Warren E. Burger: Ms. Oberly, I think you may proceed when you're ready.
Ms. Kathryn A. Oberly: Thank you, Mr. Chief Justice, and may it please the Court: Respondents are three individual consumers who want to buy reconstituted milk, which is milk made from powder and water and occasionally blended with a portion of fresh milk, at a price below the price they would pay for the price of regular fresh milk. Their complaint is that federal milk market orders issued under the Agricultural Marketing Agreement Act make it uneconomical for milk handlers to manufacture the product they want, and so they're attacking the federal orders. The issue for this Court is whether ultimate consumers of milk products are proper parties to challenge the minimum wholesale prices that milk handlers are required to pay to farmers. When this suit was first filed, the three individual consumers were joined by a milk handler and a nutrition organization as co-plaintiffs. The district court dismissed the entire case, holding that both the organization and the consumers lacked standing, and that the handler had failed to exhaust his administrative remedies under the Agricultural Marketing Agreement Act. The court of appeals affirmed the dismissal of the handler and the nutrition organization, but it held that the consumers had standing and remanded the case for a trial on the merits. The milk market order program, as this Court has recognized in a number of prior cases, is extraordinarily complex, and so I will try to limit my description of it to just a layman's description of those provisions of the program that affect the issues in this case. Probably the most important aspect of milk market orders is the classified pricing system embodied in those orders, and that system has always been a feature of the dairy industry, even before orders came into being in the early 1930s. Milk... under this system, milk that's used for drinking purposes commands a higher price, known as Class I. Milk that's made into manufactured products such as cheese or milk powder sells at a lower Class II or Class III price. The statute requires handlers, who are essentially middlemen, to pay farmers according to the end use to which the raw milk is put. In other words, if a handler buys milk and sells it for drinking purposes, he pays Class I prices for it. If he buys the same raw milk and makes it into cheese and sells it as cheese, then he pays Class II or Class III lower prices for it. But to protect farmers against destructive competition for sales in the desirable fluid market, the handlers' payments are pooled, and farmers get paid a uniform blend price regardless of the use to which the milk of an individual farmer is put. To maintain the integrity of this classified pricing system, the Secretary of Agriculture regulates, and has since 1964, reconstituted fluid milk as if it were a Class I product. In other words, if a handler buys powder, then turns around and reconstitutes it into fluid milk, he pays for the powder or the raw milk that he uses to make the powder at Class I prices. If he uses the powder to make ice cream or some other nondrinking purpose, then he pays for it as a Class II or a Class III product. Respondents' goal in this case is to let handlers pay for raw milk at the class... the lowest Class III price, even if the handlers turn around and make the powder into fluid milk that competes directly with fresh milk for fluid sales. As I'll discuss in a moment, we think that Respondents are precluded from litigating what's basically a handlers' grievance about the prices that handlers pay. First the Court should consider that this lawsuit as a factual matter really makes very little sense.
Speaker: Ms. Oberly, in that connection why was the handler dismissed?
Ms. Kathryn A. Oberly: Justice Blackmun, the statute, as I'll explain, has a specific and detailed review procedures... procedure for handlers who wish to challenge a milk market order. The first step in that procedure is under 608c(15)(A) of the statute. 7 U.S.C. 608c(15)(A) requires a handler to file a petition for review with the Secretary, and the Secretary then holds a formal adjudicatory, on the record hearing, reaches a decision on the handler's petition, and if the handler is dissatisfied, the handler is then afforded a right of judicial review in district court. The handler in this case did not and has not to this date filed such a petition. Factually, we are at somewhat of a loss to understand the sense of this case. As best we can tell, Respondents' complaint, even though they phrased it in terms of price, is simply a matter of convenience. The potential savings per consumers is negligible. It's 82 cents a year per capita, and that's if all variables operate in consumers' favor. But consumers could save more than that by making reconstituted milk at home, because they would be saving for themselves the manufacturer's processing and marketing costs. There's no nutritional difference between the product that a manufacturer would sell and what a consumer would make at home; and there's no real aesthetic difference either. In the past and in the allegations in this complaint, consumers allege that they prefer the test of manufacturer-reconstituted milk because it has a butterfat content; but the record in this case, the Agriculture Department's impact statement of Respondents' proposal, demonstrates that it's possible to make a product at home that's virtually indistinguishable in taste from the product that these Respondents want to buy in a store by simply blending powdered milk and water and some portion of fresh milk. So in our view this case does come down to a consumer interest in convenience. They would rather be able to buy the product in the store for slightly more money than they could... than it would cost to make them at home. Our position as a matter of law is that Congress never intended to permit consumer attacks on market orders, but that it certainly didn't intend to let consumers upset such a delicate regulatory scheme for convenience. Respondents--
Speaker: I suppose your position there isn't dependent on what you concede to be the small benefit that consumers... consumers might obtain.
Ms. Kathryn A. Oberly: --No. We would... as a legal matter we would say that all consumer suits are precluded, even if they were more substantial than this one. But in considering whether Congress could have intended this much disruption to be visited upon its program, we think it's relevant for the Court to consider what's on the other side of the balance in this case. Respondents contend that they're entitled to maintain this suit under the APA, but the APA has its own preclusion provision that prohibits review whenever review is precluded by the relevant statute. Here, of course, the relevant statute is the Agricultural Marketing Agreement Act. That statute, as I mentioned a moment ago, sets up a special scheme for handlers to get review of market orders; and it's clear that consumer suits would be completely inconsistent with Congress' plan for handler review. This Court has never permitted the APA to be used as a way for strangers to a regulatory program to get greater rights to review than the parties that Congress has specifically provided for in the statute. But that would be the effect of allowing consumer suits attacking market orders to be brought under the APA. The basic problem with Respondents' lawsuit, as we see it, is that they're attempting to litigate someone else's rights... handlers' rights. The suit really isn't about the prices that consumers pay for milk or milk products; it's about the order prices that handlers pay to farmers. And as to those prices, the Act does set up the detailed and specific scheme that I mentioned for handlers to challenge the Secretary's actions. It requires, first, administrative exhaustion, and then if the handler is dissatisfied, and only then, may he go to court. So the question in this case is not issue preclusion, but party preclusion. The statute clearly does allow the issues that the consumers are interested in to be litigated, but that litigation under Congress' scheme is to be conducted by handlers. And what's most striking about this case is that the consumers did have a handler in the case who was interested in litigating the issue that the consumers want to bring before the court, but as both courts below held, that handler failed to follow the statutory scheme for exhaustion.
Speaker: Wouldn't a handler normally be a consumer, too?
Ms. Kathryn A. Oberly: Yes, he would, and that, we think, is a very serious problem with Respondents' lawsuit. Any handler, if he is an individual, presumably drinks milk and is a consumer. If he's a corporation, he's ultimately owned by consumers. And under the court of appeals decision, all he has to do in the future is instead of coming to the Secretary first and then the court through the statutory scheme as a handler, is come directly into court and say I'm here as a consumer of milk. And that would be the end of Congress' scheme for administrative exhaustion followed by judicial review at the behest of a handler. Handlers would just turn into consumers or align themselves with consumers. If a court might pierce through the sham of a handler trying to litigate as a consumer, then consumers and handlers need only join together, as they did in this case and as they did in the similar Ninth Circuit case of Rasmussen v. Hardin. And you then have handlers litigating as consumers, but not in the way that Congress has specified handlers are to bring these claims to the Secretary's and the court's attention. Our basic position is that when Congress has said how it wants a statute to be enforced, and here it's said how handlers are to enforce these provisions, then there's no room for other parties who are complete strangers to the regulatory scheme to come in and litigate someone else's rights and liabilities. We really think it's quite inconceivable that Congress could have intended to let consumers litigate handlers' rights. One is the reason that I just gave to you, Mr. Justice Rehnquist; that that would complete eviscerate Congress' scheme for handler... excuse me... handler administrative review followed by judicial review. Also, suits by handlers acting as consumers or just plain consumers would cause chaos in the regulatory program that Congress could not possibly have intended. Every time this Court has considered a case under the Agricultural Marketing Agreement Act, it's noted how complex the statute is. In the case of milk, the market order prices change monthly. The court of appeals decision would appear to allow consumers to come in every month and attack those price changes. In the fruit and vegetable area, which is regulated by the same section of the statute that regulates milk, the orders are even more complex. There are changes made every week during the marketing season. Again, the court of appeals decision would appear to allow consumers to come in every week and challenge the Secretary's actions. I'd like to give an example in the fruit and vegetable area that may sound a little silly, but to me it's really no more farfetched than Respondents' monetary stake in this lawsuit. The market orders regulating commodities such as lemons don't control prices directly like the milk market orders do, but instead they do... they do it by controlling the quantity of a product like lemons that can be brought to market each week. At the beginning of the season a lemon advisory committee makes recommendations to the Secretary of Agriculture about how many lemons should be marketed each week, but during the course of the season, the lemon committee looks at the results of the previous week's marketing efforts and decides whether to recommend changes. The Secretary then enacts those changes. Under the court of appeals decisions, consumers could bring suit every week and claim that if the Secretary had simply allowed more lemons to get to market, then consumers could have shaved a few pennies off their grocery bills. And since consumers don't have to bring their grievances to the Secretary first, we would then have the courts in the business of deciding how many lemons should be marketed each week. We think it's inconceivable that Congress intended this complex statutory scheme to operate in that manner. Besides the fact that the Secretary's expertise would be lost to the courts, it's obvious that suits like this would cause chaos in a program that has market stability as one of its primary purposes. When Congress gave handlers a right of review, it was careful to balance that right against the needs of the industry for stability. It provided that a handler review petition, whether pending before the Secretary or in court, can't be used to impede, hinder or delay the Secretary's ability to obtain handler compliance with existing market orders. But a consumer suit under the APA would not be subject to any such limitations.
