William H. Rehnquist: We will hear argument first this morning in No. 86-805, Billy J. B.J.> ["] Pinter v. Maurice Dahl. Mr. Sparks, you may begin whenever you are ready.
Braden W. Sparks: Mr. Chief Justice, and may it please the Court: The case this morning is important because it bears upon the day to day regulation of the securities industry, and it has to do with two issues that concern Section 12(1) of the Securities Act of 1933 which provides for an express private right of action against any person who offers or sells an unregistered security through the use of the mails or the interstate commerce. I would like to state the questions as follows. First of all, whether the long established definition of a Section 12(1) seller under the Securities Act of 1933 and Section 12(1) specifically should be modified to incorporate a new threshold requirement that the seller must be motivated, and I would like to stress that word motivated, by a desire to receive a financial benefit for his efforts in order to be held responsible for his conduct. And secondly, whether or not the common law in pari delicto defense, or perhaps I would prefer to refer to this as the regulatory purpose defense rather than strict in pari delicto defense, is available in a private action for the rescission of the sale of unregistered securities brought under Section 12(1). Just briefly, the statute provides that any person who offers or sells a security in violation of Section 77(e) of this title shall be liable to the person purchasing such security from him, and it goes on to provide for rescission in the common law fashion. To telegraph my position in this case, the Fifth Circuit's addition of a pecuniary benefits test to the settled definition of a seller of unregistered securities is damaging and threatening to the continued regulation of the securities industry in my opinion. And the ruling by the Court of Appeals that the in pari delicto defense does not apply between co-violators of Section 12(1) is in direct conflict with this Court's ruling in the Bateman Eichler case. I think that the facts in this case are extremely important, and I would like to spend a certain amount of time with regard to the facts. Of course, in the trial court, Mr. Pinter was a Defendant, and Mr. Dahl was one of twelve Plaintiffs. Mr. Dahl and the other eleven Plaintiffs sought to recover from Mr. Pinter for the sale of unregistered securities. The complaint detailed a number of misrepresentations, and concealments, and non-disclosures on the part of Mr. Pinter doing business under the various names of his companies. Mr. Dahl, the Trial Court found, was a California or Texas resident, a real estate broker, and a man whose personal wealth exceeded one million dollars, and whose income approached $250,000 on an annual basis. And he detailed certain abortive efforts, and I am at paragraph 7 on page 31 of the petition, the appendix to the petition for writ of certiorari. The Trial Court detailed certain abortive efforts by Mr. Dahl to become interested in the oil business. I would like to quote from the record. And I want to make it clear that everything that I quote from the record will be either from Mr. Dahl's testimony who I am in opposition to, or from the testimony of Mr. Gottsch who was called on behalf of Mr. Dahl. I am not attempting to support my arguments by any statements made by my client in this case. Mr. Dahl testified at the joint appendix, page 105, that he was interested in being in the drilling business, and that he did not have the money that he needed to become involved in the business, and that he hired Mr. Minor whose position was to "raise money", and that is quote. And that it was his job, and this was Mr. Minor who was hired by Mr. Dahl to work for Puma Petroleum and Wrangle Oil & Gas, it was his job to bring investor money. And Mr. Minor was fired by Mr. Dahl prior to his hiring of a Mr. Kirk when it became known to Mr. Dahl that he had spent $10,000 to obtain a legal prospective, and he was fired on that basis. And then Mr. Dahl then hired another individual by the name of Mr. Kirk, who was in the Texas and Oklahoma area attempting to acquire leases for Mr. Dahl who was living in California.
John Paul Stevens: Mr. Sparks, was the legal prospectus the one that would have pertained to the transaction that gave rise to this suit?
Braden W. Sparks: The record does not say, Your Honor.
John Paul Stevens: Do you contend that it was?
Braden W. Sparks: Sir?
John Paul Stevens: Are we supposed to draw that inference from what you are telling us?
Braden W. Sparks: The only inference that I would like the Court to draw is that Mr. Dahl was aware of the need to draw a prospectus in becoming involved in the oil and gas business, and had hired Mr. Minor for that purpose, and fired him when he discovered that he had spent $10,000 in that way. The position of the government, the Attorney General, is that one must be a promoter if one is interested in becoming involved in the business, more a promoter than an investor, and one may be held in pari delicto. And I want to point out that I am trying to isolate in my discussion of the facts those facts which would show that Mr. Dahl was desirous of getting into the oil and gas business, and that it was his intention to not be merely a investor at least initially. I think that the inference that I have explained is all that needs to be drawn from that fact. Mr. Kirk was hired after Mr. Minor was fired. His job, and this is page 108 from the joint appendix, was to locate, acquire and sell leases. And Mr. Kirk introduced Mr. Dahl to Mr. Pinter as a knowledgeable and capable oil man. I would like to point out that Mr. Kirk, of course, was Mr. Dahl's agent in that introduction.
John Paul Stevens: You mean he introduced him to his former employee?
Braden W. Sparks: Mr. Kirk, the new employee, introduced Mr. Dahl, his employer, to Mr. Pinter, an oil man, who was in the Oklahoma oil and gas business.
John Paul Stevens: Oh, I misunderstood you. I thought that you were saying that Pinter had previously worked for Dahl.
Braden W. Sparks: No, sir.
John Paul Stevens: I am sorry. I did not follow your statement as well as I should have.
Braden W. Sparks: Mr. Kirk was working for Mr. Dahl. He found Mr. Pinter in Oklahoma, and introduced Mr. Pinter to Mr. Dahl as a knowledgeable oil and gas man who was working in Oklahoma. Then Mr. Pinter came to Oklahoma and visited the properties, and looked at the geology, the well logs and the other materials which were assembled in the words of the Trial Court by Mr. Pinter. And after conducting his own investigation of the circumstanced decided in the Trial Court's words that there "no way that he could lose investing. " Now there were two different groups of investments which were made by Mr. Dahl, and I would like to point this out and go into some detail here. Because again it is important, because it deals with Mr. Dahl's involvement and the extent to which he may be considered to be actively involved in seeking oil and gas business opportunities. After deciding that he wanted to invest with Mr. Pinter, he went up to Kansas where he found his friend, a Mr. Gottsch, who testified for him at the time of trial. Mr. Gottsch was in the cattle feeding business, and was an independently wealthy individual. He contacted Mr. Gottsch, in his own words, brought Mr. Gottsch to Oklahoma, and introduced Mr. Gottsch to Mr. Pinter in Oklahoma. And as a result of that introduction, he caused Mr. Gottsch to loan him, Mr. Dahl, $250,000 and to put $250,000 of his own money into the initial three well project that the two men got involved in. And they, Mr. Dahl and his friend, Mr. Gottsch from Kansas put up the entire $500,000 needed to fund the first three of five wells that will be discussed here. They bought all of the available interest money in those three wells. Mr. Dahl put not one penny of his own money into those three wells. He caused Mr. Gottsch to loan him the money and solicited, I believe that it is very fair to say, Mr. Gottsch with regard to that transaction. Mr. Gottsch and Mr. Dahl then went into business with Mr. Pinter in effect drilling the first three wells. Sometime prior to that, Mr. Pinter had begun the process of drilling two additional wells. In the words of Mr. Dahl, he decided that it would be appropriate for him to go to Mr. Pinter and to suggest to Mr. Pinter that he had certain friends and relatives in California who would be very interested in these other two wells, since they seemed like a sure deal as far as he was concerned. And so he went to Mr. Pinter and suggested to Mr. Pinter that he would involve his friends in California. Pinter gave him some investment contracts. He took the investment contracts in hand, some of which were in blank and some of which were made out in the name of Maurice Dahl or assignee. He then took these. They had not been fractionalized. They were simply blank investment contracts. He took them to California, and went to eleven of his friends and sold them interests, and made all representations and all communications to each of the people in California.
William H. Rehnquist: When you say blank investment contracts, Mr. Sparks, do you mean that the contracts were all written out but unsigned?
Braden W. Sparks: No, sir. They had blanks in them for the percentage of interest that the investor would buy. They had a blank for the name of the investor. Or in some cases, instead of a blank, they said Maurice Dahl or assignee. So they were blank only in those respects. As to the amount of money, as to the percentage of interest in the various wells, and as to the person who was acquiring the interest.
John Paul Stevens: While you are interrupted, Mr. Sparks.
Braden W. Sparks: Yes, sir.
John Paul Stevens: This transaction with Mr. Gottsch, the first half that you described, was Gottsch one of the Plaintiffs?
Braden W. Sparks: No, sir, he did not sue. He testified on behalf of Mr. Dahl, but he was not a Plaintiff in the action. He testified at trial that he was looking, to put it in his words, and this at 113 in the joint appendix, "I was looking to Maurice. " "Whoever he was in business with, that was not of merit to me. "
John Paul Stevens: What does that have to do with the claims of the eleven other people?
Braden W. Sparks: The only importance that Mr. Gottsch has is that I believe that it is very fair to say that Mr. Dahl solicited Mr. Gottsch.
