William H. Rehnquist: We will hear arguments first this morning in No. 86-526, Caterpillar and others against Cecil Williams. Mr. Skoning, you may proceed whenever you are ready.
Gerald D. Skoning: Mr. Chief Justice, and may it please the Court: This case presents two interrelated issues. First, whether the Ninth Circuit's decision that a state action can be removed to Federal court under the complete preemption doctrine only when a superseding Federal remedy exists can be squared with this Court's decisions in Franchise Tax Board, Avco, and the recent decision in Metropolitan Life v. Taylor. And second, whether a state contract claims, based upon allegedly independent employment contracts of individuals covered by a union contract, were within the scope of Section 301 of the Labor-Management Relations Act, and therefore properly removed to Federal court, and dismissed for failure to exhaust contractual grievance procedures. The facts in this case are really quite simple and commonplace in the industrial setting. Respondents are former employees of Caterpillar who were laid off from their bargaining unit jobs pursuant with the company's contract with Local 284 of the International Association of Machinists when the company shut down its plant in San Leandro, California. At the time of their layoff, all respondents were union members whose employment was governed by the collective bargaining agreement entered into with their union. In fact, although respondents had worked at jobs outside of the bargaining unit for varying periods of time, all except two had returned to the bargaining unit prior to May of 1983, when Caterpillar and the respondents' union negotiated their most recent master labor agreement. And all respondents were working at bargaining unit jobs, covered by their union contract, when the company and the IAM negotiated the package of letters of agreement culminating with the agreement of June 27, 1984, providing each of the respondents expensive additional benefits because of the plant shutdown-- Respondent--
Harry A. Blackmun: Counsel, how long were the respondents management employees?
Gerald D. Skoning: --For varying periods of time that are not fully established in the record, but for varying times, Justice Blackmun.
Harry A. Blackmun: When in respect to the plant closing were they downgraded?
Gerald D. Skoning: The downgrades occurred as the plant began to shut down, and the respondents were offered these positions back in the bargaining unit to protect their employment.
Harry A. Blackmun: So that Caterpillar knew that the plant would close at the time they were downgraded?
Gerald D. Skoning: I'm not sure that's clear from the record, Justice Blackmun, but leave it at this. The times were not good as far as this plant was concerned, and there was an effort to cut back on the labor force which resulted in the reduction in jobs in the plant. Whether or not they knew at a given time that the plant would ultimately be shut down I don't think is clear from the record, and I really would respectfully submit that it isn't entirely relevant to the resolution of the issues in this case. Respondents' 1983 contract covered the usual wages, hours and working conditions, and also expressly covered employee rights in the event of a shut down of the plant. It covered such matters as exercise of seniority in a downgrade; severance pay; continuation of medical and dental benefit coverage; and even transfer rights to other Caterpillar plants. These supplemental letters of agreement were the product of legally required effects bargaining required under the National Labor Relations Act between the company and the union. Now respondents sued Caterpillar and several management employees in state court in December, 1984, claiming that their layoff breached state law contracts, independent of their collective bargaining agreement. More specifically in their complaint, respondents contended that while they were working in salaried jobs outside their union contract, petitioners promised that they would have lasting permanent employment, and that they would be provided other jobs if the company shut down the plant.
Byron R. White: What was the allegation about the promise? Was it that they were promised permanent employment as salaried employees?
Gerald D. Skoning: Yes, Your Honor. Respondents further alleged in their complaint that similar promises were made to them after they returned to their bargaining unit jobs prior to the shutdown of the plant. The district court ruled that respondents' complaint was properly removed to Federal court, since the complaint stated Federal claims arising under Section 301. The court then dismissed the complaint because respondents had failed to exhaust the applicable grievance procedures under their union contract. Respondents elected not to amend their complaint and appeal. The Ninth Circuit reversed, ruling that the case was not properly removed, and this Court granted a writ of certiorari. Our argument can be summarized briefly as follows. First, this Court has clearly ruled that, contrary to the Ninth Circuit, Federal removal jurisdiction cannot be conditioned on the existence of a superseding Federal remedy. This Court has reaffirmed as recently as its April 6th unanimous decision in Taylor that removal jurisdiction is proper if a purported state claim falls within the broad preemptive reach of Section 301. Thus, the second and critical issue is whether the state claims asserted here fall within the scope of Section 301. Quite simply, these claims fall within the scope of Section 301 since, in the words of Allis-Chalmers v. Lueck, they are inextricably intertwined with the collective bargaining agreement. The first issue, the removal issue raised by this case, is a question of Federal jurisdiction. It is an issue separate and entirely distinct from the issue of remedy mistakenly identified by the Ninth Circuit as the basis for its decision that this case should be remanded to state court. This Court's decisions in Franchise Tax Board and Avco and its recent decision in Taylor established the indisputable proposition that the issue of whether or not plaintiffs would obtain a remedy is entirely irrelevant to the courts' removal jurisdiction.
William H. Rehnquist: But the complaint here, Mr. Skoning, disavows any reliance on the collective bargaining agreement. That certainly distinguishes it from a case like Avco, don't you think?
Gerald D. Skoning: I would respectfully submit that it doesn't, Your Honor, for the reason that what the plaintiffs have alleged in their complaint is really quite irrelevant to the question of the court's jurisdiction under Section 301 of the Labor-Management Relations Act. What they say in their complaint is not the important factor. The important factor is what Congress has said, and what this Court has interpreted.
William H. Rehnquist: Well, what about the well-pleaded complaint doctrine?
Gerald D. Skoning: The well-pleaded complaint doctrine is still fully applicable to cases other than Section 301. We respectfully submit that in light of the Court's line of cases under 301, and the complete preemption doctrine that's been announced by this Court's decision, the well-pleaded complaint doctrine really has no validity with respect to 301 cases because of the intent of Congress.
William H. Rehnquist: Has any case of ours said what you just said in so many words?
Gerald D. Skoning: Not precisely.
William H. Rehnquist: So that's a new proposition you're urging on us?
Gerald D. Skoning: Correct, Your Honor. But it isn't necessary to reach that proposition for this case. Because in this case, even assuming the well-pleaded complaint doctrine were applied fully in the context of a 301 case, on the face of plaintiffs' complaint, they have identified the facts that all respondents were union members, that all respondents were in their bargaining unit jobs covered by a collective bargaining agreement. And they've acknowledged the existence of that collective bargaining agreement.
Sandra Day O'Connor: Well, Mr. Skoning, it seems to me that you're contending that this contract claim is preempted because it violates some Federal labor principle of exclusive representation. And if so, that may be raising a Garmin type preemption argument, not a Section 301 preemption. And I'm not sure that our cases such as J.I. Case or Belknap indicate that what was pleaded here is necessarily a complaint that falls under Section 301. Maybe at the end of the day it is preempted by some Federal labor policy. I don't know. But that doesn't maybe answer the jurisdiction question, and I'd like you to address that.
Gerald D. Skoning: Justice O'Connor, we submit that the line of cases involving Garmin, Machinists, and Belknap, are really irrelevant in the context of a 301 case. This Court has stated that really 301 cases are not governed by the courts--
Sandra Day O'Connor: Well, I guess you missed the point of my question. I'm not sure that this falls within 301. It seems to me the thrust of your argument is another type of preemption.
Gerald D. Skoning: --The thrust of our argument is that the plaintiffs' complaint falls squarely within 301, because it falls squarely within rights and obligations governed by the collective bargaining agreement. And that, simply put, is the position we're taking.
Byron R. White: You wouldn't really say that... suppose... suppose while they were... before the plant shut down, these people were just let go; they were... their salaried jobs were terminated, and they were just let go. They were out of work. And they brought a suit in the state court suing on this alleged contract for permanent employment. You certainly wouldn't say that their rights as supervisors were governed by the collective bargaining contract?
Gerald D. Skoning: Not at all, Justice White. And in fact, under those hypothetical facts, we would concede that they would in fact have--
Byron R. White: Well, how does the fact that they were demoted to the... to the bargaining unit, and then terminated, how do those facts change the basis for their claim?
Gerald D. Skoning: --These respondents were returned to the bargaining unit well prior to the negotiation of the 1983 collective bargaining agreement?
Byron R. White: So?
Gerald D. Skoning: And presumably, an arbitrator, if this case were ultimately to reach arbitration, could discover that in fact those very rights that they allege existed when they were salaried employees were part of the package of give and take at the collective bargaining agreement. Respondent Williams was in the bargaining unit for over four years prior to the action that was taken here. He received full benefits under the collective bargaining agreement. Full--
William H. Rehnquist: But he says he's not suing for any of that in his complaint.
Gerald D. Skoning: --It's our contention that what he says in his complaint is not the important factor.
William H. Rehnquist: Well, then you simply reject the doctrines of this Court that the plaintiff is master of his own complaint.
Gerald D. Skoning: No, we don't reject that. We suggest that the doctrine of the well-pleaded complaint, and the doctrine that the plaintiff is the master of his complaint has less validity within the scope of 301 cases such as this.
Byron R. White: You're arguing that... you're arguing, I take it, that the... after they returned to the bargaining unit, there was a new contract negotiated. And your argument is that... that their rights that they may have acquired when they were supervisory employees are just merged into the collective bargaining contract; is that it?
Gerald D. Skoning: That's not our contention... in this case, that is our contention. That's not our contention generally that all--
Byron R. White: Well, I know. You say in this case, though, that the rights they obtained as supervisory are governed by a collective bargaining contract executed after they became members of the bargaining unit?
