good morning honors my name is jesse caddick and i represent the plaintiffs in a letter this case asked the question whether the state can reserved to itself the right to unilaterally impair the central financial term of a contract to which the state itself is a party it cannot along inconsistent line of supreme court and ninth circuit authority says almost as a categorical rule that the state cannot change the law in a way that impairs its own contractual obligations what you've started out by saying reserved to itself what if it reserves that right to itself in the contract it's not a contract of the state as  a right it's not a contract and it can't be impaired well except in this case the state has admitted that it's a contract that's never been an issue in this case but i'm just one of our group with your opening statement government you deal with you're subject to laws but assuming your initial statement is correct my difficulty here in this case is the very contract that you say was impaired warns you that we may change the law from time to time  that relates to this subject and if we do the contract that the contract will be changed that way in your client signs it doesn't so why doesn't that end the case i have two answers to that question the first is as a general matter of contractual interpretation there is a very specific provision of on the front page of the contract in section two about how the commission adjustments can happen and it says right there on the front page subsequent changes to the law by the legislature may require terms to change in future renewals of the agreement that you are thirty one on the very front page so in that section two it provides a whole  i'm saying section two is more specific then then it seems to me you don't you have a contractual claim well you're coakley or claim is that your claim is that they breached the contract rather than that the impaired it that's actually really interesting your honor because the peer wafer case from last year talked about that extensively however in that case they the district court deter decided on contract clause grounds but this court said no you still have a contract remedy so there's no  that's my point so if you're right about that if you're right that they had the that under the contract the old commission level should have remained in you have a contract claim against the state but which you couldn't have brought it in federal court probably you might have to do it otherwise we actually brought this case in state court and it was removed but your honor i think the problem with that idea is that the when media has been removed by the change in law we can't go to the court and say enforce our contract terms when those contract terms are now in violation of the law so that they well i don't understand that it seems to me your argument is they're claiming section eleven applies we're claiming section to apprise court tell us which one applies if section eleven applies then i've got an impairment argument and you know we can we can deal with that but if section two applies they should have been paying me more under the contract and give me those damages the problem is again your honor i don't disagree with that as a general principle but that's pure way for talked about that a lot and the reason the contract was exists and there's no remedy i don't believe i can go to the state district court or the federal district court in this case and say enforce this contract when the court goes to look at what the statute says and says no this statute what the statute doesn't say if there's or if somebody has a preexisting if somebody has a contractual ri to hire commissions one must not pay them it just sets up a commission a commission schedule right to apply from this point going forward that is correct your honor but i mean i don't think we have i mean i'm i'm not going to concede that but if i have a hard time believing that we have a contract remedy when well i would have thought you didn't either until you told me that you thought section two controlled over section eleven that's a contractual origin but that's  interpretation of contract market it's an interpretation of argument that defeats their defense to the contract clause claim so this same type of provision was in the contract in the energy reserves case there was a similar think that's the case you know that that contract expression recognize the existence of extensive regulation and by providing any contractual terms are subject to relevant present and future is change in federal law in other words they didn't really regarded as a contractual override that instead as as a further reference that your contract with the government they can change the law two points about that first of all the contract in energy reserves was between private parties and energy reserves itself noted that when two private parties contract with the proviso that they're going to share the risk that the law might change and that the contract or relationship might change if that happens is completely different than the government reserving to itself that same right energy reserves itself recognise that in footnote fourteen where it said when a state itself enters into a contract it cannot simply walk away from its financial obligations you know most every case the court has held a governmental unit to its contractual obligations when it enters financial or other markets like the courts two courts made a distinction and i want to move off the contract argument to the contract clause argument second which is your primary argument recordist said not every the impairment is so substantial as to reach a certain level here as i understand it you're getting lower commissions twenty five percent lower commissions which is the ultimately the net revenue for the whole time somebody why that meets their standards if the supreme court says are required to establish a contract clause elation so for example if they'd said no commissions for you in the future that's easy for me i actually have three quick responses that the first one is in one nine hundred ninety this court said in that employee's association that energy reserves has no direct effect on ninth circuit contract clause jurisprudence applies to public contracts because  using any alteration in a public on tract i'm saying by way violates the contract clause since one thousand nine hundred seventy seven when the supreme court decided us trust this court has found in every case where the government has changed a law that's altered a purely financial obligation that that's a cop that left the other party without remedy that that's a contract called violation and you know no matter how substantial or insubstantial so this when you look at the case they're not if you're just my question i  case here we believe that set out for ways that a state law can substantially imperil contract so it says one if it deprives a party of an important right to if it weren't the performance of essential term three if it