author: Chief Justice Burger Justice Brennan, Justice Blackmun,

text:
    AETNA LIFE INSURANCE CO. v. LAVOIE et al.
    No. 84-1601.
    Argued December 4, 1985
    Decided April 22, 1986

      BURGER, C. J., delivered the opinion of the Court, in which Brennan, White, Powell, Rehnquist, and O’ConnoR, JJj, joined. BRENNAN, J., filed a concurring opinion, post, p. 829. Blackmun, J., filed an opinion concurring in the judgment, in which Marshall, J., joined, post, p. 831. Stevens, J., took no part in the consideration or decision of the case.

      Theodore B. Olson argued the cause for appellant. With him on the briefs were John J. Swenson, Larry L. Simms, Peter V. Sintz, and Wm. M. Cunningham, Jr.

      Jack N. Goodman argued the cause for appellees. With him on the briefs were Alvin T. Prestwood and Joseph M. Brown, Jr.

      Briefs of amici curiae urging reversal were filed for the Alabama Defense Lawyers Association by Davis Carr; for the Association of California Insurance Companies et al. by Joseph W. Rogers, Jr., Martin Quinn, and Susan M. Popik; for the American Council of Life Insurance et al. by Erwin N. Griswold, Thomas F. Cullen, Jr., Jack H. Blaine, Edward J. Zimmerman, and John P. Dineen; for the American Insurance Association et al. by Ellis J. Horvitz; for Golden Rule Insurance Co. by David A. Strauss; and for the Southeastern Legal Foundation, Inc., by G. Stephen Parker.

      Briefs of amici curiae urging affirmance were filed for the Alabama Trial Lawyers Association by Lanny S. Vines; and for the Association of California Trial Lawyers et al. by Peter Perlman and Harvey R. Levine.

   Chief Justice Burger

delivered the opinion of the Court.

The question presented is whether the Due Process Clause of the Fourteenth Amendment was violated when a justice of the Alabama Supreme Court declined to recuse himself from participation in that court’s consideration of this case.

I — I

This appeal arises out of litigation concerning an insurance policy issued by appellant covering appellees Margaret and Roger Lavoie. In January 1977, Mrs. Lavoie was examined by her physician, Dr. Douglas, because of various ailments. Shortly thereafter, on Dr. Douglas’ recommendation, she was admitted to the Mobile Infirmary Hospital, where she remained for 23 days for a battery of tests.

After her discharge, the hospital forwarded the appropriate forms and medical records along with a bill for $3,028.25 to appellant’s local office in Mobile, Alabama. The local office refused to pay the entire amount, tendering payment for only $1,650.22. The local office also sent a letter to the national office, concluding that the 23-day hospitalization was unnecessary and that “[hjospital records do not indicate anything to the contrary,” even though all the hospital records had not yet been received. At one point, the national office told the local office to continue denying the request for full payment, but added that “if they act like they are going to file suit,” the file should be reviewed.

Appellees filed suit against appellant, seeking both payment of the remainder of their original claim and punitive damages for the tort of bad-faith refusal to pay a valid claim. The trial court dismissed for failure to state a cause of action with respect to the bad-faith counts. Appellees appealed to the Alabama Supreme Court, which remanded on the ground that it had “not foreclosed the possibility of recovery in tort for the bad faith refusal of an insurer to pay legitimate benefits due under an insurance policy.” Lavoie v. Aetna Life & Casualty Co., 374 So. 2d 310, 312 (1979). On remand, the trial court entered judgment for appellees on the unpaid portion of their claim and granted summary judgment for appellant on the bad-faith claim. The Alabama Supreme Court again reversed, explaining that on that same day it had “recognized the intentional tort of bad faith in first party insurance actions.” Lavoie v. Aetna Life & Casualty Co., 405 So. 2d 17, 18 (1981) (citing Chavers v. National Security Fire & Casualty Co., 405 So. 2d 1 (1981)). On remand, appellees’ bad-faith claim was submitted to a jury. The jury awarded $3.5 million in punitive damages. The trial judge denied appellant’s motion for judgment n.o.v. or, alternatively, for remittitur.

The Alabama Supreme Court affirmed the award in a 5-to-4 decision. 470 So. 2d 1060 (1984). An unsigned per curiam opinion expressed the view of five justices that the evidence demonstrated that appellant had acted in bad faith. The court interpreted its prior opinions as not requiring dismissal of a bad-faith-refusal-to-pay claim even where a directed verdict against the insurer on the underlying claim was impossible. The opinion also clarified the issue of whether a bad-faith suit could be maintained where the insurer had made a partial payment of the underlying claim. Although earlier opinions of the court had refused to allow bad-faith suits in such circumstances, partial payment was not dispositive of the bad-faith issue. The court also rejected.appellant’s argument that the punitive damages award was so excessive that it must be set aside.

Chief Justice Torbert, joined by Justice Beatty, dissented; Justice Maddox, joined by Justice Shores, also dissented, concluding that the case was controlled by the court’s earlier decision in National Savings Life Ins. Co. v. Dutton, 419 So. 2d 1357 (1982), because there was an arguable reason for appellant’s refusal to pay the claim.

The court’s opinion was released on December 7, 1984; on December 21,1984, appellant filed a timely application for rehearing. On February 14, 1985, before its application had been acted on, appellant learned that while the instant action was pending before the Alabama Supreme Court, Justice Embry, one of the five justices joining the per curiam opinion, had filed two actions in the Circuit Court for Jefferson County, Alabama, against insurance companies. Both of these actions alleged bad-faith failure to pay a claim. One suit arose out of Maryland Casualty Company’s alleged failure to pay for the loss of a valuable mink coat; the other suit, which Justice Embry brought on behalf of himself and as a representative of a class of all other Alabama state employees insured under a group plan by Blue Cross-Blue Shield of Alabama (including, apparently, all justices of the Alabama Supreme Court), alleged a willful and intentional plan to withhold payment on valid claims. Both suits sought punitive damages.

On February 21, 1985, appellant filed two motions in the Alabama Supreme Court, challenging Justice Embry’s participation in the court’s December 7, 1984, decision and his continued participation in considering appellant’s application for rehearing. The motion also alleged that all justices on the court should recuse themselves because of their interests as potential class members in Justice Embry’s suit against Blue Cross. On March 8, 1985, the court unanimously denied the recusal motions. The brief order stated that each justice had voted individually on the matter of whether he should recuse himself and that each justice had voted not to do so. At the same time, by a 5-to~4 division, the court denied appellant’s motion for rehearing.

Chief Justice Torbert wrote separately, explaining that although his views had not been influenced by his possible membership in the putative class alleged in Justice Embry’s suit against Blue Cross, he was nonetheless notifying the Clerk of the court where that suit was pending not to permit him to be included in the alleged class. Justice Maddox also wrote separately, taking similar action.

On March 20, 1985, appellant obtained a copy of the transcript of Justice Embry’s deposition, taken on January 10, 1985, in connection with his Blue Cross suit. The deposition revealed that Justice Embry had authored the per curiam opinion in this case over an 8- or 9-month period during which his civil action against Blue Cross was being prosecuted. Justice Embry also stated that, during that period, he had received “leads” from people with regard to his bad-faith action against Blue Cross and that he put them in touch with his attorney. Finally, Justice Embry revealed frustration with insurance companies. For example, when asked if he had ever had any difficulty with processing claims, Justice Embry retorted: “[T]hat is a silly question. For years and years.”

