William H. Rehnquist: We'll hear argument next in No. 87-1346, Bonito Boats v. Thunder Craft Boats. Mr. Russell, you may proceed whenever you're ready.
Tomas Morgan Russell: Thank you, Mr. Chief Justice. May it please the Court: This case presents for review the issue of whether a state unfair competition statute enacted pursuant to state police power can exist harmoniously with the federal patent laws. We submit that it can. The cases here, on a petition for certiorari to the Supreme Court of Florida, which held that the Florida statute unconstitutional on Sears-Compco grounds. Three reasons support reversal of the Florida Supreme Court. One, the Sears-Compco cases are clearly distinguishable, were misapplied below, and are not controlling here. Two, the Florida statute does not clash with the purposes and the effects of the patent laws. And three, the Florida statute is a legitimate exercise of the state police power to regulate unfair competition. A long line of decisions of this Court has approved and upheld as constitutional these state statutes, even when they totally banned the manufacture and use of patented or unpatented articles or processes.
Sandra Day O'Connor: Mr. Russell, may I inquire preliminarily whether your client could have obtained a patent for its boat hull?
Tomas Morgan Russell: Justice O'Connor, quite clearly boat hulls could be patented, have been patented, in the past.
Sandra Day O'Connor: But your client chose not to try to obtain a patent for it?
Tomas Morgan Russell: I don't know whether they tried to obtain a patent or not, but quite clearly the boat in issue in this case was not patented.
Sandra Day O'Connor: Could the boat hull have been registered as a sculptural work?
Tomas Morgan Russell: That raises a procedural issue, Justice O'Connor. I think the direct answer to your question is quite clearly no. But it raises a question as to whether the review of the copyright preemption issue is properly before the Court. We take... we noted in page 13, footnote five of our reply brief, we took the position that the copyright issue was not properly before the Court, relying on Supreme Court Rule 21.1, and we would like to rely on the recent case of Barkers Life v. Crenshaw, which is now reported at 108(a), Supreme Court 1645, a decision handed down last May 16. We take that position because the copyright preemption issue was not within the scope of the petition when it was granted in this case. It's an issue which has not been pressed or passed on below. It is a... an issue--
John Paul Stevens: Excuse me, Mr. Russell, would it not result in affirmance if we bought the argument? Can't we affirm on a ground not argued below?
Tomas Morgan Russell: --Yes, I believe the Court can.
John Paul Stevens: So we could consider the copyright issue if we decided to.
Tomas Morgan Russell: Yes, sir, that's true.
William H. Rehnquist: We can affirm on, on a, a basis not relied upon by the Supreme Court of Florida. Is that where this came from?
Tomas Morgan Russell: Yes, sir.
William H. Rehnquist: But the ground has to have been maintained in that court, as I understand it.
Tomas Morgan Russell: That's my understanding as well. And the copyright preemption issue has not been raised or pressed or passed on by any of the Florida courts. It has not within... it has not been briefed by counsel; we have no judicial decisions on the copyright issue below. This issue is being raised de novo in this Court, and it's being raised by amici, not by the parties.
Sandra Day O'Connor: Well, the thing that's curious, if the thing... if the boat hull was patentable, it is curious that if the Florida statute is valid it would in effect grant a, a right in perpetuity that under the patent law would be limited.
Tomas Morgan Russell: The right... may I first back to, Justice O'Connor, and fully answer your, your prior question as to whether it would be a sculptural work? It quite clearly is not under 301 for three reasons: 301 preempts as to the subject matter of copyright, as specified in 102, but 102(b) specifically excludes a process. Secondly, 301 applies to subject matter of copyright and 102 includes pictorial, graphic, and sculptural works. And that phrase is defined in 101. In 101 there is an exclusion, and the exclusion is that if the design of the useful article shall be considered a pictorial, graphic or sculptural work, only if and only to the extent that such design incorporates pictorial, graphic, or sculptural features that can be identified separately from and capable of existing independently of the utilitarian aspects of the article. Now, these boats are clearly utilitarian. So, it would be considered a sculptural work only if some aesthetic feature could be separated and identified. The third ground is that Section 301 really doesn't apply here because the Florida statute does not create a right equivalent to any of the exclusive rights specified in Section 106, and that is the right to reproduce copies. The Florida statute just does not create any such right to reproduce copies. Justice O'Connor, would you help me by giving your question again on the patent law?
Sandra Day O'Connor: Well, it just struck me that if this boat hull could have been patented and wasn't, but the owners of it want to be protected under Florida's special law, Florida's law would give them a right in perpetuity that the patent law would give only for a limited period of time.
Tomas Morgan Russell: That is correct, Justice O'Connor. The same thing was true with the protection of the sound recording master recording in Goldstein. That is true. But the right that is granted for the protection of the industry in Florida is exceedingly narrow, and we, we submit does not conflict with the purposes and effects of the Federal patent law.
John Paul Stevens: Mr. Russell, maybe this is the same question, but may I just phrase it a little differently. Would you contend that this statute would apply even to the boat hull after a patent had been issued and expired, something that had been previously covered by an expired patent?
Tomas Morgan Russell: Yes, Justice Stevens, that's true.
John Paul Stevens: So it clearly would give--
Tomas Morgan Russell: They're both unpatentable items.
John Paul Stevens: --But, but the statute would apply even if a patent had issued and expired, so there would be, as Justice O'Connor says, a state law grant in perpetuity of something that the Federal patent had covered?
Tomas Morgan Russell: Yes, and I think that is also true with respect to the master recordings that were protected in perpetuity in the Goldstein case. I might add that the Florida statute does not distinguish... does not operate as against a patented product. It is simply a separate independent cause of action against a copier. One would be a violation of the monopoly given by the Federal patent law, and the second would be a violation of the Florida statute, if the boat had been copied using the direct holding method.
John Paul Stevens: Well, it would clearly be an infringement if the patent had been in effect at the time.
Tomas Morgan Russell: There would clearly be an infringement, and there was also clearly be a violation of the Florida statute, if it had been copied using the direct holding method.
Antonin Scalia: Right. Well, your argument rests upon the fact this is only one way of copying? There are other ways of copying. What, what if Florida had a lot of other laws, each, each ore of which only copies... only applies to one manner of copying, but, but together they cover all manners of copying?
Tomas Morgan Russell: Justice Scalia, I think the line has already been drawn in the Sears-Compco cases, and that is whether it is the equivalent of the Federal patent laws. Now, clearly in Sears-Compco, in those cases no copying was permitted at all. That was the holding of the Seventh Circuit below, and quite clearly that is a line. Now, at the other end of the extreme, we have Florida that prohibits only the direct molding method.
Antonin Scalia: Only the simplest method of copying?
Tomas Morgan Russell: Well, I can't say that it's the simplest, Justice. There may be many other methods of copying that may be simpler than the direct molding method. For example, it can be copied by hand, it can be copied by measurement, it can be copied by photographic means. It can be copied by the use of very sophisticated computer equipment. There may be other means that are, are much easier and in fact may even be less expensive than the direct molding method. Remember, the direct molding method is a labor-intensive method.
Anthony M. Kennedy: Well, then, what's the point of the Florida statute?
Tomas Morgan Russell: It is, it is--
Anthony M. Kennedy: If there are other methods that are easier, then what purpose does the statute serve?
Tomas Morgan Russell: --The statute serves the purpose, Justice Kennedy, of prohibiting as unfair competition a practice which is widespread in the marine industry--
Anthony M. Kennedy: Well, but if you're telling us there are a lot of other ways that are easier, then I just don't see what purpose the statute has at all.
Tomas Morgan Russell: --The purpose has the statute of prohibiting the practice which is prevalent commercially in the marketplace and is being used today to copy boat hulls and to take the investment that the original manufacturer puts in producing a new, a new product on the market, with product improvements. It is in effect an unfair taking, a misappropriation of that investment. So those are purposes that are served.
Antonin Scalia: One suspects it's being used because it's the easiest. Don't you have that nagging suspicion? That the reason this is the prevalent method is because it's the easiest? Or you think they're using the hardest? It is the easiest, isn't it? I mean, you say you don't know it's easiest. Isn't that why it's being used?
Tomas Morgan Russell: Well, it is, it is a difficult process. Justice Scalla. They have to go buy the boat, take the boat apart, put the hull upside down--
Antonin Scalia: Well, I know, but compared to what? It's difficult compared to what? What's the alternative? I really thought your... I really thought the whole point in your brief was that the reason the Florida law was good is that this is an excessively easy way to copy things.
