Phillips Petroleum Company v. Shutts

PETITIONER:Phillips Petroleum Company
RESPONDENT:Shutts
LOCATION:New Mexico State Police Headquarters

DOCKET NO.: 84-233
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: Kansas Supreme Court

CITATION: 472 US 797 (1985)
ARGUED: Feb 25, 1985
DECIDED: Jun 26, 1985

ADVOCATES:
Arthur R. Miller – on behalf of the petitioner
Joel I. Klein – on behalf of the respondent

Facts of the case

Question

Audio Transcription for Oral Argument – February 25, 1985 in Phillips Petroleum Company v. Shutts

Warren E. Burger:

We will hear arguments next in Phillips Petroleum Company against Shutts, et al.–

Mr. Miller.

Arthur R. Miller:

Thank you, Mr. Chief Justice, and may it please the Court.

The two issues in this case are, first, whether the state of Kansas, consistent with the notions of individual liberty and interstate federalism imbedded in the due process clause and the full faith and credit clause may assert jurisdiction and enter a binding judgment affecting thousands of non-residents of Kansas who have had no contacts with Kansas and whose oil and gas royalty interest claims have absolutely nothing to do with Kansas and when there is no legitimate public policy of Kansas implicated in the action, and second, whether Kansas can indiscriminately apply Kansas law to each and every one of these claims.

The petitioner asserts that the answer to both of these questions is in the negative.

In an unbroken line of cases starting with International Shoe and moving through Hanson and Denckla, and most recently further articulated in the Woodson case, for 40 years this Court has established a constitutional requirement that minimum contacts must exist between a party and a state before that state can assert jurisdiction over that party, that there must be a relationship among the defendant, the forum, and the litigation, to use language from those cases.

As fully articulated in Justice White’s opinion in the Woodson case, that minimum contact standard serves as a principal, realistic, and flexible instrument protecting two values.

First is the liberty interest of the individual not to be subjected to litigation in a forum with which he or she has not voluntarily affiliated.

The second objective of the minimum contacts test is to limit the authority of each state within the context of the federal system.

That means that I as a citizen of Massachusetts, and Mr. Kubbich of Phillips Petroleum as a citizen of Oklahoma, has an individual liberty interest not to be burdened, not to be affected, not to have his property rights or personal rights affected by a state that he has not affiliated with.

Byron R. White:

So this would just… your submission is that that is just a limit on plaintiff class actions?

Arthur R. Miller:

Our position, Justice White, is that although those cases which I have described do speak in terms of the defendant, because the party to be affected in those cases were defendants, that that same principle must be applied to non-resident class members.

Byron R. White:

And it isn’t enough just to give them an option to opt-out?

Arthur R. Miller:

Absolutely not.

This Court has said several times that a cause of action is a property right.

It has said that in the Zimmerman case.

It has said it in effect in the Mullane case.

It has said it in Boddie.

It has said it in Rogers.

In a sense it has said it in the Dunleavy case many, many years ago, that there really is no difference between my being held liable for $10 and my claim of $10 being foreclosed by the judicial action of the state of Kansas, that I have an individual liberty interest unless I have affiliated with Kansas.

I have a constitutional right to have my property, my claims, my liabilities adjudicated by the sovereignty of my state–

So a plaintiff class has… the Constitution requires the plaintiff’s class to be limited to those who have some realistic connection with the forum state?

Arthur R. Miller:

–Well, those members of the plaintiff’s class who have voluntarily affiliated by some affirmative act.

Right, like the named plaintiffs.

Arthur R. Miller:

Like the named plaintiffs or anyone from any state who would wish to join the named plaintiffs in that action.

Sandra Day O’Connor:

You would require an opt-in procedure in effect?

Arthur R. Miller:

We would require, and I believe the constitution requires that there be an affirmative act taken by the non-resident to show a willingness to subject himself to the forum.

Sandra Day O’Connor:

Even if you are right, I am concerned about the standing of your client to raise that question for one of the 28,000 some odd people who apparently have not come forward to object.

Arthur R. Miller:

We base our standing on cases going back to Hansen and Denckla in which a defendant from Florida was permitted by this Court to assert on behalf of an absent trustee the non-jurisdiction of the state of Florida over that Delaware trustee.

In that situation, this Court said that those Floridians had a direct, substantial personal interest in the outcome of that jurisdictional question, in part, of course, because the Delaware trustee was declared by Florida law to be indispensable.

Arthur R. Miller:

We believe that the non-resident, non-volitional plaintiff class members are also indispensable parties to their own claims, just as that Delaware trust was indispensable in the Hansen case.

Well, if these non-residents are proper parties, you may have to pay them.

That sounds like a piece of standing, doesn’t it?

Arthur R. Miller:

Well, our standing, I believe, is predicated on our own personal interest in this case.

We have been subjected in Kansas to a lawsuit and the judgment now in favor of 28,100 plaintiffs.

There are only somewhere between 500 and 1,000 Kansas or Kansas leased plaintiffs that would satisfy any of the due process standards.

Well, I suppose even now if all the parties were notified that the Phillips attorney is making an argument that you people shouldn’t be entitled to share, but please write us a letter now and we will give you some money, I suppose even at this late date thee could be some opt-ins, couldn’t there?

Arthur R. Miller:

If you believe that each of the non-resident class members has a constitutional right to make up his own mind as to whether his piece of property is to be put on the litigation chessboard, then it seems to me that if, to go back to Justice O’Connor’s reference to the opt-in class, if Kansas wishes to expand its class action power, then its invitation to non-residents, its invitation to those with whom it has no constitutional affiliation, must come at a moment in time that is meaningful.

