Warren E. Burger: The case is submitted. We'll hear arguments next in Reeves, Incorporated against Stake. Mr. Kirven, I think you may proceed when you are ready now.
Dennis M. Kirven: Mr. Chief Justice and may it please the Court. I represent Reeves, Inc., plaintiff, in the action below and petitioner before this Court. The issue presented in this case concerns the application of the Commerce Clause of the United States Constitution of a state policy favoring its own citizens over citizens of other States in a sale of products owned and manufactured by that State. The petitioner is here on a writ of certiorari from the United States Court of Appeals Eighth Circuit which held that this preferential state policy did not violate the Commerce Clause. The State of South Dakota owns and operates a cement plant in Rapid City, South Dakota, which manufactures, sells and distributes cement. This cement plant was authorized by the citizens of South Dakota by constitutional amendment in 1918.
William H. Rehnquist: Mr. Kirven, are there -- is there any North rather South Dakota law or constitutional provision which would prevent a private cement plant from operating in South Dakota?
Dennis M. Kirven: I do not know of any law which would prevent private cement plant from operating in South Dakota.
William H. Rehnquist: So, that in -- in effect, you have the state-owned one, but you could also have a private one in competition with it?
Dennis M. Kirven: There could be a private manufacturer. In 1920, the -- there is published a 1920 report of the South Dakota Cement Commission, published document, which was the study made at that time concerning the availability of cement and the feasibility of building a cement plant in South Dakota. And that report indicates that there'd been two attempts by private industry to build a cement plant in the State of South Dakota. That's just -- and that they had both failed. And the one plant was -- was built and the -- the report is not clear, but it indicated that it ran out of funds and closed its doors. There was cement being supplied to the State of South Dakota by a manufacturer located out of the State at that time.
William H. Rehnquist: But so far as you know, there's no statutory prohibition against another private plant making another effort even though it might be unsuccessful.
Dennis M. Kirven: None that I'm aware of.
Warren E. Burger: Suppose these two private operations having gone out of business, this is hypothetical now, and the State had a lot of road building to carry on, and so, they've set up their own cement plant for their own road construction, not for commercial purposes, not for proprietary purposes, do you think they'd have to sell cement to non-South Dakota residents just because they were maintaining a plant for their own purposes?
Dennis M. Kirven: I don't think --
Warren E. Burger: Or is it -- is it because they have entered the commercial stream of commerce that you'd make your point?
Dennis M. Kirven: In the case where the cement plant wasn't exclusively in-state process for the State itself and not for the State citizens, but for the public roads that are required to the State normally supplies though as a governmental service, then that would not be -- they were no be -- no requirement that a resident who comes from, say the State of Wyoming, would have a right to purchase any cement or be treated in the marketplace as any other competitor, because the State really has never placed the cement in the interstate commerce at that point. It's not involved as a participant in the market as they are today, because they participate in the marketplace, they solicit sales in a sevens, eight-state area. In 1977, 48% of the shipments of this plant went outside of the State. Now, Reeves can say, Wyoming Corporation, it has purchased cement from the South Dakota Cement Commission for a period of over 20 years and during that period of time, it has received salesmen who have asked for about the needs of the cement plant and orders have been placed and the cement has been either picked up by Reeves itself or delivered to the cement plant by trucks from the plant or hired by the company.
Harry A. Blackmun: But you didn't have a -- a long-term contract for delivery.
Dennis M. Kirven: No, there's no -- there was no longterm contract. There is no written contract period. The customary course of dealing with ready-mix dealers is to make sales purchases over the phone, orders over the phone, based primarily for the reason that they have no storage capacities. Most ready-mix don't have the type of storage facilities that could --
Warren E. Burger: Well, you can't store cement for very long after you've processed it, can you?
Dennis M. Kirven: Well, it requires special silos which most ready-mix -- small ready-mix dealers would not have. So, their needs are more or less, met on a -- as their demand comes in for concrete, they order more cements.
Warren E. Burger: The history you've outlined about the financial failures of the private enterprise cement plants indicates that for some reason or other, it's -- it's not a very profitable business. Now, is it possible that the state taxpayers of South Dakota are to some degree, already subsidizing the present plant and if they do subsidize a plant with tax revenues, which obviously they did to launch it, can't they favor the people who have taken the financial risk independent of the Commerce Clause?
Dennis M. Kirven: Well, I don't know that they are subsidizing this time.
Warren E. Burger: Well, they had to subsidize it to build it in the first place didn't they? I --
Dennis M. Kirven: They --
Warren E. Burger: I assume it was built with taxpayers' money, wasn't it?
Dennis M. Kirven: It was. It was built on the sale of bonds by the State and there was an assessment against the citizens for -- to pay off the bonds.
Warren E. Burger: And -- and does the record show whether it makes a profit or not?
Dennis M. Kirven: The record does not show that. I don't know whether the Court could take judicial notice of it or not.
Harry A. Blackmun: Mr. Kirven, about 30 years ago, South Dakota had a bad year for pheasants and it was decreed that no Minnesota or Wyoming or non-South Dakota hunter could come into South Dakota and hunt pheasants. The -- the South Dakota Supreme Court upheld that ruling and this Court dismissed the appeal. Do you think that has any bearing on this case adversely to your position?
Dennis M. Kirven: I don't think it does particularly after Hughes v. Oklahoma, Your Honor, which dealt of course, with the minnows in Oklahoma, in which it expressly overruled Geer v. Connecticut which was concerned, the -- the killing of -- of wild game in Connecticut in a transportation of that game outside of the State.
William H. Rehnquist: But you Hughes was a state regulation that applied to everybody within the State, private or public. Was it not?
Dennis M. Kirven: Applied and restricted the transportation of minnows and -- of natural minnows in-state and harvested from state waters for resale outside of the State.
William H. Rehnquist: And here, as I understood your earlier answer to my question. There -- there's no -- no statutory prohibition against a private corporation going into the cement manufacture business in South Dakota and competing with the state-owned one.