Tomas Morgan Russell: --It is, it is an easier method to copy than using the traditional methods of developing and preparing a wooden plug. Perhaps it would be helpful if I described that process. A naval architect sits down and designs a boat after he is given the parameters of the design by the designers, and after the designers learn from market researchers what the public actually wants. The architect designs the boat on a regular standard size, small drawings, and he determines the contours of the hull, its shape and its curvature. And then that drawing is given to other people and they prepare full-size drawings. If you're making a 55-foot motor yacht, you then have drawings that are 55 feet long. They then are placed down on wood and design of the section on the hull is then cut out or the wood. And those wood sections are then mounted on a foundation, starting at one end of the boat and going to the other. And then plywood, strips, are nailed across those forms, which then produces the contours of the hull. And then a second layer of wooden strips is glued on the surface and then that wood plug is sanded down very, very smooth. And then that is used to make a master mold. And from the master mold then are... production molds are made that are used on the actual production lines. It quite clearly is true that the direct molding method is much simpler, much easier, and certainly much less expensive than the traditional method of building a wood plug. That certainly is true. I thought you were going to the other and of the spectrum, Justice. The Florida statute only prohibits this one method that we have been discussing, the use of a competitor's boat as the wooden plug to build a production mold. And only if it is done for commercial purposes. It prohibits only this one limited method. It does not prohibit the copying of boats; the boats themselves and the boat designs are in the public domain, they remain in the public domain. And they may be legally and freely copied in every detail by anyone who so chooses to do so.
Byron R. White: I suppose that some other state might just prevent copying by another manner, just the single... it picks out some other way of copying and says we are preventing copying only in this way. And, and, and another state might, might permit copying in another specific way. And each one of those states would be quite proper, in your view.
Tomas Morgan Russell: Yes. There are 12 states, Justice Blackmun, that have enacted an anti-direct molding statute. That is the practice--
Speaker: You flatter me.
Tomas Morgan Russell: --Thank you. I'm sorry, Justice.
Byron R. White: No, you flatter me, that's all.
Tomas Morgan Russell: The Florida statute does not prohibit the use of the direct molding process to copy another's boat for non-commercial purposes. For example, you want a copy, make a boat of your own as Boy Scouts sometimes do with canoes, fine. If you want to copy it for research purposes or testing purposes, that's fine. The first argument that... that we want to make here is that the Sears-Compco cases, all clearly distinguishable from this cases, and Justice Scalia your question was right on the heart of it. In the Sears-Compco cases, all forms of copying were prohibited, and here we have only one form, one form of copying. It's not the equivalent of the, the law in Sears-Compco, the Illinois law of unfair Competition, because that was in effect a monopoly that we enforceable by the state government. And this Court held that unconstitutional, and we believe correctly so.
Byron R. White: Of course, Sears old say that, that, that absent a patent there was a public right to copy in every detail.
Tomas Morgan Russell: And that is true here, that is true here. They may copy in every detail. They may not copy using direct molding method, that is the only limitation here. And in fact if you, if you... you can copy in every single detail, and it's, it's not objectionable, because the boats are in the public domain and the design is in the public domain.
Byron R. White: What if Florida says, you can't copy it in the following ways, and they list six, but there's still another way?
Tomas Morgan Russell: I would go back to the Sears-Compco cases and make a determination as to whether that is the equivalent of the patent laws, and in doing that I would look to what are the purposes and effects of the state statute and what are the purposes and effects of the federal patent laws. And I submit that they are not inconsistent. Aronson, decided by this Court in 1979, set out for purposes of the patent laws which... by which a state statute is to be measured for supremacy purposes. And the first purpose was to foster and reward invention. The second was to promote disclosure of inventions to the public. The third was to assure that ideas placed in the public domain remain there for the free use of the public. Now, the purposes of the Florida statute do not clash with those purposes. First of all, the Florida law fosters future product improvements. It does so by protecting the investment that is made in the original manufacturer bringing his product to market with an innovation. Two, it protects the investment of time, money and effort in making the original boat. And it therefore provides incentive for innovation. It preserves an industry which is endangered by a common act of unfair competition, the direct molding method. That industry is considered, that threat is considered a threat--
John Paul Stevens: Mr. Russell, may I ask, you refer to his unfair competition. If there were no Florida statute would it be unfair competition?
Tomas Morgan Russell: --Well, we do have a law on unfair competition, yes. Now, I think your question goes as to whether it could be actionable as misappropriation under the common law. Quite clearly there, there is a body of state law of misappropriation, yes.
John Paul Stevens: So you think that even without the... you don't need the Florida statute then?
Tomas Morgan Russell: Well, we certainly do because it makes it very clear that the direct molding method--
John Paul Stevens: You think it's just clarifying a law, a rule that existed independently of the Florida statute?
Tomas Morgan Russell: --Well, certainly we have statutes that have parallel rules that are in the common law.
John Paul Stevens: Well, I know that's possible, but is that your position in this case? That really, as a matter of unfair competition, common law, you could have enjoined this, this--
Tomas Morgan Russell: Well, we certainly could have brought the action and tried to persuade a court to do so.
Speaker: --Well, sure.
Tomas Morgan Russell: It certainly is... it's much clearer if we have a state statute that says that that is a--
John Paul Stevens: Well, the real point of my question is, when you characterize it as unfair competition, it seems to me that that's the issue. It's, it's unfair competition by reason of the statute and whether, whether you can pass a statute that makes something unfair competition that otherwise would be preempted by the policies under the patent laws.
Tomas Morgan Russell: --Well, we think clearly that it is a proper exercise of the state police power to govern and set conditions on competition. Free competition doesn't mean unfettered competition.
John Paul Stevens: Could the state provide that, that they could charge a royalty for, for using the molding process?
Tomas Morgan Russell: Well, certainly this statute does not provide it.
John Paul Stevens: Well, it provides it without the written permission of the other party, and I suppose you could say I'll give you written permission provided you pay me $100 a boat.
Tomas Morgan Russell: That's correct.
John Paul Stevens: And you think that would be proper?
Tomas Morgan Russell: I think that would be proper. It would be, it would be... it's the same as the license of a trade secret, it's the same as the license--
John Paul Stevens: But this is the license of something that's in the public domain.
Tomas Morgan Russell: --It is a license to use the direct molding method to copy something that is in the public domain.
John Paul Stevens: Something that the copier has purchased and owns himself, I suppose.
Tomas Morgan Russell: Yes, that could be true. It is fundamental that a patent grants the right to exclude errors from making, using or selling a product, a machine or a process. In effect it is a property right, it can be sold, licensed, pledged, devised. It can be the subject of a trust, it can be the basis for worldwide patent protection. But, a patent does not grant a right to actually make, use or sell the invention. It doesn't give a right to practice the invention. Whether you can practice your invention is is a question of whether the sale or distribution of that product would violate other laws. And here we have our third argument, which is the Florida statute is a valid exercise of Florida's police power. The patent laws and the state police power have existed in harmony for many, many years. The Patterson and Webber cases cited in our briefs, decided back in 1879 and 1880... the 1880 term, applied the patented and unpatented articles. Sears itself recognizes the validity of the exercise of state police power against unfair competition. In the passage where it said that the states could establish requirements for the labeling of package dress or to prevent deception of the public. The broad range of state authority to regulate intellectual property was reaffirmed in the post Sears-Compco trilogy of cases cited in our brief. State competition laws regulate business ethics, such as misappropriation of the original investment. The Florida state statute protecting investments in boat improvements is a legitimate exercise of police power. And I would like to reserve the remainder of my time.
William H. Rehnquist: Thank you. Mr. Russell. Mr. Lipsey, we'll hear now from you.
Charles E. Lipsey: Mr. Chief Justice, and may it please the Court: I would like to refocus the Court's attention for a moment on five basic principles which I think are fundamentally undisputed and which I think govern the outcome of this case. The first is that the Federal patent law seeks to strike a balance between incentives for innovation and preservation of competition. The second point is that the patentability standards which Congress has adopted to effect that policy reflect not only what Congress wished to be protectable but also that which Congress wished to remain in the public domain. The third point, where there's no dispute, is that the boat design and the boat manufacturing process involved in this case are both squarely within the technological subject matter covered by the patent law, addressed by the patent law, but equally clearly fail to meet the patentability standards which Congress has prescribed. They are in the public domain because the boat proprietor here chose not to avail itself of the protections afforded by the patent law. The fourth point which I think is not in dispute is that had a patent issued on the boat itself, among the rights which would have been conveyed to the proprietor would have been the right to exclude others from making that boat by any technique, including making that boat by the direct molding technique. In fact, had a product... had a patent issued on the process of making the boat, that would have directly prohibited others from manufacturing the boat by the direct molding technique. And the last point, which I think... is not in dispute, is that the Florida statute, for the purpose of striking a balance between incentive for innovation and competition, has chosen to give to this boat manufacturer a right to exclude others from making his boat by the direct molding process under circumstances where the Federal patent law would have denied that right. And when one analyzes that scenario under applicable authority of this Court in the federal preemption area, one is led to the conclusion that the Florida statute interferes with attainment of the full objectives of the federal patent law. Why? Because it strikes the balance in a different place than Congress would have struck it.
Sandra Day O'Connor: Mr. Lipsey, do you acknowledge that there is some room still for state laws to protect trade secrets and to do other similar things for protection?
Charles E. Lipsey: Absolutely, Your Honor. The trilogy of cases upon which the Petitioner relies really don't address the area addressed by the patent law. The patent law deals with the rights of the public and the rights of inventor... the inventor to use things which are publicly known. It doesn't purport to address contractual obligations of confidence or rights of privacy from industrial espionage addressed by the Trade Secret Law. The subject of the Trade Secret Law by definition is not in the public domain. Just to mention the Goldstein case while we're on it, that case... the whole ratio desidende of that case was that the area addressed by the State of California was one left wholly untouched by the federal government and the copyright law. The federal copyright law simply didn't deal with sound recordings at that time, and since there had been no balance struck there was no interference with a federal balance by the state choosing to act in that area. Now, they specifically distinguished the patent situation in the Goldstein case where there had been a comprehensive scheme of federal regulation enacted that dealt with virtually everything under the sun. That's how this Court has interpreted the scope of the patent law and where the balance had in fact been struck.
