Lamers Dairy Inc. v. U.S. Dept. of Agriculture

• Decision Date: 13 August 2004
• Docket Number: No. 03-2661.,No. 03-2308.,03-2308.,03-2661.
• Citation: 379 F.3d 466
• Parties: LAMERS DAIRY INCORPORATED, Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF AGRICULTURE, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

379 F.3d 466

LAMERS DAIRY INCORPORATED, Plaintiff-Appellant, v. UNITED STATES DEPARTMENT OF AGRICULTURE, Defendant-Appellee.

No. 03-2308.

No. 03-2661.

United States Court of Appeals, Seventh Circuit.

Argued February 10, 2004.

Decided August 13, 2004.

Appeal from the United States District Court for the Eastern District of Wisconsin, William C. Griesbach, J Robert N. Duimstra (argued), Menn, Nelson, Sharratt, Teetaert & Beisenstein, Appleton, WI, for Plaintiff-Appellant in Nos. 03-2308-03-2661.

Jeffrey Clair (argued), Department of Justice, Civil Division, Washington, DC for Defendant-Appellee in No. 03-2308.

Michelle L. Jacobs, Office of the United States Attorney, Milwaukee, WI, for Defendant-Appellee in No. 03-2661.

Before RIPPLE, ROVNER and DIANE P. WOOD, Circuit Judges.

RIPPLE, Circuit Judge.

Lamers Dairy ("Lamers") sought an exemption from Milk Marketing Order No. 30, promulgated under the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. § 601 et seq. After the Secretary of the United States Department of Agriculture ("the USDA") denied the petition in a final administrative order, Lamers sought review in the district court. The USDA counterclaimed for enforcement of the Secretary's decision and for a judgment against Lamers in an amount equal to the unpaid monetary assessments due under the terms of the marketing order. The district court granted summary judgment to the USDA on Lamers' complaint and on the USDA's counterclaim. It ordered further proceedings on the amount due. Subsequently, the district court denied a motion for reconsideration by Lamers and entered an amended judgment awarding the Government $850,931.26. Lamers appeals. For the reasons set forth in the following opinion, we affirm the judgment of the district court.

I BACKGROUND

A. Facts

Lamers Dairy, a Wisconsin family-operated dairy, has as its principal business the handling and packaging of fluid milk. In this appeal, Lamers challenges aspects of the federal milk-marketing regulatory scheme. To understand the nature of Lamers' challenges, we must discuss briefly the dairy industry and the regulatory and market forces governing it.¹

1. The Dairy Industry

In the dairy industry, dairy farmers, also referred to as "producers," produce and sell raw milk to "handlers." Handlers, in turn, prepare the milk product for resale to consumers or serve as intermediaries to those who do. Consumer dairy products, such as fluid milk beverages, ice cream and cheese, can all be produced from "Grade A" or "fluid grade" raw milk.² In the consumer market, however, milk beverages generally command a higher price than non-fluid products, which are known also as "manufactured dairy products." For this reason, the market into which dairy farmers sell their product more highly values (and pays a premium price for) Grade A milk ultimately used to produce beverage milk. This market premium based on end use creates an incentive among producers to divert their Grade A product to fluid milk handlers.³ Were this incentive not controlled, lower market prices would result, harming milk production revenues.⁴

The dairy industry also is characterized by daily and seasonal fluctuations in supply and demand. Consumer demand fluctuates significantly on a daily basis, primarily due to consumer buying patterns; milk production, on the other hand, is relatively constant on a daily basis. Conversely, milk production varies seasonally based on the animals' nutritional health. In fall and winter months, less milk is produced, but in spring and summer months, more milk is produced. To meet consumer demand in the winter, producers must maintain large herds; these same herds over-produce in the summer. Given milk's perishable quality, the supply must go to market at least every other day. Historically, handlers were thus able to obtain summer supplies at bargain prices.

2. The Regulatory Scheme

In the wake of the Great Depression, in an attempt to address these unique industry characteristics, Congress enacted various provisions governing the dairy industry as part of the Agricultural Marketing Agreement Act of 1937 ("the AMAA"). A driving purpose of the AMAA was "to remove ruinous and self-defeating competition among the producers and permit all farmers to share the benefits of fluid milk profits according to the value of goods produced and services rendered." Zuber v. Allen, 396 U.S. 168, 180-81, 90 S.Ct. 314, 24 L.Ed.2d 345 (1969). The AMAA, as amended, thus ensures that producers receive a uniform minimum price for their product, regardless of the end use to which it is put.

