Metropolitan Life Ins. Company v. Ward

PETITIONER:Metropolitan Life Ins. Company
LOCATION:United States Courthouse

DOCKET NO.: 83-1274
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: State appellate court

CITATION: 470 US 869 (1985)
ARGUED: Oct 31, 1984
DECIDED: Mar 26, 1985

Matthew J. Zinn – on behalf of Appellants
Warren B. Lightfoot – on behalf of Appellees

Facts of the case

The law in force in the state of Alabama presupposed an increased tax rate for insurance companies that were registered in the territory of another state. Metropolitan Life Insurance Company filed a statement of claim in which asked to recognize this provision as unconstitutional and contrary to the ethics of doing business in the territory of the country. The court of the first instance did not satisfy the claim and justified its decision by the fact that this provision does not contradict the constitution, but rather promotes the creation of new enterprises on the territory of the state, and also provides conditions that are more favorable for foreign companies to invest in local ones. At this stage, the court relied on the authority of the state to have its own legal norms, and proceeded from the fact that higher tax rates are financially beneficial for the local budget.

The Supreme Court justified a different opinion. He ruled that this law gives advantages to one company while creating conditions that are more disadvantageous for others, and this contradicts the principle of equal conditions for doing business in the country regardless of the state and place of registration. The court also pointed out that there is a need to develop foreign companies on its territory since it is profitable from the perspective of filling the federal budget and recognized the law of the State of Alabama as unconstitutional. Thus, this decision formed a precedent and gave equal rights and opportunities for realization for companies operating on the territory of the whole country.


Audio Transcription for Oral Argument – October 31, 1984 in Metropolitan Life Ins. Company v. Ward

Warren E. Burger:

We’ll hear arguments next in Metropolitan Life Insurance Company against Ward.

Mr. Zinn, you may proceed whenever you’re ready.

Matthew J. Zinn:

Mr. Chief Justice, and may it please the Court:

This case is here on appeal from the Supreme Court of Alabama.

At issue is the validity of Alabama’s domestic preference tax statute under the equal protection clause of the Fourteenth Amendment.

Alabama grants a tax preference to domestic life insurance companies by imposing a tax of one percent on their gross premiums, while imposing a tax of three percent or three times that amount on the gross premiums of out-of-state life insurance companies.

Alabama grants a tax preference to domestic property casualty insurance companies by imposing a tax on their gross premiums of one percent and imposing a tax on the gross premiums of out-of-state property casualty companies of four times that amount or four percent.

So in its basic structure the Alabama domestic preference tax statute provides for taxing out-of-state life companies at triple the rate of domestic life companies and providing for taxing out-of-state property casualty companies at quadruple the rate of domestic companies.

The Alabama domestic preference tax statute also contains a so-called investment incentive provision.

Under this provision, an out-of-state company can reduce its tax by one-tenth of one percent for each one percent of its total assets that it invests in Alabama.

However, there’s a limitation on the amount of the reduction.

The maximum reduction cannot exceed one percentage point, and this occurs if an out-of-state company invests ten percent or more of its total assets in Alabama.

What this means is that if an out-of-state company takes maximum advantage of the investment incentive, if it’s a life insurance company it can then reduce its tax rate four four percent… from three percent to two percent, or double the rate of a domestic company; and if it’s a property casualty insurance company, it can then reduce its tax rate from three percent to two percent… four percent to three percent, or triple the rate of a domestic company.

Now, these suits for refund were brought in the Circuit Court of Montgomery County for refund of the discriminatory taxes.

The Appellants here are a number of out-of-state insurance companies that do a nationwide business, including business in Alabama.

The Appellees are the insurance commissioner of Alabama, who denied Appellants’ claims for refund, and several Alabama insurance companies which intervened in these proceedings below.

The ultimate issue is whether Alabama’s domestic preference tax statue satisfies the rational basis test of equal protection review.

In holding that it did, the courts below found that at least two of the 17 purposes advanced by the Appellees were legitimate state purposes that justified the discrimination inherent in the statute.

These were: first, encouraging the formation of new insurance companies in Alabama; and second, encouraging capital investment in Alabama by out-of-state companies.

Our position is that in the context of this case involving domestic preference taxation neither these two purposes nor any of the other purposes advanced by Alabama are legitimate state purposes as that term has been interpreted by this Court.

William H. Rehnquist:

In its equal protection cases?

Matthew J. Zinn:

Pardon me?

William H. Rehnquist:

In its Equal protection cases?

Matthew J. Zinn:

Yes, Justice Rehnquist.

We believe that three major considerations should guide decision in this case.

The first of these is that this precise issue has been considered by this Court on seven occasions and on each of those seven occasions domestic preference taxation has been held to violate equal protection.

Now, the Appellees contend that these cases were really commerce clause cases and that the purposes that they are putting forward were not put before the Court in these seven cases.

So there is a difference of opinion as to whether these cases are on point.

A great deal of discussion of the cases in the briefs of the parties–

William H. Rehnquist:

Well, Mr. Zinn, I take it you have to concede that in this case protectionist purposes in light of the commerce clause, the fact you can’t rely on the commerce clause, are permissible for the state?

Matthew J. Zinn:

–Oh, yes.

We rely exclusively on the equal protection clause, Justice Rehnquist.

But these seven cases that we rely upon were all equal protection cases.

William H. Rehnquist:

Well, but just arguing perhaps from the point of view cf res nova or whatever you want to call it, you know, something that hadn’t been decided before, if you can’t claim that a protectionist purpose is illegitimate under the commerce clause, any legislative purpose is legitimate, virtually, under the equal protection clause.

Matthew J. Zinn:

Well, we would say that that is the position the Appellees are putting forward.

William H. Rehnquist:

Well, what’s the matter with it as a matter of logic?

Matthew J. Zinn:

Well, if you state the purpose at a level of generality, such as a purpose to encourage rural insurance, to pick one of the 17 purposes that the Appellees have identified… that is one of their 17.

They say that there is a lack of insurance in rural areas.

