Gilbertville Trucking Company, Inc. v. United States

PETITIONER:Gilbertville Trucking Company, Inc.
RESPONDENT:United States
LOCATION:Clauson’s Inn

DOCKET NO.: 40
DECIDED BY: Warren Court (1962-1965)
LOWER COURT:

CITATION: 371 US 115 (1962)
ARGUED: Oct 15, 1962
DECIDED: Dec 03, 1962

Facts of the case

Question

Audio Transcription for Oral Argument – October 15, 1962 in Gilbertville Trucking Company, Inc. v. United States

Earl Warren:

Number 40, Gilbertville Trucking Company, Incorporated, et al., Appellants versus United States, et al.

Mr. Kestenbaum.

Lionel Kestenbaum:

Mr. Chief Justice, may it please the Court.

And I have one application to make on behalf of the appellants which is a request for a leave, Mr. Starrett of Massachusetts here to argue pro hac vice.

Earl Warren:

Your motion is granted.

Lionel Kestenbaum:

Thank you, Mr. Chief Justice.

Earl Warren:

Mr. Starrett.

Loyd M. Starrett:

May it please the Court.

This case involves two working companies and various individuals who owns stock and worked with companies.

The case began a few days more than seven years ago when an application was filed for leave — for approval of the Interstate Commerce Commission to merge these two companies.

An agreement had been made expressly subject to the approval of the Commission that the companies be merged by stock acquisition and later consolidation.

Statute involved the Section 5 (2) of the Interstate Commerce Act which is printed at page 81 starting at page 81 of the appendix to our brief.

Particular paragraph B on page 82, whenever a transaction, that includes a merger of this sort, is proposed the carriers seeking authority shall permit — shall present an application in the Commission.

Commission shall take certain action, then the Commission shall approve if it finds that the merger is in the public interest.

Gilbertville is a fairly small general commodity carrier operating in New England and New Jersey.

Nelson is a specific commodity carrier, as far as interstate rates are concerned.

It’s associated with the textile industry.

Also has general commodity authority intrastate into states.

Two and a half months after the merger application was filed then, an investigation was started by the Commission under Section 5 (7) of the Interstate Commerce Act, an investigation to determine whether control or management of the two carriers in a common interest had been effectuated and was continuing.

These two proceedings were consolidated for hearing and later and gradually they grew more and more bound together as the Commission added decision after decision.

A lengthy hearing was held resulting in many pages of transcript for the trial examiner.

Participating in the hearing in addition to the applicants, representatives of the eastern territory railroads as protestants and 13 large competitors, motor carriers in New England as well as the Bureau of the Commission, that is the Bureau of — ingoing compliance.

There were four issues presented to the trial examiner and to everyone else who decided the case.

One of these issues was whether there had been a violation of law that is control or management in the common interest one way or another.

Secondly, if there were, was that violation continuing?

Because a peculiarity of the Interstate Commerce Act is that the remedial authority of the Commission is to order such action as it’s necessary to prevent continuance and other language of the section makes it very clear and the appellees don’t contest that continuance is a prerequisite to their remedial jurisdiction.

Earl Warren:

Mr. Starrett.

Loyd M. Starrett:

Yes sir.

Earl Warren:

Because these facts are rather involved as well as the statutes, I wonder if it wouldn’t be well for you, if it wouldn’t disturb your argument to state the facts of the case to us; the relationship of these two companies, the facts upon which the — examine what the Commission acted.

I think it would help some of us anyway in understanding your case.

Loyd M. Starrett:

Very well.

First, before I do, let me say what I construe to be the facts.

We had always thought that the facts in the case were the findings of facts that the Commission sustained by a substantial evidence.

Earl Warren:

I beg your pardon.

Loyd M. Starrett:

We had always thought that the findings of facts in the case by the Commission sustained the substantial evidence for the basic factual reference.

In this case, I note this as we come through.

The District Court has departed from the facts expressly and indeed appellees rely on the trial examiner’s facts which were different.

Now, with those — with that notation, let me outline just very briefly what the Commission found to be factually true.

Earl Warren:

Well, are you going to state the facts, not just the other findings but are you going to state the facts, the relationship between the companies and how they were constituted and so forth?

Loyd M. Starrett:

Yes sir.

Yes I am, Mr. Chief Justice.

Earl Warren:

Yes.

Loyd M. Starrett:

The Nelson Company, L. Nelson & Sons Transportation Company originated first as a partnership of a woman, Mrs. Linnea Nelson and two of her sons and was later incorporated, other sons and members of the family came into the business.

And then in 1950, the — Mrs. Nelson, L. Nelson died.

At that point, the sons and daughters of L. Nelson started to go their separate ways, some of them.

Charles Chilberg managed the corporation as approximately the executives.

Oscar Chilberg sold the stock and he went and managed a garage in Philadelphia and he has very little further connection in this case.

Kenneth Nelson sold his stock in September — September 22 of 1951.

He continued thereafter to have an association with Nelson Company solely as Nelson Company was a client of his as a tariff consultant.

Let me come to that in a moment.

Another son, Howard, sold his stock and went to the navy.

He went back to a surveying job with the navy really.

A daughter also sold her stock.

Thus, there were three stockholders left in L. Nelson & Sons and they are the first three individuals listed in the caption of the case, Charles Chilberg, Clifford Nelson, and Kenneth Nelson.

Earl Warren:

Brothers and sister?

Loyd M. Starrett:

With — there were — Charles Chilberg is a half brother of the — of these two.

I mentioned that Kenneth continued to have some association with Nelson Company.

This is a highly rooted issue in this case.

The Commission found that Kenneth was a freelance tariff consultant until March 1 of 1953.

Now, the date, March 1 of 1953 is important because the purchase by Kenneth Nelson of the stock with Gilbertville Company did not occur until March 3, that is his taking over control, does not occur until March 3.

Loyd M. Starrett:

A contract dated March 2 was signed March 3, the evidences says that the escrow money was deposited in March 3.

Later in July, the stock was actually transferred, but I take it that March 3 would be or could be its significant date.

The appellees, therefore, contend that the March 1 finding by the Commission was an error and they referred to certain alleged evidence to that effect in the record.

The evidence on which they would ask this Court to find that the Commission was in error and therefore affirmed the Commission, consisted of the testimony of an accountant who had indicated that he was testifying solely from income tax returns who indicated that he could not tell from the income tax returns from the material he had when during a year money was received.

Who was confused, admittedly so, who inadvertently gave incorrect answers many times.

This is all in the record and it’s outlined in our brief.

Earl Warren:

Did you challenge the finding?

Loyd M. Starrett:

We do not challenge the finding, Mr. Chief Justice.

The appellees do.

Then this accountant was asked the question as to whether any of the money or the salary or income or what have you that Kenneth was supposed to receive from 1953, was received for services rendered after he bought the stock from Gilbertville Company.

The accountant’s answer where some of that would have to be which leaves the impression that he was talking about, in the first place, the time he received the money and at the time the services were rendered.

And secondly, that he was guessing, as he must have been guessing because he had no way of knowing.

This sounds like delving in trivia and I’d be reluctant to do it except the appellees have made such a point of it.

And the appellees are attempting to find here some relationship to sustain the Commission’s action.

They could argue, I suppose, if they — that they could create an overlap of the dates, that there would be such a relationship here.

When I use the word ‘relationship’, I’m referring to the definition of affiliation in Section 5 (6) of the Act.

Then there’s one other question as to Nelson’s — as to Kenneth Nelson’s career as if the —

William J. Brennan, Jr.:

Mr. Starrett, tell me, am I right —

Loyd M. Starrett:

Yes, Mr. Justice.

William J. Brennan, Jr.:

— that the only thing we have is whether the three-judge court should properly have dismissed the complaint which is I get to challenged only the order of June 9, 1959 which ordered Nelson to invest himself of the stock interest in Gilbertville?

Loyd M. Starrett:

The complaint attacked a number of orders, Mr. Justice, although at the District —

William J. Brennan, Jr.:

One — one two and three but didn’t order three, didn’t order three merely have the effect of reinstating after an interim stage and so forth?

Isn’t the real issue doesn’t arise from the order of divestiture under the June 9, 1959 order or does it?

Loyd M. Starrett:

The order of divestiture is one of the factors, Mr. Justice.

William J. Brennan, Jr.:

Yes.

Loyd M. Starrett:

The order of June 9 which I read is the only relevant order as far as substance is concerned.

The order of June 9 finds a violation of law and must find that as continuing.

It denies the Section 5 (2), the merger application which the examiner had concluded would moot the whole investigation question.

And then it attacks on to the end.

It orders termination of the violation of law found and then attacks onto the end of the divestiture.

William J. Brennan, Jr.:

And Gilb — was that Gilbertville — yes.

Loyd M. Starrett:

That Kenneth Nelson sold the stock at Gilbertville Company.

William J. Brennan, Jr.:

Now, what is it that you want from us?

Loyd M. Starrett:

We want, may it please the Court, a reversal of the District Court’s judgment.

We contend that the Commission was in error on all three or four as the Court — well of these points.

William J. Brennan, Jr.:

That is the divestiture, it’s in error on the divestiture.

It’s in error on the merger?

Loyd M. Starrett:

Denial of the application.

