Appellants Reply Brief — Commonwealth Edison Co. v. Montana

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Office Suxeme Court, U.S.

No. 80-581 7 FILED

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TAR 29 1980

Supreme Court of the Hnited States

OCTOBER TERM, 1980

IN THE

- COMMONWEALTH EDISON COMPANY, CENTRAL ILLINOIS LIGHT COMPANY, DAIRY-

LAND POWER COOPERATIVE, DETROIT EDISON COMPANY, INTERSTATE POWER

COMPANY, LAKE SUPERIOR DISTRICT POWER COMPANY, LOWER COLORADO

RIVER AUTHORITY/CITY OF AUSTIN, MINNESOTA POWER & LIGHT COMPANY,

NORTHERN STATES POWER COMPANY, UPPER PENINSULA GENERATING COM-

PANY, WISCONSIN POWER & LIGHT COMPANY, DECKER COAL COMPANY,

PEABODY COAL COMPANY, WESTMORELAND RESOURCES, INC. and WESTERN

ENERGY COMPANY,

Appellants,

—against—

STATE OF MONTANA, TED SCHWINDEN, GOVERNOR OF MONTANA, ELLEN J.

FEAVER, DIRECTOR OF THE STATE DEPARTMENT OF REVENUE, and MorRIS L.

BRUSETT, DIRECTOR OF ADMINISTRATION AND STATE TREASURER,

Appellees.

ON APPEAL FROM THE SUPREME COURT OF THE STATE OF MONTANA

REPLY BRIEF OF APPELLANTS

WILLIAM J, CARL WILLIAM P. ROGERS

40 East Broadway Counsel of Record

Butte, Montana 59701 WILLIAM R, GLENDON

(406) 723-5421 STANLEY GODOFSKY

Attorney for Appellant STEPHEN FROLING

JAMES N. BENEDICT

ANNE E. FONTAINE

Rogers & Wells

Western Energy Company

Of Counsel. 200 Park Avenue

GEORGE J. MILLER New York, New York 10166

Dechert Price & Rhoads (212) 972-7000

717 Seventeenth Street

Denver, Colorado 80202 PATRICK F. HOOKS

(303) 623-1777 THOMAS A. BUDEWITZ

Attorney for Appellant 218 Broadway

Westmoreland Resources, Inc. Townsend, Montana 59644

(406) 266-3476

Attorneys for Appellants

March, 1981 except Western Energy Company

a4.

TABLE OF CONTENTS

TABLE OF CONTENT SS ......ccccccsevcvcevenes

TABLE OF AUTHORITIES. ...........eseeeeees

PRELIMINARY STATEMENT ..............-+.

ARGUMENT 12.0 os cre cccsescsneccccvevcscscece

-

II.

Ill.

IV.

THE SEVERANCE TAX IS NOT IMMUNE

FROM SCRUTINY UNDER AN APPRO-

PRIATE COMMERCE CLAUSE TEST.....

THE. COMMERCE CLAUSE CLAIM RE-

QUIRES RESOLUTION OF FACTUAL

QUE ING cob oo acccccrescerensaveeens

A. Whether A State Tax Is “Fairly Related To

The Services Provided By The State”

Raises Triable Issues Of Fact ...........

B. Plaintiffs’ Claim That The Tax “Discrimi-

nates Against Interstate Commerce” States

A Valid Claim and Raises Triable Issues ..

THE TAX SUBSTANTIALLY FRUS-

TRATES FEDERAL ENERGY STATUTES .

THE TAX SUBSTANTIALLY FRUS-

TRATES THE MINERAL LANDS LEAS-

| ose eae aera ny Creer ey Sieg

ei RR) 8) Darren er tee crea

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ii

TABLE OF AUTHORITIES

Cases

Baker v. Carr, 369 U.S. 166. (1962) .. 0c cccvecseus

Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520

CEG vc ost che baa cioe tecenedser Ohlone

Boston Stock Exchange v. State Tax Commission,

GID U.S. SIC TAS 5 6. een st ctccsee einen

Carmichael v. Southern Coal & Coke Co., 301 U.S.

GS CRA gnkcicc> vatnccnnd seeessaceeeeseenes

City of Pittsburgh v. Alco Parking Corp., 417 U.S.

SOF CIF v v0 kb veins hd es baa kee netes

Colegrove v. Green, 328 U.S. 549 (1946) .........

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274

CFA K ss 4c 5s POR aed a EAs eck en

DeCanas v. Bica, 424 U.S. 351 (1976)............

Exxon Corp. v. Wisconsin Department of Revenue,

100:S..Co. ZICD LISS 5. ak Kes Cees ebevspewess

Floral Park Tenants Association v. Project Hold-

ing, Inc., 152 N.J. Super. 582, 378 A.2d 266 (Ch.

Div. 1977), aff’d per curiam on other grounds sub

nom. Project Holding, Inc. v. Smyth, 166 N.J.

Super. 354, 399 A.2d 1033 (Super. Ct. App. Div.

OTD eo iccviberevecbdbevetieseieeteeee

H.P Hood & Sons, Inc. v. Du Mond, 336 U.S. 525

chi pep eiweberscaseetees asa ereeian

16

ili

PAGE

Heisler v. Thomas Colliery Co., 260 U.S. 245

a ee ee dae 3 2

Hill v. Florida, 325 U.S. $38 (1945) .........c00: 14, 15

Hines v. Davidowitz, 312 U.S. 52 (1942) ......... 12

Illinois Central Railroad Co. v. Minnesota, 309

Neen ee wan eeea ne 4

Ingels v. Morf, 300 U.S. 290 (1937)............ 3, 4, 6

Japan Line, Ltd. v. County of Los Angeles, 441

ENTE IESG et oe A 4

Jones v. Rath Packing Co., 430 U.S. 519 (1977) ..12, 15

Mid-Northern Co. v. Montana, 268 U.S. 45 (1925) 17

Minnesota v. Clover Leaf Creamery Company, 49

me On SOM. 21, FSBL) ccc cecccccccess a)

Nash v. Florida Industrial Commission, 389 U.S.

