SPEAKERS CONTENTS INSERTS Tables
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59–928
2000
UNITED STATES JUDICIAL CONFERENCE, ADMINISTRATIVE OFFICE AND FEDERAL JUDICIAL CENTER AND THE ''PROTECTING AMERICAN SMALL BUSINESS TRADE ACT OF 1998''
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
ON
H.R. 3578
JUNE 11, 1998
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Serial No. 149
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
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CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director
Subcommittee on Courts and Intellectual Property
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HOWARD COBLE, North Carolina, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
BILL McCOLLUM, Florida
CHARLES T. CANADY, Florida
JAMES E. ROGAN, California
MARY BONO, California
BARNEY FRANK, Massachusetts
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts
MITCH GLAZIER, Chief Counsel
BLAINE MERRITT, Counsel
VINCE GARLOCK, Counsel
DEBBIE K. LAMAN, Counsel
ROBERT RABEN, Minority Counsel
EUNICE GOLDRING, Staff Assistant
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C O N T E N T S
HEARING DATE
June 11, 1998
OPENING STATEMENT
Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property
WITNESSES
Hodges, Wm. Terrell, Chairman, Executive Committee, Judicial Conference of the United States
Kovar, Jeffrey D., Assistant Legal Adviser, Private International Law, Office of the Legal Adviser, Department of State
Mecham, Leonidas Ralph, Director, Administrative Office of U.S. Courts
Menendez, Hon. Robert, a Representative in Congress from the State of New Jersey
Monte, Salvatore J., Owner, Kenrich Petrochemicals, Inc.
Townsend, John, Esq., Hughes, Hubbard & Reed, LLP, on behalf of Ajinomoto Company, Inc.
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Zobel, Rya W., Director, Federal Judicial Center
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Ajinomoto Co., Inc.: Prepared statement
Hodges, Wm. Terrell, Chairman, Executive Committee, Judicial Conference of the United States: Prepared statement
Kovar, Jeffrey D., Assistant Legal Adviser, Private International Law, Office of the Legal Adviser, Department of State: Prepared statement
Mecham, Leonidas Ralph, Director, Administrative Office of U.S. Courts: Prepared statement
Menendez, Hon. Robert, a Representative in Congress from the State of New Jersey: Prepared statement
Monte, Salvatore J., Owner, Kenrich Petrochemicals, Inc.: Prepared statement
Townsend, John, Esq., Hughes, Hubbard & Reed, LLP, on behalf of Ajinomoto Company, Inc.: Prepared statement
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Zobel, Rya W., Director, Federal Judicial Center: Prepared statement
APPENDIX
Material submitted for the record
UNITED STATES JUDICIAL CONFERENCE, ADMINISTRATIVE OFFICE AND FEDERAL JUDICIAL CENTER AND THE ''PROTECTING AMERICAN SMALL BUSINESS TRADE ACT OF 1998''
THURSDAY, JUNE 11, 1998
House of Representatives,
Subcommittee on Courts
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to call, at 10 a.m., in Room 2226, Rayburn House Office Building, Hon. Howard Coble [chairman of the subcommittee] presiding.
Present: Representatives Howard Coble, Bob Goodlatte, James E. Rogan, Edward A. Pease, Barney Frank, Zoe Lofgren and William D. Delahunt.
Staff Present: Blaine Merrit, Counsel; Debbie Laman, Counsel, Eunice Goldring, Staff Assistant; Robert Raben, Counsel, Minority.
OPENING STATEMENT OF CHAIRMAN COBLE
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Mr. COBLE. Good morning, ladies and gentlemen. The Subcommittee on Courts and Intellectual Property will come to order.
We are conducting an oversight hearing on the administration of the Federal judiciary. The House Judiciary Committee is charged with the responsibility of oversight over the administration of the judiciary to ensure that it is utilizing its funds efficiently and effectively. To that end, we will be reviewing administrative activities of the Judicial Conference, the Administrative Office of the United States Courts, and the Federal Judicial Center.
Last November, Congress approved over $3.8 billion for the Federal judiciary for fiscal year 1998, which is an 11 percent increase over approved funding in fiscal year 1997. This figure takes into account both appropriated and nonappropriated funds, such as fee collections. The Subcommittee will focus on how this money is allocated to the different offices and programs within the judiciary and whether or not it is being utilized efficiently and effectively.
Several areas of the budget will be discussed. These include the rising costs of the Federal Defender Services program and courtroom use and courtroom construction. The subcommittee will explore the judiciary's use of high-tech products and services and their impact on operating costs and efficiency in administering the judicial process. The Subcommittee will also address the growing concerns about judicial travel funded by taxpayers or privately, and judicial conflicts of interest occurring when judges fail to ensure that they have no financial interest in a company that is a party to litigation. This list of topics to be covered is by no means exhaustive. All members of the Subcommittee are welcome to address any issue relating to the administration of the Federal judiciary.
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Our first panel consists of three witnesses. The first witness is the Honorable William Terrell Hodges, who is a U.S. District Judge for the Middle District of Florida, a graduate of the University of Florida, receiving his BS and JD degrees there.
The second witness will be Ralph Mecham, who is the director of the Administrative Office of the Courts. Mr. Mecham is secretary to the Judicial Conference and a member of this executive committee. He earned his BS degree with highest honors from the University of Utah, a JD degree at George Washington University, and MPA from Harvard.
Our final witness on this panel is the Honorable Rya W. Zobel, who is a U.S. District Judge from the District of Massachusetts. In April 1995, she became the seventh director of the Federal Judicial Circuit. Judge Zobel is a graduate of Radcliffe College and the Harvard School of Law and was in private practice prior to joining the bench.
We have written statements from all the witnesses and I ask unanimous consent to submit them into the record in their entirety.
Folks, you are all familiar, I am sure, with our 5-minute rule. When the red light appears, judges and Mr. Mecham, please begin to wind up. We have your written testimony and that will not be casually discarded. We will thoroughly examine it. But if you could confine your oral statement to 5 minutes, we will be appreciative because we have a fairly busy day today.
Judge Hodges, why don't you commence.
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STATEMENT OF WM. TERRELL HODGES, CHAIRMAN, EXECUTIVE COMMITTEE, JUDICIAL CONFERENCE OF THE UNITED STATES
Mr. HODGES. Thank you, Mr. Chairman, and good morning. As you pointed out, of course, I am here today to testify on behalf of the Federal judiciary and I am joined by Judge Rya Zobel, as the director of the Judicial Center, and Mr. Mecham as the director of the Administrative Office. I will keep my remarks well within the limitation you just suggested and rely upon the written statement that has previously been filed.
I did want to express, however, my appreciation to you and to the other members of the subcommittee for your past support of the judiciary in general, and we are particularly grateful for your action this year on the Federal Courts Improvement Act.
There are three or four matters of concern expressed in my written statement that I would like to highlight very briefly as a part of these oral remarks. The first is to call attention to the fact that the business of the courts over the last few years has continuously grown at a time when we have not had any added judgeships since 1990 and during a time in which our vacancies have on occasion remained unfilled for lengthy periods of time; and the coalescent effect of these two factors has made it very difficult, or I should say increasingly difficult, for the judiciary to discharge its responsibility in a timely and effective manner. We would hope that the judgeship bill that we will propose to the Congress next year, seeking additional judgeships to enable us to discharge our responsibility, will receive early and favorable attention by the Congress.
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Another matter that I would like to briefly mention is the difficulty that we encounter from time to time in dealing with bills that have been introduced in the House or Senate amending the Federal Rules of Procedure, the Rules of Civil Procedure, Criminal Procedure, Rules of Evidence, and so forth. We would urge Members of the Congress to yield to the procedures established by the Rules Enabling Act process with respect to proposed amendments to the Federal rules.
We realize, of course, that rulemaking is a joint undertaking or joint responsibility on the part of the two branches of government. We do not suggest that the judiciary has any superior rulemaking ability. But we do suggest that the procedure, the process that is established in the Rules Enabling Act is normally the better one with respect to any proposed amendments to the rules, and we would ask that that be given consideration.
The next subject that I would mention briefly I know is a sensitive one, but the pay adjustment for judges last year, while much appreciated, quite frankly did not fulfill the promise that we had seen in the 1989 Pay and Ethics Act. And we would urge Members of the Congress to give consideration to cost-of-living increases not only for judges, but for the members of the Congress itself in order to enable us to attract and to retain the best and the brightest in the Federal judiciary.
Another point of concern for us is the lack of funding these last 2 years for badly needed courthouse construction projects. We understand that the Senate is presently giving what we hope will be favorable consideration to funding our most needed construction projects for fiscal 1999; and if that bill does come to the House, we would hope and ask that it be given early and favorable consideration here.
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Finally, I would remark that we are in need, and this is one of the factors I think you mentioned, for additional funds to defray the cost of the Defender Services program, both Federal public defenders and panel attorneys and providing constitutionally required services to those who are indicted in our courts and charged with a crime. That may be a matter of subsequent discussion.
But with that, Mr. Chairman, I would conclude my oral comments and be pleased to answer any questions you might have.
[The prepared statement of Judge Hodges follows:]
PREPARED STATEMENT OF WM. TERRELL HODGES, CHAIRMAN, EXECUTIVE COMMITTEE, JUDICIAL CONFERENCE OF THE UNITED STATES
SUMMARY
I am Judge Wm. Terrell Hodges, chair of the Executive Committee of the Judicial Conference of the United States, testifying on behalf of the federal judiciary.
The judiciary has a unique governance structure that strikes a careful balance between judicial independence and administration by national, regional, and individual court authorities. The Judicial Conference is the principal policy-making body for the federal judiciary. The Judicial Circuit Councils oversee court operation within their regions, and each federal court exercises a great deal of discretion in determining local rules and practices and managing its operations within guidelines set by Judicial Conference policies, administrative directives, and circuit judicial council orders.
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Article III of the United States Constitution established the federal judiciary as an independent and co-equal branch of the federal government. The founding fathers also embraced the concept of federalism, i.e., a national government with limited, delegated powers. Over the past decade, however, new legislation has expanded the federal courts' jurisdiction into criminal and civil areas traditionally reserved to the state courts.
A major challenge facing the federal judiciary is increasing workloads. From 1993 to 1997, the federal courts have experienced the following workload increases:
In the courts of appeals, the number of filings increased 4% to reach an all-time high of 52,319 in 1997.
In the district courts, the total number of civil filings increased 18% to 272,072.
Criminal cases filings rose 8% to 50,363, their highest level since 1933, when the Prohibition Amendment was appealed.
The number of persons subject to pretrial services investigations increased by 21% from 1993 to 1997, and the number of defendants released under supervision by pretrial services officers increased 10%.
The number of convicted offenders under the supervision of probation officers rose 5% to 91,343 at the end of 1997, an all time high.
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The number of ''representations'' by federal defender organizations and court-appointed panel attorneys exceeded 90,000 in 1997, an 8% increase from 1993.
Bankruptcy filings soared 52%, reaching an all time high of nearly 1.4 million.
The judiciary needs adequate resources to meet its burgeoning workload and we are thankful that Congress has generally appropriated a high percentage of the funds requested by the federal courts. The judiciary also needs sufficient funding to meet its court security, courthouse facility, and defender services needs.
Recognizing that the judiciary must do its part to conserve federal resources, the Judicial Conference, its committees, the Administrative Office and the courts are regularly engaged in identifying ways to streamline operations, increase the use of technology, and ensure that resources are deployed appropriately and used efficiently. These efforts are summarized in the Report to Congress on the Optimal Utilization of Judicial Resources, which is being provided to the subcommittee.
There are a number of current issues and concerns facing the federal judiciary that I would like to address with the subcommittee.
New legislation federalizing additional crimes, such as the pending juvenile justice bills, continues to expand the judiciary's jurisdiction and workload. Also, the bankruptcy reform bills currently under consideration by Congress could substantially increase the judiciary's cost of administering the bankruptcy system.
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The need for additional judicial resources is critical in some courts. The last year Congress created additional Article III judgeships was 1990, and the last time bankruptcy judgeships were created was 1992.
High numbers of judicial vacancies are adversely affecting the judiciary's ability to meet its workload.
Members of Congress are increasingly introducing legislation that would amend the federal rules directly by statute. This bypasses the procedures for public notice and comment, and the careful drafting and review contemplated by the Rules Enabling Act.
A 1999 pay adjustment is needed for federal judges, members of Congress, and high-level executive branch officials.
Lack of funding for the courthouse construction program the past two years is worsening operational and security problems caused by aging and obsolete court facilities. It also highlights the need for the judiciary to have real property authority independent of the executive branch.
The judiciary should be reimbursed for its costs related to the Department of Justice's seizures and forfeitures of criminal assets.
Funds are needed for an increase in the hourly rate for CJA panel attorneys to attract attorneys with the requisite skills and knowledge to provide adequate defense services.
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STATEMENT
Mr. Chairman and Members of the Subcommittee:
I am here today to testify on behalf of the federal judiciary. Also appearing with me are the Director of the Administrative Office of the United States Courts, Leonidas Ralph Mecham, and the Director of the Federal Judicial Center, Judge Rya W. Zobel.
Before I begin, I would like to express my appreciation to the chairman, Mr. Coble, and the other members of this subcommittee for the support you have given the judiciary. We are particularly grateful for your action this year on the Federal Courts Improvement Act of 1998 (H.R. 2294).
Today, I will summarize the judiciary's unique governance structure and its mission and work. I will highlight some activities that may be of interest, and note our most pressing concerns.
Federal Judiciary Governance
The judiciary's governance structures and mechanisms are uniquely suited to the judiciary—striking a careful balance between judicial independence and administration by national, regional, and individual court authorities.
I appear before you in my capacity as chairman of the Executive Committee of the Judicial Conference of the United States. The Judicial Conference of the United States is the policy-making body for the federal judiciary. The Chief Justice of the United States is the presiding officer, and there are 26 additional members: the chief judge from each of the 12 regional circuit courts of appeal, one district judge from each circuit, and the Chief Judges of the Court of Appeals for the Federal Circuit and the Court of International Trade.
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The Chief Justice has established a number of Judicial Conference committees along subject matter lines, such as automation, bankruptcy, budget, court administration and case management, criminal law, defender services, rules, and security and facilities. The Executive Committee, which I chair, acts on behalf of the Judicial Conference between regular sessions on any matter requiring emergency action.
The Director of the Administrative Office of the U.S. Courts serves as Secretary to the Judicial Conference and carries out specific statutory authorities as the chief administrative officer for the federal courts under the supervision and direction of the Judicial Conference. The Administrative Office provides staff to the Judicial Conference committees and it is the judiciary's primary support agency for program development, implementation, and assessment; financial management; technology development and support; data collection and analysis; administrative program support; communications; and legislative liaison.
The Federal Judicial Center is the judicial branch's primary education and research center. It provides training for judges and judiciary staff, and it conducts research in areas of judicial administration.
The Judicial Councils of the Circuits oversee court operations within their regions. They have specific statutory authority to ''issue all necessary and appropriate orders for the expeditious administration of justice'' within the circuit.
Each of the 94 district courts, 90 bankruptcy courts, and 13 courts of appeals, by statute and practice, exercises a great deal of discretion in determining local rules and practices and in managing its operations within the guidelines set by Judicial Conference policies, administrative directives, and circuit judicial council orders.
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The Judiciary's Mission
Article III of the United States Constitution established the federal judiciary as an independent and co-equal branch of the federal government, along with the executive and legislative branches. Our nation's founders considered an independent judiciary essential to ensuring fair and equal justice under law for the citizens of the United States.
Federalism lies at the heart of our Constitution's creation of a national government with limited, delegated powers. In granting Congress the authority to establish courts and prescribe their jurisdiction, the Framers provided two important guideposts: (1) the purpose of the federal courts should be to complement, not supplant, state court systems; and (2) the federal courts should be a distinctive judicial forum of limited jurisdiction, performing only those functions that state courts cannot.
Judicial federalism proceeds from the idea that the state and federal courts together comprise an integrated system for delivery of justice in this country. Historically, the two sets of courts have played different, but equally significant, roles. The state courts have served as the primary forum for resolving civil disputes and enforcing the criminal law. The federal courts, by contrast, have had a much more limited mandate, with the source and nature of federal jurisdiction derived solely from the powers vested in Congress. Article III, Section 2 of the Constitution potentially extends federal judicial power to a wide range of ''cases and controversies,'' but the Framers wisely left the actual scope of lower federal court jurisdiction to legislative discretion. For much of our nation's history, Congress was reluctant to expand federal court jurisdiction at the expense of the state courts. But in recent years, the trend has been toward ever increasing ''federalization'' of litigation—most notably in the criminal justice context.
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One of the greatest challenges confronting the federal judiciary is to continue providing just and timely adjudication of a burgeoning federal docket. Over the past decade, a variety of proposals have been made, and some enacted, that expand jurisdiction in the federal courts over criminal and civil litigation in areas traditionally reserved to the states. We have witnessed in the past few years a trend toward federalization of a wide variety of narcotics offenses, violent street crimes, firearms violations, and other crimes. For example, such legislation as the Anti-Car Theft Act of 1992 and the Freedom of Access to Clinic Entrances Act of 1994 brings before the federal courts the types of cases that previously were prosecuted solely in the state courts. There are bills pending in Congress that would, if enacted, expand the role of federal courts in prosecutions of juveniles—especially where the offender is to be prosecuted as an adult.
On the civil side, the docket has also seen dramatic growth in recent decades. This reflects not only a growing litigiousness on the part of the American public, but also a readiness on the part of lawmakers to provide a federal solution to highly visible social and economic ills, despite the long-term costs to the justice system.
Fueled by these developments, the number of cases filed in federal courts keeps growing. This signals a serious threat to the basic tenets of our system of justice. If federal courts come to exercise, in the normal course of business, the broad range of subject-matter jurisdiction traditionally reserved to the states, they could lose both their distinctive nature and their ability to resolve fairly and efficiently those disputes of clear national import that properly fall within the scope of federal jurisdiction, such as cases involving interpretation and enforcement of the Constitution itself.
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Federal Court Workload
Because the Constitution gives Congress the power to determine the jurisdiction of the federal courts, it is Congress that controls most of the types of cases and disputes that will be addressed in federal courts. The executive branch determines the government's law enforcement, prosecutorial, and civil litigation strategies, and it is a primary litigant in the federal courts.
The courts decide cases that are brought to them; they do not determine what those cases will be, when they will come, how many will come, or who will bring them. Increasing the volume and complexity of the work of the federal courts are these catalysts: new legislation and regulations, expanding federal jurisdiction, more law enforcement activities, increasing litigiousness, case law developments, and economic and social developments. More work for the courts requires additional judges, staff, buildings and facilities, defense services, supervision of offenders, juror usage, security measures, information processing and administrative programs.
The workload of the federal courts keeps growing. Despite productivity gains by judges, with no increases in Article III judgeships since 1990 or bankruptcy judgeships since 1992, compounded by a large number of unfilled judicial vacancies, many courts are simply congested with too much work and growing backlogs.
United States District Courts
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The district courts continue to face increasing workloads. Total filings per judge increased 17% from 1993 to 1997—from 426 filings per authorized judgeship in 1993 to 498 filings per authorized judgeship in 1997. The number of ''weighted'' filings per judge, which is a measure reflecting the complexity of different case types, rose 7% in the last year alone, and 20% since 1993.
Civil Filings
Civil cases, which constitute the majority of filings, increased 18% from 1993 to 1997 (reaching 272,072 cases). The increase was due largely to civil rights, personal injury, and prisoner-petition cases. Actions involving the United States as a plaintiff or defendant also increased. Civil filings per authorized judgeship grew from 354 cases in 1993, to 420 cases per judgeship in 1997. Although district judges achieved a 10% increase in the number of civil case terminations per judge over this period, this productivity gain was overshadowed by the larger increase in filings; thus, the number of pending cases per judge continues to grow.
Criminal Filings
Criminal filings increased 8% from 1993 to 1997, to an all-time high of 50,363—their highest levels since 1933, when the Prohibition Amendment was repealed. Criminal filings per authorized judgeship increased by 8%, from 72 cases in 1993 to 78 cases per judgeship in 1997. The increase in criminal cases was primarily due to a rise in drug, immigration, and fraud cases.
Because of a freeze in hiring assistant U.S. attorneys, there was a temporary decline in the number of criminal cases filed in the district courts in 1994 and 1995. After more prosecutors were hired by the Justice Department, criminal filings in the district courts increased by 10% from 1995 to 1997, and they have continued at an increased pace this year. Drug prosecutions increased 19% from 1995 to 1997, and they accounted for 27% of all criminal cases filed in 1997. Increased activity by the Justice Department against alien smuggling and illegal re-entry of deported aliens led to substantial increases in criminal immigration filings, which jumped 21% in 1997 alone.
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These statistics demonstrate the relationship between the criminal workload in the district courts and the level of resources provided by Congress to the Department of Justice and other executive branch law enforcement agencies. This year, the Department of Justice plans to increase the number of attorneys in its litigating divisions, and U.S. attorneys' offices will grow by 6%. Also, the Department of Justice plans to increase the number of Federal Bureau of Investigation, Drug Enforcement Administration, and Immigration and Naturalization Service agents and investigators by 7%. These increased resources will undoubtedly translate into additional filings in the courts in 1999 and beyond.
Increases in the number and changes in the types of criminal cases also have a substantial impact on other judiciary programs. The effects on probation and pretrial services offices and on the defender services program are described below.
Probation and Pretrial Services
Increased criminal filings have caused growth in the workload of the probation and pretrial services functions in the districts. United States probation and pretrial services officers play an essential role in controlling crime and protecting the public. Probation officers supervise offenders serving sentences in the community, including probation and supervised release imposed by the federal courts and parole granted by the United States Parole Commission or military authorities. Pretrial services officers supervise persons who are charged with offenses and released pending adjudication.
The control of risk to the community is the most critical function of the probation and pretrial services system. Officers conduct home and employment inspections to look for contraband, monitor lifestyles, and detect association with known criminals. They use urine testing to detect and deter substance abuse, financial investigations to assess resources and ability to pay fines and restitution, and home confinement with electronic monitoring to isolate and control selected offenders. Officers provide or contract for substance abuse and mental health treatment where appropriate to reduce the risk of recidivism and protect the community.
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The number of persons subject to pretrial services investigations increased by 21% from 1993 to 1997, and the number of defendants released under supervision by pretrial services officers increased 10%.
An all-time high of 91,434 convicted offenders were under the supervision of probation officers at the end of 1997. This number was 5% greater than the number in 1993. In fact, the judiciary is supervising nearly as many offenders as the Federal Bureau of Prisons, which has 118,000 offenders. The rise in caseload is almost entirely due to the significant increase in the number of offenders released to the community on ''supervised release'' from prison. These offenders tend to have more serious criminal histories including acts of violence and substance abuse problems, and a higher risk of recidivism. A report by the General Accounting Office entitled Federal Offenders, Trends in Community Supervision, concluded that inmates to be released from federal prisons through 2001 will include a greater number of high-risk offenders than did the population released from prison prior to 1997. This portends more difficult supervision caseloads for probation officers in years to come.
Defender Services
The right to criminal defense counsel is guaranteed by the Sixth Amendment to the Constitution. The judiciary's defender services program originated with the 1964 enactment of the Criminal Justice Act (CJA), 18 U.S.C. §3006A, to provide for the compensation and expense reimbursement of attorneys and others furnishing representational services for persons with limited financial means in federal criminal matters. The mission of the defender services program is to ensure that the right to counsel guaranteed by the Sixth Amendment, the CJA, and other congressional mandates is enforced on behalf of those who cannot afford to retain counsel and other necessary defense services. This program helps to maintain public confidence in the nation's commitment to equal justice under law, and ensure the successful operation of the constitutionally-based adversary system of justice by which both federal criminal laws and federally guaranteed rights are enforced.
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The caseload in this program is entirely dependent on the actions taking by the Department of Justice, which prosecutes criminal defendants. More than 85% of the criminal defendants in federal courts require court-appointed counsel. As the number of criminal filings in the federal courts has grown, so has the need to provide defense services. The number of ''representations'' by federal defender organizations and court-appointed panel attorneys exceeded 90,000 in 1997, an 8% increase from 1993.
United States Courts of Appeals
The number of appeals filed increased 4% from 1993 to 1997, reaching an all-time high of 52,319. The courts of appeals have handled the increased workload with fewer active appellate judges than there were in 1993. Even though the national average number of actions per appellate panel has increased over the last five years, the median time from filing to disposition has risen by more than a month (from 10 to 11 months on average), and the pending caseload has continued upward in some circuits.
United States Bankruptcy Courts
Bankruptcy filings soared 52% from 1993 to 1997, surpassing one million in 1996 and reaching an all-time high of nearly 1.4 million filings in 1997. Personal bankruptcies, which comprise a large majority of bankruptcy cases, increased by 27% in 1997 alone. The volume of business bankruptcy filings has actually decreased by about 16% since 1993.
Because there have been no new bankruptcy judgeships approved since the Bankruptcy Judgeship Act of 1992, the continued dramatic increase in personal bankruptcy filings caused the ratio of filings per authorized judgeship to reach nearly 4,200 by the end of 1997. In 1993, there were 2,752 filings per judgeship.
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Judicial Resources
Although we may not control the work assigned to us or the level of resources provided, the judiciary can and does control, to a great extent, how we undertake the work and how we use our resources. The Judicial Conference and its committees, the Administrative Office, and the courts are regularly engaged in identifying ways to accommodate more work, contain costs, improve services, and operate more efficiently.
In spite of the continuing growth in workload, in the fiscal year 1999 budget sent to Congress, as a result of numerous economy measures, the judiciary requested its smallest annual percentage increase in 20 years. With a total request of $4.1 billion for 1999, the budget for the judicial branch constitutes less than 0.2% of the federal budget.
In recognition of the judicial branch's unique mission and our conscientious approach to using resources as wisely and cost effectively as possible, Congress generally appropriates a high percentage of the funds requested by the courts. The Director of the Administrative Office of the U.S. Courts has reported to Congress on our efforts to streamline operations, increase the use of technology, and ensure resources are deployed appropriately and used efficiently. Copies of the Report to Congress on the Optimal Utilization of Judicial Resources will be provided to the subcommittee.
The Optimal Utilization report describes how the number of judges and court employees needed is directly linked to the judiciary's workload. For example, to hold down salary expenses, the judiciary has implemented policies and new methods for recommending the establishment and elimination of judgeship positions. We are continually increasing our use of technology to save time and staff. We have a program to identify ''better practices'' in the courts that can be adopted by others. We have taken a number of steps to hold down rent costs, including closing some court facilities without a resident judge and making revisions to the U.S. Courts Design Guide to reduce building construction costs and future rent costs. And we are taking steps to try to control the growing costs of defender services. All together, the numerous initiatives taken over the past several years have saved or avoided hundreds of millions of dollars in costs.
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Judgeships
The Judicial Conference conducts systematic surveys of the need for Article III judgeships every two years and submits recommendations to Congress regarding which courts need additional judgeships. In developing its recommendations, the Judicial Conference has adopted caseload standards that all courts requesting additional judgeships must meet, absent unique circumstances. The Judicial Conference has been very restrained in making recommendations for additional judgeships, and has increased the caseload standards in recent years. The Judicial Conference also is giving greater consideration to requesting temporary rather than permanent judgeships. In a further effort to become more responsive to congressional concerns about the number of judgeships, the Judicial Conference recently adopted a process for reviewing situations where it may be appropriate to recommend that judicial positions be eliminated, or vacancies not filled, in courts where the per-judgeship caseload may be low.
The judiciary also conducts thorough, biennial bankruptcy judgeship reviews in accordance with 28 U.S.C. §152(b)(2) and (3). The Judicial Conference has adopted detailed criteria for evaluating bankruptcy judgeship requests. It has implemented procedures to review the continuing need for each judgeship that becomes vacant due to the death, retirement, removal, or resignation of a bankruptcy judge.
Other economy measures to make the most of judicial resources and avoid adding new judgeships include the use of senior and recalled judges, the cross-designation of judgeship positions, temporary inter- and intra-circuit assignments, and the establishment of magistrate judge positions where they can be used effectively. At its meeting last week, where it reviewed requests from district and appellate courts for additional judgeships, the Judicial Conference's Judicial Resources Committee discussed options that might help to reduce future requests for new judgeships. That committee will request that the Executive Committee coordinate an effort among several committees to explore the feasibility of employing different options for handling work in the most burdened courts.
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Other Judiciary Staff
The judiciary uses sophisticated techniques for determining human resource needs. Staffing levels for clerks' offices (appeals, district, bankruptcy), probation offices, and pretrial services offices are determined by formulas derived from comprehensive national studies of the work performed in these offices. Applied each year and driven by workload demands, the formulas ensure the correct and even application of staffing throughout the judicial system. Because of numerous initiatives taken to improve operating efficiency, the courts have been able to operate with fewer employees than the staffing formulas dictate, thereby saving significant amounts of resources. In recognition of the impact of automation and other operational changes, we are now undertaking a major effort to revise the work measurement formulas.
Court Operations
Operating improvements are regularly introduced. In particular, in recent years, the increased use of various technologies has enabled the courts to streamline operations. Congress has been very supportive of the judiciary's initiatives to make greater use of automation and communications technologies. Continuing technological advances offer opportunities for enhancing the management and processing of information, improving communications and access to information, conducting legal research, and holding court proceedings. Director Mecham will describe some of the accomplishments thus far and some of the projects underway in his testimony about the activities of the Administrative Office. Judge Zobel will also address the cost-effective use of distance-learning technology by the Federal Judicial Center for training judiciary employees. I will mention only a couple of examples of the effective use of automation in the courts.
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The automation of processes in the bankruptcy courts has enabled them to handle an enormous volume of cases. For example, the Bankruptcy Noticing Center, under contract to the Administrative Office, last year issued 72 million bankruptcy notices for the bankruptcy courts. Since its inception in 1993, the Bankruptcy Noticing Center has saved the judiciary more than $11 million compared with the old court-based noticing process. Under development is a program to send bankruptcy notices electronically to major creditors who are capable of handling them. This has the potential to achieve large savings.
Electronic Public Access programs, which are self-funded through user fees, have made selected court records readily available to litigants and the public. The judiciary is also exploring the use of electronic case file system employing the Internet or other means. Such systems have significant potential to affect how the courts process the large volumes files and documents that are currently maintained in paper form. We have projects underway now to evaluate and develop these capabilities and to redesign the core appellate, district and bankruptcy court case management systems to take advantage of them.
One of the most visible uses of technology will be seen in the courtroom. Volunteer courts have been testing the effectiveness of various courtroom technologies. An evaluation was recently completed that demonstrates the value of using various technologies, such as evidence presentation equipment, real-time recording of the record, and video-conferencing. This month, the Judicial Conference's Committee on Automation and Technology will review the results of this evaluation and make recommendations to the Judicial Conference.
Court Security
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Court security needs have increased substantially in recent years and the budget for this program has been growing. The U.S. Marshals Service has statutory responsibility for the provision of security to the judiciary. Funds appropriated to the judiciary to support the judicial facility security program are transferred to the U.S. Marshals Service to pay for contract court security officers, and security systems and equipment in court facilities. Security is necessary not only for the judges, but for all who enter courthouses, including jurors, court employees, attorneys, and witnesses.
The judiciary has enhanced its financial oversight of the funds transferred to the U.S. Marshals Service to ensure they are spent in accordance with a memorandum of agreement between the U.S. Marshals and the Administrative Office of the U.S. Courts. The judiciary has also increased its oversight of how the U.S. Marshals Service is providing security-related services to the courts, and we have given the Marshals Service additional resources to help improve program management.
Courthouse Facilities
The judiciary is dependent on the executive branch for its buildings. The General Services Administration (GSA) builds and manages federal courthouses, and courthouse construction funds are appropriated by Congress to GSA. The judiciary, the Congress and GSA over the past several years have, in a concerted effort, developed an orderly, logical, and economical program for identifying, evaluating, prioritizing, and funding the replacement of federal courthouses. The increasing caseloads, increased staffing needs and the changing nature of the courts' workloads have pushed existing courthouse facilities to their maximum capacity, rendering many obsolete. In fact, most of the courthouses being used today were built in two earlier periods of construction. The first was just after the civil war, and the second period was in the 1930's. Needless to say the majority of these facilities, which were not built to accommodate such growth, are now severely overcrowded. In addition, these older buildings are suffering serious security deficiencies that pose a safety risk for the judges, staff, litigants, witnesses, and jurors. They are structurally incapable of accommodating the new technology being used in the courts. The judiciary's courthouse program facilitates the construction of high quality, secure and functional court facilities that will last for several decades and foster the effective administration of justice.
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The Judicial Conference, upon recommendations by its Security and Facilities Committee and its Budget Committee, undertook a number of initiatives to contain the cost of rent in the judiciary and to limit the cost of new courthouse facilities. In fiscal year 1997, the judiciary released 62,773 square feet of existing space with an associated annual rent savings of about $1 million. Combined with fiscal year 1996 reductions to existing and planned space assignments, the judiciary has reduced projected space inventory and annual rent costs by 643,888 square feet and $13.4 million.
During the past year, the federal judiciary conducted a comprehensive review of the U. S. Courts Design Guide, first published by the judiciary in 1991. The Design Guide contains the information needed by GSA, private sector designers and builders, and members of the judiciary about the special requirements of federal courthouses that make them functional, secure, high-quality public buildings. Recommendations for changes to the Design Guide, many of which will save construction costs, were approved by the Judicial Conference of the United States at its March 1997 meeting.
The judiciary will continue to examine possibilities for further reductions. As part of this ongoing effort, the judicial councils are to submit every two years evaluations of all current space in each occupied building to determine whether space can be used more efficiently or released to the General Services Administration.
A question was raised by some in Congress about the possibility of limiting the number of courtrooms by requiring judges to share courtrooms. This question was extensively studied by the judiciary, and in March 1997, the Judicial Conference reaffirmed a policy that provides a courtroom for each active district judge.
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Providing a courtroom for each active district judge permits timely handling of emergency matters, such as requests for injunctions, grand jury problems, contempt hearings, and detention and bail appeals. Moreover, this practice provides an effective incentive to settle large multi-party cases, opportunities that may be lost without the immediate access to a courtroom. Firm trial dates promote settlement in civil cases and pleas in criminal cases, thereby avoiding the need for and cost of trials. This also ensures that cases that go to trial are handled expeditiously, as required by the Speedy Trial Act of 1974. You can imagine how difficult it would be for congressional committees to carry out your business if you did not have designated hearing rooms.
The Judicial Conference also encourages the circuit judicial councils to develop policies on courtroom sharing by senior judges, particularly for senior judges who do not draw caseloads requiring substantial use of a courtroom, and for visiting judges. All circuit judicial councils have developed courtroom-sharing policies for senior and visiting judges.
Defender Services
Increasing criminal workload has continued to drive up the total costs for providing defense services under the Criminal Justice Act (CJA). In particular, defense costs have increased as a result of legislation passed over the last decade to revive the federal death penalty and expand the number of federal crimes punishable by death.
In response to congressional concerns about the increasing costs of defender services, the judiciary recently provided Congress a comprehensive analysis by an independent consultant, Coopers & Lybrand. The major finding was that average costs per case in this program have been elevated by a relatively new phenomenon: federal death penalty prosecutions. Although the number of death penalty cases is relatively small, Coopers & Lybrand found that when the cost of death penalty representations are excluded—especially the few very expensive, high-profile cases—the average annual cost of the remaining cases has only grown by a rate roughly equivalent to inflation.
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This and other studies show that program costs are in line with the increase in the number of representations, the increasing proportion of capital prosecutions and capital habeas representations, and the costs incurred in a handful of extraordinarily expensive representations each year.
Although the judiciary cannot control the workload in the defender services program, the judiciary is taking action wherever possible to contain program costs and to identify best practices and institute procedures designed to ensure that CJA representation is both high quality and cost-effective, including the following initiatives:
Development of a Comprehensive Performance Measurement System for the Defender Services Program. The judiciary is well along in developing a performance measurement system by which the judiciary, the Congress and the American people will be able to assess the value received for the dollars expended.
Subcommittee on Federal Death Penalty Cases. The Judicial Conference Committee on Defender Services established a Subcommittee on Federal Death Penalty Cases to review the cost and quality of defense representation in federal death penalty cases. The subcommittee is examining the impact of such factors as the current statutory limits on attorney hourly rates and expert compensation costs, standards of professional responsibility, federal statutes regulating appointment of counsel, the type of service provider (federal defender versus private attorney), and training and other support currently being provided to appointed counsel in federal capital prosecutions.
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Improved Capital Habeas Corpus Voucher Review Processes. At its September 1997 session, the Judicial Conference adopted a policy urging each circuit judicial council to establish a special process for the review of any state death penalty habeas corpus case within the circuit in which attorney compensation exceeds $100,000. This will ensure that counsel charges in high-cost cases receive careful scrutiny before payments are made.
Capital Habeas Corpus Cost Management Initiatives. To improve management of the costs of capital habeas corpus cases, the judiciary is encouraging courts to 1) require counsel to submit proposed litigation budgets for court approval before commencement of representation and 2) employ case management techniques commonly used in complex civil litigation.