If you say that that’s the purpose and then the statistics show that domestic companies are servicing rural areas, therefore you’re furthering the purpose, then it seems to us that the equal protection clause falls between the two-pronged test that this Court is applying.

William H. Rehnquist:

Well, that’s what rational basis is all about.

Isn’t it a very easily satisfied requirement?

Matthew J. Zinn:

Our stress here… yes, I think that is.

But our stress here is on the legitimacy of the purpose, and what we are saying is… let me see if I can put a hypothetical, Justice Rehnquist.

Suppose instead of the statute that we were dealing with, we had a statute that started all property casualty insurance companies out at a four percent rate, but that provided that if you sold a lot of rural insurance then you would be reduced to a one percent rate.

And suppose also that that for opportunity reduction to one percent was available only to domestic companies.

Now, we would submit in that situation that, sure you’ve passed the rationalist test, but the only reason for confining the incentive to domestic companies is local favoritism, and that favoritism has always been held in violation of equal protection.

William H. Rehnquist:

Well, but isn’t this business of the commerce clause and not the equal protection clause to protect against local favoritism?

Matthew J. Zinn:


I think also there is a purpose here to treat people that are similarly circumstanced in the same way.

There is no reason–

Warren E. Burger:

We will resume there at 1:00 o’clock, Mr. Zinn.

You may continue, Mr. Zinn.

Matthew J. Zinn:

Mr. Chief Justice and may it please the Court:

Prior to the noon recess, Justice Rehnquist had asked a question as to why it isn’t okay to help domestic companies.

I guess our answer is that if that is the ultimate purpose of the statute it’s not okay because it simply restates the discrimination.

Now, if it’s not the ultimate purpose of the statute, as is suggested by the state’s 17 purposes in this case, and you look at those 17 purposes, you will find that foreign companies can contribute to those goals just as domestic companies can.

And I put the hypothetical before the noon recess of a statute that imposed a four percent tax on both foreign companies and domestic companies, but which allowed a reduction to one percent if, for example, a large number of rural policies were sold, but limited that possibility to domestic companies.

In that situation we think it’s clear that the only purpose of that statute could be to favor domestic companies, because there’s no reason other than that that could explain the discrimination inherent in the statute.

Seven times this Court has had this issue before it and seven times it has held that domestic preference taxes violate the equal protection clause of the Constitution.

As we discussed prior to the noon recess, the Appellees contend that these cases are not on point for two reasons.

Matthew J. Zinn:

First, they say they’re commerce clause cases; and second, they say that the purposes they are putting forward, these 17 purposes, were never put forward before.

Both of these contentions, we submit, are without merit.

There is long discussion in all of the briefs of these 17 cases… of these seven cases, and I will just touch on a few highlights.

Southern Railway versus Greene was the first of the seven cases, and the Appellees make much of the fact that in that 1910 decision two commerce clause cases were cited.

But those two cases were cited only on the question of whether the privilege tax doctrine was applicable.

Once the Court decided that the privilege tax doctrine was not applicable, the rest of the discussion in Southern Railway versus Greene was equal protection.

In fact, the Court said in that case, 75 years ago, that for a classification to be valid under the equal protection it must bear

“a reasonable and just relation to the things in respect of which such classification is imposed. “

William H. Rehnquist:

Mr. Zinn, do you think those cases that are pre-McCarran-Ferguson Act and don’t deal with insurance are really relevant here?

Matthew J. Zinn:


This is the eighth case that’s come up in this line of cases, Justice Rehnquist.

Half of them have been insurance cases and half have not.

But in every one of them, insurance or not, the Court has always framed its decision on the equal protection clause.

The next two cases, the next two cases in this line, the Hanover Fire and Concordia Fire cases in 1926 and 1934, were decided at a time when this Court did not consider the business of insurance to be commerce.

They could only be… they could only have rested on the equal protection clause.

And the Reserve Life case, which came on in 1965, was after this Court’s decision in the Southeastern Underwriters case had held that the business of insurance was commerce, and after Congress had then enacted the McCarran Act and lifted all commerce clause restraints.

They’re not explainable except on equal protection.

William H. Rehnquist:

But was that all spelled out in the Reserve life case, the 1965 case, that although the commerce clause doesn’t apply because of McCarran-Ferguson, we nonetheless–

Matthew J. Zinn:

The Appellees have argued that we are placing too much weight on the Reserve life case, because it didn’t spell all this cut.

That we think might be fair criticism if this were the only case in this line, Justice Rehnquist.

But it’s one of seven.

And I would point out that, although there were dissents in some of these seven cases, not one dissent in all of these seven cases ever rested on the basis that this classification was reasonable, not one dissent.

Seven times since 1910 and not a single Justice that has heard these seven cases has ever said the classification was reasonable.

I think it’s also particularly significant, Justice Rehnquist, that the Reserve Life case came after Wheeling Steel in the sequence of cases.

Wheeling Steel was decided in 1949, and I think it’s a notable decision of this Court for various reasons.

The case was decided by a seven to two vote.

The dissent in that case was written by Justice Douglas and Justice Black joined in it.

The dissent was on the ground that the equal protection clause did not apply to corporations.

Justice Jackson wrote for the majority in that case and he also, in an unusual procedure, filed a separate statement dealing exclusively with the views of the dissenting Justices.

In his opinion for the Court, in which the domestic preference tax issue and classification was raised, he made what I think is the clearest statement of what the rule of this Court has been for 75 years.

Matthew J. Zinn:

He said that in the area of taxation

“the federal right of a non-resident is the right to equal treatment. “

With that clear statement in the prior case, it seems to us understandable that the Court felt comfortable in disposing of the Reserve Life case as it did, in a per curiam opinion.

Moreover, we would point out–

Byron R. White:

–And just citing–

Matthew J. Zinn:

–Wheeling Steel versus Glander.

William H. Rehnquist:

–But if that’s the correct state of the law, then the McCarran-Ferguson Act is almost meaningless, because although you can’t… they’ve lifted the commerce, Congress has lifted the commerce clause bar to state regulation of insurance, the equal protection clause in your view kicks in and does just the same thing as the commerce clause.