ES SaaS it Os a 15

Oklahoma Tax Commission v. Texas, 336 U.S. 342

ESSN Sd PO EO ee 16

Perez v. Campbell, 402 U.S. 637 (1971).......... 12, 16

Ray v. Atlantic Richfield Co., 435 U.S. 151 (1978) 12

Raymond Motor Transport, Inc. v. Rice, 434 U.S.

SRT LE a )

Reynolds v. Sims, 377 U.S. 533 (1964) ...........

Southern Pacific Co. v. Arizona, 325 U.S. 761

SE RE kere e ee a )

Ventura County v. Gulf Oil Corp., 601 F.2d 1080,

OT 14, 17

iV

PAGE

Washington Revenue Department v. Stevedoring

Association, 435 U.S. 734 (1978) ........ee eee 5

White Mountain Apache Tribe v. Bracker, 100 S.Ct.

yy $i, ere Tere eT eee er 14-16

Constitutions, Statutes & Regulations

Mineral Lands Leasing Act of 1920, Ch. 85, 41

ee ee eas ge waeens e oN Am Ree ee 17

Ch. 85, § 32, 41 Stat. 450, 30 U.S.C. § 189

COUP cua be etek khine cena es Rembee as ey Pe

National Labor Relations Act, Pub. L. No. 198, 49

Stat. 449, 29 U.S.C. § 151 et seq. (1976) ....... 15

§ 1, 49 Stat. 449-50, 29 U.S.C. § 151 ....... 15

Powerplant and Industrial Fuel Use Act of 1978,

Pub. L. No. 95-620, 92 Stat. 3289, 42 U.S.C.

(Supp. III 1979) §§ 8301 ef seq. ... 66. e eee eee 12

§ 601(a)(2), 92 Stat. 3323, 42 U.S.C. (Supp.

III 1979) § 8401(a)(2) ... ccc cceccveveees 13

Legislative History

123 Cong. Rec. 27195 (1977) (remarks of Sen.

Randolph), reprinted in III1 U.S. Department of

Energy, Legislative History of the Powerplant and

Industrial Fuel Use Act of 1978 (June 1979) .... 13

122 Cong. Rec. 495, 520 (1976) (remarks of Rep.

PPP Perr rre rr Ter trey Teer ET 18

122 Cong. Rec. 515 (1976) (remarks of Rep. Mink) 18

53 Cong. Rec. 1122 (1916)... .... ee eee eee eee ees 18

Other Authorities

Boom in Strip Mining: Windfall for Montana,

Washington Post, May 22, 1977.........e0++5:

Coal Severance Tax: Hearings Before the Commit-

tee on Energy and Natural Resources, United

States Senate, on S. 2695 (August 6, 1980) (Pub.

Se eer ees Gr ewe er te eee ore

Coal Severance Taxes: Hearings Before the Sub-

committee on Energy and Power of the Commit-

tee on Interstate and Foreign Commerce, House

of Representatives, on H.R. 6625, H.R. 6654 and

H.R. 7163 (March 21 and June 5, 1980) (Serial

PE, ETI oa okie wh aos 0 ees ere re vet's os

W. Hellerstein, Constitutional Constraints on State

and Local Taxation of Energy Resources, 31 Nat.

, eae S|, ere ee

Towe, Explanation of Reasons for Montana's Coal

Transcript of the Joint Conference on Energy on

the Powerplant and Industrial Fuel Use Act (No-

vember 9, 1977), reprinted in II U.S. Department

of Energy, Legislative History of the Powerplant

and Industrial Fuel Use Act of 1978 (June 1979).

L. Tribe, American Constitutional Law (1978) ....

U.S. Department of Energy, Legislative History of

the Powerplant and Industrial Fuel Use Act of

1978 (June 1979) 2... cece ec cece cece ee eeeceee

PAGE

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

a

COMMONWEALTH EDISON COMPANY, ef ai.,

Appellants,

—against—

STATE OF MONTANA, ef ai.,

Appellees.

ON APPEAL FROM THE SUPREME COURT OF THE STATE OF MONTANA

-

REPLY BRIEF OF APPELLANTS

PRELIMINARY STATEMENT

Montana asserts that the states possess an unfettered

power to tax, free from any constitutional restraint or

scrutiny. Significantly, Montana fails to acknowledge or

defend the practical consequences of this position—that it

may impose a severance tax in any amount no matter how

high, notwithstanding the undue burden such a tax may

cast on interstate commerce.

Despite a number of vague references—none with rec-

ord support—concerning the sort of governmental costs

which might justify severance taxes, this case does not

involve any rough correspondence between such costs and

this tax. It does involve an attempt by one state, for-

tuitously endowed with a vital natural resource, most of it

federally owned, to use its taxing power to shift literally

billions of dollars to its coffers from consumers in other

states. From this posture, Montanans have accurately

portrayed themselves as the “blue-eyed Arabs.”' One

l A characterization employed by then-Governor Judge in describing

Montana's coal windfall. Boom in Strip Mining: Windfall for Mon-

tana, Washington Post, May 22, 1977, at 1.

2

consequence of acquiescing in Montana’s position would

be the Balkanization of this nation over access to neces-

sary energy resources. Significantly, Montana offers no

response to this assertion either.

In plaintiffs’ view, both the negative implications of

the Commerce Clause and the affirmative force of exist-

ing federal legislation ultimately restrain the power of the

states to collect taxes such as Montana’s.’ If that be

so—if there is any federal principle limiting such state

power—this case should be reversed and remanded for

trial.