Gerald D. Skoning: --That's correct, Justice White. The contention is that these are private consensual agreements that they are relying on, the independent contracts that they rely on. And as private consensual agreements, they can be negotiated. Contrary to respondent's contention that somehow you look at these... these agreements in a vacuum, these--
Byron R. White: Well, it does involve a judgment here before this 301 preemption and removability, there does have to be some judgment as to whether or not these claims are independent of the collective bargaining contract or sufficiently involved in it that there is preemption.
Gerald D. Skoning: --That is correct, Justice White.
Byron R. White: Then that's--
Gerald D. Skoning: That's the judgment that we submit the district court properly made on the basis of the complaint, and the collective bargaining agreement.
Antonin Scalia: --It's purely a defensive matter, of course. Your defense to the... to the individual contract claim is that all of this merged into the collective bargaining agreement, and that is indeed a Federal question. But I thought our doctrine was quite clear that the mere fact that you have a Federal defense doesn't make the case removable. Now can you conceive of any situation in which there would be a Section 301 preemption defense in which the suit would not be removable? If this one is, why is a suit not always removable whenever there is a Section 301 defense?
Gerald D. Skoning: Our contention is that if the respondents, if the plaintiffs in a case brought in state court are covered under the terms and provisions of the collective bargaining agreement, and their claims do not assert nonwaivable state rights... nonwaivable state rights, as opposed to the private consensual agreements that we have here... that that case is removable as a matter of law under Section 301 in this Court's decisions. And it doesn't turn... this Court in the Taylor case... respondents have argued that it depends on the clarity of the issue of 301 preemption.
Antonin Scalia: Excuse me, before you go on.
Gerald D. Skoning: Yes, sir?
Antonin Scalia: Their claim does not depend on 301 at all. They are claiming that they have a state ground that's quite separate from 301. It's your defense that hangs on 301.
Gerald D. Skoning: Our... our position is that 301 governs this case, and therefore--
Antonin Scalia: Well, you may be right, but that's a defense. They're coming in saying, I have a state cause of action. You're saying, no you don't; it's been preempted by 301.
Gerald D. Skoning: --This Court has said that under Section 301 preemption is complete.
Antonin Scalia: You may be right. But it's still a defense, and it's not their cause of action.
Gerald D. Skoning: They have specifically alleged the facts that these respondents were in the bargaining unit at the time they were laid off. And their contention is that the layoff was improper as a result of the promises that they had before they returned to the collective bargaining agreement... to coverage under the collective bargaining agreement. It's our contention that the question of whether it is clearly pleaded in the plaintiffs' complaint or not clearly pleaded in the plaintiffs' complaint is really entirely irrelevant.
Antonin Scalia: Even if they had said in their complaint, we expressly disavow any Federal cause of action. We are simply suing for... on these state grounds. There are no Federal grounds in this complaint.
Gerald D. Skoning: They have attempted to say just that in this complaint. They have stated in their complaint that these promises were continually and repeatedly made to plaintiffs while they were management and weekly salaried employees, and thereby constituted a total agreement, wholly independent of the collective bargaining agreement pertaining to the hourly employees,-- It's our contention as I said earlier--
Antonin Scalia: You can't bring the state cause of action. You're just not able to.
Gerald D. Skoning: --That you cannot bring it as a state cause of action because these employees were in the bargaining unit; they'd been in the bargaining unit for years; and the bargaining unit expressly covered the matters that they contend were covered independent of the collective bargaining agreement.
John Paul Stevens: Would you make the same argument if they were alleging that the side agreement that was made when they were in management capacity specified that at the time of termination that each of you would receive 500 shares of stock, something that would normally not be part of the collective bargaining agreement, and that's all they allege. And then you had the same collective bargaining agreement and the rest. You say that would also be merged into the--
Gerald D. Skoning: Needless to say, that's not a situation covered by this agreement.
John Paul Stevens: --What's the difference, really? They claim that they had an independent promise, independent agreement. Is it the nature of what they were promised that makes a difference?
Gerald D. Skoning: I think to the extent the collective bargaining agreement rights and remedies afforded to the plaintiffs are intertwined with the stock issue--
John Paul Stevens: They get something. The collective bargaining agreement gives them something at the time of termination, but they say it's not what they were independently promised. Why can't they make a side agreement like that when they're in a management capacity?
Gerald D. Skoning: --That's a matter that is covered under Federal law, and that is complete preemption under--
John Paul Stevens: You'd say that the stock option agreement would be preempted under Federal law, too?
Gerald D. Skoning: --The stock option agreement--
John Paul Stevens: I don't mean stock option; stock promise to give 500 shares when he retired. They just can't do that through a management person and make it binding if the management person later joins a bargaining unit, is your position, as I understand it.
Gerald D. Skoning: --Obviously, the answer to that question isn't dispositive in this case.
John Paul Stevens: I think it is.
Gerald D. Skoning: Trying to answer the question directly, it's our position that if that agreement to give them stock at the time of plant shutdown--
John Paul Stevens: Time of severance, right.
Gerald D. Skoning: --were in some manner intertwined with the provisions of the collective bargaining agreement, it would be preempted under Section 301.
John Paul Stevens: In other words, if the collective bargaining agreement says, this supersedes all side agreements of every kind?
Gerald D. Skoning: If there were language of that sort, of if there were other--
John Paul Stevens: Well, what if there's language in the agreement that says, this does not supersede any side agreements? Then it clearly wouldn't, would it?
Gerald D. Skoning: --If they had bargained over and expressly excluded that matter, expressly excluded it under the Court's decision in AT&T, then I think that would be actionable in state courts.
Antonin Scalia: How do we decide this? Why... why would the collective bargaining agent be bargaining about issues they probably didn't even know about? And especially when the breach, if a breach occurred at all, it seems to me is when they were returned to the bargaining unit as nonsalaried employees when they had been promised permanent employment, they claim, as salaried employees? Why would that be implicated... why is it even arguably implicated in the collective bargaining agreement?
Gerald D. Skoning: Justice White, the crucial fact is that these suits... this suit was brought well after the time they returned to the collective bargaining agreement. And on this record, I'll concede, we don't know what was bargained across the bargaining table in 1983, because that's a matter--
Byron R. White: Well, I think we judge the case on the ground that the promise really was made. They were promised permanent employment as salaried employees.
Gerald D. Skoning: --And Justice White--
Byron R. White: Let's just accept that.
Gerald D. Skoning: --I accept that.
Byron R. White: And you say... and I suppose then that when they were returned to the bargaining unit, and... the breach occurred then.
Gerald D. Skoning: We don't contend that those promises are no longer valid. Our contention is that those promises must be reconciled with the express provisions of the collective bargaining agreement and the side letters of agreement which dealt with plant shutdown. Because those contractual terms deal... deal precisely with the same issues that they allege their independent value.
William H. Rehnquist: Well, then you're saying that they haven't pleaded the full contract that's in existence between the parties?
Gerald D. Skoning: Well, that in fact is the case.
William H. Rehnquist: But that isn't something that you... that you can raise to remove a case. That's clearly a matter of defense. You set forth the contract you think is in existence. The defendant comes in and says, well, no, that's not the contract; there were a lot of other things here. But that's a matter of defense, which isn't considerable on removal.
Gerald D. Skoning: Our contention is that the issues raised in a 301 removal situation are, whether or not those plaintiffs were covered under the terms of a collective bargaining agreement, first of all. And secondly, whether or not those claims asserted by those plaintiffs were private consensual agreements, or whether they were under the provisions of this Court's decisions in Lueck, nonwaivable state rights.
Antonin Scalia: But how do we know that on the face of it? I mean, what we're talking about here is the well-pleaded complaint doctrine. What troubles me about your response to Justice Stevens, is that you really... we really can't tell until the trial proceeds or there's something further than the complaint at least, whether or not the stock agreement was superseded by the bargaining agreement; whether the bargaining agreement had terms; or if the terms weren't expressed, whether it was understood that it would supersede everything. In many cases, you have to get into the trial to figure out that. And you have to determine removal on the basis of the complaint. How can we tell on the basis of the complaint whether these factors are met or not?
Gerald D. Skoning: Justice Scalia, I think that this Court's decision in the Taylor case really bears directly on the question that you've raised. The Court there dealt with preemption under ERISA, of course. But under ERISA, the ERISA provisions were closely tailored to the complete preemption notion of preemption announced in 301. The Court said, the touchstone of a Federal district court's removal jurisdiction is not the obviousness of the preemption defense, but the intent of Congress. We must honor that intent, whether preemption was obvious or not, at the time this suit was filed. So the contention made by respondents that this Court may look nowhere beyond the face of its complaint, in a 301 context, we submit, is not a proper construction of this Court's decision. I'd like to reserve the balance of my time.
William H. Rehnquist: Thank you, Mr. Skoning. We'll hear now from you, Mr. Wollett.
Fritz Wollett: Mr. Chief Justice and may it please the Court: I wanted to respond to Justice Blackmun's question at the start of the questioning of the Petitioners' attorney. The answer to the question as to how long the Respondents were employed in management positions or positions outside the bargaining unit is set forth in note 3 of Respondents' brief, and that is varying periods of time ranging from three to 15 years.
Speaker: Is that in the record?
