William H. Rehnquist: We'll hear argument next in No. 88-1719, Chauffeurs, Teamsters and Helpers v. Terry. Mr. James.
J. David James: Mr. Chief Justice, and may it please the Court: The question presented in this case is whether there is a right to a jury trial in a case where an employee sues his union alleging a breach of the duty of fair representation whenever he seeks also some type of monetary damages, which in this case are the back pay.
Speaker: It doesn't sound very interesting.
J. David James: It certainly didn't draw the crowd that the first one did. [Laughter] It is, however, important for not only these parties, but for the large number of cases that this raises. We contend that there is no right to a jury trial in such a case, and we do that based upon the historical analysis that this Court has set forth we should follow in Seventh Amendment questions. We have to go to the Seventh Amendment because, like everybody agrees, there is no statutory right to a jury trial and so the question turns on if there is a right to a jury trial, it could be found only in the Seventh Amendment. The first, and this Court has set out that that's a two-pronged test, look at the historical analog to see if this is more like an equitable or a legal action, and then turn to the more important issue, what are the types of remedies asked for in the case, the nature of those remedies and are they more legal or equitable in nature. We say, turning to the first prong, that this, while not recognized in... at the time the Constitution and the Seventh Amendment was enacted... the duty of fair representation action was not recognized then... that the duty of fair representation action does have its origin in the traditions of equities law trust. And we have discussed that our brief... in our briefs at some length, how the union in a duty of fair representation case is much like a trustee situation that was found prior to the enactment of the Seventh Amendment. A union, like a trustee, is given discretionary power to be exercised for the benefit of certain employees. In Steele v. L&N Railroad, this Court recognized that the union, like a trustee, must act on behalf of these employees non-arbitrarily, must act in good faith. The relationship that we find between a union and the employees that it represents is very much like that between a trustee and beneficiaries that it represents. The union has broad discretion, just like a trustee has broad discretion. The trustee, or a union, can represent employees or beneficiaries with divergent, even conflicting interests. That's unlike the lawyer/client relationship where the client controls and tells the lawyer what he has to do and can withdraw, have other counsel, if he does not like what the attorney is doing. With a union, an employee cannot insist that the union take any specific action. It... the union, like a trustee... has discretion to decide itself what to do. And as long as it stays within the certain bounds allowed by the courts in that discretion, the employee cannot force the union, just like a beneficiary could not force a trustee to take any particular action. Thus, we say that the duty of fair representation action is very similar to the trust action which was found prior to the enactment of the Seventh Amendment, and it's clear that those trust actions were developed solely in equity, that they were not recognized in law courts. And we say that, therefore, if you look at the nature of the duty of fair representation action, it is most like that trust analogy and it's thus equitable. That's particular seen in the sort of hybrid action that we have here where a union is sued by an employee who claims that the union did not take some action properly and at the same time the employee claims the company that it... is its employer also acted improperly. That is very similar to the old trust actions where a... an... a beneficiary of a trust would say the trustee should have taken some action against a third party but... and it was an abuse of its discretion, the trustee's discretion, not to take that action. And, therefore, in equity courts... not in law courts, could not do it there... but in equity courts the beneficiary would go in and say to the court, the trustee has acted improperly in not taking this action against the third party, and the third party has acted improperly. Give me a remedy against them. That is something that it is clear could not be done in law courts.
William H. Rehnquist: What sort of a remedy would the chancellory court give in that situation?
J. David James: In that situation it was not unusual for the equity court to give money damages as a remedy. It was... they could give the traditional equitable remedies also, but they also gave money damages against a trustee. And we've cited some cases and cited some authorities about that so that if actions of the third party were harmful to the beneficiary, caused it to lose some money, and because of running the statute of limitations or some reason that money could not be recovered from the third party, it could be recovered from the trustee. Or, it could be recovered from both. But, in any case, it was a money damage recoverable in equity.
John Paul Stevens: Yes, but is... aren't those cases in which, had the trustee acted properly in the first instance, the trustee would have recovered money damages in a jury trial from the... from the third party?
J. David James: No, they don't... you don't... if the beneficiary in that situation wanted to... thought that the trustee had not acted properly, he couldn't go to the law court. He couldn't--
John Paul Stevens: The beneficiary couldn't. But I'm assuming a case in which the third party caused some injury to the trust, embezzled some money or something like that, for which the trustee, suing on behalf of the trust, would have had a remedy at law. There would be such--
J. David James: --There are cases where the trust would have a remedy at law, yes.
John Paul Stevens: --Which would be something like... sort of like a derivative suit where it--
J. David James: It's not like a derivative suit.
John Paul Stevens: --Well, that the corporation might have a remedy at law and the shareholder in... before the merger of law and equity, and all the rest, the shareholder could have had, you know, had an equitable proceeding which would have brought something comparable to the damages that you describe here.
J. David James: Let me tell you why I think it's not the same.
John Paul Stevens: Because I know perfectly well--
J. David James: Is that in those shareholder derivative suits you had basically the shareholder standing in the shoes of the corporation asserting the corporation's claim. Here, this is not a claim of the trustee. These are rights that the beneficiary claims it has. If... if there is a recovery, it doesn't go to the corporation, like in the shareholder's derivative action. It goes directly to the beneficiary. And in those shareholder derivative actions, they came about, as this Court explained in Ross v. Bernhard, because of procedural problems that they could not be brought in the law court. And so... but that procedural problem is not here. The law courts didn't recognize the beneficiaries' rights at all.
John Paul Stevens: --Well, but there is an analogy in this sense. That the member of the labor union may not directly sue the employer because of the collective bargaining agreement there. So he has to really basically... basically has to rely on the union as the intermediary to process grievances and all of that.
J. David James: But he doesn't stand in the shoes of the union the way he does in a shareholder's derivative suit, because in a shareholder's derivative suit he stands in the shoes and he recovers a benefit for the corporation. Here, he doesn't stand in their shoes. He recovers a benefit for himself and in fact can recover it directly from the union. In a shareholder's derivative suit--
John Paul Stevens: I understand.
J. David James: --he wasn't getting it from the corporation. That's why I think they are different. And because the shareholder's derivative suit was this procedural device used by the equity courts to get to it... that's not a procedural device here. This is just a pure equity claim against... against... like the equity claim like against the trustee.
Antonin Scalia: Mr. James, we're not talking about any tort-like recovery here, are we? Are we only talking about giving to the union member a fixed monetary sum that would have been his but for the action of the union, or are we talking about some smart money against the union or some tort-like--
J. David James: Well, I don't think we're talking about smart money. That goes to the second prong of the test dealing with what remedy is available. I think in this case that it is not a fixed set sum that is sought. It is a sum that the court in its discretion can decide how much or how little to give.
Antonin Scalia: --Well, I know, but is it... well, but to make it really analogous to those trust actions don't you have to say that what this individual is getting is precisely what the union would have obtained had it acted... would have obtained on his behalf had it acted properly?
J. David James: Well, I think--
Antonin Scalia: And that no element of it is... is a sort of tortious recovery against the union.
J. David James: --Well, I think that if you look at the... the duty of fair representation actions, they talk in terms that you are to get only a make whole relief. You are not to get something beyond what would make that employee whole. You are not to recover... for instance, in Faust you do not recover punitive damages.
Antonin Scalia: Well, what does making whole consist of? Does it consist of the... the employee's pain and suffering, his emotional upset at not... any of those elements ever included?
J. David James: I would say that it does not. This Court has not specifically passed on that issue, but I would say that it does not include those.
Antonin Scalia: It only consists of what he would have gotten from the employer had the union acted... acted properly?
J. David James: And it may include some additional damages for legal fees and things like that to make him whole. What he had to spend to get to... to get to that position. That's what I'm talking about... about make whole relief. The Respondents argue that Beacon Theatres and Dairy Queen and Ross v. Bernhard do say that these are legal issues, ultimate legal issues and that, therefore, this is a legal case. I'd say that those cases do not say that. They say that if there are purely legal claims that are being raised, then you cannot be denied your right to jury trial. But we're--
William H. Rehnquist: So, to prevail you really have to show that none of the claims in the case are triable by jury under the Seventh Amendment?
J. David James: --I believe that's correct, Your Honor. If they are legal claims triable to a jury, then... that those would... there would be a right to a jury trial under the Seventh Amendment for those. But we assert they are not, these legal claims. Of course, there's the two prongs. The first prong would be not as important as the remedy section, but we think that under that first prong that these claims are purely equitable claims. They were recognized only in the equity courts and not legal claims at all. There are some factual inquiries that are found both in legal courts and equitable courts. But when this issue is raised in the equitable court, the equitable court passed on those factual inquiries as the... factor... finders of fact. And it was because the claim was purely an equitable claim that it had to do that. Therefore, because we think those are purely equitable issues, we do believe that the first prong of the test, that the nature of the claim shows that there is no right to a jury trial. Which leads us, then, to the second prong of the test which, of course, this Court has said is the more important, which is the nature of the remedies. The only remedy sought here, which the plaintiffs claim is legal rather than equitable, is the back pay remedy. There was a claim made for punitive damages, emotional distress damages, but that was dismissed by the trial court. Those claims are not in this... found that those were not appropriate in duty of fair representation cases, and that is consistent with the decisions of this Court and other courts.