ARGUMENT

I. THE SEVERANCE TAX IS NOT IMMUNE FROM

SCRUTINY UNDER AN APPROPRIATE COM-

MERCE CLAUSE TEST

Montana has few supporters, even among those who

ultimately support the tax here, for its view that the scope

of the Commerce Clause continues to be limited by

Heisler v. Thomas Colliery Co., 260 U.S. 245 (1922). Its

arguments have been fully answered in our opening brief.

It is clear that both the United States and the states

supporting Montana concede that the Clause may be used

as a vehicle to exainine, and to limit, this state tax. As the

Solicitor General put it (Brief for the United States at 22):

[W]e agree with Appellants . . . that Montana’s Sever-

ance Tax is not altogether immune from Commerce

Clause scrutiny on the theory that mining is a purely

‘local’ activity.

The briefs submitted by virtually all of the amici, even

those opposing our position, are in accord with this view.’

2 Montana’s spurious, and newly raised, claim that Section 32 of the

Mineral Lands Leasing Act of 1920 (41 Stat. 450, 30 U.S.C. § 189

(1976)) shows an intent to grant unfettered discretion to tax to the

states is dispelled at page 17, infra.

3 E.g., Brief of the States of Wyoming, Colorado, Nevada, Idaho,

Washington, and Oregon at 6. North Dakota and West Virginia did not

(Footnote continued)

3

Il. THE COMMERCE CLAUSE CLAIM REQUIRES

RESOLUTION OF FACTUAL QUESTIONS

If, then, Montana’s tax may be measured under sub-

stantive Commerce Clause tests, there is no dispute that

the standards of Complete Auto Transit, Inc. v. Brady,

430 U.S. 274, 288-89 (1977), are pertinent here. There is,

however, substantial disagreement as to the meaning and

application of two of its tests—whether the tax is “fairly

related” to the benefits and protection provided by the

State, and whether it discriminates against interstate com-

merce. These are the central disputed questions before the

Court.

A. Whether A State Tax Is “Fairly Related To The

Services Provided By The State” Raises Triable

Issues Of Fact

While no case here has considered the question directly,

the “fairly related” test has clear roots in a factual

inquiry. This Court has stated repeatedly that the Com-

plete Auto tests are focused on the “practical effects” of

the tax in question, not on labels or artificial rules. Where

taxes are “tailored,” as this tax is, the Commerce Clause

requires “special scrutiny.” Complete Auto Transit, Inc.

v. Brady, supra, 430 U.S. at 288-89 n.15. The “fairly

related” test itself is expressly derived from Jngels v.

Morf, 300 U.S. 290 (1937), in which a state tax was held

invalid because a factual analysis showed it was excessive

in relation to the governmental burdens imposed by the

activity. See Complete Auto Transit, Inc. v. Brady, supra,

430 U.S. at 278 n.6.* Washington Revenue Department v.

(Footnote continued)

specifically address the issue, but adopted these views by reference. See

Brief of North Dakota and West Virginia at 4 n.3. Arizona also

adopted the Wyoming Brief by reference in its motion for leave to

appear as amicus.

4 Each of the four principal cases cited in that note appears to support

one of the four prongs of the test, standing, respectively, for dis-

crimination (Boston Stock Exchange v. State Tax Commission, 429

(Footnote continued)

4

Stevedoring Association, 435 U.S. 734, 748 (1978), under-

scored the necessity for examining the facts:

Complete Auto recognized that a state has a significant

interest in exacting from interstate commerce its fair share

of the cost of state government. . . . All tax burdens do

not impermissibly impede interstate commerce. The Com-

merce Clause balance tips against the tax only when it

unfairly burdens commerce by exacting more than a just

share from the interstate activity. [Citations omitted].

Neither Montana nor the amici supporting it satisfac-

torily explain how the Court can give “special scrutiny”

to the “practical effects” of this tax, or determine

whether it exacts “more than a just share,” without a

factual inquiry at a trial.

For its part, Montana takes the view (Brief of Appel-

lees at 22-27) that the test is satisfied whenever a state

provides the benefits of a civilized society, a standard

which could be met in any case and under any circum-

stances, thus vitiating the test entirely, notwithstanding

the required scrutiny of the “practical effects” of any tax.

(See Brief of Appellants at 29-31).° We do not believe that

this Court has created and reiterated a meaningless test,

nor do we see how any such contention squares with the

commitment to give “tailored” taxes “special scrutiny”.

Neither of the cases on which Montana relies (Brief of

Appellees at 26)° for this position so held, nor was the

(Footnote continued)

U.S. 318 (1977)); nexus (General Motors Corp. v. Washington, 377

U.S. 436 (1964)); apportionment (//linois Cent. R. Co. v. Minnesota,

309 U.S. 157 (1940)); and fair relation (/ngels v. Morf, 300 U.S. 290

(1937)).

3 This is not to say that Montana misses any opportunity to present .is

version of facts which might justify severance taxes in some circum-

stances, thus attempting to have whatever benefits a factual record

might provide without the burden of discovery—which was stayed at

the outset of the case—or of permitting plaintiffs to prove their side of

the case at a trial.

6 See Exxon Corp. v. Wisconsin Dep’t of Revenue, 100 S. Ct. 2109,

2122 (1980); Japan Line, Ltd. v. County of Los Angeies, 441 U.S. 434,

445 (1979).

5

issue whether the test raised factual questions deter-

mined.’