Antonin Scalia: Mr. Lipsey, I'd always thought the patent law protects ideas, it protects discoveries as the Constitution puts it. Here Florida is saying, you can use that idea, you can create hulls that like all you like. But you can't use this man's hull. What if Florida had a law saying, you can't... you... are houses patentable? Can you design... I presume you can design a house in a certain way that's, that's so novel that it's patented. Suppose Florida had a law saying, you can't use a photograph of anyone's house for commercial purposes, without compensating that person.
Charles E. Lipsey: Well, Your Honor--
Antonin Scalia: Now, would that violate the patent law?
Charles E. Lipsey: --It wouldn't... let me address--
Antonin Scalia: Now, the person hasn't patented the house, but has built the house, and there's this Florida law, you can't use a photograph of anybody's house without compensation. Now, if somebody violated that law, would you say, or, this is contrary to the United States patent law?
Charles E. Lipsey: --Let me answer that by giving you two hypothetical situations. The first is... where the house is being built in a secluded area surrounded by a fence, and the idea of the house has never been disclosed to anybody who has... who doesn't have an obligation of confidence to the designer, and the photograph is taking by flying over the fence for the purpose of taking a photograph. That violates the law, but it doesn't violate the patent law. That's the trade secret theft, that's a discovery by improper means. Now, let me posit the other scenario, which is the house is built on the corner of 14th and Pennsylvania Avenue out here, and as it is arising it is in plain view of the public and a man takes a photograph of it, as he's entitled to take a photograph of anything in the public domain, and uses that. An attempt to reach... that, that could not be reached under the Trade Secret Law, and an attempt to limit his options in, in copying something he's entitled to copy would offend the principles of the patent law, it would strike a different--
Antonin Scalia: Don't, don't state laws all the time prevent people from using another person's product in certain ways? There are all sorts of laws, even though the products are patented... all, all Florida here is saying is we're not interested in this man's idea, his idea you car steal. He hasn't patented it. But doggone it, don't use his hull to make another one. We're just protecting the physical hull. You cannot use that hull to make another hull out of it. What does that have to do with ideas?
Charles E. Lipsey: --Well, first of all, let me correct a misperception. Even the patent law doesn't cover ideas. Ideas, principles of nature, laws of nature, those are things that are in the storehouse of information for all men to use, they're not... they are not articles, machines, compositions of matter and processes within the scope of the patent law. It's only the application of those ideas to practically useful ends that the patent law addresses. But assuming... your question still has validity notwithstanding that, which I frankly have totally lost track of. [Laughter]
Antonin Scalia: Never mind. [Laughter]
Charles E. Lipsey: I must confess I've forgotten the question. I'm sure--
John Paul Stevens: Well, the question... I remember the question. The question was, say the house is down here or 14th and Pennsylvania. Can the governing jurisdiction pass a law saying you cannot take a picture of that house and use it for commercial purposes without the permission of the owner?
Charles E. Lipsey: --The patent law is concerned with what's in the public domain, and that's a term of art in these cases. The public domain means exactly what the words say. It means it's an area over which the public has supreme title. Now, just because the public has supreme title in an area, as it does in a public park, doesn't mean the public is necessarily, necessarily entitled to use it. There's a sign at the top of a waterfall in Yosemite National Park that says, you may not pass this, this spot. That doesn't withdraw that waterfall from the public domain. It, it remains in, in the public's ownership. And that is not the sort of action that offends the patent law. But--
William H. Rehnquist: What's, what's your answer to the question about that house at 14th Street?
Charles E. Lipsey: --Well, I... I'm, I'm getting to that, which is that where the, where the state regulates the right to use something to prevent... to protect the health and safety of its citizens, it doesn't create in that thing an exclusive right in belonging to a private individual. It says, if the sign at the top of the waterfall said, you may not go here unless John Doe says you may come here, that does remove that from the public domain. And the scenario you posit, if the state simply wants to regulate for health and safety reasons how everybody can use--
John Paul Stevens: No, no. Let's say the purpose of the regulation is for economic, just for economic purposes. Say instead of a house you take your picture and I want to use it in my ads for new suits or something like that, as a, as a handsome... would you be entitled to, and say the state law provided that you can't take somebody's picture and use it for commercial purposes without compensating that individual.
Charles E. Lipsey: --There, there is a law to that effect, it's grounded in the law of--
Thurgood Marshall: It's known as the right of privacy.
Charles E. Lipsey: --That's the right of publicity, that's perhaps--
John Paul Stevens: Is the law of privacy inconsistent with the policies of the patent law?
Charles E. Lipsey: --Not at all, because those are interests which are not addressed at all in the balancing core by Congress. What they're concerned about is how do I promote innovation on the one hand, by giving property rights, and how do I preserve competition on the other by denying property rights in things which ought to be in the public domain. That's all the patent law deals with.
John Paul Stevens: Well, what if this boatmaker had a provision in his regular sales contract that required the purchaser to agree not to copy it?
Charles E. Lipsey: Your Honor, I believe that's the next case that you're going to have here. That--
John Paul Stevens: How do we decide it?
Charles E. Lipsey: --I believe that that raises issues of state contract law enforcement. It may raise questions under the antitrust law, and there is a patent law doctrine which might be implicated, this Court's decision in Lear v. Atkins, that says when you seek by contract to deny to a member of the public a right which the patent law demands he has the Court may declare the provision of that contract unenforceable on policy grounds. But I don't believe it raises a preemption question. So, I'd, I'd like to deal briefly with the opposition, the arguments of the Petitioner in opposition to the decision of the Florida Supreme Court. Their main argument is, this doesn't take any product out of the public domain, it only takes a process out of the public domain. And there's a double-barreled answer to that. One is the answer which is in the opinion of the Supreme Court, Court of Florida, and that is that when you undertake, for purposes of striking a balance between innovation and competition, to tamper with the resources that are in the public domain that are available to a man who's entitled to copy, you interfere indirectly with the right which Sears and Compco says you may not interfere with directly, and that statute, that act ought also to be preempted. There's a second and I think equally powerful answer to that, which is you ignore completely the notion that processes are patentable inventions too. The patent law covers not just articles, it covers processes, compositions of matter, and machines. And when you go to withdraw from the public domain an unpatented and publicly-known process, you offend the principles of Sears and Compco just as surely as you do if you seek to withdraw an unpatented and publicly-known article.
Antonin Scalia: I assume a state can say you can't reproduce it by a process that involves nuclear energy, or something of that sort.
Charles E. Lipsey: Absolutely. That's a safety matter, a safety matter. And that applies to everybody.
Antonin Scalia: That's a safety matter. That's... one of the state's police power concerns is safety. Here, here the state is saying you can't do it by using the very individual's... the sweat of his very brew, using the same physical hull that he has, has, has produced. You want to do it, produce your own physical hull.
Charles E. Lipsey: Well--
Antonin Scalia: I, I, I mean, once you acknowledge the state can limit some of the manners of reproduction, why isn't this a reasonable manner of, of limitation? I mean, you're making up the... you're making up a principle you can only limit it for safety reasons. Where did you get that from?
Charles E. Lipsey: --Well, Your Honor, I had that trying to be fair. I was--
Antonin Scalia: Oh, maybe you can't even do that.
Charles E. Lipsey: --No, no. Let me answer that. The Federal law of supremacy and preemption is not a black letter, inflexible thing, and the interest which the state is seeking to protect is certainly a relevant inquiry in making the preemption analysis. And I think the authorities of this Court indicate that where the state is acting in the heart of its police power, dealing with the health and safety of its citizens, that greater deference is given state action in that area than it might be where the state is acting in a peripheral, commercial sort of arena. And so that's why I focused on that distinction. Secondly, differences in the state's objectives manifest themselves in differences in the vehicles adopted in the statute to attain the goal. If you're interested in protecting health and safety, you prevent everybody from doing it. You create no private right to exclude others. But when you're interested in balancing incentive for innovation against the right to compete, the vehicle one adopts is to give an exclusionary right to the proprietor, just as the patent law adopts giving an exclusionary right to the proprietor. And so the difference in objective of the statute is reflected in adoption of a vehicle which directly collides with the statutory scheme in the patent law. And that, that was why I, I focused on the difference in objective.
Antonin Scalia: Isn't there a law requiring licensing of engineers, of mechanical engineers, or whatever kind of an engineer makes a drawing of a hull, I don't know. Nautical engineer, whatever it is.
Charles E. Lipsey: Creates no private property right, Your Honor. It creates in no citizen the right to exclude some other citizen from using something in the public domain.
Antonin Scalia: No, but it prevents, it prevents somebody from, from taking to his friend, Charlie, who happens to be very good at draftsmanship, this hull and say, Charlie, do me a hull. You can't do that. That warner of reproducing it is prohibited by the state. You have to take it to a, a, a licensed engineer. Now, why doesn't that limit the warner of reproduction? And it's an area that doesn't involve health or safety.
