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SANI-DAIRY v. ESPY

December 30, 1993

SANI-DAIRY, a division of Penn Traffic Co., Inc.; JOHN P. STRITTMATTER, d/b/a STRITTMATTERS DAIRY; DELBERT and ED THOMAS; LOWELL FRIEDLIN; ARTHUR BLOOM; and JAMES L. HARRIS, Plaintiffs,
v.
MIKE ESPY, Secretary of Agriculture, United States Department of Agriculture; and Commissioner of Agriculture and Markets, State of New York, Defendants. MILK MARKETING, INC., Plaintiffs, vs. MIKE ESPY, Secretary of Agriculture, Defendant.



The opinion of the court was delivered by: SMITH

 SMITH, District J.

 I. Introduction Several Pennsylvania dairy farmers and a dairy cooperative *fn1" challenge the validity of the Secretary of Agriculture's regulations governing the marketing of fluid milk in the New York-New Jersey milk marketing area. *fn2" Plaintiffs allege that the Secretary's regulations, promulgated pursuant to the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. § 601 et seq. ("the Act"), violate 7 U.S.C. § 608c(5)(6), which states:

 
No marketing agreement or order applicable to milk and its products in any marketing area shall prohibit or in any manner limit, in the case of the products of milk, the marketing in that area of any milk or product thereof produced in any production area in the United States.

 I held an evidentiary hearing on January 28, 1993 to determine whether the Secretary's regulation, as applied to the plaintiffs, constitutes a prohibited economic trade barrier," see Lehigh Valley Cooperative Farmers, Inc. v. United States, 370 U.S. 76, 91-98, 8 L. Ed. 2d 345, 82 S. Ct. 1168 (1962), to milk producers and sellers outside the New York-New Jersey milk marketing area. The parties have filed proposed findings of fact and conclusions of law (Docket Nos. 42 and 44). I now enter the following findings of fact and conclusions of law:

 II. Background

 A. Regulation of Milk Products Under the Federal Order System and Order 2

 Raw milk has two principal end uses: fresh fluid milk or for use in manufactured products such as yogurt, butter and cheese. Milk that is sold for fluid use brings a higher price than milk sold for use in manufactured products; accordingly, in the absence of regulation, competition among farmers for fluid milk sales can be intense. During the Great Depression, the demand for fluid milk fell, exacerbating the price-depressing effects of fierce competition and seasonal milk surplus, and causing unrest among milk producers. See Richard A. Ippolito and Robert T. Masson, The Social Cost of Government Regulation of Milk, 21 J. Law & Econ. 33, 36 (1978).

 Reconciliation of the uniform price received by producers with the varying prices paid by handlers is accomplished by operation of the producer settlement fund ("the Fund"). Each month, the Market Administrator establishes the minimum price for each class of milk, and then ascertains the total volume of milk, by class, used in the market. By multiplying the volume of each class of milk by the applicable class price, and dividing the product by the aggregate volume of all milk, the Administrator arrives at the uniform "blend price" which handlers must pay to all producers regardless of the ultimate utilization of their milk. 7 C.F.R. § 1002.61. Handlers pay into the Fund the amount by which their purchased milk multiplied by the respective minimum class prices, is greater than their purchased milk multiplied by the blend price. Handlers receive from the Fund the amount that the handlers' purchased milk multiplied by minimum class prices, is less than their purchased milk multiplied by the blend price. See United States v. Royal Rock Co-Operative, 307 U.S. 533, 555, 83 L. Ed. 1446, 59 S. Ct. 993 (1939).

 The Secretary regulates milk sales in the New York-New Jersey milk marketing area through marketing Order No. 2 ("Order 2"), 7 C.F.R. § 1002, et seq., issued pursuant to 7 U.S.C. § 608(c)(1). These consolidated actions focus on certain of the Secretary's regulations in Order 2 requiring what are commonly known as "partially regulated handlers" located outside the marketing area to make payments to the Order 2 producer settlement fund.

 Generally, under Order 2, a handler shall be a fully regulated handler, and its facilities designated a "pool plant," each month that it classifies at least twenty five percent of its milk as Class I-A for distribution in the New York-New Jersey marketing area. 7 C.F.R. 1002.28(a). Handlers that classify less than the minimum percentage of their milk as Class I-A for distribution in the marketing area are informally called "partially regulated handlers," and their facilities are designated "partial pool plants." 7 C.F.R. 1002.29. Unlike fully regulated handlers, partially regulated handlers are subject to regulation only on their sales of Class I milk in the marketing area.

 Sani-Dairy, the handler to whom the individual plaintiffs sell their milk, is a partially regulated handler under Order 2, and is required to account to the Order 2 Fund in the same manner as fully regulated Order 2 handlers: it must pay the Fund the difference between the Class I minimum price and the blend price of milk on all the milk it sells in the marketing area each month. 7 C.F.R. §§ 1002.50-1002.77. Order 2 permits a partially regulated handler to meet its obligation to the Fund in one of three ways: (1) purchase from fully regulated handlers sufficient quantities of milk to meet its distribution requirements; (2) become fully regulated itself *fn3" ; or (3) establish a "bulk tank unit" pursuant to 7 C.F.R. § 1002.25. Tr. 148. Handlers who are partially regulated ...


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