OPINION OF THE COURT
FORMAN, Circuit Judge.
This is the second time the Secretary of Agriculture appeals from an order of the United States District Court for the District of Delaware which held invalid certain minimum pricing provisions of Milk Marketing Order No. 16
In an earlier proceeding, following Department of Agriculture administrative hearings,
On appeal this court reversed the ruling of the District Court and held that the case should be remanded to the Department of Agriculture to give it an opportunity properly to exercise its statutory powers, because the trade barrier issue had not been raised or considered in the administrative proceedings which were held approximately one year prior to the decision in Lehigh Valley.
The Judicial Officer, acting for the Secretary, held further hearings on the remand and, in a formal decision, rejected the challenge to the Marketing Order as both unsupported by the record and incorrect in law.
The operation of the Milk Marketing Order and the facts of this case will be briefly summarized since they are at this point "beyond dispute". Under the Order, milk is classified according to the use made of it by milk companies, or "handlers". Thus, milk used in fluid form is Class I, and milk used to manufacture products such as butter and cheese is Class II. The Order establishes a minimum price for each class of milk — the Class I fluid price being higher than the Class II price.
These established prices reflect those which would usually be paid for milk depending on use value. Because of the price differential in an unregulated market, where the supply of fluid milk is greater than the demands of the fluid milk market, chaotic conditions often resulted among producers each seeking to benefit from the greater use value, and therefore the higher price paid for milk used in fluid form. One of the major purposes of the Agricultural Marketing Agreement Act was to create and maintain an orderly market and, in so doing, assure the dairy farmer an adequate minimum price for the milk he delivered to the handlers regardless of how the milk was later used. To avoid the often destructive competition of the unregulated market, a method was devised whereby handlers are required to pay at least a uniform "blend" price to the producers regardless of the use to which it has been put. To arrive at this blend price, all handlers who receive or distribute milk within the marketing 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. These reports are tabulated and each month a blend price is established which represents the average of the class prices weighted by the amount of producer milk actually used in each class by all of the handlers regulated under the Order.
In promulgating a marketing order the Secretary must consider the supply of milk upon which the market, in this instance, Upper Chesapeake Bay, Maryland, regularly and normally depends. This milk, comprising the "market-wide pool" the Secretary found consisted of that received by plants regularly serving the market area with fluid milk. The regulatory scheme was designed to affect those plants of handlers which have substantial business in the market area. These plants, called "pool plants", are those which utilize at least 50 percent of the milk received from farmer producers as fluid milk and distribute at least 10 percent of those receipts in the form of fluid milk in the marketing area. The Marketing Order places pool plants under "full regulation". This means that the milk company or handler which operates a pool plant must pay producers at least the uniform blend price on all milk received from them irrespective of the uses made of the milk by the handler or the places where it is later distributed.
While requiring that the blend price be paid to producers, the Act also recognizes that regulated handlers may make different uses of the fluid milk which they purchase. To make adjustments among the handlers and thereby reflect the class use value of the milk to the handler, a producer settlement fund is established by the Order. Each regulated handler pays into, or draws from this fund the difference between the amount paid to its producers under the uniform blend price and the use value of its milk computed at the established class prices. A handler who distributes most of his milk as Class I fluid milk has a greater use value for the milk than the blend price which he paid for it. He would contribute the difference between the blend price and the class utilization price into the fund. A handler who paid the blend price but used the milk to manufacture products would draw from the fund the difference between the blend price he paid and the lower class utilization price. In this way, each handler ultimately pays a price for the milk he
Lewes operates one milk processing plant, located in Sussex County, Delaware, from which it distributes fluid milk to retail outlets in the area of Maryland regulated by the Marketing Order in question, and various parts of Delaware which are unregulated by any Marketing Order. The regular source of supply of the milk which Lewes processes and sells is from nine or ten producers, all from Kent and Sussex Counties, Delaware. An additional supply of milk, ranging from 18 to 33 percent of its total annual receipts, is obtained from another handler located in Pennsylvania when it is needed by Lewes to balance or supplement its requirements.
The Secretary found that Lewes utilized substantially all of its milk in Class I form and that annually it distributed in the regulated area between 40 and 61 percent of its receipts from farmer producers. Lewes admits that this finding is accurate but argues that when its receipts from all sources are considered it ships on an annual basis, between 35 and 45 percent of its total production into the regulated marketing area and sells the remaining 55 to 65 percent in Delaware. Regardless of which figure is used, the Order imposes full regulation on Lewes since it distributes more than 10 percent of its production in the regulated area.
