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August 19, 1982

JOHN R. BLOCK, Secretary of Agriculture of the United States, Defendant

The opinion of the court was delivered by: NEAHER


 NEAHER, District Judge.

 These consolidated actions under the Agricultural Marketing Agreement Act of 1937, as amended ("the Act"), 7 U.S.C. § 608c, seek review, pursuant to § 608c(15)(B), of a final decision of the defendant Secretary of Agriculture ("Secretary") upholding the validity of a portion of Milk Marketing Order No. 2 ("Order 2"), 7 C.F.R. § 1002 (1976), which governs the pricing and classification of milk and milk products in the New York-New Jersey marketing area. Plaintiffs are licensed milk handlers, i.e., processors of milk and milk products, subject to the provisions of Order 2, which was promulgated by the Secretary under the Act. *fn1" They have moved for summary judgment and defendant has similarly cross-moved, both parties agreeing that there are no material issues of fact. This is the second time the actions have been before the Court on the merits. See Oak Tree Farm Dairy, Inc. v. Butz, 390 F. Supp. 852 (E.D.N.Y. 1975), hereinafter referred to as " Oak Tree I ", remanding the matter to the Secretary for further proceedings.


 The operation and complex economic, social and legislative background of the present milk marketing regulatory scheme have been canvassed amply in the decisions, e.g., Zuber v. Allen, 396 U.S. 168, 172-79, 24 L. Ed. 2d 345, 90 S. Ct. 314 (1969); United States v. Rock Royal Co-Operative, Inc., 307 U.S. 533, 542-48, 83 L. Ed. 1446, 59 S. Ct. 993 (1939); Schepps Dairy, Inc. v. Bergland, 202 U.S. App. D.C. 11, 628 F.2d 11, 13-15 (D.C. Cir. 1979), and only a brief review of some salient features is needed to set the proper perspective for the present case.

 As noted in Oak Tree I, the Act, which is part of the Agricultural Adjustment Act of 1935, as amended, 7 U.S.C. § 601 et seq., sought to eliminate what Congress, then confronting the economic dislocations caused by the Great Depression, had perceived was ultimately deleterious competition among the producers of milk (and other agricultural commodities) for marketing outlets, and, conversely, to restore "orderly marketing conditions" to ensure both the continuous supply of such commodities to consumer markets and the payment of "parity prices" to the producers. See 7 U.S.C. § 602(1), (4) (declaration of Congressional policy). In the special case of milk, Congress had to recognize that the milk used by handlers to satisfy the relatively inelastic demand for fluid or drinking milk historically had commanded a higher price for producers than the milk the handlers used to make butter, cheese and other dairy products. Indeed, it was producer competition for the higher valued fluid handler outlets in a time of falling prices, worsened by the oversupply of milk during the spring and summer months when cows are more productive, that precipitated Congressional action.

 To eliminate harmful price competition, Congress decided to ensure that producers would share evenly in the higher and lower valued sales of milk to handlers by providing a method for fixing a uniform blend price which handlers pay producers for all milk they have received, regardless of the actual use to which a particular producer's milk is put. The Act also authorizes the Secretary to establish "use classifications" for classifying milk according to how handlers "use" it, and handlers are required to account and pay for their disposition of producer milk within such classifications. Milk used as fluid, drinking milk, is classified and priced in Class I. Milk used to produce other dairy products is put in one or more lower classes. Currently in Order 2 there is a single Class II; formerly there were four or five classes, and further price subdivisions within each class. Essentially, the uniform blend price is arrived at by dividing the total volume of milk producers have sold to handlers by the combined total dollar volume of Class I and Class II handler dispositions.

 During each accounting period handlers pay producers for the milk on receiving it, based upon the handlers' estimates of how much milk they will use in Class I or Class II. Since the estimates typically exceed or fall below a handler's actual utilization of milk in the various classes, at the close of an accounting period the handlers contribute or withdraw further sums from an equalization pool, the producers settlement fund, to equalize their net payments to producers based upon their actual utilization.