Most of our opponents here, including Montana, fail

to respond to the point that any construction of this test

which avoids factual inquiries renders the test meaning-

less. Those who do, give responses which are as varied as

they are unconvincing.*

-

In his concurring opinion in Washington Revenue Dep’t v. Steve-

doring Ass’n, 435 U.S. 734, 764 (1978), Justice Powell remarked that

the Court’s conclusion concerning the record in the case “cannot be

questioned.” It strains credulity to argue, as Montana does (Brief of

Appellees at 25-26), that this means that he would bar proof on this

issue in all future cases. Compare City of Pittsburgh v. Alco Parking

Corp., 417 U.S. 369, 379 (1974) (Powell, J. concurring), where Justice

Powell states, in an analogous context, that the Court’s decision

should not be read as barring proof in future cases.

Some amici, while agreeing that “the total impact costs of coal

extraction activity are the proper constitutional boundary for Mon-

tana’s Severance Tax,” argue that this determination is to be made by

some procedure short of a trial. (See Brief of Environmental Defense

Fund, ef al. at 4-7). Others appear to agree that the issue is one of fact,

and attempt to justify the tax by existing or impending impact costs.

(See Brief of Wyoming, ef al. at 12-16). If such justifications exist, they

remain to be shown in this case. Plaintiffs have alleged—and should be

given the opportunity to prove—that no such justification exists here,

either with respect to direct “impact costs” or with respect to any other

costs—present or future—which Montana could legitimately claim.

That is clearly an issue for trial.

Montana suggests (Brief of Appellees at 27), and several amici assert

(e.g., Brief of the Environmental Defense Fund, e a/. at 8-10), that the

tax is justifiable because the state may, in the future, face costs arising

from “unknown” and unquantifiable environmental degradation or

social costs. This, too, renders the test meaningless since such nebulous

assertions are not susceptible to proof. Plaintiffs recognize the risks of

environmental degradation and social costs associated with coal min-

ing but, as a factual matter, strongly dispute the proposition that these

risks are limitless and, as a legal matter, strongly dispute the proposi-

tion that the shibboleth of “unknown risk” should be substituted for

reasoned factual analysis. This is a trial issue as well.

We are also told that “Montana is wisely setting aside in trust a part

of its severance taxes so that future generations will not have to bear

the cost of these burdens. . . . ” (Brief of Appellees at 27 n.31). This

(Footnote continued)

6

The Solicitor General, apparently recognizing that

Montana’s approach leads only to the conclusion that the

fairly related test is an “empty” one, erases the test in

another way. His brief asserts that the “fairly related” test

is simply an elaboration of the “nexus” or “apportion-

ment” branches of the Complete Auto standard and that

it is satisfied whenever the “measure” of a tax is related

to the taxpayers’ activity within the taxing jurisdiction,

without regard to the “amount” of the tax or the “value”

of the services and protection provided by the state. (Brief

for the United States at 28-31). While this suggestion is

linguistically ingenious, it simply underscores our position

since it altogether fails to meet the serious objection that

it, too, renders the test meaningless.’ It takes little imagi-

nation to see that if a legislature is constrained simply to

“measure” a tax by the value of the taxpayer’s activity,

but is free to se’ any tax rate it chooses—for example,

30% or 1,000% or 2,000%, to use the rates mentioned in

this proceeding—it is not constrained at all. In the end,

the Solicitor General’s construction of the Complete Auto

test, like the construction proposed by Montana, is no

test at all.

In this connection, cases decided under the Due Process

Clause'® are of little relevance, since the purposes of the

(Footnote continued)

statement simply masks the truth—the Constitutional Trust, expected

to accumulate several billions of dollars by the end of the century,

bears no relation at all to any present or future costs. Whether it is

“wise” depends on whether one expects to be a forced donor or a

grateful beneficiary.

9 The Government’s view is apparently based, in part, on a misappre-

hension of the origin of the test, which its brief attributes to “General

Motors, J.C. Penney, and similar cases. See [Complete Auto Transit,

Inc. v. Brady,} 430 U.S. at 279 n.8.” (Brief for the United States at 28).

But, as noted above (page 4), the fair share test actually traces its

origins to Ingels v. Morf, 300 U.S. 290 (1937).

10 Montana refers to Carmichael v. Southern Coal & Coke Co., 301

U.S. 495 (1937), and other cases. (See Brief of Appellees at 24-25). Our

observations are equally pertinent to City of Pittsburgh vy. Alco

Parking Corp., 417 U.S. 368 (1974), to which several amici refer.

Neither involved interstate commerce.

7

Due Process and Commerce Clauses differ and the judi-

cial standards necessary to their protection differ accord-

ingly. State legislation which passes muster under the Due

Process Clause may nevertheless violate the Commerce

Clause. E.g., H.R Hood & Sons, Inc. v. Du Mond, 336

U.S. 525, 533-34 (1949). The special role of the Com-

merce Clause in our federal system (see id. at 532, et seq.)

has led the Court to its “special scrutiny” rule where the

dangers of localism are apparent and where normal politi-

cal checks and balances are likely to fail. (See Brief of

Appellants at 27-28). Concepts of due process may not

require any “fair relation” test; but, as this Court has

repeatedly said, the Commerce Clause does impose such a

standard. |

Montana also objects to application of the “fairly

related” test by attacking the competence of the courts to

apply it, urging that enforcement of the test would

burden the courts with additional complicated litigation

which Montana believes ought to be left, in the end, to

the legislative branch. We believe that all of these argu-

ments reflect a misperception of the nature of the “fair

relation” test, and of the respective roles of our courts

and legislative bodies.

