Tasty Baking Co. v. Cost of Living Council

• Decision Date: 22 December 1975
• Docket Number: No. 3-9.,3-9.
• Citation: 529 F.2d 1005
• Parties: TASTY BAKING COMPANY, Plaintiff-Appellant, v. COST OF LIVING COUNCIL et al., Defendants-Appellees.
• Court: U.S. Temporary Emergency Court of Appeals Court of Appeals

529 F.2d 1005

TASTY BAKING COMPANY, Plaintiff-Appellant, v. COST OF LIVING COUNCIL et al., Defendants-Appellees.

No. 3-9.

Temporary Emergency Court of Appeals.

December 22, 1975.

Robert A. Altman, Clifford, Warnke, Glass, McIlwain & Finney, Washington, D. C., with whom S. Gordon Elkins, Stradley, Ronon, Stevens & Young, Philadelphia, Pa., were on the brief, for appellant.

Barrie L. Goldstein, Dept. of Justice, Washington, D. C., with whom Rex E. Lee, Asst. Atty. Gen., and Stanley D. Rose, Atty., Dept. of Justice, Washington, D. C., were on the brief, for appellees.

Before TAMM, Chief Judge, and HASTIE and CHRISTENSEN, Judges.

TAMM, Chief Judge:

The plaintiff-appellant Tasty Baking Company by this appeal challenges the validity, as it unsuccessfully did before the district court, of several decisions and orders of the appellee Cost of Living Council ("CLC") in effect denying appellant's request for an exception from the requirements of those Phase II regulations, promulgated under the Economic Stabilization Act of 1970, as amended, 12 U.S.C. § 1904 note (Supp. III 1973), which limited its profit margin, and finding the company in violation of Phase II controls. Appellant alleges that CLC's decisions are invalid because they are arbitrary and capricious, unsupported by substantial evidence, and based on regulations promulgated without compliance with the Administrative Procedure Act. Although we agree with the trial court that the orders rest on substantial evidence, we must reverse the affirmance insofar as the orders rely on invalid regulations promulgated without proper notice several months after Phase II controls were instituted. We also deny appellee's motions to dismiss the appeal as moot and to permit the filing of a counterclaim for the reasons discussed infra.

I. Background

On November 13, 1971, two days before Phase I ended, a new set of price control regulations was issued, referred to as "Phase II." The Phase II regulations were designed "to stabilize prices and rents within the general economic stabilization goals . . " See Cost of Living Council Order No. 4, 36 Fed. Reg. 20202 (1972).

Under the Economic Stabilization Regulations in effect during Phase II, a manufacturer was permitted to "charge a price in excess of the base price . . only to the extent that the increased price does not result in an increase in its profit margin over that which prevailed during the base period." 6 C.F.R. § 300.12, 36 Fed.Reg. 23976 (1971). Similarly, a retailer or wholesaler was permitted to charge a price in excess of the base if the increased price did not "increase its profit margin over that which prevailed during the base period." 6 C.F.R. § 300.-13(a)(2), 36 Fed.Reg. 23976 (1971). Definitions of the terms "base period" and "profit margin" were contained in 6 C.F.R. § 300.5, 36 Fed.Reg. 23975 (1971) and 37 Fed.Reg. 3914 (1972):

"Base period" means any two, at the option of the person concerned, of that person's last 3 fiscal years ending before August 15, 1971, and in determining a base period for the purpose of computing a profit margin during a base period, a weighted average of its profits during the two years chosen shall be used.

"Profit margin" means the ratio that operating income (net sales less cost of sales and less normal and generally recurring costs of business operations, determined before non-operating items, extraordinary items, and income taxes) bears to net sales as supported on the person's financial statement prepared in accordance with generally accepted accounting principles consistently applied.¹

A profit margin limitation violation was deemed to have occurred if a person's profit margin for the fiscal year in which he made a charge above a base price exceeded his base period profit margin. 6 C.F.R. § 300.54, 37 Fed.Reg. 10494 (1972). If the Price Commission found that a person had violated a profit limitation it could order that person, among other things, to refund the revenues derived from the price increases above base or the dollar value of the excess profit margin, whichever was less. Id. at § 300.54(e)(1).

