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1955_71

https://www.oyez.org/cases/1955/71

MR. JUSTICE REED delivered the opinion of the Court. Affronti was tried in the United States District Court for the Western District of Missouri on a ten-count indictment charging him with illegal sales of narcotics. A jury found him guilty on counts two through ten, and a five-year sentence was imposed on each count, to be served consecutively. At the time of sentencing, execution of the sentences on counts six through ten was suspended and probation granted, the probation to commence at the expiration of the sentences on counts two through five. While serving his sentence on count two, petitioner filed a motion in the District Court seeking suspension of sentence and probation on counts three, four and five. The motion was denied upon the controlling authority of Phillips v. United States, 212 F.2d 327 (1954), which held that the district courts have no power to suspend sentence after a prisoner has begun to serve a cumulative sentence composed of two or more consecutive sentences. The Court of Appeals affirmed, and we granted certiorari because of the existence of a conflict between the decision below and the decision of the Ninth Circuit in Kirk v. United States, 185 F.2d 185. Prior to 1925, the district courts had no power at all to suspend sentences and release a convict on probation. Ex parte United States,. This situation was remedied by Congress when it passed the Probation Act in 1925. That Act gave power to the federal courts, "after conviction or after a plea of guilty or nolo contendere," to suspend sentence and place the defendant on probation. The purpose of the Act, as revealed by its legislative history, was discussed by this Court in United States v. Murray,. That case also presented a question concerning the time within which a district court can suspend a sentence and grant probation. In Murray, this Court observed that, in view of the existence of provisions for parole and executive clemency, it would seem unlikely that Congress would have intended to make the probation provisions applicable during the same period of time. Id. at. It was concluded that it would be more reasonable to construe the Probation Act so as to reconcile the three methods of mitigation of criminal sentences, thereby "making them as little of a repetition as we can." Id. at. This and other considerations led the Court to hold that a district judge had no power under the Act to place a convict on probation after he had begun the execution of his sentence. The decision in the Murray case does not, however, completely dispose of the question now before the Court. Since the Murray decision, there has been a language change in the statutory provisions for probation. In Murray, the Court was considering the question of power of the district courts to place a convict on probation after he had commenced to serve a single general sentence. Here, we are concerned with the power to grant suspension of sentences which are, technically, wholly unexecuted because they constitute the unserved terms of a series of consecutive sentences. In 1948, in connection with the revision and codification of Title 18 of the United States Code, the language of the Probation Act with which we are concerned was changed. The statute now provides for suspension of sentence and probation "[u]pon entering a judgment of conviction." The substitution of the quoted words for "after conviction or after a plea of guilty or nolo contendere," the phrase which appeared in the Probation Act prior to the 1948 codification of Title 18, does not appear to have resulted in any substantive change in the law. The Reviser's Notes which accompanied the 1948 codification merely stated the following with respect to this amendment: "Words 'after conviction or after a plea of guilty or nolo contendere for any crime or offense not punishable by death or life imprisonment' were omitted from first sentence as unnecessary. " The Reviser's Notes were used by Congress as a full explanation of all changes made in the text of the existing law. It is unlikely, therefore, that Congress intended the phrase as it appears in the present section to have a different meaning than the phrase had prior to the revision. The more significant difference between the Murray case and the present one is the fact that here we are dealing with a cumulative sentence composed of a number of distinct sentences which are to run consecutively. Petitioner notes that, while he has begun the execution of the first of the series of sentences, he has not commenced the execution of the sentences which he is now seeking to have suspended. He reasons from this fact that the District Court still has probationary power over the latter sentences. Of course, the words of the statute do not themselves require adoption of petitioner's argument. In fact, the language of the present probation provision, and of the original provision as interpreted by Murray, suggests a contrary result. In the final analysis, this case must be governed by the meaning of the statute. Are we to read the statute to mean that the courts should be able to suspend the uncommenced terms of a cumulative sentence after the prisoner has been imprisoned and entered upon the execution of a prior term? We think not. The Murray opinion points out that it is unlikely that Congress would have found it wise to make probation apply in such a way as to unnecessarily overlap the parole and executive clemency provisions of the law. Federal judicial power to permit probation springs solely from legislative action. Ex parte United States, supra. The authority to put a convict on probation for an uncommenced term, after service of an earlier term has begun, has not been clearly given. Therefore, in construing the provisions for probation, we adhere to the Murray interpretation to avoid interference with the parole and clemency powers vested in the Executive Branch. We conclude that the probationary power ceases with respect to all of the sentences composing a single cumulative sentence immediately upon imprisonment for any part of the cumulative sentence. We note the argument that, since Congress has authorized the sentencing court to limit probation to less than all of the terms of a cumulative sentence, it should follow that the probation powers for each term exist until that term is begun. But the power to limit a grant of probation to less than an entire cumulative sentence does not compel a conclusion that the power to grant probation as to each of the separate sentences exists until the convict begins to serve each. We think, moreover, this argument is met by our conclusion that the provisions for probation should be interpreted to avoid, so far as possible, duplicating other existing provisions for the mitigation of criminal sentences. See note 12 supra. Congress has done nothing since this Court's decision in United States v. Murray, supra, to indicate that probation power should be applied after the beginning of any term of a sentence. Affirmed.

Under 18 U.S.C. § 3651, after a sentence of consecutive terms on multiple counts of an indictment has been imposed and service of sentence for the first such term has commenced, a federal district court may not suspend sentence and grant probation as to the remaining term or terms. United States v. Murray,. . (a) The legislative history of this section does not require a different result. ,. (b) The probationary power ceases with respect to all of the sentences composing a single cumulative sentence immediately upon imprisonment for any part of the cumulative sentence. . (c) The provisions for probation should be interpreted to avoid, so far as possible, duplicating other existing provisions for the mitigating of criminal sentences. P.. 221 F.2d 150 affirmed.

1955_410

https://www.oyez.org/cases/1955/410

MR. JUSTICE MINTON delivered the opinion of the Court. Twentieth Century Airlines, Inc., was issued a letter of registration as a large irregular air carrier by the Civil Aeronautics Board in 1947. For some reason, beginning in 1951, it conducted its business under the name of North American Airlines. On March 3, 1952, it amended its articles of incorporation so as legally to change its name to North American Airlines, Inc. By letter dated March 11, 1952, it requested the CAB to reissue its letter of registration in the new corporate name. The Board took no action on that request, but rather, in August, 1952, adopted an Economic Regulation requiring every irregular carrier, after November 15, 1952, to do business in the name in which its letter of registration was issued. 14 CFR § 291.28. The Board explained that, under the Regulation, it would allow continued use of a different name to which good will had become attached, except where use of such name constitutes a violation of § 411 of the Civil Aeronautics Act, 52 Stat. 1003, as amended, 66 Stat. 628, 49 U.S.C. § 491, which prohibits unfair or deceptive commercial practices and unfair methods of competition. 17 Fed.Reg. 7809. On October 6, 1952, respondent applied for permission to continue use of its name, "North American Airlines." Petitioner, American Airlines, on October 17, 1952, filed a memorandum with the Board requesting denial of North American's application for the reasons, among others, that use of the name "North American" infringed upon its long established trade name, "American," and constituted an unfair method of competition in violation of § 411 of the Act. The Board, as authorized by § 411, on its own motion, instituted an investigation and hearing into whether there was a violation of § 411 by North American. It consolidated with that proceeding an investigation and hearing into the matter of North American's application for change of name in its letter of registration. American was granted leave to intervene in the consolidated proceeding. After extensive hearings, the Board found that respondent's use of the name "North American" in the air transportation industry, in which it competed with American, had caused "substantial public confusion," which was "likely to continue" and which constituted "an unfair or deceptive practice and an unfair method of competition within the meaning of Section 411." Docket Nos. 5774 and 5928 (Nov. 4, 1953), 14-15 mimeo. It found that the public interest required elimination of the use of the name, and accordingly it denied the application of North American and ordered it to "cease and desist from engaging in air transportation under the name 'North American Airlines, Inc.,' 'North American Airlines,' 'North American,' or any combination of the word 'American.'" Id. at 15-16. On petition for review by North American, the Court of Appeals for the District of Columbia set aside the Board's order. 97 U.S.App.D.C. 85, 228 F.2d 432. American, having been admitted as a party below by intervention, sought, and we granted, certiorari. 350 U.S. 894. As we understand its opinion, the Court of Appeals set aside the order because the public interest in this proceeding was inadequate to justify exercise of the Board's jurisdiction under § 411. Although the court was critical of the finding of "substantial public confusion," it did not, on its disposition of the case, expressly disturb that or any other of the Board's findings. For the purposes of review here, we will accept the findings, and there is no cause for this Court to review the evidence. Universal Camera Corp. v. Labor Board,, has no application in the present posture of the case before us. The questions then presented are whether confusion between the parties' trade names justified a proceeding by the Board to protect the public, and whether the kind of confusion found by the Board could support a conclusion of a violation of the statute by respondent. This is a case of first impression under § 411. That section provides that "The Board may, upon its own initiative or upon complaint . . . if it considers that such action by it would be in the interest of the public, investigate and determine whether any air carrier . . . has been or is engaged in unfair or deceptive practices or unfair methods of competition in air transportation or the sale thereof." If the Board finds that the carrier is so engaged, "it shall order such air carrier . . . to cease and desist from such practices or methods of competition." Section 411 was modeled closely after § 5 of the Federal Trade Commission Act, * which similarly prohibits "unfair methods of competition in commerce, and unfair or deceptive acts or practices" and provides for issuance of a complaint "if it shall appear to the Commission that a proceeding by it . . . would be to the interest of the public." 38 Stat. 719, as amended, 15 U.S.C. § 45. We may profitably look to judicial interpretation of § 5 as an aid in the resolution of the questions raised here under § 411. It should be noted at the outset that a finding as to the "interest of the public" under both § 411 and § 5 is not a prerequisite to the issuance of a cease and desist order as such. Rather, consideration of the public interest is made a condition upon the assumption of jurisdiction by the agency to investigate trade practices and methods of competition and determine whether or not they are unfair. Thus, this Court has held that, under § 5, the Federal Trade Commission may not employ its powers to vindicate private rights, and that whether or not the facts, on complaint or as developed, show the public interest to be sufficiently "specific and substantial" to authorize a proceeding by the Commission is a question subject to judicial review. Federal Trade Commission v. Klesner,. See also Federal Trade Commission v. R. F. Keppel & Bro., Inc.,; Federal Trade Commission v. Royal Milling Co.,. In the Klesner case, two District of Columbia retailers, with a long history of acrimonious personal and business relations, were both operating stores called the "Shade Shop." This Court held that the public interest merely in resolving their private unfair competition dispute would not justify the Commission in issuing a complaint. The courts of law are open to competitors for the settlement of their private legal rights, one against the other. The Board, under a mandate from Congress, is charged with the protection of the public interest as affected by practices of carriers in the field of air transportation. In exercising our function of review of the Board's jurisdiction to protect the public interest by a proceeding which may be generated from facts also giving rise to a private dispute, we must take account of the significant differences between § 5 and § 411. Section 5 is concerned with purely private business enterprises which cover the full spectrum of economic activity. On the other hand, the air carriers here conduct their business under a regulated system of limited competition. The business so conducted is of especial and essential concern to the public, as is true of all common carriers and public utilities. Finally, Congress has committed the regulation of this industry to an administrative agency of special competence that deals only with the problems of the industry. The practices of the competitors here clashed in a field where Congress was specifically concerned to protect the public interest. Demonstrated confusion of the public as to the origin of major air transportation services may be of obvious national public concern. The criteria which the Board employed to determine whether the confusion here created a problem of concern to the public are contained in the following quotation from its report: ". . . the record is convincing that the public interest requires this action in order to prevent further public confusion between respondent and intervenor due to similarity of names. The maintenance of high standards in dealing with the public is expected of common carriers, and the public has a right to be free of the inconveniences which flow from confusion between carriers engaging in the transportation of persons by air. The speed of air travel may well be diminished when passengers check in for flights with the wrong carrier, or attempt to retrieve baggage from the wrong carrier, or attempt to purchase transportation from the wrong carrier, or direct their inquiries to the wrong carrier. Friends, relatives, or business associates planning to meet passengers or seeking information on delayed arrivals are subject to annoyance or worse when confused as to the carrier involved. The proper handling of complaints from members of the public is impeded by confusion as to the carrier to whom the complaint should be presented. The transportation itself may differ from what the confused purchaser had anticipated (e.g., in terms of equipment), even though the time and place of arrival may be about the same. It is obvious that public confusion between air carriers operating between the same cities is adverse to the public interest. . . ." Docket Nos. 5774 and 5928 (Nov. 4, 1953), 12-13 (mimeo). Under § 411, it is the Board that speaks in the public interest. We do not sit to determine independently what is the public interest in matters of this kind, committed as they are to the judgment of the Board. We decide only whether, in determining what is the public interest, the Board has stayed within its jurisdiction and applied criteria appropriate to that determination. The Board has done that in the instant case. Considerations of the high standards required of common carriers in dealing with the public, convenience of the traveling public, speed, and efficiency in air transport, and protection of reliance on a carrier's equipment are all criteria which the Board in its judgment may properly employ to determine whether the public interest justifies use of its powers under § 411. It is argued that respondent's use of the name "North American" cannot amount to an unfair or deceptive practice or an unfair method of competition authorizing the Board's order within § 411. "Unfair or deceptive practices or unfair methods of competition," as used in § 411, are broader concepts than the common law idea of unfair competition. See Federal Trade Commission v. R. F. Keppel & Bro., Inc., supra; Federal Trade Commission v. Raladam Co.,,. The section is concerned not with punishment of wrongdoing or protection of injured competitors, but rather with protection of the public interest. See Federal Trade Commission v. Klesner, supra, at. The courts have held, in construing § 5 of the Trade Commission Act, that the use of a trade name that is similar to that of a competitor, which has the capacity to confuse, or deceive the public, may be prohibited by the Commission. Federal Trade Commission v. Algoma Lumber Co.,; Juvenile Shoe Co. v. Federal Trade Commission, 289 F. 57. And see Pep Boys -- Manny, Moe & Jack, Inc. v. Federal Trade Commission, 122 F.2d 158, where the confusing name was not that of any competitor. The Board found that respondent knowingly adopted a trade name that might well cause confusion. But it made no findings that the use of the name was intentionally deceptive or fraudulent, or that the competitor, American Airlines, was injured thereby. Such findings are not required of the Trade Commission under § 5, and there is no reason to require them of the Civil Aeronautics Board under § 411. Federal Trade Commission v. Algoma Lumber Co., supra, at; Eugene Dietzgen Co. v. Federal Trade Commission, 142 F.2d 321, 327; D.D.D. Corp. v. Federal Trade Commission, 125 F.2d 679, 682; Gimbel Bros., Inc. v. Federal Trade Commission, 116 F.2d 578, 579; Federal Trade Commission v. Balme, 23 F.2d 615, 621. See also S.Rep. No. 221, 75th Cong., 1st Sess. 2. The Board had jurisdiction to inquire into the methods of competition presented here, and its evidentiary findings concerned confusion of the type which can support a finding of violation of § 411. The judgment of the Court of Appeals must therefore be reversed. However, since we do not understand the court to have decided whether the Board's findings were supported by substantial evidence on the record as a whole, the case is remanded to the Court of Appeals for further proceedings in the light of this opinion. Reversed and remanded.

In a proceeding under § 411 of the Civil Aeronautics Act, the Civil Aeronautics Board found that respondent's use of the name "North American" in the air transportation industry, in which it competed with American Airlines, had caused "substantial public confusion" by causing persons to check in at the wrong carrier, attempt to purchase transportation from the wrong carrier, meet flights of the wrong carrier, and otherwise, that such public confusion was "likely to continue" and was an unfair method of competition within the meaning of § 411. It further found that the public interest required elimination of the use of the name, and it ordered respondent to cease and desist from engaging in air transportation under the name of "North American Airlines" or any combination of the word "American." Held: 1. The Board applied criteria appropriate to a determination of whether a proceeding by it in this case would be in the "interest of the public," as required by § 411, and it had jurisdiction to inquire into the methods of competition presented here and to determine whether they constituted a violation of the Act. . 2. The Board's evidentiary findings concerned confusion of the type which can support a finding of violation of § 411. . 3. However, since this Court does not understand the Court of Appeals to have decided whether the Board's findings were supported by substantial evidence on the record as a whole, the case is remanded to that Court for further proceedings in the light of this opinion. P.. 9 U.S.App.D.C. 85, 228 F.2d 432, reversed and remanded.

