Graphic Packaging Corporation v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas

ACCEPTED

03-14-00197-CV

4929353

THIRD COURT OF APPEALS

AUSTIN, TEXAS

4/17/2015 10:36:54 AM

JEFFREY D. KYLE

CLERK

NO. 03-14-00197-CV

_____________________________________________

FILED IN

IN THE COURT OF APPEALS 3rd COURT OF APPEALS

THIRD JUDICIAL DISTRICT OF TEXAS AUSTIN, TEXAS

AT AUSTIN 4/17/2015 10:36:54 AM

JEFFREY D. KYLE

________________________________________________

Clerk

GRAPHIC PACKAGING, INC.,

Appellant

v.

GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF

THE STATE OF TEXAS; AND KEN PAXTON, ATTORNEY

GENERAL OF THE STATE OF TEXAS,

Appellees.

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT,

CAUSE NO. D-1-GN-12-003038, THE HONORABLE DARLENE BYRNE PRESIDING

REPLY BRIEF FOR APPELLANT

James F. Martens Amy L. Silverstein

jmartens@textaxlaw.com asilverstein@sptaxlaw.com

Texas Bar No. 13050720 California Bar No. 154221

Amanda G. Taylor SILVERSTEIN & POMERANTZ LLP

ataylor@textaxlaw.com 12 Gough Street, Second Floor

Texas Bar No. 24045921 San Francisco, California 94103

Lacy L. Leonard Tele: (415) 593-3502

lleonard@textaxlaw.com Fax: (415) 593-3501

Texas Bar No. 24040561

Danielle Ahlrich ATTORNEYS FOR APPELLANT

dahlrich@textaxlaw.com

GRAPHIC PACKAGING, INC.

Texas Bar No. 24059215

MARTENS, TODD, LEONARD, TAYLOR & AHLRICH

301 Congress Avenue, Suite 1950

Austin, Texas 78701

Tele: (512) 542-9898

Fax: (512) 542-9899

ORAL ARGUMENT REQUESTED

IDENTITY OF PARTIES AND COUNSEL

APPELLANT APPELLEES

Graphic Packaging, Inc. Glenn Hegar, Comptroller of Public

Accounts of the State of Texas, and

Ken Paxton, Attorney General of the

State of Texas

Appellate Counsel: Appellate Counsel:

Amy L. Silverstein Rance Craft,

asilverstein@sptaxlaw.com Assistant Solicitor General

SILVERSTEIN & POMERANTZ LLP rance.craft@texasattorneygeneral.gov

12 Gough Street, Second Floor Cynthia A. Morales,

San Francisco, California 94103 Assistant Attorney General

Tele: (415) 593-3502 cynthia.morales@texasattorneygeneral.gov

Fax: (415) 593-3501 OFFICE OF THE ATTORNEY GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

Trial and Appellate Counsel: Tele: (512) 936-2872

James F. Martens Fax: (512) 474-2697

jmartens@textaxlaw.com

Amanda G. Taylor

ataylor@textaxlaw.com Trial Counsel:

Lacy L. Leonard Kevin D. Van Oort

lleonard@textaxlaw.com Formerly with the Office of the Attorney

Danielle Ahlrich General

dahlrich@textaxlaw.com

MARTENS, TODD, LEONARD, TAYLOR &

AHLRICH

301 Congress Avenue, Suite 1950

Austin, Texas 78701

Tele: (512) 542-9898

Fax: (512) 542-9899

i

TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL .............................................................i

TABLE OF CONTENTS .......................................................................................... ii

INDEX OF AUTHORITIES.....................................................................................iv

ABBREVIATIONS ...................................................................................................x

REPLY ARGUMENT ...............................................................................................1

I. Section 171.106(a) Did Not Impliedly Repeal the Compact

Formula. ................................................................................................3

II. The Compact Is Valid And Binding...................................................... 5

A. The Compact Bears Clear Indicia of a Binding Compact. ......... 5

1. The Commission’s Establishment. ................................... 8

2. No Unilateral Modification or Repeal. ............................. 9

3. Requires Reciprocal Action. ...........................................11

B. The Compact is Not an Advisory Compact or a Uniform

Law. ...........................................................................................12

III. THE COMPACT’S ELECTION PROVISION IS

UNAMBIGUOUSLY MANDATORY. .............................................14

A. The Express Terms are Mandatory. ..........................................14

B. The Most Relevant Extrinsic Evidence Supports the

Mandatory Election. ..................................................................16

C. The Conduct of Other Party States Cannot Override the

Compact’s Express Terms. .......................................................17

D. The Compact Does Not Surrender Texas’s Power to Tax........ 19

1. The Compact Election Does Not Involve the

“Power to Tax.” ..............................................................19

2. No Surrender or Suspension. ..........................................21

ii

IV. COMPACT LAW AND THE CONTRACT CLAUSE

PRECLUDE TEXAS FROM UNILATERALLY

ELIMINATING THE ELECTION. ....................................................22

A. Settled Principles for Construing Compacts Are

Applicable. ................................................................................22

B. The Contract Clause Would Be Violated By Elimination

of The Compact Election. .........................................................25

V. The Franchise Tax Is an Income Tax under the Compact

Definition.............................................................................................29

CERTIFICATE OF SERVICE ................................................................................34

CERTIFICATE OF COMPLIANCE .......................................................................34

iii

INDEX OF AUTHORITIES

CASES

Alabama v. North Carolina,

560 U.S. 330 (2010)............................................................................ 9, 16, 19

Alcorn v. Wolfe,

827 F. Supp. 47 (D. D.C. 1993).....................................................................23

Allied Structural Steel Co. v. Spannaus,

438 U.S. 234 (1978).......................................................................................28

Arizona v. California,

292 U.S. 341 (1934).......................................................................................16

Blair v. State Tax Assessor,

485 A.2d 957 (Me. 1984) ....................................................................... 21, 22

Bolton v. Terra Bella Irrigation Dist.,

106 Cal. App. 313 (1930) ..............................................................................22

City of Charleston v. Pub. Serv. Comm’n,

57 F.3d 385 (4th Cir. 1995) ...........................................................................26

CT Hellmuth & Association, Inc. v. Washington Metro Area Transit Authority,

414 F. Supp. 408 (D. Md. 1976)....................................................................24

Cuyler v. Adams,

449 U.S. 433 (1911).......................................................................................23

Dartmouth College v. Woodward,

17 U.S. 518 (1819).........................................................................................20

Doe v. Ward,

124 F. Supp. 2d 900 (W.D. Pa. 2000) ...........................................................25

Energy Reserves Group v. Kan. Power & Light Co.,

459 U.S. 400 (1983)................................................................................ 27, 28

Gaar, Scott & Co. v. Shannon,

115 S.W. 361, 362 (Tex. Civ. App.—Austin 1908) aff’d,

233 U.S. 468 (1912).......................................................................................20

iv

General Expressways, Inc. v. Iowa Reciprocity Board,

163 N.W.2d 413 (Iowa 1968) ........................................................................25

Gillette Co. v. Franchise Tax Board,

207 Cal. App. 4th 1369 (2012) ............................................................... 18, 26

Green v. Biddle,

21 U.S. 1 (1823)...................................................................................... 25, 28

Harsha v. Detroit,

246 N.W. 849 (Mich. Sup. Ct. 1939) ............................................................19

In re C.B.,

188 Cal. App. 4th 1024 (2010) ........................................................................9

Int’l Serv. Ins. Co. v. Jackson,

335 S.W.2d 420 (Tex. App.—Austin 1960, writ ref’d n.r.e.) .........................3

Int’l Union of Operating Eng'rs, Local 542 v. Del. River Joint Toll Bridge Comm’n,

311 F.3d 273 (3rd Cir. 2002) ...........................................................................9

Int'l Business Machines Corp. v. Dept. of Treasury,

852 N.W.2d 865 (Mich. 2014) .............................................................. passim

Kansas v. Colorado,

514 U.S. 673 (1995)................................................................................ 18, 19

McComb v. Wambaugh, 934 F.2d 474 (3rd Cir. 1991) ................................ 9, 16, 24

Memphis & Little Rock Railroad v. Railroad Comm.,

112 U.S. 609 (1884).......................................................................................19

National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Railway Co.,

470 U.S. 451 (1985).......................................................................................10

Northeast Bancorp, Inc. v. Bd. of Governors of the Federal Reserve,

472 U.S. 159 (1985)............................................................................... passim

Oklahoma v. New Mexico,

501 U.S. 221 (1991).......................................................................................16

People v. Board of Supervisors of Calaveras County,

126 Cal. App. 670 (1932) ..............................................................................20

v

Railroad Tax Cases,

13 F. 722 (D. Cal. 1882) ................................................................................20

Rhoades v. State,

934 S.W.2d 113 (Tex. 1996) ...........................................................................4

Seattle Masters Builders Ass'n v. Pacific Northwest Electric Power and

Conservation Planning Council,

786 F.2d 1359 (9th Cir. 1986) ............................................................... passim

Sheehy v. Public Empl. Retirement Div.,

864 P.2d 762 (Mont. Sup. Ct. 1993)..............................................................21

Standard Oil Co. v. Johnson,

10 Cal. 2d. 758 (1938) ...................................................................................21

State Bank of Ohio v. Knoop,

57 U.S. 369 (1854).........................................................................................20

State Highway Dep’t v. Gorham,

162 S.W.2d 934 (Tex. 1942) .......................................................................4, 5

Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility,

71 S.W.3d 846 (Tex. App.–Austin 2002, no pet.) .........................................28

Switzer v. Phoenix,

341 P.2d 427 (Ariz. Sup. Ct. 1959) ........................................................ 21, 22

Tarrant Reg’l Water Dist. v. Hermann,

186 L. Ed. 2d 153 (2013) .................................................................. 10, 16, 19

Texas v. New Mexico,

462 U.S. 554 (1983).......................................................................................16

Texas v. New Mexico,

482 U.S. 124 (1987).......................................................................................29

Trinova Corp. v. Dep’t of Treasury,

498 U.S. 358 (1991).......................................................................................29

U.S. Steel Corp. v. Multistate Tax Commission,

434 U.S. 452 (1978)............................................................................... passim

vi

U.S. Trust Co. of N.Y. v. New Jersey,

431 U.S. 1 (1976)........................................................................ 25, 26, 27, 28

Valencia Energy Co. v. Dep’t of Rev.,

959 P.2d 1256 (Ariz. Sup. Ct. 1998) .............................................................19

Virginia v. Tennessee,

148 U.S. 503 (1893).......................................................................................23

West Virginia ex rel. Dyer v. Sims,

341 U.S. 22 (1951).....................................................................................9, 23

STATUTES & RULES

1971 Fla. Laws ch. 71-980 § 2.................................................................................17

1981 Nev. Stat. ch. 181, at 350 ................................................................................18

1985 Neb. Laws L.B. 344 ........................................................................................18

1985 W. Va. Acts ch. 160 ........................................................................................18

2005 Me. Laws ch. 332, § 29 ...................................................................................18

2006 Tex. Gen. Laws 1, 38 ......................................................................................29

2012 Cal. Stat. ch. 37, § 3 ........................................................................................18

2013 Minn. Ch. Law 143 (H.F. 677) .......................................................................18

2014 Mich. Pub. Acts 282, § 1.................................................................................18

Cal. Fish & Game Code § 14001 ...............................................................................8

Cal. Gov’t Code § 66800 .........................................................................................10

Cal. Veh. Code § 15207 ...........................................................................................10

Fla. Stat. § 214.71 ....................................................................................................17

I.R.C. § 55 ................................................................................................................31

I.R.C. § 63 ................................................................................................................31

I.R.C. § 151 ..............................................................................................................31

vii

I.R.C. §§ 101-140.....................................................................................................30

Mich. Comp. Laws § 205.581....................................................................................3

Mo. Rev. Stat. § 32.200 ...........................................................................................17

Mont. Code Ann. § 15-1-601 ...................................................................................17

N.D. Cent. Code § 57-59-01 ....................................................................................17

N.M. Stat. Ann. § 7-5-1 ...........................................................................................17

Tex. Code Crim. Proc. art. 42.19 ...............................................................................8

Tex. Const. art. III, § 36 .........................................................................................4, 5

Tex. Const. art. VIII, § 4 ............................................................................. 19, 21, 22

Tex. Fam. Code § 60.010 .........................................................................................10

Tex. Gov’t Code § 510.017......................................................................................10

Tex. R. App. P. 38.3.................................................................................................28

Tex. Tax Code § 141.001 ................................................................................. passim

Tex. Tax Code § 171.106 ................................................................................. passim

Tex. Tax Code § 171.1011 .......................................................................................30

Tex. Tax Code § 171.1012 .......................................................................................30

Tex. Tax Code § 171.1013 .......................................................................................31

viii

OTHER AUTHORITIES

California Chamber of Commerce,

Special Exhibits Re: A.B. 1304: Ratifying Multistate Tax Compact (Jul. 13,

1973) ..............................................................................................................18

Caroline Broun, Richard Masters and others, The Evolving Use and Changing Role

of Interstate Compacts (ABA 2006)............................................. 9, 12, 13, 24

Fletcher Cyclopedia of the Law of Corporations ....................................................30

Interstate Compacts vs. Uniform Laws,

at cglg.org/media/1302/ compacts_vs_uniform_laws-csgncic.pdf (last visited

Apr. 9, 2015) ..................................................................................................14

Kearns B. Taylor, Texas’ Exciting Answer in the Battle with Proponents of Federal

Control Over State Taxation of Interstate Commerce,

30 Tex. B.J. 773 .............................................................................................15

Lilian V. Faulhaber, The Hidden Limits of the Charitable Deduction: An

Introduction to Hypersalience,

92 B.U. L. Rev. 1307 (2012) .........................................................................31

Public Law 86-272 ...................................................................................................29

Texas House of Representatives Ways & Means Committee HB 3........................29

Texas House Research Organization HB 3..............................................................29

Walter Hellerstein, State Taxation

¶ 9.01[1] n.12.19, ¶ 7.12[7] ...........................................................................30

ix

ABBREVIATIONS

For ease of reference, Graphic Packaging, Inc. uses the following abbreviated

references to the record and the parties herein:

Abbreviation Reference

Graphic Graphic Packaging, Inc.