Under 6 C.F.R. § 300.203, 37 Fed.Reg. 20828 (1972), a person was allowed to restate accounting information for business combinations only in accordance with generally accepted accounting principles, consistently applied. Restatement of prior accounts was required for changes accounted for as a pooling of interest, a spin-off, or a split-off; the preamble to Section 300.203 also recognized that for sound business reasons a large number of acquisitions and divestitures which were not accounted for in this manner could also have substantially the same economic impact on the acquiring or divesting firm, and that if the impact of the transaction on a company's base period profit margin was substantial the difference in treatment might be inequitable in certain cases. Accordingly, the Price Commission was authorized to grant such exceptions to its regulations "as may be necessary to prevent or correct a serious hardship or gross inequity," including adjustment of a base period profit margin. 6 C.F.R. § 300.355, 37 Fed.Reg. 20829 (1972).

On October 23, 1972, appellant filed an application for exception relief alleging that a divestiture of its Potato Chip and Pretzel Division had been completed in 1970, and a divestiture of its Silver Nitrate Division, which had been commenced in October 1971, would be completed by the end of appellant's 1972 fiscal year. Appellant alleged that the operation of those divisions had a substantially depressive economic impact on its profit margins during the base period years of 1968 and 1969 and requested CLC to restate Tasty's base period profit margin from 6.64% to 7.63% to reflect the divestitures of the two divisions.

On February 5, 1973, appellee issued a decision and order which permitted appellant to restate its base period profit margin to reflect the divestiture of both the Potato Chip and Pretzel Division and the Silver Nitrate Division. That restatement, however, was to be effective only from the start of appellant's 1973 fiscal year. II J.A., Exhibit 3. On February 22, 1973, appellant filed a request for reconsideration, pointing out that the divestiture of the Potato Chip and Pretzel Division was completed in 1970, not 1972 as appellee had indicated in its February 5, 1973 decision. The appellant further indicated that restatement of its base period profit margin properly to reflect divestiture of that division alone would result in an adjusted base period profit margin of 7.26%. Upon reconsideration appellee recognized that it had made an error with respect to the date of the Potato Chip and Pretzel Division's divestiture. Accordingly, appellee granted the appellant an adjusted base period profit margin for 1972 profit margin limitation purposes to reflect that divestiture, but not the divestiture of the Silver Nitrate Division. Id., Exhibit 5. On June 22, 1973, the appellant received from CLC a notice dated June 19, 1973, which stated that a determination had been made that there was probable violation by appellant of its base period profit margin, and following review of appellant's written and oral presentation, appellee concluded that a profit margin violation had indeed occurred. On August 2, 1973, the appellee mandated price reductions to bring appellant into compliance with the Economic Stabilization Program as interpreted. The filing of this suit in the district court followed.

After the present suit was filed by appellant in the district court, the parties entered into an agreement to reopen appellant's prior unsuccessful request for exception relief. In that request, appellant asked CLC to adjust Tasty's base period profit margin beyond that previously granted for establishing a 1972 profit margin limitation from 7.26% to 7.55%. Appellant claimed that, since the base period years of 1968 and 1969 were its lowest profit margin years during the 26-year operation period (1945-1971), an adjustment to reflect a level of earnings more historically representative was necessitated. Additionally the appellant argued that the base period profit margin must be adjusted to reflect the substantial changes in business operations of its Silver Nitrate Division, an alleged switch to "tolling" practices² and the alleged decrease in the Silver Nitrate Division's dollar volume of sales.³ According to appellant, both of these factors combined to inflate artificially the appellant's actual 1972 profit margin as compared to its base period profit margin. On February 11, 1974, CLC issued a decision and order which reaffirmed the prior decision and order of April 2, 1973. Id. Exhibit 16. The district court action resumed following the February 11, 1974 order on cross-motions for summary judgment and the trial judge granted judgment in favor of defendant CLC. Tasty Baking Co. then appealed to this court. Although the original action specified a challenge to the violation order of August 2 and the exception denial of September 28, 1973, subsequent CLC orders relating to Tasty Baking Co.'s request for an exception are also at issue in this case. Also pending before us are two motions by CLC. The first sought dismissal of the appeal on mootness grounds; the second asked permission to join the United States as a party and to file an answer and counterclaim. We shall discuss these motions before evaluating the merits of appellant's claim.

II. Mootness

The first motion before us is CLC's motion to dismiss the appeal as moot.⁴ The Economic Stabilization Act expired April 30, 1974. The district court claim was filed in October, 1973, but judgment was not entered until May 30, 1975. Any discussion of mootness must necessarily begin with a close look at the saving clause of the Act and with this court's recent decisions in United States v. California, 504 F.2d 750 (Em. App.1974), cert. denied, 421 U.S. 1015, 95 S.Ct. 2423, 44 L.Ed.2d 684 (19...