1955_351

https://www.oyez.org/cases/1955/351

MR. JUSTICE DOUGLAS delivered the opinion of the Court. The sole question in the case is whether the cause of action alleged comes within the admiralty jurisdiction of the District Court. The District Court held that this was an action on a maritime contract, within the admiralty jurisdiction, 129 F. Supp. 410. The Court of Appeals reversed, holding that the suit was in the nature of the old common law indebitatus assumpsit for money had and received, based upon the wrongful withholding of money. 223 F.2d 406. The case is here on a petition for certiorari which we granted, 350 U.S. 872, because of the seeming conflict of that ruling with Krauss Bros. Lumber Co. v. Dimon S.S. Corp.,,. The libel alleges that respondent, doing business in his own and in various trade names, owned and controlled a passenger vessel, known as the City of Athens, and held out that vessel as a common carrier of passengers for hire, and that petitioners paid moneys for passage upon the vessel, scheduled for July 15, 1947, to Europe. A contract for the transportation of passengers is a maritime contract within admiralty jurisdiction. The Moses Taylor, 4 Wall. 411. The allegations so far mentioned are plainly sufficient to establish such a contract. The libel goes on to allege a breach of that contract through an abandonment of the voyage. If this were all, it would be plain that petitioners stated a claim for breach of a maritime contract. But the libel further alleges that the sums paid by petitioners as passage money were "wrongfully and deliberately" applied by respondent to his own use and benefit "in reckless disregard of his obligations to refund the same" and that respondent "has secreted himself away and manipulated his assets . . . for the purpose of defrauding" petitioners. Then follow allegations of certain fraudulent acts and transactions. The allegations of wrongfulness and fraud do not alter the essential character of the libel. For the ancient admiralty teaching is that "[t]he rules of pleading in the admiralty are exceedingly simple, and free from technical requirements." Dupont de Nemours & Co. v. Vance, 19 How. 162,. And see 2 Benedict, American Admiralty (6th ed. 1940), §§ 223, 237. Though these particular allegations of the libel sound in fraud or in the wrongful withholding of moneys, it is plain in the context that the obligation to pay the moneys arose because of a breach of the contract to transport passengers. Lawyers speak of the obligation in terms of indebitatus assumpsit, a concept whose tortuous development gave expression to "the ethical character of the law." See Ames, The History of Assumpsit, 2 Harv.L.Rev. 1, 53, 58 (1888). As Mr. Justice Holmes once put it, "An obligation to pay money generally is enforced by an action of assumpsit, and to that extent is referred to a contract, even though it be one existing only by fiction of law." Thomas v. Matthiessen,,. The fiction sometimes distorted the law. A line of authorities emerged to the effect that admiralty had no jurisdiction to grant relief in such cases, "because the implied promise to repay the moneys which cannot in good conscience be retained -- necessary to support the action for money had and received -- is not a maritime contract. " United Transportation & Lighterage Co. v. New York & B.T. Line, 185 F. 386, 391. Yet that duty to pay is often referable, as here, to the breach of a maritime contract. As Mr. Justice Stone said in Krauss Bros. Lumber Co. v. Dimon S.S. Corp., supra, at: ". . . Even under the common law form of action for money had and received, there could be no recovery without proof of the breach of the contract involved in demanding the payment, and the basis of recovery there, as in admiralty, is the violation of some term of the contract of affreightment, whether by failure to carry or by exaction of freight which the contract did not authorize." The truth is that, in a case such as the present one, there is neither an actual promise to repay the passage moneys nor a second contract. The problem is to prevent unjust enrichment from a maritime contract. See Morrison, The Remedial Powers of the Admiralty, 43 Yale L.J. 1, 27 (1933). A court that prevents a maritime contract from being exploited in that way does not reach beyond the domain of maritime affairs. We conclude that, so long as the claim asserted arises out of a maritime contract, the admiralty court has jurisdiction over it. The philosophy of indebitatus assumpsit is, indeed, not wholly foreign to admiralty. Analogous conceptions of rights based on quasi-contract are found in admiralty. One who saves property at sea has the right to an award of salvage, regardless of any agreement between him and the owner. See Mason v. Ship Blaireau, 2 Cranch 240,; The Sabine,,; 1 Benedict, supra, § 117 et seq. Likewise, where cargo is jettisoned, the owner becomes entitled to a contribution in general average from the owners of other cargo which was saved without the aid of any agreement. See Barnard v. Adams, 10 How. 270,; Star of Hope, 9 Wall. 203,; 1 Benedict, supra, § 98. Other examples could be given. See Chandler, Quasi Contractual Relief in Admiralty, 27 Mich.L.Rev. 23 (1928). Rights which admiralty recognizes as serving the ends of justice are often indistinguishable from ordinary quasi-contractual rights created to prevent unjust enrichment. How far the concept of quasi-contracts may be applied in admiralty it is unnecessary to decide. It is sufficient this day to hold that admiralty has jurisdiction, even where the libel reads like indebitatus assumpsit at common law, provided that the unjust enrichment arose as a result of the breach of a maritime contract. Such is the case here. The judgment is reversed, and the case is remanded to the Court of Appeals for proceedings in conformity with this opinion. Reversed and remanded.

A libel in admiralty alleged that petitioners paid moneys to respondent for transportation to Europe on respondent's vessel, and that respondent breached the contract by abandonment of the voyage. The libel further alleged that respondent wrongfully appropriated the passage money to his own use and committed other fraudulent acts. Held: the cause of action alleged was within the admiralty jurisdiction of the Federal District Court. Pp. 532-536. (a) The essential character of the libel as a claim for breach of a maritime contract was not altered by the allegations of wrongfulness and fraud. . (b) So long as the claim asserted arises out of a maritime contract, the admiralty court has jurisdiction over it. P.. (c) Admiralty has jurisdiction even where a libel reads like indebitatus assumpsit at common law, provided that the unjust enrichment arose out of the breach of a maritime contract. . 223 F.2d 406 reversed and remanded.

1955_49

https://www.oyez.org/cases/1955/49

MR. JUSTICE DOUGLAS delivered the opinion of the Court. This suit, removed from a Vermont court to the District Court on grounds of diversity of citizenship, was brought for damages for the discharge of petitioner under an employment contract. At the time the contract was made, petitioner was a resident of New York. Respondent is a New York corporation. The contract was made in New York. Petitioner later became a resident of Vermont, where he was to perform his duties under the contract, and asserts his rights there. The contract contains a provision that, in case of any dispute, the parties will submit the matter to arbitration under New York law by the American Arbitration Association, whose determination "shall be final and absolute." After the case had been removed to the District Court, respondent moved for a stay of the proceedings so that the controversy could go to arbitration in New York. The motion alleged that the law of New York governs the question whether the arbitration provision of the contract is binding. The District Court ruled that, under Erie R. Co. v. Tompkins,, the arbitration provision of the contract was governed by Vermont law, and that the law of Vermont makes revocable an agreement to arbitrate at any time before an award is actually made. The District Court therefore denied the stay, 122 F. Supp. 733. The Court of Appeals reversed, 218 F.2d 948. The case is here on a petition for certiorari which we granted, 349 U.S. 943, because of the doubtful application by the Court of Appeals of Erie R. Co. v. Tompkins, supra. A question under the United States Arbitration Act, 43 Stat. 883, as amended, 61 Stat. 669, 9 U.S.C. §§ 1-3, lies at the threshold of the case. Section 2 of that Act makes "valid, irrevocable, and enforceable" provisions for arbitration in certain classes of contracts, and § 3 provides for a stay of actions in the federal courts of issues referable to arbitration under those contracts. Section 2 makes "valid, irrevocable, and enforceable" only two types of contracts: those relating to a maritime transaction and those involving commerce. No maritime transaction is involved here. Nor does this contract evidence "a transaction involving commerce" within the meaning of § 2 of the Act. There is no showing that petitioner while performing his duties under the employment contract was working "in" commerce, was producing goods for commerce, or was engaging in activity that affected commerce within the meaning of our decisions. The Court of Appeals went on to hold that, in any event, § 3 of the Act stands on its own footing. It concluded that, while § 2 makes enforceable arbitration agreements in maritime transactions and in transactions involving commerce, § 3 covers all arbitration agreements even though they do not involve maritime transactions or transactions in commerce. We disagree with that reading of the Act. Sections 1, 2, and 3 are integral parts of a whole. To be sure, § 3 does not repeat the words "maritime transaction" or "transaction involving commerce," used in §§ 1 and 2. But §§ 1 and 2 define the field in which Congress was legislating. Since § 3 is a part of the regulatory scheme, we can only assume that the "agreement in writing" for arbitration referred to in § 3 is the kind of agreement which §§ 1 and 2 have brought under federal regulation. There is no intimation or suggestion in the Committee Reports that §§ 1 and 2 cover a narrower field than § 3. On the contrary, S.Rep. No. 536, 68th Cong., 1st Sess., p. 2, states that § 1 defines the contracts to which "the bill will be applicable." And H.R. Rep. No. 96, 68th Cong., 1st Sess., p. 1, states that one foundation of the new regulating measure is "the Federal control over interstate commerce and over admiralty." If respondent's contention is correct, a constitutional question might be presented. Erie R. Co. v. Tompkins indicated that Congress does not have the constitutional authority to make the law that is applicable to controversies in diversity of citizenship cases. Shanferoke Coal & Supply Corp. v. Westchester Service Corp.,, applied the Federal Act in a diversity case. But that decision antedated Erie R. Co. v. Tompkins, and the Court did not consider the larger question presented here -- that is, whether arbitration touched on substantive rights, which Erie R. Co. v. Tompkins held were governed by local law, or was a mere form of procedure within the power of the federal courts or Congress to prescribe. Our view, as will be developed, is that § 3, so read, would invade the local law field. We therefore read § 3 narrowly to avoid that issue. Federal Trade Commission v. American Tobacco Co.,,. We conclude that the stay provided in § 3 reaches only those contracts covered by §§ 1 and 2. The question remains whether, apart from the Federal Act, a provision of a contract providing for arbitration is enforceable in a diversity case. The Court of Appeals, in disagreeing with the District Court as to the effect of an arbitration agreement under Erie R. Co. v. Tompkins, followed its earlier decision of Murray Oil Products Co. v. Mitsui & Co., 146 F.2d 381, 383, which held that "Arbitration is merely a form of trial, to be adopted in the action itself, in place of the trial at common law: it is like a reference to a master, or an 'advisory trial' under Federal Rules of Civil Procedure. . . ." We disagree with that conclusion. We deal here with a right to recover that owes its existence to one of the States, not to the United States. The federal court enforces the state-created right by rules of procedure which it has acquired from the Federal Government and which therefore are not identical with those of the state courts. Yet, in spite of that difference in procedure, the federal court enforcing a state-created right in a diversity case is, as we said in Guaranty Trust Co. v. York,,, in substance "only another court of the State." The federal court therefore may not "substantially affect the enforcement of the right as given by the State." Id.,. If the federal court allows arbitration where the state court would disallow it, the outcome of litigation might depend on the courthouse where suit is brought. For the remedy by arbitration, whatever its merits or shortcomings, substantially affects the cause of action created by the State. The nature of the tribunal where suits are tried is an important part of the parcel of rights behind a cause of action. The change from a court of law to an arbitration panel may make a radical difference in ultimate result. Arbitration carries no right to trial by jury that is guaranteed both by the Seventh Amendment and by Ch. 1, Art. 12th, of the Vermont Constitution. Arbitrators do not have the benefit of judicial instruction on the law; they need not give their reasons for their results; the record of their proceedings is not as complete as it is in a court trial; and judicial review of an award is more limited than judicial review of a trial -- all as discussed in Wilko v. Swan,,. We said in the York case that "The nub of the policy that underlies Erie R. Co. v. Tompkins is that for the same transaction the accident of a suit by a nonresident litigant in a federal court instead of in a State court a block away should not lead to a substantially different result." 326 U.S. at. There would in our judgment be a resultant discrimination if the parties suing on a Vermont cause of action in the federal court were remitted to arbitration, while those suing in the Vermont court could not be. The District Court found that, if the parties were in a Vermont court, the agreement to submit to arbitration would not be binding, and could be revoked at any time before an award was made. He gave as his authority Mead's Adm'x v. Owen, 83 Vt. 132, 135, 74 A. 1058, and Sartwell v. Sowles, 72 Vt. 270, 277, 48 A. 11, decided by the Supreme Court of Vermont. In the Owen case, the court, in speaking of an agreement to arbitrate, held that " . . . either party may revoke the submission at any time before the publication of an award." 83 Vt. at 135, 74 A. at 1059. That case was decided in 1910. But it was agreed on oral argument that there is no later authority from the Vermont courts, that no fracture in the rules announced in those cases has appeared in subsequent rulings or dicta, and that no legislative movement is under way in Vermont to change the result of those cases. Since the federal judge making those findings is from the Vermont bar, we give special weight to his statement of what the Vermont law is. See MacGregor v. State Mutual Life Assur. Co.,; Hillsborough v. Cromwell,,; Steele v. General Mills,,. We agree with him that, if arbitration could not be compelled in the Vermont courts, it should not be compelled in the Federal District Court. Were the question in doubt or deserving further canvass, we would, of course, remand the case to the Court of Appeals to pass on this question of Vermont law. But, as we have indicated, there appears to be no confusion in the Vermont decisions, no developing line of authorities that casts a shadow over the established ones, no dicta, doubts, or ambiguities in the opinions of Vermont judges on the question, no legislative development that promises to undermine the judicial rule. We see no reason, therefore, to remand the case to the Court of Appeals to pass on this question of local law. Respondent argues that, since the contract was made in New York and the parties contracted for arbitration under New York law, New York arbitration law should be applied to the enforcement of the contract. A question of conflict of laws is tendered, a question that is also governed by Vermont law. See Klaxon Co. v. Stentor Electric Mfg. Co.,. It is not clear to some of us that the District Court ruled on that question. We mention it explicitly so that it will be open for consideration on remand of the cause to the District Court. The judgment of the Court of Appeals is reversed, and the cause is remanded to the District Court for proceedings in conformity with this opinion. Reversed and remanded.

Petitioner's action against respondent in a Vermont state court, for damages for the discharge of petitioner under an employment contract, was removed to the Federal District Court on grounds of diversity of citizenship. The contract had been made in New York, where both parties resided at the time, and provided that the parties would submit any dispute to arbitration under New York law, but petitioner had later become a resident of Vermont, where he was to perform his duties. Respondent's motion for a stay of the proceedings so that the controversy could go to arbitration in New York was denied by the District Court, which ruled that the arbitration provision of the contract was governed by Vermont law and that, under Vermont law, the agreement to arbitrate was revocable any time before an award was actually made. The Court of Appeals reversed. Held: the judgment of the Court of Appeals is reversed, and the cause is remanded to the District Court. . 1. The provision of § 3 of the United States Arbitration Act for stay of the trial of an action until arbitration has been had does not apply to all arbitration agreements, but only to those covered by §§ 1 and 2 of the Act (those relating to maritime transactions and those involving interstate or foreign commerce), and there is no showing that the contract here involved is in either of those classes. . 2. The differences between arbitration and judicial determination of a controversy substantially affect the cause of action arising under state law, and make the doctrine of Erie R. Co. v. Tompkins,, applicable. . 3. If, in this case, arbitration could not be compelled in the Vermont state courts, it should not be compelled in the Federal District Court. . 4. In the circumstances of this case, there is no reason to remand the case to the Court of Appeals to pass on the question of local law. P.. 5. On remand of the cause to the District Court, there will be open for consideration the question whether New York arbitration law should be applied to the enforcement of the contract -- a question of conflict of laws governed by Vermont law and on which it is not clear that the District Court ruled. P.. 21 F.2d 948 reversed and remanded.

1955_60

https://www.oyez.org/cases/1955/60

MR. JUSTICE HARLAN delivered the opinion of the Court. Petitioner was charged, in a three-count indictment, with wilfully attempting to evade federal income taxes for 1951, 1952, and 1953 by filing with the Collector "false and fraudulent" tax returns, "in violation of Section 145(b), Title 26, United States Code." That section of the Internal Revenue Code of 1939, 53 Stat. 63, provided: "Any person . . . who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution." Section 3616(a) of the 1939 Code, 53 Stat. 440, also made it a crime for any person to deliver to the Collector "any false or fraudulent list, return, account, or statement, with intent to defeat or evade the valuation, enumeration, or assessment intended to be made. . . ." The penalty for violation of § 3616(a), however, was a fine of not more than $1,000, or imprisonment not exceeding one year, or both, together with the costs of prosecution. At the close of the trial judge's charge to the jury, petitioner asked that the jury be instructed with respect to each count that a verdict of guilty of the "lesser crime" under § 3616(a) would be permissible. No motions addressed to the validity of the indictment, judgment of conviction, or sentence under § 145(b) were made before, during, or after trial, and we read the requested instruction as aimed at leaving to the jury the question of whether the defendant should be convicted under § 145(b) or § 3616(a) if the jury found him guilty. The instruction was refused, and, after conviction, petitioner was sentenced to four years' imprisonment on each count, the sentences to run concurrently. Thus, petitioner has been sentenced to imprisonment greater than the maximum possible had the conviction been under § 3616(a) alone. The Court of Appeals affirmed, 221 F.2d 590, and we granted certiorari, 350 U.S. 910, limited to the question of whether it was error for the trial judge to refuse to give the requested instruction. The Court of Appeals, in affirming the conviction, held that § 3616(a) did not apply to income tax returns, and that any instruction relating to that section would therefore have been irrelevant under the evidence in this case. Both parties agree, however, that § 3616(a) was applicable to income tax returns, and we shall assume, arguendo, the correctness of that interpretation of the statute. Rule 31(c) of the Federal Rules of Criminal Procedure provides that a defendant may be found guilty of an offense "necessarily included in the offense charged." In a case where some of the elements of the crime charged themselves constitute a lesser crime, the defendant, if the evidence justified it, would no doubt be entitled to an instruction which would permit a finding of guilt of the lesser offense. See Stevenson v. United States,. But this is not such a case. For here, the method of evasion charged was the filing of a false return, and it is apparent that the facts necessary to prove that petitioner "willfully" attempted to evade taxes by filing a false return, § 145(b), were identical with those required to prove that he delivered a false return with "intent" to evade taxes, § 3616(a). In this instance. §§ 145(b) and 3616(a) covered precisely the same ground. Petitioner contends that he was nevertheless entitled to the requested instruction. He argues that, since there was no difference in the proof required to establish violations of §§ 145(b) and 3616(a), the indictment must be taken as charging violations of both sections, and the jury, under Rule 31(c), should have been permitted to make the choice between the two crimes. We do not agree. The role of the jury in a federal criminal case is to decide only the issues of fact, taking the law as given by the court. Sparf v. United States,,. Certainly Rule 31(c) was never intended to change this traditional function of the jury. Here, whether § 145(b) or § 3616(a) be deemed to govern, the factual issues to be submitted to the jury were the same; the instruction requested by petitioner would not have added any other such issue for the jury's determination. When the jury resolved those issues against petitioner, its function was exhausted, since there is here no statutory provision giving to the jury the right to determine the punishment to be imposed after the determination of guilt. Whatever other questions might have been raised as to the validity of petitioner's conviction and sentence, because of the assumed overlapping of §§ 145(b) and 3616(a), were questions of law for the court. No such questions are presented here. The only question before us is whether the jury should have been allowed to decide whether it would apply § 3616(a), rather than § 145(b), and that we hold was not for the jury. It was, therefore, not error to refuse the requested instruction. Affirmed.