The Comptroller Appellees Glenn Hegar, Comptroller of Public

Accounts of the State of Texas, and Ken Paxton,

Attorney General of the State of Texas, collectively

The Compact Multistate Tax Compact

The Compact Election The election contained in Texas Tax Code Section

141.001, art. III(1)

The Compact Formula The apportionment formula contained in Texas Tax

Code Section 141.001, art. IV, i.e., an

equally-weighted, three-factor formula consisting of a

property factor, a payroll factor, and a sales factor

The Texas Formula The apportionment formula contained in Texas Tax

Code Section 171.106(a), i.e., a single factor formula

consisting of only a sales factor

UDITPA The Uniform Division of Income for Tax Purposes Act

x

REPLY ARGUMENT

Graphic properly used the Compact Formula to determine its franchise tax

base. Texas became a party to the Compact in 1967 and thereby agreed to all of its

terms, including the core provision allowing all taxpayers to elect to apportion

income by either the Compact Formula or an alternative state formula, the Texas

Formula. Tex. Tax Code § 141.001, art. III(1).

Texas has never repealed the Compact Election or Formula. The

Comptroller contends that Texas Tax Code § 171.106(a) eliminated the Compact

Formula. Yet, neither the plain language of Section 171.106(a) nor its legislative

history indicate an amendment of the Compact to mandate the Texas Formula.

In International Business Machines Corp. v. Department of Treasury, 852

N.W.2d 865 (Mich. 2014) (“IBM”), the Michigan Supreme Court rejected a nearly

identical argument involving the same Compact. The Court agreed that Michigan’s

apportionment statute was mandatory, but “the Legislature gave no clear indication

that it intended to repeal the [Compact Election],” so it assumed “the Legislature

intended for both to remain in effect.” Id. at 875. When enacted, the Compact

“contemplat[ed] the future enactment of a state income tax with a mandatory

apportionment formula different from the Compact's apportionment formula.” Id.

at 874. The statutes were compatible: if a taxpayer elects the Compact, the

Compact Formula applied; otherwise, the taxpayer was “required to apportion its tax

1

base consistently with the mandatory language of” the Michigan’s statute. Id. at

875. The Michigan Supreme Court’s reasoning is on point here and provides the

proper analytical path for reconciling the terms of the Compact and the franchise tax

law. If this Court agrees, then it need not reach any other issues.

Furthermore, the Compact is valid and binding on Texas until it withdraws.

The states and the drafters understood compacts were an established mechanism for

resolving cross-border issues and intended the Compact to be binding. The plain

terms of the Compact demonstrate a clear intent to create a binding interstate

compact. The legislative history confirms that intent. There is no evidence of

intent to enact a mere model law. Enactment and withdrawal provisions and a

commission are never features of garden-variety statutes. And, there is no evidence

of intent to allow piecemeal amendment of the Compact’s terms. Subsequent

actions of party states are inconsistent; some states never deviated from the Compact

Election, some states withdrew, and most notably, some states deviated from the

Compact Election and later withdrew.

Finally, the Compact Election applies because the franchise tax is an “income

tax” under the Compact’s broad definition. All of Texas’s alternative tax bases,

especially the cost of goods sold computation, begin with gross income and allow

deductions not directly related to specific transactions. Thus, they are income taxes

under the Compact.

2

I. SECTION 171.106(A) DID NOT IMPLIEDLY REPEAL THE

COMPACT FORMULA.

Tex. Tax Code § 171.106(a) did not impliedly repeal the Compact Formula.

An implied repeal would require that the statutes were irreconcilable or that repeal

was “plainly intended by the Legislature... The implication must be clear,

necessary, irresistible, and free from reasonable doubt.” Int’l Serv. Ins. Co. v.

Jackson, 335 S.W.2d 420, 424 (Tex. Civ. App. 1960).

Sections 171.106(a) and 141.001 are harmonized to preserve both: if a

taxpayer makes the Compact Election, the Compact Formula applies; otherwise, the

Texas Formula applies. See Appellant’s Brief 23-24.

The Michigan Supreme Court in IBM, 852 N.W.2d 865, adopted this analysis,

holding the Compact Election reconciled the Compact Formula with the Michigan

Formula, which is materially similar to Section 171.106(a). 1

[The state’s apportionment formula] is not the only

provision of Michigan’s tax laws pertaining to the

apportionment of business income--the Compact's

election provision shares the same purpose. Therefore, we

cannot interpret [the state’s apportionment formula] in a

vacuum… The Department's argument overlooks that

the Compact's election provision, by using the terms “may

elect,” contemplates a divergence between a party state's

mandated apportionment formula and the Compact's own

formula--either at the time of the Compact's adoption by a

1. Compare Mich. Comp. Laws § 205.581, art. IV(9) (2011), with Section 171.106(a). The

Michigan statute also contained a clause stating “except as otherwise provided in this act.” IBM,

852 N.W.2d at 873.

3

party state or at some point in the future. Otherwise, there

would be no point in giving taxpayers an election between

the two. In fact, reading the Compact's election provision

as forward-looking--i.e., contemplating the future

enactment of a state income tax with a mandatory

apportionment formula different from the Compact's

apportionment formula--is the only way to give meaning

to the provision when it was enacted in Michigan.

Viewed in this light, the [state’s] mandatory

apportionment language may plausibly be read as

compatible with the Compact's election provision.

Id. at 873-74.

To say that prior to enacting the franchise tax in 2006, the “Legislature never

has intended to apply” the Compact Formula does not establish a policy or say

anything about legislative intent in 2006. Appellees’ Brief 36. Silence does not

evidence intent to eliminate the Compact Formula. Rather this Court must assume

“the Legislature intended for both to remain in effect.” IBM, 852 N.W.2d at 875.

Finally, the Comptroller’s interpretation would violate Tex. Const. art. III, §

36, which is aimed at eliminating confusion and uncertainty; requiring amended

statutes to be re-enacted and published allows “their meaning [to be] known without

the necessity of examining the statute amended.” Rhoades v. State, 934 S.W.2d

113, 121 (Tex. 1996) (quoting Tex. Const. art. III, § 36 commentary). However,

Section 171.106(a) as interpreted by the Comptroller gives no notice it affects

Section 141.001, creating just the confusion and uncertainty the Constitution intends

to prevent. See Appellees’ Brief 39; State Highway Dep’t v. Gorham, 162 S.W.2d

4

934, 937 (Tex. 1942) (a law restricting application of a statute and not expressly

referencing the title of the provisions it restricted, violated Tex. Const. art. III, §

36). Id. at 937.

Section 171.106(a) did not impliedly repeal the Compact Election or Formula.

II. THE COMPACT IS VALID AND BINDING.

The Compact bears clear indicia of a binding compact. Appellant’s Brief

38-41 (discussing enactment provisions, imposition of mutual obligations on party

states, withdrawal provision, creation of Commission). History confirms the states

and the drafters understood compacts to be an established mechanism for resolving

cross-border issues, and they intended the Compact to be a binding compact. Id.

Claiming that the Compact is a uniform law disregards its plain terms and its

legislative history. Appellees’ Brief 54-55. Arguing that without an express

prohibition, party states are free to ignore the Compact (Id. at 55-60), turns the

concept of compacts on its head.2

A. The Compact Bears Clear Indicia of a Binding Compact.

Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve, 472

U.S. 159 (1985), and Seattle Masters Builders Association v. Pacific Northwest

2. The Comptroller misreads Tex. Tax Code § 141.001, art. XI(a) (“Nothing in this compact shall

be construed to … [a]ffect the power of any state or subdivision thereof to fix rates of taxation,

except that a party state shall be obligated to implement Article III.2 of this compact.”). See

Appellees’ Brief 53 n.8. This language anticipates and preempts an argument that Article III.2

might interfere with the power to set tax rates.

5

Electric Power and Conservation Planning Council, 786 F.2d 1359 (9th Cir. 1986),

did not establish absolute requirements for the existence of a compact but rather

discussed certain indicia common in compacts in a manner pertinent to the facts in

those cases. Seattle Master Builders also recognized that “[a]n unusual feature of a

compact does not make it invalid.” 786 F.2d at 1364.

One issue in Northeast Bancorp was whether statutes in Massachusetts and

Connecticut permitting the acquisitions of banks by out-of-state entities were an

invalid compact under the Compact Clause due to lack of Congressional approval.

Northeast Bancorp, 472 U.S. at 162. The statutes were not titled compacts, were

not “entered into” with other states, and lacked withdrawal provisions. The

Supreme Court rejected the Compact Clause challenge, expressing doubt as to

“whether there is an agreement amounting to a compact.” Id. at 175-76. The

Court noted:

The two statutes are similar in that they both require

reciprocity and impose a regional limitation... But

several of the classic indicia of a compact are missing.

No joint organization or body has been established to

regulate regional banking or for any other purpose.

Neither statute is conditioned on action by the other State,

and each State is free to modify or repeal its law

unilaterally. Most importantly, neither statute requires a

reciprocation of the regional limitation.

Id. at 175.

6

Seattle Master Builders paraphrased Northeast Bancorp in determining the

Pacific Northwest Electric Power and Conservation Planning Council was a

compact organization, not a federal agency (subject to the Constitutional

appointments clause):

The Supreme Court recently outlined some of the indicia

of compacts. These are establishment of a joint

organization for regulatory purposes; conditional consent

by member states in which each state is not free to modify

or repeal its participation unilaterally; and state

enactments which require reciprocal action for their

effectiveness.

Seattle Master Builders, 786 F.2d at 1363 (citing Northeast Bancorp).

U.S. Steel Corp. v. Multistate Tax Commission, 434 U.S. 452 (1978), supports

Appellant. The Court reviewed the Compact’s terms before determining it was

legal without Congressional consent. See id. at 471 (detailing the Compact’s

obligations and the “multilateral nature of the agreement”); Appellant’s Brief 14. If

the Court doubted whether the Compact was a binding compact, it would have said

so, like in Northeast Bancorp, and the lengthy Compact Clause analysis would have

been irrelevant. The Court held the Compact was valid and the audits authorized by

the Compact could proceed. U.S. Steel, 434 U.S. at 472-78.

In any event, the Compact indeed contains the “classic indicia of a compact”

discussed in Northeast Bancorp.

7

1. The Commission’s Establishment.

The Compact established the Commission, a classic characteristic of a

binding compact. See Northeast Bancorp, 472 U.S. at 175 (indicia includes “a joint

organization or body has been established to regulate regional banking or for any

other purpose”). The Commission has been in existence for more than 45 years,

employs a large number of people, has a sizeable budget, assembles leaders to

advance important proposals, and undertakes numerous audits. See Tex. Tax Code

§ 141.001, arts. VI-VIII; see also, www.mtc.gov (Commission website detailing its

activities) and www.mtc.gov/Audit.aspx?id=578 (reporting over 1600 audits in the

last five years). Although the term “regulatory” power is not defined, the

Commission is a robust organization with significant influence and powers. See

Northeast Bancorp, 472 U.S. at 175 (failing to define “regulatory” power).

Seattle Master Builders imprecisely paraphrased Northeast Bancorp, and no

case holds a compact must create a compact agency with regulatory power to be

binding. A compact agency is highly suggestive of a compact’s existence, but it

does not need to be a regulatory agency, because even the absence of a regulatory

agency does not necessarily mean no compact exists. Many compacts have

advisory commissions (see Pacific Marine Fisheries Compact (Cal. Fish & Game

Code § 14001)), and others have no commission at all (see, e.g., Interstate

Corrections Compact (Tex. Code Crim. Proc. art. 42.19) (imposing obligations on

8

states without creating a commission)). See also Caroline Broun, Richard Masters

and others, The Evolving Use and Changing Role of Interstate Compacts (ABA

2006) (“Broun”), at 133-47 (discussing various structures for administering

compacts).

2. No Unilateral Modification or Repeal.

Silence in the Compact does not mean states may modify Compact

provisions. In effect, the Comptroller argues the Compact had to expressly prohibit

eliminating the Election provision. Appellees’ Brief 55-60. The rule is the

opposite – the terms of a compact are mandatory, and a party cannot alter or ignore

them unless expressly authorized. See, e.g., West Virginia ex rel. Dyer v. Sims, 341

U.S. 22, 28 (1951); McComb v. Wambaugh, 934 F.2d 474, 479 (3rd Cir. 1991); In re

C.B., 188 Cal. App. 4th 1024, 1031 (2010); Int’l Union of Operating Eng'rs, Local

542 v. Del. River Joint Toll Bridge Comm’n, 311 F.3d 273, 281 (3rd Cir. 2002)

(“This is because the ‘concurred in’ provision introduces the issue of, and

mechanism for, modification, without which there is absolutely no authority for, let

alone specific means of accomplishing, a modification of the Compact…”); Broun

at 23.

Likewise, a withdrawal provision does not render a Compact non-binding.

Many binding compacts have withdrawal provisions. See Alabama v. North

Carolina, 560 U.S. 330, 352-53 (2010) (discussing analogous withdrawal provision

9

in Southeast Interstate Low-Level Radioactive Waste Management Compact); Cal.

Gov’t Code § 66800, art. X (c) (Tahoe Regional Planning Compact: “A State party

to this compact may withdraw therefrom by enacting a statute repealing the

compact…”); Cal. Veh. Code § 15027 (Driver’s License Compact: “any party state

may withdraw from this compact by enacting a statute repealing the same…”); Tex.

Fam. Code § 60.010, art. XI (Interstate Compact on Juveniles); Tex. Gov’t Code §

510.017, art. XI (Interstate Compact for Adult Offender Supervision).

The Comptroller cites National R.R. Passenger Corp. v. Atchison, Topeka &

Santa Fe Railway Co., 470 U.S. 451, 465-66 (1985), stating that “‘absent some clear

indication that the legislature intends to bind itself contractually,’ an enacted law

does not create contractual or vested rights.” However, that case is inapplicable

because it did not involve a compact. Moreover, the very choice of a compact

communicates the legislature’s intent to enter into a binding agreement.

Appellant’s Brief 38-39.

Similarly, the concept that “[s]tates rarely relinquish their sovereign powers”

and “when they do we would expect a clear indication of such devolution, not

inscrutable silence” is not applicable because the Compact’s election provision is

unambiguously mandatory. See Appellees’ Brief 51 (quoting Tarrant Reg’l Water

Dist. v. Hermann, 186 L. Ed. 2d 153, 169 (2013)); see § III.A infra. Similarly, the

10

course of conduct by member states does not establish a right to unilaterally amend

the Compact. See § III.C infra.

