, exactly as I urge it should recognize here, that the fact that an interstate business is involved does not remove the fact that the local activity that is being regulated is indistinguishable from the local activity of the same kind.

In that case the Court recognized that it made no difference whether the solicitor coming to the door was local or was from interstate commerce.

The fact was that the evil, or the situation that the local legislation was attempting to deal with and which the Court felt was rationally based under the Fourteenth Amendment, that was the exact same problem presented by the local solicitor and the out-of-State solicitor, and the State and the local community had no obligation to differentiate on the basis of its regulation.

Thank you very much.

Unknown Speaker: Thank you, Mr. Brashares.

Mrs. Christian, you have 4 minutes remaining.

Rebuttal of Betty Jo Christian

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

Respondents, in response to a question, have, I believe, admitted that this law would be invalid if it required that trash must be processed within 5 miles of the city limits of Clarkstown.

It seems to me that is dispositive of this case.

There is no difference, from a constitutional standpoint, from a Commerce Clause standpoint, between such a requirement and the requirement that we have in this case, which requires that it must be processed at the designated transfer station.

Now, beyond this--

Unknown Speaker: Because that transfer station is within 5 miles of Clarkstown?

Ms Christian: --It is within Clarkstown.

Unknown Speaker: But may I ask a question?

Ms Christian: I believe there was a question to respondents if it would be valid if it... if the law required processing within 5 miles of Clarkstown.

I think this falls within that description.

Unknown Speaker: But is it correct that there... that the processing itself violates the ordinance?

I thought it was what you do with the residue after the processing that preempts the... creates the problem.

Ms Christian: It is not what... it is not the processing done by--

Unknown Speaker: You don't violate the ordinance just by processing it--

Ms Christian: --No.

Unknown Speaker: --So long as you ship the residue over to their facility and pay them 81 a ton as a tipping fee.

Ms Christian: That's right, and pay them 81 a ton, but for the processing.

Unknown Speaker: So you're not objecting to... you're not objecting to any restriction on process.

Ms Christian: No.

We're objecting to the restriction that requires what they require... regard as local processing at the designated transfer facility, for which they charge the 81 a ton.

Unknown Speaker: And that's--

Ms Christian: It is--

Unknown Speaker: --That's the disposal of the... of the residue?

Ms Christian: --We don't know what they would do when they receive it.

It is the processing and the disposal of the residue.

Now, respondents have taken the position--

Unknown Speaker: But am I correct that the 81 a ton doesn't have any impact at all on the portion of your business that deals with recyclable garbage?

Ms Christian: --The ordinance itself permits the recyclables to be shipped directly outside of... out of State.

Unknown Speaker: So you can continue to do that as long as you pay the 81 on the residue?

Ms Christian: That is correct.

As long as we ship--

Unknown Speaker: They why isn't the residue locally generated waste if it produced by the recycling that takes place within the community?

Ms Christian: --For one specific reason.

We do not discard the revenue... the residue.

Petitioners' business consists of the handling of trash.

After they separate out the recyclables petitioners themselves process and bale the trash, and themselves ship it to landfills or waste energy plants which they pay to accept disposal of the nonrecyclables.

So the fundamental difference is that petitioners never discard anything.

They're in the business of handling the trash.

Now, we believe that this statute, as a matter of constitutional jurisprudence, would be unconstitutional even with respect to locally discarded trash.

But the fact is petitioners never discard trash at all.

They handle it, they dispose of it out of State.

Unknown Speaker: Well, you--

--Yes, but--

--You say the ordinance applies only to trash discarded in the city.

Ms Christian: No, that is not our position.

The trash plainly has been interpreted to apply to the nonrecyclable residue of petitioners' operation, which they do not discard in the city.

Respondents--

Unknown Speaker: It applies to discarded trash and you say we don't discard.

Is that what you're... is that your point?

Ms Christian: --Not quite, Justice O'Connor.

We do not discard trash, but the ordinance nevertheless has been interpreted by the New York State courts as applying to our operation.

A major distinction between trash handled by petitioners and the local trash to which respondents sought to draw an analogy is that we do not discard it.

A correction of one factual point.

Respondents also said that under the permit petitioners are limited to handling trash that is no more than 10 percent nonrecyclable.

There is no such limit.

Chief Justice Rehnquist: Thank you, Mrs. Christian.

Ms Christian: Thank you.

Chief Justice Rehnquist: The case is submitted.

Attribution:

The OYEZ Project

Featured:

Fort Gratiot Sanitary Landfill, Inc. v. Michigan Department Of Natural Resources - Oral Argument

Fri, 09 Jan 2009 14:49:36 +0000

Case:

Fort Gratiot Sanitary Landfill, Inc. v. Michigan Department Of Natural Resources

Media File:

91-636_19920330-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Harold B. Finn, III

Chief Justice Rehnquist: We'll hear argument next in No. 91-636, Fort Gratiot Sanitary Landfill v. the Michigan Department of Natural Resources.

Mr. Finn, you may proceed.

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

Petitioner owns and operates a private landfill in St. Clair County, Michigan.

In 1988 Michigan amended its Solid Waste Management Act--

Unknown Speaker: That's up by Port Huron?

Mr. Finn: --Yes, sir.

By adopting waste importation restrictions, namely section 13(a) and subsection (2) of section 30 of the act, which prohibit, in the case of St. Clair County, the importation into the country of municipal solid waste generated out-of-county or out-of-state.

On its face this case presents the question of whether these waste importation restrictions by prohibiting the importation of out-of-state waste into petitioner's landfill impermissibly discriminate against out-of-state commerce by, because in-county municipal waste is subject to no such constraint.

Unknown Speaker: I take it this waste is not of the kind that we were talking about in the last case?

Mr. Finn: That's correct, sir.

This is plain garbage.

This is not hazardous waste.

This is not lowlevel radioactive waste.

Unknown Speaker: And garbage is your element of commerce here, I guess?

Mr. Finn: Yes, sir.

Unknown Speaker: Is the waste, could it ever be said to be hazardous to transport it?

Mr. Finn: Under the regulations that have been promulgated by the State of Michigan, the transportation of municipal solid waste if it is moisture laden must be transported in trucks that are sealed and not capable of leaking.

In the case of all other municipal solid waste they must be covered and carried in a manner that does not create a nuisance.

The same would be true under the new regulations that are--

Unknown Speaker: Well, would that aspect of it possibly bring it in the quarantine exception?

Mr. Finn: --In this case, Justice O'Connor, no one has suggested that the quarantine cases are applicable.

In the first place there is nothing, in the first place the regulations that have been promulgated by Michigan make it clear that there is no risk of disease or pestilence coming into the State, and the new regulations that have been promulgated by the Federal EPA make it clear that there need not be any risk of disease or pestilence.

Indeed Michigan allows out-of-state waste to come into Michigan now, albeit to a minor extent, from neighboring states.

So I don't think the quarantine cases are applicable here, nor has Michigan suggested that they are applicable.

One of the amicus has suggested that the quarantine cases may be applicable, and it may well be.

In some states the regulations and laws are so lax as to create risks, but that's not true in Michigan.

There is an even more important question, however, at stake in this case, and that's whether or not this Court is going to uphold the novel new constitutional principle that was relied upon by the Sixth Circuit in upholding the waste importation restrictions.

That new constitutional principle is that state legislation which excludes foreign commerce from local areas within the State does not discriminate against interstate commerce so long as like commerce from elsewhere in the State is subject to the same embargo.

Acceptance of that new principle would have extraordinary consequences.

By way of illustration, if this principle were adopted by this Court a district comprised of the southern, the counties of Southern California could impose an embargo upon or a discriminatory tariff upon goods coming from Arizona so long as like commerce coming from Northern California were subject to the same constraint or the same discriminatory tariff.

That principle simply cannot be allowed to stand by this Court.

It is hopelessly inconsistent with the prior decisions of this Court, it belies the basic principles that underlie the Commerce Clause, and it would eventually result in the evisceration of the negative aspects--

Unknown Speaker: Mr. Finn, I guess the Sixth Circuit purported to apply the Pike v. Bruce Church test in this case?

Mr. Finn: --Yes, it did, Justice Scalia... Justice O'Connor.

Unknown Speaker: And do you make the argument that it was, that was the wrong test to apply, or that it was the correct test to apply but they applied it wrong?

What is it you're arguing?

Mr. Finn: There is no question in our mind that the Sixth Circuit applied the incorrect test.

In our judgment once discrimination exists, this Court's decision, decisions in the past have made it perfectly clear that the strict scrutiny test should apply, and it doesn't make any difference, as the State, the respondents, seem to suggest, that it's local discrimination versus statewide discrimination.

Somehow the Sixth Circuit made that distinction.

Unknown Speaker: Well, what's the matter with it?

You attack it verbally, but will you explain why you think it isn't consistent with our cases?

Mr. Finn: Well, in Brimmer v. Rebman, which was decided in 1891, in Dean Milk v. the City of Madison in 1954, and in Polar Ice Cream and Creamery Co., this Court has held that it's immaterial for purposes of determining whether there is discrimination against interstate commerce that in-state commerce is subject to the same constraint.

And that, those decisions in Brimmer v. Rebman, Dean Milk, and Polar Ice Cream and Creamery Co., they're consistent with and they're part of a line of nine cases in which this Court has over the past 119 years consistently and repeatedly held that embargoes against foreign commerce, be they statewide or local, overt or disguised, violate the Commerce Clause.

This case does not present a new concept.

Unknown Speaker: Mr. Finn, isn't it really a little unrealistic to say that what we're dealing with here is an article of commerce called garbage?

Isn't the article of commerce landfill space?

Isn't that what's being bought and sold?

Mr. Finn: Well, in this case it's the question of--

Unknown Speaker: Nobody wants garbage.

What they want is landfill space.

And why should, why isn't that the correct way to look at the case?

Mr. Finn: --The, there's no question but that the landfill is itself engaged in commerce.

What the landfill wishes to do and what the people who wish to have waste brought to the landfill wish to do is to engage in the interstate commerce of bringing municipal solid waste into that landfill.

Unknown Speaker: But the landfill space is just in St. Clair County, right?

Mr. Finn: That's correct, Justice Scalia.

Unknown Speaker: Now I suppose, I suppose St. Clair County could impose an enormous tax upon any garbage brought into this landfill space.

Mr. Finn: That's, I agree with that, Justice Scalia.

Unknown Speaker: It would have the same result, wouldn't it?

Mr. Finn: It would not be discriminatory.

That's the infirmity in this statute.

Unknown Speaker: Yes, but of course all the tax goes into St. Clair County's own coffers, so as a matter of fact it would not deter St. Clair County from using the landfill.

It would just deter everybody else from using the landfill.

That's precisely the same result.

Mr. Finn: The discrimination is made against the citizens and businesses of other states in this instance who are prohibited from bringing municipal solid waste into St. Clair County, whereas the citizens and businesses of St. Clair County are free to put their waste into the landfill without constraint.

Unknown Speaker: Well--

Mr. Finn: That discrimination is what's impermissible.

Unknown Speaker: --So all you're making St. Clair County do is to reduce its business taxes and impose an enormous tax on taking stuff to the landfill.

Mr. Finn: If they choose to do that, that would be... I can't address whether that would be permissible or not.

It would not violate my view of what I am arguing here today.

Unknown Speaker: But to the extent that the county tried to do that and imposed the tax on its own citizens as well, I imagine it wouldn't sit too well to be told that the county was going to recoup some of the money.

Mr. Finn: I think that is correct.

I think that's why the county is objecting to--

Unknown Speaker: People who live there and who vote there still have to get rid of their garbage, don't they?

Mr. Finn: --Yes, they do, Justice O'Connor.

Unknown Speaker: And they want to do it at reasonable rates, I suppose.

Mr. Finn: Well, their alternative is not--

Unknown Speaker: Let me ask you this.

Do you think that solid waste has today a commercial value in part?

Are there things included in solid waste today that make it potentially a valuable item?

Mr. Finn: --To some extent municipal solid waste as it starts from our respective homes or our respective businesses contains materials that can be removed from the solid waste, such as recyclables, plastics, aluminum, or the like.

I, when the municipal solid waste is brought to the landfill it is not, we are not currently processing municipal solid waste.

I think the problem with suggesting that municipal solid waste is not an article of commerce, which has not been suggested in the briefs but is implicit in the questions, is where, what is the neutral principle that would apply: Is it that when you reach the end of usefulness it's no longer articles of commerce?

That... first of all, the neutral principle would likewise apply to the dead, dead human beings, and that would make the funeral home business or the cemetery business not being engaged in commerce.

In the same manner--

Unknown Speaker: I dare say lots of people would think they weren't.

[Laughter]

Mr. Finn: --I think it's clear that Congress would think that it had the power to regulate the funeral home industry or the cemetery industry because it was regulating a matter of interstate commerce.

Also, to suggest that this article of commerce is not, rather that municipal solid waste is not an article of commerce is to not, to deny reality.

This is a multi-billion dollar business, and to suggest that it's not an article of commerce is to ignore reality.

Unknown Speaker: Mr. Finn, could Michigan put together a scheme whereby the counties could decide that they wouldn't allow any private landfills, period, and that all waste disposal would be at county-owned sites?

Mr. Finn: Other than the problem of expropriating the existing privately-owned landfills, I think the county would have the power, the state would have the power to prohibit the operation of private landfills.

Unknown Speaker: And if they did that and then said no out-of-state waste, I guess you wouldn't win.

Mr. Finn: Well, I wouldn't have a private landfill in that case.

Unknown Speaker: Right.

Mr. Finn: But I don't, we don't question but that the state can, through the market participant doctrine, restrict out-of-state waste from coming into the state, into the state-owned or county-owned landfills.

Unknown Speaker: Mr. Finn, I think some of our cases have said that when the motive of the state appears to be protectionist, parochial favoring local industry, then we're going to give it strict scrutiny.

What is the local industry that you think is being favored here?

Mr. Finn: The citizens and businesses of the county, of St. Clair County, have an opportunity to put their municipal solid waste in petitioner's private landfill whereas citizens and businesses out-of-county don't have that opportunity.

Unknown Speaker: That is the, that is the protectionist aspect?

Mr. Finn: Well, I think it's a broader--

Unknown Speaker: It's certainly a good deal different than a lot of cases that we've--

Mr. Finn: --It is true that this Court has talked repeatedly in terms of economic protectionism, but it has to be recognized that virtually all of the nine embargo cases that this Court has struck down over the past 119 years involved the argument on the part of the state that their statute was justified by some legitimate purpose.

The reason the statutes were struck down is that the embargo, that is the means of achieving that purpose was impermissible.

It was, that was what was unconstitutional.

Unknown Speaker: --But the Madison, the Dean Milk case was a case where the, I think the City of Madison was trying to assure that a particular local processing plant got the business and not somewhere else, wasn't it?

Mr. Finn: Well, it was also cited, the state, or rather the city contended that they needed to have the local requirement for processing of milk in order to be able to adequately inspect.

Unknown Speaker: Yes.

Mr. Finn: But the Court did not buy that.

Unknown Speaker: But you... I don't see the same protectionist element in this case as there was in the Dean Milk case.

Mr. Finn: Well, I--

Unknown Speaker: They're not trying to protect a local business.

Mr. Finn: --I think what they are trying to protect is the need for local expenditures and to protect citizens from competition.

Let me illustrate, if I may.

It is clear from the briefs of the respondents and the amici that landfills are not natural resources.

They are engineered and manufactured facilities which can be sited anywhere, depending solely on cost.

In other words, if that, that being the case, these statutes are designed to restrict the free flow of municipal solid waste into the state and to reserve private landfills so as to enable the state and the county to avoid the costs of creating new landfills, and also to avoid the competition.

What they're trying to do is to take over, in effect, the private landfill of petitioner and make it available for the state use only.

Unknown Speaker: So the New Jerseyans end up shipping their garbage to St. Clair County, and St. Clair County ends up shipping its garbage to South Dakota?

I mean, when the spaces are all gone in St. Clair County.

Mr. Finn: St. Clair... it's just a question of creating space.

St. Clair County or the State of Michigan or any of the states can create the space.

It's not a natural resource.

It is simply erecting and manufacturing, in effect, a ship on the land that is safe for the disposal of municipal solid waste.

So it's not a question of running out of space.

It's a question of incurring the cost to create the space, and that's what the State doesn't want to do.

And in fact they want to protect themselves from having to incur that cost in the future by preventing citizens from other states from bringing their municipal solid waste into St. Clair County.

Unknown Speaker: Well, it's not just--

Mr. Finn: I think that's the essence of economic protectionism.

Unknown Speaker: --I assume that it also means that the, that what you can charge the state today, or what any existing landfill can charge the state or in-state citizens or in-county citizens has to be lower, doesn't it?

I mean, if you could accept material from out-of-state, presumably the price would go up, wouldn't it?

Mr. Finn: There is no question about that, Justice Scalia.

Unknown Speaker: Well, that sounds like protectionism to me.

Mr. Finn: That's why we're here.

We are unable to accept the higher prices that are offered by out-of-state citizens and businesses.

Mr. Chief Justice, I should also point out that it's not just a question of whether or not there is or is not economic protectionism.

In the case of Maine v. Taylor the Court found that the embargo was permissible because the bait fish were likely to be infected with parasites, but it nonetheless subjected the Maine statute to the strict scrutiny test.

The twofold test being one, whether the statute serves a legitimate purpose, and two, whether there is available a non-discriminatory means.

And in the case of the Maine bait fish statute the statute passed that test.

I, we submit that in this case, this legislation, the waste importations do not pass that strict scrutiny test.

Unknown Speaker: Because there is no threat from the garbage.

Mr. Finn: I don't think that the quarantine cases present any threat.

They haven't claimed that they present any threat, and they would be hard pressed to do so since they take it from out-of-state as it is, albeit in limited quantities.

I'd like to return for a moment to the problem of local regional discrimination.

The problem as a matter of constitutional principle about regional discrimination is that it puts citizens of the region, of the preferred region, on a different footing from citizens of all the states.

They will therefore tend, as James Madison said about Connecticut's discriminatory tariff of 1784, to beget retaliating regulations not less expensive and vexatious in themselves than they are destructive of the general harmony.

These regional discriminations, these regional embargoes will enable the state to place itself in a position of economic isolation and ultimately will lead to an evasion of the strictures of the Commerce Clause.

That's exactly what Pennsylvania proposes to do with their new legislation.

The governor has proposed to divide Pennsylvania up into four quadrants called waste sheds.

Each waste shed will be allowed to accept municipal solid waste only from within the waste shed.

The result will be that every citizen and business in Pennsylvania will have a place to put his or her municipal solid waste, but no one from outside Pennsylvania will be able to bring municipal solid waste into Pennsylvania.

Unknown Speaker: What if the county in this case had combined its embargo with a temporal limitation, let's say 5 years or 10 years, and had justified that, assuming it could do so, on the ground that it takes that long to engage in responsible planning and construction of further facilities, so that it justified it essentially on the basis of a planning purpose, expressly and overtly?

Could they do that?

Mr. Finn: I don't think that this Court has ever upheld discriminatory legislation which discriminates against foreign articles of commerce or against foreign citizens and businesses on the basis that it was a temporary planning measure.

There are some quarantine cases--

Unknown Speaker: No, but I mean in the classic sort of case.

That's not going to apply to the question whether or not we ought to let in foreign milk.

I mean it's either going to be consumed or not consumed by the market.

That's going to take care of it.

But in this case there, I assume there is a legitimate argument to be made that you can't in effect create a landfill overnight, and that it is at least reasonable for people to take measures to prevent having to send their garbage to South Dakota.

Would that (a) take it out of the category of heightened scrutiny, and (b) would it be a reasonable basis on a balancing test for allowing a, at least a temporal limitation?

Mr. Finn: --Well, I don't think it would take it out of the strict scrutiny test because the strict scrutiny test is applied whenever discrimination is found.

It may be that you could subject it to the strict scrutiny test and on your hypothetical conclude that the purpose was legitimate and that there was no available alternative.

A finite period of time to decide how you're going to handle this might well fall under that category.

This case, of course, does not fit into that category.

This is an, a forever ban.

I don't think the Pike test would ever be applicable in the hypothetical you have described, but that doesn't mean that it couldn't pass scrutiny.

Apparently recognizing that this Court is likely to hold that the waste importation restrictions discriminate against interstate commerce, the respondents and the amici have suggested a number of novel theories upon which they would have this Court distinguish City of Philadelphia v. New Jersey or even overrule it, and they would ask this Court to hold that the waste importation restrictions do not violate or indeed are not even subject to the Commerce Clause.

We have attempted to address these novel arguments in our reply brief and to anticipate them to some extend in our brief on the merits, and I do not propose to do so here in oral argument.

I do think it appropriate to spend a moment addressing the State's apparent principle claim that Sporhase v. Nebraska justifies a different result.

Sporhase held that the, a state statute, the portion of a state statute which prohibited the exportation of water across the state line was unconstitutional.

So rather than help the State in this case, Sporhase dictates the conclusion that a state statute which prohibits the importation of municipal solid waste across state lines violates the Commerce Clause.

Also, to the extent that Sporhase condoned a discriminatory requirement, that exportation of water be allowed only with a permit, it's irrelevant to this case.

In the first place a discriminatory permit is far less onerous as a constitutional matter than an outright discriminatory embargo.

In the second place, there is no permit available here.

There is no means by permit that one could obtain the right to bring municipal solid waste into the county.

In addition, in Sporhase it doesn't even appear that the permit requirement was discriminatory.

The in-state use was subject to extraordinary constraints.

Indeed a landowner in the district that was involved in Sporhase couldn't even sell his water.

And finally, Sporhase, it has to be recognized, involved a special scarce natural resource, water, which has always been subject to special consideration in this Court, whereas here we're dealing with an engineered and manufactured facility which is capable of being sited anywhere, depending solely on cost.

Unknown Speaker: Well, not anywhere in the strictly soil sense.

You can't have a landfill just anywhere you choose, can you?

It has to be a particular kind of soil, and that sort of thing.

It has to be sited away from certain other things.

Mr. Finn: Well, I think it's clear from the briefs of the respondents and the amici that that's no longer necessary.

You now are required, indeed if one looks at the regulations that have been promulgated by the EPA, to have liners in all new landfills that will avoid the problem of having to choose particular soil.

You don't want to put it on an earthquake zone.

I certainly agree with that.

But it is, as I have described, more akin to building a ship on top of the land.

This Court has never before upheld a discriminatory embargo except in the case of a necessary quarantine.

A quarantine, the quarantine cases aren't applicable here, and there would be no principle basis for the Court to uphold these discriminatory embargoes.

If there are no further questions I'd like to reserve the remainder of my time.

Unknown Speaker: Very well.

Mr. Casey.

Argument of Thomas L. Casey

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

In 1905 in the California Reduction Company decision this Court said many of the questions involved in municipal sanitation have proved to be difficult of solution.

87 years later the problems are still with us, and they are still difficult of solution.

Michigan has attempted to address these difficult problems by imposing a comprehensive, mandatory, long range planning and long range management process for solid waste which is to be disposed of in each county in Michigan.

Petitioner's claim is that the Commerce Clause exempts it from even participating in the planning process.

Petitioner asks this Court to extend its decision in Philadelphia v. New Jersey and announce a rule which would require every county in Michigan, presumably every county across the Nation, to absorb as much out-of-county waste as a landfill operator wanted to bring in, with no ability for state or local governments to have any control over volumes and regardless of the local circumstances or the local consequences.

Unknown Speaker: How... I take it that the State allows a county, however, to take out-of-state waste?

Mr. Casey: Yes.

Unknown Speaker: And how many counties have in their plan permission to do that?

Mr. Casey: Each county creates a plan.

There are 83 counties.

I believe eight of them currently permit importation of out-of-state waste.

Unknown Speaker: And the, but none of the rest of them?

Mr. Casey: The others do not currently contain a specific provision permitting out-of-state waste to be brought in.

Unknown Speaker: And unless it does then the state law forbids the importation?

Mr. Casey: That's correct.

Unknown Speaker: So it's a state law that puts the teeth in this arrangement?

Mr. Casey: A state law requires affirmative action by each county before out-of-state waste can be brought in.

Unknown Speaker: And approval by the State.

Mr. Casey: Correct.

Unknown Speaker: Yes.

Mr. Casey: There is a comprehensive process for developing the plan with input from the local counties, local planning agencies, votes by the municipalities within a county, regional approval, and ultimately approval by the director of the Department of Natural Resources.

