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May 24, 1989

STATE OF NEW YORK by ROBERT ABRAMS, Attorney General, Plaintiff,
ARTHUR R. BROWN, JR., et al., Defendants

The opinion of the court was delivered by: WOLIN

 The State of New York, by its Attorney General, has brought this action to challenge a New Jersey statute and regulation that prohibit the sale of milk in New Jersey below cost. New York alleges that the statute and regulation have both the purpose and effect of discriminating against New York milk dealers and thus violate the Commerce Clause of the United States Constitution both on their face and as applied. New York has named as defendants Arthur R. Brown, Jr., the New Jersey Secretary of Agriculture, and Woodson W. Moffett, Jr., the Director of the State's Division of Dairy Industry.

 Brown and Moffett have moved for summary judgment on three grounds. First, defendants contend that this Court has no jurisdiction to hear this case. Second, Brown and Moffett argue that New York has no standing to assert the interests of New York milk dealers, who, Brown and Moffett contend, are the aggrieved parties, if any. Finally, the New Jersey defendants argue that the statute and regulation in question do not violate the Commerce Clause but rather are the least burdensome method of achieving the valid legislative goal of promoting stability in an industry that is particularly susceptible to destructive competition. New York has cross-moved for summary judgment. The Court will deny both motions.


 Ever since the time of the Great Depression, which witnessed the destructive effects of unchecked competition on the dairy industry, the federal government *fn1" and many individual States have regulated the price of milk. According to defendants, 20 States currently set minimum prices at or above which dealers must sell to retailers. Milk's perishability and the industry's sensitivity to anticompetitive practices create the need for this regulation; price competition can quickly destroy many dealers, leading to monopolies or oligopolies and ultimately higher consumer prices. As they affect the purely internal commerce of a State, state milk control laws are evaluated under the Due Process Clause of the Fourteenth Amendment and will be upheld as long as the laws are rationally related to the Legislature's purposes. Nebbia v. New York, 291 U.S. 502, 538-39, 54 S. Ct. 505, 516-17, 78 L. Ed. 940 (1934). As they impinge on interstate commerce, however, state milk control laws are subject to the more exacting scrutiny of the Commerce Clause. Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 519, 521-26, 55 S. Ct. 497, 498, 499-501, 79 L. Ed. 2d 1032 (1935).

 In order to reduce the instability in the State's milk industry, the New Jersey legislature in 1941 enacted the New Jersey Milk Control Act ("the Act"), ch. 274, 1941 N.J. Laws 713 (codified as amended at N.J.S.A. § 4:12A-1 et seq.). *fn2" See Garden State Farms, Inc. v. Mathis, 61 N.J. 406, 422-23, 294 A.2d 713, 721 (1972); Abbotts Dairies, Inc. v. Armstrong, 14 N.J. 319, 323-24, 328, 102 A.2d 372, 374-75, 376-77 (1954). The Act establishes a Milk Control Board and vests certain powers in the Director of Milk Control. N.J.S.A. §§ 4:12A-2 & -3. The Act provides that, subject to certain limitations not relevant here,

the director may fix the price at which milk is to be bought, sold, or distributed; regulate conditions and terms of sale; establish and require observance of fair trade practices; supervise, regulate and control the entire milk industry of the State of New Jersey, including the production, importation, classification, processing, transportation, disposal, sale or resale, storage or distribution of milk as defined in this act in the State of New Jersey in those matters and in every way necessary to carry out the purposes of this act and necessary to control or prevent unfair, unjust, destructive or demoralizing practices which are likely to result in the demoralization of agricultural interest in this State engaged in the production of milk or interfere with the maintenance of a fresh, wholesome supply of sanitary milk for the consumers of this State.

 Id. § 4:12A-21. The Director originally imposed absolute minimum prices applicable to all sellers of milk in New Jersey. In 1980, however, the Director abolished these fixed minimum prices and instead promulgated regulations prohibiting milk producers from selling milk below their cost. The regulations provide:

It shall be unlawful and a violation of these regulations for any dealer licensee to directly or indirectly be a party to, or assist in, any transaction to sell or offer to sell milk and milk products within the State of New Jersey, or for sale in the State of New Jersey at less than the cost thereof as hereinafter defined; but nothing in this regulation shall prevent a dealer from meeting the price or offer of a competitor for a product or products of like quality and nature in similar quantities; but nothing in this section shall prohibit bulk, distress or business-closing sale if prior notice of such sale has been filed with the Director of the Division of Dairy Industry; provided however that the burden of proving and properly documenting the meeting of a competitive price shall rest with the licensee asserting the claim.

