William H. Rehnquist: We'll hear argument now in No. 94-820, the Metropolitan Stevedore Company v. John Rambo. Mr. Babcock.
Robert E. Babcock: Thank you, Mr. Chief Justice, and may it please the Court: The issue in this case is whether Longshore Act compensation for permanent partial disability stops when economic harm caused by injury ends or whether the benefits must continue in the absence of economic harm until the worker's physical condition improves or fully resolves. It's an exercise in statutory construction. And the starting point must be the central and, we think, undebatable fact that the statute contains no express distinction between physical and other factors in determining the conditions which may serve as grounds for modification. Any restrictions on modification... this clear, bright line that Respondent Rambo found... finds separating a worker's physical condition from all the other factors and circumstances to collectively determine the economic effects of injury... has to be found outside the statutory language itself. We say that it cannot be found within the structure of the Act, the meaning or the context within which the meaning of the word must fit. It's simply not a concept suited to a wage loss system. This bright line, this sharp distinction, would provide benefits to those who have no economic loss, and deny them to those to whom that disability... that economic loss... was delayed. When Congress has decided... and they have decided on several occasions... to provide benefits in the absence of economic loss, they've made that intention quite clear. They've used a schedule, which now appears at Sections 8(c)(1) through (20) of the Act... it has been there since its beginning in 1928... or as they did in 1984, they amended and tailored the definition of disability to require focus on impairment in the case of certain retiree cases involving occupational disease. And they did that because, in that instance, the retirement was thought by the Benefits Review Board and some courts to have foreclosed the prospect of economic loss. We see in the legislative history nothing that demonstrates the presence of an intent to mark between physical and economic factors. And we certainly see in the legislative... in... excuse me, in the decisions of this Court no suggestion, particularly in Banks and O'Keefe, that a distinction should occur.
Ruth Bader Ginsburg: Now, the initial determination of liability is made by considering things other than the physical condition?
Robert E. Babcock: The--
Ruth Bader Ginsburg: The physical condition as well as the effect on the... the wage-earning ability?
Robert E. Babcock: --The original determination is made in accordance with some instructions appearing at Section 8(h) of the Act, and includes, in addition to the physical condition, virtually all that would affect either the stability of the current employment or the prospects and stability of future employment, both micro or personal factors such as skills and capacities, and macro factors such as the industry as a whole. And in this situation, though, the source of this perceived distinction, in our judgment, lies not in the language, not in the structure, not in the history, not in the decisions of this Court, but, instead, it lies in what can be best called 62-year-old dicta, drawn from a case in which the central question that we're now dealing with was not even a factor. That case, McCormick, a 1933 opinion out of the 9th Circuit... we would reach the same conclusion in McCormick regardless of whether we're following the Fleetwood Rule, allowing consideration for modification purposes of all factors, or following the more rigid rule that the 9th Circuit adopted, simply because Fleetwood lost his income because there was a depression. He didn't... and therefore he sought more compensation. Even under our rule, no more compensation would be payable because the loss... this additional loss... is unrelated to the injury itself.
William H. Rehnquist: Fleetwood is the name of the person involved in the McCormick case?
Robert E. Babcock: Excuse me, Your Honor. Fleetwood is the name of the worker involved in the 4th Circuit case as to which the 9th Circuit's opinion in this proceeding stands in contrast. I've forgotten the name of the worker in McCormick. Another case relied upon in Rambo and by Petitioner at length is Pillsbury. Once again, dicta. And in both cases is... there has been repetition, we think thoughtless repetition, of those cases and their dicta throughout the years, and we don't think they have gained any greater significance than they originally possessed simply because they've been used at times in other cases.
Antonin Scalia: Do we... do we adjust conditions for inflation? I mean, when you figure out whether conditions have changed, do you use the dollar amount he was earning or... or... to adjust that up or what?
Robert E. Babcock: The Benefits Review Board's rule... and it's been approved by, I think, all the circuits that have looked at it, requires the parties who are taking earnings at a date subsequent to the date of the injury to prove, as a matter of fact, what those new jobs or that new position would have paid at the time of injury. There's always an effort to bring it back to erode the effects of inflation and make that not a meaningful factor.
Antonin Scalia: And what if his condition gets worse? If his physical condition gets worse, is there any remedy for him?
Robert E. Babcock: Well, it would depend on whether one were working from the 9th Circuit or the 4th Circuit position. Let's presume that Mr. Rambo had his injury after he had been trained and gained the skills to be a crane operator and was now making much higher earnings than the typical longshoremen. If you took the 9th Circuit approach and a year passed and then containers were replaced by rail cars or some other form of unloading, Mr. Rambo would not, even if his physical... would not, under that circumstance in the absence of a change in his physical condition, gain anything. Improvement or deterioration of physical condition is always a... even within the 9th Circuit's view... basis for modification.
Antonin Scalia: Is-- --But under the 4th Circuit rule, he would get--
Robert E. Babcock: Yes, it's just broader. It includes both the physical and the other economic factors that we believe should be included.
Anthony M. Kennedy: --How often would that adjustment be made under the 4th Circuit rule? You lose your job for six weeks or eight?
Robert E. Babcock: I think that it's very hard... when you move off a single definition, you start down a slippery slope to find a place that's a logical stopping point. I don't think that lies within the term "conditions" itself. You have to look to some of the other things that will limit the frequency of the claim. The prospect of success is one, because an employer who is unsuccessful pays both his and the claimant's attorney's fees in the process. A claimant who is unsuccessful of course pays his own. Settlement and the frequency of it... 90 to 95 percent of these cases settle... is not a modifiable resolution. I don't think it'll happen very often. That's the best I can say. I know of no studies. We lived with this rule for 10 years, since Fleetwood, since the Benefits Review Board has worked with it, and there certainly has been no torrent of these cases.
John Paul Stevens: Of course, Fleetwood is a case where the employer got the modification, wasn't it?
Robert E. Babcock: That's correct.
John Paul Stevens: But are there similar cases where the employee has gotten modification?
Robert E. Babcock: In the amicus brief submitted by Industrial Indemnity Insurance Company there was reference to one case... I believe it's name was Vasquez... where an employee had come in seeking modification as a result of a loss of skills and a loss of employment and was awarded--
John Paul Stevens: Just... just one case... it would seem to me that there is a lot... there would be a lot of possibilities for claims by employees that... say the job had been abolished or something like that... the example you gave... but why do you suppose there aren't more of them?
Robert E. Babcock: --Well, I think first, in reality, 90 percent of these cases settle before the first hearing occurs. And then you have, following that, since '84 and amendments permitted it, some settlements post-hearing and post-award, so that forecloses that basis for... for modification. The--
Anthony M. Kennedy: Are you saying that in your experience there are say hundreds or thousands of cases in which adjustments are requested because of economic changes that the Board never sees?
Robert E. Babcock: --No, I'm saying... excuse me... I see, one way or another, probably a third to half of the longshore cases on the West Coast, both shipyards and stevedoring trades. I know of five or six modification cases, including this one, that have come up in the past 10 years.
John Paul Stevens: Were all those requests by the employer?
Robert E. Babcock: Except for the Vasquez case--
John Paul Stevens: But the one you knew about, though?
Robert E. Babcock: --All that I've... all that I've dealt with have dealt with employer requests, that's correct.
Anthony M. Kennedy: What I'm trying to get some sense of is your experience as a practitioner and just how many of these claims are made and resolved without the necessity of... or review by the Board?
Robert E. Babcock: I... I would say virtually none, Your Honor. It just doesn't occur. If you look through the last 10 years of the... the reports of the administrative law judge opinions that are collected in the Matthew Bender publication of it, it s a minuscule number of cases involving the issue.
Anthony M. Kennedy: Well, I suppose, given your being in the 9th Circuit, I... I should ask what the experience of some other circuits are.
Robert E. Babcock: Well, I'm speaking nationally: The 9th Circuit, of course... those of us within it... lived under the Benefits Review Board rule until the 9th Circuit issued its opinion in this case, striking the Board's rule down.
Ruth Bader Ginsburg: What about State workers' compensation schemes? Don't they have some analog to this?
Robert E. Babcock: There are. And... and I did my best to try to gather them. It's kind of hard to find sometimes what States do, because they're done in an informal basis. We were able to identify about... if I may pull my note for a second, Your Honor... 13 States that have taken very similar language, "condition" or "conditions", and have judicially determined that to encompass the economic and the physical. Six have gone the other way, taking those same terms and said it's limited to the physical.
Ruth Bader Ginsburg: So you have the same split among the States that you have between the 4th and the 9th?
Robert E. Babcock: I don't think I could do that, Your Honor, without looking at the States. I didn't see a... a geographic pattern.
Ruth Bader Ginsburg: Well, I... there is a split, and some States take the position that the 9th Circuit has taken and some take the position that the 4th Circuit has taken--
Robert E. Babcock: Right.
Ruth Bader Ginsburg: --construing similar language in State statute?
Robert E. Babcock: That's right. It's about 2 to 1, with the majority favoring the Fleetwood, more open interpretation of the language. And about 15 more have just been more precise in their legislative direction, sometimes saying you must include economic factors, sometimes saying you may include only physical factors.
