Lehigh Valley Cooperative Farmers, Inc. v. United States/Opinion of the Court

Petitioners, operating milk processing plants in Pennsylvania, challenge the validity of certain 'compensatory payment' provisions included in milk marketing orders affecting the New York-New Jersey area, which were promulgated by the Secretary of Agriculture under the authority granted him by § 8c of the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. § 608c, 7 U.S.C.A. § 608c. That section permits the Secretary to issue regional regulations governing, in various enumerated respects, the marketing of certain agricultural commodities, among which is milk. This provision in question requires those who buy milk elsewhere and bring it into the region for sale as fluid milk to pay to the farmers who supply the region a fixed amount as a 'compensatory payment.' This amount is measured by the difference between the minimum price set by the Market Administrator for fluid milk and the minimum price for surplus milk. The judgment of the Court of Appeals for the Third Circuit, 287 F.2d 726, upholding the validity of the 'compensatory payment' provision here under attack, conflicted with an earlier decision rendered by the Court of Appeals for the Second Circuit, Kass v. Brannan, 196 F.2d 791. To resolve this conflict we granted certiorari. 366 U.S. 957, 81 S.Ct. 1919, 6 L.Ed.2d 1251.

The order around which the present controversy centers, now titled Milk Marketing Order No. 2, 7 CFR §§ 1002.1 et seq., though somewhat more complex than others, is in its general outline representative of the pattern of regulation established by the Secretary for the promotion of orderly marketing conditions in the milk industry and the preservation of minimum prices for farmers. Pursuant to the authority granted by § 8c(5)(A), the Order classifies milk that is sold within the New York-New Jersey marketing area 'in accordance with the form in which or the purpose for which it is used.' Milk that contains 3% to 5% butterfat-the usual proportion in ordinary liquid milk-and is sold for fluid consumption is assigned to Class I. Milk that is used for cream (sweet and sour), half and half, or milk drinks containing less than 3% or more than 5% butterfat is classified in Class II. The remainder-milk that is to be stored for a substantial period and used for dairy products such as butter and cheese-is grouped in Class III. 7 CFR § 1002.37.

This classification reflects the relative prices usually commanded by the different forms of milk. Thus, highest prices are paid for milk used for fluid consumption, and the lowest for milk which is to be processed into butter and cheese. Since the supply of milk is always greater than the demands of the fluid-milk market, the excess must be channeled to the less desirable, lower-priced outlets. It is in order to avoid destructive competition among milk producers for the premium outlets that the 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.

Under the Marketing Order here in question it is primarily the handlers whose plants are located within the marketing area and who regularly supply that area with fluid milk who are regulated. All handlers who receive or distribute milk within the 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. But only the handlers operating 'pool plants'-i.e., plants which meet certain standards set out in 7 CFR §§ 1002.25-1002.29 -must pay the producers from whom they buy the uniform price set by the Administrator. This price is calculated each month on the basis of the reports that are submitted. After determining the minimum prices for each use classification pursuant to formulas set out in 7 CFR § 1002.40, the Administrator computes an average price for the 'pool' milk handled during that month. This figure is reached by first multiplying the 'pool' milk disposed of in each class by the established minimum price for that class, and then adding the products to the 'compensatory payments' made for nonpool milk. After certain minor adjustments are made, this sum is divided by the total quantity of 'pool' milk sold in the market during the month. The quotient is a 'blend price.' With some adjustments to reflect transportation expenses, this uniform price must be paid to producers by all handlers maintaining 'pool' plants. 7 CFR § 1002.66.

Adjustments among handlers are made by way of a 'Producer Settlement Fund,' into which each handler contributes the excess of his 'use value' over the uniform price paid by him to his producer. Handlers whose 'use value' of the milk they purchase is less than the 'blend price' they are required to pay may withdraw the difference from the fund. The net effect is that each handler pays for his milk at the price he would have paid had it been earmarked at the outset for the use to which it was ultimately put. But the farmer who produces the milk is protected from the effects of competition for premium outlets since he is automatically allotted a proportional share of each of the different 'use' markets.