3. Requires Reciprocal Action.

The Compact requires reciprocal action by the party states for effectiveness,

because it did not “enter[] into force” until enacted by seven states. Tex. Tax Code

§ 141.001, art. X(1); Seattle Master Builders Ass’n, 786 F.2d at 1363 (provisions

requiring reciprocal action constitute indicia of a compact). The Comptroller

claims, “the Supreme Court could not have meant that the joint action necessary to

establish an advisory body with no regulatory power is evidence of a binding

regulatory compact.” Appellees’ Brief 48. This statement, without any authority,

misconstrues the authorities (particularly Northeast Bancorp, which did not refer to

regulatory power) and the facts (the Commission has broad powers beyond simply

providing advice). Appellant’s Brief 37-38; see § II.A.1 supra. Requiring

enactment by multiple states is never a characteristic of regular statutes and satisfies

the requirement of reciprocal action that characterizes a binding compact. The

Comptroller is correct that the Compact would have been effective as a regular

statute even if seven other states did not enact it. Appellees’ Brief 48. But this

misses the point. Enactment by seven states elevated it to a binding compact.

The Compact Election also is reciprocal because it ensures states that their

taxpayers will be afforded the Compact Election when they do business in other

11

party states. This reciprocity was central to staving off Congressional pre-emption,

one of the Compact’s main purposes. See Appellant’s Brief 44-45. The sales/use

tax credit provision is also reciprocal because party states agree provide credits for

taxes paid in other states.

B. The Compact is Not an Advisory Compact or a Uniform Law.

The Commissioner cites Broun for its claim that the Compact is “an advisory

compact containing model laws.” Appellees’ Brief 42-43. According to Broun,

“[b]y their very terms, advisory compacts cede no state sovereignty nor delegate any

governing power to a compact-created agency.” Broun at 14. Because the

Compact does cede some state sovereignty, including particularly the authority to

impose an exclusive apportionment formula, Broun confirms that it is not an

advisory compact. Appellant’s Brief 36-45.

Advisory compacts also “lack formal enforcement mechanisms and are

designed not to actually resolve an interstate matter, but simply to study such

matters.” Broun at 13. However, the Compact was designed to resolve an

interstate matter, i.e., to secure base-line uniformity through binding obligations

upon the party states. And the terms go beyond simply study, e.g., they require

party states to provide the Election to apportion under the Compact, to honor

sales/use tax exemptions and credits, and to pay dues and provide members to the

Commission. Tex. Tax Code § 141.001, arts. III(1), V, VI(1), VI(4)(b). The

12

Commission also does more than study; it has a robust audit function. Id. at art.

VIII. 3

Regardless, no authority (including Broun) says advisory compacts are not

binding. See Appellees’ Brief 42 (as an advisory compact, the Compact does not

“carr[y] the preemptive force that Graphic assigns to it”). A state entering into an

advisory compact must conduct the compact’s study. Advisory compacts are one

of three general types of compacts: boundary compacts, advisory compacts, and

regulatory compacts. Broun distinguishes all compacts from administrative

agreements, which are between state agencies. Broun at 16-17. The Compact is

between states, not state agencies. Thus, Broun supports the conclusion that

because an advisory compact is one of three established types of compacts, states are

bound to the obligations they undertake by entering into an advisory compact.

UDITPA does not operate as a uniform law when enacted as part of the

Compact. 4 It was drafted in the late 1950s to address the lack of uniformity in state

taxation, but it was insufficient to establish uniformity. See Appellant’s Brief 2-6.

3. Not requiring Congressional consent is not a feature of an advisory compact but rather a

consequence of a compact not tending to “encroach upon or interfere with the just supremacy of

the United States.” U.S. Steel, 434 U.S. at 471.

4. The Comptroller’s statement that the “Compact simply sets those articles into its text without

any prefatory language requiring members to maintain those provisions unchanged in their laws or

any means of compelling them to do so” is incorrect. Appellees’ Brief 54. The terms of the

Compact require it to be enacted “in the form substantially” as written by the drafters.

Appellant’s Brief, Att. G at 4 (Council of State Governments memorandum accompanying the

Compact’s final text).

13

To stave off Congressional preemption, the states and drafters chose a different

vehicle, a binding agreement containing the Compact Election. Id. at 6-7.

According to the Council on State Government’s National Center for Interstate

Compacts: “If uniform provisions are embodied in a compact, no state could

subsequently destroy this uniformity by unilateral amendment of its own statute

except to the extent that such variation might be permitted by specific provision of

the compact.” 5 Interstate Compacts vs. Uniform Laws, at cglg.org/media/1302/

compacts_vs_uniform_laws-csgncic.pdf (last visited Apr. 9, 2015).

III. THE COMPACT’S ELECTION PROVISION IS

UNAMBIGUOUSLY MANDATORY.

A. The Express Terms are Mandatory.

The Comptroller incorrectly argues, “applying Article III.1 to the franchise

tax creates a latent ambiguity.” Appellees’ Brief 55.

The Compact Election states:

A taxpayer subject to an income tax … may elect to

apportion and allocate his income in the manner provided

by the laws of such States … without reference to this

compact, or may elect to apportion and allocate in

accordance with Article IV.

5. The Comptroller also quotes the Commission’s first annual report as saying the Compact had

“been enacted as a uniform law” by 15 states. Appellees’ Brief 55. The Commission knew then

the Compact was not a uniform law. Supp.CR.29. Thus, the more reasonable interpretation of

this statement is that it refers simply to the uniform template used by states to enact the Compact.

14

Tex. Tax Code § 141.001, art. III(1). Because a taxpayer “may elect,” the party

states must make the Election available. In 1970, the Commission agreed:

The Multistate Tax Compact thus preserves the right of

the states to make such alternative formulas available to

taxpayers even though it makes uniformity available to

taxpayers where and when desired.

Supp.CR.47; see Kearns B. Taylor, Texas’ Exciting Answer in the Battle with

Proponents of Federal Control Over State Taxation of Interstate Commerce, 30 Tex.

B.J. 773, 821 (the Compact “provides for giving a taxpayer the option to achieve

uniformity if he so desires, by utilizing the Uniform Division of Income for Tax

Purposes Act”).

The Compact Election was the central provision of the Compact. See § II.B

supra. If the Election were optional, the Compact would have failed its purpose of

establishing the uniformity Congress demanded. Appellant’s Brief 44-45. In fact,

the Compact Election advances each of its express purposes. The Election

facilitates proper determination of taxpayers’ state and local tax liabilities, equitably

apportions their tax bases among states, prevents duplicative taxation, and secures

base-line uniformity and compatibility. In addition, using the same formula in

multiple states simplifies compliance. Id. at Att. G at 1 (Council of State

Governments memorandum accompanying the Compact’s final text), Att. H at 1

(Council of State Governments Compact Summary and Analysis). Tex. Tax Code

15

§ 141.001, art. XII directs, the “[C]ompact shall be liberally construed so as to

effectuate the purposes thereof.”

By contrast, the Comptroller’s interpretation eviscerates the Compact’s

purposes. Different formulas ensure complexity, raise compliance costs, reduce

uniformity, and risk double-taxation. Oklahoma v. New Mexico, 501 U.S. 221,

230-31 (1991) (compact must be interpreted consistent with its stated purposes).

B. The Most Relevant Extrinsic Evidence Supports the Mandatory

Election.

The construction aids the Comptroller mentions (Appellees’ Brief 57) are

irrelevant because there is no ambiguity in the Compact’s terms. Tarrant, 186 L.

Ed. 2d 153. Nonetheless, if this Court considers extrinsic evidence, the

contemporaneous drafting and negotiation evidence and the Compact’s express

purposes are most probative of the parties’ intent, not evidence of conduct years or

decades later as cited by the Comptroller. See Alabama v. North Carolina, 560

U.S. at 345-48; Oklahoma v. New Mexico, 501 U.S. at 231-37 (relying on “purpose

and negotiating history” to interpret ambiguous phrases in Canadian River

Compact); Texas v. New Mexico, 462 U.S. 554, 568 n.14 (1983) (using context at

time of compact’s enactment to aid interpreting ambiguous provision); Arizona v.

California, 292 U.S. 341, 359-60 (1934); McComb, 934 F.2d at 481. That evidence

indicates the states and the drafters knew what compacts were and how they

operated, and intended to enter into such a binding agreement. See Appellant’s

16

Brief 44. The Election was a core element of the Compact to secure a base-line

level of uniformity and thus avoid federal imposition of a single apportionment

formula. See id. at 43. A model law (UDITPA) had already proven insufficient to

stave off federal action.

C. The Conduct of Other Party States Cannot Override the Compact’s

Express Terms.

The claim “the Compact states consistently have construed that silence to

mean that members may unilaterally change or restrict the Compact’s terms in their

own laws” is incorrect. See Appellees’ Brief 51.

First, the Commission’s 1972 resolution is inapposite because Fla. Stat. §

214.71 set forth the same formula as Compact Article IV. 1971 Fla. Laws ch.

71-980 § 2 (amending Fla. Stat. § 214.71 and describing an equally-weighted

three-factor formula). Accordingly, Florida did not meaningfully change the

Compact Formula after it repealed Articles III and IV. The Commission’s

resolution supports this: “Whereas, the State of Florida has repealed Articles III and

IV of the Multistate Tax Compact, while still legislatively adhering to the spirit of

the Compact…” CR.487.

Moreover, many states have not altered the Election. See, e.g., Missouri

(Mo. Rev. Stat. § 32.200); North Dakota (N.D. Cent. Code § 57-59-01); Montana

(Mont. Code Ann. § 15-1-601); New Mexico (N.M. Stat. Ann. § 7-5-1). Other

states have withdrawn from the Compact. See U.S. Steel, 434 U.S. at 454 n.1

17

(citing statutes repealing the Compact in Florida, Illinois, Indiana, and Wyoming);

Nevada (1981 Nev. Stat. ch. 181, at 350); Maine (2005 Me. Laws ch. 332, § 29);

Nebraska (1985 Neb. Laws L.B. 344, § 9); West Virginia (1985 W. Va. Acts ch.

160); California Chamber of Commerce, Special Exhibits Re: A.B. 1304: Ratifying

Multistate Tax Compact (Jul. 13, 1973) (explaining that New York withdrew

because of its opposition to “mandat[ing] uniformity”).

The most that can be gleaned from states’ deviations from the Compact

Formula after the complaint in Gillette Co. v. Franchise Tax Board, 207 Cal. App.

4th 1369 (2012), was filed is those states recognized a controversy existed about

their ability to modify the Compact. Most importantly, some states that previously

deviated from the Compact Formula have since withdrawn from the Compact.

California (2012 Cal. Stat. ch. 37, § 3); Michigan (2014 Mich. Pub. Acts 282, § 1

(S.B. 156)); Minnesota (2013 Minn. Law ch. Law 143, art. 13, § 24 (H.F. 677)).

Other states repealed and re-enacted the Compact. See Appellees’ Brief 12-13

(Oregon, Utah, and the District of Columbia). From this patchwork of states’

conduct, it is impossible to draw a conclusion that party states “consistently have

construed that silence” to allow unilateral amendment.

Finally, no court has used course of performance evidence to override the

express terms of a compact, as opposed to aiding in the interpretation of an

ambiguous compact provision. In Kansas v. Colorado, 514 U.S. 673 (1995), the

18

Supreme Court explicitly refused to allow “the subsequent practice of the parties” to

alter the Court’s interpretation of the Arkansas River Compact when that practice

was inconsistent with the compact’s “clear language.” Id. at 690; cf. Tarrant, 186

L. Ed. 2d at 172 (looking to party states’ practical conduct to interpret ambiguous

compact provisions); Alabama v. North Carolina, 560 U.S. at 345-46 (considering

party states’ practical conduct in interpreting ambiguous compact provision).

D. The Compact Does Not Surrender Texas’s Power to Tax.

A mandatory Compact Election does not violate Texas Constitution, Article

VIII, Section 4: “The power to tax corporations and corporate property shall not be

surrendered or suspended by act of the Legislature, by any contract or grant to which

the State shall be a party.” A choice of apportionment formula is not the “power to

tax.” Nor is it a permanent or irrevocable surrender or suspension because Texas

may withdraw under the Compact’s terms.

1. The Compact Election Does Not Involve the “Power to Tax.”

The purpose of states’ anti-surrender provisions was to prohibit legislatures

from granting corporate charters with tax immunities they could not later alter. See,

e.g., Valencia Energy Co. v. Dep’t of Rev., 959 P.2d 1256, 1263-65 (Ariz. Sup. Ct.

1998); Memphis & Little Rock Railroad v. Railroad Comm., 112 U.S. 609 (1884);

Harsha v. Detroit, 246 N.W. 849, 852 (Mich. Sup. Ct. 1939).

19

Article 13, §§ 1, 6, says that ‘the power of taxation shall

never be surrendered or suspended by any grant or

contract to which the state shall be a party.’ … By a

contract authorizing certain persons to form a corporation

and exercise its franchises, however valuable the

consideration received, the state cannot, as we have seen,

surrender or suspend its rights to tax its property besides,

as all other property is taxed.

Railroad Tax Cases, 13 F. 722, 776 (D. Cal. 1882). States conceived of such

provisions after Supreme Court cases enforced perpetual tax exemptions in

corporate charters. See, e.g., Dartmouth College v. Woodward, 17 U.S. 518 (1819);

State Bank of Ohio v. Knoop, 57 U.S. 369 (1854).

Anti-surrender provisions prohibit relinquishing the power to impose or

collect a tax, in particular through an irrevocable contractual tax exemption. For

example, in People v. Board of Supervisors of Calaveras County, 126 Cal. App. 670

(1932), the court rejected the argument that cancelling taxes due on land acquired by

the state would violate the anti-surrender provision: “[T]he power of taxation has

[not] been surrendered by the state either by grant or contract. The facts before us

show that the power of taxation was exercised, and that by operation of law, it has

ceased to be a charge upon the land for the reason that the land is now the property of

the state.” Id. at 674.

Similarly, in Gaar, Scott & Co. v. Shannon, 115 S.W. 361, 362 (Tex. Civ.