defeats a party's expectations and for if it alters a financial term of the contract and when you look at these cases so for example if you look at the university of hawaii case the impairment in that case was they changed the day on which state employees got paid six times over the course of a year by three to five days so there was hardly a financial impairment was just a couple days different about when people got paid and they said this court said well that changes the relationship between the parties because people have these financial obligations and if you change the law to alter their financial obligations that's enough of an impairment in southern california gas they actually noted that it wasn't clear from the record what sort of financial impact that would have on the gas company it was only that it  defeated that party's expectations and made them you know it changed what they expected and i think our one other really important factor in that case is that it talked about the course of performance of the parties and here there's no question that since one thousand nine hundred five when the stores were privatized no stores ever had its overall negotiated for commission rate lower during the term of the contract and just to go back to the section two thing i think want i don't want to be misunderstood about what we're arguing with the import of section two being more specific and backstop by statute administrative rule legislative history from the director of the dio r and coarser performance we're not using that to say it's a breach of contract case we're using that to say that provision is more important and more central to the contract then section eleven and so section eleven well i think that what you're look at the judge haddon's opinion and if you look at the states arguments they'd their reading of the contract gives no effect to section two they just say section eleven completely trumps that we don't have to give section eleven would you still have the same question i think yes and i don't think it would be a strong but i think it would still be there because again this court has said over and over again and like in southern california guess if when the state just cannot reserve to itself the right to perform or not knowing letters into a contract those don't deal with contractual that doesn't deal with a contractual provision that deals with the states sovereign ability if you will to reserve to itself the ability to change contracts so the difficulty i'm having here is the line between your claim that the contract and titles me to continue commissions and the line that the state can't change the law this  that it's that it's that contract line i'm having a difficult estate can change the law and it has changed the law and there are many ways that the state can change the law that technically changes their agency franchise agreement but that does not impair it in a constitutional sense for example they could change the hours that liquor stores are allowed to operate by expanding no it's no one would say that that's an impairment for ninety of the ninety six agency liquor stores this s b one ninety three increased what they're going to be paid for the same amount of work in no way does that impair the contract as to them they're getting a benefit from this the problem is that this law was targeted by those other stores shop to the department of revenue as a way to cut well liquor off at the knees and when you look at all love the debts are due process claim not a contract and i don't believe it is your honor in this context because we have this express provision of the constitution that says no state shall pass and pairing the obligation of contract and that's what he did in his as well i mean the problem is it doesn't work in the absence of your contract cause clearly the state legislature could get together and say hey eighty percent of our sales are to one big supplier and we think not making enough money on them so let's change the commission rates in the absence of a contract the fact that they targeted your client doesn't doesn't make doesn't give you any right to write it i guess if we had a license or something like that and they did the same type of thing that might be a different claim but we have a written contract that no one has ever disputed is a legitimate contract and you know i just want to point out one more thing from southern california from southern california gas that contract and they called an agency franchise agreement there too it's exactly the same it said that the gas companies rights were supposedly quote subject to all ordinances here to for here after adopted in the exercise of the city's police powers and that is the precise provision that this court rejected in saying that does not remove the state from contract clause liability because if it did what would stop every public entity forever in this circuit from putting that clause in their contracts and therefore removing any obligation that they had to change the law there's no remedy because a you waive contract clause your contract contract clause rights and be removed the remedy so one other question it seems to me that if we accept everything you said here  by the liquor store owners association of montana there's no evidence in the record that this was designed to fix some broad problem with like you don't accept or goes justification well because the director of the department of revenue admitted in his deposition which is in the record that if the deal are had believed that this new law was important for some broad public purpose or something to do with the program then it could have supported the law as it was always the law was passed by t montana legislature career right but the deal with the bureaucrats thing would have thought why quite can't on this record we we concluded the legislature concluded that the reasons offered by by the by the lobbyists in effect where the reason to pass the statute well i suppose you could your honor but this circuit never has done that before and there's a heightened standard for the state to prove that it really was reasonable and the multiple case that talked about you have to look at what is the broad public purpose to be served and in the case of a purely financial term this circuit has never so found that when they ask you one more question i know and i know you're over time did the district court  i'm trying to recall deal with the justification it never reached that if we were to find that you were correct on everything else should we remain true to the district court to deal with that issue i don't think so your honor because i know you don't like that because he ruled against you the first time the party filed the parties filed cross motions for summary judgment on the content of the show that happens i want to hear but there is the record was fully developed there's no dispute the fact you can look at what the state sets out is justified there's no doubt we can do it my question is why should it in