Byron R. White: xxx suit solely against the employer? Suppose there was a breach of duty by the union and the employee thinks that the employer breached the contract but I don't want to sue the union, I'm just going to sue the employer. And if he can prove a breach of duty by the union, the employer must respond.
J. David James: That's correct. I don't think the issues are--
Byron R. White: Then... then--
J. David James: --are any different in that situation.
Byron R. White: --So you think that no jury trial then either?
J. David James: No jury trial there either.
Byron R. White: Because of the... because you have to prove a breach of trust first?
J. David James: You have to show the same breach of duty in that case that you do if you're suing the union. The issues are identical in both cases.
Byron R. White: Well, I... I thought in trust law that if the... if the... if the beneficiary thinks the trustee hasn't acted properly and hasn't collected something from some third party he asks the trustee to sue and the trustee doesn't... says no, and he goes and sues the third party directly.
J. David James: I believe he can.
Byron R. White: Yes, but he gets a jury trial.
J. David James: No. That... that is not my understanding. If he is a beneficiary and he is suing claiming that there is a relationship between the trustee and this third party and the trustee isn't doing what he wants, he cannot go into the law courts and bring that. He could only go into the equity courts and bring that action. That's my understanding as it was back--
Byron R. White: And you say the same thing applies here, therefore, even if he sued the employer alone?
J. David James: --Yes, I believe it does. I believe since the issues that he would have to prove in both the suit against the company or against the union, or both, are the same, then the same rules would apply across the board. The plain... the respondents in this case argue that the back pay is always legal. That is, upon a proof of a breach of the duty that there is an automatic and mandatory requirement that they receive this back pay. We say that that's just not true, that there is a discretionary element. When they cite in their brief a quote that generally at equity, money judgments were allowed only when ancillary to traditional equity relief, we say, while that's generally true, it's not always true, and we've given you the specific example in the trust situation where money damages were recovered. And that was recognized by this Court, I think, in Curtis v. Loether where it says that just because it's monetary damages you don't say that that always makes it legal relief. So you have to look beyond the fact that it's money damages and look at those money damages and the nature of those damages to make this determination. And on that the issue is, is there discretion in awarding these monetary damages or is there not? If there's no discretion, then it's a legal type relief. If there is discretion, it's equitable. I think the respondents in their brief concede that that's the line, that that's the test to be followed. And if you follow that test, you find that these... there is this discretionary element and thus these are equitable type remedies. I think that most clearly can be seen by comparing the duty of fair representation remedies with those found... found in Title VII. When you find Title VII, you find that those remedies are based upon the NLRA, the National Labor Relations Act, that there is a discretionary element in this damages. This Court has held that there is that discretionary element.
Byron R. White: I suppose that in a suit against the union alone to prove a breach you don't have to prove that the employer breached a contract. You just have to prove that the--
J. David James: In this particular kind of duty of fair representation case you certainly do have to prove that the employer--
Byron R. White: --Well, yeah, you're--
J. David James: --had breached the contract.
Byron R. White: --going to have to prove... you're going to have to prove the employer breached it in order to get... to get any--
J. David James: Relief.
Byron R. White: --to get the damages... to get back pay--
J. David James: That's correct.
Byron R. White: --or whatever you want to call it.
J. David James: That's correct.
Byron R. White: But you can prove the duty, breach of the duty, without proving the breach by the employer.
J. David James: My understanding of the breach--
Byron R. White: Because if... but if it's... but if it's a... if it's a case that should be then taken to arbitration, the union... and the union doesn't take it, the union's breached its duty, whether you... whether it turns out that an arbitrator would have held for the employee or not.
J. David James: --Well, my reading of the cases says that you have to prove both of those things in this sort of situation before--
Byron R. White: Well, you can--
J. David James: --you could recover.
Byron R. White: --Well, you're going to have to prove the breach by the employer to get--
J. David James: Relief.
Byron R. White: --to get the kind of relief you want.
J. David James: That's correct. Back, just a minute, to the Title VII where this Court has held that those Title VII remedies are discretionary because they're based on the NLRA, and under the National Labor Relations Act remedies are discretionary. In Phelps Dodge, this Court has said that they're not to be mechanically complied with, but are entrusted to the discretion of the NLRB. Likewise, the duty of fair representation remedies are derived from the National Labor Relations Act. This Court has held that the remedies in duty of fair representation cases must effectuate the policies under the Labor Act, just like in Title VII. The remedies in Title VII are make whole remedies. That's what you talked about in Albermarle Paper. Here they're make whole remedies.
William H. Rehnquist: Well, really, this kind of hybrid action isn't based on the National Labor Relations Act the same way that the ADA... the ADEA is. I mean, it patterned after it... by statute.
J. David James: Well, you talk in Faust, though, that the remedial policy... the remedies given under... for duty of fair representation breaches... must effectuate the policies espoused by the Act. And I think that that, sort of by implication, does the same thing you found in Title VII.
William H. Rehnquist: But all we held in Faust was that no punitive damages, wasn't it?
J. David James: Yes, but in getting to that position you did talk about how the remedial policies... remedies available for DFR, duty of fair representation cases, must be such that effectuate the policies underlying the Act. And you found that punitive damages did not effectuate those policies in that case.
William H. Rehnquist: But we certainly didn't find that ordinary damages would not?
J. David James: It wasn't presented in that case. No, Judge, it has not. The--
Antonin Scalia: Can you give me an example of... of where discretion would be exercised not to... not to give a--
J. David James: --Well, there's a... there's a case cited in our brief called Navigation... American Navigation, or something like that. It's an NLRB case. And in that case, they found that the employer had violated... had committed an unfair labor practice but did not award back pay remedies to the employee because the employee in the midst of the compliance proceedings had lied, had said, well, we didn't work here or did work here. Had lied about what money it had earned. And so the board said, we're going to exercise our discretion. We're going to deny you back pay relief in that situation.
Antonin Scalia: --And you think that in a... in a duty of fair representation case you could similarly not... not award any relief against... against the union on the basis of--
J. David James: I believe that's true. If you look at our brief, we talk at length about how the parties in these agreements really negotiate for a decision by an arbitrator and give an arbitrator wide discretion as to what relief is given. It is not at all unusual for an employee who is discharged to go to arbitration and be found that the company has improperly discharged it. But then be placed back at work without back pay. It is not at all unusual to have that sort of remedy come in an arbitration proceeding. If the idea is to make whole the employee, not give him a windfall, then I think that you have to look at what were the possible remedies he could get in an arbitrator's decision but for this DFR breach. And if that's true, then there is this wide range of discretion given to arbitrators that I think carries over into the DFR area as well. And because you have that wide range of discretion which is applicable not only to the arbitrator's decision, not only applicable for the board, but also by the courts in the duty of fair representation area, the remedy, the nature of the remedy, is an equitable remedy and not a legal remedy. When you take that prong, the stronger of the two prongs, and it clearly says that the remedies are equitable, and attach it to the first prong which says that the nature of the action was basically an equitable... like an equitable... not exactly the same, but like the old trust action... then I conclude that the action here, the duty of fair representation action in this sort of hybrid situation, is an equitable action, does not call for a jury trial under the Seventh Amendment, and that the district court was incorrect below when they denied our motion to strike their jury trial demand.
John Paul Stevens: --May I ask one question, Mr. James? I'm just not... just to show my ignorance. But, just as a general practice in this kind of litigation, have there been a fair number of jury trials or... are these cases often tried to juries?
J. David James: I think it would be fair to say there often have been jury trials in these areas in the past.
Speaker: Thank you.
J. David James: And, as you would see from the cases cited, it's slowly building through the circuit. Some say yes, some say no.
John Paul Stevens: There are different... different views among the circuits.
J. David James: That's right.
Speaker: Yeah.
J. David James: If you have no further questions, I'll just reserve the remainder of my time. Thank you.
William H. Rehnquist: Thank you, Mr. James. Mr. Elliot, we'll hear now from you.
Robert M. Elliot: Thank you, Mr. Chief Justice. May it please the Court: The question in this case is whether there are legal issues and remedies involved in this case which must be tried before a jury. If there are, this Court has said in its past decisions, that the Seventh Amendment applies and that my clients, or respondents, are entitled to a jury trial. Now, in response... or in his argument, the petitioner states, or tries to wrap the entire action in a trust cloak, so to speak, and tries to say that because this action has some resemblance to a trust, that that analogy should pervade the entire analysis and go off over to the second prong of the Ross test. And, therefore, since there maybe some resemblance to a trust, that the remedy sought in this case should be considered trust remedy. We contend that that analogy does not fit for a number of reasons. It's important to remember at the outset that in this case are talking at this point in time about an action against the union alone. The company is bankrupt and we have an action against the union saying that the union breached its duty of fair representation and as a result, a direct result of that breach, we have lost the opportunity to earn wages. Compensatory... traditional compensatory monetary relief. In... I would like to begin with--
Byron R. White: How much are you going to ask for? How are you going to measure your damages?
