Summary of a Recent
Judicial Development in
Farm Programs

Manufacturer's Challenge of USDA's Milk
Pricing Classifications Rejected

Harrison M. Pittman
Staff Attorney

The United States Court of Appeals for the District of Columbia Circuit has ruled that a chocolate manufacturer failed to exhaust its administrative remedies when it challenged the USDA's implementation of pricing classifications for milk used in the manufacture of milk chocolate. Hershey Foods Corporation v. Department of Agriculture, 293 F.3d 520 (D.C. Cir. 2002). The D.C. Circuit affirmed the district court's decision to dismiss the action, but disagreed with the district court's ruling that the USDA's final rule was converted into statutory law when the 2000 Appropriations Act was enacted. See id. at 524.

The Agricultural Marketing Agreement Act of 1937 ("AMAA") provides the Secretary of Agriculture with the authority to regulate the sale of milk by geographic region. See id. at 521 (citing 7 U.S.C. Sec. 608c(5)). The Secretary issues federal milk marketing orders ("FMMOs") to carry out this authority. See id. The FMMOs apply to different geographic regions and to different milk classifications. See id. The different milk classifications are based upon the "'form in which or the purpose for which [the milk] is used.'" Id. (quoting 7 U.S.C. Sec. 608c(5)(A)).

The Federal Agriculture Improvement and Reform Act of 1996 ("FAIR Act") directed the Secretary to reduce the number of FMMOs to no more than fourteen and to make other changes. See id. at 521-22 (citing 7 U.S.C. Sec. 7523 (1996) and Milk in the New England and Other Marketing Areas: Proposed Rule and Opportunity to File Comments, Including Written Exceptions, on Proposed Amendments to Marketing Agreements and Orders, 63 Fed. Reg. 4802, 4805 (Jan. 30, 1998)). The FAIR Act authorized the USDA to use informal rulemaking procedures to expedite the FMMO reform process. See id.

In January 1998 the USDA proposed a final rule that used four classifications of milk: Class I, Class II, Class III, and Class IV. See id. Class I consisted of fluid milk; Class II consisted of fluid milk used to produce food products such as candy; Class III consisted of milk used to produce spreadable cheeses; and Class IV consisted of milk used to produce butter and milk products in dried form. See id. (citing Milk in New England and Other Marketing Areas; Order Amending the Orders, 64 Fed. Reg. 47,898, 47,903 (Sept. 1, 1999) ("the final rule")).

The Hershey Foods Corporation ("Hershey") is the leading manufacturer of milk chocolate in the United States and is the only milk manufacturer that still uses fresh fluid milk in its manufacturing process. See id. Hershey purchases fluid milk at Class II prices. See id. Because Hershey's competitors purchase their milk in dried form from independent milk drying plants, they purchase their dried milk at Class IV prices. See id. The USDA's final rule made Class II skim milk 70 cents more expensive per hundredweight than Class IV milk. See id. (citing Milk in New England and Other Marketing Areas, 64 Fed. Reg. at 47,907) (to be codified at 7 C.F.R. Sec. 1000.50(e)).

Hershey brought an action in district court seeking declaratory and injunctive relief, alleging that the final rule created an unlawful price disparity between the price for Class II milk and the price for Class IV milk. See id. Hershey also claimed that the final rule violated the Administrative Procedure Act ("APA") because it was arbitrary, capricious, and contrary to the AMAA. See id. In a separate challenge to the new rule, a federal district court in Vermont enjoined the Secretary from implementing the rule three days before the final rule would take effect. See id.(citing St. Albans Coop. Creamery, Inc. v. Glickman, 68 F.Supp.2d 380, 392 (D.Vt. 1999)). Several days later a bill was introduced in the House of Representatives that was intended "'to provide for the modification and implementation of the final rule for the consolidation and reform of Federal milk marketing orders.'" Id. (quoting H.R. 3428, 106th Cong. (Nov. 17, 1999)). H.R. 3428 called for the USDA's final rule to "'take effect and be implemented' with some alterations." Id. (quoting H.R. 3428 Sec. 1(b)). H.R. 3428 was incorporated by reference into the 2000 Appropriations Act soon thereafter. See id. (citing Pub. L. No. 106-113, Sec. 1000(a)(8), 113 Stat. 1501, 1536-37 (1999)).

