Earl Warren: Number 480, Robert Morales, et al., Petitioners, versus City of Galveston, et al. Mr. Mandell.
Arthur J. Mandell: Chief Justice, may it please the Court. This case presents again the question of whether or not a transitory act creating an unseaworthy condition aboard the vessel imposes liability for consequentially injuries or not. On March 13, 1957, the Grelmarion was in the port of Galveston beginning to load grain. Grain was loaded by a means of a spout that pour the grain into an open hatch. When the hatch had enough of grain up to and to a cone where the grain would have spilled over, longshoremen went into the hatch and by a means of shovels equalize the grain all over the hatch so the hatch would be filled up. The grain was stored at a granary own and operated by the City of Galveston. The City of Galveston and a number of stevedoring companies have experienced at least since 1949, at least four instances in which a substantial number of longshoremen received serious injuries because the grain was treated with certain fumigants was not properly aerated so that when the grain got into the hatch and the men worked with it, they became ill. The one case, there was strive, substantial damages were allowed. Three subsequent cases or at least two subsequent cases were settled. The last settlement of the case involving some 70 years old longshoreman took place on 1957. When that vessel came in into the port of Galveston for the first day and a half, the loading operation proceeded in its usual normal course. The longshoremen quit at noon for lunch and came back at 1 o'clock. At that time there had been on which the grain was been poured into and loaded for was about four or five feet from the overhead bulk hair or ceiling. Enough grain was poured in there at that time so that the longshoremen had to go into the hold and spread out which shovels the grain. After they were in there for a while, another shot of grain was ordered which completely cover the hatch and so to speak bury the longshoremen in there. That shot of grain was claim and the trial court found to have been contaminated with noxious fumes and gases and immediately thereafter, the longshoremen became ill. There had to be so to speak bury there from under and they came on dead. They immediately became ill and suffered injuries. Suit was filed against the vessel owners as well as the City of Galveston. As to the vessel, unseaworthiness was claimed and negligence as the City of Galveston, negligence on failing to see that the grain is free and clear of any obnoxious fumes before it reaches the vessel. After the trial that had lasted sometime, the trial court made certain findings of fact. It is our position and it has been our position below that the findings of fact that the trial court has made, in effect, constitutes a finding of unseaworthiness under the applicable law. It was our position that the trial court applied the doctrine of temporary or transitory unseaworthiness, which prior to the Mitchell case, we contended was not a proper measure of judging that doctrine and subsequent thereto, of course, we felt the same way. The trial court made these important findings. Finding number 9 was that as the 500 bushels of grain were poured in to hat -- into the hatch, the longshoremen were working for the moment in an area completely enclosed without access to outside air. This was not an unusual incident. Finding of fact number 10, almost immediately, libellants felt ill effects. Finding of fact number 11, the illness and disabilities that resulted from the noxious fumes and gases introduced into the bin when the last shot of grain which was loaded after 1 p.m.and that such fume resulted from an insecticide applied at some point to destroy weevil infestation. Findings of fact number 19, the illness resulted from the fumigant improperly applied and adhere to the grain in unreasonably -- unseasonably long period of time. These are the findings of fact the court has made. Then concludes that under such circumstances, these did not cause the Gre -- Grelmarion to become unseaworthy. We contended and contend here that a test is whether the area aboard the vessel where the longshoremen are required to work was reasonably fit to do that work with safety. If it is not, then a condition of unseaworthiness exist as a matter of law. For instance, and this instance, this was a trial before a jury, the court on the special interrogatories could have asked the jury whether the grain was contaminated with gas fumes, whether that condition made that area an area that was not reasonably safe to do that work. If in such condition was a cause of harm impart of the resulting illness and injuries suffered by the longshoremen, that in effect does what the court has found and its on findings of fact. The appellate court recognized this point and said as follows, “This is the case of happening when the last batch of wheat came out of the funnels, instantaneously rendering unfit quarters which until then had been and when the funnels cleared away, continued to be entirely seaworthy.” The question, therefore, is whether that condition rendered the area, and which these people are working, not a reasonable safe place to work. We submit to this Court that long before the Mitchell case, such circumstances rendered an area on -- of the vessel unseaworthy and Dixon versus United States, Judge Harlan, I believe, was the judge in that case, held unsatisfactory working conditions held to be within the seaworthiness doctrine although the vessel itself and her appliances were seaworthy. The defense in this case and apparently adapted by the appellate court was that the hatch itself and the bins, the bins in there, were a nowise was defective. And therefore, the introduction of the dangerous substances into the hatch was not of such a character as to render that condition a condition of unseaworthiness. We submit that under the decisions of this Court, particularly the Mitchell case, that doctrine is unsound. In fact Judge Reeves in the second time the case went around stated so in his dissent. He said that it is clear that temporarily the bin where the libellants were working was not a reasonable safe place in which to work. Obviously, if it was not a reasonable safe place in which to work and if that condition was created by cargo that was infested with obnoxious fumes and gases that created a conditional unseaworthiness for which liability applies under the applicable law, the question that particularly rather the particularly importance here is whether a vessel which has no difficulty whether its hatch which has a good deck, for instance, and some plane party comes in or one of the officers of the vessel or anyone else creates a dangerous condition on the deck as it happened in the Mitchell case and injury follows that under the applicable laws, we now have it, creates an unseaworthy condition for which liability it applies. The appellate court rested its decision, I believe, on the fact that the trial court concluded that under these facts, unseaworthiness did not take place and holding that the unseaworthy condition of the vessel as a question of fact. And therefore, they would not under the McAllister case overturn findings of fact by the trial court. We submit that in the -- under the facts in this case and under the fact finding by the trial court, the conclusion reached by the trial court is repudiated by its own findings. The findings clearly set out a dangerous condition facing this longshoremen working in there. There was nothing that these longshoremen could possibly do to extricate themselves from the situation they found themselves in to --
John M. Harlan II: Are there anything the ships could do to prevent the condition?
Arthur J. Mandell: May it please --
John M. Harlan II: Are there anything the ships could do to prevent the condition?
Arthur J. Mandell: May it please the Court. Assuming that there is not, I will in a moment show that there was. But assuming that there was not, still, the species of liability without fault under the unseaworthiness doctrine applies. But --
Potter Stewart: Does an unseaworthiness -- imply a condition whether the condition is there with or without fault, with or without knowledge by the shipowner, doesn't it, nevertheless, imply a condition that is a correctable condition correctable by the shipowner, following up Mr. Justice Harlan's question?
Arthur J. Mandell: Well, that -- that's alright. It -- not necessarily so and let me point out why. Let us assume that a bad drum of oil began leaking because of some reason or other and momentarily, there was a lot of oil on the deck and someone passes by and slips and falls and receives injuries, they -- nothing they could do about it. They didn't know anything about it. They had no knowledge of the situation. Since foreseeability, knowledge is -- are no elements prerequisite unseaworthiness, I submit that that is not a prerequisite to a liability. But let's see whether they could have done something about it. Now, the Court will recall that I've stated at the -- on my opening remarks that there were at least three other incidents of somewhat of nature. The court finds that the steamship company's agents had knowledge of this fact, that the City of Galveston had knowledge of these facts. The evidence shows that had a placed a person to test the grain at the last bin before they went into the spout that could -- by testing it, that could have been discovered and such a discovery could have prevented what has taken place. Of course that goes to the question in my opinion to negligence and really has nothing to do with the unseaworthiness doctrine. But I submit that under the findings of the court that even negligence exists in this case. And while I know that the trial court's findings of fact supported by any top of evidence either not challengeable in any appellate court, I say that under the court's findings of fact in this case, negligence has been established in number of cases holding that a judge's determination of negligence as distinguished from the evidentially facts leading to it is a conclusion of law, freely review of the long appeal. And it's not a finding of fact entitled to the benefit of the unless clearly O'Neal's doctrine. And I say first as to the unseaworthiness doctrine, the trial court's findings of -- of fact that a vessel was not unseaworthy is contrary not only to its own findings of fact but under this particular circumstances, it's a conclusion of law which is freely reviewable by this Court. Libellants and the petitioners in this case can still on -- and ask for a reversal of the trial court's judgment and the appellate court's opinion on the findings of fact made by the trial court. Indeed, the trial court was, itself, not quite sure about its own position in the matter because as you will note --
William J. Brennan, Jr.: (Voice Overlap) -- you have both the shipowner and the City yield --
Arthur J. Mandell: Yes.
William J. Brennan, Jr.: Because the unseaworthiness claim doesn't go against the -- the City?
Arthur J. Mandell: It does not, no, sir.
William J. Brennan, Jr.: No any -- that action has to be predicated on negligence, does it?
Arthur J. Mandell: Yes, sir. Yes.
William J. Brennan, Jr.: And that's what you now arguing that there is sufficient evidence of negligence as to the City or as to both?
Arthur J. Mandell: As to both.
William J. Brennan, Jr.: As to both, I see. But have you -- have we any question of negligence as to the shipowner before us?
Arthur J. Mandell: Yes.
William J. Brennan, Jr.: As to the shipowner as well?