Unknown Speaker: Mr. Casey, does the State take the position that the transportation of solid waste presents significant health or safety dangers?

Mr. Casey: Yes, it can.

The solid--

Unknown Speaker: Is that a position taken by the State here to justify its position?

Mr. Casey: --We are urging this Court... this case presents the opportunity for the Court to reexamine the Philadelphia v. New Jersey decision.

In that case the Court found that solid waste was an article of commerce and found that a specific New Jersey statute violated the Commerce Clause.

As the dissent in that case indicates, and as we have argued in our brief and in the amicus briefs, there are unique characteristics of solid waste which present strong arguments why solid waste should not be considered within the Commerce Clause.

If the Court--

Unknown Speaker: Well, if we disagree with that and leave the precedents on the books, then where are you?

Mr. Casey: --We believe that the judgments below can be affirmed without retreating whatsoever from Philadelphia v. New Jersey.

We do believe, however, that there are unique aspects of the solid waste problem which should urge this Court to exert great deference in reviewing the state statute.

I'd like to talk about those in a moment, but I would like to mention at the outset the very narrow and limited posture of this case before this Court today.

In its original complaint in the district court petitioner challenged the statute on its face.

Count 2 challenged the statute as applied by St. Clair County, and Count 3 alleged due process violations.

In this Court, however, they have abandoned everything except the facial challenge.

They have abandoned their claim that St. Clair County's refusal to amend their plan was unconstitutional.

So the sole challenge in this Court is whether this comprehensive statewide statute is unconstitutional merely because it permits each county to consider local circumstances in deciding whether to permit or to prohibit out-of-state waste.

Under petitioner's view in this facial challenge a county can never prohibit out-of-state waste regardless of local circumstances or local consequences.

Our position is that a state may implement a planning process, as we have done here, which permits counties to take into consideration of local circumstances.

Unknown Speaker: Well, do you think just because the State operates through the county that it's off the hook?

You would be making the same argument if the State had a law that says no solid waste from outside the State may be, may come into this State?

Mr. Casey: We would be probably taking a stronger position that Philadelphia v. New Jersey should be overruled.

We believe that our statute is significantly different than the statute in Philadelphia v. New Jersey.

Michigan does, the Michigan statute does permit counties to accept waste from out-of-state.

Eight of the counties do.

Michigan also exports some waste to other counties.

Michigan--

Unknown Speaker: Well, what if in this case, Mr. Casey, the Michigan statute by name said these eight counties shall be able to import waste and the others shall not.

Would that make it any different a case for constitutional purposes?

Mr. Casey: --In a facial challenge that would be much more like the statute that was present in Philadelphia v. New Jersey.

If Philadelphia v. New Jersey is still good law then the statute in Michigan would be--

Unknown Speaker: It would be much more like it in the sense that it was more like the Pennsylvania statute, or the New Jersey statute there.

But is that distinction significant for constitutional purposes, is that difference, the fact that the state, that it's the state that decides whether or not a county will import garbage rather than the county itself?

Mr. Casey: --The key differences between our statute and the statute in Philadelphia v. New Jersey is that in that case there was an absolute prohibition.

Our statute does not contain an absolute prohibition.

Our statute sets up a comprehensive planning process for all of the waste which is to be disposed of in a county to be subjected to identification of sources, estimation of volumes, because the key aspect of the Michigan statute is that it imposes on each county the requirement that they guarantee future disposal capacity for 20 years.

Unknown Speaker: But you have to take responsibility for what your counties do under your authorization, and in fact it is a total prohibition with respect to some of the counties.

And they're doing that under your state power, so it's a total prohibition into some areas of the state.

Mr. Casey: I would suggest to you that that would be the analysis if this were a challenge to the statute as applied in a particular circumstance.

What the petitioner is challenging is the mere fact that the state statute permits counties to make this local evaluation.

If a county prohibited out-of-state waste and a petitioner came in and challenged that as applied to if there would be a Commerce Clause challenge there, we would depend on local circumstances.

We would get into a detailed factual dispute as the Court had in Maine v. Taylor with an extensive evidentiary record.

This case was decided on summary judgment with virtually no evidentiary record at all.

And as it is postured in this case, the petitioner framed the question he presented in the petition, it is only a facial challenge.

We submit the question in this case is can a state ever permit local units of government to evaluate local circumstances--

Unknown Speaker: In such manner as to exclude out-of-state garbage--

Mr. Casey: --Yes.

Unknown Speaker: --while still receiving in-county garbage.

Mr. Casey: Correct.

That is the question.

Can a state, can any local circumstances ever justify a county in excluding out-of-state waste?

Unknown Speaker: Well, suppose there's an operator of an amusement park in St. Clair County and the county, and the state has a law like this that anybody, any county that wants to keep amusement, to prevent amusement parks from catering to out-of-state visitors may do so?

Mr. Casey: That would not be our position, no.

Unknown Speaker: Well what, what's the difference?

Mr. Casey: This subject matter is fundamentally different than the typical economic--

Unknown Speaker: This amusement park operator wants to do business with out-of-state visitors, and the state says well, the county can keep them out, and the county has.

The county just doesn't like the traffic that is coming in from out-of-state.

Mr. Casey: --Under the traditional Commerce Clause analysis you have to determine the nature and the legitimacy of the local concerns.

We submit in this case this is not simply economic protectionism.

As the Court said in the Sporhase decision--

Unknown Speaker: Well, neither would this be in my example.

Mr. Casey: --Perhaps I didn't understand your example.

I understood the, your hypothetical to be that they wanted to exclude out-of-county residents from using this county--

Unknown Speaker: They want to exclude, they want to prevent the amusement park operator from doing business with people from out-of-state.

Mr. Casey: --That probably would not be a sufficient justification for making the exclusion.

What you have to look at is the legitimacy of the local purpose.

What we have here is a purpose which is clearly legitimate, protection of the public health and the environment.

Unknown Speaker: Well, the--

Mr. Casey: The key is the means that the state has used to implement that legitimate purpose.

We believe the means that are used here in this statute are reasonable.

They are non-discriminatory, it is not an absolute statewide prohibition.

In this limited facial challenge it cannot be said that the Commerce Clause absolutely requires every county in Michigan to absorb waste without limitation of volume from all sources outside of the county.

Unknown Speaker: --We do have to have a sense, don't we, even as you have posed the issue before us, of the kinds of interest that, the kinds of local interest that it would be legitimate to assert, that might reasonably be asserted?

One of them, or maybe the one that you have just described to us, is a concern over public health.

And I'm not sure exactly, when you get beyond that, how that concern is to be expressed.

I take it you don't take the position that it is impossible to run a landfill without a threat to public health, do you?

Mr. Casey: To some extent landfills always pose dangers to public health.

This Michigan statute and the Federal statutes do their best to minimize that danger, but there is always going to be a danger.

Unknown Speaker: All right, well how are we supposed to kind of get our hands on the kind of public health concern which you say at least facially, on a facial challenge might justify the restriction?

I mean, to be candid with you, all we've got is kind of a slogan, public health, protect public health, and I don't know where we go when we get beyond that.

Mr. Casey: The cases in which the Court has applied strict scrutiny in this Commerce Clause area deal with simple economic protectionism.

We don't have that.

We have different--

Unknown Speaker: No, that may be, but how do you articulate your public health interest?

That's what I want to know.

I will assume that there is a public health motivation, but I want to have some sense... as you pose the case to us, I want to have some sense of what the legitimate concerns might be that therefore should be allowed, the possibility of which should be allowed to prevail over the facial challenge.

What are they?

Mr. Casey: --There are in the neighborhood of 180 million tons a year of municipal solid waste generated.

It has to go somewhere.

Statutes on the Federal and state level are trying to encourage other types of source separation, recycling, composting, but the current practical reality is there are going to be landfills for the foreseeable future.

Landfills pose dangers wherever they're located.

Our position in this case is that because Michigan has imposed on its county citizens the extreme burden of guaranteeing future capacity for their own incounty waste, because they have taken that burden on themselves they therefore are entitled under the Commerce Clause to have some limit in deciding their service area.

Unknown Speaker: Well, it seems to me you have raised two issued but you haven't answered the question.

The first issue is why does the decision of the State of Michigan to impose this burden on their citizens make it somehow affect the Commerce Clause analysis?

And number two, it still is an open question in my mind as to exactly what the public health hazards are, given the present state of solid waste technology, that we should consider as at least possible justifications in response to a facial challenge.

So you... I still think you've got two questions.

Why is it at all relevant that Michigan has allocated responsibility the way it has.

And number two, leaving that aside, what are the public health dangers that we're supposed to consider as possibilities in responding to this challenge?

Mr. Casey: Public health dangers in the form of leachate, fluids that seep through the landfill and are required to be pumped out and drained.

Public health dangers of methane gas which is produced by these, pest animals, insects, noise--

Unknown Speaker: Those are good arguments for saying solid waste disposal sites are not desirable neighbors.

I mean, we'll accept that.

They may be good arguments for saying in a perfect world we wouldn't have them.

But why do, how do they rise to a point of clarity to allow us to consider them in deciding this case?

Mr. Casey: --Because of the volume of solid waste which is created throughout the country, measures have to be taken somewhere to provide proper disposal.

Unknown Speaker: But this case is unlike the Taylor and Maine case, because there the out-of-state character of the item imported was itself the evil.

Here the evils that you have described apply in like measure to in-state and out-of-state garbage.

So I'm not sure how persuasive your answer is to Justice Souter's question when he asked you to specify for us the particular evil, other than you're saying it's the shear volume, but volume can be measured by many ways other than in-state and out-of-state discrimination.

Mr. Casey: Correct.

But under the traditional Commerce Clause analysis you look to the nature and legitimacy of the public purpose which is served.

You look to the legislative ends and the legislative means.

The goal here is to minimize environmental damage and minimize public health damage by landfills.

St. Clair County could have--

Unknown Speaker: Is this law subject to strict scrutiny?

Mr. Casey: --No.

We submit it--

Unknown Speaker: What if it were?

Mr. Casey: --It would still pass muster under either the--

Unknown Speaker: And why isn't it subject to strict scrutiny?

Mr. Casey: --Because it is not facially discriminatory to the extent that the strict scrutiny cases have applied that standard.

Unknown Speaker: Mr. Casey, may I go back to one of the questions that we have left dangling here?

Do you take the position that Michigan's allocation of responsibility is in anyway relevant to the Commerce Clause analysis?

Mr. Casey: I am not sure I understand.

Unknown Speaker: Well, you began to answer a previous question of mine by saying that somehow it is reasonable to give the counties the kind of leeway that you want to give them because the state has allocated to the counties the responsibility for finding, or for establishing, I guess, disposal sites for, at least for their own county wastes.

And my... I think that's what you were telling me.

And my question is isn't that a problem for the State of Michigan?

What has that got to do with the Commerce Clause analysis?

Mr. Casey: The Commerce Clause analysis that the petitioner has raised is that the statute is discriminatory, it favors in-county residents.

We submit that when you look at the entire statute as a whole as it operates it does not favor in-county residents.

In fact it burdens in-county residents.

They are not permitted to put their waste on trucks and send it someplace else.

They are required to guarantee for the next 20 years adequate landfill capacity to take care of all of the solid waste generated within that county.

Unknown Speaker: Well, we don't care, we don't care if you discriminate against county residents.

That--

Mr. Casey: But in the, the point I'm--

Unknown Speaker: --You can be as unfair as you like to your state citizens and the Federal Government doesn't care.

It's only when you're unfair to out-of-state citizens, and that's the issue here.

Mr. Casey: --I would analogize to the Sporhase decision.

There there was a statute regulating the withdrawal and transfer of groundwater.

The State of Nebraska imposed restrictions on in-state transfers and it imposed different restrictions on out-of-state transfers.

That was one of the factors the Court looked at in saying that that portion of the statute was not facially discriminatory, because it imposed burdens both on in-state residents and out-of-state residents.

We submit the same principle applies here.

Significant burdens are imposed on in-county residents, and the only burden that is imposed on out-of-county residents, for out-of-county waste, is that they participate in the planning process, but the counties, because they have assumed the burden of disposing of their own, are given some ability to limit their service area.

In a particular case if a county did not have sufficient justification for excluding out-of-county waste, a prohibition might be unconstitutional as applied.

We don't have that challenge in this case.

Unknown Speaker: It isn't enough to impose some burden on intrastate, on state residents.

It has to be the same burden, doesn't it?

I can't say well, I'm taxing my state residents and I don't tax out-of-state people, and therefore I can do, you know, therefore I can prevent out-of-state people from bringing their garbage into this state.

Mr. Casey: If the burdens are comparable, then the statute--

Unknown Speaker: But they aren't comparable.

Mr. Casey: --We submit they are.

Unknown Speaker: How are they?

Your county resident can dispose of the trash in the county landfill.

The out-of-state resident can't.

Mr. Casey: That's correct, but the out-of-state resident can satisfy... the problem of solid waste is a local problem.

It's generated at a local level.

Some localities solve the problem by putting it on trucks or trains and shipping it away.

When Michigan has undertaken the burden to dispose of its own waste, we submit that the Commerce Clause does not compel it to provide unlimited future landfill capacity for the rest of the country as well.

Unknown Speaker: The Commerce Clause says there's no such thing as a local problem, doesn't it?

Isn't that basically what the Commerce Clause says?

Mr. Casey: No, I don't think so at all.

I don't think so at all.

The Commerce Clause does not elevate free trade above all other values.

Where there are legitimate public health purposes in this statute protecting against the health hazards, and the State has undertaken to address those problems and has burdened itself with the duty to provide its own future landfill capacity, we submit that by assuming that burden they can therefore exercise some control.

Unknown Speaker: Mr. Casey, you point out that in some communities they put the garbage on trains or trucks and ship it away.

If every state in the United States had the same law that Michigan had, would that still be possible?

Mr. Casey: If every state had a law like Michigan's, every county would be required to dispose of its own solid waste and we would not have an interstate problem.

Unknown Speaker: And if it found that it could do it much more cheaply by putting it on a train and shipping it to some area where the land is very cheap and there's a lot of desert or something, they wouldn't be able to do that, would they?

Mr. Casey: They could if the receiving state accepted that burden.

There is nothing in the statute which prohibits any county from accepting burdens.

The question here is does the Commerce Clause require them to accept that burden when they are already assuming the burden of guaranteeing--

Unknown Speaker: Why does, why does St. Clair County really want to forbid this private landfill operator from processing or disposing of out-of-state waste?

Mr. Casey: --Again, we have very little in the way of evidentiary record here.

The only record we have is that the petitioner made a request to the county to amend its plan to permit 1,750 tons per day of out-of-county waste.

A staff of the County Planning Commission, staff group looked at that and concluded that that amount of additional waste would use up all of the capacity which the county had planned for within 6 years instead of 20.

And at that point--

Unknown Speaker: Well, hadn't the operator been taking out-of-state waste?

Mr. Casey: --No.

Unknown Speaker: This was going to be new business?

Mr. Casey: There had been litigation within the State where they were trying to take out-of-county waste.

Unknown Speaker: So this would just be new business for the landfill operator?

Mr. Casey: Correct.

Correct.

The Fort Gratiot Landfill is included within the county plan.

The county plan estimates all of the waste which will be generated within the county, identifies the sources, estimates the volumes.

They are required to assure proper disposal for a 20-year period, and they have included the Fort Gratiot landfill in that.

Unknown Speaker: It's still true, as I understand, that if he could demonstrate that he could still handle all the local garbage for the next 20 years the law would still prohibit him from taking any out-of-state garbage.

Mr. Casey: If he could make that showing in a challenge to the statute as applied--

Unknown Speaker: No, I'm not, I'm not worrying about constitutionality, just the way it would work.

If he could demonstrate that he has this tremendous capacity that could handle both the out-of-state garbage and the local garbage for the next 50 years, the statute would still prohibit him from taking the out-of-state garbage.

Mr. Casey: --Correct.

But a challenge by him on those facts could succeed.

A similar challenge has succeeded.

We cited the Dafter Township opinion of the Michigan Court of Appeals where precisely that situation occurred.

The Township sued a landfill operator who wanted to bring in out-of-county waste which was not included in the county plan.

The landfill operator was able to demonstrate that the, bringing in this additional amount would not impair the county's capacity, and therefore the injunction was denied.

Unknown Speaker: Well... go ahead.

What would happen under the statute if he decided that he couldn't make a profit without taking out-of-state garbage and he decided to close up the dump entirely?

What would the county do?

Mr. Casey: The county would have to find some alternative method of assuring disposal.

Unknown Speaker: I see.

Mr. Casey: That is the obligation--

Unknown Speaker: He has no obligation to serve the county for the next 20 years.

Mr. Casey: --No.

There are obligations in closing--

Unknown Speaker: So that if he rents his space to an out-of-state customer it has the same impact on the county as if he just closed up?

The county still has to solve the problem.

Mr. Casey: --The county would still have to solve the problem, yes.

Unknown Speaker: Now I take it you agree with Mr. Finn that the county could do that simply by prohibiting landfills, or by going into the landfill business itself and in that instance could prohibit out-of-state receipt?

Mr. Casey: I don't know if the county could do that on its own because the statute requires them to assure capacity--

Unknown Speaker: Well, there's not comment that there would be... I assume you agree there would be no Commerce Clause bar to its doing so if that were otherwise the political disposition of the State?

Mr. Casey: --Correct.

Correct.

The Commerce Clause would permit the State of Michigan to say no landfills anywhere.

Unknown Speaker: Did this landfill operator, didn't he offer to, didn't he undertake to satisfy the, all of the county's--

Mr. Casey: In the proposal that he submitted he said that, the county said... the company said it would guarantee the full 20-year capacity.

The staff looked at that same proposal and said no, there is only, there would only be 6 years that would use it up.

That's a fact dispute.

If they had pursued their as applied challenge and he could show that St. Clair County impermissibly was restricting out-of-state waste for protectionist purposes, to hoard their own limited capacity, he might succeed on an as-applied challenge.

But we have here, the simple question that's before the Court today is where the county, or the State of Michigan and its counties have assumed this burden of taking care of their own waste, guaranteeing their own future capacity for 20 years, does the Commerce Clause require every county also to assume the burden of disposing in the future of as much waste as the landfill operator wants to bring in?

We say it does not.

In the balancing of local interests and the national interest in free markets, this statute is a reasonable regulation.

It is not an absolute prohibition.

It is, it applies even-handedly because--

Unknown Speaker: --Of course there wasn't an absolute prohibition in the New Jersey case either, was there?

Mr. Casey: --There were four very limited exceptions, but--

Unknown Speaker: But they were whatever exceptions the agency wanted to allow, and they allowed for.

Mr. Casey: --The governor or whoever the official was passed a regulation with four exceptions, but the Court said--

Unknown Speaker: Just as here a county can allow out-of-state garbage if it wants to.

It's the same kind of loophole if they want to take advantage of it, if the government wants to take advantage of it.

Mr. Casey: --In a facial challenge such as this what we're saying is that it is permissible for a state statute to let local governments evaluate local circumstances.

If the local circumstances are such that they cannot accommodate out-of-state waste, then the Commerce Clause does not require that county to accept the out-of-state waste.

That would require a challenge as applied.

What we have here is a facial challenge, and the question is can a state statute ever permit a county to evaluate its own local circumstances and make its decision based on those local circumstances and local consequences.

If a particular challenge was made a prohibition such as St. Clair County's might be unconstitutional as applied in a particular case, but on the facts that we have here and the very narrow limited challenge it simply cannot be said that the Michigan statute unreasonably impairs interstate commerce.

Unknown Speaker: The district court here granted summary judgment to the respondents here, I mean to the petitioner here?

Mr. Casey: No.

The petitioner filed motions for summary judgment.

The court denied those and entered judgments for the respondents on all counts.

But there was no trial.

Unknown Speaker: So in effect it was giving you the benefit, it was resolving all disputed facts against you, I take it then?

Mr. Casey: That's correct.

It was on a summary judgment motion.

Unknown Speaker: And then the Sixth Circuit sent it, the Sixth Circuit upheld that?

Mr. Casey: Correct.

Both the district court and the court of appeals applied the Pike test, and in the traditional application of the Pike test they found there was no facial discrimination.

We reject the petitioner's characterization that there is some new principle being espoused here.

We submit there is not.

In summary we submit this is a reasonable regulation that does not unduly interfere with interstate commerce, but it does permit protection of the public health.

If there are no further questions.

Thank you.

Unknown Speaker: Thank you, Mr. Casey.

Mr. Finn, you have 6 minutes remaining.

Rebuttal of Harold B. Finn, III

Mr. Finn: The section 13(a) and subsection (2) of the act prohibit any public or private landfill in the, in any county from accepting waste, municipal solid waste, unless it is expressly authorized in the county plan.

In 1988 at the time that the waste importation restrictions were enacted and at all times thereafter the St. Clair County plan did not permit the importation of municipal solid waste from out-of-county.

So the act at the moment it was passed and at all times since has barred absolutely the importation of municipal solid waste into St. Clair County.

Unknown Speaker: Is that a facial challenge to the act, or is it a facial challenge to the act plus the St. Clair implementation of the act?

Mr. Finn: It is--

Unknown Speaker: What are you facially challenging?

The Michigan--

Mr. Finn: --I am challenging the act as it incorporates the St. Clair County solid waste management plan as it was in effect at the time.

Unknown Speaker: --So yours is not just a facial challenge to the whole Michigan statute, it's a facial challenge to the Michigan statute with the St. Clair ordinance implementing?

Mr. Finn: That is correct.

It is on its face by incorporating the St. Clair County solid waste management plan, or in effect in either case the result is the same.

The suggestion that there is a safety concern, I don't... it is not in the briefs, it is not in the record.

Obviously one wants to handle municipal solid waste in a manner that doesn't create a safety problem.

And I think in the case of Michigan their regulatory and legislative scheme prevents there from being any safety problem so long as it's handled in accordance with the requirements of the act and the regulations.

I also want to point out that under the new EPA regulations there is no need for there to be any safety problem.

Indeed the new regulations specifically state that the minimum national criteria prescribed therein insure the protection of human health and the environment.

With respect to the suggestion that Michigan is in a special place because it's bearing a burden, I want to call the Court's attention to the decision of this Court in Edwards v. California.

There California attempted to impose criminal sanctions upon anyone who brought indigents into the State of California, and California contended that during the period of the Depression when indigents coming into the state would put the state to extraordinary strains, they should be allowed to avoid this burden, and this Court, as you all know, rejected that contention on Commerce Clause grounds.

I also want to point out that every state bears the burden of other by-products of other states.

For example, Connecticut bears the burden of the soot and smoke and pollution that comes out of Michigan's factories.

No one would suggest that we can take retaliatory steps in Connecticut to prevent Michigan by way of preventing Michigan products from coming into Connecticut, or otherwise to alleviate our burden.

Here Michigan seeks to impose the burden that it believes it is undertaking--

Unknown Speaker: This garbage is coming all the way from Connecticut to Michigan?

Mr. Finn: --No garbage is coming to this landfill.

None is allowed in.

Unknown Speaker: But I mean that was the proposal, to bring garbage in--

Mr. Finn: There was a proposal to bring it, as I recall, from the New York area.

I finally want to point out that if Michigan or the other states believed that this, that the Commerce Clause causes them burdens that they find unacceptable, that's a political question.

There are 21 states who have joined as amici with Michigan, and that creates 22 states or 44 senators who have the power to do something about this.

As Justice McKenna said in West v. Kansas Natural Gas, if there is to be any turning backward it must be done by the authority of another instrumentality than a court.

That is Congress has the responsibility to act in this matter, and it hasn't chosen to do so.

Unknown Speaker: --Well, a state... we had this problem in the last case.

The state legislatures don't elect their senators anymore.

Mr. Finn: I would hope that the states can exert a sufficient influence either through their populace, which seems to be the one that's, the populace seems to be objecting more than anything to the placement of landfills, and they are the ones that elect the senators.

And if they don't like it I think they can exert the political pressure to get a political change.

If there are no further questions, thank you very much.

Chief Justice Rehnquist: Thank you, Mr. Finn.

The case is submitted.

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

Attribution:

The OYEZ Project

Featured:

General Motors Corp. v. Romein - Oral Argument

Fri, 09 Jan 2009 14:49:36 +0000

Case:

General Motors Corp. v. Romein

Media File:

90-1390_19911210-argument.mp3

Related Transcript:

transcript.xml

Transcript:

Argument of Kenneth S. Geller

Chief Justice Rehnquist: We'll hear argument now in No. 90-1390, General Motors Corporation v. Evert Romein.

