William H. Rehnquist: case is submitted We'll hear argument next in Number oh oh five eleven, Verizon Communications versus FCC Worldcom versus Verizon, FCC versus Iowa Utilities Board, Iowa Utilities Board versus General Communications. Mr. Barr.
William P. Barr: Mr. Chief Justice, may it please the Court. I'd like to start with a brief illustration that I think will help crystallize the legal issues, both the so-called forward-looking issues and the historical cost issues. The illustration itself self starts with a forward-looking perspective. Now, any firm that operates and builds a network incurs three costs going forward. Let's say I, the hypothetical new entrant capable of coming in today and instantaneously deploying the most efficient network possible today, I would have to expend my baseline facility costs. And let's say the FCC is right. Let's say that costs about a hundred and eighty billion dollars to reproduce the system today from scratch. Then I would face my operating costs that are dictated by the network that I just built. Let's say those are seventy-five billion dollars a year. And then I would face the incremental capital investment that I would make each year to upgrade and expand the network. Let's say that's thirty billion dollars a year. Now, let me show why under TELRIC no firm that actually makes expenditures can recover them.
Anthony M. Kennedy: What what w- what was your second cost, the seventy-five?
William P. Barr: The seventy-five is operating costs...
William P. Barr: dictated by the network... Per year? Per y-
William P. Barr: that I've deployed.
Anthony M. Kennedy: Per year?
William P. Barr: Per year, which is how much our operating costs are per year.
Antonin Scalia: And the first was was the...
Speaker: Building the network from scratch.
Antonin Scalia: not the not the not the debt debt service on building it?
William P. Barr: No.
Antonin Scalia: But the building it.
William P. Barr: Yes.
Antonin Scalia: That's a o- that's a one-time cost.
Speaker: Yes.
William P. Barr: That's the sunk capital...
Speaker: cost.
David H. Souter: depreciated figure, the one hundred and eighty...
Speaker: No. I'm starting I'm starting,
William P. Barr: yeah.
Speaker: today.
William H. Rehnquist: W- You you've presented three questions.
Speaker: We-
William P. Barr: I'm going to show it's devoted to all three, and I'm going to show how TELRIC does not, going forward, permit the recovery because it bases compensation, for someone who has already expended money on the network, on the imaginary cost structure of a hypothetical entrant who can be unconstrained and who's capable, at any given time, of instantaneously deploying and ubiquitously deploying a brand new network that's the most efficient at that point.
Speaker: But we we've said in in...
William H. Rehnquist: in a number of cases, going back fifty years, that if you're talking about an a unreasonable rate of return or a taking or something that has constitutional implications, you you can't attack the method because different methods can work out differently.
William P. Barr: Well well, Your Honor, I think that what the Court has done is made distinctions between ends and means.
William H. Rehnquist: They're probably going to be set by by State commissions, are they not?
William P. Barr: Excuse me, Your Honor?
William H. Rehnquist: Aren't aren't these costs and fees going to be ultimately set by State commissions applying the FCC rules?
William P. Barr: The rates themselves will be set by by the State commissions, implementing a methodology, and we are complaining about...
Speaker: the methodology because...
William H. Rehnquist: what the cases say you can't do, it seems to me, going back to the J- Stone's opinion fifty years ago, the opinion of the Court in Duquesne, that you can't attack the methodology unless you can point to some something wrong in the actual fee that you're allowed or the rate that you're allowed.
William P. Barr: Well, Your Honor, I think that the Court has always reviewed methodologies.
Speaker: Excuse me, ju-
Antonin Scalia: Just a risk? It's I mean, but there's always a risk, I suppose, until you get the final determination by whoever the ratemaker is.
William P. Barr: Well, if if the if if we are correct that we are entitled to a fair opportunity to recover our costs, and the Government decides that they're going to spin a roulette wheel, I can't come in and say that's a problem? That exposes me to risk? The reason we have why do we have methodologies set in the first place instead of later r- instead of later proceedings that, We have them to set up front a promise to pay that sets investor expectations and ensures that the users, not the Government, is going to end up footing the bill.
Speaker: But n- nu-
William H. Rehnquist: numerous cases have said that m- he- his, th- the ratemaking agency is not required to follow histor- to adopt historical costs as the method of fixing rat-
William P. Barr: That's the method, but the objective has to be an opportunity of getting me back my costs.
Speaker: Duquesne said, but the...
Anthony M. Kennedy: different from previous rate cases in that previous rate cases, the expenditure has been made and the question is d- fair compensation, just compensation.
Speaker: No. I'm saying that all the...
William P. Barr: No.
Anthony M. Kennedy: But but that's true in any ratemaking case.
Speaker: Right.
Anthony M. Kennedy: Chief Justice and Justice Scalia are saying our our cases say we have to wait to see what the rate is.
Speaker: N- No.
Anthony M. Kennedy: position was, well, this is different because we have an initial outlay that we're required to make now.
Speaker: may maybe I misunderstand your argument.
William P. Barr: The reason we have methodologies and the reason I'm entitled to know that I have a fair opportunity to recover it is that I shouldn't be forced to spend money, to lay out money unless I have a fair opportunity to get it...
Speaker: back.
David H. Souter: whole argument is assuming that by adopting this particular methodology, it is some kind of a necessary conclusion that at the end of the day, you're going to be getting less of a return than you would have gotten if an historic cost methodology had had been employed.
William P. Barr: Well, actually, y- you know, we do know whether it's so.
Speaker: But but...
David H. Souter: then why haven't you come in telling us a- a- about rates that you were getting that in fact are are bleeding you dry.
Speaker: Well, because we're not com-, well,
William P. Barr: there are two reasons.
Speaker: in the methodology.
David H. Souter: could understand your argument if that systemic defect had a , by by some logical necessity, the conclusion of compensating you for what, on traditional standards of review, would be a confiscatory rate.
William P. Barr: Yes.
David H. Souter: But there is no such necessity that I can find in your argument.
William P. Barr: There are...
Antonin Scalia: You you don't concede that necessity, do you?
Speaker: No, I don't. But there are...
Antonin Scalia: Otherwise, you would think that a that s- that spinning a, spinning a wheel of fortune would be an adequate methodology.
William P. Barr: Right.
Speaker: Rates,
Speaker: No. You wouldn't. You wouldn't concede that.
Antonin Scalia: that that we would not accept a spinning wheel as a- a- as being adequate, a- although spinning a wheel might give you compensation, it might not give you compensation.
Speaker: In in...
William P. Barr: in in the Duquesne case, the Court said even a small shift in methodology warrants a p- an increase in the risk of premium because you are always entitled to get pay for wh- to whatever risk you're exposed to.
Speaker: There are two things on the face of this order...
David H. Souter: and where does the increase in the premium take place? It takes place in State ratemaking, doesn't it?
William P. Barr: Th- The problem here i- i- the problem here in this order...
Speaker: there are two...
David H. Souter: correct, isn't it? That's that's that's...
Speaker: No. The di- the f-
William P. Barr: Th- The the decision took place in the Federal proceeding, and it took place in paragraph six eighty-eight and seven oh two of the order.
Speaker: we pointed out...
William H. Rehnquist: Where do we find them?
William P. Barr: Joint appendix three eighty-five three eighty-six and joint appendix three ninety-five.
Antonin Scalia: B- If if all of that is true and you're exposed to so much greater risk, I assume that your costs of capital will be much higher.
Speaker: The States are...
William P. Barr: the s- the the issue here is the cost of capital in the UNE business, our wholesale business.
Speaker: compensation other than historical...
John Paul Stevens: seven oh two as saying what you say it says, Mr. Barr.
William P. Barr: Well, Your Honor, it it it it does say that y- you use you start with the the current rate of return and the current depreciation.
John Paul Stevens: Correct.