Robert M. Elliot: --Our damage will be... damages will be measured by what these respondents would have made in... in their wages if they--
Byron R. White: Back pay. Essentially back pay.
Robert M. Elliot: --if they had been successful in arbitration. Yes, sir.
Byron R. White: But no... no other damages and no punitive damages?
Robert M. Elliot: At this point there are no other damages involved. There are some moving expenses which may classify as compensatory relief as well.
Anthony M. Kennedy: If the employer had not been bankrupt and had still been in the suit, would our analytic problem here today be the same?
Robert M. Elliot: I think the answer should be the same. But perhaps it's not quite as clear. In a case against the union, this more clearly can be analogized to a legal malpractice case because we have no company to pay the damages and we're going against the union, and that's where the focus is.
Speaker: Well, why wouldn't... if the employer were here, why wouldn't it just be a breach of contract case?
Robert M. Elliot: Well, that... one side of the Vaca standards would be satisfied by a breach of contract issue. And there is clearly a legal issue there. The--
Anthony M. Kennedy: I'm not sure how it changes just because the employer is either here or not here.
Robert M. Elliot: --The only way it changes... I don't think it really changes the constitutional analysis. But it does change the analogy to some extent because since we are suing the union only in this case at this point in time as a representative, then it's more analogous to a legal malpractice case where you are suing the lawyer for failing to represent you before a court or an arbitration panel. And our damages all flow in this case, at this point in time, from the breach of the union agent in failing to represent us. And since we are not suing the company at this time, our damages are not flowing from the actual breach of contract. I would like to set out some of the facts before I get too far along. But before I do so, I think it's important to keep in mind, especially in considering this trust analogy, the various roles that a union plays as an agent of its members. It's not always in this, quote, "trustee's discretionary role". Obviously, as a negotiator in negotiating a collective bargaining agreement, a union is playing a role that requires expertise and requires a great deal of discretion in considering all aspects of the labor management relationship.
Antonin Scalia: That's all very true, but the only... the only element of the union's role at issue in this case is its... is its obligation fairly to represent its employees.
Robert M. Elliot: That's my point, Your Honor. My point is that in this case we're not talking about a great discretionary duty. We're talking about an absolute duty to these union members to represent them on a grievance, which is a duty much more akin to the duty of a lawyer than it is to the duty of a trustee. The facts bear this out. The essence of our case is discrimination. The change of operation procedure was designed to allow my clients the right to follow their work to Winston-Salem. At the time they followed their work they were supposed to have some seniority preferences because they were following their work, theoretically. The order of recalls and layoffs after that were in direct violation of that procedure which had been devised by the collective bargaining procedure. At that time we have alleged that the union, in direct discrimination or blatant discrimination against my clients, sided with the locals, the local inactive people who had been off the board, to try to bring them back on the board, at which time they would dovetail in my clients seniority.
Speaker: What is the... what is the board, Mr. Elliot?
Robert M. Elliot: The... the active employment. The active board in this case would be the list of truck drivers who were actually getting calls. According to the change of operations procedure, my clients were supposed to have seniority over the people who were actively working... I mean, over the people who were not actively working, regardless of their continuous company seniority when they came in. We have contended that the union in this case discriminated, that they sided with the locals to try to get the locals back on the board... the active employment... so that they would all dovetail and my clients would lose their rights. That was the first aspect of our case, and everything... flowed from there. Then the first decision was decided, which decided exactly that. The order of recalls had been a violation, and a clear violation, of the change of operations procedure in the contract even though the union... the union had gone along with that... that interpretation and that order of recall. And the grievance committee found it was a clear violation. A week later the union and the company got together and decided that we are going to do exactly what the decision said, we're calling back the... the foreign drivers... my clients who were laid off in direct violation of the agreement. We'll call them back... that's 30 drivers... and we're going to lay off the 30 local drivers who had not been active.
Byron R. White: What's this got to do with the issue we've got to--
Robert M. Elliot: Well, Your Honor, the point I'm trying to get to is... is that at that point in time the union played a role as lawyer. It accepted a grievance that this was a subterfuge and that this was a circumvention of the decision. And from then on, it took that grievance to the grievance committee and we say acted perfunctorily in representing our clients on that grievance because--
Antonin Scalia: --Sometimes the trustee has to play a role as lawyer... I mean, when he has a claim on behalf of the trust against someone that he fails to prosecute, either by prosecuting it himself if he's a lawyer, or hiring a lawyer, you have a cause of action against the trustee, but it's purely an equitable cause of action.
Robert M. Elliot: --I think in that case the trustee would have to get a lawyer, and the trustee would not be acting in the role of the lawyer but in the role of a client.
Antonin Scalia: Well, that may well be, but you'd still... the decision of whether to prosecute or not is a decision of the trustee and he'd be... he'd be suable in equity.
Robert M. Elliot: That... that is--
Antonin Scalia: If the lawyer did a bad job in prosecuting this suit, I guess that... you might have a malpractice action against him, although I'm not sure that that wouldn't have to be brought in equity too. But the problem here is not that he was a bad lawyer. The problem is he didn't bring a lawsuit.
Robert M. Elliot: --He did bring the lawsuit, Your Honor. He... he filed a grievance on my clients' behalf, that the actions of the company and the union a week after the first decision was a subterfuge. And that's the words that are used. It had circumvented the decision because it had just turned everything right where it was before the decision applied. At that time he filed the grievance.
Byron R. White: The employer was entitled, under his contract, the collective bargaining contract, the employer was entitled to rely on the decision of the arbitrator or the arbitrating... whoever it was that decided the grievance... unless the union breached its duty. And if the union breached its duty, then the employer could not rely on his... could not rely on the board's decision. Isn't that right?
Robert M. Elliot: Yes, sir.
Byron R. White: Now, you say that that a... if you're going to set aside a contract, isn't that sort of an equitable action?
Robert M. Elliot: Your Honor, we're not trying to set aside anything in this case. We're suing the union directly for--
Speaker: Well, I know.
Robert M. Elliot: --for its breach.
Byron R. White: Yeah, yeah. I know. But the employer... to stick the employer, you've got to prove a breach by the union and you say that... that the union's duty is... should not be analogized at all to a trust operation, to a trustee. It should be analogized to a... to a--
Robert M. Elliot: Lawyer.
Byron R. White: --to a lawyer.
Robert M. Elliot: In that respect. Now, you know... and there are other... there are certainly other characteristics of this action which are not so close to a lawyer, and I'm not denying that. But I'm just saying that's probably the best common law analog to the case in its posture before the Court at this time. But there are several other reasons the trust analogy does not fit. Trust, as I understand it, was created by the courts of equity because courts of law did not recognize the distinction between legal and beneficial title. Therefore, beneficiaries... beneficiaries had no rights before courts of law and the re... courts of equity recognized rights... that there was no adequate remedy at law. So these trusts... beneficiaries had to go to courts of equity. There's no property in this case. And that was it... an absolute essential element of a trust, that there be a corpus. Now the petitioner tries to argue that the contract rights was property in this case. But I'd contend that the only thing about this case that resembles the trust relationship is the relationship itself. And that relationship is recognized and was recognized at law just as well as it was at equity. It's... it's the confidential relationship between these parties. It's no different from the relationship between the director in the corporation in Ross... there's no difference between that relationship and the relationship we have here. And if the only thing that resembles a trust is the relationship which was also recognized at law, the trust analogy loses... loses its force, its persuasive force. That relationship, as this Court found in Ross, could be the focus of an illegal action. In Ross the case... the legal issues that were found were negligence and breach of contract by a director who owed a fiduciary duty to his corporation. Another issue was breach of fiduciary duty. So, the union membership... the union member relationship in this case does not magically convert this action to a trust action any more than the director's relationship did in Ross. Even beyond the derivative stockholder standing issue, the relationship itself is the same. Going to the second part of the Ross test, the nature of relief, in this Court's... it's clear that this Court has recognized on a number of occasions that, generally speaking, monetary relief is traditional legal relief because there was an adequate remedy at law. And that's what we have here in DFR actions. But more importantly, when this Court has been... has decided cases involving statutory rights to a jury trial, the Court has looked at statutory intent on the specific statute at issue, such as Title VII or the ADEA in the Lorillard case. We contend that in deciding the issue in this case there is no statutory intent because it's a judicial action. But this Court should look at the judicial common law, the federal common law which has evolved over the years in DFR actions. And that... the number of decisions decided by this Court in the DFR... 301 DFR area indicates that this... that monetary damages is a form of legal relief. Even the Steele case said that. The Steele decision, while saying it was a grant of power to act on behalf of another... which inferred some relationship not necessarily trust, Steele also said that the full range of judicial remedies should be available to a victim of the breach of duty of fair representation, including injunction and damages. The Vaca court underscored that in talking about the compensation principle. The Faust court, while striking punitive damages, again emphasized the compensation principle and the very distinction between this kind of action and the action before the NLRB on an unfair labor practice. That this type of action that's involved is focused on the individual, the private right of the individual. And I believe this Court underscored that principle once again in its decision yesterday in the Breininger case, that there are two different types of actions, two different sets... at least, to some extent, two different sets of policies and two different sets of rules because one was created or implied... or one was recognized by the board according to a statute and the other was recognized by this Court and implied... developed by this Court. And in the Faust case I think it becomes even clearer in the concurring opinion by Justice Blackmun. Justice Blackmun stated, along with three other members of this Court, that punitive damages... there should be no per se rule against punitive damages because Steele recognized the full range of judicial remedies. And that should include punitive damages. Now, this Court, as a matter of federal labor policy, the majority decided to strike punitive damages at least in that kind of action. But the fact remains that while limiting the range of remedies, this Court has always at least implicitly recognized that we're dealing with legal relief. And for that reason, this case is very distinguishable from the Title VII case and the cases under the NLRA. The last point I'd like to make on the second part of the Ross test is that the other theories on which back pay in various types of actions has been found to be equitable relief has to do... is whether it's restitutionary, whether it's ancillary to or incidental to equitable relief or whether specific performance. As Justice Marshall I think stated in Curtis, for the same reason restitution was not an appropriate theory in that case, it's not in this case. This... this... we're not trying to discourage the company or the union from any kind of unjust enrichment. We're not trying to follow money. We're trying to seek compensation for what we've lost. In conclusion, we contend that these individuals who've alleged that their union sold them out in effect, and discriminated against them in favor of the other members, have a right to a jury trial on this case which presents legal issues and monetary relief.