Speaker: What about producers?
Ms. Kathryn A. Oberly: Producers, Your Honor, we think are clearly different than consumers. Respondents--
Speaker: Well, there's no doubt about that.
Ms. Kathryn A. Oberly: --Pardon?
Speaker: For this purpose?
Ms. Kathryn A. Oberly: Respondents rely heavily on the Court's decision in Stark v. Wickard which allows producers to sue even though they're not expressly mentioned in the statute. But there are several different features about producers. One of the most important is this statute was passed expressly for the benefit of producers.
Speaker: Well, that may be true, but in terms of... in terms of the... of the chaos you say would result from letting consumers sue every week, producers are the ones who... for whose benefit the statute was really passed, and if they don't think they're getting a good enough deal, I suppose every week they could come in and... under Stark v. Wickard and upset the Secretary's applicant.
Ms. Kathryn A. Oberly: They haven't--
Speaker: Or milkcart.
Ms. Kathryn A. Oberly: --It seems much less likely that they would do that, Your Honor, because the statute gives them a different form of protection in that market orders can't be adopted unless two-thirds of the producers vote for them. If the... if the producers are unhappy with the orders, a majority of them can require the Secretary to terminate the order. And so they're included and given great protection in the administrative level of the statutory scheme.
Speaker: Well, then why... why... why Stark v. Wickard?
Ms. Kathryn A. Oberly: Not every producer is always going to be happy, and there are some producer suits. But--
Speaker: Yeah. Any one of the third who didn't vote for it.
Ms. Kathryn A. Oberly: --That's correct. But not any one of the nation's entire stock of consumers, which is basically every household in the nation. And as the Ninth Circuit noted in the Rasmussen case, the statute is a cooperative venture between producers, handlers and the Secretary, and consumers are outside of that venture. And the statute goes to great lengths to protect the interests of consumers, and this Court has added an additional level of protection in its decision in Stark. Consumers just aren't in this scheme, and there's no rationale for extending Stark to the situation of consumers. I might also... in the same point--
Speaker: Well, here in this case, though, the consumers weren't really asserting a separate interest as consumers. Weren't they basically asserting the same interest as the handlers?
Ms. Kathryn A. Oberly: --That's... yes, and that's another problem with their lawsuit. They're litigating somebody else's rights. They don't... they can't legitimately care about what handlers pay to farmers at the wholesale level. They only care about the trickledown effect, if they can even show that there is such an effect--
Speaker: Yeah, but they--
Ms. Kathryn A. Oberly: --At retail prices.
Speaker: --They said in this case that they could; that if handlers got a bigger break, the consumers... that would trickle down.
Ms. Kathryn A. Oberly: Well, we dispute that, Your Honor, in our argument on standing; that we think they're unable to show redressability. But even if... I mean in this suit they're litigating handlers' rights to lower payments. They have a handler who says that he's ready to litigate the same issue, only he hasn't followed the proper procedure. When Mr. Oberweiss, the handler who was dismissed from the case, is out there and able to do exactly... to litigate this issue in exactly the manner that Congress intended, it doesn't make any sense to assume that Congress would have allowed strangers to come in and litigate the same issue but not go through the procedures specified in the statute. One other difference, Justice White, between consumers and producers is that basically the market orders are government-ordered contracts between handlers and producers; and it would be quite unfair and perhaps even unconstitutional to say that one party to the contract, the handler, can sue, but the other party to the contract, whose personal proprietary rights are affected, can't sue because Congress didn't mention them. The same thing is not true of consumers. The consumers are not parties to these minimum wholesale price contracts between producers and consumers. They're suing on somebody else's rights, and we think that's a substantial difference.
Speaker: What... what particular aspect of standing do you rely on mostly?
Ms. Kathryn A. Oberly: We think--
Speaker: Zone of interest, is that it?
Ms. Kathryn A. Oberly: --We think they've failed at least three standing tests. Zone of interest is one; generalized grievance is another; and redressability is the third. I was planning in my argument to focus on redressability, just due to time limitations and because we had briefed zone of interest more thoroughly in the brief. And as for the zone of interest problem with this case, there basically are three or four or even more different factors that would all have to coalesce in Respondents' favor before there could be any substantial probability that Respondents' injury would be redressed by a favorable judicial decision. The first is that Respondents live in Florida, Texas and Arkansas, but they haven't alleged that there are any handlers who are interested in making the product they want and marketing it in the areas where they live. The one handler, Oberweiss, who was dismissed from this case, operates in the Chicago area; but he's never alleged that he would market reconstituted milk where the Respondents live. The examples in the record indicate that it's actually quite unlikely that milk handlers would go into the business of marketing reconstituted milk. As an example, the impact statement in this case notes that the entire State of California is unregulated by federal market orders, and yet there's still no reconstituted milk made in that state. Another example is the one relied on Respondents in North Carolina, which is also an unregulated market. Reconstituted milk was sold there for a while, but then the manufacturer on his own simply decided to stop making it. His action obviously had nothing to do with the federal milk market orders because the area is still unregulated, and yet the product isn't available in that area. Even if Respondents could find a handler who wanted to market reconstituted milk in their area, they are unable to show that the handlers' cost savings would be passed on to consumers. The legislative history indicates that when farm prices increase, consumers do see that at the retail level; but when farm prices decrease, as would be the case here, handlers frequently keep a substantial portion of the savings for themselves rather than passing it on to the consumers. Another point is the Department of Agriculture's impact statements show that this plan of Respondents would cost farmers far more than it would save consumers... a difference of several hundred million dollars of savings to consumers, on the one hand, and a loss in farmers' income on the other. It's not very likely that farmers or their representatives in Congress would allow that to happen. It's almost certain that farmers would press for an increase in the price support program that would wipe out any savings to consumers by raising the prices that they have to pay for manufactured dairy products. Respondents also ignore the fact that even now with these supposedly prohibitive federal regulations in place, seven states completely ban the sale of reconstituted milk, and another eight or nine place various restrictions on it. If the federal regulations were changed, it's a likely assumption that more states would pass similar legislation to protect their local dairy industries. So, in sum, on the redressability issue, we think this case is virtually indistinguishable from Warth v. Seldin and Simon v. Eastern Kentucky Welfare Rights Organization. In both cases it was entirely speculative whether there was any substantial probability that granting... that having a court hear the complaint Respondents had brought to court would actually result in the relief that they want, which is lower retail prices at the consumer level. I'll save the remainder of my time.
Warren E. Burger: Mr. Plesser.
Ronald L. Plesser: Thank you, Mr. Chief Justice, and may it please the Court: In this case three cost-conscious consumers of milk from Tampa Bay, central Arkansas and Texas are seeking to challenge regulations of the Secretary of Agriculture which effectively prohibit the sale to them of reconstituted milk... a lower cost alternative to fresh fluid milk. The Government in their argument continued to misstate, I think, the interest of consumers in this case. I believe counsel said that we are challenging the minimal... minimum price level that handlers must pay to producers for fresh fluid milk. That is not at all the claim of consumers in this case. The claim of consumers in this case is that the Secretary of Agriculture has issued a set of regulations which prohibit the marketing of an alternative product in contravention of the regulation, of the statute which is the Agriculture Marketing Agreement Act. We are not challenging price levels; we are challenging whether or not a competitive product should be able to be marketed. There is only one issue in this case at this point. The Government is arguing a good deal of the merits, but the real issue at this point is whether or not these three consumers have access to the courts to challenge certain milk market regulations by the Secretary. The consumers' claims are asserted under Section 10 of the Administrative Procedure Act as persons aggrieved by regulations under the Agriculture Marketing Agreement Act. The Government contends that they are precluded by inference and that they lack the required elements of standing. As a preliminary matter, I won't go into the detail that Ms. Oberly did, but I think a little discussion of the regulatory scheme is necessary. The milk market system is a regulatory program that is essentially a price-fixing scheme to set minimum prices that producers receive from handlers for milk. Producers are the primary beneficiaries of this legislation. And we readily agree to that. They are not, however, regulated. They are the beneficiaries of the regulation, but are not certainly principally regulated. The handlers are the regulated parties. They are the parties to whom it is determined how much they will pay for a product that they then have to sell. The consumers--
Speaker: Well, aren't... aren't the producers subject to that same regulation? Just as the handlers can't enter into a contract to buy milk on conditions that are inconsistent with the marketing order, aren't producers likewise forbidden to enter into a contract inconsistent with the marketing order?
