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Abbotts Dairies Division of Fairmont Foods Inc. v. Butz

UNITED STATES COURT OF APPEALS, THIRD CIRCUIT


decided: August 1, 1978.

ABBOTTS DAIRIES DIVISION OF FAIRMONT FOODS, INC.
v.
EARL M. BUTZ, SECRETARY OF AGRICULTURE, U.S. DEPARTMENT OF AGRICULTURE, PENNMARVA DAIRYMEN'S COOPERATIVE FEDERATION INC., LEHIGH VALLEY COOPERATIVE FARMERS AND CAPITALMILK PRODUCERS COOPERATIVE, INC., INTERVENING DEFTS., PENNMARVA DAIRYMEN'S COOPERATIVE FEDERATION, INC., INTERVENORS, APPELLANT IN NO. 77-2245. ABBOTTS DAIRES DIVISION OF FAIRMONT FOOD, INC., APPELLANT IN NO. 77-2246 V. EARL M. BUTZ, SECRETARY OF AGRICULTURE, U.S. DEPARTMENT OF AGRICULTURE, PENNMARVA DAIRYMEN'S COOPERATIVE FEDERATION INC., LEHIGH VALLEY COOPERATIVE FARMERS AND CAPITALMILK PRODUCERS COOPERATIVE, INC., INTERVENING DEFTS. ABBOTTS DAIRIES DIVISION OF FAIRMONT FOOD, INC. V. EARL M. BUTZ, SECRETARY OF AGRICULTURE, U.S. DEPARTMENT OF AGRICULTURE, PENNMARVA DAIRYMEN'S COOPERATIVE FEDERATION INC., LEHIGH VALLEY COOPERATIVE FARMERS AND CAPITALMILK PRODUCERS COOPERATIVE, INC., INTERVENING DEFTS. BOB BERGLAND, SECRETARY OF AGRICULTURE, APPELLANT IN NO. 77-2247

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 71-549)

Before Aldisert, Gibbons and Higginbotham, Circuit Judges.

Author: Higginbotham

Opinion OF THE COURT

Under the Agricultural Adjustment Act of May 12, 1933, 48 Stat. 31, as amended, 7 U.S.C. § 601 Et seq., the minimum price at which milk processors and distributors ("handlers") may purchase unprocessed milk from farmers ("producers") is subject to regulation by the Secretary of Agriculture. As a result, milk prices are typically adjusted in accordance with changing economic indices in order to assure, Inter alia, "an orderly flow of the supply . . . (of milk) to market throughout its normal marketing season to avoid unreasonable fluctuations in supplies and prices." 7 U.S.C. § 602(4). This case raises the question whether Abbotts Dairies Division of Fairmont Foods Company ("Abbotts"), after succeeding ultimately in invalidating a Milk Marketing Order of August 20, 1969, may now recover the difference between the invalid order price and a lesser proposed price for the period between September, 1969 and July, 1970.*fn1 Also before us are the issues whether the amount of Abbotts' overpayment could be made subject to reduction to the extent that Abbotts "passed on" any excess prices to its customers, and whether the Secretary must in the first instance consider the restitution question.

The district court, rejecting the passing on defense determined that Abbotts could receive recompense in the amount of the difference between the invalid order price and the price at which Abbotts would have been able to purchase milk during the period in question. The district court determined also that the case should be remanded to the Secretary for ascertainment of that amount and the amount of interest, if any, which should be awarded.*fn2 For the reasons expressed below we reverse the district court's order of remand to the Secretary and instruct the district court to make findings in the specified areas, as necessary, and enter judgment accordingly.

The procedural history of this case cannot, unfortunately, be stated so briefly as would be desired. Over a period of nine years the issues in this case have been litigated, adjudicated, revised and reconsidered in several different administrative and judicial proceedings. There have been three rulings by the Secretary since the August 20, 1969, Order, pursuant to three administrative proceedings; there has been extensive litigation in the United States District Court, first the Secretary's action for a preliminary injunction before Judge Luongo and then the hearings before and adjudications by Judge Ditter on the validity of the August 20, 1969, Order and the availability of damages; and, now, there have been two appeals to this Court.