Arthur J. Mandell: As to the shipowner as well as to the -- as to the City of Galveston. As to the shipowner, of course, the court made findings of fact that the shipowner through its agent knew of this pre -- previous instances and having knowledge that such a condition exists or may exist at the Galveston warehouse wharfage, they should have taken certain precautions which we say they have not taken. Now, had the court's finding found that they had no such knowledge, a different situation might exist. But the court found the exact knowledge of these facts as in knowledge as to both, the City as well as to the ship. I think that in 1962, there is no longer any question under the applicable law whether the vessel could or could not have done something about it. Let us assume purely for argument's sake that this was the first instance that this occasion arose, that there were no previous instances given notice to the -- to the ship or to the City of such conditions but particularly to the ship because I'm discussing seaworthiness. And this is the first instant that it happened. The fact remains that this Court has held that once it is established, that the area where these longshoremen were working was not reasonably fit to permit them to do that work with safety and damages, illness, injury resulted there from as the law stands today liability is imposed. Just for instance, like in the Petterson case versus Alaska Steamship Company, the -- the stevedore board in a hook which upon inspection was in all respects just fine. It had a latent defect. They couldn't discover and nothing they could do about it but it had -- it turned out to be a latent defect. Injury occurred, liability was imposed. I submit that it is no difference between a latent defect, which the shipowner could not have done anything about it and the condition here. Really, the crucial question to -- that I see in this case is whether a hatch that is without defect in which cargo is put and that cargo, it contains, is always of such character or contains rather obnoxious fumes, gases fumes or any other condition which reduces injury whether or not liability imposes. Now, frankly, I think this is the crux of the case here and this has been the crux of the case and all other cases under similar circumstances. I don't see how the shipowner could have anticipated and fish gurry may have gotten -- might have gotten on that rail of the vessel as they did in the Mitchell case or -- or some cargo that was brought in that shifted during the voyage. These are the topic cases that are applicable in the case here. Another case, I think, that came out in the Fourth Circuit is the Grosbaski (ph) case where the stevedoring company put plane jelly on the deck in order to make it easier to load the -- the cargo that had -- had to slide on it. Somebody -- some longshoreman slipped on the plane jelly and the Court held that under such facts, the fact that was it a transitory condition that a shipowner didn't know anything about it, had nothing to do with it, that does not constitute any defense in this case. The -- the appellate court probably mistaken stated this, “If it had been claimed here as it could not be that the damages resulted from the flood of grain closing the hatch and shutting off the air or for many thing else then the on toward and expe -- unexpected factors that the last amount of grain loaded was charged with a fum -- fumigant the question would be different.” Well, of course, Judge Hutcheson misunderstood the facts, the evidence and the court found, as a matter of fact, that the flood of grain close the hatch and shu -- shut off all air. And -- but the fact that it was unexpected. There's no defense on this case because that again brings in the doctrine of unseawo -- unforeseeabi -- foreseeability or knowledge. Now, under this state of facts, we submit the liability in this case is imposed. But the court, the trial court in its findings of fact numbers 9, 10, 11 and 19 established unseaworthiness. And the trial court in its findings of fact, that number I which I do not know remember, giving finding as a fact that this -- the steamship company as well as the City of Galveston had knowledge of the previous conditions that existed.
Potter Stewart: Would you say that the foreseeability was an element of the negligence claims but not of unseaworthiness?
Arthur J. Mandell: Yes.
Potter Stewart: You acknowledge that is of the negligence?
Arthur J. Mandell: Yes, certainly, because in the negligence, they have to -- they have to exercise ordinary care and of course they could not exercise ordinary care without foreseeing that something like that may likely happen or some similar event. But the trial courts found the findings of fact that they did. I submit that the trial court's findings of fact can be lightened to a situation where a jury may find that accidental headlights and fail to keep a proper look at but it was no negligence. Such a finding could not possibly be sustained and that's exactly the situation that we have here. We have, of course, one third point here but, frankly, I don't know whether this is a matter for this Court to consider or not. I couldn't get it from the rules that I frankly don't know. And that is that the trial court obviously not sure itself whether the findings of fact it had made constitute unseaworthiness or not, went further and assessed damages in this case after finding no liability. We urge in our brief and we urge here now that the damages went out unrealistic. They're grossly inadequate as to -- I think shock this Court evidently didn't shock the court below, I'm talking about the trial court. Judge Reeves there -- there wasn't impressed with the fact that certainly the point merited attention. But I don't want --
William O. Douglas: The Court of Appeals has enact to that question of neither opinion has it?
Arthur J. Mandell: Yes -- no, the majority opinion did not but -- but a dissent did. And I --
William J. Brennan, Jr.: Could you prevail out of the issue of liabilities, should we pass on the adequacy of question without first hearing to the Court of Appeals?
Arthur J. Mandell: Well, that's why I said I don't know. I do know that an appellate court has, in an admiralty case, has the power and authority to increase the damages that has done some number of times whether this Court can or will do it, I don't know.
William O. Douglas: Judge Reeves didn't appeal the appellate court or has deal with that matter --
Arthur J. Mandell: Well --
William O. Douglas: -- he said it's ought to go back to the District Court (Voice Overlap) --
Arthur J. Mandell: Judge Reeves just said just that. And I think Judge Reeves did not consult the authorities on that because I have, at least on two occasions, taken up cases from the Seventh District of Texas to the Fifth Circuit where they increased the damages. And I think that send it back to the trial court would not be the proper thing to do. And this Court sees fit not to do it. And I think it ought to be done by the Court of Appeals for the Fifth Circuit.
Earl Warren: We'll recess now, Mr. Mandell.


Earl Warren: Number 278 James P. Mitchell, Secretary of Labor, versus Joseph T. Budd Jr., and Florence W. Budd, Co-Partners. Ms. Margolin.
Bessie Margolin: May it please the Court. The -- this case which is really two cases consolidated was instituted by the Secretary of Labor to enjoin the three respondents from violating the minimum wage and record-keeping provisions of the Fair Labor Standards Act and the suits were brought against just two of these respondents, King Edward and Budd companies and the May company intervened on the ground that the same issues in fact and law are similar issues of fact and law were involved. Our three plaintiffs operate tobacco-bulking plant in Quincy, Florida. The cases present several issues relating to the very complex exemptions in a Fair Labor Standards Act for employees engaged in farming and practices incidental to farming and to certain agricultural operations and one of the sections, which is not raised here, a third one relates to certain processing operations. The three -- the three sections with which the cases is primarily concerned are printed in the separate appendix of the Government and starting on page one. And I think I should briefly point out the differences in those sections at the background to the facts here. The agriculture exemption with which this Court has some familiarity, it was concerned with that in the Waialua case last term, is a complete wage hour and child labor, minimum wage, overtime and child labor exemption for farming and this Court described their practices which are really incident to farming. The Section 13 (a) (10) exemption is also related to operations that are -- but which are performed on agricultural or horticultural commodities and it is also from the minimum wage and overtime provisions not the child labor however. But it is restricted to the operations -- operations carried on within the area of production as the defined by the Administrator. This Court has recognized that Section 13 (a) (6) is related to the agriculture exemptions as the two were designed to meet to equalize the situation between the agriculture exemption, their farming activity and operations which -- which might be close to the farming. Now, it does -- Section 13 (a) (10) does include some processing operations but not the word processing which we think is significant. It doesn't include processing generally, but it does specify certain things which are processing operations. Section (c) which is the other exemption in 7 (c) which is the other exemption in the Act which has something to do with operations on agriculture on agriculture commodity, Section (c) -- 7 (c) is just from the overtime provisions of the Act. That is not the minimum wage.
William O. Douglas: What --
Bessie Margolin: And that Section is on --
William O. Douglas: 7 (c)?
Bessie Margolin: 7 (c) is on page -- starts on page 1 of their separate appendix.
William O. Douglas: This is (Inaudible) exemption.
Bessie Margolin: This is an exemption. These are all three exemptions which has some relation to agriculture or agricultural operations. But 7 (c) is -- is quite different from the agriculture exemptions which is 3 (f), the definition, quite different from that in Section 13 (a) (10). Section 7 (c) has -- is just from the overtime as I state and it is full of the word “processing.” We think that's quite significant and I'll come back to it. The other two sections have nowhere used the word “processing.” Section 7 (c) is just full of the word. And Section 7 (c) so far as agricultural and horticultural of commodities are concerned also limits the exemption to the area of production as defined by the Administrator. Now, the two other exemptions, the ones that were commented on by this Court in the Waialua case, their purpose is to exempt things that are essentially farming or practices incident to farming. I think the legislative history makes that clear that that was the purpose and although Section 13 (a) (10) did cover some other operations and some processing operations. The apparent reason for it was because there were some representation that sometimes those things were performed that -- frequently that they were characteristic of farming activities enclosed to them. In Section 7 (c), on the other hand, which is just the overtime exemption, is not particularly concerned with farming.It is frankly and candidly a processing exemption. It is not particularly concerned with farming and its purpose was not to -- was not particularly for farming. Its purpose was to relieve processes, the processes there mentioned, of the overtime provision during peak seasons of their operations. It was not peculiarly concerned with -- with farming. Now, the reason we think that is important, the significant of that, is that if the exemption is construed, as the court below construed it and respondents urged here that it'd be construed, the agriculture exemption in 13 (a) (10), then 7 (c) is meaningless because the other two exemptions, they have a complete exemptions from overtime and minimum wages, and Section 7 (c) which covers processing operations gives only an overtime exemption. And if those processing operations are included under either one of the others, there would be no rhyme or reason for Section 7 (c). Now, to get back to the facts in this particular case, all three of the respondents here operate tobacco-bulking plant in Quincy, Florida.
Tom C. Clark: What's -- what does Section 13 (a) (10) refer to, the employer or the individual?
Bessie Margolin: Well, if any individual --
Tom C. Clark: It's -- so it's the individual who's working and his work is excluded?