Matthew J. Zinn:

We would not agree with that.

There are two major taxes that apply to the insurance industry, state taxes.

One is the domestic preference tax that’s in issue in this case.

We would agree that in this particular situation the equal protection clause would do what the commerce clause would do.

But three years ago this Court considered retaliatory taxes and it held that they passed equal protection review.

On the other hand, in that case I think it’s clear that they would not pass commerce clause review.

In fact, the Appellees conceded that.

So we would have to disagree that the tests simply coincide and that the McCarran Act doesn’t mean anything.

I want to mention again that the seventh case in the line of cases that we are relying upon was the WHYY case, which came three years after Reserve Life, and in that case as well the Court felt comfortable with a per curiam opinion, and it cited the Reserve life case along with Wheeling Steel and several of the other cases in this line.

So we don’t think there could be any question, really, that these seven cases are dead on point, and that if the Court is going to affirm the judgment below in this case it’s going to have to overrule seven of its own precedents, dating back to 1910.

Now, going again to the question of whether–

Byron R. White:

Well, even if the McCarran Act… even if the equal protection clause would make the McCarran Act irrelevant in this case, it would just do it for taxation.

The McCarran Act would still have a terrific bite in other areas.

Matthew J. Zinn:

–Absolutely, and one of the arguments that the Appellees make in this case is that they say it is more difficult to regulate out-of-state companies than it is domestic companies.

We don’t agree with that.

But even if it’s true, it doesn’t follow from that that you can tax out-of-state companies more for that reason.

There’s no relationship between the two.

Let me turn again to the Reserve life case, because I think it is very instructive.

We have in an appendix to our jurisdictional statement submitted the brief that Ohio filed in the Reserve Life case, and we have also lodged with the Clerk of this Court the transcript of the oral argument in the Reserve Life case, and we have excerpted that transcript, the relevant portions of it, in the appendix to our brief on the merits on pages 13a to 16a.

Now, in this case the court below found that one of the primary… one of the two purposes that justified domestic preference taxation in Alabama was

“encouraging the formation of domestic insurance companies in Alabama. “

That’s at page 9a of the appendix to our jurisdictional statement.

Now, on page 59a of the same appendix appears the Ohio brief, and Ohio argued that its purpose was

Matthew J. Zinn:

“to encourage the location of insurance companies in Ohio. “

–almost the same words.

And the oral argument is to the same effect.

On page 15a of the appendix to our brief on the merits, the counsel for Ohio argued that the State of Ohio had

“a desire to foster the development and creation of insurance companies within the state. “

And then at the bottom of the same page he said

“the State of Ohio, in seeking to encourage the location and development of insurance companies in the State of Ohio. “

And then finally, on the bottom of page 16a, the last page that we excerpt, counsel said the legislature of the State of Ohio intends

“to encourage the location of insurance companies in the State of Ohio. “

This case is, we submit, a replay of the Reserve life case.

The same arguments that were made by Ohio in that case were made by Alabama here.

We think it gives much too little credit to all of the Justices who heard all of these seven cases for Alabama to suggest that the purpose to encourage the location of companies in Alabama is something that nobody ever thought of in the prior seven cases.

That’s the most obvious purpose in the world.

If you give a domestic preference to a local company, of course it’s going to encourage the location of companies in your state.

And as far as the remaining purposes that Alabama relies on, the 17 purposes, those are purposes that any company, foreign or domestic, can accomplish.

There’s no inherent characteristic of a domestic company that makes it better suited to sell policies in rural areas, or to sell small policies rather than big ones, or industrial policies, or any of the other types of advantages that the state contends those companies are offering.

So the first critical point, we think, it the resolution of this case is recognition by this Court that these seven cases are right on point.

And this brings me to the second major consideration which we think should guide the decision here, and that is the concerns that we think the Court has felt in reaching its conclusions in these seven cases.

The first concern it seems to us is that we’re talking here about unlimited discrimination.

In this case we’re talking triple and quadruple taxation of out-of-state companies.

But there is no suggestion that that relationship has any bearing whatsoever to the goals that Alabama is seeking to achieve.

Now, we recognize that mathematical precision is not required under the equal protection clause.

We don’t think that total imprecision is the goal, either, and it just seems to us that these numbers have nothing to do with the goals and they’re possibly unlimited.

I think another factor that has influenced the Court in these seven cases is that out-of-state companies have no representation in the legislature of Alabama and there is no protection for them whatsoever.

Going back to Justice Jackson’s statement–

Warren E. Burger:

Do you mean, Mr. Zinn, that only domestic companies have lobbyists?

Matthew J. Zinn:

–I would suggest obviously not, Mr. Chief Justice.

But given the pattern of discrimination that we see, with 33 states having these laws, those lobbyists may have not been effective.

We find the same type of policy concept, I think, in the diversity jurisdiction, where state of incorporation and principal place of business are concerns that bear on whether diversity jurisdiction exists.

So we think that, while they may have lobbyists, obviously these statutes have persisted over a long period of time, much to the detriment of out-of-state companies.

Warren E. Burger:

You said, at least I thought I heard you say, that obviously, or generally, this type of tax would encourage companies to come into the state.

If that’s so, there must be some empirical data on the subject.

Matthew J. Zinn:

Well, the empirical data has been offered by the Appellees in this case, Mr. Chief Justice.

Our point is, even if it’s so, it is not a justification for discrimination under the equal protection clause.

Another consideration that we think is–

Warren E. Burger:

The point I was curious about is that you seem to concede that.

You think it’s not relevant?

Matthew J. Zinn:

–We think we’re entitled to summary judgment in this case, regardless of all the evidence that the State has entered through its experts.

We think that’s simply an impermissible purpose.

That purpose, as indicated previously, was obviously present in each one of those seven cases.

You couldn’t miss it, and as I indicated previously it gives too little credit to all of the Justices that sat in those cases to assume that they didn’t see that that purpose was there.