William P. Barr: It says that we bear the burden in the State proceedings of showing a business risk, and then it goes on to say that the business risk relates to actual competition.
Speaker: four and five...
John Paul Stevens: point Justice Scalia made, that we recognize the incumbent LEC's are likely to face increased risks o-, no we may also some, we- u- by reason of the increased cost of capital.
William P. Barr: Yeah.
William H. Rehnquist: But that's true of any utility in those cases that we've we've decided over the...
Speaker: years.
William P. Barr: They don't.
Speaker: they apply their hypoth-
William H. Rehnquist: who who is they?
William P. Barr: The FCC...
Speaker: Okay.
William P. Barr: Okay.
Anthony M. Kennedy: Is the Government going to tell us that there are other ways you can recover that cost through depreciation or...
William P. Barr: No, because the thing they're depreci- the thing they're depreciating is the TELRIC price.
Anthony M. Kennedy: Are they going to tell us you get it back on t- the cost of capital?
Speaker: No.
Anthony M. Kennedy: the same because it's just the capital based on the...
Speaker: TELRIC...
William P. Barr: Their briefs talk about cost of capital.
Speaker: they take, excuse me?
Antonin Scalia: Can you get it back in costs of capital? What costs of capital do they allow you?
William P. Barr: They allow the cost of capital that exists in a closed market.
Stephen G. Breyer: But your your point there the answer Justice Scalia's question, I take it, was forgetting your first problem that's your first problem.
Speaker: Right?
Stephen G. Breyer: The one you brought up at the beginning.
Speaker: Correct.
Stephen G. Breyer: that they're pretending actual competition is what makes the difference, but what the problem arises out of is the fact that they're pricing on a hypothetically perfectly competitive...
Speaker: Right.
Stephen G. Breyer: that point were wrong, then the answer to Justice Scalia, I take it, would be, there's no other problem.
William P. Barr: The rule says no.
Stephen G. Breyer: The r-
William P. Barr: But but if you change the rule,
Stephen G. Breyer: Yeah.
William P. Barr: you theoretically could do a high enough rate of return.
Speaker: problem.
Antonin Scalia: say no? Gi- Gi- Give us the the exact text where the rule says no.
William P. Barr: Okay.
Antonin Scalia: This is yours...
Speaker: I had also...
William P. Barr: asked i- I, it's not in the record.
Speaker: paragraph...
David H. Souter: this is on this is at three ninety-five of the joint appendix?
William P. Barr: Yes.
Speaker: by the FCC...
Anthony M. Kennedy: t- show us the language...
Speaker: there?
Speaker: Where? What's the language?
William P. Barr: That the s- that the existing rate of return and existing depreciation are reasonable starting points.
Speaker: Starting...
Antonin Scalia: point?
Speaker: Yeah, starting points.
Speaker: seven?
Anthony M. Kennedy: Seven oh t-
Speaker: Seven oh two.
Speaker: Seven oh two.
Speaker: Page three ninety-
William P. Barr: starting point.
Antonin Scalia: Gee.
William P. Barr: actual competition.
William H. Rehnquist: Now, but you're you're saying rule seven oh two prevents you from ge- getting back what you otherwise should have through capital costs?
Speaker: Yes. In fact, they've admitted it in their brief.
William H. Rehnquist: w- what language in rule seven oh two are you relying on?
William P. Barr: Yes.
Speaker: It's not in the record,
William P. Barr: but it is a separate order.
William H. Rehnquist: Okay.
William P. Barr: We recognize that incumbent LECs are likely to face increased risks given the overall increases in competition in the industry, which might warrant an increased cost of capital.
Speaker: as if there's instantaneous entry.
William H. Rehnquist: page eighty-three A, toward the end of seven, r- rule seven oh two, it says, State States may adjust the cost of capital if a party demonstrates to a State commission that either a higher or lower level of cost of capital is warranted without the commission conducting a rate of return or other rate-based proceeding.
William P. Barr: That paragraph I think a fair reading of that paragraph and the way it is read and applied...
Speaker: including...
William H. Rehnquist: the language I just quoted to you? How do you distinguish that if you don't if you don't agree with me?
William P. Barr: I would distinguish it by then looking at the rule, which is rule five oh five, and that's on joint appendix fifty-one and fifty-two.
Speaker: But isn't isn't...
William P. Barr: excuse me, Your Honor.
David H. Souter: No.
William P. Barr: That's right, and that's a...
Speaker: Okay.
William P. Barr: That's a directive to the State.
Speaker: But that is not...
David H. Souter: i- if if if if you understand by the distinction what I understand by the distinction, it is not a directive to the State which binds them in the ultimate rate that they can set.
William P. Barr: It binds yes, it does bind them.
William P. Barr: The rate...
Speaker: the rate cannot...
William P. Barr: The the the they cannot consider in se- in setting the cost of capital historical costs.
Antonin Scalia: Well,
Speaker: but they don't have to...
Antonin Scalia: consider it if they give you a high enough rate on your TELRIC costs.
Speaker: How do they determine what's high enough, Your Honor?
Antonin Scalia: past costs were, indeed, ten million, and they're saying, well, it's just five because somebody else could do it for five if they came in right now.
Speaker: you're going to be...
Antonin Scalia: in just as good shape a- as if they were giving you your fifteen percent on the ten.
William P. Barr: And how do they determine h- what's high enough...
Speaker: unless you have a standard?
Antonin Scalia: basis of what your risk is.
Speaker: and it's very...
Antonin Scalia: it's a v-, your risk of continuing to put in capital which will which will not b- which you will not be able to have taken into account in setting the rate.
William P. Barr: Well, I think, you know, y- your concurrence in in in Duquesne, Justice Scalia, made a v- very fundamental point, which is you can't talk about return on risk without implying a standard.
Speaker: It's the risk I'm not going to...
William P. Barr: be able to recover my capital.
Stephen G. Breyer: Right.
Speaker: But now, I'm sorry. In...
William P. Barr: looking at what my capital is in relation to what you're allowing...
Speaker: Right.
Stephen G. Breyer: That may all be true, and I have only one question to ask, and it be and I'm asking it.
William P. Barr: That was mixing the apples and oranges.
Speaker: So,
Stephen G. Breyer: what you're saying is in response to what I said, that I am wrong in saying that the TELRIC set depreciation, capital return, and other numbers, I am wrong in saying that they will earn you a fair rate of return on a hundred and forty billion.
William P. Barr: Correct.
Stephen G. Breyer: And I can find that in the...
Speaker: is there anything on that in the record?
Stephen G. Breyer: No.
William P. Barr: T- Well, by using the same depreciation schedule...
Stephen G. Breyer: Mhm.
William P. Barr: and hypothesizing a new network,
Stephen G. Breyer: Mhm...
William P. Barr: that reduces my e- my, that reduces my capital charge.
Stephen G. Breyer: The capital charge will fall from a hundred and forty billion.
William P. Barr: No.
Speaker: because in...
William P. Barr: five years I have to buy a new switch, and I strand what I haven't yet recovered.
David H. Souter: But you're saying the commission sets the depreciation period and binds the State commissions...
Speaker: by that?
William P. Barr: the, well, yes.
David H. Souter: And the commission says, five year depreciation a ten year depreciation, not five, or five not ten the That's the commission fo- i- forces that on the States?
William P. Barr: The, Yes.
Speaker: Can can...
William P. Barr: depreciation...
David H. Souter: Okay.
William P. Barr: Yes.
Speaker: If,  This is...
William P. Barr: this is a separate proceeding,
Speaker: but it's...
William P. Barr: their application of TELRIC.
David H. Souter: Okay.
William P. Barr: In the universal service.
Speaker: the rate of return must either be...
David H. Souter: What what are you reading from?
William P. Barr: Paragr- Paragraph two fifty of that order.
Speaker: it's published opinion, but it's not part of the record.