Controlling Federal Defender Organization Costs. The judiciary has revised its budgetary procedures to tighten controls on federal defender organization spending, such as requiring a review of caseload statistics before filling vacant positions.
Pilot Studies to Improve Panel Attorney Management and Voucher Review Process. The judiciary is conducting a pilot project to explore the benefits of using a supervisory attorney to assist with administering the panel of private attorneys accepting court appointments and with reviewing payment claims submitted by attorneys and other service providers.
Reviewing and Assessing Defender Program Operations. Reviews help defender organizations improve the effectiveness and efficiency of their operations, and enable the Administrative Office to collect and disseminate ''better practices.''
As summarized above, the judiciary is committed to analyzing our organizations, operations, and programs to monitor spending patterns, analyze cost increases, identify ways to contain costs, and make policy and operational changes to improve economy and efficiency where feasible.
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Current Issues and Concerns
Federalization of Crime and Other Jurisdictional Issues
It is, of course, the province and function of Congress to define the jurisdiction of the federal courts based on members' perception of whether a federal response is needed to our society's changing conditions. And the federal courts will continue to carry out their responsibility to exercise any jurisdiction lawfully conferred upon them. But the ideals of judicial federalism should be heeded as lawmakers decide on particular bills and proposals. Although reasonable minds certainly can differ on where to draw the line in apportioning judicial workload, it is critical that the following question be asked in Congress, within the legal community, and among the general public: ''Are the federal courts to be the forum for resolving disputes of any kind based on their public visibility or notoriety, or only those matters that cannot practically be resolved in any other place, especially cases involving constitutional claims or issues?'' The courts cannot answer that question in the final analysis, but they, and the American people, will have to live with the consequences of the answers given.
In 1995, the Judicial Conference of the United States recommended, in the Long Range Plan for the Federal Courts, a series of principles for conserving the federal courts' civil and criminal jurisdiction ''only to further clearly defined and justified national interests, leaving to the state courts the responsibility for adjudicating all other matters.'' Consistent with this overarching principle, the Plan urges Congress to limit the criminal caseload of the federal courts to five categories:
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offenses against the federal government or its agents or inherent interests
prohibited activity with substantial multi-state or international aspects
prohibited activity involving complex commercial or institutional enterprises most effectively prosecuted using federal resources or expertise
serious, high-level, or widespread state or local government corruption
prohibited activities that, by raising highly sensitive local issues, are perceived as being most objectively prosecuted in the federal courts.
Likewise, the Long Range Plan identifies six types of cases—constitutional disputes; matters involving a strong need for uniformity or paramount federal interests; matters affecting the foreign relations of the United States; cases involving the federal government, its agencies or officials; disputes between or among the states; or matters affecting substantial interstate or international activities—in which clearly defined and justified federal interests justify a federal forum.
Judgeships
In March 1997, the judiciary transmitted proposed legislation to the 105th Congress requesting the creation of permanent and temporary court of appeals and district court judgeships. The Judicial Conference requested 12 permanent and 5 temporary court of appeals judgeships, and 24 permanent and 12 temporary district court judgeships. Based on changing workload, the circuit judgeship requirement was reduced by one by the Judicial Conference in March 1998, and one district's judgeship request was withdrawn and another one added. As you know, the House has not acted on these requests.
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The last year Congress created additional Article III judgeships was 1990. Since that time, the caseload used to recommend judgeship needs has grown nearly 22% in the courts of appeals and 31% in the district courts. In contrast, the judiciary requested a 9% increase in the number of court of appeals judgeships and a 6% increase in the number of district court judgeships. These judgeship requests are modest by comparison to the increases in the caseload.
The need for judicial resources is becoming critical in some courts, and if the caseload continues to grow at the current pace without additional judgeships, it will not be long before the entire system is in a critical state. The Judicial Conference will again submit a judgeship request in March 1999. I hope we can count on your support.
I appreciate the support we received in the House last year in its passage of a bill to create 18 additional bankruptcy judgeships (11 temporary and 7 permanent), as requested by the Judicial Conference. The Senate Judiciary Committee recently reported out a bankruptcy judgeship bill, but the full Senate has not yet acted.
The Impact of Judicial Vacancies
High numbers of judicial vacancies adversely affect the judiciary's ability to meet its workload. Fortunately, the pace of filling judicial vacancies has quickened in 1998. During the 105th Congress, President Clinton has nominated 113 people to fill vacant judgeships. To date, 13 appellate judges, 49 district judges and 2 judges on the Court of International Trade were confirmed by the Senate, for a total of 64.
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As of June 5, 1998, there were 75 Article III vacancies: 20 on the courts of appeals, 54 on the district courts, and 1 on the Court of International Trade. There are 45 nominations pending for these positions: 11 for the courts of appeals, 33 for the district courts, and 1 on the Court of International Trade. Thirty-three of the vacancies are considered judicial emergencies, having been in existence for 18 months or longer.
To illustrate the seriousness of the vacancy problem, I note the unprecedented action taken by Chief Judge Ralph K. Winter in the Second Circuit Court of Appeals. The 13-member court had five vacancies, which forced Chief Judge Winter to declare a ''judicial emergency,'' cancel some panels that were scheduled to sit earlier this year, and determine that future panels can consist of two visiting judges and just one judge from the Second Circuit. Fortunately, two nominees for this circuit were confirmed last week. Similar problems exist throughout the country in other courts of appeals and district courts.
Senior judges increasingly help courts with judicial vacancies and pressing caseloads handle their work. In 1997, more than 20% of all district court trials were conducted by senior judges. Senior judges, who must be at least 65 years of age and have served for a minimum of 15 years, are volunteer public servants. Since Article III of the Constitution gives them a lifetime appointment and prohibits diminution of their salary, senior judges would be compensated even if they chose to retire and perform no judicial work. Rulemaking by Congress
The federal rules of practice and procedure are the primary responsibility of the federal judiciary. The Judicial Conference's Committee on Rules of Practice and Procedure, and its five advisory committees, are properly concerned when bills are introduced in Congress to amend the federal rules directly by statute, bypassing the Rules Enabling Act. More than twenty-five bills have been introduced in this Congress affecting the rules.
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The general rules of practice and procedure affect the daily business of the courts. The rules have evolved over time and form an intricate, interlocking whole. Changes in one rule can have unforeseen and unintended consequences affecting other rules. Widespread opportunity to comment by those who work daily with the rules and meticulous care in drafting by experts—as envisioned by the Rules Enabling Act—have demonstrated the superiority of the rulemaking process. The rules committees are committed to defending the Rules Enabling Act process and promoting it by reaching out to the bar and public for their input.
The procedures for public notice and comment, and the careful drafting and review contemplated by the Rules Enabling Act have produced high-quality rule amendments and have generally satisfied Congress that recourse to amending the rules directly is not necessary or prudent. Indeed, very few bills amending the rules have been enacted into law. In turn, the rules committees are sensitive to congressional criticism that the rulemaking process can be too slow. In particular instances, the process has been accelerated.
Although sometimes arcane and strictly procedural, rules can implicate substantial interests involving substantive rights of individuals. Congress has a clear duty in rulemaking, but the genius of the Rules Enabling Act process is that it accords to each branch of government its proper role in this shared endeavor.
Judicial Compensation
The Constitution guarantees the independence of federal judges in two important ways: lifetime tenure during good behavior, and undiminishable compensation during their tenure. These protections help ensure an independent judiciary that decides cases free from popular passion and political influence.
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I would like to thank Congress for the 2.3% Employment Cost Index (ECI) adjustment it approved for federal judges, members of Congress, and top-level executive branch personnel this fiscal year. However, this was the first pay adjustment for these government officials since 1993. Even with this increase, inflation has reduced the actual value of the salaries of these officials by about 14% over the past five and a half years.
Consequently, the Judicial Conference strongly supports a 1999 pay adjustment for judges, Members of Congress, and top executive branch officials. In recent years, Chairmen Bob Livingston of the House Appropriations Committee and Ted Stevens of the Senate Appropriations Committee have both observed that the repeated denial of annual cost-of-living increases to these officials may imperil the pluralism and integrity of all three branches of government. To deal with this problem, the judiciary believes that annual General Schedule ECI adjustments should be extended to top officials in all three branches of government.
In addition to permitting the annual adjustment of the salaries of judges, Members of Congress, and high-level federal executives, Congress and the President need to fix the process by which the salaries of these officials are set. The current process for fixing the salaries of top federal officials—the Citizens Commission on Public Service—has not served this purpose. Congress effectively canceled the 1993 Commission by rescinding its appropriation, and the 1997 Commission was not impaneled. There is, therefore, no practical machinery today for reviewing the adequacy of the salaries of top federal officials.
The Judicial Conference believes that this matter needs to be addressed, and strongly encourages Congress to consider reestablishing a panel similar to the former Commission on Executive, Legislative and Judicial Salaries (popularly known as the Quadrennial Salary Commission). This ''blue ribbon'' Commission was keenly aware that its charge was to determine not only how much top government officials need to live on, but also what needs to be done in order to attract and retain top quality officials. Otherwise, the morale and quality of top officials in all three branches is endangered.
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Judiciary Employee Benefits
The judiciary has undertaken an assessment of the federal benefits programs available to its workforce. Last year, the Administrative Office contracted with Towers Perrin, an international benefits consulting firm, to study the adequacy of the federal employee benefits package offered to judicial officers and employees. The study found the benefits package to be lacking in certain areas such as coverage for prescription drugs and mental health treatment, dental benefits, long-term care, and disability benefits.
To meet the needs of its employees and to address the demographics of its aging workforce (e.g., the average age of a judge is 56, which is 11 years higher than the average age of federal employees), the judiciary will be exploring new employee pay-all benefits options, such as long-term care insurance. Also, we will be seeking legislation to grant the judiciary the authority to establish a program of supplemental benefits not covered by the core federal benefits program. Congress may be interested in improving the benefits options for its own members and staff, and we can work cooperatively with you on this initiative.
Bankruptcy Reform Bills and Information Issues
Senator Charles Grassley and Representative George Gekas have introduced separate bankruptcy reform bills (S. 1301 and H.R. 3150) that, among other things, would create a ''needs-based'' bankruptcy system. While the bankruptcy system may need reform, it should be recognized that these bills could increase the cost of administering the bankruptcy system.
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The two bills contain some provisions that the judiciary considers problematic. The Senate bill would require the Administrative Office to collect, publish, and report to Congress annually data on consumer debtors that are currently not collected. The House bill, as clarified in the House Report 105–540, has a better approach that would charge the Executive Office for the United States Trustees with collecting, publishing, and reporting to Congress data on consumer debtors, but in a form prescribed by the Administrative Office.
The primary business of the federal courts is the processing and disposition of cases. A vast array of information on the nature and volume of the work of the federal courts is collected and reported by the Administrative Office of the U.S. Courts. These statistics reveal a great deal, not only about what work is before the courts, but about the impact of laws, and changing societal issues.
There is always some interest in collecting more and more information. However, it is important to recognize that information collection is an expensive investment, and there are many practical implications associated with forms and systems redesign to compile and disseminate new reports, including staff costs, collection time, processing, analysis and quality control. The Executive Committee, on behalf of the Judicial Conference, has taken this position:
The federal judiciary should collect and maintain those data it requires for its own operations to fulfill its statutory requirements. Accordingly, the collection of financial data on consumer debtors, if desired by Congress, should be assigned to the United States trustee system, which is responsible for supervising trustees and estates and approving distributions to creditors.
One concern we have with the House bill is that it expresses ''the sense of the Congress'' that all public record data held by bankruptcy clerks in electronic form should be released in electronic form to the public on demand. A number of individuals and consumer groups have raised privacy concerns over this provision. In response, the Executive Committee, again on behalf of the Judicial Conference, has taken the following position:
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Release of data held by the federal judiciary shall be subject to appropriate privacy concerns and safeguards.
A third area of concern relates to provisions in these bills regarding bankruptcy appeals. The House bill would allow direct appeal to the court of appeals, and the Senate bill provides for expedited district court review. These provisions could effect a fundamental change in court structure, and we urge Congress to make no change in the current appellate structure for review of dispositive orders of bankruptcy judges without further study.
As these two bills make their way through Congress, I urge the members of this subcommittee and others in Congress to consider their impact on the judiciary.
Courthouse Construction and Real Property Authority
Congress has been very supportive of the federal courthouse construction program in the past. Unfortunately, the President's FY 1999 budget submission contained no funding for courthouse construction, site acquisition, or design. This is the second consecutive year that the President's budget has ''frozen'' all courthouse construction funds.
The freeze is a serious blow to the judiciary. The Judicial Conference's five-year plan for courthouse construction recommends funding for 14 projects in FY 1999 at a total cost of approximately $500 million. Many of these projects have already been delayed one year due to last year's moratorium. These include facilities in Denver, Colorado; Laredo, Texas; Brooklyn, New York; Wheeling, West Virginia; Jacksonville, Florida; and Greenville, Tennessee. With additional delays, security and operational problems caused by aging and obsolete court facilities will continue to worsen. Also, the delay will cause the costs of these projects to increase. The General Services Administration (GSA) agrees that these courthouse projects are fully justifiable, but the Office of Management and Budget will not submit the projects for congressional consideration.
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Earlier this year, on behalf of the judiciary, Chief Justice William H. Rehnquist wrote to the Republican and Democratic leadership and the chairs of the Senate and House Appropriations Committees, urging their support for funding courthouse construction projects. Since then, we have been successful in getting the Senate Budget Committee to recommend funding for all the judiciary's fiscal year 1999 courthouse construction projects. We are optimistic that the House and Senate Appropriations Committees will provide these funds to GSA. I ask for your support in urging the House leadership to support funding for these courthouse construction projects.
In 1989, the Judicial Conference endorsed legislation that would give the judiciary real property authority independent of the executive branch. Although this legislation has not been actively pursued for some time, the ''freeze'' on courthouse construction funds the past two years makes it a point worth raising again.
Currently, the General Services Administration has the statutory authority to build courthouses and to provide for other facilities-related needs of the courts. At the same time, under 28 U.S.C. §604(a)(12), the Director of the Administrative Office has the statutory authority to ''provide accommodations for the courts, the Federal Judicial Center, the offices providing pretrial services and their clerical and administrative personnel.'' In short, the Director has the statutory duty to attend to all matters related to space and facilities for the courts, but he is dependent on GSA to fulfill those responsibilities.
Reimbursement to the Judiciary for Criminal Forfeiture Expenses
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In three of the past five years, the defender services program has experienced budget shortfalls that led to the suspension of payments to private ''panel'' attorneys. The use of asset forfeiture by the Department of Justice has added to the financial burden on the courts by requiring the judiciary to secure counsel for otherwise financially secure defendants who could have retained private counsel. Although other federal and state government entities are reimbursed for costs related to seizures and forfeitures of assets based upon their participation in these actions, the courts receive no similar reimbursement.
The judiciary has unsuccessfully sought to obtain congressional approval to remedy this situation so that seized assets can be used to help defray defense costs. If the expenses to the defender services appropriation, and those of the judiciary generally, were offset by provisions for appropriate sharing of the funds that accrue to the federal government through the seizure of assets of criminal defendants, this would reduce the direct appropriations needed for this purpose.
Panel Attorney Hourly Rates
The current panel attorney compensation rates of $65 per in-court hour and $45 per out-of-court hour in most federal districts are very low to attract panel attorneys with the requisite skill and knowledge to provide defense services in a modern federal criminal prosecution. According to The Annual Survey of Law Firm Statistics, by Altman, Weil and Pensa, the average hourly billing rates are $194 and $134 for partners and associates, respectively.
The judiciary is attempting to address the negative impact of low panel attorney rates by providing training and other support services to panel attorneys. However, the efforts are not likely to succeed in the absence of a rate increase that attracts more experienced counsel and provides a financial incentive for assigned counsel to develop and maintain a federal criminal practice expertise.
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In 1986, the Criminal Justice Act was amended to authorize the Judicial Conference to set higher maximum hourly rates of up to $75 per hour where it could be shown that such a rate increase was warranted and to permit the judiciary to raise hourly rates in accordance with federal employee annual cost-of-living increases. The Judicial Conference approved the higher rate of $75 per hour for 93 of 94 districts. Due to funding limitations, this rate has only been fully implemented in eight districts (and partially implemented in another eight).
Beginning with its FY 1996 Defender Services appropriation request, the judiciary initiated an incremental, multi-year approach to increase gradually the hourly rates paid to panel attorneys. Under this plan, the in-court/out-of-court panel attorney hourly rates would be increased by $5 each year until a uniform rate of $75 is achieved. Consistent with this goal, the $60/$40 panel attorney hourly rates were increased to $65/$45, respectively, for work performed on or after January 1, 1996. In FY 1997 and FY 1998 the judiciary requested funding to increase the hourly rates by $5. Funding for these requests was denied by congressional appropriations committees in both years. Thus, most panel attorneys have had only a $5 increase in hourly rates in 12 years.
In denying the increase, Congress expressed concern about the increase in costs in the Defender Services program. However, as reported earlier, analysis performed by both the Administrative Office and Coopers & Lybrand shows that the increase in program costs is not attributable to non-capital panel attorney cases. The requested increase in panel attorney rates would only affect non-capital representations because the hourly rate for capital cases is set by statute at up to $125 and would not change as a result of this type of increase. Based on FY 1998 cost information to date, the FY 1998 non-capital panel attorney cost per representation is expected to remain stable and possibly decrease slightly. This environment provides the Congress with a unique opportunity to address federal judges' concerns about the quality of representation provided by panel attorneys by funding a rate increase for representation services in non-capital cases.
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Conclusion
The American judicial system has withstood the test of time, earned respect at home and abroad, and is regarded as a model by emerging democracies around the globe. The federal courts have served the nation well because they are special purpose courts, designed and equipped to adjudicate small numbers of disputes involving important national and constitutional interests. Indeed, the vast majority of legal disputes are addressed by the state courts and extreme care should be taken to ensure that this delicate balance is not disturbed.
The federal courts strive to make the ideal of equal justice under law a reality. As guardians of the Constitution, federal judges throughout history, and sometimes at great personal sacrifice in the face of hostile disagreement by a majority of the local citizens, have enforced adherence to the law of the land. Federal judges have protected unpopular movements and individuals, and punished corruption that seemed immune from accountability under local laws.
In sum, the most pressing problem confronting the federal judiciary is to adjudicate, fairly and effectively, a significantly expanding docket. You can be certain that, should the increase in caseload and the trend toward federalization continue, every judge will continue to do his or her very best to meet the responsibilities of the federal judiciary. However, as we search for innovative ways to discharge those responsibilities and dispose of more and more cases, all of us—both Congress and the Courts—must give consideration to the quality and well as to the quantity of the justice being dispensed. Ultimately, to increase output, a judge must decrease the time that he or she spends on each case, and wile it is easy to measure the number of cases being decided, it is difficult, if not impossible, to measure the quality of the work or the quality of the justice being done in the process. We can only know that quality is decreasing in some proportion to the increase in output, but precisely because that phenomenon is not measured and reported in statistics, it is sometimes overlooked or forgotten. We must remember to guard against it.
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I would be happy to answer any questions you have.
Mr. COBLE. Judge, I apologize to you for the premature illumination of the red light. It went off too early. That was not your fault, that was our fault. Thank you, Judge.
Either Ms. Zobel or Mr. Mecham, either of you may go.
STATEMENT OF LEONIDAS RALPH MECHAM, DIRECTOR, ADMINISTRATIVE OFFICE OF U.S. COURTS
Mr. MECHAM. Mr. Chairman, members of the committee, it is a privilege to be here. This is my third opportunity to appear at an oversight committee conducted by this subcommittee. We are flattered and pleased that you have given recognition to the judiciary, which is an equal and coordinate branch of government. Even though we have only two-tenths of the 1 percent of the Federal budget to spend, we nonetheless consider our mission to be very important as the Article III creation of the constitutional fathers.
I too would like to join Judge Hodges in thanking you for the approval of the Federal Courts Improvement Act of 1998, earlier this year.
Let me give you a little background about the Administrative Office of the U.S. Courts, which I head. It was created by Congress in 1939 to be the central administrative support agency for the Federal court system in carrying out its mission to provide equal justice under the law.
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Interestingly enough, prior to that time, administrative support for the judiciary was provided by the Government's principal litigant, the Justice Department, and the old Bureau of the Budget, which was an antecedent to the present OMB. It is an anomaly that the executive branch would be in such a dominant role with respect to the judiciary. But, since 1939, my office has provided that support.
Interestingly enough also, Russia has now adopted something similar to our system. We hope that leads it an independent judiciary there. And Ireland has recently adopted a modified form. And we believe that Norway will, along with others.
When I became director in 1985, I set as one of my key objectives to increase the delegation of administrative decision making to each court, because I believe they have the greatest knowledge of their own needs and priorities. Our success in this area is frankly one of my proudest accomplishments. Over the past 13 years, I have delegated financial, personnel procurement, and other administrative authorities to chief judges and to court managers, at the same time ensuring that court staff are trained and equipped to handle these responsibilities. The Administrative Office performs regular audits and management reviews so as to assure the policies of the Congress and the Judicial Conference are followed.
This arrangement has benefited both the judiciary and the taxpayer, because it reduces bureaucracy and commits every court to find innovative ways to increase efficiency and improve services. We look at every opportunity to seek economy and efficiency. The Judicial Conference has established an Economy Subcommittee which performs a role analogous to that of OMB within the judiciary and is consciously striving to be sure the judiciary is effectively well-managed.
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The size of the AO appropriations and the number of AO-funded positions has grown at a considerably slower pace than has the judiciary overall. Furthermore, our work load has increased while our relative staffing has decreased. We are stretched to the limit and we will need additional staff resources in order to continue to provide the kind of high quality support that we have been able to do in the past.
The AO's portion of funding within the judiciary has declined. Our staffing levels also in relationship to the judiciary overall has also declined from 2.7 percent to 2.1 percent overall, and the funding from 3.4 to 3 percent of judiciary funding. So while our work load is going up, our proportional share of resources is going down, which I think is a tribute to our ability to operate efficiently, but we are undergoing considerable strain as we try to do this task.
The chairman of our executive committee Judge Hodges has alluded to the problem we have with courthouse construction. The judiciary by and large was neglected since the early '30's; and then again in the '50's. As the judiciary grew, it did not receive buildings. But in 1991, working with the GSA and with Congress, a significant building program was inaugurated. Regretfully that construction program has been stopped in its tracks, because the president and OMB have frozen construction for our buildings for the past 2 years.
We now have a backlog throughout the country of 14 projects that are stacked up which were ready to go but now cannot be built. This is false economy, because we may lose the sites that have been acquired, we may lose the advantage of the planning that has been done, and we will have to pay rent wherever we are, usually sometimes at very substantial rates.
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The Judicial Conference has endorsed legislation in 1989 to shift the responsibility from GSA to the Administrative Office as far as overall courthouse construction planning goes. We would not anticipate that legislation would pass to establish a big bureaucracy but rather to authorize the Judicial Conference to contract with GSA. We should not be in a position of having GSA be our bosses. Even though we are supposed to be their clients the courts end up as supplicants to GSA. That is precisely what the present arrangement brings about.
The AO will continue to seek improvements in efficiencies in judiciary operations as well as in our own enterprise. Our policy and support responsibilities touch on all aspects of judicial operations. I believe no other Federal agency has such overall sweeping responsibilities with respect to the body that it serves. We met the challenges in the past and we will continue to do so in the future.
I thank the members of the subcommittee for the opportunity to appear today, and am grateful for your interest in our branch of government and our agency.
Mr. COBLE. Thank you, Mr. Mecham.
[The prepared statement of Mr. Mecham follows:]
PREPARED STATEMENT OF LEONIDAS RALPH MECHAM, DIRECTOR, ADMINISTRATIVE OFFICE OF U.S. COURTS
SUMMARY
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I am Leonidas Ralph Mecham, Director of the Administrative Office of the United States Courts (AO). I am here to describe the work of the AO, highlight some recent accomplishments, and note a few areas of concern.
Created by Congress in 1939, the Administrative Office of the United States Courts serves as the central administrative support agency for the federal court system in carrying out its mission to provide equal justice under law. The AO supports over 30,000 judiciary employees, including over 2,000 Article III, bankruptcy and magistrate judges, in over 800 locations throughout the United States and its territories.
Since I last appeared before this subcommittee five years ago, the AO has made major strides in several areas, including:
the delegation of administrative decision-making to the courts has been expanded, particularly in the budget and human resources areas
an ambitious effort to seek efficiencies and economies in judiciary programs has produced significant savings
far-reaching planning process improvements have been made
a major courthouse construction program has been undertaken
program management improvements have been achieved judiciary-wide
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the Federal Judicial Television Network has been launched in cooperation with the Federal Judicial Center and the U.S. Sentencing Commission
communication has been improved within the judiciary and with Congress, the executive branch, and the public through such mechanisms as the Data Communications Network, the J-Net, the Public Access to Court Records system, and videoconferencing
dozens of information technology projects have been undertaken to improve existing systems and processes and ease the workload burden on the courts.
Despite the successes of recent years, there are several areas of concern I would like to address with the subcommittee: the need for additional AO staff, whose number has grown at a considerably slower pace than has the judiciary overall; the lack of funding for courthouse construction for the past two years, which highlights the problems associated with the judiciary's dependence on the executive branch for facilities funding; the erosion of judges' salaries; the administrative burdens placed on the AO by bankruptcy reform bills under consideration by the Congress; and, the need for improvements in the employee benefits available to judiciary employees.
STATEMENT
Mr. Chairman and Members of the Subcommittee:
It is an honor to appear before you today to discuss the Administrative Office of the United States Courts and its role in the judicial system. It has been five years since I last appeared before this subcommittee, and much has happened in that time. I would like to express my appreciation to this subcommittee for your support over the years and your help enacting legislative changes, most recently the Federal Courts Improvement Act of 1998 (H.R. 2294). Today, I will describe the work of the Administrative Office, highlight some recent accomplishments, and note a few areas of concern.
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Administrative Office Mission
Next year, the Administrative Office will celebrate its 60th year of operation. Created by Congress in 1939, the Administrative Office of the United States Courts serves as the central administrative support agency for the federal court system in carrying out its mission to provide equal justice under law. Prior to the creation of the Administrative Office, the Department of Justice controlled the courts' administrative support, budget development and expenditures. Since the Attorney General was a political appointee and the Department of Justice was the chief litigator in the federal courts, there were inherent conflicts in this arrangement. The need for the federal judiciary, as a separate and independent branch of government, to be in charge of its own affairs was recognized by the Congress, the Attorney General, and the leaders in the field of judicial administration of that day.
The Administrative Office's Director is appointed by the Chief Justice in consultation with the Judicial Conference of the United States, and serves under the direction and supervision of the Judicial Conference. There have been only 6 Administrative Office directors in the agency's 59 years of existence. I have had the honor to serve in this position for nearly 13 years.
As you know, the Judicial Conference is the judiciary's policy-making body. It is composed of 27 members: the Chief Justice of the United States, who serves as presiding officer, the chief judges of the 12 regional U.S. courts of appeals, the chief judge of the Court of Appeals for the Federal Circuit, the chief judge of the Court of International Trade, and one district judge from each of the 12 regional circuits, elected by the members of their circuit. I serve as Secretary to the Judicial Conference of the United States, and Administrative Office staff provide support to the Judicial Conference and its committees. Administrative Office staff analyze issues and prepare reports on hundreds of issues each year for the 24 committees of the Judicial Conference.
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By statutory assignment (28 U.S.C. §604), I serve as Chief Administrative Officer of the United States Courts. Some of my responsibilities, as required by statute or direction of the Judicial Conference, are to:
Oversee the operations of the Administrative Office of the United States Courts and its divisions and offices
Serve as a member of the Executive Committee of the Judicial Conference
Supervise all administrative matters relating to the offices of magistrate judges, clerks and other administrative personnel of the courts
Serve as Secretary to the Judicial Conference of the United States and provide the principal staff support and assistance to the Judicial Conference and its committees
Examine the state of the dockets of the courts, secure information as to the courts' need of assistance, and prepare statistical data and reports on the business of the courts
Report on the status of the activities of the Administrative Office and the state of the business of the courts to the Judicial Conference, the Congress and the Attorney General
Provide accommodations for the courts
Plan and administer the Judiciary Information Technology Fund
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Promulgate rules and regulations for the judiciary
Compile the federal rules of practice and procedure
Prepare and submit to Congress the budget of the courts, disburse moneys appropriated for the maintenance and operation of the courts, audit vouchers and accounts of the courts
Serve as a permanent member of the Board of the Federal Judicial Center.
The Administrative Office supports over 30,000 judiciary employees, including over 2,000 Article III, bankruptcy and magistrate judges, and over 27,000 clerks of court, probation officers, pretrial services officers, staff attorneys, conference and preargument attorneys, librarians, bankruptcy administrators, court reporters, federal public defenders and other court staff, in over 800 locations throughout the United States and its territories. We carry out policies established by the Judicial Conference, issuing guidelines, standards, and procedures; providing training and assistance; and conducting reviews and evaluations. We provide centralized core administrative services such as payroll, contracting, and accounting services, and we administer the judiciary's unique personnel systems. The agency manages the judiciary's space and facilities program, identifying the need for new space and coordinating construction and facilities management with the General Services Administration and, in some instances, private sector property management firms. The Administrative Office develops, implements and supports automated systems and technologies. We prepare and submit the judiciary's budget, perform audits, manage funds for the operation of the courts, compile and publish statistics on the volume and distribution of the business in the courts, and recommend plans and strategies to manage efficiently court business. The agency maintains liaison with and provides information to various groups interested in the courts including Congress, executive branch agencies, state and local courts, and the public. In carrying out these duties, the Administrative Office prepares and submits the judiciary's budget to the Congress and executes the budget, monitors legislation that affects federal court operations and personnel, and maintains liaison with the committees of the Congress.
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As the business of the courts has increased and grown more complex, the Administrative Office has responded by shifting its resources and its focus to meet the changing needs of the courts.
Activities and Accomplishments
For a summary of recent Administrative Office activities, I have provided you with a copy of the 1997 Annual Report of the Director: Activities of the Administrative Office of the United States Courts. I would like to touch briefly on some major activities and accomplishments.
Advances in Judicial Administration: Decentralized Management
When I became director in 1985, I set as one of my key objectives to increase the delegation of administrative decision-making to each court because I believe they have the greatest knowledge of their own needs and priorities. In the corporate world, decentralized management has a proven track record, with line managers being given authority to make decisions within overall budget and management parameters. Over the past 13 years, I have delegated financial, personnel, procurement and other administrative authorities to chief judges and court managers—at the same time ensuring that court staff are trained and equipped adequately to handle these responsibilities. It is the responsibility of the Administrative Office to provide necessary guidance, training and oversight to ensure delegated responsibilities are carried out properly. This arrangement has benefitted both the judiciary and the taxpayer because it reduces bureaucracy and commits every court to find innovative ways to increase efficiency and improve services.
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One of the strategies identified by Vice President's Gore's 1993 National Performance Review report, Creating a Government that Works Better and Costs Less, was to decentralize decision-making to local managers. The Judicial Branch was well ahead of the Executive Branch in pursuing this strategy, and we have achieved great success.
As Chief Justice William H. Rehnquist observed in his 1997 year-end report on the state of the judiciary, ''Led by the Administrative Office, the federal judiciary has achieved a remarkable devolution of management authorities and control away from Washington to the individual federal courts. . . . Decentralized management has established the Judiciary as an archetype for other complex public and private institutions, and it has also garnered the attention of judicial leaders and administrators from other nations.''
The decentralization of budget and management authority to the courts began in fiscal year 1991 on a pilot basis. Full implementation started in fiscal year 1994 and is now complete. It has been a major success. Decentralization enables each court to determine how to use available funds to meet priorities. Each court can shift funds from one category of spending to another without needless red tape or approval from Washington. This past year, the Administrative Office made another significant advance to reduce unnecessary paperwork and complexity. We did this by simplifying the way non-salary operating funds are allotted to the courts. Funds previously allocated in 40 separate expense categories were combined in one aggregate amount based on formulas developed by teams of financial analysts, program experts, statisticians, and court staff. As a result, the paperwork burden for each court to prepare detailed budget requests has been substantially reduced or eliminated entirely, and the courts receive a more equitable formula-based distribution of operating funds.
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Another major management advance was the creation of an innovative personnel system for the courts, known as the Court Personnel System. Launched in fiscal year 1995 on a pilot basis, and expanded to all remaining courts in fiscal year 1996, the new court personnel system replaces an antiquated, rules-driven personnel system. Under the old system, standard job descriptions and pay levels did not always match the practical work needs of individual locations or the local labor force. The new personnel system is a modern, flexible program with three primary components: a classification system, a compensation system, and a qualifications standards system. It is the product of four years of collaborative effort by the Administrative Office, outside experts, and the courts. Under the new system of benchmark jobs and broad pay bands, based on the court's needs and the local job market, court managers decide how best to set up and classify jobs, evaluate candidate qualifications, and set employee compensation. More flexible rules enable the courts to recognize and reward higher performance with higher pay while keeping salary expenses within an overall ceiling.
Budget decentralization and the Court Personnel System are two prime examples of a continuing effort to improve court management. I must say that, that contrary to what some might expect, decentralization requires more work by the Administrative Office to develop and update program guidelines and procedures, to develop and implement related systems, to train court staff and managers, to provide advice and assistance, and to monitor the operation of the decentralized programs.
Administrative Office resources previously devoted to administrative processing and hands-on management of local concerns, are being more properly directed toward essential development of systems and program guidance and to oversight of programs. Administrative Office program experts assist court staff in carrying out delegated responsibilities and ensure adherence with applicable standards and program requirements.
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Economy and Efficiency Initiatives
The Administrative Office looks for opportunities to develop, implement, and evaluate cost-containment measures in all its endeavors in every program area. In support of the Economy Subcommittee of the Judicial Conference's Budget Committee, and in conjunction with other Judicial Conference committees, Administrative Office staff study, evaluate, and promote methods to contain costs. Among the techniques used by the judiciary to minimize staffing needs are: formal and systemic surveys of judgeship needs; the use of senior and recalled judges to handle some of the judiciary's workload at a lower cost; intercircuit and intracircuit assignments; requesting significantly less funding for court staffing than the full complement of staff indicated by the judiciary's staffing formulas, a new staffing allocation method for bankruptcy courts, and the use of contract employees. A major effort to re-examine and revise the judiciary's staffing formulas, in light of the productivity improvements and economies that have been achieved, has recently begun.
In addition, the Methods Analysis Program is a multi-year effort to review various court operations using methods analysis techniques used in government and industry to determine better practices for accomplishing the work. These practices are then shared with the court community so each court can decide, based on its particular circumstances, whether and how these techniques would best work for them.
The Administrative Office is aggressively pursuing the use of automated technology to reduce costs and improve productivity and business practices. The Administrative Office is exploring various technologies to improve courtroom operations, handle case processing, improve core administrative systems and expand training opportunities through the use of distance learning methods.
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Reducing space and facilities costs has also been a major focus. The Administrative Office has assisted the Judicial Conference's Security and Facilities Committee and other committees in developing and carrying out a comprehensive program to control the cost of the judiciary's space. The Administrative Office has also assisted with revisions to the United States Design Guide that will reduce future construction costs. The Administrative Office developed an extensive planning process to ensure that space needs are well supported and justified.
The Administrative Office will soon launch a Productivity Improvement Website on the judiciary's intranet (the J-Net) so courts can publicize and share their economy ideas. For a summary of recent economy and efficiency efforts see the report, Optimal Utilization of Judicial Resources, which was provided to the subcommittee.
Planning Process Improvements
Long Range Plan for the Federal Courts. The Judicial Conference's strategic planning process reached a notable milestone in September 1995 with the approval of the first Long Range Plan for the Federal Courts, which provides an integrated vision to guide future policy development and administrative action by the Judicial Conference, its committees, and the Administrative Office. The Administrative Office aids the Judicial Conference in its continued planning efforts and in its implementation of the plan's recommendations.
Long Range Planning Process for Court Accommodations. Under the direction of the Judicial Conference's Committee on Security and Facilities, the Administrative Office developed a long-rang facility planning process to predict future space needs. Using this process, all court and court-related components in a district meet to coordinate and integrate their space needs and work together to develop a coordinated long-range facility plan. Forty years of historic workload data are used to predict growth. The General Services Administration (GSA) relies upon these plans in developing is projections of future courthouse construction needs. For several years, the Administrative Office held workshops throughout the country to train the courts in using this technique. All courts have been trained and plans are in place in all 94 districts. Periodic updates are conducted to make sure plans remain current.
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Information Technology Planning. The Administrative Office supports the Judicial Conference's Committee on Automation and Technology in developing an information technology plan. One of the chief planning mechanisms is the annual update to the Long Range Plan for Automation in the Federal Courts which is prepared pursuant to 28 U.S.C. §612. Through the planning process, the Administrative Office, together with groups of judges and court staff, defines the judiciary's business needs and develops effective technological strategies to meet those needs. In addition, a life-cycle management process is employed during the design, development, and implementation phases of all major projects to ensure project funds are managed prudently and that the project stays on track to meet programmatic objectives.