It will thus be seen that this system of regulation contemplates economic controls only over 'pool-handler' plants since only such handlers are required to pay the 'blend price' to their producers and to account to the Producer Settlement Fund. If limited to the provisions recounted above, the regulatory scheme would not affect milk brought into the New York-New Jersey marketing area by handlers who are primarily engaged in supplying some other market and whose producers are not located within the New York-New Jersey area. Some of the regional orders now in effect do not undertake any economic regulation of 'outside' or 'other source' milk. But it is quite obvious that under certain circumstances some regulation of such milk may be necessary. Accordingly, § 8c(7)(D) of the Act, 7 U.S.C. § 608c(7)(D), 7 U.S.C.A. § 608c(7) (D), authorizes the Secretary to include in his regulating orders conditions that are incidental to terms expressly authorized to effectuate the other provisions of such order.'

A handler who brings outside milk into a marketing area may disrupt the regulatory scheme in at least two respects:

(1) Pool handlers in the marketing area who are required to     pay the minimum class prices for their milk may find their      selling prices undercut by those of nonpool handlers dealing      in outside milk purchased at an unregulated price.

(2) Producers in the marketing area, whose 'blend price'     depends on how much of the relatively constant fluid-milk      demand they supply in a given month, may find the outside      milk occupying a portion of the premium market, thus      displacing the 'pool' milk and forcing it into the less      rewarding surplus uses, with the ultimate effect of      diminishing the 'blend price' payable to producers.

In an effort to cope with these disruptive economic forces, the Secretary devised his 'compensatory payment' plan. In essence the plan imposes special monetary exactions on handlers introducing 'outside' milk for fluid consumption into a marketing area in months when there is a substantial surplus of milk on the market.

Of the 68 regional milk orders which establish marketwide pools, 64 contain 'compensatory payment' provisions of one kind or another. The Order now before us is typical of 23 of these orders. The Order provides that a handler who brings 'outside' milk into the New York-New Jersey area and sells it for fluid use must pay to the pool's producers, through the Producer Settlement Fund, an amount equal to the difference between the minimum prices for the highest and for the lowest use classifications prevailing in that area. In other words, for each hundredweight of non-pool milk sold for Class I use in the New York-New Jersey area, a payment equal to the difference between Class I and Class III prices must be made by the seller to the Producer Settlement Fund.

The Purpose and Effect of the Compensatory Payment.

After the Court of Appeals for the Second Circuit had held that compensatory payment requirement in the New York-New Jersey Milk Marketing Order (then Order No. 27) to be a 'penalty,' Kass v. Brannan, 2 Cir., 196 F.2d 791, 795, the Secretary of Agriculture conducted extensive hearings to determine whether it should be retained. His findings, which appear at 18 Fed.Reg. 8444-8454, explain this requirement as the most satisfactory means of imposing 'a suitable charge on such unpriced milk in an amount sufficient to neutralize, compensate for and eliminate the artificial economic advantage for non-pool milk which necessarily is created by the classified pricing and pooling of pool milk under the order.' Id., at 8448. There seems little doubt that an assessment equal to the Class I-Class III differential would, in all but rare instances, nullify any competitive advantage that nonpool milk could have: only if the sum of the purchase price of the outside milk and the cost of its transportation to market were less than the Class III price would a handler find it profitable to bring such milk into the marketing area. But it must be obvious that this payment is wholly or partially 'compensatory'-i.e., puts pool and nonpool milk 'on substantially similar competitive positions at source' (ibid.) only if the milk has been purchased at not more than the Class III price. If the purchase price of the nonpool milk exceeds the Class III price within the area, the effect of the fixed compensatory payment is to make it economically unfeasible for a handler to bring such milk into the marketing area.

The Secretary of Agriculture's determination that the Class I-Class III differential was the most suitable compensatory figure rested upon what was, in effect, an irrebuttable presumption that the nonpool milk was purchased at a rate commensurate with the value of 'surplus' (Class III) milk. See 18 Fed.Reg., at 8448. That presumption was based in turn on the supposition that the nonpool milk could not have been worth more than the Class III price where purchased since it could not be shipped elsewhere for Class I use. But it must be apparent that it is only if the milk is denied access to other marketing areas or if a prohibitive payment is assessed on its use elsewhere that it will depreciate in value to Class III levels. For if the milk can be freely shipped elsewhere for fluid use or if it is purchased in an area where prices paid to producers are regulated, it will command a higher price.

