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STEW
LEONARD v. USDA
60 Agric. Dec. 1
Part 1 (General)
AGRICULTURAL MARKETING AGREEMENT ACT
COURT DECISION
STEW LEONARD’S
v. DANIEL GLICKMAN, UNITED STATES SECRETARY OF AGRICULTURE.
No. 3:00CV627
(TPS)
Decided March
21, 2001.
(Cite as 199
F.R.D. 48 (D. Conn.).
Milk - Handler - Producer-handler - Lease -
Equal protection.
The United States District Court for the
District of Connecticut affirmed the Secretary of Agriculture’s classification
of Stew Leonard’s as a handler, and not a producer-handler under Federal Milk
Order No. 1 (7 C.F.R. pt. 1001). The Court
stated it must afford substantial deference to the agency’s interpretation of
its own regulations and give the interpretation controlling weight unless the
interpretation is plainly erroneous or inconsistent with the regulation. The Court held the Secretary of
Agriculture’s narrow construction of the definition of the term
“producer-handler” is consistent with the plain language of the regulation and
also faithful to the Secretary of Agriculture’s intent at the time of the
regulation’s promulgation. The Court
further held substantial evidence exists to support the Secretary of
Agriculture’s conclusion that Stew Leonard’s is a handler and not a
producer-handler. The Court rejected
Stew Leonard’s claim that the Secretary of Agriculture violated equal protection
guarantees of the Fifth Amendment by granting producer-handler status to
operations that lease a portion of their dairy herd, without assuming a
significant portion of the risks involved, and by refusing to grant
producer-handler status to Stew Leonard’s, who leased a herd that fulfills all
its processing demands, while assuming a significant portion of the risks
involved.
United States
District Court
District of
Connecticut
RULING ON CROSS
MOTIONS FOR SUMMARY JUDGMENT
SMITH, Magistrate J.
I. INTRODUCTION
Pending before the court[1] are the
parties’ cross motions for summary judgment (docs. 17 & 18). Petitioner, Stew Leonard’s Dairy (“Stew
Leonard’s”), brings this action pursuant to the judicial review provision of
the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. § 608c(15)(B),
against respondent, Dan Glickman, United States Secretary of Agriculture,
seeking reversal of the Secretary’s March 16, 2000 decision to deny Stew
Leonard’s “producer-handler” status under Federal Milk Order No. 1, 7 C.F.R. §§
1001 et seq. (1999). Petitioner claims that the Secretary’s decision is “not in accordance
with the law,” 7 U.S.C. § 608c(15)(B), because the Secretary’s decision was
arbitrary and capricious. For the
reasons set forth below, the Secretary’s decision is AFFIRMED,
petitioner’s motion for summary judgment is DENIED, and
defendant’s motion for summary judgment is GRANTED.
II. DISCUSSION
A. FACTS AND PROCEDURAL BACKGROUND
The facts giving rise to this petition are
not in dispute, and are set forth in the administrative record filed with the
court in this matter.
In order to view the facts in the proper
context, an explanation of the underlying regulatory scheme is essential. In the United States, the milk industry is
beleaguered by two unique characteristics.
One characteristic is the existence of “a basic two-price structure that
permits a higher return for the same product, depending on its ultimate
use.” Zuber v. Allen, 396 U.S.
168, 172 (1969). Milk, regardless of
whether it is produced for consumer drinking or product manufacture, is
produced in the same manner. The
difference lies in the price the end product can fetch in the consumer market;
a handler[2] can sell fluid
milk at a higher price, thereby allowing the producer to charge the handler a
premium for milk destined for drinking.
This premium fosters intense competition amongst the producers to sell
their milk at the premium price.
The other unique characteristic is “that
production yield varies seasonally, resulting in oversupply in the summer months.”
Minnesota Milk Producers Ass’n v. Glickman, 153 F.3d 632, 638 (8th
Cir. 1998). Because the consumer demand
for milk remains relatively constant throughout the year, and the animals’
production fluctuates with the animals’ nutrition supply during the year,
producers must maintain a herd of animals that is able to meet the peak demand
in the lean months. The effect of
maintaining a herd that can meet the consumer demand in the winter months
leaves the producers with a surplus of highly perishable milk in the summer,
when the animals are the most productive.
Historically, this glut allowed handlers to demand bargain prices
because they could obtain their milk from an increased variety of sources
because all the producers, both far and near, had a surplus they were anxious
to dispose of.
After the milk market, as well as the
market for other commodities, self-destructed under the strain of these two
forces during the Great Depression, Congress stepped in and enacted the Agricultural
Marketing Agreement Act of 1937 (“AMAA”), codified at 7 U.S.C. § 601
et seq. The purpose of the
legislation was “to remove ruinous and self-defeating competition among the
producers and permit all farmers to share the benefits of fluid milk profits
according to the value of goods produced and
services rendered.” Zuber, 396
U.S. at 180-81. In order to effectuate
this purpose, the legislation was intended to “raise producer prices and to
ensure that the benefits and burdens of the milk market are fairly and
proportionately shared by all dairy farmers.”
Minnesota Milk Producers Ass’n, 153 F.3d at 637.
Specifically, the AMAA gives the Secretary
of Agriculture the authority to issue orders governing the handling of
agricultural commodities, see 7 U.S.C. §
608c(1),
including milk, see 7 U.S.C. § 608c(5), through a system of marketing
orders applicable to a designated region.
