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Cloverland-Green Spring Dairies, Inc. v. Pennsylvania Milk Marketing Board

September 1, 2006

CLOVERLAND-GREEN SPRING DAIRIES, INC., APPELLANT THOMAS E. MCGLINCHEY; GERTRUDE GIORGINI; SUE A. SPIGLER, ("MILK CONSUMERS") (INTERVENORS IN D.C.)
v.
PENNSYLVANIA MILK MARKETING BOARD; BOYD WOLFF*, IN HIS CAPACITY AS MEMBER OF THE BOARD; LUKE F. BRUBAKER, INDIVIDUALLY AND AS MEMBER OF THE BOARD; BARBARA GRUMBINE*, IN HER CAPACITY AS MEMBER OF THE BOARD; BOYD WOLFF, INDIVIDUALLY; BARBARA GRUMBINE, INDIVIDUALLY PENNSYLVANIA ASSOCIATION OF MILK DEALERS (INTERVENORS IN D.C.) (*AMENDED - SEE CLERK'S ORDER DATED 6/29/05)



Appeal from the United States District Court for the Middle District of Pennsylvania (D.C. Civil Action No. 99-cv-00487) District Judge: Honorable Yvette Kane.

The opinion of the court was delivered by: Ambro, Circuit Judge

PRECEDENTIAL

Argued June 8, 2006

Before: AMBRO, FUENTES and NYGAARD, Circuit Judges.

OPINION OF THE COURT

This case, on appeal for the second time to our Court, concerns whether Pennsylvania's minimum wholesale prices for fluid milk violate the dormant Commerce Clause of our Constitution. In our first opinion, we held that the District Court improperly granted summary judgment to the Pennsylvania Milk Marketing Board ("Board"),*fn1 and remanded to the District Court for a trial. See Cloverland-Green Spring Dairies, Inc. v. Pa. Milk Mktg. Bd., 298 F.3d 201 (3d Cir. 2002) (hereafter "Cloverland I"). The District Court then conducted a six-day bench trial and ruled in favor of the Board. We now affirm.

I. Milk Economics

Before addressing the facts of this case, we believe it helpful (if not necessary) to explain how milk pricing works. On the surface, the path of milk from the cow to the consumer seems simple. A farmer (commonly called a "producer") sells raw milk to a processor (or "handler"). The handler processes the raw milk into fluid milk or other dairy products, packages it, and sells the product to a retailer. The retailer, in turn, sells to the consumer.

Yet this apparent simplicity is deceptive. Federal and state regulations regarding the sale of milk make "Byzantine" an apt, and none too pejorative, description. See, e.g., Lansing Dairy, Inc. v. Espy, 39 F.3d 1339, 1344 (6th Cir. 1994) ("[T]he system established by [federal law] to regulate the sale of milk is of labyrinthine complexity."); Kenneth W. Bailey, Marketing and Pricing of Milk and Dairy Products in the United States 109 (1997) (noting that the rules governing milk prices are "mind-boggling");*fn2 Jim Chen, Around the World in Eighty Centiliters, 15 Minn. J. Int'l L. 1, 6 (2006) (describing the federal milk pricing structure as "outlandishly complex").*fn3 This complexity, and the large sums of money at stake,*fn4 have spawned an extraordinary amount of litigation. It has been estimated that "no other commodity in the United States has been involved in as many legal challenges in regard to how it is marketed" as milk. Bailey, supra, at 3.

Two systems of milk price regulation concern us on this appeal: the federal system and Pennsylvania's state system. We describe each in turn.

A. Federal Milk Price Regulation

1. Unique Nature of Milk

Milk is a unique agricultural commodity. The Supreme Court has recognized "two distinctive and essential phenomena of the milk industry[:] a basic two-price structure that permits a higher return for the same product, depending on its ultimate use, and the cyclical characteristic of production." Zuber v. Allen, 396 U.S. 168, 172 (1969); see also Lehigh Valley Farmers v. Block, 829 F.2d 409, 411 (3d Cir. 1987) (same). The Queensboro Farms Prods. v. Wickard, 137 F.2d 969, 974-75 (2d Cir. 1943). first phenomenon derives from the fact that raw milk may be put to two general uses by handlers: fluid milk for drinking and manufactured dairy products such as cheese, butter, and ice cream. See Zuber, 396 U.S. at 172. Fluid milk is more expensive for handlers to produce and market because it is highly perishable (a gallon of milk must ordinarily be marketed to the consumer within two days of milking), requires more sanitation and processing than other dairy products, and is heavier and thus more expensive to transport. See id. at 173 n.3; Bailey, supra, at 34, 46, 109-10; Alden C. Manchester & Don P. Blayney, Econ. Research Serv., U.S. Dep't of Agric., Milk Pricing in the United States 2 (2001), available at http://www.ers.usda.gov/publications/aib761/aib761.pdf. Fluid milk for drinking therefore costs the consumer more per pound than milk that has been manufactured into other dairy products, and the partial inelasticity of demand for fluid milk (viewed as a dietary staple by many Americans) means profit margins on fluid milk sales may also be higher. See Bailey, supra, at 34; see also Smyser v. Block, 760 F.2d 514, 516 (3d Cir. 1985) ("Milk that is ultimately used for fluid purposes has traditionally commanded a higher price than milk of the same grade and quality used for manufactured products. This difference is not entirely accounted for by differences in cost.").