Internal Management and Financial Planning. In 1989, I implemented a Planning and Management Objectives System. Through quarterly meetings with Administrative Office senior managers, the Associate Director for Management and Operations tracks agency process toward meeting established goals. The system focuses on strategic thinking and enables the agency to devote its limited resources to achieving the highest priority objectives. I have expanded this system to include financial program and major cross-cutting project reviews.
Program Highlights and Recent Accomplishments
Courthouse Construction. I am charged by statute with the responsibility for providing accommodations to the courts. Unfortunately, I have not been able to make much progress in this area lately because the President has declined to include funding for courthouse construction, site acquisition, or design in the General Services Administration's budget request for two successive years. This freeze has seriously disrupted the judiciary's orderly process for planning, designing and building needed courthouses. The Judicial Conference's five-year plan for courthouse construction recommends funding for 14 projects in FY 1999 at a total cost of approximately $500 million. Many of these projects have already been delayed one year, and additional delays will threaten judicial security and may disrupt judicial operations due to the aging condition of several buildings we currently occupy. In addition, the delays will lead to greater costs. The irony of this situation is that the executive branch agrees that all of these courthouse projects are completly justified and necessary. This freeze on funding has created an intolerable situation for the judiciary, which is in dire need of additional, more modern facilities in numerous locations throughout the country to accommodate the additional judges, staff and new technology required to keep up with burgeoning caseloads.
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Court Security. The U.S. Marshals Service has primary responsibility for the security of court facilities. Funding for the court security program is provided to the judiciary, which in turn, transfers funding to the Marshals Service for program implementation. The Administrative Office has improved its financial oversight of the court security program, receiving quarterly reports from the Marshals Service on expenditures for court security officers, equipment and systems.
Last year, a Memorandum of Agreement between the General Services Administration, the U. S. Marshals Service and the Administrative Office (on behalf of the judiciary) was updated. The new agreement gives the Marshals Service the authority to determine the level of access control at all GSA-managed facilities that house a judicial officer. To further enhance security, the Administrative Office, in conjunction with the Marshals Service, initiated a new program of security surveys of federal court facilities to evaluate and enhance existing security services and procedures.
Defender Services Program Initiatives. The Administrative Office supports the Judicial Conference's Defender Services Committee and administers the defender services program. The agency conducts regular reviews of federal defender offices to improve the effectiveness and efficiency of their operations, and to collect and disseminate to all offices information regarding exemplary procedures, best practices, improved processes, and enhanced controls.
As part of the judiciary's January 1998 report to Congress on the Federal Defender Services program, the Administrative Office developed and submitted a list of suggested cost containment and best practices recommendations that drew upon the contributions of various internal judiciary groups as well as external criminal justice experts. The judiciary is exploring mechanisms for implementation of many of these recommendations. In addition, Administrative Office staff have met with Department of Justice representatives regarding these initiatives. As a result, an Administrative Office/Department of Justice Working Group will be established to explore methods to make use of technology in order to reduce costs.
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Probation and Pretrial Services Initiatives. The Administrative Office supports over 7,000 probation and pretrial services office employees. Probation and pretrial services officers are responsible for the supervision of all persons released to the community by the federal courts; in 1997, they supervised more than 93,000 persons. The Administrative Office signed a Memorandum of Understanding with the Department of Justice to implement Operation Drug TEST (Testing, Effective Sanctions, Treatment), a pilot project in 54 sites in 24 federal court districts, to expand pretrial drug testing, enhance supervision and treatment of defendants at risk for substance abuse, and provide the court with information pertinent to setting a defendant's pretrial release conditions. Districts participating in the pilot use on-site laboratory or hand-held testing devices to administer voluntary drug tests to defendants before their initial court appearance or immediately upon release by the court to the community. Being able to perform the testing on-site is key to providing the court with timely information and to responding promptly to evidence of substance abuse. The Department of Justice is funding the cost of the additional testing, treatment, and supervision.
Bankruptcy Appellate Panels. Pursuant to the Bankruptcy Reform Act of 1994, new bankruptcy appellate panels (BAPs) have been established in the First, Second, Sixth, Eighth, and Tenth Circuits. The Ninth Circuit's BAP was established in 1979 under previous legislation. A BAP is composed of bankruptcy judges from the districts in the circuit that are appointed by the judicial council to hear and determine, with the consent of all parties, appeals from bankruptcy court decisions. The Administrative Office serves as a clearinghouse for questions regarding the BAPS, including the allocation of staffing and financial resources and clerk's office operations. Agency staff also are responsible for implementing statistical reporting procedures for BAP caseload data.
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Publications. The agency issues many publications in the form of handbooks, manuals, technical bulletins, newsletters, and brochures that provide guidance and information to judges and court staff. Examples of just a few are: Getting Started as a Federal Judge, a guide for judges during their first year on the bench; Selection and Appointment of United States Magistrate Judges, to assist district courts and merit selection panels with the process of selecting and appointing magistrate judges; the U.S. District Court Clerks Manual and U.S. Bankruptcy Court Clerks Manual, basic reference and training tools for clerks and their staff; the Guide to Judiciary Policies and Procedures, a 13-volume set that brings together information judiciary employees need and use everyday to accomplish their work; Supervision of Federal Offenders: Monograph 109, an essential reference for probation officers that covers standards for the supervision of federal offenders; and Federal Court Management Report, a monthly newsletter for court managers that provides timely information on court administration and developments in finance, technology, personnel administration, and court programs.
Training. The Administrative Office provides training programs for judiciary personnel to implement new judiciary programs and systems and to assist them in carrying out delegated administrative authorities. During fiscal year 1997, Administrative Office training efforts reached 25,820 judiciary personnel in such areas as automation, procurement, retirement, equal employment opportunity, statistical reporting, financial management, human resources, defender services, firearms instruction, travel regulations, and facilities management.
Over the last year, the Administrative Office worked with the Federal Judicial Center, U.S. Sentencing Commission and telecommunication consultants, to launch the Federal Judicial Television Network, a satellite television network that will broadcast educational and informational programming to judges and court employees nationwide. Equipment to receive the broadcasts, including downlink antennas or satellite dishes, is being installed in nearly 200 court locations. Installation began in March 1998, with completion expected this summer.
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Audit, Review and Assessment. The Administrative Office has in place mechanisms for auditing, reviewing, and assessing judiciary operations and programs. Under 28 U.S.C. §604, the agency has the responsibility for conducting judiciary audits. Cyclical financial audits, conducted every four years, and other audits are performed in accordance with standards set by the General Accounting Office. The Administrative Office also conducts management and operational assessments, technical reviews, and program evaluations. The Administrative Office spends a significant amount of time on analytical studies of judiciary programs, many of them at the request of Judicial Conference committees. During fiscal year 1997, the agency conducted about 200 court audits and reviews. In addition, the Administrative Office has devoted considerable time to providing information needed for the numerous studies of judiciary activities conducted by the General Accounting Office (GAO).
External and Internal Communications Advances
Another agency-wide objective is to enhance communications within the judiciary and with the Congress, the executive branch, and the public. Each Administrative Office unit has an objective to review and improve communications and service to its primary court and external customers. I will summarize some of our major initiatives in this area.
Data Communications Network (DCN). By October 1998, the judiciary's Data Communications Network (DCN) will be fully implemented in more than 700 court sites, one year ahead of schedule. The DCN offers a number of benefits and opportunities for efficiencies, including electronic mail and the ability to share easily and securely, case information, opinions, and other information across the country.
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J-NET. The use of web technology is transforming communication throughout the world and offers exciting new possibilities for the judiciary. The DCN provides the platform for the J-Net, the judiciary's intranet web site we launched last year. More than 2,000 judiciary employees visit the J-Net each week to access such information as policy guides, directories, manuals, reports, statistics, memoranda, newsletters and other documents via their personal computers. It is also being used for surveys, data collection, and group discussion forums. Opportunities for long distance instruction are also being explored. This inexpensive and easy form of electronic reference reduces the need for paper copies and saves postage, printing, and time.
Public Access to Court Records (PACER). A goal of the federal judiciary is to ensure appropriate access to electronic information at a reasonable cost to the judiciary, other government entities, litigants, attorneys, and the public. The judiciary's electronic public access program, which is self-funded, has been a great success. It has dramatically enhanced the bar's and the public's ability to access and obtain court information quickly and at a nominal cost directly from their homes or offices. Currently, there are more than 30,000 registered users of the PACER systems available at 183 federal courts. The various electronic public access services received approximately 9 million queries in 1997. The judiciary has recently begun to study the alternatives and implications of providing public access to court records on the Internet.
Videoconferencing. The judiciary is using videoconferencing for many purposes, including training, manager conferencing, the handling of routine and case-related administrative responsibilities such as judge-lawyer conferencing, and the conduct of courtroom proceedings. By the end of fiscal year 1998, 34 district courts will be using videoconferencing to hear prisoner-related proceedings, such as pretrial or evidentiary hearings. Videoconferencing helps judges and court staff schedule prisoner hearings more efficiently, reduces security risk in transporting prisoners, and reduces travel costs.
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Information Technology Advances
Throughout its history, the Administrative Office has been a catalyst for improved judicial administration, always seeking ways to modify operations and thereby ease the workload burdens on the courts. In recent times, as workload grew unabated, the Administrative Office has looked to new technologies to help the courts handle their workload. One of the primary activities of the Administrative Office has been to develop new systems and to promote and support the use of information technology and systems in the courts for managing and processing information, conducting legal research, and performing business functions. There are currently dozens of information technology projects underway.
Electronic Courtroom Project. The Electronic Courtroom Project involves the testing of various courtroom technologies, such as evidence presentation equipment, realtime court reporting, and video-conferencing across the court system to assess their impact on the resolution of cases, the logistical costs of conducting a trial, and the comprehension of information by jurors and other participants. With input from judges, court staff, federal public defenders and U.S. attorneys, the Administrative Office has recently completed an evaluation of various courtroom technologies. Survey responses from judges, attorneys, and jurors are overwhelmingly positive: 87% of judges and 83% of jurors reported that the technologies improved their understanding of the evidence; 79% of judges reported an improved ability to reach a decision; and 85% of attorneys reported an improved ability to examine witnesses. This month, the Judicial Conference's Committee on Automation and Technology will consider the results of these tests and make recommendations to the Judicial Conference regarding acquisition, implementation and use of the courtroom technologies that were found to be cost-effective.
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Electronic Case Files System. This initiative will move us closer to a future scenario of a ''paperless'' courthouse. An electronic case files system will allow the courts to receive, store, and retrieve pleadings, motions, briefs, and other case-related documents in an electronic format as electronic images. Litigants will be able to file papers electronically with the court. Accuracy will be increased because vital case information will be automatically entered into the courts' case management systems. Public access will be enhanced. The Administrative Office has installed and is testing prototype electronic case files systems in nine courts.
Computer Assisted Legal Research. The Administrative Office administers the Judiciary's national program for computer-assisted legal research (CALR). In September 1995, the agency awarded two contracts for computer-assisted legal research: one to West Group, for all categories of research services, including legal research, newspapers and journals, and people and public records, and one to Lexis-Nexis, for newspapers and journals services only. Effective October 1, 1997, the Administrative Office accepted, on behalf of the federal judiciary, an unsolicited gift of free research services from Lexis-Nexis. The gift extends for seven years, through FY 2004. The Administrative Office is working with Lexis-Nexis to implement access to these services throughout the federal judiciary. In addition, a limited contract for newspaper and journal services not covered by the gift, was renewed for FY 1998. The judiciary's contract with West Group was renewed for FY 1998; thus judiciary users will have access to both Westlaw and Lexis-Nexis research services.
Bankruptcy Noticing Center. The number of bankruptcy petitions has risen 52% in the last 5 years, reaching nearly 1.4 million filings last year. One of the most paper-intensive requirements in the bankruptcy process is the issuance of notices to creditors. The Bankruptcy Noticing Center (BNC), under a contract managed by the Administrative Office, provides notice production and distribution services to the United States Bankruptcy Courts. The BNC electronically retrieves data from participating courts' case management systems and then prints, addresses, batches, and mails paper notices at a fraction of the time and cost required to produce the notices manually. Since the BNC's implementation in 1993, it has resulted in staff reductions and cost savings worth approximately $11 million over the former court-based noticing method.
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Electronic Bankruptcy Noticing. While the production and distribution of paper notices through the BNC has significantly reduced costs, further savings will be realized through electronic noticing. Functioning like a sophisticated e-mail system, the Electronic Bankruptcy Noticing system is designed to eliminate the production and mailing of a substantial number of paper notices. Electronic noticing will cost the judiciary about seven cents to transmit versus 37 cents to print and mail a paper notice, allow creditors to receive notices more quickly, and may reduce their processing expenses. Implementation of electronic noticing will depend, in large part, upon the readiness of major creditors to handle these transactions electronically.
Year 2000. Recent news reports have warned that some of the government's computers will stop working in the year 2000 because agencies will be unable to reprogram their equipment to understand years other than those beginning with ''19.'' Administrative Office staff have been working with the courts to ensure that the judiciary's national systems and software will be able to understand entries that begin with ''20.'' The Administrative Office has modified and tested the nationally supported Integrated Case Management Software that is the basis for current case management systems. With the modifications, the systems have been deemed trouble-free. The software is now available to the courts for installation. Using judiciary employees instead of contractors for this testing is estimated to have saved more than $3 million. In addition to preparing nationally supported software for the year 2000, we are working with courts to correct problems with their local systems.
Several other major information technology projects are underway including the following:
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Financial Accounting System for Tomorrow: will provide a comprehensive and integrated financial system that will automate and streamline the recording of financial transactions, produce timelier, more reliable financial reports, and improve internal control processes.
Human Resources Management Information System: will enable the courts to process personnel and payroll actions more timely, accurately, and efficiently. Judiciary managers will be able to access an up-to-date database, generate management reports, and monitor personnel costs.
Criminal Justice Act (CJA) Panel Attorney Payment System: will improve the quality of CJA payment voucher financial data, enhance accountability, and provide more timely, accurate management reports.
Integrated Library System: will provide a consistent, reliable suite of tools that will enable circuit libraries to manage the more than $30 million in annual legal publication spending and the judiciary's legal research inventories valued at more than $1 billion.
Jury Management System: will process juror questionnaires, select jurors randomly for jury panels, track the status of jurors, and process juror payments.
Probation and Pretrial Services Automated Case Tracking System (PACTS 2000): will provide the probation and pretrial services offices with a much needed modern case management system that will improve overall data quality.
Major Issues and Concerns
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Need for Additional Administrative Office Staff
The size of the Administrative Office appropriation and the number of Administrative Office funded positions has grown at a considerably slower pace than has the judiciary overall. Furthermore, our workload has increased while our relative staffing has decreased. We are stretched to the limit and will need additional staff resources in order to continue to provide high-quality support to federal judiciary.
The Administrative Office's direct FY 1998 funding equals $61 million in obligations and 657 FTE. The judiciary's FY 1998 funding equals $3.8 billion in obligations and 30,930 FTE. The Administrative Office's share of the judiciary's appropriation has declined in the last ten years from 2.3% to 1.5%. In terms of total judiciary staffing, the Administrative Office's direct portion has eroded over the last ten years from 2.7% to 2.1% for directly funded positions. The graph below depicts how the Administrative Office's portion of the judiciary's funding and personnel has steadily declined. What makes this decline even more remarkable is that throughout this period, the Administrative Office's overall workload and requests for services increased substantially.
At the request of the Judicial Conference, Congress has, over the past several years, authorized reimbursable positions from the courts' Salaries and Expenses appropriation for the Administrative Office to carry out specific functions in support of the courts (e.g., court automation support) or other judiciary appropriations (e.g., defender services and court security). This has enabled the agency to meet critical court support requirements. Nevertheless, even counting the reimbursable positions, in the last five years, the Administrative Office portion of total judiciary personnel has decreased from 3.4% to 3.0%, and its share of judiciary funding, including reimbursable funding, has declined from 2.8% to 2.6%.
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Percentages under 3% for national administration are extraordinarily low. For example, the funding and staffing provided for the general administrative functions at the Department of Justice (DOJ) are higher. Appropriated fund staffing levels in DOJ's ''Management and Administration'' accounts grew by almost 18% from FY 1995 to FY 1998. Over that same period, Administrative Office appropriated fund staffing declined by almost 2%. Also, as the chart below shows, Administrative Office appropriated fund staffing levels amount to 2% (or 3% counting reimbursable staffing) of total judiciary FTE in FY 1998 while the FTE funded by appropriations for the DOJ ''Management and Administration'' accounts amount to almost 5% of total DOJ FTE.
Lack of Funding for Courthouse Construction
To rectify serious past deficiencies, the GSA, at the judiciary's urging, undertook a major courthouse construction program in 1991. Prior to this time, it had been several decades since a major effort had been undertaken to build courthouses. Many courthouses in use today were built in the 1930's or earlier. Regrettably, this construction program has been stopped in its tracks because for two years in a row, the executive branch has refused to ask for funding for courthouse construction projects it has already approved.
This brings into stark relief the problems associated with having the executive branch in charge of the judicial branch's funding. Just as it was clear in 1939 that an executive branch agency, the Department of Justice, should not be in charge of the judiciary's administrative support budget, it is clear now that an executive branch agency, the GSA, should not be in charge of the judiciary's facilities budget. The Judicial Conference endorsed legislation in 1989 that would have given the judiciary real property authority independent of the executive branch. If funding for courthouses remains ''frozen,'' perhaps it is time to pursue such legislation again.
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Erosion of Judges' Salaries
I would like the thank you for your support in securing the first pay adjustment for federal judges since 1993. Unfortunately, we were unsuccessful in repealing section 140 of Public Law 97–92 (the Continuing Resolution Act of December 15, 1981), which requires specific congressional action for judges to receive pay adjustments. Part of the reason is that many members of Congress mistakenly believe repealing Section 140 would delink judges pay from Executive Schedule and congressional pay. It would not. Instead it would place judges on an even playing field with members of Congress rather than penalize them as the present system does.
Increasing judicial compensation will continue to be the Administrative Office's top legislative priority and we will work vigorously to obtain annual pay adjustments.
Bankruptcy Reform Legislation
Senator Charles Grassley has introduced S. 1301, a bankruptcy reform bill that would, as one of its provisions, require the Administrative Office to collect, publish, and report data on consumer debtors to Congress. A companion bill introduced by Representative George Gekas in the House, H.R. 3150, assigns this duty to the Executive Office for the United States Trustees, but charges the AO with prescribing the form in which the data should be collected. The AO already collects a sizable amount of data on the nature and volume of the work of the courts. I believe data of this nature is rightly the responsibility of the United States trustee system, which is responsible for supervising trustees and estates and approving distributions to creditors.
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Judiciary Employee Benefits
Last year, under the guidance of the Judicial Resources Committee, the Administrative Office contracted with Towers Perrin, an international benefits consulting firm, to review the employee benefits available to judicial officers and employees though the executive branch's federal employee health and life insurance benefits programs. The study found the benefits package to be lacking in certain areas, particularly in its coverage for prescription drugs and mental health treatment, dental benefits, long-term care, and disability benefits. We are interested in working with Congress to seek improvements in the employee benefits available to judiciary employees. Congress may be interested in improving the benefits package available to its own members and staff, and we would be happy to work cooperatively with you on such an endeavor.
Conclusion
The Administrative Office will continue to seek improvements and efficiencies in judiciary operations, including our own activities. Our policy and support responsibilities touch on all aspects of judicial operations. I believe no other federal agency has such far-reaching responsibilities as our own. We have met the challenge in the past and will continue to do so in the future to ensure equal justice for all Americans. I thank the members of this subcommittee for the opportunity to appear before you and for your assistance in the past, and I look forward to working with you in the future. I would be happy to answer any questions you may have.
Mr. COBLE. Judge Zobel.
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STATEMENT OF RYA W. ZOBEL, DIRECTOR, FEDERAL JUDICIAL CENTER
Ms. ZOBEL. Good morning. I am honored to be here to represent the Federal Judicial Center, and thank you for the invitation to participate in these hearings.
I am here to tell you what we did. But even more, I would like to hear your views and your recommendations as to what we should be doing in addition to what we already do. I would like to highlight two things. You have the written statement; and, as you said, you will study it. One is what we have been doing in the way of distance education, and the other is what we do to ensure that the education that particularly judges receive is relevant and up to date.
The Center devotes about three-fourths of its resources to education, not only of judges but of court staff as well. Distance education and using technology to provide education is nothing new with the Center. About 10 years ago, most of our education was in the form of seminars to which people would come. Since then, we have changed dramatically.
Last year, of the 41,000 participants in a range of programs, about 90 percent were taught in their courts by a range of different technologies. We have used for some period of time videotapes. We have used on-line conferences, we have used interactive CD–ROMs that the Center has produced, and we have done a lot of training of trainers, who then provide training to their colleagues within the courts.
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We have now moved into satellite video and we are doing this in a big way. One of our recent publications is this announcement and program schedule for the next several months. There are a number of interesting good programs that we have put together, and we have now devoted substantial resources to be able to do this. We have built a studio, an additional studio. We have trained staff. We have assigned additional staff from traditional programs to working on these video programs. We have drawn on our many years of experience in producing videotape programs.
Our travel budget has declined during the last 3 years by some 36 percent. There are lots of benefits to using the technology, not the least of which is this. One probation officer who listened to a program we did last week said it has made him feel, for the first time, as if he is not just a part of this probation office in which he works, but part of the national corps of probation officers. And I think that is an enormous benefit to the courts. We will be doing a program, as we did last year, reviewing the most recent Supreme Court term. We will be able to do that within 3 weeks after the last opinion issues, and that will be broadcast all around the country.
We have done and will repeat a program that teaches judges about computer-generated evidence. In September, we will broadcast a two-part program to law clerks orienting them to their new work.
That is just a sampling of what we have in mind to do.
None of this, however, comes without cost. And we have had to redeploy resources to do this, including one person who really is in charge of all the studios, and ensure that they work properly not only for the Center but for the Administrative Office and the Sentencing Commission, all of which participate in the use of these resources.
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I think it is important to note that there are some programs that are simply not suitable for video or other technologies, that there are times when judges as well as court staff need to get together because of the opportunity for informal exchange and what that teaches each of them about the nature of their job and how they can do it better.
So we have gone about as far as we can, I think, in reducing travel costs, and I hope that we will not have to go further, because we will lose the benefit of certain programs.
Let me briefly mention the kinds of programs we do. We are keen to be sure that judges learn about the cutting edge issues. We teach about science. We teach about law and biology, about the scientific process. As a result of the Supreme Court's Daubert opinion, judges have to be much more versed in these areas. We checked with judges about what they need to know. We have a committee that helps us decide what they should learn. We give balanced programs with heavy content; and I think in general, we do a very good job in teaching judges what they need to know and equip them then to manage the litigation that comes before them.
We are, by Washington's standards, a small agency, but there are those who love it. And I think under the circumstances we really do an excellent job, but would love to hear from you if there is anything in which we have been remiss or in which you wish us to expand our efforts.
Thank you very much.
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[The prepared statement of Judge Zobel follows:]
PREPARED STATEMENT OF RYA W. ZOBEL, DIRECTOR, FEDERAL JUDICIAL CENTER
SUMMARY
Rya Zobel has been a U.S. district judge for the District of Massachusetts since 1979. In 1995, the Board of the Federal Judicial Center selected her to serve as its seventh director.
The Center is the federal judicial branch's agency for education of judges and supporting staff and for research and evaluation to improve the administration of justice.
It operates this year on an appropriation of $17,495,000, with approximately 140 full-time equivalents. It commits about three-fourths of its resources to education and training and the rest to research and evaluation.
Judge Zobel's statement describes aspects of the Center's work in which the subcommittee may have special interest, including:
Technology in support of education—About 90% of the 41,000 participants in Center education programs last year received training through distance education methods. The newly launched Federal Judicial Television Network will let us expand our non-travel education. (For some types of education, however, face-to-face meetings are essential.)
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Education to keep judges abreast of the law and law-related developments
Case management to reduce cost and delay
Alternative methods of dispute resolution—The Center's active and supportive role in this field will enable it to advise the courts as directed by the proposed Alternative Dispute Resolution Act of 1998
Science and technology—This project helps judges play the gatekeeping role created by the Daubert decision and assists courts with difficult issues of scientific evidence
Prisoner litigation and capital cases
Pretrial discovery
Mass torts and class actions—The Center is assisting the Judicial Conference's Mass Tort Working Group, recently appointed by the Chief Justice.
Appellate court structure
Training to promote effective management of the federal courts—Our ''maximizing productivity project'' helps court managers use the tools of team-based leadership, total quality management, and process improvement.
Cooperation between the state and federal judicial systems
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STATEMENT
Mr. Chairman and Members of the Subcommittee:
My name is Rya Zobel. I have been a U.S. district judge for the District of Massachusetts since 1979. In 1995, the Board of the Federal Judicial Center selected me to serve as the Center's seventh director.
That Board is chaired by Chief Justice Rehnquist and includes two circuit judges, three district judges, one bankruptcy judge, and one magistrate judge, each elected by the Judicial Conference; the director of the Administrative Office of the U.S. Courts serves ex officio. The Center operates this year on an appropriation of $17,495,000, with approximately 140 full-time equivalents. We commit about three-fourths of our resources to education and training and the rest to research and evaluation.
Congress established the Center in 1967 to meet a widely acknowledged need for a separate judicial branch agency for education and training of judges and court personnel, and to provide objective, independent study to help the federal courts improve how they administer justice. Last year a committee, appointed by the Chief Justice at my suggestion and comprising members of the Center Board and a member of the Judicial Conference Executive Committee, completed a strategic plan to help us keep our work closely aligned to the needs of the federal court system in the years ahead.
Areas of our work in which the subcommittee may have special interest include the following:
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Technology in support of education
The Center uses a full panoply of educational methods to ensure that its training is timely and effective, and that it conserves both taxpayer dollars and the time of participants. Of the nearly 41,000 participants in our programs last year, almost 90% received training through distance learning methods. These include in-court workshops in which local staff teach colleagues using Center-prepared lesson plans, as well as seminars held by satellite, by computer, by videoconference, and by telephone. We have reduced our travel costs by 36% since 1995, and, as explained below, we continue to seek new ways to use technology for education.
I am bound to stress, however, that for some types of education, it is essential that judges or court staff meet face to face with their colleagues.
Satellite television education
With the inauguration this year of the Federal Judicial Television Network (FJTN), the Center expanded its non-travel education to include direct broadcasts to federal courthouses across the country. To enable us to provide interactive education by satellite on a regular basis, we used $500,000 of fiscal 1996 travel funds for a new teletraining studio at our headquarters. The Sentencing Commission and the Administrative Office provided logistic and financial support, and the Administrative Office, with funding from the Judicial Conference, will soon have installed more than 200 satellite dishes in federal courts around the country.
This month we are broadcasting thirty hours of programming developed by the Center to different groups within the federal courts. Our satellite education ranges from judicial seminars on computer-generated evidence to interactive programs to teach probation officers how to deal with the gangs that increasingly pervade offender populations.
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A probation officer on the West Coast commented after a program last week that ''this helps makes us a national probation system, not just a collection of ninety-four offices.'' I want to thank Congressman Harold Rogers of Kentucky, who chairs our appropriations subcommittee, for his leadership and support in the development of the Federal Judicial Television Network.
Other educational technologies
In addition to the 41,000 participants in Center programs—both in-person and electronic—judges and staff also received training through Center-produced videocassettes and interactive services. Last year, for example, to orient probation officers to a new method of assessing the likely recidivism of offenders under federal supervision, we produced a videocassette and an interactive program distributed on computer diskette to let officers learn the new method at their desktops.
Center CD-ROMs and videocassettes dramatizing hypothetical cases help deputy clerks understand the rules of procedure. On-line computer conferencing lets Center and court staff ''stay at home'' to develop curriculum for upcoming programs and share ideas on improving court processes such as case-flow management and procedures for pro se cases.
Our manuals and in-court training teach probation officers to conduct financial and other investigations to advise judges as they impose criminal sentences, and teach court staff the skills they need to interact with the public and with others in the courthouse.
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Education to keep judges abreast of the law and law-related developments
In all our judicial education—whether by seminars, by manuals and monographs, or through video broadcasts—we assure that judges receive balanced and practical explanations of the governing law and its implications, and of the economic and scientific factors that increasingly affect litigation.
Within the limits of our resources, we keep judges up to date on changes in the law that you and your colleagues enact, as well as changes in appellate case law, and developments in related fields that judges must understand if they are to function effectively (for example, in such areas as environment and land use or intellectual property). With the guidance of our Board and our judicial education advisory committees, we present education that judges need, and when there are legitimate differences of opinion about an issue, we ensure that our participants hear them all.
Case management to reduce cost and delay
The best-known Center education program is our two-part orientation seminar for new trial judges, where we stress the importance and the techniques of effective case management to control litigation cost and delay. The program also covers the Codes of Conduct, the rules of evidence, and sentencing. Our case-management seminars for district, magistrate, and bankruptcy judges, as well as our manuals on cost and delay reduction, and on managing complex litigation, help federal judges stay abreast of caseloads that have grown much faster than the number of judgeships. The Center's case-management and education experience was also instrumental in the production of the Judicial Conference Bankruptcy Committee's case-management manual.
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Alternative methods of dispute resolution
Congress and the Judicial Conference have strongly encouraged federal judges to use alternative methods to traditional trial procedures in appropriate cases. Given its active and supportive role in this field for years, the Center is well positioned to advise the courts as directed by H.R. 3528, the Alternative Dispute Resolution Act of 1998, which originated in this subcommittee.
After passage of the 1990 Civil Justice Reform Act, special Center education programs acquainted judges and court staff with ADR and helped them design sound programs. To further assist courts in establishing quality ADR programs, we have developed a series of reference manuals to enable federal courts to identify the features of the federal ADR programs that they may wish to adopt and adapt. These manuals, which have also proven useful to state and foreign courts, include:
separate ''sourcebooks'' on district court ADR programs with profiles of each of the ADR programs in operation in our trial courts; on appellate court mediation programs; and on bankruptcy court ADR programs (in preparation)
a handbook to assist judges in their specific tasks within the ADR context, such as referral of appropriate cases and management of cases once they have entered into ADR (in preparation).
Some federal judges—magistrate judges in particular—have also begun to develop specialized expertise in dispute resolution, and in response to their needs we offer hands-on training in mediation skills.
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In the 1980s, we evaluated the district court arbitration programs, as directed by Congress, and we also analyzed one of the few mediation programs then in operation. We have subsequently assessed the efficacy of the different types of ADR represented by the Civil Justice Reform Act's five ADR demonstration districts—again in response to a statutory directive. We recently provided the Judicial Conference Advisory Committee on Bankruptcy Rules the results of a nationwide survey on the need for national rules on mediation in bankruptcy. We also assisted the Conference's Committee on Court Administration and Case Management in its consideration of ethical issues that may arise in court-based ADR programs.
In cooperation with several state courts and other organizations, we are participating in a new project that examines six types of court-based mediation to identify those that are most efficient and ensure highest quality of resolution.
Science and technology
Our science and technology project is a multi-phased effort to help judges assess scientific evidence, especially in light of the gatekeeping role for expert testimony created by the Supreme Court's Daubert decision. The Center's 1994 Reference Manual on Scientific Evidence—widely republished by private firms for the bar—helps both judges and lawyers understand the science being presented in courtrooms. We will release the second edition next year, with a foreword by Justice Stephen Breyer.
We also explore innovative ways to assist courts with difficult issues of scientific evidence, such as the use of panels of independent experts appointed by the courts to prepare neutral testimony.
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Prisoner litigation and capital cases
Prisoner litigation
Shortly after Congress enacted the Prison Litigation Reform Act and the Anti-Terrorism and Effective Death Penalty Act in 1996, we broadcast a nationwide seminar to help judges understand the new requirements, published a manual to help district and magistrate judges manage cases under the new law, and began a newsletter to report the developing caselaw under both statutes.
Capital case management
Early next year, we will publish the first part of a two-part resource guide to help judges efficiently and effectively manage capital cases, both capital habeas cases and federal death penalty prosecutions. The manual will include techniques of capital-case budgeting. This resource guide will draw on the experiences of judges and attorneys who have previously handled such cases.
Pretrial discovery
At the request of the Judicial Conference Advisory Committee on Civil Rules, the Center studied the use of discovery in federal civil cases, examining how frequently discovery is used, how much it costs, what kinds of problems arise in discovery, and what effect the 1993 amendments to the rules have had.
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Mass torts and class actions
The Chief Justice has designated a Judicial Conference Mass Tort Working Group, which has asked the Center to conduct a set of case studies (comparing limited-fund class actions with Chapter 11 bankruptcy reorganizations) and a review of legal and empirical literature on proposals to resolve mass torts. This work builds on our recent studies of settlement classes in mass torts and of other types of class action litigation.
Bankruptcy in forma pauperis
Earlier this year we completed our evaluation of the Judicial Conference's legislatively mandated pilot project to assess the costs and benefits of waiving the filing fee for indigent Chapter 7 bankruptcy debtors.
Appellate court structure
Pursuant to statute, we are providing research for the Commission on Structural Alternatives for the Federal Courts of Appeals, which Congress created last December to analyze the appellate courts, especially the Ninth Circuit. Earlier in the decade, again pursuant to statute, the Board of the Center released its report on structure and procedure in the federal appellate courts and its report on intercircuit conflicts, prepared with the assistance of Professor Arthur Hellman. Shortly we will publish a follow-up study by Professor Hellman on the persistence and tolerability of conflicts.
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Training to promote effective management of the federal courts
Taking a page from management trends in industry and other parts of the government, in 1994 we launched a ''maximizing productivity'' project to help court managers and their staffs develop and use the modern management tools of team-based leadership, total quality management, and process improvement. Since then, eighty-nine court units in fifty-nine districts have participated in the program. Participation in the program helped the District Court for the Northern District of Texas receive the Vice President's Hammer Award in 1997 for faster turnaround time and reduced error rates for services provided, reduction of paperwork, reduced duplication of work, automation of manual processes, and improved customer relations. This is only one of our many programs for court staff.
Cooperation between the state and federal judicial systems
Chief Justice Rehnquist often quotes Alexander Hamilton's observation that the federal and state court systems should be seen as ''one whole.''
To help the two elements of our justice system cooperate within their respective spheres, we have worked with the state courts, and with the National Center for State Courts and the State Justice Institute, to arrange regional and state-specific symposia to promote dialogue between state and federal judges and help them find practical solutions to practical problems. To the same end, last year we published, with the National Center and the State Justice Institute, the widely used Manual for Cooperation Between State and Federal Courts.
I appreciate this opportunity to provide this information in support of the subcommittee's oversight function. I welcome your attendance, or that of your staffs, at any of our seminars and workshops, invite you to view our satellite broadcasts, and hope you will turn to the Center whenever the products of our research work will be helpful to you.
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Mr. COBLE. Thank you, Judge Zobel. Thank you all for your testimony.
Judge Hodges, the Kansas City Star recently published a series of articles which reveal that perhaps some Federal judges were not taking adequate steps to ensure that they did not have any financial interests in companies that may have ultimately become litigants in cases before them.
What has the Judicial Conference done in response to this alleged conflict or conflict of interest problem? And do you have any proposals to resolve it?
Mr. HODGES. Two things have been done up to this point to my knowledge, Mr. Chairman. First, letters have gone out from the Administrative Office and also from the chairs of two conference committees, the Court Administration Committee I believe and the Code of Conduct Committee, calling the attention of judicial officers throughout the country to this potential problem, and encouraging them to make sure that they are giving proper attention to the requirement of recusal under Section 455 of Title 28 when they could conceivably have a financial interest in any matter coming before them. We recognize that there could be a problem in this area, and those two committees that I mentioned will be addressing it.
One of the provocative issues I think raised by the series of articles is the question whether a broader disclosure could be more efficiently made of the judges' financial disclosures and make them more accessible to the public. That is not as easy an issue as it might seem, because of security concerns, quite frankly. There have been instances when inappropriate use has been made by incarcerated prisoners, for example, of the judge's financial disclosure forms.
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There have also been instances throughout the judiciary in which some people have filed completely false and fictitious leins against judicial officers' assets and that sort of thing. Those are the reasons, some of them, at least, for the procedure that has made it at least superficially difficult for people to gain access to those materials.
One problem is, I think, that the financial disclosure provisions of the Ethics Act of 1989, I think it was, were designed to fulfill the need for general accountability, and not necessarily aimed at a judge's duty of recusal under Section 455 of Title 28.
One of the things that the judges in Kansas City have done is to prepare what they call, I think, a ''recusal list,'' which is displayed in the clerk's office and made available, and that is possibly a useful idea that I am sure the Code of Conduct and the Court Administration Committee will pursue. I think the direct answer to your question is that our attention has been drawn to this matter and we are dealing with it.
