Petition for Writ of Certiorari — Flav-O-Rich, Inc. v. North Carolina Milk Commission

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No. ___ : eS

IN THE =

Supreme Court of the Anited States

1984 TERM

FLAV-O-Ricu, INC.,

Petitioner,

Vv

NORTH CAROLINA MILK COMMISSION,

HERBERT C. HAWTHORNE, VILA M. ROSENFELD,

ANNA G. BUTLER, RUSSELL E. DAVENPORT

CHARLIE L. HARDEE, INEZ M. MYLEs, B.F. NESBITT,

KATHRYN G. KIRKPATRICK, AND DaviD A. SMITH,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT.

D. PAuL ALAGIA, JR., Ese.*

JOHN S. KEcK, Esq.*

JOHN F. SHERLOCK, III, Esa.

JOSEPH L. HAMILTON, Esa.

BARNETT & ALAGIA

The Fifth Avenue Building

444 South Fifth Street

Louisville, Kentucky 40202

(502) 585-4131

Attorneys for Flav-O-Rich, Inc.

*Counsel of Record

ATE TELE TT ST EATERS TE RE

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

Pa

i

QUESTION PRESENTED

Whether the courts below have erred in applying the

standards announced by this Court in Parker v. Brown,

317 U.S. 341 (1948) (“Parker”) and Califernia Retail

Liquor Dealers v. MidCal Aluminum, Inc., 445 U.S. 97

(1980) (““MidCal”) with the result that the North Carolina

Milk Commission (“Commission”), its members and staff

continue to squelch price competition in the sale of fluid

milk products in North Carolina in per se violation of

Section 1 of the Sherman Act, 15 U.S.C. § 1 (1980)?

‘i

TABLE OF CONTENTS

Page

PP ETE TTT PTET TE ETT ETT Te i

pe BEG Oy i ne ee ere ii

Me MRR onc a Sa cece cctncpeccacccccnes ili

ae oe net oi cea ea eh kWh Oech es 1

ee chee bese ae enews 0.03 2

STATUTORY PROVISIONS INVOLVED ............ecee00: 2

Be tr IE NIN co gan a.c bi cncgavcddocdsteaes 2

A. Nature Of The Case And Course Of Proceedings. 2

a a es eo haidve kine ens 3

REASONS FOR GRANTING THE PETITION ............205: 4

I. THE Courts BELOW HAVE MISCONSTRUED THIS

CourT’s DECISIONS DEFINING THE SCOPE OF THE

STATE ACTION EXEMPTION TO THE ANTITRUST LAWS 5

A. The Lower Courts Erred In Holding That The

Activity Of The Commission, Its Members And

Staff At Issue Is This Action Met The First Part

Of The Two-Prong MidCal Test ............ 9

B. The Lower Courts Erred In Holding That The

Activity Of The Commission, Its Members And

Staff At Issue In This Action Met The Second

Part Of Two-Part MidCal Test ............. 16

II. THE FourTH CIRCUIT’s DECISION APPLYING THE Two

PRONGS OF THE MIDCAL TEST CONFLICTS WITH HOLD-

INGS OF OTHER COURTS OF APPEALS............5. 21

A. The Fourth And Ninth Circuits Directly Con-

flict In Their Interpretation Of The First Prong

Se UE EE bec ccusccecdcsacesacs 21

B. The Fourth Circuit’s Decision In This Action

Also Conflicts With The Ninth Circuits’ View

Of The Second Prong Of The MidCal Test .. 23

GRIER EY MIS SS aA ae er Oe Oe 25

TABLE OF AUTHORITIES

CASES: Page

Appeal of Arcadia Dairy Farms,Inc., 289 N.C. 456, 223

ET IEEE hi re dedasuk dns baecancanka< 3, 18

Bates v. State Bar of Arizona, 433 U.S. 350 (1977), reh.

denied, 434 U.S. 881 (1977) ..............eeeees 6, 17

California Retail Liquor Dealers Association v. MidCal

~ Aluminum, Inc., 445 U.S. 97 (1980) ......... passim

Cantor v. Detroit Edison Co., 428 U.S. 579 (1976) ... 6, 19

City of Lafayette v. Louisiana Power and Light Com-

pany, 435 U.S. 389 (1978) ............... 5, 6, 11, 19

Community Communication Company v. City of Boul-

der, Se EE oc ik Cesc avviekocases 10, 19

Gambrel v. Kentucky Board of Dentistry, 689 F.2d 612,

(6th Cir. 1982) cert. denied, ___ U.S. ___., 10S. Ct.

ES CANO dance wtvewoscensnshacdaeeas 24

Goldfarb v. “alas State Bar, 421 U.S. 733 (1975), reh.

denied, 423 U.S. 886 (1975) .............4.. 6, 17, 18

Hoover v. Ronwin, ___ U.S. —_, 80 L.Ed.2d 590

GRE sa ea uaAhs sac Cannan se ywe nec aguiien vas passim

Knudsen Corporation v. Nevada State Dairy Commis-

sion, 676 F.2d 374 (9th Cir. 1982) .............. 4, 21

Miller v. Oregon Liquor Control Commission, 688 F.2d

EE icc ect.ok bacbnececssenano kd 4, 23

Parker v. Brown, 317 U.S. 341 (1948) ............ passim

Princeton Community Phonebook, Inc. v. Bate, 582

ee EY NTE oc Seeks dics Couwaineds

United States v. Container Corporation of America, 393

Ec ccudics cues dnccegs saab bkxcunns

United States v. Title Insurance Rating Bureau of Arizo-

na, Inc., 700 F.2d 1247 (9th Cir. 1983) ..........

STATUTES AND REGULATIONS:

TE Tui e uur be see kas des eckavespededes passim

PE TT wie ces ca ve Sietdevadvekavessene 2

I a ns ca cac bed rekyasteeed ies es 2

Us ca <A ca csachbdesawcaendacebaced 2

iv

Table of Authorities Continued

PEM UIE naeeceakcesissutsees «meabe

ke eee

og EO ee eee

Ss SC MD Cod bh vivieive's sntinavidcesasiers

PR OE scene ivntacbesndeeavcde’

N.C.G.S. § 10G-206.7(a) .... 20. c ccc c ccc eeee

PA RTD oa disc scat case diaoens

N.C.G.S. § 106-266.8(10)b ..................

FOAL AR. G PURER) oo cess sc cscepeness

FEAR ND, ack ona toncdoasadonnes

4 North Carolina Administrative Code 7.0101

RECORD REFERENCES

The following abbreviations are used in this petition:

Appendix—“App.”

IN THE

Supreme Court of the Qnited States

1984 TERM

BS adic

FLAV-O-RICH, INC.,

Petitioner,

V.

NorTH CAROLINA MILK COMMISSION,

HERBERT C. HAWTHORNE, VILA M. ROSENFELD,

ANNA G. BUTLER, RUSSELL E. DAVENPORT

CHARLIE L. HARDEE, INEZ M. MYLES, B.F. NESBITT,

KATHRYN G. KIRKPATRICK, AND Davip A. SMITH,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Petitioner, Flav-O-Rich, Inc. (“FOR”), prays that a

Writ of Certiorari issue to review the judgment of the

United States Court of Appeals for the Fourth Circuit

entered in the above-referenced case on April 12, 1984.

OPINIONS BELOW

The unpublished opinion of the Court of Appeals for the

Fourth Circuit was filed on April 12, 1984, No. 83-2066.

The opinion and judgment of the United States District

Court for the Eastern District of North Carolina were

entered October 27, 1983, No. 82-1172-CIV -5, but are not

yet reported. The opinions are reproduced in the Appen-

dix to this Petition.