Petitioner was indicted for wilfully attempting to evade federal income taxes by filing with the Collector "false and fraudulent" tax returns in violation of 26 U.S.C. (1952 ed.) § 145(b). This, it is here assumed, is also a violation of 26 U.S.C. (1952 ed.) § 3616(a), the penalty for the violation of which is lesser than for a violation of § 145(b). Petitioner was convicted and sentenced to imprisonment greater than the maximum possible had the conviction been under § 3616(a). Held: it was not error for the trial judge to refuse to give to the jury an instruction requested by petitioner that a verdict of guilty of the "lesser crime" under § 3616(a) would be permissible. . (a) It is here assumed, arguendo, that § 3616(a) is applicable to income tax returns. P.. (b) The contention that, since there was no difference in the proof required to establish violations of §§ 145(b) and 3616(a), the indictment must be taken as charging violations of both sections, and that, under Rule 31(c) of the Federal Rules of Criminal Procedure, the jury should have been permitted to make the choice between the two crimes, cannot be sustained. . (c) Rule 31(c) was not intended to change the jury's traditional function of deciding only the issues of fact, and taking the law as given by the court. P.. (d) Whether § 3616(a), rather than § 145(b), should apply was not for the jury to determine. . 221 F.2d 590 affirmed.

1955_92

https://www.oyez.org/cases/1955/92

MR. JUSTICE CLARK delivered the opinion of the Court. In 1949, Mrs. Doris Walker was discharged from her job at Cutter Laboratories, a manufacturer of pharmaceutical and biological products, on the claimed grounds that she was an active member of the Communist Party and had falsified her application for employment there.

A corporation manufacturing pharmaceutical and biological products in California discharged an employee on the grounds that she was an active member of the Communist Party and had falsified her application for employment. Her union sought her reinstatement before an arbitration board pursuant to a valid collective bargaining agreement which authorized discharge for "just cause" only. Finding that she was an active member of the Communist Party and had falsified her application for employment, but that these grounds for discharge had been waived by the employer and that she actually was discharged for union activities, the board ordered her reinstatement. The lower California courts affirmed this order, but the Supreme Court of California reversed. Certiorari was granted by this Court on a petition contending that the decision and opinion violated the Equal Protection and Due Process Clauses of the Fourteenth Amendment. Upon an analysis of the record, however, it appeared that the Supreme Court of California construed the term "just cause" to embrace membership in the Communist Party, and refused to apply a doctrine of waiver. Held: the decision involves only California's construction of a local contract under local law, no substantial federal question is presented, and the writ of certiorari is dismissed. . (a) This Court reviews judgments, not statements in opinions, and it will not pass on federal questions discussed in the opinion of a state court where it appears that the judgment rests on adequate state grounds. . (b) The scope of review of the findings of the arbitration board under the California Arbitration Act is a matter exclusively for the courts of that State. P.. (c) The Supreme Court of California construed the term "just cause" to embrace membership in the Communist Party, and refused to apply a doctrine of waiver. . (d) Such a decision involves only California's construction of a local contract under local law, and no substantial federal question is presented. P.. Writ of certiorari dismissed.

1955_110

https://www.oyez.org/cases/1955/110

MR. JUSTICE BLACK delivered the opinion of the Court. 18 U.S.C. § 401(2) empowers a court of the United States to punish as contempt "Misbehavior of any of its officers in their official transactions. . . ."

A lawyer is not the kind of "officer" who can be tried summarily for contempt under 18 U.S.C. § 401(2), which empowers a court of the United States to punish as contempt "[m]isbehavior of any of its officers in their official transactions." . (a) This section derives from the Contempt Act of March 2, 1831, 4 Stat. 487, and should be narrowly construed, because its legislative history shows that Congress intended drastically to limit the contempt power of federal courts, and because the exercise of any broader contempt power would permit too great inroads on the procedural safeguards of the Bill of Rights. . (b) The term "officers," as used in 18 U.S.C. § 401(2), should not be expanded beyond the group of persons -- such as marshals, bailiffs, court clerks, and judges -- who serve as conventional court officers and are regularly treated as such in the laws. P.. (c) The legislative history of the 1831 Act is completely inconsistent with a purpose to treat lawyers as "officers of the court" subject to summary punishment. . ___ U.S.App.D.C. ___, 223 F.2d 322, reversed.

1955_76

https://www.oyez.org/cases/1955/76

MR. JUSTICE BURTON delivered the opinion of the Court. This is a multiple claims action in which the District Court entered a judgment disposing of but one claim. Pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, as amended in 1946, that court expressly determined that there was no just reason for delay, and expressly directed the entry of judgment. Thereupon, an appeal was taken to the Court of Appeals, and the issue before us is whether the latter court has jurisdiction to entertain that appeal under 28 U.S.C. § 1291, although an unadjudicated counterclaim awaits disposition in the District Court. The issue is comparable to that decided in Sears, Roebuck & Co. v. Mackey, ante, p., except that here, the unadjudicated claim is a counterclaim arising in part out of the same transactions and occurrences as the adjudicated claim. By applying the reasoning used in the Sears case, we reach a like conclusion here, and uphold the jurisdiction of the Court of Appeals. While the counterclaim arises in part out of the same transactions as does the adjudicated claim, it was filed long after the principal proceeding was begun, and is in the nature of an action ancillary to the principal proceeding, and bears a separate case number. Upon request of both parties, the District Court has removed the counterclaim from the trial calendar, without prejudice to either party, leaving it subject to reinstatement for trial at any time by order of the court upon its own initiative, or upon request of either party after reasonable notice. A brief review of the entire proceedings and a disclosure of its subject matter throws light on the relationship between the adjudicated claim and the counterclaim. In 1927, petitioner, The Cold Metal Process Company, an Ohio corporation, and United Engineering & Foundry Company, a Pennsylvania corporation, entered into a contract for the purpose of securing a patent in the name of Cold Metal relating to a certain type of steel rolling mill and of granting to United an exclusive license to make, use, and sell mills under such patent. To that end, the parties contributed claims under their respective patent applications, and it was agreed that the license should be granted when the patent was issued. The parties also agreed to try, by negotiation, to determine the amount of the payment by United for the license. If the parties could not agree on that point, the subject was to be submitted to arbitration in a manner specified in the contract. In 1930, the patent was issued, but Cold Metal refused to treat the 1927 contract as conferring an exclusive license on United. Cold Metal maintained that United was not a licensee until the amount due Cold Metal had been determined and paid. United, on the other hand, treated the contract as an enforceable exclusive license under which the license fee was to be determined later. After litigation not now material, Cold Metal, in 1934, instituted the present proceeding, Equity No. 2991, against United in the United States District Court for the Western District of Pennsylvania. Cold Metal asked (1) for an injunction restraining United from prosecuting certain suits, pending in Ohio and elsewhere, founded upon United's claim of exclusive rights under the patent, and (2) for determination of the amount to be paid by United under the 1927 contract. The court declined to issue a preliminary injunction, 9 F. Supp. 994, but Cold Metal appealed from such denial and, in 1935, obtained a reversal directing the injunction to be issued, 79 F.2d 666. In 1939, Cold Metal, in line with the foregoing results, filed a supplemental complaint asking that the 1927 contract be "cancelled, revoked and annulled," and that United be enjoined from further operations under the patent. However, in 1938, the District Court, after trial, held the contract valid and enforceable, and directed an accounting before a master. 83 F. Supp. 914. Cold Metal appealed, but, in 1939, the Court of Appeals reversed its 1935 decision and largely sustained United's position. It ordered that the injunction against United's infringement suits be dissolved, and held that the 1927 contract created a valid and enforceable exclusive license in favor of United. It also stated that the master could determine, from an "understanding" between the parties as shown by the record, the amount due from United under the 1927 contract. 107 F.2d 27. In 1941, United asked leave to file an amended answer and counterclaim, complaining that Cold Metal's recent acts were inconsistent with the 1939 judgment of the Court of Appeals. In 1942, the District Court denied that motion on the ground that it could carry out only the existing mandate of the Court of Appeals. 43 F. Supp. 375. It suggested, however, that the injunction sought by United in its counterclaim should be the subject matter of another action, and that United could assert, before the master, Cold Metal's breaches of the 1927 contract. In 1943, the District Court modified its 1938 decree to make it conform to the Court of Appeals' order of 1939. It also appointed a master to determine not only the amount due Cold Metal from United for its past operations, but the payments to be made on licensed mills in the future. In 1949, United refiled its claims as an "Ancillary Cross Complaint" in Civil Action No. 7744. United sought, inter alia, (1) to enjoin the prosecution of infringement suits by Cold Metal against parties using mills under licenses granted by United, (2) to require Cold Metal to account for any funds it had collected for the use of such mills within the field of United's exclusive license, and (3) to set off those funds from any payment or royalty that might be due from United to Cold Metal under the 1927 contract. In 1950, the District Court dismissed the cross-complaint on the ground that it was not ancillary to Equity No. 2991. 92 F. Supp. 596. However, in 1951, the Court of Appeals reversed the District Court. It held that United's cross complaint was, in reality, a counterclaim, ancillary to Equity No. 2991, and therefore within the jurisdiction of the District Court. 190 F.2d 217. The Court of Appeals reviewed the previous course of the proceedings and pointed out that the claims now made by United in this counterclaim are entirely dependent upon the 1939 decision of that court, 107 F.2d 27, which upheld the validity of United's exclusive license. Into this situation, in 1954, came the master's report on the accounting in Equity No. 2991. It listed the licensed mills, fixed the compensation payable under the 1927 contract, and found that United's license had existed from 1930 to 1947, and that United's customers were duly licensed to use the patented mills. It also held that certain United mills were exempt from royalty, that Cold Metal had failed to respect the license or to perform all of its obligations under the 1927 contract, but that United owed Cold Metal a substantial sum under it. In 1955, the District Court approved the master's report in all respects and entered judgment against United for $387,650, with interest at 6% from the date of filing of the report. Both parties appealed. Cold Metal at once moved to dismiss United's appeal on the ground that the District Court had not made the certification required by Rule 54(b). With permission of the Court of Appeals, the District Court then amended its judgment to add such certification. Again, both parties appealed. Again, Cold Metal moved to dismiss United's appeal from the amended judgment because the Court of Appeals lacked jurisdiction to entertain it. This time, the motion was denied with a per curiam opinion in which the Court of Appeals said, "We think the determination made under the circumstances of this case is the very kind of thing Rule 54(b) was written to provide for. We see no violation of discretion on the part of the district judge in entering it." 221 F.2d 115. Accordingly, on October 3, 1955, in the Court of Appeals, the parties argued their respective appeals on their merits in Equity No. 2991. However, before any decision was rendered on the merits, we granted certiorari upon Cold Metal's petition questioning the jurisdiction of the Court of Appeals to entertain the appeal. 350 U.S. 819. We agree with the Court of Appeals that this is the very kind of case for which amended Rule 54(b) was designed. The appealability of the adjudicated claim is upheld so that the merits of the existing judgment may be determined at this stage of the proceedings. Prior to the promulgation of the Federal Rules of Civil Procedure in 1939, it may well have been true that the Court of Appeals would not at this stage have had jurisdiction over United's appeal. Under the single judicial unit theory of finality which was then recognized, the Court of Appeals would have been without jurisdiction until United's counterclaim also had been decided by the District Court. That would have been so even if the counterclaim did not arise out of the same transaction and occurrence as Cold Metal's claim. However, as stated in Sears, Roebuck & Co. v. Mackey, ante, p., Rule 54(b), in its original form, modified the judicial unit theory in respect to multiple claims actions. Accordingly, under that rule, it is likely that, if United's counterclaim qualified as "permissive," rather than as "compulsory," the Court of Appeals would have had jurisdiction to entertain the appeal now before us. This conclusion follows from the fact that the test of appealability under the original rule was whether the adjudicated claims were separate from, and independent of, the unadjudicated claims. See Reeves v. Beardall,. However, as set forth in Sears, Roebuck & Co. v. Mackey, ante, that test led to uncertainty, of which the present case might have been an example. The amended rule overcomes that difficulty, and, under its terms, we need not decide whether United's counterclaim is compulsory or permissive. The amended rule, in contrast to the rule in its original form, treats counterclaims, whether compulsory or permissive, like other multiple claims. It provides that "When more than one claim for relief is presented in an action, whether as a claim, counterclaim, cross-claim, or third-party claim, the [district] court may direct the entry of a final judgment upon one or more but less than all of the claims. . . ." (Emphasis supplied.) Counterclaims and cross-claims are thus equated with the others. See Bendix Aviation Corp. v. Glass, 195 F.2d 267. Therefore, under the amended rule, the relationship of the adjudicated claims to the unadjudicated claims is one of the factors which the District Court can consider in the exercise of its discretion. If the District Court certifies a final order on a claim which arises out of the same transaction and occurrence as pending claims, and the Court of Appeals is satisfied that there has been no abuse of discretion, the order is appealable. The reasoning and the result in Sears, Roebuck & Co. v. Mackey, ante, is dispositive of this case. The order appealed from finally adjudicates Cold Metal's claim for relief, and the Court of Appeals has held that the trial court did not abuse its discretion in certifying the absence of just reasons for delay. That this order is appealable at a time when it would not have been appealable prior to the Federal Rules of Civil Procedure, or under Rule 54(b) in its original form, does not mean that Rule 54(b), as amended, is invalid. It applies only to a final decision of one or more claims for relief. The amended rule meets the needs and problems of modern judicial administration by adjusting the unit for appeal to fit multiple claims actions, while retaining a right of judicial review over the discretion exercised by the District Court in determining when there is no just reason for delay. This does not impair the statutory concept of finality embraced in § 1291, and, as held in Sears, Roebuck & Co. v. Mackey, ante, is within the rulemaking power of this Court. Affirmed.

In a multiple claims action, the Federal District Court, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, as amended in 1946, expressly determined that there was no just reason for delay and expressly directed entry of judgment on one of the claims. The unadjudicated claim was a counterclaim arising in part out of the same transactions and occurrences as the adjudicated claim. Held: the Court of Appeals had jurisdiction under 28 U.S.C. § 1291 to entertain an appeal from the judgment. . (a) Rule 54(b), as amended, treats counterclaims, whether "compulsory" or "permissive," like other multiple claims. P.. (b) Under amended Rule 54(b), the relationship of the adjudicated claims to the unadjudicated claims is one of the factors which the District Court can consider in the exercise of its discretion. P.. (c) That the order in this case is appealable at a time when it would no have been appealable prior to the Federal Rules of Civil Procedure, or under Rule 54(b) in its original form, does not mean that Rule 54(b), as amended, is invalid. . (d) Amended Rule 54(b) meets the needs and problems of modern judicial administration by adjusting the unit for appeal to fit multiple claims actions, while retaining a right of judicial review over the discretion exercised by the District Court in determining when there is no just reason for delay. P.. (e) Rule 54(b), as amended, does not impair the statutory concept of finality embraced in 28 U.S.C. § 1291, and it is within the rulemaking power of this Court. P.. 221 F.2d 115 affirmed.