Dennis M. Kirven: No, there's not. But the -- the issue is whether or not, a consumer can go to any marketplace in the United States and be free from being -- then -- the exploitation of that person, because it happens to go into the State of South Dakota being a cement market. The State of South Dakota has enjoyed all of the benefits of interstate commerce and not only have as this plant been subsidized by tax dollars of the citizens of South Dakota, it has been subsidized by people who buy cement from the plant. That's their other source of revenue with 48% of the cement going out of the State, other people have paid and made payments to the plant over the course of dealings with that plant which have resulted to in its continued success.
Warren E. Burger: Does this plant pay taxes to the State of South Dakota for its operations?
Dennis M. Kirven: It pays the profit over and I think --
Warren E. Burger: I beg your pardon?
Dennis M. Kirven: It pays the profit over that it does make to the state treasury, but --
Warren E. Burger: Was the pay -- does it -- they have all the incidents of the -- the private plants that went broke, income taxes, real estate taxes?
Dennis M. Kirven: No, it doesn't. It has -- it has the power of eminent domain. It has the --
Warren E. Burger: No, I'm just talking about profits now, taxes.Do they tax the income, do they tax the real estate?
Dennis M. Kirven: I don't -- did not believe they -- they tax income and I believe that the real estate is -- is not taxed.
Warren E. Burger: Maybe that's why they -- they can produce cement to -- cheaply enough to induce the people of Wyoming to come over to South Dakota to buy it rather than making it themselves.
Dennis M. Kirven: I wouldn't know the answer to that whether --
Warren E. Burger: Wasn't going to -- it's just a matter of simple economics. If -- if Wyoming could make it as cheaply or cheaper wouldn't -- Wyoming do just what South Dakota does or private enterprisers in Wyoming set up plants?
Dennis M. Kirven: Well, I feel that's certainly a possibility if -- if it reaches a point where we have a scarcity of resources whether it be a cement on any other place where a state through its police powers and its ability to exempt certain operations from, say paying taxes or using its power of eminent domain to acquire a business which deals on a natural resource and feels that it could in fact operate the plant with less -- at a less competitive price than is available either by a private industry or -- or another, that barriers between interstate commerce are going to be set up when preferences are then granted to these particular states and that's what creates the trade barrier.
Warren E. Burger: Are there no cement plants in Wyoming?
Dennis M. Kirven: There is one cement plant in Wyoming, in the southern part of the State. It does not serve area where my client is.
Byron R. White: Where is it?
Dennis M. Kirven: The cement plant is in Laramie, Wyoming.
Byron R. White: Is it operating?
Dennis M. Kirven: It is operating.
Byron R. White: At what capacity?
Dennis M. Kirven: It produces this is out just nine -- well, maybe in the record, maybe in the affidavit of the Secretary of the Cement Commission. It produces approximately I think 200,000 tons of cement.
Byron R. White: Where does it get its raw material, do you know?
Dennis M. Kirven: I do not know.
Byron R. White: Where do you -- where -- where does South Dakota plant get its material?
Dennis M. Kirven: Most of those raw materials are located in the State of South Dakota. Its -- its fuel, coal comes from Wyoming and natural gas comes from North Dakota.
Byron R. White: But the -- but the rock, the -- the lower --
Dennis M. Kirven: Limestone --
Byron R. White: The limestone.
Dennis M. Kirven: -- is quarried right at the mine site in Rapid City, as I understand.
Byron R. White: And is that state-owned?
Dennis M. Kirven: Yes, I believe it is.
Byron R. White: Is that the only quarry like that in the State?
Dennis M. Kirven: I do not know.
John Paul Stevens: Mr. Kirven, do you know if there has been any change in the capacity of the South Dakota cement plant since it was first put in -- started operation?
Dennis M. Kirven: On July of 1978, when the cement plant in -- experienced a shortage that we were discussing here today and they were bringing on line a new production expansion facility, which would almost double its production. So, they had problems with production at that time and that would have doubled the capacity as I understand it of the plant before 1978. The new facility will actually double its production which --
John Paul Stevens: Let me ask you one other question. If the State were to restrict its sales or consumption of its -- its output to public facilities such as public highways, public buildings, bridges and the like, would you think you have any objection to that, any constitutional objection to that?
Dennis M. Kirven: Only if -- if the State was actually using the cement for its own -- own uses and not selling it to its citizens. I -- I would agree with that.
John Paul Stevens: And do you say there'll be no objection to that?
Dennis M. Kirven: Right. I would have no objection. It's just --
John Paul Stevens: Your point is that once it goes into the open market it should be treated like a (Voice Overlap) --
Dennis M. Kirven: And once it's sold to a -- to a citizen in a -- in a nongovernmental type of activity where it makes a sale for its citizen.
John Paul Stevens: Do you think a State can restrict its purchases of supplies for various public uses to instate sources? Could they buy all their printing and all their paper and all their own -- say they didn't operate their own thing from local sources, just to favor a local business?
Dennis M. Kirven: Only if they -- I -- I would say that it would be unconstitutional unless they pass the balancing test this Court has traditionally employed to determine whether its -- only has an incidental effect on interstate commerce.
Warren E. Burger: Are you saying that the legislature of South Dakota couldn't pass a -- via South Dakota sort of a program requiring all state purchases to be made from the State if they were available?
Dennis M. Kirven: If that regulation has a significant burden on interstate commerce which I -- and if that were showing, I do not believe it promotes any legitimate local interest which this Court has previously recognized because the purpose of that, assuming it would be for the economic gain of the citizens of South Dakota.
Harry A. Blackmun: I thought this program specifically upheld instate printing requirements?
Dennis M. Kirven: It -- in American -- I think it's American printing and -- versus Askew case, the Florida case. The -- there was a summary affirmance of that statute, but --
Harry A. Blackmun: Let me ask you one other question. There always seems to be a man named Hughes in this area, but not in your case. You mentioned that Hughes against Oklahoma, do you think that case is closer to this one than Hughes against Alexandria Scrap?
Dennis M. Kirven: I would say that Hughes v. Alexandria Scrap is closer than Hughes v. Oklahoma case.