Appellant moved for leave to file a second application for rehearing based on the deposition, but that motion was denied. Appellant filed an appeal with this Court, and Justice Powell, as Circuit Justice, granted appellant’s application for a stay of the judgment below pending this Court’s disposition of the appeal. Shortly thereafter, Justice Embry’s suit against Blue Cross was settled by stipulation of the parties. In the stipulation, Blue Cross recognized that “some problems have occurred in the past and is determined to minimize them in the future.” Justice Embry received $30,000 under the settlement agreement on a basic compensatory claim of unspecified amount; a check for that sum was deposited by his attorney directly into Justice Embry’s personal account.

We postponed consideration of the question of jurisdiction pending argument on the merits. 471 U. S. 1134 (1985). We now vacate and remand.

r — i ⅜ — I

We are satisfied as to the Court’s jurisdiction over the question of whether Justice Embry’s participation violated appellant’s Fourteenth Amendment due process rights. Ap-pellees argue that the Alabama Supreme Court did not reach this issue because it was raised only after the court’s decision on the merits. We reject that contention as at odds with the record. On March 8, 1985, the court entered the following order:

“Upon consideration, the Court is of the opinion that under the allegation of said motion in this case each justice should vote individually on the matter of whether or not he or she is disqualified and should recuse. Each justice having voted not to recuse,
“IT IS, THEREFORE, ORDERED that the ‘Motion for Disqualification and Motion for Withdrawal of Opinion of December 7, 1984, and for Hearing De Novo’ be . . . denied.” App. to Juris. Statement 64a.

This order clearly demonstrates that the Alabama court reached the merits of appellant’s constitutional challenge, albeit on a justice-by-justice basis. Moreover, appellant raised this issue as soon as it discovered the facts relating to Justice Embry’s personal lawsuits. On this record, we conclude jurisdiction is proper. See Ulster County Court v. Allen, 442 U. S. 140, 147-154 (1979); Ward v. Village of Monroeville, 409 U. S. 57, 61 (1972).

HH hH

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Appellant contends Justice Embry s general hostility towards insurance companies that were dilatory in paying claims, as expressed in his deposition, requires a conclusion that the Due Procéss Clause was violated by his participation in the disposition of this case. The Court has recognized that not “[a]ll questions of judicial qualification . . . involve constitutional validity. Thus matters of kinship, personal bias, state policy, remoteness of interest, would seem generally to be matters merely of legislative discretion.” Tumey v. Ohio, 273 U. S. 510, 523 (1927); see also FTC v. Cement Institute, 333 U. S. 683, 702 (1948) (“[M]ost matters relating to judicial disqualification [do] not rise to a constitutional level”). Moreover, the traditional common-law rule was that disqualification for bias or prejudice was not permitted. See, e. g., Clyma v. Kennedy, 64 Conn. 310, 29 A. 539 (1894). See generally Frank, Disqualification of Judges, 56 Yale L. J. 605 (1947). As Blackstone put it, “the law will not suppose a possibility of bias or favour in a judge, who is already sworn to administer impartial justice, and whose authority greatly depends upon that presumption and idea.” 3 W. Blackstone, Commentaries *361. The more recent trend has been towards the adoption of statutes that permit disqualification for bias or prejudice. See Berger v. United States, 255 U. S. 22, 31 (1921) (enforcing statute disqualifying federal judges in certain circumstances for personal bias or prejudice). See also ABA Code of Judicial Conduct, Canon 3C(l)(a) (1980) (“A judge should disqualify himself. . . where he has a personal bias or prejudice concerning a party”). But that alone would not be sufficient basis for imposing a constitutional requirement under the Due Process Clause. We held in Patterson v. New York, 432 U. S. 197, 201-202 (1977) (citations omitted), that

“it is normally within the power of the State to regulate procedures under which its laws are carried out. . . and its decision in this regard is not subject to proscription under the Due Process Clause unless it offends some principle of justice so rooted in the traditions and conscience of our people as to be ranked as fundamental.”

We need not decide whether allegations of bias or prejudice by a judge of the type we have here would ever be sufficient under the Due Process Clause to force recusal. Certainly only in the most extreme of cases would disqualification on this basis be constitutionally required, and appellant’s arguments here fall well below that level. Appellant suggests that Justice Embry’s general frustration with insurance companies reveals a disqualifying bias, but it is likely that many claimants have developed hostile feelings from the frustration in awaiting settlement of insurance claims. Insurers, on their side, have no easy task, especially when trying to evaluate whether certain medical diagnostic tests or prolonged hospitalization were indicated. In turn, the physicians and surgeons, whether impelled by valid medical judgment or by apprehension as to future malpractice claims — or some combination of the two — similarly face difficult problems. Appellant’s allegations of bias and prejudice on this general basis, however, are insufficient to establish any constitutional violation.

B

The record in this case presents more than mere allegations of bias and prejudice, however. Appellant also presses a claim that Justice Embry had a more direct stake in the outcome of this case. In Tumey, while recognizing that the Constitution does not reach every issue of judicial qualification, the Court concluded that “it certainly violates the Fourteenth Amendment ... to subject [a person’s] liberty or property to the judgment of a court the judge of which has a direct, personal, substantial, pecuniary interest in reaching a conclusion against him in his case.” 273 U. S., at 523.

More than .30 years ago Justice Black, speaking for the Court, reached a similar conclusion and recognized that under the Due Process Clause no judge “can be a judge in his own case [or be] permitted to try cases where he has an interest in the outcome.” In re Murchison, 349 U. S. 133, 136 (1955). He went on to acknowledge that what degree or kind of interest is sufficient to disqualify a judge from sitting “cannot be defined with precision.” Ibid. Nonetheless, a reasonable formulation of the issue is whether the

“situation is one ‘which would offer a possible temptation to the average . . . judge to . . . lead him not to hold the balance nice, clear and true.’” Ward v. Village of Monroeville, supra, at 60.

Under these prior holdings, we examine just what factors might constitute such an interest in the outcome of this case that would bear on recusal. At the time Justice Embry cast the deciding vote and authored the court’s opinion, he had pending at least one very similar bad-faith-refusal-to-pay lawsuit against Blue Cross in another Alabama court. The decisions of the court on which Justice Embry sat, the Alabama Supreme Court, are binding on all Alabama courts. We need not blind ourselves to the fact that the law in the area of bad-faith-refusal-to-pay claims in Alabama, as in many other jurisdictions, was unsettled at that time, as the court’s close division in deciding this case indicates. When Justice Embry cast the deciding vote, he did not merely apply well-established law and in fact quite possibly made new law; the court’s opinion does not suggest that its conclusion was compelled by earlier decisions. Instead, to decide the case the court stated that “it is first necessary to review the policy considerations, elements, and instructive guide posts set out by this court in earlier case law.” 470 So. 2d, at 1070. And in another case the court acknowledged that “the tort of bad faith refusal to pay a valid insurance claim is in the embryonic stage, and the Court has not had occasion to address every issue that might arise in these cases.” National Savings Life Ins. Co. v. Dutton, 419 So. 2d, at 1362.