 Handlers must account and pay for all milk they receive from producers. All federal milk marketing orders accordingly provide for the classifying and accounting of milk shrinkage, which for purposes of this proceeding refers to the volume of milk lost after its receipt from producers by reason of adhesion, evaporation and spillage during transportation, processing and laboratory testing, and also milk returned to handlers from retail outlets and dumped by them. See Vol. 9, Doc. 105, Transcript of Oral Argument before Judicial Officer, 116, 120. Shrinkage essentially is milk which handlers must purchase without receiving a direct return. An order's classification scheme determines in which class, and therefore the price at which handlers must account and pay for shrinkage. Immediately prior to amendments effective Nov. 1, 1977 and March 1, 1979, see 42 Fed. Reg. 41582, 41597-98 (1977); 43 Fed. Reg. 57914 (1978), Order 2 treated shrinkage in the following manner:

"Shrinkage shall be classified at each plant or unit as follows:
(a) Compute the total shrinkage of skim milk and butterfat respectively at each plant or unit.
(b) Such shrinkage shall be assigned pro rata to classes of use in accordance with the respective volumes of skim milk and butterfat actually accounted for in each class: Provided, That shrinkage assigned to Class II shall not exceed 2 percent of the skim milk and butterfat, respectively, in such class actually accounted for and any excess thereof shall be classified as Class I-A." 7 C.F.R. § 1002.42 (1975).

 Plaintiffs handle Class I milk almost exclusively, and thus under Order 2 were required to account for shrinkage losses at the higher Class I price. Consequently, they almost always contributed rather than withdrew balancing amounts from the equalization pool. More importantly, plaintiffs considered themselves at a competitive disadvantage with handlers in other marketing areas, especially those in the bordering Middle Atlantic Order 4. In that area and more than 70 other milk marketing order areas a stated percentage, typically two percent, of the monthly inventory of producer milk receipts could be classified and accounted for as shrinkage in the lowest use classification, regardless of the handler's actual dispositions or classes of use, although shrinkage above the allowed percentage would be allocated to Class I, again regardless of actual use.

 This suit had its genesis over a decade ago when plaintiff Oak Tree Farm Dairy, Inc. ("Oak Tree") petitioned the Secretary for a hearing under 7 U.S.C. § 608c(15)(A), seeking review of the validity of Order 2's shrinkage provisions. Following a hearing and subsequent dismissal of the petition by the Secretary's Judicial Officer, *fn2" review was sought in this Court under 7 U.S.C. § 608c(15)(B). As already noted, Oak Tree I resulted in a remand of the case for further administrative proceedings. The Court then concluded that this was required because the administrative record contained only "fleeting and conclusory" references to the two main issues formulated on Oak Tree's appeal. These were (1) whether as a matter of statutory construction the Act precluded the Secretary from classifying shrinkage in the highest "use" classification because shrinkage as such has no "value" for a handler, and (2) whether, under 7 U.S.C. § 608c(4) and (11), and the Administrative Procedure Act, 5 U.S.C. § 557(b), the Secretary improperly failed to make adequate findings and conclusions, including whether it was necessary to treat shrinkage differently under Order 2 than under other milk marketing orders.

 After the remand order, Oak Tree sought by a "supplemental" petition to broaden its attack on § 1002.42 by including for review the record underlying the Secretary's decision published at 36 Fed. Reg. 17580 (Sept. 2, 1971), which had denied after formal rulemaking proceedings the petition of several handlers to amend the Order 2 shrinkage provision to conform it to that in the neighboring Middle Atlantic Order, Order 4, 7 C.F.R. §§ 1004.41(b), 1004.42 (1970). Twelve other handlers, the remaining plaintiffs in the present actions, filed similar review petitions under § 608c(15)(A), which then were consolidated and included for review before an Administrative Law Judge ("ALJ") with Oak Tree's remanded petition. Oak Tree and two of the new petitioners requested class action treatment for the common issues of the validity of the shrinkage provision and monetary relief.

 In Oak Tree I, 390 F. Supp. at 856 n.6 and 860 n.16, the Court had suggested that full determination of the validity of Order 2's almost unique treatment of shrinkage might require review of numerous sets of administrative findings made over the years with respect to the challenged provisions. Relevant portions of prior rulemaking proceedings pertaining to shrinkage relied upon by the parties were annexed as exhibits to their briefs before the ALJ.