To accomplish this objective, the statute contains several mechanisms. First, it authorizes the Secretary to classify milk according to its end use and to establish minimum prices for each end-use classification. See 7 U.S.C. § 608c(5)(A). Second, it authorizes the Secretary to establish a uniform minimum price, termed the "blend price," based on a weighted average of all units of production of classes of milk sold to handlers associated with a marketing area. See id. Third, it requires handlers to pay producers the blend price, regardless of the end use to which the milk will be put. See id. § 608c(5)(B). Fourth, it authorizes a method for adjustments in payments among handlers so that the final amount paid by each handler equals the value of the milk that handler has purchased, according to the minimum prices established. See id. § 608c(5)(C). Overall, the provisions attempt to promote orderly milk-marketing by maintaining minimum prices for producers and limiting the competitive effects of excess supply of Grade A milk.

Although it protects producers, the AMAA regulates handlers only. Pursuant to the AMAA directives, the Secretary has classified milk into the following classes of utilization: Class I milk includes fluid milk processed and bottled as a beverage; Class II milk includes soft milk products such as cottage cheese, sour cream, yogurt and ice cream; Class III includes hard cheese and cream cheese; and Class IV includes raw milk used for butter and dry milk powder. As directed by the AMAA, the Secretary has established a uniform pricing scheme for each of these classes of milk, as well as the average blend price.⁵ Handlers governed by milk-marketing orders must pay producers this uniform blend price. The process of blending the prices of the different classes of milk on a monthly basis has come to be known as "pooling."

This uniform minimum pricing is intended to reduce the incentive producers would have to divert all fluid milk to Class I handlers and, literally, to flood that market. As the system operates, dairy producers within a marketing area receive the guaranteed uniform blend price for their milk, regardless of the end use to which it is put. Because the uniform price is a weighted average, some handlers pay producers less for their milk than its market worth while other handlers pay more. Handlers who pay less to producers must make compensating payments into the producer settlement fund while handlers who pay more to producers may withdraw compensating payments from the fund.⁶ Thus, within the regulatory scheme, handlers ultimately pay an amount equal to the utilization value of the milk they purchase.⁷ This simplified example of the regulatory scheme by the district court for the District of Connecticut is helpful:

Suppose Handler A purchases 100 units of Class I (fluid) milk from Producer A at the minimum value of $3.00 per unit. Assume further that Handler B purchases 100 units of Class II (soft milk products) milk from Producer B at the minimum value of $2.00 per unit, and that Handler C purchases 100 units of Class III (hard milk products) milk from Producer C at $1.00 per unit. Assuming that this constitutes the entire milk market for a regulatory district, during this period the total price paid for milk is $600.00, making the average price per unit of milk $2.00. Thus, under the regulatory scheme, Producers A, B, and C all receive $200.00 for the milk they supplied, irrespective of the use to which it was put. However, Handler A must, in addition to the $200.00 that it must tender to Producer A, pay $100.00 into the settlement fund because the value of the milk it purchased exceeded the regulatory average price. Along the same vein, Handler C will receive $100.00 from the settlement fund because it will pay Producer C more than the milk it received was worth.

Stew Leonard's v. Glickman, 199 F.R.D. 48, 50 (D.Conn.2001). The system of compensating payments into and out of the settlement fund thereby fulfills the AMAA requirement that "the total sums paid by each handler shall equal the value of the milk purchased by him at the prices fixed." 7 U.S.C. § 608c(5)(C).

The country is divided into regional milk-marketing areas, which are governed by different marketing orders. Milk Marketing Order No. 30 governs the Upper Midwest marketing area, including portions of Illinois, Iowa, Michigan, Minnesota, North Dakota, South Dakota and Wisconsin. As a Wisconsin dairy that bottles milk for fluid consumption, Lamers is subject to regulation under Milk Marketing Order No. 30 as a Class I handler.

3. Price Inversions

As discussed, Class I prices are generally higher than Class III prices. Thus, the blend price usually falls above the Class III price, and Class III handlers typically are entitled to withdraw compensating payments from the settlement fund after paying producers the blend price. However, occasionally, periods of "price inversion" occur,⁸ in which Class III prices exceed Class I prices. Price inversions occur in part because of differences in how and when classes of milk are priced. Class I milk prices are set prospectively while Class III and IV prices are set retrospectively, based on actual market prices during the pertinent time period. The USDA has explained:

Class price inversion occurs when a markets's [sic] regulated price for milk used...