Harry A. Blackmun: And you feel then, it had touched in your favor?
Dennis M. Kirven: Hughes v. Oklahoma?
Harry A. Blackmun: No. Oh --
Dennis M. Kirven: Hughes v. Alexandria Scrap?
Harry A. Blackmun: Yes.
Dennis M. Kirven: Well, I would distinguish Hughes v. Alexandria Scrap. I do not believe that Alexandria Scrap can be extended to include a preferential policy by a State which is engaged in a -- a nongovernmental service or in this case, a -- an actual regulation of commerce. The State of South Dakota claims immunity under Alexandria Scarp saying that their conduct was similar to that of -- of Maryland in the Alexandria Scrap case and just simply participating in the marketplace, but I submit to this Court that much more than being a participant, they became a regulator of interstate commerce when they adopted the policy. Only by regulating interstate commerce could they accomplish the purpose of providing their residents with a -- a preference. It wasn't a --
William H. Rehnquist: But I thought you -- I thought you said at least by a statute or regulation. They had no prohibition against anybody else going into the cement business.
Dennis M. Kirven: Not going into the cement business. But this policy, this preferential policy of who could buy from the cement plant affects my client because no cement was available for him to buy. It was taken up by South Dakota residents. The South Dakota Cement Commission eliminated competition for its cement from residents in the six-state area. And that's how they were able to supply the -- their residents with cement.
William H. Rehnquist: So you would distinguish then between as a policy of a state producing -- company like this that sold only to state-owned entities which you would say is alright.
Dennis M. Kirven: Yes.
William H. Rehnquist: And a policy of a state-owned entity like this, which sold only to persons or entities residing within the State which you say is bad.
Dennis M. Kirven: That's correct. The -- the options that South Dakota had at that time for an even handed treatment of not only its own citizens, but the consumers and customers who had -- had traded with previously, was the 50% allocation policy which gave all persons the right or the allocation of cement based on a previous three years average of the previous three years cement purchases. And that would've been perfectly acceptable to Reeves to be able to receive that kind of allocation because it did not discriminate against inter-commerce. And the -- the classifications of South Dakota is being either a participant in the marketplace or even being in a proprietary rather than a governmental nature or activity, does not preclude that State from regulating the market. Because in this case with the large segment of the market in that area being handled by South Dakota, it could in effect, regulate interstate commerce.
William H. Rehnquist: What if this had been a municipal utility in South Dakota that had extended service into Wyoming at a certain time and then found its, say it was supplied the hydraulic power and -- of a short season, bad season and it had to -- it simply didn't have the generating capacity anymore. Would it be permitted under your view of Interstate Commerce Clause to cut back its services to only South Dakota municipalities?
Dennis M. Kirven: If the decision was based on a rule of reason or a good business decision. I don't think that -- that anyone can object to business withdrawing from certain market areas. The -- the position is that this was not -- our position is this is not a marketing decision. If a hydroelectric company because of its facilities must in fact cut back and it's a reasonable business decision. It's not based on the fact that it's where you live, but it's where the distribution lines are. It's not that you're a resident of the State of Wyoming, but that the distribution lines or the capacity just isn't sufficient to supply that electricity to Wyoming, then in those cases if it's a logical business reason, there is no violation because there's really no discrimination against interstate commerce.
William H. Rehnquist: Well, but what if -- what if there were some lines going to South Dakota communities that were longer than lines going to near Wyoming communities?
Dennis M. Kirven: Well --
William H. Rehnquist: And the -- the hydroelectric generating plant nonetheless said, “We're going to serve first to South Dakota demand.”
Dennis M. Kirven: In that case, I would say that's unconstitutional. I think that that's an impermissible burden on interstate commerce because it discriminates against interstate commerce. It's a disguise of a form of creating a benefit to its own citizens which if it was a substantial burden, couldn't be overcome.
Warren E. Burger: When you -- you answered some questions of both mine and Mr. Justice Stevens about once entering the stream of commerce, then they took on all the burdens. Now, go back to the hypothetical I put to you that South Dakota set up a cement plant which would be exclusively to supply the contractors who were building South Dakota roads and you -- I understood your response to that earlier was that that would be alright. But have --
Dennis M. Kirven: Well --
Warren E. Burger: Has not that cement operation -- has not that cement gone into stream of commerce as soon as they begin to sell to the contractors who are building South Dakota roads, because some of them might be contractors from North Dakota, Minnesota, Wyoming and Nebraska?
Dennis M. Kirven: Your Honor, I understood your first question as being directly used by state employees themselves and I didn't --
Warren E. Burger: Well then, all right.
Dennis M. Kirven: -- didn't understand the contractors being in your first question.
Warren E. Burger: Now, we have then in --
Dennis M. Kirven: Okay.
Warren E. Burger: -- from your point of view, I need to (Voice Overlap) --
Dennis M. Kirven: With the contractors in the first question, I believe that if they supply a contractor who is doing a -- a job for a public hospital or a public road or any other public facility, that is interstate commerce. Because in --
Warren E. Burger: And South Dakota could not confine under the Commerce Clause, could not confine itself to those South Dakota public works projects.
Dennis M. Kirven: I submit that it cannot, unless it builds the hospital itself and it uses the cement itself.
William J. Brennan, Jr.: Mr. Kirven, I don't really like -- the Court fully -- why you think Alexandria is distinguishable?
Dennis M. Kirven: This -- the distinction of being a participant in the marketplace in that case, it appears to me that the State was attempting to accomplish a governmental function of keeping a clearing -- clean environment. Here, the purpose and policy of South Dakota is not what has been traditionally defined as a governmental function, but is one which seeks to gain economic opportunity of the citizens of the State of South Dakota. That's clear in the Eakin versus South Dakota Cement Commission case, which was cited in the briefs, as the state case involving the --
William J. Brennan, Jr.: Well then, as I understand it, what you suggest is that Maryland had a state interest, an important state interest which was served by a manner in which they limited the pick up of --
Dennis M. Kirven: Yes.