Antonin Scalia: Could you... you mentioned at the outset that part of your claim includes moving expenses.
Robert M. Elliot: Yes, sir.
Antonin Scalia: What... what do they consist of?
Robert M. Elliot: According to the change of operations procedure, Justice Scalia, our clients were moved into Winston-Salem. The company picked up some of those expenses but our client picked up the rest of them in moving their family and reestablishing themselves in a new location.
Antonin Scalia: But they would have been moved anyway. I mean, how can you get both the wages and the moving expenses? Aren't the two inconsistent? If you would have gotten the wages, you would have incurred the moving expenses.
Robert M. Elliot: Well, that... that's correct. There is... there is some inconsistency there. We have asked for those expenses. At this point... you know, even in view of the district court's ruling on our other compensatory relief, those claims are still viable. Thank you.
Antonin Scalia: Thank you, Mr. Elliot. Mr. James, you have six minutes remaining.
J. David James: We did not seek to have that claim for moving expenses struck at the same time we did emotional distress damages and punitive damages. In hindsight, we should have. It was just one of those things. We never could understand that claim, and we always thought it was inconsistent. They never said it once before, and so we didn't make that motion at that time. But I think he's right, it is inconsistent. I've never understood. There's no contract breach about that. They got what the contract was... required about the moving expenses, and so I've always ignored that in this case. I do want to say that we think that the trust analogy is much more apt than the legal malpractice analogy principally because of the discretion given the union to act on behalf of these employees. An attorney does not have that discretion. It... an attorney cannot represent conflicting views. A union does do that all the time and so did a trustee who had beneficiaries with conflicting interests, directly conflicting. And that's why we say that the trust analogy is more apt in this case than is that legal malpractice action. In fact, a union doesn't have any duty to file the grievance. If it files it, it doesn't have to take it to arbitration. it can even refuse to take something to arbitration because it's too costly if in its exercise of discretion yet in good faith determines that for the best interests of everyone in that group this grievance should not be taken to arbitration. An attorney doesn't have that. He can't make that choice. He's specifically prohibited from making that--
Anthony M. Kennedy: Well, an attorney's duty is the standard of care.
J. David James: --That's correct.
Anthony M. Kennedy: But the trustee has a similar duty. He really wears two hats.
J. David James: The trustee's duty is somewhat different than... than the... than the attorney's. I've seen someplace... some people call it the standard of conduct rather than the standard of care. That doesn't help me a whole lot to understand the difference. But with a trustee and with a union, they have this discretion... discretion of whether they should bring this claim or not. If a client comes to an attorney and employs and attorney and says, I want you to bring this claim, and the attorney just doesn't, well, he breaches his standard of care. He can't make that decision. The union can make that decision. The trustee can make that decision. That's why we think that analogy is more apt. It's also... the rights of the employee in this case are not equal to simple contract rights against the employer. The employee must rely upon the union, like a beneficiary must rely upon the trustee. And the rights the employees have are like the rights beneficiaries have. That is, they come from this trust relationship. All of that leads us to conclude that this is more analogous to the trust situation. Finally, just one point. In talking about whether the... he mentioned in Ross how there was a claim of a breach of fiduciary duty there. This Court specifically reserved the question and did not say that... whether that had a right to a jury trial on that issue or not. The only issues in Ross that it found it... was a right to a jury trial were the clearly legal issues. And as we've said, these are not those clearly legal issues. Thank you very much.
William H. Rehnquist: Thank you, Mr. Elliot. The case is submitted.


Warren E. Burger: Thank you, gentlemen. The case is submitted. We'll hear arguments next in Commissioner of Internal Revenue against Portland Cement Company. I think you may proceed when you're ready, Mr. Smith.
Stuart A. Smith: Thank you. Mr. Chief Justice, may it please the Court. This income tax case here -- comes here on a writ of certiorari from the United States Court of Appeals for the Tenth Circuit. The questions involve an application of a well-established formula method set out in the regulations for more than 40 years for measuring the gross income from mining of a taxpayer who mines and, thereafter, produces a finished manufactured product, the so-called integrated miner-manufacturer. The object of the formula which we also call the proportionate profits method is to determine the price at which the taxpayer would have sold his mine or to itself in a hypothetical sale, so as to confine the depletion deduction to its intended purpose of compensating for the exhaustion of the mineral deposit. The depletion deduction is a fixed percentage of gross income from mining. The method, the proportionate profits method, is employed as it was in this case where there is no representative field price or sales of actual sales at the cut-off point at -- at the point in which the mining activity ceases or whether it's essentially at arm's length. And the underlying theory of the proportionate profits method, which is a cost ratio method which is set out in our brief at pages -- at page 3, it's a formula which essentially multiplies a fraction, the numerator of which is mining costs over total costs, that is, mining plus non-mining costs times the gross sales of the first marketable product which here is finished Portland Cement and that figure --
Byron R. White: May I ask you right there, that gross sales figure? That is the actual -- that isn't the constructed figure, is it?
Stuart A. Smith: No, no.
Byron R. White: That is an actual figure representing the sales price of the finished product whatever that product is.
Stuart A. Smith: Exactly, exactly.
Byron R. White: Of the first marketable product.
Stuart A. Smith: Of the first marketable product.
Byron R. White: And so that if it normally, that -- that price would be enough to cover all costs, anyway --
Stuart A. Smith: Yes.
Byron R. White: -- or they'll go broke.
Stuart A. Smith: Exactly.
Byron R. White: So, it's -- it's -- so it's the gross sales price.
Stuart A. Smith: Exactly. And the theory of the -- the underlying theory of the method is that each dollar of costs earns its proportionate share of gross sales and thereby of profits. And the questions in this case are two and they involve a -- they may involve -- both involve detailed applications of the method. The first question involves -- is -- is whether the gross sales figure, that is, the multiplier of the first marketable product includes bulk and bagged cement as the regulations require or whether as respondent contends simply bulk cement. And the second question involves the denominator of the fraction, that is, the total cost and whether the -- whether those -- whether that denominator should include costs of bags, bagging, storage, distribution and sales should be included as the regulations require.
Potter Stewart: Now, the two questions are separate. They're -- they're interrelated, are they not?
Stuart A. Smith: Absolutely, absolutely.
Potter Stewart: I mean, they have to kind of be answered the same way --
Stuart A. Smith: Exactly.
Potter Stewart: -- consistently.
Stuart A. Smith: Exactly.
Byron R. White: So you could include the first question and still not --
Potter Stewart: No.
Byron R. White: -- change the -- the denominator, could you?
Potter Stewart: No.
Stuart A. Smith: Well, the questions are interrelated. I think the -- the --
John Paul Stevens: Well, so -- but your -- but if -- if your first marketable product is bulk cement --
Potter Stewart: Right.
John Paul Stevens: You're certainly not going to include in the denominator the cost of bagging.
Potter Stewart: No, exactly. No.
Stuart A. Smith: The facts --
Potter Stewart: (Inaudible)
Stuart A. Smith: Sure.