To achieve equality among producers
of milk, the marketing orders create a
market-wide pricing pool for handlers.
The marketing order sets minimum prices that the handlers may pay for
the basic classes of milk. Handlers who
deal primarily in high grade, or “fluid” milk, which is used to produce milk
intended for drinking, pay into a pool that is then drawn on by the handlers of
the lower grade milk, or “surplus.”
Producers then receive a uniform, or “blend,”[3] price from the
handlers irrespective of the use to which their milk is eventually put. See 7 U.S.C. § 608c(5); see generally
Lehigh Valley Cooperative Farmers, Inc. v. U.S., 370 U.S. 76, 79-80 (1962)
(“[T]he statute authorizes the Secretary to devise a method whereby uniform
prices are paid by milk handlers to producers for all milk received, regardless
of the form in which it leaves the plant and its ultimate use. Adjustments are then made among the handlers
so that each eventually pays out-of-pocket an amount equal to the actual
utilization value of the milk he has bought.”).
The regulatory effect of this pool can be
demonstrated by a simple example.
Suppose Handler A purchases 100 units of Class I (fluid) milk from
Producer A at the minimum value of $3.00 per unit. Assume further that Handler B purchases 100 units of Class II
(soft milk products) milk from Producer B at the minimum value of $2.00 per
unit, and that Handler C purchases 100 units of Class III (hard milk products)
milk from Producer C at $1.00 per unit.
Assuming that this constitutes the entire
milk
market for a regulatory district, during this period the total price paid for
milk is $600.00, making the average price per unit of milk $2.00. Thus, under the regulatory scheme, Producers
A, B, and C all receive $200.00 for the milk they supplied, irrespective of the
use to which it was put. However,
Handler A must, in addition to the $200.00 that it must tender to Producer A,
pay $100.00 into the settlement fund because the value of the milk it purchased
exceeded the regulatory average price.
Along the same vein, Handler C will receive $100.00 from the settlement
fund because it will pay Producer C more than the milk it received was
worth. The pool achieves equality among
producers, and uniformity in price paid by handlers.
Although, generally speaking, the
regulatory scheme closely monitors the conduct of handlers, a certain category
of handlers is exempt from participation in the pricing pool. The Secretary has chosen not require those
entities that both produce and handle their own milk to make payments into the
pool.[4] The regulations designate such entities as “producer-handlers.”
“Typically, a producer-handler conducts a small family-type operation,
processing, bottling and distributing only his own farm production.” Decision on Proposed Amendments to Tentative
Marketing Agreements and to Orders, 25 Fed. Reg. 7819, 7825 (Aug. 16,
1960). The rationale for this exemption
is “that such businesses are so small that they
have little or no effect upon the pool.” Id.
The effects of
this exemption are twofold. First, if
the producer-handler uses all the milk it produces as Class I milk, it avoids
having to make payments into the producer settlement fund; it merely sells the
milk at the market price, which is tempered only by the production costs. Assuming all other conditions are equal, the
exemption allows the producer-handler to make a greater profit because it sells
Class I milk without having to pay the full Class I price into the settlement
fund.
The second effect of the exemption is upon
the pool as a whole. Because the total
amount of Class I milk purchased in a marketing area is a factor in calculating
the aggregate blend price for the marketing area, removing a handler’s Class I
purchases from the calculus brings the aggregate price down. Exemption of a handler who purchases a
significant quantity of Class I milk from producers in the pool depresses the
blend price in the region.
This exemption may also provide an
additional windfall to producer-handlers who “ride the pool.” This term refers to a producer-handler who
draws upon pool resources to compensate for any deficiency in its own supply during
the lean production months, thereby allowing the producer-handler to maintain a
relatively smaller supply of animals with a minimal surplus of milk in periods
of greater production.
Producer-handlers could also take advantage of the price regulation by
“riding the pool” if they do dispose of any surplus because the milk they
dispose of most likely is used as Class II or Class III milk, but the
producer-handler is still able to collect the relatively higher blend price. Thus, in theory, producer-handlers who “ride
the pool” could reap the benefits of the regulatory scheme without sharing the
burdens.
The instant lawsuit concerns the scope of
the producer-handler exemption from the regulatory pool in Connecticut. Petitioner, who operates a dairy retail
store in Norwalk, Connecticut, because of a lease with Oakridge Farm executed
on December 10, 1997, which was superseded by a subsequent lease executed on
June 16, 1998, claims that it should be classified as a producer-handler. The lease provided that:
1. Stew Leonard’s hereby leases from Oakridge
Farm its entire herd of milking cows at the rate of $1.00 per cow per day. Payment will be made on a monthly
basis. In determining whether a cow is
deemed to be part of Oakridge Farm’s herd of milking cows, a cow shall be so
counted from the date it is first milked until it is culled or dies. Inventory will be established on the last
day of each month and verified by the DHI (Dairy Herd Management Services)
records. Stew Leonard’s agrees to
replace culls and/or attrition with newly bred heifers.
2. In addition to the foregoing lease rate, Stew
Leonard’s hereby leases from Oakridge Farm its barns, milking parlors, personal
property and all equipment necessary to produce raw milk and its related
products for $12,000 a month. Stew
Leonard’s agrees that it will transport the milk products from Oakridge Farm to
its facilities for processing, packaging, sale and distribution at its own
expense.
