Hershey Foods Corp. v. Department of Agriculture, 01-5169.

• Decision Date: 18 June 2002
• Docket Number: No. 01-5169.,01-5169.
• Parties: HERSHEY FOODS CORPORATION, Appellant, v. DEPARTMENT OF AGRICULTURE, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

293 F.3d 520

HERSHEY FOODS CORPORATION, Appellant, v. DEPARTMENT OF AGRICULTURE, Appellee.

No. 01-5169.

United States Court of Appeals, District of Columbia Circuit.

Argued April 18, 2002.

Decided June 18, 2002.

Appeal from the United States District Court for the District of Columbia (99cv02138).

Andrew G. McBride argued the cause for appellant. With him on the briefs was Eve J. Klindera. Robert M. Reese entered an appearance.

Douglas N. Letter, Litigation Counsel, U.S. Department of Justice, argued the cause for appellee. With him on the brief was Roscoe C. Howard, Jr., U.S. Attorney.

Before: SENTELLE, RANDOLPH and GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge RANDOLPH.

RANDOLPH, Circuit Judge:

Hershey Foods Corporation appeals the dismissal of its complaint seeking to vacate a portion of the Department of Agriculture's regulation establishing pricing classifications of milk used in the manufacture of milk chocolate. The district court dismissed the complaint on the ground that legislation converted the regulation into a statute, not subject to judicial review under the Administrative Procedure Act. Although we disagree with the district court in this respect, we hold that dismissal was proper because Hershey failed to exhaust its administrative remedies.

I.

The Agricultural Marketing Agreement Act of 1937 ("AMAA"), empowered the Secretary of Agriculture to regulate the sale of milk by geographic region. See 7 U.S.C. § 608c(5). Over the years, the Secretary issued many milk marketing orders, applying to different geographic regions and classifying milk according to the "form in which or the purpose for which it is used." 7 U.S.C. § 608c(5)(A). By 1998, there were thirty-one milk marketing orders in effect. See Milk in the New England and Other Marketing Areas: Proposed Rule and Opportunity to File Comments, Including Written Exceptions, on Proposed Amendments to Marketing Agreements and Orders, 63 Fed. Reg. 4802, 4805 (Jan. 30, 1998). In the Federal Agriculture Improvement and Reform Act ("FAIR Act") of 1996, Congress directed the Secretary to reduce the number of these orders to no more than fourteen, and authorized the use of informal rulemaking to expedite the process of milk marketing order consolidation. See 7 U.S.C. § 7253. In January 1998, the Department of Agriculture proposed a rule consolidating the number of marketing orders to eleven, and reconfiguring the milk pricing classification system. See 63 Fed. Reg. 4802. As promulgated, the final rule contained four milk classifications. In very general terms, Class I consisted of fluid milk; Class II, fluid milk used to produce food products such as candy; Class III, milk used to produce spreadable cheeses; Class IV, milk used to produce butter and milk products in dried form. See Milk in the New England and Other Marketing Areas; Order Amending the Orders, 64 Fed. Reg. 47,898, 47,903 (Sept. 1, 1999) ("the final rule"). The final rule's pricing formulas made Class II skim milk 70 cents more expensive per hundredweight than Class IV milk. See id. at 47,907 (to be codified at 7 C.F.R. § 1000.50(e)).

Hershey is the leading maker of milk chocolate in the United States. The company traces its beginnings to the late 19^th century when Milton S. Hershey developed a process in which fresh milk was sweetened, mixed with chocolate, and dried as the first step in making milk chocolate. Today, Hershey is the only major manufacturer of milk chocolate still using fresh fluid milk in the proprietary process developed more than a century ago. Hershey's competitors purchase their milk in dried form from independent milk drying plants. (Milk chocolate must be made with dried milk.)

When Hershey buys fluid milk to make candy, it purchases the milk at Class II prices. Hershey's competitors in the milk chocolate industry pay Class IV prices because they use dried milk. Alleging the unlawfulness of the price disparity resulting from the final rule, Hershey brought an action in district court seeking injunctive and declaratory relief.