Ronald L. Plesser: --Well, there are some... there are some restrictions, I think. There are some restrictions on producers. But, for example, if a producer is also a handler, that producer is outside of the regulations and can really... and can market milk outside of the marketing order. And there is far less control on the producers than there is on the... on the handlers. And finally, the consumers are the beneficiary of a fair and balanced system. I think it is just common sense that consumers were the... are the ultimate beneficiary of a system that requires milk supply to... to this country. I think more importantly, consumers are the people who pay the price. And it is... it is in that interest that these consumers come forward. Consumers first sought relief by going to the Secretary of Agriculture in this case by filing a petition for rulemaking. This petition was supported by consumers but was also supported by the Council on Wage and Price Stability, was also supported by the Department of Justice Antitrust Division, and indeed, in the U.S.... the U.S.D.A. itself filed an impact statement, which we will discuss and is discussed in our brief, which goes against consumers on the merits, but very clearly indicates that consumers will be... would be favorably affected if their relief was sought. There is... I say it at this point in the record... there is simply every piece of evidence in this rulemaking record that was initiated just prior to this case, and every statement of the Government and every report cited indicates and assumes that consumers will be benefited if these regulations are eliminated. The Government has argued here even more strongly than they've argued in their brief that we haven't shown any evidence that relief will be... will be realized by our plaintiffs. But I think the plain truth is there is not one study, not one statement that the Government can present other than in argument to indicate that consumers will not have the benefit. In fact, the United States Department--
Speaker: Do you know of any... any study at any time that showed that any regulation cut prices, resulted in the consumer getting a lower price?
Ronald L. Plesser: --No, Your Honor.
Speaker: Well, what do you hope to get?
Ronald L. Plesser: Well, Your Honor, I think what... on the merits of this case what we hope is that essentially the... the reconstituted milk process will be taken out of part of the regulation and will be treated as a milk product rather than milk so that its price will be able to float in the marketplace and not necessarily be regulated.
Speaker: Mr. Plesser, you're talking now, I guess, about kind of questions of fact involving standing. You say one thing; the Government says another thing. And I notice that Judge Wilkie's opinion in the court of appeals, the majority opinion there, devotes some attention. How are these kind of factual questions resolved at the pleading stage? Is the Court required simply to take your allegations? Can it make some sort of factual inquiry? What is the test?
Ronald L. Plesser: Well, I think the test was enunciated in the Earth v. Seldin which indicated that you could... that the Court could take the allegations, but if those allegations were challenged by the Government, that it then... then the plaintiffs had a requirement to substantiate those... those allegations. So I don't think I can just sit here and say allegations are enough to get us past the barrier of... of injury in fact and redressability. But I think the... what we've produced in the record, which by the way is primarily material developed by governmental agencies in this case, indicate that we have... we have met the threshold requirement for injury in fact, redressability.
Speaker: You... you would stop short of a full dress trial on that issue, I take it, before you--
Ronald L. Plesser: Oh, I would certainly stop short. And I think the court of appeals in this case indicated that if you have a full dress trial on the issues of standing, essentially you're litigating the issues of merits at the standing level. And at least Judge Wilkie in the court of appeals thought that that was inappropriate, but did feel that there was a need for this threshold of some facts. And we're certainly not just standing on the bare allegations in our complaint. We were turned down... consumers were turned down in their petition to the Secretary of Agriculture, and I think it's important to, as I go into the injury and preclusion issues, to... to just review the three basic requirements for this kind of case were set down in Associated Data Processing and Barlow v. Collins. And those three requirements are that injury in fact by the government agency, that the interests asserted are within the zone of interest of a substantive statute, and that the statute cannot explicitly or implicitly preclude judicial review. As I've already stated, of course, we don't have to demonstrate merits. We just have to demonstrate sufficient facts to get past the threshold of standing. The injury being suffered by these consumers is distinct, palpable and is personal to them. The Government has argued as though we are representing consumers from all over the country and that it is 89 cents per capita per year, or what we are arguing is for three particular consumers in regions of the country, where the Secretary's own impact statement indicated that they would be benefited if reconstituted milk was made available. These are in regions which are typically referred to as inefficient milk market regions. It may be that in the more efficient regions consumers would not be able to demonstrate the injury that our clients can demonstrate in this case. We are not representing all consumers in the United States. We are representing three consumers who are located in three specific market areas, and we've demonstrated facts in our case... in our papers sufficient to indicate an injury to them if... an injury to them by the failure of the Secretary to allow the marketing of reconstituted milk. It is... it has not been contested that the effect of the regulation is to prohibit reconstituted milk. As we've demonstrated on page 5 of our brief, in the regions in which our... our clients are situate, the cost of reconstituted milk at the wholesale level exceeds that of regular fresh milk. And I think it is... it's not contested also that the same price... and we don't contest it... at the same price or higher price that consumers would buy reconstituted milk. They would only buy it if it was at a cost savings. And in those three areas not only does the regulations of the Secretary make them equal price, but in fact, reconstituted milk is more expensive. And that's not been contested at any point by the Government. And I think it is also important to focus both on the Secretary of Agriculture's impact statement that indicated that consumers would be damaged to the extent of $186 million a year, or in other words, they would receive a benefit of $186 million a year. And we contend that for purposes of standing that that is a salient factor. The fact that, as Judge Gash at the district level thought there was some countervailing concerns that farmers would be injured and then resultingly affect consumers, I think the court of appeals handled that appropriately and said that that was... that was essentially conjecture that could be resolved on the merits, but that there was no substantiation of that at this point. But for merits discussion there was $184 million.
Speaker: --Mr. Plesser, even assuming that your clients have standing, isn't the more difficult question whether the whole statutory scheme just precludes giving relief to consumers? It seems to have been designed to keep prices up for producers, not to get them down for consumers. How do you fit into the scheme of the statute?
Ronald L. Plesser: Well, as we... we state on page 32 of our brief, we believe the interest of consumers is in a fair and balanced price. As I stated at the outset of my argument, we are not contending that we want cheaper prices. We simply want a fair and balanced approach. And we think we will be able to demonstrate--
Speaker: Well, but to get... to get standing, you have to allege that you're going to have lower prices, and that certainly seems to be outside the scope of the concept of the statute.
Ronald L. Plesser: --Justice O'Connor, I think what we have to argue or we have to contend is that if we prevail on the merits and we... it's determined that the Secretary's regulations create an illegal trade barrier to reconstituted milk and that reconstituted milk is effectively classified as fluid milk in contravention of the statute, then reconstituted milk will have to be made available, and we will benefit. It's not necessarily that we're asking for a lower price. We're simply asking for a product essentially to be released from what we think is an illegal regulatory scheme. We're asking for this product to be broken out. If that product is broken out, we will benefit by more... more... by cheaper prices. But we don't think Congress intended in that statute to allow the Secretary to create trade barriers or to classify products as milk to the detriment of... of consumers. So while I understand your question, I think that our... that our concerns are... it's very confusing and it's very close, but I think we're... we're more interested in getting that product available rather than arguing the price. And I think the legislative history indicates that there's an interest in... in this fair and balanced price, and there's no interest in illegally... in illegal price structures. Getting to the second part of the Associated Data Processing test I think is responsive to Justice O'Connor's question, which is essentially the... the arguably within the zone of interest test that's been asserted by this Court. We turn to two sections of the Agriculture Marketing Agreement Act, Section 22 and Section 24, both of which on the face of those sections indicate an interest to protect consumers, and that the consumer has an interest, on the face of the statute, in fair prices and in an appropriate administration of the Act to comply with the requirements of the Act. Again, the interest is not just in lower prices, but in a fair and balanced program. Clearly, the rights of consumers are intended to be protected from the face of the statute. To require more, we believe at this... at this juncture would return to the legal interest tests that were turned over in Associated Data Processing. Clearly, as the... as Judge Wilkie recognized in this case, consumers have a stake in the outcome of... of orders under the Milk Market Agreement Act, and that they have an interest to assure compliance with the Secretary with the challenge of the Act. The Government has said in their briefs that we are challenging the basis of the Act. We are not. We are simply challenging the legality of whether... of certain regulatory schemes under the Act as adopted by the Secretary.
Speaker: Do you think that the so-called zone of interest test still has relevance in determining standing?
Ronald L. Plesser: The court of appeals did in this case, Your Honor, and discussed it in great detail. And I think that following the cases that I reviewed from this Court, it appears that... that administrative... that the zone of interest test is still a... is still a strong holding, although there are some commentators that disagree.
Speaker: Why do... why do the consumers... why do the consumers satisfy that test?
Ronald L. Plesser: As I said, Your Honor, I think... and as Judge Wilkie has indicated in his court of appeals decision... there are two sections, sections in the Act which talk about the interests of consumers. The legislative history that we cited talks about the interests of consumers in a fair and balanced... in a fair and balanced system. And I think there is a threshold of interest of consumers in how that regulatory structure is created. So that I think the zone of interest being an expansive test is satisfied in this case.
Speaker: Does that apply to all consumers?
Ronald L. Plesser: I think--
Speaker: Don't go too far, because I'm going to get a consumer over in West Africa in a minute.
Ronald L. Plesser: --I think on zone of interest, Your Honor, that it would go to consumers who were asserting the type of injury that we are asserting in terms of the access to reconstituted milk. Conceivably there could be consumers or other people who would be injured but not within the zone of interest. For example, a manufacturer or reconstituted milk equipment or a trucker of milk powder is injured by these regulations. It is not entirely clear to me that such a... such a person would be within the zone of interest. But these consumers are.
Speaker: I said a consumer, somebody that consumes this milk, somebody that consumes milk.
Ronald L. Plesser: Yes. If they assert the type of claims we do.
Speaker: He'd have all of them.
Ronald L. Plesser: Your Honor, I can really only speak--
Speaker: Well, am I not disqualified, and all nine of us? Don't we have an interest?
