Edaleen Dairy v. Johanns, Mike

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 25, 2006 Decided October 31, 2006

No. 06-5010

EDALEEN DAIRY, LLC,

APPELLANT

v.

MICHAEL JOHANNS, SECRETARY, UNITED STATES

DEPARTMENT OF AGRICULTURE, ET AL.,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 05cv02442)

Benjamin F. Yale argued the cause for appellant. With him

on the briefs were Kristine H. Reed and Ryan K. Miltner.

Mark R. Freeman, Attorney, U.S. Department of Justice,

argued the cause for federal appellee. With him on the brief

were Peter D. Keisler, Assistant Attorney General, and Michael

S. Raab, Attorney.

Charles M. English, Jr. argued the cause for appellees

United Dairymen of Arizona, et al. With him on the brief were

Wendy M. Yoviene and Sara R. Pikofsky.

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Marvin Beshore was on the brief for appellee Dairy Farmers

of America, Inc.

Before: SENTELLE, ROGERS and GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: Edaleen Dairy, LLC (“Edaleen”)

appeals from a district court decision denying its motion for a

preliminary injunction. Edaleen seeks to enjoin the Secretary of

Agriculture from enforcing a new rule that changed the

regulatory status of “producer-handlers” of milk, alleging that

the rule exceeds the Secretary’s authority under the Agricultural

Marketing Agreement Act of 1937, 7 U.S.C. §§ 601-674 (2000)

(“AMAA”). We need not reach the question whether Edaleen

is entitled to preliminary injunctive relief because Edaleen has

failed to exhaust its administrative remedies as required by the

AMAA.

I.

Milk markets in the United States are governed by a

complex system of price controls that dates back to the

Depression era. The AMAA authorizes the Secretary of

Agriculture to issue “milk marketing order[s]” to regulate milk

sales in different regions of the country. 7 U.S.C. § 608c(5).

Under a typical milk marketing order, a “producer” (i.e.,

dairy farmer) supplies raw milk to a “handler” (i.e., processor or

distributor), and the handler pays money into a “producer

settlement fund” at fixed prices based on the intended use of the

milk. See, e.g., Alto Dairy v. Veneman, 336 F.3d 560, 562-63

(7th Cir. 2003). Handlers using their milk for “high-value” uses,

such as fluid milk, must pay higher prices than handlers that

engage in “low-value” uses, such as processing of butter and

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cheese. Id. The money that handlers pay into the producer

settlement fund is then redistributed to milk producers at a

uniform “blend price” per quantity of milk sold. See 7 U.S.C.

§ 608c(5)(B)(ii). This system ensures that all dairy farmers will

receive the same price for their raw milk whether they sell to

high-value handlers or low-value handlers.

A complication arises, however, when the same firm is both

a producer and a handler. In such cases, there is no opportunity

for the producer-handler to pay into the producer settlement

fund because there is no intermediate sale of raw milk. The

producer-handler simply processes the milk that it has already

produced; it need not purchase milk from other dairy farmers.

Historically, the Secretary of Agriculture has exempted

producer-handlers from the pooling and pricing requirements of

milk marketing orders. See Milk in the Pacific Northwest and

Arizona-Las Vegas Marketing Areas; Final Decision on

Proposed Amendments to Marketing Agreement and to Orders,

70 Fed. Reg. 74,166, 74,167-68 (Dec. 14, 2005) (to be codified

at 7 C.F.R. pts. 1124, 1131) (“Proposed Rule”).

Because they could process and sell high-value milk

products without having to pay into the pool, producer-handlers

often enjoyed a significant competitive advantage in milk

markets. Initially, this raised little concern because most

producer-handlers were small family operations that had little

effect on the market. In recent years, however, several

producer-handlers have grown much larger, which had a twofold

effect on the pooling system. First, because they did not have to

contribute to the producer settlement fund, the large producer-

handlers could sell their milk at lower prices than their regulated

rivals, thus gaining sales and market share. See Proposed Rule,

70 Fed. Reg. at 74,186-88. Second, the amount of money in the

producer settlement fund was shrinking because fully-regulated

handlers – who did contribute to the pool – were losing business

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to the unregulated producer-handlers. Id.

In response to these concerns, the Secretary of Agriculture

initiated a formal, on-the-record rulemaking to determine

whether the regulatory status of producer-handlers should be

changed in the Pacific Northwest and Arizona-Las Vegas

marketing areas. After two years of hearings, testimony, and

data analysis, the Secretary issued a Recommended Decision on

April 7, 2005. Recommended Decision and Opportunity to File

Written Exceptions on Proposed Amendments, 70 Fed. Reg.