Speaker: It's not in the record?
William P. Barr: joint appendix, but it's a pub- i- it's the parallel proceeding to this where they were setting TELRIC for our universal service prices.
William H. Rehnquist: w- o- Or or the or the State prescr- was this last part, or the State prescribed rate?
Speaker: Retail rate. The retail rate.  Yes.
William P. Barr: I- It has to be either the Federal interstate, that's a retail rate.
Speaker: there...
William P. Barr: State's prescribed rate of return for intrastate intrastate services.
Speaker: on the...
David H. Souter: these are rates of return.
William P. Barr: Well, the next paragraph, paragraph five, says that we agree with those commentators that argue that currently authorized lives should be used because the high cost areas are unlikely to face a serious competitive threat.
William H. Rehnquist: Well but, What part of footnote eight are you relying on?
William P. Barr: That second consideration is notwithstanding the incumbent's contrary suggestion implicit in any determination of the true economic cost of capital.
Speaker: costs. You can't just...
William P. Barr: make up a value...
Speaker: for it.
William H. Rehnquist: here no property is taken in the condemnation sense of the word.
Speaker: is it?
William P. Barr: No, that's wrong in two respects.
Speaker: Well, have they done so? W- is...
William P. Barr: percent of our lines have been taken in this respect.
Speaker: Yes, but i- i-
William H. Rehnquist: i- I don't think it comes under the Just Compensation Clause.
Speaker: Compensation Clau-
William P. Barr: Your Honor, I respectfully disagree because I think that the reason wh- w- when you dedicate property and there's a taking, the reason the Government has to come up with a methodology to pay is precisely because it has to promise to pay at the point of the dedication.
Speaker: and this takes us...
Antonin Scalia: every breach of contract by the Government is a taking.
Speaker: I mean, every time...
Antonin Scalia: Every time the Government enters a contract, it creates an expectation, and whenever the Government breaks a contract, it's a it's a...
Speaker: taking.
William P. Barr: Your Honor.
Antonin Scalia: Compelled because you agreed to it.
Speaker: return. That was the deal.
William P. Barr: Right, a- a return in order to give us a fair opportunity to get our money back.
Ruth Bader Ginsburg: Mr. Barr, may I ask, o- one piece of this case is you made this investment for your local telephone business.
Speaker: this.
William P. Barr: These use the same facilities.
Speaker: But you're...
Ruth Bader Ginsburg: getting back the lion's share.
William P. Barr: Well, yes, but it's, that's like going to GM and saying give away your...
Speaker: Chevys because you're still making money.
Ruth Bader Ginsburg: piece of it that I'd like you to tell me how it fits in, and that is the quid pro quo of you can get into for the first time a new business, that you can get into the long distance business.
William P. Barr: N- No.
Speaker: reasonably...
John Paul Stevens: argues that the word cost is ambiguous.
William P. Barr: Not in the context, i- y- you have cost and you have value methodologies.
William H. Rehnquist: Very well, Mr. Barr.
Speaker: Mr. Chief Justice, and may it please the Court.
Speaker: techniques.
Antonin Scalia: think that really means that you could come up here with a with with a with an FCC scheme that says we're going to spin a wheel, and if it lands in the right place, you're going to get a good rate, if it lands in another place you're going to get a...
Speaker: Well there might be, there...
Antonin Scalia: that is irrational and and does d- i- is not designed to provide a fair rate of return? Don't you have the burden of showing that this is at least designed to to provide a fair rate of return?
Speaker: The C-, This Court has said that the challenger of a rate has a heavy burden to make a convincing case that the outcome is confiscatory.
Antonin Scalia: You you can't meet that burden with with with a wheel.
Speaker: You can't meet that burden with a wheel. You're really saying that...
Antonin Scalia: you can come up with a wheel and just say, well, you know, you can't prove that you're not going to get a fair return.
Speaker: that...
Antonin Scalia: can't be right.
Speaker: Well, the the the person who challenges the way the commission is setting rates has to deter- has to present to this Court a- an explanation for why that the system that's developed, wheth- whether it's spinning a wheel or whatever and I I I won't engage in that c- hypothetical because we've got a several hundred page record that looked into various different arguments with respect to various different methods of recovery.
Speaker: be based upon the statute.
Anthony M. Kennedy: it seems to me that necessarily a hypothetically most efficient market will invariably, necessarily result in a rate that is less than their actual cost.
Speaker: Well, no, I don't...
Speaker: agree.
Anthony M. Kennedy: just that just has to be.
Speaker: No, it it does not have to be.
Anthony M. Kennedy: Warr- Warranted by what standard?
Speaker: By the circumstances and and the constitutional obligation to set a reasonable rate under the statute considering this methodology and limited by the constitutional standard that this Court has articulated as the lowest reasonable rate, a rate that is not confiscatory.
Speaker: Are actual are actual...
Anthony M. Kennedy: costs re- relevant in determining...
Speaker: what's ultimately reasonable?
Speaker: Well, this Court has repeatedly said that it would, it has refused to constitutionalize the embedded cost or historical cost formulation.
Speaker: Duquesne case.
Anthony M. Kennedy: must have some specific standard.
Speaker: I t-, That argument is made, but it's not substantiated by anything in the record in in this this long, elaborate TELRIC articulation of of numerous standards, both with respect to cost of capital and depreciation because the very next...
Speaker: paragraph...
Antonin Scalia: Never mind the next paragraph.
Speaker: Well, but that says...
Antonin Scalia: higher or lower level of cost of capital is warranted without that commission conducting a rate-of-return or other rate-based proceeding.
Speaker: utility has.
Speaker: that because that's precisely what it said in the statute.
Speaker: I don't care if it's required by the s-
Antonin Scalia: statute or not.
Speaker: capital that they've invested,
Antonin Scalia: w- with a promise by the Government, that they'd be able to get a fair return on it.
Speaker: Well, i- u- you may not, Justice Scalia, but the but the the case has been presented on alternative bases the heavy burden that the local exchange carriers must carry here is proving that the embedded cost, historic cost requirement is either in the statute or in the Constitution.
Speaker: because...
Antonin Scalia: doesn't matter if they if they end up not getting a fair return on billions of dollars that have been invested with the Government's insu- assurance that they...
Speaker: that they get a fair return. Is that what you're saying? It...
Antonin Scalia: doesn't matter.
Speaker: I'm not saying that.
Antonin Scalia: And and not compensate investors.
Speaker: taken into account.
Speaker: its, it that's correct.
Speaker: In footnote...
Antonin Scalia: depending on on how it's applied.
Speaker: Yes.
Antonin Scalia: assume assume and and I'm I'm sure you you d- you don't agree with it, but but assume that I that that I think this system has to not just be the spinning of a wheel, but it has to contain in it some some assurance that they'll get a fair rate of return on money that they have invested, with the Government's assurance that that they get a fair rate of return.
Speaker: I'm, The problem, Justice...
Antonin Scalia: Just just point to me the...
Speaker: provision that shows where that will be taken into account a fair at all. Is it...
Antonin Scalia: ever anywhere taken into account?
Speaker: It is not taken into account what their embedded costs are with respect to portions of their network that may or may not have anything to do with the provision of the service or the network element involved here.
Speaker: written.
Antonin Scalia: saying some of the costs shouldn't be counted.
Speaker: Let's just take...
Antonin Scalia: the costs that you agree should be counted.
Speaker: Let's just take...
Antonin Scalia: the embedded costs that do relate that do relate...
Speaker: to these services.
Speaker: can't determine what those are.
Antonin Scalia: That's always been the...
Speaker: case.
Antonin Scalia: case with rate ratemaking methodology.
Speaker: So, you...
Antonin Scalia: you can come up now and say, it's always been so difficult.
Speaker: giving co-
Speaker: Justice Scalia.
Speaker: the local exchange...