Ronald L. Plesser: --Your Honor, as I... as I stated, I think you are... I assume... I will take judicial notice that you're all consumers of milk, but I think that... I think that what we're arguing here is what area of the country, what would the impact on those milk market orders are. We've done the analysis of the Washington metropolitan area. I do not know if there would be the kind of impact in this area that... that would... that we've done for our consumers in the Tampa Bay, Arkansas and Texas area, that would... would justify consumers. I think... but I think what you're getting at is the generalized grievance argument, Justice Marshall. And I think that... I think that Judge... Judge Wilkie had a good response to that, which is if we can demonstrate that our... that there is a distinct and palpable injury, my clients cannot go to a supermarket and find reconstituted milk on the shelf, and studies indicate that but for these regulations there's a substantial probability that that product would be there. We can't find it on the shelf. That's a real injury. That's a real loss. We then have... I think we then can demonstrate that we are within the zone of interest of the statute for a fair and balanced program, and that is, I think, the basis of our claim. The fact that many other consumers are like situate I don't think lessens the impact or the rights of our clients to seek redress. Finally is the preclusion argument that we have recognized and which the Government relies on quite strongly, and I think the preclusion argument of the Government is really very simple. It says that anybody... since handlers were given specific remedial rights under the statute, that no one else should be able to challenge the statute. Nonhandlers are excluded. Of course, that argument was rejected by this Court in 1944 in Stark v. Wickard, where it was determined that producers, although not given specific administrative and judicial rights, were allowed standing. The Government has argued well, producers really is a different situation because they are more affected by the statute, they're more recognized as the principal beneficiary, none of which we... we contest or argue with. Our claim simply... and our position is very straightforward. For the position... for an argument of preclusion, if nonhandlers are to be precluded and if it was the intent of Congress to preclude nonhandlers, then producers and consumers are indistinguishable for that purpose. They may be on much different grounds for standing arguments, for injury in fact and redressability, but on a straight preclusion concept addressed by the Government in this case, we believe that it's inconsistent. And the... the harms that they asserted were the same harms that they... exactly the same harms that they asserted in 1944 when they argued Stark v. Wickard. We've looked at the briefs in that case, and the Supreme Court, this Court in Stark v. Wickard responded to that argument, as we quote in our material, and suggested that... that those types of arguments of the delicate balance and the excessive litigation would be solved by motions to dismiss and other activities that limit frivolous actions, as well as the cost of brining the action. And I... I think that... that this Court in responding in 1944 to those exact same concerns can raise the same... the same responses are valid today; that... that there is no great fear that... that consumers are going to overburden the courts. I think if consumers can come forward and show the kind of injury we've showed in this case and show... demonstrate the type of violation that they... that we are attempting to demonstrate in this case, that they should be able to... to respond... to have standing. There is just two points I'd like to say before I conclude. One, counsel for the Government has indicated... used two examples, the State of California and the State... and North Carolina to indicate why there really isn't any interest in marketing reconstituted milk. My response to North Carolina is the reason... and it's in the record, I think in the impact statement of the Secretary... the reason that the... that the... the handler in North Carolina stopped making reconstituted milk, which was relatively successful... it wasn't overwhelming, but they were selling a fair amount of it... was because the handler was bought by a co-op. The co-op is a milk producer, and I suggest that it was not in the interest of the co-op after they purchased this handler to continue the reconstituted milk product, and that's why the North Carolina experience, which was a truly deregulated situation, did not... did not result in... why that ended. In California it is true that California is not regulated under the federal milk market order, but California is regulated by a State of California milk market system very similar to that of the federal program. And while I can't say with absolute certainty because it wasn't discussed in the brief, I am comfortable in asserting that the same type of restrictions that were existent in this case were existent in the California system. So while federal law didn't stop them, state law did. And finally, in terms of the restrictions on reconstituted milk, reconstituted milk is not milk. It is another product. It has to be labeled separately, as most states have required, and in some states, I suspect in... in response to dairy interests, it is even... it is even prohibited from being marketed, I assume primarily for economic reasons. It is a product that will benefit consumers, and we believe... we contend that the Government... that consumers have asserted sufficient interest for standing. If you have no further questions, I'm complete. Thank you.
Warren E. Burger: Do you have anything further, Ms. Oberly?
Ms. Kathryn A. Oberly: Your Honor, as I understand Respondents' argument, their injury is that the product they want to buy is not available; and I would simply like to repeat that it is available. They can make it at home, and they've been able to make it at home for at least the past 20 years. Second, Respondents repeatedly say that in order to bring themselves within the statute zone of interest that the statute has a purpose--
Speaker: Well, Ms. Oberly, what if I as a consumer said I wanted to have a particular kind of cheese available, and that I couldn't find it on the market? Would it be an adequate answer to my lawsuit on my standing to say well, you can make that kind of cheese at home; just go out and buy some milk and churn it and so forth? [Laughter]
Ms. Kathryn A. Oberly: --No, not probably to your problem. But since their interest is lower prices and they could save more money by making it at home, I think it is an adequate answer to say that if they're really serious about saving money, the way to do it is to make this product at home.
Speaker: How do you make it?
Ms. Kathryn A. Oberly: You can do it any number of ways. I've experimented the last several days at home. You can take milk powder and water and just mix them together in equal proportions, and you wind up with a product that resembles skim milk. Or if you like some butterfat in your milk, you can take milk powder and water and add in some fresh milk, which is something that a manufacturer also does, and you wind up with a product that resembles 2 percent milk. And much to my surprise, the Federal Register is correct. This product is basically indistinguishable from fresh fluid milk that you would buy in a store.
Speaker: How's it taste?
Ms. Kathryn A. Oberly: That's what I meant. It was indistinguishable.
Speaker: It depends on how much you like milk. [Laughter]
Ms. Kathryn A. Oberly: I come from Wisconsin, so I'm a big milk drinker.
Speaker: Is it different from the dry milk they had in the war?
Ms. Kathryn A. Oberly: Well, since I wasn't in the war, I can't answer that question. [Laughter] I would say that the technology for making powdered milk has substantially improved over about the last 10 to 15 years, and it probably is different than the milk that they had in the war.
Speaker: I can only say I hope. [Laughter]
Ms. Kathryn A. Oberly: There was one serious point that I wanted to make, and that was that Respondents repeatedly assert that the statute has as an interest setting up a fair and balanced relationship that benefits them. We don't find that interest in the statute anywhere. As Justice O'Connor pointed out, the purpose of the statute is to raise producer prices. Congress has told the Secretary exactly the level to which he is to raise producer prices. That's the parity level. Respondents don't contend that the Secretary has exceeded that level. We think it's quite clear that Respondents are asking the courts to define this fair and balanced relationship between producers and consumers when Congress itself has already said that the relationship it wants to promote is increased farm prices, and it had not the slightest interest in lowering consumer prices. The only protection for consumers was to make sure that they were not subject to excessive price increases, which are not at issue in this case, or to prices above the parity level, which also are not at interest in this case. Thank you.
Warren E. Burger: Thank you, counsel. The case is submitted. We will resume at 1:00.


Earl Warren: Number 56, Lear Incorporated, petitioner, versus John S. Adkins. Mr. Hale.
C. Russell Hale: Mr. Chief Justice and may it please the Court. We're assembling a few exhibits that we expect to demonstrate to the Court to make a point during the argument. This case is here on writ of certiorari to the Supreme Court of the State of California. In simplest form, the case is concern where the patent license agreement between petitioner Lear and respondent Adkins and the validity and enforcement under this agreement of patent rights, a patent which ultimately issued to respondent. The Supreme Court of California has upheld this license agreement to the practical effect that the patent is immune from challenge of validity and also to the practical effect that established federal criteria need not govern the determination of the scope of the patent when it's enforced under the agreement in question. What we're asking this Court is to rule that the patent laws and the protection afforded by them cannot be so extended by private agreement between individual parties. We're asking that this Court rule that patent rights cannot be so extended under state law so as to render the validity and interpretation of the scope of the patent immune to the criteria of the federal patent laws.
Abe Fortas: Well, does the so-called Michigan -- does the so-called Michigan patent here really -- Michigan device really involved a question under the patent law?
C. Russell Hale: Yes, Your Honor --
Abe Fortas: As distinguished from the California, I think I've got it straightened. The Michigan device up to during the -- up to the time of term notice of termination any way was not patented, was it?
C. Russell Hale: No, Your Honor.
Abe Fortas: And was it patented on -- up through the stipulated time or the cut off or purposes, cut off on damages for purposes of this litigation?
C. Russell Hale: No, Your Honor. There were -- there was one patent. It was directed to the device that has been identified as the California model 2156 gyros.
Abe Fortas: Now, that was the so-called California?
C. Russell Hale: Yes, sir.
Abe Fortas: I'm talking all about Michigan which --
C. Russell Hale: Yes.
Abe Fortas: -- last legs on someone, I don't want to anticipate your argument (Voice Overlap).
C. Russell Hale: But Your Honor mentioned that --
Abe Fortas: Don't bother to answer me now but as you go along, I trust you will.
C. Russell Hale: Yes, Your Honor.
Abe Fortas: I brought it up at this time because the nature of your opening statement but it's bothered me since I first studied this case whether in the extent to which this is truly a question involving the patent laws of the United States or whether at least so far as the Michigan patent is concerned, it's a contract question perhaps under antitrust laws generally. I don't want --
C. Russell Hale: Yes Your Honor.
Abe Fortas: -- to interfere with your plain argument but I -- that is the basic problem in my mind in this case.