2

JURISDICTION

’ The judgment of the Court of Appeals for the Fourth

Circuit was entered on April 12, 1984. The jurisdiction of

this Court is invoked pursuant to 28 U.S.C. § 1254(1)

(1980).

STATUTORY PROVISIONS INVOLVED

The question presented by this case involves the appli-

cability of the proscriptions of Section 1 of the Sherman

Act, 15 U.S.C. § 1 (1980), to the price stabilizing activity

of the Commission, its members and staff.

STATEMENT OF THE CASE

A. Nature of the Case and Course of Proceedings

On October 18, 1982, FOR filed the Complaint in this

action against the Commission and its members asserting

jurisdiction pursuant to 28 U.S.C. §§ 1331(a), 1332(b),

1337, and 1343. The complaint sought injunctive and

declaratory relief from the enforcement of any statute,

regulation, or Commission policy which caused, or was

used by the Commission, its staff or members, to force

FOR to divulge its confidential cost and price information

to its competitors, in violation of Section 1 of the Sherman

Act, 15 U.S.C. § 1.

On October 22, 1983, the district court entered an

Order and Memorandum Opinion concluding that the re-

spondents had violated Section 1 of the Sherman Act, 15

U.S.C. § 1, pursuant to this Court’s holding in United

States v. Container Corporation of America, 393 U.S.

333 (1969). The district court found specifically that the

milk industry in North Carolina is similar to the container

industry in its marketing conditions and concluded that

the exchanges of proprietary price and cost information

by the staff and members of the Commission tend to

3

stabilize wholesale milk prices in the milk industry in

North Carolina in per se violation of § 1 of the Sherman

Act. However, then the district court also held that the

conduct at issue met the requirements for antitrust ex-

emption enunciated in Parker v. Brown, 317 U.S. 341

(1943) (“Parker”) and granted summary judgment for the

respondents and against FOR. (App. at 3a). On appeal,

the Court of Appeals affirmed the district court in an

unpublished per curiam opinion issued on April 12, 1984.

(App. at 1a). The Court of Appeals affirmed by referring

to the reasoning and conclusions of the district court.

B. Statement of Facts.

FOR, an agricultural cooperative association organized

and existing under the laws of the Commonwealth of

Kentucky, is a subsidiary of Dairymen, Inc. (“Dairy-

men”). Dairymen is also an agricultural cooperative asso-

ciation organized and existing under the laws of the Com-

monwealth of Kentucky. Dairymen has approximately

8,000 dairy farmer members in seventeen states, includ-

ing approximately 400 in North Carolina.

FOR is authorized to do business in eleven states,

including North Carolina. It has three operating divisions

and milk processing plants in North Carolina, located in

Durham, Greensboro, and Wilkesboro. Each of these

three divisions has a separate license to distribute milk in

North Carolina. The Commission exists pursuant to the

provisions of Article 28B of Chapter 106 of the North

Carolina General Statutes. The Commission, its staff and

members have only those powers which are specifically

set forth therein. Appeal of Arcadia Dairy Farms, Inc.,

289 N.C. 456, 223 S.E.2d 323 (1976) (“Arcadia”). The

purpose of the Commission, as conceived by the North

Carolina General Assembly and as stated in the Commis-

sion’s own rules and regulations, is “to ensure the con-

4

sumers of North Carolina an adequate supply of milk.” 4

North Carolina Administrative Code 7.0101. Its mem-

bers are equally divided between five milk industry rep-

resentatives (two milk producers, two milk processor

representatives, and one milk retailer) and five non-milk

industry representatives. N.C.G.S. (North Carolina

General Statutes) § 106-266.7(a).

On November 10 and December 8, 1981, and May 3,

1982, the members and staff of the Commission requested

that the Durham division of FOR disclose prices charged

bv it to certain of its customers. Disclosure of this in-

formation to the members and staff of the Commission

would have been-tantamount to public disclosure and

would have had a detrimental effect on competition. Ac-

cordingly, FOR declined to produce the requested in-

formation. On October 12, 1982, the Commission sus-

pended the license of FOR’s Durham division to dis-

tribute milk in North Carolina, effective November 12,

1982, for its refusal to produce the pricing records. FOR

immediately filed this action.

REASONS FOR GRANTING THE WRIT

There are two reasons for granting the Writ sought by

FOR. First, the courts below, in deciding a critical issue

of federal law—the applicability of the antitrust laws

which protect our free enterprise system—have erred in

applying the standards announced by this Court in Par-

ker. Supreme Court Rule 17.1(c). Second, in determining

that the price stabilizing activities of the Commission, its

members and staff were exempt from the antitrust laws,

the Fourth Circuit has rendered a decision which is in

direct conflict with the decisions of the Ninth Circuit in

Knudsen Corp. v. Nevada State Dairy Commission, 676

F.2d 374 (9th Cir. 1982) (“Knudsen”) and Miller v. Ore-

5

gon Liquor Control Commission, 688 F.2d 1222 (9th Cir.

1982). Supreme Court Rule 17.1(a).

We discuss each of these reasons in turn.

I.

THE COURTS BELOW HAVE MISCONSTRUED THIS

COURT’S DECISIONS DEFINING THE SCOPE OF THE

STATE ACTION EXEMPTION TO THE ANTITRUST LAWS

This Court first articulated the state action exemption

to the antitrust laws in Parker. At issue in Parker were

mandatory participation marketing proration programs

imposed upon the state’s raisin growers by a state com-

mission. This Court upheld the commission’s authority to

impose the program on the raisin growers because the

Sherman Act regulates only conduct of individuals and

not the conduct of states, unless such state conduct im-

pairs national control over commerce. To qualify for ex-

emption, Parker held that state action must “derive its

authority and efficacy from the legislative command of

the state” and not be “intended to operate or become

effective without that command.” Thus, Parker did not

grant a blank check to states or their instrumentalities.

Unless challenged actions are pursuant to the explicit

legislative command of the state, they are not exempt.

This Court has frequently recognized that the Parker

antitrust exemption should be strictly construed in that

such fundamental antitrust policies as established in the

Sherman Act should not be displaced unless the two

policies are clearly repugnant. City of Lafayette v.

Louisiana Power & Light Co., 435 U.S. 389, 398-99

(1978).

Subsequent to Parker, this court has, in reviewing

numerous claims for the state action exemption, con-

siderably clarified the scope of its ruling in Parker.

6

In Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975),

reh. denied, 423 U.S. 886 (1975), the Court imposed liabil-

ity upon a state agency, the Virginia Bar, where anti-

competitive activities in conjunction with its statutorily

authorized power in such conduct did not amount to an act

of the sovereign state. In Cantor v. Detroit Edison Co..,

428 U.S. 579 (1976), this Court held that parties other

than the state could not claim Parker exemption unless

such conduct was compelled by the state and that such

compulsion was explicit. The holding in Bates v. State Bar

of Arizona, 483 U.S. 350 (1977), reh. denied, 434 U.S. 881

(1977), defined what is meant by a sovereign act. The

court permitted conduct similar to that in Goldfarb be-

cuase that conduct was explicitly demanded by the Arizo-

na Supreme Court in its exercise of its sovereign control

over the practice of law in that state. In Lafayette v.

Louisiana Power and Light Company, supra, the court

held that cities, political subdivisions, agencies, and other

entities inferior to the sovereign state were subject to the

antitrust laws unless such conduct was undertaken pur-

suant to a state’s explicit policy and under a state’s active

supervision. Lafayette further held that the anti-

competitive nature and effect of the act had to have been

contemplated by the sovereign in order to enjoy Parker

exemption.

