Warren E. Burger: Mr. Franks, I think you may proceed when you are ready.
Mitchell D. Franks: Mr. Chief Justice, and may it please the Court: This 1983 due process case arose out of the firing of an employee of the Florida Highway Patrol in 1977. Although the district court ultimately held that the law regarding pre-termination due process was not clearly established at the time of the firing, it nevertheless continued on and ruled that the Florida statute, Chapter 110, was unconstitutional in that it violated post-termination due process. It also continued on and found that the employee was entitled to damages under 1983 not for any violation of clearly established constitutional law, but because the defendants did not follow a departmental regulation recently enacted in terminating this employee.
Sandra Day O'Connor: Mr. Franks, would you help us interpret what the holding of the district court is now?
Mitchell D. Franks: There are--
Sandra Day O'Connor: It... it seems to have held... the second district court opinion seemed to hold a new statute unconstitutional; and you agree that that much of the holding is in error, and I guess the other side does, too.
Mitchell D. Franks: --Yes, Justice O'Connor.
Sandra Day O'Connor: Was anything left of its original finding that the older statute was unconstitutional because of the failure to provide a prompt post-termination hearing?
Mitchell D. Franks: No, Justice O'Connor. The older statute was enacted previously, was in 1977, general law, and by the amendment in 1981 that statute was vitiated and is no longer part of this case.
Sandra Day O'Connor: Well, and you think there was nothing left of the original district court holding in that regard?
Mitchell D. Franks: That's correct, Justice O'Connor.
Sandra Day O'Connor: And so all we have is the holding on the new statute--
Mitchell D. Franks: That is--
Sandra Day O'Connor: --And... and a finding that the employers failed to follow their own regulation requiring a speedy investigation, is that right?
Mitchell D. Franks: --I... I don't know that I would call it a speedy investigation. I believe the word is thorough investigation.
Sandra Day O'Connor: All right.
Mitchell D. Franks: On complete investigation.
Sandra Day O'Connor: Yeah.
Mitchell D. Franks: In fact, yes, that's correct. There... there is nothing left of the... of the original July 15, 1981 decision of the district court.
William H. Rehnquist: Your... your... your opponent agrees, does he not--
Mitchell D. Franks: Yes, sir.
William H. Rehnquist: --That that part of the judgment which declared the 1981 statute unconstitutional should be vacated.
Mitchell D. Franks: Yes, sir. They have conceded that. And--
William H. Rehnquist: So what is there left for us? Is it this issue of whether failure to follow regulations by a state official amounts to some sort of due process violation?
Mitchell D. Franks: --Well, the... the concession by the Appellee was not made, Justice Rehnquist, until the brief on the merits was filed. They defended the finding of the district court in their jurisdictional... in their jurisdictional brief or in their motion to oppose or dismiss. And it wasn't until we got to the brief on the merits that the Appellee conceded that the district court erred in finding the 1981 statute unconstitutional. However, the appeal was brought here properly under 1254(2), 28 U.S. Code 1252; and it carries with it the federal questions that are attendant to that appeal. This Court has jurisdiction over that issue and its attendant federal question issues, and that federal question issue that's remaining is the qualified good faith immunity of the governmental employees.
Byron R. White: With respect to a judgment for damages.
Mitchell D. Franks: With respect to a judgment for damages. Here--
Byron R. White: Which is outstanding.
Mitchell D. Franks: --Which is still outstanding, yes, sir. So we feel that the Court has the jurisdiction and can proceed on to address the issue that is remaining, and as we see it is the good faith immunity of the governmental officials and their action in terminating this insubordinate personnel. The facts are somewhat convoluted, but essentially the employee Scherer requested permission to work a second job with the Escambia County Sheriff's Department in Florida. That permission was erroneously granted when a letter that the captain had instructed his secretary not to mail was mailed. The employee immediately went out and bought a handgun and a uniform and proceeded work. A couple of weeks later the captain found that the employee was working, went back, found out that the letter had been inadvertently mailed; and he was instructed, both orally and in writing, to cease his second job because there was a potential for a conflict. He was a radio teletype operator, not a trooper. There were only six radio teletype operators in that particular troop in Pensacola, and they worked around the clock. The troopers in that particular... in the Highway Patrol were the beneficiaries of a collective bargaining agreement with the Police Benevolent Association by which troopers could work second jobs, and their employers, the Highway Patrol, were required to allow them to work. No such benefit was accorded to the radio teletype operators or to other administrative support personnel. But in any event, he continued his second job, the sergeant found out about it and advised him that he was in violation of the captain's orders to cease his second job. And the record is clear that there were numerous conferences on this point and that he refused to terminate his second job. He was stating I don't see any reason for a conflict, not that one did or did not exist... that's not the point... but whether he didn't see one. And as a result of his not seeing it, although he had been told to cease his job, refused to do so. This was reported up through channels. The sergeant recommended termination. His lieutenant--
John Paul Stevens: Mr. Franks, are you taking the position there was no violation of a constitutional right?
Mitchell D. Franks: --Yes, sir, that's right. We are taking that position. The court--
John Paul Stevens: You didn't raise that question in your jurisdictional provision.
Mitchell D. Franks: --Well, we... we submit that, Your Honor, that it comes part and parcel with the good faith... qualified good faith immunity that is addressed in our jurisdictional brief; that the court found that the law regarding the pre-termination of due process was not clearly established at the time.
John Paul Stevens: Well, but you're arguing that even as of today's law there was no violation, as I understand it.
Mitchell D. Franks: I would say under the facts of this case that's correct. And even going back to 1977 and looking at it at that point, he was advised of why he was in violation of the order; he was advised, both orally and in writing, as to why... what could happen to him. And his response was fire me, or I have been advised... and he put this in writing on the 18th of October, just shortly before the termination letter came down... that he was aware that he could be terminated, but he didn't see... he didn't see a conflict. The Appellee here is not arguing, the employee is not arguing that your facts are wrong, and here are the reasons why your facts are wrong, and this is why I should have a hearing. He concedes that. He says I don't agree with your policy. He is not arguing that the facts aren't true, that he is in violation of the dual employment status, but rather that the operational policy is not wild... is not wise. Now, he's not entitled to a hearing on the wisdom of the policy. He's entitled to a hearing on the legality of--
John Paul Stevens: Mr. Franks, let me ask you another question. In your view has there been any relevant change in the law since his termination?
Mitchell D. Franks: --I would say that the--
John Paul Stevens: The law is exactly the same today as it was then?
Mitchell D. Franks: --The Fifth Circuit's adoption of the... of the standard in Weisbrod where they held that the individual is entitled to notice and that he is entitled to respond to the notice of... of disciplinary action has been clearly established since the facts, the operative facts were developed in this case.
John Paul Stevens: But you argue there was not a violation of the law as construed in Weisbrod, or do you? What's your--
Mitchell D. Franks: Oh, no. The Weisbrod decision came out considerably after--
John Paul Stevens: --I understand it came later, but would you say if that had come out before that there would have been a constitutional violation?
Mitchell D. Franks: --Well, I'd say that the... there was no violation of... of his constitutional rights at any time as it regards his notice that he could be terminated for his failure to terminate his second job, whether he challenges the wisdom--
John Paul Stevens: In other words, you'd win even if Weisbrod had been decided before this all happened.
Mitchell D. Franks: --Yes, sir.
William H. Rehnquist: Well, what's your view as to the correctness of the Weisbrod decision under this Court's precedents?
Mitchell D. Franks: Well, we believe that the... it adopts or looks to Arnett v. Johnson as... as the guidance for the type of hearing. Some sort of hearing must be required. There is no requirement that you have a full-blown evidentiary pre-termination hearing, but rather that the individual be notified, be put on notice.