Fritz Wollett: That is in the record, yes, Your Honor. The issue in this case is whether Respondents' claims, which are based solely on contracts entered into by the parties while the Respondents were employed in positions outside the collective bargaining unit, are removable under the doctrine of complete preemption, solely because after the Respondents entered into these contracts of employment they were downgraded into positions covered by the collective bargaining unit. This case is not about the merits of any substantive preemption defense, but it is about the form in which those questions should be decided. This is not a case which raises a question of whether we are right or wrong in our view that our claims are not preempted by federal labor law, but rather a basic question as to whether or not this complaint is removable. Our contention is that the unusual facts of the well-pleaded complaint in this case do not fall within the doctrine of complete preemption, because the cause of action we have alleged is not covered by section 301 and the collective bargaining agreement and the cause of action that we are claiming does not require the resolution of any question of federal law. The facts in this case, which have already been discussed, show that our contract claims were entered into while the Respondents were solely... were employed solely in positions outside the collective bargaining unit, and that thereafter they were downgraded into the bargaining unit and then terminated. However, one of the plaintiffs, Fred Chambers, was... let me start again. The complaint was removed to the federal court after... we sued in state court alleging a violation of the contract claims which were entered into while my clients were outside the bargaining unit. The case was removed to federal court. It was thereafter dismissed on the grounds that it was preempted by section 301. The claims of one of the plaintiffs, Fred Chambers, were remanded to state court. The reason that his claims were remanded, unlike the claims of any of the other Respondents who are here today, was that Mr. Chambers never was downgraded into a collective bargaining unit position after he entered into the same contracts that the Respondents here today allegedly entered into. We believe that the test for removability in this case should be determined by looking to the source or the basis of the rights which have been claimed to be violated. In the Avco case, the source of the alleged state cause of action was a no-strike provision in a collective bargaining agreement. In the Lueck case, the source of the preemption defense in the finding that section 301 preempted that state action was a collective bargaining provision providing for the payment of disability benefits. In the Taylor case, the source of the contract right was a federally covered ERISA plan.
Sandra Day O'Connor: Mr. Wollett, do you defend the Ninth Circuit's view or test of removability as being kind of a two-step inquiry, and you look to see whether there is a federal remedy which supplants?
Fritz Wollett: No, Your Honor, we specifically stated in footnote 13 of our brief that we did not believe the Court would have to adopt that test in order to affirm this result. We do not defend that portion of the Ninth Circuit's opinion, which seems to suggest that removal should rely on the question of whether a remedy is available. We do believe that the Ninth Circuit's decision is defensible insofar as it bases its test of removability on the question of whether or not the plaintiff's claims fall within a federal cause of action. And our position is, of course, that there is no federal cause of action into which the plaintiffs' claims fall here.
Byron R. White: What if there had been no attempt to remove, but the company had just moved to dismiss the case in the state court on the same ground that it moved to dismiss in the federal court, saying that this is governed by the collective bargaining contract, or at least it's arguably covered by it, and it should be decided by an arbitrator, and you really haven't satisfied the time requirements? What would have been your response?
Fritz Wollett: Well, our response would be that our claims were based upon contracts which were outside the bargaining agreement and therefore--
Byron R. White: Well, but would you concede that if your contract arguably was covered by the bargaining agreement, that your claim was arguably covered by the bargaining agreement, that it should be decided by the arbitrator, whose job it is to construe a contract?
Fritz Wollett: --We would only make that concession, Justice White, if two facts were present: number one, an agreement by both the parties to the original contract, the employer and the employes, that the original contract could be merged into the collective bargaining agreement; and secondly, an agreement by the union, as the party to the collective bargaining agreement, that the contracts should be merged into the collective bargaining agreement. Absent that evidence, we would not agree with that, no, Your Honor.
Byron R. White: Well, so your answer to my question is no, is plain no.
Fritz Wollett: That is correct, Your Honor.
Byron R. White: You sort of say that the court itself should construe the contract, should construe the collective bargaining contract?
Fritz Wollett: Are you talking about the state court, Your Honor?
Byron R. White: In the state court in my example, because if the state court construed the contract to cover this kind of a claim, you would be out of court.
Fritz Wollett: I think the state--
Byron R. White: Because then it would be completely governed by federal law, and the provisions of the contract would be enforced in accordance with its terms.
Fritz Wollett: --Certainly, Justice White, I think that the state court would have the obligation, if the federal preemption defense was raised in the state court, to examine that defense.
Byron R. White: Not federal preemption. It just says that, say... well, they would make the claim that this is governed by federal law, and they say the collective bargaining contract governs this claim. And if the state court agreed with them, you would be out of court, I suppose.
Fritz Wollett: I would agree with that, Justice White. I still think it's all defensive, but I agree that a state court would have the right to make that judgment.
Byron R. White: All right.
Fritz Wollett: In support of its argument that section 301 accomplishes complete preemption, Caterpillar rejects the applicability of what it characterizes as national Labor Relations Act defensive preemption. That is irrelevant, Caterpillar says, in complete preemption cases arising under section 301. However, the principle Caterpillar relies upon to establish the preemptive impact of section 301 is derived from a case involving National Labor Relations Act preemption, the J.I. Case case. Petitioners argue that J.I. Case means that whether the employees antecedently created contracts of employment survived the subsequently negotiated collective bargaining agreements or were surperseded and extinguished thereby is a question of federal law. Petitioners are right. This is a question of federal law. But the principle of exclusivity and the primacy of the collective bargaining agreement derive not from section 301 and not from the collective bargaining agreement itself, but rather from the National Labor Relations Act. As the AFL-CIO's amicus brief points out, the substantive rule upon which Petitioners rely for their argument that the state cause of action has been eradicated, like any other federal labor law preemption defense, is derived from the National Labor Relations Act. And thus, in response to a question that Justice O'Connor asked earlier, we believe that if a federal preemption defense based upon labor law is applicable at all to this case, it is a Garmon balancing test, it is not a section 301 test. Not only is the question of federal preemption clearly defensive, it is a question for courts, not for arbitrators. Arbitrators deal with questions of interpretation and application of provisions in collective bargaining agreements where claim is made that the collective bargaining agreement has been violated. Arbitrators do not deal with defenses raised by defendants in response to claims being made of violation of some other kind of agreement.
Byron R. White: Well, the argument is here that the collective bargaining agreement did cover this kind of a claim, even a claim that a promise to a supervisory employee had been breached.
Fritz Wollett: That is the argument, Your Honor.
Byron R. White: Well, that's an argument about the meaning and reach of the collective bargaining contract.
Fritz Wollett: It is that, Your Honor, but I believe it's a defensive argument. The question of the impact of the collective bargaining agreement upon the individual contracts of employment can only be a defensive claim. The only way that this cause of action is removable is if it falls within the complete doctrine of... complete preemption doctrine of section 301. That can only occur if our claims are based upon the collective bargaining agreement.
Byron R. White: Well, it can only occur if it's plain enough that it does.
Fritz Wollett: If it's plain enough or there is some basis for the court to characterize our claims as falling within the scope of the collective bargaining agreement. Caterpillar urges the Court to hold that arising under jurisdiction exists because the individual contracts in question were automatically merged into and superseded by the bargaining agreement. Petitioners' unique and unprecedented request should be rejected for two reasons: First of all, it is defensive;-- And secondly, it is far from clear that any merger of the individual contracts into the collective bargaining agreement actually occurred. For literally a full century, this Court, consistent with the express intent of Congress, has held that claims of federal preemption raised in a defensive manner do not provide removal jurisdiction. As illustrated before, the situation with Fred Chambers, the plaintiff who was not in the bargaining unit at the time he was terminated, he was permitted to take his case back to the state court. The remaining Respondents were dismissed. The only difference between Chambers and the remaining Respondents is the collective bargaining agreement. Thus, the collective bargaining agreement is defensive. In addition to the defensive nature of the Petitioners' preemption claim, it is of course far from clear that the Respondents' claims are preempted. We know of no proposition of federal law that requires merger per se of the individual contracts with the collective bargaining agreement, unless there can be a showing that the parties to the first contract, the employee and the employer, agreed to such a merger and that the collective bargaining agent for the employees, the union, agreed to that merger. This Court specifically acknowledged in J.I. Case the possibility that individual contracts of employment could coexist simultaneously with a collective bargaining agreement. Moreover, J.I. Case specifically stated that any discontinuance of the individual contracts as a result of a collective bargaining agreement was without prejudice to the right of any employee to pursue damages under that contract or any defense by the employer thereto. We believe also, as previously noted, that the Belknap case supports our notion that, if this case... if preemption is involved at all in this case, it is defensive preemption. In that particular case, collective bargaining... employees were hired during a strike and were allegedly promised permanent employment. The strike was settled and those employees were terminated. The settlement, the provisions of the collective bargained strike settlement, required the employer to rehire the strikers. Pursuant to that, the employer laid off the employees hired during the strike. This Court held on the merits of the preemption claim in that case that the claims were not preempted, even though the collective bargaining agreement required the reinstatement of the strikers to collective bargaining unit positions which had previously been occupied by the strikers. How, given the Belknap decision on the merits of the preemption claim, can Petitioners seriously contend that this case is removable under the doctrine of complete preemption? Finally, application of the well-pleaded complaint rule will permit the state court to take evidence on the question of the preemption defense and to determine what, if any, impact the collective bargaining agreement had on the individual preexisting contracts of employment which are alleged to exist by our complaint. Allowing this case to be remanded to the state court will permit the case to possibly be resolved without reference to any federal defense. The result that Petitioners seek here is essentially a ruling that any time an employee is in a collective bargaining unit covered by a collective bargaining agreement his claims are preempted, regardless if he attempts to allege a claim under state law and regardless of the source of those claims. That argument would take the scope of section 301 and its preemptive impact far beyond the scope of the National Labor Relations Act.
John Paul Stevens: I don't think they argue quite that broadly, do they? Don't they say that, in view of the fact that the alleged state law contracts dealt with the same subject matter as the collective bargaining agreement, namely what happens on severance and whether you have a right to stay on? I don't think they would say if you had rented a house from them or something like that during the collective bargaining agreement, that that would be preempted.
