Dean Foods Co. v. Brancel

• Decision Date: 03 August 1999
• Docket Number: No. 98-3797,98-3797
• Citation: 187 F.3d 609
• Parties: (7th Cir. 1999) Dean Foods Company, Plaintiff-Appellee, v. Ben Brancel, Secretary of the Wisconsin Dept. of Agriculture, Trade and Consumer Protection, Defendant-Appellant
• Court: U.S. Court of Appeals — Seventh Circuit

Page 609

187 F.3d 609 (7th Cir. 1999)

Dean Foods Company, Plaintiff-Appellee, v. Ben Brancel, Secretary of the Wisconsin Dept. of Agriculture, Trade and Consumer Protection, Defendant-Appellant.

No. 98-3797

United States Court of Appeals, Seventh Circuit

Argued May 21, 1999

Decided August 3, 1999

Appeal from the United States District Court for the Western District of Wisconsin. No. 96-C-875-C--Barbara B. Crabb, Judge.

Before Flaum, Kanne and Rovner, Circuit Judges.

Flaum, Circuit Judge.

Dean Foods Company ("Dean Foods") sued the defendant Ben Brancel ("the Secretary") in his official capacity to prevent him from enforcing Wisconsin milk-pricing regulations against transactions Dean Foods claimed took place in Illinois. After extensive fact-finding, the district court judge granted the plaintiff's motion for injunctive relief, holding that because these transactions took place outside Wisconsin (and in Illinois), the Wisconsin regulations could not be enforced because of the Constitutional ban on extraterritorial legislation. The district court additionally suggested that the regulations likely violate the dormant Commerce Clause's restriction on statutes discriminating against interstate commerce, although it refrained from actually declaring them unconstitutional. For the reasons set out below, we reach only the extraterritoriality grounds, and affirm the district court's ruling on that basis.

Facts

Dean Foods is an Illinois milk processor which purchases raw milk from Wisconsin dairy producers for processing at its three northern Illinois plants. It buys approximately 1.07 billion pounds of milk, equaling 89% of its yearly purchases, from Wisconsin farmers. For efficiency reasons, the appellee prefers to purchase from milk producers with large herds, rather than those with fewer cows. To encourage producers to maintain larger herds, Dean Foods pays "volume premiums" to those producers supplying it with greater quantities of milk. Dean Foods is not alone in paying these premiums; generally, processors that can afford volume premiums pay them. A volume premium is a payment over and above the base price for milk, and is calculated based on the amount of milk delivered by the farmer to whom the premium is paid. For volume premium purposes, the bigger the delivery, the larger the payout. The premium is based solely on the amount of milk a producer sells to Dean Foods, and is unrelated to product quality.

The processing industry's preference for larger herds, and the incentives processors pay to encourage bigger herds, appear to have exacted a cost: the record indicates that Wisconsin has lost roughly 15,000 dairy farms in the past fifteen years. To stem this tide, the Secretary has promulgated regulations which prohibit the payment of volume premiums. See Wis. Admin. Code ATCP sec.sec. 100.98-100.987 (1996) (also referred to as the "rules" or the "regulations"). Another apparent reason for the ban on these premiums is that smaller in-state processors are less likely to be able to pay them, thus threatening their future viability. Fewer processors, according to the appellant, would reduce competition among processors and harm consumers. These rules were enacted pursuant to a Wisconsin statute first passed in 1981, which states that "no person engaged in the business of buying milk from producers . . . may discriminate between producers in the price paid for milk . . . if the discrimination injures producers," Wis. Stat. sec. 100.22(1), but which was apparently not enforced against volume premiums prior to the enactment of the 1996 regulations. The rules prohibit dairy processors from paying "unjustified" volume premiums to dairy farmers. Premiums are only justified by: 1) differences in the cost of procurement of the milk; 2) differences in the milk quality; 3) the need to meet competition; and 4) the need to comply with a federal milk marketing order. See Wis. Admin. Code ATCP sec.sec. 100.982-100.984. Under the statute, the Secretary can seek injunctions against processors who violate the regulations, and can also impose civil penalties against them. Wis. Stat. sec. 100.22 (4)-(5). A full complement of remedies to injured private parties is also available, including double damages. Id. at sec. 100.20(5).