Contrary to several suggestions in the briefs of our

adversaries and opposing amici, plaintiffs have never

maintained that this or any other court should calculate

an appropriate rate of tax.'' In our view, that burden

11 We wish to correct a misapprehension which may arise from a

statement of the Montana Supreme Court that plaintiffs conceded that

a tax of “perhaps twelve and a half to fifteen percent of the value of

the coai” could be justified. (Opinion 7; Apdx. 9a). (See Brief of

Appellees at 9 n.13). These figures were simply speculation on the part

of plaintiffs’ counsel at oral argument—not a substantive concession—

following counsels’ repeated insistence that the question could only be

determined after trial. Plaintiffs have also supported bills in Congress

to limit coal severance taxes nationwide to 12.5%, saying that that

amount “more than takes care of any needs that any State could

have.” Coal Severance Taxes, Hearings Before the Subcommittee on

Energy and Power of the Committee on Interstate and Foreign

(Footnote continued)

8

falls, in the first instance, on the appropriate state legisla-

tures. The question properly brought before a court is not

whether the rate, itself, is correct, but whether there is

some reasonable basis, founded on the needs of the state

arising from the activities of the taxpayer, to support the

amount of the tax. It is a particularly pertinent question

where, as here, the subject of the tax has been narrowly

drawn, directed to a specific activity—here, coal min-

ing—and carefully selected to fall outside the taxing state.

In such circumstances, we believe it is appropriate for the

courts, inter alia, to examine whether the legislature had a

reasonable basis for what it did; to review what studies it

made and what justifications it found for the tax; whether

the specific activity selected to tax in fact added to

governmental costs and the extent thereof; whether the

proceeds are being used for such added costs; whether

they are in substantial part being cached away, in effect,

for unrelated and unknown purposes—all to the end that

a determination can be made as to whether the tax is

fairly related to the benefits provided. In so doing, far

from usurping any legislative function, the courts are

carrying out their appropriate judicial responsibility. '’

(Footnote continued)

Commerce, House of Representatives, on H.R. 6625, H.R. 6654 and

H.R. 7163 (March 21 and June 5, 1980) (Serial No. 96-173) at 94.

Plaintiffs would hope to show—and have solid basis for believing—

that no such figure is actually justified. (See Brief of Appellants at 12).

12 Montana and several amici also raise the contention, familiar when

any novel question is presented, that a decision in plaintiffs’ favor will

open the floodgates to similar suits. This, of course, is hardly an

answer to an invasion of constitutional rights. See Reynolds v. Sims,

377 U.S. 533, 566 (1964). But, in any event, the suggestion lacks merit.

This case is distinguished by (i) the grossly excessive nature of the tax

and (ii) the relative rarity of the circumstances which gave rise to it.

This is not a general tax measure of the sort typically subject to

widespread opposition in the taxing jurisdiction. The tax falls on a

specific activity, the mining of coal, uniquely suited to exportation of

the tax burden. In these circumstances, it is unreasonable to suggest

that application of constitutional principles to this situation will lead to

a surge in tax litigation.

(Footnote continued)

9

State legislatures must have substantial latitude to

adopt tax measures to generate necessary revenues, but

their discretion must be exercised within constitutional

bounds. Where—as here—a state legislature manifestly

overreaches, this Court has repeatedly recognized that the

“negative implications” of the Commerce Clause require

the courts to impose judicial restraints:

[T]he commerce clause, without the aid of Congressional

legislation, thus affords some protection from state legis-

lation inimical to the national commerce, and ,. . in

such cases, where Congress has not acted, this Court, and

not the state legislature, is under the commerce clause the

final arbiter of the competing demands of state and

national interests.

Southern Pacific Co. v. Arizona, 325 U.S. 761, 769

(1945). See also Minnesota v. Clover Leaf Creamery

Company, 49 U.S.L.W. 4111, 4115 (Jan. 21, 1981); Ray-

mond Motor Transport, Inc. v. Rice, 434 U.S. 429,

442-44 (1978); Bibb v. Navajo Freight Lines, 359 U.S.

520, 529-30 (1959).

Montana and others also argue that this matter ought

to be left to Congress. The vigor with which they make

this argument here is matched only by the enthusiasm

with which they argued in Congress that the matter ought

to be left to the courts,'’? and by the arguments of certain

(Footnote continued)

Some amici have suggested that the “fair relation” test should not be

applied here because it would give a windfall to plaintiffs. (See Brief of

The Western Conference of The Council of State Governments at

24-25). This is not true. Just as they are permitted to pass tax increases

through, plaintiffs are obligated to return tax savings to their cus-

tomers, the ultimate consumers.

13 In testimony before the United States Senate just a few months ago,

then-Governor Judge of Montana took the view that:

The reasonableness of the [Montana Coal Severance] tax will be

decided probably in the Supreme Court.

There you will decide on the reasonableness or the burden on

interstate commerce and that is a question most properly left to the

(Footnote continued)

10

members of Congress, appearing here as amici, that the

matter should be left to the state legislatures. '*

The short answer is that Congress, the state legisla-

tures, and the courts all have a proper role to play.

Whether or not Congress may ultimately act to restrain a

burden on commerce by a state serves as no basis for the

argument that this Court should abdicate its responsibili-

ties under the Commerce Clause and should refrain from

construing the Constitution in the case presented to it

here. Compare Baker v. Carr, 369 U.S. 186, 226 (1961)

with Colegrove v. Green, 328 U.S. 549, 552 (1946). In the

end, Congress ‘cannot be expected to anticipate and ex-

pressly prohibit every abuse which may unduly burden

interstate commerce.

B. Plaintiffs’ Claim That The Tax “Discriminates

Against Interstate Commerce” States A Valid Claim

And Raises Triable Issues

Montana is in a position to exact « levy on an energy

resource fortuitously located in that State, substantially

(Footnote continued)

court and not determined by a committee of the United States

Senate.

Coal Severance Tax: Hearings Before the Committee on Energy and

Natural Resources, United States Senate, on S. 2695 (August 6, 1980)

(Pub. No. 96-143) at 237 [hereinafter cited as “Hearings”]. (Emphasis

supplied).