John Paul Stevens: Maybe he solicited a lot of people. But if they are not the people that are involved in the lawsuit, how does that bear on the lawsuit?
Braden W. Sparks: Well, to me, sir, it is circumstantial evidence of Mr. Dahl's solicitor type behavior. And it seems to me that it is fundamental to Section 12(1) of the Securities Act of 1933, especially when understood on its face and also from the legislative history of that Act, and President Roosevelt's comments when he introduced the bill and asked that it be passed, that the whole idea was to shift the burden of responsibility on the person who made solicitive type of comments or representational activity in connection.
John Paul Stevens: Yes. Maybe he did or did not solicit the eleven people involved, but would it prove solicitation of these eleven if he solicited Mr X, Y, Z? I do not follow that.
Braden W. Sparks: No, sir. But in pari delicto, actually what I referred to as the regulatory purpose defense, the whole issue is to look at what Mr. Dahl did.
John Paul Stevens: Supposedly you proved that he committed an egregious violation with respect to Mr. Gottsch, would that be a defense that Mr. Pinter could assert in the claim?
Braden W. Sparks: It would be evidentiary of his conduct in pari delicto; yes, sir. I might point out, Justice Stevens, that at the Trial Court that Mr. Dahl bore down exceedingly hard in attempting to establish that all of these transactions were integrated. Now on appeal, the position is that these are separate transactions. And I might point out also that the Trial Court found that each of the sales involved from the Defendant to the various Plaintiffs including Mr. Dahl were related. That was the word that the Trial Court used in describing the various oil wells and investments. Now Mr. Gottsch's involvement is simply circumstantial evidence of Mr. Dahl's attempt to solicit others in the offer, sale and delivery of unregistered securities. The statute being a strict liability statute, clearly Mr. Pinter is responsible under Section 12(1). It was never contended otherwise. His position is to allow the judgment to be affirmed with regard to the other eleven Plaintiffs. And solely with respect to Mr. Dahl, he is asserting the defense that it would be inappropriate and would not further the statutory purpose of allow Mr. Dahl to recover against him, because Mr. Dahl was fundamentally responsible in the words of... yes, sir.
John Paul Stevens: May I ask, you are only claiming in pari delicto insofar as the claim by Dahl against Pinter?
Braden W. Sparks: That is correct, Your Honor.
John Paul Stevens: You are not claiming that it has any bearing on the claims of the other eleven or right to contribution or anything like that?
Braden W. Sparks: We did not appeal with regard to 12(1) violations as to the others. We do contend that Mr. Dahl should be responsible in contribution along with Mr. Pinter to the other Plaintiffs.
John Paul Stevens: What is the statutory basis, or is a state law basis, for your contribution claim?
Braden W. Sparks: The securities laws, Your Honor, Section 11, for example, provides for a right of contribution between joint tort feasors.
Byron R. White: That is because he is a seller?
Braden W. Sparks: Yes, sir.
Byron R. White: You claim that he is a seller, and therefore a joint tort feasor with Pinter?
Braden W. Sparks: That is correct; yes, Your Honor. Equally responsible for the same statutory violation.
Byron R. White: And the Court of Appeals rejected your claim that he was a seller?
Braden W. Sparks: Yes, sir. They invoked a pecuniary benefit test to get around, from my position, in order to substantiate the decision that he was not a seller.
Byron R. White: And both issues are here?
Braden W. Sparks: Yes, sir. And the Court of Appeals found that his conduct was a substantial factor in the sale of unregistered securities.
Byron R. White: But what?
Braden W. Sparks: But that he was not motivated by a desire for pecuniary benefit directly or indirectly, which seems to me to fall right in the face of the Dirks opinion which talks about representational benefit at the very least. And which seems to me on the facts, even the facts as adduced by the Fifth Circuit, to be inappropriate as a conclusion, as a matter of factual conclusion, Your Honor. This was a man who was trying to get into the business and who was also trying in the words of Judge Brown to capitalize his own investment, and thought that it was appropriate to do so by going to California and selling other investors in this very same project. It seems to me to be inappropriate to conclude that he was acting merely gregariously which is what the Fifth Circuit said. I do not believe that this was in the words of Judge Jones happy hour cocktail conversationalist type of advice. This was not simply a comment. And in the words of the government, they contend that strongly urging someone to become involved without being motivated by pecuniary benefit constitutes non-seller and non-solicitation conduct. I would respectfully disagree with that position. It seems to me that fundamental to the Securities Act of 1933 is this concept that the burden must be shifted. And I am essentially quoting from the legislative history, House Report 85. Every lawyer knows that all facts in control of the Defendant that it is practically impossible for a buyer to prove a state of knowledge or failure to exercise due care on the part of a Defendant. How are you going to show what the motivation was in the mind of someone who is selling a security? That it going to get from the trial lawyer's standpoint and from the litigation standpoint into a swearing match and I think unnecessarily, and it would protract litigation to have a test like that. H.R. 85 in 1933, "is to involve paper liability, it is necessary to throw the burden of disproving responsibility for reprehensible acts of omission or commission on those who purport to issue statements. " It seems to me that the gravamen of the wrong, if you will, the statutory wrong, is to sell. You cannot go to California with a bunch of investment contracts in your briefcase and sit down with your friends, including your banker, and a man who is in the contracting business with you, and your accountant, and your partner in a business deal, and your employer and employees, and these were the individuals from the record and from Mr. Dahl's testimony were the people purchased and none of whom knew each other in the admission of the Respondent prior to Mr. Dahl's selling them, you cannot go to those people, those kinds of people, sit there with an investment contract and fill out the blanks without assuming some fiduciary responsibility it seems to me to them to tell them the truth. Now Mr. Dahl's position is I am not a seller, and that seems to me to be absurd. He is a seller. And the mere fact that he is not directly receiving some pecuniary benefit does not mean that he is not receiving some pecuniary benefit. Certainly, he is, because he is capitalizing the investment that he is trying to become involved in.
John Paul Stevens: Mr. Sparks, I am sorry to interrupt you again. But you told me that you are relying on Section 11 for the right of contribution. Is this not a Section 12 suit?
Braden W. Sparks: It is a Section 12 lawsuit from the standpoint of the Plaintiffs; yes, sir.
John Paul Stevens: Section 11 applies to misstatements in prospectuses, does it not?
Braden W. Sparks: Section 12.2.
John Paul Stevens: Section 12 is where you have no registration at all, is it not?
Braden W. Sparks: Yes, Your Honor.
John Paul Stevens: So the contribution right does not apply to this case, does it?
Braden W. Sparks: I believe that it does, Your Honor. And I have addressed that in my brief, and I do believe that there is a right of contribution under common law.
John Paul Stevens: Has any court so held in a Section 12 case?
Braden W. Sparks: No, Your Honor, no court has so held in a Section 12 case. And I might point out that I do believe that that issue has been perfected. Because I attempted at the time of trial to have Mr. Dahl realigned as a Third Party Defendant from the outset, and the Trial Court refused to realign him as a Third Party Defendant. And I was not able to assert the contribution defense at that time. It was submitted to a magistrate. And I appealed that, and it was overruled by operation of law.
Sandra Day O'Connor: Of course, Mr. Sparks, I thought that both the District Court and the Fifth Circuit determined that Mr. Dahl lacked any sort of pecuniary gain motivation.
Braden W. Sparks: No, Your Honor, that is not correct. What the Trial Court found was that Mr. Dahl did not receive a commission from the sale of unregistered securities. The Trial Court did not enter a finding with respect to direct or indirect pecuniary benefit. And the Fifth Circuit decided that he was merely gregarious. I would like to reserve the rest of my time, Your Honor.
William H. Rehnquist: Thank you, Mr. Sparks. We will hear from you now, Mr. Taranto.
Richard G. Taranto: Chief Justice Rehnquist, and may it please the Court: On the in pari delicto question in this case, the Securities and Exchange Commission thinks that the Court of Appeals was wrong to the extent that it ruled that the in pari delicto defense is never available in an action brought under Section 12(1). As I propose to explain in more detail in a moment, and I want to present our views in a manner slightly different from our presentation in our brief, we think that the in pari delicto should be available in certain narrowly defined circumstances. On the second question in the case, we think that the Court of Appeals was right in ruling that a person who solicits a securities purchase may be liable under Section 12(1) along with the person who passed title, but only is the solicitor had some motivation in promoting the purchase other than a friendly desire to further the interests of the buyer. Because only then can he fairly be aligned on the selling side of the transaction. We do not take a position in this case on whether contribution may be available in a Section 12 action.
Antonin Scalia: Mr. Taranto, suppose the primary Defendant here, suppose Mr. Pinter, were a philanthropist, and it were shown that he really did not expect to make any profit from this stock, but just to benefit his friends and associates that he was selling their interests in the wells, would that be enough to exempt him from liability under 12(1)?
Richard G. Taranto: No, I do not think so. Not when the issuer is actually the person passing title to the security.