William J. Brennan, Jr.: (Inaudible)
Dennis M. Kirven: And also, private enterprise in Maryland as I understand it was in business in scrap processing market, but they were not effectively taking care of the junk cars for -- to -- to keep a clean environment. And so the state has stepped in and -- and taken over that aspect to the extent that it does now clean up the environment, presume it has some effect on cleaning the environment. Though --
Harry A. Blackmun: Well, there is another distinction, but I question whether it's worth anything. In Alexandria, the State was the purchaser. Here, it's the seller. Does that make any difference?
Dennis M. Kirven: Well, it seems to me that it does, because it's difficult to resolve the differences between purchasing just like the -- the -- there -- it seems to me that a state needs certain purchases to operate. It needs pencils. It needs paper. It needs gasoline. There is a difference between a state buying those materials which it needs and saying, “Well, we're going to buy all the pencils for all the citizens of the State.” That I see is a distinction between it to purchase. I'd like to reserve the balance of my time for rebuttal.
Warren E. Burger: Very well. Governor Janklow.
William J. Janklow: Mr. Chief Justice and may it please the Court. As I begin the oral argument, I'd like to touch upon some of the questions that were raised by members of the Court to counsel during his argument. First of all, the fact that the South Dakota is in the cement business comes as a direct result of the South Dakota citizens being in the teens and the 20s, some 50, 60, 70 years ago, about 70 years ago being unable to get the cement they needed to do the things that normal society carries on, things like building hospitals, building schools, building roads. A good analysis is -- of this is found in the Eakin case that -- that both of us have cited in our briefs. And the South Dakota Supreme Court made very, very specific findings in its determination of the Eakin case. It found, for example, that cement and its products are commodities that are necessary to the people of South Dakota. They cannot be produced at the present time through individual effort, that the construction of highways, bridges, streets, pavings, sidewalks and public buildings within the State, cement is necessary. They found that the use of cement is rapidly increasing in South Dakota that a serious shortage of the supply of cement is threatening to the people of the State. That there had been a shortage on many occasions during the previous years, but the shortage has interfered with and delayed both public and private enterprises, that the materials for making of cement are found in large quantities and at necessary points within the State. I think that answers a couple questions that have been raised. In addition to that, nobody can cite any statute any place. In the history of South Dakota that says anybody who wants to, including Mr. Reeves from Wyoming, can't come to South Dakota and go in the cement business. There is no statute that says that Mr. Reeves can't come over and haul our raw materials over the Wyoming and make cement. There's no regulation.
John Paul Stevens: Governor, supposing the State owns all the land on which the raw materials for cement are available, would your argument be the same?
William J. Janklow: Sure it would. As far as South Dakota --
John Paul Stevens: All right, if somebody else comes in and -- how could someone else come in and go into the cement business if you owned all the --
William J. Janklow: Well --
John Paul Stevens: -- raw materials?
William J. Janklow: You mean all through out the entire State of South Dakota?
John Paul Stevens: Yes.
William J. Janklow: I think, I'll argue --
John Paul Stevens: I don't know of the facts, but assume they're concentrated in a certain area and that you happen to own that as public land.
William J. Janklow: I think that as long as it wasn't opened up to anyone, that they wouldn't have an argument. I think once it was opened up to some private people, it would be a different situation, but that's not even approaching the case that we have in this situation.
John Paul Stevens: But you've opened up the -- the cement market to private people by selling to private people.
William J. Janklow: But that's no different than a private individual, unless -- unless it's being suggested that somehow in the history of the Commerce Clause that there's been a dual standard set up that's different for Government than it is for private individuals.
John Paul Stevens: Well, Governor, do you think the South Dakota could charge one price to local residents and a higher price to people in Wyoming?
William J. Janklow: No, sir, not with the Fourteenth Amendment in place, I don't.
John Paul Stevens: Why not?
William J. Janklow: Because I think Equal Protection of the laws Clause would apply. And I don't think --
John Paul Stevens: You think there in -- you think the Wyoming purchases are entitled to be treated equally with the South Dakota purchasing?
William J. Janklow: In terms of price?
John Paul Stevens: In terms of price.
William J. Janklow: I would, yes. Why not?
John Paul Stevens: Why not in terms of quantity then?
William J. Janklow: Pardon me?
John Paul Stevens: Then why not in terms of quantity?
William J. Janklow: Because I think that when you talk about a discrimination of the Fourteenth Amendment, if there's a valid state purpose, they don't go behind it. You -- you got a different standard completely when you're talking about a Fourteenth Amendment case.
John Paul Stevens: All right. I don't understand the distinction between subsidizing local residents by giving them a bargain and subsidizing local residents by letting them have all the available supply.
William J. Janklow: Well, this -- the -- the issue is, is what is Government falling for? And we have government in South Dakota as they do every place else to take care of the need of its citizens. Our government in South Dakota doesn't function for Wyoming citizens or Iowa's or Florida's or anybody else's. It generally functions for the needs of the citizens of South Dakota. And the endeavors and the engagements and the functions that we get into are those things that have been determined as a legislative policy to be the things that the citizens of South Dakota need.
Warren E. Burger: Does this record show what is the investment of the people of South Dakota in the cement plant?
William J. Janklow: I don't believe the record shows it.
Warren E. Burger: Well, I -- I suppose that's a matter of public knowledge somewhere.
William J. Janklow: I think the Court could picture this and notice the fact. That's around $40 million, because the records of South Dakota which are public records would indicate it's about $40 million.
Warren E. Burger: Over what period of time?
William J. Janklow: Over the period of time since the cement plant was built. The capital and the --
Byron R. White: Suppose you sold the cement plant to a private company and then the legislature passed a law saying the company may not sell outside the State.
William J. Janklow: We couldn't do that that. That would be an absolute constraint against the Commerce Clause and we agree to that.
Byron R. White: And yet as long as the State is -- as long as the State keeps all -- owns the plant, you can do it?
William J. Janklow: Yes. We can do it as long as the State owns the plant.