3. In addition to the foregoing lease rate, Stew
Leonard’s agrees to pay for all ordinary and necessary expenses related to the
production, processing, or packaging of milk.
Also, Stew Leonard’s agrees to assume all risk, responsibility, and
maintenance of the cows, equipment, buildings, and labor. The aforesaid risks and responsibilities
include, but are not limited to, life and death of all animals, damage and
destruction resulting from acts of God (including storms, fires, pestilence,
drought, etc.), damage and destruction resulting from employee negligence
and/or malfeasance. Stew Leonard’s
agrees to buy corn silage from Bahler Farms, Inc. when needed. Stew Leonard’s also agrees to pay Bahler
Farms, Inc. a management fee of $2,000 per month.
4. The term of the agreement shall be for a term
of two years. Advance written notice 60
days prior to change in ownership, or key management personnel by either Stew
Leonard’s or Oakridge Farm. If either
Stew Leonard’s or Oakridge Farm fails to approve of the aforementioned change,
they will have the option to terminate the lease on the last day of the month
of the change.
(Petition for
Review of Agency Decision, Ex. G at 1-2).
Petitioner believed that the lease transaction had the effect of
creating one enterprise, which would then qualify petitioner for
producer-handler status under the order.
In December of 1997, petitioner initially
requested that the Market Administrator for the New England Marketing Order,[5] Erik
Rassmussen, classify Stew Leonard’s as a producer-handler under the order. Under the applicable provisions of this
order, a producer-handler is defined as:
any person who,
during the month, is both a dairy farmer and a handler and who meets all of the
following conditions:
(a) Provides as the
person’s own enterprise and at the person’s own risk the maintenance, care, and
management of the dairy herd and other resources and facilities that are used
to produce milk, to process and package such milk at the producer-handler’s own
plant, and to distribute it as route disposition.
(b) The person’s own route disposition constitutes
the majority of the route disposition from the plant.
(c) The quantity of route disposition in the
marketing area from the person’s plant is greater than in any other Federal
marketing area.
(d) The producer-handler receives no fluid milk products except from such handler’s own production and from pool handlers, either by transfer or diversion pursuant to § 1001.15. If the producer-handler’s receipts from own production and the total route disposition from the producer-handler’s plant each exceed 4,300 pounds per day for the month, the producer-handler’s receipts from pool plants are not in excess of 2 percent of receipts from own production. For the purposes of this paragraph, the producer-handler’s receipts of fluid milk products shall include receipts from plants of other persons at all retail and wholesale outlets that are located in a Federal marketing area and operated by the producer-handler, an affiliate, or any person who controls or is controlled by the producer-handler.
7 C.F.R. §
1001.10 (1999) amended by Milk in the New England and Other Marketing
Areas; Order Amending the Orders, 64 Fed. Reg. 47898 (Sept. 1, 1999).[6]
After a period
of correspondence with the Market Administrator, concerning various proposed
changes to drafts of the leases, the Market Administrator declined to
re-classify petitioner as a producer-handler in a letter dated February 6,
1998:
The office has
reviewed the various leases you have proposed.
The stated purpose of the leases is to change the regulatory status of
Stew Leonard’s Dairy from a handler operating a pool distributing plant that
purchases milk from producers to status as a producer-handler.
There is
precedent by this office to approve farm leases for a producer-handler. These approvals follow the needs of
currently operating producer-handlers to utilize additional sites for expansion
purposes.
The situation at
Stew Leonard’s Dairy is distinct from proposals received by some
producer-handlers. You propose to
construct a legal framework, with our assistance, that would allow you to
circumvent the Agricultural Marketing Agreement Act, 7 U.S.C. 608(c)(5)
[sic]. The determination has been made that the means you propose to meet the producer-handler
qualification under Section 1001.10(a) violate the letter and intent of the Act
and this section.
Stew Leonard’s
Dairy must continue to file handler reports as a pool distributing plant. If you wish to challenge this decision,
refer to 7 U.S.C. (608(c)(15)(A) [sic].
(Administrative
Record, Ex. 100, PX 14). On February
17, 1998, petitioner commenced the administrative action by filing a petition
for relief from the Market Administrator’s February 6, 1998 determination
pursuant to 7 U.S.C. § 608c(15)(A).[7]
The Secretary
affirmed the Market Administrator’s February 6, 1998 determination. On January 11 and 12, 1999, the parties
presented evidence and testimony before an Administrative Law Judge (“ALJ”),
who dismissed the petition and affirmed the decision of the Market
Administrator. Petitioner then appealed
to the Secretary of Agriculture, who, through a designated Judicial Officer,
after modifying the ALJ’s decision in some areas, also affirmed the decision of
the Market Administrator on March 16, 2000.[8] Petitioner then commenced the instant action
on April 4, 2000 pursuant to 7 U.S.C. § 608c(15)(B).[9]
B. REVIEW OF THE SECRETARY’S DECISION
The question before the court is whether
the Market Administrator’s classification of Stew Leonard’s as a handler, and
not a producer-handler, which was adopted by the Secretary after completion of
the administrative review process, was “in accordance with the law” under 7
U.S.C. § 608c(15)(B). The Secretary
held that
1. Petitioner is a “handler,” as defined in
section 1001.9 of the New England Marketing Order (7 C.F.R. § 1001.9).
