# Appellants Reply Brief — Commonwealth Edison Co. v. Montana

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appellants Reply Brief
- **Published:** January 1, 1981
- **Citation:** 453 U.S. 609

## Text

i
Hy

Office Suxeme Court, U.S.
No. 80-581 7 FILED

es ae |

—_ |

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

10

12

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

10

11

11

13
14

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_0596%3A11. Public record. Not legal advice.