The decision under review firmly established that punitive damages could be obtained in Alabama in a situation where the insured’s claim is not fully approved and only partial payment of the underlying claim had been made. Prior to the decision under review, the Alabama Supreme Court had not clearly recognized any claim for tortious injury in such circumstances; moreover, it had affirmatively recognized that partial payment was evidence of good faith on the part of the insurer. Sexton v. Liberty National Life Ins. Co., 405 So. 2d 18, 22 (1981). The Alabama court also held that a bad-faith-refusal-to-pay cause of action will lie in Alabama even where the insured is not entitled to a directed verdict on the underlying claim, a conclusion that at the least clarified the thrust of an earlier holding. Cf. National Savings Life Ins. Co. v. Dutton, supra, at 1362. Finally, the court refused to set aside as excessive a punitive damages award of $3.5 million. The largest punitive award previously affirmed by that court was $100,000, a figure remitted from $1.1 million as “obviously the result of passion and prejudice on the part of the jury.” -Gulf Atlantic Life Ins. Co. v. Barnes, 405 So. 2d 916, 926 (1981).

All of these issues were present in Justice Embry’s lawsuit against Blue Cross. His complaint sought recovery for partial payment of claims. Also the very nature of Justice Embry’s suit placed in issue whether he would have to establish that he was entitled to a directed verdict on the underlying claims that he alleged Blue Cross refused to pay before gaining punitive damages. Finally, the affirmance of the largest punitive damages award ever (by a substantial margin) on precisely the type of claim raised in the Blue Cross suit undoubtedly “raised the stakes” for Blue Cross in that suit, to the benefit of Justice Embry. Thus, Justice Embry’s opinion for the Alabama Supreme Court had the clear and immediate effect of enhancing both the legal status and the settlement value of his own case.

We need not decide whether to characterize the decision under review as a change in Alabama law or a clarification of the contours of that law, a judgment we are obviously not called on to make. We hold simply that when Justice Embry made that judgment, he acted as “a judge in his own case.” Murchison, supra, at 136.

We also hold that his interest was “ ‘direct, personal, substantial, [and] pecuniary.’” Ward, supra, at 60 (quoting Tumey v. Ohio, 273 U. S., at 523). Justice Embry’s complaint against Blue Cross sought “compensatory damage for breach of contract, inconvenience, emotional and mental distress, disappointment, pain and suffering” in addition to punitive damages for himself and for the class. Soon after the opinion of the Alabama Supreme Court in this case was announced, Blue Cross paid Justice Embry what he characterized in an interview as “a tidy sum,” Reply Brief for Appellant 10, n. 8, to settle the suit. Records lodged with this Court show that Justice Embry received $30,000, which was deposited by his attorney directly into Justice Embry’s personal account. To be sure, a portion of this money may have gone to Justice Embry’s attorney in connection with the case, even though some materials before us suggest that his attorney agreed to waive his fee. Deposition of A. Grey Till in Clay v. Nationwide Insurance Co., CV-78-1148 (Cir. Ct. of Mobile Cty., Ala.), pp. 27-29. We are also aware that Justice Embry obtained a statement in the settlement agreement to the effect that “[t]he primary object of the institution of this suit . . . was to emphasize to defendant Blue Cross . . . that, claims under the Plan be processed and determined by Blue Cross in a timely and efficient manner,” even though that type of relief was not sought specifically in the complaint while monetary relief was. We nonetheless hold that the “tidy sum” that Justice Embry received directly is sufficient to establish the substantiality of his interest here.

We conclude that Justice, Embry’s participation in this case violated appellant’s due process rights as explicated in Tumey, Murchison, and Ward. We make clear that we are not required to decide whether in fact Justice Embry was influenced, but only whether sitting on the case then before the Supreme Court of Alabama “ ‘would offer a possible temptation to the average . . . judge to . . . lead him not to hold the balance nice, clear and true.’” Ward, 409 U. S., at 60 (quoting Tumey v. Ohio, supra, at 532). The Due Process Clause “may sometimes bar trial by judges who have no actual bias and who would do their very best to weigh the scales of justice equally between contending parties. But to perform its high fimction in the best way, ‘justice must satisfy the appearance of justice.’” Murchison, 349 U. S., at 136 (citation omitted).

C

Appellant has challenged not only the participation of Justice Embry in this case but also the participation of all the other justices of the Alabama Supreme Court, or at least the six justices who did not withdraw from Justice Embry’s class action against Blue Cross, claiming that they also have an interest in this case. Such allegations do not constitute a sufficient basis for requiring recusal under the Constitution. In the first place, accepting appellant’s expansive contentions might require the disqualification of every judge in the State. If so, it is possible that under a “rule of necessity” none of the judges or justices would be disqualified. See United States v. Will, 449 U. S. 200, 214 (1980).

More important, while these justices might conceivably have had a slight pecuniary interest, we find it impossible to characterize that interest as “ ‘direct, personal, substantial, [and] pecuniary.’” Ward, supra, at 60 (quoting Tumey, supra, at 523). Appellant concedes that nothing in the record even suggests that these justices had any knowledge of the class action before the court issued a decision on the merits. Thus, at most only the decision to deny rehearing was even plausibly affected. Any interest that they might have had when they passed on the rehearing motion was clearly highly speculative and contingent. At the time, the trial court had not even certified a class, let alone awarded any class relief of a pecuniary nature. With the proliferation of class actions involving broadly defined classes, the application of the constitutional requirement of disqualification must be carefully limited. Otherwise constitutional disqualification arguments could quickly become a standard feature of class-action litigation. Cf. In re City of Houston, 745 F. 2d 925 (CA5 1984). At some point, “[t]he biasing influence . . . [will be] too remote and insubstantial to violate the constitutional constraints.” Marshall v. Jerrico, Inc., 446 U. S. 238, 243 (1980). Charges of disqualification should not be made lightly. See Rooker v. Fidelity Trust Co., 263 U. S. 413 (1923). We hold that there is no basis for concluding these justices were disqualified under the Due Process Clause.

D

Having concluded that only Justice Embry was disqualified from participation in this case, we turn to the issue of the proper remedy for this constitutional violation. Our prior decisions have not considered the question whether a decision of a multimember tribunal must be vacated because of the participation of one member who had an interest in the outcome of the case. Rather, our prior cases have involved interpretations of statutes with provisions concerning this question, e. g., Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U. S. 145 (1968), disqualifications of the sole member of a tribunal, e. g., Ward v. Village of Monroeville, supra, and disqualifications of an entire panel, e. g., Gibson v. Berryhill, 411 U. S. 564 (1973). Some courts have concluded that a decision need not be vacated where a disqualified judge’s vote is mere surplusage. See, e. g., State ex rel. Langer v. Kositzky, 38 N. D. 616, 166 N. W. 534 (1918); but see, e. g., Oakley v. Aspinwall, 3 N. Y. 547 (1850). But we are aware of no case, and none has been called to our attention, permitting a court’s decision to stand when a disqualified judge casts the deciding vote. Here Justice Embry’s vote was decisive in the 5-to-4 decision and he was the author of the court’s opinion. Because of Justice Embry’s leading role in the decision under review, we conclude that the “appearance of justice” will best be served by vacating the decision and remanding for further proceedings. Appellees have not contended that, upon a finding of disqualification, this disposition is. improper.

