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FARMLAND DAIRIES v. MCGUIRE

April 14, 1992

FARMLAND DAIRIES, FAIRDALE DAIRIES, INC. and FAIRLAWN DAIRIES, INC., Plaintiffs, against RICHARD T. McGUIRE, as Commissioner of the New York State Department of Agriculture and Markets, Defendant. LEHIGH VALLEY DAIRIES, INC. JOHANNA FARMS, INC., JOHNSTOWN SANI-DAIRY, a Division of Penn Traffic Co., and TUSCAN DAIRY FARMS, INC. Plaintiffs, -against- RICHARD T. McGUIRE, as Commissioner of the New York State Department of Agriculture and Markets, Defendant.


The opinion of the court was delivered by: ROBERT P. PATTERSON, JR.

OPINION AND ORDER

 ROBERT P. PATTERSON, JR., U.S.D.J.

 Plaintiffs bring these actions for declaratory and injunctive relief under 42 U.S.C. § 1983 and the Commerce Clause of the United States Constitution, Article I, Section 8, Clause 3. Plaintiffs also seek an award of attorneys fees, pursuant to 42 U.S.C. § 1988, and costs. Plaintiffs, milk dealers who are licensed to sell milk in New York and whose milk processing plants are located out of state, challenge New York's implementation of 1991 N.Y. Laws ch. 84. That statute provides for the establishment of interim minimum prices for milk produced in New York and for the establishment of compensatory payment mechanisms to equalize the costs to dealers of supplying Class I milk in New York. Both complaints aver that the portion of the statute requiring compensatory payments, and its implementation pursuant to orders of the Commissioner of the New York State Department Agriculture and Markets ("the Commissioner"), violate the Commerce Clause. Plaintiff Tuscan Dairy Farms, Inc. also alleges that New York's requirement that it pay the New York minimum price for New York milk it purchases F.O.B. its New Jersey plant violates the Commerce Clause. Defendant has filed counterclaims alleging that Plaintiffs owe, and have not paid, compensatory payments under the Commissioner's orders and requesting a money judgment in an amount equal to Plaintiffs' alleged obligations, with interest. Plaintiffs have moved for summary judgment. For the reasons set forth below, Plaintiffs' motions are granted in part denied in part, and Defendant's counterclaims as to the compensatory payments are dismissed.

 BACKGROUND

 1. The Parties

 Defendant Richard T. McGuire is the Commissioner of the New York State Department of Agriculture and Markets (the "Department"). *fn1" The Department is the state administrative agency that, inter alia, is charged with the regulation of the milk industry in New York.

 Plaintiff Farmland Dairies is a milk processing company. Plaintiffs Fairdale, Inc. and Fairlawn Dairies, Inc. are wholly owned subsidiaries of Farmland Dairies. (The three companies are referred to herein collectively as "Farmland.") Farmland Dairies and Fair lawn are incorporated in New Jersey, and Fairdale is incorporated in Pennsylvania. All three companies have their principal place of business in Wallington, New Jersey. Fairdale purchases raw milk from dairy farmers in New York, New Jersey, and Pennsylvania. Farmland Dairies processes milk at its plant in New Jersey, and both Farmland Dairies and Fairlawn sell the finished products to retail outlets on the east coast of the United States, including in the state of New York. The Commissioner has required that Farmland make compensatory payments to an equalization fund established by the Commissioner ("the Equalization Fund") with respect to Farmland's non-New York Class I milk distributed and sold in New York. *fn2" Goldman Aff. PP2-4.

 Plaintiff Lehigh Valley Dairies, Inc. ("Lehigh Valley") operates a milk processing plant in Schuylkill Haven, Pennsylvania. It purchases raw milk at its Schuylkill Haven plant from non-New York farmers. It has been shipping milk for Class I distribution into New York State since 1984. The Commissioner has required that Lehigh make compensatory payments to the Equalization Fund for Lehigh Valley's non-New York Class I milk shipped into New York. Cowan Aff. PP2-5.