William H. Rehnquist: You... you concede or agree that Weisbrod is a correct statement of--
Mitchell D. Franks: Yes, sir. We lived with that, and we think that's the... the correct statement. But those aren't the facts that were... that are attendant here. The court went on, as I indicated, and they found that the state had adopted a general regulation which stated that there must be a thorough investigation. This is a... the Florida Highway Patrol is a paramilitary organization, and the facts reflect that there was a thorough investigation made of this incident, and that it was reported up through the channels. It went from Pensacola to Panama City where his captain was to Tallahassee where the Appellants, Colonel Beach and Mr. Davis, referred the matter to the legal office and the personnel office and were advised that the matter was... was proper and proceeded to terminate this insubordinate personnel. And the court found in analyzing 1983 that because the state, or in this case an agency of the state, had promulgated a regulation, that that was a sufficient basis under 1983 to award damages for a violation which... of... of state law and state regulation and not of any clearly established constitutional right. Now, the court originally found that there was a right that was there, but they retreated from that in a subsequent opinion in June of 1982 which was announced a couple of weeks before the Harlow. So admittedly, the district court did not have the wisdom of this Court in the Harlow decision, but... and Harlow did away with the subjective prong and looked to was the violation of the law clearly established, and was it clearly established constitutional law, not state law. Because you looked to the decision of Procunier v. Navarette, and there was an allegation in that case that prison officials had violated clearly established state law and regulations regarding the prison mailing regulations. And the Court specifically rejected that as a finding and found that the law had to be one that was clearly established and was under the Constitution. Now, to look at the law and in preparing for this case I came across an admonition of former Solicitor General and dean Irwin Griswold, and his statement to his students was look to the law; and when we look to the law, we find 1983, and it says that... that the individuals will be subject to the... within the jurisdiction thereof the deprivation of any rights, privileges or immunities secured by the Constitution and the laws. And it's our contention that the laws therein do not address state laws but rather federal laws, because this act, the Civil Rights Act of 1871, was designed and directed toward the abrogation of state... by states of the rights secured by the Constitution, particularly under the Fourteenth Amendment. What if a state adopted rules and regulations that go beyond those required to be clearly... as required by clearly established constitutional law? For example, if there is a jail inspection statute and there is no requirement that individuals go out and inspect jails except by the state law. If state A promulgates such a regulation and they go out and they violate it, then under the holding in this case and in the position urged by the Appellee, those state officials would be subject to a constitutional suit for damages, whereas--
William H. Rehnquist: --Mr. Franks, do you think the district court used the violation of state regulations by the state official as an element of the violation of constitutional rights finding, or simply as a denial of good faith immunity?
Mitchell D. Franks: --I think that he looked at it purely as a denial of good faith immunity. He found specifically, one, that the law was not clearly established at the time; and, two, he found that there was no malice involved. So he then looked to the reasonableness of the conduct of the officials and stated that because there was a clearly established state regulation or departmental regulation that their... this abrogated their shield of good faith immunity, and for that reason he would be subject to damages, not for the violation--
Sandra Day O'Connor: Well, then, what is left to base the damage award on?
Mitchell D. Franks: --We would argue... urge that there is nothing to base the damage on under the law that was announced in Harlow, and I see no need to retreat from--
Sandra Day O'Connor: What... what did the settlement agreement that the Appellee entered into say?
Mitchell D. Franks: --The settlement agreement was reached in his state career service proceeding whereby he was challenging the termination, and he was ordered reinstated with partial back pay. And the difference between full back pay and partial back pay was the difference between--
Sandra Day O'Connor: Did it mention the Section 1983 claims or the basis for them?
Mitchell D. Franks: --No. It was purely addressed under state career service regulations. If there are no other questions, I would like to reserve and turn over to the United States the argument that we consider today.
Warren E. Burger: Mr. Wilkins.
Richard G. Wilkins: Mr. Chief Justice, and may it please the Court: In defining the contours of the concept of qualified official immunity, this Court has attempted to balance two important but competing interests: the right of the individual to a remedy for a constitutional wrong against the necessity of protecting public officials from the hazards of litigation so as to prevent undue disruption in the conduct of public affairs. Beginning with the Court's first case in this area, in Pierson v. Ray, and continuing through its decision in Butz v. Ecnomou, it accommodated these interests by casting the qualified immunity defense as a wide-ranging inquiry into the subjective and objective good faith of the defendant public official. In Harlow, however, relying on the past experience of the federal courts... that is, in Harlow v. Fitzgerald... the Court recast the qualified immunity doctrine as a single, strictly legal inquiry that turned on one factor; that is, the Court extended immunity to public officials unless they violated clearly established rights of which a reasonable person would have known. The Court left little doubt why it was so dramatically restructuring the doctrine. It did so because the prior test had rarely resulted in the dismissal of claims prior to actual litigation because it turned on so many evidentiary variables. The new test was specifically designed to permit the disposition of immunity claims without the necessity of subjecting all public officials to discovery and trial on that issue. The question... the important question presented here that's left in this case at this point is whether or not the Court will remain with the position so recently taken in Harlow, or whether the qualified immunity test will once more evolve into a consideration of multiple factors, thereby robbing the test of the ability to settle litigation prior to actual discovery or trial. In this case, the Appellee entered federal district court with a claim that he'd been denied due process. Although the district court ultimately concluded that he was denied no clearly established due process right... although I would reply to one of the questions from the bench I think it's clear from the decision that he found that under current law the statute would be... would be violated now, or the Constitution had been violated in the current provisions, although in 1977 when he'd been dismissed it wasn't clearly established at that point. He nevertheless or the court nevertheless denied the Appellants qualified immunity, and it did so by citing what it called the totality of the circumstances. It said looking at all the facts in the record, I see that there was a violation of a regulatory provision here that renders their conduct unreasonable. Unreasonable conduct is not eligible for qualified immunity. That sort of analysis, of course, has some force. Indeed, it was the analysis that prevailed prior to Harlow. But it was specifically rejected by this Court in Harlow, and the Court made clear in that case that immunity would no longer depend upon an analysis of the totality of the circumstances, but rather whether or not there was allegation of clearly established rights.
John Paul Stevens: Counsel, would it be... would you make the same argument if the administrative regulation were perfectly clear, so that you could objectively say we don't have the problems we have in a subjective analysis or totality of the facts on summary judgment?
Richard G. Wilkins: Yes, we would, Justice Stevens, for one important question... for one important reason. It becomes extremely difficult, even when you say the regulation is very clear, to keep the analysis from going beyond the narrow bounds set in Harlow. And let me try and explain why. It is a little difficult. What... what the Court did in Harlow was not say that good faith is irrelevant to qualified immunity. The Court simply concluded that the benefits of making qualified immunity depend upon proof of absolute good faith, were simply not worth the cost of subjecting all public officials to discovery and trial on that issue. Now, the Appellee's argument here, and the only argument that really can be made in support of the approach below, is that a violation of a regulatory or statutory provision demonstrates the absence of good faith but does so in a way that doesn't incur the kinds of costs associated with the approach prior to Harlow. And so taking from your question, the argument would be well, when they're clear, isn't that really a cost-free means of determining the absence of good faith? We don't think that's so at all for this reason: when... when a public official violates a clearly established constitutional right, we think that it can be fairly assumed or it can be fairly... that conduct can be fairly described as lacking in good faith. After all, if it's a clearly described constitutional rule, the public official should be aware and should not transgress it. However, the same thing cannot be said with regarding to the vast majority of regulatory or statutory provisions. They're rarely as clearly established as constitutional provisions once they're announced by this Court. Indeed, in this case the Appellants had the advice of counsel before they dismissed the Appellee. The district court looking even at all the conduct in this case said that they acted in ultimate... in... in good faith. As we describe in our brief, even with clearly established sorts of provisions, there are all kinds of reasons why a public official might or might not comply with the provision in a given circumstance. Also, it's very difficult for a court to determine after the fact whether or not something really was clearly established in the heat of battle. It's easy for a judge or easier perhaps for a judge sitting back looking at a developed trial record to say well, from the words of this regulation you should have done A.
John Paul Stevens: Of course, that's true of even clearly constitutional rules.
Richard G. Wilkins: Exactly. But the Court has not imposed liability. Until we've determined that it's clearly established, we don't impose liability on those public officials. Another great danger in this area is that if we accept the argument that regulatory or statutory violations are relevant to the general good faith of public officials and hence to their qualified immunity, there's no reason not to expand the analysis beyond at that point at the behest of other plaintiffs. In other cases there might be commissions of common law torts or violation of professional codes of ethics.
Byron R. White: Well, would you ever deny qualified immunity in the 1983 based on clearly established state law?
Richard G. Wilkins: Well, we don't think that that would be appropriate. We think--
Byron R. White: Ever.
Richard G. Wilkins: --We don't think that would be appropriate ever.
Byron R. White: That... that is what happened in this case.
Richard G. Wilkins: That is what happened in this case.
Byron R. White: So you don't need to make the argument he just made.
Richard G. Wilkins: No, we don't, but we're making the argument because when it comes up in the federal context, of course we're not going to be talking about state law. In short, it is our position that to adopt the position of the court below will rapidly and quickly recreate all of the difficulties that this Court sought to avoid in Harlow. A court faced with an immunity claim will once more have to look at that particular violation to determine whether or not in the circumstances of that case that violation demonstrates a lack of good faith. It will not be a simple, objective test. It will turn the clock back past Harlow to the rule that prevailed under Wood v. Strickland and Imbler v. Pachtman, whereas this Court said the fate of a public official with qualified immunity depends upon the circumstances and motivations of his conduct as established by the evidence at trial. That is precisely the result that Harlow was designed to avoid. Thank you.
Warren E. Burger: Mr. Rogow.