Antonin Scalia: No, but he comes under the same language. I mean he sells or offers. Why should that be a necessity for the in pari delicto but not a necessity for the substantive liability in the first place?
Richard G. Taranto: Well, the financial interest test does not go to the in pari delicto defense, but it goes only to whether a person other than the person passing title can also be a seller, and therefore conceivably liable to the other people that he solicits.
Antonin Scalia: I understand that, but that is the first step to establishing the in pari delicto defense. Why should it be that the issuer need not have that kind of motivation, but that someone else in order to be liable must?
Richard G. Taranto: We think that Section 12 is firmly rooted in the common law remedy of rescission where financial interest does not play a role as to the person who passes title. The history of the development of Section 12, and its amendment in 1954, and its judicial history prior to that seems to us to make it clear that liability can extend somewhat beyond the person who owned the security before the sale. The question then is what kind of limits have to be placed on the extension of liability beyond the person who passed title. Solicitation, we think, is part of the statute, but there is an important distinction which we think that the Court of Appeals rightly captured between somebody who simply urges somebody else to get in on a good deal and on the other hand somebody who because of his own interests is properly aligned on the selling side of the transaction. We do not think that financial benefit is a... we do not mean by that something terribly precise or limited in that indirect financial interests can align the individual on the selling side of the transaction just as a commission can.
Antonin Scalia: But that it not necessary, you say, to align Pinter on the selling side?
Richard G. Taranto: No. It seems to me that there are always two people, one person on each of the two sides of a sale, the person who passed title and the person who then owns the security after that transaction. And what we are trying to do is establish some limits on the extension of the seller class beyond the person who is unquestionably in that class, namely the person who passed title.
Antonin Scalia: That is the key then. If you have title and pass it, it does not matter whether your motivation is beneficent or proper. Whereas if you did not pass title and you are looking only at someone who participated in the offering somehow, you need the motivation.
Richard G. Taranto: Yes, I think that is right.
Byron R. White: Even if you are an agent of somebody else?
Richard G. Taranto: If you are an agent for the seller, there is very likely to be some kind of interest of your own, presumably a continuing relationship with the seller, if you are carrying on the activities for the seller.
Byron R. White: Supposing the person holding title is an agent of someone else just for the purpose of holding title, and he passes it when he is told to by his principal?
Richard G. Taranto: It sounds to me as though... I am somewhat confused by who exactly is passing title in the course of that transaction.
Byron R. White: Whoever is holding title passes title, and supposing that the person holding title is an agent for that purpose for somebody else?
Richard G. Taranto: I think that anybody who is the holder of title before--
John Paul Stevens: Who passes title is the seller.
Richard G. Taranto: --is a seller, that is right. Let me try to--
John Paul Stevens: If I can ask one other question about the seller. Is it necessary to be a seller in order to... I mean is it not possible that Dahl could not be a seller and nevertheless the defense of in pari delicto would be available?
Richard G. Taranto: --Oh, yes, absolutely.
John Paul Stevens: And is it also not possible that he could be a seller and nevertheless the claim of contribution would fail?
Richard G. Taranto: Yes.
John Paul Stevens: So it may be true that we do not have to decide the seller issue?
Richard G. Taranto: That is right. The Court of Appeals did not decide the underlying legal question whether contribution can ever be available in Section 12. It found it unnecessary to do that, because it thought contribution should not be available in this case even if it could be available in some other Section 12 case.
Sandra Day O'Connor: Do you also think, Mr. Taranto, that the District Court and the Fifth Circuit did not make the necessary determination about the pecuniary interests that Dahl might have had?
Richard G. Taranto: Yes, we do. We think that the District Court did note that Dahl did not receive any commissions, but did not address whether there was some indirect financial interest. In particular, whether Dahl would have needed these particular purchases in order to make his investment profitable, and whether there were other potential purchasers who might have taken the place of these.
Sandra Day O'Connor: So you think that we need to remand on that?
Richard G. Taranto: Yes, we do.
Sandra Day O'Connor: And that means that we have to also address the merits of the contribution issue?
Richard G. Taranto: Well, it seems to us that that issue has not been briefed. And if on remanding to the Court of Appeals, the Court of Appeals were to address the contribution question and decide that contribution could not be available under Section 12 regardless of the particular financial interest or its absence, that issue would not have to be addressed. But the question of whether Section 12 in any circumstance permits contribution has not been presented or briefed in this case. So that issue would have to be decided on a remand.
John Paul Stevens: Mr. Taranto, would you do one more thing because your time is short. Would you be sure to explain to me the difference between the position that you now advocate and the one that you set forth in your brief, because I want to be sure that I get that.
Richard G. Taranto: The difference I think is really one of emphasis. To the extent that we suggested in the brief that the first part of our test for the in pari delicto defense was that the buyer had to be more a promoter than an investor, the main thing that I wanted to do was to dispel any misimpression that what we meant by that was a simple comparison, how much did the buyer solicit and how much did he purchase, and that that would somehow automatically answer the question. By promoter, we mean something broader than that. We mean simply what role did this buyer play in the offering as a whole. To be a promoter, he might have played an active role in any number of respects, not just soliciting purchases. He might have prepared offering material, and he might have been the instigator.
Antonin Scalia: You mean on the whole and not necessarily to these particular Plaintiffs?
Richard G. Taranto: That is right. What we mean by the promoter part of the test is something that focuses on the buyer's role and the offer as a whole, and we then move on.
Antonin Scalia: But you would not say in the colloquy that was going between counsel and Justice Stevens that the offering to someone who was not one of the Plaintiffs here is merely confirmatory or circumstantial evidence of the necessary qualification?
Richard G. Taranto: We think that that could be evidence of--
Antonin Scalia: Direct evidence.
Richard G. Taranto: --Direct evidence of a promoter role.
Antonin Scalia: May I ask one more question. If I agree with you that this matter was not found, that is the financial motivation by the District Court, but I think that it was found by the Court of Appeals, would we still have to remand? Your brief says that the Court of Appeals did not find it either, and I happen to disagree with that. What if I think that the Court of Appeals did find no financial motivation, but the District Court did not?
Richard G. Taranto: I think that without factual findings by the District Court made in the light of a broad enough understanding of what kinds of financial interests can qualify for this test to align him on the selling side of the transaction that further findings should be made. In particular, there seems to be some disagreement between the majority and the dissent in the Court of Appeals about certain kinds of indirect financial interests and whether they would quality.
Byron R. White: Mr. Taranto, I do take it that you disagree with the Court of Appeals on the standard to be applied in determining the in pari delicto defense?
Richard G. Taranto: Yes. We read the Court of Appeals to have said that because 12(1) is a strict liability statute that the in pari delicto is never available.
William H. Rehnquist: Thank you.
William H. Rehnquist: Thank you, Mr. Taranto. We will hear now from you, Mr. Spinuzzi.
John A. Spinuzzi: Mr. Chief Justice, and may it please the Court: We have a delicate problem here in dealing with the securities laws. Congress set them up, and this Court has interpreted them, and now we are juggling with those laws and taking them out of balance again. And the premise on which we are trying to take these delicate mechanisms out of balance is that this Court made a ruling in the Bateman Eichler case that under certain circumstances that the defense of in pari delicto may be asserted in a 10(b)(5) fraud case. It is sought here to extend that beyond the fraud activity to an unregistered security activity. Frankly, my first impression was similar, that on a strict liability statute that you could never bring in pari delicto. I do not agree with that now, because equitably it has always been permitted in not only fraudulent conduct but also in illegal conduct. And if there is a illegal act in selling unregistered securities, then I agree with the SEC that in pari delicto should be applicable. However, it is a rare exception, as stated by this court, that you will permit that defense, because the normal and general rule is that it will not be permitted. Now we have a special problem here. Section 12(1) specifically says that the seller will be liable to his purchaser for selling unregistered securities. There is no defense to that statement. It is absolute liability. In this particular case, Mr. Pinter was the seller of securities, and he admitted it. And the court found that they were not registered, and the court found him liable not only to Mr. Dahl but to Mr. Dahl's friends and associates who also invested. The critical nature of this problem is can an illegal seller of unregistered securities avoid his liability by raising a theory that one of the buyers indirectly or directly assisted him in bringing other investors into the ventures. To me, that is a critical question. It is not quite a tippee-tipper situation. As the Fifth Circuit stated, it was a gregarious act intended to benefit his friends. I am talking about Mr. Dahl's friends. And to show how he tried to benefit, it is critical for this Court to be aware that Mr. Dahl invested a total of $351,000 roughly in three different ventures. His ten or eleven friends that he brought in invested a total of $82,000 in two ventures. And more importantly, the other Plaintiffs... we will call them the California investors, because that is essentially what they are except for one person who was Mr. Dahl's fiancee... the California investors invested in two wells, and those wells and leases had already been fractionated by Mr. Pinter months and months before. He had already drilled two wells on one lease with other investors, and he had already drilled one well on another lease with other investors. He was trying to drill two more wells, and we call them the Doss 3-B and the Doss 2-C well. He had some of his investors drop out. When they dropped out, he approached Mr. Dahl. And he said, Mr. Dahl, some of my investors have fallen out, and I have got room for some more. Dahl said fine, I have some close friends who probably will be interested, let me check, and he did. In the Doss 3-B, there were three investors from these Plaintiffs. One was Mr. Dahl himself, one was his fiancee, and one was his CPA. Those three investors invested little. The CPA invested $7400, and his fiancee invested $3500, and Mr. Dahl invested about $28,000. But the remainder, the several hundred thousand dollars that was raised, was raised by people unknown to Mr. Dahl. And Mr. Pinter, he raised that capital. So the act of selling unregistered securities was already in process by Mr. Pinter, and all he did was get Mr. Dahl to help fill in the void for the last three interests. As to the Antwine 2-C, the same basic idea except a total of nine of Mr. Dahl's friends invested approximately $7500 in those wells, and the remainder of the funds were raised by other investors by Mr. Pinter in his other efforts. Now the record shows that Mr. Pinter--
Antonin Scalia: What did the Court of Appeals find on this point?