Charles E. Lipsey: Well, first of all, Your Honor, it may limit the options in reproduction, but it does so without withdrawing anything from the public domain. There's no God-given right to--
Antonin Scalia: Neither does this.
Charles E. Lipsey: --I beg your pardon?
Antonin Scalia: Neither does this. The shape of the hull is not withdrawn from the public domain. What's--
Charles E. Lipsey: But the process of making it is, and the process of--
Antonin Scalia: --So in the case I gave you, making it through this... through Charlie os withdrawn.
Charles E. Lipsey: --Well, your... we are disagreeing on the difference between a technological technique, which is the subject of the patent law, and a method of doing business, such as whether you'd use a licensed engineer or an unlicensed engineer, which the patent law doesn't even address. And if we're talking about preemption by the patent law, only the former situation is preempted and the latter is not.
Antonin Scalia: xxx as you say that the patent law does address manner of reproduction.
Charles E. Lipsey: No, I--
Antonin Scalia: And I don't see that it addresses that. It addresses whether people are allowed to reproduced it doesn't specifically say, by every possible means and the state can't exclude any, because you acknowledge the state can exclude some.
Charles E. Lipsey: --Your Honor, the patent law deals with technology, with the skill and art by which things happen in this country, by which things are changed into other things, with science. It doesn't purport to deal with licensing techniques, with safety concerns, with any of these other matters cited in the cases in the Petitioner's brief. And, and so the preemption issue is a narrow one. Is the state creating a property right, a right to exclude others, in technology of the sort which the patent law deals with and says should be free. And I, I think we've established pretty clearly that it does in this case. I'd like to just mention that this argument that it's police power, it's police power, is kind of a recoherring. Even if you concede that it is within the police power of the state, all that does is establish the right of the state to act absent the patent law. It begs the question of whether or not it's an exercise of police power, which is nonetheless preempted because it clashes with the objectives of the federal patent law.
William H. Rehnquist: Of course, you do, you do have statements in the Patterson case that the patent laws were not designed to displace the police power of the state. You can certainly distinguish Patterson, but there is that language in the case.
Charles E. Lipsey: There is that language, but the same argument that it's police power, it's police power, could have been made in Sears-Compco as well. And, and so obviously there are some police powers which are not preempted and there are some which may be exercised in a way which is preempted. And let me give you an example. Suppose the State of Florida wanted to promote innovation in boat hull design, but did so by granting tax credits for investments made in manufacture of an original boat hull. They achieved the same goal, but they do so without withdrawing anything from the public domain, without giving to the proprietor a right to exclude others from using technology that's already out there. That would not have been preempted. But the vehicle they've chosen to effect this policy happens to be preempted. I'd like to mention briefly the interpart opinion of the federal circuit, which is cited and relied upon heavily by the Petitioner. As with any lower court authority, I think its value here is only for the thoroughness and logic of its analysis. The interpart opinion didn't deal at all with the flip side of the federal patent law coin, which is this policy of protecting competition in things that are in the public domain. It did not deal at all with the process patent aspects of the right, which is given by the State of Florida, and it's wholly unsatisfying sort of analysis, and I don't think that it really alters the analysis in this Court at all. Finally, I would like to address the point they make, they reap where they do not sow, it's unfair, and there caught to be a law. As the questions of Mr. Russell pointed out, the question of whether it's unfair is something we have to analyze in light of what the law permits, what the patent law permits. And in 1938 this Court decided the Kellogg case and said, it's not unfair to use something that the patent law leaves in the public domain. And that was the essence of the Sears and Compco holdings in 1964. And it's apparently time to say that again. Secondly, they're really not reaping where they do not sow, to carry the agricultural analogy further they are gathering what nature leaves in the public domain. It is in the very nature of technological processes that once they are publicly disclosed they force themselves into the possession of everybody who learns of them. And that person can be dispossessed of the right to use them only by the issuance of a valid patent. And finally, when they say there ought to be a law, there is a law. There's the Federal Patent Law, there's the Federal Design Patent Law. It provides protection in this area. They should use it. If it's inadequate they should go to Congress and ask them to change it, or to modify it, or embellish it. And in fact requests have been before Congress for years to modify the patent law in the area of industrial designs and to allow some more limited, easier to obtain protection. That's where the debate is. I think that's where it ought to stay. The dispute is much broader than just boat hulls in Florida. There are 12 statutes dealing with this sort of thing. Three of them deal with every manufactured article that there is, not just boat hulls. One of those statutes is being used to try to stifle competition in the automobiles aftermarket for crash part. The economic stakes are immerse. The divergent interests are immense and of national scope. And it's the sort of thing which really is peculiarly within the ken of Congress, and I would urge the Court to leave it there. Thank you very much.
William H. Rehnquist: Thank you, Mr. Lipsey. Mr. Russell, you have eight minutes remaining.
Tomas Morgan Russell: Thank you, Your Honor. I'll make just a series of very quick points here in response, in rebuttal, and then save the Court some time, I hope. First of all, the fact that a patent has not issued on a product really is independent and free and has nothing to do with the exercise of the police power. The police power can be used by the states to legitimately regulate competition, whether or not a product is patented. I cite you to the Sears case itself when it discussed what laws were applicable to patented products, and they even cited the antitrust laws. The citation was to IBM, in the 1936 decision, and the United Shoe Machinery case in 1922. And that certainly is, is as true here. Florida, Florida and 11 other states have exercised their police power, saying that this is an improper method of competition between competitors. And it's within their power to do so. That power was never delegated--
William H. Rehnquist: Sears... Sears... Sears-Compco you car say was an exercise of state police power too, if you mean by police power the reserve power of any state to operate in an area unless prohibited by Federal law.
Tomas Morgan Russell: --Well, I'm using the term here in the sense that it regulates for the general welfare of the public the health, safety and commerce.
William H. Rehnquist: How, how does that distinguish... are there, are there some state laws in your view that wouldn't come under the state police power?
Tomas Morgan Russell: I would... I can't think of one right off hard, Your Honor, but--
William H. Rehnquist: Usually it's used just as a, as a shorthand for those laws the state has, has a right to enforce, really.
Tomas Morgan Russell: --Well, I think it certainly is clear here that the state has the authority and the power to regulate the conditions of competition within its borders.
William H. Rehnquist: You, you may be right, but I think it doesn't depend on whether or not you, you, you use the word "police power" in any specialized sense.
Tomas Morgan Russell: Yes.
John Paul Stevens: Mr. Russell, can I go back for a second to the Sears case? That was... Sears copied the Stiffel lamp, was that right? How did they make the copies there? Does the record tell us?
Tomas Morgan Russell: No, it does not, Your Honor.
John Paul Stevens: Supposing the record told us that they did it by a molding process or something like, that they... I don't know how... how you'd copy a lamp, but could Illinois have forbidden that one method of copying but lets that any other method is okay?
Tomas Morgan Russell: I think just as Florida could Illinois could too.
John Paul Stevens: So that--
Tomas Morgan Russell: But there is, there is, there--
John Paul Stevens: --So that... the only thing wrong there was the total prohibition.
Tomas Morgan Russell: --It was a total prohibition in Sears. Now remember, they couldn't do it in Florida because the Florida statute only applies to boats. I wanted to call the Court's attention to--
Antonin Scalia: It's more than just that it isn't a total prohibition. I mean, that's not very satisfying. You can do anything so long as it's a total prohibition. Isn't there something different about this kind of prohibition, that it's a prohibition that relates to the physical hull, to what you can do with the physical hull? Not with the drawings, not with the ideas, not with the invention, but what you can do with an identifiable physical hull, just as what was, in Sears, in your, your example, what you could do with the physical lamp.
Tomas Morgan Russell: --Yes, I quite agree.
John Paul Stevens: In other words, you have a statute saying, you cannot use the physical lamp when you're trying to make a copy of it.
Tomas Morgan Russell: That would be the parallel. I wanted to just point out that the fact that--
Byron R. White: The prohibition applies to something that a copier owns. I mean, he bought the hull.
Tomas Morgan Russell: --He bought the hull.
Byron R. White: It's his hull.
Tomas Morgan Russell: Justice White, you're absolutely correct.
Byron R. White: And the state says, awfully sorry, but you can't make a mold of your hull.
Tomas Morgan Russell: To copy it and make identical products for commercial purposes.
Byron R. White: Yes.
Tomas Morgan Russell: Yes, that's correct. That is what the statute does.
Byron R. White: You cannot use your hull, you cannot use your hull, reproduce it in that way for commercial purposes.
Tomas Morgan Russell: For commercial purposes, that's right. Because it is the equivalent of taking the investment that the original manufacturer race in producing that design and producing the plug mold.
Byron R. White: Well, he, he... he's marketed it. he's getting everything out of it he thought he was getting.
Tomas Morgan Russell: Not unless he sells enough units.
Byron R. White: Well--
Tomas Morgan Russell: He may not be able to sell enough, if the copier's in the marketplace, in order to recoup his investment.
Byron R. White: --That's, that's the problem with everybody who doesn't have a patent. That's the risk you take, I suppose.