Bruce S. Rogow: Mr. Chief Justice, and may it please the Court. I'm really at complete odds with opposing counsel in this case from the very beginning point of it. The first issue is whether or not the law was clearly established when Gregory Scherer was fired, as to whether or not he had some opportunity, some right to have an opportunity to be heard before he was terminated from public employment. The district court judge found that he did not have that right to some opportunity to be heard. The district court found that Scherer's right to due process was clearly established and that it had been violated by his termination without an opportunity to be heard. What happened in this case was was that Scherer did have a conflict with the people in his troop. His supervisor recommended a three-day suspension on October 12, 1977. Twelve days later Colonel Beach fired him without an opportunity for Scherer to be heard by Colonel Beach in any fashion... in terms of a written letter, in terms of an opportunity to appear. And from Fuentes v. Shevin, and Perry v. Sindermann, and Roth v. Board of Regents, and Arnett v. Kennedy, the law was clearly established that there should be some opportunity to be heard before the disciplinarian takes the disciplinary act. And the disciplinarian in this case was Colonel Beach. And the law that clearly established it beyond peradventure was Thurston v. Dekle, a 1976 Fifth Circuit case. When Mr. Franks was discussing the law, I think he misspoke, and he called Weisbrod v. Donigan Thurston v. Dekle. Thurston v. Dekle is the case in the Fifth Circuit that said the accommodation that must be struck must include some minimal opportunity to be heard by the determiner of the ultimate sanction before the sanction is imposed, and then, of course, there would be a post-termination hearing.
Sandra Day O'Connor: Mr. Rogow, how do we reach that question? What... if the district court vacated its holding concerning the 1977 statute and decided instead something in connection with the 1981 statute, which even you agree was error for it to do, what's left for it to base a damages award on at all?
Bruce S. Rogow: Justice O'Connor, first, the statutory question here, whether the statutes are constitutional or not, are not an issue in this case. I've conceded the district court was wrong in declaring unconstitutional the Civil Service statute. What we're focusing on here is whether or not the district court was right or wrong in its initial determination that Scherer was entitled to some opportunity to be heard--
Byron R. White: Under the federal Constitution.
Bruce S. Rogow: --Under the federal Constitution, yes, Justice White.
Byron R. White: But not under some state law.
Bruce S. Rogow: Absolutely not, Justice White. That is not the issue in this case at all. The question, the threshold question is was the constitutional right clearly established, and was Scherer deprived of that right. If he was, there is no need to reach Harlow v. Fitzgerald or anything else in this case. And what I am saying is given this Court's opinions and given Thurston v. Dekle, the district court's initial ruling, which was that the law was clearly established, was right. Then the district court retreated in light of Weisbrod v. Donigan. And Weisbrod v. Donigan is a page and a half decision that never even makes a mention of all of the due process cases. And the only thing I can say about Weisbrod v. Donigan is that it is an anomaly. It certainly was no basis for the district court to have retreated from its initial conclusion. And oddly, if one follows through on Thurston v. Dekle, and the district court did... there's a case called Glenn v. Neuman at 614 F. Second, a Fifth Circuit case in 1980, which says very clearly that Thurston v. Dekle sets forth the due process law in this circuit, which is some chance to be heard before you're fired. And Scherer--
William H. Rehnquist: But the district... the district court really didn't rely on this line of reasoning, did it, because if it had relied on this line of reasoning, I would think it wouldn't gotten into the violation of a state regulation.
Bruce S. Rogow: --It... when Weisbrod came out, five days later the district court then amended its original judgment and said well, Weisbrod says that the law wasn't clearly established, although Weisbrod really says very little, if anything, about that, and Weisbrod does not pay any attention to what all the due process development had been. I... all I can say is that the district court when Weisbrod came out felt obliged to follow the last word, even though the last word was not consistent with--
William H. Rehnquist: So you're... you're really arguing here for an alternative basis of upholding the judgment, not on the reasoning most recently advanced by the district court?
Bruce S. Rogow: --That's right. His original reason, that he was right in his original decision, and that there was no need for him to retreat. And all... if one takes a look at the law that he based his original decision on, I think that that law amply supports his... his judgment.
Byron R. White: Well, the other side of that coin, I take it, is that you don't defend his... his amended opinion.
Bruce S. Rogow: Oh, yes, I can reach that, too, and defend that also. I don't think we have to get to that if he was right in his initial opinion.
Byron R. White: Well, why don't you just... just... I take it you feel some uneasiness about defending his--
Bruce S. Rogow: Not at all, but I'd like to--
Byron R. White: --Well, why would you start about... on... why would you start out arguing an alternative ground?
Bruce S. Rogow: --Well, the alternative ground, of course, is the ground... if the law is clearly established, then Harlow presents no issue at all in the case.
Byron R. White: Well, I know, but the law he said was clearly established he ultimately said was state law.
Bruce S. Rogow: No, sir. That is not so. Justice White, what he said was was that the constitutional... I'm looking at page 71 and 71A of the joint... of the appendix in the jurisdictional statement... he said that Scherer's due process rights were violated, and the department's own orders were violated. And so the district court judge found that they should be bound, meaning the defendants, by their department's own orders and held accountable for not affording plaintiff due process. What happened here was this: the district court, once it decided it had--
William H. Rehnquist: What was that language... what was that language you just quoted? Was that at page 70 and 71?
Bruce S. Rogow: --70A and 71A of the jurisdictional statement appendix. That's a district order, the second, the amended district court judgment. They should be bound by their department's own orders and held accountable for not affording plaintiff due process. This is what occurred. When Weisbrod v. Donigan led the district court to think he had to retreat from his original decision, he then still found that there was a violation of the Constitution, but not clearly established constitutional law, because Weisbrod had taken him off that point. And so then he had to make a decision about damages. The damage decision in this case was not based on a violation of the state regulation. It was based upon a violation of constitutional law and a parallel regulation of the state which was also violated, and putting the two together, the judge felt that there was no impediment to awarding damages in the case. And Harlow is now raised because the government says that Harlow v. Fitzgerald holds that you can only award damages if you're dealing with a violation of clearly established constitutional law. Of course, our initial point is that yes, there was a clearly established--
Byron R. White: Yes, but the district judge finally said that "Although the issue of whether a clearly established constitutional right was violated must be resolved against the plaintiff, the defendants can take little comfort. " and then he goes on and says there's an alternative ground for... for denying qualified immunity. And they... and they say it's because General Order 43 clearly established an employee's right to a complete investigation.
Bruce S. Rogow: --The combination of General Order 43 and the constitutional right of due process.
Byron R. White: Well, that isn't what 67... I don't understand. I read on page 67A that he... he said that there was not a clearly established constitutional right.
Bruce S. Rogow: That's right. After Weisbrod v. Donigan. He--
Byron R. White: That was his ultimate... his ultimate holding was that qualified immunity is denied because there was a... a clearly established state law.
Bruce S. Rogow: --And due process was violated.
Byron R. White: And you don't define... you don't defend that part of it, do you?
Bruce S. Rogow: No. If that were the only basis for awarding damages, the violation of state law, that... that would be a different case from this one. But when you look at 70 and 71A, he melds them both together. The difficulty is Harlow talks about clearly established constitutional rights being violated. There's no dispute between the government and us that if that is so, then Scherer is entitled to damages.
Byron R. White: Of course, what we're reviewing here is a judgment of the court of appeals.
Bruce S. Rogow: Which per curiam affirmed the decision below.
Byron R. White: Right. And it... and it... it affirmed per curiam precisely what I just read you out of the district court's opinion.
Bruce S. Rogow: Yes.
Byron R. White: Now, if we... if that is not defensible, it seems to me the proper recourse would be to remand to the court of appeals and disabuse them of their... of an erroneous view of the law.
Bruce S. Rogow: Well, I... the alternative ground, which is clear from this record and easily--
Byron R. White: Well, we'll let them decide that.
Bruce S. Rogow: --That the case... the case has had a long history already, and since the law was so clearly established, it seems to us there is no problem in this Court taking the original judgment that the district court found and saying he was right in that original judgment, and that supports the decision of the court of appeals. The Harlow problem that's raised by the other side is they neglect at all to make the distinction between discretionary and nondiscretionary duties. Even if... even if Harlow is implicated in this case, this case doesn't run afoul of Harlow. Harlow says that when a public official is performing a discretionary duty, then if he or she violates clearly established law, then they're liable in damages. This... in this case we're dealing with a nondiscretionary, mandatory duty. Colonel Beach had a mandatory duty to give Scherer, under the state regulation, an opportunity to be heard; and he didn't do that under the state regulation. So we're dealing here with a nondiscretionary duty, and once the concern about discretionary/nondiscretionary functions is removed from the case, then the question becomes whether or not the official was acting in good faith and whether or not damages can be awarded on a summary judgment basis. The Court had two concerns in Harlow. Once is if a defendant... if a public official has to choose between A and B, the public official should not worry about the potential of a damage action being filed. The clearly established constitutional right principle would mean that in choosing between A and B, if he violated that clearly established principle, there would be damages. But if it weren't clearly established, then he shouldn't have to worry about the choice. When you're dealing with a nondiscretionary duty as in this situation, then we come to whether or not the official's conduct was objectively reasonable. And objective reasonableness... and this is what the district court did in this case... it measured objective reasonableness by a violation of a state regulation--
William H. Rehnquist: Did Harlow... did Harlow limit itself to the immunity of officers performing discretionary functions?