App.—Austin 1908) aff’d, 233 U.S. 468 (1912), the sole case cited by the

Comptroller, a taxpayer’s 10-year business permit did not preclude the state from

20

imposing additional franchise taxes because of Texas’s anti-surrender provision. See

also Switzer v. Phoenix, 341 P.2d 427, 430-31 (Ariz. Sup. Ct. 1959) (parallel

provision is a “prohibition against the surrender or relinquishment of the right to

impose a tax” and “against the irrepealable grant of immunity from taxation”);

Sheehy v. Public Empl. Retirement Div., 864 P.2d 762, 766 (Mont. Sup. Ct. 1993)

(Under Montana’s anti-surrender provision, “the state cannot promise any group of

taxpayers that it will never tax them.”); Blair v. State Tax Assessor, 485 A.2d 957,

960 (Me. 1984) (Maine Constitution prevents legislature from granting permanent

tax exemptions); Standard Oil Co. v. Johnson, 10 Cal. 2d. 758, 763-64 (1938)

(because state reserved power to tax in ceding federal jurisdiction over national

parks, the provision was not implicated).

Providing taxpayers a choice between formulas to apportion income does not

implicate the power to impose or collect a tax. See U.S. Steel, 434 U.S. at 457

(explaining a party state retains complete control over the tax base, the tax rate, its

tax revenues, and the means and methods of tax collection). Rather, the

apportionment formula plays a role in the computation of the amount of tax a

multistate corporation ultimately owes.

2. No Surrender or Suspension.

In addition, the Compact Election is not a surrender or suspension by grant or

contract. Tex. Const. art. VIII, § 4. Anti-surrender provisions bar irrevocable

21

exemptions from taxation. The legislature cannot act on a permanent basis or even

for a specific amount of time (for example, a 10-year charter exempting taxation),

without the ability to revoke the tax exemption. See, e.g., Switzer, 341 P.2d at 431;

Blair, 485 A.2d at 960. Here, Texas can reclaim full control over the

apportionment formula by withdrawing from the Compact. Tex. Tax Code §

141.001, art. X(2); U.S. Steel, 434 U.S. at 473; see also Bolton v. Terra Bella

Irrigation Dist., 106 Cal. App. 313, 328 (1930) (anti-surrender provision not

implicated when legislative grant can be withdrawn).

In sum, the Compact Election does not violate Texas Constitution, Article

VIII, Section 4.

IV. COMPACT LAW AND THE CONTRACT CLAUSE

PRECLUDE TEXAS FROM UNILATERALLY

ELIMINATING THE ELECTION.

A. Settled Principles for Construing Compacts Are Applicable.

The argument that “a non-approved compact’s preeminence over other state

law arises from its status as a contract” is incomplete and misleading, and Appellant

does not concede it. See Appellees’ Brief 63. Compacts “are a unique type of

arrangement, conceptualized by the courts as simultaneously both contracts and

binding reciprocal statutes among sovereign states.” Appellant’s Brief 32. This

accounts for the fundamental interpretive principle of compacts, that they supersede

inconsistent state law. Id.

22

Lack of Congressional consent does not change compacts’ interpretive

principles. See id. at 34-36. Both Congressionally-approved and unapproved

compacts solve cross-border problems. States and other stakeholders rely on the

binding nature of compacts. If a state could override a compact term at will, the

compact would not serve its vital purposes. Both types of Compacts are

simultaneously statutes and binding agreements among sovereign states, and this

results in a compact superseding other state laws.

By contrast, Congressional consent is unrelated to states’ and other

stakeholders’ need to rely on the binding nature of compacts. Congressional

consent serves an entirely different purpose. A compact requires consent only if it

“tend[s] to the increase of political power in the States, [and thus] may encroach

upon or interfere with the just supremacy of the United States.” U.S. Steel, 434

U.S. at 471 (citing Virginia v. Tennessee, 148 U.S. 503, 518-19 (1893)). In that

case, consent ensures Congress affirmatively agrees to the agreement.

Prior to Cuyler v. Adams, 449 U.S. 433 (1911), it was not clear that

Congressionally approved compacts were federal law; yet, pre-Cuyler cases

consistently held compacts supersede other state laws. Dyer, 341 U.S. at 28.

Thus, Congressional approval is merely an additional reason subsequent state law

cannot override a compact. See Alcorn v. Wolfe, 827 F. Supp. 47, 52 (D. D.C.

1993) (“In light of the Supremacy Clause … and because compacts are analogous

23

to contracts between states, the terms of the [] compact cannot be modified

unilaterally by state legislation and take precedence over conflicting state law.”)

(emphasis added); Broun at 65 (“Congressional consent may change the venue in

which compact disputes are ultimately litigated; it does not change the controlling

nature of the agreement on the member states.”); Appellant’s Brief 35-36.

The IBM dissent is wrong. It began by stating that IBM cited only two cases

to support the proposition that non-Congressionally approved compacts supersede

conflicting state law, McComb, 934 F.2d at 479, and CT Hellmuth & Association,

Inc. v. Washington Metro Area Transit Authority, 414 F. Supp. 408, 409 (D. Md.

1976).

While those cases do support the principle that the Compact supersedes

conflicting state law, IBM did not rely on them exclusively. Rather, IBM and its

amici thoroughly discussed the purposes of compacts, and analyzed the caselaw

involving compacts, both Congressionally-approved and unapproved. The

dissent’s failure both to acknowledge and to consider those facts and legal

authorities caused it to reach the wrong conclusion. This Court should not make the

same mistake. To do so would have negative reverberations throughout the law of

compact interpretation and operation.

24

B. The Contract Clause Would Be Violated By Elimination of The

Compact Election.

Green v. Biddle, 21 U.S. 1, 84 (1823), held that “any deviation” from the

terms of a compact violates the Contract Clause. Green has not been questioned or

overruled and is still frequently cited in modern compact cases. See Gen.

Expressways, Inc. v. Iowa Reciprocity Board, 163 N.W.2d 413, 420-21 (Iowa 1968);

Doe v. Ward, 124 F. Supp. 2d 900, 914-15 (W.D. Pa. 2000).

The multi-step analysis invoked by the Comptroller (Appellees’ Brief 65) was

developed to strike a balance between the nature of a contract’s impairment and the

state’s justification for that impairment. However, this approach has never been

applied to a compact among states (rather than a contract with at least one private

party). This is sensible because compacts are agreements among sovereign states

related to collective governance that cannot be unilaterally altered.

Even applying the multi-step analysis, the conclusion is the same. Contract

Clause analysis raises two questions: (1) was there substantial impairment, and (2) if

so, was it “reasonable and necessary to serve an important public purpose.” U.S.

Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 22, 25 (1976). Elimination of the

Compact Election, which was essential to the Compact’s purposes, is a substantial

impairment. See § III.B supra.

To avoid this result, the Comptroller focuses on the language of a

non-compact case which states, “of greatest concern appears to be the contracting

25

parties’ actual reliance on the abridged contractual term.” Appellees’ Brief 66.

The Comptroller contends Graphic could not have relied on the Compact Election

because it did not use it until March 2011 and because states can withdraw at will.

Id.

However, the Comptroller’s subjective reliance analysis is wrong.6 “When

assessing whether there has been the requisite reliance, the Court has looked to

objective evidence of reliance.” City of Charleston v. Pub. Serv. Comm’n, 57 F.3d

385, 392 (4th Cir. 1995) (emphasis added). Objective factors confirm that

eliminating the Compact Election would substantially impair the Compact. U.S.

Trust, 431 U.S. 1, 19-21; Tex. Tax Code § 141.001, art. X(2); see § III.B supra.

First, the Compact does not indicate the Compact Election is subject to impairment

by unilateral amendment by the states. Instead, by entering into a compact, the

states bound themselves to the Compact’s terms until they withdrew. Tex. Tax

Code § 141.001, art. X(2).

Second, prior regulation of state taxation does not diminish the reliance

interests of party states and taxpayers. By acting collectively through a compact,

6. The Comptroller argues that Graphic was not an intended third-party beneficiary of the

Compact. Appellees’ Brief 65. The Comptroller is mistaken. See Gillette. 209 Cal. App. 4th at

952 (“This is a right specifically extended not to the party states but to taxpayers as third parties

regulated under the Compact, and as such Taxpayers may seek to enforce this right as part of its tax

refund suit.”).

26

the states agreed the Compact's terms bound them, thus eliminating any expectation

the states would enact subsequent statutes in conflict with the Compact.

Third, the fact that Texas did not modify the Compact Election but purported

to eliminate it is strong evidence of substantial impairment. U.S. Trust, 431 U.S. at

19 (state law which “totally eliminated” the state’s promise that Port Authority

revenues pay bondholders was a substantial impairment).

Fourth, the Compact Election was the central undertaking (core provision) of

the party states when they entered into the Compact. See § III.B supra.

In sum, objective criteria establish reliance and substantial impairment of the

Compact if the Election was eliminated.

The Comptroller also claims “Section 171.106 serves a significant and

legitimate purpose” because doing so “treats both local and foreign concerns with an

even hand.” Appellees’ Brief 66-67. In actuality, an apportionment formula

based only upon gross receipts is universally understood to benefit in-state interests

over out-of-state interests. It does not treat them with an even hand. Moreover,

the legitimate public purposes that can save an otherwise unconstitutional

impairment are typically economic emergencies, such as the Great Depression, or

the necessity to regulate a broad-based social ill under a state’s police powers.

Energy Reserves Group v. Kan. Power & Light Co., 459 U.S. 400, 411-12 (1983);

27

Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 242-44 (1978). No such

exigencies exist.

Finally, the Comptroller argues Section 171.106 is reasonable and appropriate

because “[t]he Supreme Court has repeatedly held that the single-factor

apportionment methods are ‘presumptively valid.’” Appellees’ Brief 67. This

does not explain why eliminating the Compact Election is reasonable. Nor does it

explain why eliminating the Compact Election was necessary, another requirement

of the multi-step analysis. U.S. Trust, 431 U.S. at 22, 25. If the Legislature

determined a mandatory apportionment formula should be imposed on all taxpayers,

it had the authority to withdraw from the Compact. See id. at 30 (state may not

impose a drastic impairment when an alternative course is available). In sum,

eliminating the Compact Election would violate the Compact and Contract Clauses.7

7. Graphic did not waive its Contract Clause argument. Appellees’ Brief 67-68. Pursuant to

Tex. R. App. P. Rule 38.3, Graphic is free to dispute the applicability of Energy Reserves

because both Appellant’s and Appellees’ Briefs discussed the Contract Clause. See Appellant’s

Brief 46-48; Appellees’ Brief 62-67. Further, Energy Reserves is not authoritative here because

it did not concern a compact, whereas Green did. Compare Energy Reserves, 459 U.S. 400,

with Green, 21 U.S. 1. See Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility, 71

S.W.3d 846, 851 (Tex. App.–Austin 2002, no pet.) (the argument alleged to have been waived

not raised in appellee’s reply brief).

28

V. THE FRANCHISE TAX IS AN INCOME TAX UNDER THE

COMPACT DEFINITION.

The Comptroller’s arguments that Texas’s franchise tax is not an income tax

under this Court’s definition, or as the phrase “is commonly understood,” and the

Legislature stated the tax was not an income tax, miss the point. Appellees’ Brief

22, 26. The Compact’s definition of an “income tax” controls here, and the

franchise tax satisfies that definition. Texas v. New Mexico, 482 U.S. 124, 128

(1987) (a compact is “a legal document that must be construed and applied in

accordance with its terms”). Appellant’s Brief 48-57.

The Legislature’s characterization of Texas’s franchise tax does not control

because the Legislature only considered the definition under Public Law 86-272,

which is materially different. 8 2006 Tex. Gen. Laws 1, 38 (“[T]he franchise tax

imposed by Chapter 171, Tax Code, as amended by this Act, is not an income tax

and Pub. L. No. 86-272 does not apply to the tax.”); Texas House of Representatives

Ways & Means Committee HB 3 Analysis at 4; Texas House Research Organization

HB 3 Bill Analysis at 9. Each time the foregoing documents describe how the

Texas franchise tax “is not an income tax,” they refer only to Public Law 86-272, not

the Compact. See Trinova Corp. v. Dep’t of Treasury, 498 U.S. 358, 374 (1991)

8. Public Law 86-272’s definition does not include the broadening phrase, “an amount arrived at

by deducting expenses from gross income, one or more forms of which expenses are not

specifically and directly related to particular transactions.” Tex. Tax Code § 141.001, art. II(4).

29

(“labeling the SBT a tax on ‘business activity’ does not permit [the court] to forgo

[sic] examination of the actual tax base”). 9

The franchise tax is an income tax under the Compact. “Total revenue” is

federal gross income less federal exclusions (I.R.C. §§ 101-140) and Texas

deductions. Tex. Tax Code § 171.1011(c)(1)(B). The Comptroller disregards

exclusions because they are not available to all taxpayers. Appellees’ Brief 28.

The Compact does not require this. Even under the federal income tax and all other

state income taxes, not every taxpayer deducts every expense or includes all income.

See I.R.C. §§ 101-140, 261-280H.

Additionally, the tax base at issue is an income tax base. The only

calculation that is relevant here is cost of goods sold (“COGS”), which Appellant

used. The Compact definition does not require more than “one type of expense,”

(Appellees’ Brief 27) but at least one type of expense that is “not specifically and

directly related to particular transactions.” Tex. Tax Code § 141.001, art. II(4).

COGS deductions satisfy this definition because they do not directly relate to any

particular transaction, but instead represent the total costs for products sold in the

reporting period. Tex. Tax Code § 171.1012 (c), (d) (COGS deductions include

9. Fletcher Cyclopedia of the Law of Corporations is not persuasive because it is not a tax treatise

and it omits Wyoming as a non-income tax state although it does not impose anything resembling

a corporate income tax. State Taxation does not take a position regarding Texas but merely

observes there is conflict regarding whether the tax is an income tax under the Compact. Walter

Hellerstein, State Taxation ¶ 9.01[1] n.12.19, ¶ 7.12[7].

30

both the direct costs of acquiring and producing goods and indirect costs, such as

insurance, utilities, rent, administrative salaries, and payroll and property taxes).

An alternative computation, compensation, allows the following deductions

not specifically and directly related to particular transactions: total wages, salaries

and benefits paid to officers, directors, owners, partners, and employees, including

administrative staff. Tex. Tax Code § 171.1013(a), (b).

The Comptroller is also incorrect that taxpayers that deduct the greater of $1

million or 30% of their gross income do not deduct any expenses. Appellees’ Brief

26-27. Those deductions are proxies for the taxpayer’s actual expenses, just as the

federal standard deduction and exemptions (under both the federal alternative

minimum tax and the federal personal income tax) are proxies for a taxpayer’s

expenses. I.R.C. §§ 55(b)(1), (d), 63, 151; see also Lilian V. Faulhaber, The

Hidden Limits of the Charitable Deduction: An Introduction to Hypersalience, 92

B.U. L. Rev. 1307, 1321-22 (2012).