Fritz Wollett: I didn't hear the last?
John Paul Stevens: I just thought you stated their position much more broadly than they did. That's all I was suggesting.
Fritz Wollett: Okay. Well, that's fair. I think that they are looking for a very broad result from the complete preemption doctrine. My point is merely, Justice Stevens, that that would take... the result they seek would take the notion of preemption under section 301 far beyond preemption that's found in the underlying statute, the National Labor Relations Act. Surely Congress did not intend such a result. Unless there are questions, Mr. Chief Justice, I have completed my argument. Thank you.
William H. Rehnquist: Thank you, Mr. Wollett. Mr. Skoning, you have five minutes remaining.
Gerald D. Skoning: Thank you, Mr. Chief Justice. First of all, I would like to deal with the Respondents' argument that Garmon Machinists and Belknap balancing type of preemption governs this case. I think this Court's decision in the Lueck case, the unanimous decision in that case, has rejected the use of balancing preemption in the context of a case arising under section 301. The Court stated: "The balancing of federal and state interests required by Garmon preemption is irrelevant, since Congress, acting within its power under the commerce clause, has provided that federal law must prevail. " And it's our contention that that is precisely the scope of the district court's examination of the case upon removal to federal court: Does it fall within the scope of section 301. Finally, national labor policy is founded on the Congressional mandate that claims relating to collective bargaining agreements are to be resolved under uniform principles of federal law. Respondents urge this Court to retreat from those principles and allow plaintiffs to define the scope of 301 and state courts, based on their own notions of the importance of state interests--
Antonin Scalia: Not necessarily. All we're arguing about at this stage is where these questions are going to be decided, not how they're going to be decided, but simply whether the state court will get the first shot at it.
Gerald D. Skoning: --That's correct. But in any event, their contention is that the state court would then balance the interests, the state interest against the federal interest. And under the circumstances we have before this Court, it's our contention that that's a proper role for the federal court to decide. Why? Because the Petitioner here--
Antonin Scalia: That's always the case where you have a federal defense. You always have the state court passing on a question which it is appropriate for a federal court to decide.
Gerald D. Skoning: --That's correct. And we don't contend that the state court does not have the power to evaluate those federal issues. Our contention is in fact that there is concurrent jurisdiction between the state and the federal courts under 301, and the fact of concurrent jurisdiction reveals that it is a federal claim in nature under 301. It is recharacterized as a 301 claim and therefore properly removed to federal court under the circumstances of this case. Such a retreat, we submit, would generate conflicting results in interpreting collective bargaining agreements based on the variety of state laws of implied contract, covenants of good faith and fair dealing, employment at will, and the like. Conflicts such as these are inconsistent with our basic labor law principles. We urge this Court to reconfirm these basic principles and reverse the judgment of the Ninth Circuit. Thank you.
William H. Rehnquist: Thank you, Mr. Skoning. The case is submitted.


William H. Rehnquist: We'll hear argument first this morning in No. 89-1283, Arcadia, Ohio v. the Ohio Power Company. Mr. Phillips.
Carter G. Phillips: Thank you, Mr. Chief Justice, and may it please the Court: Petitioners are 15 small villages and towns in Ohio that purchase electricity from the Ohio Power Company for the purpose of reselling it to their residents. Ohio Power is an electric utility company that sells electricity at wholesale, and is part of a public utility holding system called the American Electric Power Company. That company is registered under the Public Utility Holding Company Act, and as a consequence of that, Ohio Power is subject to regulation by both the Federal Energy Regulatory Commission and the Securities Exchange Commission. At issue in this case is the division of regulatory authority specified in section 318 of the Federal Power Act between these two agencies in connection with Ohio Power's wholesale electric rates. The rates Ohio Power charges to petitioners are significantly affected by the cost of coal. Coal represents approximately 50 percent of the total cost of the production of electricity by the Ohio Power Company. The issue in this case arises because Ohio Power does not purchase its coal on the open market, but rather it purchases most of its coal from a wholly owned subsidiary called the Southern Ohio Coal Company. Between 1971 and 1980 Ohio Power went to the Securities Exchange Commission and asked for four separate orders with respect to the coal mined by the Southern Ohio Coal Company. The first one provided essentially for the creation of the coal mining operation and asked for securities to be issued for that purpose. The second one followed up by an additional grant of securities in order to provide an actual operating opportunity for that coal company. And the last two orders also provided for the issuance of securities in order to upgrade the quality of the mining operations by that coal company. Nothing in those orders specifically refers to the Ohio Power and Southern Ohio Coal Company and the sale of coal. They simply refer generally to these basic transactions under a host of provisions of the security... of the Public Utility Holding Company Act, but not section 13(b) of the Public Utility Holding Company Act which is the provision that specifically regulates these kinds of inter-affiliate coal transactions.
Sandra Day O'Connor: Mr. Phillips, what is the effect of the SEC order? Does it require that coal be purchased at cost, or is it just a ceiling?
Carter G. Phillips: To the extent it applies at all, it would... it would clearly be just a ceiling. But what it seems to me clearly, what I think is in fact the case is it doesn't say anything about how it has to be purchased. What it does is recite an intention by Ohio Power essentially to comply with an unstated section 13(b), whatever section 13(b) requires. The way I would read the order, it simply says we will comply with the Federal standards. Since those standards incorporate a market basis under rule 92, they could just as easily be saying that we will comply with that requirement, whatever it happens to be at the end of the day.
Sandra Day O'Connor: So you don't concede that at least the SEC orders effectively set a ceiling?
Carter G. Phillips: No, I don't believe that they necessarily... I mean, at some point they set a ceiling in the sense that you cannot exceed either cost or the market price. But I don't think they were designed to say anything about what Ohio Power is required to do with respect to the Southern Ohio Coal Company. And it is difficult to see any requirements in those orders, given that there is nothing that specifically says anything about Ohio Power buying coal from Southern Ohio, how much, at what prices. It only says that Southern Ohio will sell to the American Electric Power system. It doesn't even specify Ohio Power in connection with that.
Byron R. White: How did the court of appeals construe the order?
Carter G. Phillips: The court of appeals was able to avoid having to construe the order, because it held that it made no difference whether there was a conflict between the... its... the SEC regulation and FERC regulation. What it said was this is a matter subject to regulation by the SEC under section 13(b). And the way they construed section 318 meant that FERC was ousted of its otherwise appropriate regulatory authority. So they didn't have to construe those orders.
Byron R. White: You don't really care whether the... I mean, you wouldn't lose this case if the... if it were perfectly clear that the SEC purported to set a ceiling, would you?
Carter G. Phillips: No, Justice White, absolutely not.
Byron R. White: You don't really care, then?
Carter G. Phillips: I think that--
Byron R. White: Like the court of appeals.
Carter G. Phillips: --Yes, but except for precisely the opposite reason, which is that I don't care because it is clear to me that there is no conflict between what the FERC has done here and what the SEC has done here, and therefore it should make no difference how the SEC's orders are characterized.
William H. Rehnquist: What would be the SEC's angle here? What would be their purpose in setting a ceiling?
Carter G. Phillips: Well, they want to... they would be reviewing to assess the relationships between the Southern Ohio Coal Company and the Ohio Power Company in order to ensure that there are no dealings going on beyond whatever representations are being made in connection with these orders. I mean, they have investment regulation to take into account, and so they have a quite reasonable... they might, potentially at least, want to exercise their authority to promote those purposes.
William H. Rehnquist: Who are they protecting, or who are they looking out for?
Carter G. Phillips: Well, they could be... in this setting they could be looking out for debt holders or preferred shareholders of Ohio Power Company, or debt... anybody who might have debt with the Southern Ohio Coal Company.
William H. Rehnquist: But I would think that they would... aren't they supposed to look out for either the coal company here or a subsidiary, rather than the principal?
Carter G. Phillips: I think in general they are supposed to look out for them. On the other hand, my understanding of what the SEC's authority and mandate is is to make sure that the transactions among affiliates within a public utility holding company system are... are handled in a way that the public is informed as to the operations, and that no one is injured, either the public interest or individual companies within that system.
Antonin Scalia: Well, don't you think someone would be... would be injured if an acquisition of a company that has coal reserves that is entered into for the purpose of using those reserves in the... in the operation of a utility run by another one of the affiliated companies, if it turns out that that can't be done? Wasn't the SEC in effect approving the acquisition of a subsidiary for the very purpose of using the coal reserves of that subsidiary in the generating?
Carter G. Phillips: Yes, of the American Electric Power System, no question about that. But nothing in what the FERC provides here interferes with Ohio Power's ability to purchase any amount of coal it wants from Southern Ohio.
Antonin Scalia: I am just trying to figure out what the SEC approved, though. And the SEC approved... approved that agreement which said that the sale would be at cost? Is that what it said? What did it say?
Carter G. Phillips: No, the SEC approved four separate securities transactions that don't say anything about the sale of coal between Ohio Power and the Southern Ohio Coal Company. With respect to those contracts, those contracts were not put before the SEC for review, and they have never been approved by the SEC. All it said was we will allow Ohio Power to invest essentially in these coal companies in order to ensure that they have available supplies. Now, in the process of saying that they did indicate, the SEC indicated, that it was the intention of Ohio Power to purchase... or not even Ohio Power, the AEP system, to purchase its coal, because that would guarantee a reliable supply. But it says nothing about the specific cost that would be incorporated into that arrangement.
Byron R. White: Well, Mr. Phillips, the SEC's brief here purports to quote an order. It says that the SEC specified that the price at which SOCCO... I guess that's the coal company--
Carter G. Phillips: Yes, Your Honor.