So we say, even if the evidence is there, the purpose is impermissible and the Court ought to rule as a matter of law that we’re entitled to a summary judgment in this case.

Sandra Day O’Connor:

Mr. Zinn, how about the purpose of assuring greater security in-state for Alabama residents covered by insurance?

Matthew J. Zinn:

We have no quarrel with that purpose, Justice O’Connor.

If the state said that every out-of-state company had to keep a percentage of its reserves on Alabama risks in Alabama, we couldn’t quarrel with that.

But what they’re saying is that–

Sandra Day O’Connor:

Or having certain assets within the state?

Matthew J. Zinn:


Sandra Day O’Connor:

And certainly that’s a portion of the effect of the tax scheme.

Matthew J. Zinn:

But those purposes here… the state is trying to accomplish those purposes through taxation, and what we’re saying is that that is not the proper way to accomplish them.

In the Metropolitan Casualty case–

Sandra Day O’Connor:

Well, it does seem to have a rational basis and not be an invalid purpose.

That’s all I’m saying.

Matthew J. Zinn:

–But the purpose has to relate to the particular means by which the state is seeking to accomplish its goals.

In the Metropolitan Casualty case, which involved a similar issue, Justice O’Connor, this Court in 1935 said that it was permissible for a domestic company to provide by contract for a slightly shorter statute of limitations than a foreign company… security.

That case was decided in 1935.

That was just one year after this Court had decided in 1934 in the Concordia Fire case by a vote to eight to nothing on this point that domestic preference taxation was invalid.

And in the Metropolitan Casualty case, I think that the quotation from that case most clearly explains the difference between the two:

“The ultimate test of validity”, the Court said,

“is not whether foreign corporations differ from domestics, but whether the differences between them are pertinent to the subject with respect to which the classification is made. “

Matthew J. Zinn:

When you’re talking about security and statute of limitations, it was pertinent, the Court found.

When you’re talking about taxation, it was not pertinent.

Our ultimate point here is we do not seek a free ride in Alabama or any other state.

We ask only for a chance to be equal and to be taxed equally if we contribute to the state’s goals.

If we provide rural policies, if we sell small policies, if we provide jobs in the state, if we put assets in the state, then we think we ought to be taxed the same way as domestic companies are taxed.

In 1910 when this Court first considered this issue in the Southern Railway case, it concluded that domestic preference taxation

“does violence to the federal Constitution. “

Nothing has occurred in the last 75 years to change this.

We urge, therefore, that the judgment of the Supreme Court of Alabama in this case be reversed.

Mr. Chief Justice, I’d like to reserve my remaining time for rebuttal.

Warren E. Burger:

Mr. Lightfoot.

Warren B. Lightfoot:

Mr. Chief Justice and may it please the Court:

This is a case of first impression.

This Court has never considered a discriminatory tax against foreign insurance companies in which the state has presented this Court with a record to show you the difference in benefits conferred on the citizens of that state by the domestic companies as opposed to the foreign companies.

Even in Western & Southern, as the dissent pointed out, there was no difference shown between domestic companies and foreign companies insofar as the State of California was shown.

It’s a case of first impression, but under the tests that this Court has framed repeatedly… such as, is there a legitimate state purpose, and are the means rationally related to achieving that purpose… our statute passes muster.

The foreign insurance companies say that we are discriminating here on the basis of a political difference, that is state of incorporation, and simply we are raising revenue at the expense of out-of-state corporations.

The fact is our statute discriminates on the basis of benefits to the State of Alabama.

Not only must you incorporate in the State of Alabama; you must also locate in the State of Alabama.

And if you don’t do either of those, you will have to pay a higher tax, which may be reduced by investing in assets in the State of Alabama, specified assets.

Warren E. Burger:

Doesn’t that offset the whole burden?

Warren B. Lightfoot:

No, sir, it never will, Mr. Chief Justice.

The discrimination is four to one for foreign property and casualty insurers and it’s three to one for life insurers.

It can be reduced to three to one for property and casualty and two to one for life.

It can never be the same, and the reason for that is because domestic insurers are different.

They perform a different service to Alabama and to the insureds in Alabama.

The burden we say here is on the foreign insurance companies to show the Court that every conceivable purpose that could be behind our statute and to negative those purposes.

If they fail in that burden, our statute is due to be upheld.

Even if you apply a lesser burden here and say what is the actual purpose, we submit to you that you can get the actual purpose of our statute from reading it on its face.

It encourages the formation of insurance companies in Alabama.

Warren B. Lightfoot:

It encourages investment in Alabama.

And we say those are legitimate state purposes.

This Court has said that.

This Court most recently said it in Western & Southern.

The Court said it is a legitimate state purpose to promote a local industry.

Now, the foreign insurers say you must take it one more step and say, you can promote that local industry if you do it in interstate competition.

That’s not what this Court said.

This Court said to promote a local industry.

It so happens that in Western & Southern those California insurance companies were benefited in the interstate market.

It so happens in our case the Alabama companies are benefited in their intrastate market and in their early formative years, when they need a tax shelter, we submit to this Court, and the evidence is before you that this is true.

The Western & Southern case is the test that this Court has given us, and we passed that test by looking for a legitimate state purpose… promotion of a local industry… and have we used a reasonable means to get there.

The commerce clause is designed to promote federalism.

The equal protection clause has never been an instrument of federalism.

This Court has said the equal protection clause has never been given that characteristic.

It is simply to assure equal treatment for those entities in the same classification.

So you come to the matter of classification here, and this Court has repeatedly said the states are free to classify as they see fit, especially in the area of taxation.

The states have the widest possible latitude to classify in the area of taxation.

And the burden is here on the foreign insurance companies to show you that the classification is not rational, is not reasonable.

In fact, this Court has said from time to time the burden is on them to show you that it’s palpably arbitrary, that it has no rational basis, and it’s not reasonably related to achieving the purpose that we have here.

Really, it’s a higher burden on them than that.