Governor Herschler of Wyoming testified similarly that the matter

“should be determined by the United States Supreme Court... .”

Hearings at 208.

Congressman Cheney of Wyoming also said:

{I]t seems prudent to leave resolution of this flexible boundary to

the courts, which have historically resolved such disputes in a

case-by-case manner... .

Id. at 155. Compare his position here, that these “are political

questions for the state legislature and beyond the institutional compe-

tence of the federal judiciary.” (Brief of Wyoming Congressmen at 1).

14 See Brief of Hon. Max Baucus, ef a/. at 4-5; Brief of Wyoming

Congressmen.

1]

all of which may be passed on to out-of-state consumers.

Plaintiffs’ theory of discrimination arises from the prem-

ise that Montana selected coal as the subject of this

extraordinary tax because taxing that commodity effec-

tively selected out-of-state taxpayers to shoulder a tax

burden grossly in excess of any costs imposed directly or

indirectly by such taxpayers on the State.

The sponsor of the tax made the Montana Legislature

aware, at the time it passed the tax, that long-term coal

contracts would pass the tax on to ultimate consumers

outside the State:

In other words, the local companies simply add the

additional taxes to their bill, and the entire cost is passed

on to the purchasers in the Midwest or elsewhere.

Towe, Explanation of Reasons for Montana’s Coal Tax 4.

(Emphasis supplied).

A leading commentator urges that plaintiffs’ theory of

discrimination in the present form has “considerable

force,” noting:

[O]ne may fairly contend that the State’s effective selec-

tion of a class of out-of-state taxpayers to shoulder a tax

burden grossly in excess of any costs imposed directly or

indirectly by such taxpayers on the State places an uncon-

stitutional burden upon interstate commerce.

W. Hellerstein, Constitutional Constraints on State and

Local Taxation of Energy Resources, 31 Nat. Tax J. 245,

249 (1979).

Discrimination has many guises. It does not serve the

salutary purpose of the Commerce Clause to limit its

application to cases of blatant facial discrimination. Re-

sult-oriented tax policies may be just as effective in

shifting tax burdens to non-residents as adoption of

patently discriminatory rates. Proof of this effect presents

no difficulty in this case. The bulk of present day Mon-

tana coal production—approximately 97% in 1980—de-

rives from contracts entered into before adoption of the

tax. (See Complaint 4 13; Apdx. S5la-52a). Not less than

12

90% of total tax payments have been shifted out of state

in the manner contrived by the Montana Legislature.

The Solicitor General argues that the Commerce Clause

was intended to create a “national Common Market” and

“area of free trade” under which “the borders between

states are essentially irrelevant.” (Brief for the United

States at 24). We agree, but the asserted application of

that truism here turns the constitutional principle upside

down. As we have shown, the Montana Legislature very

carefully made the borders “relevant” by ascertaining

that the principal burden of this tax would fall beyond its

boundaries. In doing this, it unconstitutionally discrimi-

nated against interstate commerce.

Ill. THE TAX SUBSTANTIALLY FRUSTRATES

FEDERAL ENERGY STATUTES

Montana does not squarely meet our claim that any

state legislation which “stands as an obstacle to the

accomplishment and execution of the full purposes and

objectives of Congress” or “frustrates the full effective-

ness of federal law” is invalid under the Supremacy

Clause. Ray v. Atlantic Richfield Co., 435 U.S. 151, 158

(1978); Jones v. Rath Packing Co., 430 U.S. 519, 525-26

(1977), quoting Hines v. Davidowitz, 312 U.S. 52, 67

(1941); Perez v. Campbell, 402 U.S. 637, 652 (1971).

Instead, defendants argue that national policies cannot

preempt state laws (Brief of Appellees at 39-43), and in so

doing completely ignore the numerous federal statutes

which are the basis of plaintiffs’ preemption claim (see

Brief of Appellants at 5n.*).'* Plaintiffs do not claim that

the Coal Severance Tax is preempted by a “national

1S The Powerplant and Industrial Fuel Use Act of 1978, Pub. L. No.

95-620, 92 Stat. 3289, 42 U.S.C. (Supp. III 1979) §§ 8301 er seq.

(“Fuel Use Act”), is but one clear example. It expressly states in its

preamble that one of its purposes is to encourage the greater use of

coal, and in fact specifically mandates the use of coal in lieu of oil and

natural gas in some instances. (See Brief of Appellants at 36-37; Brief

ror the United States at 15-17).

13

policy”, by itself, but by a series of federal laws, all

reflecting the same national policy, which were designed

to encourage the production and use of coal, and that

these statutes have preemptive effect.

The Solicitor General—and virtually all of the oppos-

ing amici that have submitted their views to this Court'*—

are more realistic than Montana, agreeing with plaintiffs

that a number of federal statutes reflect a national policy

which favors the increased production and use of coal—

including Western coal. They argue, however, that these

federal statutes do not preempt the Coal Severance Tax

because they do not reflect a Congressional intent to

preempt state severance taxes or specifically, by their

terms, limit the State’s right to tax. (See, e.g., Brief for

the United States at 18-19; see also Brief of Appellees at

36, 39).!’

16 See, e.g., Brief for the United States at 15; Brief of Wyoming, et al.

at 19; Brief of North Dakota and West Virginia at 7. See generally

Brief of Appellants at 35-41; Brief of Texas at 4-12; Brief of New

Jersey, et al. at 4; Brief of Hon. Robert W. Edgar, ef a/. at 2; Brief of

Kansas at 10-11.

17 —- Section 601(a)(2) of the Fuel Use Act, 92 Stat. 3323, 42 U.S.C.

