handler's bid for producers' milk often turns on one or two cents per gallon: "Sometimes ... in rough situations it can be even less, half a cent." Tr. 55. Under those conditions, Order 2's imposition of an additional fifteen cents per gallon charge on such producers would be an economic barrier of the sort contemplated by § 608c(5)(G).
The Order 2 charge applies to all milk pooled on the bulk tank unit, not the amount of milk actually distributed in the Order 2 marketing area. To the extent Sani-Dairy pools excess milk on its bulk tank unit, it pays more money than necessary to the Order 2 Fund. Order 2 requires only that partially regulated handlers pool enough milk on their bulk tank units to cover their monthly average distribution in the marketing area. 7 C.F.R. § 1002.25; Tr 149-150. Admittedly, identifying that figure precisely is probably impossible, and handlers may prefer to err on the side of over-pooling. But the Secretary demonstrated that Sani-Dairy regularly pools substantially more milk in its bulk tank unit than necessary. Sani-Dairy's excess, ranging from 25 percent to 50 percent over its monthly average distribution of Class I milk into Order 2, is objectively high. Defendant is not under any duty to inform Sani-Dairy that it is pooling too much milk on its bulk tank unit, and that it could save money for itself and for plaintiff producers by pooling an amount that more closely approximates that amount it actually distributes.
The Secretary calculates the cost of Sani-Dairy's obligations to Order 2, based upon the amount of milk Sani-Dairy was obligated to pool (not the greater amount of milk it actually did pool) at $ 463,556.79, or $ 1.48 per hundredweight, Defendant's Exhibit 1. A charge of $ 1.48 per hundredweight translates into a per gallon charge of 12.7 cents, compared to 15.5 cents per gallon by Sani-Dairy's calculations.
Using either set of figures, the compensatory payment scheme places a regulatory disadvantage on the plaintiff producers that New York producers are not burdened with, and in a market where bids turn on one or two, or even five or ten cents per gallon, Tr. 87-88, it is a disadvantage substantial enough to violate § 608c(5)(G).
The crux of the problem is that Order 2 levies its charge on Sani-Dairy regardless of what Sani-Dairy paid its producers pursuant to PMMB regulations. Under the federal milk marketing scheme,
Order 2 may properly protect its producers from underpriced milk dumped into the marketing area by outside handlers. Lehigh Valley, 370 U.S. at 99. Even before the Order 2 charge, however, Sani-Dairy already pays plaintiff producers 3.5 percent more per hundredweight than Order 2 handlers pay their producers under the Order 2 blend price. Accordingly, the "compensatory" payment does not level the playing field between partially regulated handlers such as Sani-Dairy and Order 2 handlers; rather, it places Sani-Dairy at a substantial disadvantage by piling an extra charge on top of the already-higher PMMB minimum blend price Sani-Dairy must pay to its producers.
The Supreme Court found, in Lehigh Valley, that a previous incarnation of Order 2 protected the blend price received by Order 2 pool producers from the competitive impact of nonpool milk, as though all such milk were physically excluded and they alone supplied the Order 2 marketing area. Lehigh Valley, 370 U.S. at 89-90. Although not as egregiously as in Lehigh Valley, the Secretary has protected Order 2 producers from all nonpool milk, not merely from underpriced nonpool milk. Order 2 thereby forces "nonpool milk . . . to subsidize the pool milk and insulate the pool milk from the competitive impact caused by the entry of outside milk," id. at 91. This creates a price protection scheme broader than the Secretary has been authorized to promulgate.
In Lehigh Valley, the Supreme Court struck down a compensatory payment scheme requiring the plaintiff, a partially regulated handler, to make payments to the Order 2 Fund of equalling 43 percent of the PMMB minimum Class I price the handler already paid to its producers. Id. at 86. The Court also noted that the Secretary could, and under other milk marketing orders did, consider "the actual price of nonpool milk" when calculating compensatory payments owed by nonpool handlers'. Id. at 87 n. 13. The Order 2 Administrator currently does not consider the effect of the PMMB regulations when determining the obligation of partially regulated handlers.
The Court in Lehigh Valley "did not strike down all compensatory payments," Lewes Dairy, Inc. v. Freeman, 401 F.2d 308, 314 (3d Cir. 1968), but only those charges that "[bear] no relation to the actual cost of the milk," id. at 313, or to the nonpool "handler's competitive advantage." Fairmont Foods Co. v. Hardin, 143 U.S. App. D.C. 40, 442 F.2d 762, 771 (D.C.Cir. 1971). Sani-Dairy makes payments of 10-12 percent more than the PMMB minimum Class I price, depending upon whether one accepts plaintiffs' or defendant's calculation of the average payment per hundredweight. Given the competitiveness of the market, the effect of the Secretary's regulations is not distinguishable from those struck down in Lehigh Valley.
Footnote 13 to Lehigh Valley does not compel a different conclusion. In that footnote, the Court addressed the Secretary's concern that nonpool handlers could acquire a competitive advantage by paying their nonpool producers a premium over the Order 2 blend price. After considering alternative regulatory schemes, including the one currently used by the Order 2 Market Administrator, Justice Harlan opined that the Secretary "might be able to justify a compensatory payment equal to the difference between the nonpool milk's 'use value' and the 'blend price,' though we do not decide the question." 370 U.S. at 87 n. 13.