I — I I — I > — i

We underscore that our decision today undertakes to answer only the question of under what circumstances the Constitution requires disqualification. The Due Process Clause demarks only the outer boundaries of judicial disqualifications. Congress and the states, of course, remain free to impose more rigorous standards for judicial disqualification than those we find mandated here today.

Appellant also argues that the retrospective imposition of punitive damages under a new cause of action violates its rights under the Contracts Clause of Article I, § 10; that a $3.5 million punitive damages award is impermissible under the Excessive Fines Clause of the Eighth Amendment; and that lack of sufficient standards governing punitive damages awards in Alabama violates the Due Process Clause of the Fourteenth Amendment. In addition, appellant contends that Ala. Code § 12-22-72 (1975), under which any person who unsuccessfully appeals a money judgment is assessed a 10% penalty, is unconstitutional under the Equal Protection Clause of the Fourteenth Amendment. These arguments raise important issues which, in an appropriate setting, must be resolved; however, our disposition of the recusal-for-bias issue makes it unnecessary to reach them.

The judgment of the Supreme Court of Alabama is vacated, and the case is remanded for further proceedings not inconsistent with this opinion.

Vacated and remanded.

Justice Stevens took no part in the consideration or decision of this case.

Justice Brennan,

concurring.

I agree with the Court that, given Justice Embry’s interest in the outcome of this case, his participation in its disposition violated due process. As the Court notes, resolution of the issues raised in the appeal below enhanced the viability and settlement value of Justice Embry’s own lawsuit. Such an interest clearly required recusal under our decisions in Tumey v. Ohio, 273 U. S. 510 (1927); In re Murchison, 349 U. S. 133 (1955); Ward v. Village of Monroeville, 409 U. S. 57 (1972); and Gibson v. Berryhill, 411 U. S. 564 (1973). As Justice Black explained in In re Murchison:

“A fair trial in a fair tribunal is a basic requirement of due process. Fairness of course requires an absence of actual bias in the trial of cases. But our system of law has always endeavored to prevent even the probability of unfairness. To this end no man can be a judge in his own case and no man is permitted to try cases where he has an interest in the outcome.” 349 U. S., at 136.

I write separately to set forth my understanding of certain statements in the Court’s opinion. First, the Court stresses that Justice Embry’s interest was ‘“direct, personal, substantial, [and] pecuniary.’” Ante, at 824 (quoting Ward, supra, at 60); see also ante, at 826. I do not understand that by this language the Court states that only an interest that satisfies this test will taint the judge’s participation as a due process violation. Nonpecuniary interests, for example, have been found to require recusal as a matter of due process. See, e. g., In re Murchison, supra (judge who presided over a “one-man grand jury” also presided over contempt proceedings relating to events which took place in the grand jury proceedings). Moreover, as this case demonstrates, an interest is sufficiently “direct” if the outcome of the challenged proceeding substantially advances the judge’s opportunity to attain some desired goal even if that goal is not actually attained in that proceeding. See, e. g., Ward v. Village of Monroeville, supra (mayor’s adjudication of traffic fines, which contributed to city finances, violated due process); Gibson v. Berryhill, supra (proceedings by Alabama Board of Optometry enjoined because Board members were competitors of petitioners and therefore stood to gain competitively). Nothing in the Court’s opinion should be read, as I understand it, to limit these precedents in any way. Rather, the Court clearly indicates the contrary in acknowledging that the interests which trigger due process condemnation “‘cannot be defined with precision.’” Ante, at 822 (quoting In re Murchison, supra, at 136).

Second, the Court points out that Justice Embry obtained a favorable settlement in his own lawsuit several months after the Alabama Supreme Court handed down its decision in this case. But even without that settlement, Justice Embry’s participation in this case deprived appellant of due process. The deprivation occurred when Justice Embry took part in the deliberations and decision of the Alabama Supreme Court in this case. At most — and, again, I do not read the Court’s opinion to say otherwise — the fact of the later settlement merely confirms that Justice Embry had a substantial interest in the outcome of this case.

Finally, I understand that the Court’s opinion is not to be read to suggest that the outcome might be different had Justice Embry not provided the necessary fifth vote in the court below. That fact too is irrelevant — Justice Embry’s participation in the court’s resolution of the case, while he was fully aware of his interest in its outcome, was sufficient in itself to impugn the decision. The description of an opinion as being “for the court” connotes more than merely that the opinion has been joined by a majority of the participating judges. It reflects the fact that these judges have exchanged ideas and arguments in deciding the case. It reflects the collective process of deliberation which shapes the court’s perceptions of which issues must be addressed and, more importantly, how they must be addressed. And, while the influence of any single participant in this process can never be measured with precision, experience teaches us that each member’s involvement plays a part in shaping the court’s ultimate disposition. The participation of a judge who has a substantial interest in the outcome of a case of which he knows at the time he participates necessarily imports a bias into the deliberative process. This deprives litigants of the assurance of impartiality that is the fundamental requirement of due process.

Justice Blackmun,

with whom Justice Marshall joins, concurring in the judgment.

I join the Court’s judgment that Justice Embry’s participation in this case denied appellant the impartial decisionmaker required by the Due Process Clause. I write separately, however, to stress that the constitutional violation in this case should not depend on the Court’s apparent belief that Justice Embry cast the deciding vote — a factual assumption that may be incorrect and, to my mind, should be irrelevant to the Court’s analysis. For me, Justice Embry’s mere participation in the shared enterprise of appellate decision-making — whether or not he ultimately wrote, or even joined, the Alabama Supreme Court’s opinion — posed an unacceptable danger of subtly distorting the decisionmaking process.

The Court states that a decision cannot be permitted to stand “when a disqualified judge casts the deciding vote. Here, Justice Embry’s vote was decisive in the 5-to-4 decision and he was the author of the court’s opinion.” Ante, at 828. In a footnote, the Court elaborates on the decisiveness of Justice Embry’s vote: had he disqualified himself, the decision of the trial court would not have been affirmed by an equally divided court because, under Alabama law, a special justice would have been appointed to break the tie. Ante, at 828, n. 5.

The record, however, casts doubt upon the Court’s suggestion that Justice Embry provided the most crucial vote. Justice Embry’s deposition testimony in the Blue Cross suit suggests that the initial vote of the Alabama Supreme Court was in fact to reverse the decision of the trial court in favor of the Lavoies. Accordingly, Justice Embry began work on a dissent. App. to Juris. Statement 168a-169a. After Justice Embry began writing, however, at least one justice switched his vote. Justice Embry’s proposed dissent ultimately was issued as the per curiam opinion of the court. He explained: “It’s customary a lot of times [to issue an opinion as a per curiam], if it’s been assigned to you because the other opinion didn’t prevail . . . .” Id., at 167a.

We cannot know what led each justice on the Alabama Supreme Court to the position he or she reached in this case. But we do know, from our own experience on this niné'-Member Court, that a forceful dissent may lead Justices to rethink their original positions and change their votes. And to suggest that the author of an opinion where the final vote is 5 to 4 somehow plays a peculiarly decisive “leading role,” ante, at 828, ignores the possibility of a case where the author’s powers of persuasion produce an even larger margin of votes. It makes little sense to intimate that if Justice Embry’s dissent, had led two colleagues to switch their votes, and the final vote had been 6 to 3, Aetna would somehow not have been injured by his participation.