If one looks at the class action statute of Kansas, which is virtually but not completely identical to Federal Rule 23, you discover that the notice provided for and the opt-out right and the representation provided for by the Kansas class action statute comes after certification, which we submit is not a rational time at which the non-resident class member can exercise his right to participate or not participate.

This case is a classic illustration of that, because three years went by between the institution of the action and the notice to the absent class members.

Justice O’Connor asked about our standing.

Well, we were the only game in town.

You cannot expect the class representative to assert the lack of jurisdiction over 28,000 of his troops.

That is unrealistic.

You cannot expect the non-resident class members to assert the jurisdiction issue between institution and notice.

They have no notice of the case.

We were obliged under the normal rules of assertion of threshold defenses to make the jurisdictional objection prior to answer and litigate it, as we did, in a fully adversarial context.

I don’t think there can be any doubt about the completeness of this issue or the zealotry with which we have pursued this issue.

We were forced to assert it when there literally was no one else who would assert it.

William H. Rehnquist:

As a matter of practicality, we really don’t have much reason to think that these 28,000 people who have been kind of handed a percentage of a recovery on a silver platter are going to have much squawk about it.

Arthur R. Miller:

If one views life with 20/20 hindsight, Justice Rehnquist, if you ask me or any rational person, would you prefer to have a check for $10 or not to have a check for $10, I assume I would take the $10 every time.

But you cannot construct a principle about state court jurisdiction and the legitimacy of Kansas powers with the assumption that the class will always win.

If the class losses, then you have the potential that the party in the Phillips position then prevents action to by another member of the class, a non-resident, and seeks to bind that person by virtue of res judicata.

Warren E. Burger:

On this record, would we be able to determine in how many jurisdictions these 23,000 people are scattered, if each category in each state was to bring a suit in its own state–

Arthur R. Miller:

The record–

Warren E. Burger:

–in their own state.

Arthur R. Miller:

–Excuse me, Mr. Chief Justice.

The record is clear that there are eleven gas states involved, and that there are class members from each and every state in the Union.

Warren E. Burger:

There must be more, too.

Every state in the Union.

Arthur R. Miller:

Every state in the Union is represented by a royalty owner, as well as some foreign countries.

Now, one thing should be, I think, very clear.

Phillips is not arguing that there cannot be a national class action in a state court.

There typically is at least one jurisdiction with the necessary Shoe, Denckla, Woodson contacts to provide a forum.

To be sure, the restriction of the forum to a state that would have the requisite minimum contacts with each and every member of the class might reduce the forum shopping capacity of the plaintiff’s attorney, but, for example, in this context we believe that quite possibly Oklahoma is such a forum.

Second–

John Paul Stevens:

May I stop you right there for a moment?

I must have misunderstood your brief, because I thought most of your arguments would apply even if you had 90 percent of your class in Kansas and your 10 percent were non-residents.

Isn’t there the same problem for those 10 percent as to the fairness to them of being bound?

Arthur R. Miller:

–Justice Stevens, I think that is right.

If you have a member of the class who is unaffiliated in the due process sense, that individual cannot be bound by the forum state absent his or her voluntary participation by using an appropriately crafted–

John Paul Stevens:

So that your first submission, then, putting aside the choice of… your first submission, as I understand it, is that unless you have an opt-in procedure or some equivalent, you may not have a class that includes non-residents.

Arthur R. Miller:

–You may not have a class that will include unaffiliated class members.

I do not–

John Paul Stevens:

By that you mean persons who are not residents of the forum state?

Arthur R. Miller:

–Persons who have not manifested consent.

John Paul Stevens:

Right.

Arthur R. Miller:

Persons who do not have voluntary affiliation.

Persons who do not–

John Paul Stevens:

To sum up, you either have to opt-in or be a resident to be a class member.

Arthur R. Miller:

–You either would have to opt-in or be a resident or by some circumstance of fact have voluntarily affiliated by the nature of your transaction.

John Paul Stevens:

And it would not be enough that you received an adequate notice and you did not respond to it.

Arthur R. Miller:

No.

Understand that–

John Paul Stevens:

That would be enough, if I understand your submission, for a resident.

Arthur R. Miller:

–It would be enough for a resident.

It would be enough for a consenting plaintiff.

It would be enough, for example, if the non-resident class member had a lease, let’s say, a gas lease in that state.

Irl Shutts is a perfect illustration.

He is a Kansan, but his gas royalty interests are in Texas and Oklahoma.

Arthur R. Miller:

Texas and Oklahoma could assert jurisdiction over him because he has voluntarily affiliated in the due process sense with that state.

Why do you suggest that Oklahoma might be able to… a forum for this entire class?

Because that is the… just because Phillips has its main office there?

Arthur R. Miller:

Phillips has its main office there, first of all.

Second–

Why would that affect the connections of the plaintiffs with the–

Arthur R. Miller:

–Conceivably, and perhaps your own opinion in the Woodson case suggests perhaps not.

The flow of transactions between Phillips and the oil royalty owners, over the years the payments of royalties, the locus of the lease transactions, many of which would be in Oklahoma.

But even in a situation in which there were no such single forum, the fact remains that at most, you might have state-based class actions in a few states, depending on what their circumference of jurisdictional reach would be.

It is quite possible, and again, I think the choice of law issue has tremendous bearing on this–

–You are going to argue that, I take it.

Arthur R. Miller:

–I would hope so, Your Honor.

It is quite possible that you wouldn’t have precisely the same efficiency of a single nationally based class.