2. Petitioner is not a dairy farmer.
3. Petitioner does not provide, as Petitioner’s
own enterprise and at Petitioner’s own risk, the maintenance, care, and
management of the dairy herd or other resources and facilities used to produce
milk, which Petitioner leases from Oakridge Farm.
4. Petitioner is not a “producer-handler,” as
defined in section 1001.10 of the New England Marketing Order (7 C.F.R. §
1001.10).
5. The Market Administrator’s determination that
Petitioner is not a “producer-handler,” as defined in section 1001.10 of the
New England Marketing Order (7 C.F.R.
§ 1001.10), is in accordance with the law.
(Administrative Record, Ex. 88 at 62-63). Petitioner contends that the Secretary’s
decision was not in accordance with the law because it is arbitrary and
capricious, in that the Secretary’s ultimate decision is not supported by the
weight of the evidence, and flies in the face of its prior action concerning
classification of entities as producer-handlers.
The scope of the court’s review is set
forth in the Administrative Procedure Act, which states that
[t]he reviewing
court shall decide all relevant questions of law, interpret constitutional or
statutory provisions, and determine the meaning or applicability of terms of an
agency action. The court shall . . .
hold unlawful and set aside agency action, findings, and conclusions found to
be . . . arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with the law . . . [or]
unsupported by substantial evidence. . . .
5 U.S.C. §
706(2)(A) & (E). Cognizant of this
standard, the court now turns to the precise issues in dispute.
1. SECRETARY’S INTERPRETATION OF 7 C.F.R. §
1001.10
A threshold issue is whether the law the
Secretary eventually applied to reach his decision is a valid exercise of
agency power. Petitioner states that
[t]he
administrator admitted under oath that the term “dairy farmer” is not defined
anywhere in the regulations. Tr. at
298. The administrator has the sole
power, without regulatory guidance, to decide what is and is not a dairy
farmer. By failing to define a critical
term within the definition of “producer-handler,” the regulations themselves
cede unlimited arbitrary authority to the administrator.
(Petitioner’s
Cross-Mot. for S.J. at 3 n. 3). In
addition, petitioner contends that respondent’s interpretation of the
regulation is contrary to the purpose of the governing statutory scheme. ( See Petitioner’s Cross-Mot. for S.J. at
22-23). Thus, petitioner argues that
respondent’s construction of the regulation is legally deficient.[10]
When determining if an agency’s
construction of a regulation is legally permissible, the analysis is governed
by the Supreme Court’s decision in Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837 (1984). See New York Currency Research Corp. v.
Commodity Futures Trading Comm’n, 180 F.3d 83, 88 (2d Cir. 1999) (“Although
Chevron dealt only with an agency’s interpretation of relevant federal
statutes, similar principles apply to judicial review of an agency’s
interpretation of its own regulations.”).
Pursuant to this framework, the reviewing court asks two questions. See id. at 842. First “is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is
the end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed intent of Congress.” Id. at 842-43. If this first question is answered in the negative, then “the
question for the court is whether the agency’s answer is based on a permissible
construction of the statute.” Id.
at 843. The agency’s interpretation is
“given controlling weight unless [it is] arbitrary, capricious, or manifestly
contrary to the statute.” Id. at
844.
Because the governing statute, 7 U.S.C. §
608c(5), is silent on the determination of exemptions to the regulatory pricing
pool, it is the second inquiry set forth in Chevron that applies
here. In such a situation, the court
must afford “substantial deference to the agency’s interpretation of its own
regulations,” and must give the interpretation “controlling weight unless it is
plainly erroneous or inconsistent with the regulation.” Thomas Jefferson University v. Shalala,
512 U.S. 504, 512 (1994) (internal quotation marks omitted). “In other words, [the court] must defer to
the Secretary’s interpretation unless an alternative reading is compelled by
the regulation’s plain language or by other indications of the Secretary’s intent
at the time of the regulation’s promulgation.” Id. (internal quotation marks omitted). This deference to the agency is especially
important when “the regulation concerns a complex and highly technical
regulatory program. . . .” Id. (internal quotation marks omitted).
The Secretary has narrowly construed the
definition of producer-handler set forth in the regulations. The pertinent part of the regulation reads
as follows:
[p]roducer-handler
means any person who, during the month, is both a dairy farmer and a handler
and who meets all of the following conditions:
(a) Provides as the person’s own enterprise and at
the person’s own risk the maintenance, care, and management of the dairy herd
and other resources and facilities that are used to produce milk, to process
and package such milk at the producer-handler’s own plant, and to distribute it
as route disposition.
7 C.F.R. §
1001.10 (1999) amended by Milk in the New England and Other Marketing
Areas; Order Amending the Orders, 64 Fed. Reg. 47898 (Sept. 1, 1999). On its face, the regulation requires that,
in order to be considered a producer-handler, an entity must be a dairy farmer,
and must produce milk through its own enterprise and at its own risk.