William J. Brennan, Jr.:

And it’s in error in finding use of violation of 5 (4).

Loyd M. Starrett:

That’s right, Mr. Justice.

William J. Brennan, Jr.:

Now, what’s — is there a fourth thing now?

Loyd M. Starrett:

No.

William J. Brennan, Jr.:

Just those three.

Loyd M. Starrett:

The violation of 5 (4) and that the violation was continuing which are really very close.

William J. Brennan, Jr.:

Now, I get it.

Potter Stewart:

Do you also contend that even assuming that violation of 5 (4), the Commission gave that absolute effect in denying the application and that that also was there.

Loyd M. Starrett:

Yes, Mr. Justice.

Each of this is independent.

That is to say even if there were a violation of law — even if they were continuing —

Potter Stewart:

Has found to be the product of the now (Inaudible) and innocence —

Loyd M. Starrett:

Yes.

Potter Stewart:

— usefulness and so on.

Loyd M. Starrett:

Then the denial of the merger application was error.

Moreover, even if the merger application weren’t granted, the divestiture order was by itself error.

Appellees raised some question also as to the Commission’s finding of it.

Kenneth was a freelance tariff consultant.

I don’t think there needs to be much said about that.

The Commission found him freelance and consultant that is an independent contractor.

There is no evidence that he did not have other clients and I can definitely rest there.

Back to other facts then and I’m leaving for the moment this tariff consultant career which the appellees find important.

Loyd M. Starrett:

The purchase of Gilbertville Company was accomplished by Kenneth Nelson going after — this was a year and a half after he had severed all his connections with Nelson Company except for this freelance tariff consultant.

He resigned as an officer director.

He sold his stock.

It was purchased by Kenneth Nelson with the aid only of Oscar who had previously — that is previous to Kenneth, left the Nelson Company and was earning a garage in Philadelphia.

There was much effort spent trying to show that there was some money of the Nelson Company that went to this purchase or some other connection with the Nelson Company and none was shown and none appears in the record.

The Commission mentions the Bergson Company.

Bergson is an outgrowth, sort of a continuation as it were of the administration of the estate of Mrs. Linnea Nelson.

It owns a substantial amount of real estate, part of which is three — is some four terminals which are used by the Nelson Company.

Though these properties used by the Nelson Company is terminal four.

The other facts and these I take it are the ones in which the Commission thought that common control or management was shown.

The other facts include evidence with respect to joint use of terminal facilities.

That is that the Nelson Company and the Gilbertville Company used — both used three properties which were owned by Bergson Company and one other company, both as terminals.

There’s nothing unusual about joint use of terminals by carriers.

It’s done all the time particularly by railroad carriers, Grand Central Station and so forth.

Then other terminal facilities, long line communications or teletype went along with the terminal facilities so did telephone.

These items were paid for by Gilbertville and Nelson and there’s never been any evidence or any suggestion other than the District Courts that there was anything improper in the method of each paying for what it used.

There has been no suggestion that the amounts are unreasonable.

The District Court observed that they were not shown to the other than arbitrary.

And apparently this was a basis of his decision.

The basis I should add we claim as clear error.

The burden of proof was most plainly on the Bureau, on the person seeking show violation of law and it was conceded to be by Bureau counsel for the District Court.

So not shown to be other than arbitrary, can be translated to reasonable in light of the burden of proof or ought to be.

The Commission speaks of a pool of equipment so-called maintained by Nelson and Gilbertville Company uses.

The facts are that the Nelson Company’s business was declining.

The textile industry was moving out of New England and that the Nelson Company was tied to that industry.

Then Gilbertville Company, on the other hand, was a company which had been undernourished by its sole stockholder previously.

That was quite obvious from the debts that have gone up and so forth.

But then it had very valuable operating authorities.

Kenneth Nelson invested substantial amounts of zone money in his effort and he was young and vigorous, and brought the company up.

But meanwhile, he had serious capital difficulties.

Loyd M. Starrett:

He bought equipment as fast as he could.

Let me add parenthetically that he bought all new equipment in exception of four used vehicles.

He bought equipment as fast as he could but in the meantime he had to use equipment to run the business and he leased that equipment.

He leased it from various sources and he leased a substantial amount by far in the majority no question from Nelson Company.

But that was equipment that Gilbertville needed and Nelson Company had available.

The evidence is very clear on that.

There was no special accommodation.

Let’s talk about the same group of drivers but it appears rather clearly that the drivers in this general area as the drivers everywhere are union people who are qualified drivers, the ones lower in the seniority list frequently don’t get a day’s work here, so they take their various work there.

And that is all that adds up to in the record.

Much time was spent on interlining and interchanging, which are two common practices growing out of the fact that motor carriers have territorially limited operating authorities.

One motor carrier simply is not authorized to take a particular shipment through; therefore, it interlines it to another carrier.

Interchanging is nothing more than interlining consisting of a trade of trailers, one trailer in particular being laid with freight that’s being underlined.

John M. Harlan II:

Are you saying that the findings of the Commission that the Commission did make are not supported by the evidence or are you saying that the findings that were not made that were essential typically made in accordance to it?

Loyd M. Starrett:

Mr. Justice, that’s — this was a narrative statement of facts, if I may answer it this way.

The narrative statement of facts contained many inferences.

John M. Harlan II:

What is your legal point that sets out the idea?

Loyd M. Starrett:

My legal are point phrased in terms of a question presented is that the findings of the Commission were not supported by substantial evidence in these specific respects.

John M. Harlan II:

The security question upon reading the evidence as though there was substantial evidence to support it.

Loyd M. Starrett:

On this one —

John M. Harlan II:

On this phase.

Loyd M. Starrett:

This one phase, yes Mr. Justice.

I don’t want to dwell too long on these facts.

Let me just mention the same source for accounting advice will obviously the use of the same account to the same lawyers are relevant.

The management — well, managerial discretion, now there’s a finding by the Commission that each carrier acts under managerial direction from officers of the evidence, this the Court will find is based on three incidents and three incidents alone which are all laid out.

One, that Kenneth Nelson was observed operating a telephone answering questions asked by a woman, and so forth.

Nothing was heard and Mr. Shea who testified, let me call the Court’s attention, Mr. Shea’s lack of hearing.

In this instant and also when he observed some action, he complains of on behalf of Clifford Nelson, Mr. Shea saw lots of things and heard nothing.

His evidence is worthless as a result.

William J. Brennan, Jr.:

Now, all of these, I gather, addressed to the 5 — violation of 5 (4), is it?

Loyd M. Starrett:

Yes, it is, Mr. Justice.

William J. Brennan, Jr.:

That you’ve been talking about so far.

Loyd M. Starrett:

Yes, but it is relevant, I would submit, to the other factors and that they all tend to pyramid.

William J. Brennan, Jr.:

I agree but are you now addressing yourself directly to the finding of a violation of 5 (4) on your argument that was not sufficient evidence to sustain that finding of violation, is that it?

Loyd M. Starrett:

Yes, I am.

William J. Brennan, Jr.:

That’s what I thought.

Loyd M. Starrett:

There are comments that the companies were leveling on settlement with each other but they’re not based on any complete accounting of the companies.

There are comments about comingling traffic which have no basis except for a couple, I think it’s four very minor violations — violations of the regulations which we’ve met but not control and management in the common interest which were gathered during inspections that were conducted in the years 1954, 1955, and 1956, there are four incidents.

They mentioned that Gilbertville prospered and they mentioned a couple of other things.

But let me move on if I may.

The trial examiner confronted with these four issues decided although no one of the acts affords a clear indication of control and management in the common interest that altogether there was a borderline case shown.

He did this, I should add, despite the presence of one piece of evidence in Exhibit 28 which he relies on record 45 and 46 which was ruled out by Division 4 and is thereafter not been in the case.

Nevertheless, even with this evidence, the trial examiner found it was a borderline case and that the violation if there were, the violation he found was at some time that cannot be determined on this record and that’s relevant because the time of the violation later becomes quite relevant.

And he presumed that it was continuing.

He said twice, it was presumably continuing.

The appellees say he was saying that it was presumably the time he was writing his report.

There’s no point in that and it’s quite obvious that he meant presumably at the time of the hearing.

That’s important because there is no further finding by the Commission by Division 4 or by the Commission that the violation was continuing.

They simply refer back to the examiner who found it was presumably continuing.

Earl Warren:

He did find specifically, did he, that there was a violation of 5 (4)?

Loyd M. Starrett:

He found specifically that there was, on all the facts, a borderline violation of Section 5 (4).

Earl Warren:

It was a violation, he said.

Loyd M. Starrett:

Yes, this was his finding, a borderline violation at some time which can’t be determined.

He further went into the factors which are relevant to appraisal that was applied or an application for merger.

He found that there would be advantages from the merger and he specifically found that the violation of law did not render the applicants unfit.

He held in his regard, there’s no evidence of extensive or flagrant violations of the act to regulations.

He held that they were innocent, degree of carelessness but not willfulness.

He specifically found that there was no willful violation.

Earl Warren:

Where is his finding of the violation?

Loyd M. Starrett:

His finding of the violation?

Earl Warren:

Yes.

Loyd M. Starrett:

Record 64, I believe it starts — well, the discussion starts earlier then in the second paragraph beginning on record 64.