John A. Spinuzzi: --It made no finding whatsoever on that.
Antonin Scalia: Did not its opinion assume, it seems to me, did it not appear to assume that he was a substantial factor?
John A. Spinuzzi: Yes, sir, it did. And that substantial factor came up under the idea of how do you determine who and what is a seller. The statute does not define a seller.
Antonin Scalia: I understand that. So you are challenging the Court of Appeals?
John A. Spinuzzi: No, I am not challenging the Court of Appeals, but I am challenging their precedent, yes. Because the majority refused to follow that precedent. They added the other financial benefit test as a threshold requirement. And frankly, I think rightly so, either that one or some other. And let me explain why, sir. We already have a complicated securities law. We now in a strict liability section statute where there is no defense, Section 12(1), we suddenly throw in tort negligence law. And we not only throw in tort negligence law, but we throw in one of the most complicated concepts that they have under that law. That is proximate cause, legal liability. And to determine proximate cause, they now say you must be a substantial factor. And I have cited in my brief what some of the authorities thing of substantial factor. They think that it is good for trying to determine causation and fact. But it has no bearing and it has no relevance, and in fact is a hindrance to determining actual legal liability. That is a policy decision of this Court and of Congress. It is not a decision for the court to be making at this trial level saying that if it is a substantial cause or substantial factor in causing it that then he is liable. It is sort of the old idea of but for you introducing me to him that I never would have met him and I never would have sold him, and therefore you are the substantial cause of my selling him. That is not a good standard. It is already a confusing issue in tort law, and here we are going to try to make it more confusing in the securities law.
Antonin Scalia: I do not understand what you are saying. Are you saying that he is liable even if he is not a substantial factor, or that even if he is a substantial factor that he is not liable?
John A. Spinuzzi: Mr. Dahl is not liable. Both the Trial Court and the Fifth Circuit found that he was not. Mr. Pinter was, because he was the issuer of the securities.
Antonin Scalia: What would make Dahl liable in your view, does he have to be the actual seller who transfers title?
John A. Spinuzzi: That would be one. Because by being the actual seller, that would do it.
Antonin Scalia: I am sure that would, but what else?
John A. Spinuzzi: I think that there are other situations. Let me use an example. If Mr. Dahl knew that these were unregistered securities, which he did, and he knew that there was a private offering exemption being sought to be proven and Mr. Dahl himself knew that he could avoid and ruin the private offering exemption by his own wrongful conduct, then I think that he could be liable. A person who wants to meet the private offering exemption or the non-public offering exemption as it is technically called has certain restrictions. Section 4.2 is the exemption provided by Congress to say all right, if you do not want to sell registered securities, you can sell unregistered securities on condition that you make the proper disclosures.
Antonin Scalia: And that is the only thing that the language, offers or sells, that the word offers brings in beyond the transfer of title?
John A. Spinuzzi: It does not really quite say that either. Section 12 says, "Whoever offers or sells a security in violation of Section 5 shall be liable to his purchaser. " The seller is liable to the purchaser, but it does not say whoever violates the statute.
Antonin Scalia: And the offerer is liable to nobody?
John A. Spinuzzi: It does not say that specifically in the statute, no. It would be construed, and I think that in many instances that it can. Because the consummation of the sale appears to be the actual damage and not necessarily just the offerer. It is an interesting point. Because at one time the statute in the definition included sale to include an offer. It was later amended about 1958 and removed that provision. But logically speaking, a person who really actively participates in a sale, and I think that a pecuniary benefit test is applicable. Because very frankly, in the Trial Court, the defense was raised that Mr. Dahl agreed to sell in exchange for a commission. That is pecuniary benefit. It was disproved. It was finally admitted by Mr. Pinter that he was wrong, that he did not pay a commission or agree to pay a commission. So that would be one sense. Another sense would be the way that the SEC has taken the position. That if he were a promoter of the enterprise, that if he had a financial interest in the actual business himself, that would be different. We have taken the position that where the purchaser of a security has only an interest in a venture as an investor himself that he cannot be a seller to someone else merely by saying, hey, I have got a good deal, I have checked it out and I think that it is great, you ought to get into it. And that is basically what happened here. Now there was not even any negotiation by Mr. Dahl with these other people. The subscription agreement prepared by Mr. Pinter and given to Mr. Dahl had all of the terms and the conditions of the sale. The only thing that it lacked was the name of the investor, his Social Security number, and his address. And at the very end, it has a form of schedule which says that if you buy a one-sixteenth interest that it costs you X dollars and if you buy three-sixty-fourths that it costs you X dollars, and all you do--
William H. Rehnquist: Mr. Spinuzzi, what is Mr. Dahl's account of why he did all of this, just to get his friends in on this good deal?
John A. Spinuzzi: --Yes, sir, it really was. As a matter of fact, to understand why he did, these were all people that he had known for some time. They were his business partners and his banker. He used to be in the construction business. His banker, his insurance man, his fiancee, his own brother. There was not any stranger to him that he was not a close associate with that he did not say, hey, you ought to be in on this. He received nothing, but perhaps except hopefully the friendship was increased. I do not know what else.
Speaker: Maybe not.
John A. Spinuzzi: You may be right. Now what really bothers me is the attempt here to shift the burden of what I consider to the statute's main function of the disclose of all material information in connection with an investment opportunity. Mr. Pinter says, hey, you should have told him the truth. Now the critical thing that came up in the testimony that really is shocking is Mr. Pinter says that he gave nothing to Mr. Dahl to explain this offering or the three offerings, nothing. He gave him one thing as a kind of geological report, but it has nothing to do with the particular well. He just said that it was to give him an idea of where approximately the wells were located. Well, that does not even meet, of course, the registration requirements, and it certainly does not meet the exemption requirements. And in this regard, Mr. Pinter specifically said in the subscription agreement that these securities are not registered under the Securities Act of 1933. But then it goes on, 146> ["]. And Rule 146 is a specific SEC rule providing a safe haven for an offering which is exempt from registration under the non-public offering exemption of Section 4(2). Now if you are going to put the burden on Mr. Dahl and say equitably he is estopped and he is in pari delicto because he knew that the securities were unregistered, then so did everyone else who invested in those wells, because they all signed the subscription agreement and the subscription agreement is very specific that these are not registered. But if you are going to charge him with that burden, then we should always charge him with the other burden it says, 146> ["], meaning that Mr. Pinter must have complied with Rule 146. But the testimony was just the opposite. And this was interesting. Mr. Dahl received a financial statement.
Antonin Scalia: But the others are not responsible for its having failed to be a private offering, and the contention here is that Dahl is in part, because he was one of those who promoted the entire scheme, whether he did it for purposes of friendship or for purposes of profit.
John A. Spinuzzi: I disagree for this reason. The scheme, as you call it, had already been laid, and in existence, and in operation. This is basically what the SEC wants to find out, was Dahl personally involved in the scheme as a promoter. It was already in operation. They were selling the interests to other people. He only needed a few more people to fill out and finalize his subscriptions.
Antonin Scalia: So you say if someone else has already approached enough other people that the private offering exemption is lost, has already been lost, then someone who comes in at that stage and assists in selling to even more of the public, he is okay, because after all the violation has occurred?
John A. Spinuzzi: No, sir.
Antonin Scalia: Is that your theory?
John A. Spinuzzi: No, sir. If that person comes in as an agent for the seller, and I am talking about the issuer as a seller, he should be liable also. But that is basically held by the courts anyway. Or if he is the agent selling on behalf of the issuer. There is another one that goes that if he is in a control relationship with the issuer, Section 15 I believe it is. There is a specific liability which they can take up. Why do we have to go to in pari delicto?
Antonin Scalia: But not if he is doing it for his own financial gain.
John A. Spinuzzi: He is not.
Antonin Scalia: But what if he is doing it for his own financial gain?
