Vaqueria Tres Monjitas, Inc. v. Irizarry, 07-2240.

Citation587 F.3d 464
Decision Date23 November 2009
Docket NumberNo. 07-2240.,No. 07-2369.,07-2240.,07-2369.
PartiesVAQUERÍA TRES MONJITAS, INC.; Suiza Dairy, Inc., Plaintiffs, Appellees, v. Cyndia E. IRIZARRY, in her official capacity as Administrator of the Office of the Milk Industry Regulatory Administration for the Commonwealth of Puerto Rico, Defendant, Appellant, José O. Fabre-Laboy, in his official capacity as Secretary of the Department of Agriculture of the Commonwealth of Puerto Rico; Industria Lechera De Puerto Rico, Inc. (INDULAC), Puerto Rico Dairy Farmers Association, Defendants. Vaquería Tres Monjitas, Inc.; Suiza Dairy, Inc., Plaintiffs, Appellees, v. Jaime Rivera-Aquino, in his official capacity as Secretary of the Department of Agriculture of the Commonwealth of Puerto Rico; Defendant, Appellant, Industria Lechera De Puerto Rico, Inc. (INDULAC); Puerto Rico Dairy Farmers Association; Cyndia E. Irizarry, in her official capacity as Administrator of the Office of the Milk Industry Regulatory Administration for the Commonwealth of Puerto Rico, Defendants.
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
587 F.3d 464
VAQUERÍA TRES MONJITAS, INC.; Suiza Dairy, Inc., Plaintiffs, Appellees,
v.
Cyndia E. IRIZARRY, in her official capacity as Administrator of the Office of the Milk Industry Regulatory Administration for the Commonwealth of Puerto Rico, Defendant, Appellant,
José O. Fabre-Laboy, in his official capacity as Secretary of the Department of Agriculture of the Commonwealth of Puerto Rico; Industria Lechera De Puerto Rico, Inc. (INDULAC), Puerto Rico Dairy Farmers Association, Defendants.
Vaquería Tres Monjitas, Inc.; Suiza Dairy, Inc., Plaintiffs, Appellees,
v.
Jaime Rivera-Aquino, in his official capacity as Secretary of the Department of Agriculture of the Commonwealth of Puerto Rico; Defendant, Appellant,
Industria Lechera De Puerto Rico, Inc. (INDULAC); Puerto Rico Dairy Farmers Association; Cyndia E. Irizarry, in her official capacity as Administrator of the Office of the Milk Industry Regulatory Administration for the Commonwealth of Puerto Rico, Defendants.
No. 07-2240.
No. 07-2369.
United States Court of Appeals, First Circuit.
Heard June 5, 2009.
Decided November 23, 2009.

[587 F.3d 467]

Edward W. Hill-Tollinche, with whom Quiñones & Sánchez, P.S.C., Yassmin González-Vélez, and Juan Carlos Ramírez-Ramos, were on brief for appellants.

Rafael Escalera-Rodríguez, with whom Reichard & Escalera, Carmen Alfonso-Rodríguez, and Amelia Caicedo-Santiago, were on brief for appellee Suiza Dairy, Inc.

José R. Lázaro-Paoli, José R. Lázaro-Paoli Law Offices, Enrique Nassar-Rizek, Maxine M. Brown-Vázquez, and ENR & Associates, on brief for appellee Vaquería Tres Monjitas, Inc.

Before TORRUELLA, LIPEZ, and HOWARD, Circuit Judges.

TORRUELLA, Circuit Judge.


This is an appeal from a preliminary injunction issued by the United States District Court for the District of Puerto Rico against the Milk Industry Regulation Administration for the Commonwealth of Puerto Rico ("ORIL" by its Spanish acronym), a sub-entity of the Department of Agriculture charged with regulating Puerto Rico's milk industry, and the Commissioners thereof. Plaintiffs, fresh milk processors in the Commonwealth, filed suit in federal court under 42 U.S.C. § 1983 and the Federal Declaratory Judgment Act, 28 U.S.C. § 2201, alleging that ORIL's regulatory scheme governing milk prices violates the Due Process, Equal Protection, Takings, and dormant Commerce Clauses, and seeking an order pursuant to Fed. R.Civ.P. 65(a) enjoining the Administrator of ORIL from continuing to implement the challenged regulatory provisions. Finding a likelihood of success on the merits of plaintiffs' constitutional claims, the district court preliminarily enjoined the regulatory scheme.

On appeal, in addition to challenging the merits of the district court's preliminary injunction ruling, Defendants-Appellants argue that the district court's actions were barred by the Burford Abstention doctrine, the Eleventh Amendment, and by various equitable defenses.

After careful consideration, we affirm.

I. Background
587 F.3d 468

A. Factual Background1

1. Parties

Plaintiffs-Appellees Vaquería Tres Monjitas ("Tres Monjitas") and Suiza Dairy, Inc. ("Suiza") are fresh milk processors in the Commonwealth of Puerto Rico (collectively "the processors"). Their business consists of purchasing raw milk from local dairy farmers and converting it into drinkable fresh milk, which they then sell to consumers. Plaintiffs are the only fresh milk processors in Puerto Rico. Tres Monjitas holds a market share of 34.7%, and Suiza holds a 65.3% share. As milk processors, plaintiffs fall under Puerto Rico's regulatory structure for milk and milk products.