You might have to have two, three, four regionally based classes, but certainly efficiency cannot be the be-all and end-all of this.

It would be efficient, for example, if a court like Kansas, which has a party rule structure just like the federal rules, it would be efficient to be able to assert jurisdiction over a third party defendant, to assert jurisdiction over a third party to a counterclaim or a cross-claim, to assert jurisdiction over a necessary or indispensable party, a Rule 19 party.

I don’t think anyone would ever argue that there is ancillary jurisdiction over these non-parties just because the party structure of the federal rules or the rules of Kansas permitted a procedural device to be used to expand the scope of the action.

So, I am mystified as to why through the simple device of saying this is a class action that suddenly the state of Kansas has broader geographic, broader due process reach than the state of Kansas would have over a necessary or indispensable party, over a third party claim, or over an additional party to a compulsory counterclaim or to a cross-claim.

No one has ever advanced that proposition in the name of efficiency and economy.

The problem is that the modern class action, based solely on common questions… that is all we have in this case; this isn’t a joint interest, it is not a common interest, it is at best a common question class action… seems to be operating in a way that sweeps aside individual liberty interests, sovereignty problems of interstate federalism, and to turn to the choice of law issue, the question of governing law.

On that issue, it seems to me one need only read Allstate Insurance Company versus Hague.

This case seems to me to violate totally the plurality opinion in that case.

What is required is a significant contact, Requirement Number One, creating state interests, Requirement Number Two, so that it is neither arbitrary nor fundamentally unfair to apply forum law, Requirement Number Three.

Petitioner submits that the application of Kansas law across the board in this class action violates each and every one of those three requirements.

There is no contact.

The only contact this case has when viewed through the eyes of the non-resident class members is the fact that Phillips does business in Kansas.

But when you look at a transaction between Phillips, the Oklahoma company, and an Oklahoma royalty owner involving gas in the ground in Oklahoma–

John Paul Stevens:

May I interrupt for just a second on that question?

Supposing we didn’t have a class action now, and are just focusing on choice of law, and somebody in Alaska sued your client, presumably got jurisdiction in Kansas, because you do business there.

Would you have the same forceful constitutional arguments to applying Kansas law in that lawsuit?

Arthur R. Miller:

–Justice Stevens, that is this case.

Arthur R. Miller:

Betty… the Andersons, they are Oklahomans.

They are Oklahomans with gas interests in Oklahoma.

They have traveled to Kansas to sue Phillips.

We submit–

John Paul Stevens:

And say the Kansas Supreme Court makes an erroneous choice of law decision.

Clearly under all principles of choice of law they should have applied Oklahoma law instead of Kansas.

Have we ever reversed a state court for making that kind of an error?

Arthur R. Miller:

–The closest case would be the Yates case and the Dick case, admittedly older cases.

John Paul Stevens:

Does this give us general review of all choice of law decisions?

Arthur R. Miller:

No, I would submit that if you simply apply the tripartite standard that this Court recently announced in the Hague case, that is a legitimate and reasonable limitation on state court choice of law.

You need go no further.

With great deference, Justice Stevens, I think if we applied the test espoused in your concurring opinion in that case, one would be hard pressed to see what conceivable interest the state of Kansas has in applying its law to a transaction about Oklahoma gas between Oklahomans and a company whose principal base is in Oklahoma.

John Paul Stevens:

May I ask also, because it helps me focus on the issue, on what particular issues of law do you think it was most outrageous for them to do what they did?

Arthur R. Miller:

There are several, Your Honor.

First, when you look at the structure of Shutts II, and it is very important to understand that Shutts II and Shutts I are two entirely different cases, they are not the same case in a later manifestation, you see that what the state of Kansas did without citing Hague is literally say, we have jurisdiction here, and absent compelling reasons, we are going to apply Kansas law across the board.

And then, in what might be called all fruits are apples approach, the state of Kansas said all of these contracts are the same.

The truth of the matter is, all the contracts are not the same.

Some of the contracts that Phillips has, particularly with producers as opposed to royalty owners, are no interest contracts that do not call for payment until the end of the suspense royalty period, and explicitly say no interest.

We know from the Supreme Court of Texas in a post-Shutts I, pre-Shutts II opinion that the state of Texas would enforce that contract.

The state of Kansas chose to ignore that in favor of Kansas’s perception of what is fair.

Second, the official statutory interest rates in the other states, particularly Texas, the most dominant state, Oklahoma, Louisiana, New Mexico, Wyoming, range between 6 and 7 percent.

The state of Kansas chose to use what is called the FERC rate.

That is a rate that applies between the interstate pipeline companies and a producer like Phillips.

It has absolutely nothing to do with royalty owners.

Absolutely nothing.

Kansas said its notions of fairness, favoring the royalty owners, caused the application of the FERC rate under Kansas law which averages 11 to 13 percent, whereas we know from the Stahl case that the state of Texas would have applied its statutory 6 percent rate.

In short, there was a complete absence of any inquiry as to what the other state laws were.

Byron R. White:

Mr. Miller, could I interject here?

Do you understand your opponents to suggest that the federal law should govern in this case?

Arthur R. Miller:

I would not go that far, Justice White.

Arthur R. Miller:

I think they view it as a sort of a brooding omnipresence, an influence, and the fault with that is that the relationship between royalty owners and gas producers is state-based, whereas the so-called FERC rate regulates the relationship between the gas sellers and the interstate pipelines.

In any event, there were no arguments in the courts below in any of these cases that federal law should govern?

Arthur R. Miller:

No, absolutely none.