Bessie Margolin: It's -- of all the -- the exemptions read any employee or any individual and then engaged in certain -- engaged in certain operation, but it is the exemption of the employee who is engaged --
Hugo L. Black: Section 7 includes the employer.
Bessie Margolin: Section 7 (c) indicates of any employer.
Hugo L. Black: If he gets a complete exemption to that.
Bessie Margolin: Well, its just -- that's just from the overtime and its very carefully restricted and I might point put that the area of production definition is in 7 (c) (2) for -- for horticultural and agricultural commodity. Some of the other things are exempted without reference to area of production, but the horticultural and agricultural commodity is all subject even in 7 (c) to the area of production definition. The three respondents here are all operating so far as physical characteristics of their plant and their process is concerned. Their plant, their tobacco-bulking plants are all pretty much alive. Those plants process, what is known as Type 62 Sumatra tobacco, which is used exclusively for cigar wrappers. That type of tobacco, like all of types of tobacco, requires some pretty extensive curing. This type requires to somewhat different kind of curing and fermentation, but our tobacco require some -- some kind of very long term curing when it comes from the farm. This type of tobacco is -- has to be a special agent called (Inaudible) pick and it is put it in the barn as it's picked and goes through a preliminary barn curing process which is, as -- as we read the evidence on it and the expert description of it, it's primarily a drying operation wherein the moisture content is reduced between 85% and 80% down to 25% to 10%. When it reaches a -- the stage where it is ready for the bulking plant, the farmer takes it to the bulking plant and this tobacco is located, I think, from 13 to 30 miles from the various bulking plants. It all comes within a 30-mile distance from the plant. It's taken by the farmers to the bulking plants which is located in the town of Quincy in this case. The bulking plant is a large scale industrial plant. It's not a simple adjunct like a farm or like barns or like silos or packing ship. The respondent's description which seems to imply the contrary is plainly refuted by their own testimony. Respondent, Budd, asked for an admission of fact and we are somewhat surprise that their assertion that this -- that the plants do not require tremendous amount of industrial machinery because they specifically asked for an admission -- requested an admission, and I'm quoting, “That tremendously large amount that these plants require a tremendously large amount of valuable and expensive equipment.” And that's on -- on -- in their request for admissions. Now, the Government objected to admitting that because we said we didn't know what the facts were in that respect at the beginning of the trial. The Court overruled the Government's objection and that was left and then -- then the Government admitted it. So that is undisputed that these -- these plants require a tremendously and I'm quoting, “A tremendously large amount of valuable and expensive equipment.” Now, it suggested that that would not apply to the other two respondents. The trial court found otherwise. The trial court found that these plants judging from the description of the process and from the similarity of it that there was a sufficient evidence to -- to infer that the same kind of equipment was required in all three of the plants and I think from reading the -- virtually identical affidavits of the various respondents as to the nature of the process, it will become evident that -- that that is true of all three plants and we have put in our supplemental appendix a quotation from the Department of Agriculture bulletin which specifically states that this type of -- of operation does require large scale equipment and that is why it's usually done as an independent large scale business by the bulking plants. Now, the bulking process itself requires the placing of the leaves in bulks of some 3000 to 4000 pounds. This much is needed in order to retain and generate sufficient heat for the sweating and fermentation process. It's obvious therefore that the ordinary small farmer is not in a position to do that bulking on his own tobacco. It requires, according to the admitted evidence or about 100 -- not less than 100 acres or not much less than 100 acres a year, to acquire that much tobacco to put in the bulking process. The bulks must be -- the temperature of the bulks must be closely controlled and watched at all times. The whole process is quite an extended one requiring from six to 12 months or more. It's the bulking process. It requires the breaking down and rebuilding of the bulks at regular intervals every six or eight days. The piles -- the bulks are turned completely inside out, although in a sense, and I might mentioned here too that the Budd request for admission also asked for an admission, that above all this process requires a skill -- special skill and experience that I mentioned that point in connection with the contention that this is ordinary farm labor which I will come back to later, although in a sense, this is -- there -- the bulking process is somewhat a continuation of the barn curing process because it's believe that some of the fermentation starts in this preliminary barn curing. The process is very obviously quite a different one. It requires quite a different sort of control machinery and skill. I might also point that entirely different wage scales are maintained for the bulking plant employees from what is maintained for the farm labor. The fact that the farmer does not ordinarily do this for himself is -- is undisputed. There some 300 growers of this type of tobacco in the -- in the neighborhood of Quincy and only five or 1.6 operate -- 1.6% operate bulking plants which bulk only their own tobacco. The three respondents, as I say, all their plants are all engaged in pretty much the same operation. They differ in this respect that Budd purchases all of the tobacco it bulks. It grows no tobacco itself. The respondent King Edward and May in the plants involved in this litigation, bulk only tobacco grown -- their own grown tobacco. King Edward, although in the plants that's in this litigation, bulks only its own grown tobacco in that plant. Also operates two other plants in which it bulks tobacco or purchased from other farmers. And the amount of tobacco it purchases from -- from other farmers that it bulks is substantially greater than the amount of its own that it bulks. So there's no question that King Edward is also engaged in a large-scale tobacco bulking business which we -- we think the fact show is separate and apart from its farming operations. The -- all three respondents in the court below claimed that they were exempt on the both, the agriculture exemption and the 13 (a) (10) exemption. The respondent, Budd, has abandoned that petition in this Court and admits that it is not entitled to the agriculture exemption. The trial court held that none of the respondents were entitled to either one of these exemptions because they were not engaged in agriculture as define in the statute and they were not engaged in any of the -- any agricultural operation covered by Section 13 (a) (10). The Court of Appeals in reversing ruled that King Edward and -- respondents, King Edward and Budd, were -- were engaged in agriculture and because -- merely because they process only their own grown crop and -- that all three of the respondents might be entitled to the exemption under 13 (a) (10) if the Administrator would issue a valid definition but held that the administrative definition was invalid.
Speaker: That decision was before the Waialua.
Bessie Margolin: That decision was before the Waialua case. So that it's conceded that if the Administrator's definition of area of production if this is regulation defining area of production is valid. Concededly, Budd is not entitled to the exemption. None of them are entitled to the 13 (a) (10) exemption. That will then leave the question as to whether the exact same kind of processing plant of King Edward and -- and respondent, May, whether their exact -- precisely the same processing plant can be said to be exempt as a mere incident to farming activity. I --
Speaker: (Inaudible) is concededly, conceded what?
Bessie Margolin: It's conceded that if the area of production definition by the Administrator --
Speaker: Is valid.
Bessie Margolin: -- is valid, if it's valid.
Speaker: Does it conclude to be defined (Inaudible)
Bessie Margolin: Well, if they're under 13 (a) (6) at all, they -- they are subject to irrespective of -- and even assuming they are under 13 (a) (6), that any of them come within those operation. Assuming they are, they still would not be entitled to the exemption if the Administrator's definition of area of production is valid because none of the three meet the area of production requirement of the administrative definition. They're all located in the town of Quincy which has a population of 6500 or more. And under the -- one of the criteria and I -- when it come to this, I don't think I'll have much time to discuss it today, under the -- one of the criteria of the administrative definition is that the plant to be exempt must be located in a rural area which for purposes of the definition is defined as if a town of not more than 2500 population. So that if that is valid, then definitely the respondent Budd is not entitled to any exemption even assuming its operation is one of those mentioned in 13 (a) (10). Now, the other two respondents would not be entitled to that exemption, but then the question is whether they -- they can exempt under the definition of agriculture on the theory that this bulking plant operation is really an incident to farming. I barely have time to just call attention to the -- well, my help is to summarize the Government's contention. The Government's contention is that none -- none of these respondents are entitled to either exemption that they are -- they are not engaged that this bulking operation is not an incident to farming, that it is not one of the operations enumerated in Section 13 (a) (10) and that even if it is one of those operations, none -- none of the respondents meet the area of production requirement.
Speaker: So far as the (Inaudible)
Bessie Margolin: Well, we -- I think we would say it is a -- a fortiori recognizing that the Court did -- did replace some qualifications on that dictation, but we think considering the whole analysis of the decision, this is a fortiori case. The only difference, I would say that could be found in the two cases, is it that there was an express mention of sugar milling in Section 7 (c) which the Court suggested might make that sui generis. But I think the -- the general opinion in the Waialua case would certainly a fortiori lead to the conclusion that hereto this is not a mere incident to farming And that certainly, it -- it's analogous in the sense that this Court has held that the mere fact, the mere fact that the grower is processing only his own crop is not enough to make it agricultural.


John G. Roberts, Jr.: We will hear argument next this morning in Case 13271, Oneok versus LearJet. Mr. Katyal.
Speaker: Thank you, Mr. Chief Justice, and may it please the Court: The complaints in this case claim, as the LearJet 1 says, quote, Defendant's conspiracy directly affected prices for natural gas. The mechanism for that conspiracy, they say, was false reporting to two common indices, Gas Daily and Inside FERC. These publications take in jurisdictional and non-jurisdictional sales data, and push out sales information for the entire market for both jurisdictional and non-jurisdictional sales alike. That's the fundamental reason why these complaints are field preempted. The NGA, which is found in our blue brief at Page 1A, gives states control over three things, over the transportation or sale of non-jurisdictional gas, as well as to it's production or gathering.
Sonia Sotomayor: Mr. Katyal, not since the new regulations, but at the -- at the time of these transactions, 2000 and 2001, could FERC have punished these retail sellers for the consumers?