The IBM Court properly applied the Compact’s “broad definition” of an

income tax. 852 N.W.2d at 878. It concluded “the MGRT [Michigan Gross

Receipts Tax] fits within the broad definition of ‘income tax’ under the Compact by

taxing a variation of net income--the entire amount received by the taxpayer as

determined from any gainful activity minus inventory and certain other deductions

that are expenses not specifically and directly related to a particular transaction.”

31

Id. at 880. “[A] tax is an income tax if the tax measures net income by subtracting

expenses from gross income, with at least one of the expense deductions not being

specifically and directly related to a particular transaction.” Id. at 878.

Like Texas’s tax, the computation of Michigan’s tax began with gross receipts

and was reduced “for the purchase of inventory during the tax year, including

freight, shipping, delivery, or engineering charges included in the original contract

price.” Id. at 880. The Court noted, “several of these exclusions or deductions are

not specifically and directly related to particular transactions,” e.g., [d]epreciable

assets can be assets used over a certain number of years and, thus, not related to a

single transaction,” “[m]aterials and supplies purchased during a tax year can be

used at any time for the operation of a business and for any amount of transactions,”

and “the purchase of inventory, which includes such things as goods held for resale

or raw materials, some of which can stay in a taxpayer's warehouse for an

indeterminate amount of time, can be an expense not specifically or directly related

to a particular transaction.” Id.

The tax base used by Graphic and the other tax bases readily satisfy the

Compact’s income tax definition.

32

Respectfully submitted,

SILVERSTEIN & POMERANTZ, LLP

12 Gough Street, 2nd Floor

San Francisco, California 94103

(415) 593-3502

(415) 593-3501 (Facsimile)

By: /s/ Amy Silverstein

Amy L. Silverstein

California State Bar No. 154221

asilverstein@sptaxlaw.com

Admitted Pro Hac Vice

MARTENS, TODD, LEONARD, TAYLOR

& AHLRICH

James F. Martens

jmartens@textaxlaw.com

State Bar No. 13050720

Lacy L. Leonard

lleonard@textaxlaw.com

State Bar No. 24040561

Danielle Ahlrich

dahlrich@textaxlaw.com

State Bar No. 24059215

Amanda Taylor

ataylor@textaxlaw.com

State Bar No. 24045921

301 Congress Avenue, Suite 1950

Austin, Texas 78701

Tele: (512) 542-9898

Fax: (512) 542-9899

ATTORNEYS FOR APPELLANT

GRAPHIC PACKAGING, INC.

33

CERTIFICATE OF SERVICE

Pursuant to the Texas Rules of Appellate Procedure and Local Rules for the

Third Court of Appeals, a true and correct copy of the foregoing was served on

counsel, via e-service and e-mail, as listed below, on the 17th day of April, 2015.

Tex. R. App. P. 9.5; Local Rule 4(d).

Rance Craft,

Assistant Solicitor General

Texas Bar No. 24035655

rance.craft@texasattorneygeneral.gov

Cynthia A. Morales,

Assistant Attorney General

Texas Bar No. 14417420

cynthia.morales@texasattorneygeneral.gov

OFFICE OF THE ATTORNEY GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

Tele: (512) 936-2872

Fax: (512) 474-2697

/s/ Amy Silverstein

Amy Silverstein

CERTIFICATE OF COMPLIANCE

I hereby certify that this Appellant’s Reply Brief complies with the typeface

requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a

conventional typeface no smaller than 14-point for text and 12-point for footnotes.

This document also complies with the word-count limitations of Tex. R. App. P.

9.4(i) because, according to the word count tool of the computer program used to

prepare this document, it contains 7,494 words, excluding any parts exempted by

Tex. R. App. P. 9.4(i)(1).

/s/ Amy Silverstein

Amy Silverstein

34

Page 1

ALLIED STRUCTURAL STEEL CO. v. SPANNAUS, ATTORNEY GENERAL OF

MINNESOTA, ET AL.

No. 77-747

SUPREME COURT OF THE UNITED STATES

438 U.S. 234; 98 S. Ct. 2716; 57 L. Ed. 2d 727; 1978 U.S. LEXIS 130; 1 Employee

Benefits Cas. (BNA) 1477

April 25, 1978, Argued

June 28, 1978, Decided

SUBSEQUENT HISTORY: Petition For Rehearing contractual relationship. The Court noted that the State's

Denied October 2, 1978. police power was limited when its exercise effected

substantial modifications of private contracts. The Act

PRIOR HISTORY: APPEAL FROM THE UNITED did not possess the attributes of the state laws that in the

STATES DISTRICT COURT FOR THE DISTRICT OF past had survived challenge under the Contract Clause. It

MINNESOTA. was not enacted to deal with a broad, generalized

economic or social problem. It invaded an area never

DISPOSITION: 449 F.Supp. 644, reversed. before subject to regulation by the State. It did not effect

simply a temporary alteration of the contractual

CASE SUMMARY: relationships of those within its coverage, but worked a

severe, permanent, and immediate change in the

relationships, irrevocably and retroactively. Its narrow

PROCEDURAL POSTURE: Appellant employer filed aim was leveled only at employers who voluntarily

an action for injunctive and declaratory relief and claimed agreed to establish pension plans for their employees.

that the Private Pension Benefits Protection Act (Act),

Minn. Stat. 181B.01 et seq., unconstitutionally impaired OUTCOME: The Court reversed the district court's

the employer's contractual obligations to its employees judgment that upheld the constitutional validity of the

under its pension agreement. The United States District Act as applied to the employer.

Court for the District of Minnesota upheld the

constitutional validity of the Act as applied to the CORE TERMS: pension plan, pension, plant, state laws,

employer. The employer appealed. pension benefits, funding, vesting, Minnesota Act,

contractual obligations, terminated, impairment, vested,

OVERVIEW: Pursuant to the Act, the State assessed a pension right, social problem, contractual relationships,

pension funding charge against the employer because it termination, terminate, severe, private contracts,

closed one of its offices and several of the discharged retroactive, discharged, impairing, emergency, pension

employees did not have vested pension rights under the funds, state legislation, police power, contingency,

employer's pension plan. The Court reversed the mortgage, monthly, Protection Act

judgment that upheld the validity of the Act. As applied

to the employer, the Act violated the Contract Clause LexisNexis(R) Headnotes

because it operated as a substantial impairment of a

Page 2

438 U.S. 234, *; 98 S. Ct. 2716, **;

57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130

tailored to the emergency that it was designed to meet;

(4) that the imposed conditions were reasonable; (5) that

the legislation was limited to the duration of the

Pensions & Benefits Law > Employee Benefit Plans > emergency. Another consideration in upholding a state

Single-Employer Plans law against a Contract Clause attack: is whether the

[HN1] Minn. Stat. § 181B.04. petitioner had purchased into an enterprise already

regulated in the particular to which he now objects.

Constitutional Law > Congressional Duties & Powers >

Contracts Clause > General Overview Constitutional Law > Congressional Duties & Powers >

[HN2] See U.S. Const. art. I, § 10. Contracts Clause > General Overview

Contracts Law > Contract Modifications > General

Constitutional Law > Congressional Duties & Powers > Overview

Contracts Clause > General Overview Governments > State & Territorial Governments >

Governments > State & Territorial Governments > Police Power

Police Power [HN7] Although the absolute language of the Contract

[HN3] Literalism in the construction of the Contract Clause leaves room for the "essential attributes of

Clause would make it destructive of the public interest by sovereign power," necessarily reserved by the states to

depriving the State of its prerogative of self-protection. safeguard the welfare of their citizens, that power has

limits when its exercise effects substantial modifications

of private contracts. Despite the customary deference

Constitutional Law > Congressional Duties & Powers > courts give to state laws directed to social and economic

Contracts Clause > General Overview problems, legislation adjusting the rights and

Governments > State & Territorial Governments > responsibilities of contracting parties must be upon

Police Power reasonable conditions and of a character appropriate to

[HN4] The Contract Clause does not operate to obliterate the public purpose justifying its adoption.

the police power of the states.

Constitutional Law > Congressional Duties & Powers >

Constitutional Law > Congressional Duties & Powers > Contracts Clause > General Overview

Contracts Clause > General Overview Governments > State & Territorial Governments >

[HN5] One whose rights are subject to state restriction Legislatures

cannot remove them from the power of the State by [HN8] The first inquiry in determining whether a state

making a contract about them. The contract will carry law violates the Contract Clause, must be whether the

with it the infirmity of the subject matter. state law has, in fact, operated as a substantial

impairment of a contractual relationship. The severity of

the impairment measures the height of the hurdle the state

Contracts Law > Contract Conditions & Provisions >

legislation must clear. Minimal alteration of contractual

General Overview

obligations may end the inquiry at its first stage. Severe

Governments > State & Territorial Governments >

impairment, on the other hand, will push the inquiry to a

Legislatures

careful examination of the nature and purpose of the state

Governments > State & Territorial Governments >

legislation.

Police Power

[HN6] Despite the Contract Clause, the states retain

residual authority to enact laws to safeguard the vital Constitutional Law > Congressional Duties & Powers >

interests of their people. In upholding a state law, the Contracts Clause > General Overview

following factors are significant; (1) that the state [HN9] The severity of an impairment of contractual

legislature has declared in the Act itself that an obligations can be measured by the factors that reflect the

emergency need for the protection existed; (2) that the high value the Framers placed on the protection of private

state law was enacted to protect a basic societal interest, contracts. Contracts enable individuals to order their

not a favored group; (3) that the relief was appropriately personal and business affairs according to their particular

Page 3

438 U.S. 234, *; 98 S. Ct. 2716, **;

57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130

needs and interests. Once arranged, those rights and subject to state regulation at the time the company's

obligations are binding under the law, and the parties are contractual obligations were originally undertaken, but

entitled to rely on them. invaded an area never before subject to regulation by the

state, (3) it did not effect simply a temporary alteration of

SUMMARY: the contractual relationships of those within its coverage,

but worked a severe, permanent, and immediate change

A company with an office in Minnesota had a in those relationships, irrevocably and retroactively, and

pension plan, under which employees could receive a (4) its narrow aim was leveled not at every Minnesota

pension upon retirement at age 65 regardless of length of employer, and not even at every Minnesota employer

service. Furthermore, an employee's right to a pension who left the state, but only at those who had in the past

vested prior to age 65 if certain requirements as to length been sufficiently enlightened to voluntarily agree to

of service and age were met. The company was the sole establish pension plans for their employees.

contributor to the pension fund, but the plan neither

required the company to make specific contributions nor Brennan, J., joined by White and Marshall, JJ.,

imposed any sanction for failing to contribute adequately. dissented, expressing the view that (1) the statute, which

The company retained a virtually unrestricted right to simply created an additional duty for the company but

amend the plan, and was free to terminate it and which did not abrogate or dilute any obligation due a

distribute the assets at any time according to a party to a private contract, did not implicate the contract

predetermined method. Minnesota enacted a statute, clause in any way, the clause not protecting all

under which private employers of 100 or more employees contract-based expectations including that of an employer

providing pension benefits under qualified plans were that his obligations to his employees not be legislatively

subject to a "pension funding charge" upon termination of enlarged beyond those explicitly provided in its pension

the plan or closing of an office within the state. The plan, and (2) the statute did not violate the due process

charge was assessed if pension funds were not sufficient clause of the Fourteenth Amendment.

to cover full pensions for all employees working at least

10 years. After enactment of the statute, in a move Blackmun, J., did not participate.

planned before its passage, the company closed its

Minnesota office. Several discharged employees, who LAWYERS' EDITION HEADNOTES:

had no vested pension rights under the plan, were

nonetheless pension obligees under the statute. The state LAW §271 ;

notified the company that it owed a significant pension

funding charge, and the company brought suit in the contract clause -- state statute -- pensions -- ;

United States District Court for the District of Minnesota

for injunctive and declaratory relief, claiming that the act Headnote:[1A][1B]

unconstitutionally impaired its contractual obligation to

its employees under its pension agreement. A three-judge A state statute which subjects certain private

District Court upheld the statute as applied to the employers who provide pension benefits under a covered

company (449 F Supp 644). plan to a "pension funding charge" if the employer

terminates the plan or closes an office within the state,

On direct appeal, the United States Supreme Court such charge being assessed if the pension fund is

reversed. In an opinion by Stewart, J., joined by Burger, insufficient to cover full pensions for all employees

Ch. J., and Powell, Rehnquist, and Stevens, JJ., it was working at least 10 years, violates the contract clause of

held that the Minnesota statute, as applied to the the Federal Constitution (Art I, 10, cl 1) insofar as it

company, violated the contract clause of the Federal applies to an employer, some of whose employees,

Constitution (Art I, 10, cl 1), it not being necessary to having been discharged upon the closing of its office, had

hold that the state law impaired the obligation of the no vested rights under its pension plan (which predated

company's employment contracts without moderation or the statute) but nonetheless qualified as pension obligees

reason or in a spirit of oppression, since (1) the law was under the statute, it not being necessary to hold that the

not enacted to deal with a broad, generalized, economic state statute impairs the obligation of the company's

or social problem, (2) it did not operate in an area already employment contracts without moderation or reason or in

Page 4

438 U.S. 234, *; 98 S. Ct. 2716, **;

57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130

a spirit of oppression, where (1) the statute was not LAW §124 ;

enacted to deal with a broad, generalized economic or

social problem, (2) the statute does not operate in an area contract clause -- limitations on state power -- police

already subject to state regulation at the time the power -- ;

company's contractual obligations under the pension plan

Headnote:[4]

were originally undertaken, but instead invades an area

never before subject to regulation by the state, (3) the The contract clause of the Federal Constitution (Art

statute does not effect simply a temporary alteration of I, 10, cl 1) imposes limits upon the power of the state to

the contractual relationships of those within its coverage, abridge existing contractual relationships, even in the

but works a severe, permanent, and immediate change in exercise of its otherwise legitimate police power.

those relationships, irrevocably and retroactively, and (4)

the statute's narrow aim is leveled not at every employer

within the state, or not even at every employer leaving LAW §128 ;

the state, but only at those employers who in the past

were sufficiently enlightened to voluntarily agree to contract clause -- state legislation -- ;

establish pension plans for their employees. (Brennan,

Headnote:[5]

White, and Marshall, JJ., dissented from this holding.)

