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STRAUS FAMILY CREAMERY v. LYONS

September 3, 2003

STRAUS FAMILY CREAMERY, ET AL. PLAINTIFFS,
v.
WILLIAM B. LYONS, DEFENDANT



The opinion of the court was delivered by: Bernard Zimmerman, Magistrate Judge

ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
Plaintiffs Straus Family Creamery, Inc. and Horizon Organic Holding Company, certified organic milk processors in Northern California, filed this action against defendant Secretary of the California Department of Food and Agriculture ("Secretary"), alleging that the milk pricing and stabilization program created by the Milk Stabilization Act, California Food and Agriculture Code sections 62061, et seq., and the Gonsalves Milk Pooling Act of 1967, California Food and Agriculture Code sections 62700, et seq., (collectively, the "Pooling Plan"), as applied to Page 2 plaintiffs violates their equal protection and substantive due process rights.*fn1 Plaintiffs also allege that the procedure for resolving plaintiffs' proposed amendment to the Pooling Plan violates their procedural due process rights. The parties filed cross-motions for summary judgment, which were heard on July 30, 2003.*fn2

THE MILK REGULATORY SCHEME

Since 1935, the milk industry in California has been regulated pursuant to the Milk Stabilization Act. Prior to 1967, the Secretary set minimum prices for raw milk depending on the end-use of that milk. Under this system, raw milk used for fluid milk had the highest value in the marketplace and highest minimum price. Raw milk used for other products, such as cheese, had lower values and lower minimum prices. This tiered pricing structure contributed to the destabilization of the market for fluid milk as producers (or farmers) competed to sell their milk for use as fluid milk. See Cal. Food & Agric. Code § 62701 (declaring that "unfair, unjust, destructive and demoralizing trade practices have appeared within this industry. . . .").

To address deficiencies in this pricing scheme and to Page 3 stabilize the milk market, the legislature enacted the Gonsalves Milk Pooling Act. Pooling reallocates money among processors of various dairy products to ensure constant supply of all those products. The current Pooling Plan implements that Act. A general description of the Pooling Plan appears in Ponderosa Dairy v. Lyons, 259 F.3d 1148, 1151-52 (9th Cir. 2001) cert. granted, 123 S.Ct. 818 (2003), judgment vacated on other grounds, 123 S.Ct. 2142 (2003).

When the Pooling Act was passed in 1967, the milk industry was homogenous. Specialty niches have since appeared, the largest of which is organic milk. Other niches include high-protein milk, milk with lower bacteria counts and milk without growth hormones. Plaintiff Horizon is the leading marketer of organic dairy products in the United States and in the United Kingdom. It markets milk, cheese, butter and other dairy products throughout the United States. Plaintiff Straus is a family-owned corporation formed to process milk produced by the family's organic farm. Currently a regional marketer of milk, cheese, butter and yogurt, it is opening an ice cream facility and hopes to market its products nationally. While in the past ten years, the organic milk industry has grown significantly — one estimate is 20% per year — it occupies a small fraction of the entire milk industry. In 1999, organic milk amounted to 0.12% of all the milk produced in California. Of California's approximately 2200 dairy farmers, an estimated 13 are organic. Page 4

This lawsuit arises from perceived inequities in the current Pooling Plan, which plaintiffs allege violate their constitutional rights. These inequities are illustrated by a hypothetical I posed during the hearing. In the hypothetical, the milk market consisted of two end-products, fluid milk and cheese.*fn3 The pool price, the minimum price that processors (typically dairies) are obligated to pay to producers (or farmers) per hundredweight of raw milk, was $13.00. The minimum classification price, or the amount for which the processor must account to the pool, was $14.00 for fluid milk, whether conventional or organic, and $12.00 for cheese milk, whether conventional or organic.*fn4 The producers' costs of production were $12.00 for conventional milk and $15.00 for organic milk. Finally, the contract price for organic raw milk, or the price organic producers demand because of higher production costs, was $18.00.*fn5

Based on these assumptions, the parties agreed that a conventional processor purchasing a hundredweight of milk Page 5 for fluid milk would pay $13.00 (pool price) to the producer and $1.00 to the pool (minimum class price less pool price). A conventional processor of cheese purchasing a hundredweight of milk would pay $13.00 (pool price) to the producer and would receive $1.00 from the pool (pool price less minimum class price).