 N.J. Admin. Code § 2:52-6.1. The definition of cost adopted by the Director is what is commonly known as "average total cost" or "fully distributed cost." *fn3" Under this standard the cost of a unit of output is calculated by totalling all the expenses of production -- including fixed costs such as rent, executive compensation and insurance -- and dividing by total output. In contrast to the average total cost or fully distributed cost, "marginal cost" is the seller's cost to produce the next additional output of milk. This cost is difficult to calculate, so "average variable cost" is frequently used in its stead. Average variable cost, which by definition is lower than average total cost, includes variable costs such as raw materials, fuel and labor, but excludes all fixed costs. See O. Hommel Co. v. Ferro Corp., 659 F.2d 340, 349 (3d Cir. 1981), cert. denied, 455 U.S. 1017, 102 S. Ct. 1711, 72 L. Ed. 2d 134 (1982); Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697, 716-17 (1975).

 Additional regulations promulgated by the Director prohibit a milk retailer from changing its source of milk without the prior approval of the Director. Such approval may only be obtained upon two weeks' notice to the Director and the current milk dealer and upon a determination by the Director that no regulations, including the below-cost regulation, would be violated. N.J. Admin. Code § 2:53-4.1.

 New York alleges that on 177 occasions in the period between January 1, 1985 and November 23, 1987, New Jersey retailers filed with defendants notices of intent to switch to milk suppliers who are licensed, incorporated and domiciled in New York and who ship their milk from facilities within New York, and that in at least 35 such instances defendant Moffett denied the applications as violative of the New Jersey below-cost regulation. Among the New York dealers alleged to be the subject of such rejection notices are Dellwood Foods, Inc., Queens Farms Dairy, Inc., Beyer Farms, Inc., Queensboro Farm Products, Inc. and Pound Ridge Dairy, Inc. *fn4" New York alleges that in many of these instances the New York dealer had evinced the intention to sell milk competitively and profitably above average variable cost, but that in all such instances Moffett's action effectively prohibited the shipment of wholesome and competitively priced milk from New York to New Jersey. According to New York, defendants have enforced the regulations so as to prohibit a New Jersey retailer from buying milk in New York at a price below the New York dealer's average total cost. Plaintiff's Statement Pursuant to Local Rule 12(G), para. 8. In several of the above instances the sale from the dealer to the retailer was to have occurred in New York, so that Moffett's action prohibited sale transactions occurring wholly within the State of New York. First Amended Complaint paras. 18-23. While conceding that New Jersey officials may prohibit the sale of milk below average variable cost, New York contends that it is a violation of the Commerce Clause for the New Jersey Director of Milk Control to prohibit pricing between average variable cost and average total cost.

 Defendants have not filed a formal answer but instead have brought this summary judgment motion on three grounds. First, defendants contest this Court's jurisdiction by asserting that this case is a controversy between two States and thus within the exclusive jurisdiction of the Supreme Court pursuant to 28 U.S.C. § 1251(a). Brown and Moffett also contend that New York has no standing to bring this action and that the alleged wrongs can be addressed in another case filed in this Court by a New York dealer that does have standing, Beyer Farms, Inc. v. Brown, 721 F. Supp. 644. With regard to the merits, defendants argue that total average cost was selected as the regulatory cost standard because it most accurately reflects a dealer's true costs. Since a dealer who sells below this level cannot sustain a milk distribution business over an extended period of time, defendants argue, a dealer who sells below this level must be presumed to be doing so in order to purposefully drive competitors out of business. Of course, a dealer could compensate for the sale of a certain percentage of product at marginal cost by selling its remaining product at a price above total average cost. The result in the instant case, however, according to defendants, would be higher prices for New York consumers, the very people on whose behalf New York is allegedly suing. See Defendants' Initial Brief at 8-10.


 I. Jurisdiction

 Defendants challenge this Court's jurisdiction to hear the case. Both defendants are officials of the State of New Jersey and have been sued in both their individual and official capacities. They assert that the real defendant is the State of New Jersey, and that a district court has no jurisdiction to hear a claim by one State against another.