Mr. Geller.

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

Up until 1982, employees in the State of Michigan who reached retirement age with a job-related disability were entitled to collect workers' compensation benefits and retirement benefits, even though both workers' compensation benefits and retirement benefits were intended to compensate an employee of the same exact wage loss.

In many cases this allowed retired employees to earn more money after retirement than they would have earned if they had continued to work.

Now, needless to say, this so-called retiree problem was quite costly to employers and was considered by many government officials to be the single biggest liability to maintaining and attracting business to the State of Michigan.

The Michigan legislature responded to this problem in 1981 by passing a statute that authorized employers to coordinate workers' compensation benefits with various other benefits provided by employers.

Under the 1981 statute, which became effective on March 31, 1982, employers were allowed to offset workers' compensation benefits against the amounts that an employee was otherwise receiving from employer-sponsored wage replacement programs, such as pensions and Social Security.

Now a few years after the 1981 statute went into effect, the Michigan supreme court held in a case called Chambers... unanimously held that the coordination provisions applied to all payments of workers' compensation after March 31, 1982, regardless of when the employee happened to have been injured.

The court reached this conclusion by relying on the plain language of the 1981 statute, the structure of the statute, and the legislative purpose in requiring coordination of benefits in the first place.

Now, the Chambers decision was immediately attacked by employee groups in the State of Michigan, and efforts were made to overrule it legislatively.

Almost 2 years later, in May of 1987, the Michigan legislature passed a statute abolishing coordination of workers' benefits for employees injured prior to March 31, 1982.

But the legislature was not content simply to abolish coordination of workers' compensation benefits prospectively; they went much further.

The 1987 statute explicitly announced that the Michigan Supreme Court's decision in Chambers was erroneously decided, had erroneously interpreted the intent of 1981 legislature.

And to remedy this perceived error, what the Michigan legislature did in 1987 was to repeal the 1981 coordination provision retroactively and required employers to make refunds, with interest, to all employees whose benefits had been lawfully coordinated during the 5-year period that the 1981 statute had been in effect.

Now, petitioners did not challenge the 1987 statute to the extent that it affected the amount of workers' compensation benefits payable prospectively; but they claimed that the retroactive provisions of the statute violated the contracts clause and the due process clause of the Federal Constitution to the extent that it required employers to go back and reassess their workers' compensation obligations for the years 1982 to 1987 under a completely different set of rules than were in effect during that period of time.

The Michigan courts rejected these Federal constitutional claims, and we have renewed them in this Court.

Unknown Speaker: Mr. Geller, what is the contract exactly that you say was impaired?

Mr. Geller: The contract is the contract of employment between employers in the State and these employees.

Unknown Speaker: Well, if you look back at the original employment contract with people who were hired before 1981 who were injured and put on disability before then, I assume under the terms of the original program, there would be no coordination of benefits.

Mr. Geller: There was no--

Unknown Speaker: That was the original understanding.

Mr. Geller: --Well, there was no coordination of benefits at that time, Justice O'Connor.

That's correct.

Unknown Speaker: So how can that contract be impaired?

Mr. Geller: I think because the terms of the contract, we allege, Your Honor, are that employers will make workers' compensation benefits to disabled employees in whatever amount is lawful at the... during the period of time of disability.

After all, the amounts that may be lawful will vary in the future based upon what the legislature determines in light of existing events.

It may go up; it may go down.

The contract obligation is pay whatever the amount is that is lawful during every subsequent period of disability, and that was what we... what we assert was the contractual obligation and the contractual expectation.

Now, at the time that these employees became injured there was no coordination, but subsequently there was coordination, and the employers satisfied their contractual obligation by paying coordinated benefits during that period of time.

Unknown Speaker: Well, I think you could certainly argue that the contract was that of the original understanding between the employer and the employees, that they'd get what the law provided when the--

Mr. Geller: I don't think that can be argued in this case because the Michigan--

Unknown Speaker: --when they were disabled and started receiving the benefits.

Mr. Geller: --First of all, Your Honor, I think the terms of the contract are essentially a question of State law.

I don't think you can make that argument in this case because we know from the Michigan Supreme Court's definitive decision in the Chambers case that the benefits could go down as well as up, and that would be consistent with the contract.

Unknown Speaker: Well, for purposes of a contract clause assertion, is it purely a matter of State law or is there a Federal law component to what a contract is?

Mr. Geller: There is a Federal law component in determining whether the contract has been impaired.

You have to determine, of course, what the contract is in order to determine whether subsequent legislation impairs it.

And what we say is that the terms of the contract here, as is shown by the consistent experience in Michigan under the workers' compensation statute is that the employers are not promising to pay any specific amount in the future.

They have promised to pay whatever the amount is that is lawful for subsequent periods of disability, and that's of course exactly what General Motors did here... and Ford... between 1982 and 1987.

Unknown Speaker: Mr. Geller, are the respondents in this case members of a class?

Mr. Geller: No, this is not a class action, Your Honor.

Unknown Speaker: So when did each of these people go to work for General Motors and for Ford?

Mr. Geller: They went to work well before the 1981 statute was passed, although they did not become disabled, at least in the case of one of the respondents, until right before the 1981 statute was--

Unknown Speaker: What were the terms of their contract?

Was it--

Mr. Geller: --It was an at-will.

Unknown Speaker: --At-will contract?

Mr. Geller: Yes.

I think--

Unknown Speaker: When you say lawful, you mean the absolute minimum that could be required by law; is that correct?

Mr. Geller: --They satisfied their obligations during 19... during the period 19--

Unknown Speaker: That's what you mean when you say the contract was... what was lawful at the time.

Mr. Geller: --That's right, they satisfied completely their obligations under the existing law during that period of time.

Unknown Speaker: Were they represented by a union?

Was there a collective bargaining contract--

Mr. Geller: There was a collective bargaining agreement, yes.

Unknown Speaker: --Well, how could it have been at will?

Mr. Geller: The collective bargaining agreement covered terms and conditions of employment--

Unknown Speaker: I know, but I suppose it probably provided that you couldn't be fired except for cause.

Mr. Geller: --I suppose.

Unknown Speaker: You suppose that is an at-will contract?

Mr. Geller: I am not familiar with the specific terms.

There are people who--

Unknown Speaker: Well, don't say it's an at-will contract if it isn't.

Mr. Geller: --I think these employees may have been at-will employees.

There are other employees who are not.

I don't think it's relevant to the resolution of the case, though.

Unknown Speaker: So the essence of the contractual provision that you are arguing here is that the employers are liable to pay what's required for that pay period?

Mr. Geller: Exactly.

Unknown Speaker: And that contract is based on long tradition and usage in Michigan?

Mr. Geller: Yes.

It's based on that.

It's based on the fact that workers' compensation is simply one form of compensation that's paid to employees in return for their promise to work.

Every other term of the contract, unquestionably... every other form of compensation, I think we would all agree is pursuant to the contract.

Unknown Speaker: Well, there had been in Michigan some retroactive adjustments of workers' compensation benefits over very minor manners... matters and reaching back just one legislative session, or is that incorrect?

Mr. Geller: I don't believe so, Justice Kennedy.

I believe not.

Unknown Speaker: It had always been prospective?

Mr. Geller: Absolutely.

I think part of the problem in this case... this is an extraordinary... extraordinary statute.

I think it's important to emphasize the extraordinary nature of this statute.

Never before in the 75-year history of workers' compensation in Michigan and as far as we know, never before in the history of workers' compensation in any State has a legislature ever gone back, raised the workers' compensation benefits for past closed periods and imposed the obligation retroactively on employers to pay those benefits.

Now the... and never before in our view has this Court ever upheld a statute of that nature, a purely retroactive statute of that nature.

Now the respondents attempt to defend this statute by trading on an ambiguity in the word retroactive.

As Justice Scalia's opinion in the Georgetown Hospital case a few years ago noted, the word retroactive is applied to two quite different types of statutes.

One type of statute is purely retroactive in the sense that it changes what the law was in the past.

It reached... it reaches back and alters the past legal consequences of already completed transactions.

Now those laws are said to be retroactive in the primary sense of the term.

Now, other more common laws contain elements of both retroactivity and prospectivity.

They affect the future legal consequences of past events.

These laws are said to be retroactive in the secondary sense of the term.

Now respondents' briefs are full of statements suggesting that the Michigan legislature has frequently enacted retroactive laws in the workers' compensation area, and that this Court has frequently upheld such retroactive legislation.

But all of the instances that they rely on, without exception, involve laws that were retroactive in the secondary sense of the term.

In other words, the legislature had from time to time increased or altered the amount of workers' compensation benefits, payable prospectively, although it made those laws applicable to people who were... who had suffered preexisting disabilities.

Now that's a quite different type of law than we have in this case.

Unknown Speaker: Mr. Geller, may I ask, supposing in 1985 that the Chambers case had been decided the other way, then the company would have had to come up with the past-due money, but that would have been because the effective date--

Mr. Geller: That would have been on construction of the 1981 statute.

Unknown Speaker: --Now, what if the legislature, while the case was pending, had passed this very same statute and said, we don't want the supreme court to make a mistake, so we will say this is what we meant back in 1981 or whatever it was.

Would you have the same attack on that statute?

Mr. Geller: I think we would have the same attack, although I think our reliance interest would be marginally weaker because--

Unknown Speaker: Well, there is no difference in the reliance interest.

You withheld the money in both cases.

Mr. Geller: --Except that here we have a definitive construction of the 1981 statute by the Michigan Supreme Court.

Unknown Speaker: But you are challenging not just payments since 1985--

Mr. Geller: That's right.

Unknown Speaker: --but all the way back.

Mr. Geller: I think for the period from 1981 to--

Unknown Speaker: I don't see analytically how it would be any different if the statute had been passed just before the Michigan Supreme Court had acted.

Mr. Geller: --I think we would have much the same arguments.

I think our case is even stronger though, Justice Stevens, because we do have a definitive construction in 1985 of this law, and it was only 2 years later that the court... that the Michigan legislature says the 1981 statute didn't mean that--

Unknown Speaker: Well, there was some prompt reaction.

Mr. Geller: --but we know for a fact that it did mean what the Chambers court said.

Unknown Speaker: Wasn't there some prompt reaction to the decision?

Mr. Geller: There was a prompt reaction to the Chambers decision, but it wasn't until 19 months later that the statute was passed overruling it.

Unknown Speaker: Would you... supposing in '87 they just made the new law prospective... changed--

Mr. Geller: Yes, we would have no challenge to that.

Unknown Speaker: --It's just the... going back to '81?

Mr. Geller: In fact--

Unknown Speaker: Just going back to '81?

Mr. Geller: --'81, that's right.

In fact, the 1987 law, Justice White, was prospective and retroactive.

We have not challenged the prospective aspects of the law.

Let me just say in answer to Justice Stevens question that there was an immediate reaction to the Chambers decision, but the... the bills that were introduced in the senate and the house of representatives in Michigan did not all provide for retroactive liability.

The bills that were introduced in the senate provided only for prospective changes in the coordination rules, and it was not until 8 days before the bill was actually passed in 1987 that a conference committee agreed to put in this retroactive provision.

Now, the court below gave two reasons for rejecting our contract clause claim.

The first reason which took up only a single sentence of its opinion and was not otherwise explained was the assertion that workers' compensation benefits are not contractual and they are therefore not protected by the contracts clause against... subsequent legislative impairment.

We believe, and we have gotten into this a little bit already, but this is inconsistent with the undisputed facts concerning the nature of workers' compensation in Michigan and contrary to many cases that this Court construing contractual obligations under the contracts clause.

Now respondents don't deny that their relationship with the petitioners is contractual.

They're employees who were working under contracts of employment with Ford and General Motors, and under those contracts of employment they were entitled to many different types of compensation.

Unknown Speaker: But, Mr. Geller, under this argument wouldn't the 1981 act have been retroactive the way you are arguing it?

Mr. Geller: No, the 1981 statute was prospective only.

In other words, it only dealt with--

Unknown Speaker: It had adjusted rights that had accrued for already retired employees, didn't it?

Mr. Geller: --Once again, it gets to the question we were talking to Justice O'Connor about, what was the nature of the contract?

We say that the contractual understanding was that employers would pay for every period of... subsequent period of disability, the amount that was determined to be the lawful amount to pay for workers' compensation benefits.

Now, the 1981 statute was prospective only.

It changed what the lawful amount was in workers' compensation.

Unknown Speaker: It was a lesser amount than it had been before.

Mr. Geller: It was a somewhat lesser amount, and General Motors and Ford paid that amount lawfully during the period between 1982 and 1987.

The distinction--

Unknown Speaker: Mr. Geller, you take the position that these workmen' comp benefits are in effect contractual?

Mr. Geller: --We do.

We take that position--

Unknown Speaker: And yet the State court found they were not--

Mr. Geller: --Well, the State court--

Unknown Speaker: --part of the contract, as a matter of State law.

Mr. Geller: --Well, it's not clear, Justice O'Connor.

The State court had a sentence in its opinion--

Unknown Speaker: Well, what if we think that's what they meant, that as a matter of Michigan law, that isn't part of the contract.

Now you want us to find as a matter of Federal law that it is?

Mr. Geller: --Yes, and I think you can for two reasons.

One is there are many, many decisions of this Court which we have cited in our brief in which this Court has said that whether or not something is a contract and therefore subject to the protections of the contracts clause is a Federal question.

And this Court has in the past disagreed with statements by State courts that things that look like contracts were not in fact contracts.

Secondly, we don't have a reasoned decision of the Michigan Supreme Court explaining why this is not a contract, and in fact, its statement that this is not a contract is inconsistent with prior decisions of the Michigan Supreme Court in cases like McAvoy and Selk, which have said that the obligation of employers under the workers' compensation statute in Michigan is contractual.

So for those two reasons we think that it's a question for this Court to decide.

Unknown Speaker: Mr. Geller, I have this problem.

It seems to me that whatever else the contracts clause is meant to do it is certainly meant to protect expectations, and I don't really see that you had any expectations here.

As far as you knew, when you went into a contract to pay whatever Michigan shall say you will pay in the future, not just during the term of employment, but even after he leaves employment with a disability, Michigan can kick it up as high as it likes, right... prospectively?

Mr. Geller: Yes, but I think--

Unknown Speaker: So prospectively, retrospective.

I mean, I don't see how any of your contractual expectations have been disappointed.

You had no contractual expectations.

Mr. Geller: --I think we... Justice Scalia, I think there is a substantial difference between the situation where in the future the amount might be increased, might be decreased.

We can take that into account in deciding what other types of compensation to pay, how to measure the cost of our product.

That's quite different than saying--

Unknown Speaker: There is a difference.

There is a difference--

Mr. Geller: --Yes.

Unknown Speaker: --but I am not sure the difference relates to contractual expectations.

Mr. Geller: Well, if you assume--

Unknown Speaker: I mean, it may be a due process claim, but I don't see how it's a contracts clause claim.

Mr. Geller: --Well, we also have a due process claim--

Unknown Speaker: I know you do make that.

I have trouble squeezing it under the contracts clause, which I usually think is meant to protect, you know, by God, I have a contract, and your contract says nothing but I will pay whatever Michigan says I will pay, and they say to pay more--

Mr. Geller: --Exactly, and Your Honor, that's exactly what the employers in this case did between 1982 and 1987 they paid the exact amounts that Michigan had said they were obligated to pay under their workers' compensation obligations, and they took that into account in making a number of business decisions as to what their expenses were during that period.

Unknown Speaker: --Oh, but they didn't know under 1985 that they'd made the right calculation.

For 4 years there they were... I mean, they proceeded perfectly lawfully, but you can't say they were darned sure they were going to win.

Mr. Geller: They weren't darn sure, Your Honor, but they looked at the plain language of the 1981 statute, which draws no distinction between people--

Unknown Speaker: No, but it bumps into a presumption against retroactively reducing benefit--

Mr. Geller: --But Your Honor, you have to look at the reason why the legislature in 1981 passed this coordination of benefits provision, and I think the Michigan Supreme Court in Chambers asked that question.

They did it because the employers in the State were facing extraordinary obligations to pay workers' compensation as well as these other types of employer-financed benefits.

It would have made no sense to say that the coordination provision provided... applied only to people who had got disabled after 19... March 31, 1982, because that would have saved, at least at the outset, an infinitesimal amount of money.

The only way that the legislature could have achieved the purpose of the 1981 statue was to make that statute applicable to all payments of workers' compensation payable after March 31, 1982, regardless of when the employees were disabled.

But the employees were willing to take the chance that that was a correct interpretation of the statute.

Their reliance was found to be completely justified by the united... unanimous decision of the Michigan supreme court in Chambers.

Unknown Speaker: --Mr. Geller, didn't the '81 statute increase... although it let the pension payments be offset against the workmen's compensation, didn't the level of workmen compensation payments go up?

Mr. Geller: Not in 1981.

They had... in 1980.

In 1980, Justice White, there had been other amendments to the workers's compensation statute.

Now the effect of those amendments was that for some class of employees it increased the amount of workers' compensation--

Unknown Speaker: But not for people who were hurt before?

Mr. Geller: --No, that's not true, Your Honor.

In 1980... let me say this to begin with.

The other side and the Michigan Supreme Court tries to draw a nexus between the 1980 and 1981 statutes, and they have conjured up this notion that the 1981 statute was in fact a way of dealing with the problem caused in 1980, and that it was a trade-off and that people who didn't get benefit increases in 1981... in 1980, were not subject to coordination in 1981.

There is absolutely no evidence for the notion that there was a nexus here.

There's no suggestion that the 1981 statute was tied to the 1980 statute, but let me say this--

Unknown Speaker: So that... you say that the workmen's compensation payments that were due to... after 1981, that were due to employees who were hurt before were the same as the workmen's compensation payments for employees who were hurt after 1981?

Mr. Geller: --The obligation to coordinate was exactly the same and people who were injured prior to 1980 did get an increase in benefits in 1980.

Unknown Speaker: You didn't answer my question.

The workmen compensation payments were at the same level for both classes of people?

Mr. Geller: No.

No, they may or may not have been.

There was a different system in place for calculating workers' compensation benefits after... for people who were injured after 1982 and in some cases it increased benefits and in some cases it didn't.

But my view is that there was--

Unknown Speaker: How about those hurt before 1981?

Mr. Geller: --People who were hurt before 1981 were entitled to get supplemental workers' compensation benefits under a statute passed in 1980, and some of these benefits were very substantial and led to increases of up to 85 percent in their benefits.

And those workers' compensation benefits, Justice White, those supplemental benefits, were not subject to coordination.

So it is not the case that people who are injured prior to 1982 were much worse off in terms of the amount that they collected than people who were injured after 1982.

But the salient point is that there is no nexus because the 1981 and 1980 statutes, and there was not a tradeoff.

Now if we are right... let me see if I can explain why we think workers' compensation benefits in Michigan are contractual by just using one hypothetical here.

If the Michigan statute had said every employer who enters into a contract of employment in the State must include the following terms in the contract, and they thereafter set out the terms of the workers' compensation package, I think it would be easy for everyone to see why that became part of the contract.

Now, what we suggest is that the situation in Michigan was indistinguishable from that.

What the State of Michigan has said is that if you wish to enter a... into a contract of employment in the State, you must offer your employees at least the following compensation in cases of job-related disability--

Unknown Speaker: Would you say the same thing about a minimum wage statute, that that's contractual too?

Mr. Geller: --Mr. Chief Justice, we would.

If an employer and an employee entered into a contract to pay the minimum wage in return for work and if 5 years later the State decided that the minimum wage had been too low and raised it retroactively, we suggest that there would in fact be a substantial... in addition to due process challenge... contract--

Unknown Speaker: So that all this government regulation of conditions of employment become contractual really--

Mr. Geller: --No, Your Honor, I think many regulations are in fact just that, a regulation of the employer, and it's irrelevant whether the employer has contracts of employment or whatever.

But the workers' compensation scheme is quite different.

There must under Michigan law be a contract of employment.

The employer is not obligated to pay workers' compensation except in return for work that is done by that employee.

It is one form of compensation.

Every other form of compensation works its way into the contract, and we say that that is the case with workers' compensation as well.

I might say that if the State of Michigan could do this, it could decide for example that the minimum wage law, as the Chief Justice suggested, was too low during the period 1982 and 1987 and it could pass a statute retroactively increasing the amount of minimum wage and make the employer pay the difference with interest, which is what happened here.

Unknown Speaker: --No, but this is... workmen's compensation is a little different because you got a private... anyway, supposing they added a new kind of injury they hadn't included and said that we've just learned that there are a lot of injured former employees of the automobile companies out there who were injured by a certain kind of exposure to something in the plant and we therefore want to retroactively have compensation for them.

Would that be permissible?

Mr. Geller: I think it might well raise problems under the contracts clause, although the reliance interest--

Unknown Speaker: It would be pretty close to the coal miners' case, wouldn't it?

Mr. Geller: --But you know the Turner Elkhorn case, Your Honor, which was not, of course, a contracts clause case, was a law that was retroactive in the secondary sense only.

It did not go back and impose new obligations for past periods of time.

All it said is that henceforth you have to pay workers' compensation to a particular category of employees.

So it was not at all like the... that's why I said earlier, this is an extraordinary type of law, and I don't know that this Court has ever, ever upheld a decision... a statute of this type.

Unknown Speaker: But if seems to me if you have contracted to pay whatever Michigan law says in the future, even after the person has left your employment, that's what you say the contract is... we'll pay whatever Michigan says in the future... why can't you have promised to say we will pay whatever Michigan says we should pay in the future including, if Michigan changes its mind and goes back and decides that we should have paid more for some earlier period.

Mr. Geller: If there--

Unknown Speaker: I mean, if you buy into some of Michigan law--

Mr. Geller: --Well, because I think--

Unknown Speaker: --why can't you buy into all of Michigan law--

Mr. Geller: --It's a question--

Unknown Speaker: --in which case there's no contracts clause violation.

Mr. Geller: --It's a question, Justice Scalia, of what the contractual expectations are.

now if there had been a history of that sort of legislation, I think that there would be a stronger argument.

But as I was saying--

Unknown Speaker: There always has to be a first time.

Mr. Geller: --Well, I think the question is whether on the first occasion, that it can be imposed retroactively, in light of the reliance interest.

Now even if we are wrong in our contracts clause challenge, let me spend a few minutes on the due process clause, because the due process clause independently imposes substantial limits on the State's ability to retroactively enact civil legislation.

And once important... once again, I think it's very important to distinguish between the two types of retroactive legislation mentioned earlier.

There are many cases of this Court upholding legislation that was retroactive in the sense of imposing future legal consequences on past events.

All of the cases that respondents rely on, such as Turner Elkhorn, fall in that category.

But the Court has taken a quite different approach when dealing with statutes that are retroactive in this primary sense, statutes that change the law in the past, that changed the past legal consequences of past events.

In that type of case, the Court has upheld retroactive statutes against the due process challenge in only two situations that we are aware of.

Now, the first situation which usually arises in tax cases, is where Congress has imposed a short period of retroactivity to prevent people from rearranging their affairs to evade pending legislation.

The Gray case is a good example of that.

That's certainly not our case here.

We are not dealing with a short period of retroactivity to evade pending legislation.

Now, the second type of case involves so-called curative legislation.

The Court on several occasions has upheld retroactive statutes that cured inadvertent technical defects in prior legislation... the Heinszen case, for example, where there was a tariff in effect, but there was a technical defect in it, and Congress reenacted the tariff and made it retroactive to the date of the original tariff.

There's no problem in that type of case because it doesn't destroy any reliance interests.

Such laws can't upset any settled expectations because they in fact reaffirm what everyone always thought to be the law.

On the other hand, this Court has said that retroactive laws that represent changes in legislative policy can't be imposed retroactively because of the fundamental unfairness of imposing new rules of conduct on people who've had... who've engaged in past completed transactions under different rules of law.

And the classic case for this type of retroactive legislation is the Forbes Pioneer case, where the case tried to enact a toll and make it retroactive 4 years to a time when a ship had passed through the canal thinking that there was no toll.

Now, with these as the relevant categories, we think it's easy to see where the 1987 statute falls.

The State of Michigan in its brief concedes the 1987 statute was plainly just a change in legislative policy, was not a curative law intended to remedy an inadvertent defect.

It changed the law during a 5-year period of the past.