John A. Spinuzzi: In that case, I would say that he is going to come under the three categories of either an issuer, or an underwriter, or a dealer in securities. Those definitions are broad enough to catch a person in that position. As a matter of fact, one of the exemptions from registration specifically says if you are not an issuer, and if you are an underwriter, and if you are not a dealer, than you may sell the security. Now normally, that is a secondary trading type exemption, but it could also count for a normal issue. So in those three categories, I think that it would almost always lump them in. And interestingly enough, that came up after the trial in a proposed finding of fact, but it was two weeks after the trial. And it was not ruled on by the court, and I can understand. And there is something else about the Trial Court. I have put in my brief that as far as I am concerned these issues are not even properly before this Court. We do not think that the in pari delicto defense, or the estoppel defense, or the right of contribution were ever raised in the Trial Court in the form in which they are brought here. And the form in which they are brought here is with reference to the sale of unregistered securities. The manner in which it was raised in the Trial Court was under a 10(b)(5) fraud theory. Well, excuse me, I will take it back. It was under a common law fraud theory. That Mr. Dahl made material misrepresentations and omissions of fact that caused Mr. Pinter to engage in this wrongful conduct.
William H. Rehnquist: The Fifth Circuit passed upon the in pari delicto.
John A. Spinuzzi: The Fifth Circuit apparently decided that it was of significant enough importance that they would go ahead and rule on it.
Byron R. White: And estoppel?
John A. Spinuzzi: And estoppel. As a matter of fact, estoppel was the main point of Judge Hill. Judge Hill kept saying... estoppel, of course, here was he knew or did not know that securities were unregistered. Judge Hill said so what, the old case from the Fifth Circuit, Henderson v. Hayden, that they have always applied the standard that you cannot waive your rights under the statute and you cannot be estopped from your rights under the statute even if you have knowledge that they are unregistered. Because in this instance, the great white father, Congress, says we are going to protect you, public, from your own ignorance unless the issuer gives you a complete disclosure of all material information. If he gives you disclosure, then Mr. Investor, it is your tough luck, you take care of yourself. And that is the way that it has been, and really the way that it should be, because the law imparts the fairness of disclosing the investment opportunity.
Sandra Day O'Connor: Well, Mr. Spinuzzi, it seems to me that under that approach that it would further Congress' objectives to provide a in pari delicto defense to someone who is a promoter and who gets other people to buy these unregistered securities as a promoter, and I think that is what the SEC is arguing.
John A. Spinuzzi: I think that they are trying to... well, the SEC has policy decisions too, and I agree. And their policy decision here is that they would like to enlarge it to cover a promoter in that sense, and I cannot disagree.
Sandra Day O'Connor: And it would seem to further Congress' purposes here?
John A. Spinuzzi: Yes.
Sandra Day O'Connor: So the question is whether Mr. Dahl is indeed a promoter in that sense.
John A. Spinuzzi: I agree.
Sandra Day O'Connor: And perhaps the courts below did not have a chance to focus on that, because at least the First Circuit thought that defense was not available at all.
John A. Spinuzzi: I do not think that is the reason that they did not focus. The reason is that it was never made an issue in the Trial Court. But more importantly, even if it had been, the record in the Trial Court shows absolutely no evidence to support such a theory. So assuming a remand as an example, there is nothing there in the record for the Court to make a ruling on. There is nothing, absolutely zero, to indicate the Mr. Dahl was a promoter of this, evidentiary-wise or otherwise. That would mean then that we start a trial all over again on issues that in my opinion were never raised.
Byron R. White: I do not think that you accept the SEC's definition of the in pari delicto defense.
John A. Spinuzzi: No.
Byron R. White: Do you think that it requires Dahl to be a promoter?
John A. Spinuzzi: I think that it would. You see, I am afraid to say.
Byron R. White: Well, that is something different than what we said in the Eichler case.
John A. Spinuzzi: Yes, sir.
Byron R. White: That is an additional element that is not present in Eichler.
John A. Spinuzzi: That is correct.
Byron R. White: But Eichler referred to another section, is that it?
John A. Spinuzzi: Eichler was basically talked on the 1934 Act which was a 10(b)(5) fraud action, and we are not talking about fraud here. I can understand the exception that this Court made in the Eichler case, and it makes good sense. But in that case, even the Court here did not permit the in pari delicto defense to be used.
Byron R. White: Exactly. Why do you need any more in this case?
John A. Spinuzzi: I do not think that we need any more. You see, the wrongful conduct that they are claiming with Mr. Dahl is that he was also a seller to his friends by giving them a tip.
Byron R. White: If we say that the in pari delicto defense is available in some circumstances contrary to the Court of Appeals, must we not remand and say, look, here is the right rule, now decide whether it is available on the facts. If there are not enough facts, maybe you have to send it back to the Trial Court.
John A. Spinuzzi: I do disagree with the SEC on that part. I do not believe that the Fifth Circuit said that the in pari delicto was never permissible in a Section 12(1) strict liability situation.
Byron R. White: Well, it said that it was not available here.
John A. Spinuzzi: Yes, sir, it did. And the reason that it did is that it said that Dahl was a buyer of all of these securities, and as a buyer you are talking about so-called seller activity which is a matter not related to his own purchases. That is basically what the Court said. That if you are going to use the equitable defense of in pari delicto, it must relate to the same identical matter of which you complain. Mr. Dahl was not complaining about the wrongful sales to his friends. He was complaining about the wrongful sales to him.
Byron R. White: Absent a showing a Dahl's conduct was offensive to the dictates of natural justice, the unclean hands, the in pari delicto unclean hands are not available.
John A. Spinuzzi: I agree. And the only thing that I can figure is that he is going back to the historical call it transition of the equitable doctrine.
Byron R. White: But did not the Court of Appeals hold in discussing estoppel that to allow the estoppel defense would frustrate the purposes of the Act?
John A. Spinuzzi: Yes, sir.
Byron R. White: And that is one of the requirements also of in pari delicto indirectly, is that not right?
John A. Spinuzzi: They have a slightly different wording, sir, and if I may read my note here on it. Under the Eichler case it says, "Preclusion of a suit would not significantly interfere with effective enforcement or protection of the public. " The Henderson standards says, "It would further the goals of securities. " To me, they are basically the same, but they are slightly different wording. And apparently, Judge Brown in his dissent put some emphasis on that difference.
Byron R. White: Yes. But the opinion says that it would frustrate the purposes of the Securities Act.
John A. Spinuzzi: That is correct.
Byron R. White: Is that not Eichler, too?
John A. Spinuzzi: In my opinion, yes. The wording is slightly different, but I see nothing different whatsoever in substance. And in addition, the Henderson case was really primarily directed in its application by the Fifth Circuit at the estoppel theory, that his knowledge that the securities were unregistered. The court said that in its opinion that the Eichler case still applies to the estoppel theory as to knowledge of unregistered securities. But that in any event, in the majority's view, that even if you applied the Eichler standard that it still would not bar or preclude recovery by Mr. Dahl. I have nothing further, Your Honor. Thank you very much, Justices.
William H. Rehnquist: Thank you, Mr. Spinuzzi. Mr. Sparks, you have one minute remaining.
Braden W. Sparks: May it please the Court: I would like to address a couple of questions very quickly. As to the disclosure issue, counsel has argued I submit outside of the record that there were omissions. The Trial Court found that there were no violations of 10(b)(5), no omissions, and that there were no acts that constituted a violation of Section 10(b)(5) in paragraph 25 of the court's findings. Secondly, I would like to point out in response to the questions of Justices Scalia and White that with regard to the in pari delicto test suggested by the government that they suggest that one ought to be a promoter and somehow be involved in the decision not to register, or involved in the conduct that results in the loss of the exemption. And I submit that in a 12(1) context, a strict liability context, that this puts again the burden on establishing a state of mind that a decision was made not to register, and that a decision was made to take the transaction outside the exemptions. I submit that that again flies in the face of the basis of the statute. Secondly, in response to Justice Scalia's questioning concerning the substantial factor test, there is some confusion.
William H. Rehnquist: Thank you, Mr. Sparks. The case is submitted.


Earl Warren: Number 77, Harold A. Boire, Regional Director, Twelfth Region, National Labor Relations Board, Petitioner, versus Greyhound Corporation. Mr. Come.
