Cloverland-Green Spring Dairies v. Pa Milk Market., 05-2336.

462 F.3d 249

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.).

No. 05-2336.

United States Court of Appeals, Third Circuit.

Argued June 8, 2006.

Opinion Filed September 1, 2006.

COPYRIGHT MATERIAL OMITTED

Scott T. Wyland, (Argued), Kevin J. McKeon, Hawke, McKeon, Sniscak & Kennard, Garrisburg, PA, for Appellant.

Wendy M. Yoviene, Charles M. English, Jr., (Argued), Glenn C. Kennett, Thelen, Reid & Priest LLP, Washington, D.C., for Appellees.

Allen C. Warshaw, Buchanan Ingersoll & Rooney, Harrisburg, PA, for Intervenors PA Assoc. of Milk Dealers.

Before AMBRO, FUENTES and NYGAARD, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

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"),¹ 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 "mindboggling");² 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").³ This complexity, and the large sums of money at stake,⁴ 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, 90 S.Ct. 314, 24 L.Ed.2d 345 (1969); see also Lehigh Valley Farmers v. Block, 829 F.2d 409, 411 (3d Cir.1987) (same). The 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, 90 S.Ct. 314. 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, 90 S.Ct. 314; 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, 90 S.Ct. 314; 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, 90 S.Ct. 314; 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, 90 S.Ct. 314. 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, 90 S.Ct. 314. The Supreme Court's decision in A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495, 55 S.Ct. 837, 79 L.Ed. 1570 (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, 90 S.Ct. 314; 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.⁵ 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. §...