Mr. COBLE. Well, I do not mean to equate the judiciary with us in the Congress. But, as you know, we are required to publicly disclose our holdings, or lack of holdings oftentimes as the case may be, and I think maybe the public has a right for more ready access to that information from the judiciary. I do not think it would require legislation. I think you could probably do it administratively and require all judges to publicly disclose financial information.
Mr. HODGES. Well, I think that is essentially true, yes, sir. As I said, though, there are some security concerns that we would have with respect to that.
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Actually, under the statute, if a judge has any financial interest, no matter how small, in the litigation before the court, there is an obligation of recusal. It is not keyed to amount, for example, which is one of the things that is dealt with in the present disclosure forms.
As I said a moment ago, I think for each judicial officer to prepare, for lack of a better term, a ''recusal list'' naming parties or entities in which he or she may have some interest might be a very useful idea; and our committees will be considering that.
Mr. COBLE. I would like for you to do that, and stay in touch with us as to what progress you make to that end.
Ms. ZOBEL. Mr. Chairman, may I add one thing that the Center is doing in this connection. We have always and continue to teach ethics to new judges as they come aboard, as well as including programs on ethics, including conflict of interest, of course, in the appropriate section to judges in a number of the programs that we put on.
One of the results of the series of articles was that we had an exchange of views at a conference of chief judges recently as to how they might be able to deal with this in their courts, so that there are a number of approaches that supplement what Judge Hodges has just explained.
Mr. COBLE. Mr. Mecham, the Federal courts have gone high tech. Talk about, if you will, electronic filing, et cetera, whether or not this has increased efficiency in the administration of justice, and will the use of high-tech products and services eventually result in a decrease in operating costs.
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Mr. MECHAM. Yes, I think we have made great progress, thanks in part to this committee and others who have supported us in this effort.
First, with respect to bankruptcy noticing, in particular lends itself to automation because of the high level of paper flow. We have established a central Bankruptcy Noticing Center, which serves virtually every bankruptcy court in the United States and electronically extracts from bankruptcy case management systems and prints addresses, batches, and mails paper at a fraction of the cost of producing notices at each bankruptcy court. As a result, we have been able, in the past several years, to save on the order of $11 million. We just entered into a new contract and we will save even more in the future. Electronic bankruptcy noticing is the wave of the future.
We are also looking at electronic libraries, and we think this is a concept that may be of some value to us as well. Many judges prefer, for example, to do computer-assisted legal research rather than use law books. We find that when judges do that, it saves money. It is an optional thing, and particularly the younger judges are interested in doing that.
Judge Zobel has already referred to the satellite video network we now have, the training potential we have, indeed not only the potential but the kinetic for video telecommunications. In addition to training, a number of the courts have opportunities for using video conferencing, say between a prison and the court. Courts of appeals are experimenting with video so they do not have to travel as much as part of their conferencing work.
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We now have a data communication network set up nationally for the judiciary. We managed to get it installed a year ahead of time. It is now being used extensively for e-mail and for exchanges of opinions. And as we perfect our accounting and our financial and statistical data systems, that will increasingly be able to assist in those areas.
I wish I could guarantee you that every dollar we spend on automation will necessarily equate to economies. It does enable us, however, to do our work more efficiently and better. I will be happy to provide you with a paper on that subject.
Mr. COBLE. Let me ask a question of you, Judge Zobel. Do you perceive a reduction in travel costs, for example, because now employees will not have to travel as they did prior to the high-tech era?
Ms. ZOBEL. Well, as I mentioned in my opening statement, we have reduced our travel costs by about 36 percent in the last 3 years. I would hope we would not have to reduce them further. They are very low already. Because there are some programs that are just better done if people can get together and exchange views—that is how both judges and court staff learn.
We have done executive leadership programs for court staff, and part of what they do is to talk to each other about how they do their work in different parts of the country where the cultures are different, where the practices are different and it is just an appropriate way of teaching in addition to the technological ways we use. There is no question that with satellite video we can reach many, many more people than we could ever reach before. So the per participant cost is way down.
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It is also the case, however, that there are certain start-up costs. We have to redeploy staff, and we have to train staff to use this technology. At the same time, we know that there are certain programs that are better done by video.
For example, the Supreme Court review that I mentioned earlier I think is a program that is far better done by satellite video than we would be able to do if we were to try to get together with that many people in person.
I hope that answers your question.
Mr. COBLE. Thank you Judge.
Mr. Goodlatte has to be at a markup, and Mr. Frank has generously agreed, Bob, for you to ask your questions.
Mr. GOODLATTE. I thank the gentleman from Massachusetts for his kindness.
Mr. Mecham, welcome. I appreciate your comments regarding economy and efficiency in the judicial branch of our government. In fact, you live on one-tenth of 1 percent of the total amount of our budget. I have introduced a bill, however, that would save your branch of government about almost 1/2 of 1 percent of the money that you spend, and have been rebuffed by you folks; and this is a bill to propose reducing the size of Federal grand juries which, as you know, now have a maximum size of 23 members.
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We do not in any way change the proportion that it takes to bring forth an indictment or any other way change it, simply to try to reduce the size in rural areas, such as encompassed by my district, where we had have a significant problem and a tremendous cost. It cost your branch of government, 6 years ago it cost over $16 million a year to fund the per diems and travel costs and accommodations of grand juries, and I know it has increased significantly since that time.
Mr. FRANK. Just by Kenneth Starr it has gone up by 25 percent.
Mr. GOODLATTE. And I think that is an excellent point, and the gentleman and I could agree on saving some effort there. But the answers that we got back from you are rather troublesome. You said it was, for example, more likely that one strong or disruptive juror might dominate deliberations. Well, the fact of the matter is, as the gentleman from Massachusetts noted, a form of deliberation where the counsel for the defendant is not even allowed in the proceeding but the prosecutor is.
Mr. DELAHUNT. Will my friend from Virginia yield for 10 seconds.
Mr. GOODLATTE. I will yield to the gentleman.
Mr. DELAHUNT. I should indicate to him that I am working as we speak on some legislation that would I think initiate some significant grand jury reforms, and I would welcome his input.
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Mr. GOODLATTE. I would be delighted to share my bill with you and to work with you on anything that would create some efficiencies here. But the fact of the matter is, are you suggesting that we should increase the size of trial juries, which right now have a maximum of 12 jurors?
Mr. MECHAM. No, I am not suggesting that.
Mr. GOODLATTE. They have no one else in the room, so if there is one juror who might dominate the process, it would seem to me far more likely to occur in what is in my opinion a far more important part of the judicial process. That is not to diminish the importance of grand juries. But the deliberation and higher standard of proof are called for in the trial jury, where there is no one else in the room to restrain the activities of one juror who might dominate the process. Because it seems to me a far greater concern than it would be for grand juries, and it seems to me a pretty lame reason for not having grand juries' sizes reduced and saving your department or branch of government $7 or $8 million.
Mr. MECHAM. The purpose of my communication with you was to try to faithfully reflect the strong views of the Judicial Conference of the United States, which took up very seriously your suggestion both in a conference committee and in the Judicial Conference itself. There was a strong view that the present system works well and that we should maintain this historic relationship that has gone on for 200 years. Not that that necessarily makes it valuable by itself, but it is a proven product.
May I suggest that I yield to real experts on this subject if you wish. I think Judge Hodges can probably respond better than I.
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Mr. GOODLATTE. Let me say, the response I got from the Judicial Conference did not address what I would think would be the critical underlying question, which would be, would the rights of defendants on grand juries be impaired if the size of them were reduced to a more manageable size and that would save taxpayers a significant amount of money? That was not addressed by the Judicial Conference.
Mr. HODGES. Congressman, I know some of the considerations that flowed through the minds of the members of the Judicial Conference in entertaining your proposal and, as Mr. Mecham just said, very serious consideration was indeed given to the difference between the nature of grand jury service and trial or petit jury service.
As you know, there are 23 members of the grand jury, 16 of whom are required for a quorum, 12 of whom must vote in favor of an indictment; and they are impaneled typically for periods of time of a year or more, over the course of which they will engage in a variety of investigations which may require that period of time.
Experience is that over that period of time there are sessions of the grand jury in which not all 23 members can be present, and there are difficulties sometimes in maintaining a quorum of 16 in order to assure a vote of 12 if an indictment is warranted.
Mr. GOODLATTE. If I may reclaim my time for a second. My bill simply reduces that to 13, 9 and 7. If the proportions are almost exactly the same, and in fact 7 out of 13 is a slightly higher percentage required to bring an indictment than 12 out of 23, but in terms of maintaining a quorum, it is much easier to do that with a smaller number of people than it is with a larger number that you are talking about. And that is precisely the reason why a U.S. District Judge in my district in rural southwest Virginia suggested that it is a practical matter for reducing the size of grand juries and making them easier to work with as well as more cost-effective.
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Mr. HODGES. Well, I certainly think that is entitled to consideration. I am not entirely sure I agree with it in terms of the ease of maintaining a quorum. But, also, the difference, quite frankly, it seems to us is insubstantial in terms of travel costs compared with the desirability of getting people involved in the administration of justice.
The grand jury is a fundamental constitutional component of the administration of criminal justice. It is assailed frequently. And any idea or suggestion that it be reduced, which has the effect of reducing the number of people who get involved in the process and go away with an understanding of the process, it seems to us is not justified by the savings it would achieve.
Mr. GOODLATTE. My time has expired. But I would just note that that begs the question of why we do not increase the size of trial juries? And frankly, all the answers given by the conference would beg the same question, or I would say, is there a more important jury than a grand jury?
Mr. COBLE. Bob, why don't we do this another day? I think this might deserve more time. And Mr. Frank, in his continuing generosity, has agreed to permit the gentlewoman from California to take his place in the next line of questioning.
Ms. LOFGREN. Thank you very much, Mr. Frank and Mr. Chairman.
I wanted to raise the issue that I think has become known clearly to the courts, which really relates to the chairman's prior question about conflicts of interest or perceived conflicts of interest.
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I think there is nothing more damaging to the citizens' faith in the country and due process of law than the belief, even if inaccurate, that those who are entrusted to judge have been influenced outside of the court through financial connections one way or the other. And that is why our standard in the judiciary is not just to ask is there a conflict of interest but is there an appearance of conflict of interest. Because that confidence and faith in our judiciary is the bedrock of why our system works as well as it does.
I was therefore enormously distressed to read, and I would like the chairman's permission to make a part of the Record a series of articles and editorials——
Mr. COBLE. Without objection.
Ms. LOFGREN [continuing]. About all-expense-paid seminars that are being accepted by apparently large numbers of Federal judges that I think very clearly at least raises the appearance of impropriety, and needs, I think, immediate attention so that faith in our system of government is not undercut.
Whenever I see a headline that says ''Judges On The Take?'' I mean, that alone is something that would distress us all. Here is an article from the Bangor Daily by property rights advocates and raises many questions. But I would have the same opinion no matter what the ideology of the group were, I mean right, left, center. If it is a group that is involved in funding litigation and the seminar is about their point of view, it is totally, totally inappropriate for a judge to accept a freebie trip. I mean, it is just so damaging to our country.
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We had a situation similar to this in California just a few years ago in which members of the state supreme court were accepting free trips from nonprofit groups, but they were nonprofit groups with an agenda. The judges felt, and I understand, it would not influence them. And I believe that in fact it probably would not influence them, but the appearance was dreadful. And in the end, the supreme court, the chief justice and the whole court, decided that they would not do that to the California state system; and they have now declined to ever accept those types of free trips.
So I am hopeful that our Federal courts will take strong steps to conform the behavior of our whole judiciary to that very high standard of lack of appearance of conflict of interest.
And I guess, Judge Hodges, you would be the one I think to address this issue and I am eager to hear from you on this subject.
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Mr. HODGES. Well, thank you. It is a very difficult problem or issue that each judge has to decide ultimately for himself or herself when invited to attend a seminar that is being sponsored by someone other than a governmental entity.
The Code of Conduct Committee of the Judicial Conference has addressed this very question in at least one opinion, approaching it from the standpoint of whether or not it could be considered in the nature of an ex parte communication with judicial officers, so as to raise the question of interest or bias and form the basis of recusal. But it is a very difficult issue to deal with generically. Because what one reasonable person might perceive as indoctrination, another equally reasonable person might perceive as education.
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Ms. LOFGREN. Might I just interrupt and ask a further question of you. Because it seems to me that you are right; under our system, each judge has great authority to make decisions about what he or she should do. However, it seems to me that the courts themselves, as an entity, ought to provide some guidance. Because, ultimately, the issue is whether or not a judge has violated the code of conduct, the ethical code that guides them. And, in fact, their judgment about what is appropriate only goes so far. Because if they were to believe a course of conduct was appropriate when in fact it violated the code of conduct, they could be removed from office.
So it seems to me that the courts need to outline a course of conduct that is quick and actionable. If you are accepting freebie trips, there are golf excursions and the like from a group that is funding litigation that will later be before you, that raises at a minimum an appearance of conflicts of interest, and judges ought to be advised that if in their judgment that is appropriate, their judgment may get them in trouble in terms of removal from office.
I think it would inure to the service of the entire judiciary to aggressively explore that and to advise the judges as to the shadyness of some types of behavior.
Do you disagree?
Mr. HODGES. No. What I was saying is I think it has been dealt with, at least to some extent, by opinions of the Conduct Committee that are already in place dealing with that very question; and judges have to make the decision whether they should recuse when perhaps some later piece of litigation comes before them that someone might perceive as having involved an earlier ex parte communication. And then, too, the parties always have the right under the statute to move the judge to recuse himself or herself if they have reason to believe that there has been some appearance which raises the question of impartiality.
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Ms. LOFGREN. One final thing. In the House of Representatives, we have a rule: You cannot accept gifts. You just cannot accept gifts. And I think that that is something that the judiciary ought to look at.
Mr. COBLE. The gentleman from Massachusetts has yielded not once but twice. So, Ed, with your permission, I will call Mr. Frank at this time.
Mr. FRANK. Thank you, Mr. Chairman.
Let me say, as elected officials, I think the easiest thing for us to do is to adopt the no-gift rule. Because the no-gift rule, I will tell you, has one enormous advantage. By not accepting gifts, you minimize or at least reduce the amount of time you have to spend talking to journalists, who in these days are far more interested in trivia than they are in public policy. And from my standpoint, the less I have to talk to any of them the better I like it. But it does not seem to me to advance the public wheel one iota.
I think the disclosure, I mean, the next thing you will be asked to sign a note as to what you wear under your robes. I do not worry about that. But I do worry about ideological aspects of the issue that my colleague raised. We have fairly strict rules against judges hearing things ex parte when there is litigation. But it is my experience that one's mind does not shut down on an issue when you leave the courtroom. And the danger we have in these seminars it seems to me is that they are increasingly offered—it does not seem to be likely that a judge will be influenced in his or her decision by being asked to go to a resort.
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But I do think there is a problem of an ex parte impact to this. Going to a seminar which is about the subject matter that is in fact under litigation—and it does not have to be the instant case to be very relevant, it could be the principles we talk about, and I assume sometimes to go hear from people who are litigators who might appear before your court, that does bother me.
So I would hope that there could be a reading in the canons that would say that judges, we are not telling people not to go listen to any one thing, and if you in the process of observing information decide if you only listen about this information you will be level-headed, since most information is potentially most useful when it is presented in the most partisan fashion, because it is important to get the partisan information from both sides.
But I would hope if there is not, that there will be some provision that says judges should make an effort to expose themselves in these kinds of forums to a variety of opinions. Because I do think there would be a problem of, in effect, a breaching of the principle against ex parte if you were sort of consistently going to one set of seminars with one set of litigators arguing one set of principles which would in fact be relevant principles when you went to a case.
I wonder if you have any reaction to that.
Mr. HODGES. Well, I agree fully with everything you said, Congressman Frank. And I think that is the sort of thing that judges have to take into consideration when they agree to attend seminars.
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Mr. FRANK. I wonder if it might help to put something explicitly into the appropriate canons to say that. This would appear to be a newer phenomenon of people doing it. And I think maybe we ought to look at that. There is no one event in that situation that seems to me improper. If people begrudge a judge for going somewhere and getting a bed for 3 days, I think that is not a serious issue. But I think, as I said, the ex parte would be.
Mr. HODGES. I was just going to say, I hear you and we will ask the Code of Conduct Committee to reexamine that question.
Mr. FRANK. The only thing I would say, part of the problem is we have got a lot of liberals that are concerned a lot of conservative foundations are holding a lot of these seminars, and I think the judges ought to make an effort to go to seminars run by all parties. But they cannot go to those seminar if only one group is running them.
So if some of my friends do not like judges going to a seminar that they do not like, they better start up some seminars that the judges can go to that they do like. I am not going to tell judges they cannot go listen to people. I am not going to engage in that. But I am prepared to say, judges, you have got to be evenhanded about this. But they cannot take advantage of nonexistent opportunities.
Mr. Chairman, I do want to note that we occasionally are told that there is not a problem of lack of judges, that the rate of confirmations is not a problem, that you have collectively plenty of judges, and if you all just work with reasonable efficiency we would not have any difficulty.
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Do we have a problem because not enough judges are now sitting?
Mr. HODGES. Well, certainly my response would be, if we do not have one, one is on the horizon. As I remarked earlier, since 1990, there have been no new judgeships created; and since that time, over the last 8 years, we have had the usual number of vacancies but an increasing period of time being taken to fill those vacancies. I think it is up to something like 600 days now on average, where it used to be half that. Those two factors taken in conjunction are making it more and more difficult for the courts to discharge our responsibility in a timely and efficient manner.
I am proud to say that my colleagues throughout this country, through diligent effort, have disposed of the business before the courts in what I think is a diligent and timely manner. But sooner or later, our ability to do that is going to be taxed beyond its limits. And we do need additional judgeships that we will be requesting next year.
Mr. FRANK. You will be requesting additional judgeships?
Mr. HODGES. Yes, sir.
Mr. DELAHUNT. How many?
Mr. FRANK. That is a good point. Do you know how many, or is that not yet confirmed?
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Mr. MECHAM. Our request this year was 53, but we have not been able to get a bill introduced except the one in the Senate.
Mr. FRANK. That is additional judges over and above what we now have, and we have this second problem or additional problem because we have not filled all the judgeships that we do have now. I have noted no slow-down in our sending you new business. There are gaps in the world.
One of the most impressive, it seems to me, is the gap between the theoretical belief in states' rights of many of my colleagues and their willingness to federalize issues. The willingness to vote to make issues a matter of Federal jurisdiction coexist wonderfully with a state of preference for states' rights. I have not yet quite been able to understand that.
But we have got a slowing down in the rate with which vacancies are filled, and we have an increase in new business. And I would say we can do all the oversight in the world, but we ought to, as a Congress, do our basic job of having enough judges there. And I am told, and I voted for the bankruptcy bill yesterday, but I am told that that is going to require more bankruptcy judges probably to administer the complex new statute. It certainly is going to slow things down.
So I do think that, as we conclude our oversight hearings, we ought to give ourselves the worse grief for having exacerbated the situation.
Thank you, Mr. Chairman.
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Mr. COBLE. The gentleman from Indiana.
Mr. PEASE. Thank you, Mr. Chairman.
I apologize to the members of this panel for my tardy arrival and my imminent departure. I have two other hearings going on simultaneously, and one is a markup. But I do want to address, Mr. Mecham, the question of facilities, and describe for you a situation and ask if it is common or not, and how you are dealing with the whole question of appropriate facilities and space for the courts.
In my district, which includes both the southern and northern districts of Indiana, but in this case the southern district, a large WPA constructed building of the late 1930's owned by the Postal Service, originally owned by the Post Office, including a number of government agencies, after the conversion of the Post Office to a semi-public corporation some years ago, I assumed—I find out incorrectly—that it was operating in a business fashion and setting aside depreciation funds for the building and that it could meet the needs of the building as it depreciated, only to find out that that is not the case. No depreciation is set aside at all, no capital improvements made.
And, so, now virtually all of the agencies have left the building, which exacerbates the financial problem there, leaving only the court, or soon to leave only the court and in this case and our office, and the concern because of the special needs of court space, the ability of the GSA or others to provide them other than this sort of facility is also limited.
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Is that a common occurrence for you? How do you deal with the need for space and the relationship with both the Postal Service and the GSA?
Mr. MECHAM. First of all, it is the ultimate responsibility of GSA, but we try to shape our own fate to the extent that we can. I have statutory authority to provide facilities, but I do not have any money or resources to do it. So we have to work through GSA, we have to work through OMB. With respect to this building in Indiana, is this is a government-owned building?
Mr. PEASE. Yes.
Mr. MECHAM. The judiciary must pay rent to GSA. We pay the commercial equivalent of rent on all these government buildings. And GSA keeps raising the rent on us every year, even though probably in case the cost of constructing the building has been paid for three or four times already. But we still have to continue to pay rent.
This is one of the biggest components of the judiciary budget. We are now looking at $675 million a year. Maybe that does not seem like much in a couple of trillion dollar budget. But, in our budget, a little over $3 billion, that is a lot of money. And we have to bleed to pay that rent every year and go before our appropriations subcommittee to get the rent.
Federal courthouse buildings were built in the early '30's, also in the early '50's. In the early '50's they built basically junk. In the early '30's, frankly they were built better. But even they cannot last forever. And it sound like your building is one of that category.
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With respect to this specific building, I would like to maybe talk with you and find out what is going on and see if there is something we can do about it.
Mr. PEASE. We are working on the specific building. And though I am not real hopeful, there is some glimmer of hope we can work things out. I am just concerned about the larger issue for the courts in general, whether this is common, if you have suggestions on how we ought to deal with it collectively to ensure that you have the appropriate space that you will need within a budget that you can afford, and so forth.
Mr. MECHAM. We really are, in many instances, running out of space, or have inadequate space or poorly secured space. We have 14 construction projects, for example, ready to go this year, but there is a freeze by the White House. We are are trying to get that reversed. We are making some progress.
I do think we need to have an institutional response, and we would be pleased to work with anyone in Congress who has an interest in this difficult problem.
Mr. PEASE. Let me ask you one other follow-up. Do you own some of your own space or do you rent everything?
Mr. MECHAM. Well, when you say do we own them, GSA, the government, owns many buildings in which the courts are located. Some of them are totally devoted to courts. Some are multiple use, multiple purpose. We frequently have U.S. Attorneys and probation pretrial service offices in courthouse buildings. It varies from location to location. Some are government-owned. Some judiciary space is leased. Some government-owned buildings are multiple-use involving several agencies. So they would vary.
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Mr. PEASE. Thank you. Do you find any pattern to the clustering of space within Federal buildings as relates to the courts? For instance, are we likely to find near your space U.S. Marshals and FBI and those folks, or do we find them abandoning Federal buildings to go to other quarters and leaving the courts by themselves in any pattern at all?
Mr. MECHAM. Usually the U.S. Attorneys and the Marshals like to be in or near the buildings. They find this a convenience. And if they are abandoning them, my guess is that they do not like the space they are in. And they currently have the right to do that.
Mr. FRANK. By the way, in Boston, we were glad to make our contribution to alleviating the space problem.
Mr. MECHAM. We are grateful to you. Although, the marina was not our responsibility. I want you to know that.
Mr. FRANK. We tell everyone it was.
Mr. COBLE. We have a vote on the floor. You all rest easy. We will return.
[Recess.]
Mr. COBLE. Best laid plans often go awry. We thought that there was going to be one vote, and it turned out to be three votes.
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If you will stand at ease, I want to give Mr. Rogan and Mr. Delahunt a chance to return. If they don't return imminently, we will excuse you all.
Welcome, Mr. Delahunt, the other gentleman from Massachusetts.
Mr. DELAHUNT. Thank you, Mr. Chairman. First, let me particularly welcome Judge Zobel, whose reputation is well known in Boston as a jurist of unimpeachable integrity, keen intellect and a wonderful temperament.
Ms. ZOBEL. Thank you very much.
Mr. DELAHUNT. But don't stay down here, come back home.
I am going to pick up on some of the questions or the theme, I think, that my friend, Mr. Frank, was talking about and I would like to focus on the area of resources. I was surprised to learn that your budget was under $4 billion. He has alluded to the fact that, despite what one would have anticipated given the concept of devolution that would seemingly have been embraced by the changes that occurred in this institution as a result of the 1994 election, since I have been here it seems that there has been an increased federalization or at least an inclination to federalize just about everything.
This committee reported out a so-called takings bill that would have allowed a petitioner in a property takings case to circumvent the state court.
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You know, we have passed much in the area of criminal legislation that would be, in my opinion as a former state prosecutor, an attempt to federalize state laws and state crimes. I am concerned about this trend. But even beyond that, yesterday—we don't do this very often coming from Massachusetts, but Mr. Frank and I disagreed on a bankruptcy vote. I voted against it for a lot of reasons, one of which was a sense that this Congress will not support the necessary resources to implement that legislation. CBO indicates that it will be necessary to add 25 to 30 additional judges. It is not in the cards.
I think we already need new bankruptcy judges now. In fact, there is one statistic that struck me. Around 1978 there were some 850 cases per bankruptcy judge, and currently it is approximately 4,500. What kind of justice can be administered with that kind of a caseload? I mean, is justice happening in the bankruptcy system today? I ask it rhetorically, but any member of the panel is more than welcome to comment.
And then we heard testimony from one particular judge, Judge Jones, who was very adamant in support—in fact she was the only Federal bankruptcy judge who came before the subcommittee indicating that she was supportive of the bill that passed yesterday, and she acknowledged the system was fragmented and it is not working. It is broken now and we are really going to make things worse.
I would like to hear some comments on what you need for resources so justice is done. You can't buy it on the cheap, and to me under $4 billion is silly. We are not filling the vacancies now, and I hear that you are going to come forward with a proposal for 53 more. I think the American people deserve justice and fairness and it should be efficient, but you can't do it without the resources.
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I am going to ask unanimous consent just to continue and prattle on for awhile, if I may.
Mr. COBLE. Without objection.
Mr. DELAHUNT. You people don't make your case. If you need 53 more judges, this has significant public policy implications. It is about justice. Don't be so shy about asking.
I was pleased to see that Chief Justice Rehnquist has come forward and talked about what has happened in terms of federalizing state crimes. This is craziness, particularly when you know that you are not going to get the resources out of Congress, but you have got to start to speak up about it. You are too gentle.
And in terms of your proposal for 53 more judges, I suggest that you send me the information and I will seriously consider it.
What is happening in terms of our probation service and do we need more administrative help? Do we need more clerks? What is the real story about what is happening out there? What is happening to the caseload? In civil litigation, when a party files a civil suit, when is that getting disposed of? We are aware of speedy trials, but what is happening to the criminal caseload? If you need the resources, this is the time to talk about it.
I will stop and listen for a moment.
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Mr. HODGES. Well, I appreciate those remarks, Congressman. As I said earlier this morning, I think we are reaching the outer limits of our capacity to do our work as people would like to see it done, and we are going to be asking next year for a substantial increase in the——
Mr. DELAHUNT. When you say that, Judge, when you say we are reaching our outer limits, no one is listening, and I say that respectfully.
I am concerned that in America the justice system is collapsing, and that litigants are not, in terms of the civil side of the court as well as the criminal side, getting a fair deal today. If it is going to cost another billion dollars, let us spend it so that people have confidence in an independent branch of government that is essential to a viable democracy. But you have to tell the story and you have to tell it clearly.
Mr. HODGES. I was somewhat conservative the way that I phrased it because I predicted that we would have floundered before now, but we are still managing to keep abreast of the work through an enormous amount of hard work by some very dedicated people.
Mr. DELAHUNT. And unappreciated.
Mr. HODGES. I suspect so. And we have indulged in all sorts of alternative dispute resolution mechanisms, mediation and arbitration, for example. I have just come from Tampa where we have what we called an accelerated trial calendar. We all agreed to concentrate in Tampa and try cases. And we did manage to dispose of hundreds of cases. In the meantime, of course, the bubble was enlarging in other places.
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If the jurisdiction of the Federal courts continues to grow, as you have mentioned, and if we don't receive additional judge power and have the vacancies filled, obviously there is going to come a time, and I wouldn't begin to predict when, that there will be a substantial shortfall in the quality of justice that we are rendering. I am not going to say that we have reached that point now because I don't think that it is true.
Mr. DELAHUNT. I just think that the American people ought to know about this.
Let me ask a specific question because I don't want to belabor this. In the memorandum we received from the committee staff, there is a piece under ''judicial resources'' that indicates that the administrative office explains the rising costs and increased workload in terms of more defendants applying for and receiving court appointed attorneys, complex cases resulting from the Federal sentencing guidelines, mandatory minimum sentencing guidelines.
What kind of an impact has on the administration of justice? What is the cost to the taxpayers of the sentencing commission? Is it working? Is it slowing down the process? Is it resulting in additional costs to the judiciary?
Mr. HODGES. Well, that is a very broad question. I don't know that I can answer it sitting here. I do know that in terms of the life of a district judge in the sentencing process, and especially now that the Sentencing Reform Act has been in effect for 11 years, that we are beginning to see more and more revocation petitions with respect to supervised releases since we no longer have the parole board. All of that work has been shifted to the district courts, and that has been one of my concerns that I have asked several of our committees to look into as to ways in which we might address that, perhaps through the use of—the large use of magistrate judges, for example.
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In terms of its impact on the courts, there is no question with what guidelines sentencing and sentencing under the Sentencing Reform Act is a totally different regime than we previously had.
Mr. DELAHUNT. And it is an additional burden?
Mr. HODGES. It is.
Mr. DELAHUNT. That is my last question. I would really make a request of the Chair.
It would appear that this particular subcommittee does have jurisdiction in the area of sentencing guidelines, and I would make a formal request that sometime before the end of the calendar year this committee exercise its oversight jurisdiction and ask the Sentencing Commission to come before us and let us make an examination—let us take a good close hard look at the impact of the sentencing guidelines and the Sentencing Commission in terms of the efficiency and the cost and the burden on the courts.
Mr. COBLE. We will take that under advisement and I will talk to you about that.
I say to the gentleman, I do not classify your comments as ''prattle.'' I think it is a level or two above prattle.
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Ms. ZOBEL. If I may make a comment?
Mr. DELAHUNT. Yes.
Ms. ZOBEL. We have a group of district judges who are going through the second week of their orientation. This afternoon we are having a component on sentencing which you would find very interesting. The entire class, about 20–25 judges, has been asked to sentence on the basis of an actual case. They were given the presentence report and a number of other materials that were available to the actual sentencing judge and to give reasons therefore. We know that they will have worked hard in coming up with whatever the sentences and the reasons may be. We also know from having seen the results that the sentences will range all over the lot so that——
Mr. DELAHUNT. So there continues to be disparity in sentencing despite the efforts made over the past 11 years?
Ms. ZOBEL. Some of it dictated by different views of the defendant and the offense and perhaps the criminal history. Some of it dictated by the way in which the case law has developed differently in different circuits.
You would find it a fascinating exercise if you have the time to come around this afternoon.
Mr. DELAHUNT. Unfortunately I don't, but I would be interested in any report that might be generated.
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Mr. FRANK. I would like to follow-up here on the question of the seminar. It does seem that to the extent possible we have members of the judiciary to get the extra intellectual stimulation. When we look at some of these other issues that are attracting judges, I assume that you are paying attention to that and the range of subject matter that you offer would be there because that is one way to avoid this problem is to make sure that your center is doing the work of offering these.
Ms. ZOBEL. Absolutely. We have offered annually a program on environmental law, for example, in conjunction with Lewis & Clark University. The primary complaint that we have had is that we work the judges too hard. We have offered programs on science, various aspects of science. Of course, we have the Manual on Scientific Evidence which helps judges to understand what kinds of experts come before them so they can make the judgments as gatekeepers that the Supreme Court asks them to make. We are in the process now of revising it and preparing the second edition of it which will reflect somewhat different case law than when the manual was first published—we now know what it is—but there will be additional scientific matters in the manual to help judges deal with the questions that they have to deal with.
Mr. FRANK. One further point. I am not too concerned if there were judges who had a pattern of going only where there was golf and swimming pools and not to yours, that might lead to some question as to whether or not they have mixed motives in their extraordinary curriculum.
Mr. COBLE. Mr. Mecham and Judge Hodges, let me ask you these two questions:
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Mr. Mecham, you indicated a continuing need of the judiciary is courtrooms. In May of last year the GAO issued a report that during a study of courtroom use in 7 major cities in 1993, courtrooms were not being used 46 percent of the time.
The GAO referred to judiciary's policy of assigning one courtroom per judge as a possible contributing factor. When you respond, would you touch on the possibility of courtroom sharing as a solution to that need.
Secondly, gentlemen, in looking at the budget outline given to us by the AO, the Administrative Office, I note that security in the judiciary will receive the largest increase in funds during fiscal year 1998, over a 20 percent increase.
I am curious to know why such a dramatic increase in that allocation. If you can respond to that in writing, I would be appreciative. We thank you for your attendance at our hearing.
[The information referred to follows:]
Question: In looking at the budget outline given to us by the Administrative Office, I see that the amount allocated to security will receive the largest increase in funds during fiscal year 1998. In fact, it will be increased by over 20%. Yet, in your testimony, you argue that the judiciary needs more funding for security. Can you please expand on why the increase in funds for security is not enough?
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Answer: Cost growth in the Judiciary's Court Security program occurs for the following reasons: (1) base adjustments (e.g. inflation); (2) additional court security officers (CSOs) and equipment for new or renovated court facilities; (3) additional CSOs to upgrade existing facilities to meet minimum Marshals Service staffing standards; and (4) replacement of obsolete X-Ray machines and magnetometers at existing court facilities.
In fiscal year 1998 total funding available to the Court Security program grew by $30 million, or 22 percent, over fiscal year 1997 levels. Approximately $19 million of this increase was driven by the need for 387 additional CSOs primarily to bring a number of court facilities nationwide up to the minimum Marshals Service security standards. $9.2 million was required to procure security systems for new court facilities or to replace outdated systems at existing locations.
Fiscal year 1999 funding grows by a only 6.9 percent above FY 1998 levels. This is a net $11.6 million increase resulting in part from a $17.2 million increase in CSO funding needed to annualize the partial cost of the 387 CSOs brought on in FY 1998, as well as the need for 168 new CSOs. This increase was offset by a reduction in security system requirements of $5.8 million for fiscal year 1999.
The following chart displays Court Security funding requirements from FY 1997 through FY 1999—
Question: In your testimony, you mention that the judiciary needs new courtrooms or courthouses. Yet, in May 1997, the GAO issued a report that during a study of courtroom use in seven major cities in 1993, courtrooms were not being used 46% of the time. The GAO referred to the Judiciary's policy of assigning one courtroom per judge as a possible contributing factor. Could you please respond to this report and discuss whether or not courtroom sharing could alleviate tile need for additional courtrooms?
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Answer: As the GAO itself acknowledged in the May 1997 report, the issue of determining proper courtroom utilization is a much more complicated process than merely counting the time the lights are on in the courtroom. This is the inevitable result of the inherent unpredictability of a judicial docket. Due to the speedy trial act, criminal cases must be tried within a very short time after the indictment. On the other hand, civil cases, that actually go to trial typically require several months of preparation and are usually scheduled for trial many weeks in advance.(see footnote 1) Further complicating this scheduling problem is the fact that there is no way to know how long any particular case will actually take to try at the time it is scheduled, and the fact that most cases will settle or otherwise be disposed of short of trial. This set of circumstances requires most active judges to plan their calendars far into the future by assigning certain weeks or months to a given activity such as civil trial terms, criminal trial terms and motions hearings. This enables the clerk of court to schedule cases into those calendar slots (and issue notices to the parties) using a method known as the ''trailing calendar.'' This involves scheduling a large number of cases into a relatively small time frame on the assumption that most of the cases will settle or otherwise be disposed of prior to trial. The cases are thus listed sequentially in the order in which the court intends to call them with each case ''trailing'' the other.(see footnote 2) Then, when the scheduled term arrives, one of two things is likely to happen: (1) most of the cases have settled, been continued or otherwise disposed of so that the courtroom is actually used for only a portion of the anticipated term;(see footnote 3) or (2) fewer cases have settled than had been anticipated (or an unexpected criminal case must be given precedence) thereby requiring the use of the courtroom beyond the time set aside for that term such that any judge sharing the courtroom would have her docket totally disrupted. Other factors also complicate courtroom sharing by active judges. Among these are emergency applications for injunctive relief, a weekly occurrence in the life of many judges requiring the unanticipated and immediate need of a courtroom. There is also the matter of an infinite variety of differing local conditions making it impossible to fashion an inflexible national standard governing courtroom sharing.