Indeed, the facts of the case now before us demonstrate the shortcomings of the Secretary's reasoning. One of the petitioners, Suncrest Farms, Inc., purchases its milk in Pennsylvania under regulations established by the Pennsylvania Milk Control Commission. In September 1957, which was one of the months during which it sought to sell its milk in the New York-New Jersey Marketing Area, Suncrest was required to pay $6.40 per cwt. for the milk it purchased from dairy farmers in Pennsylvania. The Class I-Class III differential in the New York-New Jersey Marketing Area during that month was $2.78 per cwt. Thus, if the 'compensatory payment' were assessed, Suncrest would actually be forced to pay $9.18 per cwt. for fluid milk sold in the area while the handlers maintaining pool plants in the area would pay only the Class I price, which was $6.23 in August 1957.

If competitive parity among handlers of pool and nonpool milk were the only objective of the Secretary's 'compensatory' regulation, other marketing orders of the Secretary show that this result has been achieved without imposing unnecessary hardships, virtually 'trade barriers' as in the instance just given, on the nonpool milk.

It is in considering the effect of the present compensatory payment provision on the pool producers, however, that the principal concern of the Secretary becomes quite apparent. As has been noted (370 U.S., p. 82, 82 S.Ct., p. 1172, supra), the sale for fluid use of nonpool milk in the marketing area displaces pool milk that might otherwise be used for this premium outlet. Since the market area's 'blend price' is computed only with reference to the pool milk, the effect of the entry of nonpool milk is to drive down the price that is paid to producers in the area. A close examination of the workings of the present compensatory payment provision reveals that its effect is to preserve for the benefit of the area's producers the blend price that they would receive if all outside milk were physically excluded and they alone would supply the fluid-milk needs of the area. For every cwt. of pool milk that is forced into 'surplus' use by the entry of nonpool milk, the handler introducing the outside milk is required to pay for the benefit of the area's producers the difference between the value the pool milk would have had if the nonpool milk had never entered and the value it has once the nonpool milk is sold for fluid use. In effect, therefore, the nonpool milk is forced to subsidize the pool milk and insulate the pool milk from the competitive impact caused by the entry of outside milk. This was recognized by the Court of Appeals which held that such a compensatory payment was 'designed to compensate the pool for the loss of the Class I fluid milk utilization and * *  * protect the uniform blend price in the marketing area.' 287 F.2d, at 730. It is only if the Secretary has been authorized by the statute to impose such economic trade barriers on the entry of milk into an area so as to protect the prices received by the pool producers that the present compensatory payment plan can be sustained as 'necessary to effectuate' the expressly authorized provisions of this Order.

Section 8c(5)(G).

Section 8c(5)(G) of the Act, however, taken in light of its legislative history, indicates that the regulation here imposed by the Secretary was of the sort that Congress intended to forbid. Section 8c(5)(G) provides:

'No marketing agreement or order applicable to milk and its     products in any marketing area shall prohibit or in any      manner limit, in the case of the products of milk, the      marketing in that area of any milk or product thereof      produced in any production area in the United States.'

This provision was first enacted into law as part of the Agricultural Adjustment Act of 1935, 49 Stat. 750, amending the Agricultural Adjustment Act of 1933, 48 Stat. 31. It was re-enacted as part of the Agricultural Marketing Agreement Act of 1937, 50 Stat. 246, which reaffirmed the marketing order provisions of the 1935 Act after the processing tax had been struck down as unconstitutional in United States v. Butler, 297 U.S. 1, 56 S.Ct. 312, 80 L.Ed. 477.

Along with enumerating the powers granted to the Secretary of Agriculture so as to avoid the 'delegation' problems brought to light by the then recent decision in Schechter Poultry Corp. v. United States, 295 U.S. 495, 55 S.Ct. 837, 79 L.Ed. 1570, the Congress sought in 1935 to limit the Secretary's powers so as to prevent him from establishing 'trade barriers.' Midwestern legislators were particularly concerned over this possibility. When the reported bill which contained no provision like the present § 8c(5)(G) came to the floor of the House of Representatives, Representative Andresen of Minnesota suggested that the Secretary might use his powers to 'stop the free flow in commerce * *  * of dairy products.' He received an assurance from Representative Jones, the Chairman of the House Committee on Agriculture, that the Secretary was not authorized to require anything more of milk coming into a marketing area than that it 'comply with the same conditions which the farmers and distributors comply with in that region.' 79 Cong.Rec. 9462. An amendment to the bill clarifying this position was then offered by Representative Sauthoff of Wisconsin, 79 Cong.Rec. 9493, but no action was taken on that proposal.