Tomas Morgan Russell: That is certainly a risk of the copier. I wanted to point out--
Anthony M. Kennedy: Suppose, suppose that someone took Borito's hull and they copied it by reverse engineering, not by molding?
Tomas Morgan Russell: --Absolutely--
Anthony M. Kennedy: And then some... all right, wait a minute--
Tomas Morgan Russell: --Legal.
Anthony M. Kennedy: --Then someone else takes that and copies it by directing molding. Violation?
Tomas Morgan Russell: It would technically be within the statute, I think.
Anthony M. Kennedy: But there's no, there's no... it's clearly not patentable.
Tomas Morgan Russell: Clearly not patentable. But the person that, that... I think, think the rationale for the statute still applies, Justice Kennedy, because by the reverse engineering, that copier is in effect rebuilding that original product. He is making the investment in the product development and then bringing that product to market. So the rationale of not taking the other man's investment, I think, still applies here. I also think it's important to point out that this Court has recognized in at least two occasions that unpatented improvements can still be of immense value to society. Certainly a trade secret is not patented and can be of value to society. The third point, I would like to point another limitation on the statute, which is that the statute is not limited to manufacturers. The statute can be invoked by a distributor, it can be invoked by a retailer, it could be invoked by anyone. The point was made that trade secret rights, or that the rights under the statute exist in perpetuity. I think the same thing is certainly true with respect to trade secrets. They exist in perpetuity until they're revealed in one way or another. And the right to not copy the master recording in Goldstein certainly was in perpetuity, and the court said that the durational limitation did not render it invalid. The state... the statute here does not take the direct molding process out of the public domain. It remains in the public domain. It can be used by anyone for any other purpose. No boat manufacturer can use the Florida statute to stop someone from copying teapots using the direct molding method. The molding method remains completely in the public domain, and it does not create a right to the manufacturer to exclude anyone else from using the direct molding process.
John Paul Stevens: Mr. Russell, let me ask one other question I meant to ask earlier. Would it violate the Florida statute to take the boat to Georgia and do the copying there?
Tomas Morgan Russell: I don't know offhand whether Georgia has such a statute.
John Paul Stevens: Assuming it does not have such a statute.
Tomas Morgan Russell: Well, then, it certainly would not violate Georgia law.
John Paul Stevens: Oh, so it just... it only applies in-state--
Tomas Morgan Russell: It's an in-state statute.
John Paul Stevens: --I see.
Tomas Morgan Russell: I wanted to point out that the--
Byron R. White: If they caught the Georgia copier in Florida, they could get an injunction against him.
Tomas Morgan Russell: --If they can find him in Florida, I believe you're right, Justice White.
John Paul Stevens: But I'm assuming he did all the copying in Georgia. So they caught him in Florida--
Tomas Morgan Russell: In the Interpart case, it was upheld by the Federal circuit, the actual copying was done in Formosa. That case involved automobile rear view mirrors, and the copying was done in Formosa.
John Paul Stevens: --So you would say if the statute would cover out-of-state copying--
Tomas Morgan Russell: It could if you can get jurisdiction of him within Florida.
John Paul Stevens: --I see.
Tomas Morgan Russell: That's exactly what happened, Justice Stevens, in the Interpart case. The parts were copied in Formosa and they were imported into California, big automobile market. And the action was brought in California applying the California anti-direct molding statute.
William H. Rehnquist: Thank you, Mr. Russell. The case is submitted.


Earl Warren: Number, 28 Louis Katchen versus Hyman D. Landy, Trustee in bankruptcy.
Fred M. Winner: Mr. Chief Justice --
Earl Warren: Mr. Winner?
Fred M. Winner: – and may it please the Court. We are here today on a very narrow question. It is a question having to do with the summary jurisdiction of the referee in bankruptcy and involved in the question is the problem of whether the Seventh Amendment prevents the exercise of summary jurisdiction by a referee in bankruptcy where if a plenary action were filed a jury trial would be available. We are before the Court on a question as to which there is difference of opinion among the circuits as to the extent of the summary jurisdiction which a referee in bankruptcy has or attempts to exercise. The Tenth Circuit probably goes farther than any other circuit in its recognition of summary jurisdiction and it holds if I correctly understand the most recent decision of the Tenth Circuit that summary -- that in an instance where a creditor files a claim in a bankruptcy estate and where the trustee seeks to assert a preference by way of counterclaim back against that creditor, the Tenth Circuit apparently go host that the summary jurisdiction does exist if the counterclaim is either compulsory or permissive or would be under the Federal Rules of Civil Procedure if a preference or one or two other things are involved and if the matter is not wholly unrelated to the claim initially filed by the creditor.
Potter Stewart: Mr. Winner that what you just said is what you draw from most recent decision of the Tenth Circuit?
Fred M. Winner: Yes sir.
Potter Stewart: And you're referring to a decision in this very case --
Fred M. Winner: Yes sir in the Katchen case, yes sir. I read the Katchen case to modify an earlier decision of the Tenth Circuit in Interstate, but I believe or I hope I have correctly summarized Katchen as decided by the Tenth Circuit. I think that perhaps the problem can be best illustrated by a very brief recitation of the facts here. Here a corporation was formed in April 1960 which had the name of Katchen's Bonus Corner Incorporated. Contemporaneously with the formation of the corporation, Louis Katchen, the principle stockholder borrowed $40,000.00 from the American National Bank. Now in fact, the note was signed by Katchen's Bonus Corner Incorporated and Louis Katchen was the accommodation maker. A few months later, $10,000.00 was borrowed from the North Denver Bank. Not very long thereafter, they had a disastrous fire which was uninsured. Within four months of the date of bankruptcy, the corporation caused first $15,000.00 and later an additional of $10,000.00 to be paid on the American National Bank loan on which Louis Katchen was an accommodation maker and did also cause to be paid in full the note to the North Denver Bank on which Katchen was an accommodation maker. Subsequent to that and prior to bankruptcy, but all within the four months, Katchen paid personally an additional $5,000.00 on the American National Bank note. Following bankruptcy, Katchen filed a claim as a creditor of the bankrupt corporation for the last $5,000.00 I have mentioned, that is the $5,000.00 which he paid personally on the note and he filed a claim for approximately $4,500.00 worth of rent said to be due him by the corporation on real property he personally owned. The trustee then asserted four counterclaims. The four counterclaims were these; the first two involved the payments, the payments which had been made by the corporation on the American National Bank note. The third one involved the payment made by the corporation on the North Denver Bank note and the fourth one involved a claim which -- in which the trustee said that Louis Katchen had failed to subscribe for his initial capital stock. The Tenth Circuit held that the claim on the failure to subscribe for the capital stock was wholly unrelated to Katchen's claims and therefore, the trustee could not exercise summary jurisdiction over it. But the Tenth Circuit held that the referee could exercise summary jurisdiction as to the three payments made by corporate funds on the notes. It is undisputed that Katchen objected to the summary jurisdiction at the first available opportunity and as I have said the question we have here today is, can a referee in bankruptcy exercise that summary jurisdiction? Now as we view it, the various circuits which have passed on the question and some of them saying they can exercise of just compulsory counterclaims some on permissive and some on -- or some on both permissive and counterclaim, an attempt seems to go all from a slightly different tension --
Potter Stewart: Do the Federal Rules of Civil Procedure applied in the proceedings before referee in bankruptcy?
Fred M. Winner: I think not sir. In their full extent that's what I mean.
Potter Stewart: Yes, that's what I meant to my question --
Fred M. Winner: In their full scope I think not.
Potter Stewart: So then when we talk about permissive and compulsory counterclaims you mean claims which would be if this were an ordinary civil action in the District Court?
Fred M. Winner: Yes sir. The Interstate case out of the Tenth Circuit specifically made reference to Rules 13 (a) and (b) the permissive and the compulsory counterclaim rules under the Federal Rules of Civil Procedure and the seem to key it into that. But I don't understand exactly how it keys in other than its -- the circuit did do it.
Potter Stewart: It did apply that test?
Fred M. Winner: Yes sir, they applied that test.
Potter Stewart: Which maybe perfectly proper not by analogy but by definition the Federal Rules of Civil Procedure do not in full force and in -- apply the action before the referee in bankruptcy?