There were many, many settled transactions during that 5-year people that were completely upset--

Unknown Speaker: Had the legislature passed resolutions earlier saying they had never intended the result that the supreme court of that State--

Mr. Geller: --Yes, in 1982, Justice O'Connor, the legislature had passed a resolution saying they didn't intend the 1981... but there are two things to be said about that.

First is, those resolutions had no retroactive... aspects to them.

They were intended to operate only prospectively.

And second and more importantly, in 1982 the legislature defeated a bill... defeated a bill that would have amended the 1981 statute to make it apply only to people who were injured after March 31, 1982.

So I think that's another reason why the employer--

Unknown Speaker: --That's probably because it wouldn't have taken care of the people from '81 to '82, isn't that right?

Mr. Geller: --Perhaps not, but it would have taken care of a large percent of the people.

Your Honor, if there are no further questions, I'd like to reserve the balance of my time.

Unknown Speaker: Very well, Mr. Geller.

Mr. Sachs, we will hear from you.

Argument of Theodore Sachs

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

The appeal to the contract clause is an extraordinary one, particularly in that it does not avail the petitioners at all, and I think it's important to get the facts and history straight.

Mr. Romein and Mr. Gonzalez, like other employees or former employees similarly situated, had worked for decades for these employers.

During the entire time of their employment and other similarly situated employees the Michigan workers' compensation statute forbade, expressly prohibited any kinds of setoffs or coordination, as it is currently called.

These respondents, Mr. Romein and Mr. Gonzalez, worked through their course of employment until Mr. Romein was disabled in 1977 in serious injuries.

I misspoke myself, Mr. Romein.

Mr. Gonzalez was disabled from silicosis in 1981.

Through all of these decades until the moment they were injured and became disabled Michigan law expressly prohibited any kind of setoff or coordination.

During this time, moreover, contrary to petitioners' statements, there was not a statement under Michigan law that there was a contract of any variety.

There are several Michigan cases, they are cited in our brief, in which the court said precisely the opposite.

And indeed, ironically, when General Motors argued to the Michigan Supreme Court in the Chambers case, it made precisely the argument that Michigan did not respect workers' compensation as an aspect of contract.

And we have appended the General Motors' brief in the Chambers case as appendix A to our own brief here, showing that General Motors's position at that time was diametrically opposite to the position asserted here.

The Michigan Supreme Court had never... I'm about to overstate it.

Prior to 1943 the Michigan statute was elective.

After that time it was compulsory and then in the recent cases of the court, the court recognized that it was compulsory.

Employers had no options to modify this law at all.

They could not agree to any changes.

They could not vary anything.

There was no right of contract.

There was no mutual assent.

There was no knowledge required.

And with respect to the characterization by the way that this was at-ill contract insofar as these employees are concerned, that was, of course, not the case.

These employees were members of the UAW bargaining unit--

Unknown Speaker: I suppose the people who were complaining were already retired and not employees any longer.

Mr. Sachs: --That is precisely correct, Your Honor, because what--

Unknown Speaker: And I suppose the union probably didn't have any interest in what GM did to these former retirees.

Mr. Sachs: --I wouldn't go that far, with all due respect to Your Honor--

Unknown Speaker: It must not have been a bargainable issue.

Mr. Sachs: --It was not a bargainable issue, and under the law of this Court it could not have been a bargainable issue because once these employees retired, they ceased to be employees by definition.

And accordingly when the 1981 amendments occurred, these were no longer employees who would have had any employment contract into which to incorporated the workers' compensation, quotes, "contract".

So the argument is extremely paradoxical.

The claim is made that we have a contract.

What's the contract?

Well, the contract you are told is anything the legislature says in the future.

Now, that's a--

Unknown Speaker: I think the claim is that it was the prior contract, that the term of the prior contract when they were employed was that the employer would pay to them in the future whatever the then-applicable Michigan law required.

Mr. Sachs: --I understand that, Justice Scalia.

Unknown Speaker: And it makes sense, whether you accept it or not.

Mr. Sachs: Well, Justice Scalia, of course, I don't accept it, and of course there is nothing in the Michigan case law or the Michigan statute which supports any such interpretation.

The courts... the Michigan court has rejected generally the notion that there is any kind of contract.

It certainly therefore did not upset... accept a subset, a promise where there is no promise at all that employers will be obligated to accept anything that comes down the pike in the future.

That's the last thing in the world the legislature would have intended or that employers would have been agreeable to.

So that when in 1981 the, quotes, "coordination" was agreed to as a part of a general accommodation of values by the legislature and policy judgments are made on the one hand to increase workers' compensation benefits prospectively, in part to be financed through the resources of the coordination, but dealing only with future injuries, that is a determination made in the legitimate policy judgment of the Michigan legislature, not as a matter of contract, but obviously in the exercise of its police powers regulating the workplace in this important area.

This Court recognized in 1917 that this was the legitimate exercise of police powers of the State to protect the serious interests that are involved.

Unknown Speaker: Suppose they did with the minimum wage.

Suppose Michigan just said, we have had a few years of good prosperity, the auto companies are doing pretty well, we're going to say that the minimum wage you should have paid 5 years ago is going to be raised and you should pay everybody in cash the difference.

Is that lawful?

Mr. Sachs: The answer to your question, Your Honor, would depend upon all the facts and circumstances under due process scrutiny--

Unknown Speaker: I know--

Mr. Sachs: --not under contract scrutiny.

And the issue there for example, to expand on--

Unknown Speaker: --I don't want to argue with you.

Are you going to deal with the due process arguments later?

Mr. Sachs: --Yes, I will.

If--

Unknown Speaker: You will answer this question then.

Mr. Sachs: --I hope to, Your Honor.

What happened when the judgments and accommodations were made in 1980 and 1981, contrary to the suggestion of counsel, was not that there was any fat increase of benefits for the workers who were already retired.

There was a nominal so-called supplemental increase, payable by the State, not by employers, which by case law has been generally inapplicable to virtually everybody who might otherwise be affected and is insignificant in its application.

But let's take the history a little further so we get this factual context straight.

What happened was in 1982, when General Motors and Ford, apparently alone, took on this aggressive posture of trying to interpret the statutory amendments as other employers were not doing, including their competitor Chrysler, to say that this was retrospective as to people who were injured prior to 1981, the legislature responded with resolutions which said that it was never the intention of this legislation to deal retroactively as to these people who were previously injured.

And I do not recall the history that counsel recites that there was a failure in the legislature to enact new legislation.

There was no reason for the legislature to enact new legislation.

They enacted the resolutions.

Then, throughout the entire administrative process which followed, throughout the entire lower court judicial process that followed, the position of General Motors and Ford were consistently and universally rejected.

It was not until the Michigan Supreme Court spoke in 1985 that General Motors prevailed and it prevailed again, on arguments diametrically opposed to the arguments which are being made here.

There was immediate revulsion, and I don't think that's an overstatement, to the decision that the court had reached because it was--

Unknown Speaker: Immediate revulsion on the part of whom?

Mr. Sachs: --On the part, I think, of people generally, certainly on the part of the legislature, on the part of the former Governor who had sponsored the coordination proposition in the first place, the administrative officers who had administered it and had sponsored it as well, as far as the public generally.

And indeed, the author of the opinion in Chambers concluded within weeks, following on a motion for rehearing, that the methodology of the court was wrong and that she had erred and she acknowledged harsh and unforeseen circumstances.

This is part of the decision in the Chambers case in terms of what was then a denial of rehearing.

Now contrary to the suggestion that there is a 2-year period as I heard counsel say, what immediately happened was that it within weeks, there was legislation which was introduced into the house.

By January of 1986, within 4 or 5 weeks after the introduction of that legislation, it had passed the house of representatives in Michigan, which did exactly what the law ultimately enacted did.

So... and what was involved there, counsel decries understandably the retroactivity, but what the legislature was seeking to correct was retroactivity, because this was the first time in some 75 years in the history of the Michigan statute that there ever had been a cutback in workers' benefits, whether retroactively or prospectively.

He errs, with all respect, when he says there has not been... there had not been, rather... retroactive legislation or amendments to the workers' comp act affecting employers.

They are assembled in footnote 1 of our brief.

The Court had several times spoken retroactively in a primary sense, as well as a secondary sense, in making adjustments where there was a conclusion that such adjustments were necessary.

And the Michigan court, in the Lahti case and the Rookledge case and several other cases mentioned there, had acted in that form.

So that what this was all about, to make a long story short was that--

Unknown Speaker: Those were upward adjustments?

Mr. Sachs: --I beg your pardon, Your Honor?

Unknown Speaker: Those were upward adjustments, the primary retroactivity cases?

Mr. Sachs: Yes, Michigan Supreme Court.

Unknown Speaker: Upward for how long?

Mr. Sachs: Oh, I'm sorry.

I misunderstood your question, Your Honor.

Unknown Speaker: Excuse me, retroactive for how long?

Mr. Sachs: There were... can I be more specific, please?

First of all, there was an increase in compensation periods for health and welfare benefits.

That was the Lahti case.

There was originally a 24-month limit.

The court extended that to later times.

The Selk case involved retroactivity regarding previously unpaid interest on workers' compensation award.

The Rookledge case, which we discuss in the footnote, dealt with the issue of whether an injured worked had to make a binding election as to whether to accept workers' compensation or, alternatively, to sue a third party tort-feasor.

Unknown Speaker: Well, did any or all of those statutes you mentioned have the effect of reopening past pay periods?

Mr. Sachs: There isn't... no, not as such, Your Honor, because there is no such thing under the Michigan statute as a closed period.

The statute through all of the decades involved here--

Unknown Speaker: Did it require a retroactive calculation and payment for past months?

Mr. Sachs: --No, because, Your Honor, there never had been an occasion before--

Unknown Speaker: Then why do you say there was primary retroactivity in the sense that the petitioner's counsel describe it?

Mr. Sachs: --As I was just starting to explain, in the Rookledge case, for example, where an election had previously been required as between accepting a workers' comp benefit or suing a third-party tort-feasor, the legislature declared that that election was no longer required by an amendment to the workers' compensation act.

And the Michigan Supreme Court construed that to be retroactive to causes of action which arose prior to the amendment, thereby reactivating a claim which had previously been waived.

So that in--

Unknown Speaker: That didn't require any increased payments on the part of the employer--

Mr. Sachs: --No, Your Honor, that's correct, it did not.

This was the first time--

Unknown Speaker: --That would be simply like waiving a statute of limitations, which we have held is permissible.

Mr. Sachs: --No, Your Honor, it was... I've... yes, I know you have so held, but what it is, what the court had said in the earlier cases was that the election was a fatal one, not statute of limitation, but a permanent and irrevocable election, and the court in effect reinstated a claim that did not previously exist.

More pertinently to the present circumstances, the reason why the action was taken here and had in the legislative judgment, which I suggest is the dispositive fact, had to be taken here was that this was the first time in 75 years where the legislature, at least as construed in the opinion in the legislature, misconstrued by the Michigan Supreme Court, had reduced benefits.

And the only way that could be dealt with if it was going to be rectified was responding to the particular action which had occurred.

What I was starting to say earlier, Justice Kennedy, was that section 831 of the act, which existed through all of this period, said that, quotes,

"Neither the payment of compensation or the accepting of the same by the employee or his dependents shall be considered as a determination of the rights of the parties under this act. "

So that there could be no claim of reliance, the act expressly foreclosed that possibility because payment itself or the receipt of benefits was nondeterminative.

If I may, I want to zero in on the extraordinary proposition that's urged by General Motors and Ford, under contract clause theory they say, that what the Michigan legislature has said not only is workers' compensation a contract when the Michigan law is quite to the contrary, but also it's a contract which accepts anything that occurs down the road.

That I would suggest, reduces the contract clause claim to utter incoherence.

The theory of... the original brief's theory was that there was a contract clause claim because it's supposed to incorporate all of this other external law.

But that is the existing external law.

One doesn't incorporate law that comes down later and make a contract claim theory.

Then in turn, when these injured workers ceased to be employees there is no employment contract into which to incorporate their claim.

And if, then, the claim is that the contractual theory is that we accept anything that comes down later, that reduces us all to nonsense because ultimately what they are saying is, as phrased in your question, Justice Scalia, the last enactment is what the employer has promised long ago to abide by.

Well, that hardly is the notion or concept or purpose of the contract clause, which is supposed to, in petitioners' view and at least in the history, to give some confidence in terms of reliance and expectation.

There is no expectation; these petitioners can hardly claim to be able to plan their affairs if they are going to be vulnerable to whatever the Michigan legislature does much later.

Unknown Speaker: Mr. Sachs, the petitioner in his argument said he thought his strongest case was the Forbes case, and in the petitioners' brief that case is mentioned three times.

You do not mention it at all in your brief.

Do you have any response to it?

Mr. Sachs: I don't think Forbes is applicable here, Your Honor.

Forbes was simply a case of retroactivity without any equitable justification... increasing tolls several years earlier.

That's not the case that we have here.

What we have here is a specific response to a judicial decision deemed to be misconstrued, and whether or not accurately misconstrued... and we suggest that it was... correcting harsh and unexpected developments which occurred.

Now, that's a classic case in which retroactivity has occurred.

The classic instance, indeed, are the Portal-to-Portal cases, decided by hundreds of courts.

Hundreds... literally hundreds of Federal courts, hundreds of Federal judges, unanimously saying that in that instance it was perceived that the decision of this Court in Mt.

Clemens Pottery upset settled expectations as the interpretation of the Fair Labor Standards Act.

And there, General Motors and Ford led the litigants in reaching back, to use their phrase, 9 years to correct what was perceived to be a misconstruction of the Court with unexpected consequences.

Unknown Speaker: That was an act of Congress, wasn't it?

Mr. Sachs: That was an act of Congress, but in terms of due process analysis, which concededly was involved there, there was found to be no problem--

Unknown Speaker: And it never came to this Court?

Mr. Sachs: --Well, this Court denied certiorari hundreds of times and as one court said, well, customarily, denial of certiorari imports nothing as to the meaning on the merits.

The assertion, at least of that appellate court was that when it's denied hundreds of times, perhaps it has some greater significance.

Learned Hand, among many other distinguished jurists, found no difficulty in the conclusions reached.

And again, General Motors and Ford were arguing exactly the opposite.

Moreover, Your Honor, in terms of due process analysis, and I do want to be responsive to Justice Scalia's earlier question, it seems to me that the holdings and the reasoning of Turner Elkhorn and of PBGC and Sperry, as well as the Portal-to-Portal cases, conceded... the latter, concededly, not by this Court, are really dispositive here.

There has to be a way, and it has been recognized repeatedly in the decisions, to deal with errors which occur along the way or with conditions which were not anticipated and require attention.

The black lung cases are a classic example.

That--

Unknown Speaker: Mr. Geller says they are not retroactive in the same sense as these.

Mr. Sachs: --I would concede that, Your Honor.

They were not retroactive in the sense of being curative, but that makes the point.

There, this Court upheld legislation where there was plainly a change in policy by the Congress.

The Congress concluded that because of the long period of latency of the black lung disease, the prevalence, the seriousness of the problems which were not apparent, it made appropriate sense in terms of the adjustments of the benefits and burdens of economic life to use the court's phrase, to impose liability, not as a matter of contract, but as a matter of the judgment of the Congress in that instance to impose liability on employers with respect to what these employers called completed transactions, namely employees who have long since terminated their employment but for whom an obligation is imposed.

PBGC said essentially the same thing.

There was retroactivity there, not only in the so-called window period of a few months before the enactment of the multi-employer pension plan amendments act, but also in effect, imposing liability going back decades as to employers who had never assumed pension liabilities at all in the sense of having to fund what were theretofore unfunded liabilities.

So that in Turner Elkhorn and in PBGC, we have not curative, but straight retroactive legislation as to which there is no problem.

This Court has found no problem.

Unknown Speaker: So your answer to the minimum wage one is that's okay.

You can--

Mr. Sachs: The answer to the minimum wage is that it is not necessarily okay.

The retroactivity might or might not be acceptable, dependent upon the purpose that it may be perceived by the legislature in reaching that conclusion.

Just as the legislature may make judgments, Your Honor--

Unknown Speaker: --They decided they didn't give them enough money, that's all.

They decided we should have given them more money.

Mr. Sachs: --I think that may be questionable under those circumstances if there is not more involved.

There is obviously minimum scrutiny.

There has to be deference.

Under the Court's holdings, there is a presumption of constitutionality, and all of that is at play.

But then one has to inquire as to the circumstances under which that may be done.

There may be, there conceivably can be circumstances where there can be that retroactivity.

There may be circumstances where its inappropriate.

This Court found in Spannaus an inappropriate circumstance--

Unknown Speaker: Are you equating the contract clause with due process--

Mr. Sachs: --No, Your Honor.

I--

Unknown Speaker: --When you said there was minimum scrutiny, are you talking about the due process clause?

Mr. Sachs: --Yes, Your Honor.

Unknown Speaker: Not the contract clause.

Mr. Sachs: That's correct.

Unknown Speaker: But Spannaus was a contract clause case.

Mr. Sachs: You're absolutely correct, Your Honor.

Of course, when this Court has applied the elements of energy reserves and come to the question of legitimacy of public purpose and the appropriateness of the means applied, there has been a deferential standard, and therefore some minimization of scrutiny in those circumstances, particularly in an extraordinarily, highly regulated area such as workers' compensation.

There is a particular need in the area of workers' compensation to be able to deal with retroactivity, just as the States have to be able to deal with it, just as Congress did it in the black lungs case.

As medical science developed, as increasing problems are realized in terms of the latency of diseases and prolonged development, there has to be an ability to relate back and to deal with those.

There equally has to be an ability to deal with the problems which arise in terms of the imperfect expression in the legislation or where harsh and unforeseen consequences occur, as occurred here.

The briefs of the United States amicus in this case, the brief of the Council of State Governments' amicus in this case develop I think extremely well and at length--

Unknown Speaker: The way... I mean, I don't know what you mean by there has to be some way to solve the problem.

Michigan could have solved the problem.

They could have taken Michigan funds and paid these people more money.

They could have said, gee, we made a terrible mistake, it's our fault, here, here is some more money.

The only question is whether this employer should be hit with it, that's all.

Mr. Sachs: --Your Honor, that is correct.

That was an option, but it was not a required option, which is the key.

Unknown Speaker: Tell me it's necessary in some absolute sense to correct and dispose--

Mr. Sachs: No, I am not suggesting in an absolute sense, Your Honor, but I am suggesting that in the legislative judgment as to what was moral and to correct terrible injustice here and terrible hardship and a thoroughly unexpected development, the legislature deemed it appropriate to do all that it did do, which was to restore the status quo ante.

It recreated the original expectations, if there were expectations, of everybody affected.

It imposed no greater liability on Ford and GM than they had any legitimate right to expect in the first place.

The relief granted was surgically tailored--

Unknown Speaker: --Mr. Sachs, isn't the Chambers opinion of the Supreme Court of Michigan a pretty fair characterization of what they had a legitimate right to expect?

Mr. Sachs: --Your Honor--

Unknown Speaker: That's the opinion of the highest court in the State saying what the legislature meant.

Mr. Sachs: --It was... the Michigan Supreme Court applying a rule of construction and no more, has, by its own acknowledgement, concluded that because the legislature had not adequately indicated an intention not to apply to previous injuries, that the act would not be construed to exclude the application to those injuries.

Unknown Speaker: Well, that's just a long way around of saying, they construed the law and... as to what the law meant and they are the final authority.

Mr. Sachs: Not the final authority, with all respect, Mr. Chief Justice, because then there is another case before the Michigan Supreme Court, namely this case.

And in the interim the Michigan legislature has spoken, and the Michigan legislature--

Unknown Speaker: You're talking then about another law, not the law that the Michigan Supreme Court construed in Chambers.

Mr. Sachs: --I am talking now about the current law, Your Honor.

Unknown Speaker: Yes.

Mr. Sachs: And my point is, that when the Michigan Supreme Court, having seen what the legislature did in 1987 and concluding that as a matter of State law, whether the Michigan Supreme Court like... deemed that consistent with its own ruling or not, concluded that as a matter of Michigan law, the legislature had the right to repair the damage that was done the first time.

Unknown Speaker: But that's quite a different point than saying Ford and GM had no expectations whatever based on the 1982 statute, because the Supreme Court of Michigan wouldn't have construed that statuted; it conformed them.

Mr. Sachs: Clearly, Your Honor, they had no expectations based on the Chambers decision, which didn't come down until 1985, the last day in 1985.

For all the years preceding that, every expression, legislative, administrative, and lower court, was contrary to their position.

So there could have been no claim of reliance.

They knew as well that all of their competitors, that the rest of industry and others, interpret it differently.

So they... whatever view they were asserting was a controversial view and not based on any expression by the highest court.

The decision to which Your Honor relates again, only came at the end of 1985, some 16 months before the new legislation was adopted and only a few weeks before the house spoke.

So there was never a period when General Motors and Ford had any legitimate reason to believe that this matter was final until the legislature indeed finally spoke.

Prior to December 1985, this was a matter that was highly contested, with every authority dealing with the matter rejecting their view.

Afterward, the legislature in one house had spoken, the matter was in ferment, and finally the legislators... the legislature spoke, with the Michigan Supreme Court concluding that they had the authority to do so.

This is, in the final analysis, a matter of State determination, the exercise of its judgment.

Counsel began by talking about whether the legislature originally had authority to reach this accommodation?

Of course it did.

It could have concluded that there should be offset, it could have concluded, as it had for decades before, there should not be offset.

It made that judgment.

It made that judgment in the exercise of its police powers.

Counsel points to workers' comp, but under the theory of contract which they urge, they would have to, in quotes,

"incorporate OSHA laws, EEO laws, labor laws, minimum wage laws, ordinary labor laws. "

There is no law which effects the workplace which under their theory would not be incorporated.

And where does that lead?

That, under a contract theory, under their theory, there is absolutely no distinction between contract and due process.

That's not the law of this Court.

It's not the law of Michigan.

It has not been the law anywhere, and there is no justification for that position.

For those reasons, unless the Court has questions, I would conclude.

Thank you, Mr. Chief Justice.

Unknown Speaker: Thank you, Mr. Sachs.

Mr. Geller, you have 1 minute remaining.

Rebuttal of Kenneth S. Geller

Mr. Geller: Just a few things, Mr. Chief Justice.

To begin with, Mr. Sachs claims that he is unaware of the fact that the legislature in 1982 defeated a bill that would have made the 1981 statute applicable only to people injured after 1982, but I would refer the Court to page 43-A to the appendix to the petition, footnote 24, where that... the defeat of that bill is mentioned.

Secondly, Mr. Sachs spent almost none of his time on the due process clause today.

The Chief Justice asked him about the Forbes case.

What he said about the Forbes case is that this Court held that statute unconstitutional because it was not rational, but it was plainly rational to require people to pay for passage through a canal.

Why should they get... why should they go through a canal for free?

The statute was struck down, not because it wasn't rational to charge people for going through a canal, but because the statute completely destroyed reliance interests of people who had gone through the canal thinking that it was toll free.

That's why it was struck down.

And the basic notion of due process is fundamental fairness and one of the basic notions of fundamental fairness is notice, and that's what we are arguing for here today.

Now we claim that General Motors--

Unknown Speaker: Thank you, Mr. Geller.

Mr. Geller: --Thank you, Mr.--

Chief Justice Rehnquist: The case is submitted.

Attribution:

The OYEZ Project

Featured:

Healy v. The Beer Institute - Oral Argument

Sun, 06 Feb 2011 03:47:07 +0000

Case:

Healy v. The Beer Institute

Media File:

88-449_19890328-argument.mp3

Related Transcript:

88-449_19890328-argument.xml

Transcript:

ORAL ARGUMENT OF ROBERT F. VACCHELLI ON BEHALF OF THE APPELLANTS

Chief Justice William H. Rehnquist: We'll hear argument now in No. 88-449, John Healy v. The Beer Institute; No. 88-513, Wine and Spirits wholesalers of Connecticut v. The Beer Institute.

Mr. Vacchelli?

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

This case is an action for declaratory judgment and injunction challenging the constitutionality of Connecticut's beer affirmation law.

Under Connecticut law brewers must post their prices once a month on the sixth day of the month, and at that time affirm or swear under oath that that price is no higher than the lowest then being offered in the surrounding states of Massachusetts, New York or Rhode Island.

The law... the price becomes effective on the first day of the next month and is effective all throughout that next month.

Also, under another provision of Connecticut law, brewers are free to change or lower their prices at any time elsewhere, and such a change or decrease in price does not constitute a violation of Connecticut law.