The finding I referred to with respect to willfulness is at record 72 and 73.

The examiner then concluded that the application proceeding in the merger proceeding, the application should be granted, and therefore, the Section 5 (4) proceeding should be terminated — would be moot.

The case went up to Division 4 on exceptions.

Division 4 ruled out the exhibit that I referred to, that is ruled out a piece of the Bureau’s evidence which the examiner considered significant then concluded that on the full chain of circumstances, there was a Section 5 (4) violation.

The Division then decided to make — taking more stringent approach as they characterize it with respect to violations of law and their effect on merger proceedings.

A more stringent approach that amounts, we say, to an automatic denial.

Division 4 then ordered that the application be denied and that the appellants be ordered to terminate the violation of law found.

Then on appellant’s petition, the proceedings were reopened on the record and the full Commission passed on them.

The full Commission substituted that Division 4 has reported its own report on reconsideration, new narrative statement of facts and so forth and the facts are different.

The Commission reappraised the evidence, stated the evidence shows as follows.

The Commission trained —

Earl Warren:

Before you get to that, did I understand you to say that the examiner found that Nelson was Kenneth’s only client —

Loyd M. Starrett:

The —

Earl Warren:

— or did you say that it did not find that he was the only –?

Loyd M. Starrett:

I said, Mr. Chief Justice, that there’s no evidence that it was his only client.

The particular finding can be read either of two ways.

It can be read that the Commission found that Nelson was — the Nelson Company was Kenneth’s only client —

Earl Warren:

Or the examiner.

I’m looking at page 65 now, at the end of the first full paragraph.

As I read it, he says unequivocally, Nelson was Kenneth’s only client.

Loyd M. Starrett:

He does say it, yes.

There is no evidence.

The evidence is very simple.

The evidence is that during two years, 1952 and 1953, Kenneth’s income as a tariff consultant came from Nelson Company, this is the accountant’s evidence, period.

The career of Kenneth as a tariff consultant started in 1951.

We know nothing about 1951.

We know nothing about the income that Kenneth may have received subsequent to 1953 for services provided earlier and there is no more direct testimony on the subject.

This is one of those cases that Kenneth Nelson testified.

The Bureau did not ask him anything about his tariff consultant career.

Loyd M. Starrett:

The Commission applied in the rule of law.

They relied on a finding that Kenneth Nelson was affiliated with Nelson Company and this is the language of Section 5 (6) of the Interstate Commerce Act.

It was affiliated with the Nelson Company at the time he purchased the stock at Gilbertville Company.

Therefore, says the Commission, the conclusive presumption of Section 5 (5) applies, therefore, we affirm the conclusions in the prior reports, affirmed the conclusions back and so forth in the statutory language.

The thing that’s lacking though, quite clearly, is any specification of the relationship in question.

Section 5 (6) says, “A person shall be held to be affiliated with the carrier if by reason of the relationship of such person to such carrier at the time in question, it is reasonable to believe that the affairs of any carrier on which control may be acquired by such person will be managed in the interest of such other carrier”.

It asks for a relationship a specific time that makes it reasonable to believe certain things.

There’s no specification of what this relationship is.

Was it because he was a brother?

The appellees denied and we would hesitate to think so.

Was it this tariff consultant that the appellees care so much about?

Was it appellees say it is an intermediary where there is no evidence, not a shred of evidence in the record, of any agency relationship and particularly there’s no evidence as of the time of the purchase of Gilbertville which is I want to specify by the Commission here, because Section 5 (5) requires a transaction.

It only applies to a transaction, it doesn’t apply to other relationships or what have you.

This is the basis.

This is the reason why we say and there’s ample support I believe in the legislative history, there’s ample support in the mere fact that Congress has inserted these several sections.

That the Section 5 (5) and 5 (6) combination, the conclusive presumption is essentially a different thing.

It’s a different theory of law and so forth than Section 5 (4).

This theory then was picked by the Commission departing from Division 4 but without the requisite findings.

And as I said before, there is no finding in relationship — the relationship was no finding of continuance.

Then the matter went up to the District Court.

The District Court departed on the facts significantly — departed on important facts.

The District Court said that the basis of his — of its finding, the violation was the fact that such and such had occurred at the time when Kenneth had — was not shown to have been, it was not shown to have severed his relationship, the burden of proof on the appellants to prove they did not commit a violation of law.

And then the District Court, as an unprejudiced sophisticated mind, comes to the conclusion that Section 5 (4) has been violated and the District Court has not viewed Sections 5 (5) and 5 (6).

This is the basis of our saying that the District Court departed from the long established rule of this Court cited among other Courts of Chancery decision as frequently cited that a decision must be reviewed on the grounds that it takes, then those basically would be the first — the points with respect to violation of law.

The next question is assuming that there is a violation of law as we see there’s not, what is the result of it?

The examiner found that the application proceeding or the merger proceeding should be proved nevertheless.

Division 4 over struck out on its more stringent policy and the Commission goes along with Division 4 and adopts a more stringent policy.

It quotes from a previous case, Central Georgia, where it explains that previously and this is set out as the fitness doctrine in appellant’s brief.

Previously, one thing that was weighed was a violation of law.

It’s of course relevant when you’re weighing it in this fashion to determine whether or not it’s willful because an innocent violation, I take it, would not reflect logically, could not reflect very much on the fitness of the applicants.

Loyd M. Starrett:

The views —

Earl Warren:

We’ll recess now, Mr. Starrett.

Loyd M. Starrett:

If the Court please.

Before the recess, I was pointing out the treatment that the Commission gave to the question whether the application for approval of the proposed merger should be granted.

The Commission following Division 4 overruled what it called the views heretofore followed in favor of a more stringent approach.

Now, appellants don’t contend and never contended that the Commission cannot change from one policy to another.

What the appellants contend is that the policy that the Commission adopted in this case is not a rational policy.

It’s not a policy in conformance with the Interstate Commerce Act or authorized by it.

The more stringent approach quite simply stated is that once a law violation, as the report calls it, is found, the merger — the approval of the merger will be denied for that reason and for that reason alone.

This ignores the mandatory language of Section 5 (2), which instructs the Commission while it grants discretion, instructs the Commission to weigh the public interest which is the National Transportation Policy, to weigh certain specific factors and adequate transportation service, and so forth, fix charges and the interest of employees.

Potter Stewart:

Now Mr. Starrett, did the Commission do what you claim it did in this respect?

Your opponents differ with you throughout as a matter of fact.

Loyd M. Starrett:

I’m aware of that Mr. Justice.

I take it that they accept more or less our version of the law and differ as to what actually happened in this case.

Potter Stewart:

I find that to.

Loyd M. Starrett:

I’d refer the Court to page 23 — 22 and 23 of the record which is the relevant language of the Commission.

On page 22, there’s a lengthy quote from the Central of Georgia decision which I should add came after the decision of Division 4 in the present case.

The Commission summarizes, saying, “We affirmed in the foregoing reviews heretofore followed.” And let me stress heretofore.

That law of violation is not necessarily at bar and so forth.

Then borrowing the language of Division 4, language which was written before the Central of Georgia decision, they say now after 20 years, more than 20 years, a more stringent approach is warranted that is a more stringent approach than simply weighing a law of violation.

They then proceed to consider absolutely nothing but the fact of a law of violation.

They don’t consider any of the factors that were abundantly supported in the record and that the examiner weighed and let the examiner to conclude in favor of the merger.

They consider simply the violation.

And they say in support of this more stringent approach, not as a penalty but in recognition that a violation of the law should not be rewarded, that existing carriers endeavoring faithfully to comply with the law should be encouraged and protected, not as a penalty but to make the appellants an example, I take it.

And then they say that the violations of law and the regulation should not be blessed by approval.

Now, this is perhaps a statement of two different reasons.

First, that the violation of law shouldn’t be rewarded.

It is relevant here that the examiner expressly found that these violations were not willful or innocent.

There is no contrary finding of fact in the record.

Now, the Division and the Commission refer to the fact that there was a prior Section 5 violation — or excuse me, not violation, the prior Section 5 proceeding in which part of these — parts of the principles were involved.

Arthur J. Goldberg:

What were the principles involved?

Loyd M. Starrett:

This is the one where the principles — that as a principle stockholders of Nelson acquired the Byrnes routes.

Earl Warren:

Mr. Starrett, assuming that (Inaudible) that there was a violation of 5 (4).

Loyd M. Starrett:

Yes sir.

Earl Warren:

(Inaudible)

Loyd M. Starrett:

Mr. Chief Justice, I’m not sure that a sanction is necessarily required as such.

Earl Warren:

It’s not required but is permissible.

Loyd M. Starrett:

Is permissible, yes.

Earl Warren:

An order.

Loyd M. Starrett:

An order to terminate the violation, assuming that the merger authority were not granted.

In order to terminate the violation or violations found the specific instance to separate and stay separate the two companies would be quite sufficient.

Earl Warren:

You say there is no industrial transactions, no (Inaudible)

Loyd M. Starrett:

If the Court please, there’s never been a rule of law that relatives can’t own — there’s never been a rule of law and I don’t understand that there is now that relatives can’t own trucking companies.

Earl Warren:

(Inaudible)

Loyd M. Starrett:

Very well.