(Supp. III 1979) § 8401, is essentially irrelevant to the issue here. The

central purpose of the Act is plainly to promote the use of coal. In

considering the impact of that policy, Congress balanced those in-

stances in which impact aid would be necessary to meet legitimate,

energy-related costs against the proposition that those costs should not

be the occasion of a windfall. See Transcript of the Joint Conference

on Energy on the Powerplant and Industrial Fuel Use Act (Nov. 9,

1977) at 1869, 1878 [hereinafter cited as “Joint Conference Tran-

script”], reprinted in \1 U.S. Department of Energy, Legislative His-

tory of the Powerplant and Industrial Fuel Use Act of 1978, at 2-823,

2-832 (1978) [hereinafter cited as “Legislative History]; Joint Con-

ference Transcript at 1819, 1822, reprinted in Il Legislative History at

2-774, 2-777; 123 Cong. Rec. 27915 (1977) (remarks of Sen. Ran-

dolph), reprinted in Ill Legislative History at 3-52. See also Joint

Conference Transcript at 1824, 1833, 1852, 1853, reprinted in II

Legislative History at 2-779, 2-788, 2-807, 2-808. It cannot fairly be

said that Congress gave any attention at all to the proposition that

state taxes could, in fact, frustrate the central purpose of the Act.

14

But arguments relating to “express preemption” and

“Congressional intent” simply divert attention from the

claims before the Court. (See Brief for the United States

at 18-19). The Compiaints here assert that there is an

actual conflict between the tax and the objectives of

federal law. Such a claim is valid. As the Court stated in

DeCanas v. Bica, 424 U.S. 351, 357 n.5 (1976):

[E]ven absent . . . a manifestation of congressional in-

tent. . . the Supremacy Clause requires the invalidation

of any state legislation that burdens or conflicts in any

manner with any federal laws... .

Accord, White Mountain Apache Tribe v. Bracker, 100 S.

Ct. 2578, 2587-88 (1980); Ventura County v. Gulf Oil

Corp., 445 U.S. 947 (1980), aff’g 601 F.2d 1080, 1086 (9th

Cir. 1979). As Professor Tribe put it:

Even if state action does not go so far as to prohibit the

very acts which the federal government requires (or vice

versa), it may nonetheless be struck down if it is in

“actual conflict” with the objectives that underlie federal

enactments. Thus, state action must be invalidated if its

effect is to discourage conduct that federal action seeks to

encourage.

L. Tribe, American Constitutional Law § 6-24 at 378

(1978). (Emphasis supplied).

It is no objection to a claim of preemption that the

Congressional statement of purpose appears in a pream-

ble, rather than in the implementing sections of the

statute.'* E.g., Hill v. Florida, 325 U.S. 538 (1945). There

the Court found a conflict between the purpose of Con-

gress expressed in the “Findings and Policy” of a statu-

tory preamble and a Florida statute requiring a union’s

18 The cases cited by the Solicitor General (Brief for the United States

at 15-16 n.10) are not to the contrary. None of those cases addressed

the question whether state legislation was preempted when it frustrated

the fulfillment of Congressional policies and objectives as expressed in

statutory preambles.

15

business agent to obtain a license.'® /d. at 541. No

particular substantive section of the federal statute pro-

hibited such state laws, but the Court nevertheless held

that the state law was invalid because it “stood as an

obstacle to the accomplishment and execution of the full

purposes and objectives of Congress” as expressed in the

preamble. /d. at 542. Accord, White Mountain Apache

Tribe v. Bracker, 100 S. Ct. 2578 (1980); Nash v. Florida

Industrial Commission, 389 U.S. 235 (1967).

Nor is it an objection to such a claim that the conflict

between state and federal law does not appear in a

head-to-head way on the face of the statute. The question

is, does the state law, in practical effect, “substantially

frustrate” the purposes and objectives of Congress. E.g.,

Jones v. Rath Packing Co., 430 U.S. 519, 540-43 (1977);

Nash v. Florida Industrial Commission, supra, 389 U.S.

at 239; Hill v. Florida, supra, 325 U.S. at 542-43. (See

Brief of Appellants at 41-45). Montana’s attempt to

distinguish the cases so holding misses the point. (See

Brief of Appellees at 41-42). The simple fact remains that

the state statutes at issue in those cases were preempted

without any showing that Congress expressed an intent to

preempt or of a direct head-to-head conflict between the

particular ~rovisions of the state and federal statutes.

Substantial frustration of the purposes and objectives of

the federal law is enough.

Significantly, defendants now admit that a trial is

necessary to resolve the substantial frustration issue if the

Court determines (1) that there is a policy to favor

Western coal, and (2) that such a policy can form the

basis of a preemption claim. (Brief of Appellees ai 43

n.48). Plaintiffs have met that standard and are accord-

19 The purpose of the National Labor Relations Act was “to encourage

collective bargaining, and to protect the ‘full freedom’ of workers in

the selection of bargaining representatives of their own choice.” 325

U.S. at 541. See 49 Stat. 449-50(§ 1), 29 U.S.C. § 151 (1976).

16

ingly entitled to a trial to prove their claims that the

Montana Coal Severance Tax has had, and continues to

have, the effect of frustrating national energy policy by

discouraging the production and use of coal, and particu-

larly of Western, low-sulphur coal. (See Brief of Appel-

lants at 45). This is necessarily a matter of degree,

depending in part on the rate of the tax and the degree to

which it interferes with federal purposes. Oklahoma Tax

Commission v. Texas Co., 336 U.S. 342, 363-64 (1948).

The Solicitor General specifically recognizes “the poten-

tial for the Montana tax to slow the increase in the use of

coal”?° (Brief for the United States at 15), and states that

it is “conceivable” for frustration to occur (id. at 17).

Only a full factual record can illuminate that question.

Plaintiffs should not have been denied an opportunity to

prove their claim.’'