Prior to the effective date of the Order, Lewes paid its producers at the competitive Delaware price which was higher than the uniform blend prices subsequently established under the Order.
Lewes concedes that as to the milk it distributes in the regulated marketing area it should meet the obligations imposed on it by the Marketing Order and pay the blend price — Class I differential into the producer-settlement fund. But Lewes insists that full regulation, which exacts from it this differential on all milk, including that which never enters the regulated marketing area, in effect, creates an economic trade barrier on its shipments of milk into Maryland in violation of section 8c(5) (G) of the Agricultural
The District Court accepted the argument of Lewes that Lehigh Valley controls the decision in this case. It construed that decision as meaning that full regulation of Lewes constituted an economic trade barrier in violation of section 8c(5) (G) of the Act.
Lehigh Valley involved the legality of a "compensatory payment" provision of the New York-New Jersey Milk Marketing Order. Such compensatory payments were assessed against "outside" milk companies, which, because of their limited sales in the marketing area, were not fully regulated and were therefore free to purchase their milk at less than the minimum class prices or blend price. Because the outside handlers could disrupt the regulatory scheme of the Marketing Order by introducing underpriced milk into the market, the Order required them to pay into the producer-settlement fund on all the fluid milk they sold in the market area the difference between the highest fluid and lowest surplus class prices established by the Order. The essence of the plan, as the Supreme Court noted, was the imposition of "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."
The Court held the plan to be an invalid attempt to effect competitive parity among non-pool and pool handlers and to correct the disruptive impact on the total regulatory scheme caused by the importation of unregulated outside fluid milk. Since the compensatory payment bore no relation to the actual cost of the milk, the effect of the plan, under the particular facts of that case, was to make outside or non-pool milk more expensive and thereby protect local producers and pool handlers in the marketing area from competition with outside fluid milk. The compensatory payment plan in Lehigh Valley constituted an economic trade barrier in violation of section 8c(5) (G) because it prevented outside handlers from competing in the marketing area on equal terms with others doing business therein. The legislative history of section 8c(5) (G) was fully examined by the Court, and it concluded that the intent of that section was to assure that milk and milk products brought into a marketing area from outside the area would not be subject to greater restrictions or limitations than would be applied to milk and milk products within the area.
In the instant case, Lewes is not an outside dealer. It is a fully regulated handler associated with the marketing area by virtue of its substantial distribution in the area. The regulations to which it is subject are identical with those imposed upon every other regulated handler doing substantial business in the area. Lewes does not contend that it cannot compete on equal terms within the market area. Its contention that the Order erects a trade barrier is based on the argument that, because of the payments it is required to make into the producer-settlement fund on the milk which it distributes in Delaware outside the regulated market area, Lewes finds itself at a disadvantage with respect to the unregulated handlers with whom it competes in Delaware. The effect, it submits, is to discourage it from doing business in the regulated Maryland area.
In Lehigh Valley the Court did not consider the difficulties encountered by a regulated handler doing business in an unregulated area. In fact the Court expressly declined to consider whether
The Supreme Court, in Lehigh Valley overturned a system of "compensatory payments" because, as it said therein, "with respect to these petitioners" the payments demanded effected a trade barrier to the introduction into the market area of "outside" milk. The Court did not strike down all compensatory payments, rather it found that the particular rate of payment involved therein was invalid.
In Sterling Davis Dairy v. Freeman,
The petitioners in Lehigh Valley introduced specific rates and prices to support their contention that the Order, as applied to them, was discriminatory. As an example, they showed that the regulation required one of the petitioning handlers to pay $9.18 per hundredweight for the milk introduced into the marketing area, while the pool plant handlers were paying only $6.23 per hundred-weight for distributing the same type of milk in the market.
It was for the very purpose of affording Lewes an opportunity to adduce evidence to demonstrate the trade barrier effect of the Marketing Order that this court remanded the matter for further administrative procedure. At the administrative hearing on remand, Lewes offered only one witness, its treasurer. He testified that there are between 500 and 600 farmer producers in the area of Delaware where Lewes buys its milk and all but 100 sell their milk to handlers who are regulated by other federal milk marketing orders. He named several local unregulated Delaware handlers with whom Lewes competes in buying milk from producers and in selling it as bottled milk. Although the witness asserted that the prices paid by competitors were lower than those which the Order forced Lewes to pay, he failed to testify as to prices paid by other milk companies and no other evidence was offered by Lewes on this crucial point. In this situation, it cannot be said that the proof offered by Lewes demonstrated the specific discriminatory effect of the challenged regulation as was disclosed in Lehigh Valley.