These holdings were synthesized in California Retail

Liquor Dealer Association v. MidCal Aluminum, Inc.,

445 U.S. 97 (1980) (“MidCal”). There, the California stat-

ute at issue required wine wholesalers to file price sche-

dules with the state and further prohibited the sale of

wine below the prices set forth in those schedules. Mid-

Cal, a wine wholesaler, was charged with selling wines

for which no price schedule had been filed and with selling

other wines at prices less than the prices set by the price

schedules which had been filed. It sought to enjoin the

statute on the grounds that it violated the Sherman Act.

7

The lower court agreed and enjoined enforcement. The

issue presented for review by this Court was whether the

California pricing program was exempt from Sherman

Act scrutiny by reason of the Parker exemption. In hold-

ing that the exemption was not available, this Court laid

down the following two-prong test:

First, the challenged restraint must be ‘one clearly

articulated and affirmatively expressed as state

policy’; second, the policy must be ‘actively super-

vised’ by the State itself.

445 U.S. at 105.

This Court then ruled that the California wine pricing

system satisfied the first prong by forthrightly stating its

purpose to permit resale price maintenance, but that it

did not meet the second requirement of active supervision

by the state. It held:

The State simply authorizes price-setting and en-

forces the prices established by private parties... . ©

The national policy in favor of competition cannot be

thwarted by casting such a gauzy cloak of state in-

volvement over what is essentially a private price-

fixing arrangement. As Parker teaches, ‘a state does

not ee immunity to those who violate the Sherman

Act by authorizing them to violate it, or by declaring

that their action is lawful. . . .’ (citation omitted.)

445 U.S. at 105-106.

MidCal thus made it clear just how narrow the state

action exemption set forth in Parker is. To pass the

MidCal test, the challenged restraint of trade must, first,

be undertaken pursuant to a clearly articulated and

affirmatively expressed state policy, and, second, be

actively supervised by the state itself.

Finally, in Hoover v. Ronwin, _— U.S. ——, 80

L.Ed.2d 590 (1984) (“Ronwin”), this Court held that a

significant degree of independence between the state and

the challenged agency requires a further analysis of the

8

specific complained of act to determine whether such act

can fairly be said to be that of the state itself. This

analysis is conducted through the use of the two-pronged

MidCal test. This Court reasoned that:

Closer analysis is required when the activity at issue

is not directly that of the cee or Supreme

Court, but is carried out by others pursuant to state

authorization. See, “d.» ommunity Communica-

tions Company v. City of Boulder, 455 U.S. 40

(1982); California Liquor Dealers v. MidCal Alumi-

num, 445 U.S. 97 (1980); New Motor Vehicle Board

of California v. Orrin W. Fox Company, 439 U.S. 96

(1978). In such cases, it becomes important to insure

that the anti-competitive conduct of the State’s rep-

resentative was” renin, “atm by the State. City of

Lafayette v. Louisiana Power and Light Company,

435 U.S. 389, 413-415 (1978); see New Mevico v.

American Petrofina, Inc., 501 F.2d 363, 369-70 (9th

Cir. 1974). If the replacing of entirely free competi-

tion with some form of regulation or restraint was

not authorized or approved by the State then the

rationale of Parker is inapposite. . . . The court also

has found the degree to which the state legislature or

Supreme Court supervises its representative to be

relevant to the BRA See MidCal Aluminum, su-

pra, at 105, 63 L. Ed.2d 233, 100 S.Ct. 937; Goldfarb,

supra, at 791, 44 L.Ed.2d 572, 95 S.Ct. 2004. en

the conduct is that of the sovereign itself, on the

other hand, the danger of unauthorized restraint of

trade does not arise. Where the conduct at issue is in

fact that of the state legislature or Supreme Court,

we need not address the issues of “clear articulation”

and “active supervision.”

80 L.Ed.2d at 599-600.

The independence of the Commission in the case at bar

requires the specific conduct at issue must also pass both

prongs of the MidCal test and the activity of the Commis-

sion, its members and staff at issue is this action fails to

9

satisfy either of the two-prongs of the MidCal test. For

the following reasons, the lower courts erred in reaching

an opposite conclusion.

A. The Lower Courts Erred In Holding That The Activity

Of The Commission, Its Members And Staff At Issue Is

This Action Met The First Part Of The Two-Prong

MidCal Test.

The first prong of the MidCal test requires that the

state’s policy with regard to the challenged action be

“clearly articulated and affirmatively expressed.” In this

ease, the conduct which the lower courts held to be in

violation of the Sherman Act is the exchange of price and

cost information among the Commission members and

staff, FOR’s competitors and even the public. As FOR

established in the lower courts, this restraint of trade has

not been undertaken pursuant to a clearly articulated and

affirmatively expressed state policy authorizing such ex-

changes of price information. The North Carolina legisla-

tive scheme grants to the Commission the authority to set

minimum and/or maximum wholesale milk prices in

North Carolina if it ever desires to implement a program

to do so fairly and with proper notice. The Commission,

however, has never done so. In fact, in addition to failing

to implement that policy, it explicitly violates another

clearly articulated state policy.

N.C.G.S. § 106-266.8(12) specifically prohibits the

public dissemination or exchange of price and cost in-

formation by the Commission, its members and/or staff.

That statute provides that the Commission may make

such information public only after it is combined with

other such information for a given milk market or mar-

kets. Clearly, the North Carolina General Assembly has

recognized that the dissemination of information with

respect to specific prices and costs would have an anti-

10

competitive effect on the North Carolina wholesale milk

industry, and that is why it required the Commission to

“combine such information” with other information be-

fore making it public. In other words, while publication of

data containing totals and averages for a market or mar-

kets is permitted, the publication of individual data is

expressly prohibited.

N.C.G.S. § 106-258 is even more explicit. That statute

provides:

Any individual plant records shall be treated as confi-

dential by anyone handling them, and such individual

records shall not be published or made accessible to

any unauthorized person or representative.

Nevertheless, as established in the lower courts, the

Commission and its staff do share with other processors

and even the public the cost information obtained from

milk processor records. Such anti-competitive conduct is

neither required nor authorized by the state and, in fact,

is proscribed by the state, and is thus in direct contraven-

tion of state policy. Certainly, such conduct does not meet

the first prong of the MidCal test, and the lower courts

erred in so concluding.

Further, had the North Carolina legislature con-

templated or anticipated such exchanges, it would not

have required that plant price and cost records be treated

confidentially. Because such confidentiality is explicitly

required by N.C.G.S. § 106-258 as to such records, the

legislature did not intend (and it therefore is not the

policy of the state) to allow the free exchange and dis-

semination of the proprietary information contained in

those records and the stabilization of milk prices in this

fashion. Directly on point is Community Communica-

tions Company v. City of Boulder, 455 U.S. 40 (1982),

where this court found that:

11

tions Company v. City of Boulder, 455 U.S. 40 (1982),

where this court found that:

A State that allows its municipalities to do as they

please can hardly be said to have ‘contemplated’ the

specific anticompetitive actions for which municipal

rer is sought. Nor can these actions be truly

described as ‘comprehended within the powers

granted,’ since the term ‘granted’ necessarily implies

an affirmative addressing of the subject by the

State. (Emphasis by the court and added.)

455 U.S. at 55.

Likewise here, the exchanges of proprietary price and

cost information in which the Commission, its members

and staff have engaged are not within the powers granted

to the Commission by the North Carolina legislature.