19,636 (Apr. 13, 2005). As required by the AMAA, this

proposed rule was then approved by a referendum of milk

producers in January 2006, after which it became final. See

Milk in the Pacific Northwest and Arizona-Las Vegas Marketing

Areas; Order Amending the Orders, 71 Fed. Reg. 9430 (Feb. 24,

2006) (codified at 7 C.F.R. pts. 1124, 1131 (2006)) (“Final

Rule”).

The final rule modified the definition of “producer-handler”

to exclude dairies that produce, process, and distribute more

than three million pounds of fluid milk per month within a given

marketing area. 7 C.F.R. §§ 1124.10, 1131.10. These large

producer-handlers – such as appellant Edaleen – are now

required to pay into the producer settlement fund to the extent

that their use-value of milk exceeds the blend price in a given

region. See id. § 1124.71 (explaining how handler payments are

calculated in the Pacific Northwest Marketing Area). The

decision to eliminate the exemption for large producer-handlers

was based upon evidence of “disorderly marketing conditions”

– namely, that the large producer-handlers were obtaining a

“competitive sales advantage” over fully-regulated handlers, and

were causing a “measurabl[e] and significant[]” decrease in the

blend price being paid to regulated producers. Proposed Rule,

70 Fed. Reg. at 74,186-88.

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Edaleen is a large producer-handler that lost its exemption

from the pricing-pooling system as a result of this rulemaking.

Edaleen sued the Secretary of Agriculture in U.S. District Court

for the District of Columbia to enjoin enforcement of the new

rule on the grounds that it exceeded the Secretary’s authority

under the AMAA.

The district court denied preliminary injunctive relief in a

statement read from the bench. Transcript of Hearing at 75-99,

Edaleen Dairy, LLC v. Johanns, No. 05-cv-2442 (D.D.C. Dec.

29, 2005). First, the court noted that the case was probably not

ripe at that time because the rule had not yet been approved by

the required producer referendum. Id. at 81-83. This

referendum has since been held, so ripeness is no longer an issue

in this case. The district court then held that the arguments

raised by Edaleen were “the very kind of thing that can be raised

in the administrative process” and thus the court should not

“hear this case before [plaintiffs] have exhausted their

administrative remedies.” Id. at 84-86. Finally, the district

court also concluded that the plaintiffs were not entitled to a

preliminary injunction. The court held that it was unlikely that

this order exceeded the Secretary’s statutory authority under the

AMAA, and noted that the alleged injury – overpayment of

funds into the pool – was “economic loss” that could be

adequately addressed in a suit for damages. Id. at 86-94. The

court also concluded that other producers were likely to be

harmed if large producer-handlers like Edaleen did not begin to

pay into the producer settlement fund. Id. at 95-96. Thus, the

district court denied Edaleen’s motion for a preliminary

injunction.

Edaleen sought timely appeal, and now contends that the

district court abused its discretion in denying preliminary

injunctive relief.

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II.

The first – and only – issue that we must address is whether

Edaleen, a producer-handler of milk, may challenge the

provisions of a milk marketing order in district court before

exhausting its administrative remedies under the AMAA. We

hold that it may not.

A.

The Agricultural Marketing Agreement Act provides for

review of the Secretary’s milk marketing orders as follows:

(A) Any handler subject to an order may file a written

petition with the Secretary of Agriculture, stating that any

such order or any provision of any such order or any

obligation imposed in connection therewith is not in

accordance with law and praying for a modification thereof

or to be exempted therefrom. He shall thereupon be given

an opportunity for a hearing upon such a petition . . . .

After such hearing, the Secretary shall make a ruling upon

the prayer of such petition, which shall be final, if in

accordance with law.

(B) The District Courts of the United States in any district

in which such handler is an inhabitant, or has his principal

place of business, are vested with jurisdiction in equity to

review such ruling, provided a bill in equity for that purpose

is filed within twenty days from the date of the entry of

such ruling.

7 U.S.C. § 608c(15).

The Supreme Court has held that these provisions of the

AMAA impose a mandatory administrative exhaustion

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requirement upon milk handlers seeking to challenge the

provisions of a milk marketing order. United States v. Ruzicka,

329 U.S. 287 (1946). In Ruzicka, the federal government sued

a handler to enforce a milk marketing order, and the handler

attempted to argue in defense that the order was unlawful. The

Supreme Court, in an opinion by Justice Frankfurter, declined to

consider this argument because the handler had not yet raised it

in an administrative review proceeding. The Court stated:

And so Congress has provided that the remedy in the first

instance must be sought from the Secretary of Agriculture.

It is on the basis of his ruling, and of the elucidation which

he would presumably give to his ruling, that resort may be

had to the courts.