Antonin Scalia: You include... I gather... what if there's just a... just a... a particularly good couple of years for the industry, so that all the wages in the industry are higher; is that one of those conditions?
Robert E. Babcock: I think it will get you in the door to a proceeding, seeking modification. And if you can persuade the administrative law judge that this blip, this... this hiccup in the economy, demonstrates a permanent change in the worker's capacity to earn, one which is likely to continue, as Section 8(h) required, into the foreseeable future, then you will see an increase in the average weekly... in the wage-earning capacity.
Antonin Scalia: But that... but that's an increase that would have happened anyway. I mean, you know, injury or no injury, he... he should get the benefit of that blip. He... he would still have been in that industry.
Robert E. Babcock: Well, that's right. And... and so the response of any claimant in that situation is, even if you've got this number... he's going... you know, that... that it increased and it's permanent, he's going to turn and say, I... I would think, but this isn't in the interest of justice... which is your overall equitable limitation on it and certainly one the Congress accepted... it isn't in the interest of justice to take away some of my money because I would have been there anyway and I would be successful.
Stephen G. Breyer: What... what do you think the conditions are, other than the physical?
Robert E. Babcock: I think that they encompass the availability and suitability of employment. I think they encompass the industry and its condition, all of the factors that we deal with now. As an example, Your Honor, when an individual has been injured and gone back to work in the shipyard... which is probably the best example that we deal with... we the debate always is, does his... do his earnings that he has received within the shipyard reasonably reflect what he's likely to earn in the future? And there's always a question about how long is this shipyard going to continue, given the state of our Nation's--
Stephen G. Breyer: So... so, well, then I was just interested... you said the lack of jobs in the depression wouldn't be a relevant factor. Why not? Well, what about inflation or just old age?
Robert E. Babcock: --Well, it--
Stephen G. Breyer: As you get older, it's harder, if you're handicapped, to... to make more money.
Robert E. Babcock: --If I may take them one at a time. The... the depression situation... earning... earnings are down. You could say earning capacity is down if it's a long-term depression. But the amount of increased benefits that the individual would otherwise receive are unavailable to him because there's no relationship between the injury and that job. The injury still has to play a role at all steps in this process. Because we only will compensate for impaired earning capacity attributable to the injury. Old age... first, I'd say that may be just as physical a condition as any of the others, and is a problem, if... if it exists, exists under either of the definitions. But, generally, we would argue that's an intervening--
Stephen G. Breyer: What I'm having trouble is finding that... that a person, say, has... his arm doesn't... is... is handicapped, and so they say, here in 1952, that's worth $80 a week, because you can't hold these jobs. And now, in 1992, of course, $80 is almost nothing, and it would be worth a lot more. So that's inflation. His injury is now causing him to lose a lot more money. Or he's now 70 years old and... or 60 years old, and it's much harder for a 60-year-old person without an arm to find a job than for a 30-year-old person without an arm, quite likely. And... and so what... do you take all those things into account?
Robert E. Babcock: --All of those things are taken into account, both in the original determination and have to be taken into account in the assessment of whether a modification is appropriate; that's correct. If there are no further questions, I would like to reserve the balance of my time.
William H. Rehnquist: Very well, Mr. Babcock. Mr. Minear, we'll hear from you.
Jeffrey P. Minear: Mr. Chief Justice, and may it please the Court: The Director submits that Metropolitan may seek modification of Rambo's disability award based on his acquisition of new job skills that have restored his wage-earning capacity. The statutory language here provides some... some very useful guidance. Section 22 allows modification based on a change in conditions. Congress' use of the plural term 22 is not limited to a change in the claimant's physical condition. If Congress had intended that result it easily could have said so.
John Paul Stevens: May I just ask one question, Mr. Minear? At the time that the Fleetwood case was decided back in '86, there was some discussion in the opinion about what the Board's position was. Is the Board's position today the same as it has always been?
Jeffrey P. Minear: The Board did not take a position on this issue. Oh, excuse me, the Board. The Director... the Director, who we represent, has not taken a position on this issue until the Fleet... after the Fleetwood case. The Board's original position... at least in 1984... it claimed that it was overruling its prior rulings. The only... only ruling, though, it cited was a case called Rizzi. And Rizzi did not involve a... a case such as we have here, where there's been an acquisition of new job skills. Instead, Rizzi involved a situation where the individual had in fact suffered degeneration unrelated to his injury. And the court had said that that was not compensable and... and apparently believed that because it was not a physical injury. So, in other words, I think the... the short answer to this is that the Board at least thought it had that position in 1974.
John Paul Stevens: It thought it had which position in '74?
Jeffrey P. Minear: It thought it had the position of being limited to a physical condition--
John Paul Stevens: Physical only.
Jeffrey P. Minear: --But the fact is--
John Paul Stevens: Well, when... when did the... either the Director or the Board first manifest the position that it's not limited to physical injury?
Jeffrey P. Minear: --Well, I think there were various manifest... manifestations along the way, although no clear holdings.
John Paul Stevens: When is the first clear indication of what their... their position was, it was not limited to physical holding?
Jeffrey P. Minear: I think one clear holding would have been in 1972, when the Assistant Secretary for Labor indicated that if a worker failed... indicated in congressional oversight hearings... that if a worker failed to... to accept rehabilitation opportunities, his award could be requced on that basis.
John Paul Stevens: Well, apart from testimony in here, when in any... any actual... controversy... you know, any... any... any actual case... when did either the Director or the Board first manifest the position unequivocally that you now espouse?
Jeffrey P. Minear: I don't think it was unequivocally manifested until 1984. But, on the other hand, there is no clear indication in the other direction as well. Most of those statements that we find in the... in the various court cases are all dicta. And in fact they have not squarely addressed the issue.
John Paul Stevens: See, the thing that puzzles me... just to get it on the table... it seems to me if the... if the... if that rule is correct, there would have been a lot of cases. Because there are a lot of reasons why you could have changed conditions both ways, and yet there don't seem to be many.
Jeffrey P. Minear: Well, I... I don't think that's necessarily so. And... and there are several reasons for that. First of all, the retraining opportunities were far less back in the 1930's and the 1940's as compared to... to today, when there are more opportunities for retraining and rehabilitation. The common practice, as I understand it, during the thirties and forties if an in... if a worker was injured was that he would be put in a light-duty program. He'd receive compensation based on his decreased wages. And his situation would not change very much. But now, because there are more opportunities on the waterfront, in fact, for white collar jobs, for jobs such as Mr. Rambo has, of operating a crane--
John Paul Stevens: Yes, but wouldn't... wouldn't your principle apply if he got a job as a travelling salesman and doubled his income?
Jeffrey P. Minear: --Yes. Yes, it would also apply in that situation.
John Paul Stevens: So, I mean, there must be lots of these people who have been able to improve their earning capacity for reasons unrelated to their injury?
Jeffrey P. Minear: Well, another difficulty is that in fact, in those cases where the people leave the industry, the employer may not know what their current earnings are. Congress actually dealt with that issue in 1984 by enacting 8(j) of the Longshore Act, which allows an employer to require a disabled employee to submit wage statements so that the employer can keep track of what the disabled worker's wages are. The obvious reason for that was base... was the assumption that there would be a basis for modification of awards based on the increased earnings.
Stephen G. Breyer: Yes, but the obvious one is inflation?
Jeffrey P. Minear: Excuse me?
Stephen G. Breyer: The obvious one is inflation. Why weren't all the workers coming in and saying, in the mid-seventies, late-seventies, you know, this is worth nothing now and--
Jeffrey P. Minear: Well, the inflation... excuse me, Your Honor--
Stephen G. Breyer: --Yes.
Jeffrey P. Minear: --To answer your question, the Longshore Act does take into account inflation in Section 10, in the case of total disability, but not in the case of permanent partial disability.
Stephen G. Breyer: So why weren't they all in and saying, hey, first of all, inflation, and... and second... well, I mean inflation is the obvious one and I... I'm sure there... there are a lot of others where... where... why wouldn't they just... they get older... that's the other obvious one.
Jeffrey P. Minear: Well--
Stephen G. Breyer: And it is harder to find a job when you're older.
Jeffrey P. Minear: --Well, under our construction, those types of considerations are not relevant changes in conditions.
Stephen G. Breyer: Why not? That's--
Jeffrey P. Minear: The reason why is because those factors are considered in the initial benefits award. A determination is made in terms of what the person's future wages might be. Now, if there is a mistake--
Stephen G. Breyer: --And you think that we're accurately in... in the... in the early seventies, people really predicted the Arab oil embargo and everything?
Jeffrey P. Minear: --Now, if there was a change there, that would arise under a mistake of fact rather than a change in conditions, to the extent that that factor is considered, in the initial benefits determination. And as this Court indicated in O'Keefe, there's no limitation to the types of facts that could be considered in a particular case. So we think that the... the same rule should apply to change in conditions.
David H. Souter: Well, what about general... a general change in the economy? We go into a boom. Someone who was unemployable before now faces a... a job market that is crying for... for more workers. Does the... does the Director consider that?