Even if the district court below had determined that

the statutes authorized the Commission to regulate pro-

cessor or wholesale milk prices in North Carolina, it does

not necessarily follow that the Commission could do so in

an anti-competitive fashion. As this Court noted in City of

Lafayette v. Louisiana Power & Light Company, supra, :

. . . [E]ven a lawful monopolist may be subject to

antitrust restraints when it seeks to extend or ex-

loit its monopoly in a manner not contemplated by

its authorization.

435 U.S. at 417.

Clearly, in the instant case, the legislature did not

contemplate the manner in which the Commission, its

members and staff have sought to disseminate price data.

First, as already stated, the legislature has expressly

prohibited the exchange of individual processor prices.

Second, while the legislature has authorized the fixing of

processor prices, it conditioned its authorization with a

requirement that the Commission first hold a public hear-

12

ing. N.C.G.S. § 106-266.8(10)b. To be sure, the legisla-

ture did not intend for the Commission, its members and

staff and the state’s processors to fix prices through pri-

vate meetings, telephone conversations and correspond-

ence.

Furthermore, the anti-competitive conduct in dis-

seminating this pricing information to stabilize prices is

contrary to the statement of public policy contained in the

North Carolina Statutes creating the Commission. As

provided in N.C.G.S. 106-266.19, the purpose and policy

of the State of North Carolina in passing the milk law is to

preserve competition, not destroy it. As this below cost

sales prohibition indicates, it is the purpose of the Com-

mission to prevent the destruction of competition in the

milk industry in North Carolina. The anti-competitive

conduct at issue in this action could hardly be less con-

sistent with this statement of the state’s public policy and

the courts below erred in failing to so recognize.

Although the lower courts correctly recognized that no

North Carolina policy authorizes the exchanges of price

and cost information challenged by FOR, the courts

nevertheless concluded that this illegal conduct met the

first prong of the MidCal test for antitrust protection

because the prohibited dissemination of price and cost

information.that occurred was somehow “incidental” to

other specific powers granted to the Commission by the

North Carolina legislature. Thus, the lower courts held

that the price information exchanges, which result only

“incidentally” from the Commission’s powers, are some-

how authorized pursuant to a “clear ly articulated policy”

of the state. As established, any exchange of price in-

formation is specifically prohibited by the legislature.

That being so, the legislature could not have intended

that the Commission, its members and staff could avoid

that specific prohibition as an “incidental” part of other

13

provisions of the statute. Furthermore, even if the legisl-

ature had so intended, that intent could, under no stretch

of the imagination, be said to be “clearly articulated and

affirmatively expressed” as required by MidCal. Indeed,

to conclude that “incidental” price exchanges are part ofa

“clearly articulated and affirmatively expressed” state

policy is a contradiction in terms. Such a conclusion ex-

tends the protection of Parker far beyond the limits es-

tablished by this Court in MidCal and is clearly in error.

Even if the “incidental” standard developed by the

lower courts in their decisions is the correct standard, the

lower courts’ application of that standard to the facts of

this case is in error. FOR established in the district court

that the Commission disseminates confidential price and

cost information in five ways. As to each, the lower courts

held that they occurred “incidental” to specifically

enumerated powers granted to the Commission by the

legislature. However, as to each type of exchange, the

lower courts have clearly erred in so concluding.

For example, FOR proved, and the district court

found, that price information has been repeatedly and

continuously exchanged between certain processors and

the Commission staff through a procedure whereby the

processors report to the Commission the wholesale prices

charged by themselves and their competitors in a given

market. (App. at 5a.) The unlimited exchange of pricing

information is then used by FOR’s competitors and the

Commission to stabilize wholesale milk prices in that area

by notifying each other of the price and bringing about

price alignment in the market. While the lower Courts

found that such exchanges violated Section 1 of the Sher-

man Act, they also held that they were the direct result of

attempts by the Commission to prevent below-cost sales,

one of its legislatively enumerated powers. However, in

no way are the exchanges between processors and Com-

14

mission staff necessary to the enforcement of the below-

cor statute or the prevention of below-cost sales or any

other stated policy and they serve no legitimate purpose.

Indeed, as noted above, such exchanges are expressly

prohibited by the confidentiality requirements of the

Commission’s regulations, which apply with equal

strength to the Commission’s below-cost functions.

Certainly, such exchanges are not pursuant to any state

policy and are not entitled to Parker exemption.

In another example, FOR established to the satisfac-

tion of the District Court that price exchanges occur

between processor representatives and members of the

Commission staff at various processor meetings called by

the Commission. (App. at 5a.) Those meetings have in-

cluded meetings of the “Eleven Man Committee,” all of

whose members are representatives of competing proces-

sors, the “Processor Information Committee,” all of

whose members are representatives of competing proces-

sors,,and several occasions where representatives of

competing processors were directed to meet with the

Commission’s “Cost Procedure Committee.” Indeed, as

indicated hereinabove, the use of below cost investiga-

tions and the filing of price and cost data in connection

therewith as a method of “stabilizing the industry” was

suggested by one of these processor committees. Such

price exchanges are clearly not contemplated by the stat-

ute authorizing such meetings. The fact that, as the Dis-

trict Court found, meetings with processors to discuss

investigations and hearings and retail and wholesale

prices may be within the legislative mandate, certainly

does not authorize the price exchanges at such meetings

in order to stabilize the North Carolina wholesale milk

market. Price exchanges at such meetings can have no

other purpose. The application of an “incidental” stand-

ard to find such unauthorized and illegal activity at those

15

meetings protected under the Sherman Act is clearly in

error.

As previously established by FOR and as found by the

district court, the North Carolina milk industry is highly

competitive and is characterized by a small number of

sellers, a large number of buyers, little perceptible differ-

ence between brands of milk, and an atmosphere in which

the primary means of competition among processors is

aggressive pricing. (App. at 5a.) The District Court also

found that although small or moderate fluctuations in

price do not have a significant effect on the total volume of

milk and dairy products sold in North Carolina, competi-

tion through price is significant in North Carolina to the

extent that the individual seller may increase its share of

the market by taking customers away from its competi-

tors. (/d.) Further, with the obvious short shelf-life of

milk, milk orders are, by necessity, placed on the basis of

short-term needs. (/d.) Having made such findings and

concluding that FOR established each of the factual and

legal criteria necessary to prove a violation of the Sher-

man Act, it was error under these facts for the lower

courts to protect the challenged conduct due to it being

“incidental” to a clearly expressed policy of the state. The

price exchanges established in this case occurred well

outside the legislative mandate of the Commission and

they clearly are not part of any clearly expressed and

affirmatively stated state policy to stabilize wholesale

milk prices in North Carolina through such exchanges.

The lower courts clearly erred in holding that the first

prong of the MidCal test has been met in this case. The

conduct at issue in this action is not pursuant to any

clearly stated and affirmatively expressed policy of the

state of North Carolina. In fact, it is contrary to the

stated policies of the state. The lower courts erred and

16

the judgment entered by the district court in favor of the

Commission should be reversed and judgment entered

for FOR.

B. The Lower Courts Erred in Holding that the Activity of

the Commission, its Members and Staff at Issue in this

Action Met the Second Part of Two-Part MidCal Test.

The second prong of the MidCal test was analyzed only

briefly by the lower courts. They found that because the

Commission must hold regular meetings, N.C.G.S. § 106-

266.7(j), and because of its supervision of the below-cost

statute with its consequent flow of price and cost informa-

tion brought about this litigation, that “this supervision

clearly meets the second prong of the test.” This concluso-

ry statement does not adequately or accurately address

the requirement of the second prong of the MidCal test,

and is in error.

MidCal specifically requires that for the applicability

of the Parker exemption, the challenged restraint of

trade must be “actively supervised by the state itself.”