Speaker: They couldn't punish, Justice Sotomayor, retailer sellers as retail -- true retailer sellers. Here, these complaints are not directed at retailer sellers. They are directed at jurisdictional sellers. All ten of the defendants in this case, as the District Court found at Petition Appendix pages 85 to 98A, are jurisdictional sellers. And, yes, FERC could regulate them, and, indeed, did regulate them in the code of conduct, not just for their jurisdictional sales--
Sonia Sotomayor: But that code of conduct came after this -- these transactions.
Speaker: --It did. It came in 2003. That's correct.
Sonia Sotomayor: All right. So -- so let's start with at the beginning. Could the consumers have come and complained to FERC?
Speaker: Absolutely. The consumers can come and complain to FERC and, indeed--
Sonia Sotomayor: Retail consumers.
Speaker: --Sure, retailers -- you know, if -- if there is manipulation that is directly affecting, as it is here, both simultaneously the wholesale and retail market. The remedy for states or retailers is to complain to FERC and ask them to regulate. But what can't happen is what happened here, which is the state coming in, and through these state causes of action, and directly regulating practices that are common to both the retail and wholesale markets. That's the crucial feature of this case.
Stephen G. Breyer: That is the crucial feature, and as I'm a little bit out of date on this. But as I think and understand the briefs, let's take El Paso as an example of a jurisdictional seller. It's a pipeline. It gathers gas from the field, or it used to, and then they resell it both to retail companies who give it to your house and are regulated by states, and sometimes directly to a company, a manufacturer, or a hospital, for example. Is that right so far?
Speaker: Yes.
Stephen G. Breyer: I take it here we are only focusing on the thing I mentioned last, the direct sales.
Speaker: Well, Your Honor, I think that's the way that they're trying to claim their complaints are written. That's actually not how the complaints are written, as I just read to--
Stephen G. Breyer: Well, I looked through the complaints, I looked through their briefs, I looked through your briefs. I tried to figure this out, and the best I can do is say whether they say it accurately or not, that's what they want to talk about.
Speaker: --That's what they want to talk to.
Stephen G. Breyer: Okay. Let's talk about what they want to talk about. Now, we have El Paso going in northern Arizona to a manufacturer, and it says, I am going to sell you a thousand cubic feet of natural gas at $48 a thousand cubic feet. You say, oh, my God, that's very high. I'm imagining very high price. I have no choice. I have to take it. But that, to me, is a very unreasonable price. Is there anyone I can complain to?
Speaker: So and I may not understand the hypothetical. If it's purely about the--
Stephen G. Breyer: The hypothetical is that the jurisdictional seller in a direct sale sells the gas at a price that is unreasonably high.
Speaker: --Exactly.
Stephen G. Breyer: Is there anyone that the buyer can complain to?
Speaker: There -- there is in that circumstance, Your Honor, because in that circumstance, if the reason the rate is high is not a common practice, that affects both markets simultaneously--
Stephen G. Breyer: The reason that it's high -- I'll tell you that it's -- why it's high. It's high because the owner of El Paso has worked out he can make more money that way. That is the only reason.
Speaker: --And -- and, Your Honor--
Stephen G. Breyer: And I want to know if the customer that used to be able to complain to somebody, but can they complain now?
Speaker: --Yes, Your Honor.
Stephen G. Breyer: Who?
Speaker: So they can complain, in your hypothetical, to the state itself why--
Stephen G. Breyer: But not to FERC?
Speaker: --Well, if it's retail sales, it can't complain to FERC.
Stephen G. Breyer: I'm saying what it is. It was a direct sale of gas gathered by the pipeline, transported from the field, and sold by the pipeline to a manufacturer.
Speaker: Right. So in that circumstance, it sound -- if they are selling it not for resale but selling it for their own use--
Stephen G. Breyer: Correct.
Speaker: --that's a retail sale--
Stephen G. Breyer: That is their point. They say there is no FERC regulating this. In fact, most places, there is no state regulating this. We think the this, i.e. the $48 per MCF is set as a result of activity that is unlawful under our state antitrust law and, therefore, we would like to sue.
Speaker: --That -- that is incorrect, Justice Breyer--
Stephen G. Breyer: All right.
Speaker: --because the this is different in your hypothetical and in this case. In your hypothetical, it is true retail rate regulation. 1(b) gives that power directly to the states, and crucial to our theory is the idea that if this is either transportation or production or regulation of the sale of the rate, which Louisiana Power is what -- says that's what that proviso is, the states can undoubtedly regulate that. Here's the difference in this--
Stephen G. Breyer: Your point, I take it, is that the this happens to be the reason that the price is higher; it's not because the owner of El Paso said, ha, ha, ha, let's make a lot of money. But, rather, the owner of El Paso, in addition to that, said that the way to make the extra money is to go out and manipulate the -- the journals, the little gas journal, by lying to them, and that happens to be the same way that they would also get wholesale prices higher.
Speaker: --And, Justice Breyer, that is precisely the difference. That is what this Court has said time and again. For example, in Northern Natural it said, look, the -- you know, the -- the particular means chosen by the state is the crucial thing for preemption analysis. The means that my friends on the other side are seeking to regulate is a common practice to both markets--
Stephen G. Breyer: Okay. I got my answer.
Elena Kagan: So let's assume--
Stephen G. Breyer: I won't interrupt you further.
Elena Kagan: --Let's assume that that's true, Mr. Katyal, that they are trying to regulate a means that's a common practice to both markets. And let's assume that because of that, FERC clearly does have authority to regulate in this area. The question is whether FERC's authority should be exclusive or whether it could be concurrent, not field preemption. Right?
Speaker: --Right.
Elena Kagan: There would still be a kind of rule of the road, even when field preemption runs out, conflict preemption takes over, and it might be that if the state regulation interfered with the goals and objectives of the federal regulation, the federal regulation would trump. But I don't really see a reason in this kind of case why you would exclude the state entirely, even if nothing the state was doing was conflicting with federal regulation or federal policy.
Speaker: But, Justice Kagan, you asked a similar question in Kerns, and I think the answer in Kerns is the same as the answer it is here. Indeed, it's stronger here, which is that this is a field in which this Court has said time and again is field preempted. When FERC acts in this area, it does provide exclusive jurisdiction--
Elena Kagan: Well, then what's the--
Ruth Bader Ginsburg: It's not--
Elena Kagan: --this area is the question.
Speaker: --Yes.
Elena Kagan: I mean, yes, there is some field preemption, but why should the field preemption carry into a sphere where the practice being regulated is commonly affected, both wholesales sales, which are clearly in the bailiwick of the federal government, and retail sales which are just as clearly in the bailiwick of the state?
Speaker: Well, precisely what this Court said in Mississippi Power, page 374, quote, "We have long rejected the sort of case-by-case analysis of the impact of the state regulation upon the national interest and power regulation cases. " Congress has drawn a bright line between state and federal authority in the setting of wholesale rates and in the regulation of agreements that affect wholesale rates. States may not regulate in areas where FERC has properly exercised its jurisdiction--
Ruth Bader Ginsburg: --But do you agree that FERC does not have the exclusive authority because you have conceded that a federal antitrust claim would be okay. So FERC is not the sole regulator. There's room for federal antitrust claims.
Speaker: --Justice Ginsburg, we absolutely agree that federal antitrust actions are available and would have been the remedy for any problems in this case except for the litigation forfeiture by the other side. We don't think that that somehow makes FERC -- ousts FERC from being the exclusive regulator. I think time and again this Court has said there is a big difference between displacement of federal statutes which have to do with canons against implied repeal and the field preemption analysis. Indeed, in Connell v. Plumbers, this Court said with respect to antitrust claims specifically, preemption of federal -- of state statutes would be -- would be the ruling of this Court, but not federal. Why? Because federal statutes can be harmonized one to another by federal courts, but states don't have quite that same experience. That's what Connell v. Plumbers says.
Ruth Bader Ginsburg: Well, suppose the state law -- and I think this is true of many states -- just mirrors the federal antitrust law, it's the same. It's the same substantive regulation.
Speaker: We -- we disagree with that for any number of reasons our brief points out. But even if it were the same, I think two things would follow. One is, then there would be no need for the state lawsuits anyway because you already have a federal remedy, and the state--
Anthony M. Kennedy: Well, may -- and I'm interested in a hypothetical. Let's assume that someone sues just under state law. The state law is exactly the same as the Sherman Act, and that's Justice Ginsburg's question, and I would be interested in it.
Speaker: --And I think that is complementary authority, which, Justice Kennedy, your opinion in Arizona vs. United States decried. Once we're in the field, once Congress has said to a federal agency, as it is here, FERC is regulating the very practice that they are seeking to regulate three different ways, then you can't tolerate states in the area. Why? Because states will have all sort--
Anthony M. Kennedy: Well, on -- on that point, let me -- this is a point that Justice Kagan was getting at, too. Let's assume that you do not prevail on conflict preemption. We say that the field has been preempted but does not include the practices here. Do you have any argument that there is conflict preemption on the facts of this case?
Speaker: --We do. It would be something that would be sorted out on remand, but--
Anthony M. Kennedy: What is it?
Speaker: --It is that FERC is regulating in this area, specifically, and, indeed, is encouraging the practice of index -- of index reporting. And if you have states coming in, then they will play -- then natural gas companies would play to the lowest common denominator and won't be able to report. The FERC report goes through any number of examples of how things that look like wash trades, like paragraphs 55 and 56, practices such as sleeving, may be regulated by the states because they--
Sonia Sotomayor: What would be left of the states' power to regulate prices if -- if the retail price controls the wholesale price? That's what it sounds like this industry has created. Is there anything left to the states' ability--
Speaker: --Absolutely.