The parties also agreed that an organic processor purchasing a hundredweight of milk for fluid milk would pay $18 (contract price) to the producer and $1 to the pool (minimum class price less pool price). An organic processor of cheese purchasing a hundredweight of milk would pay $18 (contract price) to the producer and would receive $1 from the pool (pool price less minimum class price). Because presently 90% of organic raw milk is used to produce fluid milk, the Pooling Plan causes plaintiffs to pay far more into the pool than they receive back from the pool. A plan that produces such a disparity, plaintiffs complain, is arbitrary and irrational.

There is no claim in this lawsuit that organic producers are entitled to a higher minimum price. Nor is there a claim by organic processors that the Pooling Plan somehow causes the organic milk market to not accommodate the high transaction prices they must pay for organic milk. Put another way, the relief plaintiffs seek could benefit them, but not necessarily the farmer or the consumer.

THE POOLING PLAN IS NOT UNCONSTITUTIONAL

The issue before me is not whether there is a better way for California to regulate the organic milk industry, Page 6 such as by having a separate pool for organic milk. The issue is only whether there is a rational basis for the Pooling Plan. Equal protection and substantive due process challenges to a state regulatory scheme are reviewed under the rational basis test.*fn6 Plaintiffs' challenge fails because the Pooling Plan is rationally related to a legitimate government interest.*fn7 See Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 124-25 (1978). Plaintiffs have not proven that the state's action was "clearly arbitrary and unreasonable, having no substantial relation to the public health, safety, morals or general welfare." Village of Euclid v. Ambler Realty Co., 272 U.S. 365, 395 (1926).

There is no dispute that California has a legitimate interest in the health and welfare of its citizens who consume milk. However, plaintiffs contend that the means Page 7 for carrying out this legitimate interest — the Pooling Plan — is unconstitutional as applied to them. As plaintiffs see it, the Pooling Plan has two principal purposes: to establish minimum prices so as to generate reasonable producer incomes and to eliminate unfair practices resulting from producers competing to obtain the "highest value" fluid milk contracts. Plaintiffs contend that it is arbitrary and irrational to apply the Pooling Plan to organic milk processors because the Plan does not generate reasonable incomes for organic producers, only for conventional producers. This is because the minimum price guaranteed to all producers falls below the cost of organic milk production; indeed plaintiffs claim that cost of production is not a factor in setting the minimum price. Plaintiffs also contend that it is arbitrary and irrational to require organic processors to contribute to a pool that, they assert, is designed to eliminate competition for conventional fluid milk sales and has no impact on sales of organic milk to organic processors.

The basic flaw in plaintiffs' arguments is that they confuse the overall purpose of the Pooling Plan with two of the means of achieving that purpose. The overriding purpose of the Pooling Plan is to protect consumers by protecting and stabilizing the quantity and quality of the milk and milk products they consume. See Golden Cheese Co. of Cal. v. Voss, 230 Cal.App.3d 547, 562 (1991); E.M. Consumer Corp. v. C.B. Christensen, 47 Cal.App.3d 642, 647 (1975) (finding that "the all pervasive end of the Page 8 [Milk Stabilization] act is that `the people shall be able to purchase milk at the lowest price at which enough distributors operating with average efficiency will be able to do business at a reasonable profit so as to supply the demand of all the consumers in the marketing area.'") (quoting Misasi v. Jacobsen, 55 Cal.2d 303, 309 (1961), citing Challenge Cream etc. Ass'n v. Parker, 23 Cal.2d 137, 141-42 (1943)); see also Cal. Food & Agric. Code §§ 61801 (the Milk Stabilization Act was enacted for the purpose of "protecting the health and welfare of the people of this state"); 62700 (the Gonsalves Milk Pooling Act was enacted for the purpose of "protecting the health and welfare of the people of this state"); 62702 (declaring that the purposes of the Gonsalves Milk Pooling Act are to "develop and maintain satisfactory marketing conditions and bring about and maintain a reasonable amount of stability and prosperity in the production of fluid milk and fluid cream" and to "insure to consumers within California an adequate and continuous supply of pure, fresh and wholesome milk at fair and reasonable prices").

On the whole, the Pooling Plan appears to meet its goal of consumer protection through stabilization of the market. Judicial segregation of organic milk processors from the overall pooling plan could tend to destabilize the milk market and fragment an industry that the legislature Page 9 has seen fit to treat as a whole.*fn8 At the hearing, plaintiffs did not dispute that if a processor, conventional or organic, used equal amounts of raw milk for fluid milk and for cheese, the amounts the processor paid to the pool and received from the pool would be a wash. The parties also agreed that all producers receive at least a minimum price for their milk, regardless of consumer market conditions. While the minimum price currently is less than an organic producer's costs of production, it still ...


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