C. Russell Hale: Yes, sir. Well, Your Honor that really highlights the federal issues that are before this Court, in that, there was one patent and it disclose essentially the structure of the California Model 2156 gyros. The Michigan structure was independently developed a different facility in view of the procedures that were used in assembling the California gyros and the Michigan gyros. The Michigan gyros were originally included as coming within the scope of the patent application and hints the agreement. So, an interpretation of the scope of the patent application that patent are very basic to this questions that's before the court likewise, whether or not Lear has the right to challenge the validity of this patent raised it very basic federal issues before this Court. The California Supreme Court based decisions solely under the terms of a license agreement that was entered into between the parties in 1955 and the California Supreme Court felt that we're not concerned with defenses which might be available to Lear in determining questions of validity and infringement. California Supreme Court apparently felt that the agreement was supreme. It need not be concerned with the details of federal law that control patent matters. The Court even went so far to say valid claims are not required. But we submit that parties should -- it's against pubic policy for parties to collaborate and export patent rights regardless of validity. Under the circumstances of this case if Lear and Adkins had so desired, it could've join forces, paid no attention to whether or not the patent was valid or not but enforced it by this year economic power and that public interest certainly would not be served by such an arrangement. The California Court also when so far as to say it doesn't matter how this patent was obtained to the patent office, patent every issues below, that's all we're concerned about. We don't care whether new matter was added in violation of the federal rules, decisions of this Court for example. The California Court said we're not concerned if whether or not fraud has practiced on the patent office. We submit that those raise very basic federal issues Your Honor. Such a decision results in extension of patent rights far beyond the rights that would be available in an infringement action. It also permits individual states to employ standards and patent matters that differ from state to state. For example, as matters stand today the law in California concerning licensee estoppel is exactly contra to the law in the State of Michigan knowing the State of Minnesota as stated by the Minnesota Supreme Court in 1954 in the case of Crew versus Flanagan which is cited in our briefs. The ultimate result of the decision of the California Supreme Court is the enforcement of the patent which the trial court in California found to be invalid as a matter of law for failure to meet the constitutional standard required for patentability. We submit that an agreement basing a decision solely upon an agreement whereby patent rights are so extended is against public policy, against the policies and provisions of both the patent laws and the antitrust laws. If an agreement can be employed to circumvent the constitutional standard required for patentability, i.e. uniform federal standards cannot be maintained in the 50 states and this is sticking example of one state that is out of step with some other states. The most significant dates and events that are involved in this case are set forth in the chart that I have behind the lectern and I will refer to these dates during my argument. The Adkins' patent application in the subject matter ensued was filed in February of 1954. The agreement was entered into in September 1955. It is the first document in appendix 2 of the record which we reproduce. The rights and the obligations of the parties under this agreement are based on the claims are set forth in the patent application which was filed by Adkins in 1954. And only to the extent that the claims are patentable, the agreement is very explicit in this regard. Lear agreed to pay royalties on its products that employ the invention that is defined by the claims that are patentable. Now contrary to the repeated assertions of Adkins that the agreement was based upon the secret ideas discoveries and unpatentable things, the California Supreme Court expressly based its decision on Adkins' patent rights under this agreement. For example in appendix 1 at page 192 the California Supreme Court said, the agreement clearly sets forth that royalties are to be paid only for patented or patentable claims which Lear utilized in its products. Now, although the agreement and the patent applications covered several devices and features only the feature of bearing alignment, supporting bearings and alignment for rotatable devices involved in this action. The technical subject matter is almost identical with that which is before this Court many years ago in Singer versus Cramer which is cited in our briefs. Now, the patent application and the patent which is ultimately issued are also reproduced in appendix 2 at pages 18 and 32, the circumstances under which this dispute arose once that Adkins was employed by Lear in 1951 under an agreement which permitted him to retain title to certain inventions. This was covered by a preliminary agreement which is not -- which is never admitted in evidence because it was superseded and cancelled by the 1955 agreement which is item number 2 in my chart. Lear had two facilities that at that time one was in California and the other one was in Michigan and Adkins did his work in the California facility and he developed along with other Lear employees this Model 2156 gyros. At the same time, Mr. Cureston in Michigan was developing the so-called Michigan gyro and in 1955, Lear started manufacturing and selling both of these devices and they are both employed in military equipment almost exclusively in military equipment. And when the license agreement was consummated, the patent application was directed primarily to the way the devices were assembled. And as I mentioned earlier in response to Mr. Justice Fortas' question, the two products were included as covered by the agreement at that time because of the similarity of the methods. In 1957, Lear conducted a search of prior art and it found that this method couldn't be patentable to Adkins that call the prior art to his attention and at that time, it renounced any further liability on the Michigan steel gyros, that's item number 3. Now, the patent application was rejected several times and amended several times and one amendment of particular importance is that of December 1958 prior to this amendment, the application was directed to the characteristic features of the Model 2156 gyros. Subsequent to this amendment, it was directed primary that the characteristic features of the Michigan steel gyros. For example, prior to the amendment the application did not say one word about removable bearings yet subsequent to the amendment, the application contains such wording and Adkins has relied very heavily on that added wording in briefs before the California Supreme Court and also before this Court emphasizing this very feature that was added by amendment many years later. In early 1959, the claims directed to bearing alignment were under adjudging by the patent office, all of them were under adjudging. The application have been pending for five years, Lear not received what it bargains for under this executory contract which has some patent rights. So, on the April 8, 1959 --
Abe Fortas: Well, is that -- are you talking now about both of them?
C. Russell Hale: Yes, Your Honor. I'm talking about the entire agreement which the agreement -- the Lear's position as of 1959, April 1959 was that we have stopped paying royalties as of 1957 because --
Abe Fortas: On what?
C. Russell Hale: On the Michigan steel gyros but they continued to pay royalties on the California gyros.
Abe Fortas: So, I just have a greatest difficulty in this case when you talk about both of them together --
C. Russell Hale: Yes, Your Honor.
Abe Fortas: -- because I understand what I've read in the briefs, there are differences in fact that maybe material in a way with respect to California and Michigan.
C. Russell Hale: Yes.
Abe Fortas: Now, that charge you got up there relates only to Michigan, does it?
C. Russell Hale: Well, not -- no, Your Honor. As of this day --
Abe Fortas: Yes that the license --
C. Russell Hale: -- 1955 the two products were listed in this contract.
Abe Fortas: Right.
C. Russell Hale: As of this day, Lear said, our search reveal, you cannot possibly get the claims covering the process. So, we're going to seize paying royalties. We (Voice Overlap) --
Abe Fortas: On Michigan?
C. Russell Hale: On the Michigan. We're going to continue on the California Model 2156 and right here is where we come into the scope question of enforcement of the patent under state laws, Your Honor. As of this day, Lear said, we don't seem to be getting anything. We've been carrying this agreement for years, no patent is issued, we don't think it's going to be any good once it does issue. So, we're going to terminate the agreement and Lear served the notice of termination --
Abe Fortas: As to both. As to both?
C. Russell Hale: As to both. As to the whole work, Your Honor. Under expressed provisions of the agreement, one of the agreements says, Lear shall have the right on 90 days prior written notice to terminate any of the licenses in this agreement. And Lear said, “All right, we have the right, we terminate the whole works.”
Abe Fortas: Well, that right as to terminate was that confined to situation in which patent did not issue?
C. Russell Hale: No Your Honor, that provisions appears in Section 2 (a) of the license agreement, it's on page 4. If I may direct your attention to the specific, it's on page 4 of appendix A (2), the large one. Section paragraph 2 (a) the very last sentence, it's about two-thirds of the way down to page. It says, “Lear shall have the right on 90 days prior written notice to Adkins to terminate any one or more of the licenses herein granted.”
Speaker: That issue is held against in state court?
C. Russell Hale: That's --
Speaker: Construction?
C. Russell Hale: Yes, Your Honor. The -- well, the state court upon considering that specific pair of that specific sentence said, “We find an implied condition that requires that you manufact -- that you seize manufacturing these devices before you can terminate.” Now, this did not arise below in the trial level. The trial court said, “The agreement is -- was terminated, Lear exercised its rights.” Intermediate Appellate Court said the same thing. California Supreme Court found this implied condition and it is our position Your Honor that such an implied condition is most certainly contrary to the purposes and provisions of the patent and antitrust laws. This is a circumstance that arose only upon the decision of the California Supreme Court. So, as of April 8, 1959, it was Lear's position that the entire agreement was cancelled which covered both of the products. Now, some eight or nine months later Adkins pushed his patent through the patent office, they issued in early 1960 and the complaint was filed on the same day. The complaint searched first cause of action asserting breach of license agreement of exhibit 8 and unjust arrangement and at the second cause of action misappropriation of Adkins' ideas discovers an inventions in violation of his common law rights. Now, the second cause of action was dismissed and was never tried. The trial court took and ruled that Lear terminate the license agreement by this notice in 1959 and the jury returned the verdict for Adkins on the basis of both products, the California of 2156 and the Michigan steel gyros. The trial court granted Lear's motion not standing the verdict concerning the Michigan steel gyros and it left to direct the verdict concerning a California gyros stand. Trial court said that Lear has not stopped to contest validity with respect to the Michigan steel gyros because they were independently developed also because the claims of the patent do no cover the Michigan steel gyros. And also patent is invalid or as that trial court is concerned is failing to meet the constitutional standard required for patentability relying upon the A&P case of this Court. Well, the Intermediate Appellate Court of California ruled generally along the same line. I won't discuss it because that decision has rendered a nullity of when the California Supreme Court takes the case. California Supreme Court held that this termination was ineffective because of this implied condition that we've just mentioned. It then adopted the defense of licensee estoppel which was asserted by Adkins and held that Lear was estopped to contest the validity of the patent and was liable for royalties. It also used some criteria in ascertaining the scope of the invention and infringement that we feel are clearly in violation of decision of this Court for example. But under the decision of the California Supreme Court, Lear has two alternatives. One is to pay the royalties regardless of the patent invalidity and failure consideration. Or seize manufacturing the devices, it's deprived of the alternative of continuing a manufacture of the products purportedly covered by the claims of Adkins' patent application in challenging validity. And this renders any licensee that challenges validity vulnerable to suit of infringement and imposition of damages which maybe a much greater magnitude and than those imposed under an agreement. So, a licensee has to be very well advised before he wants to take such a step. Well, now, the issues are the major questions before this Court are --
Abe Fortas: Well, don't you have to treat the Michigan steel gyro problem as license to use know-how or none patent that I recall --
C. Russell Hale: No Your Honor.
Abe Fortas: How do you -- why do you talk about that one in the terms of patent law? That's a question I put to you initially and it's still bothers me.