Potter Stewart: On the tax -- this tax return, did the taxpayer -- or with respect to gross sales cost, on -- an office administrative cost, did the taxpayer seek to exclude them entirely or to place some of them in the numerator?
Stuart A. Smith: My -- my understanding is that he sought to exclude them entirely. That -- that's basically the position -- that's basically the position of the court below which is we set forth in our petition in our brief is really -- has been out of line with not only the regulations but with all the other Courts of Appeals.
Potter Stewart: Does the tax take -- take a different position on that that it did in the court below?
Stuart A. Smith: I think so. My understanding in looking at the briefs now is the taxpayer is -- is seeking a prorated -- prorated approach.
Harry A. Blackmun: Well, Mr. -- Mr. Smith, if the court below it agreed with you that the first marketable product was both bulk and bagged cement, I'm not sure it would have excluded any cost from the denominator.
Stuart A. Smith: Well, it's hard to tell. I mean, I can't --
Harry A. Blackmun: Well, I know, but it -- it said that the first marketable product was bulk cement.
Stuart A. Smith: Yes, yes, so, it more or less then --
Harry A. Blackmun: In this event, you should throw out some costs from the denominator.
Stuart A. Smith: Yes, and I -- they said --
Harry A. Blackmun: So, your first question, if you went on the first question, you --
William J. Brennan, Jr.: -- you win.
Stuart A. Smith: I think I really win on the first question as a logical matter, the second question is a subsidiary question which takes care of itself but it's --
Byron R. White: Exactly -- exactly --
Stuart A. Smith: -- it's hard -- it's hard to know exactly how the court below felt about this question generally because it had -- this question has been kicking around in the Tenth Circuit ever since the -- it's the idea of basic test.
Harry A. Blackmun: Yes, but there's no suggestion that they would throw those costs out of the denominator even if --
Stuart A. Smith: No.
Harry A. Blackmun: -- even if the first marketable product --
Stuart A. Smith: No.
Harry A. Blackmun: -- was bagged cement.
Stuart A. Smith: What the -- what the Tenth Circuit has said and which we take strong disagreement with is that the first marketable product was bulk cement. Let me just simply sketch out the facts which are relatively simple.
Warren E. Burger: Which do they sell most of by the way?
Stuart A. Smith: They sell mostly bulk cement. The bagged cement, accounts for about 7% or 8% of its -- 7 or 8, so let me put it this way. The cement in bags, it's the same product. It's whether it's sold in a railroad car, whether it's packed in bags pursuant to particular kind of customer demand, the cement in bags. The facts are relatively simple. This respondent, like all others, in the cement industry is an integrated mine -- miner-manufacturer of Portland Cement. The mining process involves a quarrying and a digging of this cement rock. It's a calcium carbonate kind of rock. It's reduced in size. It's then ground to a high degree of fineness. Water is added to produce something called the “slurry” and then that slurry is stored in tanks and agitated to maintain uniform mixture until -- until such time as it passes through the manufacturing process.
John Paul Stevens: Mr. Smith --
Stuart A. Smith: What --
John Paul Stevens: -- is it agreed that the -- the mining phase stops at the point where slurry is --
Stuart A. Smith: Yes, I think that is -- that is agreed because the mining process, and Congress has you know ratified this in Section 613 (c) (4) (F) which was enacted in response to the Court's Cannelton decision, the mining process stops at the kiln feed. Everything after that is non-mining and then this liquid slurry, as I have adverted, is then fed into these rotary kilns and that -- which are fired and a hard substance called a “clinker” is ultimately formed. That clinker is cooled, ground up with purchased gypsum to produce the finished cement and then there's a final grinding and then the finished cement is stored in silos. Some of the cement is sold in bulk, in tank cars or piggyback or gondola cars, a variety of different forms for large consumers that need -- that need cement in that kind of quantity.But the important thing is that cement has to be kept dry, otherwise, it becomes wet, it becomes worthless. So some people don't need that much cement and if -- and for those customers, this manufacturer, as well as all to others in the integrated industry, pack the bag -- pack the cement in bags of these -- which are a standard 94-pound weight, as I understand.
John Paul Stevens: Mr. Smith, I suppose it never happens, but suppose this manufacturer sold everything in -- in bags, would you have a different case? Isn't (Voice Overlap) --
Stuart A. Smith: Then I -- I -- we'd have a different case but I don't think there would be a quarrel. I mean, essentially, it would be the same marketable product, in our view, would still be cement, the bagging cost would be a cost of sale and we would contend that that would be -- that that would have to go into the denominator and the bagging --
Warren E. Burger: So, the (Voice Overlap) --
Stuart A. Smith: -- premium would go --
Warren E. Burger: -- would take the same position that he does here?
Stuart A. Smith: Right, but I assume that this taxpayer couldn't really argue that anything else was a first marketable product.
Thurgood Marshall: Mr. Smith, it -- it has nothing to do with this case at all. But what's the difference between concrete and cement?
Stuart A. Smith: Concrete, as I understand it, and I should know this, because I'm a city boy, I think is -- it -- is what happens when the cement is put in the building and hardens. I think you talk about a concrete sidewalk. I don't think you talk about a cement sidewalk, but I could be wrong on that. Well, the -- this taxpayer, the respondent computed its gross income from mining in accordance with the proportionate profits method. Indeed, it had to because, as I said, there is no representative field price and it did not sell, and as nor did anyone in this industry sell kiln feed, so there's no way to know how much kiln feed would sell for. But contrary to the command of the regulations and I have to emphasize that these regulations which are set forth in detail and are at the appendix to our brief are detailed and more or less preempt this area and preempt it in accordance with a command of Congress in section 611(a) that the commission to promulgate such regulations, the respondent computed its gross income by excluding bagged cement from the computation and by excluding the cost of bagging, storage, distribution and sales from the total costs element in the form and of the so-called “the -- the denominator in that fraction.” The Tax Court in this case upheld the respondent because the Tax Court has a rule in which it will follow the relevant circuit to which a case will go, the so-called “Golsen rule” and since the Court of -- this Court of Appeals had already expressed itself in the idea of basic case, that's why the Tax Court held the way it did and the Court of Appeals followed its idea of basic decision. Now, in our view with respect to the first question, the respondent's first marketable product is finished cement, regardless of the form of packaging. As I said, the theory of the proportionate profits method is that each dollar of costs produces the same percentage of profits to exclude any costs or any element of any aspect of gross sales received in production or a sale of the first marketable product ompromises the integrity of the formula.
Byron R. White: Well, what about companies that sell on delivered price basis and they pay for transportation? You don't include transportation. You -- you deduct transportation costs from gross sales price, don't you?
Stuart A. Smith: Only certain kinds of transportation, Mr. Justice White.
Byron R. White: The ones you don't make a profit on?
Stuart A. Smith: Well, essentially, if -- if they're delivered over, they would transport it and it's the transport as profit. That is -- that is an accommodation that the regulations make with respect to purchase --
Byron R. White: So, you do not -- so you did not include all elements of gross sales?
Stuart A. Smith: Well that -- that as I understand is the only element of gross sales that is not included.
Byron R. White: Why -- why isn't it included?
Stuart A. Smith: It's not included as I --
Byron R. White: Because the company doesn't make a profit on it.
Stuart A. Smith: Because the company -- basically, because it's to transport is profit --
Byron R. White: Well --
Stuart A. Smith: -- but --
Byron R. White: So -- so yes, I'm right that the company itself doesn't make a profit on it.
Stuart A. Smith: The company does not make a profit on the transportation but --
Byron R. White: But what if they didn't make any profit on its bagging?
Stuart A. Smith: If -- well, I don't think we have to worry about that in this case because --
Byron R. White: I know you don't want to worry about it but that's the very worry in the case.
Stuart A. Smith: No, it's not the very worry in the --
Byron R. White: But that's one of them.
Stuart A. Smith: Well, no, it isn't, Mr. Justice White. And the reason it isn't is because the -- the respondent -- because it's been stipulated in this case that the respondent realized the net profit on the sale of each bag of cement and it --
Byron R. White: That is not -- that it is not stipulated that he made a profit on his bagging expense on the bag.
Stuart A. Smith: Well, if you -- yes.
Byron R. White: Is it?
Stuart A. Smith: Yes, it is not stipulated that he made a profits on --
Byron R. White: As a matter of fact, the claim is that he loses, that it cost him more to bag than he -- than he adds to the price from the bagging.
Stuart A. Smith: Yes, but the -- but the point of the proportionate profits method is that it has to measure the sales of the -- of a finished product and part of the -- and the -- with this respondent as well as all other cement-integrated producers sold bagged cement in response to a customer demand, put cement in bags and there is no suggestion here that -- and it seems to me that the relevant fact is that this respondent earned a profit on each bag of cement that it sold. And once it is assumed that that is a profitable aspect of its business, all of that has to go into the equation.
Byron R. White: Except -- except the transportation because he doesn't make a profit on them.