Jeffrey P. Minear: No, the Director generally doesn't. And this is on the basis of McCormick and... and Burley. McCormick, you recall, was a case involving a... the depression, and the benefits... well, actually the court at that point held... the court of appeals... held that you do not take into account change... economic changes of that type in adjusting an award. Burley was a case that involved an increase in work available to a disabled worker during World War II, because of the booming economy. The same result there. That is not a relevant condition.
David H. Souter: Well, is the... what... what condition is relevant beyond an... an acquisition of the new skill?
Jeffrey P. Minear: New skills, a change in physical condition.
David H. Souter: Yes.
Jeffrey P. Minear: The elimination of a particular job because it's obsolete, for instance. Suppose that the award was based on the understanding that this person could perform a job that is no longer available anywhere in the economy because of... changes have made his remaining skills obsolete.
David H. Souter: Yes.
Jeffrey P. Minear: I think there's one--
Antonin Scalia: Why... why do you draw the line-- --Yes, why is that different from the things you say aren't included? Yes. How... what's your criterion?
Jeffrey P. Minear: --Well, the difference there is he had a particular skill that was taken into account at that... at that time. I think there's a more important point, though, that ought not to be lost. And that is that Section--
John Paul Stevens: No, but--
Jeffrey P. Minear: --Excuse me. Section 22 also applies to modification of death benefits. And death benefits are... may... are awarded without regard to the claimant's physical condition. Section 22 has to apply to that situation. It clearly applies to the situation where there's a remarriage or a termination of benefits.
John Paul Stevens: --Yes, but that could be because it covers mistakes as well as change in condition. That might explain why it applies to death benefits.
Jeffrey P. Minear: Oh, that's... that's a separate concern, again, whether or not there is State compensation. But under Section 909 or Section 9 of the... the Longshore Act, it's quite clear that there are certain changes that can take place with regard to death benefits, such as remarriage, such as the termination of a minor child's dependency. Section 22 serves the function of allowing changes with regard to those changes as well. And there's no question that it has been applied for many years with regard to those types of changes. Section 22 cannot mean one thing with regard to disability awards and another thing with regard to death benefit awards. The real problem that I think is troubling you, Justice Souter, is the question of--
David H. Souter: Well, if that's--
Jeffrey P. Minear: --what are the considerations--
David H. Souter: --if I'm following you, if that's the case, why can you consider a... an acquisition of a new skill?
Jeffrey P. Minear: --An acquisition of a new skill is something that is a relevant change in conditions. Again, our focus--
David H. Souter: You mean because the skill level was considered at the time the original award was made?
Jeffrey P. Minear: --Because he was assumed to have had only limited skills. He developed new skills.
David H. Souter: Yes, but your... I take it your criterion, in answer to Justice Scalia's question and my question, your criterion is a change in condition refers to any condition which was considered or anticipated at the time of the original award; is that your answer?
Jeffrey P. Minear: Or... or could have been considered as well. Any of those factors... our basic position is any factor that was considered in the initial benefits award could be considered based on a modification, either based on a mistake of fact or a change of conditions. But some of these changes are simply not relevant. For instance, economic changes are generally not relevant because wage capacity is... is determined on the basis of what is described by the ALJ here as normal employment conditions. Now, if the worker can come in and show that in fact there was a mistake made with regard to what was normal employment conditions in the initial hearing, he would be entitled to a modification. But he is not entitled to a modification--
David H. Souter: Then why... why can't... why can't he say they... they anticipated a depression? Why can't the employer say they anticipated a depression and they got a boom?
Jeffrey P. Minear: --Well, he could certainly say that, but he would have to prove here... the... the problem here is if you move for modification you're going to have to prove the basis for your modification. And that... the focus in the... in the modification hearing is going to be, well, what... what are your current earnings now? Do they accurately reflect your wage-earning capacity? And, if not, what other factors should be considered? Thank you, Your Honor.
William H. Rehnquist: Thank you, Mr. Minear. Mr. Pierry, we'll hear from you.
Thomas J. Pierry, III: Mr. Chief Justice, if the Court please: This is primarily a statutory construction case, and I had planned on starting by the analogy to the Newport News decision that this Court handed down 33 days ago. But, rather, I'd like to address the question asked by... by Justice Stevens as to how many cases for modification have been filed. And I've only practiced law for 30 years, but I've never handled one. My firm has handled probably more claims under the Longshore and Harbor Workers' Compensation Act in Los Angeles than anyone else in the area. And I think there's a good reason for it. The reason that we don't have a slew of claims is because of the restrictive reopening process that was passed by Congress. And that is, change in physical condition. Mr. Babcock stated that... in response to one of the other Justice's questions... well, that'll get you in the door. That's always been the problem... getting in the door. The Fleetwood decision flings open the door. And as one of the other Justices pointed out, there will be modifications when men age and they're unable to earn what they were earning on prior situations.
John Paul Stevens: Of course, Fleetwood flung open the door about 10 years ago, and we haven't been flooded with cases--
Thomas J. Pierry, III: Not in the 1st, 5th, 9th, or 11th Circuit.
John Paul Stevens: --Yes.
Thomas J. Pierry, III: We've still--
John Paul Stevens: I see. That's just in the... in the 4th Circuit, isn't it?
Thomas J. Pierry, III: --That's correct, Your Honor.
Ruth Bader Ginsburg: And how, if at all, did that re... relate to Congress' requiring or allowing the employer to get wage reports from the employee?
Thomas J. Pierry, III: Interesting, Your Honor, on the Congressional Record, Mr. Nickles pointed out that the 1984 amendments were concerned with fraud. And after going through at least a column about fraud, he addressed the issue of requiring the employee to file, at least semiannually, wage statements to avoid the situation where a man had returned to gainful employment and was still receiving temporary total disability benefits. That particular provision, 8(j), has nothing to do with modification. It provides for a forfeiture. If the man lies about his earnings or refuses to give the information, he then is penalized by forfeiting the benefits that he would otherwise draw during that period of time. And then, even, the Deputy Commissioner has the authority, if it's prospective in nature, of arranging some sort of a... of a repayment schedule, if you will, that does not jeopardize the man or his family.
Ruth Bader Ginsburg: Is the reporting mandatory now, or is it up to--
Thomas J. Pierry, III: Mandatory. It's mandatory if the employer requires it. The employer can require it semiannually. The Newport News decision that was handed down by this Court just recently, although it's in a different area, precludes the Director from standing to sue to file appeals. And, in effect, precludes her from being the champion of either party in claims under the L&H Act. If the Director's opinion is adopted in this case, you'll be opening the back door, and she will be able to come in, under Section 22, and file modifications on those very things that you said she had no standing to do in the Newport News decision.
Stephen G. Breyer: --Well, but so what? I mean, why is that bad? If she has the standing, she has the standing. In the 4th Circuit, what has happened? Has there been a big--
Thomas J. Pierry, III: It's not a question of whether she has the standing; it's a question of whether or not this Court and Congress intended that she would be in the position where she would be litigating on behalf of the parties, as opposed to as the recent decision by Justice Scalia said, that they... the... they are an independent arbiter and not a litigator.
Stephen G. Breyer: --Well, if... what I'm actually driving at is, is... is it a bad thing to... why is it a bad thing, if the language allows it, to let the Agency work out a set of rules, over time, even if nobody has thought of it before, whereby they will... when there are changes, the worker... usually it'll probably work in favor of the worker... I mean the inflation will go up or there's an economic change nobody thought of and he has a harder time getting a job as he gets older... isn't that what the Agency is there for, to work all these things out?
Thomas J. Pierry, III: The Agency is there to do as Congress delegated it to do. And Congress did not delegate to it that function. Congress delegated to it four items that Justice Scalia mentioned in his recent decision. And not one of those is to litigate on behalf of either party. It's to monitor and to administer.
William H. Rehnquist: I don't think I follow, Mr. Pierry, your contention that if we resolve this case one way there will be something contrary to the Newport News decision in it.
Thomas J. Pierry, III: I'm not sure I understand your question, Chief Justice.
William H. Rehnquist: Well, I... I gather you're arguing that if we decide this case in favor of your opponent, we will somehow undercut our recent decision in the Newport News case. I don't think I follow that argument.
Thomas J. Pierry, III: Under Section 22, the Director is... is given specific authority to file a modification, whereas she is not given that authority as she is under the Black Lung Act, et cetera, et cetera. And in the Newport News decision, she had no standing to appeal for Mr. Kerram and allege permanent total disability and/or 8(f) benefits.
William H. Rehnquist: But she is authorized to file for a modification?
Thomas J. Pierry, III: Yes, she is.
William H. Rehnquist: Well, that's what Congress has provided. I mean, I don't see that it results in any inconsistency between the two cases. We said in Newport News Congress had not provided it; and in this situation, apparently everybody agrees it has provided it.
Thomas J. Pierry, III: It has provided the Director the authority to file a petition for modification. But, in my view of it, that does not carry with it the right to litigate the issue under Section 22 for anything save and except changing conditions, which has been uniformly held to be a change in physical condition.
John Paul Stevens: Uniformly except in the 4th Circuit?