More importantly, even if Justice Embry had not written the court’s opinion, his participation in the case would have violated the Due Process Clause. Our experience should tell us that the concessions extracted as the price of joining an opinion may influence its shape as decisively as the sentiments of its nominal author. To discern a constitutionally significant difference between the author of an opinion and the other judges who participated in a case ignores the possibility that the collegial decisionmaking process that is the hallmark of multimember courts led the author to alter the tone and actual holding of the opinion to reach a majority, or to attain unanimity. And because this collegial exchange of ideas occurs in private, a reviewing court may never discover the actual effect a biased judge had on the outcome of a particular case. We should not attempt the perhaps futile task of distilling Justice Embry’s particular contribution to determine whether the result would have been the same had he disqualified himself at the outset. I would not want other appellate courts to read the Court’s opinion today to suggest that such an inquiry provides an appropriate guarantee of due process.

The violation of the Due Process Clause occurred when Justice Embry sat on this case, for it was then the danger arose that his vote and his views, potentially tainted by his interest in the pending Blue Cross suit, would influence the votes and views of his colleagues. The remaining events — that another justice switched his vote and that Justice Embry wrote the court’s opinion — illustrate, but do not create, the constitutional infirmity that requires us to vacate the judgment of the Alabama Supreme Court.

       Justice Embry’s suit against Maryland Casualty Company had been settled sometime earlier by the payment of Justice Embry’s claim.

       Justice Embry has since retired from the court for health reasons.

       The Court in Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U. S. 145 (1968), stated in dicta that “in Tumey[, 273 U. S., at 524,] the Court held that a decision should be set aside where there is ‘the slightest pecuniary interest’ on the part of the judge . . . .” Id., at 148. We think this was a misreading of Tumey. The reference to “the slightest pecuniary interest” in that opinion came in a portion of the opinion describing “cases at common law in England prior to the separation of colonies from the mother country . . . 273 U. S., at 524. At a later point in the opinion, Chief Justice Taft quoted approvingly from the work of Justice Cooley, that disqualification is not worked in cases where the “‘interest is so remote, trifling and insignificant that it may fairly be supposed to be incapable of affecting the judgment of or of influencing the conduct of an individual.’” Id., at 531 (quoting T. Cooley, Constitutional Limitations 594 (7th ed. 1903)). Chief Justice Taft also reiterated that the case was not one “in which the penalties and the costs are negligible. . . . The court is a state agency, imposing substantial punishment.... It is not to be treated as a mere village tribunal for village peccadilloes.” 273 U. S., at 532. We therefore follow Ward v. Village of Monroeville, 409 U. S. 57, 60 (1972), and decline to read Tumey as constitutionalizing any rule that a decision rendered by a judge with “the slightest pecuniary interest” constitutes a violation of the Due Process Clause.

       We have confined the opinion to the issues presented by the parties and express no view on the question discussed by the justices who write separately. The issues here are far more complex than acknowledged by the concurrences, which, reasoning from hypothetical situations on matters not presented by the facts of this case, postulate a broad general rule. Traditionally the Court does not undertake to “ ‘formulate a rule of constitutional law broader than is required by the precise facts to which it is to be applied.’” Ashwander v. TVA, 297 U. S. 288, 347 (1936) (Brandéis, J., concurring) (quoting Liverpool, N. Y. & P. S. S. Co. v. Emigration Comm’rs, 113 U. S. 33, 39 (1885)). Because the issue of disqualification of a single member of a multimember panel arises in a variety of factual contexts, see generally 48A C. J. S., Judges § 159, p. 868 (1981) (collecting eases), sound judicial practice wisely counsels judges to avoid unnecessary declarations on issues not presented, briefed, or argued.

       If Justice Embry had disqualified himself, the decision of the trial court would not have been affirmed by a vote of an equally divided court. Rather, Ala. Code § 12-2-14 (1975), which authorizes the appointment of special justices in the event disqualifications result in an even-numbered court which is evenly divided on a matter, would presumably have come into play.


source: Caselaw Access Project

author: Justice Marshall Chief Justice Burger,

license: Public Domain

text:
    UNITED STATES v. AMERICAN COLLEGE OF PHYSICIANS
    No. 84-1737.
    Argued January 21, 1986
    Decided April 22, 1986

      MARSHALL, J., delivered the opinion for a unanimous Court. BURGER, C. J., filed a concurring opinion, in which Powell, J., joined, post, p. 850.

      Albert G. Lauber, Jr., argued the cause for the United States. With him on the briefs were Solicitor General Fried, Assistant Attorney General Archer, Robert A. Bernstein, and Robert S. Pomerance.

      John B. Huffaker argued the cause for respondent. With him on the brief were Eleanor N. Ewing and Gerald P. Norton

        Robert A. Saltzstein and Joseph J. Saunders filed a brief for American Business Press as amicus curiae urging reversal.
      Briefs of amici curiae urging affirmance were filed for the American Association for the Advancement of Science by John D. Lane; for the American Medical Association et al. by George A. Platz, Frank V. Battle, Jr., J. Timothy Kleespies, and Kathleen R. Curtis; and for the American Society of Association Executives by George D. Webster and Frank M. Northam.

   Justice Marshall

delivered the opinion of the Court.

A tax-exempt organization must pay tax on income that it earns by carrying on a business not “substantially related” to the purposes for which the organization has received its exemption from federal taxation. The question before-this Court is whether respondent, a tax-exempt organization, must pay tax on the profits it earns by selling commercial advertising space in its professional journal, The Annals of Internal Medicine.

I

Respondent, the American College of Physicians, is an organization exempt from taxation under § 501(c)(3) of the Internal Revenue Code. The purposes of the College, as stated in its articles of incorporation, are to maintain high standards in medical education and medical practice; to encourage research, especially in clinical medicine; and to foster measures for the prevention of disease and for the improvement of public health. App. 16a. The principal facts were stipulated at trial. In furtherance of its exempt purposes, respondent publishes The Annals of Internal Medicine (Annals), a highly regarded monthly medical journal containing scholarly articles relevant to the practice of internal medicine. Each issue of Annals contains advertisements for pharmaceuticals, medical supplies, and equipment useful in the practice of internal medicine, as well as notices of positions available in that field. Respondent has a longstanding policy of accepting only advertisements containing information about the use of medical products, and screens proffered advertisements for accuracy and relevance to internal medicine. The advertisements are clustered in two groups, one at the front and one at the back of each issue.

In 1975, Annals produced gross advertising income of $1,376,322. After expenses and deductible losses were subtracted, there remained a net income of $153,388. Respondent reported this figure as taxable income and paid taxes on it in the amount of $55,965. Respondent then filed a timely claim with the Internal Revenue Service for refund of these taxes, and when the Government demurred, filed suit in the United States Claims Court.

The Claims Court held a trial and concluded that the advertisements in Annals were not substantially related to respondent’s tax-exempt purposes. 3 Cl. Ct. 531 (1983). Rather, after finding various facts regarding the nature of the College’s advertising business, it concluded that any correlation between the advertisements and respondent’s educational purpose was incidental because “the comprehensiveness and content of the advertising package is entirely dependent on each manufacturer’s willingness to pay for space and the imagination of its advertising agency. ” Id., at 535. Accordingly, the court determined that the advertising proceeds were taxable.