Bruce S. Rogow: --It certainly did in its language. It speaks very clearly and distinctly about--
William H. Rehnquist: In... in its statement of the rule did it?
Bruce S. Rogow: --When... yes. And I've set it out in the brief. When an official is performing a discretionary function, then generally he or she should not be held liable in damages. And... and what we've got in this situation is a nondiscretionary function. And one of the other concerns about Harlow was summary judgment. Can you decide a case on summary judgment, or will you get tied up in trying these cases on good faith/bad faith? If one looks at this situation, Beach's violation of the regulation is clear. It's an objective criteria. So the violation of the regulation and the due process violation, albeit it not clearly established the way the district judge came to his second conclusion, allows there to be a decision on immunity without having to have a full trial. So we have a violation of an established constitutional principle and a violation of a regulation which parallels that principle. And that then allows a district court to award damages without the need for a trial on whether or not the official was acting in good faith or bad faith. And that's why Harlow is really no problem. And, Justice White, I can defend this case on the Harlow grounds. The Solicitor General nor the state have made the distinction between discretionary/nondiscretionary duties. They lump them all together. That's not what Harlow talks about. And in terms of the focus being on objective criteria, the violation of the regulation here, along with the violation of the Constitution, meets the objective criteria... objective criteria test and does not require the case to be tried. It can be determined on summary judgment in--
William H. Rehnquist: What... what is your argument here as to why this particular defendant was exercising a nondiscretionary function?
Bruce S. Rogow: --Because defendant Beach under the regulation had to, once informed of a violation of... of a departmental order, had to order a complete investigation which will include a statement from the defendant. That's General Order 43. It's in the jurisdictional statement appendix at page 69A. And it was mandatory. He shall, Colonel Beach, upon receiving a report of a violation, order a complete investigation. He did not do that.
William H. Rehnquist: So you say that if a person's function is claimed to be nondiscretionary, it is open to argument by the, plaintiff in a case like this, that a state regulation made the duty mandatory. And presumably the federal judge in the civil rights action will decide whether or not it was discretionary then.
Bruce S. Rogow: Yes, yes. And in a situation like--
William H. Rehnquist: I doubt that Harlow ever intended that.
Bruce S. Rogow: --Harlow focused on discretionary/nondiscretionary, which must have some content, and here we're dealing with mandatory language. This could have been the basis of a mandamus action. He shall do something.
William H. Rehnquist: Yeah, but then the next case you're going to get is one where the language isn't that clear, and you'll be arguing in the 1983 action well, it doesn't really appear mandatory, but it's open to that construction. And, you know, then that will be the next step in this line, which I think would erode Harlow.
Bruce S. Rogow: Well, I... we're dealing here with... with one step... I like to take them one step at a time... and I think that when you're dealing with a regulation that parallels the constitutional right... and that's exactly what this regulation does; in fact, it looks like it was passed to enact really the meaning of Thurston v. Dekle. I think in that situation there is no need for a district court to make further inquiry. Whether or not in some subsequent case that might be, that's what the Solicitor General suggests in this parade of horribles about what may happen in the future; but my concern is this case and the constitutional due process right. And Harlow certainly did not preclude the use of a regulation or statutory violation when it's clear and mandatory as being a portion of the basis for making the decision. The essential basis, of course, is the violation of the Constitution which existed in this case. There is another problem in this case, and that's a jurisdictional one. Under 28 U.S.C. Section 1254(2), this Court's jurisdiction to review a case on appeal is limited to those federal questions presented in the declaring unconstitutional of the state statute by the federal court. This Harlow federal question presented is... is clearly not... is clearly not one that arises through the decision of the court of appeals that the state statute was unconstitutional. Once I've conceded that portion of the case, that the court should not have reached that, what is left? Only possibly an issue that should be decided on certiorari. There was no petition for certiorari sought in this case. 1254(2) limits the federal questions presented not to the question that's been presented, a subsidiary question presented in this case. And so our position is is that the Court should not exercise its jurisdiction to reach the Harlow problem in the case. I call it a problem only because the other side has called it a problem. But on those three grounds, then, we think that the decision below regarding to damages should be affirmed: a) that the law was clearly established and therefore there's no need to get into any question of whether or not there is an immunity problem in the case; b) if the law was not clearly established, Harlow is no problem because Harlow focuses on a discretionary duty, not a nondiscretionary duty, and Harlow focuses on deciding these cases on summary judgment, and this could have been decided on summary judgment because Colonel Beach violated a nondiscretionary duty, and he also violated the Constitution; and finally, that there's no need to exercise the Court's jurisdiction since under 1254(2) it's limited, and we've conceded the point dealing with the declaring unconstitutional of the state statute. So for those reasons we suggest the decision below should be affirmed.
Warren E. Burger: Do you have anything further? You have four minutes remaining, Mr. Franks.
Mitchell D. Franks: Thank you, sir. Addressing the last point first, even assuming... and we're not conceding that it's correct... that this case was prominently brought here under 1254(2), this Court has the authority to consider the other questions that came along with the 1254 as a request for a writ of certiorari under 2103, 28 U.S. Code 2103, and may consider that point on a writ of certiorari. We would urge the Court that if they do so to consider addressing the... the writ on the basis of the conflict between the various circuits on the point of whether or not a violation of state or regulatory law--
Byron R. White: Well, there was an affirmed judgment below that... that accepted the district court's declaration of unconstitutionality.
Mitchell D. Franks: --Yes, sir, that's correct.
Byron R. White: So the case had to get here before you could get that vacated.
Mitchell D. Franks: Yes, sir, that's correct.
Byron R. White: And it was properly here on appeal, I take it, is what you first argued.
Mitchell D. Franks: That's our first argument, and everything that came with it is likewise here on appeal and can be considered.
Byron R. White: Just because he concedes that you ought to win on that point doesn't mean that it's not appellate jurisdiction.
Mitchell D. Franks: We would argue that the dismissal or termination of an employee is the ultimate in a... the exercise of discretionary function. What he's saying is that this matter which had been completely investigated and had been forwarded up through the chain of command and which had been looked at by the personnel office and by the legal office, that those officials had no discretion but to order a second or an additional complete investigation when the facts were... were clear. In the letter that was sent forward, the employee Scherer stated, "This writer had talked with W.A. Clark on two different occasions in the past three weeks with reference to my outside employment as a deputy sheriff of the Escambia County Sheriff's Department. " "I have advised Sergeant Clark that I feel there is no reason for me to resign my position with him. " "I feel it in no way interferes with my job as a radio teletype operator with the Florida Highway Patrol. " On cross examination Scherer was asked, "Now, isn't it true that on October the 3rd Sergeant Clark informed you that you were working with the auxiliary as an auxiliary sheriff; that was contrary to the captain's instructions? " "They told me"... Answer: "They told me I would have to quit or they would fire me. " "On October the 3rd is that what he told you? " "Yes". "What was your response"? "I told him to fire me. " That's in the record. Clearly, these officials were exercising their discretionary function. This insubordinate employee who didn't like the answer he got, but nevertheless had notice of possible termination, and was afforded the opportunity and availed himself of that opportunity to state his side of the case. He didn't agree with the policy and not the facts regarding--
Thurgood Marshall: Are you saying that was a hearing?
Mitchell D. Franks: --The Fifth Circuit, Justice Marshall, has held that that is a form of hearing which meets the due process.
Thurgood Marshall: My question is do you consider that a hearing?
Mitchell D. Franks: Yes, sir, I do. He was advised of the... of the potential of what could happen to him if he persisted in his refusal to quit his second job, and he nevertheless persisted. He was given an opportunity to explain, and he did so.
Warren E. Burger: Thank you, gentlemen. The case is submitted.
Speaker: The Honorable Court is now adjourned until tomorrow at 10:00.


Warren E. Burger: We will hear arguments next in Securities Industry Association against the Board of Governors of the Federal Reserve. Mr. Weidner, you may proceed whenever you are ready.
James B. Weidner: Mr. Chief Justice, may it please the Court. This case involves an admittedly unprecedented order of the Federal Reserve Board, reversing 50 years of administrative understanding, and industry understanding permitting bank affiliates, for the first time in half a century--
Speaker: How can it be unprecedented if you reverse something?