a typical case what we say is look the district court never reached this we could do it but let the dischord do it because if this record errors in doing it the second time you have an appeal if we screw it up you won't have an appeal because the supreme court will be interested so my view is that the normal course should be to send it back to the district court to address on addressed issues i guess it would have to overcome a long and consistent line of circuit authority to  my name is chris sweeney i'm representing all of the defendants and apple is in this matter i think two issues i want to address right up front based on the argument from lola lickers counsel first of all the commission rate was not the most fundamental term of the signs and there is language in our case law that says that if in a contract with itself the state impairs a financial term that's good enough to be substantial i think in some instances that can be and  it it's so i would respectfully disagree from that southern california gas case the the core focus is not on the dollar amount but on the phone the importance of the term this is a pretty important for how much money they're going to make selling liquor depends on how much they have to buy it for i completely sorry i mean it's hard to it's hard to think as a retailer or a wholesaler that there's much more important many more important things in your contract than price if i may i think if we look at the system and as a whole what we have here is a state mandated monopoly of which there are ninety six seats at the table and lolo liquor was given one of them the most important term of this contract of the contract itself because it has limited competition but we don't rank well in terminator substantiality for contract corps purposes we don't say well because there's a more important part of this contract this other part of the contract that deals with price can't be subject to impairment do we know i think that's exactly right and i think lowell liquor was wrong in making that argument i'm just saying that there is more important terms than the commission rate what i think the court looks at when it's determining financial provision that's been there i don't think it i don't think it's the most important term and they're going to say most of the question is is it important financial i suppose that they could argue that it's important to them but i think the case also goes on my apologies i don't have the case number that says that they don't necessarily look at the dollar amounts rich or that when assessing substantial impairment reserve the question of valuation in terms of dollars if an important financial provision is apparent seems to me to well i don't i don't think from the view of the entire contract that's the important term for purposes of substantial payment let's remember the liquor was able to use this advantages commission rate to grow its business a thousand percent in three years and at even more proof that it wasn't no but it also proves that it wasn't substantially impaired but my next point that after the implementation of senate bill one ninety three their own expert projects that they will increase their purchases from the state to thirteen and a half million and then in the following year of twenty eighteen to sixteen million ultimately peaking at twenty million that's under the implementation of the new law and so i would argue that it was within their reasonable expectations that this could happen based on the modification as well but that's true your argument about reasonable expectations turns on the language of the contract is it not a couple of things that turned out so the let me just make my question clear it let's assume there had been no section eleven ok and section two seems to say we might change the commission rate in future contracts so it in the absence of section eleven wouldn't they have a very strong contractual question no because i think the court looks to energy reserves the u s supreme court case that also says that look when you enter into a contract in a landscape of a highly regulated industry and the owners of lowell weicker have been in the right so now i'm reading again from southern as explained above a contract that allows one party to you know laterally rewrite quadro central terms is not a contract at all so they seem to discount that entirely well i would point the court's attention to the more recent case this court case are you i one that was cited extensively in our brief that was the supreme court's case and in particular pages eleven fifty one through eleven fifty two for this court made a very clear point i believe for a page and a half and when it is considering the substantial impairment prong of the contract clause analysis it does not focus on whether the government party government was a party to the contract the government's status as a party to the contract only matters on the second prong of the analysis as to whether it was reasonable for an important public purpose so back to the previous argument that reasonable expectations comes yes from the modification provision a section eleven didn't something that was directly in the contract between the parties it the court addressed in two ways first they said the the living wage which was the legit legislation in our u i one did not change an existing term in the contract that is true but they but they also said the contract in our u i one said that it would be changed or the lessee would be subject to future laws which said that they knew that the law could change and they would be subject to them not immune from them directly country that's exactly right which is why section eleven said the law could change in one it does and that's why i go back to my first question if there were no section eleven then it seems to me you wouldn't have a good argument that expectations were the contract just i do i'm dealing with the government the government can always change the law i think that's exactly what their supreme court says an energy reserves i mean are not focus i would think we wouldn't have as good of an argument where i think the fact that the contract entered into a highly regulated landscape also means the parties reasonably expect the walk of change and i would also point out that with respect to agency franchise agreements in montana the law has unilaterally changed by the government in two thousand and one the government unilaterally implemented a new discount for agency stores and what that did was added another piece of the commission which varied every year depending on the store's previous year's sales it may well be that nobody has to challenge a governmental regulation that benefits them well in some of this is somebody doesn't view that as an impairment the fact that nobody stepped forward to complain about it doesn't establish that the contract doesn't give you reasonable i would agree although i would say that in some instances people's commissions after they went up also went back down play