They’re supposed to show you that our legislature couldn’t rationally have believed that classification would accomplish the purpose.

If you assume in the abstract that promotion of local industry and encouraging investment are legitimate state purposes, with all the benefits attendant on those two goals, then you come to whether the means chosen by our legislature are rationally related to that.

And they’ve said you must incorporate, locate your principal place of business there, or else pay a higher tax, unless you reduce it by investments.

As to whether those means, those classifications, are reasonably related to achieving our purpose, we have about 120 pages of facts that have been stipulated to by the foreign insurance companies.

They say it–

Byron R. White:

Your basic purpose, though, is to benefit local industry, isn’t it?

Warren B. Lightfoot:

–That’s it, that’s the basic purpose.

Byron R. White:

And so you’re just saying that the discrimination is justified because we want to discriminate.

Warren B. Lightfoot:

We’re saying that they’re different, Justice White, that they’re different in what they do.

Byron R. White:

I know, but all you have to do is move into the state and become a resident and the discrimination ends.

Warren B. Lightfoot:

Under the facts that are before you, that are admitted by the foreign insurers, domestic insurance companies perform differently.

They sell different kinds of insurance, they sell it in different areas.

They get in the rural parts of Alabama and sell it, where the foreign companies won’t operate.

They don’t have the agents in those rural counties that the domestic ones do.

The domestic companies sell smaller policies.

They sell industrial insurance.

The system is working.

Alabama has more insurance per capita, more industrial insurance, than any state in the Union.

Byron R. White:

But you still say, we’re entitled to discriminate in favor of local companies?

Warren B. Lightfoot:

Because there is a distinction in the benefits to the State of Alabama and to the market place.

The system… we say to you the system is working.

The foreign insurance companies have a dominant share of the market in Alabama.

They have 75 percent of the life market and 87 percent of the casualty market.

So they’re doing well.

It’s not as though we were excluding them at the state line.

Maybe our tax is not accomplishing what we might like it to, but we have, as a result of the statute and as a result of this tax shelter to these young companies who cannot make it without a tax shelter, we have a healthy competitive mix.

And the marketplace benefits from having that mix of foreign insurers and a healthy domestic insurance industry.

Warren E. Burger:

Why can’t they make it without that special protection?

Warren B. Lightfoot:

It’s because of the economics of scale and because of the capital requirements, and these facts are all admitted by the foreign insurance companies.

They say it doesn’t matter, but they went on and admitted these facts.

And we’ve had a computer model run in the appendix, and it shows that a domestic company that doesn’t have this tax shelter, this advantage in its early years, probably won’t make it.

Warren E. Burger:

Are you suggesting, with reference to the industrial insurance, that because traditionally that’s not a very profitable business that the domestic companies are willing to carry that burden, but the foreign companies shy away from it?

Warren B. Lightfoot:

I think that the domestic companies can tailor their sales force and their policies to the needs of the local populace.

And I think that’s what Congress said when they passed McCarran-Ferguson.

I think they said the business of insurance is local and is suited to local regulation and taxation.

They didn’t just say regulation, of course; they said taxation and regulation.

And it is local.

The insurance industry is different, it’s unique.

It depends on getting out and serving the public.

Industrial insurance policies, as Your Honor may know, are sold by door to door solicitation and collection, and the big companies won’t do that, for one reason or another.

Warren B. Lightfoot:

Some of them do, but primarily the foreign insurance companies won’t do that.

Warren E. Burger:

Does Metropolitan no longer handle industrial insurance?

Warren B. Lightfoot:

I don’t know the answer to that.

I do know that far more industrial coverage results from our domestic companies.

That statistic is in the appendix.

Warren E. Burger:

Surely Metropolitan did at one time, if it doesn’t now, sell industrial insurance?

Warren B. Lightfoot:

I could find that statistic.

It’s in the facts, but I don’t know right now whether Metropolitan does it still or not.

What happens is this.

We have a domestic industry that’s fostered by this tax shelter and we get the payrolls that a domestic industry, that a healthy domestic industry brings.

We get the multiplier effect of those payrolls.

We get investment in the state, we get bank accounts.

All of those facts are given in this case and all of them are in the appendix.

If we see that… if we have the foreign insurers concede that insurance coverage is a good thing, we see that Alabama has far more policies per capita than the rest of the nation as a whole; that new insurance companies are being formed in the states with discriminatory statutes far more rapidly than in those states without discriminatory statutes.

There are 32 states like us in varying degrees, and this comes from the foreign insurers’ appendix.

32 states have this system in one form or another.

It discriminates.

It’s in those discriminatory statute states that insurance companies are choosing to incorporate, and it must be because of the tax shelter that’s offered.

In the last 20 years, we’ve had 500, a net gain of 500 insurance companies.

89 percent of those have chosen to locate in states with discriminatory tax statutes.

So we get the benefit of the niches of the local populace being served that would otherwise go unserved.

We get the investment in the state.

We get the payrolls and bank accounts.

And yet at the same time we can have a prospering foreign insurance industry.

They’re doing extremely well.

They just want to do better.

The last statistic bears on the reasonableness of our statute.

It’s four to one and it’s three to one, and counsel for the foreign insurers says that like it’s a terrible discrimination, and it may be.

But we submit to you it’s reasonable and rational and it’s working.

Byron R. White:

Mr. Lightfoot, what does the McCarran-Ferguson Act say?

Warren B. Lightfoot:

As I read it, Your Honor, it takes the business of insurance out from under the protection of the commerce clause.

Byron R. White:

Well, it can only do so by giving Congressional consent discriminate against interstate commerce.

It can’t by fiat say it isn’t interstate commerce, can it?

Warren B. Lightfoot:

It gave, as I understand it, the states the power to tax and regulate.

Byron R. White:

So that Congress says that in insurance it’s perfectly reasonable to discriminate against interstate commerce, didn’t it?

Isn’t that what it said?

Warren B. Lightfoot:

Yes, sir, it did say that.

Byron R. White:

And do you suggest that that kind of a Congressional policy ought to be taken into consideration in deciding whether something is reasonable under the equal protection clause?