When considering the criteria listed in
the regulation as applied to leases, the Secretary has declined to state that a
handler entering into a lease transaction with a producer can never pass
muster, but has consistently held that such arrangements do not warrant
re-classification of a handler as a producer-handler. The Secretary maintains that such
transactions, despite the fact that they often appear to meet the criteria in
the regulation, do not in fact meet the test because they are often constructed
for the purpose of escaping regulation, and therefore it must interpret the
regulation strictly, in order to avoid the circumvention of the regulatory
scheme. ( See Petition for Review of
Agency Decision, Ex. J at 27-28, 36 (“[A] handler that tries to circumvent the
milk pricing regulations by claiming to lease or purchase a farm, while in
reality simply buying milk, does not obtain
producer-handler status.”)).
This interpretation of the regulation is
consistent with the plain language and also is faithful to the Secretary’s
intent at the time of the regulation’s promulgation. In 1960, when the producer-handler concept as it now stands was
promulgated, the Secretary offered the following explanation:
Typically, a
producer-handler conducts a small family-type operation, processing, bottling
and distributing only his own farm production.
Full regulation of such individuals provides considerable administrative
difficulties. Normally, exemption from
regulated status is made in a Federal order for such individuals on the grounds
that such businesses are so small that they have little or no effect on the
pool.
* *
* *
In order to
maintain producer-handler status, it is provided that the maintenance, care and
management of the dairy animals and other resources necessary to produce the
milk, and the processing, packaging and distribution of the milk shall be the
personal enterprise of and the personal risk of the person involved. These standards are intended to distinguish
the family-type operation normally involved, and to bring under full regulation
operations which attempt to masquerade as those of producer-handlers in their
normal concept through leases, rental arrangements, and other devices designed
to circumvent regulation by the order.
Decision on
Proposed Amendments to Tentative Marketing Agreements and to Orders, 25 Fed.
Reg. 7819, 7825 (Aug. 16, 1960). This
explanation provides conclusive support for the Secretary’s careful policing of
its regulatory pricing scheme by strictly construing the definition of
producer-handler.
Petitioner maintains that the Secretary’s
interpretation of the regulations is not consistent with the purpose of the
legislation because the Secretary’s strict construction of the requirements
hinders petitioner’s stated purpose for entering the lease transaction: to exercise control over the production of
the milk so that it may implement a rigorous quality control program that far
exceeds any mandatory regimen.
Petitioner presented a great deal of evidence to this effect at the administrative
hearing, and now argues that
[t]he market
administrator effectively seeks to penalize Stew Leonard’s by making it bear
the cost of a regulatory program even though such regulation of Stew
Leonard’s–a self-contained enterprise
that simply produces milk and sells it at retail–would not serve the purpose of
the program. The administrator seeks to
bring Stew Leonard’s back into the fold, such that Stew Leonard’s would
presumably resume purchasing lower quality milk from the dairy cooperative that
once supplied its milk, and Oakridge Farm would resume selling its high-quality
milk to the dairy cooperative to be blended with and diluted by the
lower-quality milk of other farms.
(Petitioner’s
Cross-Mot. for S.J. at 24). As such,
petitioner claims that failing to interpret the definition of producer-handler
to include arrangements such as the one in the instant case serves as a
deterrent to handlers such as Stew Leonard’s inventing creative solutions to
produce a higher quality product.
The fact that petitioner can meet its
quality-control objectives under its current classification, albeit at a higher
production cost, fatally undermines this argument. The evidence in the record demonstrates that conferring
producer-handler status upon petitioner is not necessary to achieve the high
quality product desired by Stew Leonard’s; indeed, the fact that the present
arrangement results in the production of a superior product was not disputed at
any time in the hearing, but the fact that petitioner has been able to
manufacture this superior product while still participating in the pricing pool
precludes any causal connection between the status of producer-handler and the
statutory objective of producing wholesome milk. Reprieve from the regulatory pool would lower the production
costs for Stew Leonard’s, but the purpose of the act is to promote the
production of wholesome milk, and not to promote the production of wholesome
milk at the lowest possible cost to the handler.
The Secretary’s construction of the
applicable regulation is in accordance with the law. It follows the plain language of the text, is consistent with the
expressly stated purpose for the exemption, and does not betray the purpose of
the AMAA.
2. SECRETARY’S APPLICATION OF THE REGULATIONS
Having decided that the construction of
the law the Secretary was charged with applying was in accordance with the law,
the court now turns to the question of whether the Secretary properly applied
the evidence to the law.
The court
reviews the agency’s on-the-record findings in such cases under the “substantial evidence” test, as set forth in
5 U.S.C. § 706(2)(E): “[t]he court
shall . . . hold unlawful and set aside agency action, findings, and
conclusions found to be . . . unsupported by substantial evidence. . . .”[11] “[S]ubstantial evidence is more than a mere
scintilla,” and “must do more than create a suspicion of the existence of the
fact to be established.” Universal
Camera Corp. v. N.L.R.B., 340 U.S. 474, 477 (1951) (citations, internal
quotation marks omitted). The quantum
of evidence, viewing the record as a whole, must be such that “it would have
been possible for a reasonable jury to reach the [Secretary’s] conclusion.” Allentown Mack Sales & Service, Inc. v.
N.L.R.B., 522 U.S. 359, 366-67 (1998).
Thus, “[e]ven if a court could draw different conclusions from those
drawn by the agency, that would not prevent the
agency’s
decision from being supported by substantial evidence.” Kinney Drugs, Inc. v. N.L.R.B., 74 F.3d
1419, 1427 (2d Cir. 1996) (citations, internal quotation marks omitted); see
also Allentown Mack Sales & Service, Inc., 522 U.S. at 377 (noting that
the substantial evidence standard “requires not
the degree of evidence which satisfies the court that the requisite fact
exists, but merely the degree which could satisfy a reasonable
factfinder.”).
