Organic Cow, LLC v. Northeast Dairy Compact Com'n, 2:00-CV-267.
| Decision Date | 24 September 2001 |
| Docket Number | No. 2:00-CV-267.,2:00-CV-267. |
| Parties | THE ORGANIC COW, LLC, Appellant, v. The NORTHEAST DAIRY COMPACT COMMISSION, Appellee. |
| Court | U.S. District Court — District of Vermont |
Jane Osborne McKnight, D'Amico & McKnight, PLC, Burlington, VT, for appellant.
Richard Thomas Cassidy, Hoff, Curtis, Pacht, Cassidy & Frame P.C., Burlington, VT, Daniel J. Smith, Northeast Diary Compact, Executive Director and General Counsel, Montpelier, VT, for appellee.
Before the Court is an appeal pursuant to 7 C.F.R. § 1381.5(a) by The Organic Cow, LLC ("Organic Cow") from a final decision of the Northeast Dairy Compact Commission ("Commission") denying Organic Cow's petition for an exemption from the Commission's over-order price obligation. On a previous appeal taken by Organic Cow from the Commission's decision to deny the exemption, the Court reversed and remanded for further proceedings. See Organic Cow, LLC v. Northeast Dairy Compact Comm'n, 46 F.Supp.2d 298 (D.Vt.1999). For the reasons stated below, the second final decision of the Commission is affirmed.
Minimum milk prices nationwide are set by the Secretary of Agriculture, under the authority of the Agricultural Marketing Agreement Act of 1937. The states retain authority to establish milk prices above the federal price floor. See Milk Indus. Found. v. Glickman, 132 F.3d 1467, 1471 (D.C.Cir.1998). In 1993, the six New England states agreed to form the Northeast Interstate Dairy Compact ("Compact") in order to raise the minimum fluid milk prices that northeast dairy farmers receive. Congress consented to the Compact on April 4, 1996, based upon a finding by the Secretary of Agriculture of a compelling public interest. See 7 U.S.C.A. § 7256 (West 1999 & Supp.2001).
The Compact's mission is to take such steps as are necessary to assure the continued viability of dairy farming in the northeast, and to assure consumers of an adequate, local supply of pure and wholesome milk.... Dairy farms, and associated suppliers, marketers, processors and retailers, are an integral component of the region's economy. Their ability to provide a stable, local supply of pure, wholesome milk is a matter of great importance to the health and welfare of the region.... [T]he participating states affirm that their ability to regulate the price which northeast dairy farmers receive for their product is essential to the public interest. Assurance of a fair and equitable price for dairy farmers ensures their ability to provide milk to the market and the vitality of the northeast dairy industry, with all the associated benefits.
Compact, Art. I, § 1, S.J.Res. 28, 104th Cong., 1st Sess. (1995).
The Compact's rules of construction state that it shall be
construed liberally in order to achieve [its] purposes and intent ... It is the intent of this compact to establish a basic structure by which the commission may achieve those purposes through the application, adaptation and development of the regulatory techniques historically associated with milk marketing and to afford the commission broad flexibility to devise regulatory mechanisms to achieve the purposes of this compact.
The Commission's over-order price sets a minimum price for Class I milk.1 In determining the price, the Commission must consider
the balance between production and consumption of milk and milk products in the regulated area, the costs of production including, but not limited to the price of feed, the cost of labor including the reasonable value of the producer's own labor and management, machinery expense, and interest expense, the prevailing price for milk outside the regulated area, the purchasing power of the public and the price necessary to yield a reasonable return to the producer and distributor.
Id., Art. IV, § 9(e). The Commission established $16.94 per hundredweight ("cwt")2 as the Compact over-order price for Class I milk. See 7 C.F.R. § 1305.1 (2001). Milk processors must pay into the Commission pool a monthly over-order obligation, the difference between $16.94 and the price established by federal regulation each month, multiplied by their total volume of fluid milk distributed in New England.3 See N.Y. State Dairy Foods, Inc. v. Northeast Dairy Compact Comm'n, 26 F.Supp.2d 249, 257 (D.Mass.1998), aff'd, 198 F.3d 1 (1st Cir.1999), cert. denied, 529 U.S. 1098, 120 S.Ct. 1833, 146 L.Ed.2d 777 (2001). The Commission disburses most of these funds to the processors, who pay the dairy farmers based on their production. All farmers producing milk in the region share in the disbursement.