Antonin Scalia: you've departed from my from my hypothesis, I'm saying assuming that I don't believe that spinning a wheel is okay.
Speaker: What...
Antonin Scalia: telling me is spinning a wheel is okay.
Speaker: No, I'm not saying that spinning a wheel is okay.
Speaker: But we refused...
William H. Rehnquist: to adopt that in Duquesne.
Speaker: Precisely.
Antonin Scalia: To say that you don't constitutionalize the prudent investment rule is not to say that any methodology will go, even one that does not enable somebody who has made investments under a commitment from the Government to allow a fair return, to recover that fair return.
Speaker: exclusive.
Speaker: that's one of the things that I was, that Mr. Barr said that I think the Court would take issue with.
Speaker: no.
Anthony M. Kennedy: the baseline standard that the utilities are entitled to rely upon?
Speaker: They're...
Anthony M. Kennedy: not like telling GM to give away Chevrolets.
Speaker: The the baseline constitutional standard, at the end of the day, once you can look at the results, is this a non f- confiscatory result.
Speaker: also...
Antonin Scalia: confiscatory to say that we're going to make you use your capital plant, which costs a hundred and forty billion, and we're going to allow you to depreciate it as though it were only seventy billion?
Speaker: Why isn't that confiscatory?
Speaker: Court, the t- Congress might have said, with respect to a transportation company, you've had it au- that t- you've had the taxi service all to yourself for all these many years and now we're going to allow other some competition in there, and you and you've got some monopolistic facility, and we're going to let s- your competitors use some piece of it.
Speaker: to allow someone else to use it.
Stephen G. Breyer: I want to be sure I have a chance to ask you a different question.
Speaker: What they wanted to do with the st-, the they wanted to accomplish a number of goals, which are set forth in the preface of the statute to which I alluded to before, which is to reduce prices, to inspire...
Speaker: competition...
Stephen G. Breyer: I would like a little bit less generality than that, i- if if i- w- i- i- if you can give it to me.
Speaker: Well, they...
Speaker: one of the important considerations, and it's hard to not...
Speaker: deal in some generality, this area does. But one of...
Speaker: the important objectives that they hoped to achieve was to develop a pricing methodology that would encourage new entrants to come into the market and pay fees that would allow them to enter the market at competitive rates and, encourage them to develop new...
Speaker: Right,
Stephen G. Breyer: If that's basically the objective, to get them to enter when they should enter, is that fair? To get them to enter when economically they should enter, not when economically it'd be wasteful for them to enter.
Speaker: Yeah, I s-, I think that's a fair premise.
Stephen G. Breyer: All right.
Speaker: question?
Speaker: seems to me that they did try to...
Speaker: Fine. Okay. Now, that's what- all right, then you're right where I think you...
Speaker: pointed out in your e- in your dissent, your...
Speaker: partial dissent...
Speaker: in the other other time this case was before the Court, there are a variety of different...
Speaker: methodologies...
Speaker: that various different economists look at and think that they can accomplish those kind of objectives.
Speaker: then we can adjudicate that. All right. Now,
Stephen G. Breyer: If that's what they're trying to do, then how could it possibly do that, to write an order that says the depreciation rate and the rate of return that you are going to charge is going to be based upon not what it will cost you, but rather, what it will cost some hypothetical firm that isn't there, let alone saying the same thing in respect to telephone poles, in respect to wires, in respect to efficiency of administration, in respect to a twenty-two percent discount for a competition that doesn't exist? In other words, how does it even come close to answering that question to look not at the cost of this firm, but at the cost of some hypothetical firm that by definition doesn't...
Speaker: exist?
Speaker: in the first place, we're not talking about replicating an entire firm.
William H. Rehnquist: Thank you, General Olson.
Donald B. Verrilli, Jr.: Mr. Chief Justice, and may it please the Court.
Speaker: we could never compete using irrelevance...
Stephen G. Breyer: blank slate.
Speaker: to uphold them. I mean, that's...
Stephen G. Breyer: basically the argument.
Speaker: And if you're going to...
Donald B. Verrilli, Jr.: Yes, thank you.
Stephen G. Breyer: U- My question, I don't want to distract you because others had a different question had nothing to do with confiscation.
Donald B. Verrilli, Jr.: But it it, be if depreciation and cost of capital are set right, it won't do that, Justice Breyer, and I believe that is what Professor Kahn conceded, their expert.
Speaker: capital are set.
Antonin Scalia: you're not asserting that the States can can kick up the cost of capital rate on the basis of u- of the fact that the utility is not is not getting depreciation on its sunk costs.
Donald B. Verrilli, Jr.: It the the s- separate two questions out.
Speaker: the risks of operating in the system. So, I think it...
Donald B. Verrilli, Jr.: does do what Mr. Barr claims it doesn't do.
Speaker: If if that that...
Stephen G. Breyer: assuming that, w- his ar- Mr. Barr's argument, I take it, was that paragraph seven oh two put read in any disclaimers you want, and they have loads of them.
Speaker: I mean, I take it...
Stephen G. Breyer: I may not have paraphrased it correctly, but I think that's...
Speaker: basically his point.
Donald B. Verrilli, Jr.: That is his argument.
Speaker: to...
Donald B. Verrilli, Jr.: to the local...
Speaker: telephone service.
Antonin Scalia: that used to be done all the time, of course,
Speaker: Well, what...
Antonin Scalia: between local and and long distance phone rates.
Speaker: Well, no, but there's a significant, I I'm sorry, Justice Scalia.
Antonin Scalia: haven't been pretending to do that...
Speaker: for years and years.
Donald B. Verrilli, Jr.: but, Justice Scalia, a significant amount of that goes to retail which can't be allocated here.
Speaker: it,
Donald B. Verrilli, Jr.: it would be a very different place in fact than it is.
William H. Rehnquist: Thank you, Mr. Verrilli.
William P. Barr: Constitution doesn't dictate a methodology, but what t- it does say is that whatever methodology is selected, it ultimately has to be judged by this Court as to whether it provides us a fair opportunity to recover our costs.
Speaker: Thank you.
William H. Rehnquist: The case is submitted.
The Marshal: The honorable court is now adjourned until Monday next at ten o'clock.


Earl Warren: Number 20, Walter C. Brulotte et al., Petitioners, versus Thys Company. Mr. Irons.
Edward S. Irons: May it please the Court. This is an action for an accounting for royalties due under a patent license agreement. The license agreement was not for a single patent but rather for a package or group of patents many of which expired during the license term. The action was brought to collect the royalties for the continuing right to use machines covered by the expired patents, none of the other patents in the package being incorporated into the machines. The Supreme Court of the State of Washington held as a matter of law that parties might contract to pay post-expiration royalties and that there was no legal or equitable reason why they should not do so. The issue basically for consideration therefore is whether that holding by the Supreme Court of the State of Washington was correct. The position of the petitioners is that it is incorrect for two basic reasons. The first reason is that the primary premise upon which the patents laws are based is the constitutional one that the patent shall be for a limited term. Underlying this concept is the further consideration that the patent is granted on condition that when it expires the invention shall be available to the free use of the public and that the patentee is foreclosed from compromising in any way the dedication which was the condition on which he got the grant in the first place. It therefore follows that any attempt to compromise that dedication by the collection of royalties by private contract after expiration is of course contrary and in violation of the primary bargain with the people which the patents represents. And it is that primary bargain with the people requiring the dedication as a matter of law and as a matter of constitutional principle which must control over any private contract which seeks a different result. The second and I believe equally important reason why the decision of the Supreme Court of Washington was wrong is because as has been repeatedly recognized, the subject matter, the invention of a patent which has expired is indeed dedicated, it is unpatented. And so therefore, a private contract which extends the right to collect royalties to that unpatented subject matter is on its face an extension of the monopoly to unpatented materials and derogation not only of the principles of the patent laws but of the principles in antitrust laws as they had been applied in analogous situations. Now, these concepts actually it seems --
Speaker: (Inaudible)
Edward S. Irons: Well, the facts Your Honor is this, as I said these licenses are for package of patents. On the face of the license, Your Honor, there are 12 patents.