Farmers also produce two "grades" of marketable raw milk. Grade A milk is fit for drinking, and therefore can be processed into fluid milk or manufactured products, while Grade B milk is not fit for drinking but may be used in other dairy products. Manchester & Blayney, supra, at 2; David L. Baumer, Federal Regulation of Milk Production and Sale is Growing at the Expense of State Authority, 12 J. Agric. Tax. & L. 36, 38-39 (1990). Not surprisingly, in an entirely unregulated market, handlers would have an incentive to produce manufactured dairy products using Grade B milk and reserve as much Grade A milk as possible for the more lucrative fluid milk market. At the same time, farmers would want to be paid a higher price for their Grade A milk than for Grade B milk, but handlers would want to pay less for Grade A milk they intended to put to use in manufactured dairy products (i.e., surplus Grade A milk they cannot sell as fluid milk).

The complexity deepens when we consider the second phenomenon identified in Zuber: the cyclical nature of milk production. Demand for fluid milk, though somewhat inelastic with respect to price, is temporally cyclic, with demand higher in the fall and winter months than in the spring and summer months. See Zuber, 396 U.S. at 172-73; Bailey, supra, at 34; see also John R. Snyder, A Summary: Political and Economic Analysis of Milk Marketing, 1980-81 Agric. L.J. 297, 310-11. Unfortunately, cows do not work this way, and produce more milk in the spring and summer (known as the "flush" season) than in the fall and winter (the "short-supply" season). Manchester & Blayney, supra, at 2; Snyder, supra, at 310-11. Thus, "it [is] necessary to coordinate a supply that is rising when fluid milk demand is falling." Manchester & Blayney, supra, at 2. Otherwise, handlers would attempt to "take advantage of this surplus to obtain bargains [from producers] during glut periods," which would lead farmers to increase production to maintain a steady income, "and the disequilibrium snowballs." Zuber, 396 U.S. at 173; Smyser, 760 F.2d at 516 ("In an unregulated market 'cutthroat' competition for more profitable fluid milk sales can lead to an overall decline in prices."); see also Bailey, supra, at 110 (explaining that the unique characteristics of the milk industry, if unregulated, lead to "chaotic marketing conditions").

2. The Federal System

Federal regulation of the nation's dairy industry began in earnest in the 1930s, when falling prices caused by the Great Depression led to "utter chaos" in the milk market. Zuber, 396 U.S. at 174. The first attempt at regulation was the Agricultural Adjustment Act ("AAA") of 1933, 48 Stat. 31, which empowered the Secretary of Agriculture to promulgate emergency licensing requirements in the dairy industry to regulate output and price. See Zuber, 396 U.S. at 174-75. The Supreme Court's decision in A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935), however, struck down a similarly broad delegation of rulemaking authority under the National Industrial Recovery Act of 1933, 48 Stat. 195, and Congress acted to protect regulation of the dairy market by first amending the AAA and then enacting the Agricultural Marketing Agreement Act ("AMAA") of 1937, 50 Stat. 246, which replaced the emergency measures with a permanent system of milk regulation. See Zuber, 396 U.S. at 175-76; Defiance Milk Prods. Co. v. Lyng, 857 F.2d 1065, 1066-67 (6th Cir. 1988).

Under the AMAA, the Secretary of Agriculture is empowered to regulate the nation's milk markets by issuing "orders" that regulate prices in defined geographic areas. See 7 U.S.C. § 608c(1); Defiance, 857 F.2d at 1067; Lehigh Valley, 829 F.2d at 411. These orders are meant to ensure "a sufficient quantity of pure and wholesome milk to meet current needs and further to assure a level of farm income adequate to maintain productive capacity sufficient to meet anticipated future needs." 7 U.S.C. § 608c(18). Although their number has varied over the years, there are currently ten federal milk marketing order areas.*fn5 See 7 C.F.R. pts. 1001-1135; U.S. Dep't of Agric., Consolidated Milk Marketing Order Areas, available at http://www.ams.usda.gov/dairy/dymap.htm. Within these orders, the Secretary sets prices at which raw milk may be sold. There are two main features of this pricing structure that merit explanation.