James B. Weidner: --Unprecedented in terms of reversing the understanding, but not unprecedented in terms of reversing a prior administrative ruling. Involved are two statutes fundamental to the governing of the banking industry, and financial services industry in this country, the Bank Holding Company Act and the Glass-Steagall Act. In this case, directly contrary to congressional intent, in our view, the Board of Governors, affirmed by the Second Circuit, turned two narrow exceptions in the statutes into broad authorizations instead. We believe that the decision below should be reversed for two reasons. First, the Bank Holding Company Act requires that any bank affiliate, which is not a bank, be involved in a business that is so closely related to banking as to be a proper incident thereto. That has been interpreted and requires that that business be closely related in the sense of being... of having a direct and significant connection to banking, and not similar... not simply being related to it in the sense of being functionally similar, which is what the Board found. Secondly, we believe that the Glass-Steagall Act prevents any affiliation of a bank with an entity that is principally engaged in the public securities business, and that is the business in which the affiliate here involved is here involved. Briefly, the facts are these: In early 1982, the BankAmerica Corporation, owner of BankAmerica, one of the largest banks in the world, applied to the Federal Reserve Board for permission to acquire the Charles Schwab Corporation. Schwab is the owner of one of the largest, if not the largest discount brokers in the United States. The SIA, our client, opposed the application and requested a hearing. The Federal Reserve Board ordered a hearing before an Administrative Law Judge. The Law Judge ruled in favor of the proposed acquisition. The Second Circuit affirmed. If I may, let me first address the Bank Holding Company Act. That Act was passed in 1956 to further the basic congressional purpose of separating banking from commerce in general. By that Act, Congress said that banks will not evade that separation through the structure of a bank holding company, and said that a bank holding company could not acquire a non-banking subsidiary unless... a very narrow exception... that subsidiary's business was so closely related to the business of banking to be a proper incident thereto. The Board of Governors interpreted that statute for the next decade as requiring a direct and significant connection between the proposed activity of the subsidiary and the activity of the bank holding company itself. In 1969, the Board asked Congress to amend the statute to loosen up the standard. They found it to be too restrictive. What they proposed was that the closely related standard be changed to read "functionally related", and that the phase "the business of" be deleted from the phrase "closely related to the business of banking. " The House and the Senate both passed bills, which in fact did substitute "functionally related" for "closely related", but there were significant differences between those bills. One of the most significant differences was that the House said: We will put functionally related in, but we are also going to have what became known as a laundry list of prohibited activities that in no case will be deemed closely related to banking. The result was a conference committee, of course, and what can only be described as a legislative Donnybrook. Clearly there was a battle in the Conference Committee as to which view would prevail. In fact, the compromise was reached only after a virtual stalemate. The obvious deal that was cut was this: The Conference agreed to leave out "the business of" from the "business of banking", but in return for that, and in return for the House members deleting their laundry list of prohibited activities, the proposed functionally related test was out and the original "closely related" language was left in the statute. A review of the legislative history makes clear... It is a little bit difficult to discern all of the ramifications of what happened, but one thing, I believe, is absolutely clear from the legislative history, and that is that Congress did not substitute "functionally related" for "closely related" in the statute. The Congressional Report... The Conference Committee Report makes clear that the Board was given greater flexibility in the sense that by deleting "the business of" from the statute, no longer did a connection a connection have to be shown between the specific holding company and the proposed activity, but that a direct and significant connection continued to be required between banking in general and the proposed activity. That is the connection that could not be found here. The specific business that is at issue is execution of securities trade for the public. That is a business that banks have not been in for the last 50 years. It was not on the basis that banks generally have been in the business that the Board found, or could find this acquisition to be permissible. Instead, the Board found it permissible because, in its view, the activities involved here were functionally similar to other activities performed by banks, so that at least some banks were well-equipped to perform them. I suggest what has happened is that the Board... This is not a mere matter of interpretation. The Board has in fact put back in the statute exactly the language that the Congress refused to accept. We have a Board, in effect, amendment of statute directly contrary to legislative intent. It is not simply that it is contrary to legislative intent, but I suggest, if anything, "functionally similar" is even broader than "functionally related". For example, if all that is necessary to be shown is that the bank, or at least some banks have the capacity to perform some activity and, therefore, it is closely related. Banks have the capacity and do execute wire transfers. Then why couldn't it be argued that they should be able to go into the telecommunications business, and that is not a farfetched example. The American Bankers Association... this is in our brief... has in fact asked the Federal Reserve Board to approve, as a bank affiliate activity, telecommunication services. It seems to me that the next thing we are going to hear is that because banks have dispensed toaster and calculators to get depositors to put money in the bank, then they can go into the retail toaster business. In a more serious vein, I really do believe that this is virtually a limitless standard. The Board has pointed to this Court's decision in what we have called ICI-2 as authority for its standard. But the fact it, the activity involved there, investment advice to a closed and mutual fund, was an activity that banks had done for 50 years. Indeed, this Court specifically said that in looking at future applications, the Board was to assure that the bank affiliate did not exceed bank's traditional fiduciary functions. In this case, however, there is no doubt that securities execution is not a traditional banking function.
Speaker: Although it is for customers.
James B. Weidner: I am sorry.
Speaker: It certainly is for customers of the bank.
James B. Weidner: Securities execution?
Speaker: Sure.
James B. Weidner: No, Justice O'Connor, I don't believe that it is. To the extent that banks have had an involvement in "brokerage" over the years, their involvement has simply been to accommodate orders of bank customers to sell stock or securities. But in doing that, they have uniformly forwarded the orders to brokers for execution. There is a significant difference here because a broker who executes a trade puts his net capital on the line every time he does that. In other words, whether it is one time a day or 100,000 times a day, each time that trade executed that broker has got to come up with the securities or cash to make good in the trade. If his customer doesn't have it, the broker has got to come up with the money or the securities. It is for that reason... Turning to Glass-Steagall just for a moment, because I think it does respond to your question, although it is not in the Bank Holding Company Act. The Glass-Steagall Act was amended, and I will return to this, to limit bank securities activities to purchasing and selling, without recourse upon the order and for the account of customers. The question is what does "without recourse" mean? This Court addressed... In its technical sense, it means without endorsement or guarantee. But this Court addressed that specific requirement in the Awotin case, and expressly flatly held that without recourse, in this context, in this statute, its predecessor, is not limited solely to endorsement and guarantee because it would make any sense in terms of trading and securities, which are not typically endorsed or guaranteed. Certainly stock is not endorsed or guaranteed. It said it had a broader meaning. Then the question is, what is the analogous liability that a broker might face to a third party, if it is not endorsement or guarantee? The analogous liability is exactly the risk of customer fails. The broker has got to come up with the securities or stock to the third person if his customer doesn't. It is exactly that kind of liability which we believe Congress expressly legislated against in the Glass-Steagall Act. The way that a bank or a broker can accomplish avoiding that liability, and many brokers do, is acting as a forwarding broker, that is to say, the broker gets a securities order, forwards it to an executing broker on a so-called fully disclosed basis... that is disclosing the name of the customer to the executing broker... who then deals directly with the customer, account statements, confirmations, and the like. There is no recourse against the bank. In fact, I should point out... this is something that has happened since our reply brief was filed on the same day... the Comptroller of Currency, in a proposed rulemaking reported at 49 Federal Register 15089, has proposed regulations to deal with bank securities activities. One of the things that the Comptroller said in that regulation a week ago was that no bank will conduct a securities business in-house, except on a fully disclosed basis, that is to say, forwarding the orders to brokers for execution, which is what banks have done on an incidental accommodation basis for years, and that, I suggest, is what the Comptroller understands "without recourse" means in the statute. To return to where we started, no, I don't believe that banks have been in the business of executing securities orders for the public at any point until they were allowed to be affiliated with Schwab only two years ago.
Speaker: Are you saying under the new proposed regulation that the activity considered here would be made invalid?
James B. Weidner: It could be performed, but only in a separate subsidiary. The bank itself could not perform it, that is correct. If I may turn--
Speaker: This case involves a separate subsidiary, does it not?
James B. Weidner: --This clearly does involve a separate subsidiary, that is right, but in terms of viewing--
Speaker: So the new regulation would not counteract this particular situation?