Byron R. White: --sold coal to Ohio Power could not exceed cost to SOCCO. And it purports to be quoting it.
Carter G. Phillips: Well, the specific language of the order doesn't refer to Ohio Power. It refers to the American Electric System, frankly.
Byron R. White: Well, I know, but at least it said... it set the price at which SOCCO could sell the coal. It said could not exceed cost.
Carter G. Phillips: Yes, it does say that, Justice White. The problem with... with making much of that as far as a requirement in any sense to be applied against Ohio Power in the context of a FERC rate-making proceeding is that that is precisely the same language that exists in section 13(b), is that coal or these goods have to be sold at cost. And since the first day that that statute was enacted, the SEC has had a regulation on the books that restricted the sale of coal or any other goods among interaffiliate companies to the market price. So by referencing language of cost, that doesn't necessarily say anything about what is required in the relationship between Ohio Power and the Southern Ohio Coal Company.
Antonin Scalia: Even... even where the market price is above cost?
Carter G. Phillips: In terms of what the charges are?
Antonin Scalia: Yes, sir. Are you saying that despite this commitment that... that it would not... it would not violate the arrangement that the SEC approved to sell above cost, so long as it's... it's not above market price?
Carter G. Phillips: I would have guessed that it might have been a risky venture, frankly, to try that. On the other hand, rule 92 states unmistakably that you are supposed to, that you have a market basis. And therefore I think they could have at least gone to the SEC and said despite these recitals in the order what we really want to do is to be able to sell it at market price, and be able to do that. I think they are still free to go to the SEC and seek that kind of approval.
Antonin Scalia: If cost means market, I don't... I don't even know how we can communicate anymore.
Carter G. Phillips: Well, I'm not the one who says cost means market. The SEC has since the first day said cost means market, or at least the restriction based on cost in section 13(b) is fully satisfied by a market price standard within rule 92.
William H. Rehnquist: But that makes no sense at all in terms of ordinary English usage.
Carter G. Phillips: Well what does... but see, the reason for that is that section 13(b) doesn't say things have to follow at cost. What section 13(b) says is you cannot have an interaffiliate contract, period, unless you satisfy certain requirements of the SEC. And one of those requirements is language that says at cost economically and efficiently allocated among the various parties. So it is not a strict at-cost standard such that Congress said in 13(b) this is how you have to operate in terms of interaffiliate contracts. It's a delegation of authority to the Securities Exchange Commission, and it has exercised its authority in a way that in no way undermines what went on here. I think it's important to step back for a second, because the truth is whatever the SEC has said about how Ohio Power and the Southern Ohio Coal Companies should entertain the idea of selling the coal between themselves, that is nevertheless fundamentally different from the question of how much the Ohio Power Company can charge its rate payers. And that is really the essence of what the issue is in this case under section 318. The question here is is there a conflict between those two provisions. And the reason we need to get to that analysis is because I think we can all agree, or should all at least agree that the D.C. Circuit erred in its construction of section 318, which says that simply because this is a matter within the jurisdiction of the SEC under section 13(b), that for that reason alone FERC is ousted of its important rate-making authority over a component of cost that represents essentially 50 percent of the rates that get charged to the petitioners in this case. What the... what we know from both the SEC and the Federal Energy Regulatory Commission is that they are in complete agreement with the petitioners that the court of appeals erred by over broadly construing the restrictions on section... in section 318.
Sandra Day O'Connor: Mr. Phillips, I take it that the court below thought that the term "subject matter" could be interpreted broadly, and do you think that the court below made at least a reasonable construction of the statute, a possible construction of the statute, so that we get into a deference question? Is... is their interpretation a reasonable one?
Carter G. Phillips: I think if you take the combination of the statutory language, the structure of the act, and the regulatory history under the act it is not a reasonable construction of the statute, because... and also it represents an incredibly malleable interpretation of the term "subject matter". And to a certain extent both the FERC and the court of appeals, I think, and certainly Ohio Power, is subject to some criticism for their handling of what the term "subject matter" means. The court of appeals criticized FERC for saying, well, this is rate making, and therefore... and the SEC doesn't engage in rate making and therefore it must be a different subject matter. I think that is an overbroad analysis of the question. I think that there are certain... it is certainly possible that the SEC could enter an order that might affect rate making directly by a requirement that could trigger section 318. On the other hand, it certainly doesn't follow what Ohio Power argues here, which is to say we all agree on what the subject matter here is. It's the interaffiliate coal transaction, and therefore we have separate requirements regarding that. The point here is that there is no obvious definition of the term "subject matter". So what you need to do is step back and see what is it you are trying to get at under the statute by that language. And what you are trying to get at by that language is you have one requirement imposed by one agency, another requirement imposed by a separate agency. They must be on the same person and the same subject matter. And the consequence is that only one requirement is then ousted. I take that to be precisely the language of conflict.
William H. Rehnquist: How... how do you define the phrase 318?
Carter G. Phillips: I would say that it would not restrict the scope of the possible conflicts to the identified subject matters that are placed within that provision regarding securities issuances.
William H. Rehnquist: You have given me a possible application. How do you define it?
Carter G. Phillips: Well, I don't think you can define subject matter in the abstract, and the SEC and FERC agree with that. They... they frankly admit that subject matter is not a term that you can simply say this is what it means. Presumably, what I think it means is any situation where both... where both agencies impose irreconcilable obligations. Because when you have got irreconcilable obligations imposed, it is clear then that they are involved in the same subject matter by definition. And the reason why you do it that way--
William H. Rehnquist: That's an extremely narrow definition.
Carter G. Phillips: --But that's... the reason it's a narrow definition is that that is the approach that best effectuates Congress' purpose. Congress did not intend for this to be a situation where the FERC and the SEC would continue to collide with each other. What the Congress intended was that they would largely operate in their respective spheres, and there would be very few conflicts. And our interpretation directly promotes that purpose, and thereby ensures that public utility holding companies are in all circumstances subject to direct and comprehensive regulation by at least one agency.
Antonin Scalia: What was the purpose of the SEC's approving... approving these contracts?
Carter G. Phillips: I want to make it clear, Justice Scalia, they did not approve any contracts. What they approved were requests to enter into securities transactions. And the reason that they approved those securities transactions was because they thought that Ohio Power engaged... would be well served by having access to coal, by having ready access to coal through an affiliate.
Antonin Scalia: Well, don't you... let's turn to section 13(b). It says or otherwise into or take any step in the performance of any service, sales, or construction contract by which that company undertakes to perform services or construction work for or sell goods to any associate company. You are saying there was never any approval of that?
Carter G. Phillips: No, they never... they were never required to bring the contracts to the SEC. They have never been submitted to them, and they have never been approved by the SEC. The orders under review are the orders that are cited by Ohio Power, are all securities transactions that have been approved, that contain some recitals about other contracts. But the specific contract under which Ohio Power and the Southern Ohio Coal Company operate are not at issue here, or have not been approved by the SEC at least. If the Court has no questions I will reserve the balance of my time for rebuttal.
William H. Rehnquist: Very well, Mr. Phillips. Mr. Wallace.
Lawrence G. Wallace: Thank you, Mr. Chief Justice, and may it please the Court: The question, the statutory question before the Court involves the proper reconciliation of two different levels of overlap and duplication. On one level there is the problem of the imposition of duplicative and possibly conflicting requirements on particular regulated entities. But on the second level, there is the problem of the extent to which the SEC is to be called upon to provide the full panoply of rate regulatory functions and expertise for holding company affiliates that FERC otherwise provides if those functions are to be provided at all in the context of holding company affiliates. And the basic concern of the two Federal agencies before the Court today is that the court of appeals has interpreted section 318 of the Federal Power Act in a manner that goes too far in eliminating overlap and the mere possibility of conflict on the first level. And the necessary effect of that interpretation is to require impractical duplication of mission by the SEC and FERC on the second level, because FERC will be disabled--
Anthony M. Kennedy: Mr. Wallace, the thrust of the power company's argument was that the SEC orders were either not enforceable, or that they didn't really set a cost requirement. Do you agree with the entire argument that was made by the power company on this point?
Lawrence G. Wallace: --I don't... I... I can't say that I agree with the entire argument. I agree that the argument is a possible outcome. Those orders have not to this point been interpreted by either the SEC or any court, and--
Anthony M. Kennedy: You did take the position that the power company can ignore the three orders of the SEC on sales above... sales at cost?
Lawrence G. Wallace: --The orders don't speak to sales as such. They... they approve the securities transactions. The orders all appear in full in the joint appendix, beginning at page 76, the series of four orders. And if you look at them you will see that they consist of a descriptive recitation of the application for the securities transaction, which includes in one case the words that the sales will be at cost, and in the others at no more than cost.
Antonin Scalia: So they are describing the contracts as part of the representations on which the approval of the financing transaction is based.
Lawrence G. Wallace: Well, the anticipated future contracts are being described in this recitation.
Antonin Scalia: Oh, you don't consider that--
Lawrence G. Wallace: But they--
Antonin Scalia: --a commitment. You're saying they are just being described.
Lawrence G. Wallace: --Well, that's one possible reading of them. This is what requires interpretation of what was meant by then the paragraph at the end in which the SEC says that these applications are approved, after reciting the terms of the application.
Anthony M. Kennedy: So would you have any objection if we wrote an opinion saying that this is just advisory language and that the power company is not bound by them in any respect?
Lawrence G. Wallace: Well as we have said in our brief we do not think that question should be addressed initially by this court. The court of appeals found in unnecessary to address the meaning of these SEC orders, because of its, in our view, misinterpretation of section 318 of the Federal Power Act on which it based its entire decision.