Fred M. Winner: I believe that is correct, Your Honor, I think clearly it is. I think that all of the circuits in arriving at their -- in arriving at their results have fundamentally relied upon the decision of this Court in Alexander against Hillman and they read Alexander against Hillman in the way that I just simply cannot read it. Alexander against Hillman was not a bankruptcy matter. Alexander against Hillman was an equity receivership. In Alexander against Hillman after the receivership was started to wind up the affairs of the corporation, some of the corporate officers filed a claim in the receivership. The receiver filed equitable counterclaims against the corporate officer and this Court held that equity having assumed jurisdiction it would certainly exercise jurisdiction as to all equitable matters and the matter came up primarily as a question of venue. It said that venue had been consented to and it held that in an equity receivership as to equitable counterclaims, the Court did have jurisdiction. But there are these distinctions between Alexander against Hillman and the summary jurisdiction which is attempted to be exercised by a bankruptcy referee. First is the most obvious distinction. An equitable receivership is not bankruptcy. Second is the second most obvious distinction. In Alexander against Hillman, the jurisdiction was exercised as to equitable counterclaims, but in the case today before the Court, the counterclaims are not equitable, they are legal. They are counterclaims for money had and received. And if the plenary action had been filed and clearly it could have been, a jury could have been demanded. The next distinction as I mentioned is that Alexander against Hillman, as we understand the case, involved only and completely the equitable issues coupled with the venue problem. That I think is a distinction which cannot be said to exist here. Here we have, as I have said, then counterclaims involving legal issues as to which a jury trial could be demanded. And we think that has been settled and settled by this Court and I make mention of Schoenthal versus Irving Trust, this in an opinion written by Mr. Justice Butler in 1932. There, there was a plenary action filed to recover a preference. Here clearly, a plenary action could have been filed. There the case was assigned in the District Court to the equity side of the court. A demand was made for a jury. This Court held as to an identical type of preference that the preference claim was an action for money had and received that it was error to hear the case on the equity side of the Court and that the defendant was entitled to a jury. We cannot distinguish that case. The only thing that can be done as we see it to get around that case is to say that Alexander against Hillman overruled it, but Alexander against Hillman was written only three years after the Schoenthal case. It was again written by Mr. Justice Butler and makes no mention of the Schoenthal case. We submit that Alexander against Hillman does not stand in anyway for the propositions for which it has been cited by the circuits. As is pointed out in Daniel against Guaranty Trust once more written in 1932, this time by Mr. Justice McReynolds. There the strict question of preference was not involved. Guaranty Trust within the bankruptcy proceeding had filed a reclamation of certain bonds and the trustee filed a counterclaim against Guaranty Trust and in that counterclaim asked to recover money which the trustee said Guaranty Trust had received after the bankruptcy adjudication. This Court there pointed out that to put upon a creditor almost, well, this isn't the Court's language of course, but to put on upon a creditor almost the problem of Russian roulette, when you file a claim in a bankruptcy, the Court would be completely unfair that the argument which is made in some of the circuit court opinions that anybody who files a lawsuit is subjected to the hazard of a counterclaim that that argument does not apply. Sure, you're always subjected to the hazards of a counterclaim, but you're subjected to the hazards of a counterclaim in a court where all of the orderly processes of the court should apply. And to say that a creditor who by exercising is very, very lawful right of seeking to recover his portion of a debt out of a bankruptcy estate must then subject himself to the risk of a counterclaim based upon a preference without the protections of a full trial in a plenary action is to make the filing of a claim in a bankruptcy estate a matter of serious risk.
Byron R. White: Well Mr. Winner, this is not a strange in the bankruptcy act, how about a set-off?
Fred M. Winner: Set-off is specifically covered I think, Your Honor.
Byron R. White: Well I grant you it is specifically covered --
Fred M. Winner: Preferences as in the same claim--
Byron R. White: I know I'm just saying the Bankruptcy Act does [Inaudible] subject creditor who risk with the set-off without any kind of a trial you're talking about?
Fred M. Winner: That I cannot question but the Bankruptcy Act does not do that--
Byron R. White: Under the extent -- under the extent that a set-off would be involved here -- into that order.
Fred M. Winner: If it had been a set-off, yes, but that isn't the contention here.
Byron R. White: Well I know because the amount claimed by the creditor is larger than his claim as applied?
Fred M. Winner: Yes, but here is something that think Your Honor --
Byron R. White: Was that set-off in the rise for preference?
Fred M. Winner: Sir? I didn't hear you sir.
Byron R. White: Do you think the trustee could make the claim with a set-off and a preference?
Fred M. Winner: I doubt it.
Byron R. White: Because that preference has to be determined first?
Fred M. Winner: Yes sir. Let me --
Byron R. White: Can he base it on a debt owed by the creditor of the bank?
Fred M. Winner: Yes.
Byron R. White: Certainly he can.
Fred M. Winner: Certainly he can.
Byron R. White: And before that you have to find -- you have to adjudicate the debt [Inaudible] in a summary proceeding?
Fred M. Winner: Let me point out, Your Honor --
Byron R. White: Normally a jury trial would be --
Fred M. Winner: More important, Your Honor -- there's something I think Your Honor is overlooking. Your Honor is, I think inherent in what Your Honor says is the thought that the determination of a preference is a part of a bankruptcy proceedings. Now if that is what Your Honor is saying, Your Honor is in complete disagreement with Schoenthal versus Irving Trust which I have mentioned before and which expressly holds that, and this happens to be a quote “Suits to recover preferences constitute no part of the proceedings in bankruptcy but concerned controversies arising out of it.” Now if the determination of a preference constitutes no part of the bank -- of the bankruptcy proceeding that concerns controversies arising out of it, I submit Your Honor, that you cannot deprive them of a constitutional right to a jury trial simply at the whim of the trustee by electing to counterclaim within the bankruptcy proceeding and the exercise of summary jurisdiction or electing to proceed by plenary action and most assuredly --
William J. Brennan, Jr.: Mr. Winner, the trustee or suitor could recover the preference in the state court?
Fred M. Winner: Under the present statute yes sir.
William J. Brennan, Jr.: Would they have a constitutional right to a jury trial in the state court?
Fred M. Winner: Mr. Justice Brennan, I have been dreading that question like the question [Inaudible] [Attempt to Laughter] Under Parker against Clinton which was decided by the Supreme Court of Colorado, the Supreme Court of Colorado held many years ago that there is no constitutional right to a jury trial in Colorado. Colorado lawyers are aware of that case. Let me add that I think if I correctly read many of the recent decisions of the Supreme Court of the United States that since the first 10 amendments are becoming rapidly or totally incorporated into the Fourteenth Amendment, I suggest that perhaps this Court has effectively overruled Parker against Clinton. And so that --
William J. Brennan, Jr.: Has there ever been any suggestions yet in the Seventh Amendment?
Fred M. Winner: No sir, I've been saving –
William J. Brennan, Jr.: -- of the defendant –
Fred M. Winner: I've been saving that one and nobody has suggested that yet but I think that is probably the logical conclusion which must follow --
William J. Brennan, Jr.: Do we have to decide that in this case?
Fred M. Winner: No sir, I couldn't get that into this case. I couldn't think of a way to do it. But I do think we have in this case a very squarely whether you can deprive the man of a constitutional right to a jury trial and I suggest this. I suggest that it is most difficult to interpret the bankruptcy statute and the bankruptcy proceedings in a way that would deprive a man of a right to a jury trial under these circumstances and still adhere to the decision of this Court in Dairy Queen which of course came up long after the Schoenthal the Dan – and the Daniel cases. But in Dairy Queen, it was so clearly pointed out by this Court that the mandate of the rules, that the rules are not intended to in any way interfere with the – the right to a jury trial and it was so clearly pointed out that where both legal and equitable issues are present in the case, you can't deny a man of a right to a jury trial by simply deciding the equitable issues first. Thank you.
Earl Warren: Mr. Creamer.