Thomas J. Pierry, III: No, uniformly except in the 1st, 5th, 9th, and 11th Circuit. In every... every single case that I've set forth in my brief, uniformly, every single case says that the change in conditions that is incorporated in Section 922 has been held to be a change in physical condition. And the... the case I think that's telling is the Golubiewski case from Maryland, where the man was in... incarcerated for murder for life. And in that case, the employer sought to... to modify. And they were held that he was not allowed to modify because there was no change in conditions. Clearly, under the Director's view, if... the same situation... only now the convict modifies and says that I have had a decrease in earnings. And I think that points out the questions that one of the Justices asked that... about what... under what circumstances other factors will be considered? And the Director, if I may, in her main brief, on page 28, states: "The Director's construction will not overburden the agency and courts with modification requests because, as discussed above, a change in wage-earning capacity necessary to support modification must be a change in an employee's capacity to earn wages because of injury. " The vice of the... the Director's position is she leaves out the causation issue, and she jumps right to the wage-earning capacity. Whereas the McCormick bright line test starts with, "Has there been a change in physical condition? " Then, if that condition precedent is met, then you've got your foot in the door. Then you go back in before the ALJ or the... the Benefits Review Board, and then all of the other factors can be considered in determining whether or not there has been a change that would necessitate modifying the award. If there are no other questions, I have nothing further.
William H. Rehnquist: Thank you, Mr. Pierry. Mr. Babcock, you have four minutes remaining.
Robert E. Babcock: Well, first, we cannot see within the Act or its structure... structure justice when an individual who no longer has an economic loss continuing to receive benefits--
John Paul Stevens: Well, I'll presume that. But isn't it true that this whole statutory scheme is a replacement of the tort liability scheme in which, if they'd been injured, you got a recovery, and later on, when he recovers completely, he still keeps whatever he got in the tort case?
Robert E. Babcock: --No, I don't think that's a fair characterization of a workers' compensation scheme. It was the characterization followed in... I'll mispronounce it too... but the Golubiewski case that dealt with the imprisonment. The idea that really what we're doing here is having periodic payments of a lump sum award. That was the concept that the judge followed there. And so he felt that you wouldn't cut it off at any later time because it's been secure and determined. The longshore system is designed to be flexible. It's designed to replace only economic loss. This isn't just a replacement for a tort system; it has a variety of rehabilitation purposes. It has the compensation purpose in itself. It's got a medical insurance program that goes along with it. I don't think you can characterize the bargain that was struck with Congress in the middle and the employers and employees on both sides as simply a replacement for a tort system.
John Paul Stevens: Well, it did... did away with having to prove fault. You had strict liability. And you get lesser damages, but you're sure what they're going to be. It certainly is a substitute for--
Robert E. Babcock: I think it's a substitute. I don't think it was designed simply to supplant... workers' comp in general is to avoid that kind of litigation, but it carries with it other benefits, and with those other considerations that go along--
John Paul Stevens: --Because we're only talking about nonscheduled awards, aren't we, in this case?
Robert E. Babcock: --That's correct.
John Paul Stevens: The scheduled awards go on whatever happens?
Robert E. Babcock: Well, I think... in theory, you would say that a scheduled award, because its focus is solely for impairment of the worker... 20 percent lost function of an arm... if somehow that improved and the award had not been fully paid out by the time this all occurred, that you would seek modification based on change of physical condition.
John Paul Stevens: But in the non... what I'm saying... in the non... in the scheduled award, it would have to be a change of physical condition; you would agree with that?
Robert E. Babcock: Yes, because that's the basis for the award. I think a couple of points about them and how long and why there isn't an overburden... and you can go back to '81, and the... and the 5th Circuit's opinion, Hole v. Miami Shipyard, where Fleetwood is presaged, by saying we're going to give a 1 percent de minimis, as many of the judges did and the 5th Circuit approved, in order to avoid the running of what was seen as a sometimes harsh statute of limitations. And they provided this 1 percent award because the economic effects might materialize later on. So we have maybe 15 years of experience with it. And the averages... I just checked... the number of cases... new cases... filed under the Longshore Act dropped from 4,500 in 1984, when Fleetwood came out, to the average of 3,500 to 3,700 in the intervening decade. There has been, and I think that padding shows, that there will not be any torrent of increased litigation as a result of--
William H. Rehnquist: Is any of that possibly the result of the declining oil business in the Gulf or things like that... any of that decrease during that period of time?
Robert E. Babcock: --I think the shipyards have gone down some. That's certainly an effect. Earnings have gone up some, and that lessens the likelihood of claims because there is a low inflationary adjustment for partial disability as time moves along.
William H. Rehnquist: Thank you, Mr. Babcock. The case is submitted.
Speaker: The honorable court is now adjourned until tomorrow at ten o'clock.


Earl Warren: Number 40, Phillips Chemical Company, Appellant, versus Dumas Independent School District. Mr. Clifford.
Clark M. Clifford: Mr. Chief Justice and may it please the Court. I represent the Phillips Chemical Company, the appellant in this Court. The respondent or appellee is the Dumas Independent School District in Texas. The Federal Government has intervened us amicus curiae as has the State of Texas. In 1950, the state legislature in Texas passed a law having to do with the taxing of lessees of federal property. The Supreme Court of Texas construed that law as permitting the Dumas Independent School District to asses a tax against Phillips Chemical Company on federal property which it leased and based that tax on the full fee value of the property. The Phillips Chemical Company below attacked the constitutionality of that statute. It was sustained by the Supreme Court of Texas and this appeal follows to this Court. The facts are simple and undisputed. During World War II, the Federal Government built an ordnance plant in Moore County, Texas and called it the Cactus Ordnance Works. It operated during the war and made explosives there. After the war was over, the Government did not wish to sell the plant, they wanted to keep it in the ownership of the Federal Government in the event that at some future time they might wish to use it again. So they leased the plant. And in 1948, the Federal Government, which owned the fee of the plant, leased the plant to Phillips Chemical Company for a primary period of 15 years with right of renewal. The rental on the plant was in excess of $1 million per year. Also, the Government can cancel the lease at anytime that it chooses on giving 90 days notice. If it desires to sell the plant, the Government can also cancel a lease on 30 days notice in the event of a national emergency. Now in 1950, the Legislature of Texas passed a law that United States property would be subject to taxation if used by a private party in its business. Now from 1950 to 1954, nothing occurred. Everybody went along in their usual manner. But in 1954, the School District, I'll refer to it as that, levied a tax against Phillips based on the full fee value of the Cactus Ordnance Works. Phillips was operating the plant as an anhydrous ammonia plant which, as Your Honors know, is used in commercial fertilizer. Now after the assessor assessed that tax against Phillips based on the full fee value of the plant, Phillips filed suit in the state court in Texas to have the assessment cancelled and to enjoin the collector from collecting the tax. The lower court denied relief as did the Intermediate Court of Civil Appeals.
Speaker: What if they didn't know what (Inaudible)?
Clark M. Clifford: We do not know, Your Honor. No explanation appears to that -- of that, as far as I know none appears in the record. The case then after going from the Court of Civil Appeals went to the Supreme Court of Texas. There the validity of the statute was upheld, but at that time, out of the nine judges of that Court, four dissented strenuously and they dissented on the ground that this statute was flagrantly, grossly discriminatory insofar as the Federal Government and its lessees are concerned. Now below briefly the contentions of Phillips Phillips showed in the trial below that lessees of non federal exempt property paid no tax at all if the lease was for under three years. And they paid the tax based only on the leasehold if the term of the lease was for more than three years. So Phillips said in view of what the other lessees of tax-exempt property were -- were subjected to in Texas that it was invalid and unconstitutional for the legislature to select just the lessees of federal property and subject them to a tax based on the full fee value of the property which they were leasing. We present but two questions here. One, the 1950 Texas law is invalid for it is repugnant to the Constitution of the United States. It discriminates against the United States and those with whom it deals. It imposes a burden on the activities of the Federal Government and infringes upon its sovereignty. It also violates the Due Process and the Equal Protection Clauses of the Fourteenth Amendment. That is our first point. Our second point is the law is invalid for it imposes an ad valorem tax upon the federal property and interferes with the sovereign right of the Government over its property in Texas. Now the argument if you please and I address myself solely to the point number one. Simply point number one is the tax is discriminatory. Now we must refer, if Your Honors will please, to the statute in question or it will be referred to a good many times in the course of the argument. I refer you to page 12 of the appellant's brief. Briefly it will be noted, it says in substance to this. “The United States shall be secure in their possession and enjoyment of all lands acquired under the provisions of this type, and such lands and all improvements thereon should be exempt from any taxation under the authority of the state so long as the same are held, owned, used, and occupied by the United States for the purposes expressed in this title and not otherwise.” Let me stop and say that down to this point that had been in the law of Texas for many years. But in 1950, the Legislature of Texas amended it to add the following language which appears in -- on the page 12.
Speaker: May I ask Mr. Clifford --
Clark M. Clifford: Yes sir.