The Court of Appeals for the Federal Circuit reversed. 743 F. 2d 1570 (1984). It held clearly erroneous the trial court’s finding that the advertising was not substantially related to respondent’s tax-exempt purpose. The Court of Appeals believed that the trial court had focused too much on the commercial character of the advertising business and not enough on the actual contribution of the advertisements to the education of the journal’s readers. It held that respondent had established the requisite substantial relation and its entitlement to exemption from taxation. Id., at 1578. We granted the Government’s petition for certiorari, 473 U. S. 904 (1985), and now reverse.

I — I I — I

The taxation of business income not “substantially related” to the objectives of exempt organizations dates from the Revenue Act of 1950, Ch. 994, 64 Stat. 906 (1950 Act). The statute was enacted in response to perceived abuses of the tax laws by tax-exempt organizations that engaged in profit-making activities. Prior law had required only that the profits garnered by exempt organizations be used in furtherance of tax-exempt purposes, without regard to the source of those profits. See Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578, 581 (1924); C. F. Mueller Co. v. Commissioner, 190 F. 2d 120 (CA3 1951); Roche’s Beach, Inc. v. Commissioner, 96 F. 2d 776 (CA2 1938). As a result, tax-exempt organizations were able to carry on full-fledged commercial enterprises in competition with corporations whose profits were fully taxable. See Revenue Revision of 1950: Hearings before the House Committee on Ways and Means, Vol. I, 81st Cong., 2d Sess., 18-19 (1950) (hereinafter cited as 1950 House Hearings) (describing universities’ production of “automobile parts, chinaware, and food products, and the operation of theatres, oil wells, and cotton gins”). Congress perceived a need to restrain the unfair competition fostered by the tax laws. See H. R. Rep. No. 2319, 81st Cong., 2d Sess., 36-37 (1950).

Nevertheless, Congress did not force exempt organizations to abandon all commercial ventures, nor did it levy a tax only upon businesses that bore no relation at all to the tax-exempt purposes of an organization, as some of the 1950 Act’s proponents had suggested. See, e. g., 1950 House Hearings, at 4, 19, 165. Rather, in the 1950 Act it struck a balance between its two objectives of encouraging benevolent enterprise and restraining unfair competition by imposing a tax on the “unrelated business taxable income” of tax-exempt organizations. 26 U. S. C. § 511(a)(1).

“Unrelated business taxable income” was defined as “the gross income derived by any organization from any unrelated trade or business . . . regularly carried on by it . . . .” § 512(a)(1). Congress defined an “unrelated trade or business” as “any trade or business the conduct of which is not substantially related ... to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption . . . .” § 513(a). Whether respondent’s advertising income is taxable, therefore, depends upon (1) whether the publication of paid advertising is a “trade or business,” (2) whether it is regularly carried on, and (3) whether it is substantially related to respondent’s tax-exempt purposes.

Ill

A

Satisfaction of the first condition is conceded in this case, as it must be, because Congress has declared unambiguously that the publication of paid advertising is a trade or business activity distinct from the publication of accompanying educational articles and editorial comment.

In 1967, the Treasury promulgated a regulation interpreting the unrelated business income provision of the 1950 Act. The regulation defined “trade or business” to include not only a complete business enterprise, but also any component activity of a business. Treas. Reg. §1.513-l(b), 26 CFR § 1.513 — 1(b) (1985) (first published at 32 Fed. Reg. 17657 (1967)). This revolutionary approach to the identification of a “trade or business” had a significant effect on advertising, which theretofore had been considered simply a part of a unified publishing business. The new regulation segregated the “trade or business” of selling advertising space from the “trade or business” of publishing a journal, an approach commonly referred to as “fragmenting” the enterprise of publishing into its component parts:

“[Activities of soliciting, selling, and publishing commercial advertising do not lose identity as a trade or business even though the advertising is published in an exempt organization periodical which contains editorial matter related to the exempt purposes of the organization.” 26 CFR § 1.513-l(b) (1985).

In 1969, Congress responded to widespread criticism of those Treasury regulations by passing the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487 (1969 Act). That legislation specifically endorsed the Treasury’s concept of “fragmenting” the publishing enterprise into its component activities, and adopted, in a new § 513(c), much of the language of the regulation that defined advertising as a separate trade or business:

“Advertising, etc., activities ... an activity does not lose identity as a trade or business merely because it is carried on . . . within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization.” 26 U. S. C. § 513(c).

The statute clearly established advertising as a trade or business, the first prong of the inquiry into the taxation of unrelated business income.

The presence of the second condition, that the business be regularly carried on, is also undisputed here. The satisfaction of the third condition, however, that of “substantial relation,” is vigorously contested, and that issue forms the crux of the controversy before us.

B

According to the Government, Congress and the Treasury established a blanket rule that advertising published by tax-exempt professional journals can never be substantially related to the purposes of those journals and is, therefore, always a taxable business. Respondent,, however, contends that each case must be determined on the basis of the characteristics of the advertisements and journal in question. Each party finds support for its position in the governing statute and regulations issued by the Department of the Treasury.

In its 1967 regulations, the Treasury not only addressed the “fragmentation” issue discussed above, but also attempted to clarify the statutory “substantially related” standard found in § 513(a). It provided that the conduct of a tax-exempt business must have a causal relation to the organization’s exempt purpose (other than through the generation of income), and that “the production or distribution of the goods or the performance of the services from which the gross income is derived must contribute importantly to the accomplishment of [the exempt] purposes.” Treas. Reg. § 1.513-l(d)(2), 26 CFR § 1.513-l(d)(2) (1985) (emphasis added). In illustration of its new test for substantial relation, the Treasury provided an example whose interpretation is central to the resolution of the issue before us. Example 7 of Treas. Reg. § 1.513-1 (d)(4)(iv) involves “Z,” an exempt association formed to advance the interests of a particular profession and drawing its membership from that profession. Z publishes a monthly journal containing articles and other editorial material that contribute importantly to the tax-exempt purpose. Z derives income from advertising products within the field of professional interest of the members:

“Following a practice common among taxable magazines which publish advertising, Z requires its advertising to comply with certain general standards of taste, fairness, and accuracy; but within those limits the form, content, and manner of presentation of the advertising messages are governed by the basic objective of the advertisers to promote the sale of the advertised products. While the advertisements contain certain information, the informational function of the advertising is incidental to the controlling aim of stimulating demand for the advertised products and differs in no essential respect from the informational function of any commercial advertising. Like taxable publishers of advertising, Z accepts advertising only from those who are willing to pay its published rates. Although continuing education of its members in matters pertaining to their profession is one of the purposes for which Z is granted exemption, the publication of advertising designed and selected in the manner of ordinary commercial advertising is not an educational activity of the kind contemplated by the exemption statute; it differs fundamentally from such an activity both in its governing objective and in its method. Accordingly, Z’s publication of advertising does not contribute importantly to the accomplishment of its exempt purposes; and the income which it derives from advertising constitutes gross income from unrelated trade or business.” § 1.513 — l(d)(4)(iv), Example 7.

The Government contends both that Example 7 creates a per se rule of taxation for journal advertising income and that Congress intended to adopt that rule, together with the remainder of the 1967 regulations, into law in the 1969 Act. We find both of these contentions unpersuasive.