Decades ago scholars pressed for reform of the judicial process; they were confident that the new administrative law process would be above all far more expeditious, fair, and responsive than what had sometimes proven to be a slow, protracted judicial process. This case exemplifies one instance in which those lofty expectations of expedition have not been met, and it is difficult to imagine a case intertwined with greater confusion and delay on a problem which, but for the administrative process, was not extremely complex. Despite this Abbotts is confronted with a request for yet another remand which could extend this litigation into its second decade.

The triggering event for this case took place on August 20, 1969, when the Secretary issued a Milk Marketing Order for the Delaware Valley Marketing Area*fn3 instituting what is known as a "penny-by-penny" system for adjusting the minimum price which a milk handler (E. g., Abbotts) must pay to milk producers. According to this system the minimum price of milk would rise on a penny-by-penny basis in conformity with rises in the price of milk in the Minnesota-Wisconsin area. This penny-by-penny pricing constituted a departure from the Delaware Valley Marketing Area tradition of bracket pricing, by which the price of milk moved in steps of twenty (20) cents when by the relevant economic formula a different bracket became applicable. The practical effect of the penny-by-penny system was that the price of milk became indisputably higher during the period at issue. At a hearing before the Secretary on October 30, 1969, to reopen the matter of the August 20, 1969, Order, Abbotts as well as all producers who were represented opposed the penny-by-penny system in favor of bracket pricing.*fn4 Significantly, Abbotts' proposal at that hearing was a bracket price different from, and in excess of, the price under the previously valid Marketing Order.*fn5

After a hearing and upon finding that Abbotts had refused to pay the August 20, 1969, Order price, Judge Luongo on August 20, 1970, enjoined Abbotts to cease and desist violations of the Marketing Order, to pay in the future the higher minimum price provided in the Secretary's Marketing Order and otherwise adhere to that Order, and to pay $34,126.25 as its due share of the administrative expenses of maintaining a producer-settlement fund.*fn6 In enjoining Abbotts, Judge Luongo rejected its request, contained in its April 22, 1970, Answer, that if the Government's prayer for an injunction was granted those funds representing the difference between the proposed bracket price Abbotts was willing to pay and the penny-by-penny price the Secretary demanded should be deposited with the court.*fn7 In rejecting this request Judge Luongo relied upon the view that the reserve in the producer-settlement fund would stand as a ready source for recovery of overpayments in the event the August 20, 1969, Marketing Order was subsequently invalidated.

On November 27, 1972, Judge Ditter filed an opinion overturning the decision of the Secretary which upheld the penny-by-penny August 20, 1969, Order as being based upon no evidence whatever. 351 F. Supp. 561 (E.D.Pa.1972). The matter was remanded to the Secretary at his request, and later came before Judge Ditter again. In his opinion of January 9, 1975, he again held the August 20, 1969, Order to be invalid, concluding: "(T)here is no substantial evidence to support the decision and it is therefore arbitrary and capricious and must be set aside." 389 F. Supp. 1, 12 (E.D.Pa.1975). In 1976 Judge Ditter yet again spoke to the issue, rejecting the Secretary's motion for reconsideration. 421 F. Supp. 415 (E.D.Pa.1976), Aff'd, 559 F.2d 1207 (3d Cir. 1977) (judgment order).*fn8 As detailed at the outset, the present appeal follows Judge Ditter's decision on monetary recovery only.

Throughout the procedural history of this case Abbotts and the Government have been the only litigating adversarial parties. A milk farmers' cooperative, Pennmarva Dairymen's Cooperative Federation, Inc. ("Pennmarva"), having been granted limited intervention for the determination of the refund issue, is before us on this appeal asserting, Inter alia, that no In personam judgment can be filed against current producers for receipt by producers in 1969 and 1970 of overpayments which were required by a then operative minimum pricing Order.

I.

