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Garden State Farms Inc. v. Mathis

Decided: September 8, 1972.

GARDEN STATE FARMS, INC., A CORPORATION OF NEW JERSEY, APPELLANT,
v.
JOSEPH C. MATHIS, JR., ACTING DIRECTOR OF DIVISION OF DAIRY INDUSTRY, RESPONDENT. CUMBERLAND FARMS OF NEW JERSEY, INC., A NEW JERSEY CORPORATION AND BURLINGTON FOOD STORE, INC., A NEW JERSEY CORPORATION, APPELLANTS, V. PHILLIP ALAMPI, SECRETARY, NEW JERSEY DEPARTMENT OF AGRICULTURE, AND JOSEPH C. MATHIS, JR., ACTING DIRECTOR, DIVISION OF DAIRY INDUSTRY, NEW JERSEY DEPARTMENT OF AGRICULTURE, RESPONDENTS



For affirmance -- Chief Justice Weintraub and Justices Jacobs, Proctor, Hall, Schettino and Mountain. For reversal -- None. The opinion of the Court was delivered by Hall, J.

Hall

[61 NJ Page 411] This case derives from two consolidated appeals of Order 69-1, fixing minimum prices for the sale of milk at retail, promulgated by the Director of the Division of Dairy Industry (Director), of the New Jersey Department of Agriculture under the milk control law of 1941, N.J.S.A. 4:12A-1, et seq., particularly N.J.S.A. 4:12A-21 to 23. The appellants are two vertically integrated "jug store" milk dealers,*fn1 Garden State Farms, Inc. (Garden State)

and Cumberland Farms of New Jersey, Inc. (Cumberland) together with its subsidiary Burlington Food Store, Inc. (Burlington). The appeals were taken to the Appellate Division, R. 2:2-3(a)(2), N.J.S.A. 4:12A-12, but certified on our own motion before argument there. R. 2:12-1.

The principal issues raised concern the current legal viability of the authority to fix prices at all and, if there is, the validity of the minimums fixed by Order 69-1. The latter contention amounts to a claim that the prescribed prices are too high in the light of the appellants' method of operation and asserted lower costs and that any regulation of prices should not go beyond prohibition of sales below the particular seller's costs or, if prices are to be fixed, that the minimum should be based upon the costs of the lowest cost seller, viz., the lowest cost vertically integrated "jug store" dealer. Appellants' contentions are not exactly the same. Both rely primarily upon the first issue noted above. The second contention is advanced by Cumberland, but Garden State's analogous points actually boil down to substantially the same proposition, i.e., that vertically integrated "jug store" dealers should, in effect, be treated separately and differently as far as resale price regulation is concerned.

Promulgation of the order was preceded by the required public hearings. N.J.S.A. 4:12A-23. They were called by the then Director at the instigation of certain segments of the industry (not appellants) who sought higher minimum prices than those prescribed by the price order (Order 64-1) then in effect. Various interested parties made proposals for consideration. Appellants submitted proposals which amounted in substance to the issues they now raise. The consequence was exceedingly lengthy hearings, producing some 7000 pages of testimony and more than 150 exhibits.

Evidence of many points of view as to price regulation was presented by those involved in the milk industry, as well as expert testimony by leading agricultural economists, some called by the Director and others by parties in interest, going deeply into the economics and functioning of milk marketing and into very intricate cost figures.

When the matter first came on for argument before us in March 1970, we determined, in the light of the sweep and fundamental nature of the contentions advanced by appellants, that neither the record nor the findings of fact and determination of the then Director were adequate to properly consider and decide the issues. We, therefore, after consultation with the parties, ordered a remand for a further record to be made before the Director, to be returned to us with additional findings on specific questions, which we propounded, directly related to the issues which had been advanced. Further lengthy hearings were held, very protracted by reason of the appointment of a new Director and other causes beyond our control, which resulted in about 5500 more pages of testimony and 125 additional exhibits. The testimony included experiences with various kinds of milk price control, or the absence of it, in other states. The present Director has submitted additional findings based on the entire record and the case has been fully reargued.