This requirement is not satisfied by a carte blanche

grant of regulatory powers which permit industry repre-

sentatives to regulate themselves. The reason for such a

rule is simple. If the state merely turned its power over to

representatives of the industry to be regulated, the in-

dustry would be regulated in the interest of the industry

and not in the interest of the public. That is precisely what

has happened here.

As established in the district court, the primary loyalty

and accountability of at least half of the members of the

Commission are to the sectors of the milk industry by

whom they are employed and not to the state or to the

public intended to be represented by the state. In other

words, these Commissioners lack the “independence”

17

from the industry that has historically been required of

state agencies for Parker immunity. In such a case, the

state’s policy cannot be said to be “actively supervised by

the state itself.”

It is precisely this lack of independence that distin-

guishes Goldfarb v. Virginia State Bar, 421 U.S. 773

(1975) reh. den. 423 U.S. 886 (1975) (“Goldfarb”), from

Bates v. State Bar of Arizona, 433 U.S. 350 (1977) reh.

den. 434 U.S. 881 (1977) (“Bates”). In Goldfarb, the state

agency claiming the state-action exemption for the fixing

of lawyer’s fees was the state bar association, an associa-

tion of lawyers. This, the court said, meant that the

lawyers and not the state were regulating the fees. The

industry representatives on the Commission, given their

interest and lack of affiliation with the state, are in

precisely the same role as the members of the State Bar of

Virginia in Goldfarb. As noted by this Court in Ronwin at

n.20:

. . . Goldfarb involved procedures that were not ap-

proved by the state supreme court or the state legis|-

ature. In contrast, petitioners here performed func-

tions required by the Supreme Court Rules and that

are not effective unless approved by the court itself.

On the other hand, in Bates, the regulation of the

advertising regulations alleged to violate the Sherman

Act was by the Arizona Supreme Court, a state agency

clearly independent of the lawyers being regulated.

Thus, the regulatory scheme in Goldfar® failed while the

one in Bates passed muster in this Court.

Clearly, Goldfarb and not Bates is applicable to the

instant case. The State of North Carolina itself has never

actively supervised the unlawful exchanges of informa-

tion at issue in this action.

18

Moreover, the exchanges of information at issue in this

action are accomplished by the Commissioners acting

both individually and in conjunction with other private

parties industry representatives. The state cannot give

immunity to private parties under the Sherman Act simp-

ly by authorizing them to violate the Act. MidCal, supra;

Goldfarb, supra.

Under all the facts of the instant case, it is clear that the

acts complained of are not exempt from the Sherman Act.

First, the state clearly does not have a policy against free

competition in the milk industry. The Supreme Court of

North Carolina has expressly stated that the “below cost”

statute which respondents contend authorize their action

is intended to promote competition and not to destroy it.

Appeal of Arcadia Dairy Farm, Inc., supra. Furth-

ermore, although the members of the Commission have

from time to time recommended to the Commission that it

limit competition by setting minimum and maximum

wholesale prices for milk processors, the Commission has

never done so. Second, it is clear that the persons en-

gaged in the unlawful exchange of information are not

adequately supervised by independent state officials. To

the contrary, one-half of the members of the Commission

are financially interested in their decisions and certainly

cannot be said to be “independent.” The acts complained

of in this case are not the acts of the state but rather the

-acts of financially interested individuals. Such activity is

not state supervision.

The decision in MidCal strongly supports this result.

As noted above, this Court there held that:

The program, however, does not meet the second

uirement for Parker immunity. The State simply

authorizes price-setting and enforces the prices es-

tablished by private parties. The State neither es-

19

tablishes prices nor reviews the reasonableness of

the price schedules; nor does it regulate the terms of

fair trade contracts. The State does not monitor mar-

ket conditions or engage in any ‘pointed reexamina-

tion’ of the program. national policy in favor of

competition cannot be thwarted by casting such a

gauzy cloak of state involvement over what is

essentially a private price-fixing arrangement. As

Parker teaches, ‘a state does not give immunity to

those who violate the Sherman Act by authorizing

them to violate it, or by declaring that their action is

lawful. . . .’ (emphasis added. )

445 U.S. at 105-106.

Furthermore “active supervision of the state itself” is

not, as the lower courts assumed, merely active enforce-

ment of the challenged program. The programs chal-

lenged in MidCal, City of Lafayette, supra, Cantor v.

Detroit Edison Company, supra, and Community Com-

munications Company v. City of Boulder, supra, were

all actively enforced by the cities, boards and agencies

involved, or else they never would have been challenged.

Yet, in each instance, the challenged conduct was found

not to be entitled to Parker exemption as there was a

failure in each instance to show “active supervision by the

state itself”. Such a rule is logical. Otherwise, anyone who

had injury by reason of illegal or unauthorized enforce-

ment sufficient to show standing to bring such an action

would immediately be blocked by the Parker exemption.

This Court never intended such a result and the MidCal

test would be meaningless if that were the rule to be

applied. Indeed, there would have been no standing to

challenge the program in the first place unless the pro-

gram had been actively enforced against the individual

bringing the action.

Thus, the lower courts’ holding that the second prong

has been satisfied merely due to the unauthorized activity

20

proved in the record of this action would lead to the

inevitable conclusion that the very existence of a cause of

action implies the satisfaction of MidCal’s second prong.

This interpretation would nullify the second prong of

MidCal altogether if allowed to stand. Governmental and

quasi-governmental entities composed, as here, of in-

dividuals with active special interests, should not be al-

lowed to escape antitrust scrutiny simply because: (1)

they have a general regulatory mandate; and (2) an action

exists against them implying active enforcement in

satisfaction of MidCal. The lewer courts have incorrectly

shielded the Commission and its members, with the very

“gauzy cloak” that MidCal deemed insufficient.

Finally, it is not the active supervision of the below-

cost statute of which FOR complains in this action. FOR

instead complains that it has proven the unauthorized

dissemination and exchange of proprietary price and cost

information by the Commission, its members and staff,

and the subsequent illegal stabilization of wholesale milk

prices in the North Carolina milk industry, all in per se

violation of Section 1 of the Sherman Act, and that it is

unable to obtain relief from that violation. The exchanges

permitted by the lower courts in this case are not only not

part of the state’s legislatively mandated policy to the

Commission, but they are expressly forbidden by the

confidentiality requirement of the Commission’s own

regulations.

FOR respectfully submits that the decisions of the

lower courts are in error and should be reversed and

judgment entered for FOR.

21

Il.

THE FOURTH CIRCUIT’S DECISION APPLYING THE TWO

PRONGS OF THE MIDCAL TEST CONFLICTS WITH

HOLDINGS OF OTHER COURTS OF APPEALS.

A. The Fourth And Ninth Circuits Directly Conflict In

Their Interpretation of the First Prong of the MidCal

Test.

The Fourth Circuit, in this case, has created a conflict

with the Ninth Circuit in its interpretation and applica-

tion of the first prong of the MidCal test and in its

application of the Parker exemption.