Id. at 294 (emphasis added). Similarly, in Block v. Community

Nutrition Institute, 467 U.S. 340, 346 (1984), the Court

explained the AMAA’s judicial review provisions as follows:

Section 608c(15) requires handlers first to exhaust the

administrative remedies made available by the Secretary

. . . . After these formal administrative remedies have been

exhausted, handlers may obtain judicial review of the

Secretary’s ruling . . . .

This Court has also held on several occasions that handlers must

exhaust their administrative remedies prior to seeking judicial

review of a milk marketing order. See Hershey Foods Corp. v.

Dep’t of Agric., 293 F.3d 520, 526-27 (D.C. Cir. 2002); Am.

Dairy of Evansville v. Bergland, 627 F.2d 1252, 1259 (D.C. Cir.

1980); Benson v. Schofield, 236 F.2d 719, 722 (D.C. Cir. 1956).

There is, however, a narrow exception to the exhaustion

requirement for certain milk producers who seek to challenge a

milk marketing order. In Stark v. Wickard, 321 U.S. 288, 289

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(1944), several milk producers sued the Secretary of

Agriculture, alleging that the Secretary was “unlawfully

diverting funds” from the producer settlement pool. The

Supreme Court held that these producers could seek judicial

review of the Secretary’s actions in district court even though

they had not sought administrative relief first. Id. at 307-11.

However, Stark was a limited holding that turned on the unique

circumstances of that case. As the Court explained:

When . . . definite personal rights are created by federal

statute . . . , the silence of Congress as to judicial review is,

at any rate in the absence of an administrative remedy, not

to be construed as a denial of authority to the aggrieved

person to seek appropriate relief in the federal courts in the

exercise of their general jurisdiction.

Id. at 309 (emphasis added). Thus, the direct right of action that

was allowed in Stark turned on two key factors. First, the Court

emphasized that the producers were not merely objecting to a

regulation; rather, they were suing to protect their “definite

personal rights” in the settlement pool fund. Id. at 308 (“It is

because every dollar of deduction comes from the producer that

he may challenge the use of the fund.”). Second, the Court

stated that these producers were able to sue directly in district

court because they did not have access to an administrative

remedy under the AMAA. Id. at 309. See also Ruzicka, 329

U.S. at 295 (holding that the Stark direct right of action is not

available to handlers because they have an administrative

remedy under the AMAA). Overall, while handlers are always

required to exhaust their administrative remedies prior to

seeking judicial review, id. at 294, producers may be able to

avoid the exhaustion requirement if they are suing to protect

“definite personal rights” for which there is no access to an

administrative remedy. Stark, 321 U.S. at 309.

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Thus, with respect to producer-handlers, the crucial

question is whether a producer-handler is bringing suit in its

capacity as a producer or as a handler. If a producer-handler

asserts an injury in its capacity as a handler, then it is bound by

the administrative exhaustion requirements of the AMAA. For

example, in Rasmussen v. Hardin, 461 F.2d 595, 596-97 (9th

Cir. 1972), a producer-handler brought suit in district court to

challenge a rule that required producer-handlers to pay into the

settlement pool if they purchased powdered milk from other

producers and reconstituted the powder into fluid milk. This

affected the plaintiffs’ interests as handlers because it required

them to make payments into the settlement fund for their use-

value of milk, which is an obligation that is only borne by

handlers. Accordingly, the Ninth Circuit affirmed the district

court’s dismissal of the case because the plaintiffs had not

exhausted their administrative remedies before bringing suit. Id.

at 598. In contrast, when a producer-handler asserts an injury in

its capacity as a producer, then it may be able to immediately

bring suit in district court. In Dairylea Cooperative v. Butz, 504

F.2d 80, 82-83 (2d Cir. 1974), a cooperative that both produced

and handled milk brought suit in district court alleging that a

milk marketing order unlawfully reduced the amount of money

that producers would receive for certain types of milk sales. The

court held that this producer-handler was suing to protect its

interests as a producer:

The concern of Dairylea in this action is not the money

which it paid into the Producer-Settlement Fund . . . , but

with the money collected on behalf of its producer-

members . . . , which will increase if the action succeeds.

Id. at 83. Only producers are eligible to receive money from the

settlement fund, and thus any action by the Secretary that

reduces the amount of money in the fund will cause injury

exclusively to producers. Thus, the Second Circuit held that the

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plaintiff was not required to exhaust administrative remedies

before bringing suit. Id.