For purposes of the contract clause of the Federal

LAW §214(1) ; Constitution (Art I, 10, cl 1), despite the customary

deference courts give to state laws directed to social and

contract clause -- state police power -- ; economic problems, legislation adjusting the rights and

responsibilities of contracting parties must be upon

Headnote:[2] reasonable conditions and of a character appropriate to

the public purpose justifying its adoption.

The contract clause of the Federal Constitution (Art

I, 10, cl 1) does not operate to obliterate the police power

of the state; the interdiction of statutes impairing the CONTRACTS §145 ;

obligation of contracts does not prevent the state from

exercising such powers as are vested in it for the bilateral contract -- diminution of duties -- ;

promotion of the common weal, or are necessary for the

Headnote:[6A][6B]

general good of the public, though contracts previously

entered into between individuals may thereby be affected, In any bilateral contract the diminution of duties on

and this police power, which is an exercise of the one side effectively increases the duties on the other.

sovereign right of the government to protect the lives,

health, morals, comfort and general welfare of the people, SYLLABUS

is paramount to any rights under contracts between

individuals. Appellant, an Illinois corporation, maintained an

office in Minnesota with 30 employees. Under

appellant's pension plan, adopted in 1963 and qualified

LAW §142 ;

under § 401 of the Internal Revenue Code, employees

contract -- subject matter infirmity -- ; were entitled to retire and receive a pension at age 65

regardless of length of service, and an employee's

Headnote:[3] pension right became vested if he satisfied certain

conditions as to length of service and age. Appellant was

One whose rights, such as they are, are subject to the sole contributor to the pension trust fund, and each

state restriction, cannot remove them from the power of year made contributions to the fund based on actuarial

the state by making a contract about them, since the predictions of eventual payout needs. But the plan

contract will carry with it the infirmity of the subject neither required appellant to make specific contributions

matter. nor imposed any sanction on it for failing to make

adequate contributions, and appellant retained a right not

Page 5

438 U.S. 234, *; 98 S. Ct. 2716, **;

57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130

only to amend the plan but also to terminate it at any time requirement was applied only to those employers who

and for any reason. In 1974, Minnesota enacted the terminated their pension plans or who, like appellant,

Private Pension Benefits Protection Act (Act), under closed their Minnesota offices, thus forcing the employer

which a private employer of 100 employees or more (at to make all the retroactive changes in its contractual

least one of whom was a Minnesota resident) who obligations at one time. Pp. 244-247.

provided pension benefits under a plan meeting the

qualifications of § 401 of the Internal Revenue Code, was (c) The Act does not possess the attributes of those

subject to a "pension funding charge" if he terminated the state laws that have survived challenge under the

plan or closed a Minnesota office. The charge was Contract Clause. It was not even purportedly enacted to

assessed if the pension funds were insufficient to cover deal with a broad, generalized economic or social

full pensions for all employees who had worked at least problem, cf. Home Building & Loan Assn. v. Blaisdell,

10 years, and periods of employment prior to the 290 U.S. 398, 445, but has an extremely narrow focus

effective date of the Act were to be included in the and enters an area never before subject to regulation by

10-year employment criterion. Shortly thereafter, in a the State. Pp. 247-250.

move planned before passage of the Act, appellant closed

its Minnesota office, and several of its employees, who COUNSEL: George B. Christensen argued the cause for

were then discharged, had no vested pension rights under appellant. With him on the briefs were Chester W. Nosal

appellant's plan but had worked for appellant for 10 years and John R. Kenefick.

or more, thus qualifying as pension obligees under the

Byron E. Starns, Chief Deputy Attorney General of

Act. Subsequently, the State notified appellant that it

Minnesota, argued the cause for appellees. With him on

owed a pension funding charge of $ 185,000 under the

the brief were Warren Spannaus, Attorney General, pro

Act. Appellant then brought suit in Federal District

se, Richard B. Allyn, Solicitor General, and Kent G.

Court for injunctive and declaratory relief, claiming that

Harbison, Richard A. Lockridge, and Jon K. Murphy,

the Act unconstitutionally impaired its contractual

Special Assistant Attorneys General. *

obligations to its employees under its pension plan, but

the court upheld the Act as applied to appellant. Held: * Peter G. Nash, Eugene B. Granof, and Stanley

The application of the Act to appellant violates the T. Kaleczyc filed a brief for the Chamber of

Contract Clause of the Constitution, which provides that Commerce of the United States as amicus curiae

"[no] State shall . . . pass any . . . Law impairing the urging reversal.

Obligation of Contracts." Pp. 240-251.

JUDGES: STEWART, J., delivered the opinion of the

(a) While the Contract Clause does not operate to

Court, in which BURGER, C. J., and POWELL,

obliterate the police power of the States, it does impose

REHNQUIST, and STEVENS, JJ., joined. BRENNAN,

some limits upon the power of a State to abridge existing

J., filed a dissenting opinion, in which WHITE and

contractual relationships, even in the exercise of its

MARSHALL, JJ., joined, post, p. 251. BLACKMUN, J.,

otherwise legitimate police power. "Legislation adjusting

took no part in the consideration or decision of the case.

the rights and responsibilities of contracting parties must

be upon reasonable conditions and of a character

OPINION BY: STEWART

appropriate to the public purpose justifying its adoption."

United States Trust Co. v. New Jersey, 431 U.S. 1, 22.

OPINION

Pp. 242-244.

[*236] [***731] [**2718] MR. JUSTICE

(b) The impact of the Act upon appellant's

STEWART delivered the opinion of the Court.

contractual obligations was both substantial and severe.

Not only did the Act retroactively modify the [***LEdHR1A] [1A]The issue in this case is

compensation that appellant had agreed to pay its whether the application of Minnesota's Private Pension

employees from 1963 to 1974, but it did so by changing Benefits Protection Act 1 to the appellant violates the

appellant's obligations in an area where the element of Contract Clause of the United States Constitution.

reliance was vital -- the funding of a pension plan.

Moreover, the retroactive state-imposed vesting 1 Minn. Stat. § 181B.01 et seq. (1974). This is

Page 6

438 U.S. 234, *236; 98 S. Ct. 2716, **2718;

57 L. Ed. 2d 727, ***LEdHR1A; 1978 U.S. LEXIS 130

the same Act that was considered in Malone v. Although those contributions once made were

White Motor Corp., 435 U.S. 497, a case irrevocable, in the sense that they remained part of the

presenting a quite different legal issue. pension trust fund, the plan neither required the company

to make specific [***732] contributions nor imposed

I any sanction on it for failing to contribute adequately to

the fund.

In 1974 appellant Allied Structural Steel Co.

(company), a corporation with its principal place of The company not only retained a virtually

business in Illinois, maintained an office in Minnesota unrestricted right to amend the plan in whole or in part,

with 30 employees. Under the company's general but was also free to terminate the plan and distribute the

pension plan, adopted in 1963 and qualified as a trust assets at any time and for any reason. In the event

single-employer plan under § 401 of the Internal Revenue of a termination, the assets of the fund were to go, first, to

Code, 26 U. S. C. § 401 (1976 ed.), 2 salaried employees meet the plan's obligation to those employees already

were covered as follows: At age 65 an employee was retired and receiving pensions; second, to those eligible

entitled to retire and receive a monthly pension generally for retirement; and finally, if any balance remained, to the

computed by multiplying 1% of his average monthly other employees covered under the plan whose pension

earnings by the total number of his years of employment rights had not yet vested. 5 Employees within each of

with the company. 3 Thus, an employee aged 65 or more these categories were assured payment only to the extent

could retire without satisfying any particular of the pension assets.

length-of-service requirement, but the size of his pension

would reflect the length of his service with the company. 5 Apart from termination of the fund and

4 An employee could also [*237] become entitled to distribution of the trust assets, there was no other

receive a pension, payable in full at age 65, if he met any situation in which employees in this third

one of the following requirements: (1) he had worked 15 category would receive anything from the pension

years for the company and reached the age of 60; or (2) fund.

he was at least 55 years old and the sum of his age and

his years of service with the company was at least 75; or [*238] The plan expressly stated:

(3) he was less than 55 years old but the sum of his age

"No employee shall have any right to, or interest in,

and his years of service with the company was at least 80.

any part of the Trust's assets upon termination of his

Once an employee satisfied any one of these conditions,

employment or otherwise, except as provided from time

his pension right became vested in the sense that any

to time under this Plan, and then only to the extent of the

subsequent termination of employment would not affect

benefits payable to such employee out of the assets of the

his right to receive a monthly pension when he reached

Trust. All payments of benefits as provided for in this

65. [**2719] Those employees who quit or were

Plan shall be made solely out of the assets of the Trust

discharged before age 65 without fulfilling one of the

and neither the employer, the trustee, nor any member of

other three conditions did not acquire any pension rights.

the Committee shall be liable therefor in any manner."

2 The plan was not the result of a

The plan also specifically advised employees that

collective-bargaining agreement, and no such

neither its existence nor any of its terms were to be

agreement is at issue in this case.

understood as implying any assurance that employees

3 The employee could elect to receive instead a

could not be dismissed from their employment with the

lump-sum payment.

company at any time.

4 Thus, an employee whose average monthly

earnings were $ 800 and who retired at 65 would In sum, an employee who did not die, did not quit,

receive eight dollars monthly if he had worked and was not discharged before meeting one of the

one year for the company and $ 320 monthly if he requirements of the plan would receive a fixed pension at

had worked for the company for 40 years. age 65 if the company remained in business and elected

to continue the pension plan in essentially its existing

The company was the sole contributor to the pension

form.

trust fund, and each year it made contributions to the fund

based on actuarial predictions of eventual payout needs.

Page 7

438 U.S. 234, *238; 98 S. Ct. 2716, **2719;

57 L. Ed. 2d 727, ***732; 1978 U.S. LEXIS 130

On April 9, 1974, Minnesota enacted the law here in vested pension rights under the company's plan, but had

question, the Private Pension Benefits Protection Act, worked for the company for 10 years or more and thus

Minn. Stat. §§ 181B.01-181B.17. Under the Act, a qualified as pension obligees of the company under the

private employer of 100 employees or more -- at least one law that Minnesota had enacted a few months earlier. On

of whom was a Minnesota resident -- who provided August 18, the State notified the company that it owed a

pension benefits under a plan meeting the qualifications pension funding charge of approximately $ 185,000

of § 401 of the Internal Revenue Code, was subject to a under the provisions of the Private Pension Benefits

"pension funding charge" if he either terminated the plan Protection Act.

or closed a Minnesota office. 6 The charge was assessed

if the pension funds were not sufficient to cover full 8 According to the stipulated facts, the closing of

pensions for all employees who had worked at least 10 the company's Minnesota office resulted from a

years. The Act required the employer to satisfy the shift of that office's duties to the main company

deficiency by purchasing deferred annuities, payable to office in Illinois the previous December. The

the employees at their normal retirement age. A separate closing was not completed until February 1975,

provision [*239] specified that periods of employment by which time the Minnesota Act had been

prior to the effective date of the Act were to be included pre-empted by federal law. See Malone v. White

in the 10-year employment criterion. 7 Motor Corp., 435 U.S., at 499. We deal here

solely with the application of the Minnesota Act

6 Although the company had only 30 employees to the 11 employees discharged in July 1974.

in Minnesota, it was subject to the Act because it

had over 100 employees altogether. The company brought suit in a Federal District

7 Entitled "Nonvested Benefits Prior to Act," Court asking [*240] for injunctive and declaratory

[HN1] Minn. Stat. § 181B.04 provided: relief. It claimed that the Act unconstitutionally impaired

its contractual obligations to its employees under its

"Every employer who hereafter ceases to pension agreement. The three-judge court upheld the

operate a place of employment or a pension plan constitutional validity of the Act as applied to the

within this state shall owe to his employees company, Fleck v. Spannaus, 449 F.Supp. 644, and an

covered by sections 181B.01 to 181B.17 a appeal was brought to this Court under 28 U. S. C. §

pension funding charge which shall be equal to 1253 (1976 ed.). 9 We noted probable jurisdiction. 434

the present value of the total amount of nonvested U.S. 1045.

pension benefits based upon service occurring

before April 10, 1974 of such employees of the 9 The claims of Walter Fleck and the other two

employer who have completed ten or more years individual plaintiffs were dismissed by the

of any covered service under the pension plan of District Court for lack of standing, Fleck v.

the employer and whose nonvested pension Spannaus, 421 F.Supp. 20, leaving only the

benefits have been or will be forfeited because of company as an appellant. Warren Spannaus, the

the employer's ceasing to operate a place of Attorney General of Minnesota, is an appellee.

employment or a pension plan, less the amount of

II

such nonvested pension benefits which are

compromised or settled to the satisfaction of the A

commissioner as provided in sections 181B.01 to

181B.17." There can be no question of the impact of the

Minnesota Private Pension Benefits Protection Act upon

[***733] [**2720] During the summer of 1974 the company's contractual relationships with its

the company began closing its Minnesota office. On July employees. The Act substantially altered those

31, it discharged 11 of its 30 Minnesota employees, and relationships by superimposing pension obligations upon

the following month it notified the Minnesota the company conspicuously beyond those that it had

Commissioner of Labor and Industry, as required by the voluntarily agreed to undertake. But it does not

Act, that it was terminating an office in the State. 8 At inexorably follow that the Act, as applied to the

least nine of the discharged employees did not have any company, violates the Contract Clause of the

Page 8

438 U.S. 234, *240; 98 S. Ct. 2716, **2720;

57 L. Ed. 2d 727, ***733; 1978 U.S. LEXIS 130

Constitution. powers as are vested in it for the promotion of the

common weal, or are necessary for the general good of

The language of the Contract Clause appears the public, though contracts previously entered into

unambiguously absolute: [HN2] "No State shall . . . pass between individuals may thereby be affected. This

any . . . Law impairing the Obligation of Contracts." U.S. power, which in its various ramifications is known as the

Const., Art. I, § 10. The Clause is not, however, the police power, is an exercise of the sovereign right of the

Draconian provision that its words might seem to imply. Government to protect the lives, health, morals, comfort

As the Court [***734] has recognized, [HN3] and general welfare of the people, and is paramount to

"literalism in the construction of the contract clause . . . any rights under contracts between individuals."

would make it destructive of the public interest by Manigault v. Springs, 199 U.S. 473, 480. As Mr. Justice

depriving the State of its prerogative of self-protection." Holmes succinctly put the matter in his opinion for the

W. B. Worthen Co. v. Thomas, 292 U.S. 426, 433. 10 Court in Hudson Water Co. v. McCarter, 209 U.S. 349,

357: [HN5] "One whose rights, such as they are, are

10 See generally B. Schwartz, A Commentary subject to state restriction, cannot remove them from the

on the Constitution of the United States, Pt. 2, power of the State by making a contract [*242] about

The Rights of Property 266-306 (1965); B. them. The contract will carry with it the infirmity of the

Wright, The Contract Clause of the Constitution subject matter."

