STATE OF NEW YORK BY ABRAMS v. Brown

• Decision Date: 11 October 1989
• Docket Number: Civ. A. 88-1512.
• Citation: 721 F. Supp. 629
• Parties: STATE OF NEW YORK by Robert ABRAMS, Attorney General, Plaintiff, v. Arthur R. BROWN, Jr., et al., Defendants.
• Court: U.S. District Court — District of New Jersey

721 F. Supp. 629

STATE OF NEW YORK by Robert ABRAMS, Attorney General, Plaintiff, v. Arthur R. BROWN, Jr., et al., Defendants.

Civ. A. 88-1512.

United States District Court, D. New Jersey.

May 24, 1989.

As Amended September 20 and October 11, 1989.

Robert Abrams, Atty. Gen. State of New York, Lloyd Constantine, Asst. Atty. Gen., Chief, Antitrust Bureau, Joseph Opper, Karen Mankes, Pamela Jones, New York City, and Linda Gargiulo, Nutley, N.J., for plaintiff.

W. Cary Edwards, Atty. Gen. of New Jersey (at time of briefing and argument), Eugene J. Sullivan, Asst. Atty. Gen., Mark Oshinskie, Deputy Atty. Gen., Trenton, N.J., for defendants.

OPINION

WOLIN, District Judge.

The State of New York, by its Attorney General, has brought this action to challenge a New Jersey statute and regulation that prohibit the sale of milk in New Jersey below cost. New York alleges that the statute and regulation have both the purpose and effect of discriminating against New York milk dealers and thus violate the Commerce Clause of the United States Constitution both on their face and as applied. New York has named as defendants Arthur R. Brown, Jr., the New Jersey Secretary of Agriculture, and Woodson W. Moffett, Jr., the Director of the State's Division of Dairy Industry.

Brown and Moffett have moved for summary judgment on three grounds. First, defendants contend that this Court has no jurisdiction to hear this case. Second, Brown and Moffett argue that New York has no standing to assert the interests of New York milk dealers, who, Brown and Moffett contend, are the aggrieved parties, if any. Finally, the New Jersey defendants argue that the statute and regulation in question do not violate the Commerce Clause but rather are the least burdensome method of achieving the valid legislative goal of promoting stability in an industry that is particularly susceptible to destructive competition. New York has cross-moved for summary judgment. The Court will deny both motions.

BACKGROUND

Ever since the time of the Great Depression, which witnessed the destructive effects of unchecked competition on the dairy industry, the federal government¹ and many individual States have regulated the price of milk. According to defendants, 20 States currently set minimum prices at or above which dealers must sell to retailers. Milk's perishability and the industry's sensitivity to anticompetitive practices create the need for this regulation; price competition can quickly destroy many dealers, leading to monopolies or oligopolies and ultimately higher consumer prices. As they affect the purely internal commerce of a State, state milk control laws are evaluated under the Due Process Clause of the Fourteenth Amendment and will be upheld as long as the laws are rationally related to the Legislature's purposes. Nebbia v. New York, 291 U.S. 502, 538-39, 54 S.Ct. 505, 516-17, 78 L.Ed. 940 (1934). As they impinge on interstate commerce, however, state milk control laws are subject to the more exacting scrutiny of the Commerce Clause. Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 519, 521-26, 55 S.Ct. 497, 498, 499-501, 79 L.Ed. 1032 (1935).

In order to reduce the instability in the State's milk industry, the New Jersey legislature in 1941 enacted the New Jersey Milk Control Act ("the Act"), ch. 274, 1941 N.J. Laws 713 (codified as amended at N.J.S.A. § 4:12A-1 et seq.).²See Garden State Farms, Inc. v. Mathis, 61 N.J. 406, 422-23, 294 A.2d 713, 721 (1972); Abbotts Dairies, Inc. v. Armstrong, 14 N.J. 319, 323-24, 328, 102 A.2d 372, 374-75, 376-77 (1954). The Act establishes a Milk Control Board and vests certain powers in the Director of Milk Control. N.J.S.A. §§ 4:12A-2 & -3. The Act provides that, subject to certain limitations not relevant here,

the director may fix the price at which milk is to be bought, sold, or distributed; regulate conditions and terms of sale; establish and require observance of fair trade practices; supervise, regulate and control the entire milk industry of the State of New Jersey, including the production, importation, classification, processing, transportation, disposal, sale or resale, storage or distribution of milk as defined in this act in the State of New Jersey in those matters and in every way necessary to carry out the purposes of this act and necessary to control or prevent unfair, unjust, destructive or demoralizing practices which are likely to result in the demoralization of agricultural interest in this State engaged in the production of milk or interfere with the maintenance of a fresh, wholesome supply of sanitary milk for the consumers of this State.