Speaker: (Inaudible)
Clark M. Clifford: Yes sir. Provided further that any portion of said lands and improvements which is use and occupied by any person, firm, and association of persons or corporation in its private capacity or which is being used or occupied in the conduct of any private business or enterprise shall be subjected to taxation by this State and its political subdivisions. It will be noted that the language of the statute refers only to the United States and refers only to the lessees. It says “occupiers.” I'll use the term lessee because they're practically all on leases. This statute points directly and unequivocally to the United States and its lessees and points to no one else. Now if you are to understand the degree of the discrimination, it is important that you be familiar with the existence -- with the law that existed in Texas before the statute was passed in 1950. There were but two sections that Texas law that had to do with lessees of tax-exempt property. 7173, which said, that lessees of tax-exempt property, if their term is for less than three years, they pay no tax on the tax-exempt property, and 7174, which in effect says, “If the lease of tax-exempt property is for more than three years, then the lessee shall pay a tax based only on the value of the leasehold,” not on the value-to-be, only on the value of the leasehold, another important element. Many years ago, the Texas Supreme Court construed those statutes to mean also that if a lease had in it a cancellation clause which permitted the lessor to cancel at his discretion, then it would be considered to be a lease for under three years, no matter what the term might be. So if the lessor could cancel it anytime, obviously, it is not a definite obligation of three years or more. So here is the picture that existed prior to the passage of this law. Here is a large classification of tax-exempt lessees. It included all lessees of tax-exempt property, lessees of federal property, state, county, municipal, irrigation districts, every lessee of tax-exempt property was included in this great large classification and that had existed for 70 years. So what the legislature did in 1950 was just carve into this long-term classification of lessees, they carved into that and extracted from it just the lessees of federal property. And so the Court said, what then happens to the lessees of federal property now that they've been carved out of this classification. The Supreme Court of Texas held that with a federal lessee, if his term of lease is less than three years, he pays a tax based on the full value of the fee, whereas back in the old classification, all other lessees of tax-exempt property paid no tax at all if the lease was for less than three years. Over here, if a lessee of federal property had a term of more than three years, it made no difference to him, he still pay the tax base on the full value of the fee, while over in the old classification, lessees of other tax-exempt property in excess of three years, they paid a tax only based on the value of the leasehold and not on the value of the fee. So that when that was made clear as it was below, four of the justices of the Supreme Court said, “This appears to be a very definite, direct discrimination against the Government of the United States and its lessees, and they so dissented claiming that it was repugnant to the Constitution and we submit repugnant to both the letter and the spirit of the United States Constitution. Now, I believe the question enters one's mind, that if it appears so clear as it does that the Legislature just took one specific group and assessed this very substantial tax. For instance, Phillips Chemical Company leased this plant, this plant was valued at a very large sum. Yet the assessor says, “Although you just -- you have a lease and the Government can cancel that lease anytime, yet you've got to pay a tax based on the full fee value of that property.” And Phillips says, “How about all these fellows that we used to be with over here and they don't pay any tax?” “We don't care. This is a law that the Legislature passed in 1950.” Now, the judges below, the five who sustained the validity, how were they able to overcome this direct and unequivocal discrimination? Well there were some three or four bases that they offered. Now the one that they seem to attach the most importance to was, they said, why this tax, that this statute in 1950, is constitutional, because the Supreme Court of the United States has ruled that this kind of statute is constitutional. And they said, “All you have to do is look at the case of Borg-Warner. Borg-Warner, Your Honors will recall, is one of the three cases decided by this Court in the 1937 term, and it was the Borg-Warner case, the Continental Motors case, and the Murray Corporation case. And in those cases or the first, the Borg-Warner, is the one they depend on mostly because it is closest in perhaps facts to this. In the Borg-Warner case, Michigan passed a statute and that statute required a lessee of property and a lessee of federal property to pay a tax based on the full value of the property that it leased from the Government. Therefore, these five gentlemen in Texas, they see there, in the Borg-Warner case, the Supreme Court said, “a State passes a statute. It permits that State to level a tax against the lessee of federal property and it permits us to level the tax on the basis of the value of the property which the lessee got from the Government.” Now what -- I submit -- what they failed to consider or what they chose to disregard was the fact that in those cases and in the -- particularly the Borg-Warner which was the first of the three cases and the lead of the three cases, this Court held very clearly that such tax as it approved in -- in that Borg-Warner case, the Michigan statute, that that tax was approved only on the basis that it was nondiscriminatory. That it applied to all lessees of all tax-exempt property and didn't single any particular group of lessees out. For instance on page 14 of our brief, we show where the majority of the court below said, “The Borg-Warner case clearly upholds the validity of the taxes assessed by the School District against Phillips insofar as the Federal Constitution and the laws are concerned. But the difference between the Michigan statute and the Texas statute seems to me that they immediately revealed upon reading. The Texas statute says, “Lessees of federal property shall pay this tax based on the value of the fee.” Whereas, the Michigan statute said, “All lessees of any types of tax-exempt property shall pay a use tax they call it upon the use of the property and engaging the amount of the tax, you may base it upon the value of the property which they have.
Felix Frankfurter: Are they any lessors in Texas comparable to the United States as the lessor?
Clark M. Clifford: Yes sir. They –
Felix Frankfurter: I think there -- I know there -- I assume there are lessors, but in the comparable situation --
Clark M. Clifford: Oh I think --
Felix Frankfurter: Suppose the Texas Legislature has said, “Whereas the” -- and investigation has found nobody in Texas leasing property of such magnitude or under such favorable conditions of the United States. Therefore, we think to concede the United States as lessor or rather their lessees differently from the normal lessee in Texas. Does that -- does that make a difference in your view? Well, they've found under the facts.
Clark M. Clifford: I thought -- one I'd say, of course, it was not found as a fact; second, this doesn't say, “just large” -- the statute in Texas just doesn't say large ordnance plants. It says, “Any property that the Federal Government has in Texas and is leased to private parties for their business, any kind of property.”
Felix Frankfurter: Could the Supreme Court of Texas make judicial notice of the fact that the kind of -- like leasing to Uncle Sam does is a big leasing?
Clark M. Clifford: Well they -- they couldn't take --
Felix Frankfurter: (Inaudible) grocery stores does it?
Clark M. Clifford: Oh they couldn't take judicial notice of that Your Honor because it doesn't happen to be the fact, because the -- the Federal Government in Texas may own warehouses for instance. The State of Texas may own warehouses. As a matter of fact, Mr. Justice Frankfurter, the reply brief of the appellant shows that 50 miles away from this plant, the Cactus plant, is another plant called the Pantex, Panhandle Texas, Pantex Plant. It was formerly owned by the Federal Government but when the war was over, they beaded about half of that plant and the surrounding material to the State of Texas, and the State of Texas owns a large part of that plant and a large part of buildings belonging to that plant and they rent those buildings out on leases to private individuals and they get the money from them and the individuals don't pay any tax on it.
Felix Frankfurter: That's because Texas doesn't tax itself, even though as a lessee, it doesn't tax itself. That's another thing.
Clark M. Clifford: Well no, it isn't the question that Texas doesn't tax itself.
Felix Frankfurter: I understood that Texas is now the lessee of this property.
Clark M. Clifford: They're owner.
Felix Frankfurter: Owner.
Clark M. Clifford: They're owner.
Felix Frankfurter: Well.
Clark M. Clifford: The Federal Government gave them --
Felix Frankfurter: Gave them.
Clark M. Clifford: -- gave them to the State of Texas, there were some adjustments of credit and a Federal Government gave the property to Texas --
Felix Frankfurter: Then it's all amuck there, because Texas doesn't tax itself or its beneficiaries.
Clark M. Clifford: No, Texas owns the fee of -- of these -- of these commercial dwellings. They lease them out to individual businesses and get the rent from them, just as the Federal Government does, and yet those people don't pay any tax and yet lessees of Federal Government pay a tax.
Felix Frankfurter: And your short answer to my question is that Texas taxes come in against Uncle Sam even if they don't pay them.
Clark M. Clifford: Well, I -- I'm just saying that that Texas cannot discriminate against the Federal Government and impugn the sovereignty of the Federal Government and they cannot pass a law, in my opinion and in the opinion of the -- of the authorities here, that hold that the Federal Government will be discriminated against in this manner. Now on that point, if I might carry it further. In the Borg-Warner case, after they discussed the fact that the Michigan statute permitted this tax, Mr. Justice Black, in speaking for the Court said, “It still remains true as it has from the beginning that a tax maybe invalid, even though it does not fall directly on the United States if it operates so as to discriminate against the Government or those with whom it deals.” They found however, in that Michigan case that the tax there, the Statute of Michigan, did not discriminate against the Government or those with whom it deals. Then again in the Borg-Warner case, the Michigan statute under attack subjected to taxation every private party who uses exempt property in Michigan in connection with the business conducted for private gain. That's what they've found there. That under the Michigan statute, every private property who uses exempt property in Michigan in connection with the business conducted for private gain is covered by the Michigan statute. And in addition, the Court observes still speaking through Mr. Justice Black, there was no showing that the tax is, in fact, administered to discriminate against those using federal property. To the contrary, undisputed evidence introduced by appellees demonstrates that lessees of other exempt property have also been taxed.” Here they held in the -- that this Court held in the Michigan case that the record shows that all lessees of tax-exempt property were subject to this tax and that the Federal Government had not been discriminated against. So they said, “All right”, you gentlemen said, “We will uphold that tax.” I suggest here that the absolute contrary is so. Now certain other language of that gets maybe even a little closer. Mr. Justice Harlan, in his separate opinion, expressed the same view in a separate opinion. He said, “The state taxes here,” that's the Michigan tax, “do not operate in a discriminatory fashion by so measuring the tax or use on activities so as to impose an unequal tax burden on lessees or users of Government property, vis-à-vis lessees, users, or owners of other tax-exempt or non-exempt property. So it was – it was in the minds of this Court at the time that this Michigan tax must be studied carefully to see if it imposed an unequal tax burden on lessees of Government property, vis-à-vis, as Mr. Justice Harlan says, “lessees, users, or owners of other tax-exempt property.” And the specific affirmative finding in that case was that the tax was not discriminatory because it fell upon this large group that I just spoke about, that is lessees of all types of tax-exempt property. They found that it did in the Michigan case. I submit that in Texas, when you carve out the one group, lessees of federal property and you put them over there, and then say, this group can be taxed on the full fee value of the property on the authority of the Borg-Warner case, I submit that it's perhaps that the case just wasn't studied to the extent that it might have been studied.