We will first consider the availability of the passing on defense in the present case. Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S. Ct. 2224, 20 L. Ed. 2d 1231 (1968), established that in a § 4 Clayton Act*fn9 suit it is no defense that a party seeking to recover overcharges has passed on equivalent price increases to its customers. The court expressed two fundamental and related rationales: first, that permitting a passing on defense would create complex, burdensome and possibly insoluble problems of proof; second, that enforcement of antitrust laws would be impeded if such a defense were deemed litigable.

The economic reasons given in support of the first rationale are not logically limited to antitrust suits. These reasons are illustrated as follows. If the exact amount of an overcharge were passed on by a purchaser-seller, the effect on that purchaser-seller may still have been a negative one for the quantity of sales may have decreased. Even if sales increased after the exact amount of the overcharge was passed on there is no way of determining how much they would have risen absent the overcharge. Also, a defendant could not practically prove that the purchaser-seller would not have raised his prices without passing on an overcharge. If the purchaser-seller would have raised prices in any event, the raising of prices to compensate for the overcharge may have wiped out the prospect of increased profits. Id. at 492-93, 88 S. Ct. 2224.

That the Court's view of the difficulties of proof was decisive in the Hanover decision is made apparent by the exception which it carved. The Court stated that if an "overcharged buyer has a pre-existing "cost-plus' contract, thus making it easy to prove that he has not been damaged . . . ," he may be subject to the passing on defense. Id. at 494, 88 S. Ct. at 2232. This follows logically because the purchaser-seller's profit is, in that case, guaranteed and controlled by a contract rather than by relatively unascertainable economic conditions. In such a circumstance, it is clear both that the overcharge is passed on automatically to that person with whom the purchaser-seller has his "cost-plus" contract and that the quantity of sales and profits remains constant despite the overcharge.

In the present case the Government argues that the milk market is inelastic that Abbotts was not competitively disadvantaged due to the overcharge because all handlers in the market area had to pay the same price to farmers for milk used for fluid consumption. By this argument the Government seeks to demonstrate that Hanover's principal rationale is not here applicable. Yet it does not follow ineluctably from the record that all overcharges were passed on, that total sales remained constant with price rises, and that Abbotts, if it did raise its price, would not have been able to do so successfully without the overcharge. The inelasticity Vel non of the fluid milk market in the Delaware Valley Marketing Area for the period in question is therefore a matter subject to factual disagreement. Because nothing in the record as developed to the present suggests that Abbotts in fact maintained "cost-plus" contracts during the relevant period, attempts to prove these elements would require at least in part the kind of inquiry which Hanover believed would be fruitless. Even if Abbotts' records were to show an increase in its prices commensurate with the overcharges, part of the increase may have been made anyway and only part of the overcharge may have been passed on. Inasmuch as the Court in Hanover articulated the need to avoid such complex and unascertainable elements of proof in an antitrust context, we are counselled against permitting those same elements here where the economic complexities promise to be every bit as great.

Hanover's other rationale evidenced the Court's concern that permitting a passing on defense would deter enforcement of the antitrust laws. If the ultimate consumers in Hanover were the only parties not subject to the passing on defense, the Court observed, no suit would be brought against the perpetrators of the overcharge. 392 U.S. 481 at 494, 88 S. Ct. 2224, 20 L. Ed. 2d 1231. In this case it is equally unlikely that individual milk consumers will ever sue to block an invalid milk marketing order raising prices to be paid to producers by handlers.*fn10 Although unlike antitrust law the Agricultural Adjustment Act does not have as one of its fundamental purposes the prevention of illegal overcharges, it is implicit that the Act envisions effective review of orders claimed to be invalid. It is precisely for this purpose that Congress provided for district court review of the Secretary's marketing orders in 7 U.S.C. § 608c(15)(B). Thus, the need for an effective review mechanism secondarily reaffirms for the present case the applicability of Hanover's rejection of the passing on defense.*fn11

The Government's argument that equitable principles require consideration of a passing on defense does not persuade us differently, for equity should not require the cognizance of a defense whose basis has been, with limited exception, soundly criticized by the Supreme Court as impracticable.

II.