The Secretary relied on the decision of this court in Titusville Dairy Products Co. v. Brannan
As the Supreme Court demonstrated in Lehigh Valley, section 8c(5) (G) evolved out of the Congressional intent to restrain the Secretary from imposing regulations which would burden the free flow of milk and its products in commerce. It was designed to insure that no regulation would be promulgated placing a greater burden on outside milk and milk products entering the market than was placed on milk and its products within the market. Thus the Secretary in his efforts to protect a particular market may require no more than equal treatment of pool and non-pool milk. Full regulation is not an attempt to keep milk out of the market or a means of placing a greater burden on outside milk entering the market. In fact, it is a means of insuring equality among all handlers operating pool plants which regularly and normally supply the market with fluid milk purchased from producers. Unlike the particular compensatory payment which was involved in Lehigh Valley, full regulation in this case can not be characterized as an attempt to protect those doing business in the market, at the expense of those outsiders seeking to enter the market. Therefore, there is nothing in Lehigh Valley which inherently invalidates full regulation. Hence, we cannot agree with the District Court's analysis of Lehigh Valley that full regulation, as applied to Lewes is "Surely, * * * the kind of `economic trade barrier' sought to be prohibited by § (5) (G), as construed in Lehigh Valley."
Moreover, we are persuaded, for other reasons, that the District Court was not justified in overturning the Secretary's decision. The power of the District Court in reviewing the decision of the Secretary, following his adjudicatory hearing,
On the other hand the Department of Agriculture went forward by offering evidence compiled from records submitted by Lewes itself which indicated that Lewes's milk business had grown steadily and in fact increased substantially since the inception of the contested Order.
The District Court, however, found vulnerable the evidence of Lewes's markedly increased business, including both its producer receipts and sales in Delaware. These, it stated, were not indicative of increased or even continued levels of profit and were made possible by producers acceptance from Lewes of the lower blend price only during the pendency of this litigation. Lewes's evidence with regard to the profitableness of its business was totally lacking, and if it sought to prove the discriminatory effect of full regulation through diminishing profit, it had the burden and not the Secretary. As to purchase arrangements with its suppliers, Lewes relied solely on the testimony of its treasurer. The Secretary declined to give the uncorroborated testimony offered by Lewes the credence with which the District Court vested it. In this respect the Secretary acted well within his province of weighing the evidence and the District Court was without power to overrule him absent clear evidence to the contrary.
Reviewing the record of the administrative proceedings, it is clear that the Secretary's findings were supported by substantial evidence and that Lewes's trade barrier assertion remained a mere abstraction without evidentiary support. Although the District Court recognized the correct standard in reviewing the decision of the Secretary, it erred in the application of that standard. The role of the District Court is quite narrow; it must assure itself that the petitioning party has been accorded due process in the administrative proceedings. In so doing, the administrative record is reviewed to determine whether the decision rendered therefrom is supported by substantial evidence. The District Court is not free to draw its own independent inferences and conclusions from the record. Yet this is precisely what was done in the instant case. Lewes's challenge to the validity of the Order rests primarily on the assertion that it is unable to meet competition from unregulated handlers in Delaware in the acquisition and sale of milk. The Secretary concluded that:
The District Court rejected the Secretary's conclusion and arrived at an opposite result with the statement: "The record clearly shows that Lewes is put at a severe competitive disadvantage by the operation of the Secretary's order."
In fortification of the decision of the Secretary, some further observations are appropriate. In the Agricultural Marketing Agreement Act, Congress gave the Secretary broad discretionary powers to effectuate its purposes. It is his responsibility to determine which handling of milk shall be isolated for the purpose of regulation. Section 8c(5) of the Act specifies how the milk handling so selected is to be regulated.