Speaker: (Inaudible) for other patents?
Edward S. Irons: Other patents pending, that's right. Now the Court --
Speaker: (Inaudible)
Edward S. Irons: Yes, that is true.
Speaker: That isn't used in the machine?
Edward S. Irons: It isn't used in the machine. It never was used in the machine and all the patents that are used in the machine have expired.
Speaker: (Inaudible)
Edward S. Irons: None of them are used. They have ever been used in the machines.
Speaker: How many (Inaudible)?
Edward S. Irons: Subject to correction Your Honor, I think three or four.
Speaker: (Inaudible)
Edward S. Irons: Well, the record doesn't support seven. That's why I said three or four. I don't mean to battle with the respondent on the fact point. I can see three or four unexpired pending patents there within.
Speaker: (Inaudible)
Edward S. Irons: Actually, there were only seven actually used. They have all expired. They expired long before the end of the contract term. That is why the court below found that the real consideration for the continued payment of the royalties had to be for the expired patents. The unexpired ones were never used. I -- I'm going to come to that point in just a little bit more detailed because it is a rather important one and I think perhaps we might as well meet it right now. This situation Your Honor is characteristic of so-called package or fee licensing which is widespread in the industry. This is not a -- an isolated for a unique situation. It is conventional in the industry for an owner -- of the owner of a basic patent which will expire in a stated time, to license it in a package with either unexpired patents or with the trademark or with know-how or with some form of right which exist in perpetuity. Now, the appeal of the original package normally is the basic patent or patents. The ex -- the royalties continue however undiminished throughout the term of these agreements and long after the basic patents expire.
Speaker: (Inaudible)
Edward S. Irons: I would say normally that is not necessarily so. It's usually based on the gross business to the licensee whether or not there is a use. Although in some cases, it is based on use.
Speaker: In this case, it was quite (Inaudible)?
Edward S. Irons: In this case, it was based on use. Yes, Your Honor.
Speaker: (Inaudible)
Edward S. Irons: Yes, Your Honor. I will certainly do that. I want to finish my comments that I was making on these package licenses and essentially it is this. A patent owner has a basic patent or patents which are needed. These are the appeal to sell the license. He does not license them alone. He licensed them -- licenses them in a package with other patents pending with know-how with trademarks which may exist in perpetuity. Now, it is self-evident that the appeal, the reason for the agreement to pay the royalty in the first place was the need for the basic patents. But the terms of these agreements extend long after the basic patents expired. And the royalties continue undiminished on the pretext that there are still some considerations in the form of some patent maybe not even thought off when the agreement was signed but it went to patents which might be pending or trademarks or know-how or some other form of right which may exist in perpetuity. I think it is a simple matter of logic that however much of that consideration was allocable to the basic patents at the beginning, continuous to be paid, there's no provision in these agreements for a reallocation. And certainly, any such arrangement necessarily results in a perpetuation of the tribute paid for the right to use the expired inventions. These are contractual arrangements by which the consequences of the dedication which is the condition on which the patent is granted in the first place are obviated and avoided. These are standard business practices in the sense that there are great many licenses of this type. My position is that -- as this Court has emphasized in a somewhat different context, each patent must stand on its own feet. The person who wishes to acquire a license under the patent must be free to deal with it on its own merit. It must not borrow quality from some other patent by any means, because if it does, this enlarges the monopoly of the patent from which it borrows quality. Manifestly, that's what happened in our case at the bar. There were presumably seven patents that were needed and that's why, the licenses were taken in the first place. The licenses however extended for years after those expired. The Court below found that the others were mere surplus and the parties gave no consideration to those as a part of the package and insofar as the basis for consideration was concerned.And so it recognized that the license did require post-expiration royalties. It expressly held that it did and the obligation to pay them was enforced. Now to specifically answer your question, there was a provision in these agreements in Paragraph 7 which the licensor put in there in anticipation of this very circumstance and it said that the royalty shall continue with an undiminished rate throughout the term regardless of the expiration of any patents. On these particular agreements before the Court, it's not a matter of argument. It's a matter of the actual provisions in the agreement itself. The same principles apply in a more general situation in which I have addressed myself. I want -- now to comment very briefly on another argument which the respondent has made and I think the brief comment is all that would be necessary. It is argued by the respondent that this maybe that they are post-expiration royalties. But these were voluntarily agreed to and they were not coerced and since they were voluntary agreed to it, there's nothing wrong with it. The position of the petitioner is that this is clearly wrong. The constitution in these patent statutes permit patents only for limited terms. This Court repeatedly has held that when the patent expires, the monopoly seizes to exist. That no part of it can be recaptured by any means and that no private contract can extend the monopoly. And so I say, it's just as illegal to extend that monopoly by a so-called voluntary private agreement as it is by any other kind. And it is therefore, not material in the context of collecting post-expiration royalties. The -- whether or not the agreement was coerced ab initio.
Speaker: (Inaudible)
Edward S. Irons: Well, I don't think it's irrelevant as Your Honor recognized. It is not a case and let's look at the distinction --
Speaker: (Inaudible)
Edward S. Irons: But in this sense Your Honor, the payment was -- in that case, with the right to use the machine during the term of the patent. It simply was the payment which was extended and as a matter of let's say economics, there was no payment for the right to use after the patent expired. In these cases, package license agreements are obviously his and that I say is the difference. I say you cannot charge a royalty for the right to use the invention of an expired patent. If you agree in advance that this patent was going to expire on a day certain and I want to use it until it does and I'll pay you $10,000 but I want to -- financially in a situation where I want to spread that predetermined payment over a period of years, I say, there's nothing wrong with that. But I say again, that is not this case. Now, Your Honor asked me in what way these agreements restricted the alienation of the machines I believe. These agreements which are before the Court have an expressed provision in them that the machines which were involved shall not be encumbered in any way and that the agreement shall not be assigned or transferred in any way by the licensees. The result was that when the --
Speaker: (Inaudible)
Edward S. Irons: Yes. But he did not permit the transfer unless the subsequent purchaser agreed to the same terms and conditions including the post-expiration royalty payments and he there -- therefore guaranteed to himself the post-expiration royalty payments.
Speaker: (Inaudible)
Edward S. Irons: That's right. But --
Speaker: You cannot move that if you are (Inaudible)?
Edward S. Irons: Well, I think the alienability of these machines, it was sharply restricted and competition in them was restricted because it was necessary for anyone who wanted to sell them to go out and find someone else who would accept the same deal and this is unique. I don't know of any other circumstances where in -- an item of tangible property has been sold under any such restraint. You see Your Honor what happened is, this respondent did not sell the total machine. He sold what he called naked title to it, but pointedly quote, “without the right to use”. So whoever purchase this for 3000 odd dollars add machine he couldn't use. And to use it, he had to take this patent license including the post-expiration royalty provisions of it. And to sell it, he not only had to find the purchaser but he -- they had to find a purchaser who would also take the patent license. Now, it is unique. This is an effort to avoid the normal consequence of the sale of the patented device, and a license arises as a matter of law when a patented device is sold usually. It -- to use the shorthand expression, extinguishes the monopoly and the machine is free of the patent after it is sold. That law was avoided in this case by the sale of the title only, without the right to use and the requirement that you get the right to use, you must take this license which extended the monopoly of the patent. I have, I think treated the basic arguments which are advanced by the respondent, namely the voluntary matter and the matter of the royalties being justified as consideration for unexpired patents. I want to conclude by pointing out that this Court in every context in which it has appeared has recognized that the dedication of a patent is absolute and cannot be compromised. It happened early in the Law of Double Patenting which precludes a second patent for the same invention on exactly these grounds in the Singer and Kellogg cases. It was held that when a patent expired, the public right to use the invention including the very form on which it was produced under the patent passed to the public, together with the right to use the name. Singer in one case, (Inaudible) in the other so that the right would not be qualified. In Scott Paper Company, it was held that a doctrine of estoppel arising under common law contract which would normally have prevented the assignor from challenging the validity of the signed patent did not operate because if it were permitted to operate, the primary public right would be compromised, and of course the later cases are Sears and Comco which were decided in February of this year I believe, once they held that a state could not grant patents of its own or otherwise operating in such a way to compromise the paramount public right in the subject matter of a patent which had expired or in that case had been invalidated. Also, as I have said obviously under these decisions that which was once patented but it is no more is unqualifiedly in the public domain, a contract which extends the monopoly to that material clashes head on with the doctrine that the antitrust laws forbid, the extension of the patent monopoly by contract to unpatented materials. Thank you.