We turn now to the issue of the measurement of monetary recovery and the related issue of the district court's remand to the Secretary.*fn12 In Fairmont Foods Co. v. Hardin, 143 U.S.App.D.C. 40, 442 F.2d 762 (1971), the court faced a similar question arising not out of an invalid minimum price order but from an invalid location price differential in a milk marketing order. The location differential required some handlers to pay a price greater than the minimum order price for milk received from producers in designated areas. The court invalidated the differential on the ground that the evidence was insufficient to show "an economic service (by producers) of benefit to the handler." Id. at 45, 442 F.2d at 767; See Zuber v. Allen, 396 U.S. 168, 90 S. Ct. 314, 24 L. Ed. 2d 345 (1969). The court then awarded a refund in the amount of the invalid differential, without a remand to the Secretary:

The Secretary argues that had the invalidity of this Order been apparent at the time, he would have chosen to replace the differentials with a single Order price, one which would have been higher than the 1965 Eastern Zone price. Thus, according to the Secretary, not all, if any, of Fairmont's payments above the Eastern price can be considered overpayments subject to refund. This argument, based as it is on mere conjecture and supposition, ignores the fact that such alternative measures were not utilized, that the Secretary in fact assumed that his Order was valid and imposed the price differentials on the basis of that assumption. We are not persuaded by the argument that had Fairmont not been required to pay a differential, it might have been required to pay the same price anyway as a result of some alternative regulatory scheme.

Id., 143 U.S.App.D.C. at 51, 442 F.2d at 773; See Borden, Inc. v. Butz, 544 F.2d 312, 319-20 (7th Cir. 1976). Were we to rely on the Fairmont analysis it would appear that the amount of recovery in this case should be the difference between the last valid order price and the price paid by Abbotts. In Fairmont, the possibility that some intermediary price might have been put into effect, had the Secretary known immediately of the invalidity of the scheme, was viewed as legally irrelevant. We need not, however, decide here whether the last valid price should serve as a basis for measuring a refund since Abbotts asks that its recovery be based on the higher price which it proposed to the Secretary in 1969.

The Government and Pennmarva contend, in opposition to the apparent simplicity of the Fairmont formula, that a refund should be based on principles of equitable restitution and hence should require consideration of whether the invalid price was nevertheless a reasonable price.*fn13 For this proposition they rely in part upon the more recent decision of the District of Columbia Court of Appeals in Moss v. Civil Aeronautics Board, 172 U.S.App.D.C. 198, 521 F.2d 298 (1975), Cert. denied, 424 U.S. 966, 96 S. Ct. 1460, 47 L. Ed. 2d 732 (1977). The court in Moss, applying equitable restitution principles, declined to grant a refund to claimants who paid airline passenger rates which were ultimately held invalid. Petitioner in Moss unsuccessfully argued that the difference between the invalidated rate and the last lawful rate should constitute the measure of overpayment recovery. The court recited as findings of fact that the invalidated rate was reasonable, that therefore there was no resulting excess profit or enrichment, and that there existed no "fund of net enrichment from which restitution could appropriately be made." Id. at 214, 521 F.2d at 314. Nevertheless, the court rested its conclusion on the view that

(t)he fares in question were charged by the carriers in reasonable reliance on the Board's explicit approval of them. To the extent that the Board was mistaken about the lawfulness of the filing, the consequences of that mistake should not be visited upon the carriers, certainly absent any actual unjust enrichment.

Id. 172 U.S.App.D.C. at 214, 521 F.2d at 314-15. To follow literally the quoted Moss prescription in the instant matter might be to deny recovery to Abbotts on the theory that the producers who received the overpayments were not at fault. However, because the facts in Moss indicate the reasonableness of the invalid fare and the unreasonableness of the last valid fare and because the court concluded that the airlines were not enriched and that there was no fund from which restitution could be made, the holding may be narrowly circumscribed.