Norton J. Come: Mr. Chief Justice, may it please the Court. This case is here on certiorari to the Fifth Circuit which sustained an injunction issued against a representation election directed by the National Labor Relations Board. And the question presented is whether a Federal District Court, under its general equity power has jurisdiction to enjoin a Board representation election at the suit of an employer who challenges its validity. Now the underlying facts are briefly these. In April of 1961, the Amalgamated Association of Street, Electric Railway and Motor Coach Employees Union filed a petition with the Board pursuant to Section 9 (c) of the National Labor Relations Act, requesting a representation election among the porters, janitors, and maids working at four bus terminals in Florida operated by respondent Greyhound. The employees were on the payroll of Floors, a cleaning and maintenance service company which was under contract with Greyhound to provide such service at the four Greyhound terminals. The Union contented that Greyhound was a joint employer of the employees, along with Floors and requested a single bargaining unit composed of the employees at the four terminals. Greyhound and Floors on the other hand, contented that Floors was the sole employer of the employees. After hearing, the Board found that while Floors hires, pays, disciplines, transfers, and promotes the porters, janitors, and maids, Greyhound exercised sufficient common control over their working conditions as to be their joint employer along with Floors. It further found that a single unit consisting of all the employees under the joint employer relationship was appropriate. Accordingly, it directed that an election be held in this unit to determine whether the employees desired to be represented by the Union for collective bargaining purposes. Greyhound, contending that it was not the employer of the employees concerned and thus, that it had illegally been made a party to the representation proceeding, brought this suit in the District Court for the Southern District of Florida to enjoin the election. The District Court issued a temporary restraining order which after hearing was converted into a permanent injunction. It predicated this action on the decision of this Court in Leedom versus Kyne which recognized District Court jurisdiction in what I shall try to show later is a very limited situation, totally distinguishable from the situation that we have here. The --
Speaker: The merits (Inaudible) determinations even though required (Inaudible)?
Norton J. Come: No, Your Honor.
Speaker: We don't have that at all.
Norton J. Come: No, Your Honor. The Board appealed and the Fifth Circuit affirmed on the opinion of the District Court. We submit, briefly that the Fifth Circuit was erroneous, that the statutory review provision of the National Labor Relations Act submit a -- provides an adequate way by which Greyhound could have had its contentions reviewed and it was Congress' intention that that would be the exclusive procedure by which those contentions could be reviewed. And as I mentioned before, that the exception recognized in Leedom against Kyne is not applicable here. Now let --
Arthur J. Goldberg: Mr. Come, in reference to Justice Harlan's question, how can they declare the answer if the merits of the case are not before us? The whole case as the District Court asserting its jurisdiction (Inaudible) that the employees in question were not employed by Greyhound, isn't that what this case involves?
Norton J. Come: Well, Your Honor --
Arthur J. Goldberg: I'm not saying --
Norton J. Come: Yes.
Arthur J. Goldberg: -- (Inaudible) results would be that (Inaudible) I take it, what in issue here is, can the District Court as you've stated, doesn't have jurisdiction (Inaudible) to the Board's finding, doesn't have jurisdiction to enjoin the Board's order? Surely, the basis upon which the District Court proceeded to (Inaudible) the District Court concluded that there is no substantial evidence that Greyhound was the employer. That is not the case (Inaudible)
Norton J. Come: Well, the District Court, Your Honor, did not have before it the record of the Board proceeding. It went on the basis of the complaint that was filed in the District Court filed by Greyhound which, attached to it, the Board's decision without the underlying evidentiary basis for the Board decision.
Arthur J. Goldberg: The allegation --
Norton J. Come: Now --
Arthur J. Goldberg: -- the allegations in the complaint is a question (Inaudible) on the propriety of the Board taking action in order to (Inaudible) employee, so it was alleged, and that employee (Inaudible).
Norton J. Come: Well we submit in the first place, Your Honor, as I will try to the -- try to develop, that there is no jurisdiction in the District Court to review, at the suit of an employer, a Board direction of election no matter what the allegation is as to the basis of what are the Board's action. Furthermore, there is no -- since an election is involved which imposes no irreparable injury, there isn't a case for equitable relief apart from the question of jurisdiction. Now, Kyne versus Leedom recognized that in the case of a Labor Union which was challenging not an election but a certification and which did not have the adequate remedy that the employer has opened to it that there was jurisdiction where it appeared that the Board violated a clear provision of the statute. Now, we don't think that you reached that exception with respect to a situation where you have, first of all, a challenge to an election and, secondly, a person like an employer that has an adequate remedy under the statute. But, our third ground for distinguishing Kyne against Leedom, if it is necessary to reach it is that unlike Kyne against Leedom, this is not a case where it is apparent from the face of the complaint and the exhibits attached to it which includes the Board's decision and order that the Board has acted plainly contrary to the statute. And therefore to that limited extent, it may be appropriate to look at the basis for the Board's action, but the merits are not here in the sense that it is appropriate for this Court to review the entire evidentiary basis for the Board's decision.
Arthur J. Goldberg: Is there any argument at all on the (Inaudible)
Norton J. Come: There is not too much argument. I think that the Board record develops them in much greater details than the Board has set them out in its -- in its decision. I --
Arthur J. Goldberg: Greyhound -- did Greyhound (Inaudible) and then the contract is now with Floors?
Norton J. Come: That is correct.
Arthur J. Goldberg: Opposed to Floors in charge of those employees (Inaudible)
Norton J. Come: As a matter of fact, some of the same employees that Floors are using used to be Greyhound's employees.
Arthur J. Goldberg: They used to work with Greyhound.
Norton J. Come: Yes. So, that this is what -- at -- at best, one of these mixed questions of fact and law where -- in order to determine the propriety of the Board's decision, you got to look at the full record. It isn't a case like Kyne against Leedom where it was open and shot that you had a specific statutory provision involved that the Board had been violating. I like to say a word about the statutory scheme which this Court is familiar with. Sections 10 (e) and (f) of the Act provide for review in the Court of Appeals of a final order of the Board which this Court has interpreted to mean an order entered at the culmination of an unfair labor practice proceeding under Section 10. Section 9 (d) of the Act provides for review of a representation case only when it forms the basis for an unfair labor practice order and that order is itself before the Court for review under Section 10 (e) and (f). Now, what does this mean in terms of this case? It means this. That Greyhound could have had its contentions respecting the invalidity of the election reviewed under the statutory procedure. What it could have done is it could have proceeded to an election. If the Union lost the election, there's no injury to Greyhound. If the Union won and were certified, Greyhound could have refused to bargain with the Union on the ground that the certification was invalid because Greyhound was not an employer of the employees involved. This would have subjected Greyhound to an unfair labor practice charge alleging that it had refused the bargain in violation of the Section 8 (a) (5). And were the charge sustained in an order compelling bargaining issued, Greyhound could have obtained review of the bargaining order and the underlying certification under Sections 10 (e) or (f) of the Act. Now, it couldn't be plainer, we submit, that Congress intended that this would be the exclusive means by which an employer like Greyhound could obtain review of a Board direction of a representation election.
Byron R. White: Even if the employer or even if the Board obviously in the -- on the face of the statute violated it?
Norton J. Come: We think, yes, Your Honor. However, this is not such a case, as I've indicated before. Public Resolution 44 which created the first National Labor Relations Board to administer Section 7 (a) of the NRA provided for immediate judicial review of Board orders and representation proceedings in the Courts of Appeals. Experience showed that the employers took advantage of such a broad review provision that contest orders directing elections and virtually every case in which the Board had directed one, thereby delaying the commencement of collective bargaining. The Senate Report on the Wagner Act well-aware of the experience under the NRA pointed out, and I'm quoting from a passage that's in our brief, that after almost a year, not a single case in which a company has chosen to contest an election order of the Board has reached decision in any Circuit Court of Appeals. And in the House Report further pointed out that the abilities of employers to block elections had been productive of a large major of industrial strike. What had happened was that the Union had build up employee support and with the delay in proceeding to an election, that strength had been worn away and the result was that they had to strike in order to try to maintain their position. Now, in the Wagner Act, Congress sought to avoid this problem by providing in Section 9 (d) for this indirect review of representation proceedings that I had outlined before. And, a Senate memorandum, which is in our brief, comparing the previous arrangement with the Wagner Act provision, pointed out that Section 9 (d) is a new provision intended to make it clearer that when the Board orders an election, persons affected by that order cannot come into court until after the election has been held. And this is where a theme is repeated time and time again in the legislative debates, as we've pointed out in full in our brief. And the history doesn't stop there because, in 1947, when Congress was enacting the Taft-Hartley amendments, the Hartley Bill contained a provision which would have permitted direct review of representation determinations, not at an election stage as here, but at least at the certification stage. And one of the reasons for that was that the employer, and these are the reasons that the District Court here relies on for finding an exception for District Court review, could obtain review under the statutory procedure only by cumbersome proceedings that always involve the risk of a strike and a -- and a finding that the employer by following the statutory course had committed an unfair labor practice. And notwithstanding that, Congress, in conference, deleted this provision, keeping 9 (d) as it was under the Wagner Act and Senator Taft, explaining the deletion, pointed out that other -- that the House provision would have permitted dilatory tactics in representation proceedings. The nub of this is, we submit, that to permit Greyhound to obtain District Court review in the situation here is the sanction precisely what Congress sought to avoid. Now, what has come to Kyne against Leedom, which I indicated at the outset, recognized an exception to the general preclusion of District Court review of Board representation proceedings and the case last term, Sociedad, which recognized a further situation for District Court review. Although the court took great pains, we submit to emphasize that it was not impending thereby to open up the very limited exception that Kyne had -- had created. The situation in Kyne was this. The Union won a Board election in a unit consisting of 233 professional and 9 non-professional employees, and was certified as the representative in that unit. You had the election, you had the certification. After the certification issue, the Union brought suit in the District Court to set aside the certification on the ground that the nine professionals had been included in the unit without the professionals first having had an opportunity to vote separately on the question of whether they wanted them in unit. It was alleged that this was contrary to Section 9 (b) (1) of the statute which provides that professional and non-professional employees shall not be included in the same unit unless the majority of the professionals' vote were such included. In other words, you had a very narrow provision that seemed to be very specific and it seemed like the Board had very clearly violated it. This Court found that the Board's action was plainly in excess of its delegated powers and contrary to a specific prohibition in the Act. But the Court didn't stop there, we submit, as we read its opinion. It further pointed out that such unlawful action had inflicted an injury on the professional employees because the election had already been held and the certification it issued. And that this we believe is significant, at the absence of jurisdiction of the federal courts would mean, and now I'm quoting from the opinion, "A sacrifice or obliteration of a right to which Congress has given professional employees where there is no other means within their control to protect and enforce that right." The Court held that, in those circumstances, it could not be inferred that Congress had intended to foreclose a judicial remedy. Now, as I pointed out, this Court only last term in the --
Byron R. White: (Inaudible)
Norton J. Come: Was who, Your Honor? I --
Byron R. White: (Inaudible)
Norton J. Come: The Union representing them was seeking this pure unit that would be restricted only to professional employees. Now, there was no dependable way on which they could have gotten their contention as to the invalidity of the unit reviewed under the statutory review proceeding for this reason. Though they were certified, they, unlike the typical union that is aggrieved by a representation determination and loses an election, were in a position where theoretically they could have insisted that the employer that they would bargain only for the 233 professionals and they wouldn't bargain for the 9 professionals. But, in that situation unlike the case that -- the traditional case of the employer, the chances of a charge being filed against the Professional Union for refusing the bargain were slim, if not indeed, largely academic because --
Byron R. White: (Inaudible)
Norton J. Come: What is that, Your Honor?