Earl Warren:

I say you have to (Inaudible) the fact of that law violation —

Loyd M. Starrett:

I agree.

Earl Warren:

— or assume this Court does agree that there is a violation.

What kind of a plea is this one?

How far could the Commission go?

Loyd M. Starrett:

The Commission certainly has power in an appropriate case to order as far as divestiture, but what it has power to order is such action as is necessary to prevent continuance of the violation.

There is no reason.

Appellants can see no reason in the present record why an injunction and order of the sort the Division 4, in fact entered is not sufficient.

That is to say if this Court should find that there has been a Section 5 (4) violation, It would have to find it, we submit, on the same ground that the examiner did, that there’s been a borderline violation consisting of these many intangibles all of which are permissible but too much of what’s permissible is not permissible or some such theory.

In which case, they could be ordered to discontinue these things, these are tangible things.

These are things which can be discontinued and the two companies can continue to operate properly as motor carriers.

Byron R. White:

(Inaudible)

Loyd M. Starrett:

We do, Mr. Justice.

Byron R. White:

And (Inaudible)

Loyd M. Starrett:

Yes.

Loyd M. Starrett:

That is a decision of course for the Commission to make — to weigh, to exercise the discretion which they were granted by Congress and that they didn’t exercise in this case to weigh all the factors and determine the public interest.

Byron R. White:

Do you think the (Inaudible)

Loyd M. Starrett:

In it of itself regardless of willfulness?

Byron R. White:

Yes.

Loyd M. Starrett:

No.

No, I would submit it’s not, Mr. Justice.

Byron R. White:

(Inaudible)

Loyd M. Starrett:

If it is willful, it certainly reflects on the fitness of the applicants and the appellants don’t question it.

Byron R. White:

(Inaudible)

Loyd M. Starrett:

— which bears on the public interest indeed.

In other words —

Byron R. White:

And there is no showing of any knowing of violation?

Loyd M. Starrett:

There is no showing of a knowing violation of Section 5 (4) here.

The examiner pointed out that the view of the appellants that their conduct had been innocent could not be said to be wholly groundless or something with that sort.

Indeed, the very course of this thing through the Commission and the District Court demonstrates it.

Here, we have one finding, one theory by the examiner substantially adopted by Division 4 but then a brand new theory substituted by the Commission, and then again a new theory by the Court.

Byron R. White:

(Inaudible)

Loyd M. Starrett:

By the Commission was the conclusive presumption of Section 5 (5) and I’m using the Commission’s language based on the definition of affiliation in Section 5 (4) — Section 5 (6).

This was a brand new theory.

This involved new questions.

This involved new time.

The examiner said sometime we can’t tell.

The Commission said at the time of purchase, the time of the acquisition of Gilbertville.

This involved a question of a relationship of what the Commission would deem it reasonable to believe.

Byron R. White:

Assuming that they have both violated that (Inaudible)

Loyd M. Starrett:

It would be meaningful and particularly the contrary, we submit, is quite meaningful.

Actually, divestiture certainly —

Byron R. White:

(Inaudible)

Loyd M. Starrett:

On the — well, on the merger, it is — if it is not willful, it does not bear unfitness.

If it is not willful, its only effect on the merger should be as appellee suggested in this brief, that anything which is the product which is found to be the product of unlawful control should be disregarded certainly.

Loyd M. Starrett:

The transaction should be judged free.

But the purpose of these sections is to create a strong national transportation system and that purpose is not served by denying something which would be a benefit to transportation for no rational reason.

But in order to punish a violation, particularly that’s not willful —

Byron R. White:

(Inaudible)

Loyd M. Starrett:

There’s no evidence that it was failing.

It was not being run at all well at all aggressively.

(Inaudible)

Loyd M. Starrett:

It was in poor financial condition, the equity was still worth many thousands of dollars but —

Byron R. White:

(Inaudible)

Loyd M. Starrett:

It was much improved.

It was much improved by the efforts of Kenneth Nelson.

It was now with all the selling.

(Inaudible)

Loyd M. Starrett:

Well — excuse me.

If the violation is innocent — let me backup a little bit.

There’s first the question of what the violation is.

This is something on which the various decisions in the Commission disagree.

Secondly, there is the — assuming that the purchase was somehow a violation, there’s a question of whether anything is gained in terms of National Transportation Policy whether there is any necessity and necessity to prevent continuance of the violation is the touch zone of the Commission’s power under 5 (7), whether there’s any necessity for a divestiture order to prevent continuance of this violation.

Byron R. White:

(Inaudible)

Loyd M. Starrett:

Not entirely true.

Your Honor, you can argue if the violation and now I’m here I guess making appellees argument for them.

But if the violation were willful and were found to be so, then the Commission could consider that in determining whether an injunction would be sufficient, for example, then it’s certainly relevant.

But the Commission should weigh all these things.

It should weigh them in determining whether or not to approve the proposed merger.

And it must weigh them again in divestiture.

And the striking thing about the divestiture order, I have just a moment to discuss it because I want to save some time.

The striking thing about the divestiture order is that the Commission simply appended it to the order.

There’s nothing in the report to indicate why divestiture.

There’s nothing in the report to indicate that divestiture is going to be ordered.

Division 4 had not ordered it.

Loyd M. Starrett:

It had never been an issue before and appellees in this respect were misled in the statement of brief to the contrary and we filed the appropriate papers with the clerk to show that it had never been an issue.

It was simply appended to the order without any mention in the report.

Now, this is a strange and a somewhat shocking thing perhaps.

We would submit that the parties are entitled to know why divestiture is necessary.

We’d submit that that’s an issue under the Administrative Procedure Act.

It’s an issue under the decisions of this Court.

This Court is entitled to know why the Commission thought divestiture was necessary or that the Commission thought it was necessary.

From all that appears in the report, the Commission may have been under the deluded notion that divestiture was required for some reason or rather that there wasn’t a question of discretion.

Nothing of this sort appears.

So the divestiture order simply came.

Now, —

Arthur J. Goldberg:

Mr. Starrett, you made reference to page 23 of the record where you referred to (Inaudible)

Is it your view that the Commission by the statute (Inaudible) was operating in a more stringent approach than it had been before (Inaudible)

Assuming that (Inaudible) the Commission learning by experience that the public interest must acquire a more stringent approach than they have here before these companies?

Loyd M. Starrett:

Mr. Justice Goldberg, first, let me say the statute is not blind.

The statute prescribes certain factors to be weighed.

We don’t challenge that the Commission can change its views, its policies as it’s indicated by experience or what have you.

That it should.

But the statute prescribes a weighing policy and 20 years of experience doesn’t indicate such obsolescence as the Commission can throw that away.

This is prescribed by Congress and to be changed by Congress.

Arthur J. Goldberg:

You say there no rational basis for the Commission to take these companies, is that correct?

Loyd M. Starrett:

I’m saying that the policy that the Commission apparently adopted in this case and perhaps just for this case but in this case in any event that this policy is not a rational policy and is not a policy authorized by the statute.

Thank you.

Earl Warren:

Mr. Kestenbaum.

Lionel Kestenbaum:

Mr. Chief Justice, may it please the Court.

The Interstate Commerce Act, Section 5, provides the Commission with authority to approve mergers and acquisitions by one carrier of another or by non-carriers of two or more carriers.

The statute states that if the Commission determined that such an acquisition will be consistent with the public interest, it shall approve such carriers — such mergers subject to such conditions as it find to be just and reasonable.

To assure that the Commission can carry out their statutory purpose, the Act also contains within it — Section 5 contains within it the most sweeping prohibitions of any mergers, acquisitions or control achieved without the Commission’s approval and that is what this case involves.

The Commission found in the order here under attack, the order of June 1959, they found three things.

It decided first that appellants had violated Section 5 (4) of the Act by the unlawful common control of these two trucking companies, Nelson Company and Gilbertville Company.

Lionel Kestenbaum:

It found — second, it denied the application of the appellants to merge these two companies and third, as a measure of relief to terminate the violation, it directed the appellants to divest themselves of any interest which they had in the acquired company, a second acquired company, the Gilbertville Company.

On the first of these issues, the finding of unlawful control, all the tribunals which determine this question, which have look into this question, which have canvassed the record have been unanimous.

The examiner found there was a violation of 5 (4), the Division 4 found it, the Commission found it, and the District Court sustained them on this point.

Mr. Starrett has discussed some of the practices in which the companies engaged and he’s argued that in many situations, there can be legitimate business justifications for them.

The issue is not whether any one of these specific practices is illegal.

The question here is whether taking all these practices together, the Commission could find that the relations of these companies were not those of independent business concerns, doing business with each other but where — that these two companies, the operations of these two companies were dictated by a common control which had been achieved without Commission approval.

I don’t want to spend too much time on these factual points.

The — we’ve stated in some detail in the statement of facts in our brief but I would like to point out to some of the highlights of the relationships of these companies.

After Kenneth Nelson took over Gilbertville Company in March 1953, the District Court — as the District Court stated there was a convergence of the operation of these two companies.

The examiner found specifically that they had developed into what was in effect a one unified organization.

Some of the highlights of this are the fact that the Gilbertville headquarters were moved from Gilbertville in Massachusetts to the Nelson Company premises in Rockville, Ellington, Connecticut.