The Ninth Circuit strictly construes both prongs of

MidCal. Knudsen Corporation v. Nevada State Dairy

Commission, 676 F.2d 374 (9th Cir. 1982) (“Knudsen”) is

the only federal circuit court of appeals opinion involving

a discussion of the Parker exemption issue as it relates to

the operation of a state dairy commission. In that case a

manufacturer and distributor of dairy products chal-

lenged the Nevada Dairy Commission alleging that

through that Commission, the state was mandating a

price filing system promoting horizontal price fixing

which restrained competition in the Nevada dairy mar-

ket. The district court issued a preliminary injunction and

the Court of Appeals affirmed. The Nevada Dairy Com-

mission unconvincingly argued that there was a clearly

stated and articulated Nevada policy to stabilize the

prices of dairy products and that therefore it was entitled

to the protection of Parker. Applying MidCal, the Ninth

Circuit concluded that the Commission was not protected

by Parker, reasoning that although the Nevada Dairy

Commission is authorized by statute to do so, it does not

set wholesale prices but simply enforces privately set

prices through the mechanism of advance filing. Further,

the court found that the public disclosure of cost and price

documents, “appears also to inhibit and constrain price

competition in the dairy industry.”

22

In another recent Ninth Court case, United States v.

Title Insurance Rating Bureau of Arizona, Inc., 700

F.2d 1247 (9th Cir. 1983) (“Title Insurance”), the court

held that the first prong of MidCal is not satisfied even

where the state statute authorizes cooperative action in

rate making. The statutory language in Title Insurance,

although it listed factors to be considered in setting rates,

was held to be insufficient to show a clearly articulated

and affirmatively expressed state policy.

In contrast, the Fourth Circuit is substantially more

liberal in interpreting the first prong of MidCal. As is

evidenced by the decision of that court below, the Fourth

Circuit expansively interprets the first prong of MidCal

so as to extend the Parker exemption far beyond the

protection contemplated by this Court in Parker. The

Fourth Circuit requires virtually no showing in order to

establish a clearly expressed and articulated policy for

the first prong by protecting unauthorized and in fact

prohibited conduct taken by the members and staff of the

Commission from antitrust scrutiny.

In support of this holding, the lower court cites Prince-

ton Community Phone Book v. Bate, 582 F.2d 706 (3d

Cir. 1978), a pre-MidCal decision, stating that the policy

of the state may be demonstrated by explicit language in

the statutes or it may be inferred from the nature of the

powers and duties conferred the agencies. However, the

court of appeals below then liberalizes even this highly

questionable pre-MidCal holding by concluding that since

the acts complained of in this case were “incidental” to

expressly authorized acts then they are to be protected

whether they are prohibited by other statutory provi-

sions or state policy or not. Therefore, the court avoids

altogether the question of whether the specific conduct

complained of in this case is protected by a state policy. It

is difficult to imagine what conduct by any state agency or

23

its members or staff would not enjoy the benefits of the

Parker exemption under this broad interpretation of

MidCal adopted by the Fourth Circuit. This is especially

true given that virtually all conceivable actions by such an

agency or its members or staff could be deemed to be, in

some way, “incidental” to expressiy authorized actions.

ee |

The disagreement over the interpretation of the first

prong of MidCal, from the strict interpretation of the

Ninth Circuit to the very liberal interpretation by the

Fourth Circuit (as is evidenced by this case), leads to

inconsistency of application and therefore inconsistency

of result. This inconsistency leads to uncertainty as to

which actions are proscribed and which are not. This

Court should grant certiorari to clarify the proper stand-

ards for application of the first prong of MidCal.

B. The Fourth Circuit’s Decision In This Action Also

Conflicts With the Ninth Circuits’ View Of The Second

Prong Of The MidCal Test.

MidCal also requires, before the state action exception

may be applied, that the clearly articulated and

affirmatively expressed state policy must be “actively

supervised by the state itself’. 445 U.S. at 105.

As with the first prong, the Fourth Circuit has staked

out a position in conflict with that of the Ninth Circuit in

articulating the standards to govern application of prong

two of the MidCal test. The Ninth Circuit in Miller v.

Oregon Liquor Control Commission, 688 F.2d 1222,

1226-27 (1982) required “pointed reexamination” by the

state and “reviews of reasonableness” as to how the state

policies are being effectuated in order for the active su-

pervision requirement of MidCal to be met. Such an

24

interpretation is required by the clear language of Mid-

Cal. The Ninth Circuit specifically held:

The wholesalers and the commission argue that Ore-

i law, like Virginia law, completely controls the

istribution of liquor within the state’s boundaries

and should therefore be immune from the Sherman

Act under Parker. We disagree. The Oregon beer

and wine pricing program resembles the California

wine pricing program more closely than a liquor and

wine pricing program in Virginia. Oregon ‘neither

establishes prices or reviews the reasonableness of

the price schedules. . . [nor does it] monitor market

conditions or engage in any “pointed reexamination”

of the program.’ MidCal, supra, 445 U.S. at 105-06,

100 S.Ct. at 943. Oregon mandates the posting of

prices to be charged by each wholesaler, but does not

in — ey review the reasonableness of the prices

set. While the commission ‘may reject any price aA

ing which is in violation of any of its rules,’ Rule

210(1)(b), the effect of that rule is simply to effectu-

ate the price — and the prohibitions on quantity

discounts and transportation allowances. It does not

provide for government establishment or review of

the prices themselves. The similarities between the

Oregon and California laws and the differences be-

tween the Oregon and Virginia laws indicate that

Oregon, like California, does not meet the second

prong of the two-prong MidCal test. Oregon merely

authorizes and enforces the disputed ager er

tices. See MidCal, supra, 445 U.S. at 105, 1 Ct.

at 943. It does not ‘ “displace unfettered business

freedom” with its own power.’ (citation omitted.)

688 F.2d at 1226-1227. See also, Knudsen, supra.

Disagreeing with this Ninth Circuit interpretation of

prong two of the MidCal test are the Sixth Circuit in the

case Gambrel v. Kentucky Board of Dentistry, 689 F.2d

612 (6th Cir. 1982), cert. denied, __ U.S. ___.,, 108 S.Ct.

1198 (1983) and the Fourth Circuit in its decision below.

25

In both instances, the courts assumed that mere active

enfor:ement of the challenged program is “active super-

vision of the state itself.” As outlined supra, at 23-4,

under this liberal interpretation, the second prong of

MidCal is nullified. Such a broad definition of active

supervision is directly contrary to MidCal, substantially

weakens the antitrust proscriptions of the Sherman Act

and incorrectly expands Parker far beyond this Court’s

intent. Such inconsistency of interpretation and result

must be clarified and this Court should grant certiorari in

order to establish the proper standards to be applied.

CONCLUSION

Whether considered separately or cumulatively, the

errors committed by the courts below are so egregious

and so plain that the petition for writ of certiorari should

be granted, the judgment of the court of appeals reversed

and judgment should be entered for petitioner.

Respectfully submitted,

D. PAUL ALAGIA, JR., ESQ.*

JOHN S. KECK, Esq.*

JOSEPH L. HAMILTON, Esa.

JOHN F. SHERLOCK, III, Esq.

BARNETT & ALAGIA

The Fifth Avenue Building

444 South Fifth Street

Louisville, Kentucky 40202

(502) 585-4131

Attorneys for Flav-O-Rich, Inc.

*Counsel of Record

July 11, 1984

26

CERTIFICATE OF SERVICE

I hereby certify that on this 11th day of July, 1984,

three copies of this Petition and Appendix were mailed,

postage prepaid, to counsel for the respc 1dent, W.C.

Harris, Esq. and F. Stephen Glass, Esq., Harris,

Cheshire, Leager & Southern, P. O. Box 2417, Raleigh,

North Carolina 27602.

I furthe ertify that all parties requi

have been served.

Ed to be served

NF. SHERLOCK, III

Junsel For Petitioner,

Flav-O-Rich, Inc.

APPENDIX

la

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

NO. 83-2066

FLAV-O-RIcH, INC.,

Appellant,

vs

NORTH CAROLINA MILK COMMISSION AND

ITs MEMBERS, HERBERT C. HAWTHORNE, VILA M.