I

Order 69-1 and Its Background

The order under review fixed minimum prices at only the one point of retail sale of fluid milk to the consumer. The same minimum was established whether the milk was sold through stores (without regard to the type of store or method of distribution) and vending machines for off-premises consumption or by home delivery routes. Contrary to earlier price-fixing orders, no minimums were prescribed for wholesale sales to dealers, subdealers, stores or at other points in the producing, processing or distributing chain.

Separate minimums were set forth with respect to consumer sales in quarts, half-gallon, gallon and larger containers, but without variation as to whether the container was glass, paper or plastic or whether the quantities above a quart were packaged in a single-wall container or by banding together smaller sized containers.

In prescribing only minimum resale prices at the single point of the retail sale and in arriving at those prices, the Director adopted the "single minimum margin" concept. The "single" aspect of this concept has reference to fixing a minimum price only at one point, here that of retail sale. The "minimum margin" aspect involves the fixing of a floor price by adding to the federal producer price a margin determined from the evidence to represent the composite costs of a number of low-cost, efficient operators (including vertically integrated "jug store" dealers) capable of supplying a substantial portion of the market. These costs consisted of two main segments -- unit costs of processing, handling and delivery to the retail seller and a percentage of the retail price to cover in-store costs. Nothing was allowed for a return on capital investment.

The design of the scheme was intended to best achieve the statutory purpose of milk pricing regulations as the Director viewed it, viz., to protect the public interest by assuring an adequate supply of fresh wholesome milk to the consumer at fair and reasonable prices through the various methods of retail distribution and sale which might be available at the choice of consumers. The theory was that most milk would sell at retail above the minimum at prices to be fixed by competitive market conditions. The Director conceived the minimum as only a floor to prevent the downward spiraling of milk prices to unreasonably low levels which he said would adversely affect the stability of the market and the industry and ultimately redound to the detriment of producers, processors and wholesale dealers, retail sellers and consumers. [61 NJ Page 415] These minimum prices were set forth in two different schedules -- one applying to North Jersey and one to South Jersey. The reason for this is found in the method by which New Jersey milk producers are now paid for their milk. Producer prices are fixed, not at the state level, but by federal marketing administrators under federal milk marketing orders pursuant to federal statutes. New Jersey is subject to two differing federal marketing orders. North Jersey is included, since 1957, in Order No. 2 covering the entire New York area; South Jersey is, since 1963, under Order No. 4 covering it and areas in adjacent states to the south and west. (Before these dates New Jersey producer prices were fixed by the state milk control agency.) Producer prices per cwt. are fixed by the federal administrators, monthly,*fn2 according to formulae on the basis that all producers in the marketing area receive a uniform blend price for their milk regardless of the kind of utilization by the particular processor-handler, i.e., without differentiation as to the proportion of that handler's milk used for fluid consumption (Class I, commanding a higher price in the market) or for manufacturing purposes (Class II, ice cream, butter, cheese, powder and the like). The formula differs as between the two federal orders affecting New Jersey by reason of a variance in the allocation of transportation charges from farm to processing plant as between producer and processor, so that the producer price is not the same in the two regions of the State. Since the minimum prices fixed by Order 69-1 are composed, as we have said, of an additive to the producer price, which additive consequently differs in the two sections of the state, separate minimum price schedules -- in effect differing

but slightly -- are required for North and South Jersey.

Order 69-1 also provides, by schedules, that the minimum prices shall increase or decrease monthly each time federal producer prices change at least 19 cents per cwt. (This has been a characteristic of New Jersey milk pricing orders since 1960.)

The order, intended to take effect June 3, 1969, was to supersede Order 64-1, which became effective March 31, 1964. Order 64-1 was structurally similar, being based on the minimum margin concept, but it also fixed minimum prices for sales into stores, sales to subdealers and sales by home delivery and the range for change in prices to accommodate changes in federal producer prices was 23 cents per cwt. instead of 19 cents. The effect of Order 69-1 was stayed pending the outcome of these appeals, as was any upward adjustment based on increases in producer prices. The effect has been to freeze minimum prices fixed by Order 64-1 at the level of the producer price at the time of the stays in 1969. We understand this has resulted in out-of-store minimum prices having remained at 28 cents per quart, 51 cents per half-gallon and 96 cents per gallon.