Organic Cow is a Vermont organic dairy founded in the early 1990's, incorporated in 1993, and reorganized in 1997 as a Vermont limited liability company. At that point, Organic Cow's original founders, Peter and Bunny Flint, sold a 70% interest in Organic Cow to H.P. Hood & Co., Inc. ("Hood"), a large Massachusetts dairy marketer and distributor. In April 1999 Organic Cow sold its trademark and certain contract rights to Horizon Organic Holding Corporation ("Horizon"), a leading producer of organic milk and other dairy products.
Organic Cow's principal product is organic fluid milk. In 1994, Organic Cow began contracting with other organic dairy farmers in Vermont to buy their milk. At the commencement of this exemption proceeding, in 1997, Organic Cow had contracted with some sixty producers, forty-five of which were located in the Northeast Dairy Compact region, in Vermont, Massachusetts and Maine.
The contracts were "output" contracts, meaning that Organic Cow was required to purchase all conforming milk produced regardless of market conditions. The contracts provided for a minimum price of $18.00 per cwt, plus additional compensation for quality and butterfat content. The average price being paid by Organic Cow under those contracts was $19.36 per cwt.4 The contracts were for a standard term of two years and provided for automatic renewal unless a party opted out of a contract extension by written notice.
In August 1997, Organic Cow was disposing of more than 1,000,000 pounds (10,380 cwt) per month of organic fluid milk within the Compact region. By contract it was paying its producers substantially more for their milk than the Compact's over-order price. As a "handler" within the meaning of the Compact,5 however, it was subject to the Compact's over-order price obligation, regardless of the contract price it paid its producers.
Organic Cow's producers typically operate small farms, averaging 150 acres and forty to forty-five cows. Approximately 7,500 acres of organic farmland is involved. Certified organic dairying methods require that no pesticides, herbicides, fungicides, or commercial fertilizers be used. Organic dairy farmers use organic hay and feed, and practice rotational pasture management. Organic crop production is more time-consuming and more expensive than conventional crop production, and organic feed can cost three times as much as conventional feed. The average feed cost for organic dairy farmers is approximately 140 to 150% of that of conventional dairies. In addition, organic dairy farmers use no bovine growth hormones, rely on homeopathic remedies rather than antibiotics except for emergencies, and experience higher labor costs than most conventional dairy farmers.
To convert from conventional to organic dairy farming requires a substantial investment by the farmer. The high cost of production is reflected in the higher contract price Organic Cow has determined to be sustainable for organic dairy farmers. The higher cost in turn is passed on to consumers: organic fluid milk retails for as much as $2.99 per half gallon. In 1998 organic milk represented .4% of overall fluid milk sales in New England.
Organic Cow was a handler of milk within the meaning of the Compact from 1997 until June 30, 1998, when it ceased operation of its milk handling plant in Tunbridge, Vermont. Beginning in July 1998, Hood began to process all Organic Cow milk. At that point the Commission determined that Hood became the handler of Organic Cow milk, and Hood took over payment of the over-order obligation and administrative assessments for Organic Cow milk.
On August 18, 1997, Organic Cow filed a petition seeking exemption from the Commission's over-order price regulation. Organic Cow sought and was granted permission to pay its assessments into escrow, pending the outcome of the administrative proceeding. A three member hearing panel conducted an evidentiary hearing on Organic Cow's petition on January 15, 1998. Organic Cow argued that (1) the regulation worked an unconscionable hardship on Organic Cow, which does not further the purposes of the Compact; (2) the over-order price regulation constituted an unconstitutional impairment of contract, and (3) the regulation violated Organic Cow's constitutional rights to substantive due process and equal protection. On March 31, 1998 the Commission issued a Final Decision denying the petition.
Organic Cow timely appealed the Commission's decision. Organic Cow argued on appeal that the over-order price regulation was an unconstitutional impairment of contract, a violation of due process and equal protection, and, as applied to organic milk, contrary to the purposes of the Compact. The appeal was consolidated with the Commission's enforcement action against Organic Cow for failure to pay its over-order and administrative assessments, filed December 31, 1997.6 See Organic Cow, LLC v. Northeast Dairy Compact Comm'n, 46 F.Supp.2d 298 (D.Vt. 1999) (oral consolidation order). This Court rejected the constitutional claims, but held that the Commission's decision to apply the over-order price regulation to handlers of organic milk was unsupported by substantial evidence. See Organic Cow, 46 F.Supp.2d at 307-08....
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