Speaker: (Inaudible)
Edward S. Irons: Well, pointedly Your Honor, the contract was for an original term perhaps significantly for 17 years which is the same term as the patent term. Well, the patents were no issue on the same time it just -- perhaps is coincidental. The first agreements were entered into in the early 40's. At the very beginning, all of those agreements extended to a time subsequent to the expiration of any patent then issued and certainly, passed the expiration of any patent then used in the machines. On the face of it, because of Paragraph 7 which provides that the royalty shall continue undiminished regardless of the expiration of the patents. The contracting terms required payment of royalties after expiration for the right to use the inventions of the expired patents, the expired ones being the only ones ever used in the machine. When it -- after they expire, this obligation as private contractual obligation to pay royalties for the right to use the subject matter of an expired patent is in violation of the fundamental principle that it patent this for a limited term, and that when it expires, the inventions is dedicated. Have I answered you at all?
Speaker: (Inaudible)
Edward S. Irons: Oh, if he had built the machine himself, he's still would have had to pay royalties.
Speaker: (Inaudible)
Edward S. Irons: And he had to pay royalties whether he used the machine or any machine or not. And he had to pay royalties that based on the extent of the use of a portable hop-picking machine, so it's the specific one so, but in any event, a minimum royalty even if he junked his machine and he couldn't cancel. He has no right to cancel during the term. The court below expressly held that so he would have accomplished nothing by building his own machine. He will still under this royalty obligation at least just to the minimum which was substantial in the economics I believe of the hop farmers. It was $500 a year. There were 200 of these contracts, 200 contracts at $500 a year is a substantial amount of money.
Speaker: (Inaudible)
Edward S. Irons: Well, that I think is based on the -- on an answer given by the respondents on trial record. The only fact I can answer Mr. Justice White is the royalty apparently was reduced from $5 to $3.33.B But there's nothing in the record that supports as far as I can tell this choice except this one answer of the respondent Thys and I really -- what --
Speaker: (Inaudible)
Edward S. Irons: Well, if Mr. Thys had arranged --
Speaker: (Inaudible)
Edward S. Irons: Well, I'll answer quite -- of course any questions. Let me make my point this way. I don't think the terms or the length of the terms is important if to any extent it goes beyond the expiration of the patent and requires the payment of royalties for the right to use a patent which has expired. Now, if Mr. Thys meant by that that he would have limited his agreements so that no royalties became due for the right to use patents after the expired, then of course there's no problem. But a mere shortening of term doesn't necessarily mean that it's coincident with the expiration of the patents.
Speaker: (Inaudible)
Edward S. Irons: Well, this is the -- Mr. Justice Goldberg's question and it make it down pretty much to matter of form that I think its in a very important matter. If you agree that the price, the fair value for the right to use your patent for 10 years, let say its $10,000 and the royalty is charged only for the right to use it during those 10 years, I do not contend that there's anything wrong with that even though, as a matter of economics you say, “Alright, I will let you pay it over 20.” But if you contract and say, “I will let you use my patent. I will charge you a royalty for the right to use it for a period of 10 years after it expires." To get to the $10,000 you have extended the monopoly and this is particularly aggravated when the royalty is based on the extent of use because we get into use after expiration as the royalty based.
Speaker: (Inaudible)
Edward S. Irons: You mean the right to use them?
Byron R. White: (Inaudible)
Edward S. Irons: Your Honor, I'd like to treat Hazeltine specifically this way. All Hazeltine held and the statement in Hazeltine is clear was that it was not per se illegal to base royalties on the total volume of the licensees sales. The next preceding paragraph made it clear that what was being spoken off there was existing patents. I read existing to mean unexpired patents.
Byron R. White: I agree with (Inaudible)?
Edward S. Irons: Was not decided in Hazeltine. My point Your Honor is --
Byron R. White: The use -- the use is not (Inaudible).
Edward S. Irons: The use are not lust and I agree, you can --
Byron R. White: (Inaudible)
Edward S. Irons: Yes. Let's look at it in another context if I may please. At the beginning there were -- let say 12 patents. Seven were used, some were not used. The royalty rate was fixed at that time at $5 per bale plus $500 a year, minimum royalty. This royalty was for package. Obviously, and as the court below I think found, the primary consideration for that royalty was for the patents that were used. It had to be, because there weren't any others used. The court below said there was no interests in the ones that there were not used. Now, they expired. Nobody ever used them. At the beginning, these $5 a bale and $500 a year minimum was in part allocable certainly, if not entirely to the patents which were used after they expire. You have to make a reallocation of this royalty and say, “Now, we're going to pay the same amount of money for patents we don't need.” This was never contemplated in the minds of the parties. They didn't pay anything and had no intention of paying anything for the right to use these patents they didn't need. But more particularly, in the context of package licenses when this Court has considered it particularly in paramount in laws, it is repeated again and again. Each patent must stand on its own feet. You must not borrow quality one from the other. You must be able to deal with them individually in the market place. Certainly, these patents that were needed barred quality from the ones that were -- or it wouldn't be paying for them years after the ones that were needed expired.
Byron R. White: (Inaudible)
Edward S. Irons: I don't think Hazeltine is relevant to this situation. I don't think it decided at any issue involved in this case. I don't put it off to one side. It's an important case that has been argued by the respondent here, that the issue and the consequences of patent expiration was not decided, and the fact that the unexpired patents borrowed quality from the needed and the expired ones was not considered in that case.
Byron R. White: (Inaudible)
Edward S. Irons: Yes, sir.
Byron R. White: (Inaudible)
Edward S. Irons: I would say so, if --
Byron R. White: (Inaudible)
Edward S. Irons: Well, it's been almost universally held as I understand it Your Honor that patents which are misused are enforceable. If these patents are misused, they're part of the package. The license agreement on its face says, “It's indivisible”. The agreement on its face went it was drawn required post-expiration royalty contracts. I don't think there's any equity here which would justify a change of that rule in this case.
Speaker: (Inaudible)
Edward S. Irons: I --
Speaker: (Inaudible)
Edward S. Irons: No, I don't agree with that, you -- entirely. I realize I'm overtime, may I answer it?
Earl Warren: Yes, go right ahead.
Edward S. Irons: The point is this Your Honor. If you're dealing with an individual patent, the problem is simple. It may come very close to that as long as it's done right. But if you have a package of patents, you certainly are going to have to make provisions in that package license so that the royalties are reduced as they expire or some other provision is put into these agreements so that the paramount right and the dedicated invention is not compromised. And in the context of a package license, it is not a matter of mere draftsmanship, it is a matter of substance. Because when you continue the royalty at an undiminished rate after the patents which were -- the primary appeal expire, you certainly indulge in post-expiration royalties as to those patents. They borrow -- the unexpired ones borrow quality from the expired ones. I won't repeat myself.