Here, Edaleen is clearly bringing suit in its capacity as a

handler. Prior to the adoption of the rule being challenged in

this case, producer-handlers were fully exempt from the pricing

and pooling provisions of the milk marketing orders. See

Proposed Rule, 70 Fed. Reg. at 74,167. The final rule

eliminates this exemption for producer-handlers with in-area

route disposition of more than three million pounds of milk per

month. Final Rule, 71 Fed. Reg. at 9430. In other words, large

producer-handlers – just like all other milk handlers – must now

pay into the producer settlement fund to the extent that their use-

value of milk exceeds the blend price in a given region. See,

e.g., 7 C.F.R. § 1124.71 (explaining how handler payments are

calculated in the Pacific Northwest Marketing Area). As the

Final Rule states, “[t]he amendments will place entities currently

considered to be producer-handlers . . . on the same terms as all

other fully regulated handlers.” 71 Fed. Reg. 9430 (emphasis

added). Edaleen is not challenging the amounts being paid out

of the pool, nor is it challenging the Secretary’s management of

funds in the pool – arguments that would be raised if it were

suing in its capacity as a producer. Cf. Stark, 321 U.S. at 308-10

(holding that a producer may seek immediate judicial review of

the Secretary’s deductions from the settlement pool funds);

Dairylea, 504 F.2d at 83 (noting that a producer-handler that

disputes the amount of money being received from the fund is

suing in its capacity as a producer). Rather, Edaleen objects to

the new rule because it will now be forced to pay into the

producer settlement fund. See Appellant’s Br. at 32 (arguing

that Edaleen has suffered irreparable injury because it must now

pay “hundreds of thousands of dollars per month and millions of

dollars per year” into the settlement fund). Producers do not pay

into the settlement fund; only handlers bear this obligation.

Thus, we hold that Edaleen has brought this suit in its capacity

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as a handler, and therefore Edaleen was required to exhaust its

remedies under the AMAA before seeking judicial review.

We emphasize that this holding is entirely consistent with

the Seventh Circuit’s decision in Alto Dairy v. Veneman, 336

F.3d 560 (7th Cir. 2003). In that case, the court held that the

plaintiffs – a group of producers and producer-handlers – were

entitled to judicial review even though they had not sought

administrative relief prior to bringing suit. Id. at 568-69. The

plaintiffs argued that a new rule – which limited when producers

could qualify for the blend price in certain marketing areas –

was adopted without proper notice from the Secretary. Id. at

564-65. Given that the plaintiffs were seeking access to pooling

funds, they were clearly bringing suit in their capacity as

producers. Indeed, the Seventh Circuit specifically noted that

the plaintiffs “have no quarrel as handlers with the order.” Id.

at 569. Thus, the plaintiffs in Alto Dairy were not bound by the

AMAA’s exhaustion requirement. In contrast, Edaleen seeks

relief in its capacity as a handler, and therefore it is required to

exhaust administrative remedies prior to challenging the

Secretary’s actions in district court.

B.

Edaleen argues that we should excuse the exhaustion

requirement in this case. It contends that the issue was “fully

framed” in the rulemaking process, that the Secretary’s “full

expertise” has already been brought to bear on this issue, and

that it would be “utterly duplicative” to require Edaleen to seek

administrative review prior to bringing suit. Appellant’s Br. at

41-42. There is no need to address these arguments, however,

because courts have held on numerous occasions that the

AMAA’s exhaustion requirement is mandatory. Thus, we hold

that Edaleen may not be excused from complying with this

requirement.

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Since the AMAA was enacted in 1937, courts have

repeatedly held that its exhaustion requirement is mandatory,

and that aggrieved handlers may not seek judicial review of milk

marketing orders until they have exhausted their administrative

remedies. See Block, 467 U.S. at 346 (stating that “handlers

may obtain judicial review” only after exhausting the AMAA’s

“formal administrative remedies”); Ruzicka, 329 U.S. at 294

(holding that “resort may be had to the courts” only after

administrative remedies have been exhausted); Hershey Foods,

293 F.3d at 527 (“A handler of milk thus must petition the

Secretary before seeking judicial review of a milk marketing

order . . . .”) (emphasis added); United States v. United Dairy

Farmers Ass’n, 611 F.2d 488, 490 (3d Cir. 1979) (“It has long

been established that the administrative relief provided in the

[AMAA] is not merely permissive but exclusive in the first

instance: any challenge to the applicability of an order must first

be made administratively.”) (emphasis added); Dairylea Coop.,

504 F.2d at 80 (holding that “handlers may apply for judicial

review of agricultural orders only after exhausting their

administrative remedies”).

Consistent with this long line of cases, we hold that the

AMAA’s administrative appeal process is a mandatory

procedure that handlers must follow prior to seeking judicial

review of a milk marketing order. Therefore, we decline to

excuse the exhaustion requirement in this case.

III.

Although Edaleen is both a producer and a handler, in this

case, it is suing to protect its interests as a handler. A handler

may not seek judicial review of a milk marketing order until it

has exhausted its administrative remedies under the AMAA.

Edaleen has failed to pursue these administrative remedies.

Therefore, we remand the case to the district court with

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instructions to dismiss the complaint.

So ordered.