 These show, in brief, that the method of shrinkage treatment complained of originated when Order 2's predecessor, Order 27, was first promulgated for the New York marketing area in 1938 and that it was continued in 1944 when extensive amendments were instituted, including one permitting up to five percent shrinkage (as determined by the market administrator) to be accounted for in each of numerous different plant operations required to process a particular product. In 1968 the handlers were required to account for milk on the basis of both butterfat and skim milk content, rather than butterfat alone as under previous Order provisions. In conjunction with this change, the Secretary eliminated loss allowances for specific operations, lowered the limit on permissible shrinkage to two percent for the remaining relevant handling operations, and retained the principle of allocating shrinkage according to the handler's actual classes of use. Finally, it appears that Order 2's treatment of shrinkage was retained in 1971 when the Secretary denied the petition of several handlers to conform it to Order 4's method by eliminating the rule requiring allocation to the actual classes of use.

 After holding a hearing at which the plaintiffs introduced expert testimony as to the meaning of "use classification," and the parties stipulated as to the composition of the record and the issues for review, the ALJ invalidated the shrinkage provisions, fundamentally because the 1968 changes had made Order 2's treatment of shrinkage "entirely different" without substantial evidentiary support in the record, and because the Secretary had failed adequately to rule on exceptions to the recommended decision, which had objected that no witness supported the precise changes instituted. See Vol. 6, Doc. 83 at 69-70, 86. The ALJ further ruled that the 1971 record and Secretary's decision did not remedy the deficiencies of the 1968 proceedings. Id. at 89. Nevertheless, the ALJ denied monetary recovery on the ground that the "catch-all" classification provision, 7 C.F.R. § 1002.42(a)(3) (1976), required classification of the shrinkage in Class I. Vol. 6, Doc. 83 at 75, 89.

 On cross-appeals by the Secretary and the plaintiffs, the Judicial Officer reversed the ALJ. He held that the classification of shrinkage by allocating it pro rata to the classes of use according to the volumes of milk actually accounted for in those classes was authorized by the Act and supported by sufficient evidence when the regulation was first promulgated in 1938. He further ruled that the continuation of this classification of shrinkage, following the rulemaking proceedings in 1944 and 1968, did not require substantial support in those hearing records, since the continuation of a provision is not an order or amendment subject to the requirements of 7 U.S.C. § 608c(4), but that the continuations, nonetheless, were supported by substantial record evidence. With respect to the 1968 and particularly the 1971 hearings, at which proposals were made to conform Order 2 shrinkage treatment to the method followed in other orders, the Judicial Officer held that the Secretary possessed complete, and unreviewable, discretion whether or not to amend an order, even where the record adequately supported doing so, which the Judicial Officer believed the 1968 record, at least, did not.

 In addition, the Judicial Officer held that the Act in 7 U.S.C. § 608c(11)(C) did not require uniform order provisions for different marketing areas where there were no differences in production or marketing conditions, implicitly rejecting this Court's suggestion in Oak Tree I that findings supported by hearing record evidence were required under this portion of the Act to explain why different provisions were promulgated. See 390 F. Supp. at 859-60. He also affirmed the ALJ's denial of class treatment for the claims and indicated disagreement with the ALJ's application of the catch-all provision.

 In the present review proceedings plaintiffs have again pressed for class action treatment of their claims. Their request must be denied. The proposed class includes handlers who did not exhaust their available administrative remedies. Since district court jurisdiction under 7 U.S.C. § 608c(15)(B) exists only to review final rulings by the Secretary upon particular petitions submitted by individual handlers under § 608c(15)(A), the Court lacks jurisdiction to entertain unexhausted claims of other handlers. See Weinberger v. Salfi, 422 U.S. 749, 763-64, 45 L. Ed. 2d 522, 95 S. Ct. 2457 (1975). *fn3"

 Substantively, in contending that the Secretary's decision upholding former § 1002.42 is not in accordance with law and should not be sustained, plaintiffs argue first, as in Oak Tree I, that Congress, by authorizing the classification of milk "in accordance with the form in which or the purpose for which it is used," and the establishment of "use classifications" for the fixing of minimum prices, 7 U.S.C. § 608c(5)(A), intended a system of classification by "value." They argue that the words "used" and "use" in the statutory provision authorizing classification embody the concept of "sales value," and further, that such classification by value precludes classifying shrinkage in any but the lowest use classification.