The district court dismissed Hershey's lawsuit without prejudice, ruling that the "enactment of H.R. 3428 [via the 2000 Appropriations Act] transformed the regulation into statutory law not subject to APA review." Id. Hershey subsequently filed an amended complaint which included constitutional challenges to H.R. 3428, and argued in the alternative that H.R. 3428 "simply implemented the rule so that Hershey could still bring suit under the APA to have it set aside." Id. The USDA argued that the suit should be dismissed because the final rule became law through the 2000 Appropriations Act. See id. The USDA also argued that even if the final rule did not become law through the Appropriations Act, Hershey would still be required to exhaust its administrative remedies, pursuant to 7 U.S.C. Sec. 608c(15)(A), before it could challenge the rule. See id. at 522-23.

The district court granted the USDA's motion to dismiss and refused to reconsider its ruling that the enactment of H.R. 3428 converted the regulation into a statute. See id. at 523 (citing Hershey Foods Corp. v. USDA, 158 F.Supp.2d 37, 37 n.1 (D.D.C. 2001)). Hershey appealed this determination to the D.C. Circuit. See id. Hershey's only argument on appeal was that the district court erred in dismissing its suit when it determined that "'the rule originally challenged by [Hershey] has been enacted into law by the Appropriations Act.'" Id. (quoting Hershey Foods Corp. v. USDA, 158 F.Supp.2d 37 (D.D.C. 2001)).

The D.C. Circuit disagreed with the district court's finding that the Appropriations Act converted the rule into a statute, stating that "[t]here is much to be said in favor of Hershey's contention that the Appropriations Act did not convert the rule into a statute." Id. at 524. The circuit court examined the language of H.R. 3428 Sec. 1(e) to support this statement. See id. H.R. 3428 . 1(e) provided in relevant part,

The implementation of the final rule, as modified by subsection (c), shall not be subject to any of the following: (1) The notice and hearing requirements of section 8c(3) of the Agricultural Adjustment Act (7 U.S.C. 608c(3)) . . . or the notice and comment provisions of section 553 of title 5, United States Code; (5) Any decision, restraining order, or injunction issued by a United States court before the date of the enactment of this Act.

Id.

The D.C. Circuit noted that "H.R. 3428 [Sec. 1(e)] nowhere states that the rule is enacted into statutory law." Id. Instead H.R. 3428 Sec. 1(e) referred to "implementation of the final rule," and that the rule "shall not be subject to" the notice and comment requirements of the APA. Id. The court remarked that H.R. 3428 would only contain this language if what was actually being implemented was a rule. See id. The D.C. Circuit added that "[n]one of this makes any sense unless what is being implemented is a rule. To state the obvious, statutes are not promulgated by agencies and they are not subject to the requirements of the APA." Id.

The D.C. Circuit also determined that H.R. 3428 Sec.1 (e)(5) overrode the injunction that was issued by the Vermont district court. See id. The circuit court stated that "the court's order had enjoined the agency from putting its rule into effect." Id. (emphasis supplied). The circuit court added, "[i]f H.R. 3428 meant to enact the rule as a statute this provision would have been unnecessary." Id. The court pointed out that the Vermont district court had issued the injunction because the plaintiff's claims that several statutory requirements had been violated by the Secretary were likely to be successful. See id. The D.C. Circuit stated that the reasoning of the Vermont district court "and the injunction itself could not have prevented a statute from going into effect, if the rule were intended to be such." Id.

The D.C. Circuit remarked that in "section 2 of the bill . . . Congress . . . directed the Secretary to undertake formal rulemaking on the subject of Class III and IV pricing formulas" and to adopt a specific formula for Class I price differentials. Id. at 525. Congress did not take any action with respect to the Class II pricing provision, the "subject of this litigation." Id. The D.C. Circuit concluded that "[b]y leaving the Class II pricing provision untouched, we believe for the reasons already given that Congress meant to treat at least this portion of the rule, not as a statute, but as agency action, still subject to challenge under the APA." Id.

Although the D.C. Circuit agreed with Hershey's argument that the district court incorrectly determined that the rule had been converted to a statute, it affirmed the district court's ruling that Hershey was required to exhaust its administrative remedies before seeking judicial review. See id. The AMAA exhaustion requirement provides that "'[a]ny handler subject to an order may file a written petition with the Secretary of Agriculture' challenging the order or requesting an exemption, that the Secretary 'shall thereupon [provide] an opportunity for a hearing upon such petition,' and that 'after such hearing, the Secretary shall make a ruling upon the prayer of such petition which shall be final, if in accordance with law.'" Id. at 526 (quoting 7 U.S.C. Sec. 608c(15)(A)). The circuit court added that Hershey, as a handler, "must petition the Secretary before seeking judicial review of a milk marketing order promulgated under the FAIR Act. Hershey did not undertake this required step, and therefore the dismissal of its complaint was the proper result." Id.

This case summary was prepared in August, 2002.