1955_442

https://www.oyez.org/cases/1955/442

Opinion of the Court by MR. JUSTICE HARLAN, announced by MR. JUSTICE BURTON. This case presents the question of the meaning of the term "national security" as used in the Act of August 26, 1950, giving to the heads of certain departments and agencies of the Government summary suspension and unreviewable dismissal powers over their civilian employees, when deemed necessary "in the interest of the national security of the United States." Petitioner, a preference-eligible veteran under § 2 of the Veterans' Preference Act of 1944, 58 Stat. 387, as amended, 5 U.S.C. § 851, held a position in the classified civil service as a food and drug inspector for the New York District of the Food and Drug Administration, Department of Health, Education, and Welfare. In November, 1953, he was suspended without pay from his position pending investigation to determine whether his employment should be terminated. He was given a written statement of charges alleging that he had "a close association with individuals reliably reported to be Communists" and that he had maintained a "sympathetic association" with, had contributed funds and services to, and had attended social gatherings of an allegedly subversive organization. Although afforded an opportunity to do so, petitioner declined to answer the charges or to request a hearing, as he had the right to do. Thereafter, the Secretary of the Department of Health, Education, and Welfare, after "a study of all the documents in [petitioner's] case," determined that petitioner's continued employment was not "clearly consistent with the interests of national security," and ordered the termination of his employment. Petitioner appealed his discharge to the Civil Service Commission, which declined to accept the appeal on the ground that the Veterans' Preference Act, under which petitioner claimed the right of appeal, was inapplicable to such discharges. Petitioner thereafter brought an action in the District Court for the District of Columbia seeking a declaratory judgment that his discharge was invalid and that the Civil Service Commission had improperly refused to entertain his appeal, and an order requiring his reinstatement in his former position. The District Court granted the respondents' motion for judgment on the pleadings and dismissed the complaint. 125 F. Supp. 284. The Court of Appeals, with one judge dissenting, affirmed. 96 U.S.App.D.C. 379, 226 F.2d 337. Because of the importance of the questions involved in the field of Government employment, we granted certiorari. 350 U.S. 900. Section 14 of the Veterans' Preference Act, 58 Stat. 390, as amended, 5 U.S.C. § 863, provides that preference eligibles may be discharged only "for such cause as will promote the efficiency of the service" and, among other procedural rights, "shall have the right to appeal to the Civil Service Commission," whose decision is made binding on the employing agency. Respondents concede that petitioner's discharge was invalid if that Act is controlling. They contend, however, as was held by the courts below, that petitioner's discharge was authorized by the Act of August 26, 1950, supra, which eliminates the right of appeal to the Civil Service Commission. Thus the sole question for decision is whether petitioner's discharge was authorized by the 1950 Act. The 1950 Act provides in material part that, notwithstanding any other personnel laws, the head of any agency to which the Act applies "may, in his absolute discretion and when deemed necessary in the interest of national security, suspend, without pay, any civilian officer or employee of [his agency]. . . . The agency head concerned may, following such investigation and review as he deems necessary, terminate the employment of such suspended civilian officer or employee whenever he shall determine such termination necessary or advisable in the interest of the national security of the United States, and such determination by the agency head concerned shall be conclusive and final. . . ." The Act was expressly made applicable only to the Departments of State, Commerce, Justice, Defense, Army, Navy, and Air Force, the Coast Guard, the Atomic Energy Commission, the National Security Resources Board, and the National Advisory Committee for Aeronautics. Section 3 of the Act provides, however, that the Act may be extended "to such other departments and agencies of the Government as the President may, from time to time, deem necessary in the best interests of national security," and the President has extended the Act under this authority "to all other departments and agencies of the Government." While the validity of this extension of the Act depends upon questions which are in many respects common to those determining the validity of the Secretary's exercise of the authority thereby extended to her, we will restrict our consideration to the latter issue and assume, for purposes of this decision, that the Act has validly been extended to apply to the Department of Health, Education, and Welfare. The Act authorizes dismissals only upon a determination by the Secretary that the dismissal is "necessary or advisable in the interest of the national security." That determination requires an evaluation of the risk of injury to the "national security" that the employee's retention would create, which, in turn, would seem necessarily to be a function not only of the character of the employee and the likelihood of his misconducting himself, but also of the nature of the position he occupies and its relationship to the "national security." That is, it must be determined whether the position is one in which the employee's misconduct would affect the "national security." That, of course, would not be necessary if "national security" were used in the Act in a sense so broad as to be involved in all activities of the Government, for then the relationship to the "national security" would follow from the very fact of employment. For the reasons set forth below, however, we conclude (1) that the term "national security" is used in the Act in a definite and limited sense, and relates only to those activities which are directly concerned with the Nation's safety, as distinguished from the general welfare; and (2) that no determination has been made that petitioner's position was affected with the "national security," as that term is used in the Act. It follows that his dismissal was not authorized by the 1950 Act, and hence violated the Veterans' Preference Act. I In interpreting the 1950 Act, it is important to note that that Act is not the only, nor even the primary, source of authority to dismiss Government employees. The general personnel laws -- the Lloyd-LaFollette and Veterans' Preference Acts -- authorize dismissals for "such cause as will promote the efficiency of the service," and the ground which we conclude was the basis for petitioner's discharge here -- a reasonable doubt as to his loyalty -- was recognized as a "cause" for dismissal under those procedures as early as 1942. Indeed, the President's so-called Loyalty Program, Exec.Order No. 9835, 12 Fed.Reg.1935, which prescribed an absolute standard of loyalty to be met by all employees regardless of position, had been established pursuant to that general authority three years prior to the 1950 Act, and remained in effect for nearly three years after its passage. Thus, there was no want of substantive authority to dismiss employees on loyalty grounds, and the question for decision here is not whether an employee can be dismissed on such grounds, but only the extent to which the summary procedures authorized by the 1950 Act are available in such a case. As noted above, the issue turns on the meaning of "national security," as used in the Act. While that term is not defined in the Act, we think it clear from the statute as a whole that that term was intended to comprehend only those activities of the Government that are directly concerned with the protection of the Nation from internal subversion or foreign aggression, and not those which contribute to the strength of the Nation only through their impact on the general welfare. Virtually conclusive of this narrow meaning of "national security" is the fact that, had Congress intended the term in a sense broad enough to include all activities of the Government, it would have granted the power to terminate employment "in the interest of the national security" to all agencies of the Government. Instead, Congress specified 11 named agencies to which the Act should apply, the character of which reveals, without doubt, a purpose to single out those agencies which are directly concerned with the national defense and which have custody over information the compromise of which might endanger the country's security, the so-called "sensitive" agencies. Thus, of the 11 named agencies, 8 are concerned with military operations or weapons development, and the other 3, with international relations, internal security, and the stockpiling of strategic materials. Nor is this conclusion vitiated by the grant of authority to the President, in § 3 of the Act, to extend the Act to such other agencies as he "may, from time to time, deem necessary in the best interests of national security." Rather, the character of the named agencies indicates the character of the determination required to be made to effect such an extension. Aware of the difficulties of attempting an exclusive enumeration and of the undesirability of a rigid classification in the face of changing circumstances, Congress simply enumerated those agencies which it determined to be affected with the "national security" and authorized the President, by making a similar determination, to add any other agencies which were, or became, "sensitive." That it was contemplated that this power would be exercised "from time to time" confirms the purpose to allow for changing circumstances and to require a selective judgment, necessarily implying that the standard to be applied is a less than all-inclusive one. The limitation of the Act to the enumerated agencies is particularly significant in the light of the fact that Exec.Order No. 9835, establishing the Loyalty Program, was in full effect at the time of the consideration and passage of the Act. In that Order, the President had expressed his view that it was of "vital importance" that all employees of the Government be of "complete and unswerving loyalty" and had prescribed a minimum loyalty standard to be applied to all employees under the normal civil service procedures. Had Congress considered the objective of insuring the "unswerving loyalty" of all employees, regardless of position, as a matter of "national security" to be effectuated by the summary procedures authorized by the Act, rather than simply a desirable personnel policy to be implemented under the normal civil service procedures, it surely would not have limited the Act to selected agencies. Presumably, therefore, Congress meant something more by the "interest of the national security" than the general interest the Nation has in the loyalty of even "nonsensitive" employees. We can find no justification for rejecting this implication of the limited purpose of the Act or for inferring the unlimited power contended for by the Government. Where applicable, the Act authorizes the agency head summarily to suspend an employee pending investigation and, after charges and a hearing, finally to terminate his employment, such termination not being subject to appeal. There is an obvious justification for the summary suspension power where the employee occupies a "sensitive" position in which he could cause serious damage to the national security during the delay incident to an investigation and the preparation of charges. Likewise, there is a reasonable basis for the view that an agency head who must bear the responsibility for the protection of classified information committed to his custody should have the final say in deciding whether to repose his trust in an employee who has access to such information. On the other hand, it is difficult to justify summary suspensions and unreviewable dismissals on loyalty grounds of employees who are not in "sensitive" positions, and who are thus not situated where they could bring about any discernible adverse effects on the Nation's security. In the absence of an immediate threat of harm to the "national security," the normal dismissal procedures seem fully adequate, and the justification for summary powers disappears. Indeed, in view of the stigma attached to persons dismissed on loyalty grounds, the need for procedural safeguards seems even greater than in other cases, and we will not lightly assume that Congress intended to take away those safeguards in the absence of some overriding necessity, such as exists in the case of employees handling defense secrets. The 1950 Act itself reflects Congress' concern for the procedural rights of employees and its desire to limit the unreviewable dismissal power to the minimum scope necessary to the purpose of protecting activities affected with the "national security." A proviso to § 1 of the Act provides that a dismissal by one agency under the power granted by the Act "shall not affect the right of such officer or employee to seek or accept employment in any other department or agency of the Government" if the Civil Service Commission determines that the employee is eligible for such other employment. That is, the unreviewable dismissal power was to be used only for the limited purpose of removing the employee from the position in which his presence had been determined to endanger the "national security"; it could affect his right to employment in other agencies only if the Civil Service Commission, after review, refused to clear him for such employment. This effort to preserve the employee's procedural rights to the maximum extent possible hardly seems consistent with an intent to define the scope of the dismissal power in terms of the indefinite and virtually unlimited meaning for which the respondents contend. Moreover, if Congress intended the term to have such a broad meaning that all positions in the Government could be said to be affected with the "national security," the result would be that the 1950 Act, though in form but an exception to the general personnel laws, could be utilized effectively to supersede those laws. For why could it not be said that national security in that sense requires not merely loyal and trustworthy employees, but also those that are industrious and efficient? The relationship of the job to the national security being the same, its demonstrated inadequate performance because of inefficiency or incompetence would seem to present a surer threat to national security, in the sense of the general welfare, than a mere doubt as to the employee's loyalty. Finally, the conclusion we draw from the face of the Act that "national security" was used in a limited and definite sense is amply supported by the legislative history of the Act. In the first place, it was constantly emphasized that the bill, first introduced as S. 1561 in the 80th Congress and passed as H.R. 7439 in the 81st Congress, was intended to be applied, or be extended, only to "sensitive" agencies, a term used to imply a close and immediate concern with the defense of the Nation. Thus, the Senate Committee on Armed Services, in reporting out S.1561, stated: "This bill provides authority to terminate employment of indiscreet or disloyal employees who are employed in areas of the Government which are sensitive from the standpoint of national security." "* * * *" "[Section 3 will permit] the President to determine additional sensitive areas and include such areas in the scope of the authorities contained in this bill." "* * * *" "Insofar as the [addition of § 3] is concerned, it was recognized by all witnesses that there were other sensitive areas within the various departments of the Government which are now, or might in the future become, deeply involved in national security. . . . In view . . . of the fact that there are now and will be in the future other sensitive areas of equal importance to the national security, it is believed that the President should have authority to make a finding concerning such areas and, by Executive action, place those areas under the authorities contained in this act. " The House Committee on Post Office and Civil Service reported that "The provisions of the bill extend only to departments and agencies which are concerned with vital matters affecting the national security of our Nation. " The committee reports on H.R. 7439 in the next Congress similarly referred to the bill as granting the dismissal power only to the heads of the "sensitive" agencies. While these references relate primarily to the agencies to be covered by the Act, rather than to the exercise of the power within an agency, the standard for both is the same -- in the "interests of the national security" -- and the statements thus clearly indicate the restricted sense in which "national security" was used. In short, "national security" is affected only by "sensitive" activities. Secondly, the history makes clear that the Act was intended to authorize the suspension and dismissal only of persons in sensitive positions. Throughout the hearings, committee reports, and debates, the bill was described as being designed to provide for the dismissal of "security risks." In turn, the examples given of what might be a "security risk" always entailed employees having access to classified materials; they were security risks because of the risk they posed of intentional or inadvertent disclosure of confidential information. Mr. Larkin, a representative of the Department of Defense, which Department had requested and drafted the bill, made this consideration more explicit: "They are security risks because of their access to confidential and classified material. . . . But if they do not have classified material, why, there is no notion that they are security risks to the United States. They are security risks to the extent of having access to classified material. " "A person is accused of being disloyal, but is cleared by the loyalty board, because there is not enough evidence against him. If that person is not in a sensitive job, it is not of any further concern to us. We are willing to take the view that, while we might have misgivings about his loyalty, he cannot prejudice our security because he does not have access to any of the classified or top secret material. " It is clear, therefore, both from the face of the Act and the legislative history, that "national security" was not used in the Act in an all-inclusive sense, but was intended to refer only to the protection of "sensitive" activities. It follows that an employee can be dismissed "in the interest of the national security" under the Act only if he occupies a "sensitive" position, and thus that a condition precedent to the exercise of the dismissal authority is a determination by the agency head that the position occupied is one affected with the "national security." We now turn to an examination of the Secretary's action to show that no such determination was made as to the position occupied by petitioner. II The Secretary's action in dismissing the petitioner was expressly taken pursuant to Exec. Order No. 10450, 18 Fed.Reg. 2489, promulgated in April, 1953, to provide uniform standards and procedures for the exercise by agency heads of the suspension and dismissal powers under the 1950 Act. That Order prescribes as the standard for dismissal, and the dismissal notice given to petitioner contained, a determination by the Secretary that the employee's retention in employment "is not clearly consistent with the interests of national security." Despite this verbal formula, however, it is our view that the Executive Order does not, in fact, require the agency head to make any determination whatever on the relationship of the employee's retention to the "national security" if the charges against him are within the categories of the charges against petitioner -- that is, charges which reflect on the employee's loyalty. Rather, as we read the Order, it enjoins upon the agency heads the duty of discharging any employee of doubtful loyalty irrespective of the character of his job and its relationship to the "national security." That is, the Executive Order deems an adverse determination as to loyalty to satisfy the requirements of the statute, without more. The opening preamble to the Order recites, among other things, that "the interests of the national security require" that "all" Government employees be persons "of complete and unswerving loyalty." It would seem to follow that an employee's retention cannot be "clearly consistent" with the "interests of the national security" as thus defined unless he is "clearly" loyal -- that is unless there is no doubt as to his loyalty. And § 8(a) indicates that that is, in fact, what was intended by the Order. That section provides that the investigation of an employee pursuant to the Order shall be designed to develop information "as to whether . . . [his employment] is clearly consistent with the interests of the national security," and prescribes certain categories of facts to which "such" information shall relate. The first category, § 8(a)(1), includes nonloyalty-oriented facts which, in general, might reflect upon the employee's reliability, trustworthiness, or susceptibility to coercion, such as dishonesty, drunkenness, sexual perversion, mental defects, or other reasons to believe that he is subject to influence or coercion. Section 8(a)(1) expressly provides, however, that such facts are relevant only "depending on the relation of the Government employment to the national security." The remaining categories include facts which, in general, reflect upon the employee's "loyalty," such as acts of espionage, advocacy of violent overthrow of the Government, sympathetic association with persons who so advocate, or sympathetic association with subversive organizations. § 8(a)(2)-(8). Significantly, there is wholly absent from these categories -- under which the charges against petitioner were expressly framed -- any qualification making their relevance dependent upon the relationship of the employee's position to the national security. The inference we draw is that, in such cases, the relationship to the national security is irrelevant, and that an adverse "loyalty" determination is sufficient ex proprio vigore to require discharge. Arguably, this inference can be avoided on the ground that § 8(a) relates only to the scope of information to be developed in the investigation, and not to the evaluation of it by the agency head. That is, while loyalty information is to be developed in all cases regardless of the nature of the employment, that does not mean that the agency head should not consider the nature of the employment in determining whether the derogatory information is sufficient to make the employee's continued employment not "clearly consistent" with the "national security." No doubt that is true to the extent that the greater the sensitivity of the position the smaller may be the doubts that would justify termination; the Order undoubtedly leaves it open to an agency head to apply a stricter standard in some cases than in others, depending on the nature of the employment. On the other hand, by making loyalty information relevant in all cases, regardless of the nature of the job, § 8(a) seems strongly to imply that there is a minimum standard of loyalty that must be met by all employees. It would follow that the agency head may terminate employment in cases where that minimum standard is not met without making any independent determination of the potential impact of the person's employment on the national security. Other provisions of the Order confirm the inferences that may be drawn from § 8(a). Thus, § 3(b) directs each agency head to designate as "sensitive" those positions in this agency "the occupant of which could bring about, by virtue of the nature of the position, a material adverse effect on the national security." By definition, therefore, some employees are admittedly not in a position to bring about such an effect. Nevertheless, the Order makes this distinction relevant only for purposes of determining the scope of the investigation to the conducted, not for purposes of limiting the dismissal power to such "sensitive" positions. Section 3(a) is more explicit. That provides that the appointment of all employees shall be made subject to an investigation the scope of which shall depend upon the degree of adverse effect on the national security the occupant of the position could bring about, but which "in no event" is to be less than a prescribed minimum. But the sole purpose of such an investigation is to provide a basis for a "clearly consistent" determination. Thus, the requirement of a minimum investigation of all persons appointed implies that an adverse "clearly consistent" determination may be made as to any such employee, regardless of the potential adverse effect he could cause to the national security. Finally, the second "Whereas" clause of the preamble recites as a justification for the Order that "all persons . . . privileged to be employed . . . [by the Government should] be adjudged by mutually consistent and no less than minimum standards," thus implying that the Order prescribes minimum standards that all employees must meet irrespective of the character of the positions held, one of which is the "complete and unswerving loyalty" standard recited in the first "Whereas" clause of the preamble. Confirmation of this reading of the Order is found in its history. Exec. Order No. 9835, supra, as amended by Exec.Order No. 10241, 16 Fed.Reg. 3690, had established the Loyalty Program under which all employees, regardless of their positions, were made subject to discharge if there was a "reasonable doubt" as to their loyalty. That Order was expressly revoked by § 12 of the present Executive Order. There is no indication, however, that it was intended thereby to limit the scope of the persons subject to a loyalty standard. And any such implication is negatived by the remarkable similarity in the preambles to the two Orders and in the kinds of information considered to be relevant to the ultimate determinations. In short, all employees, were still to be subject to at least a minimum loyalty standard, though under new procedures which do not afford a right to appeal to the Civil Service Commission. We therefore interpret the Executive Order as meaning that, when "loyalty" charges are involved, an employee may be dismissed regardless of the character of his position in the Government service, and that the agency head need make no evaluation as to the effect which continuance of his employment might have upon the "national security." We recognize that this interpretation of the Order rests upon a chain of inferences drawn from less than explicit provisions. But the Order was promulgated to guide the agency heads in the exercise of the dismissal power, and its failure to state explicitly what determinations are required leaves no choice to the agency heads but to follow the most reasonable inferences to be drawn. Moreover, whatever the practical reasons that may have dictated the awkward form of the Order, its failure to state explicitly what was meant is the fault of the Government. Any ambiguities should therefore be resolved against the Government, and we will not burden the employee with the assumption that an agency head, in stating no more than the formal conclusion that retention of the employee is not "clearly consistent with the interests of national security," has made any subsidiary determinations not clearly required by the Executive Order. From the Secretary's determination that petitioner's employment was not "clearly consistent with the interests of national security," therefore, it may be assumed only that the Secretary found the charges to be true and that they created a reasonable doubt as to petitioner's loyalty. No other subsidiary finding may be inferred, however, for, under the Executive Order as we have interpreted it, no other finding was required to support the Secretary's action. From our holdings (1) that not all positions in the Government are affected with the "national security" as that term is used in the 1950 Act, and (2) that no determination has been made that petitioner's position was one in which he could adversely affect the "national security," it necessarily follows that petitioner's discharge was not authorized by the 1950 Act. In reaching this conclusion, we are not confronted with the problem of reviewing the Secretary's exercise of discretion, since the basis for our decision is simply that the standard prescribed by the Executive Order and applied by the Secretary is not in conformity with the Act. Since petitioner's discharge was not authorized by the 1950 Act, and hence violated the Veterans' Preference Act, the judgment of the Court of Appeals is reversed, and the case is remanded to the District Court for further proceedings not inconsistent with this opinion. Reversed and remanded.