C. Russell Hale: Well, Your Honor you're going to that to the crux of one of the issues in this case and that is on any common law rights involved here patents and common law the rights are mutually exclusive.
Abe Fortas: Well, that's what I'm trying to get at.
C. Russell Hale: Yes, sir.
Abe Fortas: Because I really don't understand it and I couldn't -- I just entangle it from your brief.
C. Russell Hale: Yes sir. Well, Your Honor the agreement is explicit. And this agreement superseded cancelled all other agreements. Lear for example, wanted to go in to things of that nature and it presented and exhibit U for admission and evidence under an offer of proof at Reporter's Transcript 1018 where Adkins says in representations leading up to the license agreement is impossible for me to give Lear a license on claims which may not be allowed or are not patentable. Now, evidence along as this line was excluded by the trial court, the trial court said, “You're under this agreement and this agreement limit you to patented or patentable things and not secret ideas, not discoveries, nothing unpatentable is covered.” And as a matter of fact Your Honor, there was a waiver just before trial of all causes of action other than the issues raised by the license agreement. So, all ideas or out of picture, know-how out of the picture, the license agreement doesn't mention know-how in any place nor does it mention ideas. The only thing it mentions are things that are patented or patentable and hence, we submit that brings that directly under the federal criteria concerning patent matters. Well, the major questions before this Court are the enforceability of such an agreement containing a restraint which is outside the scope of the rights provided in the patent laws. Number 2, the applicability of licensee estoppel under the circumstances of this case and as the general principle whether the claims of Adkins' patent application are really unpatentable and invalid as a matter of law like the Superior Court of the State of California held. And there is question number 4, whether the ground rules in enforcing a patent under a license agreement are the same as they are in enforcing a patent in an infringement action. And the California Supreme Court didn't use the same ground rules. Otherwise, they could've never held that the Michigan steel gyros are covered by the claims of the patent. Well, as to question number 1, enforceability of such an agreement, the requirement that Lear sees manufacturing the products covered by the license agreement in order to terminate is not an act granted by the patent laws. Their tendency of patent application provides no vested rights in fact the patent may never issue and this we submit is similar to the situation in Brulotte versus Thys where this Court held that an agreement which attempts to extend patent rights beyond the 17-year period, patents are good for 17 years and if the patent is attempted to be extended beyond that period, it's an improper use of patent rights. We submit that the very same considerations apply here where the patent rights are attempted to be extended before they really issue. We submit that this, such a provision which is at California Supreme Court found was implied in the agreement, renders it unenforceable. Such an unwarranted extension of patent rights is particularly objectionable here where products affected are military equipment. This is because of the policy embodied in 28 U.S.C. 1498 which permits use by the Government of all inventions without possibility of injunction. It also safeguards Government from payment of royalties on species patents because validity can always be attacked. Now, with reference to the second major question concerning estoppel, the Government has filed a brief as amicus curiae are urging that this Court should complete reject any doctrine of licensee estoppel and advised that counsel for the Government, Mr. Wallace will direct his oral argument to the broad grounds and accordingly I will discuss the circumstances of this case. Under the circumstances of this case, Lear specifically renounced any liability. It renounced liability with respect to the Michigan steel gyros in 1957. It renounced liability under the whole agreement as of 1959. This placed Adkins in the position that he could've charged Lear as an infringer if he had so desired. He elected to bring suit for royalties and he relies very heavily on the Hazeltine case in support of his position. When the Hazeltine case, there was no renouncement of the license agreement prior to the suit against Hazeltine. They just didn't pay royalties, didn't make royalty reports, this is all brought out in the lower court decisions. Under the Hazeltine case, the license order didn't have the right to sue for infringement. It was an outstanding agreement. The party simply had not paid royalties. Here, Lear has renounced and Adkins had a choice. He chose to proceed under the agreement and the various cases cited in our brief, show that under such circumstances where there is a renouncement, assertion of pay or consideration, Lear has the right to challenge the validity of that patent. The Dale Tile Company case is his one along this line and --
Speaker: Why was the Hazeltine judgment covered the issue?
C. Russell Hale: The amount of the judgment on the California Model 2156 gyros was a little over $16,000.00. On the Michigan steel gyros, it was -- well, it was almost $900,000.00. It was $888,000.00 I believe. Now, that was as of 1963 Your Honor and which was a period agreed upon for accounting purposes only. And of course that the same thing applies today, it's been going on Lear is doing the same thing today, it was during 1963. With defense of failure of consideration as well established defense in contract matters and that's what Lear asserted. And that's a defense of record in the trial court, in the pleadings and we submit that the doctrine of licensee estoppel should not override such a well-known and undisputed defense. Second circumstance of this case was that the license to Lear was granted under patent application. That was altered by amendment, numerous amendments were filed in this application and as I pointed out one of major importance was filed in December 1958 which change the tender of face. Patent issue with claims Lear never seen it invoked the rule of estoppel under such circumstances gives the license order of a patent application the right to change the gist of his invention, covered products that weren't originally considered to be covered. It -- in essence places the licensee at the mercy of the licensor with no mean to readdress. Now we submit that licensee estoppel should not apply if the agreement is based upon a patent application which is in fact changed -- which is in fact amended from time to time after execution of the agreement. The third circumstance of this case is that the -- has I've already mentioned the license agreement as construed by the California Supreme Court embodied and implied condition for termination that requires Lear to seize manufacturing the products of the agreement in order to terminate it. As this Court held in MacGregor versus Westinghouse, the rule of licensee estoppel cannot be used as a shield to preclude investigation of the validity of a patent where in the absence of a valid patent it would be a restraint of trade and certainly that's a circumstance here. The requirement that Lear seize manufacturing the devices as a restraint a trade and in licensee estoppel should not be implied as a shield to prevent Lear from defenses concerning this issue. Anyone of these three circumstances is sufficient to override any estoppel if an adversity job of the doctrine still survives and Mr. Wallace will discuss that on behalf of the Government. Now, Lear's third and fourth questions relate to the validity and the scope of Adkins' patent, these are always interrelated because the patent of certain scope then claims must not read on the prior order otherwise, it's rendered invalid. And these two questions require an understanding of the bearing supporting apparatus of the Michigan steel gyros and that California Model 2156 gyros and I think perhaps this will help clarify some of the questions that Mr. Justice Fortas was raising earlier. The alignment arrangements if I may ask the Court to refer to figure 9 of Lear's reply brief at page 50. The two alignment arrangements are shown there in simplified form.
Hugo L. Black: Whose reply brief did you say?
C. Russell Hale: Lear's reply brief Your Honor. It's the gray covered, very small brief towards the end at page 50. You will find two figures illustrating Adkins' patent and one figure illustrating the Michigan steel gyro. Now, Adkins' patent shows a bearing supporting apparatus which implies a cone-shaped seat in a gimbal housing and spherical shape bearing couch. And the patent states that those elements are shown at both the top and bottom of the figures concerning Adkins's patent and I will elaborate on that little more in the moment. The patent states, the bearings may be aligned by placing them on a jig or mandrel and then placing them in the bearing or seeding elements as we've illustrate. When the mandrel is rotated, it causes the bearings to become align and this is accommodated by the engaging surfaces between the cylindrical shape bearing cups in the cone-shaped seats, in view of their different curved shapes. I'm purporting more or less from the patent I believe exactly from it. Now at the trial, we use this demonstration to illustrate the two types of services we're talking about the cone-shaped seat are the two seats in the framework that's shown on figure 9 and the segment -- the other members are spherical shape, they're portion of spear and we've illustrated this by a piece of a croquet ball. This shows the type of action that Adkins used in order to achieve alignment. It provides angular and the so-called angular tilt that you'll see referred to in the briefs due to the two surfaces that are involved that accommodate this kind of movement. Now, we have a model here in Court showing the alignment of the bearings and accordance with Adkins' patent, this was demonstrated at the trial and I think it's essential if the Court will bear with me. I believe it's essential for thorough understanding of the issue of scope -- scope of the patent, definite patent and patent application that are involved in this action. So, Mr. Hartz will demonstrate this model, it's approximately four times the actual size of the actual parts in reality. It shows a cone-shaped seat like the paddle that I just demonstrated. It has bearing caps with a spherical surface. This is the spherical surface much like the croquet ball and that I demonstrated. It has bearings for mounting in the bearing caps which ultimately go into the seats which in the framework.
Potter Stewart: Mr. Hale, I want to be sure I understand the relationship between what's being demonstrated here and the diagrams of page 50 of the reply brief. Is this the -- what is it?
C. Russell Hale: This is the left hand portion Adkins' patent. Adkins' patent and the 21 -- the California Model 2156 gyro was very similar Your Honor. As the cone-shaped member here, the spherical shape member here or receiving bearing element there, this is very much like the top thing that shown on the first one as you can see it and there's a small cut away there.