Potter Stewart: (Voice Overlap) --
William J. Janklow: And this Court has -- this Court has indicated that in previous decisions in the Alexandria case. The Maryland case, this Court -- Justice Powell's decisions specifically alluded to that.
Potter Stewart: If the plant were owned not by the State, but by a private company, could that private company decide to break off all its sales to out-of-state residents and sell --
William J. Janklow: Absolutely.
Potter Stewart: -- sell only in -- in -- within the state of South Dakota?
William J. Janklow: There's never been any --
Potter Stewart: Clearly could, couldn't it?
William J. Janklow: Absolutely. There's no question about it.
Potter Stewart: I see.
William J. Janklow: And once we -- the -- the -- we think the key issue in this case is, are we a regulator or are we in a proprietary aspect of government.
Potter Stewart: Right.
William J. Janklow: If we are regulating interstate commerce in a direct sense or even in an indirect sense, then we think that we fall under the Commerce Clause. If we're not, we don't think we fall under it at all and that's where we think the key distinctions of this case are. This is no different in colleges. The governments get into colleges. We charge people tuitions, some states more, some states less, but nobody would argue that South Dakota can't prohibit all out-of-staters from coming to its state schools, because of the investment we've made and trying to educate our people. Now and as a matter of fact, all states allow out-of-staters, but there's a discriminatory policy that every state has that basically favors their own citizens. And providing an education isn't really any different than providing the buildings that people go to, to get their education or the houses that they live in when they're growing up. As far as paying taxes, the question was raised and I think the Court could take just -- judicial notice of the statute to South Dakota, although it's not in the record that the -- the state cement plant does pay severance taxes to the state government, just exactly like Homestake gold mine, the gravel pits and the other aspects of enterprise that deal with the severability or that deal with -- with severable resources being taken from the State.
Warren E. Burger: How about the income taxes?
William J. Janklow: Pardon me?
Warren E. Burger: Do they pay income taxes?
William J. Janklow: We're one of three states that doesn't have that. We -- we don't have an income tax, Mr. Chief Justice.
Warren E. Burger: (Voice Overlap) --
William J. Janklow: We have property taxes and -- and the property tax fee, we're going on in our State also. But the property taxes are paid to local government by the state cement plant, again under a statute authorized by the state legislature.
John Paul Stevens: Governor, you mentioned that there's about $40 million been invested in the plant. Do the public records disclose whether or not over the period of its life, the plant has been profitable or unprofitable?
William J. Janklow: It -- it has -- it has been both. It is --
John Paul Stevens: But in (Voice Overlap) --
William J. Janklow: -- when you talk about profit --
John Paul Stevens: -- but in taking the entire period into account.
William J. Janklow: It has had at -- at the -- over the entire period of time, I can't answer that. I can tell you there are years when its cash flow is plus and years when its cash flow is a minus. But I don't think you can call that profit or nonprofit because the State doesn't -- governmental accounting doesn't take into consideration, historically, the payment of taxes. It doesn't take into consideration depreciation and the bookkeeping methods.
John Paul Stevens: You mean to tell me -- you can't tell me whether the plants made money or not?
William J. Janklow: It -- I can tell you that it ends up some years with a cash surplus, but in terms of bottom-line net. In terms of proper accounting, I can't tell you if that's a profit, but I can -- but I can tell you every year for the last several years -- for example, this year, the legislature and the preparation of its annual budget has ordered that $9 million will be transferred from the state cement plant to the state general fund to assist in reaching a balance budget. Last year, it was $7 million, the previous year, it was $5 million. But there have been years when nothing has been transferred because there wasn't any -- any excess cash.
John Paul Stevens: Have there been years in which general revenues have been applied to the fund to keep it from losing money? I mean your -- to keep it going.
William J. Janklow: To my knowledge, no, because they've had the bond --
John Paul Stevens: Then -- then isn't that a fair inference that the plant has over the years, made money.
William J. Janklow: No. It has had positive cash, but that's not making money. You can end up with excess cash at the end of the year and lose money, because they may not be funding their depreciation. They may not be putting funds aside for --
Warren E. Burger: And many of that --
John Paul Stevens: But if --
William J. Janklow: (Voice Overlap) --
John Paul Stevens: -- they always have -- if they -- if every year in which they do something, it's always giving money to the general revenues. It seems to me the interference is inescapable they've made money.
William J. Janklow: There are years when they borrow money when they're short. Several years ago, they borrowed several million dollars. They have the power and borrow.
John Paul Stevens: They never defaulted any of those loans?
William J. Janklow: Pardon me?
John Paul Stevens: Have they ever defaulted on any of those loans?
William J. Janklow: No, sir. To my knowledge, no, sir.
John Paul Stevens: But you don't know whether the plant has made money or not. That's -- the bottom line as far as your answer to my question (Voice Overlap) --
William J. Janklow: That's right. In accounting sense, I can't answer that
Warren E. Burger: But in any event, there -- the -- the plant, the operation is at risk of losing or making just the way Chrysler Corporation has been.
William J. Janklow: Or any other private enterprise. And I think the thing that we have to keep in the context is as both briefs will indicate, what happened in 1978 to cause this problem? We had a new kiln coming online and the new kiln was really to replace the old kilns which were built 50 or 70 years ago or I should -- about 70 years ago. Their pollution -- they have a lot of pollution and this new kiln will equal the production of the old ones. It just so happens there was such an incredible demand for cement about the time this was done, they didn't shut the old ones down, they've been pumping it out as fast as they could ever since. But there's a limited lifespan available to those other ones. Is plaintiff in this case arguing that we could force them to buy cement from us, if they ever quit buying from us on the theory that their refusal to buy from us is an interference in interstate commerce? For them to be logical, they're going to have to concede that point. That -- they can't just put all the burden on us and say, “If they choose, they can come to us and buy, but we can't choose to force them to buy from us.” And the logic would be the same.
Harry A. Blackmun: Governor, does South Dakota have any other special enterprises like this cement plant? Your neighbor to the north has the Bank of North Dakota.
William J. Janklow: Yes, sir. It does, Mr. Justice Blackmun.