The law is challenged under the Commerce Clause, and three issues emerge: one, whether it contains an impermissible extraterritorial thrust and thus directly regulates commerce in other states; second, whether it constitutes protectionist legislation by neutralizing the competitive advantages in other states; and third, whether it is an indirect burden on interstate commerce.

We submit that the law passes muster under all three Commerce Clause tests and to whatever effect it has on interstate commerce, it is sanctioned by the Twenty-first Amendment to the United States Constitution.

Considering extraterritorial effect, the case of Brown-Forman is on point.

In that case, this Court struck down New York's affirmation law because it prevented brewers from lowering their prices in other states lower than that which was in effect in New York at the time.

The Court noted that that constituted an impermissible extraterritorial effect because it, in effect, regulated prices in other states in violation of the Commerce Clause.

Connecticut's law was struck down in 1982 for this same reason.

And it was amended in 1984 with precisely this defect in mind.

Today under Connecticut law, brewers are free to change their prices in other states at any time, and that price change does not constitute a violation of Connecticut law.

Brewers, however, contend that they do not have the pricing flexibility that the Connecticut statute purports to extend.

New York, they argue, has a 180-day price hold on price reductions, and Massachusetts has a 30-day price hold on all prices.

The Second Circuit agreed and found that there... since there was no difference between what, in effect, occurred prior to the amendment, that even with the amendment, the law still contains an impermissible extraterritorial thrust.

We respectfully submit that it should be clear that Connecticut has no control over the pricing laws in New York or Massachusetts.

Connecticut allows brewers to change their prices at any time and it does not constitute a violation of Connecticut law.

Connecticut has done all that it can to satisfy the statements in Brown-Forman and the prohibitions discouraged there.

Unidentified Justice: Counsel, you have no brewery in the State of Connecticut.

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

There is still no brewery in Connecticut.

Unidentified Justice: How does that ever happen?

The... the record indicates... or I think... that beer prices in Connecticut have always been a little bit high.

Mr. Vacchelli: Yes.

Unidentified Justice: Why is this?

Mr. Vacchelli: Well, the... that is because we submit in Connecticut prior to 1981, the Connecticut laws were congested with regulatory provisions that protected the local industry.

And as a result, liquor prices were high and consumers found it worthwhile to cross the state borders in large numbers.

In 1982, the... the... in... the general assembly made a policy change.

They decided they were no longer going to be supporting the profits of its local industry members.

It would attempt to bring beer prices down which would facilitate consumers purchasing beer in Connecticut more and thereby facilitate the collection of taxes.

Unidentified Justice: It's kind of hard on Yale, isn't it?

Mr. Vacchelli: Pardon me?

Unidentified Justice: I say it's a little hard on Yale, isn't it?

Mr. Vacchelli: Well, not at all.

[Laughter]

The brewers contend that this is protectionist, and the Second Circuit agreed.

And we submit it's completely ironic to view a law which attempts to bring prices down in a state, which attempts to make a local industry more competitive, to call that protectionist.

Unidentified Justice: Well, but you do allow for quantity discounts in Connecticut?

Mr. Vacchelli: Quantity discounts are not allowed in Connecticut.

Unidentified Justice: But they are in New York, aren't they?

Mr. Vacchelli: They are.

Quantity discounts are allowed in New York.

Whether or not they actually--

Unidentified Justice: How do you explain that as consistent with your policy in trying to make the market real competitive?

Mr. Vacchelli: --Well, it's... the net effect is that the price of beer is lower in Connecticut now, that it has worked.

And I think the statements of Representative Zajac in the joint appendix at page 65A shows that beer prices are now lower, and we don't have the problem that we had in Connecticut prior to 1981.

Unidentified Justice: Of... of course, if that's true and quantity discounts are irrelevant, you wouldn't... you wouldn't need this statute.

Mr. Vacchelli: Well--

Unidentified Justice: But the problem is that with quantity discounts in... in New York, a New York price per se just has really no relation to the Connecticut market structure.

Mr. Vacchelli: --Well, you're... I think you're making some assumptions about the marketplace in New York and... and in Connecticut.

It's true that New York does allow volume discounts, but there are other provisions in New York law that are more restrictive too, such as the 180-day price hold.

If brewers lower their prices in New York, they must keep that for six months.

That is certainly a deterrent to their ability to target prices throughout the State of New York.

And I think this is--

Unidentified Justice: Well, I guess the point is, as Justice Stevens' question illustrates, you say, well, Connecticut is really eliminated... a rigidly controlled market, but it still abolishes... or it still prohibits quantity discounts.

And that's one of the whole problems in this case.

Mr. Vacchelli: --Well, I... I'm not sure that the ability or disability to give quantity discounts has much to do with the competitiveness of the... of the Connecticut industry since the net effect is that we do have lower prices in Connecticut now.

And by... because the--

Unidentified Justice: Lower than what?

You keep saying we have lower prices.

I don't... it sounds like an ad, you know.

Mr. Vacchelli: --Well, lower in comparison to other states.

Prior to 1981, the price difference was... was significantly different.

In Connecticut consumers were leaving the state in large numbers to purchase their beer elsewhere.

Unidentified Justice: Do you have lower prices than New York now?

Is--

Mr. Vacchelli: No, they're not lower than New York now, but we don't have--

Unidentified Justice: --Lower than what?

Mr. Vacchelli: --the price difference that--

Unidentified Justice: They're lower than what?

You keep saying they're lower prices.

Mr. Vacchelli: --They're... they're lower in comparison to New York as they used to be in 1981.

Unidentified Justice: They're lower than they used to be is all you're saying.

Mr. Vacchelli: Yes, right.

Unidentified Justice: They're still higher than New York, but... but lower than they used to be.

Mr. Vacchelli: Well, the actual prices are... are not a matter of record, but they may very well be still a little bit higher than they are in New York.

But the... the difference between the prices in Connecticut and the prices in New York, Massachusetts and Rhode Island are not as significant as they used to be.

And I think that's what Representative Zajac was referring to in the testimony that appears in the joint appendix.

Unidentified Justice: Well, what... is it your submission that Connecticut's posting law has no effect at all on the prices in New York, for example?

Mr. Vacchelli: That's exactly what we're saying, Your Honor.

I think--

Unidentified Justice: And... and so, what was the purpose of your posting law?

Mr. Vacchelli: --Well, the... the essential purpose of the posting law is so that regulators know what price is in effect in Connecticut.

And so, if prices are... are sold at a lower level, they... they know who is violating the law.

It's... it's an administrative facility to determine--

Unidentified Justice: Well, that's the posting law.

What about the affirmation law?

Mr. Vacchelli: --The affirmation law--

Unidentified Justice: What's the purpose of that?

Mr. Vacchelli: --Well, the purpose of that I think, as I was getting at before, is that the general assembly made a policy change in 1982.

They were going to try to make prices in Connecticut more competitive.

And affirmation is one of the tools that enables states to do that.

Unidentified Justice: So, would you concede that the goal is to... of the... of the affirmation law is to eliminate the price disparity between Connecticut and other states?

Mr. Vacchelli: That's exactly right.

Unidentified Justice: All right.

And that has no effect on the prices in New York--

Mr. Vacchelli: No, Your Honor, it doesn't.

We had quite a bit of litigation over this in the first Healy case.

Unidentified Justice: --Well, the--

Mr. Vacchelli: As you understand--

Unidentified Justice: --The Court below thought... certainly thought it did.

Mr. Vacchelli: --I don't think any of the trial courts agreed with that.

In the first case, Healy I, Justice... the trial court judge there said there was no impact, no effect on interstate commerce by this law.

Unidentified Justice: What did the court of appeals say?

Mr. Vacchelli: The court of appeals didn't address that issue at all.

Unidentified Justice: What--

Mr. Vacchelli: It... it let that stand.

What the court of appeals did in the Healy I case is focus on the mechanics of the law.

Unidentified Justice: --Uh-hum.

Mr. Vacchelli: They found that this... the... the law at the time prevented brewers from lowering their prices in other states because if they did that--

Unidentified Justice: Well, that... that... that means that it has an effect on pricing in other states.

Mr. Vacchelli: --It does, but I don't think--

Unidentified Justice: Well, that's what... that's what I asked.

You said no.

Mr. Vacchelli: --I'm trying to make the distinction now.

It certainly did prevent them from changing their prices in other states, and that was extraterritorial.

But we don't read either the Healy I case or this Court's decision in Brown-Forman as finding that all laws... all affirmation laws have a burden on interstate commerce, that they are protectionist.

I think both those cases focused on the mechanics of the law and... and how they worked because, as in the Seagram's case, there's no evidence in this case of whether or not there's a burden on interstate commerce, but what exactly affirmation does to the markets in beer.

It's quite clear that beer flows freely across state borders into Connecticut.

And the brewers have failed to put on any evidence in this case of the market and what the effect of this law has on the market.

They did put on evidence like that in the Healy I case.

They put on affidavits from various officers and companies.

They put on an affidavit from their economist saying the adverse effects to interstate commerce.

In Healy I, the state put on its... its affidavits, and it put on its expert witness, its economist.

And there was a battle of the... of the experts in that case.

And the net result was the trial court found that there was no burden on interstate commerce.

In this case it's devoid of any evidence of what adverse impact this law may have on the market.

And so, we moved for summary judgment in that... on that issue and were successful on that at least in the trial court.

But, again, also in the Second Circuit, the court didn't focus on what interference is being worked in the market.

It didn't focus... it didn't even address whether or not there was a burden on interstate commerce.

The... the Second Circuit didn't discuss the protectionism issue.

Again, it focused on the mechanics of the law and whether it has an extraterritorial effect.

Unidentified Justice: But it did say that the effect of your affirmation law... posting an affirmation... was that the companies couldn't change their prices in other states.

Mr. Vacchelli: Well, I think it--

Unidentified Justice: For all practical purposes, they couldn't because of the laws of the other states.

Mr. Vacchelli: --Yes.

In effect, they--

Unidentified Justice: And so, you were really achieving by your... by your new... by your new law or the present law what you... you had the same effect as under the old law, didn't you?

Mr. Vacchelli: --That's exactly what the court felt, and I think that's how they ruled.

Unidentified Justice: And do you think it... do you disagree that it had the same effect?

Mr. Vacchelli: No, I don't think I disagree with that in that they're not--

Unidentified Justice: And... and don't you think the legislature wanted it to have the same effect?

Mr. Vacchelli: --No.

That's absolutely not... what the legislature wanted to do was to make Connecticut marketplace more competitive, to bring prices down.

Its purpose wasn't to prevent brewers from changing their prices in other states.

And that's exactly why they wrote this specific provision of the law to free them to do that.

That's the defect they had in mind.

They addressed it as plainly and as squarely as they possibly could.

If brewers are not free to change their prices in New York or Massachusetts as freely as they wish, that is because of the laws in New York, not because of the laws of Connecticut.

And this is not--

Unidentified Justice: Mr.... go on.

Finish that thought and I'll--

Mr. Vacchelli: --And we submit that this is not a constitutional deficiency because of this.

All companies engage--

Unidentified Justice: --Can... can I ask about... about the discrimination against interstate commerce aspect you've just been talking about the affecting the laws of other states.

Why... why doesn't this discriminate against interstate commerce because it's plain that on the face of this statute if... if you are a brewer that... that manufacturers and markets only in Connecticut... there's no limit on what price you could set.

You can piece out the market throughout Connecticut any way you want.

You can charge low here, high there.

You're entirely free to... to price any way you want.

But if you're a brewer that sells in Connecticut and elsewhere, you suddenly have a price constraint.

You cannot go lower in Connecticut than you can go elsewhere.

Why isn't that a... and that only applies if you're selling outside of Connecticut.

You... you have no restriction if you're selling in Connecticut.

Mr. Vacchelli: --Well, are you saying that it discriminates against Connecticut brewers?

Unidentified Justice: It... no.

Connecticut brewers are freer.

They can... they can price their... their product at whatever they want inside Connecticut.

Mr. Vacchelli: And there's... there are no brewers, and they are also--

Unidentified Justice: Well, there may--

Mr. Vacchelli: --They must sell to wholesalers.

If they sell to a wholesaler in New York, they must sell in Connecticut at that same low price.

Unidentified Justice: --Yes, but therefore--

Mr. Vacchelli: xxx.

Unidentified Justice: --Therefore, if you're smart, don't sell in New York.

If you're smart just sell in Connecticut.

Then you can price throughout Connecticut at whatever level you want.

But as soon as you sell in New York, then your prices in Connecticut have to be constricted.

Now, I don't see any response to that except that you happen right now to have no... to have no brewers in... in... in Connecticut, but I don't know that we adjudge the--

Mr. Vacchelli: Well--

Unidentified Justice: --the facial discriminatory nature of a... of a particular law on the basis of whether there currently are any... any people being benefited by it.

Mr. Vacchelli: --Well, I don't think that constitutes a discrimination, Your Honor.

As long as all... if all brewers are free to sell only in Connecticut or if they're free only to sell in New York, then the law affects them all the same.

Every brewer is eligible to... under that same kind of a scenario.

Unidentified Justice: Gee, well... then there's no such thing as discriminating against interstate commerce.

So long as you're... you're free to engage in just intrastate commerce, you're not being discriminated against.

Mr. Vacchelli: Well--

Unidentified Justice: That can't be right.

Mr. Vacchelli: --The... the... there are no brewers in Connecticut, so that is a hypothetical--

Unidentified Justice: Well, there might--

--Maybe you're trying to develop them.

Maybe you're trying to develop them.

It's certainly... if you want to sell in Connecticut, the best way to do it now is to... is to manufacture and sell only there.

Then... then you can price at whatever you want.

Whereas, as soon as you start selling outside of Connecticut, then... then... then you have a price constraint.

Mr. Vacchelli: --Well, how does it interfere with interstate commerce?

Unidentified Justice: You're discouraging me from selling outside of Connecticut because once I do, then... then... then I have a price constraint when I sell within Connecticut.

Whereas, if I just limit myself to selling inside Connecticut, I can price at whatever level I want.

Mr. Vacchelli: Well, I... I'm falling to see the discrimination because you're... you're... I think it's talking about apples and oranges.

In one case, you're talking about one company that only sells within the State of Connecticut.

In another case, you're talking about people that sell in all different states.

If you're talking about discriminating against interstate commerce, it would be discriminatory for Connecticut to say that Connecticut brewers who engage in interstate commerce are free to sell lower in Connecticut as opposed to interstate brewers--

Unidentified Justice: No, his point is they're free to--

Mr. Vacchelli: --who are not located in Connecticut can sell elsewhere.

Unidentified Justice: --His point is they're free to sell higher in Connecticut.

But the problem with that is I suppose it's pretty hard to sell beer at a much higher price than the competitive level, That's the... that's--

Mr. Vacchelli: Well, I'm just not following.

I don't think it's... you're talking about different classes.

If they... if all are in the same class and if they're being discriminated against, that constitutes a discrimination against interstate commerce.

You're talking about different classes altogether.

One class, only interstate... only within the state of Connecticut... if they don't engage in interstate commerce, and another class that engages in interstate commerce.

We can't treat companies engaged in interstate commerce any differently than we treat local companies.

But that's not the case here.

Unidentified Justice: --Oh, I... I don't think that's right--

Mr. Vacchelli: There are two different categories and two different classifications in--

Unidentified Justice: --You... you're telling me that you don't violate the Commerce Clause so long as you treat people who do business only in Connecticut differently from people who are interstate business people.

Mr. Vacchelli: --I think so, and that's especially true under the Twenty-first Amendment to the United States Constitution where each state... if I'm... if I'm not giving an acceptable answer to you on that, at least under the Twenty-first Amendment--

Unidentified Justice: Well--

Mr. Vacchelli: --It's certainly valid for them to do that--

Unidentified Justice: --That's--

Mr. Vacchelli: --because there they're just regulating commerce within the state.

If it's not going out the... out the state, they can discriminate all they want.

But I think the point I'm trying to bring out is that you're talking about two different classes and where there are differences, discrimination is permitted as long as there are differences in factual situations.

And you have completely different factual situations here.

Unidentified Justice: --Mr. Vacchelli, if this case involved a product other than alcoholic beverages, would you think that a posting statute would violate the Commerce Clause?

Mr. Vacchelli: That's difficult to answer.

The yes... the answer to that would probably be, yes, probably.

The answer would be this would be a valid provision provided it's not protectionist in purpose and provided it doesn't interfere with interstate commerce.

But without testing those other two issues, I don't think I can answer that... that question.

Unidentified Justice: Well, why isn't it a protectionist purpose for the... the state to try to obtain a competitive advantage for its own consumers?

Mr. Vacchelli: Connecticut isn't trying to contain to give a competitive advantage to Connecticut over New York, Massachusetts or Rhode Island.

It's trying to make its own liquor industry more competitive.

It's not trying to treat New York customers differently, and there's no evidence in this case that it does.

Just as in the Seagram's case, the... it's just as likely that this law will give Connecticut lower prices rather than New York or Massachusetts higher prices, and there's no evidence to the contrary.

But I think when you're... when you're getting at the... the... the heart of the protectionism issue, the... you have to look at whether or not you're protecting a local industry from competition outside, protecting a local industry from interstate competition.

Connecticut is not trying to protect its local industry from competition.

We're not trying to make--

Unidentified Justice: You're trying to protect your local consumers.

Mr. Vacchelli: --We're trying to get the best prices for beer for our consumers that we can.

Unidentified Justice: You're trying to protect your retail dealers, aren't you?

Mr. Vacchelli: That, as I... that is also... it's... we're not trying to make them in a better position than anyone else.

It's... it is trying to put them in a more competitive position.

Unidentified Justice: Could I ask you just... New York has... permits volume discounts.

Mr. Vacchelli: They permit quantity discounts.

Unidentified Justice: I mean, quantity discounts.

Mr. Vacchelli: There is... there is a difference.

Unidentified Justice: And in Connecticut you cannot give them.

Mr. Vacchelli: That's correct.

Unidentified Justice: Now, what if the... what if the... do the... do the brewers selling in New York have to... when they post under the New York law, they have to post their quantity discounts?

Mr. Vacchelli: I'm not sure about that.

Unidentified Justice: Well, let's assume there is a quantity discount in effect in New York.

Mr. Vacchelli: Yes.

Unidentified Justice: Now, at what price do they have to sell in Connecticut?

Do they have to give every small wholesaler a... a... the advantage of a quantity discount even though he doesn't... even though he doesn't buy in such quantities?

Mr. Vacchelli: Well, the... the... it's yes, but that's... I don't think that situation exists.

Unidentified Justice: Why?

Mr. Vacchelli: There's no evidence in the record that only small wholesalers get quantity discounts.

I think it would just be the opposite.

Unidentified Justice: Well, I know, but... but--

Mr. Vacchelli: We do get the lowest price that's offered.

And if one wholesaler is getting a quantity discount that brings the price down to a particular level per case, then that is the price that Connecticut gets.

Unidentified Justice: --Well, but they can't be giving your... your people quantity discounts.

Mr. Vacchelli: That's right.

Connecticut doesn't get the quantity discount.

But if you take their price, subtract the quantity discount, determine what the case price is, that's the case--

Unidentified Justice: Don't you think that has some consequence on... on their pricing and... their quantity discount pricing in New York?

Mr. Vacchelli: --There's no evidence of that, Your Honor.

And that's... that's the whole heart of this case.

I think you're assuming that... that this... this will cause... what... what will happen if that's the case?

Is that causing them to raise their prices in New York?

There's no evidence of that.

Does that cause a disturbance in the market in beer?

There's no evidence in that.

Beer flows freely across the borders in Connecticut, and that is the focus of the Commerce Clause, looking at what is the disturbance in the market--

Unidentified Justice: But you do... but... but if they want to give quantity discounts in New York, they're going to have to sell beer at that quantity discount price in Connecticut.

Mr. Vacchelli: --Yes.

Unidentified Justice: Even though... even though none of the buyers happen to... happen to be buying in quantities big enough to justify a discount.

Mr. Vacchelli: That's... well, that's correct.

But in... in Connecticut we don't permit quantity discounts--

Unidentified Justice: I know.

Mr. Vacchelli: --or volume discounts because all wholesalers--

Unidentified Justice: I know.

I know.

Mr. Vacchelli: --must be treated the same.

Unidentified Justice: But you force the companies to sell at that lower price even though if they had a quantity discount system, none of these people would qualify for the quantity discount.

Mr. Vacchelli: Well, it's possible.

But what effect does that have on the market?

That's... that is... if that is the case, assuming you... there is evidence of that, and assuming you could read that from the face of the law, what is the effect of that on the market?

Unidentified Justice: Well--

Mr. Vacchelli: There is no evidence of... of that.

Unidentified Justice: --Pennsylvania comes in here and says the effect it has on... on the market is that the brewers won't give us quantity discounts anymore.

Mr. Vacchelli: Well, Pennsylvania is... is trying to get prices lower than anyone else in the country, and that's exactly why affirmation laws came into effect in the first place.

If it does cause a disturbance in the market, it certainly would have been apparent by now.

Affirmation--

Unidentified Justice: What is the... what is the basic purpose of an affirmation law?

Is it to get lower prices for the retailers or for the consumers or for both?

Or Is it some other purpose?

Mr. Vacchelli: --Well, I think generally they were enacted for both purposes: one, to prevent discrimination, geographic price discrimination which is the same kind of theory as under the Robinson Patman Act, and secondly, to... to get better prices for their consumers vis-a-vis other states.

And if you can see how it works in Connecticut, it has worked to solve a particular social problem that Connecticut was having with consumers leaving the states in large numbers, buying liquor themselves, bring it into Connecticut completely beyond the control of Connecticut authorities.

And this is... this is where the Twenty-first Amendment issue comes in.

Under that Amendment, states have broad powers to regulate liquor within their borders according to their own philosophies.

And this Court has consistently held that the Twenty-first Amendment works an exception to the normal operations of the Commerce Clause; that is, if the law is not extraterritorial... and to this point, extraterritorial means preventing brewers from changing prices in other states and making it illegal for them to do that.

If it's not extraterritorial and if its an exercise of a core power of the Twenty-first Amendment, then the law will outweigh whatever impact... adverse impacts it may have on interstate commerce.

Unidentified Justice: Mr. Vacchelli, would the following law be... be constitutional in your view?

Connecticut says anyone who sells beer only within Connecticut may price it at whatever price he wishes.

Anyone, however, who sells beer both within and outside of Connecticut cannot price it at any more than $12 a case.

Would that law be constitutional?

Mr. Vacchelli: Yes, as long as it's not protectionist and as long as it doesn't burden interstate commerce.

Unidentified Justice: Well, why... but that's the point.

Why doesn't it burden interstate commerce since it... since it comes down only on those who... who... who sell not just within Connecticut, out across state lines?

Mr. Vacchelli: Well, I think you have to see what it does to the marketplace and how it interferes with interstate commerce.

I don't think it can--

Unidentified Justice: We can't say that facially it discriminates against interstate commerce?

Mr. Vacchelli: --On its face it's dealing with two different categories, two different classifications of dealers, one that's only involved in Connecticut and one that's involved in interstate commerce.

Unidentified Justice: May I ask this question?

Your statute only has this restriction with respect to prices in neighboring states, as I understand it.

Mr. Vacchelli: Yes.

Unidentified Justice: What happens to beer that might be imported from Tennessee of Canada or something like that?

Is that free of all restriction, or does it have to come through a wholesaler that's regulated?

Mr. Vacchelli: The system is every product has to have a shipper.

The shipper has to be licensed in Connecticut.

That shipper sells to the wholesaler.

The wholesaler sells to the retailer.

So, whether the origin is... is Canada or Germany or anywhere in the world... the origin of the product... it still goes through the same system.

Unidentified Justice: But then is... I'm still not quite clear.

Is it subject to this restraint then that if the Canadian beer is sold through a shipper that's licensed, does... oh, then they... they still have to represent that it's not sold at any lower or any higher price than in New York or... or... I see.

Mr. Vacchelli: That's right.

Unidentified Justice: Yes.

Mr. Vacchelli: And considering the hypotheticals, Your Honor, the real world is that there are no brewers in Connecticut.

And I don't think the law... the law... you have to test the... the actual effects of the law on the market.

There is no adverse effect on the market in this case.

Unidentified Justice: Counsel--

Mr. Vacchelli: And a core power that it's being exercised--

Unidentified Justice: --Do... do... do we have any case in which we say that market behavior of a regulated entity in some other state can be the premise for legislation in the home state?

