# 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 > Texas Court of Appeals, 3rd District (Austin) · April 17, 2015 URL: https://www.frixlaw.com/law-library/cases/4040130 ## Case - **Court:** Texas Court of Appeals, 3rd District (Austin) - **Decided:** April 17, 2015 - **Precedential status:** Published - **Opinion:** Opinion - **Cited by:** 0 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4040130 ## Opinion text 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 sp [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4040130. Public record. Not legal advice.