I do not believe there is a problem here of–

Preemption.

Arthur R. Miller:

–preemption or federal common law or anything of that kind.

Thank you.

Arthur R. Miller:

We have tried to indicate, Justice Stevens, in our reply brief that we are not talking about harmless error here.

At the moment, the interest liability imposed on Phillips is approximately $6.5 million.

We estimate that the application of the applicable statutory interest rates of the other states and the recognition as Texas would recognize the no-interest contracts would reduce that $6.5 million liability to something under $2 million, perhaps as low as $1 million.

So, I think it is fair to say that Phillips feels aggrieved by the indiscriminate application of Kansas law to transactions that are not transitory the way the national risk coverage in Allstate was.

This is gas in the ground.

This is a contract about gas in the ground, being Oklahoma, or in Texas.

It is not a national risk.

I would like to reserve the remainder of my time.

Warren E. Burger:

Mr. Klein.

Joel I. Klein:

Mr. Chief Justice, and may it please the Court, the standing issue in this case is not merely whether Phillips may raise the constitutional rights of others, but whether Phillips may raise the rights of absent class members to defeat a recovery in their favor that was obtained against Phillips.

Sandra Day O’Connor:

Mr. Klein, did the respondents challenge petitioners’ standing to raise this question over non-resident plaintiffs in the Kansas courts?

Joel I. Klein:

Yes, we did, Your Honor.

We challenged that in the Kansas courts.

Sandra Day O’Connor:

And did the Kansas courts nevertheless reach and resolve the jurisdiction question?

Joel I. Klein:

The Kansas courts did reach and resolve the jurisdictional question.

Sandra Day O’Connor:

Well, is that sufficient, then, for us to exercise discretion to reach it under Craig versus Boren?

Joel I. Klein:

Absolutely not, Your Honor.

This Court has made clear that state court determinations of standing do not confer a jurisdiction in this Court.

It made clear in Tileston, and of course the term before last in Massachusetts General Hospital and the City of Revere case the Court said that state courts are not bound by the limitations on standing that this Court is bound by.

And of course this Court always assesses its jurisdiction, and this standing doctrine is a part of its jurisdiction independently, and that is, no matter what the state court does, it applies federal principles here.

Sandra Day O’Connor:

And you think this Court doesn’t even have discretion to reach the issue?

Joel I. Klein:

I do not think… on established case law it doesn’t, Your Honor, and I think the reason is that no case has ever gone in this direction.

Let me make something clear.

Joel I. Klein:

It is somewhat confused by the argument we have just heard.

There is only one constitutional right at issue here.

That is the right of the action class member to object to jurisdiction in Kansas.

Now, when a case comes to this Court, that class member has received a complete recovery against Phillips, and here is what Phillips is saying to him.

We are going to take your right, we are going to take it to the Supreme Court, we are going to protect your right, and the result of it is, we take away your recovery.

William H. Rehnquist:

Well, Mr. Miller’s argument is that that isn’t always going to happen, and in a case where the defendant prevails, there may be some problems with the absent plaintiff.

Joel I. Klein:

There may be, Your Honor, and in that case I assume we may hear from them.

They will press their own rights then.

William H. Rehnquist:

But how do you decide this sort of an issue when the time comes for a motion to certify at the beginning of the case in the state court?

Joel I. Klein:

Well, at the beginning of the case in the state court, in Kansas as in the federal court, all parties have a right to raise the issue.

But it is entirely different after judgment, and that is true, Justice Rehnquist, with respect to a defendant.

Let me give you an example.

A defendant comes into court.

He makes a special appearance and contests jurisdiction.

The court rules he has jurisdiction.

They proceed to the merits.

The defendant wins on the merits.

The plaintiff can’t appeal and say we wouldn’t have had jurisdiction.

Once there is a judgment, the equation changes.

Now, Phillips says in this Court, it says we have suffered injury.

That satisfies the case in controversy requirement.

But this Court has made clear time and again injury alone is not sufficient to invoke jurisdiction.

Everybody up here seeking a reverse of judgment has suffered injury.

That is by definition the case.

In order to reverse the judgment, you have to invoke your rights, or in limited circumstances the rights of an allied party, such as when the Court has said a doctor can use a patient’s rights, but never, in no case, and Phillips cites none, has the Court suggested that a party could raise his adversary’s rights.

So you say that even though the defendant prevailed on the merits in this case, the defendant either before or after judgment can never raise the rights of an absent plaintiff.

Joel I. Klein:

The defendant can raise them at the outset of litigation.

That is what Kansas law allows them, Your Honor, and I think if you read the federal rules, the federal courts allow that.

But it is an entirely different matter, it must be, once the person has a judgment, to say you are going to raise his rights.

Anybody can raise a right and then waive it later.

Joel I. Klein:

That is the nature of the right, and that is effectively what is going on here.

John Paul Stevens:

Are you conceding, Mr. Klein, that before judgment they did have standing to say it is unfair for you to sue me when I couldn’t get a binding judgment against you?

Joel I. Klein:

I am conceding that under Kansas law, that is–

John Paul Stevens:

No, as a matter of constitutional law.

Joel I. Klein:

–Not as a matter of constitutional law.

John Paul Stevens:

Article III standing, isn’t it… don’t I have the right to argue it is unfair to me for you to be suing me when I can’t get a binding judgment if I win?

That is basically their argument, as I understand it.

Joel I. Klein:

Their argument is that–

John Paul Stevens:

They could not get a binding judgment against the absent plaintiffs even if they win on the merits.

Joel I. Klein:

–But they have no constitutional right.