The two companies again sharing terminals, they shared four terminals and each one had one additional terminal.

They shared the same telephone number in seven cities.

There was an extensive interchange of freight which developed between the companies.

When they interchanged freight, Nelson Company, the original carrier did all the billing and they had the — they shared the interchange revenues at a fixed percentage contrary to trade practice.

There was extensive leasing of equipment from the initial carrier owned by the family to the second carrier from Nelson Company to Gilbertville Company.

And what this amounted to in effect was the shifting of equipment from the service under the Nelson Company authority through the service under the Gilbertville Company authority.

At the time of the hearing, as a matter of fact, Gilbertville was leasing regularly and continuously from Nelson Company about three times as many vehicles as it had at the time Kenneth Nelson acquired it.

The one remarkable kind of arrangement which was found by the examiner was that they would — the parties would arrange to change an interchange of freight into a — through service by a transaction in advance which at the interchange point took effect as a lease of a vehicle from one company to the other and a shift of employment of the driver from one company to the other, thus, enabling the driver to go right through and being transformed in effect from a vehicle of one company to a vehicle of the second company.

As a matter of fact, most of the interchange, according to the testimony of Mr. Chilberg, the principal of Nelson Company, took place — most of these interchanges took place in a town months in Massachusetts where the parties do not even have a terminal, so this transaction was an automatic kind of thing arranged in advance for the common interest of the two companies.

There was a testimony that the principals of each company acted in a managerial relationship with the other company.

The inspectors testified that when they visited the common premises, Kenneth Nelson was not in the Gilbertville office.

The office labeled Gilbertville.

He was downstairs and as far as he could tell, he was running the business, running both businesses and directing Nelson Company employees.

On another occasion, a shared terminal was visited and a principal of the Nelson Company, Clifford Nelson, arranged for the dispatching of a Gilbertville truck and hired a driver for it.

There were several occasions.

Mr. Starrett pointed out that these were four occasions in which the — in road inspections which were not directed to these companies were — just checks of the vehicles on the road.

The ICC inspectors discovered that a vehicle of one company was carrying freight under the papers, the shipping papers of another company without the formality of transferring papers, the issuance of a new delivery receipt or anything such as that.

These items were not presented specifically as individual violations.

They were presented to show the context, to show that the companies were not independent business concerns doing business with each other.

Lionel Kestenbaum:

They were companies which were managed in a common interest.

And the Commission is certainly suppose to make this judgment on the basis of these facts that is suppose to be the expert familiar with the trucking industry and without companies do business with one another.

Arthur J. Goldberg:

Mr. Kestenbaum, Gilbertville is a very small company, isn’t it?

Lionel Kestenbaum:

They —

Arthur J. Goldberg:

That motor carriers is still today.

Lionel Kestenbaum:

Well, Gilbertville certainly was very small company which began operating under this arrangement.

It grew so that in time of the hearing, it was running at an annual gross of about $425, 000 and Nelson Company was running an annual gross of something like $900,000 at that time.

Arthur J. Goldberg:

Can you tell us how many employees?

Lionel Kestenbaum:

At the time of the hearing, sir?

At the time of the hearing, Nelson owned 14 trucks, 61 tractors, and 83 trailers.

I’m citing the examiner’s report at page 43, and had 110 employees.

Gilbertville, this is at page 44 of the record, had 15 trucks, 12 tractors, and eight trailers, and 71 employees.

Now, these were not very great, very large operations.

These were operations, however, since they involve more than 20 vehicles were subject to Section 5 of the Act.

One of the things found by the examiner, Mr. Justice, was that the character of the service is somewhat changed under the spirit of unlawful control.

Nelson, as counsel pointed out, has a certificate limited to the textile industry and it is found that as the textile trade shifted out of New England, it was — its service is being somewhat impaired.

Gilbertville has a general commodity certificate.

When acquired, it had only — so here’s the record 44, it had one truck, three tractors and four trailers, and —

Arthur J. Goldberg:

Absent this evidence of operation to (Inaudible) the Government finds that the merger would be in the public interest.

Lionel Kestenbaum:

The examiner found that the merger would be consistent with the public interest then I think had not been in violation, it’s fair to say that the merger would have been approved, yes sir.

Arthur J. Goldberg:

The violation, therefore, was the key aspect of this case with the same point that whether there’s a public interest.

Lionel Kestenbaum:

Yes sir.

Potter Stewart:

Now, the examiner found that the violation was unknowing and not very serious to paraphrase this remark.

But what if the Commission finds out — found as to that subject if anything?

Lionel Kestenbaum:

Well, the Commission — the Commission’s one reference on this point, sir, is the reference to the awareness that Nelson’s — principals of the two companies had the regulatory requirements of the law.

The examiner was discussing at that point, at the point cited by counsel, he was discussing both the violation of 5 (4) and he’s also discussing various safety violation that had been discovered in road checks.

Certainly, as far as the 5 (4) violation, I think it’s fair to say that he found no specific intent.

The Commission’s standard is somewhat different, however.

The Commission’s standard is that if the person — the one mitigating factor that can be discerned from other Commission opinions is that if a party can show good faith in terms of lack of awareness of the law, then that will be considered a mitigation of what would otherwise be found to be unlawful control, a mitigation of the violation so that perhaps the application would be granted.

But the Commission does not require — does not set a standard of a specific intent.

Lionel Kestenbaum:

If the parties were aware of the requirements of the law and there is no doubt about that on this record, then the violation is not mitigated.

Potter Stewart:

What the examiner’s findings to which I had reference appear on page 72 and the top page of 73 of the record and I wondered what, if anything, the Commission had to say as to those findings.

Lionel Kestenbaum:

The Commission — the Commission at page 23 of the record is quoting Division 4 and it states that it should be emphasized that Nelson and Gilbertville’s principals are not new to transportation or to Section 5 proceedings.

Potter Stewart:

And where is it, page 23?

Lionel Kestenbaum:

Page 23 in the quotation from Division 4 about halfway down the page.

John M. Harlan II:

(Inaudible)

Lionel Kestenbaum:

Yes and Division 4 where I discuss this point at pages 92 and 93 of the record, go into that in somewhat greater detail, the experience of the parties in the trucking industry and their experience in the acting pursuant to the regulatory requirements of Section 5.

That citation is 92 and 93 of the record.

I may say that the examiner’s finding in this respect is inconsistent with other parts of his opinion because the examiner found that an overall plan had developed at some stage or another, an overall plan had been conceived and followed to enlarge Nelson Company into a more substantial and more significant carrier in the Mid-Atlantic New England area.

Certainly, the conception in following of such a plan is inconsistent with a finding thereafter that the parties would be unaware of what they were doing.

Potter Stewart:

Well, there’s nothing — there’s nothing narrowly wrong in trying to enlarge your company, isn’t it?

There’s no violation of anything, is there?

Lionel Kestenbaum:

No, there certainly is not, sir.

But I should point out how this enlargement took place.

This enlargement did not take place by enlarging Nelson Company itself.

It took place by means of the acquisition of this very weak company, Gilbertville and by the shifting of equipment, personnel, funds, and energies into the general commodity service which that carrier was able to provide under its certificate.

Now, if Nelson had come to the Commission in March 1953 and said, “Textile industry in New England is going down, we would like to carry general commodities from Massachusetts, Connecticut, Rhode Island, all the way down to the District of Columbia, they would have had to prove as the Commission requires in all its proceedings that there’s a need for this service.

They did not so request and yet that is the kind of authority — that is the authority which they would have if this application would have been granted, taking the Gilbertville’s certificate and adding it to a previous acquisition, the Byrnes acquisition by Nelson Company.

Nelson Company would have been transmuted from a textile carrier from New England — in New England and from New England to New York and Philadelphia to a general commodity carrier down as essential part of the eastern seaboard.

That would be presented as somewhat considerably different question and the — that emphasizes of course the importance of presenting proposed transactions to the Commission that Section 5 requires.

Since we don’t have a proposed transaction, the Commission has to do two things and this is what it does when it finds a violation of Section 5 (4).

It gives weight against the approval of a merger to the finding of violation and it refuses to consider any benefits which are based upon the services under unlawful control.

Arthur J. Goldberg:

The Commission did have, however, putting aside those evidences that are acquired during the lawful control.

It gives them consideration of discretion, I gather, the merger would be in the public interest.

Lionel Kestenbaum:

Well, other than the conclusory statement on page 23, the Commission cites the finding of Division 4 and that it says that it has carefully considered the evidence in the pleadings and it finds no basis to support a finding that the transaction for which authority is sought would be consistent with the public interest under all the circumstances.

Arthur J. Goldberg:

It doesn’t have to bring back where the Commission really found that there was a violation of law that ought not to be condoned?

Lionel Kestenbaum:

It certainly involves that finding sir, but on the other hand, it’s clear from the Commission’s opinion in this case and in other cases which have dealt with these questions from the Central of Georgia case which the Commission cites here the leading authority on the point that a violation can be overridden.

The result of the violation is that a party assumes or has imposed upon him a burden.

He has to do more than show consistency with the public interest.

He has to show strong affirmative benefits to flow from the merger or as the —

Arthur J. Goldberg:

Is it your theory, therefore, that this finding that you just quoted was applied here by the Commission in public interest and regardless of the violation that was concerned?