Harry A. Blackmun: Are -- are you in any other business beside --
William J. Janklow: We were in a coal business in the 1930s and we went broke and we were on rural credits in the 1930s and we went broke. These -- these are enterprises that flow from that old La Follette, Wild Bill Langer in North Dakota --
Harry A. Blackmun: Sure.
William J. Janklow: -- nor back in South Dakota tradition that grew up back in the 1920s and 1930s where that populous tradition that the Government into those fundamental services that wasn't being provided and couldn't be provided at that time by private enterprise. We, who consider ourselves very conservative state, have a state-owned cement plant.North Dakota has got a bank in there and is in the grain business and I think they also still have a coalmine in North Dakota. Nebraska is in the power of business and we don't allege for a minute that we can go down and ask Nebraska Public Power District and force them to sell us electricity because they do go across state lines in the grid. They're hooked into the national grid and that was brought up in the Court of Appeals.
William H. Rehnquist: Well, if I might be so bold to suggest. I think Minnesota is also in a municipal power business. In many parts of the State, there's been competition between public and private power sources, has there not?
Warren E. Burger: That's usually local governments, is it not?
William J. Janklow: It's local governments. The rule of electric administrations and private, the investor on utilities, the REAs and municipal governments, there are many communities that have their own municipal power plants throughout the entire Upper Midwest. Some of whom still have them, most of them whom are now hooked into the major power companies.
Warren E. Burger: When you -- you were in the rural credits business? Did you lend on farms outside of South Dakota?
William J. Janklow: No, sir. Pardon me?
Warren E. Burger: Did you lend on farms outside?
William J. Janklow: No. And to my knowledge, no. We didn't lend on farms outside the South Dakota, but if you go all the way back to 1920, how did we start selling the Wyoming? Way back in 1920, the record will disclose in the appendix that the minutes of the Commission back in 1920 specifically stated that if they ever had any excess over and above their needs for South Dakotans, they would make it available to other people. That -- and when we ran into this problem in 1978, what did our Commission do? It said, “We will give preference to South Dakotans and everybody we have a contract with.” And Reeves comes in here and argues and it in come to all the courts and argued. We didn't have a contract. The briefs will show or the record will show that we had 75,000 tons under contract at the time we ran into trouble. And our cement plants said, “We will fulfill those contracts irrespective of where those people happen to be located any place in America, plus we will take care of South Dakotans and after we've taken care of South Dakotans and fulfilled our contracts, we will go first-come, first-serve to everyone.” What they're complaining about is the policy we established. Theirs would be that you taken on the order of either first-come, first-serve which -- which is nonsense. You'd force people to just go put in a big order, bigger than they needed, so they could sell it to others in terms of the shortage or two, if it was on a pro rata basis to put in a bigger order than they needed, hoping to get a larger share of what they actually needed. What they're complaining about really -- Reeves is complaining that he didn't have the foresight to go sign a contract with the cement plant --
William J. Brennan, Jr.: The Government did you say --
William J. Janklow: -- and fulfill our contracts.
William J. Brennan, Jr.: Did you say that the end use today of the production of the cement plant is in every case in a public building or a public road or something else?
William J. Janklow: No, sir. It's --
William J. Brennan, Jr.: They could go into an apartment building, to anybody?
William J. Janklow: It -- it does. It does. It's generally --
William J. Brennan, Jr.: And in which -- to which the purchase and as long as he's a South Dakotan, wants -- wants to put if he make, it may not.
William J. Janklow: Well, everybody made today. Since 90 -- since June of a year ago, there's been no restriction again, because the production's up. So everybody is being taken care of, but I would end to answer your question, yes, that South Dakotans would come first, but it does not go into just the public enterprises.
William J. Brennan, Jr.: Do we have any idea what the percentage is that goes in the private as against the public enterprise?
William J. Janklow: I can tell you that a year ago, I think the record would show that of the 750,000 tons. Some place rather, 278,000 just went into highway paving contracts in the State of South Dakota.A year ago, we had to stop the building of the poor Indians housing on the reservations and the record reflects that. We had to stop the building of the school in Spearfish, South Dakota, because -- and the record will reflect that. We had to stop the building of hospitals in South Dakota because everybody ran out of cement. There just wasn't then.
Warren E. Burger: Well, this was before you built the new facility?
William J. Janklow: No, sir. This was afterwards.
Warren E. Burger: Even after?
William J. Janklow: This was afterwards. They were just -- the only reason we don't have another year like that this year is because interest rates are 20% and -- you know only the Arabs can afford to buy right now. That to build anything, nobody else can. We can't, there's anybody in Midwest that can afford to build the 20% interest rates. If we could, we wouldn't spend their money building anything out there.
Lewis F. Powell, Jr.: You've emphasized in much of the argument the necessity from the view point of your State to have the cement plant. Would that apply to a sporting good equipment plant for example? What I'm interested is how far down the road of governmental necessity would your theory take you. Is there any -- any sort of manufacturing plant that -- that you would say the State could not operate and impose these restrictions on its product?
William J. Janklow: I -- to be logical, I have to say, yes. I can't think -- I -- I can't think of any.
Lewis F. Powell, Jr.: But what about my example say as -- the plant that manufactured ski equipment?
William J. Janklow: Again, I think that -- that you'd have to look at -- first of all -- well, my -- my answer would be, if a private business can say, if Coors Beer can say, “We're not selling of South Dakota”. If -- if Wilsons Sporting Goods could say, “We're only selling East of the Mississippi river,” then I think that a government can do it. I don't think the Commerce Clause drives a distinction between what the Government does and private business does when you're talking about proprietary functions as opposed to regulatory functions.
Lewis F. Powell, Jr.: It's not likely to happen in this country, but in theory at least, the State, I suppose, could socialize most of its businesses and could it then deny to interstate commerce the products of all of those businesses?
William J. Janklow: I'd say yes, but and my but is, on condition that Congress has the right under the Constitution to say that it can't be done that way. They haven't clearly enunciated that, but Congress does have the right because everything to some respect, touches commerce and we don't even argue that, interstate commerce. And as a result, Congress could proscribe that and that you'd have different issue -- set of issues. But we don't have that here.