ROSENFELD,

ANNA G. BUTLER, RUSSELL E. DAVENPORT

CHARLIE L. HARDEE, INEZ M. MyLes, B.F NEsBITT,

KATHRYN G. KIRKPATRICK, AND DAVID A. SMITH,

Appellees.

APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE EASTERN DISTRICT OF NORTH

CAROLINA, AT RALEIGH. FRANKLIN T. DUP-

REE, JR., SENIOR DISTRICT JUDGE. (C/A 82-1172-

CIV-5)

ARGUED APRIL 3, 1984 DECIDED APRIL 12, 1984

BEFORE WINTER, CHIEF JUDGE, WIDENER

AND PHILLIPS, CIRCUIT JUDGES.

JOHN S. KECK (D. PAUL ALAGIA, JR., JOSEPH L.

HAMILTON, BARNETT & ALAGIA; JERRY W.

AMOS, REID L. PHILLIPS, BROOKS, PIERCE,

McCLEN DON, HUMPHREY & LEONARD ON

BRIEF) FOR APPELLANT; F. STEPHEN GLASS

(W. C. HARRIS, JR., HARRIS, CHESHIRE, LEA-

GER & SOUTHERN ON BRIEF) FOR APPELLEES.

PER CURIAM:

Plaintiff sued the North Carolina Milk Commission

praying a declaratory judgment and injunctive relief for

alleged violations of § 1 of the Sherman Act, 15 U.S.C.

§ 1. The action arose out of defendant’s suspension of

plaintiff's license to distribute milk in North Carolina as a

result of plaintiffs refusal to make its records available in

connection with an investigation of below-cost selling in

violation of N.C.G.S. § 106-266.19. Plaintiff claimed, in-

ter alia, that defendant disseminated confidential price

information and stabilized prices in North Carolina in

violation of the Sherman Act.

The district court granted summary judgment for de-

fendant ruling that defendant had violated § 1 of the

Sherman Act but that defendant and its activities were

exempt from antitrust scrutiny under the doctrine of

Parker v. Brown, 317 U.S. 341 (1943), and its progeny.

We agree.

We affirm the judgment of the district court for the

reasons set forth in its memorandum of decision. Flav-O-

Rich, Inc. v. North Carolina Milk Commission, No.

82-1172-Civ.-5, E.D.N.C., October 27, 1983 (unpub-

lished).

AFFIRMED.

3a

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTH CAROLINA

RALEIGH DIVISION

NO. 82-1172-CIV-5

FLAV-O-RICH, INC.,

Plaintiff,

Vv.

NorRTH CAROLINA MILK COMMISSION AND

Its MEMBERS,ETC.,

Defendants.

MEMORANDUM GF DECISION

Plaintiff, Flav-O-Rich, Inc., a milk processor-

distributcr, brought this action against the North Caroli-

na Milk Commission and its members for declaratory and

injunctive relief for violations of Section 1 of the Sherman

Act, 15 U.S.C. §1.!

The action is before the court on the parties’ cross-

motions for summary judgment. After hearing argu-

ments on the motions and considering the submissions of

the parties, the court is of opinion that although the

question is a close one, that plaintiff's motion should be

denied and defendants’ motion granted.

On November 10, 1981, auditors from the Milk Com-

mission requested Flav-O-Rich’s Durham Division Office

to disclose information on cost and prices for certain

‘Plaintiff also alleged due process violations under 42 U.S.C.

§ 1983. Inasmuch as these claims were neither argued nor briefed by

plaintiff in its motion for summary judgment, the court will treat

them as waived. In addition the court finds that the disclosure

requirement is rationally related to a legitimate state purpose. Thus

this claim must be dismissed as without merit.

4a

wholesale accounts. The information requested was to be

used in connection with an investigation of below-cost

selling in violation of N.C.G.S. § 106-266.19. Flav-O-Rich

denied the auditors access to this information. On Decem-

ber 8, 1981 and May 3, 1982, the auditors again requested

and were refused the information.

After giving plaintiff notice that it should appear and

show cause why its license should not be revoked for

refusing to make the records available, the Milk Commis-

sion, on May 25, 1982, conducted a hearing. At the hear-

ing, Flav-O-Rich did not offer evidence opting instead to

read a statement concerning the importance of confiden-

tial cost and price information. As a result of the hearing,

the Milk Commission, on October 12, 1982, ordered that

effective November 12 of that year the license of Flav-O-

Rich, Ine., Durham Division, to distribute milk in North

Carolina would be suspended. Plaintiff then brought this

action seeking injunctive and declaratory relief. On

November 5, 1982, the court granted plaintiff's motion for

a preliminary injunction.

Although other issues are raised in the record the

principal issue presented by these motions is whether the

requirement by the North Carolina Milk Commission that

Flav-O-Rich permit inspection of its records which re-

sults in an exchange of price information is exempt from

the Sherman Act under the “state action” doctrine of

Parker v. Brown, 317 U.S. 341 (1943). When addressing

the “state action” doctrine, the threshold issue of whether

the activity violates the Sherman Act must be resolved.

California Retail Liquor Dealers Association v. Midcal

Aluminum, Inc., 445 U.S. 97 (1980). In this instance,

Flav-O-Rich is complaining of an exchange of price in-

formation which leads to price stabilization in violation of

Section 1 of the Sherman Act. United States v. Container

Corporation, 393 U.S. 333 (1969). In Container Corpora-

5a

tion there was an exchange of specific sales and price

information of identified customers. The court held that

where the industry was dominated by relatively few sel-

lers, the product is fungible, competition for sales is

primarily through price and demand is inelastic, such that

buyers place orders only for short term needs, the ex-

change tends toward price uniformity and is therefore

illegal per se.

Plaintiff's exhibits clearly document exchanges of price

information. Moreover, the milk industry in North Caro-

lina is characterized by a small number of sellers and a

large number of buyers. There is little perceptible differ-

ence between brands of milk and the primary means of

competition among processor-distributors is aggressive

pricing. Although small or moderate fluctuations in price

do not have a significant effect on the volume of milk and

dairy products sold, competition through price is only

significant to the extent that an individual seller may

increase its share of the market by taking customers

away from its competitors. With the obvious short-term

life span of milk, orders are, by necessity, placed on the

basis of short-term needs. U der these circumstances,

the court agrees with plaintiff that price exchanges would

result in price stability in violation of United States v.

Container Corporation, supra.

Having satisfied the initial requirement that the com-

plained of activity violates the antitrust laws, the issue of

whether the actions of the North Carolina Milk Commis-

sion are immune from the antitrust laws under the “state

action” doctrine must be decided.’

2 Plaintiff has argued that this court’s prior memorandum of deci-

sion accompanying the preliminary injunction forecloses considera-

tion of this issue. This argument, however, misperceives the inquiry

when a preliminary injunction is before the court. At that stage, the

6a

In Parker v. Brown, the Supreme Court held that the

federal antitrust laws did not prohibit a state, in the

exercise of its sovereign powers, from imposing certain

anti-competitive restraints. Community Communica-

tions Company v. City of Boulder, 455 U.S. 10 (1982).

Cases interpreting the Parker v. Brown doctrine reveal

that unless the activity is an act of the state, done in its

sovereign capacity, or is that of a state agency under a

clearly articulated and affirmatively expressed policy,

e.g., California Retail Liquor Dealers Association v.

Midcal Aluminum, Inc., 445 U.S. at 105, the exemption

is inapplicable. Community Communications Company

v. City of Boulder, 455 U.S. at 52.