Lionel Kestenbaum:

Yes sir.

Arthur J. Goldberg:

Do you believe that is this?

Lionel Kestenbaum:

Yes sir.

I think what we have here is a situation where the policy of the Commission, the balancing which the Commission undertakes to do as a matter of general rule is very clear and where the Commission has stated this in general terms, and where the record is overwhelmingly in support of such a conclusion.

I may say that under a different act, we have the WOKO decision which was cited in our brief under the Communications Act in 329 U.S.

This Court has held that the balancing is up to the Commission even though in that case as well there was a sanction for misrepresentation to the Federal Communications Commission which had to be balanced against the quality of service and one other specific finding on this point, the Commission in that case had dealt only with the importance of deterring such violations.

I mentioned a moment ago that whatever the situation might be in another case, in this case, there was nothing to balance against the violation.

There were no countervailing public benefits which could have outweighed it.

There was no evidence introduced to shipper needs.

There’s no showing that existing service was inadequate.

The only finding by the examiner who would’ve approve the merger, the only finding by him on this point was that there would have been more efficiency and greater economy in the related services which are developed since the acquisition of 1953, particularly he mentioned the interchange which have developed between the carriers.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Well, I —

Byron R. White:

Would you go that far?

Lionel Kestenbaum:

I would go that far.

I don’t know why I have to go that far in March 1953 but when the Commission was finally faced with it, I would not go that far because there was a relationship between these carriers.

And if that relationship had been up and developed — excuse me sir.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

That’s right, sir.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

I’m sorry.

I don’t quite get the question, sir.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Alright, that’s a difficult — that’s a difficult question to —

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Well, I’m sorry.

I was pointing out that if we were to consider this as a proposed transaction that is admitting — eliminating all this development under the unlawful control then there might be a serious question whether the Commission would have granted it.

As a matter of fact, the applicants in this case, the Nelson Company principals tried to acquire other carrier in 1953, and the Commission turned them down on the ground that it was a dormant company and there was no public interest shown in reviving it.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Well, Mr. Justice, I’m sorry.

I didn’t make my point clear.

I was trying to distinguish between the situation in 1953 and the situation in 1956.

In 1956, assuming there were no violation, I think it’s pretty clear that the merger would’ve been approved that the merger would have been found consistent with the public interest and would have been approved, had not been for the fact that the support for this had to rest upon a violation.

Byron R. White:

Well, (Inaudible) indicates that the application of merger was filed.

Lionel Kestenbaum:

Yes sir.

John M. Harlan II:

How can you say what the Commission would have done on a hypothetical instead of circumstances?

Lionel Kestenbaum:

Well, that is why I was not trying to — I was trying to avoid answering that question because I did not wish — I did not wish to —

John M. Harlan II:

I thought pretty freely the evidence though.

The question that is put to you as to what — what would have been the situation if the 5 (4) violation have been — not in the picture as in other lawsuit.

Lionel Kestenbaum:

And that’s correct sir, yes.

John M. Harlan II:

Isn’t that right?

Lionel Kestenbaum:

Yes sir.

I —

John M. Harlan II:

Your position is that given the findings of the Commission that there has been a 5 (4) violation, the Commission could permissibly conclude that it was not in the public interest to permit a merger between two companies that had been under an illegal relationship, that’s in this case, isn’t it?

Lionel Kestenbaum:

Yes sir.

John M. Harlan II:

That’s all there is, isn’t it?

Lionel Kestenbaum:

That’s correct sir.

I was referring back to the previous relationship to indicate how this situation illustrates the importance and the value of the Commission’s policy of giving a violation weight.

That it is significant that is vital for the Commission’s administration of this statute that the carriers come in before they consummate transactions.

And then if they don’t come in, not only can services be developed if you’re not in the public interest but the matter cannot even be cured by its related application because the — under their unlawful control, they couldn’t change the circumstances.

John M. Harlan II:

That’s why — why the Commission is before it.

Lionel Kestenbaum:

Yes sir.

(Inaudible)

Lionel Kestenbaum:

The Commission’s standard on this and which we’re defending here is that if the party that the one mitigating possible factor, the one mitigating possible fact is not possible from the way the examiner considered it but awareness of the law.

The examiner, I may say, was considering this from the point of view of fitness of the applicants.

Are they of such character that they can’t be trusted with a certificate?

The Commission’s policy is quite different.

The Commission’s policy is that the public interest requires a deterrent against such violations.

And that therefore, as a matter of the public interest, it will give weight against the approval of a merger when a violation has occurred.

Lionel Kestenbaum:

This was the —

Byron R. White:

Unlawful?

Lionel Kestenbaum:

I beg your pardon.

Byron R. White:

Unlawful or knowingly?

Lionel Kestenbaum:

Knowingly.

Byron R. White:

With awareness.

Lionel Kestenbaum:

With awareness, yes.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

We have illustrated that by a number of cases which we’ve cited from the Commission.

Where they’ve mitigated or they’ve agreed to ignore a violation when the party showed good faith confusion about the law, uncertainty, lack of legal advice, that kind of situation.

Here, I don’t think there’s any question.

The parties are aware of the requirement of the law and that they want to add with this —

William J. Brennan, Jr.:

(Inaudible)

Lionel Kestenbaum:

Yes sir.

And they don’t claim that they didn’t know what the law required.

The examiners findings themselves show this in a sense that he found the conception of a plan to increase the service to enlarge the service of the original carrier through the acquisition.

William J. Brennan, Jr.:

(Inaudible)

Lionel Kestenbaum:

No sir.

I think it’s quite clear that if you found there were no violation and the matter would have to go back for the Commission to consider as a matter of discretion under Section 5.

William J. Brennan, Jr.:

(Voice Overlap)

Lionel Kestenbaum:

Yes sir.

Arthur J. Goldberg:

I’m not skeptical but something’s not right with your argument.

I thought you said earlier that even — first, I thought you said that the violation was the key but then I’ve heard you through Justice Harlan that that might be a hypothetical case.

The answer for this that there were other elements that the Commission passed it on and now I heard you say in your answer to Mr. Justice Brennan that if you didn’t found the violation you would have to go back in the Commission.

Now, let me see if I understand what your point is.

Is your point here that the violation in this record has given a hypothetical case?

The violation is the key here if it were a violation to the point where it will not be of significant.

The Commission had not passed on the question of whether the merger is in the public interest.

Lionel Kestenbaum:

Yes sir.

Arthur J. Goldberg:

Is that what you’re saying?

Lionel Kestenbaum:

Yes sir.

Arthur J. Goldberg:

So this language about the other language of both mergers from the Commission’s report has no relevance.

Lionel Kestenbaum:

Well, it does have relevance in the sense that the Commission did not have an automatic rule of denying a merger when it finds a violation.

It does — there is an element of balancing that remains, I quoted that language to indicate that the Commission had undertaken to make such a balancing and had considered all of the circumstances before it’s concluded that the merger should not be approved.

Arthur J. Goldberg:

The circumstances other than violation —

Lionel Kestenbaum:

That’s correct.

The —

Arthur J. Goldberg:

But if the violations were out, there would be another review then, if I understand what you’re saying.

Lionel Kestenbaum:

Yes sir.

Arthur J. Goldberg:

There should be another review.

Lionel Kestenbaum:

Well, there would have to be, that’s right.

Since the Commission is the body in charge, deciding whether applications such as this should be granted.

If I may, I’d like to spend just one moment on the statutory provisions which have been discussed earlier that are set out on pages 64 and 65 of the brief.

The appellants make a rather extensive intricate argument that there is a difference between a finding of violation by use of affiliation, affiliation provisions and without use of the affiliation provisions.

On page 64 in the appendix to our brief is Section 5 (4) which is the basic statutory prohibition.

It states that it is unlawful for any person without Commission approval to enter into a transaction requiring such approval or to accomplish control over management in a common interest of any two or more carriers.

However, such result is attained whether directly or indirectly.

On the facing page, Section 5 (6) provides a definition of affiliation and Section 5 (5) in intervening subsection, states, that certain transactions by carriers and persons affiliated with them, I’m now reading at the top of 65, shall be deemed to accomplish or effectuate the control or management in a common interest of two carriers.

This is the language I’ve just read as an echo of Section 5 (4).

So what these two additional provisions state is that certain transactions by carriers and other persons were found to be affiliated with them, will constitute a violation of the — this single prohibition that is in the statute of Section 5 (4).

The appellants go to some effort to try to separate these provisions of law and to say that a different kind of finding, a different kind of evidence is required to find a violation of the affiliation provisions and is required to find a violation of 5 (4).

But actually, that is certainly not what Congress intended when it passed this statute and certainly not what the law provides.

The Committee reports are very clear on this point.

They state that these 5 (5) and 5 (6) were adopted, and I’m quoting from Committee reports, to spell out and make clear the various possible forms of indirect control which 5 (4) was intended to prohibit.

To make sure that 5 (4) which is the single prohibition that the Act contains was construed to prevent indirect control regardless of the device that was used.

In other words, a finding of affiliation in this case is a finding simply that Kenneth Nelson was acting on behalf of Nelson Company.

And the finding of violation by use of these provisions is no more than a finding that the unlawful control was accomplished indirectly through an affiliated person, indirectly through Kenneth Nelson.