(1938).

B

[*241] Although it was perhaps the strongest single

constitutional check on state legislation during our early [***LEdHR4] [4]If the Contract Clause is to retain

years as a Nation, 11 the Contract Clause receded into any meaning at all, however, it must be understood to

comparative desuetude with the adoption of the impose some limits upon the power of a State to abridge

Fourteenth Amendment, and particularly with the existing contractual relationships, even in the exercise of

development of the large body of jurisprudence under the its otherwise legitimate police power. The existence and

Due Process Clause of that Amendment in modern nature of those limits were clearly indicated in a series of

constitutional history. 12 Nonetheless, the Contract cases in this Court arising from the efforts of the States to

[**2721] Clause remains part of the Constitution. It is deal with the unprecedented emergencies brought on by

not a dead letter. And its basic contours are brought into the severe economic depression of the early 1930's.

focus by several of this Court's 20th-century decisions.

In Home Building & Loan Assn. v. Blaisdell, 290

11 Perhaps the best known of all Contract Clause U.S. 398, the Court [***735] upheld against a Contract

cases of that era was Dartmouth College v. Clause attack a mortgage moratorium law that Minnesota

Woodward, 4 Wheat. 518. had enacted to provide relief for homeowners threatened

12 Indeed, at least one commentator has with foreclosure. Although the legislation conflicted

suggested that "the results might be the same if directly with lenders' contractual foreclosure rights, the

the contract clause were dropped out of the Court there acknowledged that, [HN6] despite the

Constitution, and the challenged statutes all Contract Clause, the States retain residual authority to

judged as reasonable or unreasonable deprivations enact laws "to safeguard the vital interests of [their]

of property." Hale, The Supreme Court and the people." Id., at 434. In upholding the state mortgage

Contract Clause: III, 57 Harv. L. Rev. 852, moratorium law, the Court found five factors significant.

890-891 (1944). First, the state legislature had declared in the Act itself

that an emergency need for the protection of homeowners

existed. Id., at 444. Second, the state law was enacted to

protect a basic societal interest, not a favored group. Id.,

[***LEdHR2] [2] [***LEdHR3] [3]First of all, it is to at 445. Third, the relief was appropriately tailored to the

be accepted as a commonplace that [HN4] the Contract

emergency that it was designed to meet. Ibid. Fourth, the

Clause does not operate to obliterate the police power of imposed conditions were reasonable. Id., at 445-447.

the States. "It is the settled law of this court that the And, finally, the legislation was limited to the duration of

interdiction of statutes impairing the obligation of the emergency. Id., at 447.

contracts does not prevent the State from exercising such

Page 9

438 U.S. 234, *242; 98 S. Ct. 2716, **2721;

57 L. Ed. 2d 727, ***735; 1978 U.S. LEXIS 130

The Blaisdell opinion thus clearly implied that if the 21, that power has limits when its exercise effects

Minnesota moratorium legislation had not possessed the substantial modifications of private contracts. Despite

characteristics attributed to it by the Court, it would have the customary deference courts give to state laws directed

been invalid under the Contract Clause of the to social and economic problems, "[legislation] adjusting

Constitution. 13 [*243] These implications were given the rights and responsibilities of contracting parties must

concrete force in three cases that followed closely in be upon reasonable conditions and of a character

Blaisdell's wake. appropriate to the public purpose justifying its adoption."

Id., at 22. Evaluating with particular scrutiny a

13 In Veix v. Sixth Ward Building & Loan Assn., modification of a contract to which the State itself was a

310 U.S. 32, 38, the Court took into account still party, the Court in that case held that legislative alteration

another consideration in upholding a state law of the rights and remedies of Port Authority bondholders

against a Contract Clause attack: the petitioner violated the Contract Clause because the legislation was

had "purchased into an enterprise already neither necessary nor reasonable. 15

regulated in the particular to which he now

objects." 14 See also El Paso v. Simmons, 379 U.S. 497.

There the Court held that a Texas law shortening

In W. B. Worthen Co. v. Thomas, 292 U.S. 426, the the time within which a defaulted land claim

Court dealt with an Arkansas law that exempted the could be reinstated did not violate the Contract

proceeds of a life insurance policy from collection by the Clause. "We do not believe that it can seriously be

beneficiary's judgment creditors. Stressing the contended that the buyer was substantially

retroactive effect of the state law, the Court held that it induced to enter into these contracts on the basis

was invalid under the Contract Clause, since it [**2722] of a defeasible right to reinstatement . . . or that he

was not precisely and reasonably designed to meet a interpreted that right to be of everlasting effect.

grave temporary emergency in the interest of the general At the time the contract was entered into the

welfare. In W. B. Worthen Co. v. Kavanaugh, 295 U.S. State's policy was to sell the land as quickly as

56, the Court was confronted with another Arkansas law possible . . . ." Id., at 514. In sum, "[the] measure

that diluted the rights and remedies of mortgage taken . . . was a mild one indeed, hardly

bondholders. The Court held the law invalid under the burdensome to the purchaser . . . but nonetheless

Contract Clause. "Even when the public welfare is an important one to the State's interest." Id., at

invoked as an excuse," Mr. Justice Cardozo wrote for the 516-517.

Court, the security of a mortgage cannot be cut down 15 The Court indicated that impairments of a

"without moderation or reason or in a spirit of State's own contracts would face more stringent

oppression." Id., at 60. And finally, in Treigle v. Acme examination under the Contract Clause than

Homestead Assn., 297 U.S. 189, the Court held invalid would laws regulating contractual relationships

under the Contract Clause a Louisiana law that modified between private parties, 431 U.S., at 22-23,

the existing withdrawal rights of the members of a although it was careful to add that "private

building and loan association. "Such an interference with contracts are not subject to unlimited modification

the right of contract," said the Court, "cannot be justified under the police power." Id., at 22.

by saying that in the public interest the operations of

building associations may be controlled [***736] and III

regulated, or that in the same interest their charters may

be amended." Id., at 196. [***LEdHR6A] [6A]In applying these principles to

the present case, [HN8] the first inquiry must be whether

[***LEdHR5] [5]The most recent Contract Clause case the state law has, in fact, operated as a substantial

in this Court was United States Trust Co. v. New Jersey, impairment of a contractual relationship. 16 [*245] The

431 U.S. 1.14 In [*244] that case the Court again severity of the impairment [***737] [**2723]

recognized that [HN7] although the absolute language of measures the height of the hurdle the state legislation

the Clause must leave room for "the 'essential attributes must clear. Minimal alteration of contractual obligations

of sovereign power,' . . . necessarily reserved by the may end the inquiry at its first stage. 17 Severe

States to safeguard the welfare of their citizens," id., at impairment, on the other hand, will push the inquiry to a

Page 10

438 U.S. 234, *245; 98 S. Ct. 2716, **2723;

57 L. Ed. 2d 727, ***737; 1978 U.S. LEXIS 130

careful examination of the nature and purpose of the state amount based on the plan's requirements for vesting. The

legislation. plan satisfied the current federal income tax code and was

subject to no other legislative requirements. And, of

16 course, the company was free to amend or terminate the

pension plan at any time. The company thus had no

[***LEdHR6A] [6B]The novel construction reason to anticipate that its employees' [*246] pension

of the Contract Clause expressed in the dissenting rights could become vested except in accordance with the

opinion is wholly contrary to the decisions of this terms of the plan. It relied heavily, and reasonably, on

Court. The narrow view that the Clause forbids this legitimate contractual expectation in calculating its

only state laws that diminish the duties of a annual contributions to the pension fund.

contractual obligor and not laws that increase

them, a view arguably suggested by Satterlee v. The effect of Minnesota's Private Pension Benefits

Matthewson, 2 Pet. 380, has since been expressly Protection Act on this contractual obligation was severe.

repudiated. Detroit United R. Co. v. Michigan, The company was required in 1974 to have made its

242 U.S. 238; Georgia R. & Power Co. v. contributions throughout the pre-1974 life of its plan as if

Decatur, 262 U.S. 432. See also, e. g., Sherman v. employees' pension rights had vested after 10 years,

Smith, 1 Black 587; Bernheimer v. Converse, 206 instead of vesting in accord with the terms of the plan.

U.S. 516, 530; Henley v. Myers, 215 U.S. 373; Thus a basic term of the pension contract -- one on which

National Surety Co. v. Architectural Decorating the company had relied for 10 years -- was substantially

Co., 226 U.S. 276; Columbia R., Gas & Electric modified. The result was that, although the company's

Co. v. South Carolina, 261 U.S. 236; past contributions were adequate when made, they were

Stockholders of Peoples Banking Co. v. Sterling, not adequate when computed under the 10-year statutory

300 U.S. 175. Moreover, in any bilateral contract vesting requirement. The Act thus forced a current

the diminution of duties on one side effectively recalculation of the past 10 years' contributions based on

increases the duties on the other. the new, unanticipated 10-year vesting requirement.

The even narrower view that the Clause is Not only did the state law thus retroactively modify

limited in its application to state laws relieving the compensation that the company had agreed to pay its

debtors of obligations to their creditors is, as the employees from 1963 to 1974, but also it did so by

dissent recognizes, post, at 257 n. 5, completely at changing the company's obligations in an area where the

odds with this Court's decisions. See Dartmouth element of reliance was vital -- the funding of a pension

College v. Woodward, 4 Wheat. 518; Wood v. plan. 18 As the Court has recently recognized:

Lovett, 313 U.S. 362; El Paso v. Simmons, supra.

See generally Hale, The Supreme Court and the [***738] "These [pension] plans, like other forms

Contract Clause, 57 Harv. L. Rev. 512, 514-516 of insurance, depend on the accumulation of large sums

(1944). to cover contingencies. The amounts set aside are

17 See n. 14, supra. determined by a painstaking assessment of the insurer's

likely liability. Risks that the insurer foresees will be

[HN9] The severity of an impairment of contractual included in the [*247] calculation of liability, and the

obligations can be measured by the factors that reflect the rates or contributions charged will reflect that calculation.

high value the Framers placed on the protection of private The occurrence of major unforeseen contingencies,

contracts. Contracts enable individuals to order their however, jeopardizes the insurer's solvency and,

personal and business affairs according to their particular ultimately, the insureds' benefits. Drastic changes in the

needs and interests. Once arranged, those rights and legal rules governing pension and insurance funds, like

obligations are binding under the law, and the parties are other unforeseen events, [**2724] can have this effect."

entitled to rely on them. Los Angeles Dept. of Water & Power v. Manhart, 435

U.S. 702, 721.

Here, the company's contracts of employment with

its employees included as a fringe benefit or additional 18 In some situations the element of reliance

form of compensation, the pension plan. The company's may cut both ways. Here, the company had relied

maximum obligation was to set aside each year an upon the funding obligation of the pension plan

Page 11

438 U.S. 234, *247; 98 S. Ct. 2716, **2724;

57 L. Ed. 2d 727, ***738; 1978 U.S. LEXIS 130

for more than a decade. There was no showing of legislature's purpose.

reliance to the contrary by its employees. Indeed,

Minnesota did not act to protect any employee But whether or not the legislation was aimed largely

reliance interest demonstrated on the record. at a single employer, 20 it clearly has an extremely

Instead, it compelled the employer to exceed [***739] narrow focus. It applies only to private

bargained-for expectations and nullified an employers who have at least 100 employees, at least one

express term of the pension plan. of whom works in Minnesota, and who have established

voluntary private pension plans, qualified under § 401 of

Moreover, the retroactive state-imposed vesting the Internal Revenue Code. And it applies only when

requirement was applied only to those employers who such an employer closes his Minnesota office or

terminated their pension plans or who, like the company, terminates his pension plan. 21 Thus, this law can [*249]

closed their Minnesota offices. The company was thus hardly be characterized, like the law at issue in the

forced to make all the retroactive changes in its Blaisdell case, as one enacted to protect a broad societal

contractual obligations at one time. By simply interest rather than a narrow class. 22

proceeding to close its office in Minnesota, a move that

had been planned before the passage of the Act, the 20 In Malone v. White Motor Corp., 435 U.S., at

company was assessed an immediate pension funding 501 n. 5, the Court noted that the White Motor

charge of approximately $ 185,000. Corp., an employer of more than 1,000 Minnesota

employees, had been prohibited from terminating

Thus, the statute in question here nullifies express its pension plan until the expiration date of its

terms of the company's contractual obligations and collective-bargaining agreement, May 1, 1974.

imposes a completely unexpected liability in potentially International Union, UAW v. White Motor Corp.,

disabling amounts. There is not even any provision for 505 F.2d 1193 (CA8). On April 9, 1974, the

gradual applicability or grace periods. Cf. the Employee Minnesota Act was passed, to become effective

Retirement Income Security Act of 1974 (ERISA), 29 U. the following day. When White Motor proceeded

S. C. §§ 1061 (b)(2), 1086 (b), and 1144 (1976 ed.). See to terminate its collectively bargained pension

n. 23, infra. Yet there is no showing in the record before plan at the earliest possible date, May 1, 1974, the

us that this severe disruption of contractual expectations State assessed a deficiency of more than $ 19

was necessary to meet an important general social million, based upon the Act's 10-year vesting

problem. The presumption favoring "legislative judgment requirement.

as to the necessity and reasonableness of a particular 21 Not only did the Act have an extremely

measure," United States Trust Co., 431 U.S., at 23, narrow aim, but also its effective life was

simply cannot stand in this case. extremely short. The United States House of

Representatives had passed a version of the

The only indication of legislative intent in the record Employee Retirement Income Security Act of

before us is to be found in a statement in the District 1974, 29 U. S. C. § 1001 et seq. (1976 ed.), on