Defendant-Appellant Cyndia E. Irizarry2 ("Administrator") is being sued in her official capacity as the current Administrator of ORIL, which is the entity responsible for creating and administering the Commonwealth's milk regulatory structure. ORIL is a subdivision of the Commonwealth's Department of Agriculture, whose current Secretary, Jaime Rivera-Aquino,3 is also a named defendant in his official capacity.

Defendant Industria Lechera de Puerto Rico, Inc. ("Indulac") was joined to the litigation after its inception. Indulac is owned and operated by Fondo de Fomento de la Industrial Lechera ("FFIL" or "the Fund"), an entity created pursuant to the Milk Industry Regulation Act, Act No. 34 of June 11, 1957 ("Act 34") to promote Puerto Rico's milk industry. 5 P.R. Laws Ann. §§ 1092-1125 (2005 & Supp.2008). Indulac is the sole entity in Puerto Rico authorized to process ultra high temperature milk ("UHT milk"), a type of milk that does not require refrigeration prior to opening and competes directly with the fresh milk produced by Tres Monjitas and Suiza.

The Administrator of ORIL, who is statutorily empowered to regulate the milk market, is also chairman of the board of FFIL, the government entity which owns Indulac. 5 P.R. Laws Ann. § 1099(e) (2005 & Supp.2008). Until the milk processors filed this suit, then-serving ORIL Administrator Pedro-Gordian also chaired the Indulac board. The CEOs of ORIL and FFIL are both former dairy farmers, as is the Secretary of Agriculture. Not only does the leadership of ORIL, FFIL, and Indulac overlap, but the three entities also operate out of the same facility.

Also joined as a defendant was the Puerto Rico Dairy Farmers Association ("PRDFA"), which represents 300 dairy farmers, who are the producers of the raw milk processed by Tres Monjitas, Suiza, and Indulac.

2. Background of this Litigation

This litigation arises out of a history of feuding between dairy farmers and milk

587 F.3d 469

processors in Puerto Rico. Milk production in the Commonwealth is seasonal and heavily dependent upon the changing temperature, leading to instability in the seasonal yield of milk and, consequently, waste during months of higher production. The strained relations between farmers and processors and the difficulty of maintaining a consistent supply led to a chaotic situation in an industry essential to the local economy and well-being of the population. To ease tensions between the farmers and processors and to stabilize the disparity between months of lean and fat milk production, Act 34, which was passed June 11, 1957, created ORIL as a regulatory agency to oversee the milk industry. 5 P.R. Laws Ann. § 1093 (2005 & Supp. 2008). From its creation, ORIL set both a maximum price for the sale of milk to consumers and a minimum price for the purchase of raw milk from dairy farmers by milk processors. See 5 P.R. Laws Ann. §§ 1096(a), 1107(d) (2005 & Supp.2008). This means that ORIL regulated both the cost at which milk processors Tres Monjitas and Suiza obtained their raw milk and the price at which they could sell the milk once they processed it into fresh milk. The result of this regulatory structure was such that the price of fresh milk was kept low to make it affordable for consumers. The price of the raw milk, however, was kept high, based on ORIL's determinations regarding the farmers' costs of production and their reasonable expectations of profits.

While processors were required to purchase all of the dairy farmers' milk, Indulac purchased from the processors any raw milk left over after the market demand for fresh milk was met (referred to as "surplus milk"), in order to avoid waste. Under ORIL's pricing system, Indulac purchased this surplus raw milk from the processors at a price significantly below the price that the processors paid the dairy farmers for their non-surplus raw milk.4 At first, Indulac processed the surplus raw milk that it purchased from the processors to make butter, cream, cheese, and other dairy products that did not directly compete with the fresh milk produced by plaintiffs.

Trouble began around 1985, however, when Indulac began to produce UHT milk, a non-refrigerated milk substitute, which competes directly with plaintiffs' fresh milk. Essentially, by mandating that plaintiffs pay a high price for raw milk and then requiring them to sell the surplus of that same milk to Indulac at a substantially lower price, ORIL created a scheme in which Tres Monjitas and Suiza were forced to subsidize Indulac, their competitor. The district court found that, but for this ORIL-imposed subsidy from the processors, Indulac would not be able to compete with UHT milk imported into Puerto Rico from the continental United States. Thus, Indulac became dependent on this scheme. And, as the only processor authorized to produce UHT milk in Puerto Rico,5 Indulac amassed 70% of the UHT milk market, with the other portion coming from out-of-state sources.

Moreover, unlike the other milk processors, the price at which Indulac may sell its milk to consumers is not regulated. This lack of regulation as to Indulac's retail price for milk, coupled with the relatively

587 F.3d 470

low price at which it could purchase surplus raw milk from plaintiffs, allowed Indulac's profit margin to soar, while the processors struggled. And, since Indulac was able to purchase its raw milk at a deflated price, UHT milk became significantly less expensive than fresh milk — a phenomenon unique to Puerto Rico — causing Indulac's UHT milk to begin to dominate the Puerto Rican milk market.

Aside from enjoying a near-monopoly on UHT milk, Indulac also has broad influence over ORIL's regulatory decisions. When, in 2002, Indulac began to guarantee supplemental minimum payments to farmers for raw milk, it was the Board of Indulac, and not ORIL, which determined what were the dairy farmers' costs and what constituted reasonable profits.6 And, since the Board of Indulac consisted entirely of dairy farmers,7 they were essentially setting their own cost of production and margin. Even as late as February 2006, during the course of this litigation, when ORIL raised the price to be paid by Indulac for surplus raw milk to 32 cents per quart from 10 cents per quart, it did so using figures provided by Indulac itself. ORIL held no hearings of...

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