Byron R. White: (Inaudible)
Norton J. Come: In the Kyne case, we made the argument in a Footnote in our brief that we thought that the Union in Kyne was in a position where it could have availed itself of the statutory review procedure because theoretically possible, it was possible that a refusal of bargain charge could have been filed against that Union. However, the Court of Appeals in the Kyne case found and we believe that this Court accepted that finding in affirming the Court of Appeals, that in the circumstances presented in Kyne, the statutory review procedure was not as dependable and as reliable as is the statutory review procedure for the case of the employer in the situation here for the reason that, if the Professional Union refuse to bargain except in a Union -- in a unit which was different from the unit certified by the Board, it was most unlikely that the employer would file an unfair labor practice charge against that Union. It was much more likely, the Court of Appeals found, that the employer would be content or just not bargain at all as he was free to do prior to the Board certification because the employer could hardly be subjected to an unfair labor practice on his part for refusing the bargain in the unit other than the one that the Board had certified. Secondly, there was a possibility that the nine non-professionals could have filed a charge against the Professional Union for refusing to bargain on their behalf, but the Court of Appeals found that that was very remote and unlikely in view of the fact that these nine represented such a minority in the total picture that they would not be wanting to jeopardize the already bad relations that they had with the Professional Union. Now, the case of the employer, which is what we have here, is totally different. It's not only different analytically, but experience has shown that it's different. Namely, a Union is in the business of -- of representing employees of that Union is certified for a particular group of employees and the employer refuses to bargain, it is virtually inevitable that that Union will file a charge with the Board alleging a refusal of bargain and experien --
Arthur J. Goldberg: (Inaudible)
Norton J. Come: Yes.
Arthur J. Goldberg: (Inaudible)
Norton J. Come: The Union could -- the Union could strike, Your Honor, but I submit that, in the first place, if it strikes, it's virtually as likely as it was in the case that I heard earlier today that the Union is going to couple that up with a refusal to bargain charge because if it doesn't do that, it's going to jeopardize the status of these strikers. They would be only economic strikers who would be subject to replacement. Furthermore, the Union might get into some problems under 8 (b) (7) which limits the time that you can strike-picket for recognition if you haven't gotten an unfair labor practice writing. Secondly, the fact -- whether or not the Union gets review at the district -- or whether not the employer gets a review at the District Court or not of the Board's representation determination is not going to avoid the likelihood of a strike because the setting aside of the representation determination is not going to preclude the Union from striking. And as a matter of fact, it was Congress' judgment that the chances of getting a strike were much more likely if you bottled up the representation proceeding at the election stage and let things drag for two to three years before you get that resolved and then look at the situation that you have. If ultimately, the Board is to prevail, the employer gets a second bite at the apple because he still cannot be ordered to do anything until the Board issues a bargaining order and then we got to go back up to the statutory procedure. And I leave on this note. Senator Wagner, in the course of the debates in the Wagner Act, pointed out that the Act here does not stoop to the following of having the Board fall in the court twice, once before the election and then a second time after the election. And that is precisely what would happen under the situation that we have in -- in this case. And for the reasons indicated, we submit that the judgment below should be reversed and the case remanded with directions to dismiss for lack of jurisdiction.
Earl Warren: Mr. Hall.
Warren E. Hall, Jr.: Mr. Chief Justice, may it please the Court. At the outset, I should like if I may to respond to a few of the questions that Mr. Justice Goldberg posed to Counsel for the Government to explain a little bit further about the facts of this case. In the first instance, the inquiry, Mr. Justice, with reference to the record before the Court, there was no point in there being a record before the Court because this was not an action to review a finding of the Board. This was an action to vacate an -- an act unlawfully taken by the National Labor Relation Board. I will elucidate on that in a minute. But in this case the petition -- the direction of election which was attached to the complaint which was the only thing before the Court besides certain affidavits and other attachments to the complaint, showed on its face that the Board had made finding of fact which as a matter of law required under the expressed congressional intent in enacting the Taft-Hartley Act in 1947. The Board had made a finding which it was prohibited from making as expressly as did the Board make in its error of statutory construction in the Kyne case. The history of the case goes a little bit further than behind the date of the petition for an election in this case. Attached to -- and also attached to the complaint and made a part of the record in this case is also a finding -- a set of findings of fact and conclusions of law and an order of the United States District Judge for the then Southern District of Florida, now Middle District of Florida, wherein when this contract came up in 1954, not just 1960 when the petition for election was filed, in 1954, the -- the employer told the Union that it was going to format this work to an independent contract. The Union said that if you do -- and this a matter of record in this case, may it please the Court. The Union said, "If you do, we will have a system-wide strike which will continue until you breach your contract with the pro -- proposed independent contract." Therefore, rather than experiencing that, the Union and the employer agreed to forbade either putting the contract into effect or to instigating a strike until a declaratory judgment complaint was filed with the District Court and resolved. Such declaratory judgment complaint was filed with Judge Simpson. He made findings of fact, conclusions of law, including that this was a contract established in an independent contract to employee-employment relationship rather than an employer-employee relationship, insofar as Greyhound and Floors were concerned, and that the company was not violating this contract by forming this workout. So those matters, Mr. Justice Goldberg would -- were determined some five years prior to the initiation of the petition for -- for election in this case. Now, we have much of and we live much with legislative histories, but I should like very much to call the Court's attention what the legislative hence -- history as of the time of this case, as of the present time, really is. The early legislative history, as Counsel for the Government has pointed out quite correctly, arose in the enactment -- the preparation for the enactment of the Wagner Act in 1935 because of this Court's declaring the Section (7) (a) of the Industrial Recovery Act and Public Resolution 44 implementing that Act unconstitutional. In the history of that Act, the legislative history the -- of the Wagner Act, it was pointed out and quite correctly, that the -- that Resolution 44 under which the Government had theretofore proceed, had permitted anyone aggrieved by any order at any stage of the proceedings to go to a Circuit Court of Appeals of the United States and obtain relief. And that the history had been up to the time of the enactment of the Wagner Act that employers did frequently go, more often than not, take a direct review prior to any further administrative proceedings and that that was bad, that the National Labor Policy was not properly being implemented. So to correct that situation, the legislative history is full of language referring to employers and employers seeking an injunction but not one bit of all that legislative history refers to employers as distinguished from -- from Unions only because it was not until the enactment of the Taft-Hartley Act in 1947 that Unions and employers had comparable responsibilities and duties under the Act. Therefore, their effort to distinguish between the right of an employer, on the one hand, to go to a District Court, if there'd be such a right in anyone, as against that of a Union is not a valid distinction. There is no legislative history, let me say, that establishes that as a valid distinction. The early cases which came before this Court on this subject matter and with regard to which this Court withheld jurisdiction to act, withheld the question until the Leedom v. Kyne case. Did not decide this question nor did any decision of this Court at any time ever hold that action of an administrative agency, acting beyond the scope of administrative authority, that is within the confines of the authority and powers vested in any such agency by Congress. At no time had this Court ever held that that was not judicial -- judicially subject to a complaint of petition to a District Court of the United States under the judicial code on its general powers of equity to review an Act taken up pursuant to an act of Congress. And to obtain relief if that were contrary to a statute. Now, when we got into the actual enactment of the Taft-Hartley Act in 1947, and you, legislative history, may it please the Court, began to take place. We began for the first time to subject Unions to the same sort of responsibility in their acts as employers that they have theretofore been subjected to under the Wagner Act, did more than that. A lot of this -- a lot of this legislative history that predates the Taft-Hartley Act is based upon the fact that the Wagner Act said that the authority to enforce unfair labor practice proceedings was exclusively within the National Labor Relations Board, that's in 10 (a) of the Wagner Act and 10 (a) of the Taft-Hartley Act effective August 23, 1947. The language was intentionally stricken by the Congress to remove the implication that the Board had exclusive jurisdiction. Now, the court -- the Taft-Hartley Act did two of the very important things which as I say, do violence, if not destroy a lot of the previous legislative history with regard to judicial review. First, the only -- the early cases, including the Myers case, the first one in 1938, Myers versus Bethlehem Shipbuilding Corporation, expressly relied upon the fact that the -- whoever was involved, be it an employer or a Union, had adequate judicial recourse by commitment of an unfair labor practice and going through the entire tortures proceeding of an unfair labor practice and then having the case reviewed prior to being made to do anything. Now the Taft-Hartley Act stopped that. The Taft-Hartley Act included a new section known as Section 10 (j). And Section 10 (j) of the Taft-Hartley Act that says -- says, "Prior to a hearing, at any time when the Board has issued a complaint that a -- an employer or a Union has committed an unfair labor practice that the Board may go to the United States District Court and obtain an injunction." And the court -- and the Board and the courts have repeatedly granted injunctions, compelling both Unions and employers to bargain before any Circuit Court of Appeals has ever had a shot at that -- to review such an action.