Mr. Vacchelli: --Well, Seagram's is the only one that comes to mind immediately in that we can regulate with reference to prices--

Unidentified Justice: And you read... you read... you read that for the proposition that outside market behavior is a valid regulatory premise under the Commerce Clause.

Mr. Vacchelli: --Well, it's not exactly the same thing, but it's very similar in that states are free to... to put on price controls on the sale of liquor within their states with reference to what's happening in other states.

And I think the very evil that it's being protected here is obvious in Connecticut, that if consumers are able to leave the state in large numbers and purpose... and purchase their liquor elsewhere, it completely short-circuits Connecticut's regulatory system.

If we can't... if Connecticut has pervasive regulations regulating what industry members can sell, when they can sell it, who they can sell it to, how much they can sell it for, and if consumers can leave the state and short-circuit that, then their powers... state power is completely short-circuited.

Connecticut's interest in this case is plain.

It's trying to make the Connecticut industry more competitive.

It's not trying to discriminate against industries that regulate... that operate in interstate commerce.

And unlike the Midcal case and 324 Liquor case, it's substantiated.

The brewers' state affirmation works in their brief.

The legislative debates show that it works, and we wouldn't be here if that wasn't so.

Unless there are any further questions, I'll reserve the rest of my time for rebuttal.

Unidentified Justice: Very well, Mr. Vacchelli.

Mr. Glekel?

ORAL ARGUMENT OF JEFFREY IVES GLEKEL ON BEHALF OF THE APPELLEES

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

As the Appellants concede, Connecticut's beer affirmation provisions were enacted by the Connecticut legislature in order to halt the practice of Connecticut consumers who live near the border areas crossing state lines to buy beer in the bordering states at the lower prices which prevailed in those states.

It is our position that the Connecticut law violates the Commerce Clause on two different though somewhat related grounds.

First, the statute is extraterritorial.

It's extraterritorial because it purposefully regulates transactions occurring in other states.

Second, in our view--

Unidentified Justice: When you say purposefully regulates, Mr. Glekel, you put to one side, I take it, cases in which a local law will have an effect, although it's not designed to have that effect in another state.

Mr. Glekel: --That's right.

I put aside the cases where a state law designed to promote some valid objective does have some ramifications on commerce in other states.

It is our view that the law is also protectionist because it operates much in the manner of a tariff or a tax to deprive out-of-state consumers and wholesalers of the competitive advantages which they presently enjoy in the actions of such legislation.

I should also add that it is our view that affirmation statutes in general... that is, state laws that tie in-state prices to out-of-state prices... are generally extraterritorial and protectionist.

We believe there is some factors that attend... attending the operation of the Connecticut statute that make it particularly objectionable on Commerce Clause grounds.

But it is our broader submission that the logic of this Court's Commerce Clause decisions compel the conclusion that affirmation statutes are generally unconstitutional.

I would like to first briefly address the extraterritorial operation of the Connecticut statute.

This, of course, was the basis for the Second Circuit's decision invalidating the law.

I think it is useful to focus for just a moment on the manner in which the statute came into existence.

In 1983, this Court summarily affirmed the Second Circuit's decision which invalidated Connecticut's predecessor statute on the grounds that it prohibited brewers from selling beer in a neighboring state at a price lower than the posted Connecticut price during the month covered by the posting.

The Connecticut legislature then amended the affirmation requirement to require that at the time of the posting the prices at which beer was sold in the bordering states was no higher than the posted Connecticut price.

It was still illegal, however, under the statutory language for the brewers to lower prices in the bordering states subsequent to their Connecticut posting.

Now, when the brewers brought suit again seeking declaratory and injunctive relief, Connecticut apparently recognized that this statute was just as unconstitutional as the one invalidated in the previous Healy decision.

The Connecticut liquor commissioners attempted to step into the breach, and they issued a declaratory ruling which basically states that despite the statutory language, under Connecticut law it is not illegal for a brewer to lower its price in the bordering states following its posting an affirmation in Connecticut.

Now, as I understand it, Connecticut's argument seems to be that the brewers really have nothing to complain about because under Connecticut law all they have to do is to adjust their prices to neighboring state prices... that is, to adjust their Connecticut price to neighboring state price levels... for the single day of the posting.

I think the problem is, as Mr. Vacchelli acknowledged... is that the brewers cannot, in fact, lower it at lower bordering state prices subsequent to their posting an affirmation in the bordering states because Connecticut law interacts with the statutes of the bordering states in a way which makes this impossible.

Unidentified Justice: Mr. Glekel, supposing that Connecticut passed the converse of this sort of a statute in the interest of a... a mild form of prohibition requiring that the brewers affirm that the prices in the neighboring states were no lower.

Would that have the same Commerce Clause consequences?

Mr. Glekel: If they were to affirm that the prices... if they had to affirm that the prices in the bordering states were no lower, it would have Commerce Clause consequences somewhat... somewhat in reverse since it would tend to... it would have the effect of preventing or at least strongly discouraging higher prices in the bordering states if the brewers intended or wanted to charge higher prices--

Unidentified Justice: Or keeping prices in Connecticut high.

Mr. Glekel: --Or keeping prices in Connecticut high.

I think it's important--

Unidentified Justice: Would that... would that be good or bad under the Commerce Clause and under the Twenty-first Amendment?

Mr. Glekel: --Well, we would take the position that it would still be exporting Connecticut price regulations beyond Connecticut's borders and influencing prices in other states.

Unidentified Justice: Even though it's a perfectly permissible purpose, I take it, for Connecticut under the Twenty-first Amendment to say we want to... we don't want to prohibit beer consumption outright but we want to keep the price high so that not many people drink very much.

Mr. Glekel: That's a permissible purpose under the... assuming that was the purpose.

That is a permissible purpose under the Twenty-first Amendment, but I think that this Court's precedents establish that even if the purpose is permissible, a state cannot attempt to achieve that purpose by protectionist or extraterritorial means.

And our objection would be to the means.

It would be somewhat similar to this... to the Bacchus Imports case where the Court ruled that a tax which Hawaii... a tax exemption which Hawaii granted just to home-grown liquor and not to other liquor was unconstitutional.

I think the... the problem with that is that there are plenty of things that Connecticut can do in order to promote temperance.

Obviously, they could prohibit the sale of beer altogether.

They can certainly regulate the price of beer.

If they want to, they can do as they do, make it illegal to promote beer or to discount the prices of beer.

But they... under this Court's decisions in Bacchus Imports and Brown-Forman and Midcal, they cannot undertake measures which essentially export the problem and make ocher states bear the burden.

Unidentified Justice: Well, Mr.... Mr. Glekel, if... if... If New York didn't have a... some kind of a posting law, if the... if the... if a company... if a distiller could lower his prices there anytime he wanted to, would the Connecticut law be valid then?

Mr. Glekel: Assuming that all... that prices could be lowered in any of the bordering states anytime the brewer wanted to, our view is that the law could still be unconstitutional.

First of all, obviously for the moment in time of the Connecticut affirmation, it does... it would compel brewers to adjust their prices in Connecticut and in the adjoining states to an equal level.

So, there would be some cost involved.

And I think all that would effect would be the degree of the extraterritorial impact.

If the... your question is directed at the type of statute--

Unidentified Justice: Of course, I doubt... probably Connecticut wouldn't have this statute then if--

Mr. Glekel: --Well, I just--

Unidentified Justice: --If it were so easy to change the prices in other states.

Mr. Glekel: --I was just going to add that Connecticut's statute would scarcely achieve the purpose it was designed to achieve, which Mr. Vacchelli believes that it was achieving, if in fact consumers had an incentive to travel from Connecticut across state lines--

Unidentified Justice: Just wait a day.

Mr. Glekel: --every day but one.

Unidentified Justice: Just wait a day, yes.

Well, Mr. Glekel, does the record tell us anything about the frequency of price changes in this industry?

Mr. Glekel: What the... what the record--

Unidentified Justice: Do we... do we know, for example, that they ever reduce the price in New York?

Mr. Glekel: --Yes.

Yes Your Honor.

The record presented in the context of the summary judgment motions... the undisputed facts... I'm referring particularly to page 154A of the joint appendix... states among other things that New York and Rhode Island brewers and importers, unfettered by extensive regulation, can and do offer a range of price discounts to wholesalers for a variety of reasons.

Discounts are offered for quantity sales, sales to special customers, the so-called home distributors in New York, to encourage advertising by wholesalers for purposes of test marketing new products, and for promotional purposes.

Unidentified Justice: But that doesn't say anything about price changes.

It says there are a lot of discounts, but they may be permanent discounts that are frozen and have been the same for the last 30 years.

Mr. Glekel: Well, I think there are also statements in the record that there is a... that the New York markets are significantly more competitive... New York and Massachusetts, Rhode Island markets.

There's extensive competition, more than in the Connecticut market, and that the New York market is characterized by substantial price flexibility and variability.

I think you have to keep in mined that in New York, unlike Connecticut, prices are not uniform.

There's no requirement that prices be uniform throughout the state.

In Connecticut, a brewer has to have one statewide price.

In New York, a brewer can charge different prices to different wholesalers in different areas, and they do that.

So, it's a very different, certainly a far more competitive market than you find in Connecticut that has chosen a very different system of... of regulation.

Unidentified Justice: Well, does that... that material in the record indicate then that there have... there have been continuing price changes from time to time in New York despite the Connecticut statute?

Mr. Glekel: Well, the record--

Unidentified Justice: Let me put it a different way.

Is there anything in the record to indicate that the Connecticut statute has ever prevented any brewer from making any price change that it wanted to make?

Mr. Glekel: --The present... the... the present statute.

Unidentified Justice: Yes.

Mr. Glekel: No, there's nothing in the record as to what has occurred since the actual enactment of the... of the Connecticut affirmation statute.

Our--

Unidentified Justice: You started to explain earlier... and I was kind of curious, and I don't think you ever completed it... how the Connecticut statute might prevent price changes in New York.

I really don't understand how it could do that.

Mr. Glekel: --Well, under the New York... New York does not have an affirmation requirement--

Unidentified Justice: Right.

Mr. Glekel: --unlike Connecticut.

But New York does have a requirement that if a brewer lowered prices in New York, which is referred to as a price promotion--

Unidentified Justice: He has got to hold it for six months.

Mr. Glekel: --that price promotion has to stay in effect for a... six months or a hundred... or 180 days.

Unidentified Justice: Right.

Mr. Glekel: It can be offered to a particular wholesaler or a particular region, but it has to remain in effect.

So, when a brewer makes the decision whether to undertake a price promotion in New York, the brewer, one, has to keep in mind that that special promotion price that may be offered to one wholesaler because wholesale is a very competitive market, has to be offered throughout Connecticut for the six months... I guess the six months plus an additional month.

Unidentified Justice: Right.

Mr. Glekel: Plus the fact that brewer, after posting the price required by the Connecticut affirmation statute following the beginning of the promotion, can't just reassess the situation and say, gee, this doesn't make any economic sense.

If we have to offer the same low price in Connecticut, let's halt the promotion and raise our prices in New York the day after.

Unidentified Justice: But that's a consequence of the New York statute.

That's because New York says you got to keep it low for six months.

Mr. Glekel: I don't believe so because it is really only the Connecticut statute, not the statutes of New York or Massachusetts or Rhode Island, that deliberately crosses state lines by referencing in-state prices and practices to out-of-state practices and prices.

If Connecticut had nothing more but the type of regulations found in Rhode Island, Massachusetts and... and New York, there would be no extraterritorial problem.

The regulations of the neighboring states don't cross borders.

The Connecticut... the Connecticut regulations do.

Unidentified Justice: Well, does that mean that every state is limited to the least restrictive form of regulation of the liquor business because if it adopts anything more restrictive like Connecticut does, it's going to interfere with neighboring states which have a more relaxed regime?

Mr. Glekel: No, it doesn't mean that, but I think it does mean if a state undertakes or enacts a statute that is designed to give a benefit to in-state businesses at the expense of out-of-state businesses and does this with the intent and effect of imposing a burden on out-of-state businesses, that violates the Commerce Clause despite the Twenty-first Amendment.

The Twenty-first Amendment, as the Court concluded in Brown-Forman, does not authorize extraterritorial legislation and does not authorize protectionist legislation.

We're not, again, talking about a statute that promotes some objective related to the Twenty-first Amendment such as temperance, but--

Unidentified Justice: You... you answered earlier in response to my hypothetical that it wouldn't make any difference if we were.

If it has an extraterritorial effect even if it promotes temperance, it fails under the Commerce Clause.

Mr. Glekel: --Not any extraterritorial--

Unidentified Justice: Well, but my... my hypothesis.

Mr. Glekel: --Yes, yes.

We would take the position that that... that that would still be unconstitutional.

Unidentified Justice: Even though it... it has a perfectly legitimate motive to promote temperance.

Mr. Glekel: Yes, because it was promoting the temperance through... through protectionist means and, in effect, was attempting to pose a burden on the brewers and consumers and businesses in the bordering states in order to achieve the goals that it was seeking on behalf of the affirmation state.

One of the--

Unidentified Justice: How would it impose a burden on consumers and border states?

Mr. Glekel: --Because it might well interfere with the policies of the border states under the Twenty-first Amendment who may take a very different view of what is desirable.

Maybe the bordering states desire lower prices.

Maybe they desire a great deal of competition, believe in flexible pricing and want different brewers to charge different prices in different areas.

Unidentified Justice: But why... why should that view prevail over the more restrictive view?

Why shouldn't each state be entitled to have its own view?

Mr. Glekel: Because at some point if a state enacts legislation to further its view that references out-of-state practices as the measure of what's permitted in state.

It's going to interfere with what other states want to do.

In effect, Connecticut under the present statute is interfering with what New York, Massachusetts and Rhode Island would like to do in effect.

New York is telling Massachusetts and New York that if they want to minimize the impact of the Connecticut statute, they have to abandon their regulatory practices such as insisting that discounts remain in effect for 180 days or Massachusetts' 30-day rule that prices have to remain in effect for 30 days, but they have to abandon these practices or significantly modify them even though what New York and Massachusetts do does not reach across state lines and is not in any way objectionable.

So, our view is that what Connecticut has done is interfere with the Twenty-first Amendment prerogatives of other states rather than furthering its own Twenty-first Amendment policies.

I would say also there's something a little bit, I think, ironic in Connecticut invoking the Twenty-first Amendment on behalf of legislation which is not designed to promote temperance or combat any evil attendant to the distribution or consumption of alcoholic beverages, but rather is designed, as Connecticut has in effect conceded, to divert business from the bordering states to Connecticut.

Indeed, what Connecticut states is that the purpose of this law is to promote the sales of beer in Connecticut.

Unidentified Justice: Well, isn't that a permissible purpose under the Twenty-first Amendment?

The state has complete authority to regulate... what is it... the sale and consumption.

Mr. Glekel: It may be a permissible purpose, but it's not a purpose that under the Twenty-first Amendment would enable a state to adopt extraterritorial or... or protectionist legislation.

I--

Unidentified Justice: But your position is that no... no... even temperance purposes under the Twenty-first Amendment wouldn't... would not allow the state to adopt extraterritorial.

Mr. Glekel: --That... that is our position, and I... I think Brown-Forman supports that position.

I'm just pointing out that there's certainly a plus factor as far as this Connecticut statute is concerned.

I... I think the way Bacchus Imports put it is really appropriate to this Connecticut statute as far as the Twenty-first Amendment issue is concerned, and what the Court concluded there is that the Amendment simply does not empower states to favor local industries by erecting barriers to competition, which is... was really precisely what Connecticut has... has done here.

I'd like to... to also add that the Connecticut affirmation provisions also constitute a classical example of an explicitly protectionist statute.

And what the law really does on its very face is to strip New York, Massachusetts and Rhode Island brewers, consumers, retailers of all the competitive advantages they would otherwise enjoy.

I mean, one thing is certain.

This legislation will remove the incentive for Connecticut residents to purchase out-of-state beer and eliminate the widespread shopping of Connecticut residents for beer in the neighboring states.

It's going to operate very much like a tariff.

And I'd like to respond here to one point that Mr. Vacchelli made in response to a question.

Mr. Vacchelli said that actually the price disparity between Connecticut and the bordering states is not as great as it used to be, and he referred to the remarks of a Connecticut legislator.

Actually the Connecticut legislator he was quoting... his remarks are reproduced at page 65A of the appendix... was speaking concerning Connecticut's... when Connecticut's current affirmation law was proposed following this Court's invalidation of the predecessor statute.

And he was speaking in support of the statute pointing out that Connecticut ought to pass a new statute because, in fact, the prior statute had worked and Connecticut residents were not traveling across state borders like they used to to purchase beer.

So, I think what Mr. Vacchelli is referring to really supports the obvious protectionist nature of the Connecticut... of the Connecticut affirmation provisions.

Unidentified Justice: I really must confess I'm puzzled about another aspect that this example points up.

This traveling back and forth across the state line suggests that the same economic market includes both sides of the state line.

And I would think under the Robinson Patman Act, you probably have to sell to your customers on both sides of the state line at the same price anyway.

Mr. Glekel: The... I think what you're suggesting is that under the supremacy--

Unidentified Justice: Well, there's a federal statute that says you can't discriminate between competing purchasers who are similarly situated.

And if they're in the same economic market and you're suggesting these people go across the state line to buy beer in New York instead of buying it in Connecticut, presumably you're saying it's cheaper in New York.

If it's cheaper in New York, you must be discriminating between the New York customers and the Connecticut customers.

Mr. Glekel: --No.

There's--

Unidentified Justice: And the statute is designed to prevent that.

Mr. Glekel: --I... I think as the record below indicates, the Connecticut brewers... the brewers basically sell beer in the New York and Connecticut markets based upon competitive provisions.

They're very different regulations in New York, Connecticut and Massachusetts and Rhode Island, very different degrees of competition.

Of course, New York brewers, wherever they may be, sell to New York wholesalers, and they sell to Connecticut wholesalers.

The wholesalers, in turn... a New York wholesaler cannot sell to a Connecticut retailer.

It can only sell to a New York retailer.

Unidentified Justice: Right.

Mr. Glekel: A Connecticut wholesaler to a Connecticut retailer.

Unidentified Justice: You're saying the problem is that the markup is higher in Connecticut.

Mr. Glekel: Well, what we are suggesting, part of the problem is undoubtedly that the markup is higher in... in Connecticut.

Part of the problem is that there's less competition in Connecticut because of its increased regulations.

So, in some cases, beer prices are higher to Connecticut wholesalers just as in some cases prices are lower to Connecticut wholesalers.

What the record indicates... the stipulated facts... is that on the wholesale level, from brewer to wholesaler, prices in Connecticut are neither the highest nor the lowest in the four-state area.

And this is something that constantly changes particularly because of a lack of restrictions in the New York market where different wholesalers receive different prices at different times.

Unidentified Justice: Mr. Glekel, what if Connecticut adopted a state liquor store policy of simply saying that the only people that can sell liquor in Connecticut or beer are liquor... are the state liquor stores.

And it's a state-owned company, and the state-owned company says to all the distributors we're not going to pay you any more for your liquor than you... than you're offering for in New York.

There would be nothing wrong with that, would it?

Mr. Glekel: There may very well be.

There is no state that has adopted that policy as far as liquor... as far as beer is concerned.

Unidentified Justice: Well, certainly lots of states have adopted it so far as liquor is concerned.

Mr. Glekel: They certainly have, and I recognize that some of this Court... this Court's decisions have held that when a state acts in a proprietary capacity of this sort, Commerce Clause restraints don't necessarily apply.

However, I don't think those precedents would necessarily support a state basically selling... taking over the liquor business inside a state and, in effect, doing the same thing that Connecticut presently compels under affirmation.

I don't think we're required to take any ultimate position on this, but I don't think this Court's precedents necessarily support a state doing this.

And I think it's open to serious question as to whether a state can... can do that.

I think that takes the state propriety doctrine one step further than--

Unidentified Justice: Then how is the state liquor business supposed go about purchasing from brewers?

To say, you know, you just charge me whatever you want?

Mr. Glekel: --Well, what Pennsylvania suggested in its amicus brief, that brewers should probably... that the state should bargain with the brewers or distillers, whatever, just like any other customer would.

Unidentified Justice: And might you not bargain to say I won't pay you a bit more than you charge New York wholesalers?

Mr. Glekel: I suppose there's always the question of fact.

At some point... whether by bargaining in this nature at some point you're doing the exact, same thing as you're doing in affirmation.

I think if a state had a hard and fast policy that, in fact, made a brewer sign an affirmation that it would never offer prices any... to a state any higher than those sold anywhere else, there would be substantial question whether that would be immunized from Commerce Clause challenge because it was the state doing it itself rather than compelling private parties... private parties to do it.

I would like to turn briefly to our contention that affirmation statutes are generally unconstitutional and that Seagram should be overruled or at least substantially qualified.

We do not believe that there is any principal distinction between prospective, contemporaneous and retrospective affirmation statutes.

In our view, all type of affirmation laws are protectionist and exercise impermissible extraterritorial control because what they do is to force brewers to consider the affirmation state's market conditions when they are setting prices in other states on the basis of market conditions in those states.

In short, any law that compels brewers to sell their product in an affirmation state at prices no higher than those offered in other states, inevitably is going to deprive brewers and consumers and retailers of the relative advantages that they would enjoy without such legislation.

Now, I want to make it clear that we are not contesting the right of a state, Connecticut or any other state, to set maximum prices for liquor, beer or any other commodity if it feels that's a wise sort of policy.

What we believe a state may not do, however, is in order to achieve lower prices within its border, to impose burdens on businesses and consumers in other states.

And this is what affirmation statutes of any kind really do because under affirmation, a brewer is no longer free to set prices in out-of-state markets on the basis of conditions prevailing in those markets in order to maximize their profits.

What the brewer is compelled to do is to consider that the lowest price it charges in out-of-state markets must be offered throughout the affirmation state.

And I think the inevitable result will be that a brewer or distiller will to some extent modify their out-of-state prices that they would otherwise charge in order to satisfy the requirements of affirmation.

Unidentified Justice: Mr. Glekel, supposing Connecticut passed a statute saying we will appoint a price control commission and we'll hire investigators to find out what the prices are in New York.

And they'll periodically report to the commission every month, and they'll set a new maximum price.

It will happen to be triggered by what the investigators find over in New York.

Would that be constitutional?

Mr. Glekel: I think there's... there always can be a question of fact whether a state is doing indirectly what's... what is... what is directly prohibited.

I suppose if it considered New York prices as one factor and took into account a lot of other factors--

Unidentified Justice: Well, the other factors it takes into account are the prices in Rhode Island and New Jersey.

Mr. Glekel: --That sounds like it's unconstitutional to me.

Unidentified Justice: I see.

[Laughter]

You can have price fixing as long as you don't do too much studying before you fix the prices.

[Laughter]

Mr. Glekel: As long as they're really not designed to deprive consumers and brewers in other states of... of their competitive advantages.

I'd just like to close by... by noting that the problem really with affirmation is that the affirmation state is projecting itself into other states and regulating prices in those states.

And I think the... the way this Court put it in Baldwin v. Selig is perfectly appropriate to affirmation statutes.

What the Court stated is that the Commerce Clause does not permit a state to establish a scale of prices for use in other states.

I think this is the problem with affirmation, and it's the primary reason why affirmation is unconstitutional.

If there are any other questions, I would be glad to answer them.

Otherwise I'd like to thank the Court for its attention.

Unidentified Justice: Thank you, Mr. Glekel.

Mr. Vacchelli, you have one minute remaining.

REBUTTAL ARGUMENT OF ROBERT F. VACCHELLI

Mr. Vacchelli: Just one point, Your Honor, and that's on the matter of the Seagram's case.

Approximately 30 years ago the Court stated in Seagram that it's permissible for states to regulate prices with reference to prices in other states, and that it would wait to see what effect it would have on the market and take the matter up at another time.

We've been waiting almost 30 years and we still haven't seen what adverse material impact affirmation laws have on... on the beer markets.

And to... and this case adds nothing to that.

And also, with respect to the Louisiana Law Review article cited by some of the amici and the... and the brewers, we urge the Court to reject consideration of that because this is economic testimony and it's impermissible to enter something like that in... at the Supreme Court.

And it's also incorrect in footnote 47 of that article the authors note that they will be--

Chief Justice William H. Rehnquist: Your time has expired, Mr. Vacchelli.

The case is submitted.