Anthony M. Kennedy: Well, can't we discuss the case as if this is a binding requirement? I... because I take it that your position is that you still prevail.
Lawrence G. Wallace: Our position would be that we would still prevail. These... the question is how should these orders be read in light of the two SEC rules that are relevant, when the orders themselves did not refer to section 13(b) or purport to be exercising the SEC's authority under section 13(b) to govern and regulate transactions between affiliated companies. I mean, it would be possible to read the orders as merely a prediction of how the application of rule 92 would result in these sales. There are various contentions that could be made about the reading of these orders. The Commission has not to this date had occasion to take a position on what these orders mean. The Commission did not participate in the court of appeals or before FERC in this case. Its first participation was in the amicus brief filed in this Court, and it has not addressed the question of how these orders should be construed.
Anthony M. Kennedy: Well, has FERC taken a position as to the meaning of "subject matter" in the statute?
Lawrence G. Wallace: Well, FERC based much of its decision on the notion that rate regulation is not the same subject matter as what the SEC deals with in prescribing the internal accounting measures to be taken within a group of affiliates.
Anthony M. Kennedy: Was this a position taken by FERC in a brief in an adjudicatory matter, I take it?
Lawrence G. Wallace: In the court of appeals.
Anthony M. Kennedy: Does Chevron deference apply to such matters, or does Chevron deference just apply to rule making?
Lawrence G. Wallace: No, Chevron deference applies to interpretation of statutory provisions that an agency administers.
Byron R. White: This was a position taken in a rate proceeding, wasn't it, that they would not allow the pass-through of costs?
Lawrence G. Wallace: That they would allow the pass-through of costs only to the extent that they would be passed through by the market criteria. They... they used a market criteria--
Byron R. White: xxx by the SEC's orders.
Lawrence G. Wallace: --That is correct. That is correct. In this Court both agencies agree that the proper interpretation of section 318 is that FERC must yield to the SEC when otherwise they... the two agencies would be imposing conflicting obligations. And that that is what gives content to whether they are imposing requirements with respect to the same subject matter.
Anthony M. Kennedy: And that we held that Chevron deference is to be given to agency positions taken in the course of litigation in an adjudicated matter, not rule making.
Lawrence G. Wallace: Well, yes, this is the kind of thing that's... that's has been--
Anthony M. Kennedy: Is that Cardoza Fonseca... what is our holding? Do you have authority for that?
Lawrence G. Wallace: --Well, I am trying to remember the precise circumstances in which the Chevron cases came up, but I--
Anthony M. Kennedy: They were rule making.
Lawrence G. Wallace: --I don't believe there was rule making involved in CFTC against Schor, if I remember correctly. I do think some of the others involved rule making. I would have to look back at the cases.
Byron R. White: We constantly defer to the NLRB, and it hardly in its whole history has issued a rule.
Lawrence G. Wallace: Well, as a matter of fact, there is a case before the Court this term which is the first... that's quite correct, Mr. Justice, which is the first rule making proceeding that the NLRB has issued. And Chevron deference has been applied a number of times--
Antonin Scalia: I think it's the first one to get here. I think it is actually the second, but that's all right.
Lawrence G. Wallace: --In any event, none of the Court's previous cases in which they deferred to interpretations, such as NLRB against Transportation Management, involved rule making. That's... that's a prime example of precisely that point.
John Paul Stevens: Mr. Wallace, whether you call it Chevron deference, or whatever you call it, is it correct that both of the Federal agencies feel there is no conflict between their two positions?
Lawrence G. Wallace: That--
John Paul Stevens: As they read the statute, the two orders can stand... the FERC order can stand with the SEC order.
Lawrence G. Wallace: --The most I can say is that the SEC agrees that the no-conflict criterion is the proper criterion, but has not yet taken a position on whether there is in fact a conflict between the FERC order and the orders that the SEC issued in this case.
Byron R. White: Do you think we should remand?
Lawrence G. Wallace: That is our position.
Byron R. White: So that is the position of both of the agencies?
Lawrence G. Wallace: It's the position of both of the agencies, Mr. Justice.
John Paul Stevens: To which agency should we remand?
Lawrence G. Wallace: Remand to the court of appeals--
John Paul Stevens: I see.
Lawrence G. Wallace: --for a determination of the meaning of the SEC orders.
William H. Rehnquist: Thank you, Mr. Wallace. Mr. Berlin.
Edward Berlin: Mr. Chief Justice, and may it please the Court: This case is indeed a case of statutory construction, but before I get to the statute, which has been avoided thus far this morning, I would like to take up two questions that the Court asked. Justice Kennedy, Chevron applies to the reasoned decision making of the agency. It does not apply, and this Court has never applied it, to the reformulation of that position by appellant counsel. And Justice Stevens, I respectfully suggest that the SEC does not believe that the orders are not in conflict. The SEC joined in the brief before this Court, but the only time the SEC has spoken to the conflict question was when Sherman Shad of the SEC testified before Congress in 1982 when he was urging an appeal of the holding company act. And he pointed out that section 318 was there to prevent overlapping jurisdiction, and that in point of fact when it comes to affiliate transactions the SEC applies a different price standard than the FERC applies to utilities subject to its jurisdiction. So the only time the SEC had occasion to speak to the compatibility of these different regulatory requirements it disagreed with the representation that was offered a few moments ago.
John Paul Stevens: That wasn't speaking to the facts of this case.
Edward Berlin: It was speaking to the fact that--
John Paul Stevens: The general problem.
Edward Berlin: --just a few months before, Justice Stevens, the FERC, which itself from 1935 until November 1981 applied a cost standard to affiliate transactions, in November 1981 it decided to apply a market standard.
John Paul Stevens: Yes, but when it applied a cost standard it was saying the price may not be above cost, wasn't it?
Edward Berlin: The price should be at cost. It couldn't be below cost, because that would be confiscatory--
John Paul Stevens: It should be at cost even if cost was higher than market.
Edward Berlin: --The FERC--
John Paul Stevens: The FERC set the standard--
Edward Berlin: --The FERC had never introduced the concept of market until November of 19--
John Paul Stevens: --But one of the ironies of this case, as I understand it, is the cost is higher than market. Is that right?
Edward Berlin: --That is correct. That was--
John Paul Stevens: And has the SEC addressed the question what should be done in that kind of situation?
Edward Berlin: --It has... it has not. It addressed the fact that different principles were articulated as governing.
John Paul Stevens: So it hasn't addressed the precise situation in this case.
Edward Berlin: That is correct. But if I can, let me get--
David H. Souter: Excuse me, that's still on the books that seems to address it?
Edward Berlin: --I'm sorry.
David H. Souter: Does it not have a rule on the books that seems to address the question?
Edward Berlin: The SEC most certainly does have a rule on the books. Its rule is that affiliate transactions shall not be above cost except where the SEC grants an exemption from the at-cost limitation. This case, boiled down to its bare essentials, is a case of statutory construction. Section--
John Paul Stevens: Can I just go back to your description?
Edward Berlin: --Certainly.
John Paul Stevens: As you describe it, that position would not be violated by the rate order in this case, would it?
Edward Berlin: It most certainly would.
John Paul Stevens: How?
Edward Berlin: The SEC applies a cost standard--
John Paul Stevens: Unless, you said.
Edward Berlin: --unless it grants an exemption. It has never, except for one instance in 1937--
John Paul Stevens: It shall not be above cost unless it grants an exemption.
Edward Berlin: --It shall not be other than cost unless it grants an exemption. Under the SEC's rules there are two regimes, a cost regime and a market regime.
John Paul Stevens: So that boils down to the question whether when they specify cost they mean it as a direction it must be at cost or that that is a ceiling.
Edward Berlin: No, I don't... I don't think so, Justice Stevens. Let me... let me tell you why. First... I think it clear we should put this aside. Section 318 asks two questions. It asks first what is the subject matter that each agency seeks to regulate, and has the SEC imposed a requirement. There is no dispute, there can be no dispute before you that the subject matter that each agency seeks to regulate is in fact the same. The court of appeals said that each agency is seeking to determine the price that Ohio Power reasonably should have paid for the coal that it purchased from its affiliate. That was the essential holding of the FERC. Yet before you no one seeks to justify, to defend that subject matter rationale. It was the essential rationale, Justice Stevens, of the FERC for a very good reason. Admittedly, the FERC express some confusion as to whether or not the SEC was imposing cost in all cases or only cost as a ceiling. I think, by the way, that it was imposing cost in all cases, and I will come back to that in a moment. But what the FERC was saying, it said we assume that it was cost as a ceiling, and it happened to be the case that at the time the FERC issued its order, market price was below cost. Hence it said there's no irreconcilability. But the FERC went on to explain the rationale of its market decision, and it said very clearly, you can find this on page 63a of the appendix to the petition, it said under all rationale it is absolutely essential that Ohio Power be able to charge market, irrespective of its relationship to cost. That Ohio Power be required to charge market even when it exceeds cost. That was the essential underpinning of the FERC's holding. So even if you believe that the SEC set cost merely as a limit, it clearly is the case that FERC says Ohio Power must be allowed, if it its rule is to have any vitality, must be allowed to pierce that limit when market exceeds cost.
Antonin Scalia: That's a conflict rationale you are describing, and that was not the rationale that was used by the court below. I mean, you may well be right about it, but... and maybe those... maybe the court of appeals would agree with you.