Warren B. Lightfoot:

I think this Court has said on occasion that it would look at Congressional enactments for public policy.

I think it does state a public policy.

I think it’s evidence to you that the insurance industry is different, or at least Congress views it as different and unique.

Byron R. White:

And you think maybe the Court has just made a mistake in Reserve Life?

How about… what was the case that that case cited?

It cited what?

Warren B. Lightfoot:

It cited Wheeling Steel versus Glander.

Byron R. White:

When was that, ’46?

Warren B. Lightfoot:

Wheeling Steel was ’49.

Reserve Life against Bowers was ’59.

Byron R. White:

And that was before McCarran-Ferguson?

Warren B. Lightfoot:

That was after.

Byron R. White:


Warren B. Lightfoot:

Both of those are after.

Byron R. White:

So we made… so the Court you say really stumbled twice?

Warren B. Lightfoot:

Not at all.

No mistake was made.

The job wasn’t done.

The guidance was not given to this Court by the states.

Byron R. White:

Oh, no, no.

I think you have to be awfully blind not to see what a state is doing when it discriminates on the basis of residence.

Warren B. Lightfoot:

Residence and location.

Warren B. Lightfoot:

I would have a harder argument to make, Your Honor, if we just said, wherever you incorporate, we’ll determine your tax.

They must not only incorporate, they must locate.

We want them in there.

And I can distinguish those seven cases, and I don’t want to do it if you don’t want me to.

But the Wheeling Steel against Glander said, the purpose of our statute is to encourage reciprocity.

This Court said: You’ve given us your purpose; we don’t find it to be a legitimate one, we strike it down.

Reserve Life against Bowers, here’s what happened.

The Court of Appeals of Ohio found the tax in Ohio–

Byron R. White:

You would say that a tax law that says, we tax all non-resident insurance corporations X and all resident corporations, all insurance companies incorporated in Alabama, by half X, you would say that’s unconstitutional under the equal protection clause?

Warren B. Lightfoot:

–I would say it would be a harder case than the one I have here, because–

Byron R. White:

How would you decide it?

Warren B. Lightfoot:


Byron R. White:

You say it would be a harder case, but would it be controlled by Reserve or not?

Warren B. Lightfoot:

No, I don’t think Reserve would control that, for this reason.

The lower courts in Reserve found the statute to be non-discriminatory.

Byron R. White:

Well, would it control… would Wheeling cover it?

Warren B. Lightfoot:

Wheeling was an ad valore tax.

It was not in the insurance–

Byron R. White:

Would it or not?

Warren B. Lightfoot:

–Wheeling would not control because the statute there was to encourage reciprocity.

We don’t say that.

We say we have a valid distinct between domestic and foreign, and that you’ve got evidence before you that none of the other courts.

In the Greene case he’s talking–

William H. Rehnquist:

Well, Wheeling didn’t even involve insurance.

Warren B. Lightfoot:

–That’s right.

It was a manufacturing company and out-of-state receipts, accounts receivable, were taxed at a higher rate the out-in-state accounts receivable.

The Greene case is the first case that the like to cite.

The Greene case Court looked five times to see if there was a distinction between out-of-state railroads and in-state railroads.

Five time the Greene Court looked and five times the Court said: No distinction has been shown.

They are in the identical business.

Warren B. Lightfoot:

They perform it in precisely the same manner.

Another time they said exactly the same manner.

The Court was searching for a distinction on which a classification could be based, and it found none.

The same thing was true in the two insurance cases, Hanover Fire and Concordia.

The State of Illinois came in with discriminatory statute against insurance companies, 1926.

This Court struck it down, because it received no guidance from the State Illinois as to why a distinction existed.

Was one better than the other for the citizens of Illinois?

And this Court was not shown any difference and it struck it down.

Eight years later, he talks about Concordia.

This Court again considered Illinois, same state, and they hadn’t learned anything in the interim.

They came in and gave you a statute and they said, we discriminate against foreign companies in favor of domestic, and they gave you no reasons why.

They gave you no distinctions.

This Court said in Concordia: No distinction, no reasonable basis for such discrimination, is suggested and none is perceived.

The Court was searching for the distinctions that we have before you in this case, and this is the first time it’s been done.

This Court in Glassboro, WHHY against Glassboro, same questions came up.

They said, is there a difference in New Jersey’s relation to the decisive transaction?

Three times the Court asked in WHHY against Glassboro: Is there any distinction between the two?

It was a non-profit corporation that was taxed if it was from out-of-state and New Jersey didn’t tax its own non-profit corporations.

This Court said no distinction is shown in the benefits to the State of New Jersey.

Another time it said, no one has advanced any difference, so we find none.

They said this is not a case where a difference in benefits is shown to exist.

So Glassboro is the same thing.

Bethlehem against Flynt is another case that’s cited in their seven cases.

In that case, the North Carolina statute was held to reach too far.

It was irrational.

The North Carolina statute said an out-of-state corporation must come in and, in order to relieve itself of the tax, invest 75 percent of its assets in the State of North Carolina.

Even the Attorney General of North Carolina said that’s a futile and unworkable plan, and this Court agreed with him.

There was no rational basis shown there in what the State of North Carolina was trying to accomplish.

So we think the cases are consistent, that the cases can be reconciled.

We think the test is given in Western & Southern.

Warren B. Lightfoot:

We say you would not be departing from precedent if you uphold Alabama’s tax.

You wouldn’t be flying in the face of those seven decisions cited by the insurance companies.

The policy announced by McCarran-Ferguson was that uniformity in the taxation of insurance companies is not desirable, it’s not in the public interest.

And the legitimacy of our state statute lies partly in that uniqueness of the insurance industry and what we have, what we want to achieve.

32 states have found it a workable system.

20 of those states have come in and filed an amicus brief with you saying: Don’t change the system.

We have one, it works; don’t change it.

Various members of the insurance industry have come in.

Allstate and State Farm, two of the largest insurance companies in the world, have come in and filed as amici our side, saying: Don’t change it.