They will get a binding judgment in this case.

Their right is protected, Justice Stevens.

As soon as each class member receives his judgment, they will have a binding–

John Paul Stevens:

Now that you have won, but in advance of the decision on the merits, their position, as I understand it, is, it ought to be a two-way street.

If you win, you will pay, but if you lose, they ought to be protected by res judicata against relitigation.

Joel I. Klein:

–No, but that… it is not a two-way street once we have won, Your Honor, because they are taking my rights.

That is the basic Parklane versus Shore.

The two-way street argument is basically a mutuality argument.

William H. Rehnquist:

But that is certainly their argument.

Joel I. Klein:

But their argument is wrong.

William H. Rehnquist:

Well, I don’t happen to agree with you.

Sandra Day O’Connor:

And, Mr. Klein, is it a matter of Article III standing or prudential standing?

Joel I. Klein:

Well, I think the Court has confused those concepts, Your Honor, but I think it is a matter that is, in some cases the Court refers to the right to invoke others’ rights as Article III standing, such as in Warth, and in other cases they refer to it as prudential standing.

Sandra Day O’Connor:

Well, it would seem here within the meaning of Article III standing that there is a case or controversy, and you have someone who is well able to litigate the issue, and that it is more a matter of prudential standing if there is a problem at all.

Joel I. Klein:

But, Justice O’Connor, when you say well able to litigate the issue, mind you, they have a directly antagonistic interest to the rights of the party they are trying to protect.

Just in thinking about this, we would not normally suppose that the right person to stand before the Court and protect the rights of absent class members was its adversary.

And the reason we have this doctrine, the whole doctrine was created, which is a jurisdictional limitation, as this Court has made clear, on the Court’s activity, the reasons we have it are two.

One, because the party is usually the best proponent.

In this case, we can assume that Phillips is the worst proponent.

They have an antagonistic interest.

Joel I. Klein:

And second, and the Court says this opinion after opinion, a party may in fact, who enjoys the rights, a party may want to waive those rights.

He is entirely free, and he doesn’t have to either waive them at the outset or never again.

Now, when a party comes to this Court with a judgment in its favor, can we simply assume, I submit, that that party would waive the rights?

They are his rights.

They are not Phillips’ rights.

He says, no, I have no interest in pursuing it.

Now, there will be a case, there will be a case before this Court where an absent class member will assert his own rights.

That has happened in more than half a dozen cases.

When you have that case, you have a real case.

You have the party saying my rights were violated.

The judgment should not bar me.

On the other hand, you have a defendant protecting his judgment, saying, no, your rights weren’t violated, you should be included.

That’s the way this issue should be framed.

William H. Rehnquist:

But that takes two lawsuits to litigate, doesn’t it?

You are saying the defendant can lose its rights in just one lawsuit, but it has to prevail in two lawsuits in order to establish res judicata.

Joel I. Klein:

Not necessarily.

In many cases class members will intervene if they–

William H. Rehnquist:

But let’s ones who don’t intervene and simply–

Joel I. Klein:

–Your Honor, ever case makes clear when you have a situation of an absent party it will always take two lawsuits to resolve the issue of res judicata.

Let me suggest even if this Court today rules for Phillips, that will not be res judicata for the absent class member.

It will be stare decisis.

But the absent class member cannot be precluded in the first litigation.

That is clear in this Court’s cases.

Sandra Day O’Connor:

–How about if there were an opt-in procedure required as a matter of–

Joel I. Klein:

Well, that is simply the question of the merits, whether opt-in would bind him or not.

What I am saying is, they don’t have the standing to raise the claim.

Sandra Day O’Connor:

–Well, I understand that, but if they did, and if it were resolved that opt-in was required, I suppose then you end up with a res judicata situation.

Joel I. Klein:

Well, but if it is resolved as we submit, now that we turn to the merits, Justice O’Connor, if it is resolved that opt-out is sufficient, they will be bound, and we frankly think they are bound.

We don’t think somebody who stays out of a litigation with an opt-out opportunity and then comes in years later and says I wasn’t bound is going to have a very good claim.

But let’s turn to the merits, because I think this shows–

Sandra Day O’Connor:

Well, how about the opt-out person, member of the class who in fact never got the notice?

Joel I. Klein:

–In this case that didn’t occur.

Anyone to whom notice wasn’t delivered, Justice O’Connor, they were struck from the class, so it had to be people who received notice.

But even these questions show why this case is a bad vehicle to resolve it.

There are questions about, what about if you didn’t get the notice?

Suppose he got it late.

How about counterclaims?

How about court costs?

All of those matters are not in this case.

We have to conjecture about them.

None of them were presented.

If we have a case from a class member, we will hear exactly what the graveman of his complaint is.

And it is clear that this Court doesn’t decide cases on conjecture, and that is what Phillips is asking you do to, especially when you have a party who wants a conjecture in the wrong direction.

So let me turn to the merits, because again, the rule here is to protect the absent class member, not to protect Phillips, but I think you look at the rule that Phillips espouses, you will see that in the name of the absent class members Phillips is shielding itself from litigation.

Now, the Kansas courts provided all class members with the following protections.

First, adequate representation through the named plaintiffs and their counsel.

Second, first class mail notice that had to be delivered describing the action.

Third, a right to participate in person or through that person’s counsel.

And fourth, a right to opt-out simply by signing a form included with the notice and sending it to the Court.

Predictably, Phillips argues that that is enough.

It says there must also be a showing of minimum contacts between the non-resident class member in the forum.