Read as a whole, the regulations do not appear to create the type of blanket rule of taxability that the Government urges upon us. On the contrary, the regulations specifically condition tax exemption of business income upon the importance of the business activity’s contribution to the particular exempt purpose at issue, and direct that “[w]hether activities productive of gross income contribute importantly to the accomplishment of any purpose for which an organization is granted an exemption depends in each case upon the facts and circumstances involved,” § 1.513 — 1(d)(2) (emphasis added). Example 7 need not be interpreted as being inconsistent with that general rule. Attributing to the term “example” its ordinary meaning, we believe that Example 7 is best construed as an illustration of one possible application, under given circumstances, of the regulatory standard for determining substantial relation.

The interpretative difficulty of Example 7 arises primarily from its failure to distinguish clearly between the statements intended to provide hypothetical facts and those designed to posit the necessary legal consequences of those facts. Just at the point in the lengthy Example at which the facts would appear to end and the analysis to begin, a pivotal statement appears: “the informational function of the advertising is incidental to the controlling aim of stimulating demand for the advertised products.” The Government’s position depends upon reading this statement as a general proposition of law, while respondent would read it as a statement of fact that may be true by hypothesis of “Z” and its journal, but is not true of Annals.

We recognize that the language of the Example is amenable to either interpretation. Nevertheless, several considerations lead us to believe that the Treasury did not intend to set out a per se statement of law. First, when the regulations were proposed in early 1967, the Treasury expressed a clear intention to treat all commercial advertising as an unrelated business. See Technical Information Release No. 889, CCH 1967 Stand. Fed. Tax Rep. ¶ 6557. When the regulations were issued in final form, however, following much criticism and the addition of Example 7, they included no such statement of intention. 32 Fed. Reg. 17657 (1967). Second, a blanket rule of taxation for advertising in professional journals would contradict the explicit case-by-case requirement articulated in Treas. Reg. § 1.513 — 1(d)(2), and we are reluctant to attribute to the Treasury an intention to depart from its own general principle in the absence of clear support for doing so. Finally, at the time the regulations were issued, the 1950 Act had been interpreted to mean that business activities customarily engaged in by tax-exempt organizations would continue to be considered “substantially related” and untaxed. See Note, The Macaroni Monopoly: The Developing Concept of Unrelated Business Income of Exempt Organizations, 81 Harv. L. Rev. 1280, 1291 (1968). A per se rule of taxation for the activity, traditional among tax-exempt journals, of carrying commercial advertising would have been a significant departure from that prevailing view. Thus, in 1967 the idea of a per se rule of taxation for all journal advertising revenue was sufficiently controversial, its effect so substantial, and its statutory authorization so tenuous, that we simply cannot attribute to the Treasury the intent to take that step in the form of an ambiguous example, appended to a subpart of a subsection of a subparagraph of a regulation.

It is still possible, of course, that, regardless of what the Treasury actually meant by its 1967 regulations, Congress read those regulations as creating a blanket rule of taxation, and intended to adopt that rule into law in the 1969 Act. The Government appears to embrace this view, which it supports with certain statements in the legislative history of the 1969 Act. For example, the Government cites to a statement in the House Report, discussing the taxation of advertising income of journals published by tax-exempt organizations:

“Your committee believes that a business competing with taxpaying organizations should not be granted an unfair competitive advantage by operating tax free unless the business contributes importantly to the exempt function. It has concluded that by that standard, advertising in a journal published by an exempt organization is not related to the organization’s exempt functions, and therefore it believes that this income should be taxed.” H. R. Rep. No. 91-413, pt. 1, p. 50 (1969).

Similar views appear in the Senate Report:

“Present law. — In December 1967, the Treasury Department promulgated regulations under which the income from advertising and similar activities is treated as ‘unrelated business income’ even though such advertising for example may appear in a periodical related to the educational or other exempt purpose of the organization.
“General reasons for change. —The committee agrees with the House that the regulations reached an appropriate result in specifying that when an exempt organization carries on an advertising business in competition with other taxpaying advertising businesses, it should pay a tax on the advertising income. The statutory language on which the regulations are based, however, is sufficiently unclear so that substantial litigation could result from these regulations. For this reason, the committee agrees with the House that the regulations, insofar as they apply to advertising and related activities, should be placed in the tax laws.” S. Rep. No. 91-552, p. 75 (1969).

Based on this language, the Government argues that the 1969 Act created a per se rule of taxation for advertising income. The weakness of this otherwise persuasive argument, however, is that the quoted discussion appears in the Reports solely in support of the legislators’ decision to enact § 513(c), the provision approving the fragmentation of “trade or business.” Although § 513(c) was a significant change in the tax law that removed one barrier to the taxation of advertising proceeds, it cannot be construed as a comment upon the two other distinct conditions — “regularly carried on” and “not substantially related” — whose satisfaction is prerequisite to taxation of business income under the 1950 Act. Congress did not incorporate into the 1969 Act the language of the regulation defining “substantial relation,” nor did the statute refer in any other way to the issue of the relation between advertising and exempt functions, even though that issue had been hotly debated at the hearings. See, e. g., Tax Reform, 1969: Hearings before the House Committee on Ways and Means, 91st Cong., 1st Sess., 1113, 1118, 1192, 1241 (1969). Thus, we have no reason to conclude from the Committee Reports that Congress resolved the dispute whether, in a specific case, a journal’s carriage of advertising could so advance its educational objectives as to be “substantially related” to those objectives within the meaning of the 1950 Act.

It is possible that the Committees’ discussion of advertising reflects merely an erroneous assumption that the “fragmentation” provision of § 513(c), without more, would establish the automatic taxation of journal advertising revenue. Alternatively, the quoted passages could be read to indicate the Committees’ intention affirmatively to endorse what they believed to be existing practice, or even to change the law substantially. The truth is that, other than a general reluctance to consider commercial advertisements generally as substantially related to the purposes of tax-exempt journals, no congressional view of the issue emerges from the quoted excerpts of the Reports. Thus, despite the Reports’ seeming endorsement of a per se rule, we are hesitant to rely on that inconclusive legislative history either to supply a provision not enacted by Congress, see Commissioner v. Acker, 361 U. S. 87, 93 (1959); 1 J. Mertens, Law of Federal Income Taxation §3.29 (Weinstein rev. 1985), or to define a statutory-term enacted by a prior Congress. See SEC v. Sloan, 436 U. S. 103, 121 (1978); United States v. Price, 361 U. S. 304, 313 (1960). Cf. TVA v. Hill, 437 U. S. 153, 193 (1978). We agree, therefore, with both the Claims Court and the Court of Appeals in their tacit rejection of the Government’s argument that the Treasury and Congress intended to establish a per se rule requiring the taxation of income from all commercial advertisements of all tax-exempt journals without a specific analysis of the circumstances.