We pay that four to one when we go to Alabama.

We’re discriminated when we go into Alabama.

It’s a good system; don’t change it.

The Florida Association of Insurance Companies, the National Association of Insurance Companies has come in.

That’s 521 members.

They say it works, don’t change it.

William H. Rehnquist:

What do you mean, it works?

Warren B. Lightfoot:

The system works.

Byron R. White:

Well, what do you mean, it works?

Warren B. Lightfoot:

It works because we encourage domestic companies–

Byron R. White:

What do you mean by it works?

Warren B. Lightfoot:

–We have a healthy domestic insurance industry that serves one segment and certain types of insurance needs, and we have a very, very healthy foreign industry that serves other needs.

There is a difference, there is a distinction.

Byron R. White:

Why do you suppose the Northeastern states are against it?

Warren B. Lightfoot:

Well, as I understand it, Connecticut has the big companies incorporated in Connecticut and they tax domestics more than foreigns, and they don’t want to see… they’d like our law changed so their domestic companies can compete better.

They’re looking after their domestic carriers, too.

And I don’t blame them for coming in on that side.

32 states feel the same way we do, and 20 of them are here before you.

The Intervenors in this case, those are five domestic carriers.

Now, they’re penalized when they go outside the state in interstate commerce.

When they go outside in interstate competition, they are hurt because of retaliatory taxes.

Warren B. Lightfoot:

But they get the benefit of our taxes at the early years when they otherwise couldn’t survive.

That tax shelter enables them, when they are fledgling companies, to make it, and that’s the only way some of them can make it.

Five of those domestic carriers are here before you as Intervenors.

Thurgood Marshall:

Counsel, should I advise you that we don’t have a computer that’ll do all of that for us, who’s on what side?

Warren B. Lightfoot:

Yes, sir, I’m not trying to come up with–

Thurgood Marshall:

I just want you to know–

Warren B. Lightfoot:

–a weight of numbers.

Byron R. White:

–I don’t have one in my office.

Well, it’s getting close to the election.

We count votes.

Warren B. Lightfoot:

Well, on that point, Your Honor, the foreign insurance companies say they get taxed without representation in Alabama.

They have a lot more agents in Alabama than the domestic carriers do.

They’ve got the votes and they’ve got the lobbying.

They’re not being unrepresented down there.

Justice Marshall, the only reason I cite those statistics is to say to you that we have a reasonable system.

It’s a rational system.

If we taxed them 20 to one it would be irrational and unreasonable.

It’d be like Bethlehem against Flynt.

It wouldn’t give you that healthy competitive mix that you have in the Alabama marketplace.

Thurgood Marshall:

My only point is, I for one don’t decide cases on the number of amicus that are on one side or the other.

That’s all I’m trying to advise you of.

Warren B. Lightfoot:

Yes, sir.

And all I say on that point is, we feel it’s reasonable and we’re not alone in feeling that it’s a reasonable system, and it’s a system that’s widespread and seems to be working not only in Alabama but in other locations.

The foreign insurance companies really are asking this Court to repeal McCarran-Ferguson.

What they’re saying is use the equal protection scrutiny, which is minimal scrutiny, as this Court has said repeatedly, use that scrutiny to enhance interstate competition.

And that is not what this Court has said.

In Allied Stores against Bowers, this Court upheld an Ohio statute that discriminated against non-residents… that discriminated against residents in favor of non-residents.

And in the concurring opinion, Justice Brennan, in Allied Stores against Bowers you said the only way to reconcile this decision with Wheeling Steel against Glanders is if equal protection is used as an instrument of federalism.

And then you cited that concurring opinion in footnote 21 of Western & Southern and said that view has never been endorsed by this Court, this Court has never said that equal protection is to be used as a tool of federalism.

And that I take it is the view of this Court.

Byron R. White:

I wasn’t alone in Allied Stores, I don’t think.

Warren B. Lightfoot:


Byron R. White:

I wasn’t alone in Allied.

Warren B. Lightfoot:

In Allied Stores, I know.

Justice Harlan joined with you, I believe.

And I think this Court has drawn the distinction between equal protection scrutiny and commerce clause analysis, and this Court has never said that you intrude… that you put commerce clause analysis into an equal protection scrutiny.

To do so is to confuse the two different analyses, one being to enhance commerce interstate and the other being to ensure equal treatment for persons in the same classification.

And it’s our job to tell you that the classification here has a basis, a rational, reasonable basis, and it’s done on a distinction that’s admitted.

The classification is admittedly rational and reasonable by stipulation of the other side.

They want you to change the system, the system in Alabama that is working and that has created jobs, payrolls, and insurance coverage.

They want you to change that and give them a more dominant market share.

They want more than the 75 and the 87 percent that they presently have.

And the domestic insurance industry is asking you not to change it, and the domestic insurance carriers cannot survive unless they have a statute that aids them like this one does.

Byron R. White:

How does this aid them?

What it does is increase the costs and the premiums of the foreign insurers?

Warren B. Lightfoot:

No, I don’t think it does.

I think it gives a tax break to the–

Byron R. White:

Well, I know.

It just means that they pay less taxes than the foreign insurer.

Warren B. Lightfoot:


Byron R. White:

Well, how does that help them?

Warren B. Lightfoot:

Because in the early years they have enormous capital requirements.

The two barriers to entry are capital requirements and economies of scale.

They don’t have either one of those in those early years.

The foreign insurers do.

By the time they come into the Alabama marketplace, they’re bigger.

Byron R. White:

Well, I know.

But the foreign insurers are still going to meet the competition, aren’t they?

They’re going to have the same, have to charge the… they’re certainly not going to be undercut on their premiums.

Warren B. Lightfoot:

That’s right, and what that does is benefit the marketplace.

Byron R. White:

How does it help the local industry?

Warren B. Lightfoot:

It helps the consumer.

That fact is stipulated in the joint appendix, that you get more attractive rates by a healthy domestic industry that doesn’t have to pay that four percent and that three percent.