Phillips reaches this conclusion, we submit, by ignoring significant and almost obvious differences between plaintiff class members and defendants, differences that we believe justify a different constitutional due process approach to protecting the rights of both groups.

Now, a defendant, of course, rarely wants to be in court at all, and certainly we know, we take it as a given that when he is opposing jurisdiction, he doesn’t want to be in that court.

If he did, and Phillips neglects this with its interstate federalism argument, and it neglects the Court’s holding in Insurance Company versus Ireland, if the defendant wants to be in a court, he is free to come in at any time irrespective of the federalism arguments.

Now, starting from that premise… you have to realize every minimum contacts case so far has started from the premise that the party doesn’t want to be in court.

When you start from that premise, what the Court has said, there are limits as to which courts we can require him to litigate in.

Now, let’s turn to a plaintiff class member.

A plaintiff class member doesn’t face the exposure that a defendant faces.

He has not made an objection.

Instead, the fact is, a class member has a claim that he wants asserted.

Joel I. Klein:

He wants to have it heard.

What is the problem?

The problem is, when the small claimant has a claim, the costs of litigation are so high that he is prohibited, in effect, from asserting his claim.

Now, as this Court has recognized in Deposit Guaranty versus Roper and elsewhere, the class action is designed to overcome that hurdle, to facilitate the plaintiff’s access to court.

Thus the class action, in contrast to what a defendant faces when he goes into court, the plaintiff faces no risk and no cost unless he prevails, in which case a portion of his fee is paid for the attorneys.

Now, given that circumstance, the plaintiff’s circumstance, it is impossible, we submit, that a minimum contacts requirement could protect him.

Rather, what it will do is limited the potential forums that he can have his claim heard in, and he will be in a different position from the other plaintiffs in cases like Keeton versus Hustler who, because they have large claims, can go to their forums.

Now, in the present case, for example, Phillips says, and we agree, that most of these class members would not meet the minimum contacts test in Kansas.

As a result, their claim in the name of protecting their rights would have been barred from this case.

Now, it may be that there would have been other cases filed.

It may be we can speculate that because Phillips is in Oklahoma, sort of, that would be okay.

All of that is speculation.

The fact is that the large majority of these people would have been denied their day in court.

Now, Phillips says, and we agree, a class member may have an interest in not involuntarily being brought into a particular class.

The reason he might have that interest is, he might want to assert a claim on his own.

Or he might want to join another class action, or for whatever reason.

But Kansas recognizes that interest.

It provides an opt-out procedure that is clear and easy.

Once again, Phillips says the opt-out procedure is not adequate.

It instead would require an opt-in procedure.

Unfortunately, the large body of scholarly and judicial opinion that has looked at the area has decided almost unanimously that an opt-out procedure better protects the class members than an opt-in procedure.

Thus, the federal rules and virtually every state court’s rules require an opt-out procedure.

They do so not to harm the absent class member but to help him.

Judge Kaplan, then Professor Kaplan, who is a recorder for the rules, he explained the way this came about.

He said, we have to be especially concerned about the relatively small claimant.

He said, this is somebody, if he is not included in the class, is likely to have no opportunity to have his claim heard.

He said nevertheless a small claimant is often unsophisticated, and as a result of what he called timidity or ignorance or unsophistication about business or legal matters, might decline to execute an opt-in forum, but that person should be protected in the class, and yet it is that person in the name of protecting his rights that Phillips would knock out from this class action altogether.

And Phillips would then suggest to the Court, well, the solution is that there be a few others, or maybe one other, or there be one with an opt-in provision, but if there is an opt-in provision, and Professor Kaplan and everybody else who has looked at the matter is right, then that opt-in provision won’t protect people, and whether or not there will be other actions we have no idea.

William H. Rehnquist:

You say it won’t protect people.

It will certainly protect them from having jurisdiction exercised over their claim contrary to their wishes.

Joel I. Klein:

An opt-out provision protects that, too, Justice Rehnquist.

William H. Rehnquist:

What is it about the opt-in provision that you say doesn’t protect–

Joel I. Klein:

The exact reason that it was chosen, and that is, there are some people, small claimants who really as a matter of unsophistication may not check the box, but these are people who every state’s rules, virtually every state’s, protect by including them in the case.

William H. Rehnquist:

–But how does it protect them to include them?

Joel I. Klein:

Because it gives them a chance to have their claim adjudicated.

They can lose nothing.

They have a claim.

It gives them a chance to be included in the class.

There can be no harm to them.

They lose, it costs them nothing.

But this really gives them the benefit of the process.

William H. Rehnquist:

Well, you know, they could lose several things, I suppose.

You know, they might have a claim adjudicated in a jurisdiction they didn’t want to.

They might have it adjudicated by a poor lawyer, that sort of thing.

Joel I. Klein:

Well, that is true, but, Justice Rehnquist, it assumes that there would be other cases out there.

These are small claimants.

They are not going to be able to bring their own case.

That is why they choose opt-out.

William H. Rehnquist:

What is the typical size of the claim?

Joel I. Klein:

In this case?

William H. Rehnquist:

Yes.

Joel I. Klein:

A hundred dollars.

William H. Rehnquist:

A hundred dollars?

Joel I. Klein:

A hundred dollars.

Right.

So these are not people… and it is to protect their interests that you have an opt-out rule.

That is why everyone does it.

I mean, is it conceivable–

William H. Rehnquist:

I can see how an opt-out rule gets you a lot more plaintiffs.

I can’t see how it necessarily “protects” the absent plaintiffs the way you are talking about.