Sonia Sotomayor: --because retail prices will always influence the wholesale price?
Speaker: Absolutely, Your Honor, almost everything. So my answer to Justice Breyer was states have the power in 1(b) to regulate retail rates themselves, rate regulation, and as well they have the ability to regulate other things in which FERC can't isolate a practice that directly affects jurisdictional rates. So my friend's hypotheticals about wage and hour laws, or as you said, Justice Sotomayor--
Sonia Sotomayor: So basically jurisdictional -- non-jurisdictional sellers can do anything they want in terms of the -- of the consumer, and consumers will always pay the cost of that.
Speaker: --No, not at all, Your Honor.
Sonia Sotomayor: Because they have no one they can recover from.
Speaker: No, not at all. If it's a non-jurisdictional seller, Your Honor, states have full power in the area. Here is our test for preemption. It's very simple. It's two things. It's a who and a what to us. The who is, is the state regulating jurisdictional sellers. Here the complaints are they're directed at ten jurisdictional sellers.
Sonia Sotomayor: But they are both. They are jurisdictional sellers, and then there are non-jurisdictional sellers. You're trying to characterize them as one.
Speaker: Your Honor, but the way the Act works is once you are a jurisdictional seller, you continue to be a jurisdictional seller; and that's why FERC is regulating these ten entities with respect to even their retail reporting. That's what the code of conduct does. Why? Because that's the way the Gas Act works. You don't take your hat off as a jurisdictional seller down the road if you are engaged in retail sales. So that's why that language from Mississippi Power I read to you is so important, because that was a case in which the State was regulating retail. They were trying to regulate retail rates. And what this Court said is, no, it doesn't matter, that -- you know, you can characterize it as hat or not. It doesn't matter. That's a practice that simultaneously and directly affects both rates. Therefore, FERC has exclusive jurisdiction in the area. Now, all these hypotheticals about wage hour laws and so on are solved by the fact that 5(a) is very limited. It only gives power to FERC over practices that directly affect the rates. The agency is coming before you saying, this is a legitimate interpretation of our authority. Indeed, it's the way they've interpreted their authority over time; and that's entitled to the highest form of deference, Chevron deference.
Elena Kagan: Mr. Katyal, suppose the following hypothetical: Suppose there is a company and it has ten customers and five of the customers are wholesalers and five of the customers are retailers, so it is a jurisdictional seller. And it says to the retailers, We're going to charge you whatever we charge to the wholesalers plus 20 percent. That's what it says to the retailers. And then it lies to the retailers about the price that it's charged the wholesalers. All right? Do the States have power to regulate that, that fraudulent communication to the retailers about what they're charging the wholesalers?
Speaker: I think if the State is -- if it's truly about the rates, Louisiana Power says that they can regulate true rate regulation. What they can't do is regulate practices that directly affect the rates. So FERC may have something to say -- and, indeed, I would expect would have something to say about that, and 5(a) says the remedy in a circumstance of divided authority in which -- excuse me, divided in which both markets are affected, the remedy is -- the first line of 5(a) says States should complain to FERC. Here you have got Federal antitrust remedies--
Elena Kagan: Just to make sure I understand, you are essentially saying my hypothetical is like this case and the States would be divested of authority because -- even though the company is having this direct interaction with the retailers because it's pegged to wholesale rates?
Speaker: --Your Honor, I may not understand the -- but if it's one indivisible practice as it is here, a common practice of index manipulation, that is something only FERC would have authority over, not the States. If I could reserve.
John G. Roberts, Jr.: Thank you, counsel. Mr. Yang.
Anthony A. Yang: Mr. Chief Justice, and may it please the Court: This case concerns FERC's jurisdiction to regulate a practice of a jurisdictional seller that directly affects the wholesale price from natural gas. Now, Justice Kagan, your example -- I think there might have been some confusion in the interchange. Your example is a practice that would directly affect the retail rate, not a jurisdictional rate. And in that context, that would lie within the rate-setting authority of the State. But here we have something that is quite different. We have juris -- indices for which the indices are based on both jurisdictional and retail trades. Then those indices are used by common practice in the industry, and not just by these Petitioners, to set wholesale rates and retail rates. That's done in advance. Particularly when we're talking about longer term contracts, the market participants end up often pegging their sale price based on the floating price that is reported in these indices. And where you have both, the input is going into the index, wholesale and retail, and the outputs that are both wholesale and retail. And FERC has jurisdiction over the entities; that is, the jurisdictional entities that are actually playing in both fields. FERC, in our view, has authority to regulate under Section 5 and Section 1 the practices of those jurisdictional sellers that directly affect the wholesale rate; that is, the rate over which FERC has exclusive jurisdiction.
Elena Kagan: But you are saying, Mr. Yang, that even if the regulation is directed toward a retail transaction, if it directly affects the wholesale rate, you have field preemption over that?
Anthony A. Yang: These have -- I'm not exactly sure what your hypothetical is getting at.
Elena Kagan: Does the -- the State is regulating a transaction with the retailer, and you are saying because that transaction has these direct effects on the wholesale market and wholesale prices, that that gives you field preemption, that that falls within the category of things which the State is simply not allowed to do irrespective of whether there is any conflict with Federal law or policy.
Anthony A. Yang: I don't think I actually agree with that characterization of our opinion -- position.
Elena Kagan: Okay. So tell me what it is.
Anthony A. Yang: So if the State were limited simply to regulating the retail rate, just because a retail rate might have some impact--
Elena Kagan: No, no, no. They are regulating a transaction with a retailer. It's not a price thing. They are regulating a transaction in the way that they are in this case. I mean, all these false sales, some of them are coming out of wholesale sales, and some of them are coming out of retail sales. And the States here are regulating transactions that involve--
Anthony A. Yang: --Actually, I think we disagree with that premise. I think there may even be further disagreement, but let me just deal with the premise first. What we're talking about are practices that postdate the transaction. So when we're dealing with the false reporting of a sale, that is after the sale has been completed. And that false reporting--
Elena Kagan: --Well, I thought a lot of these were false sales themselves.
Anthony A. Yang: --Well, there are two things. Like there's wash trades as well. So with respect to the false reporting, that can be either with a real trade that they are, after the fact, reporting it to be something that it wasn't or--
Elena Kagan: And some of those real trades are real trades with retailers.
Anthony A. Yang: --That's true, but the trade itself is completed, and so the market manipulation deals with future things that might be affected by the index. Now, the index, of course, affects retail rates that use the index just as it affects wholesale rates that -- that use the index. But, in our view, where you have got this partial merge -- and this is a very unusual aspect of this case. Where you have a partial merging of the wholesale and retail rates -- the retail markets here, Congress would have intended, through Section 5(a), which grants FERC authority to regulate practices directly affecting wholesale rates so it's not just limited to the rates itself for the wholesale sales--
Ruth Bader Ginsburg: Can FERC give a remedy to the consumers who are involved with the Plaintiffs in this case?
Anthony A. Yang: --The answer is no and yes, and it's a little complicated. First, as we note in our brief, there is a remedy in Federal antitrust law, which would be outside of FERC. We also think that there may well be contract-based remedies outside that would be available. But with respect to--
Ruth Bader Ginsburg: But FERC at this time.
Anthony A. Yang: --With respect to FERC regulation, FERC has authority to grant disgorgement as has been held by the courts under Section 16, and complaints are brought often by States and municipalities and others on behalf of retail customers. The western energy crisis is an example. There are a number of complaints brought to FERC which FERC adjudicated. They have resulted in settlements. Those settlements with the jurisdictional sellers have involved payments to retail parties. There's an open question, and I think it might be very hard outside the settlement context to determine if FERC would have direct authority to order that. But at least in the context of adjudicating disputes brought by States against jurisdictional sellers involving wholesale trades, there can be sometimes a pass-through. That said, we're not relying on the availability of a FERC remedy for retailers here. We think there is an adequate remedy at Federal antitrust and that's particularly true--
Ruth Bader Ginsburg: Can you explain -- can you explain something? The government recommended that we deny cert in this case, and the government's reason was the case lacked prospective importance. So what is the situation today with the Energy Policy Act?
Anthony A. Yang: --Well, the reason why it lacks -- it lacked, in our view, prospective importance is because whatever the question was about FERC's authority before 2005, Congress expanded that authority in the EPA. Congress granted FERC not only jurisdiction over jurisdictional entities, which I -- which is an important limitation to our position here, pre-2005, it granted authority over entity -- any entities. So going forward, you know, that's a separate question on how far the EPA Act of 2005 goes. But with respect to the questions here, we think that would be controlled by the EPA Act and not by the authority that existed prior to 2005. That said, prior to 2005, our view is FERC did have authority to regulate the jurisdictional sellers with respect to these practices that directly affect wholesale rates over FERC -- which FERC has exclusive authority. And this Court in, for instance, both Schneidewind and recognized this as -- the Court recognizes as well in Northwest Central, it said that the exclusive authority of FERC extends not just be -- not beyond just the sales, but the practices that are affecting the sales. And this--
Elena Kagan: Can I ask Justice Kennedy's question again to you, Mr. Yang, which is if -- if this were a conflict preemption regime, is there a conflict?
Anthony A. Yang: --We haven't analyzed this under a conflict preemption regime, and so it would kind of depend on an analysis of what the state law prohibitions were visavis the federal prohibitions. We think that if you were to adopt only a conflict preemption type of a -- a regime, then you would have to at least have the state's accept a FERC determination of the lawfulness of these types of practices and then take that as a given in determining whether there is further conflict.