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Northwest Cent. Pipeline v. Kan. Corp. Comm'n - Oral Argument

Sun, 06 Feb 2011 03:44:46 +0000

Case:

Northwest Cent. Pipeline v. Kan. Corp. Comm'n

Media File:

86-1856_19881129-argument.mp3

Related Transcript:

86-1856_19881129-argument.xml

Transcript:

ORAL ARGUMENT OF HAROLD L. TALISMAN ON BEHALF OF THE APPELLANT

Chief Justice William H. Rehnquist: We'll hear argument first this morning in No. 86-1856, Northwest Central Pipeline Corporation v. The State Corporation Commission of Kansas.

Now, Mr. Talisman, you may proceed whenever you're ready.

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

This is another case involving a regulation of the Kansas Corporation Commission which is designed to alter the purchasing practices of interstate natural gas pipelines that are regulated under the Natural Gas Act.

I say it's another case because on two prior occasions, in 1958 in Cities Service Gas Company versus The Kansas Corporation Commission and in 1963 in Northern Natural Gas Company versus The Kansas Corporation Commission, this Court held invalid Kansas Corporation Commission regulations which intruded on federal regulation under the Natural Gas Act.

There as here the Kansas Corporation Commission contended that those regulations were necessary for it to carry out its functions in the regulation of production from Kansas fields.

In Northern Natural Gas Company, this Court squarely held that the Kansas Corporation Commission could not either directly or indirectly intrude on federal regulation of purchasing practices of interstate pipeline companies.

And it therefore held that a Kansas regulation which had directed a pipeline company to take gas in a certain manner in that field to be invalid under the supremacy clause.

More recently, in 1986 in Transcontinental, this Court upheld and it reaffirmed the Northern Natural decision although the gas in that case was federally deregulated.

Since the gas in this case is old gas, gas that remains subject to federal regulation, it's our view that this case falls squarely within the confines of the Northern Natural decision and a fortiori, Transcontinental.

Now, the Kansas Commission contends they have... that they have circumvented this Court's prohibitions in Northern Natural and in the Transco case because the regulation in this case is nominally addressed to producers.

But the record shows clearly that the purpose and effect of the regulation is to alter the purchasing practices of interstate pipelines.

Indeed, it was justified on the basis that it would cause interstate pipelines to buy more Kansas gas at the expense of gas from other sources outside of Kansas on pain of suffering an economic penalty.

It's for this reason that we contend that the regulation in this case is the same type of case that we had in Northern Natural, but it's in sheep's clothing.

With that brief introduction, let me outline the facts.

The regulation that we're talking about in this case applies to the Kansas Hugoton Field.

It is one of the largest, if not the largest, gas field and one of the old gas fields in the United States.

Northwest Central is one of several interstate pipeline companies that purchased gas from the Kansas Hugoton Field under long-term contracts.

The natural gas pipeline companies that purchase gas in this field have invested hundreds of millions of collars in pipeline facilities to take gas in the field.

And those facilities were authorized by the Federal Energy Regulatory Commission upon a showing that there would be sufficient reserves to support the investments that were made.

The gas which Northwest Central and other pipelines take in this field is commingled with gas which they take from other sources in other states.

This gas is transported and sold in interstate commerce to retail... to distributors that resell the gas for ultimate consumption for residential, commercial and industrial use.

The rates that are charged by Northwest Central and other pipelines are regulated by the Federal Energy Regulatory Commission under the Natural Gas Act on a cost-of-service basis.

And the cost to purchase gas is probably the... no doubt the largest item in the cost of service, and the mix of gas affects that cost.

And, therefore, the cost to purchase gas is subject to very, very close scrutiny by the Federal Energy Regulatory Commission including prudency reviews as to the mix of gas being used.

Now, the Kansas Commission has authority to regulate production in Kansas.

Under Kansas law, the objective is for the regulation to provide that each owner in a common pool will get its fair share of the gas in place.

So, the purpose of the law is not to promote Kansas gas, but rather to provide a basis upon... in which each producer will get his share of the gas.

In doing that, Kansas establishes allowables for each well on a monthly basis.

The allowables are basically a limit on how much well... how much each well can produce.

And because wells in the Kansas Hugoton Field do not produce uniformly because the purchaser's requirements are for different or for other reasons, wells can either over-produce or under-produce.

And where there is an accumulated underage, the underage is cancelled.

But it is--

Unidentified Justice: Mr. Talisman, excuse me.

Could I ask a question at this point?

Mr. Talisman: --Yes.

Unidentified Justice: You say the purpose is to give each producer his fair share of the--

Mr. Talisman: Yes.

Unidentified Justice: --of the common pool of gas.

Mr. Talisman: Yes.

Unidentified Justice: Well, why couldn't fairness be decided on a... on a first-take/first... first win rule, whoever captures the gas is entitled to it, which is the way some other natural resources are by some states treated?

why can't Kansas say the fair rule is if you're all tapped into the same pool of gas, whoever takes it out gets it?

Mr. Talisman: The... the entire purpose at the... of the Kansas statute was to amend the rule of capture.

That is, the Kansas statute provide... basically it was to amend that provision and to... to obtain a method of allocation and production which would enable each party to take that out.

Unidentified Justice: I understand that.

Mr. Talisman: And the reason for that was... was that the view that the rule of capture would lead to... to waste.

Unidentified Justice: Well, they've changed their mind, and they're going closer back to a rule of capture.

Would the rule of capture violate in and of itself the Natural Gas Act?

Mr. Talisman: Well, if... if there was a rule of capture under the... if you were to, say, repeal the Act and go back to the rule of capture... just take that as an illustration... in that event there wouldn't be any restriction on our producers in producing later on.

There would be no limits on what they could produce in order to catch up.

But Kansas hasn't repealed the statute.

What Kansas is doing is continuing the process of having allowables, but what it's saying is that the reinstatement provision, the provision that has existed previously in the law, that permits a producer who was underproduced an opportunity to get the allowables that were cancelled reinstated so it could catch up and get Its fair share of the gas, that that no longer will exist.

And the purpose of that, the clear purpose as shown by the... by the record in this case... the clear purpose of their doing that was basically to confront the interstate pipeline companies with a Hobson's choice.

Either they had to start taking more gas out of the Kansas Hugoton Field under the timetable that Kansas wanted us to take it out of the field, or else they would forego their contractual opportunities to take that gas at a... at a... at a later time.

Unidentified Justice: I understand that, but before we get to whether the purpose invalidates it, I'm trying to... trying to establish whether you assert that the mere fact of the rule that they have, regardless of its purpose, invalidates it.

I don't see how their rule is any worse than a rule of capture.

You acknowledge a rule of capture would be all right, in and of itself--

Mr. Talisman: Well--

Unidentified Justice: --not... not looking to its purpose.

Mr. Talisman: --Well, I... I don't know that... and I think you have to look at its purpose.

But--

Unidentified Justice: Let's leave that for the moment.

Mr. Talisman: --if there was a--

Unidentified Justice: Would a rule of capture be all right?

Mr. Talisman: --Not it it--

Unidentified Justice: Apart from purpose.

Apart from purpose.

Mr. Talisman: --A rule of... I assume that a state is not required to impose a law which regulates taking of gas from a field.

Unidentified Justice: All right.

Now... now, is this any worse than a rule of capture?

Surely it's no worse.

Mr. Talisman: In some ways, yes, I think it is.

Unidentified Justice: How is it worse?

It seems to me that--

Mr. Talisman: Well, because--

Unidentified Justice: --all this rule says is that whatever you take out... if somebody else takes out more this year than you do--

Mr. Talisman: --Yes.

Unidentified Justice: --you won't be able to make up that next year.

That's all.

That's all it says, isn't it?

Mr. Talisman: Justice Scalla, here's why I think it's worse.

If you had a rule of capture, there would be no limit, for example, on the producers connected to our pipeline and producing gas in the future in order to try to recapture their share of the gas.

But under the... under the regulation--

Unidentified Justice: There would be if somebody took out the entire... the entire pool this year, wouldn't there?

There would be nothing left.

Mr. Talisman: --Well, certainly it that were the case in that extreme situation, there would be... would be nothing left.

Unidentified Justice: Whereas in this case, they can't take everything out.

There is some limit set, and the only difference is if you don't take out that amount this year, you won't have a right to make it up next year.

I don't see how that's any worse than a rule of capture.

Mr. Talisman: Well, because... because the intent of the statute is that you be permitted to take your fair share of the gas.

And once they're regulating, the way in which they regulate has to be a way which is not intended to interfere with the purchasing mix regulation under the Natural Gas Act.

Unidentified Justice: xxx.

Mr. Talisman: Once they assume the job of regulating--

Unidentified Justice: Mr. Talisman?

Mr. Talisman: --they have to do it in a way which does not interfere with federal regulation.

Unidentified Justice: Mr. Talisman, don't all state regulations such as numbers and spacing of wells and otter safety regulations also affect in a sense the interstate mix of gas?

Mr. Talisman: Justice O'Connor, they probably have some incidental effect, and that was considered--

Unidentified Justice: Well, there's no doubt they do.

Mr. Talisman: --that was considered in the Northern decision.

In fact, that was discussed in the dissent in the Northern--

Unidentified Justice: It just seems to me allowables are... are more on the order of that kind of traditional state regulation.

Mr. Talisman: --Well, I agree that allowables are under traditional state regulation, but you have to lock at the central purpose of the regulation that's being adopted.

It's the same kind of test that the Court adopted in the Schneidewind case, and that is you have to lock at the central purpose of what they're doing.

And here the record is absolutely clear... no question... that the purpose of this regulation, its central purpose, was to cause Interstate pipelines to take gas out at a faster rate on the timetable prescribed by the state because--

Unidentified Justice: Well, don't you think--

Mr. Talisman: --because they--

Unidentified Justice: --we have to look at what Congress intended?

Mr. Talisman: --You have to look at what Congress--

Unidentified Justice: Don't we have to--

Mr. Talisman: --Yes.

Unidentified Justice: --determine--

Mr. Talisman: Yes.

Unidentified Justice: --whether Congress intended to allow the states to take this role?

Mr. Talisman: Yes.

And... and... and that was--

Unidentified Justice: And under Silkwood, pervasive regulation alone doesn't tell us that.

Mr. Talisman: --Yes.

Unidentified Justice: And we do have some indications that Congress did, indeed, intend states to have some role in regulating the production of gas.

Mr. Talisman: Yes, and we don't contend otherwise.

What we do contend, however, that in conducting that... in that sphere of regulation, which is within their jurisdiction, they cannot do it in a way which interferes with--

Unidentified Justice: Do other states have--

Mr. Talisman: --federal regulation.

Unidentified Justice: --similar regulations that require gas to be taken or lost?

Mr. Talisman: Other states--

Unidentified Justice: xxx.

Mr. Talisman: --Other... other... other states have cancellation provisions.

Unidentified Justice: Right.

Mr. Talisman: But... but they... but one big difference between the way in which they have regulated and the way Kansas has regulated is they have fixed allowables from a very close relationship to the actual market demand from the field.

What Kansas has done for a great many years is to fix allowables far above what is the actual demand for the field, and what that has done... that... and that was done to try to induce pipelines to take more gas out of the field because they were dissatisfied with what pipelines... the amount they were taking.

They wanted them to take more from Kansas.

Now, what that did is that led to a disparity, a substantial disparity, between those wells which were underproduced and those wells which were overproduced.

And the overproduced wells were generally tied to the intrastate Kansas buyer, whereas the underproduced wells were tied to interstate pipelines.

Now, having created this great disparity, they then came in and said, well, that didn't work.

We didn't get... we didn't induce more takes that way.

Now we're coming up with what Chief Justice Schroeder of the Kansas Supreme Court said in his dissent, Now we're coming up with the ultimate weapon, and that is, now we're going to say if you don't take these underages which have accumulated based on their allowances which are too... were too high, you're going to lose the right to obtain these in the future.

And so, he basically was giving the pipelines... they have beer basically giving the pipelines a... a... a Hobson's choice: either they start taking gas out on the timetable prescribed by Kansas or... and which means we can't take gas from other states... we'd have to cut back there on the basis we're doing it... or else we lose the right to buy this gas in the future.

Now, the order, as I say, was nominally addressed to the producer.

Unidentified Justice: Well, you don't argue for a rule of capture.

Mr. Talisman: No.

Unidentified Justice: And you don't argue against the old allowable system.

Mr. Talisman: No.

Unidentified Justice: You argue against the new allowable system because in part it's inconsistent with your take-or-pay provisions in other states.

Mr. Talisman: Well, it's... it's... what it does is it interferes with the purchasing mix under regulation by the Commission.

Let me give you an example.

Unidentified Justice: You don't... you don't say it has no relation to conservation purposes, do you?

Mr. Talisman: We feel it does not.

Unidentified Justice: It has no relation to conservation--

Mr. Talisman: No.

Unidentified Justice: --purposes at all.

Mr. Talisman: No.

Unidentified Justice: Cannot... cannot--

Mr. Talisman: It doesn't... it doesn't make sense to us to... to say to people who are underproduced that we're going to cancel the underages and not permit you to catch up.

Now--

Unidentified Justice: --That's... that's given this market.

Mr. Talisman: --In... in the... in this situation.

Now, I think--

Unidentified Justice: I take it... I take it if the price of gas radically escalated, that the case would be different, wouldn't it?

Mr. Talisman: --Well, if the markets improved.

Unidentified Justice: It would be a much different case.

Mr. Talisman: We... we would... we would be able to take perhaps this gas.

In fact, that's what we're saying.

In the 1970s when there were very strong markets, the interstate pipeline companies were able to take greater volumes of gas, and many of the underages that had accumulated before that time were taken.

And... and so, the natural flow of the market was permitted to operate, and we did.

The producers connected to us were able to basically produce the underages, a great many of their underages.

Unidentified Justice: So, then Kansas... so, then Kansas has to change its scheme every time the interstate market changes.

Mr. Talisman: No, it doesn't have to change its scheme.

I'm saying simply that what they... what they should have done was let the thing alone, but they should not basically introduce regulations that are intended to mix into the purchase mix for pipelines.

And I--

Unidentified Justice: I don't quite understand your overriding principle.

If you said that Kansas simply has no Jurisdiction to do this and it has to be a law of capture and the federal government has to regulate it, fine.

But you want a very precise kind of regulation that benefits you.

Mr. Talisman: --No.

What we're saying in effect is that if the central purpose of the regulation is to change the purchasing mix of pipelines, that is a... a area which is preempted under the Natural Gas Act.

Unidentified Justice: Well, I... I would think that you would make the same argument if a state which has the rule of capture, if any of them does, suddenly changed to a... a proration, an allowable system, because then you are... you are just invalidating the rule of captured.

And surely your so-called mix would change when you shifted from capture to proration.

I don't see how you can possibly--

Mr. Talisman: I would--

Unidentified Justice: --accept just an ordinary proration order then.

Mr. Talisman: --I would... I would say that if a state adopted a... a... went from a rule of capture to a proration plan, that it would be our... and if the central purpose of that was to prevent waste and to assure that people got their fair share of the gas, we would consider that to be a legitimate function of the state within--

Unidentified Justice: Well, I know but--

Mr. Talisman: --within the producing--

Unidentified Justice: --Well, I know but... but you could make the same argument there that the purpose of the state was to... was to prevent the producers from producing from Oklahoma in the Hugoton Field instead of Kansas.

Mr. Talisman: --Yes.

And if there's... if the... if the intent was to interfere with the purchasing mix of pipelines, I would say that that would be a--

Unidentified Justice: And I don't see--

Mr. Talisman: --that would be preempted.

Unidentified Justice: --And I would... I would... I would think that Kansas wouldn't be prevented from having a proration system from the outset where no underages would accumulate.

They just... if you didn't produce your... your allowable, that's just too bad.

Mr. Talisman: Yes, but the... but the--

Unidentified Justice: Isn't that right?

Mr. Talisman: --Well, there are other states that have that system, and in... in--

Unidentified Justice: Well, you don't say that's unconstitutional, do you?

Mr. Talisman: --Well, if... if the way they use it is the way to Influence the purchasing mix, yes.

But if... but where you have a situation like you have in Kansas where they have had fixed market... demand allowables far in excess of the actual market to create this sort of excess amount of allowables, and then say now if you don't take all of this within a certain period of time, you're going to be... you're going to lose all that, that opportunity to take that, that is attempting to interfere with the purchasing mix.

And it was clear from the record.

The witness who sponsored the exhibit said and testified unequivocally that... that the purpose of the regulation was to induce pipelines to take greater volumes from the Kansas Hugoton Field given the limited market.

And the... the Kansas District Court in its decision said that this regulation will cause a loss... permanent loss of underages and change the mix of pipelines which are transporting gas miles away, And the Supreme Court of Kansas in its majority decision said that this order gives us pause.

It's obviously intended for the pipelines.

And... and it's for this reason we say this case falls within Northern Natural.

Unidentified Justice: But it was still--

Mr. Talisman: We don't believe the mere fact--

Unidentified Justice: --It was still a regulation of production.

It has just had this consequence on--

Mr. Talisman: --Yes, well, you're not... but you cannot use... you cannot regulate in production in a way which interferes with federal regulation.

In Mississippi Power--

Unidentified Justice: --No.

Anytime you regulate production, you're going to have an impact on--

Mr. Talisman: --Well, but it's the question of... and I... I go back to the question of what is the central objective of the regulation.

If the central objective... and that is clear on the record here.

If the central objective of the regulation is to basically change the mix for pipelines, that's a precluded area.

Unidentified Justice: --Well, what is your preemption?

Is it that it interferes with the jurisdiction of the Energy Commission?

Mr. Talisman: Yes.

Unidentified Justice: Or is it just that there's such a pervasive federal regulation that the states just can't do anything that has an effect on the price of gas or that... or the... or the purchasing practices of the pipelines?

Mr. Talisman: What I'm saying... what I'm saying is is that they cannot regulate in an area which its intended purpose is to change the mix of pipelines.

In Northern, this Court held squarely that that was a field occupied under the Natural Gas Act.

Unidentified Justice: xxx.

xxx.

Mr. Talisman: And that applies... and that applies to this case as well.

Unidentified Justice: Under your view what's left of the reservation of the authority in the Act that says the states can regulate the production in gathering?

Mr. Talisman: Well, we think a great deal is left.

We have indicated in our... in our briefs that there are actions which they could take to bring the field into balance.

They could, for example, fix allowables which are more nearly in line with what's going on in the market.

Unidentified Justice: But anything... anything directed by its terms to regulate production or gathering is bad if there's an attempt to... to influence the purchasers?

Mr. Talisman: If... if... if what they're doing is trying to regulate the takes from the field of the purchasers in terms of trying to change their mix, yes.

We contend that that's preempted under the Natural Gas Act--

Unidentified Justice: So, then you--

Mr. Talisman: --for the same reasons this Court held to in Northern.

Unidentified Justice: --So, then you take the position that the state must take interstate commerce and interstate markets into account.

Mr. Talisman: Well--

Unidentified Justice: Which is precisely the opposite of what I thought our Commerce Clause cases--

Mr. Talisman: --No.

I don't say that it must take that into account.

I... I say that it cannot issue a regulation which is intended to change the mix.

Let me show you the conflict here.

While this... after our notice of appeal was filed in this case, in fact, after our initial brief was filed, the Federal Energy Regulatory Commission issued a order concluding a long proceeding relating to the purchase mix of Northwest Central Pipeline Corporation.

The Kansas Corporation Commission was an intervenor in that case.

And a number of parties presented their views as to what the purchase mix of the company should be, including some parties saying that they thought that we should be taking greater amounts of gas from the Kansas Hugoton Field.

And... and the Commission heard these various claims.

There was a pretty extensive hearing, administrative law judge's decision.

And the Commission concluded that it rejected the proposals of parties that more gas should be taken from the Kansas Hugoton Field and it approved as prudent the purchasing mix being used by the company.

And the... the mix being used by the company was to take a mix of low-priced and high-priced gas and to blend it together and to try to arrive at a target market price which would enable it to compete against alternative fuels.

And by not taking all of the Kansas Hugoton gas, which was lower priced, and reserving that for mixing with some of the higher priced gas for future use, the company was-able to be able to reserve some to be competitive in the future.

And it was able also to avoid incurring payments for gas not taken in other areas.

Now, the record in that case showed that had we taken the volumes of gas from the Kansas Hugoton Field that the parties wanted us to take, we would have incurred some $77 million of take-or-pay payments in just a period of eight months.

And the Commission found this... found what we were doing to be prudent.

Now, we see this as--

Unidentified Justice: --Well, has that got any impact on this case?

Mr. Talisman: --Yes, because what... what we have, therefore, is a sort of a... what as I see as a... an obstacle between the program that Kansas wants and the program that the Corporation Commission--

Unidentified Justice: Well, you mean... but is... is that company that you mentioned... is that a party here?

Mr. Talisman: --That's our company.

Unidentified Justice: That's your company.

Mr. Talisman: Yes.

Unidentified Justice: But then is it your argument now simply that this... this Kansas system is invalid as applied?

Mr. Talisman: No.

I'm saying that--

Unidentified Justice: You're saying... your argument--

Mr. Talisman: --We're saying... I'm... I'm--

Unidentified Justice: --is that it's just plain invalid.

Mr. Talisman: --I'm just giving you an illustration of how you have a conflict.

The conflict is that we can't obviously comply with both programs.

We can't take gas out in the mix which has been approved.

Unidentified Justice: Well, that's quite a different argument.

You're saying now that it's inconsistent with a Energy Commission order.

Mr. Talisman: I'm saying that... that... that it shows that there is an obstacle, that it presents an obstacle to following the mixes that are approved by the Commission.

And the Kansas Commission intervened in that case so that it seems to me that if... if Kansas can do this, so can other states which would try to issue regulations which will favor them in terms of your taking gas.

And if you have that, then what you're going to have is a situation where the kind of uniformity of regulation that was--

Unidentified Justice: Well--

Mr. Talisman: --intended under the Natural Gas Act--

Unidentified Justice: --The Commission doesn't--

Mr. Talisman: --would be destroyed.

Unidentified Justice: --The Commission doesn't seem to think that... that this system is inconsistent with any orders of it.

Mr. Talisman: Well, the--

Unidentified Justice: Does it?

Does It?

Mr. Talisman: --The Commission is now supporting the Kansas position.

Earlier it filed a brief in which it contended that the Kansas order was preempted.

Unidentified Justice: Well, yes, but... but I would--

Mr. Talisman: Now.

the--

Unidentified Justice: --I would think they know... they would know better than we would whether... whether the order... the prudent... the order that you mentioned as being prudent that says your practices were prudent... they would know whether that is inconsistent with the Kansas system.

They say it isn't.

Mr. Talisman: --Well, I don't... I don't believe that if you... that you can square their position with that order.

The... the order disapproved proposals to take more gas from the Kansas Hugoton Field, and basically approved as prudent the purchase mix obtained by the companies.

I don't believe you can square their position in this case that there's no--

Unidentified Justice: That order... that order was entered after you filed your initial brief?

Mr. Talisman: --After the initial brief, but we refer to it in our reply brief.

Unidentified Justice: In your reply brief.

Mr. Talisman: Yes.

If there are no further questions, I'll close at this point.

Unidentified Justice: Very well, Mr. Talisman.

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

ORAL ARGUMENT OF FRANK A. CARO, JR. ON BEHALF OF THE APPELLEES

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

The purpose of my argument is to show that the Kansas Corporation Commission's order amending paragraph P of the basic proration order for the Kansas Hugoton Field was an exercise of the state's legitimate interest to conserve its natural resources by preventing waste from occurring in the field and in protecting correlative rights of adjoining leaseholders in that field.

Second, the action of the Kansas Commission... the action the Kansas Commission took fits squarely within the production and gathering exemption of the Natural Gas Act.

And finally, the effect of the Kansas Commission's order does not interfere with the comprehensive federal regulatory scheme, nor does it unconstitutionally burden interstate commerce.

The problem in the field, in the Kansas Hugoton Field, was that the field was out of balance.

Pressures in the Kansas Hugoton Field indicated that gas was draining from a non-producing well to the producing well.

The reason for that is that when a well is not producing or is shut in, pressures accumulate in that well.

Gas migrates in the field... in a common source of supply in this field, in the Kansas Hugoton Field, from a high pressure zone to a low pressure zone, the low pressure zone being the area in which the well is timely producing its allowables.

That's what was happening here in the Kansas... in the Kansas Hugoton Field.

The field was being used as a storage facility.