Petitioner contends that the Secretary’s
decision should be reversed for two reasons.
First, it argues that the Secretary’s finding that petitioner did not
meet the requirements of the definition of producer-handler is not supported by
the weight of the evidence in the record.
Second, petitioner maintains that the Secretary’s decision is
disingenuous because it flies in the face of prior departmental precedent.
The gravamen of petitioner’s first
contention is that the evidence shows that the lease in question gives it a
great degree of control over the farming operations, and shifts a significant
amount of risk from the Bahlers, the family who owns Oakridge Farm, to Stew
Leonard’s. Also, petitioner points out
that it operates in the intuitively precarious position of paying rent for
animals and equipment at a monthly rate, in addition to the monthly expenses of
running the farm, and then has to conduct its accounting in such a way that
complies with the federal regulatory pricing scheme. Petitioner maintains that, because of the logistics of this
arrangement, and the fact that it contractually assumes much of the risks of
conducting a farming operation, it should be considered one enterprise under
the marketing order.
However, the Secretary’s decision is
supported by substantial evidence. The
Secretary adequately considered both the evidence that supported petitioner’s
contention, and the evidence that bolstered the Market Administrator’s
decision. He examined the terms of the
effective lease, which provides that “Stew Leonard’s agrees to pay for all
ordinary and necessary expenses related to the production, processing and
packaging of milk,” and that “Stew Leonard’s agrees to assume all risk,
responsibility and maintenance of the cows, equipment, buildings, and labor,”
(Petition for Review of Agency Decision, Ex. G, ¶ 3). He also noted the fact that Stew Leonard’s “has paid the cost of
fertilizing cows, hardware maintenance and repair, equipment repair, feed,
payroll, veterinary services, and services to keep track of animals,” (Petition
for Review of Agency Decision, Ex. J, ¶ 23 at 19), and that Stew Leonard’s
maintains insurance on Oakridge Farm, (see id.). The Secretary’s findings to this effect were
consistent with the evidence produced at the hearing.[12]
In spite of
these findings, substantial evidence exists to support the conclusion of the
Secretary. Specifically, the Secretary
found that, despite the indicia of control discussed above, petitioner was not
a dairy farmer who operated his own enterprise at his own risk. ( See Petition for Review of Agency
Decision, Ex. J at 27 (“The evidence establishes that Petitioner is not a dairy
farmer . . . and that Petitioner does not provide, at Petitioner’s own risk,
the maintenance, care, and management of the Oakridge Farm Dairy herd and other resources and facilities used to
produce milk. . . .”)). The Secretary
found that Stew Leonard’s has no interest in the
land
itself under the terms of the lease. ( See id., ¶ 30). In addition, the Secretary found that Oakridge Farm, which is the
entity with which Stew Leonard’s entered into the lease, retains a significant
connection to Bahler Farms, Inc. an adjacent farm operation, in that the
principals of Bahler Farms, Inc., are authorized to write checks for Stew
Leonard’s (see id., ¶ 25), records for Oakridge Farms are maintained at
Bahler Farms, Inc. (see id., ¶ 27), the two operations purchase supplies
jointly (see id., ¶ 26), and the two entities share “equipment and a
full-time calf raiser, a mechanic, and full-time milkers,” (see id., ¶
24). Oakridge and Bahler also pledged
security for a loan together (see id., ¶ 28), and jointly insure against
a loss resulting from the joint operation (see id., ¶ 29). Finally, the evidence shows that Stew
Leonard’s does not know how to operate a dairy farm (see id., ¶ 33), and
that the day-to-day operation of Oakridge Farm did not change at all after the
execution of the lease (see id., ¶ 37).[13]
This evidence is sufficient for a
reasonable jury to conclude that Stew Leonard’s does not operate a dairy farm
as its own enterprise and at its own risk.
Although, without question, the lease places Stew Leonard’s in a
position to take a more active role in the production of the milk it sells, the
evidence supports the conclusion that the lease had very little practical
effect upon the symbiotic operation of Oakridge Farm and Bahler Farms,
Inc. In this respect, the scenario
closely resembles the ordinary purchase and sale of milk. Given the evidence presented, a reasonable
conclusion to draw would be that, despite the fact that the lease was not a
sham, Stew Leonard’s is actually a handler posing as a producer-handler.
Petitioner, in a vigorous
cross-examination of Erik Rassmussen, the Market Administrator of the New
England Marketing Order at the time of the hearing, explored, at length, the
limits and legal ramifications of the Market Administrator’s knowledge and
views concerning how much control and assumption of the risk of loss is
necessary to be classified as a producer-handler. Although informative, the testimony elicited during the hearing
from Mr. Rassmussen does not detract from his ultimate conclusion. Counsel for the petitioner asked pointed
questions about complicated legal intricacies regarding the forms of business
organizations and the distinctions between a lease and a transfer of
property. Mr. Rassmussen admitted that
he was not a lawyer, and, indeed, familiarity with these legal concepts is not
qualification of his position; his job is to look at the circumstances as a
whole, under the guidance of the provisions and purpose of the regulatory
scheme, in order to make an informed practical determination. He does not have to explore every legal
consequence of the transaction, or refute all indicia of control, rather he
must use his knowledge and experience to determine if, practically speaking,
the entity in question is a dairy farmer who
conducts his operation at his own risk, or a handler who has donned a clever
disguise as a producer-handler. See
Elm Spring Farm, Inc. v. U.S., 127 F.2d 920, 926 (1st Cir. 1942) (“The
regulatory scheme embodied in the Order is an
intensely practical business, and the question now before us is not to be determined by a
purely abstract inquiry as to who had ‘title’ to the cows which produced the
milk.”).