Court's opinion: February 28, 1974, 120 Cong. Rec. 4781-4782

(1974), and the Senate on March 4, 1974, id., at

5011. Both versions expressly pre-empted state

laws. That the Minnesota Legislature was aware

"It seems clear that the problem of plant closure and of the impending federal legislation is reflected in

pension plan termination was brought to the attention the explicit provision of the Act that it will

[*248] of the Minnesota legislature when the "become null and void upon the institution of a

Minneapolis-Moline Division of White Motor mandatory plan of termination insurance

Corporation closed one of its Minnesota plants and guaranteeing the payment of a substantial portion

attempted to terminate its pension plan." 449 F.Supp., at of an employee's vested pension benefits pursuant

651. 19

to any law of the United States." Minn. Stat. §

181B.17. ERISA itself, effective January 1, 1975,

19 The Minnesota Supreme Court, Fleck v.

expressly pre-empts all state laws regulating

Spannaus, 312 Minn. 223, 251 N. W. 2d 334,

covered plans. 29 U. S. C. § 1144 (a) (1976 ed.).

engaged in mere speculation as to the state

Page 12

438 U.S. 234, *249; 98 S. Ct. 2716, **2724;

57 L. Ed. 2d 727, ***739; 1978 U.S. LEXIS 130

Thus, the Minnesota Act was in force less than State.

nine months, from April 10, 1974, until January 1,

1975. The company argues that the enactment of

the law while ERISA was on the horizon totally

belies the State's need for this pension legislation. [***740] [***LEdHR1A] [1B]This Minnesota law

22 In upholding the constitutionality of the Act, simply does not possess the attributes of those state laws

the District Court referred to Minnesota's interest that in the past have survived challenge under the

in protecting the economic welfare of its older Contract Clause of the Constitution. The law was not

citizens, as well as their surrounding economic even purportedly enacted to deal with a broad,

communities. 449 F.Supp. 644. generalized economic or social problem. Cf. Home

Building & Loan Assn. v. Blaisdell, 290 U.S., at 445. It

[**2725] Moreover, in at least one other important did not operate in an area already subject to state

respect the Act does not resemble the mortgage regulation at the time the company's contractual

moratorium legislation whose constitutionality was obligations were originally undertaken, but invaded an

upheld in the Blaisdell case. This legislation, imposing a area never before subject to regulation by the State. Cf.

sudden, totally unanticipated, and substantial retroactive Veix v. Sixth Ward Building & Loan Assn., 310 U.S. 32,

obligation upon the company to its employees, 23 was not 38. 25 It did not effect simply a temporary alteration of

enacted to deal with a situation remotely approaching the the contractual relationships of those within its coverage,

broad and desperate emergency economic conditions of but worked a severe, permanent, and immediate change

the early 1930's -- conditions of which the Court in in those relationships -- irrevocably and retroactively. Cf.

Blaisdell took judicial notice. 24 United States Trust Co. v. New Jersey, 431 U.S., at 22.

And its narrow aim was leveled, not at every Minnesota

23 Compare the gradual applicability of ERISA, employer, not even at every Minnesota employer who left

which itself is not even mandatory. At the outset the State, but only at those who had in the past been

ERISA did not go into effect at all until four sufficiently enlightened as voluntarily to agree to

months after it was enacted. 29 U. S. C. § 1144 establish pension plans for their employees.

(1976 ed.). Funding and vesting requirements

were delayed for an additional year. §§ 1086 (b), 25 See n. 13, supra.

1061 (b)(2) (1976 ed.). By contrast, the

Minnesota Act became fully effective the day "Not Blaisdell's case, but Worthen's (W. B. Worthen

after its passage. The District Court rejected out Co. v. Thomas, [292 U.S. 426]) supplies the applicable

of hand the argument that employers were rule" here. W. B. Worthen Co. v. Kavanaugh, 295 U.S.,

constitutionally entitled to some grace period to at 63. It is not necessary to hold that the Minnesota law

adjust their pension planning. 449 F.Supp., at impaired the obligation of the company's employment

651. contracts "without moderation or reason or in a spirit of

24 This is not to suggest that only an emergency oppression." Id., at 60. 26 But we do hold that if the

of great magnitude can constitutionally justify a Contract Clause means anything at [*251] all, it means

state law impairing the obligations of contracts. that Minnesota could not constitutionally do what it tried

See, e. g., Veix v. Sixth Ward Building & Loan to do to the company in this case.

Assn., 310 U.S., at 39-40; East New York Savings

26 As Mr. Justice Cardozo's opinion for the

Bank v. Hahn, 326 U.S. 230; El Paso v. Simmons,

Court in the Kavanaugh case made clear, these

379 U.S. 497.

criteria are "the outermost limits only." The

Entering a field it had never before sought to opinion went on to stress the state law's "studied

regulate, the Minnesota Legislature grossly distorted the indifference to the interests" of creditors. 295

company's existing contractual relationships with its U.S., at 60.

employees by superimposing retroactive obligations upon

The judgment of the District Court is reversed.

the company substantially [*250] beyond the terms of

its employment contracts. And that burden was imposed It is so ordered.

upon the company only because it closed its office in the

Page 13

438 U.S. 234, *251; 98 S. Ct. 2716, **2725;

57 L. Ed. 2d 727, ***LEdHR1A; 1978 U.S. LEXIS 130

[**2726] MR. JUSTICE BLACKMUN took no part pension plans. As the Minnesota Supreme Court

in the consideration or decision of this case. indicated, see Fleck v. Spannaus, 312 Minn. 223, 231,

251 N. W. 2d 334, 338 (1977), the impetus for the law

DISSENT BY: BRENNAN must have been a legislative belief -- shared by Congress,

see generally Employee Retirement Income Security Act

DISSENT of 1974 (ERISA), 29 U. S. C. § 1001 et seq. (1976 ed.) --

that private pension plans often were grossly unfair to

MR. JUSTICE BRENNAN, with whom MR. covered employees. Not only would employers often

JUSTICE WHITE and MR. JUSTICE MARSHALL join, neglect to furnish their employees with adequate

dissenting. information concerning their rights under the plans,

leading to erroneous expectations, but also because

In cases involving state legislation affecting private

employers often failed to make contributions to the

contracts, this Court's decisions over the past half

pension funds large enough adequately to fund their

century, consistently with both the constitutional text and

plans, employees often ultimately received only a small

its original understanding, have interpreted the Contract

amount of those benefits they reasonably anticipated.

Clause as prohibiting state legislative Acts which, "[with]

See Fleck v. Spannaus, supra, at 231, 251 N. W. 2d, at

studied indifference to the interests of the [contracting

338. Acting against this background, Minnesota, prior to

party] or to his appropriate protection," effectively

the enactment of ERISA, adopted the Act to remedy,

diminished or nullified the obligation due him under the

inter alia, what was viewed as a related serious social

terms of a contract. W. B. Worthen Co. v. Kavanaugh,

problem: the frustration of expectation interests that can

295 U.S. 56, 60 [***741] (1935). But the Contract

occur when an employer closes a single plant and

Clause has not, during this period, been applied to state

terminates the employees who work there. 1

legislation that, while creating new duties, in nowise

diminished the efficacy of any contractual obligation 1 Since appellant's plan remains in force at its

owed the constitutional claimant. Cf. Goldblatt v. other plants, this case does not involve a

Hempstead, 369 U.S. 590 (1962). The constitutionality of termination of a pension plan, and I will therefore

such legislation has, rather, been determined solely by not discuss the aspect of the statute that involves

reference to other provisions of the Constitution, e. g., the such contingencies except to observe that it, too,

Due Process Clause, insofar as they operate to protect is a sensitive attempt to protect employees'

existing economic values. expectation interests.

Today's decision greatly expands the reach of the Pension plans normally do not make provision to

Clause. The Minnesota Private Pension Benefits protect [*253] the interests of employees -- even those

Protection Act (Act) does not abrogate or dilute any within only a few months of the "vesting" of their rights

obligation due a party to a private contract; rather, like all under the plan -- who are terminated because an

positive social legislation, the Act imposes new, employer closes one of his plants. See generally

additional obligations on a particular class of persons. In Bernstein, Employee Pension Rights When Plants Shut

my view, any constitutional infirmity in the law must Down: Problems and Some Proposals, 76 [***742]

therefore derive, not from the Contract Clause, but from Harv. L. Rev. 952 (1963). Even assuming -- contrary to

the Due Process Clause of the Fourteenth Amendment. common experience -- [**2727] that an employer

[*252] I perceive nothing in the Act that works a denial adequately informs his employees that a termination for

of due process and therefore I dissent. any reason prior to vesting will result in forfeiture of

accrued pension credits, denial of all pension benefits not

I

because of job-related failings, but only because the

I begin with an assessment of the operation and employees are unfortunate enough to be employed at a

effect of the Minnesota statute. Although the Court plant that closes for purely economic reasons, is harsh

disclaims knowledge of the purposes of the law, both the indeed. For unlike discharges for inadequate job

terms of the Act and the opinion of the State Supreme performance, which may reasonably be foreseen, the

Court disclose that it was designed to remedy a serious closing of a plant is a contingency outside the range of

social problem arising from the operation of private normal expectations of both the employer and the

Page 14

438 U.S. 234, *253; 98 S. Ct. 2716, **2727;

57 L. Ed. 2d 727, ***742; 1978 U.S. LEXIS 130

employee -- as is made clear by the fact that Allied did undertaking to set up a pension plan for the

not rely upon the possibility of a plant's closing in benefit of its employees.

calculating the amount of its contributions to its pension

plan fund. 2 Although the Court refers to the fact that,

under the terms of the plan, no sanctions could be

2 All parties to this case agree that Allied's imposed on appellant for not adequately funding

actuarial assumptions in calculating its annual it, no substantial objection can be levied against

contributions to the pension plan did not include the Act to the extent that it mandates funding

the possibility of a plant's closing. sufficient to meet the employer's original

undertaking. The plan in the present case can be

The Minnesota Act addresses this problem by interpreted as imposing a duty on the employer to

selecting a period -- 10 years of employment -- after fund it adequately, see App. to Brief for Appellant

which this generally unforeseen contingency may not be 10a (§ 10 of the plan), and the employees here

the basis for depriving employees of their accumulated surely would have understood it as imposing that

pension fund credits, and by establishing a mechanism to requirement. There can be no serious objection to

provide the employees with the equivalent of the earned a measure that makes such a promise enforceable.

pension plan credits. Although the Court glides over this

fact, it should be apparent that the Act will impose only I emphasize, contrary to the repeated [***743]

minor economic burdens on employers whose pension protestations of the Court, that the Act does not impose

plans have been adequately funded. For, where, as was "sudden and unanticipated" burdens. The features of the

true here and as will generally be true, the possibility of a Act involved in this case come into play only when an

plant's closing was not relied upon by actuaries in employer, after the effective date of the Act, closes a

calculating the amount of the employer's contributions to plant. The existence of the Act's duties -- which are

the plan, an [*254] adequate pension plan fund would similar to a legislatively imposed requirement of [*255]

include contributions on behalf of terminated employees severance pay measured by the length of the discharged

of 10 or more years' service whose rights had not vested. employees' service -- is simply one of a number of factors

Indeed, without the Act, the closing of the plant would that the employer considers in making the business

create a windfall for the employer, because, due to the decision whether to close a plant and terminate the

resulting surplus in the fund, his future contributions employees who work there. In no sense, therefore, are

would be reduced. In denying the windfall, the Act the Act's requirements unanticipated. While the extent of

requires that the employer use the money he will save in the employer's obligation depends on pre-enactment

the future to purchase annuities for the terminated [**2728] conduct, the requirements are triggered solely

employees. 3 Of course, the consequence for the by the closing of a plant subsequent to enactment. 4

employer may be a slightly higher pension expense; the

greater outlay might arise, in part, because the past 4 Although appellant here apparently decided to

contributions to the plan would have reflected the close its Minnesota plant prior to the Act's

actuarial possibility that some of the employees who had effective date, appellant had every opportunity to

served 10 years might not ultimately satisfy the plan's reconsider that decision after the Act was adopted

vesting requirement. and presumably reached its final decision after

weighing the possible liabilities under the Act.

3 Because appellant's pension plan was, at the

time of the plant closing, underfunded by in II

excess of $ 295,000, appellant's pension-funding

The primary question in this case is whether the

charge -- which the parties stipulate will be

Contract Clause is violated by state legislation enacted to

between $ 114,000 and $ 195,000 -- will not in

protect employees covered by a pension plan by requiring

fact be offset by future out-of-pocket savings.

an employer to make outlays -- which, although not in

But this is incidental. What is critical is that

this case, will largely be offset against future savings -- to

appellant, like all covered employers, will be

provide terminated employees with the equivalent of

forced to assume an economic burden only a little

benefits reasonably to be expected under the plan. The

greater than that inherent in its original

Act does not relieve either the employer or his employees

Page 15

438 U.S. 234, *255; 98 S. Ct. 2716, **2728;

57 L. Ed. 2d 727, ***743; 1978 U.S. LEXIS 130

of any existing contract obligation. Rather, the Act courts; and "commodity payment laws," permitting

simply creates an additional, supplemental duty of the payments in certain enumerated commodities at a

employer, no different in kind from myriad duties created proportion, often three-fourths or four-fifths, of actual

by a wide variety of legislative measures which defeat value. See id., at 454-459 (Sutherland, J., dissenting);

settled expectations but which have nonetheless been Sturges v. Crowninshield, 4 Wheat. 122, 204 (1819); see

sustained by this Court. See, e. g., Usery v. Turner also B. Wright, The Contract Clause of the [*257]

Elkhorn Mining Co., 428 U.S. 1 (1976); Hadacheck v. Constitution 4 (1938); Hale, The Supreme Court and the

Sebastian, 239 U.S. 394 (1915). For this reason, the Contract Clause, 57 Harv. L. Rev. 512-513 (1944).

Minnesota Act, in my view, does not implicate the

Contract Clause in any way. The basic fallacy of today's Thus, the several provisions of Art. I, § 10, of the

decision is its mistaken view that the Contract Clause Constitution -- "No State shall . . . coin Money; emit Bills

protects all contract-based expectations, including that of of Credit; [**2729] make any Thing but gold and silver

an employer that his obligations to his employees will not Coin a Tender in Payment of Debts; [or] pass any . . .

be legislatively enlarged beyond those explicitly provided Law impairing the Obligation of Contracts . . . ." -- were

in his pension plan. targeted directly at this wide variety of debtor relief

measures. Although the debates in the Constitutional

[*256] A Convention and the subsequent public discussion of the

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