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Lewes Dairy Inc. v. Freeman

decided: September 25, 1968.


Staley, Chief Judge, and Kalodner and Forman, Circuit Judges.

Author: Forman


FORMAN, Circuit Judge.

This is the second time the Secretary of Agriculture appeals from an order of the United States District Court for the District of Delaware which held invalid certain minimum pricing provisions of Milk Marketing Order No. 16*fn1 on the ground that, as applied to Lewes Dairy, Inc.,*fn2 they created a prohibited "trade barrier". The Order in question, promulgated by the Secretary pursuant to authority granted him by the Agricultural Marketing Agreement Act of 1937, as amended, 7 U.S.C. § 608c, regulates the milk industry in the Upper Chesapeake Bay, Maryland marketing area.

In an earlier proceeding, following Department of Agriculture administrative hearings,*fn3 the District Court held that the Milk Marketing Order in question was invalid as applied to Lewes in that it violated 7 U.S.C. § 608c(5) (G), as construed in Lehigh Valley Cooperative Farmers, Inc. v. United States.*fn4

On appeal this court reversed the ruling of the District Court and held that the case should be remanded to the Department of Agriculture to give it an opportunity properly to exercise its statutory powers, because the trade barrier issue had not been raised or considered in the administrative proceedings which were held approximately one year prior to the decision in Lehigh Valley.*fn5

The Judicial Officer, acting for the Secretary, held further hearings on the remand and, in a formal decision, rejected the challenge to the Marketing Order as both unsupported by the record and incorrect in law.*fn6 Judicial review of this ruling was sought by Lewes, and again the District Court held the Order invalid as creating a trade barrier.*fn7 On this appeal the Secretary, for the second time, contends that the District Court erred in concluding that the Marketing Order, as applied to Lewes, created a trade barrier.

The operation of the Milk Marketing Order and the facts of this case will be briefly summarized since they are at this point "beyond dispute". Under the Order, milk is classified according to the use made of it by milk companies, or "handlers". Thus, milk used in fluid form is Class I, and milk used to manufacture products such as butter and cheese is Class II. The Order establishes a minimum price for each class of milk -- the Class I fluid price being higher than the Class II price.

These established prices reflect those which would usually be paid for milk depending on use value. Because of the price differential in an unregulated market, where the supply of fluid milk is greater than the demands of the fluid milk market, chaotic conditions often resulted among producers each seeking to benefit from the greater use value, and therefore the higher price paid for milk used in fluid form. One of the major purposes of the Agricultural Marketing Agreement Act was to create and maintain an orderly market and, in so doing, assure the dairy farmer an adequate minimum price for the milk he delivered to the handlers regardless of how the milk was later used. To avoid the often destructive competition of the unregulated market, a method was devised whereby handlers are required to pay at least a uniform "blend" price to the producers regardless of the use to which it has been put. To arrive at this blend price, all handlers who receive or distribute milk within the marketing area are required to submit monthly reports to the Market Administrator, listing the quantity of milk they have handled and the use for which it was sold. These reports are tabulated and each month a blend price is established which represents the average of the class prices weighted by the amount of producer milk actually used in each class by all of the handlers regulated under the Order.

In promulgating a marketing order the Secretary must consider the supply of milk upon which the market, in this instance, Upper Chesapeake Bay, Maryland, regularly and normally depends. This milk, comprising the "market-wide pool" the Secretary found consisted of that received by plants regularly serving the market area with fluid milk. The regulatory scheme was designed to affect those plants of handlers which have substantial business in the market area. These plants, called "pool plants", are those which utilize at least 50 percent of the milk received from farmer producers as fluid milk and distribute at least 10 percent of those receipts in the form of fluid milk in the marketing area. The Marketing Order places pool plants under "full regulation". This means that the milk company or handler which operates a pool plant must pay producers at least the uniform blend price on all milk received from them irrespective of the uses made of the milk by the handler or the places where it is later distributed.

While requiring that the blend price be paid to producers, the Act also recognizes that regulated handlers may make different uses of the fluid milk which they purchase. To make adjustments among the handlers and thereby reflect the class use value of the milk to the handler, a producer settlement fund is established by the Order. Each regulated handler pays into, or draws from this fund the difference between the amount paid to its producers under the uniform blend price and the use value of its milk computed at the established class prices. A handler who distributes most of his milk as Class I fluid milk has a greater use value for the milk than the blend price which he paid for it. He would contribute the difference between the blend price and the class utilization price into the fund. A handler who paid the blend price but used the milk to manufacture products would draw from the fund the difference between the blend price he paid and the lower class utilization price. In this way, each handler ultimately pays a price for the milk he purchases which reflects the use he makes of it. The net result of this regulation is that handlers pay for the milk according to its use value to them while the producer farmers are protected from the perilous competition for the fluid milk market by the automatic allocation to them of the blend price which apportions the profitable fluid milk market and the burdensome surplus market among all the producers that serve the marketing area.

Lewes operates one milk processing plant, located in Sussex County, Delaware, from which it distributes fluid milk to retail outlets in the area of Maryland regulated by the Marketing Order in question, and various parts of Delaware which are unregulated by any Marketing Order. The regular source of supply of the milk which Lewes processes and sells is from nine or ten producers, all from Kent and Sussex Counties, Delaware. An additional supply of milk, ranging from 18 to 33 percent of its total annual receipts, is obtained from another handler located in Pennsylvania when it is needed by Lewes to balance or supplement its requirements.

The Secretary found that Lewes utilized substantially all of its milk in Class I form and that annually it distributed in the regulated area between 40 and 61 percent of its receipts from farmer producers. Lewes admits that this finding is accurate but argues that when its receipts from all sources are considered it ships on an annual basis, between 35 and 45 percent of its total production into the regulated marketing area and sells the remaining 55 to 65 percent in Delaware. Regardless of which figure is used, the Order imposes full regulation on Lewes since it distributes more than 10 percent of its production in the regulated area.

Prior to the effective date of the Order, Lewes paid its producers at the competitive Delaware price which was higher than the uniform blend prices subsequently established under the Order.*fn8 Because the Order imposes full regulation on it, Lewes contends that its principal competitors, who are unregulated Delaware dairies, enjoy a price advantage. Full regulation requires Lewes, a fluid milk handler, to pay into the producer-settlement fund the blend price -- Class I differential on all the milk it processes even though the greater portion of it is distributed in the Delaware market. Thus, it contends, the total cost of the milk it purchases (the price it pays to its producers plus the amount it pays into the fund) is greater than the cost which its unregulated Delaware competitors must pay. Also, Lewes contends that the Delaware ...

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