This is not inconsistent with the findings without using those provisions.

It’s the same thing because it’s clear that if any violation did occur in this case, it occurred because Kenneth Nelson purchased the company and by means of his management and control of it.

As I said earlier, I think it’s very clear that the record amply supports the Commission on this point.

Lionel Kestenbaum:

The Commission certainly were justified in its finding that a violation had occurred and that it had occurred through the medium of the Kenneth Nelson’s purchase and control of the second carrier.

John M. Harlan II:

I suppose that if this order stands and two or three years go by and the — is there any reason why under the Commission’s rules, a new application for a merger could be filed based on the intervening experience and the public interest is determined in the light of that experience — intervening experience?

Lionel Kestenbaum:

Yes, there is certainly a freedom.

An application could be filed.

Of course this order here is more than an order to denying the application to merge.

John M. Harlan II:

I understand that.

Lionel Kestenbaum:

Yes.

John M. Harlan II:

Then assuming that a period has gone by and the divestiture of the urging of this common interest has been accomplished by this order and then showing an application is made for a merger.

Could the Commission then entertain that and act on it.

Lionel Kestenbaum:

Yes sir.

They certainly could.

(Inaudible)

Lionel Kestenbaum:

Yes, I’m coming to that right now, Mr. Justice.

The final issue of course is whether the Commission properly ordered Kenneth Nelson to sell his stock in Gilbertville Company.

Once you’ve decided not to approve the merger, obviously it will do something to eliminate the unlawful situation which had — it had decided not to legalize.

It had to decide — it had to act under Section 5 (7) of the Act.

It had to direct appellants to take such action as may be necessary in its opinion to prevent continuance of the violations.

The order of divestiture in this case which the Commission adopted is its usual remedy for unlawful acquisitions insofar as appellants cite various cases in their brief from context such as unlawful advertising pertaining to that for the proposition that agencies should not use the harshest available alternative if there are several alternatives present.

Insofar as situations under other laws may be relevant, we have cited and we believe it’s appropriate —

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

I beg your pardon.

Byron R. White:

Division 4 (Inaudible)

Lionel Kestenbaum:

The Division 4 order stated that the party should terminate their violations.

They did not specifically order divestiture.

We’ve cited in our brief a number of cases which indicate that the Commission considers the words ‘termination’ and ‘violation’ to be equivalent of divestiture.

As a matter of fact, Starrett urges that the parties never presented the issue of divestiture to the Commission to Division 4 in the exceptions.

We’ve checked the exceptions and the exceptions to the Division 4.

One of the parties mentioned divorcement.

The Bureau relied upon a case which was a divestiture case.

But they did specifically request termination of the violation.

Lionel Kestenbaum:

Now the Division regarded that as a request for a divestiture order and it’s so stated in discussing the contentions of the parties.

The Division that entered this termination order which in other cases I’ve said had been considered to be to mean divestiture.

The parties went to the Commission and said that order is so vague.

We can’t understand what it means and the Commission then elucidated what it meant and directed the various appellant to sell their interest in Gilbertville Company.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Again, we have Mr. Justice, a situation where the agency has a general policy of ordering divestiture unless there are some circumstances which make the relief either inadequate or harsh to innocent parties.

Our brief has cited cases in which the Commission — one case in which the Commission considered it too harsh to innocent parties and use the voting trust.

In other case, in which considered it inadequate to cure the violation and it ordered something even more drastic than divestiture.

The — it does have a general policy if those situations do not obtain —

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

It has also so stated in another case.

It says — and the case, as a matter of fact, in which they found divestiture would be inadequate Nigro Trucking which we have cited in our brief.

The Commission said, instead of the usual remedy of ordering divestiture, we will have to do something more drastic in this case which they then proceeded to do.

The — as far as considering the available alternatives, the Commission’s opinion did not — truly does not discuss the matter in any detail, did not discuss the matter and the availability of other alternatives.

However, after the entry of the —

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

I don’t think this Court has had a case under Section 5 before Your Honor.

On —

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

That’s correct.

It should be —

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

That’s correct sir.

I should — I should mention as far as other contexts are relevant.

I think that the antitrust context is somewhat relevant and this Court has held in the antitrust situation that divestiture is obviously the natural remedy for an unlawful acquisition.

That’s the view that Judge Wyzanski took in this case that divestiture has a perfect fitness for a violation of an illegal acquisition.

The appellants suggest that somehow the two companies should be —

Byron R. White:

Here, there was a total control of the company’s activity.

Lionel Kestenbaum:

It was spelled in large part out of — that’s correct.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Well it was — the control was — the existence of the control was spelled out in large parts from these in many activities that the two companies engaged in but it’s quite clear that the reason why they did this is because Kenneth Nelson purchased Gilbertville Company.

It’s not a normal business relation to move into someone else’s terminal to share offices, to share telephone numbers, and do all these other things.

And the Commission found specifically that this was done by virtue and resulted — this resulted from the Kenneth Nelson’s purchase and control.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Well, I think it’s clear.

It would have been rather difficult to police an order which would tell two carriers not to do business with one another because of such violation.

But aside from that, the crucial aspect — the vital aspect of the —

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

The divestiture would not be very difficult to believe that they sell the stock and they sell it to a third independent party, we know that it’s been carried out.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

The Commission has — the Commission’s order specified that it can’t be sold to anyone who is affiliated with the Nelson Company interest.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Well, I presume that Gilbertville could continue to interchange freight with Nelson Company as a matter of normal business relations.

What the Commission has found, was that the —

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

That is hypothetical, sir, which I can’t very well answer.

I don’t — I can’t imagine that any independent business concern would have done what Gilbertville did with Nelson Company during these three years.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Well, there was an acquisition of control and the acquisition was that of Kenneth Nelson.

And the Commission has found that that acquisition was a means by which the unlawful control occurred.

The only alternative, which is suggested, that somehow the company should be separated but that Kenneth Nelson should be left as the owner of Gilbertville Company.

I can’t imagine that the Commission is required to assume that any order of termination would lead him to act contrary to the interest which has been shown during this period that the Commission had on the hearing.

As a matter of fact, if we refer to a case in another context as you did, Your Honor, the DuPont case, it was suggested that — the Court stated that it’ll pass through the stock would not be adequate because the stockholders shouldn’t — the Court should not be required to assume that the stockholders would act contrary to their interest.

It was very clear what Kenneth Nelson’s interests were.

At least it’s clear enough for the Commission to have acted on that basis.

The arguments against divestiture, I may say Your Honor, were also presented to the Commission after the entry of the order of June 1959.

The appellants at that point petitioned for reconsideration and raised all the arguments which are now being raised.

They stated the order was too harsh and they suggested that if the Commission issued an order directing him not to share terminals, not to interline freights, not to use vehicles, evidently, not to do — not to conduct business relations.

This was opposed — the Bureau opposed it on the ground that the unlawful control by Kenneth Nelson was an integral part of the violation and that the alternative would essentially left and retain the fruits of the unlawful conduct.

The petition was denied in February of 1960.

Lionel Kestenbaum:

And then appellants proposed a very interesting second alternative.

They proposed a filed petition with the Commission and proposed to cancel the Nelson Company certificate if they could retain Gilbertville.

And this indicates the truth of what I spoke of earlier the value of the acquisition.

The value of this related service that has developed over the years had become even greater than that of the original company which had initiated this — this development.

The Commission denied —

(Inaudible)

Lionel Kestenbaum:

It could be.

The situation might arise in which the Commission would find unlawful control.

I don’t think — but I — I don’t think that that would necessarily follow from any specific cooperative activities.

The essential aspect of this — the order of the Commission is its belief.

And I think the belief is amply supported by the record that if you did separate these two companies, this kind of relationship would never arise.

(Inaudible)

Lionel Kestenbaum:

Undoubtedly —

That Gilbertville will continue to operate too.

Lionel Kestenbaum:

Undoubtedly, he might — he might continue some of them, Your Honor.

But for example Kenneth Nelson stated on the stand that he — when he interchanges freight in New York, he always gives — naturally, he gives priority to the Nelson affiliate first, it’s his testimony.

Well, I can’t see any reason why an independent company would particularly give priority to this other company unless there was some kind of relationship that’s existing.

(Inaudible)

Lionel Kestenbaum:

Yes sir.

(Inaudible)

Lionel Kestenbaum:

Well, we can face that situation in another day.

I think it’s certainly adequate for the Commission to conclude that this is the way to terminate the violation and this is essentially the only way to terminate a violation which is affected by — and accomplished by a purchase of stock and the management drawing the companies more and more closely together.

I should point out that I did not mean by omission to ignore the specific relations that Kenneth Nelson had with Nelson Company to suggest that the entire case was build up out of these cooperative activities, if you will.

Potter Stewart:

If Kenneth Nelson had not been related at all to the owners of the other company but it’s just been John Smith and his practices, most of — each individual practice, as I understand it, is perfectly legal and proper and rather common, is it not?

I mean sharing terminals and so on.

Lionel Kestenbaum:

Well, except for the shifting of freight without papers.

I think that’s more —

Potter Stewart:

That’s unusual.

That’s the only unusual.

Lionel Kestenbaum:

Yes.