Joel I. Klein:

–It protects them by facilitating the chance for them to have their claim litigated, people who would otherwise not execute the form and therefore never get a chance to have their claim, these people in this case.

They are not going to get their own lawyer.

There were not other class actions out there.

So it protects them in that it gives them a fair shot to have their claim litigated.

Now, if I might in the time remaining, I would like to address the choice of law issue that has been raised here.

Now, Phillips objects to the choice of law by the Kansas Supreme Court on the grounds that its application to the claims of the non-resident class members violated the principles set forth in this Court’s decision in Allstate versus Hague.

Now, in Allstate, the Court made clear that in deciding whether a state may apply its law to a dispute, it does not matter that another state might have an interest or even a greater interest in that dispute.

As the Court said, the forum court is allowed to apply its law when it has a significant contact or contacts creating state interests such that, and this is the important part, such that the application of its law is neither arbitrary nor fundamentally unfair.

Now, to clarify our position and to state it briefly, Kansas’s contact with Phillips is constitutionally sufficient in the circumstances of this case, especially in light of the fact that the law it chose to apply was by no means parochial, but rather was borrowed directly from a federal regulatory program that actually led to the dispute in question in this case.

Now, the plurality opinion in Allstate–

John Paul Stevens:

May I just ask, does your position require this to be a class action?

Would you make the same argument with my individual from Alaska who sued on an Oklahoma lease?

Joel I. Klein:

–Absolutely.

John Paul Stevens:

What if the lease… it is clear there would be expected Oklahoma law to apply, and in Oklahoma he wouldn’t have gotten any interest at all?

I don’t know if that is true of Oklahoma.

It seems to me there is an argument that in one state you wouldn’t have gotten any interest.

Texas, I guess it is.

Joel I. Klein:

I suggest… let me say I think, Your Honor, it would not make a difference.

When you say there is an expectation that the law would always apply, that expectation can be put in the agreement.

Phillips never put that expectation in the agreement.

Now, in Allstate there was an expectation in that sense, I think, as the plurality and Your Honor’s opinion suggested, there was an expectation that the matter would be resolved by state law–

John Paul Stevens:

You are saying that a party like Phillips, unless it puts it in the agreement, it cannot rely on the normal rule of the place where the contract is made that this will be governed by, say, everybody expects that rule to apply?

Joel I. Klein:

–Well, I think when you say–

John Paul Stevens:

How would they have ever anticipated in my Alaska-Oklahoma example that Kansas law would apply?

Joel I. Klein:

–I think the question is not whether they would anticipate it.

I think the question is whether the Constitution prohibits Kansas from applying its law.

I think as the Court realized in Allstate, that in an interstate situation–

John Paul Stevens:

Doesn’t there have to be a reason for Kansas to apply its law, or do you say there doesn’t even have to be a reason?

Joel I. Klein:

–I think there is a reason here.

I think there are two reasons.

Joel I. Klein:

The first reason is, Phillips does business, big business, in Kansas.

Now, Kansas confers the authority.

It has no right on its own measure to come in and do business.

The state confers the authority for it to do business.

Now, it has been recognized by this Court that when a corporation is doing business within a state, the state has an interest not only in the corporation–

John Paul Stevens:

That is… any time you get jurisdiction over the defendant in a state, it is all right for that state to apply its own law?

Joel I. Klein:

–Well, I think you have to look at the facts of the case.

What is the second interest?

You said there were two reasons.

Joel I. Klein:

Well, the second interest has to do with the law that was chosen, Justice Stevens.

That is is a particularly fair choice.

Joel I. Klein:

It was an especially fair choice, and not only that, it was not simply a fair choice in the sense it was a good rule, but it was chosen out of the federal regulatory system that created the problem.

Let me explain that for a second.

If it were perfectly clear that in one of these other states they would have not chosen that law, but they would have chosen a rule that says no interest at all, would you still be able to make the same argument?

Joel I. Klein:

Yes, sir.

My argument would be based on Allstate–

Even though the royalty… even though the governing papers said no interest, there will be no interest in these suspended royalty payments.

Joel I. Klein:

–I think–

Suppose the contract was perfectly clear, and I understand it to be asserted here that if this case had been tried in some other states, they would have followed the provisions of the contracts.

Joel I. Klein:

–I dispute that, but I don’t think it is helpful.

I think let’s operate on that assumption.

Yes, all right.

Joel I. Klein:

My point is that as long as it doesn’t violate the standard in Allstate, it doesn’t have to apply in other states’ law, and that is clear.

Now, Allstate said that with this–

So Kansas would be perfectly free as far as you are concerned to say, well, we know that that provision is in the contract forbidding interest, but we just won’t follow that provision in the contract.

Joel I. Klein:

–No, no–

It is contrary to our law.

Joel I. Klein:

–No, at that point you get to the question which I think is fair, Justice White, is, is it parochial, is it arcane?

After all, why are there limitations on a choice of law?

This Court hadn’t decided–

Well, what about my question then?

Here is, in this case, it is shown to the Court that there are some contracts with royalty owners that would bar interest, just no interest, it just provides right in the contract no interest.

Joel I. Klein:

–That would–

Now, could Kansas then apply its law and say we are going to disregard that?

Joel I. Klein:

–That wasn’t shown in this case.

If it were shown, I think that would raise an issue of parochialism that I think might well raise a choice of constitutional violation, but that was not shown in this case, and if there is a question on that, I think that it is appropriate to look at the Texas law.

But the question, what is–

Sandra Day O’Connor:

Well, don’t the respondents make the argument that the applicable law in some of the states in which the leases were made would result in a different amount of interest?