They can charge lower premiums and the foreign insurers have to meet that.

Byron R. White:

Well, all right, so the foreign insurers meet it.

Warren B. Lightfoot:

And the consumer–

Byron R. White:

So why can they sell any more?

Warren B. Lightfoot:

–I don’t know the answer to that, except that they’re doing very well.

Apparently they can meet it.

Byron R. White:

Well, if you don’t know the answer to it I don’t know why it’s a rational purpose.

Warren B. Lightfoot:

The answer is they are able to overcome that, that advantage.

We admittedly give an advantage to the domestic carriers, but the foreign carriers are able to overcome it and to even–

Byron R. White:

If they just meet whatever premiums the locals establish, I don’t know how the locals are benefited at all by the tax preference.

Warren B. Lightfoot:

–The consumer is benefited by having more attractive rates.

If the domestic industry can sell at cheaper rates and the foreigns have to meet that, the consumer is benefited.

Byron R. White:

So it really isn’t the domestic industry that’s being protected?

Warren B. Lightfoot:

Ultimately it’s the Alabama citizens.

Byron R. White:

We’re switching to the consumer now.

Warren B. Lightfoot:

Well, I think that’s part of the same purpose.

Obviously, if we have–

Byron R. White:

Well, the only time you talked about the consumer before was the country consumer.

Warren B. Lightfoot:

–I think all of the Alabama marketplace.

Byron R. White:

You’ve got a new argument now.

Warren B. Lightfoot:

Those are one of our 17.

We gave you 17 purposes, and part of that is the insured himself.

Byron R. White:

Well, that’s a real piano you’re playing.

Warren B. Lightfoot:

There are a number of… that’s what this Court has said, that they must play that piano and negative every one of those keys, and I think that’s the burden you’ve put on them in your previous decisions.

And I don’t think they’ve met that here, and they’ve stipulated to some facts that in fact show you the very contrary.

Thank you.

Warren E. Burger:

You have three minutes remaining, Mr. Zinn.

Matthew J. Zinn:

Mr. Chief Justice and may it please the Court:

The Reserve Life case is still the critical case here, and my brother Lightfoot has misstated the holding of that case.

He said the holding was that there was no discrimination.

I would like to quote from the opinion of the Court of Appeals of Ohio of Hamilton County at 196 Northeastern Reporter Second at page 118.

The court said:

“Accordingly, it is the opinion of the court that the taxing distinction existing between domestic and foreign insurance companies is neither an unreasonable classification of taxpayers nor can it be said to discriminate either in favor of or against the two types of insurance companies. “

In other words, there were alternative holdings in that case.

Byron R. White:

And what happened?

Matthew J. Zinn:

And this Court reversed.

Byron R. White:

Reversed, citing?

Matthew J. Zinn:

Wheeling Steel versus Glander.

Mr. Lightfoot conceded during his argument that 20 to one would be irrational.

I would call the Court’s attention to the opinion of the trial court of North Dakota, which is included on page 38a of the appendix to our jurisdictional statement, in which that trial court held unconstitutional North Dakota’s domestic preference tax statute.

There are some samples in that opinion of the magnitude of the discrimination.

On page 42a, under the North Dakota domestic preference statute a 2-1/2 percent gross premiums tax is imposed on out-of-state companies and an income tax is imposed on North Dakota companies.

In the case of Massachusetts Mutual Life Insurance Company, on page 42a, the discrimination is more than four to one.

In the case of Prudential Property & Casualty Insurance Company, it’s infinite.

In the case of Prudential Life Insurance Company, it’s more than seven to one.

In the case of Metropolitan, it’s more than seven to one.

The Oklahoma statute is very instructive also.

That statute imposes a four percent gross premiums tax on out-of-state companies and a four percent income tax–

Byron R. White:

Mr. Zinn, it may be… let’s assume you’re right about Reserve Life.

But I take it your colleague on the other side is at least implicitly saying that, whatever Reserve might be, whatever it might mean, it should be disregarded in this case.

What do you say about the argument that the McCarran Act is a statement of Congressional purpose that a state may disregard the commerce clause and including that it can discriminate, despite the commerce clause it can discriminate, against insurance companies?

Matthew J. Zinn:

–Well, I think the Court dealt precisely with that issue in the Western & Southern case, Justice White.

It said that the McCarran Act lifted commerce clause restraints, but it did not lift equal protection restraints.

And we rely solely on–

Byron R. White:

Well, that’s true, but I’m asking you why you wouldn’t take into consideration the Congressional policy in determining whether something is reasonable under the equal protection clause?

Matthew J. Zinn:

–In the legislative history of the McCarran Act, Congress specifically stated… and this was quoted in Justice Brennan’s opinion in Western & Southern… that all other constitutional provisions were to continue unaffected–

Well, I agree.

Matthew J. Zinn:

–by the–

Byron R. White:

Nobody says that the equal protection clause was lifted by the McCarran Act.

I’m just asking you, why shouldn’t you consider that Congressional policy in deciding whether there’s a rational purpose in this case?

Matthew J. Zinn:

–Because, as we indicated before, it may be–

Byron R. White:

It’s true, the Court has decided otherwise in the past, but I’m still asking you that question.

Matthew J. Zinn:

–I guess the reasons are, anything goes if you say that.

There is no protection for out-of-state companies.

It’s limitless discrimination and I think this Court has never been prepared to countenance that.

Mr. Chief Justice, Metropolitan still does handle industrial insurance and it’s one of its most profitable lines.

Warren E. Burger:

Thank you, gentlemen.

The case is submitted–

Harry A. Blackmun:

Mr. Zinn, a long time ago when I was a youngster, Metropolitan would have small insurance, life insurance policies, ten cents a week.

And the collector would go about picking that dime up.

Do they still sell that kind of thing?

Matthew J. Zinn:

They still do, and all they want is the opportunity to do that in Alabama on an equal basis with Alabama companies.

Warren E. Burger:

–Thank you, gentlemen.

The case is submitted.