The Secretary contends that because Sani-Dairy "is paying the same as its competitors, and its producers receive no less than any other similarly situated Order 2 producer," Order 2 as currently administered complies with the regulatory scheme Justice Harlan approved in dictum. However, plaintiff producers are not "similarly situated" with any Order 2 producer, because their competitive environment is dictated by PMMB regulations and prices, which do not mirror Order 2 regulations and prices. Unlike the plaintiff in Lehigh Valley, Sani-Dairy cannot be treated as if it operated on terms similar to those faced by Order 2 handlers, for Sani-Dairy does not choose to pay its producers more than the Order 2 minimum Class I price for milk purchased. Therefore, the Court's suggestion in footnote 13 that "the exaction of a Class I-blend price payment would effectively discourage [nonpool handlers'] purchases in excess of the [Order 2] blend price" is inapposite to the instant case. Sani-Dairy obtains no competitive advantage over Order 2 producers by paying plaintiff producers more than the Order 2 minimum Class I price, and cannot be discouraged from paying its producers more than Order 2 minimum prices in any event, for the price it pays for raw milk is determined by PMMB regulations.
The conclusion I reach is supported by County Line Cheese Co. v. Lyng, 823 F.2d 1127 (7th Cir. 1987), the most recent reported case addressing the compensatory payment scheme sub judice in light of 7 U.S.C. § 608c(5)(G). In County Line, one of the plaintiffs was a handler who purchased milk from another pool handler. When the selling handler's plant from which the purchasing handler bought its pool milk was "depooled" for several months, the purchasing handler had to make compensatory payments into the producer settlement fund on each gallon of "nonpool" milk it had purchased during those months. The purchasing handler's obligation for those months was the same as Sani-Dairy's obligation since it began distributing milk in the Order 2 marketing area: the difference between the blend price and the Class I price. Id. at 1129-30.
The court in County Line rejected the plaintiff handlers' § 608c(5)(G) challenge to the compensatory payment scheme in light of Lehigh Valley. In so doing, the court considered three situations to which the compensatory payment scheme might apply. First, a handler might purchase nonpool milk at a price less than the pool's blend price. In that case, requiring the handler to pay a compensatory payment of the difference between the Class I and the blend price clearly compensates the pool producers without putting the nonpool milk at a disadvantage, for nonpool Class I milk could still enter the pool at a total cost less than pool Class I milk.
Second, the fact pattern actually faced by the plaintiff in County Line, a handler might purchase nonpool milk at a price that falls somewhere between the blend price and the Class I price. In that case, the compensatory payment would put nonpool milk at a slight disadvantage, "because the handler's total cost after adding the compensatory payment would then be more than the Class I price." However, it is appropriate to demand the payment from purchasers of nonpool milk for the sake of consistency, because handlers who buy pool milk at more than blend price have to pay the difference between blend and Class I too. Id. at 1134; Lehigh Valley, 370 U.S. at 87 n. 13.
Finally, it is possible that a handler would purchase nonpool milk at a price that is higher than the Class I price. In that case, the "nonpool milk's price ... would already cost more than pool milk," County Line, 823 F.2d at 1134, and the purchasing handler should not be subject to a compensatory payment. Any compensatory payment is inappropriate under this scenario for two reasons. First, no price advantage can possibly redound to the handler who buys nonpool milk at a price greater than Class I. Second, no purchaser of pool milk would ever be subject to the payment obligation because, assuming economic rationality in the Milk Marketing Order regulatory system of milk pricing, it is inconceivable that the over-blend premium pool producers sometimes enjoy would ever be so high as to raise the price they receive over the minimum Class I price.
In sum, where a nonpool handler already pays its producers 3.5 percent more for raw milk than handlers in the protected marketing area, imposing an extra 10-12 percent charge on the nonpool handler neither wholly nor partially "compensates" entities regulated under the order, that is, does not "put pool and nonpool milk on substantially similar competitive positions at source," Lehigh Valley, 370 U.S. at 84. Rather, in that situation the charge is a sheer penalty, see Kass v. Brannan, 196 F.2d 791, 795 (2d Cir. 1952), that, plaintiffs' have shown by adequate evidence, see United States v. Ott, 214 F. Supp. 616, 618 n. 4 (D. Del. 1963), constitutes an economic trade barrier making nonpool milk more expensive, impermissibly limiting the marketing of dairy products in the Order 2 marketing area for the benefit of "those doing business in [that area], at the expense of those outsiders seeking to enter the market," Lewes Dairy, 401 F.2d at 315, in violation of 7 U.S.C. § 608c(5)(G).
An appropriate order follows.
AND NOW, this 30th day of December, 1993, consistent with the foregoing Findings of Fact and Conclusions of Law, judgment is hereby entered in favor of plaintiffs John P. Strittmatter, d/b/a Strittmatters Dairy, Delbert and Ed Thomas, Lowell Friedlin, Arthur Bloom, James L. Harris, and Milk Marketing, Inc. Defendant's Motion For Summary Judgment (Docket No. 44) is hereby DENIED.
It is further ORDERED, that defendant's Motion To Admit Defendant's Exhibit 1-a (Docket No. 37) and Motion To Strike Portions of Plaintiffs' Exhibit 1 (Docket No. 38) are denied as moot.
In the event that the parties are unable to agree within thirty (30) days of this Order on the appropriate measure of damages due to plaintiffs, they shall apply to the Court for a determination of damages.
BY THE COURT,
D. Brooks Smith
United States District Court