Stuart A. Smith: Well, except transportation because transportation basically is taken out of his hands and put into the hands of the transporter. And the point -- our point is with respect to transportation that I know that the --
Byron R. White: But the point is that he doesn't make a profit out of it.
Stuart A. Smith: Exactly, exactly, but -- but he -- but he did make a profit on the sale of bagged cement and I think that makes all the difference in the world.
Byron R. White: I know you do.
Stuart A. Smith: The conditions of the regulation, the purchase -- transportation regulations are set forth at page 13(a) of our -- of our appendix to our brief and you can see that the conditions are very narrow. It says which are -- it's not transportation conducted by the taxpayer but which is performed in conveyances owned or leased by persons other than the taxpayer rather than in conveyances owned or leased by the taxpayer which are performed solely to deliver the taxpayer's minerals and mineral products to the customer rather than to transport such minerals or products for packaging or other additional processing which you charge the customers in such a way that the taxpayer does not ordinarily earn any profit with respect to such transportation. Now, that is the -- and as I understand it, the only arguable exception to the integrity of the method because the method demands that all -- the method won't work with respect to carving out that aspect of gross income from mining unless the denominator in that fraction includes all of the costs and the multiplier includes the gross income from mining and since this taxpayer sold cement in bags and charged a price for it, that whole price has to be included because if -- because if it isn't, you -- you don't get -- its an approximated method but the approximation you know starts to depart from the intended ambit of the depletion allowance which is to compensate for the exhaustion of the mineral deposit and not to -- and not to provide any deduction for --
Byron R. White: So, what is defining --
Stuart A. Smith: -- non-mining -- non- mining activity.
Byron R. White: Well, what if the taxpayer price list said, I'll -- I'll sell cement to you either in bags or in gross for exactly the same price per hundred?
Stuart A. Smith: For exactly the same price per hundred? Then I assume -- then I assume that you know people will either take it one way or another. That -- that doesn't mean that the taxpayer is not making a profit. All it means is that he's selling bagged cement for -- for less.
Byron R. White: And so what if he had had a price list that says I'll sell you bulk cement for $2 and bagged cement for $2.10? So, it doesn't make any difference what his price list is or what the cost of bagging.
Stuart A. Smith: No, it doesn't make any -- well, it does make it, in your example, it makes a difference, but the point is that his gross sale of a -- of his first marketable product in -- in that -- in the -- in your latter example is either $2 or $2.10. And we assume as the -- as a --
Byron R. White: And you -- it wouldn't make any difference to your case if it were stipulated that the cost of bagging was 20 cents, would it?
Stuart A. Smith: It wouldn't make any difference to me that the cost of bagging, and in fact it was -- you know, essentially, that there was a disparity between the bagging premium and the bagging cost in this case. But -- but essentially all that means is that he's selling the cement for less. I mean we have to assume that this taxpayer sold bagged cement, and you know the Third Circuit more or less inferred that in Whitehall and though -- and there's an array of on the part of authority that rejects the notion that you can simply say, “Well, the bagging aspects of this thing are just an entirely different business and that we're going to ignore them because it's -- because the regulations provide with explicit direction that the first marketable product is cement no matter -- what -- no matter how it's packaged in either bulk or bagged form.” If I can -- can refer the Court to page 8(a) of our appendix which says here, “The first marketable product meets the product, produced by the taxpayer as a result of the application of non-mining processes in a form or condition in which such product or products are first marketed in significant quantities by the taxpayers.” And then with specific reference to the cement industry, they say here, “For example, if the a cement manufacturer sells his own finished cement of various types in bulk and bags and also sells concrete blocks or dry ready-mixed aggregates containing additives, the finished cement of various types in bulk and bags constitutes the first marketable product.”
Byron R. White: And your suggestion is that's -- that's a permissible construction of the statute?
Stuart A. Smith: Absolutely.
Byron R. White: And that's --
Stuart A. Smith: Absolutely.
Byron R. White: And if it isn't, you lose, but if it is, you should win.
Stuart A. Smith: I think we should win because -- because the statute simply permits the Commissioner to -- permits a reasonable allowance and also, this case has been made under regulations prescribed by the secretary or his delegate. Now the -- that's a very broad delegation. We view those regulations as legislative in type and this Court has held in cases which are legion that the Commissioner's regulations are entitled to (Voice Overlap) --
Byron R. White: What is the -- what is the source of the language, first marketable product?
Stuart A. Smith: What is the -- I assume that the source of the first (Voice Overlap)
Byron R. White: Is that in the regulations anywhere?
Stuart A. Smith: Yes.
Byron R. White: Is it in the statute?
Stuart A. Smith: It is not in the statute but I assume that the --
Byron R. White: So, the first marketable product is a product of the Commissioner's mine?
Stuart A. Smith: Based -- based upon his reading of the -- of this Court's decision in Cannelton Sewer Pipe which talked about commercially marketable pipe.
Byron R. White: Because isn't that a little -- isn't it a little strange to say that -- that there are three products that are the first marketable product even though bulk cement -- you have to do something else to it to get it in the bags?
Stuart A. Smith: Put it --
Byron R. White: (Inaudible)
Stuart A. Smith: -- in the bag.
Byron R. White: Well, I know --
Stuart A. Smith: Yes.
Byron R. White: -- you have to do something else to it --
Stuart A. Smith: Yes.
Byron R. White: -- to get it in the cement block.
Stuart A. Smith: Oh -- oh yes.
Byron R. White: And it costs you money to do it and yet you say all three are --
Stuart A. Smith: No, no. That's not what I said. That the -- the block is -- is not the first marketable product.
Byron R. White: You said it was.
Stuart A. Smith: No, no, I didn't. He also -- it says the finished cement of various types in bulk and bags constitutes the first marketable product but the blocks and the aggregates and the (Inaudible) or whatever, that's a different product.
Byron R. White: What about the -- what about the bagged cement?
Stuart A. Smith: The bags --
Byron R. White: It costs him money if there's a whole new -- another process to go through to put in bags.
Stuart A. Smith: Yes, Mr. Justice White.
Byron R. White: And so how can there be two first marketable products?
Stuart A. Smith: Of course there -- no, there's only one first marketable product, cement, no matter how it's packaged.
Byron R. White: I know that's what you said.
Stuart A. Smith: Yes.
Byron R. White: There's -- there's -- although --
Stuart A. Smith: Because in our view, bagging is not -- is not a chemical or a physical process that adds -- that -- that alters the character of the -- of the manufactured product. The manufactured product is Portland Cement whether it's in a railroad car, the Fifth Circuit stated this with excruciating detail, whether its in a railroad car or a piggyback or whatever, it's still cement and if you put it --
William H. Rehnquist: Well, Mr. Smith, is that consistent with the Tenth Circuit's opinion at 14(a) of the petition down towards the bottom where the Court there says, “The Government seeks to have "bagged cement" be the "first marketable product" and to so include the expenses associated with the bag? Does the Government take the same position?
Byron R. White: Tenth Circuit --
Stuart A. Smith: Oh -- oh well, that's really a mischaracterization of the Government's position. The Government argues that the first marketable product is finished cement no matter how it's packaged. I'm reading this most charitably, I would assume that what the Court meant is that the Government seeks to have bagged cement included in the first marketable product because it's the -- it's the same cement. It's simply put in a bag.
Warren E. Burger: Once -- one answer might be that the reason you're here is because the Tenth Circuit, from your point of view, did not understand the case.
Stuart A. Smith: I think that's right. I mean, the -- the Tenth Circuit took the position that bulk cement was the first product and bagged cement was the second product, but -- the putting something in a bag is not the chemical or physical processing that the Court in Cannelton adverted to when it tried to fix the cut-off point as to when mining stops and when manufacturing begins. And you know, put -- the bagging is clearly part of the manufacturing cost but it goes into the sales of what this respondent and all other integrated producers sell as the first marketable product.
John Paul Stevens: Mr. Smith, may I ask you a question prompted by some of Mr. Justice White's question? As I understand your position as a matter of fact (Inaudible) with the taxpayer as they made a profit on the bagged cement --
Stuart A. Smith: Yes.
John Paul Stevens: -- and they wouldn't sell it otherwise.
Stuart A. Smith: Yes.
John Paul Stevens: But the profit on the bagged cement is less than the profit on the other cement because the bags are more --
Stuart A. Smith: Sure.
John Paul Stevens: -- costly than the bagging premium. But is it not true that in your analysis of the case, even if they lost money on the bagging -- the bagged cement, say, the bags were so terribly expensive, they packed them up in Christmas packages or something. They lost money on the bags but you'd still make the same position --
Stuart A. Smith: Sure.
John Paul Stevens: (Voice Overlap) --
Stuart A. Smith: It would have to -- it would have to be included in the gross sales of the first marketable product and -- then it would be -- you know --
John Paul Stevens: Yes, I --
Stuart A. Smith: -- it may -- it may affect the -- the amount of --
John Paul Stevens: From your point of view, just as if they maybe had a price cut during February --
Stuart A. Smith: Sure.