Id. § 4:12A-21. The Director originally imposed absolute minimum prices applicable to all sellers of milk in New Jersey. In 1980, however, the Director abolished these fixed minimum prices and instead promulgated regulations prohibiting milk producers from selling milk below their cost. The regulations provide:

It shall be unlawful and a violation of these regulations for any dealer licensee to directly or indirectly be a party to, or assist in, any transaction to sell or offer to sell milk and milk products within the State of New Jersey, or for sale in the State of New Jersey at less than the cost thereof as hereinafter defined; but nothing in this regulation shall prevent a dealer from meeting the price or offer of a competitor for a product or products of like quality and nature in similar quantities; but nothing in this section shall prohibit bulk, distress or business-closing sale if prior notice of such sale has been filed with the Director of the Division of Dairy Industry; provided however that the burden of proving and properly documenting the meeting of a competitive price shall rest with the licensee asserting the claim.

N.J.Admin.Code § 2:52-6.1. The definition of cost adopted by the Director is what is commonly known as "average total cost" or "fully distributed cost."³ Under this standard the cost of a unit of output is calculated by totalling all the expenses of production — including fixed costs such as rent, executive compensation and insurance — and dividing by total output. In contrast to the average total cost or fully distributed cost, "marginal cost" is the seller's cost to produce the next additional output of milk. This cost is difficult to calculate, so "average variable cost" is frequently used in its stead. Average variable cost, which by definition is lower than average total cost, includes variable costs such as raw materials, fuel and labor, but excludes all fixed costs. See O. Hommel Co. v. Ferro Corp., 659 F.2d 340, 349 (3d Cir.1981), cert. denied, 455 U.S. 1017, 102 S.Ct. 1711, 72 L.Ed.2d 134 (1982); Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697, 716-17 (1975).

Additional regulations promulgated by the Director prohibit a milk retailer from changing its source of milk without the prior approval of the Director. Such approval may only be obtained upon two weeks' notice to the Director and the current milk dealer and upon a determination by the Director that no regulations, including the below-cost regulation, would be violated. N.J.Admin.Code § 2:53-4.1.

New York alleges that on 177 occasions in the period between January 1, 1985 and November 23, 1987, New Jersey retailers filed with defendants notices of intent to switch to milk suppliers who are licensed, incorporated and domiciled in New York and who ship their milk from facilities within New York, and that in at least 35 such instances defendant Moffett denied the applications as violative of the New Jersey below-cost regulation. Among the New York dealers alleged to be the subject of such rejection notices are Dellwood Foods, Inc., Queens Farms Dairy, Inc., Beyer Farms, Inc., Queensboro Farm Products, Inc. and Pound Ridge Dairy, Inc.⁴ New York alleges that in many of these instances the New York dealer had evinced the intention to sell milk competitively and profitably above average variable cost, but that in all such instances Moffett's action effectively prohibited the shipment of wholesome and competitively priced milk from New York to New Jersey. According to New York, defendants have enforced the regulations so as to prohibit a New Jersey retailer from buying milk in New York at a price below the New York dealer's average total cost. Plaintiff's Statement Pursuant to Local Rule 12(G), ¶ 8. In several of the above instances the sale from the dealer to the retailer was to have occurred in New York, so that Moffett's action prohibited sale transactions occurring wholly within the State of New York. First Amended Complaint ¶¶ 18-23. While conceding that New Jersey officials may prohibit the sale of milk below average variable cost, New York contends that it is a violation of the Commerce Clause for the New Jersey Director of Milk Control to prohibit pricing between average variable cost and average total cost.

Defendants have not filed a formal answer but instead have brought this summary judgment motion on three grounds. First, defendants contest this Court's jurisdiction by asserting that this case is a controversy between two States and thus within the exclusive jurisdiction of the Supreme Court pursuant to 28 U.S.C. § 1251(a). Brown and Moffett also contend that New York has no standing to bring this action and that the alleged wrongs can be addressed in another case filed in this Court by a New York dealer that does have standing, Beyer Farms, Inc. v. Brown, 721 F.Supp. 644. With regard to the merits, defendants argue that total average cost was selected as the regulatory cost standard because it most accurately reflects a dealer's true costs. Since a dealer who sells below this level cannot sustain a milk distribution business over an extended period of time, defendants argue, a dealer who sells below this level must be presumed to be doing so in order to purposefully drive competitors out...