George Louis Creamer: Mr. Chief Justice, if it please the Court. Counsel has mentioned that the issues in this case are narrow and they are in the sense that factually it is uncomplicated narrow. They are broad in a legal sense in that fundamentally, what is involved in the case seems to be the very foundation and fundamental of bankruptcy law and bankruptcy administration. Mr. Winner has summarized it quite accurately. I think the facts about which there is no dispute and thus the Court has doubtless noticed from a record that there is almost no factual problem presented by the record. Three claims, two of them effectively the same were allowed two different payments to one bank. And a third claim which was a similar payment to another bank were allowed as preferences; fourth, which was a stock matter was not permitted by the circuit. Now, we certainly do have very clearly involved here of the problem of Alexander versus Hillman. It is categorical. Alexander versus Hillman came out from the Fourth Circuit. It is a receivership case. It is a receivership case which has this great cogency to bankruptcy we believe as a receivership case well might have or as any case might have of what the Court said which is cogent in Hillman applies to bankruptcy quite as much as it applies to the receivership situation. All that had occurred was that there – was a receiver having the assets of an insolvent person in hand. Other persons, who were debtors or might have been, made the application to share in the receivership assets. It was held that having made application to the receiver to share in those assets claims with the receiver. The receiver had a right to offset or to counterclaim on other claims that might be held against the particular persons making the claim and the Court simply said and I think we quote Hillman at 11 of the brief, of our brief. Respondent's contention means that while they invoke in the Court's jurisdiction to establish their right to participate in distribution, they may deny its power to require them to account for what they misappropriated. In behalf of creditors and stockholders, the receivers reasonably may insist that before taking out respondents made by the receivership of the Court be required to make restitution. The requirement is in harmony with the rule generally followed by the courts of equity that having jurisdiction of the parties to controversies brought before them. They will decide all matters in dispute and to create a complete relief. Distribution may not be made without decisions of the counterclaims. Nothing is marked there. They are part of the subject matter of the main suit than recovery that all through there is belongs. I think that is probably the essence of Hillman. Now, the problem is, does that apply in bankruptcy? Counsel says, that it is alleged and stated by the Court in other cases that there is a jury right with reference to the recovery of a preference. What counsel that does not do is to draw the distinction of that such a case is a case in which there has not been a claim made in bankruptcy. The case is not pending in bankruptcy upon a claim of the claimant. It is one of those situations in which the trustee having such assets as would be assets of the bankrupt state may go out as a party into other parts and bring an ordinary action. He might bring an action I presume in tort and might frequently do and such a tort action would not be an action in bankruptcy but a declaration that it was not, would not have anything to do with a claim made in bankruptcy. There perhaps also is an off discussion of the issue by a reference to the summary jurisdiction in bankruptcy. Bankruptcy is a kind of thing that is sui generis. It is not legal jurisdiction, while legal jurisdiction it is an equitable jurisdiction. Now the Court has said it applies basically equitable principles. It is an extremely broad jurisdiction to meet a specific type of the recurrent and critical economic problem which obviously has its origins in constitutional power in exactly the same fashion the Seventh Amendment guarantee has and the power this Court has said is a --- rather plenary power vested in the Congress over the whole subject of bankruptcies and then the Court has defined subject to bankruptcies extremely broadly. Now, the statute says specifically Section 2a-7 of the Act through 11a-7 U.S.C that the courts of the United States are hereby invested with such jurisdiction to pause the stage of the bankrupt to be collected, reduce the money distributed and determine controversies in relation thereto. Now, what are the basic types of controversies? Well, the essential controversy in bankruptcy is who gets the money that usually it's what occurs and the way you determine it is that the claimants file their claims. Each claim filed in bankruptcy for every practical purpose is simply a lawsuit instituted against the trustee by the claimant asserting that he has the right to part of whatever is in the hands of or maybe garnered by of the trustee. If this is a lawsuit and it is a controversy then we would submit that might other lawsuits it has a reverse and then adverse, and the Court trying to completely adjudicate it, must look at its reverse and must look at its odd versus wealth. Now, if it is such a claim then certainly counterclaims or set-offs must be ascertained to determine if there is a right fundamentally to receive anything out of the pool of the assets and if this is a type of matter applying rules of equitable cognizance as we suppose that it is and as the Court has stated repeatedly that it is, then necessarily, there must be an avoidance of circulative litigation in the matter and there must be avoidance or a determination of whatever is implicit in determining the claim. But how do you determine if somebody has a right to draw money out of the pool without determining whether that person is of necessity required to contribute into the pool out of which money maybe drawn. In the first instance, the statute says first; that the courts of the United States have the right to settle the estate of the bankrupt to collect, reduce the money distributed, and determine controversies in the relation thereto. And the third Section 1668 I believe say that it is incumbent upon the Court also to make determinations of preferences, set-offs and all of the rest of the equitable claims that may derive.
Byron R. White: Mr. Creamer, you have gone much farther than the Court of Appeals I take it that the bankruptcy of the Court jurisdiction over any kind of the claim whatsoever --
George Louis Creamer: No.
Byron R. White: Well against the creditor who files a claim?
George Louis Creamer: Not any kind of whatsoever. I think possibly a claim, the Court of Appeals used rather a broad category. It withdrew from its Luther position and said that in the present circumstances it would hold to the rule that there might be an adjudication of set-offs equitable counterclaims and claims in the nature of preference or fraudulent allowances, yet stated of that it would not allow claims on a totally unrelated method.
Byron R. White: Although your argument was under jurisdiction --
George Louis Creamer: I would tend to think logically, it might tend to do so. I have rather a feeling and it is curious to express it so that that I [Attempt to Laughter] – I would emotionally like to make rule of the circuit as it has announced it because it doesn't seemed to me that the matter of – of the -- such questions as to stop payment are logically awfully much related but I don't think it would be no logical to permit the rule to those go far and of course Luther did permit it to go so far but the Tenth did not follow its own rule in Luther. And though the current rule of Tenth is I think entirely concurred in by Sixth Circuit that is included in the Tenth, none of them have gone so far as Luther except the Tenth itself.
Byron R. White: Mr. Creamer, I – I – doesn't the Bankruptcy Act provide that a claim may not be allowed if a creditor has received the preference?
George Louis Creamer: Yes.
Byron R. White: Is – is one of the obligations of the Court or the referee and the Trustee to determine whether this received the preference before the claims about?
George Louis Creamer: He must do so. It's absolutely required to determine it.
Byron R. White: Is it the – was – was the dissent below suggesting that in order to disavow a claim based on the receiver of the preference, a trustee must file a plenary suit somewhere to have it determined?
George Louis Creamer: Yes, that seems to be implicit in Judge Philips' decision and in fact --
Byron R. White: I was saying – I would think the same would be true of a setoff?
George Louis Creamer: I can see no reason why it wouldn't accept that it seems to be conceded every place that it's ever argued but the setoff whatever this maybe as though it were some kind of anything summarily determinable but you don't know what one is. It just says, you can of course and it is I think – and submit suspect when anyone says, of course but you can of course determine a set-off whatever this is but you cannot plenarily determine the – the matter of a preference but it is rather like – like it's trying to undo omelets when you get into a state of this kind. If you can't determine that there has not been a preference, you cannot allow the claim. If you allow the claim then you are allowing something to be taken out under what I think Mr. Moore or Professor Moore, the editor of Collier has said, allows a terrible kind of logical dichotomy in that if you follow the opposite of this rule, you allow B to receive money from A when A in actuality owes money to B. And this is the kind of thing that – that generally not to be allowed. Now, Judge Philips in his decent indicates that there's a method of avoiding this and several other courts following similar reasoning have. They have said that all of you need to do which I submit is another matter of the same kind of letter in generality which rapidly deteriorates into fattitude and its ponderosity as somebody wants it, but all that you must do is stay execution of rights on the claim or stay payment of the claim until you bring a plenary action. But this, of course, hits at the very heart of what the problem is because it means that in every single case of bankruptcy and in a major bankruptcy, there maybe several hundred claims sometimes many thousands but several hundred is not unusual then you must go into a -- an investigation in plenary suit of all these matters in each claim holding the entire administration of bankruptcy in suspense until such time as you contemplate the entire plenary operation which effectively means that the entire bankrupt of the state must be dissipated and will be. And that the fundamental function restorative and distributive of bankruptcy has to be eliminated. There – there is underlying all of this a notion that the summary jurisdiction is something sinister. Well the summary jurisdiction isn't anything sinister at all. The bankruptcy court is the course District Court or is in personnel identical with the District Court of the United States. But this Court has pointed out frequently that it is merely because the United States judge is a judge in bankruptcy having the right to refer matters to referees and also having the right I presume to people. Now the matter in bankruptcy for summary jurisdiction then is the basic jurisdiction of the bankruptcy court to administer a system of law which is sui generis highly emulative and palliative in its nature and intended primarily in the states as distinguished from England to be restorative in its effect and certainly having a tremendously significant basic economic function and modality of operation. If it is necessary to say that every action where there maybe thought to be involved a claim for a preference must involve a plenary action in a -- another court then bankruptcy of itself must grind to a rather dreadful halt and that what is it is what I would submit is involved here. It is really what most of the writers have stated. Now the conclusions as to the Hillman application to the bankruptcy situation were drawn first in Florance against Kresge which was asserted which was reversed in Hillman. And all that the Fourth Circuit said was, “We were mistaken in the receivership case according to the Supreme Court only a short while ago. Therefore, we will take the opposite tax in bankruptcy and assume that there being the same economic and functional purpose accomplished, the Court means as essentially to follow the same rule and this has been done. Now through the larger number of circuits the Fourth developed the rule most completely, the Second has followed it, the Third has followed it, the Eighth, Ninth and Tenth have all followed it.
Byron R. White: Well then you would – do you or don't you reject the distinction between so-called related and unrelated counterclaims -- that permissive or compulsory counterclaim?
George Louis Creamer: Yet on the basis of permissive and compulsory counterclaim, I reject it entirely.
Byron R. White: Why?
George Louis Creamer: Because I don't think it has any particular applicability. Permissive and compulsory counterclaim is an argument that has been made by analogy to the classification of claims under Rule 13 and--
Byron R. White: Well what's inconsistent between Rule 13 in the bankruptcy rule?
George Louis Creamer: There isn't anything inconsistent at all.
Byron R. White: Well why wouldn't – well why wouldn't they apply that?
George Louis Creamer: Except but I don't think you need to import Rule 13 into the matter. It --
Byron R. White: Doesn't the general order 37 say that the rules do apply where--
George Louis Creamer: Where they're applicable or where they can logically be made to fit in any of that.
William J. Brennan, Jr.: Nearest maybe something like that.
George Louis Creamer: I'm sorry.
William J. Brennan, Jr.: As near as maybe.