Edward Berlin: I believe it was the rationale, Justice Scalia, used as a supplement by the court below. But let me point out it was also not the rationale used by the FERC, because it could not. The FERC recognized that if it was allowing cost to gravitate to market, when cost under the SEC's order was a limitation, it recognized that there was an obvious irreconcilability. Ohio Power said the effect of your pronouncement, FERC, and the SEC's prescription is to constrain us to the lower of cost or market. The FERC said no, you misconstrued. We are allowing you to charge market in any case, because we are dealing with a different subject matter.
William H. Rehnquist: Mr. Berlin, the orders that have... we have been referred to entered by the SEC in this case are somewhat ambiguous, it seems to me, as to just what they are doing. What is the SEC's goal in regulating the price paid by Ohio Power Company for captive coal?
Edward Berlin: First, let me suggest that while they could have been written a bit more clearly, unquestionably the first order that initiated this whole enterprise said it should be based on amount equal to actual cost. And then the subsequent orders said it shall not exceed cost--
William H. Rehnquist: Well, I think it's a question to me whether the final paragraph of those orders incorporates all the recitals. That is why I am interested in getting an answer to the question that I just asked you.
Edward Berlin: --I'm sorry, Chief Justice. Chief Justice Rehnquist, I think it's very clear why 13(b) is in the statute and why the SEC issued its orders under 13(b). 13(b) was put into the statute although Congress knew that the FERC was to be the agency that ultimately was to prescribe rates. In 13(b) Congress intended to affect how rates were set. The whole purpose of 13(b) is to affect the transfer price paid in an affiliate transaction. 13(b), I suggest to you very respectfully, is robbed of all meaning unless it is intended to affect rates.
William H. Rehnquist: But if I am sitting as a commissioner of the SEC, this transaction comes in, Ohio Power is talking about getting some securities, they recite that they are going to pay so much for coal from a captive coal company. What is the interest of the SEC in regulating that particular transaction? Not the securities transaction, but the price that Ohio... Ohio Power is paying to its captive company?
Edward Berlin: Under the holding company act, you cannot go forward with an affiliate transaction, wholly apart from 13(b), without getting a whole host of authorizations from the SEC.
William H. Rehnquist: Okay, but why is the SEC interested in this particular price?
Edward Berlin: The reason it is interested in this particular price is because when the holding company act was being considered by Congress, one of the evils that was basic to congressional concern was the fact that it was perceived that, as a consequence of interaffiliate transactions, inflated prices were being passed along to the utility purchaser within the holding company system. Congress... and this portion of legislative history is conceded by everyone in this case... Congress was concerned about the effect on rates of affiliate transactions, and it gave... it made two basic policy choices in the holding company act. It first gave jurisdictional responsibility to deal with that concern to the SEC. And then in a very unusual step it didn't think to establish a broad regulatory standard. It said in exercising that responsibility, SEC, we want you to apply an at-cost standard. I suggest to you that that was prescribed by Congress precisely because it recognized that affiliate transactions affect rates, and Congress wanted the SEC to police them and to--
John Paul Stevens: Yes, but Mr. Berlin, your description suggests to me that they were concerned about the danger the rates might be too high. There was no concern about undercharging, was there? I mean, that's why it fits right into the notion that this was intended to be a ceiling.
Edward Berlin: --I think not, Justice Stevens. As the petitioners correctly point out in their brief, the holding company act had two objectives. Clearly a consumer protection--
John Paul Stevens: The first one, insofar as you have described it, fits exactly into what I just said, I believe.
Edward Berlin: --It also had an investment protection objective. And if, if it is in fact the case that as the result of the collision of these two requirements Ohio Power Company will be constrained to the lower of cost or market, then I would suggest to you that the investors that petitioners correctly point out were also a concern of Congress, are left exceedingly naked.
John Paul Stevens: In other words, the purpose of this order was to protect the stockholders of the parent company?
Edward Berlin: The purpose of this order was to balance, was to balance the dual concern that Congress had for both consumers and investors.
William H. Rehnquist: Investors in the sense of investors in the company that owns all the affiliates?
Edward Berlin: In the final... in the final analysis, Mr. Chief Justice--
William H. Rehnquist: Can you answer that question yes or no?
Edward Berlin: --Yes, it was.
William H. Rehnquist: It was to protect the investors in Ohio Power Company, which is the holding company.
Edward Berlin: It was to protect both the investors in Ohio Power Company, namely American Electric Power, and the consumers of the operating utility, Ohio Power. The fact of the matter is that even though the FERC may say that cost is X, it doesn't change one iota the costs that are actually incurred by the holding company. And if the X established by the FERC is below the actual cost, then I suggest to you there is a trapping of costs, and that trapping of costs unnecessarily adversely impacts on investors. And I further suggest to the Court that if in fact as a product of this case affiliates of holding companies are told that they are going to be constrained to the lower of cost of market, which means that they only have a potential for losing, and at best for holding themselves even, you will not see holding companies go into affiliate relationships--
John Paul Stevens: Yes, but you're using the term cost, you know, and this, as defined in this order the cost is including all sorts of things, based ultimately on the rate of return which is fixed by the rate-making body, isn't it?
Edward Berlin: --That is correct, Justice.
John Paul Stevens: The two are inevitably intertwined.
Edward Berlin: That is correct, Justice Stevens, and that particular instance the SEC has certainly used its province, said that while we are going to specify and police most of the costs, we are going to delegate to the FERC, as it is permitted to do under 318, the responsibility for setting the return. And interestingly, what it said was the return on this transaction is to be constricted by the regulated utility return, a concept--
John Paul Stevens: It says will be no greater than the return, which is language of ceiling.
Edward Berlin: --No greater than the return allowed by the FERC. But that is an instance in which the SEC recognized that it had to permit, that it had to open up an area of jurisdiction if the FERC was to be allowed to go forward, and it did so explicitly. No matter how you view the SEC's order, Justice Stevens, whether you view it as setting a cap or merely as setting cost, that is cost, no more, no less, I think it's the latter. Because I think that's what section 13(b) is talking about. I think that is the only way you can harmonize the interests of consumers and of rate payers.
Antonin Scalia: 13(b) does refer, in fact, to both investors or consumers.
Edward Berlin: That is correct.
Antonin Scalia: It does say protect both investors and consumers--
Edward Berlin: That is correct.
Antonin Scalia: --which would seem to indicate that you can neither be above course nor below cost.
Edward Berlin: I believe that is right, Justice.
Antonin Scalia: And it does say such contracts shall be performed economically and efficiently at cost, not at no... more than cost, but it says at cost.
Edward Berlin: That is correct, Justice Scalia. There was a question about the court of appeals' dealing with this matter. I respectfully suggest that the court of appeals paid total allegiance to section 318. It followed the prescription of 318 precisely. It said what is the subject matter that each agency is seeking to regulate, and I think the subject matter is fairly clear. It's the regulated activity. That is what Congress was concerned about. Congress wanted to allow these transactions to go forward, and it recognized that if there was an inevitable clash of two regulators dealing with the same subject matter, the same regulated activity, frustration could take place. So 318 is intended to preclude that frustration.
Antonin Scalia: It seems to me, Mr. Berlin, you come in talking field preemption, as you... as you are now, but you ultimately end up defining the field by finding a conflict. And I think that is probably right, because that is the only way I could possibly define the field. If you say that they are both dealing with the same subject, you know, anything the FC... SEC promulgates in this field deals with holding companies, right? And any order of the, of FERC dealing with holding companies would deal with the same subject, if you want to define it that broadly. How do you decide how broadly you define the subject?
Edward Berlin: Justice Scalia, if I have given the impression that I believe field preemption is appropriate, then I have misspoken. I do not believe this is a field preemption case. My reaction was to petitioners' quotation of physical impossibility cases. I do not believe this is a field preemption situation--
Antonin Scalia: Okay, you think it's a conflict case.
Edward Berlin: --No. I believe it's a question of how one defines the field. If you define field preemption to mean that once the SEC has spoken it has occupied the field to the total exclusion of the FERC, that is not what I am saying. That is not what 318 says.
Antonin Scalia: That is what I mean by field preemption.
Edward Berlin: What I mean is what I think flows out of 318, that if with respect to a subject matter the SEC has imposed a requirement, then FERC may not impose a requirement with respect to that subject matter. Now the issue, of course--
Anthony M. Kennedy: Whether or not... whether or not it conflicts?
Edward Berlin: --Whether or not it conflicts, although I believe in this case, as the court of appeals went on to discuss, the conflict is inevitable.
Anthony M. Kennedy: Well, but that's field preemption. That's field preemption, now you're back to--
Edward Berlin: I can, I believe, visualize a situation where the FERC would believe that it could supplement the requirement imposed with respect to a particular regulated activity that would not, in its judgment, result in conflict.
Antonin Scalia: --And you'd say that's no good?
Edward Berlin: And I would say that that is no good under 318. But you do not have to reach that issue in this case.
Antonin Scalia: How do you determine the field? How do you determine what the field is? Why isn't the field all holding, you know, all holding... regulating holding company activities?
Edward Berlin: If you look at the legislative history, what the legislative history tells me is Congress recognized that it was setting up two regulatory regimes, each of which were going to speak to the same companies. And it recognized that if it did not do something to sharply divide jurisdiction, that you could have a stalemate.
Antonin Scalia: Yes. So the SEC issues rules governing bookkeeping. It says you shall keep books in this fashion. It is very clearly addressed to keeping the corporate books. FERC comes up with a requirement and says well, in order for us to do our job you have to, in addition, do these things in... in your books. Now is that the same field? Supplemental requirement. It goes beyond what the SEC said. Why doesn't your theory say, well, this is the same field? Does it?
Edward Berlin: But for the fact that your example is covered elsewhere in the statute, and the issue of accounting is one where the FERC is given--
Antonin Scalia: Make believe it's not. You know, don't make me make up another one.