IV

It remains to be determined whether, in this case, the business of selling advertising space is “substantially related”— or, in the words of the regulation, “contributes importantly”— to the purposes for which respondent enjoys an exemption from federal taxation. Respondent has maintained throughout this litigation that the advertising in Annals performs an educational function supplemental to that of the journal’s editorial content. App. 7a. Testimony of respondent’s witnesses at trial tended to show that drug advertising performs a valuable function for doctors by disseminating information on recent developments in drug manufacture and use. Id., at 27a, 38a, 43a. In addition, respondent has contended that the role played by the Food and Drug Administration, in regulating much of the form and content of prescription-drug advertisements, enhances the contribution that such advertisements make to the readers’ education. All of these factors, respondent argues, distinguish the advertising in Annals from standard commercial advertising. Respondent approaches the question of substantial relation from the perspective of the journal’s subscribers; it points to the benefit that they may glean from reading the advertisements and concludes that that benefit is substantial enough to satisfy the statutory test for tax exemption. The Court of Appeals took the same approach. It concluded that the advertisements performed various “essential” functions for physicians, 743 F. 2d, at 1576, and found a substantial relation based entirely upon the medically related content of the advertisements as a group.

The Government, on the other hand, looks to the conduct of the tax-exempt organization itself, inquiring whether the publishers of Annals have performed the advertising services in a manner that evinces an intention to use the advertisements for the purpose of contributing to the educational value of the journal. Also approaching the question from the vantage point of the College, the Claims Court emphasized the lack of a comprehensive presentation of the material contained in the advertisements. It commented upon the “hit-or-miss nature of the advertising,” 3 Cl. Ct., at 543, n. 3, and observed that the “differences between ads plainly reflected the advertiser’s marketing strategy rather than their probable importance to the reader.” Id., at 534. “[A]ny educational function [the advertising] may have served was incidental to its purpose of raising revenue.” Id., at 535.

We believe that the Claims Court was correct to concentrate its scrutiny upon the conduct of the College rather than upon the educational quality of the advertisements. For all advertisements contain some information, and if a modicum of informative content were enough to supply the important contribution necessary to achieve tax exemption for commercial advertising, it would be the rare advertisement indeed that would fail to meet the test. Yet the statutory and regulatory scheme, even if not creating a per se rule against tax exemption, is clearly antagonistic to the concept of a per se rule for exemption for advertising revenue. Moreover, the statute provides that a tax will be imposed on “any trade or business the conduct of which is not substantially related,” 26 U. S. C. § 513(a) (emphasis added), directing our focus to the manner in which the tax-exempt organization operates its business. The implication of the statute is confirmed by the regulations, which emphasize the “manner” of designing and selecting the advertisements. See Treas. Reg. § 1.513-1 (d)(4)(iv), Example 7, 26 CFR § 1.513-l(d)(4)(iv), Example 7 (1985). Thus, the Claims Court properly directed its attention to the College’s conduct of its advertising business, and it found the following pertinent facts:

“The evidence is clear that plaintiff did not use the advertising to provide its readers a comprehensive or systematic presentation of any aspect of the goods or services publicized. Those companies willing to pay for advertising space got it; others did not. Moreover, some of the advertising was for established drugs or devices and was repeated from one month to another, undermining the suggestion that the advertising was principally designed to alert readers of recent developments [citing, as examples, ads for Valium, Insulin and Maalox]. Some ads even concerned matters that had no conceivable relationship to the College’s tax-exempt purposes.” 3 Cl. Ct., at 534 (footnotes omitted).

These facts find adequate support in the record. See, e. g., App. 29a-30a, 59a. Considering them in light of the applicable legal standard, we are bound to conclude that the advertising in Annals does not contribute importantly to the journal’s educational purposes. This is not to say that the College could not control its publication of advertisements in such a way as to reflect an intention to contribute importantly to its educational functions. By coordinating the content of the advertisements with the editorial content of the issue, or by publishing only advertisements reflecting new developments in the pharmaceutical market, for example, perhaps the College could satisfy the stringent standards erected by Congress and the Treasury. In this case, however, we have concluded that the Court of Appeals erroneously focused exclusively upon the information that is invariably conveyed by commercial advertising, and consequently failed to give effect to the governing statute and regulations. Its judgment, accordingly, is

Reversed.

Chief Justice Burger,

with whom Justice Powell joins, concurring.

Most medical journals are not comparable to magazines and newspapers published for profit. Their purpose is to assemble and disseminate to the profession relevant information bearing on patient care. The enormous expansion of medical knowledge makes it difficult for a general practitioner— or even a specialist — to keep fully current with the latest developments without such aids. In a sense these journals provide continuing education for physicians — a “correspondence course” not sponsored for profit but public health.

There is a public value in the widest possible circulation of such data, and advertising surely tends to reduce the cost of publication and hence the cost to each subscriber, thereby enhancing the prospect of wider circulation. Plainly a regulation recognizing these realities would be appropriate. Such regulations, of course, are for the Executive Branch and the Congress, not the courts. I join the opinion because it reflects a permissible reading of the present Treasury regulations.

       Title 26 U. S. C. § 501(c)(3) exempts from taxation entities “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes,” with certain restrictions on their activities, including prohibition of political activity.

       The 1967 Treasury regulations at issue in this case, published in final form at 32 Fed. Reg. 17657 (1967), have not been amended in pertinent part since their promulgation, and references to those regulations herein are to the current version.

       See, e. g., Moore, Current Problems of Exempt Organizations, 24 Tax L. Rev. 469, 476 (1969); Middleditch & Webster, The new unrelated business income Regs: what they mean; how to cope with them, 28 J. Tax. 174, 178 (1968); Webster, New proposals change definition of unrelated business-income, 27 J. Tax. 42, 43 (1967); Weithom & Liles, Unrelated Business Income Tax: Changes Affecting Journal Advertising Revenues, 45 Taxes 791, 798 (1967). See also Tax Reform, 1969: Hearings before the House Committee on Ways and Means, 91st Cong., 1st Sess., 1129, 1184, 1223 (1969). Numerous bills were introduced in the 90th Congress, 1st Session, in an unsuccessful attempt to overturn the regulations, even before they became final. See, e. g., H. R. 8765; H. R. 8766; H. R. 9103; H. R. 9468; H. R. 9661; H. R. 9763; H. R. 10150; H. R. 10997; H. R. 10998; H. R. 11491; H. R. 11492. And several years later, two federal courts struck down the 1967 regulations as exceeding pre-1969 statutory authority, insofar as they required the “fragmentation” of publishing activities. See American College of Physicians v. United States, 209 Ct. Cl. 23, 29, 530 F. 2d 930, 933 (1976); Massachusetts Medical Society v. United States, 514 F. 2d 153, 154 (CA1 1975).

       Indeed, different excerpts suggest that perhaps the House Committee did not construe the statute as creating a per se rule. In its explanation of § 513(c), the House Report states that “the advertising contained in a publication of an exempt organization may be subject to the tax under section 511 even though the editorial content of the publication may be related to the exempt purposes of the organization.” H. R. Rep. No. 91-413, pt. 2, p. 26 (1969) (emphasis added).

       This conclusion is consistent with the Treasury’s own approach to analogous problems. See, e. g., Rev. Rui. 82-139,1982-2 Cum. Bull. 108 (advertisements in county bar journal; no per se rule); Rev. Rui. 72-431, 1972-2 Cum. Bull. 281 (exempt organization’s sale of mailing lists to commercial advertisers; no per se rule). Our rejection of the per se rule renders it unnecessary for us to address respondent’s alternative argument that any such rule should apply only to associations organized under § 501(c)(6) of the Internal Revenue Code.