We also understand, since the Director denied proposals to increase the minimums over those for out-of-store sales in Order 64-1, that the minimums in Order 69-1 are substantially the same as in the prior order, although computation of the figures making up the minimum prices is involved and difficult to comprehend. It is apparent, however, that, were Order 69-1 to become effective today, the minimum retail prices would be some pennies higher as to each size container than the frozen prices above set forth by reason of fairly substantial increases in federal producer prices in the interim. It further should be noted that no interested party other than Garden State and Cumberland appealed Order 69-1 and in fact several have participated before us in support of the order. [61 NJ Page 417] Some fairly recent history of milk distribution and regulation in this state should be in mind to put the issues before us in sharper focus. Prior to 1960 fluid milk had largely been sold to New Jersey consumers in glass quart bottles through grocery stores and home delivery, with distribution to these outlets in the hands of wholesale dealers and processors who bought from producers. Prices prescribed by the milk control agency, as they had since the original imposition of controls many years before, related to every step in this conventional distributive process -- "across-the-board" -- and were generally thought to be high and geared to the idea that the minimum prices fixed would also represent the price charged. There was a pervasive feeling that the prices fixed were intended to or had the effect of subsidizing and maintaining various components of this process, as well as restricting competition and inhibiting new methods of distribution. Beginning in 1960 the vertically integrated chain "jug store" dealer made his appearance, pioneered by Garden State and a few others and soon joined by Cumberland. They stressed the sale of milk in specialized stores (see footnote (1)) by the half-gallon and gallon (first in returnable glass containers requiring a deposit and in later years in nonreusable paper and plastic containers), which they claimed could be sold at retail at a profit for less than the minimum. As this method of retail milk sale achieved consumer popularity and the number of "jug stores" increased, supermarkets and other stores turned to selling milk in half-gallons and gallons, consumers bought their milk in such quantities when they purchased their groceries, and home delivery, which always carried a higher price, declined markedly. Today, (we speak as of the time of the remand hearings in this case) vertically integrated retailers (including one supermarket chain doing its own processing) sell something over a fifth of the milk retailed in this state and the half-gallon container has become the most popular size in all stores.

The advent of the "jug store" increased the dissatisfaction with the "across-the-board" method of strict milk price regulation. The situation came to a head following Order 60-1, to be effective April 1, 1961, which raised minimum prices "across-the-board" on the basis of a composite profit and loss statement of 12 conventional milk wholesalers. The order was attacked by Garden State and other vertically integrated jug dealers for failure to take their lower costs into account and was twice set aside by this court on their appeals. Lampert Dairy Farm, Inc. v. Hoffman, 35 N.J. 205 (1961) (Lampert I) and Lampert Dairy Farm, Inc. v. Hoffman, 37 N.J. 598 (1962) (Lampert II). In the second decision we said:

Order 60-4 substantially and uniformly raises price minimums. Since much of the milk delivered to homes in quart containers has been selling at more than the minimums established under Order 60-1, while much of the milk sold in stores in quarts or packaged in the larger containers has apparently been selling at those minimums, Order 60-4 is likely to further limit any economies the consumer can achieve by purchasing at stores in either quarts or larger containers. Before we can properly sanction such a result there must be evidence to support the conclusion that the method of distribution or type of container is not subsidized at the expense of another unless the record discloses the subsidy and the extent thereof is justifiable in light of the statutory objective. (37 N.J. at 605)

and remanded the matter to the Director to hold further hearings and present and take evidence "as to cost factors consistently associated with the various methods of distribution and container sizes." Id.

Shortly after this opinion was filed, the Governor appointed a milk study commission to probe into the causes of dissatisfaction with the state's milk control program. Upon receiving the commission's report in October 1962, the agency, at the direction of the Governor, suspended all resale price control. Prices dropped considerably and evidence of disruption began to appear in the industry. Some weeks later the ...


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