Speaker: May I ask you a question?
Clark M. Clifford: Yes.
Speaker: If your condition on discrimination is accepted (Inaudible), and the state get to assume that there is a discrimination, is that all you've to prove in brief?
Clark M. Clifford: If there is a type of discrimination that is obvious, it's direct and it places the Federal Government and its lessee at a disadvantage as this obviously does, then I say to you that this statute falls, this statute should be declared unconstitutional.
Speaker: That statute on discrimination.
Clark M. Clifford: All right. That if --
Speaker: Is it open in your view for the state to show discrimination based on (Inaudible)?
Clark M. Clifford: Oh yes. Yes Your Honor. Yes.
Speaker: Well that factor, that wasn't done.
Clark M. Clifford: Well that's right. Now, as I mentioned before, when this discrimination is as apparent as it is here, it makes you wonder what were the bases of the holding of the majority below. We know why the four dissented. They said specifically because of discrimination against the Federal Government. But how did the five happened to hold that this was constitutional? Now I have just given one that that is the first point that I wanted to cover. The five judges below said, “We place our decision, one of the reasons, because the Borg-Warner case decided by this Court clearly upholds the validity of the taxes assessed by the School District.” Now there were some three or four other reasons. Mr. Justice Harlan, one was, the one that you mentioned that the state says, “This is a proper action on the part of the state to create a new classification. There has been, in effect, this old classification of all of them. We now create a new classification by carving out just the lessees of federal property and we will show that we can justify this new classification." I will not, if the Court agrees, I will not, at this time, give further attention to that for the reason that by agreement between counsel, myself, and the Solicitor General's office, they're going to take that particular issue and discuss it fully. That's one in which they have a very vital interest when the lessees of Federal Government are just carved out and it is said in the state that that in itself can constitute a new classification. Another point that the judges below said sustain their position was a 1947 statute, which said that lessees of plants, such as this and other government property, would be subjected to state taxes. That --
Charles E. Whittaker: Who --
Clark M. Clifford: Sir.
Charles E. Whittaker: Who (Inaudible)?
Clark M. Clifford: No. No, that was in 1947 Your Honor. That was the National Military Leasing Act that provided for the leasing of these war plants and other types of property. Counsel for the Government also desires to take over that one because they – they feel strongly about that. There -- there was -- there is another argument they -- they make below for justifying this particular classification, he will also take that one over, so that we won't be repetitive insofar as Your Honors are concerned.
Speaker: Currently, I want to clear this part you say, this part of the case. You pointed two discriminations. Number one is the (Inaudible) less than three years, in which case a lessee of the state pays no tax, whereas the federal lessee does fell into the tax.
Clark M. Clifford: That is correct.
Speaker: Secondly that's -- apart from that assuming that that discrimination has pronounced a condition themselves, where the state lessee gets taxed only the leasehold value, whereas the federal lessee gets taxed on the full value of the feel, correct?
Clark M. Clifford: If the term of the lease is in excess of three years that second equation comes into being. Now --
Speaker: Is there a dispute being --
Clark M. Clifford: None.
Speaker: -- that's an unconstitutional discrimination, and now a dispute (Inaudible)?
Clark M. Clifford: Well I -- I would answer by saying this. I think that our adversary concedes that there is discrimination in the case but they attempt to justify the discrimination. I -- I believe there's no quarrel to take this equation. If a lease by the state to a private party is for less than three years, that lessee pays no tax. If the state leases property in excess of three years, that lessee pays a tax only on the value of the leasehold. Now on the other side of the coin, either one of those situations, if it involves a lessee of federal property, the lessee of federal property pays a flat tax based on the full value of the fee no matter what the length of the term of the lease. And there's where we say is the -- is the flagrant evidence of discrimination, because just before I leave that point, the Texas Legislature could have done the same thing that the Michigan Legislature did. The Michigan Legislature passed a law, this was in 1953, which said, “All lessees of all types of tax-exempt property”, that's a general language, “shall pay a tax all the use tax based upon the value of the property.” Now the Texas Legislature could have done that. They chose not to. They only chose to direct this tax against lessees of federal property.
Charles E. Whittaker: And how do you -- (Inaudible) is this a tax and that we find that the (Inaudible) except the lessee or this is the plain word (Inaudible) and at any portion of federal lands which is being used or occupied that in (Inaudible) shall be for taxation by the state (Inaudible).
Clark M. Clifford: Yes sir.
Charles E. Whittaker: Is that your position of these portions of the federal lands (Inaudible)?
Clark M. Clifford: I claim that it is under the second point that is, that it's a tax against the federal land. The -- that point was raised below. The majority of the Supreme Court in Texas held it was not. We argued strenuously below that this imposed a tax upon federal property.
Charles E. Whittaker: It's essential.
Clark M. Clifford: Well, that's what we contended at that time. That is counsel who tried it below, but the Court says no. The Court in -- construes that to mean that it just means that if a private party is in possession of some federal property, then we're going to assess a tax and the private party is the one that we're going to help with the tax. That's the way they construed it, Your Honor. Now I've just about reached our second point which you'll remember I said was that the law poses, this law imposes an ad valorem tax on federal property. I have now left the discrimination point now I get to -- I get to this next point.
Speaker: This point is bad under Allegheny.
Clark M. Clifford: It's bad under Allegheny, if Your Honor please. That's right. And it's bad under Allegheny, even after what Your Honors did to Allegheny in the -- in the Michigan cases. It's still bad under Allegheny.
Speaker: It's this one.
Clark M. Clifford: No. (Laughs) Yes, Your Honor.
Speaker: (Inaudible) and here in Texas statute it seems to be an ad valorem tax.
Clark M. Clifford: Yes. And it not only seems to be, Your Honor, it is. And -- and the – and the -- our adversaries do not disagree. They say it is an ad valorem tax. Now I'd always been led to believe that an ad valorem tax attached to property and was based upon the value of the property. And that's why you called it an ad valorem tax. But when the Court got hold of this, they said in effect, “Yes, this is an ad valorem tax. But we're go -- we're going to construe it as being not attached on federal property, because we're going conceive of the fact and assume that the Legislature knew they couldn't tax federal property so we'll take -- they weren't going to do a useless act. So, yes, we're going to say it's an ad valorem tax, but we're going to direct it against the lessee of the federal property and all the ad valorem means is we're going to base that lessee's tax upon the value of the whole fee.” That's finally the way it seems to me that they get to. Now I -- I'd like again just to point out what bothered you Mr. Justice Whittaker. If -- if Your Honors will look at that language in the end of this statute, it says that just in the -- in the part that's in a different print, “provided further that any portion of said land that remains -- refers only to federal lands, that if some portion of said land”, it's in this instance is the whole plant, “and if that land is occupied, used or occupied, in the conduct of any private business or enterprise, it” I'm supplying “it” but “it” is the lands, “it shall be subject to taxation by the State and its political subdivision.” The subject of this sentence is “portion of said land shall be subject to taxation by the State.”
Speaker: The Court construed it the other way.
Clark M. Clifford: Well the Court construed it the other way. That's right. But --
Felix Frankfurter: But supposing, suppose the Legislature having firmly said, “If it is used by somebody else except Uncle Sam, the tax shall be left measured by” -- suppose -- suppose they used those words. You couldn't make the argument that you're now making, you'd have to make it the argument.
Clark M. Clifford: Well –
Felix Frankfurter: And that's what the Court -- and that's what Supreme Court of Texas said that in -- in the first half of the statute, they recognized the immunities of Uncle Sam. And therefore in the second -- second half, presumably they didn't -- they simply contradict themselves but differentiated between somebody enjoining the use -- somebody utilizing, that which belonged to Uncle Sam and we will tax that utilization and the determination of how much shall be taxed as a means of measurement.