Earl Warren: Mr. Hutcheson.
Elwood Hutcheson: Mr. Chief Justice, may it please Your Honors. We believe that the petitioner's position here is entirely unsound both as a matter of fact and as a matter of law. First, let me briefly clarify several important undisputed factual matters that have immaterial bearing on both of those issues. Under the expressed language of these contracts, the mid-annual minimum warranty of the $500 per machine plus the 4% sales tax was payable irrespective entirely of the standard use of the machines during any year and irrespective of whether the machines were used at all. In other words, it was about the -- for -- particularly of our concern whether the machines were used or the extent they were used the minimum royalties were payable in any event. And the judgment center appealed from here for the -- insofar as they were entered, they cover a number of years. But the judgments that were entered for the years 1957 and subsequent years of -- were only for the minimum royalty not for anything in addition to the minimum royalty. It is undisputed that these two petitioners had hired the use of the competitive larger and newer stationary machine that were owned by their neighbors or their relatives and paid for that use. The -- here, there is no monopoly in hop-picking machines. As a matter of fact, the stationery machines have come into such favor although much more expensive that since 1947, there has been a manufacture or sale of not a single new portable picking machine. On the other hand, the suggestion in the reply brief here that these portable machines had become obsolete is utterly absurd and completely contrary to the record. Fees has not interfered or attempted to interfere in any measure with the use of any of these machines or any of these patented inventions subsequent to expiration of any of the patents. We've not brought any injunction suit or anything of that kind, either as to the general public or as to the petitioners. Admittedly as to -- this is an over simplification, but as to a particular single patent, permit expires admittedly the invention becomes in the public domain and the public has a right to use it and that seems to be one of the petitioner's principle contentions here. That in some way we're interfering with that but we have not interfered with that as to the general public. We have not interfered with that as to the petitioners except merely that we're asking for the payment of certain money by the petitioners, based upon the contracts that they entered into.
Hugo L. Black: What is the mutual fact on the file?
Elwood Hutcheson: Well, the -- there were several important patents that expired at the end of the 1957 season. In other words, they were granted in 1940 I believe or 41 and expired at the end of the 1957 season.
Hugo L. Black: There's no payment made after 1952?
Elwood Hutcheson: That is correct, yes. No payments made by either petitioner after 52. Of course, there were by other purchasers but not by the two petitioners here.
Hugo L. Black: (Inaudible)
Elwood Hutcheson: Well, it varied with different contracts --
Hugo L. Black: (Inaudible) contracts here?
Elwood Hutcheson: Yes. And as to Brulotte, it expired at the end of the 1958 season and as to Charvet, it expired at the end of the 1960 season. In other words, it extended only a relatively short time after the expiration of these basic patents at the end of the 1957 season. Here, there were 12 original patents which were listed by number, and title, and by date of issue on the face of the contract, those 12 being all that had been issued up to that time. The contracts also said, other patents pending in addition to the 12, there are -- or first, one of the twelve, the last of the twelve did not expire until after the expiration of these royalty contracts. I'll refer to that again in the moment. There were three additional patents, in addition to the twelve, as to which applications were pending when these contracts were entered into upon which patent were later issued and there were four additional ones that were applied for later by fees, and upon which patents were later issued. And Thys' testimony is undisputed that these inventions covered by these various patents which expired later could have been incorporated and were suitable, and available and beneficial for incorporation in the machines as improvements and additions thereto.
Byron R. White: Mr. Hutcheson, (Inaudible)?
Elwood Hutcheson: Yes, Your Honor.
Byron R. White: (Inaudible)
Elwood Hutcheson: Very definitely. They could've utilized several of them if -- thus entirely optional with that, but yes, they were suitable and beneficial for use.
Byron R. White: (Inaudible)
Elwood Hutcheson: Well -- yes, Your Honor. Of course the manufacturer was willing to help. In other words, they could have -- these additional devices, for example, a new device for thinning crops, more thinner, eliminating the leaves and stems. These were available. They -- it wasn't surely a theoretical academic matter. They were available and whether or not the petitioners or others actually purchase and used them was entirely optional with that. But these were not dead-letter patents any of them, they were actually used by large numbers of people.
Byron R. White: Were they still (Inaudible)?
Elwood Hutcheson: Were these patents on the --
Byron R. White: You can use the -- and based on the same (Inaudible)?
Elwood Hutcheson: Yes. That is -- the contracts were all of the same general type.
William J. Brennan, Jr.: Well, this is a single contract I believe.
Elwood Hutcheson: Yes.
William J. Brennan, Jr.: That is all these patents go as --
Elwood Hutcheson: Yes.
William J. Brennan, Jr.: -- pending as well as expires (Inaudible) --
Elwood Hutcheson: That is exactly right, yes.
William J. Brennan, Jr.: And your position is that the stipulation upon (Inaudible).
Elwood Hutcheson: It is my position -- yes, Your Honor. The quid pro quo referred to by the petitioner actually was -- the contract is elementary, it should be given a -- for reason -- reasonably possible in lawful interpretation, just as a statute should be as reasonably possible construed to be constitution -- in such a matter is to be constitutional. And as I see it, the benefits that were received by the petitioners, another similarly situated, was the right which the general public did not have without being subject to infringement suit, the right to use any or all of the existing or future of these patents.
Byron R. White: (Inaudible)
Elwood Hutcheson: Your Honor, my answer to that is that it would not have been practicable where we are concern with a single machine and additions and accessories to a single machine. It would have been very impracticable to have -- had a reduction of the royalty as time went off. In other words, that if there were a large number of items used separately and independently, that might have been practicable, but it was not practicable to this kind of a situation where we were concern with a single machine and additions on accessories too.And I submit that legally it was not necessary to do so. In other words here, before the expiration of any of these patents, these parties voluntarily entered into this contract. If the farmers had had the cash to make a full payment not only of Lindleman's charge for manufacturing the machines but also the Thys' patent royalties at the time of original purchase of the machine, well good. But this patent financing arrangements was necessary from a practical standpoint.
Byron R. White: exactly
Elwood Hutcheson: Well, if I understand you correctly, I would say no. In other words, I was going to mention that. But here, it is undisputed that neither these petitioners nor anyone else ever requested a license limited to certain specific patents or payable in any different manner, in other words, payable in larger amount for shorter periods.
Byron R. White: (Inaudible)
Elwood Hutcheson: No, I think not Your Honor. I -- I'm arguing of both --
Byron R. White: (Inaudible)
Elwood Hutcheson: Yes. Yes, Your Honor. In other words, it is my belief that under the actual fact as they exist here, undisputed on this record, that the Court should not even reach this legal question as they are presented here. In other words, that is my first contention which is a factual matter based on the record of the evidence here. Secondly, it is my --
Earl Warren: We'll recess now Mr. Hutcheson.