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Instead of embarking upon what experts have said would be ' a lengthy and costly study process that may not produce definitive results, the judiciary has taken definitive steps to respond to the issues raised by the Congress about the number of courtrooms needed in new facilities. The Conference recently has adopted policies to assist the courts in determining the number of courtrooms that are necessary in each district. At its March 1997 session, the Judicial Conference adopted a policy on courtroom sharing that balances the essential need for judges to have an available courtroom to fulfill their responsibilities with the economic reality of limited resources. The policy is based on a judge's need for a courtroom rather than the particular status of the judge. It continues the standard of providing one courtroom for each active district court judge. In addition, with regard to senior judges who do not carry a caseload requiring substantial use of a courtroom and visiting judges, the policy sets forth a non-exclusive list of factors for circuit councils to consider when determining the number of courtrooms needed at a facility. Such factors include an assessment of workload anticipated to be carried by a senior judge and the number of years a senior judge is likely to carry such a caseload, as well as evaluation of the complement of courtrooms throughout the entire district. Courts are encouraged to provide for flexible and varied use of courtrooms. The Conference asked the judicial councils, which have the statutory authority to determine the need for court accommodations (28 U.S.C. sec. 462(b)), to develop a policy on sharing courtrooms by senior judges when a senior judge does not draw a caseload requiring substantial use of a courtroom, and for visiting judges.
Likewise, in recognition of congressional interest in the number of courtrooms constructed in new courthouses and in major alteration projects, the Conference approved specific planning assumptions that can be used to determine the courtroom capacity in new buildings. These assumptions, which have been incorporated into an automated model that can be used by courts and circuit judicial councils as a complement to other available planning tools, address several factors that, can affect the number of courtrooms needed in the short and long term. Some of these factors include the average age of a district judge upon appointment, the average number of years it takes for a replacement judge to begin work, and the number of years that a senior judge would require a courtroom dedicated specifically to his or her use. Prior to taking this action, there were no specific assumptions for use by the courts.
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In addition to the courtroom sharing policy, the Judicial Conference approved criteria for circuit councils to use in determining whether to establish or close a non-resident facility (a facility that does not have a resident judge). This policy must be viewed in conjunction with the courtroom sharing policy as both policies will guide circuit councils in determining the facilities they need in their particular circuits to perform their judicial duties. Circuits must consider how many days a non-resident facility is likely to be used for court proceedings, the distance from the next closest facility in the district, and the cost per day of use of the facility. In addition to those three basic factors, circuits are encouraged to consider the travel and per them costs involved for litigants, court staff, jurors, and U.S. Marshals to travel to a distant facility, as well as jury pool representativeness, and cultural, community, and historic reasons for establishing or closing a facility.
In relative terms, the courtrooms themselves do not contribute significantly to the overall cost of a new courthouse. Opportunities for sharing in smaller buildings would be quite limited. If sharing courtrooms; was feasible in a larger building, for example in a building with 16 courtrooms, there would be the potential to save about $750,000 by eliminating one courtroom. In an $80 million building, this equates to about one percent of the total construction cost. If the building were already designed, redesign costs and any construction delays attributed to the elimination of the courtroom could erode the savings.
These policies related to courtroom sharing, as well as recent changes to the U.S. Courts Design Guide, will assist the judiciary in containing the costs of court facilities, while assuring the appropriate number of courtrooms necessary to fulfill its constitutional mission.
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Mr. FRANK. To the extent that you want to submit that under double security, we can keep that in confidence. If there is a restricted index, that might be good with regard to security.
Mr. COBLE. That would certainly be the case.
Ms. ZOBEL. Thank you.
Mr. MECHAM. Thank you.
Mr. COBLE. Attending to a technical matter of committee procedure, I announce that the oversight portion of the hearing today has concluded. The subcommittee has recessed. We will now convene to consider H.R. 3578, the ''Protecting American Small Business Trade Act of 1998,'' sponsored by our colleague from New Jersey, Representative Mendendez.
At the outset, I want to say to you that I advocate Federal arbitration programs. In fact, the House, you may recall, has passed an alternative dispute resolution bill that is pending in the Senate. Is Mr. Mendendez present? I saw him come in earlier. I understand that one of his constituents discussed some problems with him and it led to the drafting of H.R. 3578.
Now, as you all no doubt know, this committee cannot intervene in ongoing or potential legal disputes as an extra-judicial body. Our job as policy makers is to examine the underlying bill before us and to determine whether it would engender good or bad results. I urge all of our witnesses to focus on the bill and the policy it endorses.
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I now recognize the Ranking Member from Massachusetts, Mr. Frank.
Mr. FRANK. Mr. Chairman, I was approached on this by our colleague, the gentleman from New Jersey, who said that a company in his district was he thought being treated unfairly and I recognize, I think everyone does, the separation of power is a difficulty we face when we are dealing with what are essentially executive and judicial branch questions.
Because I was persuaded by Mr. Mendendez that it was a serious issue and out of respect for him I thought we should go ahead and I appreciate your granting us a hearing. We are aware of our conflict of interest and I hope to address one of the companies—the company of Kenrich Petrochemicals, in Bayonne, New Jersey, about six blocks from where my mother was born in 1912 and where she lived in Bayonne, and I did want to put on the record that six block coincidence is entirely unrelated.
Mr. COBLE. I thank the gentleman.
The first panel consists of one witness, Jeffrey Kovar, who is the Assistant Legal Adviser for the Department of State. He is involved in various projects related to the creation of uniform rules of international private law, including the Hague Conference on private international law, the U.N. Commission on International Trade Law and the International Institute for the Unification of Private Law. Until recently he was Deputy Assistant Legal Adviser for International Oil Claims and Investment Disputes where he specialized in international arbitrations and claims resolution involving the United States and its nationals.
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Mr. Kovar began his legal career as a law clerk to the Honorable Hugh H. Downes of the U.S. First Circuit Court of Appeals. We have a written statement from Mr. Kovar which I ask unanimous consent to submit into the record in its entirety.
Mr. Kovar, we are on a short leash today so if you can confine your oral testimony to 5 minutes. You will know that has elapsed when the red light illuminates. Your written is received and will be examined thoroughly, so we are not cutting anybody off.
STATEMENT OF JEFFREY D. KOVAR, ASSISTANT LEGAL ADVISER, PRIVATE INTERNATIONAL LAW, OFFICE OF THE LEGAL ADVISER, DEPARTMENT OF STATE
Mr. KOVAR. Thank you very much, Mr. Chairman and members of the subcommittee. I very much appreciate the opportunity to appear before you today to address the proposed legislation.
The Department of State and the Administration strongly oppose this legislation. It would cause great harm to the orderly and assured system of international commercial arbitration created by the New York Convention on which a substantial amount of U.S. commerce relies.
H.R. 3578 would cut a hole in the well-established provisions of U.S. law regarding arbitration, disrupt long standing U.S. policy favoring arbitration of commercial disputes, and could cause an overall weakening of the worldwide system for arbitration of commercial disputes through retaliatory or copy-cat legislation. It is directly contrary to existing law implementing our international treaty obligations, which clearly require all parties to enforce valid agreements to arbitrate.
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Since 1925, arbitration agreements have been enforceable in U.S. courts. In 1970, the United States became a party to the United States Convention on the Recognition and Enforcement of the Foreign Arbitral Awards, called the New York Convention, and this extended the U.S. legal principles internationally. In 1990, we also became party to an inter-American arbitration convention which we call the Panama Convention.
To implement these conventions, Congress amended the Federal Arbitration Act, which is Title IX of the U.S. Code, to add language that expressly provides that the New York Convention and Panama Convention shall be enforced in United States courts. As a result of this legislation, Federal and state courts are bound to comply with the conventions, including provisions which require courts to refer parties to arbitration when an international dispute arises that is governed by a valid arbitration clause in a commercial contract.
H.R. 3578 would create an unprecedented situation where one party to a valid arbitration agreement could instead bring the dispute before the U.S. courts, contrary to the party's freely chosen agreement to arbitrate. This would be a severe blow to the New York Convention from which U.S. businesses derive so much benefit.
The proposed legislation could significantly impair the ability of U.S. businesses to enforce arbitration clauses and contracts they have with foreign parties. Japan could retaliate by refusing to enforce arbitration agreements. Moreover, if the precedent is followed by other countries, U.S. businesses could be unexpectedly forced to litigate their disputes in foreign courts when they have relied upon the availability of international arbitration under their contracts. These foreign courts might be significantly less impartial than the arbitration panels called for under these contracts.
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Worldwide the United States has been in the forefront in advocating the use of international arbitration because it is good for American business. There are 118 countries now party to the New York Convention, including Japan, and the result is that businesses are now able to bargain for the forum and for the procedures they want to resolve business disputes with foreign partners, and they can have an assurance that the final award can be enforced in any of these 118 countries.
We understand that there is a particular company that is having a business dispute with a Japanese company, and in an effort to assist, the Department of State met with representatives of Kenrich Petrochemical Company and have consulted with our Embassy in Tokyo about the status of arbitration in Japan.
Our Embassy and the arbitration experts we consulted assured us that fair and unbiased arbitration is available in Japan for American companies. We urged Kenrich Company to consider following the dispute resolution procedures to which it had agreed in its contract by seeking to arbitrate in Japan, and we offered to put Kenrich in touch with leading experts on arbitration in Japan.
We understand that there has been an argument made that the Supreme Court's decision in the Mitsubishi case in 1985 affected rights that Kenrich believed it had to bring suit in the United States. The Mitsubishi decision made no change in U.S. law which would have affected Kenrich's action regarding its licensing agreement.
In Mitsubishi the Supreme Court simply held that antitrust claims were arbitrable. Disputes about the interpretation of licensing agreement performance provisions, which is what Kenrich's dispute is about, were arbitrated before Mitsubishi and still are. We sympathize with the difficulties of small companies like Kenrich who have disputes with large foreign corporations, but abandoning the worldwide arbitration system is not the solution.
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Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Kovar follows:]
PREPARED STATEMENT OF JEFFREY D. KOVAR, ASSISTANT LEGAL ADVISER, PRIVATE INTERNATIONAL LAW, OFFICE OF THE LEGAL ADVISER, DEPARTMENT OF STATE
Thank you very much, Mr. Chairman and members of the Subcommittee. I very much appreciate the opportunity to appear before you today to address the proposed legislation, H.R. 3578.
The Administration strongly opposes this legislation. It would cause great harm to the orderly and assured system of international commercial arbitration created by the New York Convention, on which a substantial amount of U.S. commerce relies. H.R. 3578 would cut a hole in the well-established provisions of U.S. law regarding arbitration, disrupt long-standing U.S. policy favoring arbitration of commercial disputes, and could cause an overall weakening of the worldwide system for arbitration of commercial disputes through retaliatory or copy-cat legislation. It is directly contrary to existing law implementing our international treaty obligations, which clearly require all parties to enforce valid agreements to arbitrate.
Since 1925, arbitration agreements have been enforceable in U.S. federal courts. In 1970, the United States became a party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (''New York Convention''), which extended these U.S. legal principles internationally. That Treaty provides in Article II:
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Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them . . . concerning a subject matter capable of settlement by arbitration. . . . [and] [t]he court of a Contracting State, when seized of [such] a matter . . . shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
To implement this requirement, Congress amended the Federal Arbitration Act, 9 U.S.C. §101–307, to add language that expressly provides that the New York Convention ''shall be enforced in United States courts.'' As a result of this legislation, federal and state courts are bound to comply with the Convention, including its provisions which require courts to refer parties to arbitration when an international dispute arises that is governed by a valid arbitration clause in a commercial contract and one party desires arbitration. Parallel to our laws regarding arbitration in domestic contracts, the Convention and its implementing legislation provide that if a valid arbitration agreement exists, courts must refer any dispute to arbitration in accordance with the agreement upon request. H.R. 3578 would create the unprecedented situation where one party to a valid arbitration agreement could instead bring the dispute before the federal courts, contrary to the parties' freely-chosen agreement to arbitrate. Such a result would be a severe blow to the system created by the New York Convention, from which U.S. businesses derive so much benefit, and would be fundamentally unfair to American businesses as a whole.
The proposed legislation could significantly impair the ability of U.S. businesses to enforce arbitration clauses in contracts they have with foreign parties. With respect to this case, Japan could take the position that it is entitled to retaliate by refusing to enforce arbitration agreements that benefit particular U.S. businesses, depriving those businesses of the benefit of the bargain they negotiated for reliable dispute settlement in the case of a contractual dispute. Moreover, if the precedent is followed by other countries, U.S. businesses could be unexpectedly forced to litigate their disputes in foreign courts, although they had relied upon the availability of international arbitration under their contracts. These foreign courts might be significantly less impartial than the arbitral panel called for under the contract.
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The New York Convention thus provides a mechanism for enforcing binding resolution of business disputes through arbitration, as an alternative to local courts, an option which can be of critical importance to U.S. investors and other businesses. We have taken the position with foreign countries and in international litigation that strict compliance with the New York Convention is critical.
Worldwide, the United States has been in the forefront in advocating the use of international arbitration because it is good for American business. With over 116 countries party to the New York Convention now, including Japan, U.S. businesses are able to bargain for the forum and procedures under which commercial disputes with their foreign business partners will be heard, be confident that choice will be respected, and have assurances that any final award can be enforced. Businesses may choose from a great number of arbitral institutions worldwide, including in Japan, that operate under well established rules of procedure.
By threatening the fabric of the New York Convention, H.R. 3578 could also lead to negative consequences for U.S. investors now protected by the 31 U.S. bilateral investment treaties (BITs). The BITs guarantee U.S. investors the right to binding and enforceable settlement of disputes through arbitration in cases of a dispute between the investor and a foreign government treaty partner. U.S. businessmen indicate that the arbitration clause is one of the key benefits of our investment treaties. The New York Convention is essential to this regime because it permits private individuals or businesses to enforce arbitral awards against foreign governments. Indeed, for this very reason, we require in our BITs that any arbitration thereunder be held in a state that is a party to the New York Convention.
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We note that this legislation applies only to arbitration agreements entered into prior to July 1, 1985. Because the U.S. joined the New York Convention in 1970, the legislation would apply to fully fifteen years of the time we have belonged to this important regime. Moreover, such a precedent could well become a basis for even more legislation, departing even further from the treaty regime and calling into question our compliance with other agreements as well. For example, the Inter-American Convention on International Commercial Arbitration of January 30, 1975 (''Inter-American Convention''), provides similar rules.
The U.S. Government is engaged in intensive, wide-ranging efforts to open up Japan's market to U.S. goods and services, and to see that our firms are allowed to compete fairly in that market. The Department of State frequently consults with U.S. industry groups and firms to understand the particular problems they face. We met with representatives of Kenrich, and consulted with our Embassy in Tokyo and others about the status of arbitration in Japan. Our Embassy and the arbitration experts we consulted assured us that fair and unbiased arbitration is available in Japan for American companies. Furthermore, recent changes in the Japan Commercial Arbitration Association (JCAA) rules have increased the attractiveness of the forum to non-Japanese claimants. In light of this information, we urged Kenrich to consider following the dispute resolution procedures to which it agreed in its contract by seeking arbitration in Japan. To further this, we forwarded a copy of the Japanese Commercial Arbitration Association rules and offered to put Kenrich in touch with experts on arbitration in Japan.
We understand that there has been an argument made that the Supreme Court's 1985 decision in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632 (1985), affected Kenrich's rights to bring suit in U.S. courts. Based on our knowledge of Kenrich's claims, we do not see the force of this argument. The Mitsubishi decision made no change in U.S. law that would have affected Kenrich's action regarding its licensing agreement. Indeed, the Court in Mitsubishi held simply that antitrust claims were arbitrable on the same terms as all other causes of action not classified by statute or public policy as non-arbitrable. Disputes about the interpretation or performance of licensing agreement provisions had been arbitrable before Mitsubishi and remained arbitrable after. Allowing Kenrich to sue in U.S. courts without having to prove to a U.S. court that the agreement was invalid would not be returning it to the status quo pre-Mitsubishi but would give it an exemption that it had no reason to expect at that time.
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We sympathize with the difficulties small companies like Kenrich have addressing disputes against large business partners. However, abandoning the arbitration is not the solution. The proposed legislation could endanger the contractual rights of innumerable other American businesses—small and large—operating abroad, who have agreed with their business partners that all disputes will be handled quickly, fairly and inexpensively through arbitration.
Thank you, Mr. Chairman.
Mr. COBLE. Mr. Kovar, thank you.
Would enactment of the bill before us, H.R. 3578, conflict with our obligations as prescribed by the Federal Arbitration Act, the U.S.-Japan Arbitration Agreement of 1952 and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
Mr. KOVAR. Yes, Mr. Chairman, it would.
Since the enactment of the Federal Arbitration Act in 1925, arbitration agreements have been enforceable in U.S. courts. We are a party to two treaties, the New York Convention and the Panama Convention which extend these U.S. legal principles internationally.
Our law currently requires courts to refer any dispute to arbitration if they determine that a valid arbitration agreement exists, and the proposed legislation would work directly against this well-established domestic and international regime by arbitrarily declaring certain arbitration agreements unenforceable.
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I might add that the U.S.-Japan Arbitration Agreement of 1952 is not an international agreement. It is actually an arrangement between a domestic arbitration institution in the United States and a domestic arbitration institution in Japan to provide common rules for companies that may wish to hold arbitrations. And it just so happens that in this particular contract that the Kenrich Petrochemical Company has, they incorporated by reference this private agreement between these two arbitration institutions, but it is not an international treaty.
Mr. COBLE. Let me ask a question which calls for an opinion answer, I suppose.
Is it likely that an American company could get a fair shake before an arbitration panel in Japan?
Mr. KOVAR. Yes, sir, it is. Our understanding, and we have consulted with experts in Japan and in the United States, American experts who have experience as well as with our Embassy in Tokyo, that it is possible to hold a fair arbitration in Japan. And we believe that the rules that this particular company agreed to in their contract would provide for that.
Mr. COBLE. My question inserted ''likely'' in lieu of ''possible.'' Do you say that it is likely?
Mr. KOVAR. Yes, sir.
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Mr. COBLE. Thank you.
Mr. Frank, the gentleman from Massachusetts.
Mr. FRANK. I notice that the bill which was very carefully drafted does refer only to contracts before the 1985 decision, and that is true I think, and I will get to that in the question of the 1985 decision which you say has no bearing on this, but it would seem to limit what you might think would be the disruptive impact.
Do you have any idea how many contracts we are talking about here? I would assume that we are talking about only contracts which were signed previous to 13 years ago so it would not have any effect on anything later.
Do you have any sense of the volume of contracts that were not resigned after the 1985 decision which would not be covered by this bill?
Mr. KOVAR. Congressman, I have no data on how many contracts there may be out there that were signed before 1985 under which disputes could still arise.
The problem really is that by taking an action like this that would be counter to our long-standing legislation and our treaty obligations that have created this worldwide system, we could engender copy-cat legislation or legislation that may retaliate against U.S. companies who have a dispute with a foreign company and are actively seeking to use arbitration to resolve that dispute rather than having to litigate in a foreign court.
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Mr. FRANK. In Japan is there complete reciprocity on the part of Japan in this area?
Mr. KOVAR. Yes. Japan is also a party to the New York Convention.
Mr. FRANK. An American company disputing with a Japanese company if the situation were reversed would have an undisputable right to bring suit in the United States?
Mr. KOVAR. If there is an American company and a Japanese company and there is an arbitration clause, the parties would be required to go to arbitration. And if either party tried to go to their national courts to get around that, the courts under the Convention would send them to arbitration.
The arbitral award would then be enforceable in any of the countries of the New York Convention. Basically you go to the jurisdiction where the assets are of the defendant.
Mr. FRANK. So you view in this case Kenrich has to agree to have this arbitrated in Japan? That is, the question on the floor?
Mr. KOVAR. Yes.
Mr. FRANK. Let me ask you on the 1985 act there is a fairly sharp difference of opinion as to whether or not that had any impact.
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Your view is that because the 1985 decision, not the act, that was an antitrust decision and that decision has no bearing on the interpretation of this contract?
Mr. KOVAR. Yes, Congressman Frank.
In the Mitsubishi case, the Supreme Court was looking to see whether claims that there is a violation of the antitrust laws were ordinarily arbitrable under U.S. law. There is an exception in the New York Convention for courts not to enforce where something is not ordinarily arbitrable under local law.
The Supreme Court found that it was arbitrable and sent the case to Japan to be arbitrated. But the difference in the case that we have before us with the Kenrich Company is that it is not an arbitration—it is not an antitrust case at all, it is a licensing dispute.
Mr. FRANK. Your view is that the 1985 decision deals only with antitrust cases?
Mr. KOVAR. Yes.
Mr. FRANK. And there is no application to a dispute outside of antitrust that is arbitrable?
Mr. KOVAR. That is what the holding is about. We can't see what the effect would be on the rights and obligations under this particular contract.
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Mr. FRANK. In your view the contract was clear without reference to the 1985 decision?
Mr. KOVAR. Yes.
Mr. FRANK. It is the contention that there was an option.
Mr. KOVAR. The contract that we saw was signed in 1980. The United States became a party to the New York Convention in 1970, 10 years before that, and U.S. law was amended to bring that into force.
Mr. FRANK. So the convention and U.S. law effect—meant that the contract didn't say what it said on its face?
Mr. KOVAR. No. The contract is clear that all disputes have to go to arbitration, and it specifically refers to the rules created by this arrangement between the American Arbitration Association and the Japanese Commercial Arbitration Association. And it is very clear. I do not think there is really any room for dispute.
By the time that the contract was signed, there was already 10 years of practice in the United States under the New York Convention. So it is really not evident to us why there would have been any confusion.
Mr. FRANK. My time has expired, Mr. Chairman. But I think that is one of the issues, whether or not the '85 decision had any impact at all on what consequences. That is one of the things I want to ask the witnesses to focus on.
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Thank you.
Mr. COBLE. The gentleman from Massachusetts.
Mr. DELAHUNT. I have no questions.
Mr. COBLE. Mr. Kovar, we thank you for your attendance.
Mr. COBLE. We will now bring forward the next panel.
Our first witness is Salvatore Monte, who is president and owner of Kenrich Petrochemicals, Inc. Mr. Monte is a coauthor of 27 patents issued in the United States and 22 countries. He earned his BCE in 1961 from Manhattan College and his MS in 1969 from New York Polytechnic Institute. Mr. Monte is accompanied by the Honorable Robert Menendez, our friend, who represents the 13th District in New Jersey.
Our second witness on this panel is Mr. John Townsend, who is partner in the Washington office of Hughes, Hubbard & Reed and is chairman of the firm's arbitration and ADCR. He received his BA in 1968 from Yale University and his JD in 1971 from the Yale School of Law.
We have written statements from all the witnesses, and I ask unanimous consent to submit them into the record in their entirety.
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Mr. Dinan, I am told, represents Mr. Monte; and you may call on him if technical questions arise. Am I reading that correctly?
Mr. MONTE. Yes, Mr. Chairman.
Mr. COBLE. Good to have you all with us.
Folks, I want to reiterate my request about the red light. We have a crowded day, so if you all could comply with the red light. When it illuminates, that is your signal that your 5 minutes has elapsed.
Mr. COBLE. Mr. Monte, why don't you kick us off?
STATEMENT OF SALVATORE J. MONTE, OWNER, KENRICH PETROCHEMICALS, INC.
Mr. MONTE. Chairman Coble, Ranking Member Frank, members of the subcommittee, thank you for holding this hearing. I am Sal Monte, president and co-owner with my wife Erika of Kenrich Petrochemicals, Inc., located in Bayonne, New Jersey, where your (Ranking Member Frank) mother was born.
I am grateful to Congressman Menendez for being here today as our champion and for sponsoring H.R. 3578. Congressman Menendez understands that if Erika and I are forced to fight our case in Japan, our company, which has survived in the family for 54 years, will disappear. We operate our small business hands-on and manage to make payroll every week. We do not have the time or resources for a legal fight in Japan.
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Congressman Menendez's bill gives the right we thought we had when we signed our contract 18 years ago, the right to fight our legal battles in the courts of the United States of America.
I do not have this in my oral statement, but no one has asked me the question, as the inventor or the licensor, if I would arbitrate in Japan if today, I thought I would be here defending my right under the laws of the United States of America to defend my license in America. I cannot believe that I am being treated like the licensee, who is being looked down upon by my State Department as the one being outrageous. And I do not think that going to Japan is a reasonable situation for me.
In 1980, our small company licensed Ajinomoto Co., one of the 100 largest companies in Japan to register, manufacture and distribute 15 of my invention products known in the trade as titanates.
My titanates dramatically improve the performance of thousands of products. They are used in everything from LOVA tank ammunition to Wilson Titanium golf balls to Cover Girl Makeup. They are used in all the videotape, copier toner and magnetic recording media produced in Japan, South Korea, and Taiwan, which is the territory where Ajinomoto holds the license to manufacture and sell my products.
There is no question that Ajinomoto is reaping enormous profits from my products. Ajinomoto has 21 patents using the licensed products, and there are over 1,000 patents controlled by other Japanese companies. Canon has 31 patents on the use of my invention in copier toner alone. We have uncovered 181 flooding patents on copycat molecules by Japanese companies designed to obfuscate our patents. Patent flooding is illegal in the U.S. and Europe, but not in Japan.
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Yet Ajinomoto continues to send us false semiannual sales reports so as to pay the minimum $50,000 per year royalty instead of the 5 percent of sales royalty they were supposed to pay when the sales exceeded $1,000,000, a level they reached over 15 years ago by our estimates.
And we can prove it if we are given the chance in Federal Court in the U.S. Prove it if we are not forced to go to Japan, where the arbitration system is closed to outsiders like Erika and me.
They are not global partners. Why should our government allow the legal system to protect them and work against us? But they will not succeed if we have your support.
Erika and I thank you sincerely for holding this hearing on H.R. 3578, whose purpose is to provide a 6-month sunset window to make right a 1985 Supreme Court decision, which is apparently a judiciary oversight.
The 1985 Supreme Court ruling on Mitsubishi v. Soler has had the unintended effect of forcing Kenrich to fight a trade dispute with Ajinomoto in Japan and not in U.S. Federal Court. In Japan, where the law allows the patent flooding that is illegal in the U.S. To fight not even in their courts, but in arbitration, in a process absent discovery where Ajinomoto can continue to withhold documents and information, as they have done to us so many times in the past.
We have tried justice the Japanese way, and we have been completely frustrated. Erika and I did go to Japan in 1984 with our documentation of their theft of our property. We had clear proof from our South African representative that Ajinomoto had violated the territorial limits of our contract by importing drums of the licensed product they called Ajinomoto KR–12 into Johannesburg. We submitted our documents and we went through the Japanese system and nothing happened. Ajinomoto continued to stonewall our hand-delivered complaint.
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We have been to Japan to conduct an expensive audit. Ajinomoto refused to provide documents and said to the auditors that they did not have the computers to track our products.
We did it the Japanese way and waited patiently for 10 years for our Ken-React trademark to go through the legal approval process by their MITI while all the while allowing Ajinomoto to use a substitute Plenact trademark. And waited patiently yet another 9 months only to be told at a meeting in their Teaneck, New Jersey, offices that they were in a legal predicament.
You see, Mr. Chairman, we must understand that since they have invested so much time and money in Plenact it would be a violation of Japanese trade law for them if they honored our contract by using Ken-React. I do not want any more of that kind of Japanese justice.
We have been told that arbitration must take place in Japan, and we simply cannot afford it. We have been to the Executive Branch but they are more interested in larger foreign policy issues, not the problems of one small company.
Mr. Chairman, H.R. 3578 is our last hope. I invented these valuable titanates, but Ajinomoto is the one who has prospered. Our company has been in and out of bankruptcy and is operating on the edge. We once had almost 100 employees. Now we have fewer than 30.
Ajinomoto can easily afford to defend themselves in Newark. They have headquarters in New Jersey. They have large financial resources. They have stolen our property and destroyed our business.
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H.R. 3578 does not ask you to prejudge our case but, rather, allows us to try our case in U.S. Federal Court in Newark, as was intended in our 1980 contract. My adversary Ajinomoto has already admitted in court to bribery in Japan and to a worldwide price-fixing scheme in U.S. Federal Court.
We have played the game by the rules. We have been transparent in our patents, technical papers, and chemical inventory listings. We have turned away numerous requests from Southeast Asia to bypass Ajinomoto. We have honored the contract. Our experience is that Ajinomoto had set us up from the very beginning, and they have lied to us continuously in the spoken and written word for the past 20 years. We do not trust them.
Please allow us the opportunity to fight them on our turf, not theirs.
Mr. COBLE. I thank you, Mr. Monte.
[The prepared statement of Mr. Monte follows:]
PREPARED STATEMENT OF SALVATORE J. MONTE, OWNER, KENRICH PETROCHEMICALS, INC.
Chairman Coble, Ranking Member Frank, Members of the Subcommittee, I am Sal Monte, President of Kenrich Petrochemicals, Inc. of Bayonne, NJ. I am joined at the witness table by Donald R. Dinan of O'Connor & Hannan in Washington, DC who has worked long and hard on behalf of Kenrich.
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My wife, Erika, who is my partner in running Kenrich, and I sincerely thank you for holding this hearing on H.R. 3578. I also want to thank Congressman Menendez for introducing the bill and for his support. We have waited a long time, since 1983 in fact, to be able to tell our story to Congress of how we, two people trying to make a living operating a small business, have been blocked at every turn in our attempt to gain justice.
Ajinomoto Co. owes us $50 million—and we can prove it. All we want is the opportunity to make our case. We are not asking anybody to pre-judge the case, we are not asking anybody to give us anything. Under H.R. 3578, we would have 180 days to go to court in the United States of America—not Japan. All we want is our day in court—the same right every American citizen has.
In this decade alone, Ajinomoto has admitted in court to bribery in Japan and a world-wide price fixing scheme in U.S. federal court. Meanwhile, the whole legal system is protecting them from having to confront our claim of $50 million.
We have played by the rules both nationally and internationally. We have filed transparent, non-flooding type patents; paid more than $100,000 per year in patent maintenance annuities worldwide—including Japan's, which were more than $8,000 this year alone; registered and disclosed chemicals to conform with environmental regulations. We have done everything that we were told to do to be able to sell our products and run our company. Yet we cannot get a fair hearing on our claim.
Ajinomoto has used a combination of legal tricks and stonewalling to defraud us of the rights to $50 million in valuable patents and to sell products of our devising, not only in the Asian markets for which they have been licensed, but throughout the world.
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Meanwhile, our company has been struggling. We have been in and out of bankruptcy. Every week, we struggle to meet our payroll and other commitments. Erika collects the time cards, enters the payroll data and then we both sign the checks. Many a weekend we've gone home with only a few thousand dollars left in the bank. We've been living on the edge for the last 10 years, waiting for the wheels of justice to turn.
We now have fewer than 30 employees compared to the almost 100 we had in 1990. If we had the $50 million we are owed—better, if we had the several hundred million dollars in sales pirated from us, I guarantee we would have 100 employees or more with productive jobs in Congressman Menendez's district.
Members of the Subcommittee, we need your help. We have been blocked in going to court, we have been to arbitration, we have been to the Executive Branch. We have been frustrated at every turn. We need you, our elected representatives, to help us correct this injustice. Give us our day in court and we will prove Ajinomoto owes us $50 million.
If I told you a $24 billion conglomerate that sells products worldwide says they don't have computers to track independently the sales of our products licensed to them, you would probably laugh.
If I told you that this huge company says they can't find buyers in Japan for substances that improve a myriad of high-tech products such as videotape, audiotape, copier toner—even ubiquitous injection molded plastic products such as television cabinets, you would probably laugh even more.
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That they can't find buyers in Japan, where there are more plastic injection molding presses than in the U.S. In Japan, where multinational corporations have filed more than 1,000 patent applications using the licensed products provided to them by Ajinomoto.
If I told you they have 21 patents themselves on the use of our licensed products, you would laugh even harder.
If I told you that this same huge conglomerate told an auditing team that separating out the production and volume figures for the products they licensed from Kenrich would be a huge burden, you would really start to wonder.
And if you had to pay $62,400 for a non-fruitful, uncertifiable audit—my entire year's salary—you wouldn't laugh. You'd get really angry at the injustice.
Those are among the stories Ajinomoto has told to hide the deceptive tactics they have been using for almost two decades.
There are complicated twists and turns to this story but it all comes down to one simple fact: Ajinomoto has brazenly and arrogantly stolen the rights to our patents and refuses to pay the royalties. Ajinomoto says, ''So, sue me,'' and I say, ''Let me at 'em.—but not in Japan, here in the United States of America.''
That's what I'm asking from this Subcommittee—Let me at 'em, let me sue Ajinomoto in Federal Court in Newark, NJ where our judicial system is fair and transparent. Not in Japan where outsiders don't stand a chance.
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I have been involved in my business almost my entire adult life. I hold 27 patents in the U.S. and 22 other countries on coupling agents. Currently, I am a Licensed Professional Engineer in New York and New Jersey and Chairman of the Thermoplastics and Foams Division of the Society of Plastic Engineers.
I have written a 340-page Reference Manual (65,000 copies in print) and eight textbook chapters. I have authored more than 200 technical papers on organometallic technology. But, most of all, I am an entrepreneur.
It was my invention of coupling agents, known as titanates, more than 25 years ago that has been at the heart of the issue we are addressing today. As the commercial says, ''We don't make the products, we make the products better.'' Titanate coupling agents—organometallics—form a chemical bridge between the organic and the inorganic world to create the components of all synthetic materials.
When combined with other materials and chemical compounds, their uses range from the most domestic, such as making stronger HDPE marine fuel containers for outboard motors, to our national defense, by making safer LOVA ammunition for the Abrams A–1A tank and for our 5-inch Naval guns, by decreasing the burn rate and burn rate exponent of solid rocket fuel. I just received a U.S. patent on May 19,1998 for a solid propellant that had been held under Pentagon secrecy orders for more than a decade.
Titanates are used to improve video and audiotapes by dispersing optimally the gamma ferric oxide; make better print and copier toner by bonding the pigment to the thermoplastic binder; improve tires by increasing the strain properties of the rubber—in fact, we are the TITANIUM in the Wilson golf ball—the ''fat feel'' on club head impact comes from the extra stretch given to the polybutadiene rubber in the ball making it go further; protect steel from corrosion by passivating its surface through phosphatization; make screw driver handles stronger, faster and at lower temperatures through a patented effect I call ''repolymerization'' for which we received a patent a few months ago in Europe; and improve the performance of a whole range of other products.
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I will not go into detail about how titanates work in plastic, elastomers, paints, inks and ceramics but I'll be happy to answer any questions. Please remember, though, we are not asking you to judge the case, but to simply let the case go forward.
Titanates were first marketed in 1974. Two years later, we reached an agreement with a Japanese company, Nitto Shoji, to market and distribute 46 American-made titanates in Japan. But, as many of you know, the Japanese have rules to make it very, very difficult for foreign companies to sell non-domestic products in Japan. We were told very soon that we needed a licensing agreement with a Japanese company to manufacture in Japan—the only country in the world where we could not sell directly.
The reasons given for needing a Japanese partner were many—for example, ''The Japanese customer does not know who Kenrich is,'' etc. ad nausea. But the biggest and most meaningful objection they offered was the high $125,000 cost in 1979 dollars of obtaining approval for the use of each of the chemicals in the Japanese environment by the Japanese Ministry of Health.
We were steered to Ajinomoto by Mike Sano of Nitto Shoji because he said they were a food and fine chemical company, had the connections and knew the process to get it done at substantially less cost. Ajinomoto is the world's largest producer of MSG. I should have realized then that the relationship would become a headache.
My wife and I made our first trip to Japan to meet with Ajinomoto officials and we were impressed. We thought we were dealing with a high-class, high quality outfit that would act in a business-like manner. We signed the agreement in 1980 to license 15 patented titanates to Ajinomoto. We reduced the number of chemicals from 46 to 15 to lower their overall costs of registering the chemicals with Japanese authorities.
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Again, you would laugh if I told you I had to pay $1,650 in 1996 to obtain the first-ever published Japanese Gazette listing the chemicals registered in Japan. Laugh, no cry, to find that only two of the 15 licensed chemicals appeared on the list. In any case, we would turn over the formulas, they would manufacture and sell in Japan, Taiwan and South Korea.
The deal was straight-forward and we fulfilled our part. We turned over the documents and Ajinomoto proceeded to manufacture and sell the titanates. Unfortunately, the third part of the deal—the part where Ajinomoto pays the 5 per cent royalty on sales for getting the licenses—never happened.
Under the contract, Ajinomoto was required to pay $50,000 a year until the $1 million sales level was reached. At an average selling price of $4/lb., it was estimated that Japanese commercial manufacturing ''start-up'' level of 30 metric tons for a three-month period would create sales of approximately $1,056,000 and kick in royalty payments in excess of $50,000. Somehow, Ajinomoto never seemed to be able to reach that level. They came close but never reached it—even when the yen was at twice the value it is now. If they did, they would be required to pay us 5 per cent of the sales value.
We believe that Ajinomoto reached the start-up level in February, 1983. We have several ways of tracking how much they are selling:
First, we have reports from customers who have told us the volume of their purchases from Ajinomoto.
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— Ken Fan, Lab Project Manager of Silicon Top, Taiwan, who told me his company has placed large orders for Ken-React but Ajinomoto would not sell it in 55-gallon drums.
