Corporation Hallmark, located in California, was in the business of manufacturing custom-ordered greeting cards, boxes, wrapping paper, and other paper products. Its operation is vertically integrated and includes the production of paper products from raw materials and wastepaper as well as its composition into the finished products ordered by customers.  During this time, Hallmark controlled 35 foreign subsidiaries located in Asia, Australia and Africa.  Its percentage ownership of the subsidiaries (ether directly or though other subsidiaries) ranged between 50% to 100%.  In those instances, where Hallmark did not own a 100% interest in the subsidiaries, the remainder was owned by local nationals.  Five of the subsidiaries were holding companies that had no payroll, sales or property, but did have income. Another three were inactive.  The rest were all engaged in their respective local markets in essentially the same business as Hallmark.

Most of Hallmark's subsidiaries were, like Hallmark itself, fully integrated, although a few bought paper products from elsewhere.  Sales of materials from Hallmark to its subsidiaries accounted for about 40% of the subsidiaries total purchases.  The subsidiaries were also relatively autonomous with respect to matters of personnel and day-to-day management.  For example transfer of personnel from Hallmark to its subsidiaries were rare and occurred only when a subsidiary could not fill a position locally.  Training was conducted for the subsidiaries' employees in California and in other countries. Hallmark and its subsidiaries visited each other frequently to familiarize themselves with Hallmark's method of operation.  Hallmark charged four senior vice presidents and eight other officers with the task of overseeing the operation of the subsidiaries.  These officers established general standards of professionalism, profitability and ethical process and dealt with major problems and long-term decisions; day-to-day management of the subsidiaries, however, was left in the hands of local executives who were always citizens of the host country.  However, whenever the subsidiaries needed help, they would call/email/text Hallmark.  Although local decisions regarding capital expenditures were subject to review by Hallmark, problems were generally worked out by consensus rather than outright domination. Hallmark also had a number of its directors and officers on the boards of directors of the subsidiaries, but they did not generally play an active role in management decision.

The relationship between Hallmark and the subsidiaries were close.  For example approximately 75% of the subsidiaries' long-term debt was either held directly, or guaranteed by Hallmark.  Hallmark also provides advice and consultation regarding manufacturing techniques, engineering, design, and architecture by entering into technical service agreements or by informal arrangements.  Hallmark did not provide insurance but when needed would provide accounting work to the subsidiaries.  Hallmark many times helped its subsidiaries in their procurement of equipment either by selling them used equipment of its own or by employing its own purchasing department to act as agent for the subsidiaries.

a)   Whether Hallmark and its subsidiaries constituted a unitary business;

b)   If so, whether the apportionment was fair;

c)   If so, did the Foreign Commerce Clause preclude California from applying its combined reporting approach on a worldwide basis?