Lionel Kestenbaum:

I think that’s somewhat unusual to find all together but each one is taken separately —

Potter Stewart:

Well, let’s assume that instead of Kenneth Nelson, it has been John Smith, and these — all of these collections of activities were found to exist by the Commission.

What would be accomplished by ordering John Smith to divest himself with the ownership of that company?

Lionel Kestenbaum:

Again, sir, I find difficult to answer that question.

The Commission —

Potter Stewart:

Well, isn’t the key to the thing here is the fact that he is a brother, isn’t that it?

Lionel Kestenbaum:

I wouldn’t say that as the only key.

We cited other cases of the other relations.

We have other cases in which the John Smith that you suggest was a lawyer for one of the carriers or an accountant for one of the carriers or a friend, or an aunt, or any kind of intermediary.

There could be a situation where many of these factors would obtain whether it would not be unlawful control.

If there is a finding of unlawful control and the unlawful was — control was effectuated through John Smith, well that is in effect the finding that John Smith is not an independent businessman.

He is acting in the interest of on behalf of one carrier when he controls the second, and that’s the violation.

And the Commission invariably required divestiture from that person who acted on behalf of the — of one carrier when he controls the other.

Potter Stewart:

Well, is there a finding here that Kenneth was an agent of Gilbertville?

Lionel Kestenbaum:

There — the Commission —

Potter Stewart:

— rather Nelson’s —

Lionel Kestenbaum:

The Commission made a finding that he was affiliated with Nelson Company and that is of the statute of finding that taking all the circumstances together, he acted on behalf of Nelson Company in his control and purchase of Gilbertville Company.

And I can’t see how that conclusion can be faulted.

This — well one decision —

Potter Stewart:

Now, the District Court didn’t find that he was an affiliate, did it?

Lionel Kestenbaum:

The District Court found a violation taking all the factors together and said that this is not contradicted but is confirmed by the statutory provisions on affiliated —

Potter Stewart:

They didn’t make any finding under 6 or 5?

Lionel Kestenbaum:

No, he did not.

It did not —

Potter Stewart:

He said, it’s confirmed by those —

Lionel Kestenbaum:

That’s right.

That’s correct.

I did point out that as the legislative history shows, 5 (6) and 5 (5) were not intended to set up a new provision.

It was simply intended to show how a violation of 5 (4) can be carried out through an intermediary, through affiliated interest.

And since the only stockholder — the only — essentially the only — there were some other, Kenneth Nelson’s wife and his terminal manager has held some share the stock, he was the only beneficial owner.

Lionel Kestenbaum:

Since the only stockholder in Gilbertville was Kenneth, it is clear that if there was a violation, he did it.

It could have been done by any of the other parties and Nelson Company without his operation of the company.

William J. Brennan, Jr.:

(Inaudible)

Lionel Kestenbaum:

No, sir.

I certainly — I hope I didn’t say that.

William J. Brennan, Jr.:

(Inaudible)

Lionel Kestenbaum:

No I said that where the Commission is found unlawful control, effectuated by affiliated persons, they have not depended upon brother — fraternal relationships.

They are dependent —

William J. Brennan, Jr.:

(Inaudible)

Lionel Kestenbaum:

That he acted on behalf of them whether he was the initiating party or whether he was merely a front may depend on the facts in each case.

I —

William J. Brennan, Jr.:

(Inaudible)

Lionel Kestenbaum:

Well, I would assume that if there were some — merely some of these factors that were involved, they wouldn’t — if they would have a finding of unlawful control, the Government wouldn’t break it up then there would be no reason to break it up.

Carriers of all kinds have cooperative relations.

And the Commission is supposed to determine when this amounts to unlawful control accomplished without approval.

And it’s so found in this case.

Byron R. White:

(Inaudible)

Lionel Kestenbaum:

Mr. Justice, I suggested that if there were one or two of these factors that occurred or some of these factors that occurred, I can’t conceive on the situation where all of them could occur.

And the parties were independent businesses.

It’s certainly not our case here, it’s not our record here and I don’t know how we can answer.

Frankly, I can’t — I can’t see how we can answer the hypothetical.

I would like to add to these factors of relationships which are so.

The Commission is supposed to judge these in terms of the industry and to — to decide for itself whether these were normal business relations between independent concerns.

I think the record is amply supported.

Aside from the business relation themselves, there is the specific relation of Kenneth Nelson with Nelson Company.

He was a stockholder and an officer up to September ‘51.

After that, the finding is quite clear although he terminated that formal relation.

He was in effect an employee.

The accountant testified that he was a freelance tariff consultant but the only person who have — whom he worked, the only person who provided any of his income as tariff consultant was the Nelson Company.

He maintained his office in the Nelson Company premises.

Lionel Kestenbaum:

The accountant also testified that Kenneth Nelson continued to work for Nelson Company after taking over Gilbertville.

And this finding was made by the examiner and by Division 4.

Under these circumstances, I believe the Commission had ample justifications in the record and in the statute defined unlawful control and violation of Section 5 (4).

They had ample justifications for using that and considering the public interest, and in deciding that the merger should not be granted, and thereafter an order to terminate the violation in directing divestiture of stock.

Earl Warren:

Mr. Starrett.

Loyd M. Starrett:

If the Court please.

The Central of Georgia rule or the rule of respect for law that Mr. Kestenbaum says it was applied here doesn’t really differ significantly from the fitness rule.

I think that’s pretty clear.

That’s a sensible weighing process.

The fact of the matter is only that rule was not applied in this case.

And the — the report of the Commission shows that fairly clearly.

Mr. Kestenbaum says that the reason for that is a so-called Section 5 rule or a rule that prior participation in Section 5 proceedings bar us any claim of any innocence or requires an automatic assumption or presumption of willfulness.

He further refers to findings or rather I think it’s more appropriate to say comment made by the examiner not repeated by the Commission about a so-called plan.

Certainly, there’s no question that Nelson Company seeing its customers, its textile industries move south from New England decided that it should obtain some route south and it did so.

It applied to the Commission for approval of their purchase which was denied and that it applied by the Commission for approval of another purchase, the Byrnes purchase which is approved.

This is the plan that was talked about.

There’s no question about and it’s perfectly lawful plan.

The expansion of carriers indeed in territorial terms because of the nature in which routes and authorities are carried up, this is normally done by acquiring authorities.

There’s nothing unusual or strange, or illegal about that.

But then to say that participation in such proceedings is equivalent to willfulness of any violation found is one step and possible step forward.

In this very case, I think the questions from the Court and Mr. Kestenbaum’s really inability to say what the Commission did or would have done in specific instance that shows it.

There is no — there’s no definition to this as the examiner said to the — it’s the culmination of the things.

Here’s a case where sum of the parts has been held to be greater or the whole has been held to be greater than sum of its parts.

Here’s a case of a number of innocent things which are held to add up to a violation of law.

As the examiner said, there is no reason to believe that individuals — non-lawyers, even though they knew about Section 5 and demonstrated indeed their deliberation and their intent to comply with Section 5 by applying for approval of mergers, indeed this one, the contract is expressly subject to Commission approval and they came into the Commission for this merger.

That these people can predict the sophisticated application of the law of all the facts adding up to more than all the facts.

And then indeed that to take the Commission’s ground, the ground the Commission substituted Section 5 (5) and 5 (6), that this layman could say that it was going to be possible — it’s going to be reasonable for the Commission to believe.

Those are terms of Section 5 (6).

Such a presumption is pretty clearly irrational and quite illogical.

Now, Mr. Kestenbaum suggested that Section — Sections 5 (5) and 5 (6) and as 5 (5) with the definition of affiliation in Section 5 (6) are exactly the same thing as Section 5 (4).

Loyd M. Starrett:

Let me just suggest this.

Section 5 (4) applies to control or the power to control as a fact something that can be proved.

Section 5 (5) and 5 (6) applied to something which can be believed even if it can’t be proved and the congressional history makes it very clear that this was the intent.

Section 5 (6) says that a man is affiliated if it is reasonable to believe that the affairs of any carrier on which control may be acquired by him will be managed — will be in the interest of another carrier.

That’s affiliation and then Section 5 (5) makes a transaction by an affiliate like by conclusive presumption a violation of law.

It seems fairly clear that there can be such transactions by persons where it’s reasonable to believe were in fact there is no control or power to control created.

It’s a different test and Congress intended it to be a different test so that it could be proven in certain cases where it could not — where it could not be proven as a matter of fact under 5 (4).

It could be proven under 5 (5) or 5 (6) of violation of law.

They are quite different.

Again, 5 (4) can apply to cases that don’t involve transactions since Section 5 (5) requires a transaction, requires a purchase.

And in light of these sophisticated rules, to say that the mere fact of prior involvement in Section 5 or of awareness and the appellants don’t deny that they were aware of Section 5 (5) or Section 5 generally in attempting to comply with, that the awareness of the existence of Section 5 means that any stepping across the line even a vague and shadowy line of this sort is willful.

There can be no such logical presumption.

It must be irrational.

Arthur J. Goldberg:

Are there any complaint filed under the statutes here before you went to court for the application for approval of the merger?

Loyd M. Starrett:

They were not, Mr. Justice.

The investigation proceeding was filed some two and a half months after the application for merger was filed.

Thank you.

Earl Warren:

Very well.