The Act of August 26, 1950, gave to the heads of certain departments and agencies of the Government summary suspension and unreviewable dismissal powers over their civilian employees, when deemed necessary "in the interest of the national security," and its provisions were extended to "all other departments and agencies of the Government" by Executive Order No. 10450. Petitioner, a preference-eligible veteran under the Veterans' Preference Act, was summarily suspended from his classified civil service position as a food and drug inspector for the Department of Health, Education, and Welfare on charges of close association with alleged Communists and an allegedly subversive organization. Later, he was dismissed on the ground that his continued employment was not "clearly consistent with the interests of national security." His appeal to the Civil Service Commission under the Veterans' Preference Act was denied on the ground that that Act was inapplicable to such discharges. Held: his discharge was not authorized by the 1950 Act, and hence it violated the Veterans' Preference Act. . 1. The 1950 Act authorizes a dismissal only upon a determination that it is "necessary or advisable in the interest of the national security." Such a determination requires an evaluation of the risk to the "national security" that the employee's retention would create, which depends not only upon the character of the employee and the likelihood of his misconducting himself, but also upon the nature of the position he occupies and its relationship to the "national security." P.. 2. The 1950 Act is not the only, nor even the primary, source of authority to dismiss government employees, and the question in this case is not whether an employee can be dismissed on such grounds, but only the extent to which the summary procedures authorized by the 1950 Act are available in such a case. . 3. This depends on the meaning of the term "national security," as used in the 1950 Act. . 4. The term "national security" is not defined in that Act, but it is clear from the statute as a whole that it was intended to comprehend only those activities of the Government that are directly concerned with the protection of the Nation from internal subversion or foreign aggression, and not those which contribute to the strength of the Nation only through their impact on the general welfare. . 5. This conclusion is supported by the legislative history of the Act. . 6. A condition precedent to the exercise of the dismissal authority conferred by the 1950 Act is a determination by the agency head that the position occupied is one affected with the "national security," as that term is used in the Act. P.. 7. No determination was made that petitioner's position was one in which he could adversely affect the "national security," as that term is used in the Act. . (a) Executive Order No. 10450 treats an adverse determination as to the loyalty of an employee as satisfying the statute, irrespective of the character of his job or the effect his continued employment might have upon the "national security." . (b) The failure of the Executive Order to state explicitly what was meant is the fault of the Government, and any ambiguities should be resolved against the Government. P.. (c) From the Secretary's determination that petitioner's employment was not "clearly consistent with the interests of national security," in the light of the Executive Order, it may be assumed only that the Secretary found the charges to be true, and that they created reasonable doubt as to petitioner's loyalty. . 96 U.S.App.D.C. 379, 226 F.2d 337, reversed and remanded.

1955_523

https://www.oyez.org/cases/1955/523

MR. JUSTICE FRANKFURTER delivered the opinion of the Court. Adolphus Henry Collins was killed in an accident near Ehrenburg, Arizona, on September 30, 1953. The accident resulted from the blowout of a tire on an American Buslines' vehicle which Collins was driving on a regular run from Phoenix to Los Angeles. Collins had been employed as a bus driver for American since 1944. He had done his driving on various routes in the Southwest, and, from 1952 until the time of his death, he was regularly employed on the Los Angeles to Phoenix and return route. He and his wife and minor child -- the petitioners in this proceeding -- made their home in Los Angeles, California, in which State Collins was covered by workmen's compensation. Petitioners applied on October 14, 1953, to the Industrial Commission of Arizona for compensation in accordance with the terms of the Arizona Workmen's Compensation Act. In an award dated November 30, 1953, that agency made, inter alia, the following findings: "That the defendant employer maintained workmen's compensation coverage in the State of California, and that payroll premium on the said Adolphus Henry Collins was reported to the State of California. That no reporting of such was made at any time to the Industrial Commission of Arizona." "That the said Adolphus Henry Collins, at the time of his death, was not regularly employed in the State of Arizona as said term has been defined by the Supreme Court of Arizona in the case of Industrial Commission v. Watson Brothers Transportation Company [75 Ariz. 357, 256 P.2d 730]. *" "That the Industrial Commission of Arizona does not have jurisdiction in the premises, and that said . . . claim on file herein should be denied for lack of jurisdiction." On certiorari to the Supreme Court of Arizona, the construction of the Arizona statute on which the Commission based its award was rejected, but its disposition of petitioners' claim was affirmed. After concluding that American Buslines "operated exclusively in interstate commerce," the court held that the Commerce Clause of the United States Constitution precluded recovery under the Arizona Workmen's Compensation Act because Collins was covered by the California statute, and to require his interstate employer to insure also in Arizona would place an undue burden on interstate commerce. 79 Ariz. 220, 286, P.2d 214. We granted certiorari because of the important federal question thus presented. 350 U.S. 931. The only respondent here is the Arizona Industrial Commission. It is not at all clear from the record before us what the interest of the state agency is in this litigation. If the employer were actively before the Court, it could claim, we assume, that an award in the circumstances of the present case burdens the interstate commerce in that the consequences of such an award would to be require it in the future to obtain insurance sufficiently comprehensive to cover potential awards in the various States through which it passes. The apparent interest of the Commission is different, namely, that, as a result of an award in this case, interstate carriers will seek insurance from a single private insurance carrier capable of giving coverage in all States through which they run. The desire by interstate carriers for such insurance will cause a defection from the state compensation fund, and it is this potential defection which leads to the Commission's claim that the Arizona Act cannot be applicable in an interstate situation. But this asserted burden upon interstate commerce -- the disadvantageous effect upon the state compensation fund -- is too intangible and elusive to be deemed a constitutionally disallowable burden. We have been advised, however, that American Buslines has been a nonparticipating defendant throughout this litigation; that it is in receivership in Nebraska; that an order has been issued by the Nebraska court barring claims against it except in that court; and that petitioners' claim is against the state compensation fund, administered by the Industrial Commission, which will in a separate proceeding be put to such recourse as it may have against American Buslines. This is not controverted. The Commission therefore appears to have an immediate interest of the same character and extent that American Buslines would have were it here. Thus, the Commission can invoke the employer's claim under the Commerce Clause. But that claim -- of an increased insurance burden imposed as a practical matter upon an interstate carrier -- while perhaps less tenuous than the defection argument directly pertinent to the Commission's case, is hardly more substantial. Whatever dollars and cents burden an eventual judgment for claimants in the position of petitioners may cast either upon a carrier or the State's fund is insufficient, compared with the interest of the State in affording remedies for injuries committed within its boundaries, see Carroll v. Lanza,, to dislodge state power. The State's power is not dislodged so long as the Federal Government has not taken over the field of remedies for injuries of employees on interstate buses, as it has done in the case of employees of interstate railroad carriers. New York Central R. Co. v. Winfield,. The court below and the Commission here rely on Southern Pacific Co. v. Arizona,. It is too slender a reed. Two less similar situations in which shelter from an exercise of state power is sought under the Commerce Clause would be difficult to find than that presented by the circumstances of this case compared with the circumstances of the Southern Pacific case. The judgment of the Supreme Court or Arizona is reversed, and the case is remanded to that court for further proceedings. Reversed and remanded.

The widow and child of a bus driver applied for compensation under the Arizona Workmen's Compensation Act for his accidental death while driving an interstate bus in Arizona. He was a resident of California, and was covered by the California Workmen's Compensation Act. The bus line operated exclusively in interstate commerce, and was not insured in Arizona. Held: the Commerce Clause of the Federal Constitution did not preclude Arizona from awarding compensation, even if the effect were to force the bus line to obtain insurance against liabilities arising in Arizona. . 79 Ariz. 220, 286 P.2d 214, reversed and remanded.

1955_373

https://www.oyez.org/cases/1955/373

MR. JUSTICE BLACK delivered the opinion of the Court. This case involves the federal income tax liability of respondent LoBue for the years 1946 and 1947. From 1941 to 1947, LoBue was manager of the New York Sales Division of the Michigan Chemical Corporation, a producer and distributor of chemical supplies. In 1944, the company adopted a stock option plan making 10,000 shares of its common stock available for distribution to key employees at $5 per share over a 3-year period. LoBue and a number of other employees were notified that they had been tentatively chosen to be recipients of nontransferable stock options contingent upon their continued employment. LoBue's notice told him: "You may be assigned a greater or less amount of stock based entirely upon your individual results and that of the entire organization." About 6 months later, he was notified that he had been definitely awarded an option to buy 150 shares of stock in recognition of his "contribution and efforts in making the operation of the Company successful." As to future allotments, he was told "It is up to you to justify your participation in the plan during the next two years." LoBue's work was so satisfactory that the company in the course of 3 years delivered to him 3 stock options covering 340 shares. He exercised all these $5 per share options in 1946 and in 1947, paying the company only $1,700 for stock having a market value when delivered of $9,930. Thus, at the end of these transactions, LoBue's employer was worth $8,230 less to its stockholders and LoBue was worth $8,230 more than before. The company deducted this sum as an expense in its 1946 and 1947 tax returns, but LoBue did not report any part of it as income. Viewing the gain to LoBue as compensation for personal services, the Commissioner levied a deficiency assessment against him, relying on § 22(a) of the Internal Revenue Code of 1939, 53 Stat. 9, as amended, 53 Stat. 574, which defines gross income as including "gains, profits, and income derived from . . . compensation for personal service . . . of whatever kind and in whatever form paid. . . ." LoBue petitioned the Tax Court to redetermine the deficiency, urging that "The said options were not intended by the Corporation or the petitioner to constitute additional compensation, but were granted to permit the petitioner to acquire a proprietary interest in the Corporation and to provide him with the interest in the successful operation of the Corporation deriving from an ownership interest." The Tax Court held that LoBue had a taxable gain if the options were intended as compensation, but not if the options were designed to provide him with "a proprietary interest in the business." Finding after hearings that the options were granted to give LoBue "a proprietary interest in the corporation, and not as compensation for services," the Tax Court held for LoBue. 22 T.C. 440, 443. Relying on this finding, the Court of Appeals affirmed, saying: "This was a factual issue which it was the peculiar responsibility of the Tax Court to resolve. From our examination of the evidence, we cannot say that its finding was clearly erroneous." 223 F.2d 367, 371. Disputes over the taxability of stock option transactions such as this are longstanding. We granted certiorari to consider whether the Tax Court and the Court of Appeals had given § 22(a) too narrow an interpretation. 350 U.S. 893. We have repeatedly held that, in defining "gross income" as broadly as it did in § 22(a), Congress intended to "tax all gains except those specifically exempted." See, e.g., Commissioner v. Glenshaw Glass Co.,,. The only exemption Congress provided from this very comprehensive definition of taxable income that could possibly have application here is the gift exemption of § 22(b)(3). But there was not the slightest indication of the kind of detached and disinterested generosity which might evidence a "gift" in the statutory sense. These transfers of stock bore none of the earmarks of a gift. They were made by a company engaged in operating a business for profit, and the Tax Court found that the stock option plan was designed to achieve more profitable operations by providing the employees "with in incentive to promote the growth of the company by permitting them to participate in its success." 22 T.C. at 445. Under these circumstances, the Tax Court and the Court of Appeals properly refrained from treating this transfer as a gift. The company was not giving something away for nothing. Since the employer's transfer of stock to its employee LoBue for much less than the stock's value was not a gift, it seems impossible to say that it was not compensation. The Tax Court held there was no taxable income, however, on the ground that one purpose of the employer was to confer a "proprietary interest." But there is not a word in § 22(a) which indicates that its broad coverage should be narrowed because of an employer's intention to enlist more efficient service from his employees by making them part proprietors of his business. In our view, there is no statutory basis for the test established by the courts below. When assets are transferred by an employer to an employee to secure better services, they are plainly compensation. It makes no difference that the compensation is paid in stock, rather than in money. Section 22(a) taxes income derived from compensation "in whatever form paid." And, in another stock option case, we said that § 22(a) "is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected." Commissioner v. Smith,,. LoBue received a very substantial economic and financial benefit from his employer prompted by the employer's desire to get better work from him. This is "compensation for personal service" within the meaning of § 22(a). LoBue nonetheless argues that we should treat this transaction as a mere purchase of a proprietary interest on which no taxable gain was "realized" in the year of purchase. It is true that our taxing system has ordinarily treated an arm's length purchase of property, even at a bargain price, as giving rise to no taxable gain in the year of purchase. See Palmer v. Commissioner,,. But that is not to say that, when a transfer which is in reality compensation is given the form of a purchase, the Government cannot tax the gain under § 22(a). The transaction here was unlike a mere purchase. It was not an arm's length transaction between strangers. Instead, it was an arrangement by which an employer transferred valuable property to his employees in recognition of their services. We hold that LoBue realized taxable gain when he purchased the stock. A question remains as to the time when the gain on the shares should be measured. LoBue gave his employer promissory notes for the option price of the first 300 shares, but the shares were not delivered until the notes were paid in cash. The market value of the shares was lower when the notes were given than when the cash was paid. The Commissioner measured the taxable gain by the market value of the shares when the cash was paid. LoBue contends that this was wrong, and that the gain should be measured either when the options were granted or when the notes were given. It is, of course, possible for the recipient of a stock option to realize an immediate taxable gain. See Commissioner v. Smith,,. The option might have a readily ascertainable market value, and the recipient might be free to sell his option. But this is not such a case. These three options were not transferable, and LoBue's right to buy stock under them was contingent upon his remaining an employee of the company until they were exercised. Moreover, the uniform Treasury practice since 1923 has been to measure the compensation to employees given stock options subject to contingencies of this sort by the difference between the option price and the market value of the shares at the time the option is exercised. We relied in part upon this practice in Commissioner v. Smith,,. And, in its 1950 Act affording limited tax benefits for "restricted stock option plans," Congress adopted the same kind of standard for measurement of gains. § 130A, Internal Revenue Code of 1939, 64 Stat. 942. And see § 421, Internal Revenue Code of 1954, 68A Stat. 142. Under these circumstances there is no reason for departing from the Treasury practice. The taxable gain to LoBue should be measured as of the time the options were exercised, and not the time they were granted. It is possible that a bona fide delivery of a binding promissory note could mark the completion of the stock purchase, and that gain should be measured as of that date. Since neither the Tax Court nor the Court of Appeals passed on this question, the judgment is reversed and the case is remanded to the Court of Appeals with instructions to remand the case to the Tax Court for further proceedings. Reversed and remanded.

In recognition of his "contribution and efforts in making the operation of the Company successful," a corporation gave an employee options to purchase stock in the corporation. The options were nontransferable, and were contingent upon continued employment. After some time had elapsed and the value of the shares had increased, the employee exercised the options and purchased the stock at less than the then current market price. For some of the shares, he gave the employer a promissory note for the option price; but the shares were not delivered until the notes were paid in cash, when the value of the shares had increased. Held: under the Internal Revenue Code of 1939, as amended, the resulting gain to the employee was taxable as income received at the time he exercised the option and purchased the stock, and his taxable gain should be measured as of the time when the options were exercised, and not as of the time when they were granted. . (a) In defining "gross income" as broadly as it did in § 22(a) of the Internal Revenue Code of 1939, as amended, Congress intended to tax all gains except those specifically exempted . P.. (b) The only exemption that could possibly apply to these transactions is the gift exemption of § 22(b)(3), and these transactions were not "gifts" in the statutory sense. . (c) There is no statutory basis for excluding such transactions from "gross income" on the ground that one purpose of the employer was to confer on the employee a "proprietary interest" in the business. P.. (d) The employee received a substantial economic and financial benefit from his employer, prompted by the employer's desire to get better work from the employee, and this is "compensation for personal service" within the meaning of § 22(a). P.. (e) In these circumstances, the employee "realized" a taxable gain when he purchased the stock. P.. (f) The employee's taxable gain should be measured by the difference between the option price and the market value of the shares as of the time when the options were exercised, and not as of the time when the options were granted. . (g) On remand, the Tax Court may consider the question, not previously passed on, whether delivery of a promissory note for the purchase price marked the completion of the stock purchase, and whether the gain should be measured as of that date or as of the date the note was paid. P.. 223 F.2d 367 reversed and remanded.