with a very good but lunch what's for i want to focus on the contract here and not get away from it for second is it take your position is that because of section or  you reserved yours to yourself parties to contracts can do that the right to do change at any time may make the contract illusory but that's not what we're fighting about here is though is that your position i would think it was two things it was to put the parties on notice that the law could change and that the legislature retains its powers to change the law to the legislatures inherent power to change the law the supreme court seems to say in a case that truly involves a contract internet and then second it told the parties by entering into this agreement you're entering into an agreement which the law could change so yes that was an important part of the agreement i would also say that it can be read in conjunction with section two i believe lolo liquor repeatedly argues that we ignore section two but i think the district court got it exactly right that this contract identifies several ways in which the commissions can be changed either on future renewals every three years with the agency store owner's consent or if the latina's which is what section eleven says there's nothing inconsistent about those provisions and the why do you see this as i asked your colleague a breach of contract case why isn't this a case in which they should be arguing to the appropriate tribunal that you breached their contract well i think very simply then you may be subject to damages and you may not be wiser to contract cause impairment i think very simply that no provision of the contract either before senate bill one ninety three or after has been breached well that's not their position their position is that section eleven doesn't override your promise in section two that commissions  change in future or new rules i understand that that's the argument they're making we disagree i think they can all be read in harmony but nobody's ever ruled on that so all the district court has done is deal with a contra contract impairment argument i think the there can be breaches of contract by the state that don't amount to an impairment of contract or the contract clause is the ide the way i view it is that all happens to have it happens at the same time in fact to just record good address or breach of contract claim th ey did address the breach of contract claim but it was not appeal but what the court said is you were not promised a commission right there would not change and therefore you don't have a breach of contract so if that's not appealed and that's the real claim why do we have to get to the impaired judgment on is always one step ahead of me why do we have to get to the impairment quite well and perhaps you don't but i think the primary arguments that have been made in this case center and the district court also centered its reasoning on the contract claim in the substantial impairment and that we re meant it as gesture her way suggestion i think you can decide that i think it's clear the district court did address the reasoning for the law but it did it under its analysis of the substantive due process argument but it did so under a lower level of scrutiny so i don't think it was decided but it's a if you offer tell me how you offer justification we deposed the proponents of the bill who found the legislative sponsor to submit the bill to the montana legislature and i think this court should it get to that that threshold or that problem of the contract clause analysis can decide that it was reasonably related to an important government purpose  there's any further questions i would be would be happy to answer them ok thank you thank you your honor i'd like to make three brief points first we did actually in our brief it's not a long section of our brief but we did make an alternative claim that it's a breach of contract the second thing i want to point out is in one thousand nine hundred five when the legislature privatized the liquor stores and made these changes the director then of the department of revenue testified before the montana legislature with a hand out and said you are sixty four and he said rates can be adjusted upward every three years if an agency's rate is lower than periods in seas or extraordinary but that all that suggests is that justification may not you didn't agree with the justification that these other guys offered in other words it may be it may be that the director is right and this won't preserve the system it doesn't have to be oh it only has to be their justification it doesn't have to be it doesn't have to be proved out to be true does it and so let me just talk about montana and the contract cause montana has a contract clause in its constitution that's functionally identical to the us constitution and there's actually a case relatively recent case from montana seven up pete which kind of shows the hurdle that the state needs to clear to justify an impairment and in that case it was a bout a law that basically nullified mineral leases when the state banned a cyanide he believed mining in two thousand and seven and the state said ok that impaired the contract even though the contracts that it was subject to whatever laws made just of the time but the state said this is ok because it  is the subject of a countervailing state interest because the montana constitution has a fundamental right to a clean healthful environment in its declaration of rights and so that is the only situation i'm aware of either in this circuit or at the montana supreme court where they found a substantially where the state is heading in terms of explaining its justification although it has done it very much is something to the effect of that the state has an interest in regulating alcohol and that this is the way it's chosen to do it but this agency system and that that agency is just system is going to be threatened unless we have this kind of forms which that's their argument and that's the argument as set forth by their lobbyist for the liquor store owners there's no evidence i mean it doesn't sound to me to be off the wall different than the one in the montana case i think it's stanley different because the general public sees no difference for this there's not even any an affidavit from a liquor store would say with what goes beyond just saving money and they didn't try and the record of cause i'm not sure what the mechanism for opening the record would be i don't think that exists but in any event there's been significantly more justification in other cases in terms of preserving pension systems and you know preserving city streets in southern california yes and all of these different things and this circuit has never found a financial impairment and i would question for you my confusion on the breach of contract issue is this the district court found that there was no breach of the implied covenant of fear doing a good face was a separate argument made that it was just a plain breach of the