The strengthened volume premium rules went into effect on October 1, 1996. Prior to that date, Dean Foods had only one method of obtaining raw milk from Wisconsin dairy farmers. It would hire milk haulers to collect and transport milk from farms, mostly in Janesville and Schullsburg, to its plants in northern Illinois. Under this arrangement, still in existence, Dean Foods took title to the raw milk and assumed the risk of loss as soon as its hauler picked it up in Wisconsin. The appellee owned the milk as soon as the hauler received it. Haulers sometimes commingled milk from different farms, and if the entire load became contaminated, Dean Foods would pay the farmers who sold it the non-spoiled milk.

Effective October 1, 1996, Dean Foods announced a new milk-purchasing program intended to circumvent Wisconsin's volume premium ban. Under its new program called "Option Two" (the old purchasing program is now referred to as "Option One"¹), the appellee does not accept the risk of loss until the raw milk is accepted at its Illinois plants. At Option Two's inception, Dean Foods told farmers that if they wished to sign up under the plan, the farmers would be responsible for contracting with haulers to transport the milk to its Illinois plants. Option Two participants also must pay the haulers for their services, and the program's guidelines stipulate that Dean Foods has no obligation to accept shipments of milk. If rejected for any reason, the milk remains the farmer's property.

The appellee assumed that because the sale of milk under Option Two occurred in Illinois, Wisconsin law banning payment of volume premiums would be inapplicable. Thus, while Option One participants may not receive volume premiums, farmers enrolled in the Option Two plan may. At the time of the district court's final decision, thirty-four farmers participated in the Option Two plan, including thirty from Wisconsin. Of these, twenty arranged to have haulers pick up their milk together and commingle their product. The other ten delivered their milk to Dean Foods' processing plants individually.

Dean Foods instituted a declaratory judgment action in federal district court against the Secretary in 1997, claiming that the volume premium rules violated the dormant Commerce Clause of the Constitution. The Secretary argued, among other things, that the plaintiff failed to meet Article III and prudential standing and injury-in-fact requirements because no administrative action against the appellee was impending. The district court rejected these arguments, but granted the defendant's motion for summary judgment on the grounds that the plaintiff could not prove that the regulations placed a significant burden on interstate commerce. See Dean Foods Co. v. Tracy, 990 F.Supp. 646, 649-56 (W.D. Wis. 1997).

The plaintiff's first motion for reconsideration was denied by the district court. However, on a second motion for reconsideration, the district court judge reversed herself, and granted the plaintiff's motion for injunctive relief. See Dean Foods Co. v. Brancel, 22 F.Supp.2d 931 (W.D. Wis. 1998). By this time, the Article III concerns were mooted because the Secretary formally commenced an action in Wisconsin state court to enforce its regulations against the appellee's Option Two program.² After examining the evidence, the district judge found that Option Two milk sales took place in Illinois, and therefore occurred wholly outside Wisconsin. Accordingly, she found that Wisconsin courts would not enforce an administrative action by the Secretary against Dean Foods for using Option Two to evade the ban on volume premiums. Thus, Judge Crabb issued an injunction barring the Secretary from enforcing the volume premium regulations against Option Two sales occurring wholly outside Wisconsin. The district court also found the Secretary's rules problematic because they "have the practical effect of discriminating against interstate commerce by protecting Wisconsin milk processors who do not have the resources to pay" volume premiums. Dean Foods Co. v. Brancel, 22 F.Supp.2d at 941.

The Secretary now appeals the district court's order granting injunctive relief to the plaintiff.

Analysis

Below, we address the three central issues the parties have raised. First, we analyze the Eleventh Amendment sovereign immunity defense Wisconsin offers. Second, we examine the scope of the constitutional ban on extraterritorial regulation, keeping in mind both sides' agreement that Wisconsin may not regulate commerce which occurs "wholly outside its borders." Third, we apply principles of contract law to determine where the Option Two "commerce" took place.

A.

The district court here adopted the somewhat unusual posture of putting itself in the position of a Wisconsin court because an enforcement action of the volume premium rules by the Secretary would normally occur in state court. The appellant claims that the ruling that a Wisconsin court would not apply the volume premium rules against Option Two because those sales occur outside of Wisconsin (referred to as "extraterritoriality" or "the extraterritoriality principle") violates the Eleventh Amendment of the United States Constitution.

The Eleventh Amendment is a jurisdictional bar to certain kinds of suits in federal court against a state by its own citizens or citizens of another state. See Hans v. Louisiana, 134 U.S. 1, 18 (1890). Of course, not all suits against states violate the constitution. See, e.g., College Savings Bank v. Florida Prepaid Postsecondary Educ. Exp. Bd., 119 S.Ct. 2219, 2223 (1999). Under the longstanding doctrine of Ex Parte Young, a private party can sue a state officer in...