James B. Weidner: --No, it would not, and I didn't mean to imply that it would. If I did, I certainly didn't mean to. It had direct relevance because a question, turning now to the Glass-Steagall Act, is exactly what did Congress mean to prohibit in that Act. In our view, without going to the background of the Glass-Steagall Act, of course, it was a reaction to the crash of '29 and the economic chaos and bank failures that followed. In our view, Congress meant to prevent banks from doing certain securities activities entirely, and from affiliating with entities who are principally in those securities activities. The question, then, is what were banks prevented from doing and how does that relate to their affiliates. Perhaps I could step back just brief to 1927, because the story really start there with the McFadden Act. In 1927, Congress passed the McFadden Act, which for the first time authorized banks to deal in securities. Significantly, it authorized banks to deal only in investment securities, that is; low risk debt securities. At no point had Congress authorized banks to deal in stock. The only thing that banks were doing at that time was, on an informal basis, accommodating customers who may have inherited some stock, or whatever, by passing along those orders to a broker for execution. By 1933, after the chaos had occurred, Congress, in effect, realized that it had made a mistake, and in the Glass-Steagall Act withdrew the securities powers that it had granted in the McFadden Act of 1927, and said that banks shall not deal in investment securities, except to the limited extent of purchasing and selling, without recourse, upon the order and for the account of their customers. I won't return to "without recourse", but it seems to us from the face of it that it is clear that that language meant that a customer... that a bank was merely to pass a customer's orders along for execution. But there really can't be much doubt about what was done, in our view, because immediately after the Glass-Steagall Act passed, the Comptroller of Currency, who is responsible, of course, for all national banks, said: Look, wait a minute. I think that you may have gone too far, because if you read that proviso, the exception to dealing literally, it says that a bank may accommodate only orders in investment securities, not stock, and said the Comptroller, that is pretty important in rural areas where a bank may be the only financial institution in miles. There isn't a brokerage house on the corner. Won't you clarify your intent, in effect, he said, and make it clear that banks can continue to accommodate on this informal basis orders and stock, as well. He proposed legislation. In 1934, both the House and Senate passed bills that incorporated it, but it floundered on the last day of the session. The Comptroller then issued a rulemaking interpretation that said, in effect, in my view Congress didn't mean to prevent accommodating orders on stock. I am going to permit it and return to Congress, in effect, next year to get it expressly permitted. But, said the Comptroller in that ruling, this does not mean banks may do a brokerage business. That was in July 1934. In August, I believe it was, or September 1934, the Federal Reserve Board ruled similarly and specifically quoted the Comptroller's language. In 1934, the Comptroller did return to Congress, testified that in his view this was necessary to expand this exception, and made clear that it was only on an accommodation basis, and convinced Congress to expand the statute to include purchasing and selling, without recourse, on the orders, securities and stock. Under this Court's precedent, in Zuber against Allen, it seems to me that that history itself should be controlling, if there were ambiguity, we don't think there is, as to what Congress intended in the exception in Section 16 for accommodating stock orders. The Comptroller proposed the legislation. He testified directly before the Congressional Committees that were considering it, what his view was, and Congress enacted what he proposed. The respondents say, wait a minute, in 1933, the Congressional Reports that accompanied the initial Glass-Steagall Act said, "Banks shall be permitted, to the same extent heretofore, to deal in securities. " therefore that shows that they were permitted to be public stockbrokers. But let's look at what happened. Banks had not been permitted prior to 1933 to broker stock, or prior to any date to broker stock. They had been permitted only to deal in investment securities. The Comptroller made that clear, he made clear what he had in mind, that is an accommodation provision limitation during 1934 and 1935. The 35 Amendment that added stock... expanded the exception to add stock, was specifically characterized as a technical amendment intended to make no substantive changes in the law. If respondents are correct that what Congress intended to do was to permit banks to be public stock brokers, it would necessarily mean that in 1935, when Congress passed a technical, non-substantive amendment to a statute, the Glass-Steagall Act, otherwise meant broadly to prohibit securities activities for banks, it authorized, for the only time in 200 years, banks to become public stockbrokers. I suggest that simply doesn't make common sense, let alone legislative history sense.
Speaker: I thought that we were dealing here with a bank affiliate, not the bank itself. I also thought that the prohibition in Section 16, on its face, applied to banks and not the affiliates.
James B. Weidner: Justice O'Connor, we clearly are dealing with a bank affiliate, and let me turn to Section 20, which deals specifically with them. Let me say this that in our view the structure and the history of the Glass-Steagall make it clear that what Congress had in mind was, given... remember that when this was passed, given the crash and the 2,000 banks that failed in the interim, to get banks out of the securities business, and it did it by prohibiting certain activities entirely for banks, and prohibiting them principally for their affiliates. There is no history, although this is in effect what we believe the Board and the Second Circuit have held, no history, legislative or statutory, that suggests that the Board has discretion to authorize bank affiliates to engage principally in what banks can't engage in at all. That we believe is what has happened. I might contrast Section 20 with Section 32 that has to do with interlocks. Section 20 has to do with bank affiliations. Section 32 did vest the Board with exemptive authority over certain circumstances. Let me turn to Section 20. As I said, that statute... that section has to do with bank affiliations, part of the Glass-Steagall Act, and provides that a bank may not be affiliated with any entity "engaged principally in the issue, floatation, underwriting, public sale, distribution. " and so on. I will come back to the language. In our view, that language covers the waterfront in terms of activities, including public brokerage. It says, "public sale". It is a remedial statute. The statute should be construed broadly, and indeed every time this Court has assessed the Glass-Steagall Act, it has said that its provisions are indeed to be read as remedial provisions, broadly. What the government... the respondents say is, now wait, public brokerage wasn't covered by that because... Let me turn to the Second Circuit first. The Second Circuit said, it is not covered because the terms apply only to principal activities, as opposed to agency activities. Underwriting, for example, they said, is a principal activity, and so on, so brokerage is out. But the fact is that underwriting certainly encompasses, and the Board doesn't dispute, best effort underwriting. That is an agency, not a principal activity. And there is no reason why a public sale couldn't equally well be an agency as well as a principal activity. The Board, apparently recognizing the problem in the Second Circuit opinion in that respect, doesn't support it here. They have a different view. Their view is that those terms concern themselves only with new issues of stock or the introduction of large blocks of stock to the public. In other words, public offerings. The problem with that interpretation is what they are saying in essence is that it covers only primary distributions of stock... the first time stock is made available to the public. If that is the case, they have just eliminated half of the securities industry from the statute. The entire secondary market where stocks are traded once they are out in public hands. If that is the case, and that is necessarily what they are saying, that means not only could bank affiliates principally be stockbrokers, but they could be dealers, that is, trading for their own account. They can even be market-makers. Even the Federal Reserve Board has said in its amended Reg Y that dealing is not a permitted activity. One further thing, I think, bears upon Section 20 to contrast it with Section 32, the interlock provision, which as of 1935 used the same phrase as Section 20. Its predecessor language... the predecessor in '32 as enacted in 1933... said, purchasing, selling, and negotiating, not issuance, floatation, and so on. That amendment was also a technical, non-substantive amendment. If, as the Board says, the statutory phrase now means only underwriting, then necessarily Section 32 must have meant the same thing in 1933 when it was initially passed. Then the statute falls apart, because Section 16, which we talked about before relating to agency activities, uses the terms "purchasing and selling", clearly relating to agency activity. In other words, I think if you look at the statute as a whole, there is only one construction that makes sense and it makes sense in terms of the general congressional intent as well, that is, and if I may let me read Section 20 in its entirety, "May not affiliate with an entity principally engaged in the issue, floatation, underwriting, public sale, or distribution at wholesale or retail, or through syndicate participation of stocks, bonds, debentures, notes, or other securities. " I suggest that what Congress had in mind was covering the waterfront. It meant to prevent principal engaging at all activities, whether they are principal or agent, in all markets, whether primary or secondary, and in all securities, whether they are equity or debt. I think any other construction of that statutory phrase throws this language out of kilter and, I respectfully suggest, congressional intent out the window. In summary, we believe that the Federal Reserve Board, affirmed by the Second Circuit, was incorrect. Schwab is unquestionably principally engaged in the execution of securities trades for the public, the public securities brokerage business. They have reached that conclusion by turning very narrow exceptions, "closely related" in the Bank Holding Company Act, "purchase and sale" in the Glass-Steagall Act, into broad authorizations instead, never intended by Congress. In effect, they are trying to turn the clock back to 1927, when Congress had permitted... even further, to permit dealings in stock. I suggest that if the legislative clock is to be turned back, that is a policy decision of enormous consequences that should be addressed by Congress only, and in fact Congress is right now looking in an omnibus fashion to the financial services industry to see if and, if so, how that industry should be restructured. I believe the decision below should be reversed.
Warren E. Burger: Mr. Phillips.
Carter G. Phillips: Mr. Chief Justice, and may it please the Court. At issue in this case is the Federal Reserve Board's determination, made on the basis of an exhaustive administrative record, that the business of executing securities transactions on exchanges is closely related to banking as to be a proper incident thereto, and that such brokerage activities are not prohibited to bank holding companies or their subsidiaries by the Glass-Steagall Act. In that regard, it is probably worthwhile to emphasize once more, as Justice O'Connor did with her question, to remember that this case concerns only a bank holding company and its subsidiary. It does not involve the bank and, therefore, precisely what banks are permitted to do, and have engaged in, in the past is not directly controlling on the outcome of this case. Contrary to petitioner's general assertion--
Speaker: Is that the same inquiry under the Bank Holding Company Act?
Carter G. Phillips: --Is what, I am sorry, I don't understand.
Speaker: What did you just say?
Carter G. Phillips: What I am suggesting is that the question of what a bank may do under Section 16 does not control what a bank holding company or its subsidiaries can do under Section 20. There is very different language.
Speaker: It is not supposed to engage in non-banking activities, is it?
Carter G. Phillips: Under the Bank... Yes, it... well, it has to be an activity that is closely related to banking, but it doesn't have to be an activity that is banking. Indeed, this Court said as much in the ICI II decision.
Speaker: You think that it doesn't have to be an activity that a bank ever engaged in?