John Paul Stevens: Governor, you -- you rely heavily on the distinction between proprietary and government functions and you argue as I understand you in substance that you're just like a private proprietor who can make a private decision not to --
William J. Janklow: Yes.
John Paul Stevens: -- sell to somebody who doesn't want to sell to.
William J. Janklow: Yes, sir.
John Paul Stevens: But is the decision to confine your sales to local residents really motivated by proprietary considerations or by a governmental interest in the welfare of the local citizens?
William J. Janklow: It's by governmental interest in the local citizen --
John Paul Stevens: But doesn't your --
William J. Janklow: -- but that puts us into the proprietary business. There are some people who go into business for goodwill and not for profit, but they end up making a profit.
John Paul Stevens: Let's say, if this were a privately owned entity, well, is there any reason in the world why it would limit its sales to local residents?
William J. Janklow: I have to say, yes, because I know that for example, half of America screaming, they Coors beer and they won't sell it to them, only some states get it. I don't know why, but we can't get it. So there must be some times when a business decision is made to limit it to certain geographical territories.
John Paul Stevens: But presumably, that's done for -- for economic -- for the economic gain of the -- of the seller, but you don't contend that this is an economically motivated respect.
William J. Janklow: Business? Not at all. It's a governmentally motivated business, a public policy motivated business. Mr. Justice Powell said in -- in the Alexandria case and we think it's just -- and I hate to just lift certain language out of it, but it ties into the whole thing that the case was discussing, nothing in the purposes animating the Commerce Clause forbids the State in the absence of congressional action from participating in the market and exercising the right to favor its own citizens over others.
Byron R. White: Mr. Governor, I take it then that if -- if you have a -- if you open a contract -- if you put out bids for building a highway, do you let foreigners bid on that?
William J. Janklow: Yes, sir. We do, sir.
Byron R. White: And that even though they aren't residents of --
William J. Janklow: Yes, sir.
Byron R. White: -- say an individual -- say an individual contractor from Denver operating in his own name, comes up to bid up there. Do you let -- do you take his bid?
William J. Janklow: Yes, sir. I -- and I'm --
Byron R. White: Would you sell him cement?
William J. Janklow: In South Dakota?
Byron R. White: Yes.
William J. Janklow: Sure. I -- you know --
Byron R. White: Well, I thought -- I thought the restriction -- doesn't this restriction provide for sales only to South Dakota residents?
William J. Janklow: Yes.
Byron R. White: So that -- so that even if the cement was going to be used in South Dakota, you nevertheless, would bar a sale to a nonresident? That's the way I take the restriction to be.
William J. Janklow: All right, as I understand it, that's correct.
Byron R. White: So that -- so that you might say that you're keeping -- you -- you want the cement to be used in South Dakota, but you really are saying that you want it to be used in South Dakota by South Dakota citizens?
William J. Janklow: No -- no, I really --
Byron R. White: Well, that's the way it operates.
William J. Janklow: Well, except only at one period of time when they ran out and that honestly, it never came to that discussion.
Byron R. White: Well, I just asked you again. If a Denver contractor came up and bid on -- on South Dakota -- on a South Dakota -- he might just as well stay at home because he couldn't buy cement up there.
William J. Janklow: No, sir. If he had a contact, he would've been taken cared of.
Byron R. White: I know. He's not resident.
William J. Janklow: Except everybody that bids, I -- it's a -- it's a -- in the -- in the bidding industry, a contractor has a got firm price on cement before he goes in bids. That's --
Byron R. White: Well, as (Inaudible) he you wouldn't bid. He wouldn't bid because he couldn't get -- because you wouldn't sell him cement.
William J. Janklow: At that particular time, that's probably correct.
Byron R. White: At that time -- at this -- well, I know but that's the way the restriction is.
William J. Janklow: I understand that and at that time --
William H. Rehnquist: He could -- he could nonetheless, bid on a South Dakota road project and if his bid were a low bid, it would be accepted.
Byron R. White: It'll be accepted but he --
William J. Janklow: Well --
Byron R. White: -- but he -- he couldn't buy South Dakota cement.
William J. Janklow: I slightly hesitated because we do have provisions under our state law that give preference to South Dakota bidders and I do know that in the purchase of materials in personal property that there is a preference for South Dakota and just like the Florida case, the Askew case, but I can't tell you whether or not that goes all the way to road bidding. So I just -- I don't know, if I'm being correct factually in the way I respond. I don't know that it carries that fact.
Warren E. Burger: Governor, in -- in calling for bids, you -- you could provide, I assume, that the successful bidders would be permitted to buy South Dakota materials.
William J. Janklow: Well, this -- this -- not really.
Warren E. Burger: Why not?
William J. Janklow: The state cement plant is an independently run organization. I have no power -- our governor --
Warren E. Burger: Well --
William J. Janklow: The -- the legislature would have to change the law to -- to tell the cement plant what to do. They have independent commissioners that once their appointed, they're -- they're almost sovereign in terms of -- of how they do their own business, consistent with the laws.
Warren E. Burger: But by agreement.
William J. Janklow: Would by agreement? Yes.
Warren E. Burger: That by agreement, that could be accomplished that the -- the successful bidder would be able to get his cement in South Dakota from this plant.
William J. Janklow: But for -- for plaintiff to be correct, you'd have to look at a whole litany of -- it just so happens that we happen to be dealing in cement, other states that deal with power, every state with their educational institutions. Maryland, when it was trying to get rid of junk cars. All of these things that when you get on a quasi-proprietary or proprietary area, you find -- you'd find the argument that somehow it's a restraint in interstate commerce. It just -- it just doesn't apply. Nobody would argue that a private business couldn't do exactly the same thing. I, as a -- as a person that wanted to build a new private factory, could provide that only South Dakotans bid. I could provide that anybody who gets the contact must buy their cement from the South Dakota cement plant. And certainly, I wouldn't be here as restraining interstate commerce.