John Paul Stevens: -- and lost money for --
Stuart A. Smith: Sure.
John Paul Stevens: -- three or four weeks the -- you'd still use the same basic ingredients (Voice Overlap) --
Stuart A. Smith: Exactly, exactly. And went on -- and -- and the suggestion on the -- the argument that I'm making is simply not one that's based up upon regulations that we contend deserve great deference as legislative regulations. The Court has held in a variety of depletion cases that the Commissioner has special powers in the depletion area because the legislative authority delegated the -- the authority delegated to him is so broad, but in the -- but -- but the respondent is faced with an array of appellate decisions in which the court below is -- stands as the sole exception that the first marketable product in this area is bulk and bagged cement. That is, finished cement. I would like -- since the second question is a subsidiary one and I assume that costs necessarily, include in the denominator, flow from the first -- from the first opinion I -- from the first question, I would like to save my remaining time for rebuttal.
Warren E. Burger: Well, just one more question. Does your case really boil down and perhaps oversimplified, something like the difference between buying a loaf of bread in Paris where you put it under your arm, and buying one at the supermarket here where it's all wrapped up in a package?
Stuart A. Smith: Exactly, it's the same bread. And if there are tax deductions that -- or computation that flow from -- from that that involve gross sales, if the -- if the supermarket in the United States has to sell some, has to raise the price to take into account the bag or if it doesn't, that -- those sales have to be included in gross sales.
Warren E. Burger: Very well.
Stuart A. Smith: And I would like to save the rest of my time for rebuttal.
Warren E. Burger: Mr. Bedell.
Dennis P. Bedell: Mr. Chief Justice, and may it please the Court. The question in this case seems to have been cast in terms of preserving the integrity of a mathematical, automatically functioning formula, rather than in terms of preserving the integrity of the purpose for which that formula is being applied. The purpose -- the purpose is to ascertain an integrated miner's gross income from mining.
Warren E. Burger: Well, let -- let me put it -- let me put -- I -- I'm alternately confused in finding the case simplified. When -- when and what is it that can be first be sold? What can first be sold here?
Dennis P. Bedell: Bulk cement.
Warren E. Burger: Yes.
Dennis P. Bedell: And bulk cement --
Warren E. Burger: Is -- is the case any more complicated than that?
Dennis P. Bedell: Not really. That is -- that is the product that is sold in a substantial quantity. And indeed, as the Tenth Circuit has correctly recognized, bagging is something that occurs additionally and it has a discrete income component.
Warren E. Burger: Well, this sounds as though you agree with Mr. Smith --
Dennis P. Bedell: It is --
Warren E. Burger: -- which I (Voice Overlap) --
Dennis P. Bedell: I do not agree with Mr. Smith.
Warren E. Burger: It sounds as though you do, though.
Dennis P. Bedell: No, there are --
Byron R. White: You say bagged -- you say bagged cement is not the -- one of the first marketable products (Voice Overlap) --
Dennis P. Bedell: I certainly do because bulk cement is sold in significant quantities.
Warren E. Burger: More bulk than bag.
Dennis P. Bedell: Indeed, approximately 95% in bulk.
John Paul Stevens: Well now, what if the situation were reversed?
Dennis P. Bedell: It is the first product reached.
John Paul Stevens: Suppose there were more in bags than in bulk, only 1% of bulk, would your position here be exactly the same?
Dennis P. Bedell: No, it would not because you have to have sufficient sales to establish the price so that you have a -- a meaningful first marketable product. Just as in the case of a representative field price at -- where the product is sold after mining ends.
Byron R. White: Where is that line of demarcation, 50%, 40%?
Dennis P. Bedell: Cases in the depletion area under the representative market or field price generally are found at 10%, 15%, 20%. It has to be determined with reference to the realities of the market.
Byron R. White: What -- what do you want it to -- to be included in your gross sales figure, the multiplier there? You -- you just want the -- yours -- the -- your gross sales of bulk cement in that or not?
Dennis P. Bedell: The sales figures should include the gross sales of bulk cement and the sales value of the cement which is sold in bags because that also is the product of cement rock which was mined by the taxpayer and manufactured into finished cement.
Byron R. White: So you're saying that -- you -- you say along with Mr. Smith then that you include in the sales figure the -- the cement sold in bags?
Dennis P. Bedell: You have to include an income figure for cement sold in bags and the proportionate profit formula contemplates this because it takes actual sales of the first marketable product, sales of cement in bulk and with respect to products that are second or third, they further processed or product after first marketable product, they take a constructed sales value derived from the sales value applied to the first marketable product.
Thurgood Marshall: You used the word process. What was this process and put it in the bag?
Dennis P. Bedell: It is the activity of putting it into a bag, Mr. Justice Marshall.
Thurgood Marshall: And that does have a process, does it?
Dennis P. Bedell: Not in the sense usually used in the depletion area, it is not.
William J. Brennan, Jr.: (Inaudible) on the portion of the gross sales that represent product that was bagged, what is the constructive -- the sales price that the taxpayer contended for? Is it the equivalent of the unbagged cement or is it the actual price less the bagging cost?
Dennis P. Bedell: The taxpayer took the -- what is the less favorable position, namely, less favorable to itself or the actual sales price less the bagging cost because in this case, as the Court has noted, the bagging cost exceeded the bag premium, the additional revenue generated by selling the cement in bags rather than in bulk. And so the taxpayer took sales figure of cement sold in bags, reduced that by the cost of bagging, which was greater really than the additional income generated by it. And put that in the sales figure that then was allocated in accordance with the proportionate profits formula.
William J. Brennan, Jr.: It doesn't seem to me that's consistent with your basic position that the sales cost is the cost of the unbagged cement. I mean the sales price is the price of the unbagged cement? It may have been good tactics to do it that way because I see what you're saying but --
Dennis P. Bedell: The --
William J. Brennan, Jr.: -- it's somewhat inconsistent.
Dennis P. Bedell: The taxpayer was following the law as had been set forth by the Tenth Circuit Court of Appeals in 1968 in the Ideal Basic case when it interpreted the manner in which the proportionate profits formula functioned in the case of a cement manufacturer.
William J. Brennan, Jr.: Do you agree, by the way, that the Government's position is the one that the regulation commands and so you must -- you must attack the regulation?
Dennis P. Bedell: No, I do not agree with that. It seems to us that there is, within the regulation, room to find a result which is consistent with the purpose of the regulation. The language Mr. Smith read to us which said that the bulk and packaged products are considered to be essentially the same product. It doesn't say they are. It says they are considered to be. That is language of -- of presumption, not language of absoluteness. And when a result occurs under regulatory language that clearly is at conflict with a purpose of the language, then seems to me that this language is susceptible of being interpreted in a manner as to cure the -- the distortion which will result under Mr. Smith's interpretation. And indeed, I think that distortion should be focused on because it is material to -- to realize the manner in which the purpose of the -- applying the formula is being frustrated. Now, let's return momentarily, the purpose is to determine the gross income from mining. That is the value of the taxpayer's mineral that could have been realized had it been sold after mining process's end. So, we're looking to a market value for the raw mineral product. That's the purpose for which the formula is being applied.
Warren E. Burger: And when did the process end in your view?
Dennis P. Bedell: The mining process ends at the point of kiln feed.
Warren E. Burger: (Inaudible)
Dennis P. Bedell: Well, that is introduced into the -- the kiln, there is no dispute between the Government and the taxpayer with respect to that. But the taxpayer's cement rock under the Government's interpretation would have one value if that cement rock was manufactured into finished cement and sold as bulk cement. But a different value, the same identical mineral, would have a different value if it was manufactured into finished cement and sold in bags or looked at differently. If in a given year, the taxpayer sold 5% of its cement rock in the form of finished cement in bags, the cement rock on an overall basis would have one value. The next year it sells 20% in bags and the same cement rock from the same quarry, assume the same economic conditions, drops in value. On the other hand, if it went down to zero instead of 7% it had here, the cement rock changes value. Now, this -- this is the identical mineral, which under the -- the Government's theory is having a change in value because of this bagging activity, an activity which occurs after all mining and all manufacturing processes have been completed.
Potter Stewart: What -- to echo my Brother Blackmun's question, what if your client sold all of the cement in bags and always had and always will?
Dennis P. Bedell: If the -- all of the cement were sold in bags, bagged cement would be the first marketable product because what is being looked to --
Potter Stewart: Bagging would clearly be part of the --
Dennis P. Bedell: Then bagging would be part of the cost in arriving at that --
Potter Stewart: All right.
Dennis P. Bedell: -- because what is being looked to is what is the point in the activity of getting to market when the taxpayer --
Potter Stewart: But however, if a competitor sold all of cement in bulk?The -- the difference of the mined product would be different between the two companies, wouldn't it?
Dennis P. Bedell: Under -- under the --
Potter Stewart: Or being identical product.