Carter G. Phillips: It may not have to be an activity that it is precisely engaged in, no. But I think that if it is so closely related to banking that a bank would be perfectly well suited to engage in that form of activity that that would be fine. Especially if, as in this case, the reason why banks are not engaged in that activity are not so much dependent on the law as they are on the financial events that gave rise to the problem in the first instance. I think that it is important to understand what the Board did here to place it in context. In the 1970s, the Securities and Exchange Commission unfixed the fees that brokers charge... can charge on their... for executing transactions on the stock exchanges. This pro-consumer decision led directly to the creation a new form of financial opportunity from this discount brokerage, a firm such as Schwab emerged. Prior to that time, it was generally not possible to offer fewer services for a lesser fee. In the early 1980s, BankAmerica, realizing what an opportunity this presented, made an application to the Federal Reserve Board to acquire the Charles Schwab Discount Brokerage firm. The Board published notice of the proposed acquisition and solicited comments from the public. You may regard it as probably worthwhile, and this will also reemphasize again that this case involves bank holding companies. It is important to note that the Securities and Exchange Commission expressly passed judgment on this particular issue, and did not oppose the acquisition of Schwab by BankAmerica's Holding Company.
Speaker: Neither did the Comptroller.
Carter G. Phillips: The Comptroller did not oppose either. In fact, the Comptroller very vigorously affirmed that decision, frankly. It is common for the Board to issue a 4(c)(8) order based solely on these sorts of written comment, but in this case they went the extra step and set the matter down for an extensive hearing in order to examine this new form of commercial opportunity. First the Administrative Law Judge, and then the Board, thoroughly analyzed the history of brokerage activities undertaken by banks, compared them with the specific business of Schwab. Both the Administrative Law Judge and the Board invoked the standards that had been applied for the last ten years regarding what is closely related to business, those standards coming in the D.C. Circuit's 1975 Courier case. Both found that banks generally provide services that are operationally and functionally so similar to the proposed services as to equip them particularly well to provide that service. Both the Administrative Law Judge and the Board then engaged in the proper incident analysis and concluded that the public benefits greatly outweighed any detriments that might arise. It is our view that procedurally and substantively, the Board's action were precisely what Congress envisioned when it rejected the House's attempt to narrowly constrain the Board's discretion in dealing with the what is closely related to banking by bank holding companies. That determination is left to the experience and the expertise of the Federal Reserve Board, and it has made a judgment in this case as to what businesses can properly be integrated under the umbrella of a bank holding company. This Court has consistently said that it would respect that kind of judgment made in this complex financial arena. Petitioners challenge that the Board's decision is based solely on a semantics fortuity. Congress, in 1970, did reject a mere functional relationship test. This Court has already recognized that the purpose of that change is very vague, and it is not clear precisely what Congress intended by its actions in 1970. From this, petitioner infers that the Board is precluded from ever analyzing these problems in terms of functional relationships. The problem with the argument is that the decision in this case did not turn on mere functional relationship. The Board found that banks have traditionally purchased and sold securities as agent for their customers. In over-the-counter markets, the Board found that banks oftentimes perform the entire function of the purchase and sale of securities.
Speaker: Do you think that they have often acted exactly like a broker?
Carter G. Phillips: That is precisely what the finding of the Administrative Law Judge were, that they have the same computer operations, they have the same training personnel, and they engage in exactly the same kinds of judgments.
Speaker: What about with the same legal effect?
Carter G. Phillips: In terms of... In terms of effecting a purchase and sale of security, there is no difference. With regard to the "without recourse" issue that the petitioner places so much emphasis on, it seems to us quite clear that the Congress did not intent to preclude banks from transmitting brokerage exchange... brokerage transactions in a way that they had to designate who the customer was in order to avoid liability of the bank. As far as we know, banks have historically collected large quantities of orders and just shipped them off, without setting out exactly who the customers are.
Speaker: You don't think they have always... You don't think that they have always submitted them to a broker?
Carter G. Phillips: On the exchanges, they have always transmitted them to a broker.
Speaker: They won't have to now, will they?
Carter G. Phillips: No, Your Honor, they won't have to now.
Speaker: That is somewhat of a change, isn't it?
Carter G. Phillips: It is true that it is somewhat of a change with regard to the exchanges, but the basic... but the bottom-line is that it is still an activity. This Court's inquiry should be limited to the issue of whether or not the Board has stated a connection between the proposed activity and what banks traditionally do, and whether it is rational to conclude that that connection is a close one.
Speaker: I thought our inquiry would be whether what the Board did is contrary to what Congress intended to do by the relevant statutes.
Carter G. Phillips: Of course, that is the ultimate inquiry, but Congress... Congress delegated to the Board discretion to make judgments, to employ its expertise in deciding what activities are closely related to banking.
Speaker: You wouldn't suggest that the Board could authorize a bank to engage in underwriting, would you?
Carter G. Phillips: No, Your Honor, of course, not.
Speaker: The argument right here is that Congress didn't intend a bank to engage in brokering.
Carter G. Phillips: But there is not one word in the legislative history to suggest that Congress had any concern about mere brokerage activities by banks. The entire debates in 1933 and again in 1956 relate to the problems of market, market collapse of large issues of securities. There is no reference in any of that history to the mere execution of a brokerage transaction, and there is no reason for any concern, because banks did not fail in the late 1920s and 1930s... in the early 1930s because they executed transactions on securities exchanges. Banks failed because they engaged in investment banking practices where purchased large quantities of securities and those securities went bad. That is precisely what Congress prohibited, not anything related to the simple execution of transactions. Indeed, Congress expressly allows banks, under Section 16, to purchase and sell securities as agents for their customers. Under the Glass-Steagall Act, it seems to us that, notwithstanding petitioner's repeated reliance on Section 16, that the only relevant provision is Section 20. Section 16, by its terms, relates only to national banks. Section 21, also relied upon by petition, only relates to the receipt of deposits, and it is undisputed that Schwab nor BankAmerica do not receive deposits, and neither has the bank. Therefore, it makes meaningless, the plain meaning role, to argue, as petitioner does, that the restrictions imposed under those provisions should be borrowed and applied willy-nilly to the activities of a bank holding company that has its own specific set or provisions to deal with. And that provision is Section 20... Section 20, by its terms, prohibits bank affiliates from underwriting, distributing, issuing, publicly selling, or floating blocks of securities. That is not an across-the-board condemnation of all securities activities. That is a condemnation of public marketing activities. If Congress had intended to preclude bank affiliates from engaging in brokerage activities, it would surely have said that brokerage activities are not permissible, or at least it would have used the term "purchase and sale of securities as agent. " just the commonly understood definition of brokerage functions. Congress did none of those things. Instead, it drafted the language in a way that makes it unmistakably clear that it is intended to deal solely with underwriting. This Court recognized as much in the Agnew decision. In characterizing the meaning of the identical language in Section 32 of the Act, this Court repeatedly described it as involving nothing but underwriting. Similarly, that interpretation of Section 32, as not embracing brokerage... mere brokerage activity, was adopted by the Federal Reserve Board in the 1930s and has remained unchanged since that time.
Speaker: Mr. Phillips, are you aware of any bank, other than J. P. Morgan, which at the time of the adoption of the Glass-Steagall Act, actually had a seat on the exchange and kept it?
Carter G. Phillips: My understanding is that there were six banks at that time--
Speaker: Six.
Carter G. Phillips: --that maintained seats on the exchanges. The reason, of course--
Speaker: Did they continue to keep their seats, other than Morgan, and use them to execute orders for customers?
Carter G. Phillips: --Unfortunately, the record doesn't reflect what those banks did, because that didn't seem to be a major issue in the administrative process. But we do know, in the New York Times Articles that discussed those investments, those banking operations that went to commercial banking as opposed to investment banking, that they prominently stated that they were keeping their seats on the exchanges, and one can only assume that they would have only made that a matter of serious concern if they planned to use those seats. So as far as we know, some banks did undertake to act in that way.
Speaker: And were not challenged under Section 16 by the Comptroller, or anyone else for executing orders?
Carter G. Phillips: As far as we know there was never any challenge, and petitioner has not presented us with any evidence to indicate that there has ever been any challenge.
Speaker: Under the Comptroller's ruling, until lately, a bank couldn't do this itself, could it?
Carter G. Phillips: Yes, Your Honor, that is correct. Until 1957, it could only do it without profit. Then after... and then most recently now, it can do it in any situation.
Speaker: That ruling was rather old, wasn't it?
Carter G. Phillips: That ruling did derive initially from the immediate aftermath of the Glass-Steagall Act.
Speaker: When did the Comptroller overturn that decision?
Carter G. Phillips: He began to erode that decision in 1957, soon after the Bank Holding Company Act.
Speaker: When did he specifically overturn that prior ruling?
Carter G. Phillips: In 1982, I believe it was. At that time, he explained that it was his view that the earlier interpretation was not predicated on anything in the language of Section 16, but appeared by all accounts to be nothing more than a very conservative reaction to the problems of problem failures.