 Second, plaintiffs argue that insufficient evidence and findings supported the Secretary's initial decision to include the challenged provision in Order 2's predecessor, and that this defect was not cured in subsequent rulemaking proceedings. They also contend that the action of the Secretary in not amending but continuing the same treatment of shrinkage in 1968 and 1971 was not in accordance with law because it was unsupported by necessary findings and hearing record evidence. Also in dispute is whether plaintiffs may recover any monetary relief in this Court if the Secretary's decision is overturned.

 Plaintiff Oak Tree originally commenced this litigation primarily to change the treatment of shrinkage in Order 2 to conform to its treatment in other federal orders. That goal was accomplished in the course of the remand proceedings after Oak Tree I by the successive 1977 and 1979 amendments to Order 2, referred to supra. The validity of Order 2's prior treatment of shrinkage remains at issue, therefore, only to determine the plaintiffs' claims to recover alleged overpayments for shrinkage through February 1979.


 The threshold question here is the proper interpretation of the statutory language under which the Secretary issued the challenged provision. "In the case of milk and its products," 7 U.S.C. § 608c(5), Congress authorized the Secretary to issue, in the manner prescribed by § 608c(1), (3), (4), marketing orders containing only specified terms, including

"classifying milk in accordance with the form in which or the purpose for which it is used, and fixing, or providing a method for fixing, minimum prices for each such use classification which all handlers shall pay, and the time when payments shall be made, for milk purchased from producers or associations of producers." Id. § 608c(5)(A).

 In construing Congress' delegation of power to the Secretary to classify milk, it is common ground for the parties that the volume of milk handlers must account and pay for includes whatever amount of shrinkage occurs in the handlers' operations. The issue dividing them is whether the grant of authority quoted above permits the Secretary to classify shrinkage in the highest use classification.

 Plaintiffs have advanced a technical and narrow interpretation of the Secretary's authority. As noted, they argue that the Secretary is empowered to classify milk only according to its value. Since the value of milk varies with its use by the handler, they urge that the core of "use classification" and therefore the most significant "value factor" under the statute, is the sales value of the milk to a handler.

 Plaintiffs point to numerous instances where the Supreme Court and lower courts have explained the operation of the "use classification" system by reference to the fundamental fact that, broadly viewed, the value of milk varies with its "use" for fluid or manufacturing purposes. Furthermore, at the hearing on remand, they adduced expert testimony to show that before the Act was passed, some producer cooperatives -- from whom, the legislative history indicates, Congress openly borrowed the use classification system -- and other contemporaneous and later authorities understood that the Class I price was reserved solely for the volume of milk actually sold in Class I, with shrinkage therefore relegated to a lower price class. Plaintiffs underscore the significance of the foregoing by reference to part of the legislative history which reveals Congress' intent that the Secretary adopt "terms [which] follow the methods employed by [producer] cooperatives" prior to the Act. S.R. No. 1011 (74th Cong., 1st Sess.), at 9.

 Plaintiffs thus interpret the statute to permit the Secretary to classify as Class I only milk that could have a sales value to the handler. Since it is undisputed that shrinkage has no actual Class I (or, indeed, any) sales value, plaintiffs conclude that it cannot be placed in Class I, and therefore the shrinkage provisions which classify it as such, rather than as the lowest Class, are not authorized by the Act. Plaintiffs' attack on the provision is summarized in their characterization of it as "an irrebuttable presumption that all shrinkage is a volume of milk marketed in the highest valued Class I" (Oak Tree Br. at 27), which, they contend, is an unsupportable interpretation of the statute.

 The Secretary, on the other hand, interprets his statutory grant of power to classify milk as authority to select a method, not inconsistent with the declared purposes of the Act, by which a value may be assigned to something which concededly earns no return but which handlers must account for in paying producers for milk received. He does not dispute that all shrinkage, even that of exclusive Class I handlers, may be assigned automatically to the lowest use class, for example, to maintain an equitable inter-order competitive relationship as was the case when Order 2 was modified effective 1979. See 43 Fed. Reg. at 57915 (1978). Indeed, every milk marketing order currently classifies up to two or three percent shrinkage in the lowest class. He maintains, however, that shrinkage legitimately and "with equal logic" can be classified in accordance with the classes for which a handler has used the milk, and be allocated to those classes in proportion to the respective volumes of milk utilized in those classes.