1955_286

https://www.oyez.org/cases/1955/286

MR. JUSTICE CLARK delivered the opinion of the Court. The Southwest Exploration Co., respondent in No. 286, contracted to develop certain oil deposits lying off the coast of California by whipstock drilling from sites located on the property of adjacent upland owners. Southwest agreed to pay to such owners 24 1/2% of the net profits for the use of their land. Both Southwest and the upland owners sought to take the statutory depletion allowance of 27 1/2% on this share of the profits. The Tax Court decided that Southwest was entitled to the depletion allowance, 18 T.C. 961, and the Ninth Circuit affirmed, 220 F.2d 58. In the other case, the Court of Claims held that one of the upland owners, Huntington Beach Co., respondent in No. 287, was entitled to the depletion allowance on its share of the net income, 132 F. Supp. 718, 132 Ct.Cl. 427. We granted certiorari in both cases, 350 U.S. 818, because both the drilling company and the upland owners cannot be entitled to depletion on the same income. We agree with the Court of Claims. The California State Lands Act of 1938 provided that the State's offshore oil might be extracted only from wells drilled on filled lands or slant drilled from upland drill sites to the submerged oil deposits. Other provisions of the same statute required that "derricks, machinery, and any and all other surface structures, equipment and appliances" be located only on filled lands or uplands. It was further provided that the state commission might require each prospective bidder for such a state lease to furnish, as a condition precedent to consideration of his bid, satisfactory evidence of "present ability to furnish all necessary sites and rights of way for all operations contemplated under the provisions of the proposed leased. " In 1938, California published notice of its intention to receive bids for the lease of certain oil lands pursuant to this statute. At the time, Southwest -- a corporation organized in 1933 but completely inactive until the transaction at issue here -- did not own, lease, operate, or control any of the uplands adjacent to the area of oil deposits. It is agreed that there were no filled lands available. Southwest entered into three agreements with the upland owners, and was granted the right of ingress to and egress from the designated uplands and the right to construct, use and maintain all equipment necessary for drilling on the same lands. The upland owners reserved to themselves the right to give easements or subsurface well crossings in the uplands, except that they would not allow such easements for the purpose of drilling into the off-shore oil deposits while Southwest retained an interest granted to it by state easement. Southwest's rights were expressly subject to all rights previously granted by the upland owners. The agreements defined "net profits" and provided that Southwest would pay a total of 24 1/2% of its net profits from extraction and sale of oil to the upland owners. It was also provided that the upland owners did not acquire a share in the lease or oil deposit by virtue of the last agreement, and that it was not the intention of the parties to create a partnership relationship. As a result of these agreements, the upland owners endorsed Southwest's bid for a lease submitted to the State of California. Southwest, as the only bidder, was granted "Easement No. 392" by the State in consideration of the "royalty to be paid, the covenants to be performed, and the conditions to be observed by the Grantee." One such condition was that set out in paragraph (1): "That each well drilled pursuant to the terms of this agreement shall be slant drilled from the uplands to and into the subsurface of the State lands. Derricks, machinery, and any and all other surface structures, equipment, and appliances shall be located only upon the uplands, and all surface operations shall be conducted therefrom." The agreement further provided that, if Southwest should "default in the performance or observance of any of the terms, covenants and stipulations hereof," the State might reenter, cancel the agreement, or close down wells not being operated according to the agreement. The wells drilled pursuant to this lease have produced oil continuously since 1939. In No. 286, Southwest Exploration Co., the tax years 1939 through 1945 are involved. If Southwest may claim the depletion allowance on the upland owner's share of the profits during this period, its tax liability is reduced by approximately $175,000. In No. 287, Huntington Beach Co., the upland owner is claiming a tax refund of $135,000 for the year 1948 alone. An allowance for depletion has been recognized in our revenue laws since 1913. It is based on the theory that the extraction of minerals gradually exhausts the capital investment in the mineral deposit. Presently, the depletion allowance is a fixed percentage of gross income which Congress allows to be excluded; this exclusion is designed to permit a recoupment of the owner's capital investment in the minerals, so that, when the minerals are exhausted, the owner's capital is unimpaired. The present allowance, however, bears little relationship to the capital investment, and the taxpayer is not limited to a recoupment of his original investment. The allowance continues so long as minerals are extracted, and even though no money was actually invested in the deposit. The depletion allowance in the Internal Revenue Code of 1939 is solely a matter of congressional grace; it is limited to 27 1/2% of gross income from the property after excluding from gross income "any rents or royalties" paid by the taxpayer with respect to the property. The complexities of oil operations and risks incident to prospecting have led to intricate, multiparty transactions, so that it is often difficult to determine which parties are entitled to a part of the allowance. The statute merely provides in § 23(m) that, in the case of leases, the depletion allowance should be "equitably apportioned between the lessor and lessee." In determining which parties are entitled to depletion on oil and gas income, this Court has relied on two interrelated concepts which were first formulated in Palmer v. Bender,. There, the taxpayer, a lessee of certain oil and gas properties, had transferred his interest in these properties to two oil companies in return for a cash bonus, a future payment to be made "out of one-half of the first oil produced and saved," and an additional royalty of one-eight of the oil produced and saved. In upholding the taxpayer's right to depletion on all such income, the Court based its decision on the grounds that a taxpayer is entitled to depletion where he has: (1) "acquired, by investment, any interest in the oil in place," and (2) secured by legal relationship "income derived from the extraction of the oil, to which he must look for a return of his capital." 287 U.S. at. These two factors, usually considered together, constitute the requirement of "an economic interest." This Court has found the requisite interest in the oil in place to have been retained by the assignor of an oil lease, Thomas v. Perkins,, the lessor of oil properties for a share of net profits, Kirby Petroleum Co. v. Commissioner,, and the grantor of oil lands considered as an assignor of drilling rights, Burton-Sutton Oil Co. v. Commissioner,. The Court found no such interest in the case of a processor of natural gas who had only contracted to buy gas after extraction, Helvering v. Bankline Oil Co.,, and in the case of a former stockholder who had traded his shares in a corporation which owned oil leases for a share of net income from production of the leased wells, Helvering v. O'Donnell,. The second factor has been interpreted to mean that the taxpayer must look solely to the extraction of oil or gas for a return of his capital, and depletion has been denied where the payments were not dependent on production, Helvering v. Elbe Oil Land Co.,, or where payments might have been made from a sale of any part of the fee interest as well as from production. Anderson v. Helvering,. It is not seriously disputed here that this requirement has been met. The problem revolves around the requirement of an interest in the oil in place. It is to be noted that, in each of the prior cases where the taxpayer has had a sufficient economic interest to entitle him to depletion, he has once had at least a fee or leasehold in the oil-producing properties themselves. No prior depletion case decided by this Court has presented a situation analogous to that here, where a fee owner of adjoining lands necessary to the extraction of oil is claiming a depletion allowance. Southwest contends that there can be no economic interest separate from the right to enter and drill for oil on the land itself. Since the upland owners did not themselves have the right to drill for offshore oil, it is argued that respondent -- who has the sole right to drill -- has the sole economic interest. It is true that the exclusive right to drill was granted to Southwest, and it is also true that the agreements expressly create no interest in the oil in the upland owners. But the tax law deals in economic realities, not legal abstractions, and, upon closer analysis, it becomes clear that these factors do not preclude an economic interest in the upland owners. Southwest's right to drill was clearly a conditional, rather than an absolute, grant. Without the prior agreements with the upland owners, Southwest could not even have qualified as a bidder for a state lease. Permission to use the upland sites was the express condition precedent to the State's consideration of Southwest's bid, and it was one of the express conditions on which "Easement No. 392" was granted to Southwest. For a default in that condition, the State retained the right to reenter or to cancel the lease. Thus, it is seen that the upland owners have played a vital role at each successive stage of the proceedings. Without their participation, there could have been no bid, no lease, no wells, and no production. But Southwest contends that the upland owners have contributed merely property which was useful, but not necessary to the drilling operation. The facts are to the contrary. State law required that the wells be drilled either on the uplands or on filled lands, and there were no filled lands available. By hindsight, Southwest now suggests that it might have constructed a drilling island which might have been considered as filled land under the statute. Then, too, perhaps the State itself might have changed the law or condemned the uplands under existing law. But none of these possibilities occurred. The fact is that the drilling arrangement was achieved and oil produced in the only way that it could have been, consistent with state law and the express requirements of the State's lease. Recognizing that the law of depletion requires an economic, rather than a legal, interest in the oil in place, we may proceed to the question of whether the upland owners had such an economic interest here. We find that they did. Proximity to the offshore oil deposits and effect of the state law combined to make the upland owners essential parties to any drilling operations. This controlling position greatly enhanced the value of their land when extraction of oil from the State's offshore fields became a possibility. The owners might have realized this value by selling their interest for a stated sum, and no problem of depletion would have been presented. But, instead, they chose to contribute the use of their land in return for rental based on a share of net profits. This contribution was an investment in the oil in place sufficient to establish their economic interest. Their income was dependent entirely on production, and the value of their interest decreased with each barrel of oil produced. No more is required by any of the earlier cases. Southwest contends, finally, that if depletion is allowed to the upland owners in this case, it would be difficult to limit the principle in instances of strangers "disassociated from the lease" who may have contributed an essential facility to the drilling operation in return for a share of the net profits. But those problems are not before us in this case, where the upland owners could hardly be said to be "disassociated from the lease." We decide only that where, in the circumstances of this case, a party essential to the drilling for and extraction of oil has made an indispensable contribution of the use of real property adjacent to the oil deposits in return for a share in the net profits from the production of oil, that party has an economic interest which entitles him to depletion on the income thus received. For the foregoing reasons, the judgment in No. 286, as to Southwest Exploration Company, is reversed, and that in No. 287, as to Huntington Beach Company, is affirmed

A drilling company contracted to develop certain oil deposits lying off the coast of California by slant drilling from sites located on the property of adjacent upland owners. State law permitted such offshore oil to be extracted only by drilling from upland drill sites or filled land, and no filled lands were available. The drilling company agreed to pay the upland owners 24 1/2% of the net profits for the use of their land. Held: under the Internal Revenue Code of 1939, the upland owners, not the drilling company, were entitled to take the statutory depletion allowance on this share of the profits. . (a) The right to depletion is determined by whether or not the taxpayer has an economic interest, i.e., an interest in the oil in place and income derived solely from production. . (b) Since the uplands were essential to any production from the offshore oil deposits, agreement of the upland owners to let their land be used for drilling in return for a share of the net profits gave them the requisite economic interest. . (c) Their income was dependent entirely on production, and the value of their interest decreased with each barrel of oil produced. P.. (d) Where, as here, a party essential to the drilling for and extraction of oil has made an indispensable contribution of the use of real property adjacent to the oil deposits in return for a share in the net profits from the production of oil, that party has an economic interest which entitles him to depletion on the income thus received. . 220 F.2d 58 reversed. 132 Ct.Cl. 427, 132 F. Supp. 718, affirmed.

1955_48

https://www.oyez.org/cases/1955/48

MR. JUSTICE FRANKFURTER delivered the opinion of the Court. This case is here to review the judgment of the Court of Appeals for the District of Columbia affirming an order of the Subversive Activities Control Board that petitioner register with the Attorney General as a "Communist action" organization, as required by the Subversive Activities Control Act of 1950, Title I of the Internal Security Act of 1950, 64 Stat. 987. That Act sets forth a comprehensive plan for regulation of "Communist action" organizations. Section 2 of the Act describes a world Communist movement directed from abroad and designed to overthrow the Government of the United States by any means available, including violence. Section 7 requires all Communist action organizations to register as such with the Attorney General. If the Attorney General has reason to believe that an organization, which has not registered, is a Communist action organization, he is required by § 13(a) to bring a proceeding to determine that fact before the Subversive Activities Control Board, a five-man board appointed by the President with the advice and consent of the Senate and created for the purpose of holding hearings and making such determinations. Section 13(e) lays down certain standards for judgment by the Board. If the Board finds that an organization is a Communist action organization, it enters an order requiring the organization to register with the Attorney General. § 13(g). Section 14 provides the right to file a petition for review of Board action in the Court of Appeals for the District of Columbia, with opportunity for review by this Court upon certiorari. Once an organization registers or there is outstanding a final order of the Board requiring it to register, several consequences follow with respect to the organization and its members, but these need not now be detailed. See §§ 4, 5, 6, 7, 8, 10, 11, 15, 22, 25, 50 U.S.C. §§ 783-787, 789, 790, 792(a, e, g), 793, 794. Proceeding under § 13(a) of this statute, the Attorney General, on November 22, 1950, petitioned the Board for an order directing petitioner to register pursuant to § 7 of the Act. Petitioner sought unsuccessfully by numerous motions before the Board and by proceedings in the United States District Court for the District of Columbia -- one case is reported at 96 F. Supp. 47 (Communist Party of United States of America v. McGrath) -- to attack the validity of, and to abort, the hearing. The hearing began on April 23, 1951, before three members of the Board, later reduced to two, sitting as a hearing panel, and it terminated on July 1, 1952. Proposed findings of fact and briefs were filed by both parties, and oral argument was held before the hearing panel in August, 1952. In October, 1952 the hearing panel issued a recommended decision that the Board order petitioner to register as a Communist action organization. Exceptions to the panel's findings were filed by both parties, and oral argument was held before the Board in January, 1953. The Board filed its report, which occupies 251 pages of the record in this case, on April 20, 1953. In its report, the Board found that there existed a world Communist movement, substantially as described in § 2 of the Act, organized and directed by a foreign government. The Board detailed the history of the Communist Party of the United States and its close relation to the world Communist movement. It then set forth illustrative evidence and made findings with respect to the statutory criteria of § 13(e) of the Act, which required the Board to consider "the extent to which" the organization met them. The Board found that the conditions set forth in each of the paragraphs were applicable to petitioner. On the basis of these findings, the Board concluded that petitioner was a Communist action organization, as defined by § 3, and ordered it to register as such with the Attorney General. Petitioner brought this order to the Court of Appeals for the District of Columbia for review. While the case was pending, it filed a motion, supported by affidavit, for leave to adduce additional evidence pursuant to § 14(a) of the Act. The basis of the motion was that the additional material evidence became available to the petitioner subsequent to the administrative proceeding, and that this evidence would "establish that the testimony of three of the witnesses for the Attorney General, on which [the Board] relied extensively and heavily in making findings which are of key importance to the order now under review, was false. . . . In summary, this evidence will establish that Crouch, Johnson, and Matusow, all professional informers heretofore employed by the Department of Justice as witnesses in numerous proceedings, have committed perjury, are completely untrustworthy, and should be accorded no credence; that at least two of them are now being investigated for perjury by the Department of Justice, and that, because their character as professional perjurors [sic] has now been conclusively and publicly demonstrated, the Attorney General has ceased to employ any of them as witnesses." Petitioner listed a number of witnesses whom it proposed to call to substantiate its claim, and also set forth a detailed affidavit in support of its allegations. The Government did not deny these allegations. It filed a "Memorandum in Opposition to Motion for Leave to Adduce Additional Evidence," signed by the General Counsel to the Board and by officials of the Department of Justice. The memorandum asserted that the hearing should not be reopened for the receipt of evidence merely questioning, as it claimed, the credibility of some witnesses, but not any fact at issue, and it maintained that the findings of the Board were amply supported by evidence apart from the testimony of the three witnesses sought to be discredited. On December 23, 1954, this motion was formally denied by the Court of Appeals without opinion. In its full opinion on the merits, filed the same day, however, the Court of Appeals supported its rejection of petitioner's motion: "The Party attacks the credibility of the witnesses presented by the Government. In this connection, it stresses that some of these witnesses . . . were under charges of false swearing. Full opportunity for cross-examination of these witnesses was afforded at the hearing before the Board, and full opportunity was also afforded for the presentation of rebuttal testimony. The evaluation of credibility is primarily a matter for the trier of the facts, and a reviewing court cannot disturb that evaluation unless a manifest error has been made. Moreover, the testimony of the witnesses against whom charges are said to have been made was consistent with, and supported by, masses of other evidence. . . ." 96 U.S.App.D.C. 66, 100, 223 F.2d 531, 565. The Court of Appeals affirmed the order of the Board. It sustained § 13(e) against the contention that its standards were vague and irrational. It held that the findings of the Board had been established by a preponderance of the evidence, except that it struck, as not being supported by a preponderance of the evidence, the finding that the secret practices were undertaken for the purpose of promoting the objectives, and concealing the true nature, of petitioner; and it also struck the finding in connection with reporting to a foreign government, because the record supported only a finding of reporting by Party leaders "upon occasion," not a finding which implied a constant, systematic reporting. The court, however, found that the Board's conclusion was supported by the basic findings which it had affirmed. With respect to petitioner's other attacks on the constitutional validity of the statute, the court found it necessary to consider some of the so-called "sanction" sections, §§ 5, 6, 10, 11, 22, and 25, as well as § 7, the registration section. It held that they were all constitutional, and therefore affirmed the order of the Board. The challenge to the Act on which the order was based plainly raises constitutional questions appropriate for this Court's consideration, and so we brought the case here. 349 U.S. 943. At the threshold, we are, however, confronted by a particular claim that the Court of Appeals erred in refusing to return the case to the Board for consideration of the new evidence proffered by petitioner's motion and affidavit. This nonconstitutional issue must be met at the outset because the case must be decided on a nonconstitutional issue, if the record calls for it, without reaching constitutional problems. Peters v. Hobby,. In considering this nonconstitutional issue raised by denial of petitioner's motion, we must avoid any intimation with respect to the other issues raised by petitioner. We do not so intimate by concluding that the testimony of the three witnesses, against whom the uncontested challenge of perjury was made, was not inconsequential in relation to the issues on which the Board had to pass. No doubt a large part of the record consisted of documentary evidence. However, not only was the human testimony significant, but the documentary evidence was also linked to the activities of the petitioner and to the ultimate finding of the Board by human testimony, and such testimony was in part that of these three witnesses. The facts bearing on the issue are not in controversy. The direct testimony of witness Crouch occupied 387 pages of the typewritten transcript; that of Johnson, 163 pages; and that of Matusow, 118 pages. The annotated report of the Board, in which citations to the evidence were made to illustrate the support for its findings, contained 36 references to the testimony of Crouch, 25 references to the testimony of Johnson, and 24 references to the testimony of Matusow. These references were made in support of every finding under the eight criteria of § 13(e), and it is also not to be assumed that the evidence given by these three witnesses played no role in the Board's findings of fact even when not specifically cited. Testimony, for example, directed toward proving that the Communist Party of the United States was an agency utilized by a foreign government to undermine the loyalty of the armed forces, and to be in a position to paralyze shipping and prevent transportation of soldiers and war supplies through the Panama Canal, Hawaii, and the ports of San Francisco and New York in time of war, cannot be deemed insignificant in such a determination as that which the Board made in this proceeding. This is a proceeding under an Act which Congress conceived necessary for "the security of the United States and to the existence of free American institutions. . . ." 64 Stat. at 989. The untainted administration of justice is certainly one of the most cherished aspects of our institutions. Its observance is one of our proudest boasts. This Court is charged with supervisory functions in relation to proceedings in the federal courts. See McNabb v. United States,. Therefore, fastidious regard for the honor of the administration of justice requires the Court to make certain that the doing of justice be made so manifest that only irrational or perverse claims of its disregard can be asserted. When uncontested challenge is made that a finding of subversive design by petitioner was in part the product of three perjurious witnesses, it does not remove the taint for a reviewing court to find that there is ample innocent testimony to support the Board's findings. If these witnesses in fact committed perjury in testifying in other cases on subject matter substantially like that of their testimony in the present proceedings, their testimony in this proceeding is inevitably discredited, and the Board's determination must duly take this fact into account. We cannot pass upon a record containing such challenged testimony. We find it necessary to dispose of the case on the grounds we do not in order to avoid a constitutional adjudication, but because the fair administration of justice requires it. Since reversal is thus demanded, however, we do not reach the constitutional issues. The basis for challenging the testimony was not in existence when the proceedings were concluded before the Board. Petitioner should therefore be given leave to make its allegations before the Board in a proceeding under § 14(a) of the Act. The issue on which the case must be returned to the Board lies within a narrow compass, and the Board has ample scope of discretion in passing upon petitioner's motion. The purpose of this remand, as is its reason, is to make certain that the Board bases its findings upon untainted evidence. To that end, it may hold a hearing to ascertain the truth of petitioner's allegations, and, if the testimony of the three witnesses is discredited, it must not leave that testimony part of the record. Alternatively, the Board may choose to assume the truth of petitioner's allegations and, without further hearing, expunge the testimony of these witnesses from the record. In either event, the Board must then reconsider its original determination in the light of the record as freed from the challenge that now beclouds it. The case is reversed and remanded for proceedings in conformity with this opinion. Reversed and remanded.