Elena Kagan: Sure, that seems right. But I mean, is there anything that FERC has said now about these practices that would suggest a conflict with this state regulation?
Anthony A. Yang: It's -- we have not analyzed it, and it's difficult for us at this point in the litigation where there seems to be flux in the characterization of what the state laws claims are and there's not been adjudication of what the state law requires for us to determine whether there is conflict preemption. That's -- it's not a position that -- an issue that we feel that we have a dog in the fight in. So that said, you know, the question of field preemption versus conflict preemption always -- as you noted before, you always have conflict preemption. This Court, however, has repeatedly determined that the Natural Gas Act -- in the Natural Gas Act, Congress intended field preemption to apply because Congress wanted to have national uniformity--
Elena Kagan: Well, it intended field preemption to apply as to wholesalers. It didn't intend field preemption to apply as to a retailers.
Anthony A. Yang: --No, actually I think the Court has recognized in Northwest Central, for instance -- we cite this in our brief -- that the regulation over the wholesales extends that power, extends beyond just the wholesales themselves. And in Section 5(a), which the Court cited both in Schneidewind and then recognized I think in Northwest Central, Section 5(a) extends that power. This is an extension that Congress did not have any -- an analog with respect to the states. It goes beyond the sales itself to practices affecting the sales. And we have here the effective merging of a state and federal market where, in our view, the states could, if they wished to, carve off their own markets for regulation. They have not done so. But where you have that merging and both the practices that are going into the index with respect to manipulation are both whole -- really the wholesale and retail matters, and then you are coming out and you are directly affecting wholesale and retail rates, Congress would have expected the field preemption that is a single federal standard regulated by FERC to govern the practices in that context. It's--
John G. Roberts, Jr.: How -- how is -- how is the state supposed to separate out the jurisdictional and non-jurisdictional regulation?
Anthony A. Yang: --If I -- if I might briefly answer.
John G. Roberts, Jr.: You may.
Anthony A. Yang: The state could require that all retail sales be based on an index that is exclusively retail-based. So, for instance, FERC did something analogous with respect to unbundled sales of natural gas by pipelines. It required that the contracts be based only on those indices that meet certain FERC standards. The state could do something analogous.
John G. Roberts, Jr.: All right. Thank you.
Anthony A. Yang: Thank you.
John G. Roberts, Jr.: Mr. Fisher.
Jeffrey L. Fisher: Thank you, Mr. Chief Justice, and may it please the Court: This is an antitrust case, and the plaintiffs claims here are very simple. It's that they paid too much in retail transactions for natural gas because the defendants conspired to fix prices. And this is important for two reasons, each of which independently saves the claims from preemption. First, because the state regulation here is retail -- is regulation of retail prices, it falls squarely within Section 1(b) reservation of power in the Natural Gas Act. And, secondly, the claims necessarily fall outside any field FERC could possibly regulate because, as my opponents have conceded, FERC has no power over antitrust -- it falls outside the agency's power under Otter Tail and California v. FPC.
Antonin Scalia: No, I'm not sure. It may be an exaggeration to say it -- it falls squarely within the exception given to the states. This is not a state regulation of prices. It's -- it's state regulation of a practice that affects state prices, retail prices, but also affects wholesale prices. It's a little different.
Jeffrey L. Fisher: Well, Justice Scalia, let me say two things about that that are very important. First, the statutory word is "sales". What Section 1(b) reserves to the states is the power to regulate retail, quote, sales. And in that regulatory power, this Court has twice spoken directly to what that means, first in the 1947 Panhandle case and second in the 1997 General Motors v. Tracy case. And in both those cases, the Court made very clear that the state's power to regulate sales goes far beyond setting a price themselves. It's regulating the terms of service, the terms of--
Stephen G. Breyer: All that is true, but it might depend on how. That is, the way I'm thinking about this which is out of date but perhaps analogous. We have El Paso, it picks up gas in the Permian Basin. It ships it up to Ohio. It sells it to a retail distributor in Toledo. Classic. FERC regulates the sale for resale, and the local regulator regulates the price to the distributor. Now, there is what used to be a further bizarre and unusual occurrence which is now common. On the way, El Paso sells directly to a manufacturer. And that seems to be at the heart of your case.
Jeffrey L. Fisher: --Right.
Stephen G. Breyer: Right. So now I'm thinking we're back to cost of service ratemaking. Suppose under cost of service ratemaking, you have FERC which said El Paso is charging too much money for sales for resales because it doesn't do its depreciation properly. Okay. You'd better load them. Now, suppose a state via antitrust or any other way said the reason that the sales that are direct to the manufacturer are unlawful under state law is because it doesn't do its depreciation properly, and suppose that the depreciation the state is talking about is identical to the depreciation that FERC is talking about. I would say absolute preemption. And if I'm right about that, in this case, we don't have depreciation rules, but we have price setting by consulting Joe's Gas Journal. And here, what the state is saying is the consultation with Joe's Gas Journal that the state wishes to make unlawful is identical to the consultation with Joe's Gas Journal that FERC wants to make unlawful and upon which rests FERC's wholesale price determination. Okay? Just like the depreciation. And if the one is field preempted, so is the other. Now that's the analogy I've been going through in my mind, just waiting to ask you, because I would be very interested in your response.
Jeffrey L. Fisher: So that's the best version of the other sides argument, but it's not this case. You just described Mississippi Power, Justice Breyer, where the state wanted to second-guess what FERC had done. Here, the state has no second-guessing. FERC has said this is terrible what happened, as did the states.
Stephen G. Breyer: But that is conflict preemption--
Jeffrey L. Fisher: Right. So let--
Stephen G. Breyer: --not field preemption.
Jeffrey L. Fisher: --That's exactly right. And so it's critical, but let me explain why we're in conflict preemption, and I turn back to Justice Scalia's question about Section 1(b). This Court has addressed in the most recent Natural Gas Act case what happens when you have a unitary practice that has effects on both the wholesale and retail market. Entire part 2(b) of Northwest Central is about that very problem. I want to read you what the Court said in that case, and this at Footnote where it summarizes the holding of the case. They said, "In the present case, it is argued-- "
Sonia Sotomayor: Can you give me a page number?
Jeffrey L. Fisher: --Pardon me.
Sonia Sotomayor: Page number you're--
Jeffrey L. Fisher: This is on page 517 of Northwest Central. It's Footnote 12. In this case, the Court says, "In the present case, it is argued that each agency acts within its assigned sphere, and the Court has observed there is no provision in the statute itself to resolve such jurisdictional tensions. " And here is the solution, "Only by applying conflict preemption analysis can we be assured that both state and federal regulatory schemes may operate with some degree of harmony. " And I would tell you there is no other outcome that could possibly square with the statute. If you look at the statute, and this is in the first page of both the blue brief appendix and the grey brief appendix. Section 1(b) says, and I'm quoting from the beginning, The provisions of this chapter shall apply, and then it goes on to say to wholesale transactions and the like. And then towards the end, it says, but shall not apply to any other transaction or sale of natural gas.
Stephen G. Breyer: Yes, yes, but wait. Suppose, in our classical system years ago, that El Paso Gas gets a price set for resale at FERC equal to three dollars a thousand cubic feet, and then the Ohio regulator, in regulating the price of the distribution company, forces it down for the reason that it thinks that three dollars for the wholesale part is too high. Not close. They couldn't do that?
Jeffrey L. Fisher: That's right.
Stephen G. Breyer: So it depends on their reason for thinking that the price or the sale -- they can't regulate the sale any way they want. They can't regulate it in a way that would interfere with and probably is, or is field-preempted by, FERC's authority to set wholesale rates.
Jeffrey L. Fisher: Those are two very different points, Justice Breyer. We wholeheartedly agree the State could not regulate retail sales in a way that conflicted with FERC's authority. But we disagree, and this is the holding of Northwest Central, and it's the only reading of the Act that gives meaning to the provision that says that States maintain authority, and it says no provision of this chapter, which would have to include Section 5(a), can apply to retail transactions. and so the only way to harmonize those is to give -- is to give meaning to both and to apply conflict preemption. That's the square holding of Northwest Central. And in Mississippi Power -- I just want to stress this -- in Mississippi Power, the problem was the State was -- the whole point of the, quote, FERC had made. So, as the Court itself said, that conflicted with FERC's authority. So once you understand that, the only--
Elena Kagan: So as I understand your argument, Mr. Fisher, you are rejecting the Ninth Circuit's analysis. Because the Ninth Circuit -- it's a little bit confusing, but I read the Ninth Circuit to say that FERC just had no authority over these transactions.
Jeffrey L. Fisher: --The Ninth Circuit didn't explicitly say, but I think the reading of the Ninth Circuit opinion, proceeding from the premise that my friends are proceeding today, which is Section 5(a) is coterminous with field preemption. The Ninth Circuit, I think, held what you say it held, which is probably why the solicitor general was concerned with that case. It holds that FERC doesn't have power. We don't have to fight FERC's power here. If Section 5(a) gives the FERC power over this practice because it affects wholesale rates, so be it. But what Northwest Central says and what the statute says is that you can't oust the States.