Potter Stewart: Yes.
C. Russell Hale: Now, the patent says these bearings are sled on a jig or mandrel which may be a cylindrical rod. This jig or mandrel simply an assembly to which is taken after later and we will demonstrate that. The bearings are then placed into the bearing caps and then they in turn of course were in the framework in their cone-shaped seats. The mandrel is rotated and due to the nature of the engaging surfaces which permit this type of movement alignment is achieved. As soon as that's done, some of it is placed around there to hold them in place. The patent states that other arrangements can be used like screws or welding what have you. Thereafter, the jig is removed then the gyro is then ready to put together in final form. Now, the alignment of the Michigan steel gyros is illustrated in the right -- corner right hand corner of figure 9 and we will now demonstrate that. Here is the jig which appears in the center of figure 9. This is taken from exhibit O and it was admitted in evidence and is part of the assembly procedure that's been throughout this trial. Here's the little mandrel or jig as actually employed in production in the Michigan steel gyro. You will notice that one end has a little bearing cap on it and the other hand I will put one on right now. This fits snuggly and not only that but they are fixed by a screws and washers so that they are absolutely rigid those bearing caps when there are mounted on this. And they are now in alignment right now no matter what you do with them. Those bearing caps are in the alignment and will stay that way. No angular motion, no tilt, bearing alignment.
Potter Stewart: Now, where is the mandrel?
C. Russell Hale: The mandrel is this portion here Your Honor and here are the two bearing caps. We have a larger model little piece here for the Court to see.
Potter Stewart: Now, what's an arbor, is that the same with the mandrel?
C. Russell Hale: Yes, Your Honor and these terms have all been used interchangeably. I feel compelled to use them, more or less interchangeably.
Potter Stewart: Mandrel or arbor or jig, all three mean the same thing?
C. Russell Hale: Yes, Your Honor. Now, here's the characteristic structure of the bearing caps in the Michigan steel gyros. It's a total -- the total thing has been sometimes characterizes as a cylindrical top cap placed in a loose hole, loosely fitting hole. And here, it's loose. I'm going to assemble that and show the Court just exactly how the alignment is achieved. Again, this is approximately four times scale.
Potter Stewart: And where is that -- is that actual scale, the actual four --
C. Russell Hale: This is four times --
Potter Stewart: Four times.
C. Russell Hale: For the benefit --
Potter Stewart: In his right hand is the?
C. Russell Hale: Actual.
Potter Stewart: Actual.
C. Russell Hale: No sir, Your Honor we have here in Court the actual housings that those -- that the mandrel goes into if I may demonstrate the -- it goes into a loose hole on this end, the loose hole on this end. The thing is submitted in place or well that what have you and then the mandrel can be removed. It's ready for final assembly and here are the packages as ready. If you'll --
Potter Stewart: And that's the actual size that you have in your hand?
C. Russell Hale: Yes, Your Honor that's right out the production. For the characteristic of alignment in the Michigan steel gyros still uses a mandrel like the California Model 2156 but that that's about the end of the resemblance and that mandrel is taken out not used -- Adkins tried to get claims covering the procedure for alignment. The way I just demonstrated on the Model 2156, he tried and tried and tried and he was turned down every time on his method claims and they cancelled those. We submit that puts him in the public domain and he cannot now claim that the method is the same to employ the same thing. California Supreme Court said it wasn't obligated to look at the file history concerning these aspects because the claims that were presented in that application were brand new. It represented down to very end of the prosecution. Well, we submit that that's not the law, the criteria that's been established by this Court and many other court say you have to look at the whole file history in order to ascertain what the claim really mean. The California Supreme Court actually -- well, in interpreting the scope of Adkins' patent, the California Supreme Court said, “The device of submitted in bearing caps using a mandrel procedure constitutes the essence of Adkins' invention as described in his application.” Well, that's the essence of his invention, it's in the public domain because he cancelled that the method in a mandrel procedure, the language I've just quoted from is in appendix (a) (1) (192). Now, this is one of the criteria that we feel that the California Supreme Court applied in improperly. And other major thing was that the California Supreme Court states that alignment of bearing caps in either Adkins or the steel gyros can be accomplished only by the angular displacement of the two caps to the access of the mandrel. Well, if it please the Court, it's impossible for either these two caps to be displaced to the access of the mandrel. It's an absolute physical impossibility and we submit that that's a major error. If I may indulge the Court, I would like to refer now to our opening brief. I believe that's blue at figure 4 which is opposite page 57. This figure 4-2 sets forth the main claim of Adkins' patent application and the patent which issued which illustrated here. I will refer to the figures since the print is a little small here and I would like to point out that the letters A, B and C identify the three elements of this invention and Adkins admits that those three elements are old, old in the art. He simply says, they have a new cooperative relationship but when he applies his new cooperative relationship he didn't talking about things in the claim. And it's the claim that defines the invention. Now, this is one of the exhibits employed in the trial court, and I use it only for the purpose of illustration. It's the left hand figure of exhibit 4-1 and I just referred the Court to. I would like to point out that the color code on all of these things is the same, red means bearing caps and so forth. And you'll see here a red element of bearing cap designated A, a bearing proceeding frame B, and means for holding that bearing cap in place designated C. Now, the bearing receiving element is in a sloppy hole and loosely fitting hole just like the Michigan steel gyros. And alignment is achieved by use of this feature. Now, I will rely --
Potter Stewart: And this is what prior argument?
C. Russell Hale: Yes Your Honor. This goes to the issue of validity and scope if Adkins' claims read on this Michigan steel gyros I just demonstrated. They also read right on this --
Potter Stewart: On this one patent which is prior?
C. Russell Hale: Yes Your Honor and also on several others and if I may Mr. Chief Justice I believe I have about five minutes left, I'd like to reserve it.
Earl Warren: You may. Mr. Wallace, it seems you're next.
Lawrence G. Wallace: Mr. Chief Justice and may it please the Court. The United States believes that the time has come for this Court to hold that the most fundamental policies of the federal patent and antitrust laws forbid the application in state or federal courts of doctrines of estoppel which result in court enforcement of invalid patent monopoly.
Byron R. White: Was that issued necessarily decided in a --
Lawrence G. Wallace: We believe that was --
Byron R. White: -- and it is necessarily here?
Lawrence G. Wallace: We believe it is necessarily --
Byron R. White: Unavoidably?
Lawrence G. Wallace: We believe that it is before this Court and if you like Your Honor I'll turn directly to that problem since respondent raises this contention in its brief in this Court. Respondent contends that the estoppel issue is not before this Court because Lear never claimed in the state courts that federal law gave it the right to contest that validity of the patent. But in our examination of the briefs that have been certified to this Court is a part of the record. We see that Lear did make this claim based on federal law in the briefs. I believe the clearest example can be found on pages 25 through 28 of Lear's reply brief in the District Court of Appeal in California which under California practice also becomes the brief in the Supreme Court, litigants are forbidden from filing new briefs in the Supreme Court of California. This portion of Lear's brief has not been reproduced in the printed appendix but it has been certified by the clerk as a part of the record and it is on file with the clerk in this Court. And let me just summarize for you why I think this is a clear example and the Government thinks this is a clear example of the petitioners having raised the federal issue before the state courts. Beginning on page 25 of that reply brief, the petitioner refers to the provisions of Article 1 of the Federal Constitution.
Potter Stewart: Do we have that in these papers that we have including the appendix or anywhere?
Lawrence G. Wallace: No, they have not -- this is not been reprinted in the appendix.
Potter Stewart: So, we do not have that in all this --
Lawrence G. Wallace: You don't have it among your papers. That is correct sir. But it is on file with the clerk here as the part of the record that was not printed in the printed appendix.
Hugo L. Black: That is on file here?
Lawrence G. Wallace: It is on file with the clerk of this Court, yes Mr. Justice but it was not printed in the appendix. Beginning on page and this is pages 25 through 28 of that brief, the reply brief before the state appellate courts. Beginning on page 25, Lear referred to and quoted from Article 1 of the Federal Constitution, the patent clause and then elaborated some of the provisions of the Patent Code which Congress has enacted and then in the course of this particular contention said, “A license or contract concerning patent applications and patents have more than the usual two interested parties.” Patents from their inception have been designed to promote the progress of science and we're instituted for the public's benefit and not as a reward for the inventor citing an opinion of this Court Kendall against Winsor in 21 Howard. This is followed by quotations from two other federal cases, one an opinion of this Court, the Precision Instrument Manufacturing Company case in 324 U.S. and then a Ninth Circuit case. And then finally at the conclusion of this portion of the argument, the contention was put this way. In the present action, the trial court expressly found that plaintiff's patent attempts to cover something that is in the existing fund of public knowledge and something that would be obvious to one skilled in art. Thus, plaintiff's patent is invalid. It does not provide protection for any device or product and its validity with respect to the 2156 gyros can be contested by defendant and also by everyone else because of the public interest which is involved.
Hugo L. Black: What page is --
Byron R. White: The California Supreme Court for instance decision on Lear's ability to count that?
Lawrence G. Wallace: Yes, it did. It explicitly held that the patent estoppel doctrine is applicable and --
Hugo L. Black: Can I ask you first to give me the pages of that brief and which you just read.
Lawrence G. Wallace: The pages --
Hugo L. Black: 25?
Lawrence G. Wallace: -- are 25 through 28.
Hugo L. Black: Alright, thank you.