Elwood Hutcheson: If Your Honors please, I wish to emphasize that not a single decision of this Court cited by petitioners is a patent royalty case. They are patent infringement, injunction suits or antitrust suits or something of that kind and the only one or two decisions of lower courts that they have cited are royalty cases. I'd like now to refer to the Hazeltine decision of this Court because I submit that it is conclusive. It was a royalty contract case which provided for a royalty based on a percentage of the total gross sales of the licensee including both patented articles and unpatented articles, plus secondly, a -- an annual minimum royalty not of a measly $500 as in this case, but $10,000 per year annual minimum royalty. And that this Court affirmed a summary judgment granted by the court below in favor of the plaintiff and upheld the legality of the contract and the royalty arrangements in both respects. The same defenses were made, misuse of patents, violation of antitrust law and so forth. To be sure if one of them -- and I say if the Court had discussed at greater length the specific question. But the record in that -- the question necessarily was decided even though not fully discussed, I submit, the record in the Hazeltine case shows that a large number of patents, I believe about half of them had expired and others had been invalidated. The Court there emphasized, which is true factually in this case that there was never any request of a licensee for a different kind of royalty arrangement and/or refusal to give a different kind of royalty arrangement which is absolutely the fact here that that's undisputed. Either the petitioners or anyone else ever requested anything different. And to suggest, as petitioners do, that if I may say so, this Court did not know what was doing or that there was an oversight in making a decision, I submit is utterly absurd because the issues were directly raised in each of the three courts, including this Court, and especially, in view of the dissenting opinion which expressly referred to the fact that the case involved, expired patents, and invalidated patents and the dissenting opinion in that connection citing the Scott case which is -- which petitioners principally relied -- rely on and had been decided only five years previously. So, I submit that the Hazeltine case does decide these matters and is conclusive and controlling and has been generally followed in many royalty contracts since that time. And as I read the case, the Court considers in the same category unpatented articles and articles as to which the patents had expired. Both of which would be in the public domain and which is in line with the reasoning of this Court in the recent Sears, Roebuck, the Stiffel case. So, I submit that that -- the case is conclusive. The Court there also distinguished and held inapplicable the line of cases strongly relied upon by petitioners here, the tie-in cases. Well, the Hazeltine held are that those are not applicable at all to this kind of a situation and certainly they are not applicable here because these never insisted or required that unpatented articles or materials they used in connection with these machines. And that is the essence of the tie-in cases so that they are not applicable here at all. I submit that in final essence, this is closely analogous, if I may say so, to a situation of judges or teachers or policeman's retirement pensions. They are deferred of partial compensation for benefits previously received and it seems to me that that is the situation here and certainly there is nothing immoral or against public policy about them. On these matters of public policy, the petitioners rely upon the Scott case --
Speaker: (Inaudible)
Elwood Hutcheson: Yes, Your Honor. That is -- I'm contending that were right on the facts but I'm meeting them head-on on their legal contention, if I make myself clear. And what I'm arguing now, I'm assuming arguendo as the State's Supreme Court did that their factual contention is correct. The -- what the Scott case hold is that -- and all that it holds, that was not a royalty but a patent infringement suit and it held that the plaintiff could not enjoin the use of an invention covered by a previous expired patent. There, it had been assigned by the defendant to the plaintiff and they held the defendant was not estopped to raise the defense of invalidity because it was covered by an expired patent. Well, here as I mentioned before, we have not and are not withholding from the public the use of anything. It is merely a matter of dollars and not of use, not of extension of the monopoly or anything of that kind. I submit that there's nothing against public policy at all in an extension of voluntary, neutrally convenient financing arrangement of this kind. On the contrary, it seems to me that for at least two reasons public policy requires affirmance of these judgments. First, it is well settled by decisions of this Court that in the absence of serious public injury or possibly fraud in the state or something of that kind, that public is a paramount -- public policy requires freedom of contract. While here, I submit there is no serious public injury at all in permitting recovery on contracts of this nature. Secondly, the validity and enforceability of arrangements of this nature, I submit is necessary for or certainly desirable from the standpoint of agricultural financing. Farmers like industry have to mechanize. Many of them are small, undercapitalized. If Your Honors strike down a convenient financing arrangement of this kind, it seems to me the effect would be frankly disastrous for undercapitalized smaller farmers or industries. So I submit that this is in accordance with the public policy and should be permitted.
Speaker: (Inaudible)
Elwood Hutcheson: Well, that is what the contract said. The judgments were not entered on that basis but its true, that's what the contract says.
Speaker: (Inaudible)
Elwood Hutcheson: Well, they must pay an unpaid balance of deferred compensation for the use and the benefits that they have received previously under the contract.
Speaker: (Inaudible)
Elwood Hutcheson: I would put it this way Your Honor. I contend that the -- that that is lawful and valid to do that under these circumstances where it is voluntarily entered into long before the patents expired. Secondly, in answer to the question, I would say that in any event we would be entitled to the minimum royalties which is all that we recovered in this case so that Your Honors take that view, the judgment should be affirmed in any event. The -- here, I submit there's no violation of the antitrust laws. There's no illegal price-fixing arrangement or anything of that kind. There is no monopoly because there is a very intense competition of stationary picking machines and there is no unreasonable restraint of a trade or interstate commerce. We don't restrain anybody. We don't try too. We're merely act -- asking that they pay the balance of the agreed compensation or royalties which they voluntarily agreed to pay. The great weight of authority and the better reasoning, I submit, sustains our position and Your Honors, I submit, should adhere to the Hazeltine case. The tax writers, Walker and Ellis and Corpus Juris Secundum and so forth, all definitely state the law in accordance with our position. The lower federal courts are practically unanimous to the decisions of the Third Circuit which I believe are distinguishable which I won't go into now but that is referred to into the briefs. Every state court which has considered the matter has held in accordance with this rule mainly. That -- if a contract is silent on the subject, it is automatically presumed that the royalty obligation terminates at the expiration of the patent. But if the contract expressly provides to the contrary, that is a valid and lawful provision. And that has been generally understood as the law for many years and certainly is not changed by the Scott case which did not even involved royalties at all.
Speaker: (Inaudible)
Elwood Hutcheson: Yes. That is one of my contentions, yes. I contend that as a matter of law that that would be true under these circumstances.
Speaker: But even if you're wrong with that, you (Inaudible).
Elwood Hutcheson: Yes, sir, yes. I urge the -- the facts of this case, I submit, do not present that clear cut legal question as petitioners contend. So, I am making both contentions. In other words, the matter of reduction of royalty was referred to here and it is undisputed that originally these contracts worth for $5 per bale, a few years later and before these contracts with petitioners were entered into which involved the resale of these machines, Thys voluntarily reduced it from $5 to $3.33 per bale, 200-pound bales, $3 they paid by October 15th. The $500 minimum royalty remained in the same and Thys testified and it's undisputed that at time, he had two alternatives. He could have reduced the royalty period and if he had, he might have avoided this question but it was considered for the best interest of the farmers instead of reducing the royalty period, to reduce the royalty rate and let it continue for the same period as before. Not extending the period but remained -- the period remained in the same by reducing the royalty rate. The advantage to the farmer has been that out of the economies of the machine picking operation they could pay the royalties and that it was to their advantage to have longer time to do so.No interest being charged. And thereby the amount that they would pay each year would be less which was certainly for their benefit and it is undisputed that that perhaps it did actually occur here. So, here there was no agreement that anyone was not to use an expired patent operation either the petitioners or anyone else. We have merely an agreement to pay money in a manner and on a basis that was not an excessive financial burden on the hop farmers. And these contracts were voluntarily entered into long before any of these patents expired and I submit that they are not against public policy. They are lawful and valid and the judgments appealed promptly should be affirmed.
Earl Warren: Mr. Solicitor General.
Archibald Cox: Mr. Chief Justice, may it please the Court. Its with sadness that I inform the Court of the death of the Herbert Hoover, the 31st President of the United States, his services to the country both before and after as well as during his Presidency will leave a mark on history and in your -- to our benefit as well as the benefit of those abroad for a long time to come. His death, well not wholly anticipated becomes, I'm sure, is a shock to all of us. I move that the Court as mark of respect to the late President now recess.
Earl Warren: Mr. Solicitor General, and also with sadness that the Court receives from you the news of the passing of this Great American. President Hoover had a long and purposeful life. One of dedication, dedicated service to this nation and to the world, people of every race, on every continent of the earth are indebted to him for alleviating much of their suffering which resulted from the two most devastating wars in history. I am sure that they too had mourned his passing as we do. It is appropriate therefore that you Mr. Solicitor General should make this motion and the Court takes some consolation from the fact that it can in granting it pay its respect and veneration to his memory. Accordingly, the Court would transact no further business today and will stand adjourned until tomorrow.