Summary of a Recent
Judicial Development in
Cooperatives

For Heightened Scrutiny Under the Dormant Commerce Clause,
Plaintiff Must Prove Competitive Advantage
from Status as Out-Of-State Firm

John Stacks
National AgLaw Center Research Associate

Summary of Decision

In Cloverland-Green Spring Dairies v. Pennsylvania Milk Marketing Board, 462 F.3d 249 (3rd Cir. 2006), the United States Court of Appeals for the Third Circuit affirmed the United States District Court for the Middle District of Pennsylvania's judgment in favor of the Pennsylvania Milk Marketing Board (Board) related to minimum milk wholesale prices.

Background

The milk industry in Pennsylvania faces extensive regulations at both the federal and state level. Id. at 252. Farmers are known as "producers," and processors are known as "handlers." Id. At each stage, there are regulations concerning pricing. Id. At the federal level, milk intended for drinking (Class I) is treated differently than milk used in manufactured products (Classes II, III, and IV). Id. at 254. Handlers pay more for milk intended for drinking than for milk used for other purposes; however, producers receive a "blend" (weighted average) price for all milk they sell in order to protect producers that sell milk used for manufacturing purposes. Id. at 255.

The Pennsylvania Milk Board also enforces a pricing scheme. Id. at 256. In-state handlers are required to pay "over-order" prices, which include a premium over Class I prices to ensure a reasonable return to producers. Id. The over-order price does not apply to out of state handlers or to sales of Classes II, III, or IV milk to in-state handlers. Id. All handlers who sell milk to retailers in Pennsylvania sell at prices that guarantee a "reasonable return" to the handlers. Id. Those who sell milk below prices set by the Board are subject to criminal penalties. Id. at 257.

Cloverland-Green Spring Dairies, Inc. (Cloverland) was operating as a Maryland milk handler. Id. It bought 90% of its raw milk from Pennsylvania producers; however, it did not sell fluid milk in Pennsylvania. Id. It contended that Pennsylvania's milk pricing scheme eliminated its competitive advantage and, in effect, barred it from the Pennsylvania milk market in violation of the Constitution's dormant Commerce Clause. Id.

The trial court stated that if minimum wholesale prices eliminated a competitive advantage enjoyed by out-of-state handlers like Cloverland, heightened scrutiny under the dormant clause would apply. Id. at 258. The trial court also stated that even if heightened scrutiny did not apply, the Pike balancing test would apply. Id. The Pike balancing test requires a court to determine whether the burdens on interstate commerce substantially outweigh the putative local benefits. Id.

Arguments

Cloverland argued that "its competitive advantages require[d] heightened scrutiny, regardless of whether those advantages [were] derive[d] from its status as an out-of-state firm," and that "the mandatory wholesale prices [were] the only reason it [could not] compete in the Pennsylvania market." Id. at 260. It also argued that even if heightened scrutiny did not apply, then under the Pike test, the burdens on interstate commerce clearly outweighed any putative benefits. Id. Cloverland contended that because it is an out-of state producer and is more efficient than Pennsylvania producers, higher prices nullify its alleged competitive advantages. Id. at 263. Cloverland further contended that Pennsylvania dealers were so entrenched and competition was so lacking that wholesale minimums were set so high that they set actual prices for all handlers and that out-of-state firms could compete without offering lower prices. Id. Finally, Cloverland claimed that it did not need to prove a cost advantage deriving from its status as an out-of-state handler. Id. at 264.

Analysis and Holdings

The court stated that for heightened scrutiny to apply, Cloverland needed to establish that the competitive advantage it argued had been neutralized by minimum wholesale prices derived from its status as an out-of-state firm. Id. at 265. A plaintiff need not prove it is prevented from entering the market through competition on all possible bases; it need only prove that its out-of-state residency confers some competitive advantage neutralized by the state law under review. Id. at 267. The court found that Cloverland did not prove an actual cost advantage deriving from its status as an out-of-state firm. Id. The court held that the putative benefits of the Milk Law (profitable independent dairy farms, lower consumer prices, protection of businesses built around the dairy industry) were not significantly outweighed by an incidental burden on commerce, and that the Milk Law satisfied the Pike test. Id. at 271.

The court stated that the constitutionality of the Pennsylvania Milk Marketing Law was unresolved by the court's decision. Id. at 272. If another out-of-state producer could prove that it "has competitive advantages over actual Pennsylvania competitors belonging to its place of origin (whether by virtue of its exemption from the over-order premium or otherwise), and these advantages translate into an actual ability to sell milk for less than similarly situated Pennsylvania handlers that [are] neutralized by the minimum wholesale prices, heightened scrutiny would apply." Id.

The case was decided on September 1, 2006.