Atlantic Coast Line R. Co. v. Florida, 295 U.S. 301, 55 S. Ct. 713, 79 L. Ed. 1451 (1935), guides us on a path between Fairmont and Moss. The Court there refused restitution of prices paid pursuant to an Interstate Commerce Commission order. In the time between the issuance of the order replacing what was viewed by the Commission as a discriminatory rate schedule, and the Court's invalidation of it, the claimant carrier had complied. Fourteen months after the declaration of invalidity, the Interstate Commerce Commission repromulgated the same order without defect based upon new evidence and new findings.*fn14 The Court accepted as fact that the rate in effect prior to the invalidated order was "less than compensatory and would result in confiscation . . .," Id. at 313, 55 S. Ct. at 718, and further observed that the claimants failed to show the unreasonableness of the rate established by the invalid order. See id. at 318, 55 S. Ct. 713. The Court rejected arguments for applying an intermediary rate in the absence of a showing that invalid one was unreasonable. We view Atlantic Coast to instruct that the unreasonableness of an invalid administrative agency rate and the reasonableness of the rate sought to be used as a measure must appear before restitution of an overpayment can be decided.

In the present case unlike Atlantic Coast, Abbotts' proposed bracket price formula was also proposed at the October, 1969, Department of Agriculture hearing by the Interstate Milk Producers representing seventy-five percent of the milk producers in the Delaware Valley area. This fact, as determined by the district court and not urged to be clearly erroneous, is itself persuasive of the reasonableness of the proposed price. The area tradition of pricing at the required minimum and availability of milk to Abbotts at the proposed bracket prices up to the August 20, 1970, injunction,*fn15 although viewed insufficient by the district court, reaffirm that conclusion. Furthermore, the Secretary's penny-by-penny price was itself unanimously opposed by the witnesses at the October 1969 hearing. It was this total absence of evidentiary support which led the district court to conclude that it was arbitrary and capricious. Indeed, we note in passing that, unlike Atlantic Coast, the record reveals that in six years since the invalidation of the 1969 Order there has been no repromulgation based on evidence favoring penny-by-penny pricing. Although Pennmarva states that a hearing was held by the Secretary in October, 1977, that proceeding could not reasonably be expected to affect the issue of the fairness of the penny-by-penny Order in 1969 and 1970, given the facts as already described.

In view of these circumstances, the producers who received overpayments did, we believe, receive enrichment in the form of excessive and unlawful prices, though they were certainly not at fault for the actual issuance of the Secretary's order. Equitable restitution to Abbotts to the extent of the monies in the producer-settlement fund reserve is therefore appropriate in our view. Denial of restitution on the facts presented here would virtually remove any possibility of recovery of overpayments due to invalid milk pricing orders. We do not believe that Atlantic Coast contemplated such a broad scale denial.

There additionally appears to be no reason for a remand to the Secretary.*fn16 Attempting to ascertain in this case the price at which Abbotts would have been able to purchase milk seems meaningless in light of the district court's statement that Abbotts continued to purchase milk at the proposed bracket price prior to the August 20, 1970, injunction. Even without this fact an inquiry into what the price of milk would have been would not likely contribute anything to the evidence since the effect of the invalid Order itself during the period in question would naturally be considerable, reducing the probative quality of any attempt at reconstructing economic history. This or related litigation has already extended over an eight year period and has received considerable judicial and administrative attention, as described earlier. At this stage we cannot view lightly the possibility of further complication and delay.

III.

The precise amounts determined by Herbert L. Forest*fn17 (as the difference between the total price required to be paid by Abbotts for milk from September, 1969, through July, 1970, and the proposed bracket price) should serve as the basis for an award of restitution to Abbotts unless: (1) the district court, in addressing the matter of the amount of Abbotts' overpayment, finds that not all of the milk purchased by Abbotts during the relevant period was paid for at the invalid penny-by-penny price due to obligations stemming from the invalid Order; or (2) the possibility of cost-plus contracts between Abbotts and others is properly raised and the cost-plus exception to Hanover is deemed applicable.*fn18 The reserve in the producer-settlement fund will serve as the source for the refund of this overpayment.*fn19

The district court's Order remanding this case to the Secretary will be vacated and the matter will be remanded to the district court for disposition in accordance with the above opinion.


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