Dennis P. Bedell: Under the proportionate profits formula, yes.
Warren E. Burger: To carry it one --
Dennis P. Bedell: And --
Warren E. Burger: -- step further, what if the industry as a whole sold largely or totally in bulk and this one manufacturer sold it just in bags?
Dennis P. Bedell: There would be -- because of the -- the manner in which the formula, mathematical formula operates, there would be a different result. Well, the question is in this case, there are actual facts.
Potter Stewart: Right.
Dennis P. Bedell: There are actual facts which can be looked to avoid what is an unrealistic result from the application of mechanical formula. And that really is the question. Can actual facts be taken into account? The bagging cost and the amount of additional income because it is clear on the record that the taxpayer realized a certain increment of revenue when it sold cement in bags rather than in bulk, an additional amount of revenue.
Potter Stewart: How is that different from, say, you have three or four methods of sales, some you sell through distributors and some on commission and some through door-to-door salesmen, and there are different sales costs per 10% of your business and another 20 and another 50, but it's still all cement would use -- and -- and as those proportions vary from year to year, the value of the -- of the mined product would also vary from year to year, as I suppose. Would you say that nevertheless, those are -- would you say that's all one marketable product or does it -- does it change from time to time? Same as none of them was in bags but some of it was sold in smaller quantities at somewhat different prices because of different sales techniques. How is that any different than the -- the bagging problem?
Dennis P. Bedell: One -- since the -- well, it seems to me it's different in two reasons because in -- in the first, there may be sales much closer to the -- the manufacturing plant itself and so as they're moved away from that --
Potter Stewart: I'm leaving out transportation because I'm just focusing on sales costs.
Dennis P. Bedell: The other -- the other thing is that sales costs. Sales costs are costs which a number of the courts said they've looked at it, the lower courts, have decided are costs allocable both to the mining and the manufacturing activity.
Potter Stewart: Well, that's exactly --
Dennis P. Bedell: And so they --
Potter Stewart: -- like -- like they say the bags are --
Dennis P. Bedell: -- they allocate --
Potter Stewart: -- allocated to both, too.
Dennis P. Bedell: They allocate them -- well, the -- the Government though, under its interpretation of the formula would allocate the cost of bagging solely, solely to the manufacturing non-mining side.
William H. Rehnquist: Well, Mr. Bedell --
Potter Stewart: That goes into the total figure, doesn't it? Just as the sales costs go into the total figure. And maybe I'm wrong, but I thought --
Dennis P. Bedell: Well, the -- the manner in which --
Potter Stewart: Let's say in the general sales manager. How -- what is the -- to his salary?
Dennis P. Bedell: The salary of a general sales manager should be treated as both in the numerator of the formula and in the denominator.
Potter Stewart: Is that what you did in your tax return?
Dennis P. Bedell: Again, following the Tenth Circuit, the Tenth Circuit interpretation or --
Potter Stewart: Well, yes or no, did you or did you not?
Dennis P. Bedell: No, because that is not the manner in which the Tenth Circuit interprets it.
William H. Rehnquist: If -- if one reads the statutory language itself, the 611(a), the general rule in talking about mines, it says that the allowance for depletion, for depreciation improvements according to the peculiar conditions in each case, such reasonable allowance in all cases to be made under regulations prescribed by the secretary or his delegate, is it conceivable in -- in view of that reference to peculiar cases that the numerator or denominator were worked out by the -- could itself be unreasonable in some cases?
Dennis P. Bedell: Exactly, exactly. It is contemplated by the -- the statute not only by the language that it'd be reasonable but that it take into account the variations in different cases. Obviously, administrative convenience and simplicity require ignoring some variations, but when you have variations that are supported by definite facts such as in this case, peculiar circumstances is what we have here, and ascertainable income item and ascertainable costs associated with the bagging activity, then that is the type of case which it should be dealt with, and indeed that is what the Tenth Circuit has consistently held that the Ideal Basic case in 1968, the Portland Cement Company of Utah case in 1969, and then in this case. Because the -- of this actual fact, it is a factor which can be taken into account and supports the determination as the Tenth Circuit has held that the first marketable product was cement in bulk. The -- the confusion between the premise, the premise of the proportionate profits formula and the purpose which it serves of trying to find gross income from mining has clouded the issue in -- in many -- that the context has been looked at up to now. There is distortion which occurs if additional processes farther away from the crude mineral product which is being valued are taken into account. The Tenth Circuit realized that and the Tenth Circuit because it realized that the purpose of the proportionate profits formula is to value the mineral product found a place closest to the mine, closest to the point where the mineral product is, and that is cement in bulk and treated that as the first marketable product so that it was the starting point for the application of this mathematical formula. To ascertain the market value, it did away with the recognized distorting effects which occur if additional activities on which a profit is not earned are -- are included in the computation in the same manner -- in the same manner as the regulations explicitly recognized with respect to purchased transportation. Purchased transportation by common carrier to the customer to deliver the material to the customer is specifically excluded. Why? Because there is a reason. It is not reasonable to presume that the miner earns a profit on the transportation because the carrier earns it. The evidence of a tariff demonstrates that. Here, the facts, the evidence of the bagging premium and the bagging costs demonstrate that it is not appropriate to attribute any further profit to the bagging activity, and so the Tenth Circuit excluded that from the computation in a similar manner by its determination that the first marketable product is cement in bulk. The -- the result of making the proportionate profits method work in the best manner it can to serve its purpose can be accomplished as the Tenth Circuit did or by finding implicit in the regulatory language, flexibility, to make its application a reasonable one, one consistent with the actual facts. I thank the Court.
Warren E. Burger: Very well. Mr. Smith, do you have anything further?
Stuart A. Smith: I think that the respondent's emphasis on -- on actual facts is -- is belied by the -- by the provisions of the regulations which provide that if -- that the Commissioner may determine that a method of computation is more appropriate than the proportionate profits method or the method being used by the taxpayer and that the taxpayer can request such a determination of an alternative method. Here, the taxpayer has, because of its integrated status, and the absence of a -- of a representative field price has invoked the proportionate profits method of computing its gross income from mining. It hasn't sought to bring any actual facts to the Commissioner before -- before going into this litigation. The proportionate profits method provides in detail the -- the language I read to the Court about a cement manufacturer. When we talk about flexibility of the regulations, the regulations provide at page 21(a) of our appendix with precise reference to this case, “If a cement manufacturer,” et cetera, et cetera there is no room for any flexible reading. What the respondent seeks in this case is nothing less than an invalidation of these regulations which three Courts of Appeals have approved and which the court below stands in sole and persistent invalidation of. And there's no way that one can read these regulations in a flexible way to take account of what this -- of what respondent seeks in this case, which in our view, is nothing less than an expanded depletion allowance that would include part of its non-mining income. The cost ratio method is indeed an -- an approximation, but it is an approximation which is designed to take into account the fact that each dollar of costs produces a proportionate amount of -- of gross sales --
Potter Stewart: Well, that -- that in itself is something of a fiction.
Stuart A. Smith: Well, of course, it's a --
Potter Stewart: Or at least (Voice Overlap) --
Stuart A. Smith: -- of course, it's a fiction but it's an approximation --
Potter Stewart: Right.
Stuart A. Smith: -- which is based upon the fact that there's no really better way to do it, and regulations like that, the choice that the Commissioner makes in -- in areas like a technical area like depletion, and in other areas of the code have been consistently upheld by this Court --
Potter Stewart: And in --
Stuart A. Smith: -- and by the courts as basically --
Potter Stewart: And your point is that this taxpayer elected to (Voice Overlap ) --
Stuart A. Smith: Elected the proportionate profits method and you can't simply elect parts of the proportionate profits method. Putting a cement -- putting cement in a bag is, in our view, and in the view of the regulations, not processing. It doesn't alter the character of the cement. The cement, whether it's in a tank car or whether it's in a bag, is still Portland Cement. That was the respondent's first marketable product and it's the gross sales of those things. If the -- if the taxpayer had sold Portland Cement at a great killing, at a very high price, whether -- it would still be in gross sales and it was a -- you know, it may produce some variations or some distortions, or if the market goes down, it would still be in gross sales. And the fact that, you know, it sought to satisfy a particular kind of demand of a small -- of small customers in this -- in the construction industry for 94-pound bags of cement, that was part of its business. And if it's part --
William J. Brennan, Jr.: Would you --
Stuart A. Smith: -- of its business --
William J. Brennan, Jr.: Would you say if for the same reason that sales expense after bagging is included?
Stuart A. Smith: The sales expense after bagging to get it to the customer is a -- is -- goes into the denominator.
William J. Brennan, Jr.: For the same reason?
Stuart A. Smith: Exactly.
William J. Brennan, Jr.: For the same reason?
Stuart A. Smith: Exactly. And for -- and for all those purposes we think the reason -- the judgment should be reversed.
Warren E. Burger: Thank you, gentlemen. The case is submitted.