This emphasis on the practical effect is
faithful to the purpose of the producer-handler exemption. The Secretary found that classifying Stew
Leonard’s as a producer-handler would have an impact upon the market as a
whole.[14] Specifically, the Secretary found that Stew
Leonard’s would enjoy a competitive advantage over its rival milk handlers in
the area by avoiding the pool equalization payments. ( See Petition for Review of Agency Decision, Ex. J, ¶ 34). Furthermore, the Secretary found that this
advantage would effect the market as a whole, (see id., ¶ 34), and that
the size of Stew Leonard’s operation could not be considered small, (see id.
at 31). As previously noted, the
purpose of the exemption was to forgo the regulation of smaller family-type
operation because these operations do not have a significant effect upon the
pricing pool, and therefore the burdens of regulating them outweigh the
benefits to the regulatory pool. When
an entity does have an effect upon the pricing pool, as a reasonable conclusion
from the evidence suggests Stew Leonard’s does, the purpose of the exemption
would be defeated.
Petitioner’s second contention is that the
Secretary’s application of the producer-handler definition contradicts prior
departmental decisions. In particular,
petitioner presented evidence that three entities currently classified as
producer-handlers lease a portion of their dairy herd, yet assume significantly
less risk than that assumed under the terms of petitioner’s lease. Petitioner argues that, because “[t]he
Market Administrator concedes these leases do not provide, as their own
enterprise and at their own risk, the maintenance, care, and management of the
leased cows and other resources and facilities used to produce the milk from
the leased cows,” (Petition for Review of Agency Decision, Ex. J, ¶ 32), that
respondent’s finding that petitioner is not a producer-handler is contradictory
to prior departmental actions.
The basis of petitioner’s argument is that
because the producer-handler lessees in the three other leases assume a lesser
degree of risk than petitioner, petitioner should be granted producer-handler
status. However, petitioner dismisses
one key fact: the three producer-handler
lessees were classified as producer-handlers
prior to the execution of the leases. (
See id.). This is certainly a credible
reason for distinguishing between the other three leases and petitioner’s; the
three producer-handler lessees could not be accused of constructing a legal
framework to avoid payments into the pricing pool, because, as producers and
dairy farmers,[15] they were never
subject to the pricing pool in the first place. Allowing existing producer-handlers to lease a portion of their
dairy herd is entirely consistent with the express purpose of the
producer-handler exemption because regulation of smaller dairy farms would have
a nominal effect upon the pricing pool,
even if they do supplement their milk production to some degree.[16]
Petitioner also cites a previous decision
by the Secretary that classified an entity as a producer-handler despite the
fact that its entire dairy herd was leased, and claims that, under this
precedent, the Secretary’s decision not to classify Stew Leonard’s as a producer-handler
would be unreasonable. Petitioner
contends that there is no foundation for the Secretary’s conclusion that an
existing producer-handler can lease a herd, but a handler may not become a
producer-handler through a lease transaction.
Because there is a substantial basis for distinguishing the case in
question, petitioner’s argument fails.
In the case in question, In re Jerome
Klocker, 26 Agric. Dec. 1050 (Oct. 30, 1967), the petitioner had “been the
sole owner of all land, buildings, machinery, equipment and facilities of both
the dairy farm and milk processing plant located thereon,” id. at 1051,
until he engaged in a sale and leaseback arrangement with a herdmaster in which
petitioner sold his heifers to one Rausch, who then leased the herd back to
petitioner, see id. The Secretary found that the transaction had
no practical effect upon the operation of the farm; the herd was never moved
off petitioner’s property, Rausch was essentially an employee of the
petitioner, and all the milk was produced from this herd in petitioner’s
facilities. See id. at 1051,
1055, 1057.
Upon consideration of these facts, the
Secretary reversed the decision of the market administrator and retained
petitioner’s classification as a producer-handler. In so finding, the Secretary noted that “[a]dmittedly, the use of
milk from a leased herd is not determinative of the question of satisfaction of
the requirements of the ‘producer-handler’ definition contained in the order,”
and held that, “[p]etitioner exercised the powers of management, supervision,
direction and control of the dairy herd and farm and such farm was his
investment or risk,” and “the production of the milk utilized at petitioner’s
plant continued to be the enterprise and risk of petitioner subsequent to the
[leaseback] . . . .” Id. at
1057-58.