An order of the Subversive Activities Control Board that petitioner register with the Attorney General as a "Communist action" organization, as required by the Subversive Activities Control Act of 1950, was appealed by petitioner to the Court of Appeals for the District of Columbia. While the appeal was pending, petitioner filed a motion for leave to adduce additional evidence pursuant to § 14(a) of the Act, alleging, inter alia, that evidence which became available to petitioner subsequent to the administrative proceeding would establish that the testimony of three of the Attorney General's witnesses on which the Board relied was perjurious. The Government did not deny petitioner's allegations. The Court of Appeals denied the motion, upheld the constitutionality of the Act, and affirmed the Board's order. Both the Government and the Court of Appeals deemed the innocent testimony sufficient to sustain the Board's conclusion. Held: the Court of Appeals erred in refusing to return the case to the Board for consideration of the new evidence proffered by petitioner's motion and affidavit. . (a) The case must be decided on the nonconstitutional issue, if the record calls for it, without reaching constitutional problems. P.. (b) The testimony of the three allegedly perjurious witnesses was not inconsequential in relation to the issues on which the Board had to pass. . (c) When uncontested challenge is made that a finding of subversive design by petitioner was in part the product of three perjurious witnesses, it does not remove the taint for a reviewing court to find that there is ample innocent testimony to support the Board's findings. . (d) Since the basis for challenging the testimony was not in existence when the proceedings were concluded before the Board, petitioner should be given leave to make its allegations before the Board in a proceeding under § 14(a) of the Act. P.. (e) The Board must reconsider its original determination in the light of the record freed from the challenge that now beclouds it, and must base its findings upon untainted evidence. P.. 96 U.S.App.D.C. 66, 223 F.2d 531, reversed and remanded.

1955_20

https://www.oyez.org/cases/1955/20

MR. JUSTICE CLARK delivered the opinion of the Court. This case concerns the tax treatment to be accorded certain transactions in commodity futures. In the Tax Court, petitioner Corn Products Refining Company contended that its purchases and sales of corn futures in 1940 and 1942 were capital asset transactions under § 117(a) of the Internal Revenue Code of 1939. It further contended that its futures transactions came within the "wash sales" provisions of § 118. The 1940 claim was disposed of on the ground that § 118 did not apply, but, for the year 1942, both the Tax Court and the Court of Appeals for the Second Circuit, 215 F.2d 513, held that the futures were not capital assets under § 117. We granted certiorari, 348 U.S. 911, because of an asserted conflict with holdings in the Courts of Appeals for the Third, Fifth, and Sixth Circuits. Since we hold that these futures do not constitute capital assets in petitioner's hands, we do not reach the issue of whether the transactions were "wash sales." Petitioner is a nationally known manufacturer of products made from grain corn. It manufactures starch, syrup, sugar, and their byproducts, feeds, and oil. Its average yearly grind of raw corn during the period 1937 through 1942 varied from thirty-five to sixty million bushels. Most of its products were sold under contracts requiring shipment in thirty days at a set price or at market price on the date of delivery, whichever was lower. It permitted cancellation of such contracts, but, from experience, it could calculate with some accuracy future orders that would remain firm. While it also sold to a few customers on long-term contracts involving substantial orders, these had little effect on the transactions here involved. In 1934 and again in 1936, droughts in the corn belt caused a sharp increase in the price of spot corn. With a storage capacity of only 2,300,000 bushels of corn, a bare three weeks' supply, Corn Products found itself unable to buy at a price which would permit its refined corn sugar, cerealose, to compete successfully with cane and beet sugar. To avoid a recurrence of this situation, petitioner, in 1937, began to establish a long position in corn futures "as a part of its corn buying program" and "as the most economical method of obtaining an adequate supply of raw corn" without entailing the expenditure of large sums for additional storage facilities. At harvest time each year, it would buy futures when the price appeared favorable. It would take delivery on such contracts as it found necessary to its manufacturing operations, and sell the remainder in early summer if no shortage was imminent. If shortages appeared, however, it sold futures only as it bought spot corn for grinding. In this manner, it reached a balanced position with reference to any increase in spot corn prices. It made no effort to protect itself against a decline in prices. In 1940, it netted a profit of $680,587.39 in corn futures, but, in 1942, it suffered a loss of $109,969.38. In computing its tax liability, Corn Products reported these figures as ordinary profit and loss from its manufacturing operations for the respective years. It now contends that its futures were "capital assets" under § 117, and that gains and losses therefrom should have been treated as arising from the sale of a capital asset. In support of this position, it claims that its futures trading was separate and apart from its manufacturing operations, and that, in its futures transactions, it was acting as a "legitimate capitalist." United States v. New York Coffee & Sugar Exchange,,. It denies that its futures transactions were "hedges" or "speculative" dealings as covered by the ruling of General Counsel's Memorandum 17322, XV-2 Cum.Bull. 151, and claims that it is in truth "the forgotten man" of that administrative interpretation. Both the Tax Court and the Court of Appeals found petitioner's futures transactions to be an integral part of its business designed to protect its manufacturing operations against a price increase in its principal raw material and to assure a ready supply for future manufacturing requirements. Corn Products does not level a direct attack on these two court findings, but insists that its futures were "property" entitled to capital asset treatment under § 117, and, as such, were distinct from its manufacturing business. We cannot agree. We find nothing in this record to support the contention that Corn Products' futures activity was separate and apart from its manufacturing operation. On the contrary, it appears that the transactions were vitally important to the company's business as a form of insurance against increases in the price of raw corn. Not only were the purchases initiated for just this reason, but the petitioner's sales policy, selling in the future at a fixed price or less, continued to leave it exceedingly vulnerable to rises in the price of corn. Further, the purchase of corn futures assured the company a source of supply which was admittedly cheaper than constructing additional storage facilities for raw corn. Under these facts, it is difficult to imagine a program more closely geared to a company's manufacturing enterprise or more important to its successful operation. Likewise, the claim of Corn Products that it was dealing in the market as a "legitimate capitalist" lacks support in the record. There can be no quarrel with a manufacturer's desire to protect itself against increasing costs of raw materials. Transactions which provide such protection are considered a legitimate form of insurance. United States v. New York Coffee & Sugar Exchange, 263 U.S. at; Browne v. Thorn,,. However, in labeling its activity as that of a "legitimate capitalist" exercising "good judgment" in the futures market, petitioner ignores the testimony of its own officers that, in entering that market, the company was "trying to protect a part of [its] manufacturing costs;" that its entry was not for the purpose of "speculating and buying and selling corn futures," but to fill an actual "need for the quantity of corn [bought] . . . in order to cover . . . what [products] we expected to market over a period of fifteen or eighteen months." It matters not whether the label be that of "legitimate capitalist" or "speculator;" this is not the talk of the capital investor, but of the far-sighted manufacturer. For tax purposes, petitioner's purchases have been found to "constitute an integral part of its manufacturing business" by both the Tax Court and the Court of Appeals, and, on essentially factual questions, the findings of two courts should not ordinarily be disturbed. Comstock v. Group of Institutional Investors,,. Petitioner also makes much of the conclusion by both the Tax Court and the Court of Appeals that its transactions did not constitute "true hedging." It is true that Corn Products did not secure complete protection from its market operations. Under its sales policy, petitioner could not guard against a fall in prices. It is clear, however, that petitioner feared the possibility of a price rise more than that of a price decline. It therefore purchased partial insurance against its principal risk, and hoped to retain sufficient flexibility to avoid serious losses on a declining market. Nor can we find support for petitioner's contention that hedging is not within the exclusions of § 117(a). Admittedly, petitioner's corn futures do not come within the literal language of the exclusions set out in that section. They were not stock in trade, actual inventory, property held for sale to customers, or depreciable property used in a trade or business. But the capital asset provision of § 117 must not be so broadly applied as to defeat, rather than further, the purpose of Congress. Burnet v. Harmel,,. Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss, rather than capital gain or loss. The preferential treatment provided by § 117 applies to transactions in property which are not the normal source of business income. It was intended "to relieve the taxpayer from . . . excessive tax burdens on gains resulting from a conversion of capital investments, and to remove the deterrent effect of those burdens on such conversions." Burnet v. Harmel, 287 U.S. at. Since this section is an exception from the normal tax requirements of the Internal Revenue Code, the definition of a capital asset must be narrowly applied, and its exclusions interpreted broadly. This is necessary to effectuate the basic congressional purpose. This Court has always construed narrowly the term "capital assets" in § 117. See Hort v. Commissioner,,; Kieselbach v. Commissioner,,. The problem of the appropriate tax treatment of hedging transactions first arose under the 1934 Tax Code revision. Thereafter, the Treasury issued G.C.M. 17322, supra, distinguishing speculative transactions in commodity futures from hedging transactions. It held that hedging transactions were essentially to be regarded as insurance, rather than a dealing in capital assets, and that gains and losses therefrom were ordinary business gains and losses. The interpretation outlined in this memorandum has been consistently followed by the courts as well as by the Commissioner. While it is true that this Court has not passed on its validity, it has been well recognized for 20 years, and Congress has made no change in it though the Code has been reenacted on three subsequent occasions. This bespeaks congressional approval. Helvering v. Winmill,,. Furthermore, Congress has since specifically recognized the hedging exception here under consideration in the short-sale rule of § 1233(a) of the 1954 Code. We believe that the statute clearly refutes the contention of Corn Products. Moreover, it is significant to note that practical considerations lead to the same conclusion. To hold otherwise would permit those engaged in hedging transactions to transmute ordinary income into capital gain at will. The hedger may either sell the future and purchase in the spot market or take delivery under the future contract itself. But if a sale of the future created a capital transaction, while delivery of the commodity under the same future did not, a loophole in the statute would be created, and the purpose of Congress frustrated. The judgment is Affirmed

Petitioner's purchases and sales of corn futures in 1940 and 1942, which, though not "true hedges," were an integral part of its manufacturing business, held not capital asset transactions under § 117(a) of the Internal Revenue Code of 1939, and gains and losses therefrom gave rise to ordinary income and ordinary deductions. . (a) The finding by both the Tax Court and the Court of Appeals that petitioner's purchases constitute "an integral part of its manufacturing business" is here sustained. . (b) Through its purchases of commodity futures, petitioner obtained partial insurance against its principal risk -- the possibility of a price rise. P.. (c) The capital asset provision of § 117 is to be narrowly construed. P.. (d) Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss, rather than capital gain or loss. P.. (e) The Treasury ruling, G.C.M. 17322, that hedging transactions were essentially to be regarded as insurance, rather than dealings in capital assets, and that gains and losses therefrom were ordinary business gains and losses, has been consistently followed by the courts as well as by the Commissioner, and has had the tacit approval of Congress. . (f) The conclusion here reached is supported by practical considerations, as well as by the statute. . 215 F.2d 513, affirmed.

1955_72

https://www.oyez.org/cases/1955/72

MR. JUSTICE BLACK delivered the opinion of the Court. We granted certiorari in this case to consider a single question: "May a defendant be required to stand trial and a conviction be sustained where only hearsay evidence was presented to the grand jury which indicted him?" 350 U.S. 819. Petitioner, Frank Costello, was indicted for wilfully attempting to evade payment of income taxes due the United States for the years 1947, 1948, and 1949. The charge was that petitioner falsely and fraudulently reported less income than he and his wife actually received during the taxable years in question. Petitioner promptly filed a motion for inspection of the minutes of the grand jury and for a dismissal of the indictment. His motion was based on an affidavit stating that he was firmly convinced there could have been no legal or competent evidence before the grand jury which indicted him, since he had reported all his income and paid all taxes due. The motion was denied. At the trial which followed, the Government offered evidence designed to show increases is Costello's net worth in an attempt to prove that he had received more income during the years in question than he had reported. To establish its case, the Government called and examined 144 witnesses and introduced 368 exhibits. All of the testimony and documents related to business transactions and expenditures by petitioner and his wife. The prosecution concluded its case by calling three government agents. Their investigations had produced the evidence used against petitioner at the trial. They were allowed to summarize the vast amount of evidence already heard, and to introduce computations showing, if correct, that petitioner and his wife had received far greater income than they had reported. We have held such summarizations admissible in a "net worth" case like this. United States v. Johnson,. Counsel for petitioner asked each government witness at the trial whether he had appeared before the grand jury which returned the indictment. This cross-examination developed the fact that the three investigating officers had been the only witnesses before the grand jury. After the Government concluded its case, petitioner again moved to dismiss the indictment on the ground that the only evidence before the grand jury was "hearsay," since the three officers had no firsthand knowledge of the transactions upon which their computations were based. Nevertheless, the trial court again refused to dismiss the indictment, and petitioner was convicted. The Court of Appeals affirmed, holding that the indictment was valid even though the sole evidence before the grand jury was hearsay. Petitioner here urges: (1) that an indictment based solely on hearsay evidence violates that part of the Fifth Amendment providing that "No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury . . . ," and (2) that, if the Fifth Amendment does not invalidate an indictment based solely on hearsay, we should now lay down such a rule for the guidance of federal courts. See McNabb v. United States,,. The Fifth Amendment provides that federal prosecutions for capital or otherwise infamous crimes must be instituted by presentments or indictments of grand juries. But neither the Fifth Amendment nor any other constitutional provision prescribes the kind of evidence upon which grand juries must act. The grand jury is an English institution, brought to this country by the early colonists and incorporated in the Constitution by the Founders. There is every reason to believe that our constitutional grand jury was intended to operate substantially like its English progenitor. The basic purpose of the English grand jury was to provide a fair method for instituting criminal proceedings against persons believed to have committed crimes. Grand jurors were selected from the body of the people, and their work was not hampered by rigid procedural or evidential rules. In fact, grand jurors could act on their own knowledge, and were free to make their presentments or indictments on such information as they deemed satisfactory. Despite its broad power to institute criminal proceedings, the grand jury grew in popular favor with the years. It acquired an independence in England free from control by the Crown or judges. Its adoption in our Constitution as the sole method for preferring charges in serious criminal cases shows the high place it held as an instrument of justice. And, in this country, as in England of old, the grand jury has convened as a body of laymen, free from technical rules, acting in secret, pledged to indict no one because of prejudice and to free no one because of special favor. As late as 1927, an English historian could say that English grand juries were still free to act on their own knowledge if they pleased to do so. And, in 1852, Mr. Justice Nelson, on circuit, could say "No case has been cited, nor have we been able to find any, furnishing an authority for looking into and revising the judgment of the grand jury upon the evidence, for the purpose of determining whether or not the finding was founded upon sufficient proof. . . ." United States v. Reed, 27 Fed.Cas. pages 727, 738. In Holt v. United States,, this Court had to decide whether an indictment should be quashed because supported in part by incompetent evidence. Aside from the incompetent evidence, "there was very little evidence against the accused." The Court refused to hold that such an indictment should be quashed, pointing out that "[t]he abuses of criminal practice would be enhanced if indictments could be upset on such a ground." 218 U.S. at. The same thing is true where, as here, all the evidence before the grand jury was in the nature of "hearsay." If indictments were to be held open to challenge on the ground that there was inadequate or incompetent evidence before the grand jury, the resulting delay would be great indeed. The result of such a rule would be that, before trial on the merits, a defendant could always insist on a kind of preliminary trial to determine the competency and adequacy of the evidence before the grand jury. This is not required by the Fifth Amendment. An indictment returned by a legally constituted and unbiased grand jury, like an information drawn by the prosecutor, if valid on its face, is enough to call for trial of the charge on the merits. The Fifth Amendment requires nothing more. Petitioner urges that this Court should exercise its power to supervise the administration of justice in federal courts and establish a rule permitting defendants to challenge indictments on the ground that they are not supported by adequate or competent evidence. No persuasive reasons are advanced for establishing such a rule. It would run counter to the whole history of the grand jury institution, in which laymen conduct their inquiries unfettered by technical rules. Neither justice nor the concept of a fair trial requires such a change. In a trial on the merits, defendants are entitled to a strict observance of all the rules designed to bring about a fair verdict. Defendants are not entitled, however, to a rule which would result in interminable delay but add nothing to the assurance of a fair trial. Affirmed.

A defendant in a criminal case in a federal court may be required to stand trial, and his conviction may be sustained, where only hearsay evidence was presented to the grand jury which indicted him. . (a) An indictment based solely on hearsay evidence does not violate the provision of the Fifth Amendment that "No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury. . . ." . (b) In the exercise of its power to supervise the administration of justice in the federal courts, this Court declines to establish a rule permitting defendants in criminal cases to challenge indictments on the ground that they are not supported by adequate or competent evidence. . 221 F.2d 668, affirmed.