Byron R. White: Well, are you -- you're saying that if the Board ordered an election, say, in a -- in a unit that was to cover two plants instead of one, and the employer thought it ought to cover only one plant or that the two plants ought to be in separate units, that the employer could go into court and stop that election and have it tried out in court before the certification?
Warren E. Hall, Jr.: Mr. Justice White, I'm not making that contention. To the contrary, I'd say that this would apply to only the most exceptional case where on the face of the direction of election, it showed that the Board had acted beyond its authority and without statutory power.
Byron R. White: But that's true in the -- in the case you have here, it's true only because you -- you're just saying it's clear that these are independent contractors.
Warren E. Hall, Jr.: I'm saying that the Board found facts which compel a legal conclusion that these employees were not the employees of the respondent here but the employees of someone else.
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: I understand, Mr. --
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: No, Mr. Justice, it does not.
Arthur J. Goldberg: Except (Inaudible)
Warren E. Hall, Jr.: No, sir. I do not -- I -- I disagree, Mr. Justice.
Arthur J. Goldberg: Well, why do you?
Warren E. Hall, Jr.: Because there's a contrary finding which does -- that -- that does not offset earlier in the opinion and direction of election. First, whatever control that the Board finds, and they only find by way of conclusion that there was control in Greyhound over these employees of Floors, they first found --
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: I agree, Mr. Justice.
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: I agree, Mr. Justice, with each of the findings there as being even more than conclusions. But that as the matter of law and as a matter of constitutional -- I mean of congressional proscription against the Board, that one cannot be an employer of employees with regard to whom he cannot have, pay, discipline, transfer, promote, discharge, etcetera, which the Board made a specific finding with regard to Floors, Inc. and not to Greyhound. These other elements are quo -- are controlled -- are elements of control which are insufficient to establish the control necessary to be an employer with regard to employees over whom someone else exercises these basic controls without -- without for instance the power to discharge, one cannot bargain with regards to those things which are covered by Section 9 (a) of the Act.
Arthur J. Goldberg: Is there -- I can assume (Inaudible)
Warren E. Hall, Jr.: As a ---
Arthur J. Goldberg: -- (Inaudible) this as a matter of law.
Warren E. Hall, Jr.: I do, Mr. Justice. And I say that not just because of the general law with regard to what constitutes an employer-employee relationship. I say it with specific regard to the legislative history of Section -- to the enactment or adoption of Section 2 and 3 of the Taft-Hartley Act. That legislative history is set forth in pages 10 and 11 of the brief of the respondent. That legislative history says it believes that the National Labor Board and this Court, in the Herz case way back in 222 U.S., had this Court relying upon the Board's alleged expertise, had defined an employee to be someone who was not in fact an employee. What the Board had done and what it has done for sometime before was to consider economic and social purposes as governing the question of the employment relationship for the purpose of the National Labor Relations Act. The Congress changed the Act in 1947 and the legislative history shows that it's expressly intended and directed to Congress -- the Board to not thereafter call someone who is an employee -- who was not an employee within the concepts described in the very legislative history, namely that one who works for another for hire. Together with the elements of control which show an employment relationship, not an employment relationship for general purposes necessarily but the employment relationship necessary to bargain, which is the ultimate, to bargain with regard to wages, working conditions, hours of employment, etcetera.
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: And --
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: In a number of ways, Mr. Justice. In the first place, as I say the record reflects in this case that if the -- if a -- my client were not protected by an order of the court that says he is not the employer in the case, he would be the employer. And his right to not be an employer came into being the instant that the Board granted this decision of direction of election. Therefore, he went to the court the very earliest time that right came into being. He destroys -- destroyed that right. The history in the record of this case shows that the Union would probably more than -- probably, rather than probably not because of their threats existing when the employee -- when the court held that the employer was not the employer. That they would then go into a system-wide strike and shut him down. Now, I would like to buttress that with one further argument along that line and that is the simple fact that what does happen, we have all of these legislative -- legislative history and all these rules of probability and possibility. What happened in this case for instance? There certainly no labor strife that arose from the granting of this injunction. That was the thing that has caused this Court to act very cautiously in this field of jurisdiction. Secondly, and adverting again to jurisdiction, the legislative history of the Act from its very inception, including the old RIA. The legislative history was related to the Congress' desire that these actions of the administrative agency not be reviewed, where? In the United States Courts of Appeals. Not one bit of it is addressed to the right of the United States District Court acting under the authority and the only authority they have and that is that which is granted to them by the Congress to vacate any order which is found -- has been made in excess of legislative power, which is precisely what the District Court did in this case. There were --
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: If the Union had struck, Mr. Justice, in this case, in a case where the -- where Greyhound was not the employer, the Union would have been violating Section 8 (b) (4) (b) of the Act automatically.
Arthur J. Goldberg: The workers would strike the contract (Inaudible)
Warren E. Hall, Jr.: They had a right to strike the contract.
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: They could still strike the contract.
Arthur J. Goldberg: I know but they are the same contract to (Inaudible) --
Warren E. Hall, Jr.: That's right.
Arthur J. Goldberg: (Inaudible)
Warren E. Hall, Jr.: I don't know. I don't know whether the -- the Union which did not represent them would've respected their picket line or not. That's speculative. But one further characterization of the relationship here which I think is extremely important. What is the nature of Floors Incorporated, the independent contractor in this case? As the briefs pointed out, as the records point out, this is an organization, a corporation engaged in the cleanup and related types of business including the repair of vehicles and that sort of thing. It's engaged generally -- as a matter of fact, it was actually engaged in the cleanup under a contract in the federal building both in -- in Jacksonville and in -- in Tampa, where we tried this case once before the Fifth Circuit and once before the District Court. These -- these people rotate these employees. That's why it's most important that there is a finding by the Board that they transfer them. That means they transfer them to work all over everywhere. These people do not work just for Greyhound. These people are transferred. These people represented at the time of the hearing less than 6% of the total employment of Floors' employees in each of the four areas described without regard to any other areas. Therefore, we get to the real point is that, why was Greyhound ever named in this case as an employer? No. It was named as a practical problem. First -- first, the Union filed a petition for election in which it named Floors, Inc. as its employee -- employer and setup the same proposed unit, Jacksonville, Miami, St. Petersburg, and Tampa. Those -- those employees of Floors working at Greyhound's terminal but they named Floors as the employer. Well, of course, it was not an appropriate unit. They could never have gotten any. Mr. Justice Berg -- Goldberg will understand that completely. It was an inappropriate unit. They could not have gotten an election order under those circumstances. Therefore, in order to get an election or attempt to get an election over employees whom they could not otherwise represent, they brought in Greyhound, called Greyhound a joint employer. And Greyhound, on the very face of the Board's decision and directly I submit, may it please the Court, is not an employer.
Earl Warren: Is that the end of your argument? (Inaudible)
Warren E. Hall, Jr.: I was stopped because of the light, Mr. Chief Justice.
Earl Warren: (Inaudible) We'll recess now.
Warren E. Hall, Jr.: I will --