Lawrence G. Wallace: Of the reply brief submitted by Lear in the District Court of Appeal. This is the brief that refers to civil actions numbers 28624 and 30089. There were numerous briefs but this is the reply brief, it's the brown covered brief.
Hugo L. Black: Of Lear?
Lawrence G. Wallace: Of Lear in the District Court of Appeal and also in the Supreme Court of California. Now on page 191 of the first volume of the reprinted appendix where you have the opinion of the Supreme Court of California, you have the holding in very explicit terms right in the middle of page 191, the doctrine of licensee estoppel is applicable and Lear is foreclosed from challenging the validity of Adkins' patent. Now, we are off the view --
Speaker: Is there any difference for that or the broad statement of course is that a question of state law or federal law?
Lawrence G. Wallace: Well, we are of the view that since the question of federal law was presented to the Court and the Court rejected that contention by applying the doctrine of estoppel that this necessarily meant that the California Supreme Court passed on the question of federal law. Now, in the pages that I referred you to in the brief before the California Court we're of the view that because only federal authorities are cited throughout these three and a half pages and the arguments ends at that point. A new point is taken off. These -- the clear intendment of these pages of the brief is to raise this issue as a federal claim and this was sufficient under the standard which this Court applied in Braniff Airways, Incorporated against the Nebraska State Board of Equalization in 347 U.S. where the clear intendment was to assert a federal claim, no precise terminology need be followed in presenting that claim so long as the state court does pass upon it. Now, it is true that this reply brief raising the issue was concerned only with the aspects of the case relating to the so-called California gyro and not to the Michigan gyro. But it is also true that the state's Supreme Court consolidated all aspects of the case to gather into one appeal and into one opinion. And thus, had this federal claim before it and passed upon it for purposes of the entire case. But even in the absence of consolidation in the court below, the issue of licensee estoppel would still be before this Court because a part of the judgment awarded is for royalties for manufacture of the California gyro, the claimed invention with respect to which this point was specifically raised.
Byron R. White: What if you -- what about -- what if Lear was (Inaudible)?
Lawrence G. Wallace: Well, in that case, the issue of the validity of the patent is still undecided. The petitioner has submitted this issue to this Court -- this Court in its discretion could pass upon it or could remand the case for consideration of that and other issues that may still remain in the case by the state courts.
Byron R. White: (Inaudible)
Lawrence G. Wallace: It's on page 191 of volume 1 of the appendix, of the printed appendix; right in the middle of the page. It follows also that the doctrine of licensee estoppel is applicable and Lear is foreclosed from challenging the validity of Adkins' patent.
Byron R. White: (Inaudible)
Lawrence G. Wallace: Well, this is necessary to the decision, yes sir as we read the California decision. Therefore, the United States believes that the issue is before this Court and we have addressed ourselves to the issue of whether the licensee estoppel doctrine should now be eliminated in view of the weight and the teaching of this Court's decisions in recent years which have required exceptions to the doctrine and which otherwise have closely confined court enforcement to monopolies to the limited scope authorized by the federal patent laws. Under our patent system unlike that of some European countries, patent monopolies are granted in essentially ex parte non-adversary administrative proceedings and as this Court and other courts and indeed Congress had have frequent occasion to observe this system results in the issuance of numerous patents for articles which do not meet the requisites standard of invention upon later investigation, an adversary investigation. Therefore, as we show in our brief the public interest is strongly dependent under our patent system on the availability of opportunities for private litigants to expose invalid patent monopolies before the courts in order to free the public from their economic effects. In many instances, a licensee may be the only potential litigant who combines the requisite knowledge with the requisite incentive to mount that challenge. The practicalities of the business situation may well have induced to licensee to enter into the license agreement even though he had doubts about the validity of the patent or had not had time to investigate the question of validity. For example, a Government contractor such as the petitioner must assure himself before he submits his bid that he will be able to perform the contract. And this means that he must have a legal right to make and sell every component required. When some of those components are covered in issued patents or in patent applications, the pressure to enter into license agreements would seem obvious. The basic vise of the estoppel doctrine is that it converts those licenses into incontestable devices for the economic effectuation of invalid patent monopolies. Now, it is instructive to remember that this Court's early recognition of the doctrine of patent licensee estoppel in the 1855 case of Kinsman against Parkhurst and as we point out in our brief, it was a recognition not a holding there. This occurred 35 years prior to the enactment of the Sherman antitrust law, when the patent laws were not yet viewed as it carefully confined exception to the broad interdiction of monopolization in the antitrust laws. And this Court's first significant limitation of the estoppel doctrine in Pope Manufacturing Co.against Gormully occurred in 1892 two years after the enactment of the Sherman law. Later, in the Sola Electric, Katzinger, and MacGregor cases discussed in our brief, this Court held that the estoppel doctrine may not be applied when the license agreement contains a price fixing clause. And in Scott Paper Company against Marcalus Company, the Court held that an assignor cannot be estopped from showing that he was not infringing the assigned patent because he was using only the prior art of an expired patent even though in the circumstances; this amounted to a showing that the patent he assigned had been anticipated and was therefore invalid. In his perceptive and candid dissenting opinions in those cases, Mr. Justice Frankfurter pointed out they have the general doctrines of assignor estoppel and licensee estoppel really could not withstand the rational of those decisions. And ultimately would have to yield to the same considerations of the public interest that govern the Court's decisions in those cases. But several years later, a majority of the Court tersely re-endorsed the general doctrine of the licensee estoppel in the Hazeltine case and said that the previous cases meant that estoppel is forbidden only if the license attempts to enlarge the patent monopoly through price fixing for example. But as Mr. Justice Douglas joined by Mr. Justice Black asked in dissent in that case, what more egregious enlargement of monopoly is there from the standpoint of public harm than the attachment of a patent monopoly to an unpatentable article. The majority opinion did not answer that question, the question remains unanswered and United States submits the question is unanswerable. More recently in the Sears, Roebuck against Stiffel and Compco cases, this Court held that the states cannot confer upon the originator of the design, the power to exclude others from copying that design that the power to exclude is the exclusive province of the federal patent laws and can attach only to a valid federal patent. Now, the power to exclude others for making, using or selling which is conferred by a patent is often utilize by the patentee conditionally in order to read economic rewards from the patent. Or he excludes others from using the product unless they buy it from him or he excludes others from making and selling the product unless they pay him and agreed upon royalty. This is precisely the power to exclude which the decision below has given to the respondent even if his patent is invalid. And California has thus used the doctrine of licensee estoppel to trespass upon the domain of the federal patent laws and to enlarge the impact on the economy of patent monopoly rights. From that, which is authorized by the federal laws just as the Illinois law of unfair competition had been used in Stiffel and Compco to trespass upon the federal domain and enlarge monopoly powers. In those cases, this Court held that the states must be confined to remedies that are compatible with the policies of federal law such as the requirement of labeling in that factual context. And likewise here, we have argued in the concluding pages of our brief that the states may device remedies to do equity between businessmen which do not conflict with federal law, but the state should be barred from sacrificing the public interest by applying doctrines of estoppel that result in enforcement of monopolies that are not authorized by a federal law. Only last term in the Perma Life Muffler's case this Court reiterated that we are dealing here in an area in which the Court has often indicated the inappropriateness of invoking broad common law barriers to relief where litigation serves important public interests. And so, the United States asked this Court in this case to relieve the people of this country of the burden of having to pay royalties for the use of non-inventions and to give the people what the Constitution and the Laws of the Congress say is rightfully theirs, the free use of all the technology that is in the public domain.
Abe Fortas: Well, assuming that the Michigan patent here is invalid and assuming that petitioner can avail itself of that point, is that in your judgment dispose of the claim with respect to compensation for the use of the Michigan device?
Lawrence G. Wallace: The United States has not really formulated a position on that question but I --
Abe Fortas: Well, your -- you're doing something more than asking us to make a ruling in the abstract, aren't you?
Lawrence G. Wallace: Well, of course the California -- there's no problem in California device at all.
Abe Fortas: (Voice Overlap) about the --
Lawrence G. Wallace: With respect to the Michigan device, --
Abe Fortas: There's no question about the California, validity of the California patent, is there in this case?
Lawrence G. Wallace: Yes. There was estoppel applied with respect to both patents and Lear was estopped from contesting the validity of either patent and the judgment reflects royalties for the use of both patents.
Abe Fortas: But the judgment as have been in adjudication that the Michigan patent is invalid in this case there hasn't, has it?
Lawrence G. Wallace: No, there has not because --
Abe Fortas: But there was such an (Voice Overlap) --
Lawrence G. Wallace: -- because the trial court held Lear estopped from the outset with respect to that.
Abe Fortas: There was an adjudication -- wasn't there an adjudication, was it in the intermediate court?
Lawrence G. Wallace: It was at the trial court that the Michigan device was held to be invalid.
Abe Fortas: Invalid at the trial court. So, that we do have that difference in the posture of the case in any event between these two patents and you, you made no study of the impact of accepting your theory with respect to whether a claim survives?
Lawrence G. Wallace: Well, I've made a study of it but the United States has not taken a position with respect to that question subject --
Abe Fortas: Well, you have made a study that's helpful to us. Thank you.
Byron R. White: Well, isn't true that both of the -- that no royalties were payable except on patented or patentable articles under this agreement?
Lawrence G. Wallace: The agreement so stated and the basis for the royalty payments having been awarded in the judgment of the California Court is that Lear was estopped to contest the validity of either patent.
Earl Warren: We'll recess.