The factual
differences between Klocker and this case are manifest. In Klocker, the petitioner operated
his own dairy farm and processing plant, but had a peculiar method of paying
his herdmaster, a method that had no practical effect upon the operation of the
farm for the purpose of the administration of the marketing order. In the instant case, petitioner never owned
a dairy farm, and then leased the animals and fixtures, in addition to assuming
some risk associated with the farm’s operation, but the practical effect upon
the operation of the farm for the purpose of the administration of the
marketing order did not change. A fair reading of the case suggests that the Secretary should
not elevate form over substance, and should, instead, look to the practical
effect upon the regulatory scheme with which he is charged to implement. Viewed in this light, the
state of affairs prior to the lease
transaction, contrary to petitioner’s assertions, is certainly a critical
issue, and a permissible basis for differentiating between the cases. Such a reading supports the Secretary’s
decision in this case.
In sum, the Secretary’s application of the
governing regulation is supported by substantial evidence and therefore is “in
accordance with the law.” The Secretary
has a duty to enforce the provisions of the AMAA, in such a way that adheres to
the purpose of the act: to avoid
ruinous pricing practices in the several market areas. The Secretary’s decision in this case was
faithful to that purpose, and also was consistent with prior departmental
action. The Secretary found that Stew
Leonard’s, under the terms of the operative lease, was not the type of entity
deserving of exemption from the regulatory pricing pool because it had a
cognizable impact upon the pricing pool, and the evidence showed that it did
not assume the degree of risk necessary to be deemed a producer-handler.
As an aside, petitioner raises some
concerns, echoed somewhat by the ALJ, regarding the determination of
producer-handler status, in particular the gaps left in the text of the
regulations regarding the lack of a definition of “dairy farmer” and the
process for ascertaining where the line should be drawn with respect to the
permissible percentage of outside milk handling by existing producer-handler
leases. However, petitioner’s concerns
merely re-state a familiar problem:
because Congress, or even the Secretary of Agriculture, cannot construct
a legislative solution to every conceivable issue, much of the classification
process is left to administrative discretion.
Although some may lament this reality, courts have consistently held
that it is lawful:
[a] statute may
be ambiguous, for the purposes of Chevron analysis, without being
inartful or deficient. The present case
exemplifies the familiar proposition that Congress need not, and likely cannot,
anticipate all circumstances in which a general policy must be given specific
effect.
U.S. v. Haggar
Apparel Co., 526 U.S. 380, 392 (1999).
A reviewing court must confine its review to the legality, and not the
desirability, of the agency’s action.
C. EQUAL PROTECTION
Petitioner claims that the Secretary’s
decision to deny Stew Leonard’s producer-handler status is
unconstitutional. It claims that the
Secretary violated the equal protection guarantees of the Fifth Amendment when
it granted producer-handler status to operations that lease a portion of their
dairy herd, without assuming a significant portion of the risks involved, and
refused to grant producer-handler status to petitioner, who leased a herd that
fulfills all its processing demands, while assuming a significant portion of
the risks involved.
The Fourteenth Amendment of the United
States Constitution states that “[n]o State shall . . . deny to any person
within its jurisdiction the equal protection of the laws.”[17] U.S. Const. Amend. XIV, § 1. This constitutional guarantee ensures that
“all similarly situated persons are treated similarly under the law,” such that
“[i]f a [regulation] classified people, the classification must be based on
criteria related to the [regulation’s] objective.” Vermont Assembly of Home Health Agencies,
Inc. v. Shalala, 18 F. Supp.2d 355, 363 (D. Vt. 1998).
In determining if this guarantee has been
infringed, a reviewing court must apply the appropriate standard. The Supreme Court instructs reviewing courts
as follows:
In areas of
social and economic policy, a [ ] classification that neither proceeds along
suspect lines nor infringes fundamental constitutional rights must be upheld
against an equal protection challenge if there is any reasonably conceivable
set of facts that could provide a rational basis for the classification.
F.C.C. v. Beach
Communications, Inc., 508 U.S. 307, 313 (1993). Since the case before the court concerns areas of social and
economic policy, and does not involve suspect classifications or fundamental
constitutional rights, the court will apply the minimum rationality standard. See id.
When applying the minimum rationality standard,
a regulatory classification “is accorded a strong presumption of validity.” Heller v. Doe, 509 U.S. 312, 319
(1993). The Secretary has no obligation
to promulgate evidence in support of its decision, and “[t]he burden is on the
one attacking the legislative arrangement to negative every conceivable basis
which might support it.” Id. at
320 (internal quotation marks omitted), see also Able v. U.S., 155 F.3d
628, 632 (2d Cir. 1998) (applying the same standard). In sum, “[w]here there are plausible reasons for [the
Secretary’s] action, our inquiry is at an end.” Beach Communications, 508 U.S. at 314 (internal quotation
marks omitted).
The court finds a plausible and legitimate
reason for the difference in treatment.
As discussed herein, the Secretary’s decision was based upon substantial
evidence. As such, petitioner cannot
sustain its burden of disproving any rational explanation for the difference in
treatment.
IV. CONCLUSION
Petitioner has failed to demonstrate that
the defendant’s decision to deny it producer-handler status under the
applicable regulations is not supported by substantial evidence, and therefore
“not in accordance with the law,” 7 U.S.C. § 608c(15)(B). Likewise, petitioner has not shown that
defendant’s application of the statutory scheme lacks a rational basis. Therefore, the decision of the Secretary of
Agriculture is AFFIRMED, petitioner’s motion for summary judgment is DENIED,
and respondent’s motion for summary judgment is GRANTED. The Clerk of the Court shall enter judgment
for the respondent on all counts.
IT IS SO ORDERED.
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