Hershey claimed the final rule violated the Administrative Procedure Act because it was arbitrary, capricious, and contrary to the AMAA. The rule's effective date was October 1, 1999, but a federal district court in Vermont, on September 28, 1999, enjoined the Secretary from implementing the rule. See St. Albans Coop. Creamery, Inc. v. Glickman, 68 F.Supp.2d 380, 392 (D.Vt.1999). (The court called its injunction a "temporary restraining order" but it was in effect a preliminary injunction.) Two weeks later, Representative Blunt introduced a bill in the House of Representatives "to provide for the modification and implementation of the final rule for the consolidation and reform of Federal milk marketing orders." H.R. 3428, 106th Cong. (Nov. 17, 1999). Among other things, the bill called for the "final rule" to "take effect, and be implemented" with some alterations. H.R. 3428, § 1(b). Twelve days later, H.R. 3428 was "enacted into law," incorporated by reference as part of the 2000 Appropriations Act. See Pub. L. No. 106-113, § 1000(a)(8), 113 Stat. 1501, 1536-37 (1999).

On December 29, 1999, the district court here dismissed Hershey's suit without prejudice, stating that enactment of H.R. 3428 transformed the regulation into statutory law not subject to APA review. Hershey amended its complaint to include constitutional challenges to the enactment of H.R. 3428, but alternatively contended that H.R. 3428 simply implemented the rule so that Hershey could still bring suit under the APA to have it set aside. The government moved to dismiss, arguing that the regulation became law through the Appropriations Act. The Department further argued that even if it this were not the case, Hershey could not challenge the rule without first exhausting its administrative remedies under the AMAA. The district court granted the Department's motion, refusing to reconsider its determination that the enactment of H.R. 3428 converted the regulation into a statute. See Hershey Foods Corp. v. USDA, 158 F.Supp.2d 37, 37 n.1 (D.D.C.2001).

On appeal, Hershey does not press its constitutional arguments. The company argues instead that the district court erred in determining that "the rule originally challenged by [Hershey] has been enacted into law by the Appropriations Act." Id.

II.

Sections 1 and 2 of H.R. 3428, which the Appropriations Act enacted into law, deal with the rule Hershey challenged. Because of their importance to the case, both sections are quoted in their entirety in the margin.^*

There is much to be said in favor of Hershey's contention that the Appropriations Act did not convert the rule into a statute. H.R. 3428 nowhere states that the rule is enacted into statutory law. It refers instead in section 1(e) to "implementation of the final rule" and, in the same subsection, states that the "final rule" "shall not be subject to" the "notice and comment provisions" of the APA. None of this makes any sense unless what is being implemented is a rule. To state the obvious, statutes are not promulgated by agencies and they are not subject to the requirements of the APA. Section 1(e) also overrides the injunction issued in the St. Albans Creamery case. The court's order had enjoined the agency from putting its rule into effect. If H.R. 3428 meant to enact the rule as a statute this provision would have been unnecessary. The Vermont district court issued its preliminary injunction on the basis that plaintiffs' claims — that the Secretary had violated several statutory procedural requirements — would likely be successful. See St. Albans Coop. Creamery, 68 F.Supp.2d at 388-90. That reasoning, and the injunction itself, could not have prevented a statute from going into effect, if the rule were intended to be such. Furthermore, the final rule had allowed the Secretary to "suspend or terminate any or all provisions" upon a finding that any provision contravened the AMAA. 64 Fed. Reg. 47,902 (to be codified at 7 C.F.R § 1000.26(b)). Nothing in H.R. 3428 altered this aspect, as a result of which the Secretary retained the authority to modify or delete provisions in the rule. While it is not unheard of for Congress to allow an agency to modify the substantive portions of a statute, see Touby v. United States, 500 U.S. 160, 162-63, 111 S.Ct. 1752, 1754-55, 114 L.Ed.2d 219 (1991), it is far from ordinary and we would expect Congress to be more explicit than it was here if that were its intent. Cf. 21 U.S.C. § 811(a)-(c) (authorizing Attorney General to add or remove substances from the Controlled Substance Act schedule only after various steps including consultation with Secretary of Health and Human Services and notice-and-hearing provisions).

As against these considerations, the government points out that Congress, not the Secretary, decided upon the specific content of the Class I pricing differentials. This raises an obvious question: if Congress has dictated the classification scheme, how could it be arbitrary or capricious for an agency to implement Congress's choice? The government also thinks the legislature's override of the Vermont court's injunction against the Secretary would make little sense if Hershey, or anyone else, could just return to court to get a restraining order as soon as the President signed the Appropriations Act into law. (This has special force with respect to the Class I price differentials. It is hard to see why Congress would have intended the provision to be subject to judicial review under the APA immediately after enactment.) The government relies on Congress's specific action in altering one part of the rule to mean that Congress intended to enact the rest of it.

There is also the matter of section 2 of the bill, which directed the Secretary to undertake formal rulemaking on the subject of Class III and IV pricing formulas. This provision effectively removed parts of the original rule and...