 Article III, § 2, cl. 2 of the United States Constitution provides that "in all cases . . . in which a State shall be a party, the Supreme Court shall have original Jurisdiction." Although that constitutional provision does not automatically render the Supreme Court's jurisdiction exclusive, see Ames v. Kansas, 111 U.S. 449, 464, 4 S. Ct. 437, 444, 28 L. Ed. 482 (1884); United States v. 4,450.72 Acres of Land, 27 F. Supp. 167, 176 (D. Minn. 1939), aff'd sub nom. Minnesota v. United States, 125 F.2d 636 (8th Cir. 1942), Congress has rendered the Supreme Court's jurisdiction of disputes between States exclusive by enacting 28 U.S.C. § 1251(a), which provides that "the Supreme Court shall have original and exclusive jurisdiction of all controversies between two or more States."

 New York seeks to avoid the effect of § 1251(a) on the ground that its naming of New Jersey officials is not merely a procedural ploy but rather a recognition of the fact that it is the officials' enforcement of the statute that is allegedly unconstitutional. According to New York, the New Jersey Legislature, in enacting the Milk Control Act, did not specifically empower and embrace the below cost pricing regulations promulgated by defendants and found in N.J.A.C. §§ 2:52-6.1 et seq.

 In support of its argument, New York cites Louisiana v. Texas, 176 U.S. 1, 20 S. Ct. 251, 44 L. Ed. 347 (1900). In that case Texas enacted a statute that gave both the Governor and the chief Texas Health Officer authority to promulgate regulations for the establishment and maintenance of quarantines against infectious diseases. In response to an outbreak of yellow fever, the Governor of Texas imposed a quarantine in border and coastal sections of Texas on persons and things coming from places infected by yellow fever. The quarantine regulations required fumigation and detention of ships and cargoes from infected ports, but permitted continued commerce between infected ports and Texas subject to those restrictions. Upon receiving a report that a case of yellow fever existed in New Orleans, the Health Officer placed an embargo on all commerce between New Orleans and Texas. Louisiana brought suit against Texas in the Supreme Court under the Court's original jurisdiction over disputes between States. Id. at 2-4, 20 S. Ct. at 252. Texas objected to the Supreme Court's original jurisdiction on the ground that Louisiana was not contesting the acts of Texas as a State but rather the acts of the Texas Health Officer in carrying out a concededly constitutional statute in an unconstitutional manner. Id. at 12, 20 S. Ct. at 254. The Supreme Court agreed, holding:

In order that a controversy between States, justiciable in this court, can be held to exist, something more must be put forward than that the citizens of one State are injured by the maladministration of the laws of another. . . . [A] controversy between States does not arise unless the action complained of is state action, and acts of state officers in abuse or excess of their powers cannot be laid hold of as in themselves committing one State to a distinct collision with a sister State.

 Id. at 22, 20 S. Ct. at 258. The Court went on to hold that Louisiana had not alleged facts to show that Texas had "so authorized or confirmed the alleged action of her health officer as to make it her own." Absent such allegations, the Court held, the two States were not in controversy within the meaning of the Constitution; therefore the Supreme Court did not have original jurisdiction over the dispute. Id. at 22-23, 20 S. Ct. at 258-59.

 The unstated corollary of the Louisiana v. Texas holding is that if two States are not in controversy, 28 U.S.C. § 1251(a) does not preclude a district court from exercising jurisdiction over a dispute.

 The Court agrees with New York that the case at bar does not involve a controversy between the States of New York and New Jersey. Ever since Ex parte Young, 209 U.S. 123, 28 S. Ct. 441, 52 L. Ed. 714 (1908), the Supreme Court has drawn a clear line between the sovereign acts of a State itself and the acts of its officials. Thus the Eleventh Amendment *fn6" does not bar suits by individuals against officials of a State for unconstitutional enforcement of valid State laws or even for enforcement of unconstitutional State laws because "the use of the name of the State to enforce an unconstitutional act . . . is a proceeding without the authority of and one which does not affect the State in its sovereign or governmental capacity." Id. at 159-60, 28 S. Ct. at 454; see Scheuer v. Rhodes, 416 U.S. 232, 237-38, 94 S. Ct. 1683, 1687, 40 L. Ed. 2d 90 (1974). Defendants note that the Supreme Court has never applied the doctrine of Ex parte Young to controversies between one State and the officials of another. There is no sound reason, however, not to so extend the doctrine. Just as a suit between a private citizen and the officials of a State is not barred by the Eleventh Amendment, so a suit between one State and the officials of another for the enforcement of an unconstitutional act or for the unconstitutional enforcement of a valid act is not ...

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