 The Secretary defends his position primarily through an appeal for deference to his interpretation. He argues that it reflects a reasonable construction of the language Congress used. By contrast, he points out that logically plaintiff's position would require invalidation of all shrinkage provisions that allocate shrinkage above the stated percentage to Class I.

 On the matter of deference, the Secretary emphasizes that the interpretation he defends was both contemporaneous and longstanding, and that administration of the Act is his responsibility. The challenged "pro rata" principle was part of the original New York marketing order promulgated in 1938 soon after passage of the Act, and necessarily the Secretary then interpreted § 608c(5)(A) to permit classification of shrinkage in accordance with the actual classes and volumes of milk used. Moreover, the principle went unchallenged for over thirty years, until Oak Tree commenced the prior review proceedings.

 Familiar principles of statutory interpretation thus seem to support the Secretary's claim to deference to his interpretation. A typical statement is the following passage from Udall v. Tallman, 380 U.S. 1, 16, 13 L. Ed. 2d 616, 85 S. Ct. 792 (1965):

"When faced with a problem of statutory construction, this Court shows great deference to the interpretation given the statute by the officers or agency charged with its administration. 'To sustain the Commission's application of this statutory term, we need not find that its construction is the only reasonable one, or even that it is the result we would have reached had the question arisen in the first instance in judicial proceedings.' . . . 'Particularly is this respect due when the administrative practice at stake "involves a contemporaneous construction of a statute by the men charged with the responsibility of setting its machinery in motion, of making the parts work efficiently and smoothly while they are yet untried and new."'" (Citations omitted.)

 See also, e.g., Mazer v. Stein, 347 U.S. 201, 213, 98 L. Ed. 630, 74 S. Ct. 460 (1954); Norwegian Nitrogen Co. v. United States, 288 U.S. 294, 315, 77 L. Ed. 796, 53 S. Ct. 350 (1933).

 However, as Justice Harlan has emphasized, even in the complicated area of milk regulation, the judiciary "may not . . . abdicate its ultimate responsibility to construe the language employed by Congress." Zuber v. Allen, supra, 396 U.S. at 193. An agency's contemporaneous construction of its own enabling legislation "is only one input in the interpretational equation," whose import is greatest "when the administrators participated in drafting, and directly made known their views to Congress in committee hearings." Id., 396 U.S. at 192. Appropriate guidance for determining the significance to be accorded the Secretary's interpretation is furnished by Skidmore v. Swift & Co., 323 U.S. 134, 140, 89 L. Ed. 124, 65 S. Ct. 161 (1944), in a passage quoted with approval in General Electric Co. v. Gilbert, 429 U.S. 125, 141-42, 50 L. Ed. 2d 343, 97 S. Ct. 401 (1976):

"We consider that the rulings, interpretations and opinions of the Administrator under this Act, while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance. The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control."

 To demonstrate the reasonableness of his interpretation, the Secretary begins with the statute's express authorization to classify milk, and therefore shrinkage, upon either of two grounds, "according to the form in which, or the purpose for which, it is used." The Secretary first reasons that the shrinkage provision may be sustained because it merely classifies milk "in accordance with the form in which . . . it is used." He defends this interpretation of his statutory authority as a straightforward application of the plain meaning of the statute. See Govt. Br. at 15, quoting Vol. 6, Doc. 101 at 14, citing Queensboro Farms Products, Inc. v. Wickard, 137 F.2d 969, 975-77 (2d Cir. 1943).

 The ordinary meaning attributable to this language clearly supports the Secretary's position. Definitions 3 and 4 of the verb "use" in Webster's New International Dictionary 2524 (3d ed. 1971) *fn4" amply bear out Judge Learned Hand's observation in dissent in the Queensboro case, that it is "exactly fitted to express the form in which [milk] was marketed for consumption, or lost its identity as a raw product." 137 F.2d at 183. Although Judge Hand was not writing for the court, there is every reason to believe, as he clearly assumed they did, that the majority agreed that marketing and processing could be distinct, operative events for classifying milk according to its form at those junctures, as ...

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