— Y.C. Kwon of the Korean Institute of Science and Technology who told me KIST was purchasing $1.2 million of Ken-React KR 41B. That purchase never happened according to Ajinomoto's semi-annual sales numbers, a report whose customers and amounts have remained almost unchanged for 15 years.
— Magnox Pulaski, a supplier of copier toner for Xerox, bought from us $87,871 of licensed product last year and they project purchases of $145,000 in 1998. Since Magnox Pulaski has only a small piece of the toner market, sales of toner for the remainder, and therefore, demand for the licensed product would be huge.
Second, we can compare our sales to customers in the U.S. and Europe who would be comparable in size to their customers.
— We sell Bayer in Germany the same product in similar shipment quantities as Magnox because they are both suppliers for Xerox. These two Kenrich customers alone consume 40 per cent of the entire total reported by Ajinomoto in the last 12 months.
— The licensed products Ken-Reacts KR 9S and KR 38S appear widely in the Japanese patent and technical literature. Our company is almost bankrupt and we have only one salesman but Kenrich outsells Ajinomoto on KR 9S by 2 to 1 and KR 38S by 3 to 1. The numbers don't add up.
Third, we can follow their filings for patents based on our licenses—an expensive and time-consuming process that would only be undertaken for large sales volumes.
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— A Computer Abstract Services (CAS) search conducted by Kenrich on May 23, 1998 in preparation for this hearing for all composition of matter patents (covering the actual chemical) produced a patent flood of 181 different molecules, which are the Japanese patent variants on the molecules of the licensed products.
— The application patents (covering use of the thing we make better) by Japanese corporations using the 15 licensed products average about one per week for the last 20 years. All this takes a lot of money and speaks to a significant intellectual property license for Ajinomoto and Japan.
Ajinomoto has even stolen the name of our products. The contract clearly states that they must use Ken-React, our trademarked name. They first told us they were required to use a different name in Japan and they filed for the trademark under Plenact. Then they told us they had invested so much time and money in the name Plenact that it would be a violation of Japanese trade law to use the name Ken-React.
This after waiting patiently for 10 years for the Ken-React trademark to be legally issued in Japan.
Now, they are selling the products they stole from us worldwide using their own trademarked name.
Again, we are not asking you to judge the case, just to let us go to court in the United States to prove it.
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Our problem in taking action against Ajinomoto began with the Supreme Court's 1985 decision in Mitsubishi v. Soler. This case was factually unrelated to our dispute. However, like theirs, our contract with Ajinomoto contained an arbitration clause. Mitsubishi claimed a form of double jeopardy to win their 1985 Supreme Court decision, thus overturning a U.S. Federal Court decision which had made Soler a winner by its reversal of a arbitration ruling in favor of Mitsubishi.
As a result of that decision, arbitration clauses in trade agreements and the subsequent rulings by the appropriate arbitration panel were made binding. Thus, Kenrich has been prevented from taking U.S. Federal Court action because our 1980 contract obviously could not anticipate the 1985 binding arbitration decision. The contract was silent on the issue of U.S. Federal Court recourse in case the arbitration proceeding proved to be unsatisfactory to either of the parties.
We assumed in 1980 that, as the contract said, the laws of the United States and the State of New Jersey governed the contract between Kenrich and Ajinomoto and, therefore, we would have the right to recourse in our court system. I believe the absence of U.S. Supreme Court language dealing with Kenrich's pre-1985 situaiton is an oversight and thus it is simply unfair to penalize us based on a Supreme Court decision issued five years after we signed a contract based on the prevailing legal opinion at the time.
Because of the 1985 Supreme Court decision, our first recourse was arbitration. We tried that course in 1994 which got started while we were in Chapter 11 bankruptcy protection. One of Kenrich's major assets was the royalty payment claim against Ajinomoto. Because Kenrich has a clear, contractual right to conduct an audit of Ajinomoto's books, the bankruptcy court ordered $40,000 set aside for an audit. Arthur Andersen & Co. Tokyo, was retained to review Ajinomoto's documents.
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After almost a three-year period of classic delays, stalls and alibi's, Arthur Andersen reported that they could not determine their sales. They could not conduct the review primarily because Ajinomoto said there were no documents detailing their sales of the licensed products between 1989 and 1992. The final report, with no infomrastion, cost me $62,400 at a time when I was in bankruptcy.
Their first delay of six months was based on the stated fact that they said their computers were incapable of separating the sales of Kenrich's products from their other product mix, which also contained licensed products from other companies. They said they were afraid that the revelation of co-mingled data would jeopardize their secrecy agreement clauses with other licensors. Of course, it is a simple job that can be done by a pre-Pentium 486 PC with off-the-shelf accounting software.
We then went to arbitration to compel Ajinomoto to turn over the documents. Ajinomoto, of course, argued that the case should be conducted in Japan because even if there were no records, if such records did exist, they would be in Japan. Amazingly, the arbitration panel under the 1952 U.S.-Japan treaty upheld their argument.
As a result, we have the spectacle of an arbitration panel ruling that a $24 billion worldwide conglomerate with a major facility in Teaneck, NJ that is represented by a Wall Street law firm could not be required to defend itself in Newark, NJ. Instead, my wife and I would be required to confront the Japanese legal system—a system famous for its hostility to foreigners. We do not have the financial resources or personnel for a lengthy legal battle in Japan nor could our company survive our absence.
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I handle all: the incoming business mail and correspondence; technical phone calls and faxes for inside sales; trade show exhibits, technical staff supervision related to invention; etc. Erika does payroll, credit, accounts receivable and payable, answers the phone and is the purchasing agent. Going to Japan as ordered by the arbitration panel would break our business.
Keep in mind, our contract was signed in New Jersey and specifies that New Jersey law governs.
Next, we tried the executive branch. We have been to the US Trade Representative twice and to the State Department, all to no avail. Our post GATT/WTO system is simply not set up for our small company to get help from these agencies. They deal in major policy issues, they work with big companies that have problems in Japan, and they work with the Japanese government. They just don't want to hear about our problems when they've got these bigger issues to worry about.
Congress is our last resort to correct this injustice. I ask you to help us by moving H.R. 3578 to give us our day in court. H.R. 3578 would give us and everybody else with a contract that had an arbitration clause prior to the Supreme Court decision 180 days to go to court. After that six-month period, the sun sets and the law reverts to what it was.
H.R. 3578 allows suits only by those who signed their contracts before the Supreme Court decision. It contains no provision to allow suit by anyone who signed a contract with an arbitration provision after the Supreme Court decision.
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Let us prove in court that Ajinomoto owes us the significant royalties due us. If we are given the right to go to court, we will prove our case.
I know that we are not the only victims of the Japanese conspiracy to steal our intellectual property. I also know that's an issue you have debated in this subcommittee. By moving H.R. 3578, you have the chance to make a statement on behalf of U.S. small business that you are not going to allow the Japanese to run over small guys like us.
Ajinomoto has a huge facility in Teaneck just a few miles from the company my wife and I own in Bayonne. We are an American small business. Allow us to go to court in Newark and prove our case. That is all we are asking. Let us go to court and get what Ajinomoto owes us.
Mr. COBLE. Folks, I hate to caution you, but you are on a punch clock or time clock. I assure you your written testimony is available to us. I do not intend to overlook it.
Do you have any opening statement you want to make, Mr. Menendez?
STATEMENT OF HON. ROBERT MENENDEZ, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY
Mr. MENENDEZ. Mr. Chairman, let me thank you for holding the hearing. I know we have a short session this year and you have a tight schedule.
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I want to thank my colleague for enticing you to hold this hearing. He is still one of Bayonne's favorite sons. I am trying to work hard at it. After 6 years, it is tough to overcome that history. But I appreciate his effort.
Mr. Chairman, this is a true David v. Goliath type story. I wish the State Department had had the courtesy of letting me know what their opinion was going to be before I arrived here today. As a member of the House International Relations Committee, I know they often come to us at times to ask about things. It would have been courteous of them to simply let me know what their position was. I think that their cataclysmic attitude is one which I would expect, because I think that, many times, their focus is more on diplomacy than defending American businesses abroad.
I want to try to give you just a little bit of background. Sal raced through it. I want to go a little slower in some parts of it just so that you clearly understand what is at stake here and stay within my 5 minutes, including the complimentary parts, Mr. Chairman.
Let me just simply say that this is a battle by a small company in the United States versus a huge foreign conglomerate over a payment of $50 million in patent royalties. There is no question, as you can see from both the written and oral testimony, that Kenrich was sent to Ajinomoto, one of the world's largest conglomerates, to form a manufacturing and sales partnership. An agreement was signed for the distribution of 15 titanates in Japan and other Asian nations. Ajinomoto agreed to pay $50,000 annually as well as royalties before and beyond that level.
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All of the information that Sal has can substantiate their position. I will not argue that for the moment. Even the State Department, in the context of what is the issue, I do not think has argued that.
Let me go to what our bill tries to do. This is why I do not understand the State Department's position.
We are talking about a very limited scope that any contract that was entered into prior to the foreign entity prior to July 1st, 1985—and that contains a provision of settlement by arbitration any controversy arising out of such contract, license, or agreement—shall not be barred from bringing an action in a court of competent jurisdiction in the U.S., and we allow them to do that only for 180 days.
Now, why? I think that the State Department has a limited view of the decision of Mitsubishi which occurred in 1985. In 1980, when Kenrich signed their contract with Ajinomoto, it was the prevailing view in the legal community that an arbitration clause would give the parties the option of pursuing arbitration or pursuing court action. The legal situation was transformed in 1985 when a case totally separate from this issue, Mitsubishi v. Solar, was determined.
The Supreme Court, in a 5–3 decision, ruled that court action would be preempted by arbitration clause. Kenrich could no longer take court against Ajinomoto for failing to pay the required royalties. And, clearly, the reason they had the arbitration clause is because you want to make sure that not every case becomes, quote, unquote, a Federal case.
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But by the same token, you wanted to have the opportunity which you had prior to 1985 to go to court if, in fact, that was the way to pursue your legal remedy. The decision of the court undid that, and we left all of those who had contracts with arbitration clauses denied of that opportunity to proceed and have their day in court.
My bill simply gives companies like Kenrich for that limited time period prior to '85 and only for 180 days a very small window, their day in court, by restoring its right, to take action in U.S. courts for the limited period of 180 days. It is a limited grandfathering for companies that could not possibly know the Mitsubishi decision was coming. The bill allows no exemption for arbitration clauses signed after the Mitsubishi decision.
So, Mr. Chairman, I think that, despite what I hear from the State Department, that the fact is that the Mitsubishi decision did undo the ability for Mr. Monte and anyone simply situated in his situation to go ahead and pursue their legal remedy in court, that, in fact, our due process system is noticed and an opportunity to be heard. That is taken away from someone who has the opportunity to go to court and now subsequently is denied.
That is the limited focus of what we are trying to do here. I think it is just. I think it is right. I think it is limited. It is not cataclysmic, as the State Department would have you believe; and I think it is appropriate for the Committee, hopefully, to consider its passage.
[The prepared statement of Mr. Menendez follows:]
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PREPARED STATEMENT OF HON. ROBERT MENENDEZ, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Chairman and Ranking Member Frank, thank you for holding this hearing. Mr. Chairman, more than 20 years ago, Salvatore and Erika Monte, the owners of Kenrich Petrochemicals Inc. of Bayonne, New Jersey, first attempted to sell their products in Japan. The Montes had developed some extremely powerful and valuable chemical substances, known as titanates, for which they held potentially lucrative patents. They wanted to sell these titanates to the expanding Japanese industrial sector.
While the Montes had simply wanted to sell what they had invented with their own work and ingenuity, their two decades of experience with Japan has resulted in a never-ending legal quagmire and estimated losses of $50 million. Kenrich, a small family-owned business, has been treated unfairly both by the big corporate interests in Japan who saw a chance to make more profit than they were entitled to, and by our own legal system. It is now time for Congress to take action and correct the injustice.
Back in 1976, Kenrich signed a distribution agreement with Nitto Shoji, in cooperation with Ajinomoto Inc., for the marketing of 46 titanates in Japan. A short time later, Kenrich was informed that its substances could no longer be sold in Japan unless a Japanese partner did the manufacturing.
Kenrich was sent to Ajinomoto, one of the world's largest conglomerates, to form a manufacturing and sales partnership. In 1980, the agreement was signed for the distribution of 15 titanates in Japan and two other Asian nations. Under the contract, Ajinomoto agreed to pay Kenrich a minimum of $50,000 annually as well as royalties on sales above specific levels.
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Ajinomoto and the Japanese corporate community were eager to gain access to Mr. Monte's creations. Titanates are key ingredients in many products we use every day. They enhance the sound and picture quality of audio and video tape, they make stronger tires and they add strength to plastics. They also make stronger, more advanced aerospace composites for our space shuttle rocket motors, and they provide a new way to recycle plastics and reduce the energy required for producing plastic coatings.
Despite records of worldwide sales patterns that clearly show Ajinomoto reached the level required to pay royalties in 1983—and has remained there ever since—not one penny has been paid in royalties. In fact, Ajinomoto has refused to pay even the full $50,000 minimum. Sal and Erika Monte can demonstrate through the use of sales patterns in other parts of the world and through other records that Ajinomoto has been reaping windfall profits from the sale of Kenrich's titanates.
All the Montes need is an impartial and fair place to make their case. So far, through circumstances beyond their control, they have been unable to get that hearing.
When the 1980 contract was signed, it was the prevailing view in the legal community that an arbitration clause would give the parties the option of pursuing arbitration or taking court action. As a result, the Kenrich-Ajinomoto contract contained both a provision saying the laws of New Jersey would govern as well as an arbitration clause.
The legal situation was transformed, however, in a 1985 case totally separate from the Kenrich-Ajinomoto dispute, Mitsubishi v. Soler. The Supreme Court, in a 5–3 decision, ruled that court action would be preempted by an arbitration clause. Kenrich could no longer take court action against Ajinomoto for failing to pay the required royalties.
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What has happened to these two companies since the 1980 contract was signed? With the lack of royalties, Kenrich has been in extremely precarious financial condition. In 1992, the Montes were forced to file for bankruptcy protection under Chapter 11. Kenrich emerged from bankruptcy in 1994 but with fewer than 30 employees compared to the almost 100 it had previously. Kenrich's financial condition remains uncertain.
In contrast, Ajinomoto has been prospering.
The Montes have continually attempted to find a way to get the money that is owed them. In 1994, Kenrich commissioned an Arthur Andersen & Co. review of Ajinomoto's records. Unfortunately, Arthur Andersen reported back that Ajinomoto refused to cooperate with the review and provide the necessary records.
Kenrich then attempted to use the arbitration route to obtain the needed records. However, an arbitration panel, comprised of two Japanese representatives and one American, ruled that the proceedings must take place in Japan. This ruling simply ignored the practical problems of the real world. Kenrich, a small company on the edge of bankruptcy could not afford to conduct a case in Japan—it would be prohibitively expensive with little chance of an outsider prevailing in a closed legal system.
Ajinomoto, one of the world's largest companies, has offices and facilities in this country, as well as representation by a Wall Street law firm. Ajinomoto would face no hardship by having an proceeding in this country.
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The Montes have now turned to us to help them in their quest for fairness. H.R. 3578 would allow Kenrich and any other company that signed a contract with an arbitration clause before the Mitsubishi decision 180 days to initiate court proceedings. It is a limited grandfathering for companies that could not possibly know the Mitsubishi decision was coming. The bill allows no exemption for arbitration clauses signed after the Mitsubishi decision.
The bill makes no judgment on the Montes claims that they are owed $50 million. It simply gives them their day in court to prove it.
This case is one of an American small business that has contributed a tremendous amount to the advance of science against a Japanese conglomerate that has a questionable record. In 1996, Ajinomoto's Chairman Yasuhiko Yasuda and President Shunsuke Inamori resigned after pleading guilty to participating in a multinational cartel to fix the price of a food additive for pigs and poultry. Overpayments of $150 million to $180 million were alleged. The company agreed in Federal Court in Illinois to pay a $10 million fine.
In 1997, two top Ajinomoto executives were arrested and indicted for allegedly paying $90,000 in hush money to racketeers. Six racketeers were sent to jail. Ajinomoto officials estimated that the indicted executives had skimmed about 100 million yen annually in company funds, or about $786,000, for ''entertainment expenses.''
Is this the kind of company we want to protect? Is this the kind of company we want to allow to create a legal maze to hide from its obligations to Kenrich? I don't believe any of us want that to happen. And do any of us believe that the Japanese government would not take this one small step to help a Japanese company that was owed $50 million by a foreign entity?
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This bill provides justice and fairness for Sal and Erika Monte and for Kenrich. Again, Mr. Chairman, I want to thank the Subcommittee for holding this hearing on this important issue. I look forward to continuing to work with you and the other members of the Subcommittee to move this bill forward. Please do not hesitate to contact me or my staff if you require my assistance.
Mr. COBLE. Mr. Townsend.
STATEMENT OF JOHN TOWNSEND, ESQ., HUGHES, HUBBARD & REED, LLP, ON BEHALF OF AJINOMOTO COMPANY, INC.
Mr. TOWNSEND. Thank you, Mr. Chairman. I appreciate the invitation to appear here today.
I appear as a lawyer for Ajinomoto Co., Incorporated. Ajinomoto has submitted to the committee a separate written statement which addresses some of the factual background. I wonder, Mr. Chairman, if it would be appropriate for the committee to include that statement, which the committee already has, in the formal record?
Mr. COBLE. Without objection.
[The prepared statement of Ajinomoto Co., Inc. follows:]
PREPARED STATEMENT OF AJINOMOTO CO., INC.
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Ajinomoto Co., Inc. (''Ajinomoto'') would like to thank the Committee for this opportunity to present its comments on H.R. 3578, a bill to provide for a judicial and administrative remedy for disputes arising under certain agreements with foreign entities.
Ajinomoto is respectful of the role of the United States Congress in passing legislation in the public interest. It believes, however, that this bill would seriously disrupt international trade and so be detrimental to the interests of the United States itself.
AJINOMOTO
Since it was founded in 1909, Ajinomoto, which is a publicly traded Japanese corporation, has become one of Japan's largest and most diversified food companies, as well as a world leader in food technology. Its significant research and development capabilities (in a wide range of life sciences) serve as the core of its worldwide network of products and services.
Ajinomoto is also a world leader in the production of amino acids for use in a variety of nutritional and pharmaceutical products, such as intravenous solutions, infant formulas and nutritional supplements. Ajinomoto's unique expertise and commitment to amino acids basic research also led to the development of numerous therapeutic agents. Since 1981, Ajinomoto research and technology has resulted in market approval for pharmaceuticals used to fight cancer, hypertension and infectious diseases, and the supply of drug substances for AIDS and Parkinson's disease, among others. In 1985, the company established a separate Pharmaceutical Department where this vital research continues today in cooperation with its central research laboratories.
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Currently, Ajinomoto employs more than 35,000 people worldwide. The company has established 57 subsidiaries, affiliates and representative offices in 20 countries with 42 manufacturing facilities operating in 13 countries.
In the United States, Ajinomoto's first office was opened in 1917 and Ajinomoto U.S.A., Inc. was established in 1956 in New York City. Today, the latter's corporate headquarters are in Teaneck, New Jersey. Ajinomoto U.S.A. has sales and representative offices in New Jersey, Washington, D.C., Los Angeles and Honolulu, manufacturing plants in Raleigh, North Carolina, and Eddyville, Iowa, and over 300 employees, including some 282 U.S. citizens.
Ajinomoto deeply regrets Kenrich's unfortunate and inappropriate attitude in its dealings with Ajinomoto, which contrasts markedly with the good business relations with many other companies in the United States which Ajinomoto and its U.S. subsidiary have enjoyed throughout its many decades of business activity in this country. Ajinomoto U.S.A. strongly believes in supporting scientific research that leads to an improved quality of life. Recent funding awards include:
A grant to Monell Chemical Senses Center, which in part funded a special project for the human sensory research lab. Ajinomoto has provided Monell with general research grants since 1975.
A grant to the University of Massachusetts, Department of Food Science, to enhance students' educational opportunities.
A grant to the Association for Chemoreception Science (AChemS) to support promising young researchers in the gustatory field.
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A three-year grant to William Penn College in Iowa to support higher education in the local community.
A grant to UCLA at Harbor, to research Sickle Cell Anemia.
Ajinomoto U.S.A. strives to support and create programs that benefit the communities in which we live and work. The following success stories illustrate the ways in which Ajinomoto U.S.A. works in partnerships with the community:
In New Jersey, it is a corporate sponsor of City Meals-on-Wheels, a non-profit organization that provides meals to New York City's homebound elderly.
Its Raleigh plant, in cooperation with several other local pharmaceutical firms, established an industrial pharmaceutical curriculum for Wake Technical Community College. An Ajinomoto plant manager serves as an advisor to the curriculum.
In Iowa, it has contributed to the value-added agricultural product research programs at both state universities, and is also assisting in the development of a new fermentation technology curriculum for Indian Hills Community College.
In Canada, it has contributed educational funding to the Chinese Cooking Program of George Brown College in Toronto.
AJINOMOTO'S DISPUTE WITH KENRICH
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H.R. 3578 has its origin in the 1980 License Agreement between Kenrich Petrochemicals Inc. (''Kenrich'') and Ajinomoto. Under that agreement, Ajinomoto was granted a license from Kenrich to manufacture and market chemical products in Japan and certain other countries in Asia. Ajinomoto fully complied with its duties under the agreement with Kenrich, and vigorously denies that it is in any way in breach of its obligations to Kenrich.
Despite Ajinomoto's best efforts to maintain a mutually beneficial and open relationship with its licensor, Kenrich commenced an arbitration before the American Arbitration Association in New York in August 1995, wrongly claiming that Ajinomoto had not paid all royalties due Kenrich. In its demand, Kenrich sought to establish New York as the site of the arbitration.
The very claims asserted in Kenrich's Demand for Arbitration had been previously considered and rejected by independent auditors selected by Kenrich itself. Contrary to Kenrich's allegation, Ajinomoto had cooperated with this independent auditor, Arthur Andersen, throughout its investigation. Ajinomoto did not block the auditor's investigation, an investigation which we believe established that Ajinomoto was in full compliance with its contractual duties.
The license payments Ajinomoto made to Kenrich must be considered in light of the fact that sales of the licensed product have been far less than expected by the parties at the time the License Agreement was executed. These sales never reached the ''Start-Up'' levels provided for by the agreement, and Ajinomoto has therefore paid the minimum royalties required under the agreement. While Kenrich wrongly claims that it is owed $50 million, the truth is that despite its best efforts, even total revenue from sales by Ajinomoto over the past 18 years does not amount to $50 million. One of the reasons for the lackluster sales of licensed products is the availability of less expensive competing products in one of the largest markets for the licensed products, which is for use in the manufacture of video and audio tapes. Moreover, the Ajinomoto license from Kenrich extends only to certain countries in Asia. It has been up to Kenrich to commercialize its technology in the United States, Europe and elsewhere outside the licensed territory. If the technology is in fact as valuable as Kenrich claims, then Kenrich should be doing very well in these other markets. The fact that it has gone into bankruptcy and shrunk to one-third its previous size is a good indication that its technology is not as valuable as Kenrich maintains.Many aspects of Kenrich's dealings with Ajinomoto—including Kenrich's attempt to deprive Ajinomoto of its contractual right to resolve contractual disputes through arbitration—have demonstrated Kenrich's lack of good faith in its dealings with Ajinomoto. See Ajinomoto's Submission to the Joint Arbitration Committee, dated October 5, 1995, which is attached to this submission as Appendix A.
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Under the License Agreement, Kenrich and Ajinomoto agreed to arbitrate their disputes ''pursuant to the Japan-American Trade Arbitration Agreement of September 16, 1952 [''the JATAA''], by which each party hereto is bound.'' (Art. 15 of the License Agreement.) Under Section 2 of the JATAA, ''the determination of the place of arbitration'' is to be made by a Joint Arbitration Committee. There was therefore never any question that the parties were—in the words of their contract—''legally bound'' to submit their disputes to arbitration in a place to be determined by a Joint Arbitration Committee, designated by the American Arbitration Association and the Japanese Commercial Arbitration Association and chaired by a neutral person. This Joint Committee was to make its venue determination only after submission of arguments by each party. In short, the decision on where the arbitration should take place was to be made by a full, fair, and neutral process.
In October 1995, following the establishment of a Joint Arbitration Committee to establish venue, both Kenrich and Ajinomoto made extensive submissions. See Appendix A (Ajinomoto's submission). In its submission, Ajinomoto presented a detailed explanation of the numerous reasons why the arbitration should take place in Japan, including the following: (1) sources of proof were more readily accessible there; (2) Japan had a greater interest in this suit; (3) a Japanese forum was better equipped to address the issues of Japanese accounting methods and business practices which lay at the heart of Kenrich's claims; and (4) Kenrich had made false public statements. See Appendix A.
On November 8, 1995, the Joint Arbitration Committee, after weighing the factors described above, and giving due consideration to Kenrich's submission, ruled that the dispute between Kenrich and Ajinomoto should be heard in Japan. Kenrich chose not to pursue its claims and abandoned the proceedings.
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As this history of the parties' dispute makes clear, Kenrich has had every opportunity to pursue its alleged claims against Ajinomoto in accordance with the arbitration clause that it freely accepted at the time it granted and entered into the License Agreement. In acknowledging that it was in fact legally bound to pursue its remedies in arbitration, Kenrich initiated and participated fully in the arbitration proceedings, at least until it was disappointed in the preliminary ruling on venue and abandoned its contractual remedies.
CONCLUSION
Ajinomoto is certain the Committee will appreciate the unfortunate consequences which would result from the adoption of this legislation. The bill is not only by definition discriminatory in nature, in that it is intended to impair the rights freely contracted for only by foreign companies; it is also detrimental to the very idea of free trade in international commerce. Alternative dispute resolution mechanisms are vital to the promotion of international trade, including trade in goods and services produced and exported by the United States. To the extent action is taken to undermine the ability of parties to provide for stable and reliable means to resolve their disputes—and enactment of this bill would do just that—all supporters of international commercial relations, including the United States itself, would suffer. For this reason, Ajinomoto respectfully urges the Committee not to report favorably on H.R. 3578.
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Mr. TOWNSEND. What I propose to talk about is the law and, specifically, arbitration, Mr. Chairman.
I worked on my first international arbitration in 1973, 25 years ago, a long time ago. It was very clear in 1973 that an arbitration agreement was not an option. An arbitration agreement that said the parties agreed to binding arbitration meant what it said—it was enforceable. It was a contract, and the courts told the parties to do what they had agreed to do. That goes back to 1925 when Congress enacted the Federal Arbitration Act. This is a field in which Congress has always taken the lead.
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The courts were very slow to catch up with Congress. In the 1950's and 1960's, the courts were still dragging their heels and saying, well, there are certain questions we do not want arbitrators to deal with.
But a couple of things happened early in the 1970's. First, Congress ratified the New York Convention in 1970, which provided for enforcement of international arbitration agreements in every country which signed the convention.
A couple of years later, the Supreme Court caught up. The real decision which changed the law, if there was a change, was the 1974 decision of the Supreme Court that is called Scherck against Alberto-Culver. That case involved a dispute between a German and an American company and an arbitration clause which provided for arbitration in Paris, France.
The Supreme Court said, we know we have opinions going back 50 years that dance around the issue. We are nevertheless taking a fresh look in light of the action of Congress in adopting the New York Convention. And we are saying, it is clearly national policy adopted by Congress that arbitration clauses should be enforced in international agreements, and it is now the policy of United States Supreme Court that we will enforce those clauses.
And they sent that case out of Federal District Court to arbitration in Paris. That has been the law ever since 1974. Mr. Kovar stated absolutely accurately that the Mitsubishi case did not change the law in this regard. This is not a bill that would help American business, Mr. Chairman. I have represented a lot of American companies in arbitrations all over the world. American companies depend upon reciprocal enforcement of arbitration agreements to keep them in neutral places to resolve dispute when they are doing business in parts of the world where you would not call the courts ''courts.''
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American companies do business all over the place, and there are lots of places where the courts are not friendly and have never heard of the rule of law. To enforce an arbitration agreement—to say this is what the parties agree, this is how the parties want to resolve their disputes, this is how we are going to do it and where we are going to do—is a very valuable asset which should not lightly be meddled with. Other countries could easily retaliate and say, okay, you come to court wherever the foreign party does business.
I submit, Mr. Chairman, that this is a dangerous bill that would set a bad example. It is contrary to the treaty obligations of the United States. It is contrary to the policy established by Congress. And it is not necessary.
Arbitration in Japan is available. The Japanese rules provide for a neutral chairman from a country neither American nor Japanese if the parties request it. People go there all the time. Transpacific airfare is high, but that is the only problem with going there.
I thank the committee for this chance to be heard.
Mr. COBLE. Thank you Mr. Townsend.
[The prepared statement of Mr. Townsend follows:]
PREPARED STATEMENT OF JOHN TOWNSEND, ESQ., HUGHES, HUBBARD & REED, LLP, ON BEHALF OF AJINOMOTO COMPANY, INC.
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Mr. Chairman, I would like to thank the Subcommittee for the invitation to testify here today. I am a partner in the firm of Hughes Hubbard & Reed LLP, which has acted as the attorneys for Ajinomoto Co., Inc. in the arbitration against it commenced by Kenrich Petrochemical, Inc. Ajinomoto Co. has submitted a written statement that explains the factual background of the contractual dispute that appears to be behind the introduction of H.R. 3578. I would like to address in this separate statement the implications of that bill for the position of arbitration, and especially international arbitration, in the American legal system.
The concern that I would like to express about this bill is that it would take sides in a private commercial dispute in a way that would effectively annul the Federal Arbitration Act and that would be inconsistent with the international obligations of the United States under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention. Kenrich is seeking to have legislation enacted to get around its signed contractual obligation to arbitrate disputes with Ajinomoto arising out of a commercial dispute between them. Imagine how we would feel if the legislature of a foreign country proposed to annul a foreign company's obligation to arbitrate a dispute with an American company in order to allow the dispute to be taken to the courts of that country.
This legislation is presented as a bill to help American business. I submit that it would be very harmful to the interests of American business around the world. Parties to private international commercial agreements frequently agree to include arbitration clauses in their contracts, precisely because neither party is comfortable leaving resolution of any dispute that may arise to the courts in the other party's country. Having represented a number of companies in negotiating such agreements, and in litigating disputes that have subsequently arisen, I can tell you that American companies, as a group, probably benefit more from such arbitration clauses than the business interests of any other country. Indeed, there are countries—Japan not among them—whose legal systems are such that American companies could hardly do business there if they could not rely on the availability of neutral arbitration to resolve their disputes. The arbitration clause that would be nullified by this bill is exactly the kind that American companies doing business around the world rely upon to protect them from potentially unfriendly court systems.
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This type of arbitration clause is specifically endorsed and protected by a federal statute. Section 2 of the Federal Arbitration Act, 9 U.S.C. §2, which has been in effect since 1925, provides:
''A written provision in any * * * contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction * * * shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.''
The Supreme Court has described that provision as ''a congressional declaration of a liberal federal policy favoring arbitration agreements.'' Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983). Nevertheless, H.R. 3578 would have the effect of suspending this clause for six months as to the rights of any foreign entity.
In addition, H.R. 3578 would put the United States at odds with Article II of the New York Convention. The New York Convention, which was ratified by the United States in 1970 and incorporated into federal law by 9 U.S.C. §201, provides:
''Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.''
Japan is also a signatory to the New York Convention.
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The Federal Arbitration Act and the New York Convention embody a national policy of the United States in favor of arbitration and other forms of alternative dispute resolution as a means of settling commercial disputes. As Chairman Cole noted in introducing a different bill, the Alternative Dispute Resolution Act of 1998, H.R. 3528, on the House floor on April 21 of this year, alternative dispute resolution, including arbitration, ''offer[s] our citizens a reasonable and cost-effective alternative to expensive Federal litigation.'' Congressional Record, April 21, 1998, page 2068 (remarks of Congressman Cole). Senator Grassley, introducing a bill on the same subject in the Senate last year, noted that:
''ADR is not a legal vogue, nor is it second-class justice. ADR is an intelligent and efficient alternative to litigation, and it is a way to ensure that civil matters can be handled as quickly as possible with low cost to the parties and with an outstanding settlement and satisfaction rate among all entities involved. Arbitration in particular combines procedural protections with the informality necessary for parties to discuss their positions in a manner that promotes and allows for a detailed exploration of the issues.'' Congressional Record, July 8, 1997, page S7012 (remarks of Senator Grassley).
The supporters of H.R. 3578 advance it as a remedy for the perceived dilemma of an American company which finds itself having voluntarily agreed to submit its dispute with a Japanese company to arbitration. They claim that it is unfair to require Kenrich to arbitrate in Japan. As recently as 1995, however, the Supreme Court ruled that ''the inconvenience and costs of proceeding in Japan'' was not an appropriate basis for refusing to enforce an arbitration agreement that called for arbitration in Tokyo. Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528 (1995). Justice Kennedy, writing for the Court, stated that ''It would * * * be out of keeping with the objects of the [New York] Convention'' for the courts to interpret a statute ''to disparage the authority or competence of international forums for dispute resolution.'' 515 U.S. at 537. Quoting a 1972 decision of the Supreme Court, Justice Kennedy went on:
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''The expansion of American business and industry will hardly be encouraged, * * * if, notwithstanding solemn contracts, we insist on a parochial concept that all disputes must be resolved under our laws and in our courts.'' 515 U.S. at 537, quoting The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 9 (1972).
The New York Convention, Justice Kennedy explained, was ''intended 'to encourage the recognition and enforcement of commercial arbitration agreements.' '' 515 U.S. at 538, quoting Scherck v. Alberto-Culver, Inc., 417 U.S. 506, 520 (1974). Therefore, Justice Kennedy wrote:
''If the United States is to be able to gain the benefits of international accords and have a role as a trusted partner in multilateral endeavors, its courts should be most cautious before interpreting its domestic legislation in such manner as to violate international agreements. That concern counsels against construing [the statute in question] to nullify foreign arbitration clauses because of inconvenience to the plaintiff or insular distrust of the ability of foreign arbitrators to apply the law.'' 515 U.S. at 538.
I submit that the same caution expressed by the Supreme Court about interpreting legislation should be felt by the Congress in drafting it. It would be unbecoming the United States to nullify a private international commercial agreement, simply because one party to such an agreement would now prefer to be in a United States court. We would resent an attempt by any other nation to nullify such a clause, and should not ourselves go back on our obligations under an international treaty. Legislation that singles out foreign entities for adverse treatment, as H.R. 3578 does, simply invites retaliation against American interests. More important, such legislation runs counter to a tradition, founded in our constitution, of fair and equal treatment of nationals of friendly countries. And it also runs counter to our long-standing national policy in favor of resolving disputes by arbitration.
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Mr. COBLE. Thank you all, gentlemen, for being here.
Mr. Monte, if we are in litigation and Mr. Townsend is examining you, he would probably say to you, Mr. Monte, this relevant arbitration clause in the contract you signed reads, all disputes, controversies, or differences which may arise between the parties out of or in relation to or in connection with this contract or the breach thereof shall finally be settled by arbitration.
And Mr. Townsend would probably continue—without inserting words into your mouth, Mr. Townsend——
Mr. TOWNSEND. I like them so far, sir.
Mr. COBLE. I do not mean this to be adversarial, Mr. Monte, but he would probably say to you, how could you sign such a document and then subsequently assert, as you have in your written testimony, that an arbitration clause is optional? In other words, it does not preclude either party from filing suit? How would you respond to that?
Mr. MONTE. Well, I would have responded that the way my sense of the contract when I signed it is that the arbitration clause, that language in there was the kind of language you had to have in there if you wanted to have an arbitration clause that was meaningful.
And I was agreeable to arbitration. I am not against arbitration. Because, just as it has been said here, you do not want every issue to become a Federal case.
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But I also assumed that when the words of my contract also said that ''the contract is governed by the laws of the United States of America'' that I always would have the option, according to my counsel, that I always had the right to go to Federal court.
So, for me, it said that it was boilerplate language that dealt with the arbitration language that you had to have if you are going have an arbitration agreement. So I had no problem with signing that. I just always thought that I had the right, if I did not like what the hell went on with arbitration, I could go to Federal court. That is the issue, really, for me.
Mr. COBLE. Well, Mr. Monte, oftentimes lawyers in particular, and I guess we humankind generally, vary in their various interpretations of different matters.
But, as I interpret Mitsubishi, the case suggests that a court will not uphold or ratify, if you will, an international agreement containing an arbitration clause that is adjudged a contract of adhesion, that is a contract based on such elements as fraud or unfair economic benefit, etc.
Do you maintain, Mr. Monte, that you were, for want of a better word, forced to sign a contract of adhesion? Would that be one of your contentions? And ''forced'' may be too strong a word.
Mr. MONTE. I am an engineer, not a lawyer.
Mr. DINAN. Mr. Chairman, of course that question goes back to really what people's state of mind, particularly in the parties, was in the late '70's and, of course, 1980, when the contract was signed.