1955_380

https://www.oyez.org/cases/1955/380

MR. CHIEF JUSTICE WARREN delivered the opinion of the Court. The application of Article VII-A, Title 3, of the New York Tax Law to the mentally incompetent ward of appellant is challenged as being repugnant to the Due Process and Equal Protection Clauses of the Fourteenth Amendment. The statute, in § 165 et seq., provides for the judicial foreclosure of tax liens on real property. The filing at the county clerk's office of a list of taxes delinquent more than four years constitutes the filing of a notice of lis pendens and of a complaint, and commences an action against the property. Provision is made for notice by publication, by posting, and by mailing. The prescribed notice is to the effect that, unless the amount of unpaid tax liens, together with interest and penalties which are a lien against the property, are paid within 7 weeks, or an answer interposed within 20 days thereafter, any person having the right to redeem or answer shall be forever foreclosed of all his right, title, and interest and equity of redemption in and to the delinquent property. Provision is made for entry of a judgment of foreclosure awarding possession of the property to the tax district and directing execution of a deed conveying an estate in fee simple absolute to the district. The provisions of Title 3 purport to be applicable to and valid and effective with respect to all defendants, even though one or more of them be infants, incompetents, absentees, or nonresidents of the State of New York. Section 165-h(7) makes the deed presumptive evidence of the regularity of the proceedings. After two years, this presumption becomes conclusive. The Section further provides that no action to set aside the deed may be maintained unless commenced and a lis pendens notice filed prior to the time the presumption becomes conclusive. We are met at the outset with the contention of appellee and the State of New York, amicus curiae, that an action, as distinguished from the motion in the original proceeding here utilized, was the exclusive remedy in this case. The statute itself contains no suggestion that a new action is the exclusive remedy; it merely limits the time within which an action may be brought to set aside the deed. The Second Department of the Appellate Division, which decided this case, has recognized the existence of equitable power to entertain a motion to open a default in an in rem tax proceeding. If that were not enough, appellee, on oral argument, conceded that, in an action of the sort contemplated by § 165-h(7), the appellant would have been able to attack the deed only on the ground of alleged irregularities in the assessment and foreclosure proceedings. Although the Attorney General of New York has supported a contrary position, it was admitted at the argument that there was no decision to support his view. Our conclusion that the constitutional question was properly raised by appellant's motion is reinforced by the action of the Court of Appeals which amended its remittitur to disclose that a constitutional question was presented and necessarily decided on the appeal to that court. 308 N.Y. 941, 127 N.E.2d 90. Manifestly, no constitutional question could have been reached if the Court of Appeals had been of the opinion that the appellant had pursued the wrong remedy. This proceeding started on May 8, 1952. The Town of Somers instituted it to foreclose many tax liens, one of which was its lien against the parcel of real property owned by the incompetent. In compliance with the statute, notice was given to the incompetent taxpayer by mail, by posting a notice at the post office, and by publication in two local newspapers. No answer having been filed by the incompetent, judgment of foreclosure was entered on September 8, 1952, and on October 24, 1952, a deed to her property was delivered to the town. Five days later, on October 29, 1952, Nora Brainard was certified by the County Court as a person of unsound mind, and one week later, November 6, 1952, she was committed to the Harlem Valley State Hospital for the insane. Thereafter, on February 13, 1953, appellant filed bond pursuant to an order appointing him Committee of the person and property of the incompetent. Sometime prior to September 22, 1953, the town offered the incompetent's property for sale at a minimum bid price of $6,500. The unpaid taxes, interest, penalties, costs of foreclosure, attorney's fees, and maintenance charges on the property to September 22, 1953, aggregated $480. On that date, appellant's attorney appeared before the Town Board and offered to repay the town the amount due on the property in consideration of its return to the incompetent's estate. The offer was refused. Appellant then filed a motion in the County Court of Westchester County, where the judgment of foreclosure had been entered, for an order to show cause why the default should not be opened, the judgment vacated, and the deed set aside, and permission granted "to answer or appear or otherwise move with respect to" the notice of foreclosure. He alleged in a supporting affidavit that, although Nora Brainard's incompetency was known to the town officials, no guardian was appointed until shortly after the foreclosure. Appellant contended that the notice given to Nora Brainard, although in compliance with the statute, was inadequate in the case of a known incompetent, and, therefore, that the statute as applied was repugnant to the Fourteenth Amendment. The trial court, finding that the incompetent had not been deprived of her constitutional rights and that the statute is valid, denied the motion. The Appellate Division of the Supreme Court, one judge dissenting, affirmed on the ground that the rights of the parties are fixed after expiration of the 7 weeks and 20 days provided for redemption or answer in § 165-a of the tax law. 283 App.Div. 883, 129 N.Y.S.2d 537. The Court of Appeals, which, as noted before, certified that a question under the Fourteenth Amendment was raised and necessarily decided, likewise affirmed. 308 N.Y. 798, 125 N.E.2d 862. We noted probable jurisdiction. 350 U.S. 882. At this stage of the proceedings, we are bound, as were the courts below, to assume that the facts are as disclosed by the uncontroverted affidavits filed with appellant's motion for an order to show cause. From these it appears that Nora Brainard was a long-time resident of the Town of Somers in the State of New York, and a person of means at all times financially able to meet her obligations, owning four pieces of improved real property in addition to the home property which has been taken by foreclosure. She lived alone, however, and had no relative in the State of New York or any other person present or available to assist her or to act in her behalf in connection with her taxes, despite the fact that she was and for upwards of 15 years had been an incompetent. Although she was known by the officials and citizens of the Town of Somers to be a person without mental capacity to handle her affairs or to understand the meaning of any notice served upon her, no attempt was made to have a Committee appointed for her person or property until after entry of the judgment of foreclosure in this proceeding. Appellee argues that the Fourteenth Amendment does not require the State to take measures in giving notice to an incompetent beyond those deemed sufficient in the case of the ordinary taxpayer. "An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections. . . . [W]hen notice is a person's due, process which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it." Mullane v. Central Hanover Bank & Trust Co.,,. Notice to a person known to be an incompetent who is without the protection of a guardian does not measure up to this requirement. Assuming the truth of the uncontradicted assertions that the taxpayer Nora Brainard was wholly unable to understand the nature of the proceedings against her property (from which it must be inferred that she was unable to avail herself of the statutory procedure for redemption or answer), and that the town authorities knew her to be an unprotected incompetent, we must hold that compliance with the statute would not afford notice to the incompetent, and that a taking under such circumstances would be without due process of law. The question was appropriately raised and the issue improperly decided against the appellant. The judgment must therefore be reversed, and the cause remanded for proceedings not inconsistent with this opinion. Reversed and remanded.

Under Article VII-A, Title 3, of the New York Tax Law, a town proceeded to foreclose a lien for delinquent taxes on the real estate of a long-time resident. In accordance with the statute, the taxpayer was given no notice except by mail, posting notice at the post office, and publication in two local newspapers. She filed no answer, judgment of foreclosure was entered, and a deed to her property was delivered to the town. A few days later, she was adjudged insane and committed to a hospital for the insane. Subsequently, appellant was appointed committee of her person and property, and he filed a motion in the trial court where the judgment of foreclosure had been entered to have the default opened, the judgment vacated and the deed set aside. He alleged that, prior to entry of the judgment of foreclosure, the taxpayer was well known by town officials to be financially able to meet her obligations but mentally incompetent to handle her affairs or to understand the meaning of any notice served upon her, and that no attempt had been made to have a committee appointed for her person or property. Held: assuming the truth of these allegations, the notice provided under the statute was inadequate as applied to this incompetent taxpayer, and the taking of her property would violate the Due Process Clause of the Fourteenth Amendment. . (a) It appears that, in an action to set aside the deed (which is contemplated by the statute), only such irregularities as failure to observe the statutory procedure may be attacked. The state court has recognized the existence of equitable power to entertain a motion to open a default in an in rem tax proceeding, and the State Court of Appeals amended its remittitur in this case to disclose that a constitutional question was presented and necessarily decided on the appeal to that Court. Therefore, the constitutional question is properly before this Court. . (b) Notice to a person known to be an incompetent and without the protection of a guardian does not measure up to the requirements of the Due Process Clause of the Fourteenth Amendment. . 308 N.Y. 798, 941, 125 N.E.2d 862, 127 N.E.2d 90, reversed and remanded.

1955_342

https://www.oyez.org/cases/1955/342

Opinion of the Court by MR. JUSTICE HARLAN, announced by MR. JUSTICE BURTON. Czaplicki was injured in 1945 while working as a longshoreman on the "SS Hoegh Silvercloud," a vessel owned by the Norwegian Shipping and Trade Mission and operated by the Kerr Steamship Company. The injury occurred when some steps, constructed by the Hamilton Marine Contracting Company, gave way, causing Czaplicki to fall about five feet. At the time, Czaplicki was employed by the Northern Dock Company, which was insured for purposes of the Longshoremen's and Harbor Workers' Compensation Act by the Travelers Insurance Company. Travelers, which was also the insurer of the Hamilton Company, filed notice with the Compensation Commission that any compensation claim by Czaplicki would be controverted. Three weeks after the accident, Czaplicki elected to accept compensation rather than proceed against any third parties, and, one day later, a formal compensation award was entered by a Deputy Commissioner. Payments under the award were made by Travelers. In 1952, Czaplicki filed a libel against the vessel, her owners and operators, and the Hamilton Company, claiming damages for his injuries on grounds of unseaworthiness and negligence. After various proceedings in the District Court for the Southern District of New York, the libel was dismissed as to all respondents on the ground that Czaplicki was not the proper party libelant, since his election to accept compensation under the award had operated, under §§ 33(b) and 33(i), as an assignment to Northern and its insurer, Travelers, of his rights of action against third parties. The District Court also overruled Czaplicki's contention that the compensation award was invalid because of alleged procedural defects, and denied his motion to add Travelers "as party libelant to sue in its behalf and as trustee for libelant," or simply to add Travelers as a party. The District Court found it unnecessary, in light of this disposition of the case, to consider the defense of laches, which had been interposed by each respondent. The Court of Appeals, affirming the District Court, held the compensation award valid and the libel barred by laches; although it indicated some doubt as to the correctness of the District Court's decision on Czaplicki's right to maintain the suit, it did not pass on that question. We granted certiorari, 350 U.S. 872, because of the importance of these questions in the administration of the Longshoremen's and Harbor Workers' Compensation Act. 1. Czaplicki seeks to avoid the assignment question by attacking the compensation award itself, on the ground of asserted procedural defects. However, we think that the award must be treated as a valid one. In the first place, the alleged irregularity could not have prejudiced Czaplicki, since it resulted from a failure to afford his employer a procedural benefit which, we assume arguendo, the statute gives. The defect, if any, is one of which only the employer could complain; Czaplicki, who has not been in any way harmed by it, cannot use it as a vehicle for setting aside the award. Secondly, the supposed defect cannot be used to attack collaterally an otherwise valid award. The statute provides a means for contesting action by the Deputy Commissioner in compensation award cases, and, unless that procedure is followed, the award becomes binding. In short, the defect was not one which would deprive the Deputy Commissioner of jurisdiction to enter an award. 2. Under § 33(b) of the Compensation Act, Czaplicki's acceptance of the compensation award had the effect of assigning his rights of action against third parties to his employer, Northern. Travelers, as Northern's insurer, was in turn subrogated to all Northern's rights by § 33(i). Travelers therefore was the proper party to sue on those rights of action. Travelers was also the insurer of Hamilton, one of the third parties subject to suit. Hamilton had constructed the steps on which the accident occurred, and might be held liable if its negligence was the cause of Czaplicki's injuries; it might also be subject to a claim over by Kerr or the Norwegian Trade Mission if either of them should be held liable. Cf. Ryan Stevedoring Co. v. Pan-Atlantic S.S. Corp.,. The result is that Czaplicki's rights of action were held by the party most likely to suffer were the rights of action to be successfully enforced. In these circumstances, we cannot agree that Czaplicki is precluded by the assignment of his rights of action from enforcing those rights in an action brought by himself. Although § 33(b) assigns to the employer "all right of the person entitled to compensation to recover damages" against third parties when there has been acceptance of compensation under an award, this does not mean that the assignee is entitled to retain all damages in the event of a recovery against a third party. Instead, § 33(e) specifically apportions any such recovery between the assignee and the employee whose right of action it was originally, giving to the former an amount equal to the expenses incurred in enforcing the right, expenses of medical care for the employee, and any amounts paid and payable as compensation, and to the latter any balance remaining. In a very real sense, therefore, the injured employee has an interest in his right of action even after it has been assigned. Normally, this interest will not be inconsistent with that of the assignee, for presumably the assignee will want to recoup the payments made to the employee. Since the assignee's right to recoup comes before the employee's interest, and because the assignee is likely to be in a better position to prosecute any claims against a third party, control over the right of action is given to the assignee, who can either institute proceedings for the recovery of damages against a third person "or may compromise with such third person either without or after instituting such proceeding." § 33(d), 33 U.S.C. § 933(d). In giving the assignee exclusive control over the right of action, however, we think that the statute presupposes that the assignee's interests will not be in conflict with those of the employee, and that, through action of the assignee, the employee will obtain his share of the proceeds of the right of action, if there is a recovery. Here, where there is such a conflict of interests, the inaction of the assignee operates to defeat the employee's interest in any possible recovery. Since an action by Travelers would, in effect, be an action against itself, Czaplicki is the only person with sufficient adverse interest to bring suit. In this circumstance, we think the statute should be construed to allow Czaplicki to enforce, in his own name, the rights of action that were his originally. We need not go so far as to say that, by giving the employee an interest in the proceeds of a third-party action, the statute places the assignee in the position of a fiduciary, cf. United States Fidelity & Guaranty Co. v. United States, 152 F.2d 46, 48; all we hold is that, given the conflict of interests and inaction by the assignee, the employee should not be relegated to any rights he may have against the assignee, but can maintain the third-party action himself. In so holding, we recognize that one Court of Appeals has held otherwise under this same statute, see Hunt v. Bank Line, 35 F.2d 136, as have certain state courts under similar statutes, see Taylor v. New York Central R. Co., 294 N.Y. 397, 62 N.E.2d 777; cf. Whalen v. Athol Mfg. Co., 242 Mass. 547, 136 N.E. 600. We think, however, that allowing suit by the employee in these circumstances is the proper way to ensure him the rights given by the Compensation Act. Travelers is, of course, a proper party to this suit, since any recovery must first go to reimburse it for amounts already paid out. If Travelers is subject to the court's jurisdiction, it should therefore be made a party, pursuant to Czaplicki's motion, assuming that there has been proper service of process. 3. Respondents contend that, since Czaplicki did not, under § 33(a), 33 U.S.C. § 933(a), elect to proceed against third parties, but rather chose to accept compensation, he can in no event revoke this election and maintain this suit. But, as this Court has already pointed out, "election not to sue a third party and assignment of the cause of action are two sides of the same coin." American Stevedores, Inc., v. Porello,,. Czaplicki can bring this suit not because there has been no assignment, but because, in the peculiar facts here, there is no other procedure by which he can secure his statutory share in the proceeds, if any, of his right of action. For the same reason, we hold that the election to accept compensation, as a step toward the compensation award, does not bar this suit. 4. The Court of Appeals found it unnecessary to consider whether Czaplicki could maintain this suit, because it was held barred in any event on account of laches. The only reason given for this holding was that both the New York and New Jersey statutes of limitations, the two that might be applicable, had run. It is well settled, however, that laches as a defense to an admiralty suit is not to be measured by strict application of statutes of limitations; instead, the rule is that "the delay which will defeat such a suit must in every case depend on the peculiar equitable circumstances of that case." The Key City, 14 Wall. 653,. In cases where suit has been brought after some lapse of time, the question is whether it would be inequitable, because of the delay, to enforce the claim. Holmberg v. Armbrecht,,; Southern Pacific Co. v. Bogert,,. "Where there has been no inexcusable delay in seeking a remedy and where no prejudice to the defendant has ensued from the mere passage of time, there should be no bar to relief." Gardner v. Panama R. Co.,,. This does not mean, of course, that the state statutes of limitations are immaterial in determining whether laches is a bar, but it does mean that they are not conclusive, and that the determination should not be made without first considering all the circumstances bearing on the issue. In this case, the District Court never passed on the defense of laches, which, although properly put in issue, was made irrelevant by the holding that, because of the statutory assignment of his right of action, Czaplicki could not maintain this action. Not only was there no decision on laches, but there was never an opportunity for Czaplicki to introduce evidence to justify the delay, since the suit was dismissed after preliminary hearings and argument on the issue of Czaplicki's "standing." When the case reached the Court of Appeals, therefore, the record was incomplete on the issue of laches. There is nothing in the record to show that Czaplicki was given any more opportunity in the Court of Appeals to explain the delay than he had been given in the District Court. The only "finding" made by the Court of Appeals was that the running of the statutes of limitations constituted laches, and that, as we have stated, was insufficient. From all that appears, Czaplicki may have failed to bring suit earlier because he relied on the assignee of the right of action to enforce what was presumably an interest common to both of them. The record does not disclose when Czaplicki discovered the assignee's conflicting interest, or whether there has been unjustifiable delay since that discovery. Nor has there been opportunity to prove the statement, made in an affidavit to the District Court, that the delay has in no way prejudiced the respondents. These are questions on which the parties should have been allowed to present evidence. The present record is inadequate to justify a holding that this action was barred by laches. Since "the existence of laches is a question primarily addressed to the discretion of the trial court," Gardner v. Panama R. Co., supra, at, we remand the case to the District Court for further proceedings not inconsistent with this opinion. Reversed and remanded.

Petitioner, a longshoreman, was injured in 1945 while working on a ship when steps built by a contractor collapsed, causing him to fall. Shortly thereafter, he elected to accept compensation under the Longshoremen's and Harbor Workers' Compensation Act, and an award was made by a Deputy Commissioner. Payments thereunder were made by an insurer which had insured both petitioner's employer and the contractor who had built the steps. In 1952, petitioner filed a libel against the ship, her owners, her operators and the contractor who had built the steps, claiming damages for his injuries on grounds of unseaworthiness and negligence. He also tried unsuccessfully to join the insurer as a party. Held: 1. An alleged procedural defect in the compensation award was not such as to prejudice petitioner or to deprive the Deputy Commissioner of jurisdiction to enter the award; and the award cannot now be set aside on that ground. . 2. Under § 33(b) of the Compensation Act, petitioner's acceptance of the award had the effect of assigning his rights of action against third parties to his employer, to whom the insurer was subrogated; but that did not preclude petitioner from bringing the libel in the circumstances of this case, because petitioner's rights were held by the insurer -- the party most likely to suffer from enforcement of those rights. . (a) Even after the assignment, petitioner had an interest in his right of action against third parties, since any recovery must be apportioned between the employee and the assignee under § 33(e). . (b) Though § 33(d) gives the assignee control over enforcement of the employee's right of action against third parties, it should not be construed to enable the assignee to defeat the employee's interest in any possible recovery where there is such a conflict of interests as exists in this case. . (c) If the insurer is within the court's jurisdiction, it should be made a party to petitioner's suit. P.. 3. Under § 33(a), petitioner's election to accept the compensation award instead of proceeding against third parties does not bar this suit in the circumstances of this case. . 4. Though the statutes of limitations that might have been applicable had run, petitioner was not necessarily barred by laches on the present record from bringing this suit. . (a) Laches as a defense to an admiralty suit is not to be measured by strict application of statutes of limitations; it depends on the peculiar equitable circumstances of each case. P.. (b) Since the District Court did not consider the defense of laches, but dismissed the libel on other grounds, and the Court of Appeals held, on a record that was incomplete on the issue of laches, that it was barred solely because the statutes of limitations had run, the present record is inadequate to justify a holding that this libel is barred by laches. . (c) The existence of laches is a question primarily addressed to the discretion of the trial court, and the case is remanded to the District Court for further proceedings. P.. 223 F.2d 189, reversed and remanded.