The Secretary called as his expert witness, Mr. Herbert L. Forest, Director of the Dairy Division, Consumer and Marketing Service of the United States Department of Agriculture, for the purpose of discussing features of the Marketing Order concerning the conditions in the Chesapeake Bay area which made necessary full regulation of all producer milk received at a pool plant at the same class price according to utilization whether sold in the marketing area or outside the marketing area. In substance Mr. Forest testified that elements were taken into consideration in prescribing geographical boundaries of a marketing area, the difficulties in arriving at them, and that inevitably some distributors would be found who sold their milk both inside and outside the area being established; that where a substantial amount of milk was sold by a handler in the marketing area — and generally ten percent or more of the fluid milk the handler received at its plant from farmers was regarded as substantial — the application of the pooling and pricing of a marketing order to all producer milk received at the handler's plant without regard to its ultimate disposition, was administratively necessary; that unless all of the milk received in such a plant was subject to full regulation the marketing order could be rendered ineffective because "open ends" would be left whereby the handler could pay a lower price for milk sold outside the market, reducing the average cost of the handler's total milk supply; that full regulation is intended to prevent a handler from disrupting the regulated market by undercutting its competitors in that market by reason of price advantages it enjoyed outside the market.
On cross examination Mr. Forest was asked if Lewes operated two plants, one exclusively in the production of milk for sale in the marketing area and the other plant for the production of milk it sells in the unregulated area, whether he agreed that the second plant would be unregulated and, as the Order is now written, Lewes would be in position to exploit the kind of profit shelter that had been described. He replied in the affirmative. The witness was then asked to consider an operation in one plant where five of ten farmers were designated as producing milk for the outside market and five for the inside market, and whether this would work a solution of the administrative problem to which he also replied in the affirmative. Pressed, on further cross examination, Mr. Forest conceded the workability of other alternatives designed to relieve the handler of paying regulated prices on milk purchased for sale outside the regulated marketing area.
The District Court noted that since the Order was written on a plant basis rather than on a company basis it permits a multiple plant handler to devote only one of its plants for sales into the regulated market with regulation attached only to that plant. This it found underscored the unfairness of the Marketing Order in this case to Lewes since it operates only one plant with 100 percent of its production regulated, but if it segregated its sales it could escape regulation on milk sold in the unregulated area as in the instance of multiple plant handler.
The District Court justified its conclusions by a too literal reading of Mr. Forest's answers interspersed in his lengthy cross examination. It predicated its reasoning that the Marketing Order was unfair to Lewes on the theory that a handler with two plants could render itself exempt from full regulation by selling all the milk it received at one plant in the market area and selling all the production of the other outside the market, while Lewes with a single plant could not so operate. No showing was made that any handler with more than one plant was thereby escaping full regulation and Mr. Forest made it clear that should such circumstances arise they would promptly induce appropriate regulatory measures. The alternative provisions for regulation found to be available to the Secretary were based on answers given by Mr. Forest which were induced by questions suggesting factors afield from the realities and practicalities of the actual conditions sought to be regulated by the Marketing Order. A review of Mr. Forest's entire testimony leads to the conclusion that the admissions noted by the District Court were counterbalanced by his reiterated statements that past experience had taught that the provision for full regulation was required for effective administration.
If there are alternatives to the Order as framed we are persuaded, as argued on behalf of the Secretary, that the wisdom of his choice of the alternatives is not cognizable in this proceeding. Only the legality of his choice is in issue here. The fact that regulation may be achieved that is equally as efficacious for the purpose of the Act with less expense to Lewes does not render illegal the application of the Order to Lewes.
Other challenges to the validity of this Order prompted the Court of Appeals for the Fourth Circuit to say:
The foregoing statement is equally cogent in this case.
With a view toward these problems, the Secretary, consistent with the declared policy of the Congress,
The foregoing discussion leads to the conclusion that Lewes has fundamentally failed to prove that its competition in the unregulated market enjoyed an advantage over it which creates an economic trade barrier contemplated by section 8c(5) (G)
"(5) In the case of milk and its products, orders issued pursuant to this section, shall contain one or more of the following terms and conditions, and (except as provided in subsection (7) of this section) no others:
"(A) Classifying milk in accordance with the form in which or the purpose for which it is used, and fixing, or providing a method for fixing, minimum prices for each such use classification which all handlers shall pay, and the time when payments shall be made, for milk purchased from producers or associations of producers. Such prices shall be uniform as to all handlers, subject only to adjustments for (1) volume, market, and production differentials customarily applied by the handlers subject to such order, (2) the grade or quality of the milk purchased, and (3) the locations at which delivery of such milk, or any use classification thereof, is made to such handlers.
"(i) for the payment to all producers and associations of producers delivering milk to the same handler of uniform prices for all milk delivered by them: * * *
"(ii) for the payment to all producers and associations of producers delivering milk to all handlers of uniform prices for all milk so delivered, irrespective of the uses made of such milk by the individual handler to whom it is delivered; * * *."