Clark M. Clifford: All right. Now there are some other factors. First place, which we just submit, the language says, “It isn't the user or the occupier who is subject to a tax”, it says, “Such federal land shall be subject to taxation.” That's what they say. Now that bothers us right from the beginning. The second point is Your Honor that when this School District levied a tax against Phillips Chemical, and it's put on tax rolls, it's in the record, they listed Cactus Ordnance Works, owner, Phillips Chemical Company and they put it on the rolls exactly the ways they would have put it on had they been taxing the fee of the property, and valued it at its full value. That's exactly the way it appeared and they had on their owner Phillips Chemical Company. Now another --
Charles E. Whittaker: (Inaudible)?
Clark M. Clifford: Gave a full description of the land just as -- as it appeared in -- in the record of the State of Texas. Now another point --
Speaker: My recollection is they did that in Michigan too which didn't impress the Court.
Clark M. Clifford: Did what?
Speaker: Listed the land that -- on its tax rolls the way you said with -- with this.
Clark M. Clifford: Yes, but in that case, they -- they list that. They --they list the Borg-Warner as the user, that was a use tax, and it specifically said there that it was a use tax. And it said the tax shall be directed against the user of the property. Now here I submit, it doesn't say that the tax is to be directed against the users of the property and one other point because my time is beginning to run out, the School District, the Dumas School District can assess, impose only one kind of tax under the Constitution of Texas and that is an ad valorem tax. That's the only kind of tax they can impose. So when the School District imposed the tax, they imposed an ad valorem tax.
Felix Frankfurter: Is that disputed here?
Clark M. Clifford: That is undisputed. It is -- it's an ad valorem tax. Now I say again the -- they -- they have to work out a theory where it's an ad valorem tax only against the lessee and that just as -- as far as I was concerned, seem novel to me. My closing remark Phillips doesn't want a free ride in this manner; they want only a fair ride. If -- if Phillips -- Phillips has contended from the day the suit was filed that it owed no tax under this statute, contended that in the trial court, the intermediate court, the Supreme Court of Texas, said along, “We don't owe any tax under this statute.” I say however that if a statute were passed which treated Phillips and the other lessees of tax-exempt property equitably and evenhandedly, we could not be heard to complain.
William O. Douglas: Well that's what the Court of Appeals did the Court of Civil Appeals, is that it?
Clark M. Clifford: Well the Court of Civil Appeals, the only difference really between their -- their ruling and the ruling of the Supreme Court of Texas was the Court of Civil Appeals said that the maximum tax that could be assessed against Phillips in this case was a tax based on the value of the leasehold. But the Supreme Court of Texas said it has nothing to do with it. We're going to hold that Phillips is liable for the full tax based on the value of the fee.
Speaker: Could I ask you one question before you sit down?
Clark M. Clifford: Yes.
Speaker: If Phillips doesn't pay the tax, what remedy is -- and Texas got to collect it?
Clark M. Clifford: Also, under Texas law, this tax becomes a lien and there is no dispute about that.
Speaker: Lien against what?
Clark M. Clifford: Well that's the question. It says that -- that when an ad valorem tax is assessed, that it becomes a lien against -- against the property. It just -- it just says it becomes a lien. And in this instance, when the tax was assessed against Phillips and the Cactus Ordnance Works, a lien attached. Now the -- the appellant says on page 53, Texas says, “It is clear from a reading of the article, that is that a lien shall attach, that the lien created is against the property or interest tax”, in this case, the appellant's leasehold interest. Now I -- I mentioned that because one, the State of Texas agrees that a lien attaches, Page 53. It's clear from a reading of its article that the lien created is against the property or interest tax. And then they go on and say, “The fact that the lien attaches to the leasehold interest and that such interest might conceivably be made the subject of a tax paid.” They concede that so I -- I suggest to you that we're beginning to enter an area where the water gets deeper all the time.
Speaker: What are the cases that they cite? I assume they're Texas cases. Do they hold such a situation, a lien runs only against the leasehold?
Clark M. Clifford: Well oh -- as I think -- I think those cases would hold that second sentence. It cannot be enforced to as -- so as to interfere with possession of the United States Government that they cite those cases, because one of them is the Allegheny case, the Allegheny County, Your Honor.
Speaker: Oh it's the next sentence end of the paragraph says it. This proposition was expressly decided in SRA against Minnesota.
Clark M. Clifford: All right. Now in that case, I think there -- all that holds is the last sentence of the preceding sentence. Since the title of the United States to the property would in nowise be thereby affected. That's what that Minnesota case hold. I -- I do not recall a case being presented to which they talked about a lien attaching to the leasehold. But here they concede the possibility, and I suggest only that should the Federal Government have a property and have a good tenant and the tenant doesn't pay his taxes and a lien attaches to the leasehold, and as they say here it's probably subject to private -- to sale, I don't know where that leads, the sovereign power of the United States under the Constitution to manage its property without interference from the State. Thank you very much.
Speaker: (Inaudible)
Clark M. Clifford: With that last point?
Speaker: In your opinion, the (Inaudible).
Clark M. Clifford: The Supreme Court of Texas with reference to the lien said that no lien would attach to the property of the United States, that the property of the United States was exempt from any lien. But what I'm suggesting is that they do admit that the lien could attach to the leasehold. And my recollection is that was never raised in the Supreme Court of Texas at that particular point. Thank you Your Honors.
Earl Warren: Mr. Davis.
John F . Davis: Mr. Chief Justice, if the Court please. Mr. Clifford's client, the Phillips Chemical Company has something like $300,000 writing on the outcome of this case. If the $19 billion of real and personal property under lease by the United States is to be subjected to discriminatory taxation by the State, the ultimate cost to the United States maybe much more than the $658 million a year which we estimated would be the tax in our petition for rehearing in the Murray case a year and a half ago.
Felix Frankfurter: Has that happened?
John F . Davis: Has it -- it -- it is --
Felix Frankfurter: Is it in the process of happening?
John F . Davis: It is in the process of happening. It hasn't reached that figure because some -- many States have not imposed this tax.
Felix Frankfurter: I was curious, because one finishes the other case and always want to (Inaudible).
John F . Davis: Well it's -- it is happening in -- in by steps in California or in New Jersey, and then in other places, it's not -- it's not happening and I'll come to that in a minute. I think it's very significant too, much of this tax although taxed against lessees, well of course, ultimately come from the United States. Now in the -- in the usual tax case in this Court, one has a private taxpayer who was drowning under the -- under the weight of the increasing burden of federal taxation. The tables are somewhat turned in this case although it isn't so much the weight of the burden that we're drowning under as it is the distribution of that burden. Here is a tax which is imposed by a state, which specifically and intentionally and discriminatorily is imposed upon lessees of the United States. Now nothing that this Court has decided in this field of intergovernmental taxation would justify such a levy. On the contrary, the very nature of 2070 in this field requires that it be forbidden. And by this I'm not meaning to reargue the cases which have been presented to this Court within the last two years. If Texas and its cities and towns and school districts has need as it undoubtedly does of revenue from properties which are used for commercial purposes. It may extract a fair portion of that from the pockets of -- of federal lessees. What we are arguing against is what Mr. Clifford made very clear a situation where there is a discriminatory tax which is imposed upon the -- the lessees from the Federal Government and is not imposed upon lessees from the State Governments. Now under the Texas law, as interpreted by the Texas Supreme Court, a lessee from any person other than the Federal Government is not taxed upon his lease, not on the leasehold nor on the fee, unless he has a term of more than three years and then unless he is leasing from an exempt -- an exempt entity. And that is to be contrasted with the type of situation here where the lease does not extend for over three years and where they are taxing upon the entire value of the -- of the enterprise. In other words, if the Phillips Chemical Company itself had leased this property from the State of Texas, I think that it's quite clear that there would be no tax at all involved. But because they are leasing the property from the United States, there is a tax imposed, and this is the kind of situation which was involved in McCulloch against Maryland.
Felix Frankfurter: I didn't get your reference to unless we lead from the exempt lessor?
John F . Davis: That's right. Ordinarily the owner of property is -- is taxed.
Felix Frankfurter: Why -- why wasn't the Texas an exempt lessor?
John F . Davis: Well --
Felix Frankfurter: You just said the -- if this were leased from Texas, it wouldn't be taxed.
John F . Davis: That's right, because it is not -- it is -- it is less than three years.
Felix Frankfurter: Oh I don't --
John F . Davis: They -- there is no general tax on lessees, Mr. Justice Frankfurter.
Felix Frankfurter: Oh no, no I understand but in the case of three lease -- three -- a term of three or more years --
John F . Davis: From Texas.
Felix Frankfurter: Pardon me.
John F . Davis: If it were from -- even if it were from Texas, it would be taxable.
Felix Frankfurter: If it's from Texas exempt lessor, it's taxed, is it?
John F . Davis: It's taxed to the extent of the -- of the late leasehold interest.
Felix Frankfurter: Yes.
John F . Davis: That's right.
Felix Frankfurter: The United States is of course a tax exempt lessor or is it?
John F . Davis: That's right. And then they have a special provision which takes the United States out of that group and says but If you lease from the United States, then you shall be taxed from the --
Felix Frankfurter: Yes, but I wonder that apart from the basis of the tax, whether it's on the rather they feel or believe, why in these were then why did the lessor lease from Uncle Sam are similar both to leases from Texas --
John F . Davis: I think – I think it would be in the absence of this special statute. I think this lessee would be subject to a tax under the other provisions of the law as a lessee or possessor from a tax.