 Plaintiff Johnstown Sani-Dairy ("Johnstown") operates a milk processing plant in Johnstown, Pennsylvania. It purchases raw milk at its Johnstown plant from non-New York farmers. It has been shipping milk for Class I distribution into New York State since 1986. The Commissioner has required that Johnstown make compensatory payments to the Equalization Fund for Johnstown's non-New York Class I milk shipped into New York. Wagner Aff. PP2-5.

 Plaintiff Johanna Farms, Inc. ("Johanna") operates a milk processing plant in Flemington, New Jersey. Johanna purchases raw milk from non-New York farmers. Johanna periodically sells a portion of this raw milk to other milk dealers and ships it to plants operated by these dealers in New York State. The Commissioner has required that dealers purchasing Johanna's raw milk make compensatory payments to the Equalization Fund for Johanna's non-New York Class I milk shipped into New York. Burns Aff. PP2-5.

 Plaintiff Tuscan Dairy Farms, Inc. ("Tuscan") operates a milk processing plant in Union, New Jersey. It purchases milk from farmers located in Pennsylvania, New Jersey, and New York and has been shipping milk for Class I purposes into New York State since 1987. Pursuant to a contract that has been in effect since 1978, Tuscan purchases some milk originating on New York farms from Dairylea, Inc., a farmers' cooperative, F.O.B. Tuscan's plant in New Jersey. The Commissioner has required that Tuscan pay to Dairylea the New York State minimum price for the New York milk purchased in New Jersey. The Commissioner has also required that Tuscan make compensatory payments to the Equalization Fund for the non-New York Class I milk shipped by Tuscan or its customers (independent distributors) into New York. Demeter Aff. PP2-5, 7-8.

 2. The Federal Milk Regulatory System

 Since 1937, the handling of milk has been extensively regulated by the federal government pursuant to 7 U.S.C. § 608c and the regulations promulgated thereunder, 7 C.F.R. ch. X. Pursuant to § 608c, the United States Secretary of Agriculture has designated milk marketing areas in which regulations establish orderly marketing conditions and minimum prices for milk purchased from dairy farmers in each area. Each such milk marketing area is governed by a separate federal order. The relevant milk marketing area in this case, the New York-New Jersey Marketing Area, is governed by Federal Order 2. 7 C.F.R. pt. 1002.

 Federal milk marketing orders classify milk according to the form in which or purpose for which it is used. 7 U.S.C. § 608c(5)(A). Most federal milk marketing orders, including Federal Order 2, divide milk into three classes: Class I primarily includes beverage milk, Class II includes fluid cream items and soft milk products such as yogurt and cottage cheese, and Class III includes hard milk products, such as butter and hard cheese. 56 Fed. Reg. 5308 (1992) (amending 7 C.F.R. § 1002.41). Each class is assigned a specific minimum price, with Class I having the highest, Class II the intermediate, and Class III the lowest price.

 The Federal Order 2 regulations governing the pricing of milk and the payments to be made for milk are complex, but essentially operate as follows. Milk pricing within the New York-New Jersey Marketing Area is performed by the federal market administrator, who computes a "Uniform Price," which is a weighted average price based on total sales of Class I, Class II, and Class III milk. 7 C.F.R. § 1002.71. Dealers are required to pay at least the Uniform Price to farmers. If a dealer sells milk for Class I purposes, the dealer is required to pay into a "Producer Settlement Fund" the difference between the Uniform Price paid to the farmer and the higher Class I established minimum price. If the dealer sells milk for Class II or Class III purposes, the dealer receives a reimbursement or credit from the Producer Settlement Fund equal to the difference between the Uniform Price paid to farmers and the lower Class II and Class III established minimum prices. Whether the dealer receives a reimbursement or makes a payment depends on the net differential between the two computations. Thus, all farmers providing milk in a federal market area receive the Uniform Price for their milk, while each dealer, by virtue of payments to or receipts from the Producer Settlement Fund, incurs net costs equal to the total assigned class prices in the market area of the Class I, Class II, and Class III milk that the dealer purchases.