20 White Mountain Apache Tribe v. Bracker, 100 S, Ct. 2578, 2587

(1980), expressly used the economic burden created by taxes as a basis

for holding that the taxes were invalid because they “adversely

affect{ed] the Tribe’s ability to comply with the standard-yield manage-

ment policies imposed by federal law.” (Emphasis supplied). Thus,

Montana’s bald assertion (Brief of Appellees at 43) that “[n]Jo state tax

has ever been invalidated” “because of the indirect economic impact

that the amount of the tax may have” is plainly wrong. See also Floral

Park Tenants Ass'n v. Project Holding, Inc., 152 N.+. Super. 582, 378

A.2d 266, 275 (Ch. Div. 1977), aff'd per curiam on other grounds sub

nom. Project Holding, Inc. v. Smyth, 166 N.J. Super. 354, 399 A.2d

1033 (Super. Ct. App. Div. 1979).

21 Defendants cite no case in this Court, or any other court, in which a

substantial frustration claim was dismissed for failure to state a claim

upon which relief could be granted, and we know of no such case. C/.

Perez v. Campbell, 402 U.S. 637 (1971). To the contrary, every case

alleging “substantial frustration” cited by defendants or the court

below—except those summarily finding preemption—was decided after

trial, or, at least, after the plaintiff had had an opportunity to make a

factual record.

17

IV. THE TAX SUBSTANTIALLY FRUSTRATES THE

MINERAL LANDS LEASING ACT

Montana invokes Section 32 of the Mineral Lands

Leasing Act, 30 U.S.C. § 189 (the “1920 Act”), to argue

(i) that it deprives the 1920 Act of preemptive effect with

respect to its central purposes, and (ii) that it “constitutes

nothing less than Congressional permission for the state

to enact the type of taxing measure at issue in this case.”

(Brief of Appellees at 10). The Solicitor General has

joined in the first contention, but not the second. Both

contentions should be rejected.

For purposes of this case, Section 32 is essentially

neutral: “[T]he proviso [in Section 32] cannot give

authority to the state which it does not already possess.

. . .” Ventura County v. Gulf Oil Corp., 601 F.2d 1080,

1086 (9th Cir. 1979), aff’d, 445 U.S. 947 (1980). The Act

simply preserves the rights of the states “to exercise any

rights which they may have” with respect to this vital

national resource. 30 U.S.C. § 189. Section 32 was cor-

rectly construed by this Court shortly after its enactment

to permit “any form of state taxation otherwise lawful.”

Mid-Northern Oil Co. v. Montana, 268 U.S. 45, 50

(1925). (Emphasis supplied). Montana’s power is ob-

viously subject to constitutional scrutiny and other rele-

vant legislation. The italicized caveat vitiates Montana’s

argument that this Section granted it a power to tax

without limit.

Montana’s argument (Brief of Appellees at 12-15) that

the legislative history of Section 32 manifests an intent to

bestow on Montana an unlimited power to tax is invalid.

The portions of “legislative history” on which Montana

principally relies (Brief of Appellees at 12) relate to an

early version of the Act which contained no proviso of

the type later incorporated in Section 32. Representative

Lenroot was speaking in 1914. No provision in any way

18

comparable to Section 32 even appeared until 1916—

some two years after the cited debate.

In its original form, Section 32 stated that “nothing in

the act shall be construed or held to confer or limit the

rights of the States. . . .” 53 Cong. Rec. 1122 (1916).

(Emphasis supplied). During the debate, the italicized

language was amended, apparently for grammatical rea-

sons, to read “affect.” This change was simply intended

to clarify the sponsor’s original intention, that is, “to

completely hurdle” the question of a state’s right to tax

output, to leave that question “absolutely alone.” /d.

Although Congress has been aware that certain states

tax the output of mines, it appears that it did not intend

to approve such taxes when it amended the 1920 Act some

five years ago. As Rep. Mink, the manager of the bill,

stated with specific reference to Montana’s tax (122

Cong. Rec. 515) (1976):

“This matter, I believe, will be litigated, but it is

certainly not intended to be covered by this legislation.”

(See also Brief for the United States at 11 n.7).

At the time it enacted the proviso in 1920, Congress

was told that the royalty and rental payments provided by

the Act were not sufficient to cover legitimate impact

costs. (See Brief of Appellants at 48-49). This view

continued into the 1976 amendment, which increased

both the states’ share of federal royalties and the mini-

mum acceptable royalties. At that time, Congress was

once again solemnly advised that the Western states were

suffering large impacts without sufficient revenues to

cover legitimate costs. See 122 Cong. Rec. 495, 520 (1976)

(remarks of Rep. Howe). State taxation was tolerated to

meet such costs. Certainly Congress never meant that the

states, through excessive taxation, could subvert the Act

itself.

19

CONCLUSION

For each of the reasons set forth above and in the Brief

of Appellants, the judgment below dismissing the Com-

plaints should be reversed and the case remanded for

trial.

Respectfully submitted,

WILLIAM J. CARL

40 East Broadway

Butte, Montana 59701

(406) 723-5421

Attorney for Appellant

Western Energy Company

Of Counsel:

GEORGE J. MILLER

Dechert Price & Rhoads

717 Seventeenth Street

Denver, Colorado 80202

(303) 623-1777

Attorney for Appellant

Westmoreland Resources,

Inc. .

March, 1981

WILLIAM P. ROGERS

Counsel of Record

WILLIAM R. GLENDON

STANLEY GODOFSKY

STEPHEN FROLING

JAMES N. BENEDICT

ANNE E. FONTAINE

Rogers & Wells

200 Park Avenue

New York, New York 10166

(212) 972-7000

PATRICK F. HOOKS

THOMAS A, BUDEWITZ

218 Broadway

Townsend, Montana 59644

(406) 266-3476

Attorneys for Appellants

except Western Energy

Company