On the next day, Representative Andresen proposed from the floor of the House the forerunner to the present § 8c(5)(G). 79 Cong.Rec. 9572. His amendment took the following form:

'(g) No marketing agreement or order applicable to milk and     its products in any marketing area shall prohibit the      marketing in that area of any milk or product thereof      produced in any production area in the United States.'

There was no objection to the addition of this language, Representative Jones remarking that '(i)t is simply clarifying.' Ibid. But when Representative Sauthoff sought to change the amendment by substituting the words 'limit or tend to limit' for 'prohibit,' Representative Jones objected on the ground that necessary milk classification and minimum pricing for the protection of outside milk producers regularly supplying their own marketing area would 'tend to limit' the introduction of their milk into other areas. Ibid.

The House bill, with the language added by Representative Andresen's amendment, went to the Senate. Accompanying the bill to the floor was S.Rep.No. 1011, 74th Cong., 1st Sess., which stated, at p. 11:

'To prevent assaults upon the price structure by the sporadic     importation of milk from new producing areas, while      permitting the orderly and natural expansion of the area      supplying any market by the introduction of new producers or      new producing areas, orders may provide that for the first 3      months of regular delivery, payments shall be made to producers not      theretofore selling milk in the area covered by the order at      the price fixed for the lowest use classification. This is     the only limitation upon the entry of new producers-wherever      located-into a market, and it can remain effective only for      the specified 3-month period.' (Emphasis added.)

In the Senate § 8c(5)(G) was amended, without objection, 79 Cong.Rec. 11655, to read:

'(G) No marketing agreement or order applicable to milk and     its products in any marketing area shall prohibit or in any      manner limit, except as provided for milk only in subsection      (d), the marketing in that area of any milk or product      thereof produced in any production area in the United      States.'

Section 8c(5)(G) emerged from conference in its present form. The conference report explained how the differences between the House and Senate versions were resolved (H.R.Rep.No. 1757, 74th Cong., 1st Sess. 21):

' * *  * The conference agreement retains the House provision      with respect to prohibitions on marketing of both milk and      products of milk. The conference agreement also denies the     authority to limit in any manner the marketing in any area of      milk products (butter, cheese, cream, etc.) produced anywhere      in the United States. The language adopted by the conference     agreement does not refer to milk, and so does not negative      the applicability to milk, for use in fluid form or for      manufacturing purposes, of the provisions of the bill relating to milk, such as the provisions      on price fixing, price adjustment, payments for milk, etc.'

When the conference agreement came to the floor of the House, Representative Jones again explained what § 8c(5)(G), when taken together with § 8c(5)(D), meant (79 Cong.Rec. 13022):

'Mr. SNELL. * *  * I do not understand exactly what this      means, 'No marketing agreement or order applicable to milk      and its products,' and so forth.

'Mr. JONES. That simply applies to fluid milk. You cannot     make any limitation at all on the amount of butter or cheese      or milk products that are shipped from any one area to      another, and the limitation that may be applied on milk is      only such limitation as puts each area on an equality with      the other areas after a certain period of about 2 1/2 months.

'Mr. SNELL. How does that change the situation from the     present law?

'Mr. JONES. The provisions of this particular bill would     enable that area to be protected from being swamped with      fluid milk from the outside, bought at any old price. For     instance, if you do not have the protection of this bill they      would run into the same trouble they ran into in the New York      milk cases, where they went into New Hampshire and bought      milk at a lower price and came in and broke down your milk      agreements. Under the provisions of this bill if a price were     fixed in this particular area in New York, then if anyone      bought milk from an outside area and brought it in he would      be compelled to pay the producer the same price that was      being paid the producers within the area and comply with all regulations and requirements of that area. For the first     2 months he would be required to take the manufacturer's      price.' (Emphasis added.)