George Louis Creamer: As near as maybe right. And there certainly is nothing wrong with arguing the logic of the matter. And if one wants to take the logic of the matter where it goes, then I presume either a permissive or a compulsory counterclaim is allowable. The Court has tried to be guarded; the Tenth Circuit has particularly done so maybe it's more guarded than it needs to be in these circumstances. I think that it is clearly correct in what it has allowed perhaps it might have allowed more than it did. But it certainly would seem to clear that once the party who is a claimant makes an election to come into a bankruptcy court and start a suit effectively against the trustee, then he must be prepared to defend against the trustee and that this is certainly a different situation from one in which he does not come into bankruptcy but the trustee as a suitor goes into a federal court or a state court to get an asset in the same manner which somebody else might have gotten one had the bankruptcy not occur. In this regard, we -- we get into the problem of a jury question. I think that the question Judge Brennan asked in Colorado certainly does have pertinence. It is asserted that there is a right to the jury trial here. And again right I guess is in the ethical, philosophical sense rather than a legal sense because it is in assertion of what – what the person asserting at things ought to be the case which is always one must predicate of a right. But what the Constitution says relative to the matter is simply that the right to jury trial in actions at common law shall be preserved. Now it doesn't go out guarded for a battle to create such a right where there isn't one. And in the situation of accounting marshaling of assets and complex economic cost data of this type, the jury has not been thought to be in many cases indispensable and in others has been thought to be downright futile. In any case Colorado under the authority a counsel cites has long recognized that there is no summary right to jury trial and that in a matter of accounting actions and the like probably there isn't any at all even when it is demanded. Now if the plenary action which is said to be the remedy were brought, the trustee would have a right to pursue it either in the federal courts or in the state court; it would then be asserted, I take it, that there is some kind of a state court right under the Seventh Amendment which would be very oblique to a jury trial in which the state court has stated the there isn't one even not derivative from bankruptcy and in an ordinary state matter or it would have to be asserted that if the referee had made this choice, something pejorative in here did in choosing to use the state court has the jurisdictional for him where – where he has an absolute right under the federal statute so to do and where the Congress had the right under the constitutional provision to allow him so to do. And if that is the argument that would be made then you get that – that to be exact that there is a kind to be logic implicit in arguing that allowing the – the trustee to assert a counterclaim when he as himself sued, which counterclaim is merely the basis on which he might have started a suit is a detriment to the person who made an election to go in and sue the referee by filing -- I mean sue the trustee by filing a claim. I – I may sound rather muddled. I hope – hope not if – if that tends to some where that can be at the moment but my--
Abe Fortas: May I ask you – may I ask you –
George Louis Creamer: Yes, Mr. Justice Fortas.
Abe Fortas: In terms of Colorado law if the action had been brought not in the Bankruptcy Court, the action on the counterclaim, would the defendant had been entitled to the jury trial?
George Louis Creamer: In a Colorado state court?
Abe Fortas: Yes.
George Louis Creamer: As a matter of absolute right?
Abe Fortas: As a matter of the law?
George Louis Creamer: As a matter of procedure it would not be necessarily the case, no. If it were construed to be primarily in the counting action, I would think not. He might have been able under the rule or entitled under the rule to make a request or demand for a jury trial.
Abe Fortas: And this is a--
George Louis Creamer: But then we thought to be an equitable counterclaim situation or an equitable accounting action, he might very well not --
Abe Fortas: Well let's – let's take this – the trustee brings an action against Mr. Katchen to recover the $5000.00 or whatever it was paid to this bank –
George Louis Creamer: He could request –
Abe Fortas: Would he – would he been – he could have?
George Louis Creamer: And he would probably have gotten it if they were no more than that involved.
Abe Fortas: Yes, it seem to me that that was so. So I want you to have here -- what you to have here whatever assumptive language one might choose to use, what you have here is a specific situation in which Mr. Katchen would have been entitled to a jury trial if the trustee had brought a plenary action instead of proceeding by a counterclaim?
George Louis Creamer: If he had requested one, yes. Well of course but in Colorado he wouldn't have been constitutionally guaranteed that the – the existing rule would have allowed him to happen and the similar federal rule would probably have permitted him to have it if there were no complexity otherwise arising factually. The essence of the case, I would submit, is much as counsel has submitted it. The problem that exists is quite clearly the problem of how far the Hillman rule is to extend in matters of bankruptcy? How far the rule of equity completely decided issues once submitted is to extend, and whether or not there is anything pejorative in the theory that once a claimant submits himself to the jurisdiction of the bankruptcy court by making a claim counterclaims maybe offset against him. Now if there maybe a set-off and everyone agrees that there maybe that as I say whatever a set-off is, if there maybe a set-off of the claim then in logic and in law there can be no reason why there cannot be an adjudication of the totality of the counterclaim. It has been said in fact sometimes that if there maybe a set-off and a setting off of the amount, then there is probably even a basis on which should argue that this constituted res judicata of all of the issues in the plenary suit if the plenary suit was brought. No everybody --
Byron R. White: Well do you have any case that indicates a set-off maybe predicated on a preference?
George Louis Creamer: Yes quite a number of the circuits do, they're all detailed.
Byron R. White: All of the ones – all of the ones which would allow a preference that--
George Louis Creamer: Correct.
Byron R. White: -- a counterclaim one of the preferences would this set-off--
George Louis Creamer: Would allow to set-off as well in some of those which would not allow some of them specific, as in the Fifth and Seventh said that there maybe a set-off but it's dicta language I think in the Fifth and Seventh. They do comment that there maybe a set-off and then they comment that there may not be unrelated matters--
Byron R. White: Well I take it that you would say that forever there's a preference a trustee may assert against the – against the claimant that the summary jurisdiction reaches the determination of that preference when it's asserted by the trustee no matter what the preference relates to.
George Louis Creamer: I think that's true. I have to assert so because taking to gather Section 11 and Section 68, I don't see how you can separate--
Byron R. White: If you are right then the permissive compulsory thing just won't work?
George Louis Creamer: I don't think it's a really logical basis for determining it. It bothers me as an assertion of legal principle. I think that the basic equitable right coupled with what is statutorily required to be done under the Bankruptcy Act is a much better basis for reaching the problem.
Byron R. White: How about the – how about fraudulent liens and transfer and things like that?
George Louis Creamer: Fraudulent liens and transfer --
Byron R. White: Which in Court of Appeals apparently would also let the assertiveness of the --
George Louis Creamer: It treats them exactly as it treats the preferences. And I -- I would treat them the same way on a basis of feeling of propriety on the assumption that the same reasons underlying the reclamation of a set-off underlie the reclamation of a fraudulent transfer. It is a marshaling in principle being applied to the distribution of assets and in order to apply marshaling you have to get back the assets improperly put out whether it was fraudulently so or simply by time preference.
Byron R. White: So if a secured creditor asks to file a claim in bankruptcy which he may not do but what if he does and the trustee says, “Look your lien is no good against me. You didn't file it on the right day or something else wrong with it. And consequently, I want the property. You've taken – that you've taken possession of property now, I want it.”
George Louis Creamer: It might very well follow and would follow from the language of Tenth that that would be adjudicable. I don't know just why the secured creditor in such circumstances would file but if he chose so to do, he is a litigant coming into Court and I presume, having opted for that choice would be under the necessity of taking whatever result is followed. If there are no further questions, I think there is there that there would be more submission I can make on the question except that with counsel, I would concur that it is a pretty clear kind of problem which does require resolution. We thank, Your Honors, for your attention.
Earl Warren: Mr. Winner.
Fred M. Winner: The Court please, Justice White's last question has been expressly answered by this Court. It was answered in Taubel-Scott-Kitzmiller versus Fox. In that case --
Hugo L. Black: Answered in what?
Fred M. Winner: Sir?
Hugo L. Black: Answered in what?
Fred M. Winner: Taubel-Scott-Kitzmiller Company versus Fox. It appears that -- the citation appears at the bottom of page 11 of our opening brief. In that case, Justice Brandeis said that there the argument was advanced that since the bankruptcy court was empowered to order that a lien void is against the trustee should be preserved, that because of that, the argument was advanced, that there were some jurisdiction. That argument was rejected and the opinion said the argument precedes upon a misapprehension of the nature and purpose of the clause in question. It does not confer jurisdiction. It confers substantive and adjective rights, which I think, it answers the question as to determining the – the power of a referee in bankruptcy to determine the validity of a lien.
Byron R. White: Well, we're really talking about the District Judge?
Fred M. Winner: Here or --
Byron R. White: Whatever you're talking about that district judge at summary jurisdiction that's not been created.
Fred M. Winner: Mr. Justice White, I think not. I appreciate that one can appeal from the referee and bankruptcy to the district judge but one appeal from the referee and bankruptcy to the district judge and one does not get a trial de novo.
William J. Brennan, Jr.: He does not get a trial --
Fred M. Winner: No sir.
William J. Brennan, Jr.: Very limited reviews.
Fred M. Winner: Yes, sir a very limited review and my experience of trial before referees and bankruptcy and I mean no slurs but my experience is that they differ somewhat --
Byron R. White: As some of us think –
Fred M. Winner: A big pardon, sir.
Byron R. White: Their summary out there.
Fred M. Winner: They're -- they're indeed summary and I say in conclusion, I do not think that you can condition -- that you can impose upon a man who sees fit to file a lawful claim in a bankruptcy state the irrevocable and unavoidable penalty that if you filed this claim, by way of a club held over your head, you cannot have a plenary trial as to any claim for preference, which is asserted against you. And if -- if you're foolish enough to file this claim -- if you're foolish enough to assert your legal rights, you as a conditioned founded into you, waive your right to a jury that we submit is not the law at least we hope it is not the law. We think Alexander against Hillman does not so hold and we think that to so hold would require that Irving Trust be expressly overruled. Thank you.
Earl Warren: We will adjourn.