Defendants contend that because the Commission is an

instrumentality of the state, N.C.G.S. § 106-266.8, the

state was acting in its sovereign capacity and therefore

immune from antitrust liability. Thus it is argued that the

two-pronged Midcal analysis is unnecessary. See, ¢.g.,

Deak-Perera Hawaii v. Department of Transportation,

553 F.Supp. 976 (Hawaii 1983). It is not the status of a

defendant as an agency, however, which entitles it to the

exemption. City of Lafayette v. Louisiana Power & Light

Company, 435 U.S. 389 (1978). In Deak, for example, the

defendant was the state department of transportation.

Because the state can act only through its agents, the

action of the state transportation department can be con-

sidered an act of the state itself. In contrast, defendant is

a regulatory commission which acts much like the agency

in Midcal. Accordingly, the two-pronged test is appropri-

ate.

court need only inquire whether serious questions of law are at issue.

Blackwelder Furniture Company v. Seilig Manufacturing Com-

pany, 550 F.2d 189 (4th Cir. 1977). The decision was not, as plaintiff's

argument presumes, a decision on the merits of the antitrust claim

for relief.

7a

Under the Midcal test, defendants must show first that

the challenged activity is clearly articulated in

affirmatively expressed state policy. To meet this test all

that must be shown is that the agency is carrying out the

mandate of the state. City of Lafayette v. Louisiana

Power & Light Company, supra (Brennan, J., concurr-

ing). It may be derived “from the authority given a gov-

ernmental entity to operate in a particular area. . . .” Jd.

at 415 (Brennan, J., concurring) (quoting the lower court

opinion, 532 F.2d at 434). In addition, the mandate may

be demonstrated by explicit language in the statutes or it

may be inferred from the nature of the powers and duties

conferred the agency. Princeton Community Phone

Book, Inc. v. Bate, 582 F.2d 706 (3d Cir.), cert. denied,

439 U.S. 966 (1978).

“(T]he purpose of the act creating the Milk Commission

was to protect the public interest in a sufficient, regularly

flowing supply of wholesome milk and, to that end, to

provide a fair price to the milk producer for his product.”

North Carolina ex rel. North Carolina Milk Commission

v. National Food Stores, Inc., 270 N.C. 323, 332, 154

S.E.2d 548, 555 (1967). To carry out its mission, the

Commission was given the power to examine records and

require their production. N.C.G.S. § 106-266.8(5). To

this end, the subpoena power could be invoked if neces-

sary. Id. In addition, the legislature made it unlawful for

anyone to sell milk below cost, N.C.G.S. § 106-266.19,

and gave the Commission the power to investigate all

matters pertaining to the production, processing, stor-

age, distribution and sale of milk. N.C.G.S. § 106-

266.8(2). The Commission also may act as mediator con-

cerning controversial issues that may arise among or

between producers or distributors. N.C.G.S. § 106-

266.8(4). From these grants of power it is clear that the

incidental exchange of price information of which plaintiff

8a

complains falls within the affirmatively expressed and

articulated state policy.

This is further evidenced by the acts of which plaintiff

complains. Plaintiff asserts five areas in which price and

cost exchanges occurred. Each instance, however, was a

natural, consequence of the Commission carrying out

explicit powers. For example, Flav-O-Rich complains

that price and cost exchanges occurred because of direct

contact between Commission members and processors.

This occurs when processors inform the Commission that

a competitor is believed to be charging below cost in

violation of N.C.G.S. § 106-266.19. The Commission then

begins an investigation in the area, N.C.G.S. § 106-

266.8(2), and may later inform the complaining processor

that the price is or is not below cost, or that there has been

an adjustment, and the complainant must either meet the

new cost or not charge below its cost. Thus the exchange

occurs as a direct result of the investigation and the

attempts to prevent below-cost sales in violation of the

statute. Otherwise, continued below-cost sales would re-

sult in ruinous competition and threaten an orderly milk

market, results the statute was explicitly designed to

correct. See 1953 N.C. Sess. Laws Chapter 1338.

The second example of an exchange occurs at public

hearings to determine if below-cost pricing in violation of

N.C.G.S. § 106-266.19 has occurred. At the hearing, cost

and price figures surely become exposed. However these

hearings are expressly contemplated by the state, id.,

and certainly such evidence must be explored to deter-

mine if below-cost sales have occurred. That the informa-

tion in some sense becomes “exchanged” is only incidental

to the procedure employed by the state to investigate

below-cost pricing.

9a

Thirdly, Flav-O-Rich complains of processors meeting

with the Commission to discuss pricing. These meetings,

however, are affirmatively authorized by the legislature.

N.C.G.S. § 106-266.8(4). Additionally, the Commission

has the power to set maximum and minimum retail and

wholesale prices charged for milk. N.C.G.S.

§ 106.266.8(10)(b). This may occur after investigations

and hearings have been conducted. Jd. Meeting with

processors to discuss this alternative and others which

may stabilize the industry is certainly within the legisla-

tive mandate.

Fourth, plaintiff complains that because the Commis-

sion has two processors as members, whenever price or

cost is discussed, an exchange occurs. However,

N.C.G.S. § 106-266.7(a) requires the Speaker of the

House to appoint two members to the Commission, one of

whom must be a processor. The Commission of Agricul-

ture, who appoints three members, must likewise appoint

one who is a processor. Jd. That they would be privy to

Commission information could not be more expected.

The last example of information exchanging occurs

through the media. While there is no statutory require-

ment that information be given to the press, the below-

cost hearings are public and the press may freely attend.

Moreover, it is not every exchange of information which

constitutes a Sherman Act violation. United States v.

United States Gypsum Company, 438 U.S. 422 (1978). It

is doubtful that the occasional dissemination of informa-

tion through the media constitutes a Sherman Act viola-

tion.

To summarize, the totality of the exchanges of price

information of which plaintiff complains would normally

amount to a violation of Section 1 of the Sherman Act.

Yet, a review of the legislative mandate of the Milk

10a

Commission discloses that these exchanges were autho-

rized by the legislature as a clearly articulated and

affirmatively expressed policy of the state. The ex-

changes occur as a natural result of the Commission’s

carrying out the very specific mandate to prevent below-

cost pricing and investigate where it occurs. The Com-

mission is also to investigate methods of maintaining

stable markets and may fix wholesale and retail prices.

Price information exchanges in this context clearly meet

the first prong of the Midcal test.

The second prong of the test is also met. Not only is the

Milk Commission to hold regular meetings, N.C.G.S.

§ 106-266.8(j), but the very active supervision of the

below-cost statute with its consequent flow of price and

cost information is the essence of this litigation. This

supervision clearly meets the second prong of the test.

Accordingly, the “state action” doctrine of Parker v.

Brown constitutes a defense to the action and the Com-

mission’s motion for summary judgment must therefore

be granted and Flav-O-Rich’s motion for summary judg-

ment must be denied. An appropriate judgment shall be

entered.

F. T. DUPREE, JR.

UNITED STATES DISTRICT JUDGE

October 27, 1983.

lla

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTH CAROLINA

RALEIGH DIVISION

NO. 82-1172-CIV-5

FLAV-O-RICH, INC.,

Plaintiff,

Vv.

NORTH CAROLINA MILK COMMISSION AND

ITs MEMBERS,ETC.,

Defendants.

JUDGMENT

For the reasons stated in this court’s memorandum of

decision filed this day it is hereby

ORDERED that defendants’ motion for summary

judgment is granted, plaintiff's motion for summary judg-

ment is denied and this action is dismissed.

F. T. DUPREE, JR.

UNITED STATES DISTRICT JUDGE

October 27, 1983.