Stephen G. Breyer: So you can't -- let me think of a better -- the -- the State, it faces a three dollar cost of goods sold to the wholesale pipeline, to El Paso, plus an additional claimed dollar in expenses, including reasonable profit. They're asked for $4 at the -- in your house. The State says, no, we're not going to give you $4, and the reason is that the $3 is too high. Now, you say that conflicts with FERC. No, it doesn't. FERC made a mistake. They will be delighted when they see that we've gone into the depreciation rules more thoroughly than their own rules and they should have said 2.50 instead of 3. And when they read our opinion, they're going to jump for joy. To prevent that, we have field preemption, not conflict preemption.
Jeffrey L. Fisher: No, Justice Breyer, we're not second-guessing anything. We are not even asking to second-guess anything FERC has ever held. First of all, FERC didn't even have regulatory power over these practices at the time they have heard.
Stephen G. Breyer: That's a different argument.
Jeffrey L. Fisher: Now, my friends have described themselves as jurisdictional sellers, but what the statute says is you're a jurisdictional seller or not depending on what kind of sales you are, quote, "engaged in". So when you are selling jurisdictional, you are a jurisdictional seller, but when you are making retail sales, you are a retail seller. And we're not asking to second-guess anything FERC has said. FERC, to the contrary, came in with this 2003 code of conduct and said, absolutely not, you cannot do these kinds of false reporting in wash sales. So all you're left with, once you understand that it's conflict preemption, if I could turn back to Justice Scalia's question, is whether you fall under the Section 1(b) reservation of power. And I've explained to you that Panhandle and General Motors v. Tracy clearly show that we do. The only thing that our opponents cite in response, which is a brand-new argument, never made in the District Court, never made in the Ninth Circuit, never even made in the cert papers, is they cite Louisiana Power for the supposed proposition that all states have this regulatory ability over rate setting, but that's not the holding of Louisiana Power.
Sonia Sotomayor: --Could you go back to one point? I'm sorry to interrupt you. But the indices at question, they report both retail prices and wholesale prices?
Jeffrey L. Fisher: Theoretically, yes. Of course, in this case, Justice Sotomayor, also completely false transactions.
Sonia Sotomayor: No, no, no. I know that. But so the so -- Old Paso -- El Paso company was reporting fake consumer prices -- this is your allegation, I know -- fake consumer prices and fake wholesale prices?
Jeffrey L. Fisher: Well, the reality is they were simply reporting fake prices. I don't think--
Sonia Sotomayor: Yeah -- no, no, no.
Jeffrey L. Fisher: --Now, it shows whether or not they were supposed wholesale transactions or supposed retail transactions. But the important point is how they're used on the other side.
Sonia Sotomayor: I'm not sure how the indices -- the indices set both prices; is that what you're saying?
Jeffrey L. Fisher: Well, the indices don't set any prices. They simply--
Sonia Sotomayor: No, no, no. But the industry sets the same price for both?
Jeffrey L. Fisher: --That's right. And certainly the industry commonly uses the indices to set retail prices. They also voluntarily, wholly voluntarily, at least sometimes, use the indices at the -- time question here -- to set wholesale prices.
Sonia Sotomayor: Are they the same, those two prices?
Jeffrey L. Fisher: No, not necessarily. Because you use the -- you use the index prices to pay, but then you can add and subtract to that depending on what kind of sale and the volume and the like. But even the act of using it as a peg, Justice Sotomayor, is an important insight, because it is wholly voluntary that they even use it for wholesale transactions. And so if they are right, then as soon as a given practice affects wholesale rates, and it's their completely voluntary decision to make that so, you would be giving them a get-out-of-jail-free card if you turn Section 5A into a field preemption statute. Because whatever practice they're engaged in with retail sales, all they have to do is do it a couple of times in a wholesale transaction and then be out from under state jurisdiction. And my friend tried to explain--
John G. Roberts, Jr.: You could say the same for setting prices of anything at all. I mean, that's kind of the idea, is that if it affects -- if the price is affecting sales, then it is preemptive. The fact that they may engage in certain practices that affect sales is not a bad thing in the abstract. I mean, you -- the case is proceeding on the ground that you are dealing with a practice that is, you know, offensive in both contexts. But the state and FERC may have different views on that. So the fact that the jurisdictional sellers engage in a practice that affects wholesale rates is not -- shouldn't be regarded as problematic.
Jeffrey L. Fisher: --No, it shouldn't, if all you are doing is asking whether FERC has authority to regulate it under Section 5A. What we're saying is, if you transform Section 5A into a field preemption statute, you would have the difficulty of giving the defendants themselves, or any malefactors themselves in the market, complete control over how they write their own contracts. They could even peg their contracts to retail prices directly, as -- Justice Kagan, I think that's what you were getting at even -- to taxes.
Sonia Sotomayor: Mr. Fisher, there is a field.
Jeffrey L. Fisher: Yes.
Sonia Sotomayor: Define the field. How would you define what the field is?
Jeffrey L. Fisher: The field is what the Court said in Schneidewind, which is the field is practices relating to wholesale transactions. So all state regulation that is directed at that field is preempted. Now, as I've explained, it is field preempted if the state cannot bring themselves under the Section 1(b) proviso. However, we can bring ourselves under the Section 1(b) reservation of power. Then you end up with a simultaneous regulatory system where conflict preemption is the solution. But if I could turn to the second argument in our case, is that the words "directed at" are very important, because that's the words the Court used in Schneidewind, which my opponents say is their best case. All state regulation directed at FERC's field of wholesale transactions is field preemption. For two reasons, our antitrust claims are not directed at FERC's field. First, they are generally applicable state antitrust cases -- claims, that is. The Court has never used the Natural Gas Act, in all of its history, to preempt in a field preemption manner a generally applicable state law. And the reason is simple: Because it's not, as the Court put it in Schneidewind, aimed at the natural gas industry. So FERC protects -- I'm sorry, the Natural Gas Act protects that turf, but it doesn't protect the state to protect companies against generally applicable laws. That is what the Court said in footnote 11 of Schneidewind, and that has to be right. As the American Antitrust Institute points out in its amicus brief, what if the way the scheme was perpetrated was simply by bribing the publishers of the indices? Certainly they wouldn't claim that it would be field preempted, but that would be -- or they shouldn't be able to, but that would be the conclusion of their argument; now even more so, even if you weren't inclined to accept that all generally applicable state laws survive. And it would be fully consistent with the Court's cases to say so, because they only two cases they cite are Louisiana Power and Arkansas Louisiana, both of which are conflict preemption cases. But even if you wanted to make a narrower holding, you could simply limit it to antitrust law. Justice Kennedy, you asked, I think, about the relationship between our antitrust claims and Federal antitrust law, and it's very important. We've said time and again, and they have never disputed, the substance of our claims is exactly what would be prohibited under the Federal antitrust laws. So under this Court's holdings in Ottertail and California v. FPC, it falls -- and I will use this Court's own words in California v. FPC. There is no pervasive regulatory scheme, including the antitrust laws, that has been entrusted to the commission. So FERC has no power over antitrust violations. It's the exact opposite of Kurns, which they say is their -- another one of their best cases. Even Kurns--
Anthony M. Kennedy: It's -- it's not this case. You don't have to argue it, but just so that I understand -- if this conduct, these transactions, had occurred after the FCC's code of conduct, would the case be substantially different, in your view?
Jeffrey L. Fisher: --No. No, it would be the same.
Anthony M. Kennedy: And is that because you rely on a conflict preemption theory?
Jeffrey L. Fisher: That's the proper way to go about this, and nothing in the code of conduct conflicts with anything that we're asking for. And remember, what Ottertail and California v. FPC hold is that FERC would lack the power to condone these actions. It's not just that they didn't; it's that they would lack the power. So this is why the -- the contrast I wanted to draw with Kurns. In Kurns, they -- this Court said, in a very, very broad field preemption holding, it said that what Congress had done there is give everything to the agency. The agency had full power to decide any locomotive practice that would be regulated, and so therefore the States couldn't tread on the field that Congress had given to the agency. Here, Congress hasn't given antitrust regulation to FERC. It's a very odd claim to come in here and say the Natural Gas Act field preempts a claim that the agency has zero power over. But that is the claim they are making today. And not only do they have zero power over it; they have zero power to give any remedy to our -- to our cause. These--
Antonin Scalia: They have power over the transactions that you are complaining about, the transactions that are the subject of the suit.
Jeffrey L. Fisher: --No, they do not have any power over the retail transactions. And even when -- even when the code of conduct was enacted, Justice Scalia -- and I want to correct something that was said earlier--
Antonin Scalia: But -- but wait--
Jeffrey L. Fisher: --FERC said it did not have authority over retail transactions.
Antonin Scalia: --The gravamen of your complaint is the fiddling with the reporting.
Jeffrey L. Fisher: Yes.
Antonin Scalia: That is the antitrust violation, that conspiracy to report false amounts and to make false sales. There is no doubt that the Natural Gas Act places that within the control of the commission. They -- it does have the power to regulate those transactions and to punish violations of those transactions.
Jeffrey L. Fisher: You are using the word "transactions". I just want to be clear. Do you mean the reporting?
Antonin Scalia: Oh, I'm sorry. The reporting. The -- the essence of the conspiracy that you are complaining about in the antitrust case, the actions that you are complaining about in the antitrust case, are actions that come within the jurisdiction of the commission.
Jeffrey L. Fisher: So two things, Justice Scalia. One is, to the extent that is so, that only puts you into conflict preemption. That's the holding of Northwest Central, because the indices as we are complaining about them were used exclusively in retail transactions.
Stephen G. Breyer: Well, actually, Louisiana. It's the same point, but in addition, you just said you agreed that they had field preemption over the setting of wholesale rates; that is, sales for resale.