Some producers were not timely producing their production allowable, and by not timely producing that production allowable, it was causing the drainage of that gas from the high pressure area, from the shut-in well area, to the low pressure area which was violating correlative rights and causing waste to occur in the field.

The Commission--

Unidentified Justice: I don't understand that.

Why isn't that its own punishment?

If you don't produced, the gas goes away from your well, why does the state have to... I mean, that's its own punishment.

Why isn't that alone enough to induce somebody to produce?

Mr. Caro: --Because... because of the Commission's decisions or the Commission's action prior to the amendment of paragraph P, it gave these producers the right to bank these allowables or to bank these non... these non-procuced allowables or these underages indefinitely.

These... the producers in the field thought that they could accumulate these unproduced allowables and at a later date come in and produce them.

Unidentified Justice: What if I don't believe all that, Mr. Caro?

What if I think Kansas really did this just to get more gas produced in Kansas--

Mr. Caro: Justice--

Unidentified Justice: --and make more money for Kansans?

Suppose I think that was the whole purpose of this?

Do you lose?

You concede that you lose?

Mr. Caro: --No.

No, we don't.

I think... I think It's important to understand that what the Kansas Commission did was encourage the timely production of those allowables because only through timely producing those allowables... producing those allowables pursuant to the proration order... in other words, making sure that each well produces its fair snare of the gas in conjunction with other wells that are producing in the field.

And it's only... when you... when you let them do that, when those wells produce in a timely manner, when... when you encourage the timely production of those allowables does the field become back... get back into balance.

And when the field is back into--

Unidentified Justice: Well, suppose... suppose your statute said in order to ensure that Kansas has a greater share of the interstate market, the following rule is enacted.

It's the same as Justice Scalla's question.

Suppose we find that the purpose is to favor Kansas producers and Kansas consumers.

Then what?

Mr. Caro: --Well--

Unidentified Justice: Do you automatically lose?

Mr. Caro: --That's not... that's... I know I'm not answering your question.

Unidentified Justice: I know it's not that case.

Mr. Caro: This is not--

Unidentified Justice: But it tests the legal proposition which is what we're here for.

Do you lose in that case?

Mr. Caro: --I think we lose in that case.

The problem is that that's not what happened here.

Unidentified Justice: Even though the--

Mr. Caro: We have to look--

Unidentified Justice: --Even though the statute says that you can regulate production?

Mr. Caro: --What we need to look at is the reason why Kansas is... is doing what it's doing.

Unidentified Justice: What you're saying is that that's not the purpose.

Mr. Caro: The purpose... we need to look at why--

Unidentified Justice: Why... why do you need to look at the purpose when the statute says you can regulate production and gathering?

Mr. Caro: --Mr. Chief Justice, because I think if... we're not forcing more Kansas gas on... on the interstate markets.

That... we're encouraging the production, the timely production, of those allowables.

Yes, more gas is going... may go to the interstate markets.

More gas may be produced in Kansas.

And it may go into the interstate markets as a result of the Kansas Commission's order.

But this order does not force the pipelines to take more gas.

It does not force the Appellants to take more gas out of the field.

It merely encourages the timely production.

And that... and it only does that to bring the field back into balance.

We saw that waste was occurring.

Waste was occurring in the field, that... that uncompensated drainage from the non-producing wells to the producing wells was occurring.

And by giving them an incentive... by giving a producer an incentive to timely produce that gas, to timely produce the allowable that's assigned to them do we... do we bring the field back into balance in the long run.

And that's the... that's the purpose of the Commission's order.

Unidentified Justice: Do we look to the legislative history?

I mean it you say purpose is crucial, I suppose we have to look to the legislative history.

And it really comes down to whether we believe Mr. Talisman or whether we believe you as to what the purpose was.

Right?

Mr. Caro: The purpose of the Kansas Commission's order?

Unidentified Justice: Right, right.

We sort of sit as a jury to decide what the purpose was, and if we... if we agree with Mr. Talisman, then you lose.

Mr. Caro: No.

I think if you look at what Mr.... what the Appellant is saying is that It's not... it's not true.

We're not forcing... we're not... the reason we're forcing more Kansas gas to be produced, the reason we're encouraging timely production of that allowable is to bring the field back into balance, to conserve the natural resources in the field, to protect correlative rights and prevent waste from occurring.

That's what the problem was.

The Commission in its expertise found that to be the problem that was occurring in the field.

As I said--

Unidentified Justice: One... one more point.

Do you agree with the characterization of the petitioners of the Appellants that the Kansas Supreme Court held that the purpose of this regulation was to increase Kansas' share of interstate gas?

Mr. Caro: --I don't believe they said it was to increase Kansas' share of interstate gas.

What they said is that... to increase the production of gas from the Kansas Hugoton Field, and that it was the purpose to encourage the timely production of that gas because by... by these producers not producing, by the pipelines not taking the gas in the field, it was causing a problem.

And the Commission had to address that problem.

If we didn't address the problem, the field would become out of balance, waste would occur and, therefore, we wouldn't be conserving our... the natural resources in the field.

The second thing to look at is this order is no different that any... than what any other state does.

The two largest states in the... the two largest natural gas producing states in the country--

Unidentified Justice: Is Northwest a producer?

Mr. Caro: --Northwest Central is a interstate pipeline.

Unidentified Justice: And it... it just buys from producers.

Mr. Caro: It buys from producers in the... in the field.

Unidentified Justice: And... and so it complains because this rule has an effect on it.

Mr. Caro: It complains because it... it says that this rule is going to have an effect on them.

It's going to affect the price that they ultimately charge for their gas because they believe that they're going to have to take less from... take less of these high take-or-pay contracts, these private contractual agreements that they've entered into that the state... that they believe the state ought to consider when it... when it wants to adjust the allowable formula in the field.

Unidentified Justice: What is your... if you'd tell me.

Do you think that this... this order of the Commission that was entered after the filing of the initial brief here... do you think that order has any impact on this case?

Mr. Caro: The order of the FERC?

Unidentified Justice: No, no, of the Federal... the Energy Commission.

Mr. Caro: The order of the Federal Energy Regulatory Commission has no impact on this case.

What... what FERC does is to look at whether the purchasing practices of... of the Appellant were prudent in light of the... in light of the state regulatory scheme, in light of... in light of all of the situations faced... facing that pipeline.

I think that if this Court upholds this decision, it's not going to affect what... how FERC looks at it.

FERC's own brief indicates that.

Unidentified Justice: Well, the purchasing practice, though, that FERC said was... was prudent... can it any longer be followed in light of the Kansas scheme?

Mr. Caro: Yes, it can, Justice.

I believe that order came out in late 1988.

The Commission's... the Kansas Commission's order took effect in 1983.

Unidentified Justice: I know.

Mr. Caro: So, I believe it may have even... it may even consider the... the state regulatory scheme in effect in Kansas just like it also considers the state regulatory schemes in effect in Oklahoma, in Texas and other states--

Unidentified Justice: So, the producers have had to comply with... with this 1983 order all these years?

Mr. Caro: --They have... they have had to comply.

Unidentified Justice: Or was it... or was it stayed?

Mr. Caro: No, This order has not been stayed.

It has been moved back... the implementation of it.

What the order did... it said that--

Unidentified Justice: Moved back to when?

Mr. Caro: --To I believe 1986.

The... the... the producers in the field had different periods of time in which unproduced allowables were cancelled off, permanently cancelled.

One period of time was pre-1975.

Well, those unproduced allowables, if not reinstated, are... have been cancelled.

The period of time from 1975 through 1986 is still in place, and the... and the producers have until December 31, 1989 to... to petition the Commission to reinstate those cancelled underages, those past 11 years of cancelled underages, and then have... and then once reinstated, they have 60 months to produce it.

The Commission in its order is not permanently cancelling underages.

What we're doing is tightening the production tolerances in the field.

Unidentified Justice: Do we... do we know what the standard is for the Commission's agreeing to reinstate them?

Mr. Caro: I don't understand the question.

Unidentified Justice: Well, I mean, I... I asked the Commission to reinstate them.

What are the criteria on the basis of which the Commission determines that?

whether what?

It's a Tuesday?

Or what is... is there any standard at all?

Mr. Caro: That's all that... that's all you have to do to reinstate... to reinstate is show that you have an accumulation of cancelled underage--

Unidentified Justice: Right.

Mr. Caro: --that you want to have it reinstated, and--

Unidentified Justice: And that's it.

Mr. Caro: --And that's It.

Unidentified Justice: Well, then there is really no prohibition at all you're saying.

Is that the commitment Kansas is going to make here now, that there--

Mr. Caro: You mean there's no prohibition... you mean what--

Unidentified Justice: --So long as you want to get your cancelled underages, you can get them.

Mr. Caro: --That's correct.

Unidentified Justice: You have an entitlement to get them even though they've been cancelled.

Mr. Caro: No.

Underages can be accumulated.

Cancelled underages under the... under the Commission's order can be accumulated for three years.

Once they've been accumulated to that three-year period, they have three years to reinstate those cancelled underages.

Once reinstated, for whatever reasons, because they say that they can... because the producer thinks that they can produce them, they have 60 months to produce those.

So, you have an eight-year period here.

Clearly reasonable to contemplate any market trends that may be in effect.

What the Commission's order did prior to the amendment--

Unidentified Justice: Well, I must say I didn't understand that reinstatement was a matter of right.

You're saying you have a right to get them reinstated so long as you say I want them reinstated.

Mr. Caro: --The Commission will reinstate those underages as long as--

Unidentified Justice: Automatically.

Mr. Caro: --Automatically as long as they have not been... as long as it's not longer than a three-year period under the Commission's amendment.

So, you can carry those cancelled underages for three years.

If you don't reinstate them--

Unidentified Justice: I understand that.

Mr. Caro: --they're permanently cancelled.

Now, once they're cancelled, once they're permanently cancelled, doesn't... doesn't... I don't fact you to be... I don't want you to misunderstand that they don't have a right to produce further reserves in the field.

They're assigned... they're constantly assigned a new allowable formula, a new allowable that they can produce in the field.

That allowable takes into consideration the fact that they may not have been producing because of the allowable... because the allowable formula is made up of three factors.

It's made up of acreage, which is the spacing unit, which in the Hugoton Field is 640 acres equals one unit.

It takes into the second factor which is well pressure or deliverability.

And if you recall, well pressure is going to be higher if your well has not been producing.

Therefore, you're going to get a higher allowable assignment in the field.

And the third factor is market demand which is set by the Commission based on the nominations of the producers and purchasers of what they... what they anticipate to use in the... in the upcoming six-month period.

So, they're not being... they're not being they're not... they are... they do have a chance to produce that... that... those reserves in the field.

what we're doing is... is merely asking them to... we're encouraging the producer to timely produce those reserves in the field to prevent the waste that the Commission found in its expertise was occurring in the field, to balance off the field, to balance off the pressures in the field.

This case is distinguishable from Northern.

The reason this case is distinguishable from Northern is because in Northern, the Northern decision or the action the Commission took or the orders taken in Northern were directed at purchasers.

It ordered the pipelines to take gas rateably in the field.

In our decision the Commission is not ordering the pipelines to do anything.

The pipeline doesn't have to... doesn't have to buy more Kansas gas if the pipeline doesn't want to.

If in the pipeline's discretion it decides that it doesn't... that it wants to take that... that high take-or-pay those high take-or-pay gas that it has contracted on its own to take, it can take it.

And if it does, does it lose its rights to the reserves in the field?

Clearly not because a new allowable, even if their... even if their underages are cancelled, a new allowable is assigned.

The Commission's order is reasonable in light of Northern.

The effect of the order is reasonable.

It's not going... you know, the effect of this order is incidental on the pipeline's purchasing practices.

It becomes merely a consideration to have to take, merely a consideration that the pipeline has to make when it's purchasing gas, just like it makes a consideration on whether to buy gas from Wyoming, Oklahoma, Texas or any other state, just like it makes a decision to buy more take-or-pay gas or less take-or-pay gas.

It becomes merely a consideration and the effect is incidental.

The effect of this decision could impact... as the amicus brief filed by the Council on State and Local Government indicates, 17 states across the country have similar law, have laws similar to Kansas that regulate the proration in the field.

Proration in the field means that gas... that each well is producing its fair share in proportion to other wells' production in the field.

So, the impact of this decision means a lot to about 17 states that produce natural gas in the field.

Every state has some form of proration, some form of an assignment of an allowable to the field to assure that that state conserves its natural resources by the orderly production of natural gas in the field.

Therefore, I ask this Court to affirm the Kansas Supreme Court's decision upholding the Kansas Commission order.

This would conclude my argument.

I'd like to entertain any questions if there are any.

Unidentified Justice: Thank your, Mr. Caro.

Mr. Caro: Thank you.

Unidentified Justice: We'll hear now from you, Mr. Lazerwitz.

ORAL ARGUMENT OF MICHAEL R. LAZERWITZ AS AMICI CURIAE SUPPORTING APPELLEES

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

At bottom the pipeline here is complaining about the state's decision to rescind its unrestrictive policy towards the reinstatement of production credits.

The pipeline does not and cannot challenge the state's authority to impose a system for controlling the production of natural gas in a common field.

Unidentified Justice: Mr. Lazerwitz, does the purpose of Kansas regulation make any difference in our analysis?

Mr. Lazerwitz: For the preemption question, which is the main focus of our position, no.

The preemption question calls for two separate inquiries.

First, is the state regulating in an area where federal law occupies the field and therefore leaves no room for state action?

And the second preemption question is whether the state rule conflicts with federal law, in other words, whether it interferes with the federal regulatory scheme.

The Natural Gas Act itself essentially answers the first preemption inquiry.

The state has the right to control the production of natural gas.

Federal law simply doesn't occupy the entire regulatory field at the production end.

Unidentified Justice: Now, that was not... the SG has taken a different position now than when the case was here before.

Is that right?

Mr. Lazerwitz: Yes, Justice O'Connor.

When we filed our first brief, we were focusing more on the question whether this... the Kansas judgment... how it should be treated in the light of Transco.

And the focus of our brief was that it should be held and then sent back in light of the decision in Transco.

On further reflection, as our... the most recent brief shows, we have now focused precisely on what the Kansas rule raises and how it might or might not conflict with the federal regulatory scheme.

Unidentified Justice: Well, do you think the Court went a little too far in Transco in some of its language?

Mr. Lazerwitz: If it's taker out of context, there is language in Transco that seems to be problematic.

But the context is in that case we were talking about field preemption where federal regulations cover the entire field, that is, regulating interstate pipeline purchasers.

Unidentified Justice: Well, that system like Northern Natural was directed at pipelines.

Mr. Lazerwitz: Yes, direct regulation.

Unidentified Justice: Directly,--

Mr. Lazerwitz: And this... and this Kansas rule is far different.

It's controlling production, and therefore that's why the first preemption question is relatively easy.

The second preemption question, whether the Kansas order conflicts with the federal regulatory scheme, is somewhat more difficult.

But in our judgment there is no conflict.

First of all, the Kansas rule tells producers that in a certain situation you might not be able to bark your production credits.

It doesn't tell the pipeline that it has to buy anything.

If the pipeline is risk-averse and worried that this gas might not be there ten years down the road, it can choose to buy the gas now.

But it's not forcing them to buy the gas, and that's a critical distinction between this case and the cases in Northern Natural and Transco and that is because the Kansas rule by itself isn't going to change anything.

The pipeline... first of all, the producer is going to have to decide whether to produce more gas and we recognize that the producer... that that decision whether to produce more gas is obviously tied to a pipeline's decision whether to purchase more gas.

But the pipeline's decision is going to be based on Kansas' rules, other states' rules, available sources of other natural gas, its take-or-pay liability.

Unidentified Justice: --Well, given take-or-pay liability that exists and the price of new gas versus old gas, it's fairly obvious that the pipeline is not going to purchase any more gas, isn't it, in the existing market?

Mr. Lazerwitz: The pipeline is fighting this case.

We assume that the pipeline is not... does not want to purchase more gas, but that doesn't mean it will note--

And more importantly, the producers... the Federal Energy Regulatory Commission's policy is trying to free up more gas and not to have it simply sold from the producers to the big interstate pipeline.

For example, the Federal Commission has an order allowing the producers to try to get out of their contracts with the... contracts where gas is dedicated to interstate commerce to sell It to someone else who is willing to buy it if the pipeline with whom it has a contract doesn't want to pay a certain price.

Unidentified Justice: Mr. Lazerwitz, I don't understand what you're... what you're describing to me.

As I understand these pipeline contracts, they are long-term contracts like... it almost amounts to the pipeline purchasing the pool of gas, doesn't it?

I mean, it has a right to take a certain amount from the... from the well over... over the next 12 years or whatever.

Mr. Lazerwitz: The contracts that are at issue in this case or that are involved in this case, these long-term contracts with the Hugoton Field, are those where the pipeline essentially... they're great contracts to the pipeline.

They can buy whatever is produced.

On the other hand, under the Federal Energy--

Unidentified Justice: And the... and the producer, if he takes it out, has to give it to the pipeline.

He can't give it to somebody else, can he?

Mr. Lazerwitz: --Yes, he can.

Unidentified Justice: Can he?

Mr. Lazerwitz: He can seek Commission authority to abandon, in the sense to find another purchaser, if he doesn't want to sell it to... for example, the pipelines are now not buying a lot of the cheap Hugoton gas.

If a producer wants to get that gas out of the ground, perhaps in response to the Commission rule, the State Commission rule, he can seek out new purchasers and not be stuck with the major interstate pipeline that is... that years ago was controlling the flow of gas from the field.

And the Federal Commission's policy is to try to foster that.

On the other hand, the pipelines themselves--

Unidentified Justice: Breaking his contract.

He would be breaking his contract with the pipelines, right, even though--

Mr. Lazerwitz: --Yes, in the sense that's what abandonment is, asking the Commission authority to change the contract, and the Commission will take a look at that.

On the other hand, the pipeline has an out too under the Commission's rule and that is that the pipeline, instead of buying the gas, can act as a transporter and sell the gas to a local distributor.

And in that situation, the Federal Commission will give credits to an interstate pipeline who is willing to do that.

The federal policy, the regulatory policy today is to free up the gas, to get more of this cheap gas into the market, and everyone will be better off.

On the point mentioned before about the Federal Commission's approval of the purchasing practices, there's no doubt that the Federal Commission did last... over the summer approve Northwest Pipeline's purchasing practices for 1984 and in doing so, held... concluded that it was prudent to bank some of this gas, not to buy it.

But that doesn't become a federal policy approving the long-term banking of production credits.

That was a narrow proceeding saying that this was prudent at the time.

Prudent under the Federal Energy Regulatory Commission's rules means a rational businessman would have done this facing the situations that he faced.

But that doesn't at all mean that it would have been imprudent to buy more cheap gas.

Unidentified Justice: --At the very outset Justice O'Connor asked you if purpose were relevent, and you said not the preemption prong of the argument.

Is it relevant to the claim that interstate commerce is being regulated in an impermissible manner?

Mr. Lazerwitz: Yes.

In that sense the purpose and for purposes of the argument we'll concede... let's assume there's a bad purpose.

But the bad purpose would have to be encouraging more production of Kansas gas at the expense of another state's gas.

Unidentified Justice: How strong is a negative Commerce Clause argument here where Congress has said the state shall have authority to regulate production and gathering?

Mr. Lazerwitz: It's not very strong, but there is something in the sense that the Natural Gas Act didn't give the states anything and the idea that the states have this power to begin with.

And under the Natural Gas Act, Congress reserved that power to the states.

So, there is... and we do recognize that there... there could be a case where the state, for example, changed the production rules to say only producers for intrastate purchasers can produce a certain amount and those for interstate cannot.

That would pose a problem under the Commerce Clause potentially.

But that's not the case here.

Kansas--

Unidentified Justice: Do you read the Kansas Supreme Court opinion as holding that there is a purpose to regulate interstate commerce that's impermissible?

Mr. Lazerwitz: --No, not at all.

The Kansas Supreme Court and the District Court and the Commission... the point of the rule is to remedy a problem, and in remedying the problem, part of the remedy is to encourage production but not at the expense of any other state.

Unidentified Justice: Mr. Lazerwitz, I really think you're... you're drawing a line that doesn't exist when you say if their purpose was only to increase production of Kansas gas at the expense of gas from other states.

I mean, we're in the real world here.

Every time you produce more gas from Kansas, you're going to produce less gas.

Is there an infinitely expandable market for gas?

Mr. Lazerwitz: Well, if the price--

Unidentified Justice: There's not a limited market up... cut there?

Mr. Lazerwitz: --The market changes.

It's not... it's not to say that Kansas by encouraging production from its field is necessarily going to hurt any other field.

The market will change depending on price and the demand.

lt's not--

Unidentified Justice: Well, I think the people in the business would be surprised to learn that, that the more gas you produce from Kansas, the less gas you won't be producing from somewhere else.

I find that rather surprising.

Mr. Lazerwitz: --Well, from a federal standpoint, the Kansas gas that's now sitting in the ground... we would like that gas out of the ground.

It's the cheapest gas around.

Unidentified Justice: Fine,--

--Mr. Lazerwitz, is there any practical means to store natural gas once it's taken out of the ground?

Mr. Lazerwitz: No.

As I understand the... the field, it's too expensive.

Thank you.

Unidentified Justice: Thank you, Mr. Lazerwitz.

Mr. Tallsman, you have three minutes remaining.

REBUTTAL ARGUMENT OF HAROLD L. TALISMAN

Mr. Talisman: Yes.

Justice Scalla, it is just net correct in the real world that if... if we were to take more Kansas gas, we wouldn't be taking less gas elsewhere.

And that was--

Unidentified Justice: You don't have to spend a whole lot of time to persuade me or that.

Mr. Talisman: --I'm not going to spend much time on that.

[Laughter]

And I think there... and I don't think that they can really say there's no conflict between the purchasing mix case approved by the Commission.

When he says the Commission would have approved more low priced gas coming out of Kansas, that's not correct.

That was proposed in that case.

The proposal in that case... one of the proposals was we should take more of that gas, and the Commission said no.

They didn't think that was... they found that there were reasons the company had given as to why it shouldn't be taken that were... that were reasonable.

Now, with respect to the... the... the Solicitor takes the position that Northern is different than this case because in Northern the order was directed to Northern and because there were certain criminal penalties involved whereas here they say that the... what we're faced with are certain economic consequences.

And therefore, we are simply going to have to take that into consideration in deciding whether or not we want to buy more Kansas gas or suffer the possibility of not being able to buy it in the future.

Now, we submit that the modest kinds of criminal penalties that were involved in the Northern Natural case are far less significant than the sanctions of losing the supply.

The gas supply is the lifeblood of interstate pipeline companies.

And if we lose supply, we shorten the economic life of the pipeline system.

Unidentified Justice: Well, it sounds like there's a lot of flexibility in the Kansas plan that you don't really lose it, and even if you supposedly lose it, you can have it reinstated and so on.

Mr. Talisman: That... Justice O'Connor, that is... that is incorrect.

The purpose of this rule was to permanently cancel.

So, you do lose it.

You do lose it.

Now, you had a certain time period.

Unidentified Justice: Well, do you disagree with the state's representation about the possibility of reinstatement, and that it's automatically granted and so forth?

Mr. Talisman: Yes.

The rule specifically provides for permanent cancellation.

So, he is just wrong about that.

Now, the... and he's also wrong about the fact--

Unidentified Justice: In less than eight years?

Mr. Talisman: --No.

You have a certain period of time to get... to ask for reinstatement--

Unidentified Justice: Well, he told us there was eight... be--

Mr. Talisman: --but once that's over with, that's a permanent cancellation.

You have to ask--

Unidentified Justice: --But he--

Mr. Talisman: --I'm sorry.

Unidentified Justice: --The counsel for the state was correct insofar as he described the scheme within the eight-year period.

Mr. Talisman: It... if you... you have three years to ask for reinstatement, five years to produce it once you did.

He's correct about that.

But after that, it's permanently... permanently gone.

Now, I think it's important to note that the producers in this field who are underproduced were against this rule.

And those producers are the ones who they say are going to get gas drained away permanently and that's why they're passing this rule to protect them.

But they were against this rule.

The people who were in favor of it were the people who were overproduced.

And why?

Because what this rule is going to do is--

Unidentified Justice: Your time is expired, Mr. Talisman.

Mr. Talisman: --Thank you.

Chief Justice William H. Rehnquist: The case is submitted.

Attribution:

The OYEZ Project

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