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I think I can speak for Mr. Monte, because he is here, that nobody goes into a contract thinking that the other side is going to defraud you. Otherwise, you probably would not do it. However, there are three considerations to keep in mind.
In the late 1970's, it was absolutely impossible and the word is ''impossible'' to sell chemical products in Japan without having a Japanese joint venture. Enforcement was through a huge system of nontariff trade barriers conducted by the Ministry of Finance.
Mr. Chairman, as you are aware, market access has been a huge bone of contention between the United States and Japan. The existence of these nontariff trade barriers and the closing of the Japanese market to U.S. products were the subject of very strenuous negotiations throughout the 1980's and the early 1990's with even today only minimal effects. But at that time it was impossible to penetrate that market.
The Japanese government required de facto through the nontariff trade barriers that you have the Japanese partner and that you have them through licensing your product, in other words, turning over the technology. So, in that regard, the contract was one that that was superimposed.
The second item I think should be clear is that the contract did specifically state the contract was to be interpreted under the laws of the State of New Jersey. I believe that the intention of the parties at the time, under the prevailing majority opinion of the law as was espoused by the first circuit in the Mitsubishi case, was that for matters that arose, that did not have to do with the actual interpretation of the contract but arose from the contract but were extraneous thereto, such as an antitrust-type case, that you clearly had the option.
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The allegations in this case—I think we have had a few red herrings thrown up. The allegations in this case are not what the license agreement says. No one disagrees with what the words say. It is the allegation that Ajinomoto is engaged in an unfair method of competition through the use of a sophisticated system of patent flooding which allows them to claim that the chemicals that they are making in the hundreds of millions of dollars are not covered under the license agreement because the technology is slightly different. This practice of patent flooding has an anticompetitive effect and arises out of a body of antitrust law.
That practice is prohibited in Europe and this country, but it exists in Japan. And, again, that is an ongoing bone of contention, to use that hackneyed phrase, between the United States and Japan.
It was part of the Framework talks under both the Bush and the Clinton administration. Those talks are somewhat basically broken down a bit. So the issue, was it a contract of adhesion, has to be put into the framework in the ambit of the time.
Mr. COBLE. I agree with you on that.
Mr. Monte, when you executed the contract, did you discuss it with your counsel? And you all had discussed this in some detail, I assume, prior to your executing the contract?
Mr. MONTE. As to what, the language?
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Mr. COBLE. Yes.
Mr. MONTE. Well, I relied on counsel, who is head of intellectual property at the time. My counsel still files my patents. And he told me that this was the best possible contract he could draw up for an agreement with Japan that would make a working arrangement, and that is what we negotiated.
Mr. COBLE. I recognize the gentleman from Massachusetts.
Mr. FRANK. Is there any contemporaneous evidence, in your view, that you were not signing away your rights to go to court? Did you have anything like that, Mr. Monte? Anything in writing? Any memoranda?
Mr. MONTE. I found out about this right not to go to U.S. court in New Jersey when Donald told me about the Mitsubishi suit. I didn't know about that at all.
Mr. FRANK. So you took it for granted.
Mr. MONTE. I thought I could take these guys to court.
Mr. FRANK. Maybe Mr. Townsend can respond.
Your point is that it was very clear, even before Mitsubishi, that you could not do this, that an arbitration clause preempted your going to court. But I do notice that Mitsubishi lost at the circuit level. It was only 5–3 at the Supreme Court, so it doesn't sound like it was quite as obvious as you would otherwise argue.
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Mr. TOWNSEND. Congressman, the issue in Mitsubishi wasn't whether an arbitration clause was enforceable, but whether an accusation of a violation of the antitrust laws could be sent to arbitration as a matter of public policy. That is what the Court split on. There was actually a 5–4 split on the question of enforcing arbitration clauses, but that was back in 1974, in the Scherck case, where the Court sent that case off to arbitration in Paris. And that was well-established law long before 1980.
Mr. FRANK. Now, Mr. Dinan, you mentioned, when you were responding to Mr. Coble, some antitrust considerations. Are there antitrust considerations in part of your client's case here?
Mr. DINAN. Yes, Mr. Congressman. Again, the basis of the allegations, it is not an issue of did they pay, did they not pay, what does this particular clause mean, what does it not mean. The allegations are that the unfair method of competition that is being used is a sophisticated form of patent flooding.
We have done a tremendous amount of research in the factual matters of this case over the last 5 years, and what we would allege, what we would contend, what we are led to believe is that Ajinomoto, in paying the royalty, is basically doing so almost as a fraud, in the sense they gave you a hand-typed sales report. It is nothing that is computer generated or anything.
Mr. FRANK. You are convinced that the arbitration in Japan would not be fruitful to this or would be at the expense of it?
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There was the fact that there are activities taking place in Japan, so there is some argument for the arbitration being there. Is it you think the arbitration simply wouldn't be fair, or is it the expense of trying to do it in Japan?
Mr. DINAN. On the issue of expense, we would concede that the courts have said that cost—while it may be important in the real world—is not the most relevant legal consideration.
No, the objection is the fairness, or the lack thereof, particularly for this type of claim, this kind of an anticompetitive claim. You would essentially be taking on not only the practice of Ajinomoto but the practice of the Japan patent trademark office, the practice of the Japanese courts in their claim interpretation and, really, a policy of the Japanese government.
Mr. FRANK. Under Japanese rules, if you had an arbitration in Japan, would that be appealable in any way to the courts, the award, and under what circumstances?
Mr. DINAN. If you were to lose on that issue, you would have an appeal. It is a limited appeal, much as it is in this country, and it is essentially analogous to the courts. But you would have to show that the arbitration panel had acted in an unreasonable manner. It is not a de novo review.
Mr. FRANK. There is a presumption of legitimacy.
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Mr. DINAN. Yes. If I could just expound on one further point. The controversy that exists between the U.S. and the EU with Japan on the issue of claim interpretation and the broadness of claim interpretation in the application of the doctrine of equivalence may all end up at the WTO some day. But the problem with this case is that, under an identical fact pattern, a U.S. court or an arbitration panel applying U.S. claim interpretation, we would win; and, in Japan, applying their very narrow claim interpretation, we would lose.
We are almost in the same boat that Kodak was in with their dispute with Fuji, albeit that was a different issue under antitrust; and, as you know, they got the United States Government to go to the WTO for them.
Mr. MONTE. Mr. Frank, in Brooklyn, we would say we wouldn't have a prayer in Japan.
Mr. FRANK. Well, if my colleagues are successful in other countries, you will have to have a prayer.
Mr. MENENDEZ. Mr. Chairman, I have two final closing points, if I may.
Mr. COBLE. I want to ask Mr. Townsend a question first. Mr. Frank touched on this, and I want to expand on it a little bit.
Prior to 1985, in the Mitsubishi case, and maybe even the Scherck case might be more applicable, I think Mr. Monte and his attorney would indicate that the prevailing view in the American legal community was that agreements to arbitrate were unenforceable, in the sense that they were merely optional. Do you want to respond to that?
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Mr. TOWNSEND. Certainly, Mr. Chairman. I think the best way to describe the law, say in the '50's and '60's, would be that there was an act of Congress, which is still in effect, the Federal Arbitration Act, which says that agreements to arbitrate are enforceable in the same way as every other contract. And that was the law of the land.
But those contracts came before courts which looked for any excuse not to enforce them, because the courts were very suspicious of the process of arbitration. So while it was the law that you could enforce an arbitration contract, if the courts could find any number of judicially created exceptions, you could weasel out. It was never a formal option.
And what the Supreme Court said in the Scherck case in 1974 was, they said we have basically been wrong. We have been looking for ways around an act of Congress, and we should be looking for ways to enforce an act of Congress.
Mr. COBLE. Do you have the citation on it, Mr. Townsend?
Mr. TOWNSEND. Yes, Mr. Chairman. That is 417 United States Reports, at page 506.
Mr. COBLE. Thank you, sir.
Final word, the gentleman from New Jersey.
Mr. MENENDEZ. Mr. Chairman, I just want to make two quick points. It is my understanding, and I would argue: Were companies barred by an arbitration clause to proceed legally in courts in the United States, particularly under the fact patterns of Mr. Monte's case? And the answer to that is no. Otherwise, we wouldn't have some of the precedents we have had in Mitsubishi that turns some of it around.
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And is enforcing an arbitration clause the same? This is not an issue, in my view, of enforcing an arbitration clause. That is not the same as denying a pre-existing right to pursue a remedy in court. Otherwise, what is Mitsubishi saying and what are the actions? I am sure that we could present to the committee evidence of actions taken in court of entities that had arbitration clauses signed as part of their agreement.
So I think, in essence, what we are trying to do is reinstate a remedy that was available prior to the '85 decision for a very limited period of time.
Thank you for your consideration.
Mr. COBLE. We express our thanks to you all for you attendance today.
Mr. FRANK. Mr. Chairman, may I say that it does seem to turn on what the understanding of the assumptions were around the time of 1980 and 1985; and we are certainly available if anybody has any further submissions that they want to make on that point.
Mr. COBLE. This concludes the oversight hearing on the U.S. Judicial Conference, Administrative Office, and Federal Judicial Center, and the Legislative Hearing on H.R. 3578.
And consistent with what Mr. Frank just said, I will remind you all that the record will remain open for 1 week if you all have additional information to submit.
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I thank you for your cooperation, and the subcommittee stands adjourned.
[Whereupon, at 1:05 p.m., the subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
| American Arbitration Association, |
| New York, NY, June 16, 1998. |
Hon. HOWARD COBLE, Chairman,
Subcommittee on Courts and
Intellectual Property,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: H.R. Bill 3578
DEAR MR. CHAIRMAN: Thank you for the invitation to provide comments on H.R. 3578. Enclosed please find five (5) copies of my statement on behalf of the American Arbitration Association, in both hard copy and diskette form, as well as my curriculum vitae.
If you, or a member of your staff, would like to discuss this directly, please do not hesitate to contact either me at (212) 484–4110 or AAA President and CEO, William K. Slate II at (212) 484–4177.
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Thank you for your time and consideration.
Sincerely,
| Michael F. Hoellering, General Counsel |
enclosure
cc: Subcommittee on Courts and Intellectual Property
PREPARED STATEMENT OF MICHAEL F. HOELLERING, GENERAL COUNSEL, AMERICAN ARBITRATION ASSOCIATION
Mr. Chairman and Members of the Subcommittee, I appreciate the invitation to provide comments on H.R. Bill 3578 on behalf of the American Arbitration Association (the ''AAA'' or ''Association''). Since 1926, the AAA has been in the forefront of furthering the advancement of arbitration as a means to resolve business disputes, both within the United States and worldwide. The AAA now administers more than 78,000 cases annually, including disputes which are international in nature.
International arbitration is of great benefit to U.S. businesses, both large and small, by providing parties the opportunity to voluntary agree on their dispute resolution procedure. It offers predictability; freedom to choose the applicable procedural rules; freedom to choose one's arbitrators, governing law and place of arbitration; and a flexible, informal procedure, often more conducive to settlement and less adversarial than litigation. It is because of these advantages, and the reluctance of parties to litigate in foreign courts, with the attendant uncertainties, that arbitration has become the preferred means of resolving international commercial disputes.
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Under our laws, the foundations of international arbitration are embodied in the Federal Arbitration Act (the ''FAA''); the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ''New York Convention'')—the highly successful international treaty to which the U.S. and 117 countries are party, including Japan; the Inter-American Convention on International Commercial Arbitration (the ''Inter-American Convention'' or the ''Panama Convention''); and a long line of interpretive U.S. decisional law upholding the enforceability of arbitral agreements and awards. Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528 (1995); Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985); Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983); Scherk v. Alberto-Culver, Inc., 417 U.S. 506 (1974); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); Productos Mercantiles E Industriales, S.A. v. Faberge USA, 23 F.3d 41 (2d Cir. 1994); Bergesen v. Joseph Muller Corp., 710 F.2d 929 (2d Cir. 1983); Parsons & Whitmore Overseas Co., Inc. v. Societe Generale (RATKA), 508 F.2d 969 (2d Cir. 1974).
Specifically, §2 of the FAA since 1925 has supported agreements to arbitrate:
A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
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Also, the New York Convention, which was ratified by the U.S. in 1970 and incorporated into federal law by 9 U.S.C. §201 provides:
Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.
The New York Convention provides the foundation of a fair dispute resolution process in international trade. It facilitates the reciprocal enforcement of arbitration agreements worldwide, i.e. Convention awards are readily enforced from contracting state to contracting state. Thus, it is much easier to enforce a foreign arbitral award than a foreign court judgment, since no similar, broadly inclusive, reciprocal treaty is in effect for the enforcement of court judgments.
Where applicable, parties may also seek enforcement of arbitral awards under the Inter-American Convention which is implemented by Chapter 3 of the FAA and provides:
An agreement in which the parties undertake to submit to arbitral decision any differences that may arise or have arisen between them with respect to a commercial transaction is valid . . .
The U.S. Supreme Court recognized the utility of forum-selection clauses by holding that such a clause in a freely negotiated international commercial agreement should be enforced absent a compelling showing that it be set aside. The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15 (1972). Here, the Court wisely instructed that in today's world ''we cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws, and resolved in our courts.'' Id. An arbitration agreement will be enforced according to its terms and the resulting award also will be enforced so long as one of the enumerated grounds listed under the FAA or the New York Convention are not found.
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Enactment of H.R. 3578 would not only violate U.S. treaty obligations, but also deprive parties to existing contracts of the benefits of their freely negotiated arbitration arrangements, serve to undermine the confidence of business partners around the globe, and adversely affect the entire international arbitration system.
There seems to be a misconception that the Supreme Court's decision in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. changed the law laid down in Scherk v. Alberto-Culver, Inc. In fact, 11 years before Mitsubishi was decided, the Scherk Court had already supported the use of arbitration generally in international transactions by stating that ''[a] parochial refusal by the courts of one country to enforce an international arbitration agreement would not only frustrate these purposes [of the New York Convention], but would invite unseemly and mutually destructive Jockeying by the parties to secure tactical litigation advantages. Id., at 520. The Court in Mitsubishi merely expanded the range of arbitrable subject matter by holding that it was not against public policy for arbitrators to decide questions of antitrust law in an international context.
Because the AAA served as an impartial administrator in the early stages of the relevant proceedings, it will not comment on the merits of the dispute which seems to be the impetus for H.R. Bill 3578. We would like to comment on the arbitration procedure chosen by the parties in their agreement—arbitration under the Japan-American Trade Arbitration Agreement (the ''Agreement''). In 1952, the AAA and the Japan Commercial Arbitration Association (the ''JCAA'') entered into the Agreement, and the procedures thereunder are fair and impartial.
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An important aspect of any arbitration is where it will be conducted. Under the Agreement, the parties are free to agree on the locale of the arbitration; if they do not agree, the Agreement provides that the parties are required, within 14 days, to submit their respective contentions in favor of their preferred locale to a committee of three persons—the ''Joint Arbitration Committee''—two appointed by the respective associations (the AAA and JCAA) and the third, to act as chairman, to be chosen by the other two. Importantly, the Agreement mandates that the third member not be a member of either association.
The locale decision in this case was not made, as Congressman Menendez indicated in his testimony, by ''two Japanese representatives and one American . . .'' but rather by a Joint Arbitration Committee consisting of William H. Mathers, Esq., a U.S. national appointed by the AAA, S. Fred Tsuchida, a Japanese national appointed by the JCAA, and David M. Barnard, Esq., a British national, who was mutually appointed by Mathers and Tscuhida. The use of such neutral locale committees is a standard feature of international arbitration and is provided for in international cooperative agreements and modern arbitration rules.
The JCAA itself is a respected arbitral institution of long standing, whose rules in many respects mirror those of the AAA. The JCAA has been instrumental in promotions, recent changes in Japanese law which now permits foreign lawyers to represent parties to international arbitration proceedings conducted in Japan, and foreign nationals to serve as arbitrators in Japanese proceedings. Parties are no longer restricted in their choice of counsel to lawyers admitted to practice domestic law in Japan, and arbitrators of Japanese nationality. In fact, JCAA arbitration rules, like those of the AAA, provide expressly that parties may be represented or assisted by any person of its choice in the arbitral proceedings. The Rules also contemplate the service of non-Japanese arbitrators.
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Further, it is expected and common for arbitrators to apply the law specified in the contract irrespective of where the arbitration is conducted and no matter which institutional rules apply to the proceeding. Merely because parties are arbitrating in Japan, under the JCAA rules, does not mean that arbitrators do not have the same obligation to apply the law as specified by the parties' agreement.
For many years, the U.S. has played a leading role in the development of a fair, effective, and predictable worldwide system of international commercial arbitration. Enactment of this legislation would seriously undermine this highly effective voluntary process of international dispute resolution, and would harm rather than help U.S. business interests.
The AAA urges the Subcommittee on Courts and Intellectual Property not to report favorably on H.R. 3578.
AMERICAN ARBITRATION ASSOCIATION
DISCLOSURE PURSUANT TO HOUSE RULE XI, CLAUSE 2(G)(4)
The American Arbitration Association is a party to the following federal contracts or subcontracts:
1. 11/13/97: the National Foreign Affairs Training Center of the Foreign Service Institute, U.S. Department of State—negotiation training.
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2. 9/8/97: the Federal Executive Institute of the United States Office of Personnel Management—negotiation teaching programs.
3. 5/29/98: the Naval School, CEC Officers—environmental negotiation workshops.
4. 11/1/97–10/31/02: General Services Administration—EEO services.
5. 11/11/97–9/30/98: U.S. Department of Agriculture, National Finance Center—mediation services under GSA contract.
6. 6/11/98–6/11/2002: U.S. Department of justice, Drug Enforcement Administration—EEO services under GSA contract.
7. 6/4/70: Federal Reserve Board of Governors, Federal Reserve System Labor Relations Panel—investigators, mediators and hearing officers pursuant to 12 CFR Part 292.
8. 5/14/96: Federal Aviation Administration—arbitrator services.
9. 8/19/80: Federal Mediation and Conciliation Service—administer FIFRA cases pursuant to 29 CFR 1440.
10. Public Law 89–249 Section 9(2)(e): Department of the Interior, National Park Service, Concession Program Division—arbitration services.
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11. 1994: National Environmental Protection Agency contract—AAA as subcontractor with Resolve.
HOELLERING, MICHAEL F.
c/o American Arbitration Association
140 West 51st Street
New York, NY 10020
U.S.A.
Telephone: (1–212) 484–4110
Telefax: (1–212) 765–4784
Education: B.S. 1956, J.D. 1959, Columbia University
Bar Admission or Professional License: Admitted to New York Bar 1960, U.S. District Court, Southern District of New York 1961, U.S. District Court, Eastern District of New York 1966, U.S. Supreme Court 1984
Areas of Specialization: Alternative Dispute Resolution, Commercial and International Law
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Present Position: General Counsel, American Arbitration Association
Professional Experience: General Counsel, American Arbitration Association (1980–); Vice President, Case Administration (1972–1980); New York Regional Director (1962–1972); Secretary, Arbitration Practice Committee (1972–1980); Secretary, National Construction Dispute Resolution Committee (1972–1995); Secretary, Corporate Counsel Committee (1980–); Secretary, Arbitration Law Committee (1980–); Pan American World Airways, Passenger Traffic and Sales (1948–1951)
Other Related Experience: President, International Federation of Commercial Arbitration Institutions (1990–); Vice President, International Council for Commercial Arbitration (1998–); Member, Arbitration Council, World Intellectual Property Organization (1994–) Member, U.S. NAFTA Advisory Committee on Private Commercial Disputes (1994–); Member, Governing Council of Arbitration and Mediation Center for the Americas (1996–); Registrar, New Zealand v. France (Rainbow Warrior arbitration) 1989–1990; U.S. Delegate, United Nations Commission on International Trade Law, Working Group on Model Arbitration Law (1981–1985); Guidelines on Preparatory Conferences in International Commercial Arbitration (1994–1995); New York Convention Session (1998); Lecturer, Queens College (1969), New School for Social Research (1980–82) and professional and legal groups world-wide;
Professional Associations: American Society of International Law; International Bar Association; International Law Association; American Bar Association; Association of the Bar of the City of New York;
Publications: Editor, ADR and the Law, Annually since 1982; various publications on arbitration and other means of alternative dispute.
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| United States Council for |
| International Business, |
| New York, NY 10036, June 18, 1998. |
Hon. HOWARD COBLE, Chairman,
Subcommittee on Courts and
Intellectual Property,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: USCIB Position on H.R. 3578
DEAR MR. CHAIRMAN: On behalf of the United States Council for International Business (USCIB), we appreciate the opportunity to provide comments on H.R. Bill 3578. Given the potential ramifications of this proposed legislation, which the USCIB strongly opposes, we appreciate your holding open the record of the Subcommittee's hearing held June 11 for further comment.
The USCIB was founded in 1945 to promote an open system of world trade, investment and finance and currently has a membership of over 300 multinational companies, law firms and business associations.
The USCIB is the U.S. affiliate of the International Chamber of Commerce (ICC) which, since 1923, has been the leading independent organization to further the advancement of international arbitration as a means of settling business disputes worldwide. The ICC International Court of Arbitration (ICC Court) is the best known administrator of international arbitration in the world. This year the ICC Court has received its 10,000th international case filing.
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In the last quarter century, arbitration has gained worldwide acceptance as the normal means of resolving international commercial disputes. Such disputes pose unique difficulties and challenges, arising from the differing nationality, background, culture and, often, languages of the parties. These differences may be compounded by distance and the disadvantages one party may face in submitting to a procedure in the other's home country. International arbitration has the merit of providing a neutral procedure offering no undue advantage to any party, final and binding decisions, and awards that enjoy much greater international currency than the judgments of national courts. It is, in addition, a speedier and less expensive alternative to litigation.
The ICC was the primary organization responsible for placing the need for an international treaty on enforcement of arbitration agreements and awards before the United Nations in 1958. The initiative resulted in the promulgation of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Said Treaty just celebrated its 40th Anniversary at the United Nations on June 10, 1998. Over 116 nations have adopted this Convention which provides in Article II:
Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them . . . concerning a subject matter capable of settlement by arbitration . . . [and] the court of a Contracting State, when seized of [such] a matter . . . shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
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In the view of USCIB, the proposed legislation would (i) be contrary to the treaty obligation of the United States as set forth above, (ii) would set back all the benefits international business has obtained in the past 40 years through recourse to prompt and efficient international dispute resolution, (iii) would seriously diminish the pro-enforcement position granted international arbitration by U.S. Courts and (iv) would encourage foreign parties to force U.S. parties to litigate in foreign courts, with all the attendant uncertainties.
Thus, for the above reasons and the well-stated views expressed on June 11 by Jeffrey D. Kovar of the Office of the Legal Adviser of the Department of State, the USCIB also strongly opposes the proposed legislation.
Sincerely,
| Abraham Katz, President |
| Gerald Aksen, Chairman, |
| Arbitration Committee |
| Hughes Hubbard & Reed LLP, |
| Washington, DC, June 16, 1998. |
Hon. HOWARD COBLE, Chairman,
Subcommittee on Courts
and Intellectual Property,
Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: H.R. 3578
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DEAR CONGRESSMAN COBLE: Thank you again for the opportunity to testify before the Subcommittee on June 11, 1998 on H.R. 3578. I am writing to follow up on the expression of interest by Congressman Barney Frank, the Ranking Member of the Subcommittee, in what the legal effect was in 1980 of an agreement to arbitrate. I would also like to address the expressions of concern by Kenrich Petrochemicals, Inc. that Japanese law might be applied to its contract with Ajinomoto Co., Inc.
Agreements to arbitrate were enforceable in 1980
By 1980, the law was quite clear, as stated by the Supreme Court in 1974, that an agreement ''to arbitrate any dispute arising out of [an] international commercial transaction is to be respected and enforced by the federal courts in accord with the explicit provisions of the Arbitration Act.'' Scherk v. Alberto-Culver Co., 417 U.S. 506, 519–520 (1974).
There had, indeed, been some uncertainty prior to 1974 about whether arbitration clauses would be enforced in certain kinds of cases. That uncertainty was traceable in large part to the Supreme Court's 1953 decision in Wilko v. Swan, 346 U.S. 427 (1953). But, as the Supreme Court observed in reviewing the history of the enforcement of arbitration clauses in its 1987 decision in Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 233 (1987), ''the mistrust of arbitration that formed the basis for the Wilko opinion in 1953 is difficult to square with the assessment of arbitration that has prevailed since that time.''
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The Supreme Court's 1985 decision in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (198 5), did not change the law in any respect relevant to the claims asserted in the arbitration Kenrich commenced against Ajinomoto in 1995. The only change in the law made by that decision was to recognize that arbitrators could decide antitrust claims in international arbitrations, but Kenrich asserted no antitrust claim in the 1995 arbitration. The significance of the Mitsubishi decision was explained by the Supreme Court in its later opinion in Shearson/American Express:
''In Mitsubishi, * * * we recognized that arbitral tribunals are readily capable of handling the factual and legal complexities of antitrust claims * * *. Likewise, we have concluded that the streamlined procedures of arbitration do not entail any consequential restriction on substantive rights.'' 482 U.S. at 232.
In the same 1987 opinion, the Supreme Court made it clear that the law had not changed except with respect to antitrust claims since the Court's 1974 decision in Scherk:
''In Scherk, the Court upheld enforcement of a predispute agreement to arbitrate Exchange Act claims by parties to an international contract. * * * The Court reasoned that arbitration reduced the uncertainty of international contracts and obviated the danger that a dispute might be submitted to a hostile or unfamiliar forum. At the same time, the Court noted that the advantages of judicial resolution were diminished by the possibility that the opposing party would make 'speedy resort to a foreign court.' The decision in Scherk thus turned on the Court's judgment that under the circumstances of that case, arbitration was an adequate substitute for adjudication as a means of enforcing the parties' statutory rights.'' 482 U.S. at 229.
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Indeed, the Mitsubishi decision itself states that Scherk established ''a strong presumption in favor of enforcement of freely negotiated contractual choice-of-forum provisions * * * reinforced by the emphatic federal policy in favor of arbitral dispute resolution.'' 473 U.S. at 631. The Court added that ''that federal policy applies with special force in the field of international commerce.'' Id.
The Scherk decision, of course, rested in part on the then-recent ratification by Congress of the New York Convention. The goal of the Convention, according to the Supreme Court, ''was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.'' Scherk, 417 U. S. at 521, n. 15. The new section added by Congress to the Federal Arbitration Act when the Convention was ratified in 1970 ''provides unequivocally that the Convention 'shall be enforced in United States courts in accordance with this chapter.' '' Id., quoting 9 U.S.C. §201.
Scherk's statements about the enforceability of international arbitration agreements under the New York Convention were reaffirmed by the Supreme Court as recently as 1995. Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 538 (1995). Such agreements have been recognized as enforceable continuously since 1974, and still are today. There was no change in the law after the Kenrich/Ajinomoto agreement was signed in 1980 that made the arbitration clause in that agreement either more or less binding.
New Jersey law will be applied by the arbitrators
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Kenrich expressed concern that an arbitration in Japan would be affected by biases that it believes to be present in Japanese law. But there is no need to fear that arbitrators will apply Japanese law in the contract dispute between Kenrich and Ajinomoto, because the contract provides for its interpretation to be governed by the law of New Jersey. It is common in international arbitration for arbitrators sitting in one country to be called upon to apply the law of another country, and for them to do so conscientiously. As the Supreme Court stated in Shearson/American Express, ''there is no reason to assume at the outset that arbitrators will not follow the law.'' 482 U.S. at 232.
The contract at issue in the Scherk case called for arbitration in Paris, but provided that the contract would be governed by the law of Illinois. In enforcing the agreement to arbitrate in Paris, the Supreme Court noted that there was no need to be concerned that ''the designation of arbitration in a certain place might also be viewed as implicitly selecting the law of that place to apply to that transaction,'' because the ''laws of the State of Illinois' were explicitly made applicable by the arbitration agreement.'' 417 U.S. at 520 n. 13.
The interpretation of the Kenrich/Ajinomoto agreement will similarly be controlled by the law of New Jersey, regardless of where the arbitration takes place. Indeed, the inclusion of this New Jersey law provision in the contract appears to be clear evidence that the agreement was not a ''contract of adhesion,'' because a New Jersey choice of law provision is hardly likely to have been imposed by a Japanese company. Rather, it is far more likely to represent the results of vigorous bargaining between the parties. That bargaining resulted in choices by the parties as to how any disputes between them should be resolved, and those choices should be respected.
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I hope that you will let me know if the Subcommittee needs any additional information. I would again like to express my thanks for the courtesies of the Subcommittee and its staff in allowing the views of Ajinomoto Co., Inc. to be heard.
Respectfully yours,
| Hughes Hubbard & Reed LLP, |
| Washington, DC, June 11, 1998. |
Mr. MARSHALL WILLIAMS, Director,
Foreign Agents Registration Unit,
U.S. Department of Justice, Washington, DC.
Re: Registration of Hughes Hubbard & Reed LLP Under the Foreign Agents Registration Act
DEAR MR. WILLIAM: We are enclosing the required forms for registration of Hughes Hubbard & Reed LLP under the Foreign Agents Registration Act. Specifically included are an original and two copies of each of the following:
1. The Registration Statement
2. Exhibit A form
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3. Exhibit B form
4. Three Short Form Registration Statements for John M. Townsend, Steven A. Hammond, and L. Mark Weeks
5. Three copies of an authorization from the Executive Committee of Hughes Hubbard & Reed authorizing designated partners of Hughes Hubbard & Reed LLP to execute Foreign Agents Registration forms on behalf of the Firm.
Pursuant to section 201(d) of the FARA regulations, we request that the requirement to file a copy of the Partnership Agreement of Hughes Hubbard & Reed LLP be waived. This Agreement contains confidential information regarding operational procedures of the Firm, the disclosure of which would not advance the interest sought to be protected under FARA but which disclosure could be adverse to the Firm.
Should you have any questions please contact the undersigned at (202) 721–4630.
Sincerely,
Enclosure(s)
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PREPARED STATEMENT OF HON. HELEN DELICH BENTLEY, A FORMER REPRESENTATIVE OF CONGRESS FROM THE STATE OF MARYLAND
SUMMARY
Sal and Erika Monte asked my help in dealing with a foreign company in 1990 and as the former Congresswoman from Maryland's 2nd Dist., I did what I could. I gave a speech on the House floor on October 1, 1990 about Kenrich Petrochemicals, Inc., of which Sal is president. The story was about patent abuse of Kenrich Petrochemicals by Ajinomoto, a Japanese company.
It was shortly after my speech that Sal's bank was sold with a majority interest to a Japanese bank, Dai-ichi Kangyo. The day after the sale Sal was contacted by a bank officer asking him for a meeting at which time he was told to go into bankruptcy or find a partner. His problems were compounded with Ajinomoto's patent abuse and a credit crunch from the bank. Only Sal Monte's business portfolio was excepted from the bank sale, but the new CIT bank handled his portfolio for a bank which was now made technically nonexistent by the recent sale.
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The Japanese firm, Ajinomoto which had wined and dined Sal and Erika Monte led them to believe they had an excellent partner in Ajinomoto. It was not so. Although the Ajinomoto sales in Southeast Asia continued to increase, Kenrich's share of royalties remained the same. Ajinomoto channeled its deceit through another company, Nippon Soda which sold Kenrich products under another name. Nippon Soda threatened action against Kenrich if it continued to sell the Kenrich product in Japan.
Kenrich technology in polymers is considered a critical technology for the United States. The Kenrich organic-metallic compounds are in products ranging from steel, rocket shots films, lead pencils, photocopier toner, tires, cars to paints and coatings. This technology has been copied in Japan and is now being shipped back into the United States through other companies. The loser is Kenrich which has invented and marketed the products.
We should not allow foreign companies and governments to force American companies to turn over their intellectual property as a price of doing business. We must protect our intellectual property which is the ''crown Jewel'' of the American economy. Patents have contributed to providing the highest standard of living for the country for over 200 years.
H.R. 3578 is a first, small step down the road in protecting American technology by giving the small businessman the tools to fight the cartels in a fair court system in the United States. it is a system which protects the rights of the individual. We should back up American business and not throw them to the wolves in foreign legal systems which are far inferior to the American system and do not protect the individual.
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STATEMENT
Chairman Coble, Ranking Member Frank, Members of the Subcommittee, I am Helen Delich Bentley, as you know formerly the representative of Maryland's 2nd Dist. Sal and Erika Monte are friends of mine.- I first met them while in Congress and I was horrified when I heard their story about the problems with Ajinomoto.
As a member of Congress, I gave a speech on October 1, 1990 on the House floor about a Japanese company, Ajinomoto and its treatment of Sal Monte, President of Kenrich Petrochemicals, Inc., Bayonne, NJ. The speech titled, ''When Will We Learn'' was about the patent abuse of Sal's patents by Ajinomoto, which is primarily a food company.
I will review some of the facts from that speech and leave it in its entirety as my full testimony. That speech on the House floor in 1990 was a turning point in Sal Monte's life and in the fortunes of Kenrich Petrochemicals. It highlighted the unfavorable treatment of an American company by Ajinomoto, which is something the company did not want.
Shortly after the speech, Sal's bank, original bank Fidelcor Business Credit Corp which was the asset based lending arm of Fidelity Bancorp. was sold to CIT which was 40 percent owned by Manufactures Hanover Trust and 60 percent owned by Dai-chi Kangyo.
As soon as the papers were signed, a bank official called him to request a meeting, where Sal was told to declare bankruptcy or find a partner. The Kenrich patents, which were in Sal's name as- the inventor, were collateral for the Kenrich loan.
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There was an effort to put a shield on Sal's loan between the U.S. bank and the Japanese bank after my speech on the House floor.
In this sale, Sal was told the entire bank portfolio had been sold to CIT which in turned claimed that Sal's loan, the only exception out of the bank sale, was still with the nonexistent American bank, Fidelcor Business Credit Corp. But CIT claimed it was just managing his portfolio for Fidelcor. Even the CIT employees were so confused that occasionally they signed documents as officers of CIT.
It was obvious that Sal's loan belonged to CIT which included the Japanese bank.
The Kenrich story is one more example of an American company being ripped off by them trying to do business in Japan. Let's go to the beginning.
Sal was approached in the mid-seventies by a trading company which subsequently introduced Sal to Ajinomoto officials who urged him to bring his product to Japan.
Sal and Erika Monte were wined and dined in Japan and given the first class treatment, including flowers in their hotel room, fine restaurants and a chauffeur.
Everything was done to make Mr. and Mrs. Monte believe they were respected and would be treated fairly. Unfortunately, that was far from what actually happened.
The Kenrich-technology was transferred to Japan over a period of years. During this time the Japanese were testing Kenrich's products under the Japanese Government's New Substance Act. Sal was told that the Japanese had received customer complaints about the quality of Kenrich products. Sal found this curious because Sal had never had a complaint from another country.
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As time went on, the sales by Ajinomoto of the licensed products changed and representatives in Southeast Asia estimated that Ajinomoto sales containing the Kenrich products were around tens of millions of dollars a year although, Sal was still receiving the original royalty of 5 percent or $50,000. In fact Ajinomoto wanted to stop paying those pennies..
In fact not only did they engage in nonreporting of sales Ajinomoto channeled its deceit through another company, Nippon Soda the Kenrich products under another name.
This was a ploy to protect the Japanese company and rip off the American company, Kenrich. It worked. Nippon Soda even threatened action against Kenrich if it continued to sell the Kenrich product in Japan.
While Sal was operating in good faith, Ajinomoto was engaging other companies and also using Japan's law to try to invalidate his product.
In America we believe in fair play and we also believe, and I certainly believe, that Sal Monte and his company should be rewarded for his work. This Kenrich case was not just another hard luck story.- We should really be concerned about the Kenrich technology because it is one of the critical technologies for the United States.
Sal's firm makes organo-metallic compounds, the chemicals which serve as a molecular glue between organic and inorganic materials making a complex product.
His compounds go into everything from rocket fuel and ammunition, tires, cars, paints, coatings, photocopier toner-even to making blue pencil lead strong.
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Patent applications in Japan using Sal's patents are issued at the rate of one a week and after some time there are now 400 patents in Japan based on Kenrich patents. Some of Sal's chemical compounds make products biodegradable and increase the conductivity of electricity in plastics.
There is a 200–500 percent improvement in products using minute amounts of Sal's organic-metallic compounds. Steel is made anti-corrosive, tires are better, the strength,of plastic is increased and ammunition is more effective. Sal Monte's patents are the cutting edge of polymer technology which is considered critical for the United States.
How he was treated by Ajinomoto reflects the difference in the attitude between Japan and the United States and how we treat patents and the rights of the inventor.
The Harvard Business Review, September-October 1990 published ''The Japanese Patent System'' an excellent piece on the problems with the Japanese patent system.
It stated that with 18 month publication the ''competitors use this time to familiarize themselves with technologies that are disclosed and then often take the inventions of others into the marketplace without bearing the R&D costs.
