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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1984
- **Citation:** 469 U.S. 853

## Text

F } waa 5 os Vo.
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84-51 | wil ises
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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_3114%3A1. Public record. Not legal advice.