Felix Frankfurter: You align on our problem. I didn't realize that.
John F . Davis: Yes, well --
Felix Frankfurter: -- with just new lines.
John F . Davis: But --
Felix Frankfurter: -- I didn't believe it such as is making several classifications.
John F . Davis: That is right.
Felix Frankfurter: (Inaudible) their classification to impose a tax on these whole of property which enjoyed complete immunity from taxation.
John F . Davis: Well, that -- that provision has been on the books for years and years and so far as I know there's never been any -- any dispute about the -- about the validity of that provision.
Felix Frankfurter: What I'm asking you is, if it's the Uncle Sam leaseholds were brought within by explicit statutory language within that tax-exempt provision, would you be here?
John F . Davis: No. This -- then it would be the same situation that you'd had in the Michigan. We would have been here two years ago but we wouldn't be here now because the Michigan cases, they brought one again.
Felix Frankfurter: So then the question gets down to the amount or the basis of measuring the tax, because what you said means to me that Texas could tax leaseholds running from the United States.
John F . Davis: Oh I think it could. I think under the Michigan cases it could.
Felix Frankfurter: That it could be found and not --
John F . Davis: Not -- not only the amount but also the imposition because it's imposed on United States and situations in these lessees from the United States and situations where nothing is imposed in leases from the State.
Felix Frankfurter: Even if it has the leasehold of tax-exempt lessors?
John F . Davis: That's right because of the three-year provision unless the lease is a lease of three years or more without any --
Felix Frankfurter: Or this is in need a fix fresh formula, it isn't quite less than two years --
John F . Davis: Well --
Felix Frankfurter: -- a terminable lease, which is again a difference there.
John F . Davis: Yes, but then may I think found by the Texas Supreme Court's construction of what a lease for three years is and they're very definite that if a lease is terminable why then --
Felix Frankfurter: But they may make it a differentiation in fact that the likelihood of a termination of an Uncle Sam lease is less than the likelihood of termination of a non-Uncle Sam lease.
John F . Davis: They could but they haven't and --
Felix Frankfurter: Well, they -- they didn't reject to that stuff they sustained the statute, and therefore your own version is to show that it's not sustainable on any fair implication or intent.
John F . Davis: That's right and as I read the Texas' own construction of what a lease for three years is as set forth in Trammell against Faught, the old case, this as -- they may change it and they can change for the State and for the Federal Government at the same time.
Felix Frankfurter: But they have changed it in this case.
John F . Davis: They didn't even consider in this case the length for the term.
Felix Frankfurter: Examine the case (Inaudible).
John F . Davis: But in this case, the statute --
Felix Frankfurter: (Inaudible)
John F . Davis: That statute under which this tax is applied. They're applying this tax not under the three-year lease provision but under another statute.
Felix Frankfurter: (Inaudible).
John F . Davis: So that --
Felix Frankfurter: All I'm saying is if that's the basis on which they sustained it has to be knocked out on the (Inaudible) of making differentiation with reference to the various taxing statute and taxing classification of Texas.
John F . Davis: That's right both in amount and in impact, in both, in both in respects of.
William J. Brennan, Jr.: (Inaudible) neither state nor in the federal law?
John F . Davis: I think insofar as the question of construction of -- of Article 7173 of the Texas taxing law which is the statute which has the three-year provision that I would think it was a matter of probably of state law.
William J. Brennan, Jr.: This is a lease as I understand it, it has a provision with 10-year lease that is terminable (Voice Overlaps) --
John F . Davis: It's 15 -- Yes.
William J. Brennan, Jr.: 15 years.
John F . Davis: Which not --
William J. Brennan, Jr.: If I understand it that kind of lease has been interpreted by the Texas Court as a lease for less than two years.
John F . Davis: That is right.
William J. Brennan, Jr.: Is that right?
John F . Davis: That is right.
William J. Brennan, Jr.: Well, --
John F . Davis: And --
William J. Brennan, Jr.: -- whether this is arisen.
John F . Davis: Well, I think that if Texas has such an interpretation as to what falls within that taxing statute and it's actual equally applied to leases from the State and leases from United States --
William J. Brennan, Jr.: But no one suggested this section in your case?
John F . Davis: No. No, it's -- because no one was trying to tax under the three-year statute. So that it -- it was -- it wasn't -- it wasn't in -- in the case.
Felix Frankfurter: No, but if they -- if they could fairly by legislation differentiate the 15-year government lease terminable on the 30-day emergency or whatever the other provisions. If they could do that by statute, then the Supreme Court of Texas can do it to file with the Federal Government, as far as properties of United States are concerned, by its own judicial power, and if they could do that, if they could do -- I see you shake your head for that which is said -- if they could do that, then the question would arises whether that is a fair basis on which they justified it what you call a discrimination.
John F . Davis: Yes Your Honor.
Felix Frankfurter: Anyhow don't think --
John F . Davis: I think --
Felix Frankfurter: (Inaudible) you think was wise.
John F . Davis: I think -- I think Mr. Justice Frankfurter that the state could classify, could make reasonable classifications. And if there were a factual basis for distinguishing apart from the immunity of the Federal Government from taxation, if there were a basis that they could find a point to where this was economically or from tax-wise or from the impact on the county a different problem, then you might be able to justify the classification but when the only basis for the classification would be that we cannot tax the United States, therefore we have to tax the lessees of the United States differently than we tax the other, I think that is not a reasonable classification for the Legislature. Now, if it's not a reasonable classification for the Legislature, I think equally it cannot be for the Supreme Court.
Felix Frankfurter: Therefore, how about the factor that ought to be brought to this Circuit, namely that Uncle Sam is trying to lease it, for 15 years trying to lease it with the 30-day termination, (Inaudible) classify themselves with reference to other leases or other lessors in Texas that a classification maybe based on.
John F . Davis: Well, I think there is no basis in the record for any such -- for any such discrimination.
Felix Frankfurter: Maybe -- maybe this Texas statute have a lot of knowledge that we haven't gotten.
John F . Davis: Well, we -- we have some knowledge of what's going on in Texas even if it isn't in the record, because the Texas statutes themselves recognize that the State of Texas and its municipality is -- is deep in the real-estate field and in the field of -- of leasing commercial real estate. I refer specifically for example to the provisions with respect to air fields, the municipalities, town, cities and towns of Texas are authorized specifically to develop air fields and to lease the properties which they include in the air field to private companies for commercial purposes and not only for -- for terminal uses as a matter of fact but even for the manufacture of -- of and assembly of military (Inaudible). So that here we have Texas itself authorizing its municipalities to go into this kind, if you want to call it, of leasing of municipal property for Government purposes with tax exemption. We've got the Legislature specifically authorizing it for the air fields, municipalities and the air fields, and denying it for the Federal Government. And that's not the only example. The -- the court facilities are handled in the similar -- in a similar way. Those parts of the Houston Ship channel which didn't burn up the other day are being used now for commercial purposes and many of them much of it are under lease and this too is under statute, under the Texas statute. The State -- the municipality called the Navigation District, develops this property and makes it available to commercial shipping companies, oil companies, cotton companies for commercial purposes. And some of that is -- done on a -- on a license basis and some it's done on -- on a lease basis, but it's handed over to them for -- for their actual use. So, you don't really -- it's not case of Texas just leasing -- raising land or agricultural land, Texas is like the other States is -- is deep in this real-estate business. It occurs to me that the example what happened in New York recently is -- is pertinent to this. After the decision of this Court in the Michigan cases, the State of New York passed a law which attempted to tax lessees, users in the same way that this Court had upheld in -- for the Michigan statutes. I said the Legislature passed it. When the City of New York and -- and the Port Authority became aware of what was going on and that their properties, which they leased for commercial purposes, were going to be subject to lease, they (Inaudible), and it affected the bonds, it affected their whole financial setup. And they took themselves all in a hurry because this equal taxation was going -- was going to hit them pretty hard and the statute was -- was vetoed by -- by the Governor of -- of New York. And I think that illustrates specifically that this isn't a -- a formal matter that it's not a question of just writing into the law, this shall apply to the state properties, it's -- it's a matter of real importance to -- to these municipalities who are in the business of making this type of commercial lease and the State -- it's not just a matter of form to write a statute in a particular way, it's a matter of real economics as to whether they do want to have equality of taxes between lessees from the State and from the municipalities. Texas attempts to meet this claim of discrimination on -- with three replies. First, it claims, or at least the School District claims, that the exemption is lost, the state exemption was lost in the case the property has leased the commercial -- for commercial uses. And I think that this is true technically at least with respect to properties of charitable institutions which are exempt for that reason. I think if they go into business, or lease the people who are in business, they do lose their exemption. But this specifically is not true with respect to towns, municipalities and states. Their exemption continues as long as they have not abandoned the ultimate use of this property for a governmental purpose and as long as they are using the current rentals for governmental -- for -- for state or municipal purposes. Under these circumstances, the exemption continues even though they are renting for commercial use. And as I -- I mentioned a minute ago, this type of commercial lease is specifically recognized by the -- by the statutes in Texas.
Earl Warren: We'll recess now.