Speaker: He didn't need to admit that he was wrong, in the first place, it is just that either his prior ruling... either one of them, his prior ruling or this one, were correct.
Carter G. Phillips: True, they both can be regarded... They both unquestionably reasonable interpretations of the plain meaning of the language. In deciding which of the provisions to apply in this case, this Court has twice rejected efforts to incorporate standards from one section in Glass-Steagall and apply to other activities. In Agnew, this Court concluded that different qualifying phrases used in the provisions mark a distinction this Court should not obliterate. Similarly, in ICI II, the Court held that the Act's structure reveals that congressional intent to treat banks separately from their affiliate and to impose a less stringent standard on bank holding companies. Adherence to those principles requires the conclusion that this case can and should be resolved completely by reference to Section 20 of the Glass-Steagall Act. By strongly urging the Court to limits its inquiry to Section 20, we do not, however, mean to imply that we shy away from scrutiny by this Court under Sections 16 or 21, by their terms they simply do not apply. But if, as petitioner seems all too often to assume, this case involved a national bank, our submission would be no different. Like their affiliates, national banks are prohibited from underwriting securities, but they are expressly authorized, as one of their many delegated powers, to purchase and sell securities on behalf of their customers as agent, and not for their own accounts. In other words, banks would appear to be able to serve as a broker. This grant of power was intended in 1933 to ratify preexisting practices of banks, and as we explained in some detail in our brief, it is clear that banks did engage in the purchase and sale of stock, and other securities, for customers prior to that time, and that is all that Congress meant to ratify. The division Congress made in the Glass-Steagall Act was between investment banking activities that carry a tremendous risk of loss if the market shifts. It did not intend to illuminate the rather minimal potential for liability, or was not worried about the potential... minimal potential liability of a broker having to cover for a customer who happens to place an order. It may be, as petitioner suggested today, that brokerage firms place their entire assets at their disposal when they execute an order, but the record in this case reflects that less than 1 percent of all of the transactions executed by the Schwab brokerage firm... less than 1 percent involves situations where the customer fails to satisfy his own order or his own request. Accordingly, this is not a significant problem, and it is certainly not a problem Congress made any specific reference in anything in 1933 or 1935. Congress could not foresee in 1933 the discount brokerage activities would some day be profitable. It seems to us quite clear from the language that it adopted, allowing for agency actions on the part of bank in executing... in the purchase and sale of securities that it would clearly have upheld and permitted the banks to engage in the kinds of activities that Schwab undertakes here. It seems to us that that interpretation, as I just mentioned to Justice White, is a reasonable one, and that is where this Court's inquiry should stop. So long as the Comptroller's newest interpretation is reasonable, it is entitled to deference by this Court. Petitioner conjures up the horrors of the bank failures of the 1930s and hints that the Board's decision here is based on arguments presented in connection with the regulatory and legislative decisions of the mid-1920s that led to that financial disaster. But the Federal Reserve Board has not turned the clock back to 1927, nor created an environment of serious bank failure. The Board has instead adjusted to the financial events of the 1970s and the 1980s, and acting faithfully to the congressional scheme created to allow substantial, but not unbridled, expansion of the business of banking. It has presented a thorough and reasonable explanation for its approval of BankAmerica's application in this case. It is petitioner and the securities firms whom it represents who seek to stop the financial clock from moving beyond the events of the 1970s, when that industry as so structured that competition was severely limited, and the only role for a bank on the exchanges was to serve as an intermediary between the bank's customer and the broker, with the latter receiving the fee, but without any risk of competition. Those times are gone, and the securities industry must recognize that banks, and of particular significance to this case, bank holding companies and their affiliates are legitimate competitors in that discrete area of securities activity concerning the purchase and sale of stock as agent. This change is not the product of regulatory fiat, but rather a reasonable application of the plain meaning of the statutes Congress adopted, and empowered the Board to use its expertise to enforce. It is, therefore, not the Board's action that "should be legislated by Congress", as petitioner puts it, but rather petitioner's efforts to overturn the orderly decision of the Board that should be submitted to Congress for reevaluation. The Administrative Law Judge, the Federal Reserve Board, and the Second Circuit have all unanimously and correctly held that the discount brokerage activities are a legitimate part of the business of banking, which Congress did not intend to prohibit by Glass-Steagall. Accordingly, the judgment of the Court of Appeals should be affirmed.
Warren E. Burger: Mr. Weidner, do you have anything further?
James B. Weidner: If I may, several brief points. Justice O'Connor, if I could respond briefly to the question of the Morgan Bank and Brown Brothers Harriman. So far as we know, there are... there were two banks that were on the exchange, and two kept their seats, but I don't think we can draw from that an inference that it was proper. First of all, remember the Comptroller specifically prohibited them from engaging in public securities brokerage, so it is unlikely that they did. Second, there is no evidence that they did. Third, there is a perfectly good economic reason why they would have retained their seats, even though they couldn't be public securities brokers, simply this, there are a lot of floor traders, or there were a lot of floor traders who had an exchange seat simply because when there were fixed commissions, if they traded on the floor themselves, they didn't have to pay any commission. If, as an exchange member, they used the privilege of using a floor broker there, you only have pay 10 percent of the commission. So that, for example, for trust accounts and the like, it would make eminently good sense for Brown Brothers to have someone stay on the exchange when they weren't engaged in the public brokering of securities. Let me turn then briefly to the Comptroller's recent interpretation or reinterpretation. I suggest that any indication that the Comptroller thought, in 1934 and 1935, he was convincing Congress to allow banks to become public stock brokers, just is simply illogical. If it is true that it was important that banks, like all other corporations, couldn't be exchange members, only partnerships could be to avoid limited liability, then why was the Comptroller trying to convince Congress to allow banks to become public stock brokers when they couldn't do it? Well, maybe it was because he wanted them to trade in the over-the-counter market where they don't have to be exchange members. If that was his motive, then why did he issue a regulation immediately after the statute was amended specifically prohibiting them from being public stock brokers. It just doesn't make any sense. Moreover, something that I didn't mention, but I think bears mention, is in 1934 Congress was considering the Securities and Exchange Act of 1934 to govern public stock brokers. They excepted banks from the definition of broker in the '34 Act. Why would they do that if they thought banks could be public stockbrokers?
Speaker: What year did you mention?
James B. Weidner: 1934, Mr. Chief Justice.
Speaker: Haven't a lot of financial arrangements changed?
James B. Weidner: Since then?
Speaker: Since then, in the '40.
James B. Weidner: They have indeed. Although in this area, the Securities and Exchange Commission has restated its views only within the last six months that in its view, and in our view, the legislative history supports it, as they believe it has, banks were excluded from the brokerage definition in the '34 Act because Congress understood that they could not engage in public stock brokerage because of the Glass-Steagall Act.
Speaker: What is the SEC's position now on this?
James B. Weidner: That they cannot.
Speaker: On this problem?
James B. Weidner: Excuse me. That because they have no jurisdiction over the banking laws, they can't very handily change the banking laws. But they have proposed a rule that would require banks that publicly solicit a brokerage business to register as brokers, because in their view the exception in the statute was never meant to permit banks to be the only brokers that were unregulated by the Securities and Exchange Commission.
Speaker: So you think that it was just a little turf gathering that they supported this application before--
James B. Weidner: Justice White, that is one of the things I wanted to mention. I must say that to say the SEC supported this application is taking a fairly wide literary liberty.
Speaker: --What will happen is that they will have many more applications for licenses.
James B. Weidner: It is certainly true that they did not oppose it, but they... their submission was in about as hedged language as it could be. It said something to the effect, and this is in the Joint Appendix on appeal in the Second Circuit, while the spirit, if not the letter of Section 20 would appear to prohibit the banks becoming brokers, nevertheless that is something over which the Federal Reserve Board has jurisdiction.
Speaker: Did they there say that if this rule is approved, the banks would have to be licensed?
James B. Weidner: No, Justice White, they didn't, but I think--
Speaker: But they now assert it?
James B. Weidner: --They do. I think it is helpful to recall that when this proceeding started at the beginning of 1982 there was no bank in the public securities brokerage business. By the end of 1982, every banking authority or financial institutions authority in the country authorized their institutions to go in the business. Things have changed enormously in the last two years. The SEC is trying to do what it can, but it seems to me that this underscores why a policy decision of this sort should not be done by piecemeal administration. What has happened is, you have the Federal Reserve Board act, now the SEC has got to react to propose regulations, and then we have the Comptroller reacting to the SEC's reaction. It is a game of administrative billiards, where the next "carem" shot is going to come from. I'm quite serious. This is a policy decision of enormous significance, and what we have seen happen is exactly what is going to happen as administrators preempt what should be a congressional and was a congressional judgment, and try to change the congressional intent. With respectfully request that the decision below be reversed.
Warren E. Burger: Thank you, gentlemen, the case is submitted.