''Because Japan has a pregrant opposition system, the true innovator has no effective rights during the period before the patent is granted. But by that time, the market may be lost or the disclosed technology obsolete.''
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Ajinomoto is a glaring example of how a Japanese company can use our government's failure to protect American businesses, the world trade system and the Japanese trade and legal system to take advantage of a small American company.
In 1990, all those forces were deployed against Kenrich in an effort to obtain the vital polymer patents. Thank God that Sal and Erika Monte are made of stern stuff and determined that their technology would remain in American hands.
I personally, fought a battle to obtain a loan guarantee from the government for Kenrich. We saw them through bankruptcy. The American Kenrich customers were even pitching in to save the company. We all worked very hard and today, though the company has been trimmed down, it is still in business under the leadership of Sal and Erika Monte.
I am proud of them and their efforts, but our government should have helped them. We should not allow the Japanese to get away with stealing our intellectual property.
We should not allow them to force American companies to turn over their intellectual property as a price of doing business.
If we do, we are giving away the economic leadership of the United States which includes our standard of living and our economic base.
The United States has ten times more intellectual property than the rest of the industrialized world combined. We better hold on to our one brass ring, intellectual property, since it creates jobs and businesses. It is the secret of the United States economic leadership in the world.
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We should not allow Japanese companies to hide behind their legal system to avoid paying the money they owe. Where is our government? For generations Americans could count on the government stepping in and fighting for them because they were American. We should not let Kenrich down.
Ajinomoto is a company with a record of bribery and price-fixing. Sal and Erika Monte have done everything they were asked to do. This small American company has been standing toe to toe in a face off against a Japanese conglomerate—while the U.S. government and Congress stand on the side-lines.
It is time for Sal and Erika to have their day in court. They fought this battle not only for their company, but for our country to keep this critical technology in the United States. Now it is our turn. Ajinomoto is hiding behind a Supreme Court decision that was issued five years after the Kenrich contract was signed. Five years.
This court battle should be in the United States. Sal and Erika are in New Jersey. There is no way they can afford to fight this battle in Japan—and no way that they will be treated fairly. The Japanese legal system is hostile to foreigners. In the United States everyone is entitled to their day in court.
Ajinomoto has been to court to plead guilty to bribery and to price-fixing—and we should add for stealing American technology that belongs to Kenrich Petrochemicals.
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The crown jewel of America is our intellectual property. We must not lose this jewel! In this global economy the true test of the American government will be whether it will stand to protect American companies and fight for them—or will we throw them to the wolves in foreign legal systems which are far inferior to the American system and do not protect the individual.
We have a serious choice to make. H.R. 3578 is a first, small step down the road in protecting American technology. I urge you to take that first step in H.R. 3578 and allow Sal and Erika to have their day in an American court. Thank you.
59928cd.eps
59928ce.eps
PREPARED STATEMENT OF HON. ROBERT MENENDEZ
Mr. Chairman and Ranking Member Frank, thank you for holding this hearing. Mr. Chairman, more than 20 years ago, Salvatore and Erika Monte, the owners of Kenrich Petrochemicals Inc. of Bayonne, New Jersey, first attempted to sell their products in Japan. The Montes had developed some extremely powerful and valuable chemical substances, known as titanates, for which they held potentially lucrative patents. They.wanted to sell these titanates to the expanding Japanese industrial sector.
While the Montes had simply wanted to sell what they bad invented with their own work and ingenuity, their two decades of experience with Japan has resulted in a never-ending legal quagmire and estimated losses of $50 million. Kenrich, a small family-owned.business, has been treated unfairly both by the big corporate interests in Japan who saw a chance to make more profit than they were entitled to, and by our own legal system. It is now time for Congress to take action and correct the injustice.
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Back in 1976, Kenrich signed a distribution agreement with Nitto Shoji, in cooperation with Ajinomoto Inc., for the marketing of 46 titanates in Japan. A short time later, Kenrich was informed that its substances could no longer be sold in Japan unless a Japanese partner did the manufacturing.
Kenrich was sent to Ajinomoto, one of the world's largest conglomerates, to form a manufacturing and sales partnership. In 1980, the agreement was signed for the distribution of 15 titanates in Japan and two other Asian nations. Under the contract, Ajinomoto agreed to pay Kenrich a minimum of $50,000 annually as well as royalties on sales above specific levels.
Ajinomoto and the Japanese corporate community were eager to gain access to creations. Titanates are key ingredients in many products we use every day. They enhance the sound and picture quality of audio and video tape, they make stronger tires and they add strength to plastics. They also make stronger, more advanced aerospace composites for our space shuttle rocket motors, and they provide a new way to recycle plastics and reduce the energy required for producing plastic coatings.
Despite records of worldwide sales patterns that clearly show Ajinomoto reached the level required to pay royalties in 1983—and has remained there ever since—not one penny has been paid in royalties. In fact, Ajinomoto has refused to pay even the full $50,000 minimum. Sal and Erika Monte can demonstrate through the use of sales patterns in other parts of the world and through other records that Ajinomoto has been reaping windfall profits from the sale of Kenrich's titanates.
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All the Montes need is an impartial and fair place to make their case. So far, through circumstances beyond their control, they have been unable to get that hearing.
When the 1980 contract was signed, it was the prevailing view in the legal community that an arbitration clause would give the parties the option of pursuing arbitration or taking court action. As a result, the Kenrich-Ajinomoto contract contained both a provision saying the laws of New Jersey would govern as well as an arbitration clause.
The legal situation was transformed, however, in a 1985 case totally separate from the Kenrich-Ajinomoto dispute, Mitsubishi v. Soler. The Supreme Court, in a 5–3 decision, ruled that court action would be preempted by an arbitration clause. Kenrich could no longer take court action against Ajinomoto for failing to pay the required royalties.
What has happened to these two companies since the 1980 contract was signed? With the lack of royalties, Kenrich has been in extremely precarious financial condition. In 1992, the Montes were forced to file for bankruptcy protection under Chapter 11. Kenrich emerged from bankruptcy in 1994 but with fewer than 30 employees compared to the almost 100 it had previously. Kenrich's financial condition remains uncertain.
In contrast, Ajinomoto has been prospering,
The Montes have continually attempted to find a way to get the money that is owed them. In 1994, Kenrich commissioned an Arthur Andersen & Co. review of Ajinomoto's records. Unfortunately, Arthur Andersen reported back that Ajinomoto refused to cooperate with the review and provide the necessary records.
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Kenrich then attempted to use the arbitration route to obtain the needed records. However, an arbitration panel, comprised of two Japanese representatives and one American, ruled that the proceedings must take place in Japan. This ruling simply ignored the practical problems of the real world. Kenrich, a small company on the edge of bankruptcy could not afford to conduct a case in Japan—it would be prohibitively expensive with little chance of an outsider prevailing in a closed legal system.
Ajinomoto, one of the world's largest companies, has offices and facilities in this country, as well as representation by a Wall Street law firm. Ajinomoto would face no hardship by having an proceeding in this country.
The Montes have now turned to us to help them in their quest for fairness. H.R. 3578 would allow Kenrich and any other company that signed a contract with an arbitration clause before the Mitsubishi decision 180 days to initiate court proceedings. It is a limited grandfathering for companies that could not possibly know the Mitsubishi decision was coming. The bill allows no exemption for arbitration clauses signed after the Mitsubishi decision.
The bill makes no judgment on the Montes claims that they are owed $50 million. It simply gives them their day in court to prove it.
This case is one of an American small business that has contributed a tremendous amount to the advance of science against a Japanese conglomerate that has a questionable record. In 1996, Ajinomoto's Chairman Yasuhiko Yasuda and President Shunsuke Inamori resigned after pleading guilty to participating in a multinational cartel to fix the price of a food additive for pigs and poultry. Overpayments of $150 million to $180 million were alleged. The company agreed in Federal Court in Illinois to pay a $10 million fine.
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In 1997, two top Ajinomoto executives were arrested and indicted for allegedly paying $90,000 in hush money to racketeers. Six racketeers were sent to jail. Ajinomoto officials estimated that the indicted executives had skimmed about 100 million yen annually in company funds, or about $786,000, for ''entertainment expenses.''
Is this the kind of company we want to protect? Is this the kind of company we want to allow to create a legal maze to hide from its obligations to Kenrich? I don't believe any of us want that to happen. And do any of us believe that the Japanese government would not take this one small step to help a Japanese company that was owed $50 million by a foreign entity?
This bill provides justice and fairness for Sal and Erika Monte and for Kenrich. Again, Mr. Chairman, I want to thank the Subcommittee for holding this hearing on this important issue. I look forward to continuing to work with you and the other members of the Subcommittee to move this bill forward. Please do not hesitate to contact me or my staff if you require my assistance.
| HALT, An Organization of |
| Americans for Legal Reform, |
| Washington, DC, June 10, 1998. |
Hon. HOWARD COBLE, Chairman,
Hon. BARNEY FRANK, Ranking Minority Member,
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Subcommittee on Courts and
Intellectual Property,
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR CHAIRMAN COBLE AND CONGRESSMAN FRANK: I am writing to call your attention to a series of very serious ethical lapses by members of the Federal Judiciary, and to request full oversight hearings by your subcommittee.
As you may know, investigative journalists for the Kansas City Star have documented several instances in which U.S. District Court Judges held a financial interest in a party appearing before them. Not only did these judges fail to recuse themselves from hearing the case where they had a conflict of interest but in some instances the judges entered procedural and dispositive court orders.
As the Kansas City Star reported on April 4, 1998:
''[F]ederal judges from the Kansas City area issued more than 200 court orders while holding an interest in a litigant. They set hearings, granted motions, threw out legal claims and even conducted a jury trial.''
Nor are these conflicts limited to the Kansas City area; the Star investigation of courthouse records in Oregon and Pennsylvania found identical problems.
Canon 3(c) of the Code of Conduct for U.S. Judges explicitly requires a judge to disqual4 himself or herself where the judge ''has a financial interest . . . in a party to the proceeding.'' It is difficult to imagine a more fundamental breach of judicial integrity and the rights of litigants than the failure to ensure that impartial, disinterested judges preside in matters before the federal courts. On behalf of HALT's 50,000 members, I am requesting an immediate congressional investigation.
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Equally troubling, the Star's investigation revealed that there are major inadequacies in the current system of financial disclosures that are intended to protect litigants against such conflicts. For example, judges' financial reports are only available at the Administrative Office of the U.S. Courts here in Washington, D.C. Litigants must request copies in writing,, not over the phone; use a special notarized form (AO–10a), which is only available from the office in Washington; and are charged 50 cents a page, payable in advance. In addition, individuals must list their name, address and occupation, and the ''organizations or persons on whose behalf this request is made.'' Finally, the form warns that lying could lead to a $ 10,000 fine and five years in prison; and a copy of the request is sent to the judge involved.
These burdensome and unnecessary requirements seem to be designed to discourage access to financial information about federal judges, and are in marked contrast to the open access that ethics laws require for Members of Congress and senior officials in the Executive Branch. There is no legitimate reason for such special treatment of Federal Judges, and we hope your subcommittee will also review the applicable disclosure statutes to bring them in line with the sunshine laws that apply to other parts of our government.
As a national, non-profit public interest group working to help all Americans handle their legal needs simply, affordably and equitably, HALT is deeply concerned by the pattern of judicial improprieties documented by the Kansas City Star, and the lax internal oversight by the Judicial Branch that allowed such clear conflicts of interest to occur. We hope you will share our concern, and will act promptly to correct this very serious situation.
Sincerely,
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| James C. Turner, Executive Director |
BRIEF OF KENRICH PETROCHEMICAL, INC. IN SUPPORT OF H.R. 3578
I. INTRODUCTION
On June 11, 1998, the House Judiciary Committee, Subcommittee on Courts and Intellectual Property, held a hearing on H.R. 3578. This bill would provide persons who signed patent license agreements with a foreign entity prior to July 1, 1985, with an opportunity to file suit in a court of competent jurisdiction, within 180 days, for claims arising out of said agreements. The purpose of this legislation is to remedy an unanticipated consequence of the U.S. Supreme Court's decision in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), which precluded companies which had an arbitration clause in their contracts from seeking redress in the courts, but rather, mandated that their claims be submitted to arbitration.
Prior to the Mitsubishi decision, it was generally believed that an arbitration clause simply gave a party an alternative dispute resolution mechanism and did not bar them from going to court. H.R. 3578 is narrowly crafted to allow persons who were adversely affected by this decision, which was issued subsequent to their entering into their respective contracts, to seek redress in the courts as they believed they had the right to do when they signed their contracts.
H.R. 3578 would apply to arbitration agreements entered into prior to July 1, 1985. The United States' accession to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (''N.Y. Convention'') requiring recognition and enforcement of arbitration agreements in international contracts became effective December 29, 1970. [1970] 21 UST 2517; TIAS 6997, 330 UNTS 3. The U.S. statutory provisions requiring United States' courts to enforce the provisions of the N.Y. Convention also became effective December 29, 1970. See 9 U.S.C. §201 note. Therefore, H.R. 3578 only would apply to arbitration agreements in contracts entered between December 29, 1970, and July 1, 1985.
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At the conclusion of the June 11, 1998 hearing, this honorable Subcommittee requested that persons testifying on the panel which included representatives of Kenrich Petrochemicals, Inc., Bayonne, New Jersey (''Kenrich''), provide supplemental briefing discussing the state of the law regarding the enforceability of arbitration provisions in contracts entered into prior to the Mitsubishi decision. Kenrich, through counsel, hereby responds to the Subcommittee's request.
II. FACTS
In 1980, Kenrich entered into a license agreement (''License Agreement'') with the Japanese multinational conglomerate, Ajinomoto Co., Ltd., Tokyo, Japan (''Ajinomoto''). The License Agreement was to license Kenrich's titanate technology to Ajinomoto. The license technology was contained in 15 United States patents held by Kenrich.
At the time of the License Agreement, it was absolutely impossible to penetrate the Japanese chemical market without a Japanese partner. This lack of market access was enforced by the Japanese government in connivance with the Japanese chemical industry through a myriad of non-tariff trade barriers. This lack of market access in Japan, particularly in the chemical, telecommunications, computer, and automobile sectors, has been a source of conflict between the United States and Japan for the past 20 years.
The License Agreement contained an arbitration clause, which required that disputes arising out of the Agreement be submitted to arbitration (relevant portions of the License Agreement are attached as Exhibit A). After the License Agreement was entered into, Kenrich began to believe that Ajinomoto was significantly understating sales upon which the royalties were to be based. The License Agreement provided that there would be a 5 percent royalty on sales with a minimum royalty payment due if sales did not reach a threshold level The minimum royalty was $50,000 a year. Despite a vastly growing market in titanates, Ajinomoto reported static sales and indeed never reported sales over the threshold amount. The nature and pattern of the sales was also suspicious and belied practical commercial experience. The amount of the sales was always approximately the same, just below the million dollar threshold, despite any changes in the economy or yen to dollar evaluation, i.e., sales in a recession were almost identical to sales during an expansion and there was no change despite the fact that the yen appreciated almost 100 percent against the dollar over the time period. Further, the reported sales to specific customers, as required under the License Agreement, did not match the sales experience that Kenrich was having with its North American and European customers. The amounts sold and the pattern of sales per customer did not appear to match any commercial reality.
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In 1993, pursuant to the License Agreement, Kenrich sought to inspect the books and records of Ajinomoto in order to determine if the proper royalties were being paid. Kenrich engaged Arthur Andersen to conduct the audit. After a month of investigation, Arthur Andersen reported that it could not determine if Ajinomoto was in violation of the License Agreement because Ajinomoto failed to produce the underlying books and records which would have enabled Arthur Andersen to a make a definitive determination. Kenrich then sought to invoke arbitration in New York, New York, to compel Ajinomoto to produce its books and records as required by the License Agreement. At the request of Ajinomoto, a three-person arbitral panel moved the arbitration to Tokyo, Japan. Kenrich did not pursue the arbitration in Japan because the cost would have been prohibitive. Further, Kenrich believed that the chance of success would have been minimal given the nature of the claims against Ajinomoto, and implicitly against the policy of the Japanese government.
Kenrich has conducted a great deal of investigation on Ajinomoto's activities in the titanate market. Based on information and belief formed from that investigation, Kenrich believes that Ajinomoto is engaged in a sophisticated form of ''patent flooding'' in order to claim that it is not practicing under the licensed technology and thus, to avoid payment of royalties to Kenrich. This unfair act and unfair method of competition is illegal in the United States and in the European Union. Further, Ajinomoto's patent flooding has had an anti-competitive effect which has lead to a restraint of trade.
Patent flooding is the practice whereby one makes a slight change to a claimed invention and then gets a separate patent on the changed item, arguing that the new item is separate and distinct from the prior invention covered by the original patent. Patent flooding is relatively easy in the chemical area where one can change the molecular structure of the chemical slightly without affecting its operative qualities. This practice is prohibited in the United States and Europe by what is known as the Doctrine of equivalents. The Doctrine of equivalents provides that if a product does the same work as the patented invention in substantially the same way to achieve substantially the same result, then it is covered by the previous patent and is not itself patentable. See Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605 (1950). Thus, minor changes or improvements will not suffice to avoid literal, even if they are superior to those actually invented. See Studiengesellschaft Kohle. m.b.H. v. Dart Industries, Inc., 746 F.2d 724.
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Patent flooding, however, is allowed in Japan through the practice of the Japanese Patent and Trademark Office, and the Japanese courts of reading claims extremely narrowly, thereby, allowing slight modifications to be patentable over existing inventions and thus, negating the Doctrine of equivalents. The practice of narrowly interpreting patent claims has been an additional point of contention between the United States and Japan for over 15 years. In fact, it was the subject of the framework talks between the United States and Japan during both the Bush and Clinton Administrations. It has also been the subject of multinational negotiations in Geneva at the World Trade Organization.
In order to prove patent flooding, one must engage in a patent claim analysis, reading the claims of the prior patent on the new chemical substance to determine if the new substance infringes the prior patent under the Doctrine of equivalents. This is exactly the same exercise that one would engage in to prove patent infringement in the United States.
The evidence of patent flooding by Ajinomoto is overwhelming. As mentioned, the annual reports and sales experience are inherently not believable. Further, the products in which titanates are used, particularly audio and video tapes, tires, plastics, copier toner and aerospace components have experienced exponential growth over the last 18 years. Ajinomoto has received over 31 patents which exploit Kenrich's patented technology and which essentially ''surround'' Kenrich's patent claims with Ajinomoto patent claims that are only slightly different. This is direct evidence of patent flooding. Yet, Ajinomoto claims that Kenrich's technology is not successful and sales are de minimus. It is not believable that Ajinomoto would spend the millions of dollars on research and development necessary to generate 31 patents on technology that was worthless or which had no market. Likewise, it is unbelievable that the explosion of sales in products which use titanates could occur with no increase in the titanate market itself.
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In addition, Kenrich has received reports from sales organizations in Taiwan and South Korea, which are within the licensed territory, of quantities of titanate being shipped by Ajinomoto to single customers in those countries, which shipments far exceed the total sales which Ajinomoto is reporting to Kenrich. Kenrich also has received reports of Ajinomoto's sales activity of the licensed technology, which has not been reported, in places as far away as Australia and South Africa. Finally, Kenrich's titanates technology is cited in over 1000 patents worldwide which shows the huge scientific and commercial value of the licensed technology.
III. DISCUSSION
A. Enforceability Of Arbitration Agreements Prior to Mitsubishi
The following is a discussion of the development and status of the law regarding the enforceability of arbitration provisions in agreements prior to the decision in Mitsubishi v. Soler, 473 U.S. 614. The law reveals that prior to Mitsubishi, claims for patent validity or infringement were not subject to arbitration and could only be brought in the courts.
The Federal Arbitration Act (''FAA'') was passed in 1925 and formally codified in 1947. See 9 U.S.C. 1 et seq. The FAA made arbitration provisions specifically enforceable and overturned the prior rule that performance of arbitration clauses could not be compelled by resort to the courts. See Albatross S.S. Co. v. Manning Bros., Inc., 95 F.Supp. 459, 463 (S.D.N.Y. 1951) (citing The Anaconda v. American Sugar Refining Co., 322 U.S. 42). Section 2 of the FAA states:
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[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. 2.
Nothing in the language of Section 2 of the FAA nor its legislative history suggests that this provision authorized the enforcement of arbitration of any statutory claims. See 9 U.S.C. 2 Regardless of this fact, various early decisions under the FAA refused to compel arbitration of certain statutory claims. See Wilko v. Swan, 346 U.S. 427 (1953); See also American Safety Equipment Corp. v. J.P. Maguire & Co., 391 F.2d 821 (2nd Cir. 1968).
In Wilko v. Swan, 346 U.S. at 438, the Supreme Court ruled that issues arising under the Securities Act of 1933, were not subject to arbitration. In that case, a customer brought suit against a brokerage firm to recover damages under the Securities Act of 1933, alleging that the brokerage firm made false representations concerning certain stocks which the customer purchased through the firm. The customer sold the stocks at a loss which he claimed resulted from the firm's misrepresentations and omissions of information. The brokerage firm moved to stay the lawsuit pending arbitration of the matter according the terms of the margin agreements. Id. at 428–429.
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In denying the brokerage firm's motion, the Supreme Court stated:
[t]wo policies, not easily reconcilable, are involved in this case. Congress has afforded participants in transactions subject to its legislative power an opportunity generally to secure prompt, economical and adequate solution of controversies through arbitration if the parties are willing to accept less certainty of legally correct adjustment. (Footnote omitted). On the other hand, it has enacted the Securities Act to protect the rights of investors and has forbidden a waiver of any of those rights. Recognizing the advantages that prior agreements for arbitration may provide for the solution of commercial controversies, we decide that the intention of Congress concerning the sale of securities is better carried out by holding invalid such an agreement for arbitration of issues arising under the Act.
Wilko v. Swan, 346 U.S. at 438.
Similarly, in American Safety Equipment, 391 F.2d at 828, the court ruled that antitrust claims were inappropriate for arbitration. In American Safety Equipment, 391 F.2d at 822–823, a licensee brought suit against the licensor seeking a declaratory judgment that a license agreement was illegal and void and that no royalty payments were due. An assignee of the licensor's royalty rights invoked the arbitration clause of the license agreement. Subsequently, the licensee brought a declaratory judgment against the assignee on the same grounds as the first suit. The assignee moved to stay the matter pending arbitration. The licensee then moved for an injunction against the arbitration proceedings. As indicated, the court ruled in favor of the licensee holding that the antitrust claims were inappropriate for arbitration. Id. at 828. As the rationale for this decision, the court cited vast public policy concerns, stating:
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[a] claim under the antitrust laws is not merely a private matter. The Sherman Act is designed to promote the national interest in a competitive economy; thus, the plaintiff asserting his rights under the Act has been likened to a private attorney-general who protects the public's interest. (Citation omitted). Antitrust violations can affect hundreds of thousands—perhaps millions—of people and inflict staggering economic damage. . . . We do not believe that Congress intended such claims to be resolved elsewhere than in the courts.
Id. at 826–827.
The court in American Safety Equipment went on to state:
[w]e conclude only that the pervasive public interest in enforcement of the antitrust laws, and the nature of the claims that arise in such cases, combine to make the outcome here clear. . . . In short, we conclude that the antitrust claims raised here are inappropriate for arbitration.
Id. at 827–828.
In 1958, the N.Y. Convention was drafted. [1970] 21 UST 2517; TIAS 6997; 330 UNTS 3. The United States did not accede to the N.Y. Convention until 1970. Id. The purpose of the N.Y. Convention ''was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in signatory countries.'' (Citations omitted). Scherk v. Alberto-Culver, Co., 417 U.S. 506, 520 n. 15 (1974), reh'g denied, 419 U.S. 885 (1974). Following the United States' accession to the N.Y. Convention, Congress amended the FAA to make the N.Y. Convention enforceable by U.S. courts. See 9 U.S.C. 201 et seq.
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Article II of the N.Y. Convention states:
1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. (Emphasis added).
* * *
3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
As indicated supra, the FAA requires U.S. courts to enforce the provisions of the N.Y. Convention. 9 U.S.C. 201. However, the very provisions that U.S. courts are required to enforce indicate that there are certain subject matters that may not be capable of arbitration. See N.Y. Convention Art. II, Sec. 1. As such, under the terms of the N.Y. Convention, agreements to arbitrate disputes involving these matters need not be enforced. See N.Y. Convention Art. II, Secs. 1 and 3. Further, as Justice Stevens noted in the dissent in Mitsubishi v. Soler, 473 U.S. at 660–661, the courts of other nations have refused to enforce agreements to arbitrate certain matters of import to them. Therefore, any allegations that passage of H.R. 3578 would be contrary to the United States' international treaty obligations under the N.Y. Convention are incorrect and disregard the specific language of the N.Y. Convention itself.
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Kenrich's argument that certain statutory based claims were not subject to arbitration following the United States' accession to the N.Y. Convention in 1970, and prior to the Supreme Court's decision in Mitsubishi v. Soler, 473 U.S. 614, is supported by the fact that during this period, U.S. courts continued to identify a series of statutory claims which they considered not capable of arbitration. See eg., N.V. Maatschappij Voor Industriele Waarden v. A.O. Smith Corp., 532 F.2d 874 (2nd Cir. 1976); Lake Communications. Inc. v. ICC Corp., 738 F.2d 1473 (9th Cir. 1984); Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974). These cases fall under what is termed the ''public policy exception'' or ''protective legislation exception.'' ''Implicit in this line of cases is the principle that the arbitral forum is not adequate to effectuate the policies underlying protective legislation.'' Breyer v. First Nat'l. Monetary Corp., 548 F.Supp. 955, 959 (D.N.J. 1982).
Of special import to Kenrich's case is that between 1970 and 1985, the ''public policy exception'' was applied to matters involving patent validity and infringement. See Beckman Instruments, Inc. v. Technical Development Corp., 433 F.2d 55, 63 (7th Cir. 1970), cert. denied, 401 U.S. 976 (1971); Diematic Mfg. Corp. v. Packaging Industries, Inc., 381 F.Supp. 1057, 1061 (S.D.N.Y. 1974); Hanes Corp. v. Millard, 531 F.2d 585, 593–594 (D.C. Cir. 1976); N.V. Maatschappij v. A.O. Smith, 532 F.2d at 876; Foster Wheeler Corp. v. Babcock & Wilcox Co., 440 F. Supp. 897, 901 (S.D.N.Y. 1977).
As the court specifically noted in Diematic v. Packaging Industries:
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[q]uestions of patent law are not mere private matters. The patent laws, in sharp contrast to the general federal policy encouraging free competition expressed in the antitrust laws, grant limited monopolies to inventors. Thus, the public has an important interest in the determination of patent validity and infringement, even though those issues may be decided in the context of a private lawsuit. We think, as have other courts which have considered this issue, that the grave public interest in questions of patent validity and infringement renders them inappropriate for determination in arbitration proceedings. (Footnotes omitted).
Diematic v. Packaging Industries, 381 F.Supp. at 1061.
During the subject time period, the ''public policy exception'' also was applied to various other statutory claims including antitrust actions, See Power Replacements. Inc. v. Air Preheater Co., 426 F.2d 980, 983–984 (9th Cir. 1970); Helfenbein v. International Industries, Inc., 438 F.2d 1068, 1070 (8th Cir. 1971), cert denied, 404 U.S. 872 (1971); Sam Reisfield & Son Import Co. v. S.A. Eteco, 530 F.2d 679, 681 (5th Cir. 1976); Applied Digital Technology, Inc. v. Continental Casualty Co., 576 F.2d 116, 117 (7th Cir. 1978); University Life Insurance Co. v. Unimarc, Ltd., 699 F.2d 846, 850–851 (7th Cir. 1983); Lake Communications v. ICC, 738 F.2d at 1479; cases involving securities issues, See Newman v. Shearson, Hammill & Co., 383 F. Supp. 265, 269 (W.D. Tex. 1974); Sibley v. Tandy Corp., 543 F.2d 540, 543 (5th Cir. 1976), reh'g denied, 547 F.2d 286 (1977); Belke v. Merrill Lynch, Pierce, Fenner & Smith, 693 F.2d 1023, 1025–1026 (11th Cir. 1982); cases involving civil rights claims, See Alexander v. Gardner-Denver, 415 U.S. at 49 (Title VII claim); Horne v. New England Patriots Football Club, Inc., 489 F.Supp. 465, 470 (D. Mass. 1980) (Age Discrimination); McDonald v. City of West Branch Michigan, 466 U.S. 284, 289–290 (1984) (1983 action); and other miscellaneous issues. See Bache Halsey Stuart, Inc. v. French, 425 F.Supp. 1231, 1233 (D.D.C. 1977) (Commodity Exchange Act); Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 745 (1981) (Fair Labor Standards Act); Breyer v. First Nat'l., 548 F.Supp. at 961 (Commodity Exchange Act); S.A. Mineracao da Trindade-Samitri v. Utah International, Inc. et al., 576 F.Supp. 566, 574–575 (S.D.N.Y. 1983), aff'd on other grounds, 745 F.2d 190 (2nd Cir. 1984) (RICO claims).
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Therefore, any claim by Ajinomoto or any other person that all statutory claims of parties to contracts containing arbitration clauses were subject to arbitration are incorrect.
Ajinomoto and other opponents of H.R. 3578, place great reliance on the decision in Scherk v. Alberto-Culver, 417 U.S. 506, to support their contention that Kenrich would have been barred from bringing suit in federal court prior to Mitsubishi v. Soler. However, this reliance is ill-founded because Scherk v. Alberto-Culver is distinguishable on its facts. In Scherk v. Alberto Culver, 417 U.S. at 519–520, the Supreme Court upheld the arbitration clause of an international contract and required arbitration of securities claims under the Securities Act of 1934. As the rationale for this decision, the Supreme Court cited the abundance of international contacts surrounding the subject agreement and the extreme likelihood that serious international conflict-of-laws problems would result if the controversy was not submitted to arbitration. Id. at 515–516. Those concerns do not exist in Kenrich's case.
The Supreme Court, discussing the international aspects of the transaction in Scherk v. Alberto-Culver, specifically noted that one of the parties, Scherk, was a citizen of Germany; the subject companies were located in Germany and Liechtenstein, organized under the laws of Europe with their activities largely directed by the European markets; the negotiations leading to the agreement took place in the United States, England and Germany; the agreement was signed in Austria; and, the closing took place in Switzerland. Id. at 515. Noting the unusual nature of this transaction, the court stated that ''[c]oncededly, situations may arise where the contacts with foreign countries are so insignificant or attenuated that the holding in Wilko [holding that securities claims are not arbitrable] would meaningfully apply.'' Id. at 517 n. 11.
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Further distinguishing Scherk v. Alberto-Culver from Wilko v. Swan, the court stated that in Wilko v. Swan, ''[t]he parties, the negotiations, and the subject matter of the contract were all situated in this country, and no credible claim could have been entertained that any international conflict-of-laws problems would arise.'' Id. at 515–516. This same distinction applies to Kenrich. Other than Ajinomoto being a Japanese corporation, the subject transaction has virtually no international contacts. Kenrich is a Delaware corporation with its principle place of business in New Jersey; the licensed technology is patented under United States' law; and, the License Agreement was negotiated and signed in New York. Further, the License Agreement states that any controversies arising thereunder are to be decided in accordance with the laws of the State of New Jersey. In addition, Ajinomoto has offices located in New Jersey (they were previously located in New York) and its attorneys are located in New York and Washington, D.C.
In addition, Scherk v. Alberto-Culver can be distinguished on the grounds that the decision is limited to the facts of that case and the underlying claim at issue, violations of the Securities Act of 1934. Subsequently, the court in S.A. Mineracao v. Utah International, 576 F.Supp. at 574, refused to compel arbitration of RICO claims arising out of international agreements containing arbitration provisions. The court's decision was based on the rationale that the public interest in the enforcement of RICO claims overrode the importance of enforcing arbitration in international agreements. Id. at 574–575.
S.A. Mineracao, was highly international in nature, involving a joint venture between various corporations from the United States, Brazil and Panama to mine iron ore from mines located in Brazil. Id. at 568–569. However, this fact did not dictate the court's decision. The court specifically stated:
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[i]n arriving at the conclusion that RICO claims are not arbitrable, the Court is mindful of the Supreme Court's decision in Scherk. . . . However, the public interest considerations involved in the enforcement of RICO are even more significant than the public interest considerations involved in the enforcement of ordinary securities fraud claims such as those involved in Scherk.
Id. at 575–576.
For these same reasons, the decision in Scherk v. Alberto-Culver would not have limited Kenrich's ability to seek relief in U.S. federal court prior to 1985, for its patent flooding claims against Ajinomoto. As the court noted in S.A. Mineracao v. Utah International, 576 F.Supp. at 574–575, ''[I]n certain cases, however, where the resolution of a dispute will have an impact not only on the parties to the case but also on matters of strong public concern, courts have held that an otherwise arbitrable dispute is not arbitrable.'' The issues of patent validity and infringement embody such public concern. As stated in Diematic v. Packaging Industries, 381 F. Supp. at 1061, '' [t]hus, the public has an important interest in the determination of patent validity and infringement, even though those issues may be decided in the context of a private lawsuit.''
B. Application Of Pre-Mitsubishi Standard To Kenrich
Kenrich's cause of action for patent flooding against Ajinomoto would have been heard by a U.S. court, if such an action had been brought prior to the decision in Mitsubishi v. Soler, 473 U.S. 614. Prior to Mitsubishi, the precedent applied by U.S. courts was that claims involving issues of patent validity or infringement were not arbitrable. Therefore, passage of H.R. 3578 would merely grant Kenrich a remedy it would have been entitled to by law prior to the decision in Mitsubishi.
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As previously indicated, prior to the decision in Mitsubishi v. Soler, 473 U.S. 614, issues of patent validity and infringement were not considered arbitrable and public policy dictated that these issues be decided by the courts. See Beckman v. Technical Development, 433 F.2d at 63; Diematic v. Packaging Industries, 381 F.Supp. at 1061; Hanes v. Millard, 531 F.2d at 593–594; N.V. Maatschappij v. A.O. Smith, 532 F.2d at 876; Foster Wheeler v. Babcock, 440 F.Supp. at 901. As such, Kenrich's claim for patent flooding against Ajinomoto would not have been subject to arbitration and its claims would have been heard in a U.S. court.
Ajinomoto may attempt to argue that Kenrich's proposed claim is merely a breach of contract claim for the payment of royalties. However, this characterization of Kenrich's patent flooding claim is incorrect. As previously indicated, to prove patent flooding, one must engage in a patent claim analysis reading the claims of the prior patent on the new chemical substance to determine if the new substance infringed on the prior patent under the Doctrine of equivalents. Essentially, this exercise requires proving patent infringement. Further, the use of Kenrich's licensed technology without paying the royalties is patent infringement.
This case presents a similar issue to that in Diematic v. Packaging Industries, 381 F.Supp. at 1061, where proof of certain contract claims also required proof of patent infringement. Diematic v. Packaging Industries involved an agreement between the parties to license certain manufacturing technology. Id. at 1059. In the agreement, Diematic admitted to the validity of Packaging Industries' patent and agreed not to contest same. In addition, Packaging Industries signed a covenant not to sue Diematic for infringement of the patent as used in Diematic's products. The agreement also contained an arbitration clause. Id. at 1059. Following expiration of the licensing agreement, Diematic continued to use the licensed technology. Id. at 1059. Subsequently, Packaging Industries filed a demand for arbitration for breach of contract and patent infringement. Id. at 1059. Diematic then brought suit in federal court seeking declaratory judgment on the validity of the patent and requested a stay of arbitration pending the decision. Id. at 1059–1060.
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In denying the request to stay the court case pending arbitration, the court stated:
[t]he breach of contract claim is based upon Diematic's obligation not to contest the validity of Packaging's patent. Since such an obligation is 'a covenant not to manufacture or sell the patented commodity without the consent of the patentee' (footnote omitted), Diematic has, in effect, promised not to infringe Packaging's I patent. Thus, the determination of whether Diematic has breached the agreement will necessarily depend upon whether an infringement has occurred. This issue of infringement, we think, as well as any related issues of patent validity, should be decided not by arbitrators, but by a court of law.
Id. at 1061.
Patent flooding is also an unfair act and an unfair method of competition that results in a restraint of trade. This is because it is essentially an expropriation of one's intellectual property and has the effect of precluding one from the market, thus lessening competition. As discussed above at pp. 11–12, antitrust issues were not considered appropriate for arbitration prior to Mitsubishi, and Kenrich's case would have been heard in the courts under the antitrust exception as well.
IV. CONCLUSION
For the foregoing reasons, Kenrich's cause of action for patent flooding against Ajinomoto would have been heard by a U.S. court prior to the decision in Mitsubishi v. Soler, 473 U.S. 614. During that period, United States' law held that claims involving issues of patent validity or infringement were not arbitrable. Therefore, passage of H.R. 3578 would merely grant Kenrich a remedy it would have been entitled to by law prior to the decision in Mitsubishi.
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