Byron R. White: Well, suppose I'm a -- suppose I'm an individual in the -- in the retail business and I have a chain and I'd like to come up and -- and establish a -- a retail outlet in South Dakota and I have to build -- I'd like to -- I'm going to build and -- so I want to buy some -- some cement from South Dakota and they say, “Are you a citizen?” And you -- and I say, “No.” And you say, “Sorry, no cement.” Right?
William J. Janklow: Well, yes. But and I say but, because there is a --
Byron R. White: Well, Yes, but -- now, all right let's take the --
William J. Janklow: -- well, there is --
Byron R. White: -- let's take the --
William J. Janklow: -- Privileges and Immunities Clause.
Byron R. White: -- let's take the period of shortage, you would say, “Sorry, you're not a citizen.”
William J. Janklow: Well, I can't because of the Privileges and Immunities Clause, we're dealing with a corporation here and I do draw distinction between a privileges in the community's -- Privileges and Immunities Clause, says I can't do that to citizens.
Byron R. White: But anyway, you only sell South Dakota cement to South Dakota citizens?
William J. Janklow: To residents.
Byron R. White: Residents?
William J. Janklow: Yes, sir.
Byron R. White: South Dakota residents --
William J. Janklow: To residents.
Byron R. White: -- only to South Dakota residents.
William J. Janklow: That's correct.
Byron R. White: And these fellows -- and you say to this fellow, “Are you a South Dakota resident?” He says, “No, I just want to do business in South Dakota. I just want to establish and I want to build a building.”
William J. Janklow: But that's no different --
Byron R. White: “Sorry, bring in your cement from Wyoming.”
William J. Janklow: What we're doing is what a private business can do and nobody argues they can't.
John Paul Stevens: But Governor, you're not limiting the sales because a private business would do that. When you limit the sales, you're acting like a government. And I don't see why it's different for the Government to limit its own sales when it's doing it for governmental purpose and for it to limit the sole private seller in the State for a governmental purpose. And you admit, he couldn't do the latter.
William J. Janklow: I don't follow you, sir. I'm sorry.
John Paul Stevens: I thought you admitted that if there were a private owner of the plant, the government of South Dakota could not accomplish the purpose it sought here by saying, “You may only sell to South Dakota.”
William J. Janklow: That's correct.
John Paul Stevens: They -- that governmental purpose would not justify that regulation.
William J. Janklow: That's correct.
John Paul Stevens: Now, I think you've also acknowledged that in operating the plant, although you normally operate like a private entrepreneur with respect to this particular decision to limit the sales to South Dakota residents, you're acting for governmental reasons.
William J. Janklow: That's correct.
Warren E. Burger: And part of the governmental reasons would be that the taxpayers of South Dakota, I take it, this is one factor for you, have invested $40 million and they -- they might turn out like Chrysler Corporation.
William J. Janklow: We could lose. If -- if somebody opens a competing modern cement plant, Rapid City is only 30 miles from Wyoming across the border in Wyoming or in the same city, they could drive us out of business. We may be inefficient. Like all government, we may not be able to compete with private enterprises, if they set up. We don't know, but if they did, we wouldn't be here complaining that somehow their competition violates the Commerce Clause. What they're complaining about is they made poor market decisions. They didn't plan ahead any better than we did. And now, somehow they want us to be -- to bear the brunt of the responsibility for the lack of their foresight in making a wise management decision. The record will show that we went out and tried to buy cement. We bought cement thousands of tons of it, all over America and moved it into South Dakota and sold it at a cheaper price than we bought it for, to try and take care of people, to fulfill our contracts and to take care of others. We were in an absolute emergency situation, because the production didn't equal the demand.
William H. Rehnquist: What was the original reason for constructing the South Dakota cement plant?
William J. Janklow: It's all in that decision, that 1920 South Dakota Supreme Court decision. They enumerated about 12 reasons, but the reasons were there were no cement plants. I believe the record says, within 175 miles --
William H. Rehnquist: So if there was --
William J. Janklow: -- up to the State of South Dakota.
William H. Rehnquist: -- going to be cement available in South Dakota, it had to be supplied by the Government, by this government-operated plant.
William J. Janklow: Right. There was none available in South. There was no cement plant in South Dakota and I believe that case says that -- and within 175 miles of South Dakota's boarders at that time.
William H. Rehnquist: So conceivably, the plant could have supplied cement and nonetheless, supplied it at a loss to these citizens of South Dakota.
William J. Janklow: There were times when it did provide it at a loss. There are -- Reeves, as in they're arguing today, we've got cement piled up over the place. There's no demand now, because there's no construction. We're not here suing him a counterclaim, but arguing that he ought to take 50,000 tons from us, because the place is swimming in clinker and cement, because nobody will buy it right now. So it's just -- they happen to run into a bad time last year. We're in a bad time now and we're not suing anybody. We're eating our loss.
William J. Brennan, Jr.: Well, has the Commission suspended this (Voice Overlap) --
William J. Janklow: As of a year ago, June, as -- last June.
William J. Brennan, Jr.: Now, it will sell to anybody?
William J. Janklow: Now, it sells to anybody, because it has the product available again. It can take care of everybody.
William J. Brennan, Jr.: And so Reeves can get all at once?
William J. Janklow: Reeves -- Reeves got two -- Reeves got 72 tons yesterday, as a matter of fact. I checked this morning. [Laughs] He's been getting it for a year.
Byron R. White: Well, what's the case all -- what's the -- what's this suit -- what's left of this suit right now? Why isn't it moot?
William J. Janklow: I have no idea. We --
Byron R. White: Have you suggested that it's moot?
William J. Janklow: No, we -- we haven't.
Byron R. White: You -- I -- I suppose you -- I suppose you suggested an untimely shortage that -- that there -- you're very likely going to restrain your sales to citizens --
William J. Janklow: We would do that.
Byron R. White: (Voice Overlap) --
William J. Janklow: And I wouldn't be honest, if I didn't say.
Warren E. Burger: We'll resume there at 1 o'clock.