Joel I. Klein:

–They do make that argument, yes.

Sandra Day O’Connor:

And we don’t know but what that might be true for purposes of our decision, right?

Joel I. Klein:

That’s correct, Justice O’Connor.

You must be arguing that it doesn’t make any difference.

Joel I. Klein:

For this point it doesn’t make a difference, but that is clear from Allstate.

That is… there is not one law that has to be chosen.

I mean, Minnesota and Wisconsin had diametrically opposed laws on stacking.

A contract was entered into in Wisconsin.

The law was applied in Minnesota.

The court found sufficient contacts, and of those contacts, a significant one was the fact that the insurance company was doing business in both states.

Now, this Court said as long ago as 1908 that a state could prevent a corporation from practicing, from doing business within its jurisdiction if it committed an antitrust violation in another jurisdiction that had no impact in the home jurisdiction, so a state does have an interest, a recognized interest in preventing or in regulating a corporation’s dealings with other states.

Well, I suppose you would make the same interest… make the same argument if it turned out to be a fact that here are 100 royalty owners who reside in a certain state, and their royalty contracts provide for a higher rate of interest than the Kansas court awarded.

Joel I. Klein:

I assume the same argument would be made, and if Phillips prevailed on that, I assume that would withstand choice of law.

But let me also go to the specifics.

Well, could Kansas apply its own rate of interest, or not?

Joel I. Klein:

I think it could.

Yes, sir.

Despite the governing law for a higher rate in another state?

Joel I. Klein:

If there were a clear contractual obligation, then I think you do raise the arbitrary and fundamentally unfair.

That is the test.

Now, here, let’s look at what they did, because I think it is important to understand that.

There is a federal price approval system that deals with retroactive prices for gas.

Joel I. Klein:

Because of that, we have suspense royalties.

That is the reason we have the problem in this case.

The federal government says, if you hold the money, you have to pay interest to the fellow you sold it to at this specific rate if we disallow the price.

That is the system.

As a result of that, they hold the royalty owner’s money, exactly as if they had held the producer’s money, exactly.

And what does the Kansas court say?

We will apply that federal principle.

The federal law created it.

We will apply it.

There is nothing arcane or provincial.

In fact, Phillips itself uses that exact rate when it demands interest from royalty owners in the precise circumstances.

When you take those facts, we submit that there was nothing arbitrary and unfair in the Kansas court uniformly applying the law that it did, enshrined in Kansas law, to the identical claims of the class member.

Thank you.

Warren E. Burger:

Do you have anything further, Mr. Miller?

Arthur R. Miller:

Yes, Mr. Chief Justice.

We believe on the standing question that the Article III requirement is clearly satisfied by the impact of this Kansas judgment on Phillips.

The question of so-called third party standing, which has been raised by several of the Justices, is a prudential doctrine, pure and simple, be applied to assure the necessary adversarial and concreteness in the case.

In Craig versus Boren, Justice Brennan, writing for the Court, said that these prudential objectives cannot be furthered here where the lower court already has entertained a relevant constitutional challenge.

In such circumstances, a decision by us to forego consideration of the constitutional challenge to the statute by injured third parties would be impermissibly to foster repetitive and time consuming litigation under the guise of caution and prudence.

As this Court well knows, this issue was up here two and one half years ago in Miner versus Gillette.

At that time, the party in the position of Phillips was told, you have no final judgment.

Now to be told that you have no standing, and to wait for the hypothetical collateral attack to occur while the states are reaching inconsistent results on this issue… keep in mind that New Jersey and Pennsylvania take a different view, take the view that Phillips is asserting here… leads to destabilization in the national class action context at the very moment in time when this phenomenon is mushrooming.

So, we believe that there clearly is standing from a prudential point of view.

Second, let me remind the Court that it has said that the issue of jurisdiction is analytically prerequisite to the issues of procedure.

That statement, analytically prerequisite, is from Rush versus Savchuk, where you had a nominal defendant.

This Court in Baldwin years ago, most recently in Bank of Ireland, said that an individual is free to ignore proceedings.

The right to ignore proceedings is taken away by saying that Kansas can assert jurisdiction over non-resident, non-volitional class members.

In the Churry case years ago, and again in Bank of Ireland just a couple of years ago, this Court said that a state cannot conclude interested parties by the mere assertion of its own power.

I suppose your argument would be also directed against a federal class action, Rule 23.

Arthur R. Miller:

A Rule 23 diversity-based class action as it is currently constituted, I believe that you have the same Fourteenth Amendment problems that we are asserting here.

Yes.

Arthur R. Miller:

What respondent is saying is that Kansas wants to help the small claimant.

God bless Kansas for doing it.

But there are many ways Kansas can do it without shoving aside the individual liberty interests, the interstate federal interests, let alone the choice of law sovereignty interest.

Kansas could create a legitimate opt-in and invite people to come in.

Kansas could sweeten the class action pot by awarding as a statutory matter treble damages.

It could provide punitive damages to encourage it.

If Kansas is really interested in the small claimant, it could create a patens patriae action.

That is for Kansas to do, not for this Court to do.

Are you suggesting the risk of sort of a Reno syndrome when Reno, Nevada, had all the divorces for a while?

Arthur R. Miller:

Yes, I think, Mr. Chief Justice, that the image in this field is known as the magnet jurisdiction.

Here Kansas is dictating oil and gas policy to the nation in the guise of what it believes is fair.

Warren E. Burger:

Thank you, gentlemen.

The case is submitted.

The honorable court is now adjourned until tomorrow at 10:00.