Handlers pay for their milk according to a classified pricing arrangement. See 7 U.S.C. § 608c(5)(A). Grade A raw milk is classified according to its end use. Class I milk is fluid milk for drinking, while other classes (II, III, and IV) are assigned to raw milk used in various manufactured products. 7 C.F.R. § 1000.40; see West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 189 n.1 (1994). It is not necessary for our purposes to explain in detail the pricing mechanism for each class, see, e.g., 7 C.F.R. § 1000.50; we simply note that handlers pay more for Grade A raw milk they intend to put to use as Class I milk than they do for Grade A raw milk they intend to put to use as Class II, III, or IV milk.*fn6 See Lansing Dairy, 39 F.3d at 1344; Smyser, 760 F.2d at 516.

Producers do not, however, receive more or less money for raw milk based on the handler's use. Instead, producers receive a uniform "blend" price that is essentially a weighted average of the price of all classes of milk sold in the region. See 7 U.S.C. 608c(5)(B); Zuber, 396 U.S. at 177; Lehigh Valley, 829 F.2d at 411. This system "eliminate[s] the potential situation where one producer, who sold milk to a fluid processor, would get a higher milk price than his neighbor who sold to a cheese plant." Bailey, supra, at 113; see also Lehigh Valley, 829 F.2d at 411-12 ("By mandating that producers within a market area receive a uniform price based on the use of milk within the area, the [AMAA] eliminates the incentive for dairy farmers to attempt to compete with their neighbors through lowering their prices.").

Of course, this would ordinarily lead to a situation in which handlers dealing mostly in lower classes of milk essentially subsidize those dealing mostly in Class I milk, because the blend price paid to the producer will be more than, say, the classified price of Class IV milk, but lower than the classified price of Class I milk. To compensate for this, the regulations establish a "Producer Settlement Fund," into which handlers who have underpaid contribute an amount equal to the difference between the blend price and classified price, which is then distributed to handlers who have overpaid. See 7 C.F.R. § 1000.70; Lansing Dairy, 39 F.3d at 1344; Smyser, 760 F.2d at 516.

By charging handlers less for Grade A raw milk used in storable dairy products like cheese and butter than for raw milk used as Class I drinking milk, while assuring that producers are paid the same no matter the use to which the raw milk is put, handlers have an incentive to use surplus Grade A milk in manufactured products during the glut months, and producers maintain a more stable income year-round. This, in turn, guards against overproduction in the flush season. Moreover, the Producer Settlement Fund relieves pressures on handlers to deal exclusively in fluid milk to the detriment of other dairy products.

B. Pennsylvania Milk Price Regulation

Although state control of milk markets has declined significantly in the wake of federal regulation, particularly through court challenges, it survives in a few states, including Pennsylvania. See Bailey, supra, at 205, 210; see generally Baumer, supra. Parts of Pennsylvania are federally regulated - the southeast and south-central parts of the Commonwealth are under the Northeast order, and the western part of the Commonwealth is under the Mideast order - while other parts are not regulated by the federal system. Pennsylvania's system covers the entire Commonwealth, however.

Under Pennsylvania's Milk Marketing Law, 31 Pa. Cons. Stat. § 700j, the Board is granted "power to supervise, investigate and regulate the entire milk industry of th[e] Commonwealth, including the production, transportation, disposal, manufacture, processing, storage, distribution, delivery, handling, bailment, brokerage, consignment, purchase and sale of milk and milk products in th[e] Commonwealth." 31 Pa. Cons. Stat. § 700j-301. The statute requires that all handlers operating in Pennsylvania be licensed by the Board, see id. § 700j-401, and empowers the Board to set minimum prices paid to producers, handlers, and retailers to "benefi[t] . . . the public interest [and] best protect the milk industry of the Commonwealth and insure a sufficient quantity of pure and wholesome milk to [its] inhabitants." Id. § 700j-801.

In-state handlers who buy raw milk from in-state producers for in-state use must pay "over-order" prices - which include a premium above the applicable Class I milk prices - to assure producers a "reasonable return" based on the "conditions affecting the milk industry in each marketing area."*fn7

Id.; see also id. § 700j-803 ("The [B]oard shall fix, by official order, the minimum prices or a formula for setting of minimum prices to be paid by milk dealears or handlers to producers for milk or milk components sold or delivered or made available on consignment or otherwise by producers to dealers or handlers."). The over-order premium only applies to sales of Class I milk. See Pa. Milk Mktg. Bd., Order No. A-913 (2001) (establishing the method for calculating the over-order premium, and specifying that the premium "shall be based on milk that is produced, processed, and utilized as Class I milk in Pennsylvania").*fn8

Pennsylvania also exports raw milk to other states. The over-order price, however, does not apply to sales to out-of-state handlers. All handlers who sell milk to retailers in Pennsylvania must do so at minimum wholesale prices that also guarantee a "reasonable return," which state law defines as between 2.5% and 3.5% of net sales. 31 Pa. Cons. Stat. § 700j-801; see also id. § 700j-802 ("The [B]oard shall fix, by official order . . ., the minimum wholesale and retail prices, and may fix, by official order, the maximum wholesale and retail prices, to be ...


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