This history discloses that rather than being confined, as Judge Learned Hand suggested in Kass v. Brannan, 196 F.2d, at 800, to practices aimed at the exclusion of cheese and other milk products from eastern markets, § 8c(5)(G) was compendiously intended to prevent the Secretary from setting up, under the guise of price-fixing regulation, any kind of economic trade barriers, whether relating to milk or its products. Whenever there was an attempt to broaden the language of subsection (G) to encompass 'limitations' as well as 'prohibitions,' those opposing it pointed only to the fact that 'limit' might be read as including the type of price fixing covered by subsection (D)-i.e., allowing new pool producers only manufacturing-use prices for a limited period-or other attempts to put outside milk on an equal footing with pool milk. Although the words of § 8c(5)(G), 'in any manner limit,' must be taken, in the context of their legislative history, as referring only to milk products, that history likewise makes it clear that as regards milk the word 'prohibit' refers not merely to absolute or quota physical restrictions, but also encompasses economic trade barriers of the kind effected by the subsidies called for by this 'compensatory payment' provision.

The Invalidity of the Present Compensatory Payment Provision.

In light of the legislative history of § 8c(5)(G) we conclude that the compensatory payment provision of the New York-New Jersey Milk Marketing Order must fall as inconsistent with the policy expressed by Congress in that section. Because it conflicts with § 8c(5)(G), the payment provision cannot be justified under the general terms of § 8c(7)(D), which prevents the inclusion of conditions that are inconsistent with express statutory provisions. Nor is the compensatory payment clause saved by the circumstance that in some instances it may also fortuitously operate to put the handlers of pool and nonpool milk on a competitive par. As has been pointed out (note 13, supra), there are other means available to the Secretary for achieving this result, while affording protection to pool producers, without imposing almost insuperable trade restrictions on the entry of nonpool milk into a marketing area.

The Government contends that the effect of § 8c(5)(G) may not be considered by this Court since that provision was not cited by the petitioners in the administrative proceeding in the Department of Agriculture. But even on the Government's premise that an unauthorized regulation should be upheld by this Court merely because the provision prohibiting it was not cited in the administrative proceeding in which it was attacked, this case presents no such instance. The administrative petition filed with the Department of Agriculture alleged that the effect of the compensatory payment clause amounted 'to establishing tariffs or barriers interfering with the free flow of milk across state lines,' an obvious reference to the prohibition of § 8c(5)(G).

In addition, the Government contends that the petitioners had the choice of joining the market-wide pool, in which case they would not have been subject to the compensatory payment provisions. Their election to stay out of the pool, it is argued, bars any attack on the consequences of their choice. However, such an 'election' is surely illusory. The consequences of joining the pool would have been that petitioners would have been forced to pay the 'blend price' to all their producers wherever located and account to the Producer Settlement Fund for all milk wherever sold. In these circumstances the election was not voluntary as in Booth Fisheries Co. v. Industrial Comm'n, 271 U.S. 208, 211, 46 S.Ct. 491, 492, 70 L.Ed. 908. It was coercive and, indeed, no election at all.

Whether full regulation of the petitioners would be permissible under the Act is a question which we need not reach in this case. If the Secretary chooses to impose such regulation as a consequence of a handler's introducing any milk into a marketing area, the validity of such a provision would involve considerations different from those now before us. With respect to these petitioners, however, and with regard to the regulation here in issue, we conclude that the action of the Secretary of Agriculture exceeded the powers entrusted to him by Congress.

The Secretary of course remains free to protect, in any manner consistent with the provisions of the statute, the 'blend price' in this or any other marketing area against economic consequences resulting from the introduction of outside milk. We do not now decide whether or not any new regulation directed to that end could be made to apply retrospectively, or whether, if it could be validly so applied, the presently impounded funds could be resorted to pro tanto in its effectuation. Cf. United States v. Morgan, 307 U.S. 183, 59 S.Ct. 795, 83 L.Ed. 1211. 'What further proceedings the Secretary may see fit to take in the light of our decision, or what determinations may be made by the District Court in relation to any such proceedings, are not matters which we should attempt to forecast or hypothetically to decide.' Morgan v. United States, 304 U.S. 1, 23, 26, 58 S.Ct. 773, 999, 1000, 1001, 82 L.Ed. 1129.

The judgment of the Court of Appeals is reversed and the case is remanded to the District Court for further proceedings consistent with this opinion. It is so ordered.

Judgment of Court of Appeals reversed and case remanded to District Court.

Mr. Justice FRANKFURTER took no part in the decision of this case.

Mr. Justice WHITE took no part in the consideration or decision of this case.

Mr. Justice BLACK, dissenting.