Jeffrey L. Fisher: Yes.
Stephen G. Breyer: And they're saying that it's the reporting to Joe in his magazine, the false reporting to Joe in his magazine.
Antonin Scalia: Right.
Stephen G. Breyer: That is what we use to set the wholesale rate, the reporting of Joe to his magazine. And so what they're suing about is the very single fact that we use to set the wholesale rate, and therefore, it falls within our wholesale jurisdiction. That's their argument. And you say the -- that's their argument, not yours.
Jeffrey L. Fisher: It's just not factually accurate, because if we win this case, they can pick up the phone tomorrow and lie to indices all they want and State antitrust law would not prohibit it. It's only prohibited if it's used as a mean to fix prices. And that's what we're complaining about, is price-fixing, not the mere reporting.
John G. Roberts, Jr.: Thank you, counsel. Mr. McAllister.
Stephen R. McAllister: Mr. Chief Justice, and may it please the Court: The States have two strong and primary interests in this case. First, the States have long been leaders in the development and enforcement of antitrust law. Many of the State antitrust laws predated the Sherman Act, and they certainly predated the Natural Gas Act. Over the past century, State attorneys general have invoked State antitrust laws on a number of occasions to challenge anticompetitive practices in the natural gas industry. The States urge the Court not to adopt an interpretation of the NGA that will foreclose the attorney generals from that traditional State role. The second interest the States have is an interest in maintaining the longstanding historical division of authority between the Federal and the State governments in this area. It's important to understand the history. If you want to talk about the original intent of the NGA, the only reason the Federal government got involved was because there were decisions of this Court that said there was certain territory the States could not reach, in particular interstate transportation and wholesale transactions. So the States urge the Federal government to fill that gap so that consumers and others wouldn't be taken advantage of by the companies, just as they have been in this case. The Federal government, the Congress, adopted 1(b) as a very clear, and unusual in some ways, if you will, division of authority provision, and it says quite clearly that the Federal government gets power over transportation and wholesale sales, but the rest of it is reserved to the States, as it always was the States' prerogative.
John G. Roberts, Jr.: No, no, not just the sales, but the practices affecting the wholesale, which is kind of the key to their argument.
Stephen R. McAllister: Mr. Chief Justice, 5(a) as is being argued here, in the State's view, is a massive expansion of anything Congress ever intended in the Natural Gas Act. 1(b) is the division of authority. And if you go back to the Court's earliest Natural Gas Act decisions, the 1940s, the Panhandle cases -- there are a series of them, even into the early 1960s -- you can find numerous quotes where the Court says the subsequent sections -- 4, 5, 6, 7, 10, you name it -- they help FERC implement the authority we've given, but they are not intended to expand the scope of section 1(b). They are not intended to diminish what is reserved to the States. And that is exactly what the United States and the -- and the defendants here are arguing for. The States have no problem with FERC having authority to address manipulation in the wholesale market. We are absolutely comfortable with that. But what we do have a problem with is saying we can't use more than century-old traditional antitrust laws that are not targeting the natural gas industry to protect consumers and businesses in our States that are paying way too much at retail because of a price-fixing conspiracy. The defendants go so far as to suggest there may be some uncertainty about what is a competitive market. Well, there is no uncertainty about this one. Under any legal regime, under any economic theory, price-fixing conspiracy is per se unlawful. And the States are not interfering with FERC here. FERC was never asked to bless the conspiracy. FERC would not have blessed the conspiracy, could not have blessed the conspiracy. And we agree fully with my colleague Mr. Fisher and the plaintiffs that the analysis should be conflict preemption here, not field preemption. Conflict preemption will more than adequately protect any and all Federal interests at stake. And the cases that have come up prior to this can be certainly explained as conflict preemption. Northwest Central, in some ways the Court's most recent statement on this issue, a Kansas case involving production, I believe gives you the blueprint, if you will, for deciding this case. The argument in Northwest Central was the production requirements Kansas was imposing had an effect on wholesale prices, and they probably did. But the Court said that doesn't mean they are field-preempted. The Court said the field of production is reserved to the States. Here the field of retail sales is reserved to the States. The Court went on to say, well, does the Kansas regulation conflict with Federal goals and purposes, concluded that it did not. We're absolutely comfortable with that sort of analysis here. We're not targeting States under antitrust laws, would not be necessarily wholesale sales. But what we are particularly interested in is protecting, consumers both large and small from anti-competitive price-fixing conspiracies. And I would just reiterate that I don't think you can fully appreciate -- you can look at -- I guess I will put it this way. You can look at four things perhaps in deciding the scope of section one 1.b. certainly start with the text; and to the States, the text is very clear about the division of authority. But importantly it's a statute that one may not fully understand without looking at the history that led up to it. The Federal government was supposed to be the gap filler, acting only where the States couldn't, not taking over everything and pushing the States to the side. Thirdly, the structure of the statute is such that 1(b) is the provision. It says the -- the provisions of this chapter shall apply to these things and shall not apply to these things. So it only makes sense that 4, 5, 6, 7, everything that comes after, is not intended to alter the scope of Section 1(b). And then, again, going back to numerous decisions of this Court, particularly the decisions closer in time to the enactment of the NGA, is quite clear that that was how the Court originally understood the scope of Section 1(b). So the States would respectfully ask that the Court affirm the Ninth Circuit's decision. To Justice Kagan's point, we're not necessarily arguing that FERC shouldn't have the authority to reach the practices that effected wholesale rates. That -- that, we're fine with. But what we do not think is that the retail sales here are field preempted. They should be subject to conflict-preemption principles at most. Unless there are questions--
John G. Roberts, Jr.: Thank you, counsel.
Stephen R. McAllister: --Thank you very much.
John G. Roberts, Jr.: Mr. Katyal, you have four minutes left.
Speaker: My friend says the field is, quote, practices relating to wholesale transactions. We agree. That means the only question is whether 1(b) -- these lawsuits fall within 1(b). If they don't, then here's why: Imagine these lawsuits went forward, for example, in Wisconsin and Kansas. If they won these lawsuits, the result would be a rate of zero, a full refund. That is not rate regulation. That is something else. If in the other States that don't have full refunds, will be treble damages. Treble damages is not just in reasonable compensation the way that rate setting is -- rate setting is. This Court, in Louisiana Power, was as clear as day that 1(b) is eliminated -- is limited just to the setting of rates. And, indeed, in this case, the complaints themselves illustrate why these aren't sales. After all, their own complaints don't even allege that all of the defendants sold to all of the retailers. Now, my friend says, Oh, we're not second-guessing FERC with these -- with these lawsuits. No. Quite to the contrary. Imagine that liability phase of the trial if it were allowed to proceed. It would be second-guessing everything FERC did. Indeed, it would look just like the FERC proceeding: What were the rates, what was the scheme of manipulation, what was done, what was carried out, what would those rates been otherwise? FERC has in its code of conduct a very careful and fine-tuned analysis of when index manipulation in wash sales are appropriate, when they're not--
Antonin Scalia: Well, that's -- that's no problem, I mean, they say that. That's conflict preemption.
Speaker: --Exactly. And the difference is, Justice Scalia, that if you allow their conflict-preemption argument, you are letting 50 States adopt their own rules with respect to this 50 different lay juries. This is something the Court has never done. The best they can come up with is Louisiana Power, and Louisiana Power -- and if you look if the footnote and the text around it -- is very clear why there was no preemption in that case. It was because the regulation there was directed at producers, at non-jurisdictional entities. These lawsuits are directed at jurisdictional sellers. That's what the District Court found in 15 pages of findings. They aren't contesting that. So this would be the first time this Court has ever adopted a rule that says there was simultaneous jurisdiction and conflict preemption in a circumstance in which you are dealing with jurisdictional sellers. It's never happened. And to do so here, I think, would be a real break from this Court's field preemption precedence. My friend's argument for why you should do it is, he says, well, people will be able to pick up the phone and manipulate prices. Absolutely not. The Sherman Antitrust Act would bar every allegation in this complaint if they were proven to be true. FERC regulates in this area and is regulating right now--
Ruth Bader Ginsburg: Your point about juries would apply to the Sherman Act as well.
Speaker: --It does in just some -- as I was saying before, Justice Ginsburg, Connell v. Plumbers says it's very different when we're dealing with Federal juries which can harmonize Federal statutes and States. Here, Congress has a comprehensive scheme that puts FERC in charge. This Court has never countenanced a result that says you can have divided authority over jurisdictional sellers, and that's what this is.
Elena Kagan: I think that goes a lot further than anything we've ever done. I mean, the jurisdictional sellers, as I understand this industry, that there are a lot of companies that sell both to wholesalers and to retailers and always before, I think, we've looked at the transaction and said, Where is the transaction, is the transaction a wholesale transaction or a retail transaction? Not, oh, look. You engaged in one wholesale transaction last year, and that insulates you from everything.
Speaker: Justice Kagan, you don't look at the transaction, you look at the practices. That's word 5(a) and that's what the Agency here is saying, is that the practices here, or the common and inseparable practice of index manipulation directly affects both markets. And so, absolutely, we agree with you. If there is some other circumstance in which there isn't a direct effect on the wholesale market, that's one the States have authority to do. This Court hasn't dealt with that situation; but, absolutely, we will give you that. But this is a circumstance that I think now my friends on the other side are conceding is within FERC's wheelhouse. FERC is here before you saying, we have exclusive authority in this area. It should be deferred to.
John G. Roberts, Jr.: Thank you, counsel. The case is submitted.