 3. The New York Milk Regulatory System3

 The dairy industry is also regulated within New York State under provisions of the New York State Agriculture and Markets Law ("the Rogers-Allen Act" or "the Act"), enacted in 1937. N.Y. Agric. & Mkts. Law §§ 258-k-258-n (McKinney 1991). Section 258-m of the Act grants the Commissioner, upon petition of dairy farmers, the authority to establish marketing orders within New York following a public hearing. Id. § 258-m(1). The petition is presented by a farmers' bargaining agency that represents at least thirty-five percent of the dairy farmers in the market area. Id. If after the hearing the Commissioner finds that conditions in the market require the setting of prices, and if it is favored by at least sixty-six and two-thirds percent of the dairy farmers in the market area, the Commissioner may by order fix and determine for the marketing area fair and equitable minimum prices to be paid to dairy farmers. *fn4" Id.

 On February 13, 1991, the Regional Cooperative Bargaining Agency ("RCBA"), an association of dairy farmers and dairy cooperatives, petitioned the Commissioner pursuant to the Rogers-Allen Act, requesting a hearing to consider the adoption of a statewide milk marketing order that would establish minimum prices for Class I, Class II, and Class III milk sold by New York dairy farmers above the minimum prices established by then existing federal and state milk marketing orders. The Commissioner granted the RCBA's request and scheduled a hearing.

 On May 1, 1991, while the hearing was in process, the New York Legislature enacted a change to the Rogers-Allen Act, amending the procedure for the determination of state-established minimum producer milk prices ("the amendment"). The Legislature found that "the continued production of milk in the state is threatened by a rapid decline in the prices paid to farmers for milk [and that this] substantial decrease in farm price has not been reflected in reduced costs to consumers." 1991 N.Y. Laws ch. 84, § 1. Declaring that "an emergency exists at the present time which requires the adoption of urgent measures" and that "the time required to complete the process set out in § 258-m of the agriculture and markets law is excessive to meet the legitimate needs of the parties to this process," the Legislature sought to expedite that process. Id. Accordingly, the amendment requires the Commissioner to set, without a hearing, an interim price for Class I milk purchased from New York farmers within five days of the receipt of a petition, to remain in effect for no longer than 180 days. Id. § 2. Additionally, the Commissioner is required to "provide for and enforce a mechanism for compensatory payments" and may establish and administer an equalization pool throughout the entire state or any part thereof. Id.

 Eight days later on May 9, 1991, pursuant to the Rogers-Allen Act amendment, the Commissioner issued an interim price determination and order establishing a minimum price of $ 13.85 per hundredweight for New York-produced class I fluid milk, to apply to milk sold by New York dairy farmers on or after June 1, 1991. Interim Price Determination and Order of May 9, 1991 (Newcomb Aff. in Opp. Exh. B) (hereinafter cited as "May 9, 1991 Interim Order"). This price was higher than the minimum Federal Order 2 price for Class I fluid milk, which was $ 12.46 per hundredweight for the month of June 1991. Lehigh Valley Mem. in Supp. at 10. The May 9 order required every licensed milk dealer purchasing New York-produced milk to pay at least the minimum prices set forth in the order. It also stated that "all milk produced outside New York State and distributed within the State as Class I fluid milk shall be subject to the application of a compensatory payment as the Commissioner determines necessary to equalize cost for such milk among licensed milk dealers. . . . Such prices shall be paid and payments made in accordance with the regulations promulgated by the Commissioner." Id.

 Two weeks later, on May 23, 1991, the Commissioner adopted a comprehensive interim milk pricing order, codified at N.Y. Comp. Codes R. & Regs. tit. 1, pt. 22 (1991) ("Part 22"), which provided for operation of an Equalization Fund and established a compensatory payments system. The Part 22 regulations established a method for the classification and pricing of milk, id. §§ 22.30-22.42, and for determining payments to be made by dealers, id. §§ 22.50-22.67.

 Stated in simplified form, the system, which in essence paralleled the federal system, operated as follows. In addition to the milk price received under the federal system, New York dairy farmers received an additional premium, the "Over Order Rate," calculated in a manner analogous to the Federal Order 2 Uniform Price but consisting of a weighted average of the New York "premiums" for Class I, II, and III milk over the ...


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