Edward Berlin: --If you can construct a situation where the SE... where the FERC can supplement, without being in conflict, then I would suggest to you that yes, there would be supremacy in favor of the SEC. And I come to that because I honestly believe from looking at the legislative history that Congress recognized in 1935 that while it was imposing a regulatory regime, there could well be instances where too much regulation would stifle the objectives of Congress. Therefore it said where the subject matter is the same and the SEC has spoken, the FERC should not. I believe that subject matter is most clearly and easily understood to be a regulated activity.
Antonin Scalia: But the SEC comes in and says look it, you have this all wrong... or FERC comes in and says you have this all wrong. The subject matter is not bookkeeping. I mean, the SEC just said you had bookkeeping rules 1, 2, 3, 4, 5. That was the subject matter, rules 1 to 5. We have totally different rules, 6 to 10. Now they both pertain to bookkeeping, but they also both pertain to holding companies. And you certainly wouldn't say that simply because the SEC can do something that pertains to the subject matter of holding companies we can't do anything at all. What I am saying, Mr. Berlin, is I think when it comes down to it you are defining the nature of the subject matter by looking for a conflict. You have to go down the levels of generality until you find a conflict, and you say ah ha, where there is a conflict, now I know what the subject matter is.
Edward Berlin: It probably is the case, and perhaps I am biting off more than I need chew, that anytime the SEC, the FERC imposes a requirement that is different than the requirement imposed by the SEC, there will be a conflict. And indeed, if the FERC imposes exactly the same requirement, I am not sure anyone would care. I believe that if you look at section 318, Justice Scalia, you will not find any support for the notion that it is addressing conflicts of requirements. The word conflict does not appear in the text of 318. It appears in the heading, but the heading talks about conflicts of jurisdiction. And if you look back at the legislative history you find that what Congress was concerned about was overlapping jurisdiction. It did not want to frustrate actions by regulated entities by having too many regulators dealing with the same activity. But I hasten to add that in this case the Court need not go that far in reading section 318, because no matter how you construe the SEC's order, whether you construe it as establishing that the price must always be at cost and no more and no less, or simply as a cost ceiling, one thing is clear and has never been suggested to the contrary. The SEC has not imposed a market standard. It has never imposed a market standard on any affiliate transaction since a single case in 1937.
John Paul Stevens: Yes, but I don't understand how that advances the argument, because if you treat it as a ceiling that would mean a market that is lower than cost would be permissible. So there would be no conflict.
Edward Berlin: I think not for two reasons, Justice Stevens. First, the essential rationale of the FERC's holding was that we must allow Ohio Power to charge market, even when market is above cost. That rationale was offered in a response to a contention by Ohio Power that if it were constrained to the lower of cost or market--
John Paul Stevens: Well, there might be a conflict which would be present when market exceeded cost.
Edward Berlin: --As in fact it did on at least two occasions before the FERC issued its final order in this case. And we also must keep in mind, Justice Stevens, that what the FERC did--
John Paul Stevens: Are those two occasions described in the findings? I didn't--
Edward Berlin: --No. They are referenced in a footnote to our brief. What the FERC did, Justice Stevens, in carrying out its rationale was to direct Ohio Power Company to modify its fuel adjustment clause to provide for the automatic pass-through of market prices, irrespective of their relationship to cost. And in fact in the Public Service of New Mexico case, where the FERC in November of 1981 abandoned its adherence to cost-based regulation and first adopted a market approach, in fact in that case the FERC was allowing market prices in excess of cost.
John Paul Stevens: --Has the SEC ever objected to that?
Edward Berlin: The SEC in fact has stated on two occasions... the staff of the SEC, in filing comments in another affiliate transaction case before the FERC, where the staff recommended--
John Paul Stevens: It would seem to me, just to jump ahead a little bit, that if that situation developed and the SEC thought it violated the basic order, they could easily go in and say to, say there is a conflict here, in the case of conflict our order prevails. And they would win hands down, if they really felt that that was a violation of the order.
Edward Berlin: --Well, the question, Justice Stevens, is whether the FERC has a veto simply because it has the opportunity to speak last.
John Paul Stevens: You mean the SEC has the opportunity?
Edward Berlin: Whether the FERC in effect can put the SEC to the burden of justifying its decision.
John Paul Stevens: Of enforcing its orders. That's what it amounts to. You would certainly be able to call it to the attention of the SEC right away. It would be a very simple situation.
Edward Berlin: I suggest one that has to also get back to 13(b), and to--
John Paul Stevens: Well, but if it means just we're concerned about conflicts, it seems to me you are adequately protected by your resort to go to the SEC and say hey look, they are making us pay market and that is in excess of cost.
Edward Berlin: --I think not, Justice Stevens--
John Paul Stevens: And then the SEC could come back and say in order to protect the stockholders of the parent company we are going to insist on our order being obeyed.
Edward Berlin: --I think not, Justice Stevens. There is a conflict even when market is below cost, because costs are tracked. Ohio Power Company--
John Paul Stevens: Excuse me, isn't a more direct answer to that question simply that the SEC does not have the option of enforcing its orders or not? If there is an order on the book which you are entitled to have enforced, if the SEC chooses not to enforce it you should be able to come into a court and get it enforced. Isn't that right?
Edward Berlin: --That's absolutely correct, Justice Scalia. And we do not have the option to do anything other than what the SEC prescribed when it gave us the authorization to enter into these transactions. It is in fact the case that the SEC did not explicitly approve the contract, but it set out the requirements that we were obliged and directed to include in the contract.
Anthony M. Kennedy: What is the enforcement consequence of a violation?
Edward Berlin: Presumably the SEC can bring enforcement action against Ohio Power and Southern Ohio for violating the only condition upon which the SEC determined that it was appropriate to allow this affiliate transaction to go forward.
Anthony M. Kennedy: The mandatory injunction to reconform your pricing scheme, or divestiture of shares? I mean, how--
Edward Berlin: I think it would be the former, Justice Kennedy. You should also keep in mind that under the holding company act Congress was not desirous of stimulating holding companies' entries into unregulated activities. It was very cautious. It provided that you can only engage in those activities that are reasonably necessary, economically necessary to your utility operations, that it mandated the SEC to enforce that. I want to say one final word about regulatory gap, because although it hasn't been mentioned today, much has been made of it in the briefs. There is a parade of horrors suggested to you that if you allow the SEC order to stand, if you over... it you allow... if you overturn the FERC's order, allow the court of appeals to stand, that there will be a regulatory gap. I respectfully suggest that under the very proper reading of 219 by the court of appeals, there can be no regulatory gap. If the SEC has not imposed a requirement with respect to a subject matter, if it itself has not filled the regulatory gap--
William H. Rehnquist: --Mr. Berlin, your time has expired. Thank you.
Edward Berlin: --Thank you, Mr. Chief Justice.
William H. Rehnquist: Mr. Phillips, you have 3 minutes remaining.
Carter G. Phillips: Thank you, Mr. Chief Justice. I believe in evaluating the case as it comes to the Court at this point it is important to keep in mind initially that the FERC here is attempting to protect the consumers by the rates that it allows to be charged and the charges that it allows Ohio Power to pass through. And that that exercise of authority should only be set aside in the most unmistakable... if supported by the most unmistakable terms. We turn first to section 13(b). It is difficult for me to tell whether Ohio Power believes section 13(b) ousts the FERC of its authority, but the SEC has clearly said that it does not, and the SEC's rule clearly says that it does not. And notwithstanding Mr. Berlin's comment to the contrary, rule 92 does not set up an exemption. Rule 92, if you read the SEC and FERC's... or, excuse me, the FERC's reply brief, says that the price is "not limited to cost" when you are talking about interaffiliate sales. So rule 92 provides no mechanism for doing away with the FERC's effort here. So the only question then are these four orders. There has been a lot of discussion as to what those four orders mean, but I submit to you the Court is not obliged to have to worry about the specific meaning of those four orders, because I am prepared to give Mr. Berlin the fuller... the fullest reading of those orders, which is really what they want here, is for Ohio Power to pay a certain price for the coal that it purchases from the Southern Ohio Coal Company. Even given that interpretation, which is the broadest available and the broadest they've asserted, it still remains available for the Federal Energy Regulatory Commission to step in and say but we do not permit you to charge that amount in the rates that you set for electricity. Why? Because these are not irreconcilable conflicts in the obligations of the Ohio Power Company under these circumstances.
Antonin Scalia: Well, it wasn't irreconcilable conflict in Nantahala either, but one doesn't... just as one doesn't interpret a Federal-State relationship to allow the trapping of costs, one should not interpret two Federal agency relationships to trap costs. Now as I understand it, the holding company acquired this asset with an understanding under section 13(b) of the Public Utility Holding Company that the SEC would... would make sure that the contracts are performed at cost.
Carter G. Phillips: But that says nothing about what the FERC was going to ultimately do with respect to those. And again here I have to go back to the argument that somehow because of the FERC order that that has in some way frustrated the SEC's purpose.
Antonin Scalia: I understand.
Carter G. Phillips: But that is not the appropriate conflict analysis, Justice--
Antonin Scalia: You do not think that it was envisioned by the Congress that enacted that provision that you be able to get that money back when you sold it?
Carter G. Phillips: --Not if it turns out that it would require the rates to be set at unjust and unreasonable levels, no, Your Honor, I don't believe Congress would have intended that. Mr. Berlin complains that this was a statute not designed to provide too much regulation. I submit to you it's a statute designed to provide just the right amount.
William H. Rehnquist: Thank you, Mr. Phillips. The case is submitted.