Opinion — Shafer v. Farmers Grain Co. of Embden

Grain

ota,

SUPREME COURT OF THE UNITED STATES.

No. 34.—Octoser Term, 1924.

_ > lerenny age a ¥ Appeal from United States

orth Dakota, - » Appellant, District Court for North

Farmers Grain Co. of Embden, et al. Dakota.

[January 5, 1925.]

This cause is restored to the docket for reargument on all the

questions involved, particularly including the following:

1. Whether the North Dakota statute of 1922 differs materially

in its provisions and operation from the statute of 1919 which was

held invalid by this Court in Lemke v. Farmers Grain Co., 258

U. 8. 50, and Lemke v. Homer Farmers Elevator Co., 258 U. 8S. 65.

2. Whether and to what extent section 17 of the statute of 1922

gives effect to and continues in force the provisions of the statute

of 1919.

8. Whether and in what particulars the statute of 1922 en-

eroaches upon the field of regulation occupied by the United States

Grain Standards Act or conflicts with that Act or with its ad-

ministration.

SUPREME COURT OF THE UNITED STATES.

No. 34.—OctToBEerR TERM, 1924.

George F. Shafer, Attorney General o

North Dakota, et al., Appellants,

vs.

Farmers Grain Company of

Embden, et al.

Appeal from the District

Court of the United

States for the District of

North Dakota.

[May 4, 1925.]

Mr. Justice VAN DEVANTER delivered the opinion of the Court.

This is a suit to restrain the enforcement of the North Dakota

Grain Grading Act, an initiated measure approved at a state

election November 7, 1922. North Dakota Laws 1923, p. 549. The

plaintiffs own and operate country elevators within the State, at

which they buy wheat from farmers for shipment to markets in

other states; and the defendants are officers of the State, who are

charged by the Act with the duty of enforcing it. The plaintiffs

challenge the validity of the Act under the Constitution of the

United States on the grounds, first, that it interferes with and

burdens interstate commerce, and, secondly, that it conflicts with

the United States Grain Standards Act, c. 313, 39 Stat. 482. An

injunction preventing its enforcement pending the suit was granted

by the District Court, three judges sitting; and that interlocutory

decree is here for review under section 266 of the Judicial Code, as

amended March 4, 1913, ec. 160, 37 Stat. 1013.

A prior statute concededly ‘‘having the same general purpose’’

was adopted by the state legislature in 1919 and held invalid by

this Court in Lemke v. Farmers Grain Company, 258 U. 8S. 50,

as an interference with interstate commerce. There are differences

between that statute and the present one, of which the parties take

divergent views. It would serve no purpose to take up these

differences in detail. We shall describe the situation to which the

2 Shafer et al. vs. Farmers Grain Co. of Embden et al.

present Act is intended to apply, state its material provisions, and

then come to its operation on interstate commerce.

Wheat is the chief product of the farms of North Dakota, the

annual crop approximating 150,000,000 bushels. About 10 per cent,

is used and consumed locally, and about 90 per cent. is sold within

the State to buyers who purchase for shipment, and ship, to termi.

nal markets outside the State. Most of the sales are made at

country elevators to which the farmers haul the grain when har.

vested and threshed. These elevators are maintained and operated

by the buyers as facilities for receiving the grain from the farmers’

wagons and loading it into railroad cars. The loading usually

proceeds as rapidly as grain of any grade is accumulated in car.

load lots and cars can be obtained. When a car is loaded it is

sent promptly to a terminal market and the grain is there sold.

This is the usual and recognized course of buying and shipment.

Occasionally a farmer has his grain stored in the country elevator,

or shipped to a terminal elevator for storage, and awaits a possible

increase in price; but even in such instances he usually sells to the

buyer operating the country elevator, and the latter then sends the

grain to the terminal market if it has not already gone there.

The price paid at the country elevators rises and falls with the

price at the terminal markets, but is sufficiently below the latter to

enable the country buyer to pay for the intermediate transporta-

tion and have a margin of profit. All transactions at the terminal

markets, including the price, are based on the grade of the wheat,

and by reason of this all buying at the country elevators is by

grade.

The grading at the terminal markets is done by inspectors licensed

under the United States Grain Standards Act, who are required

to apply to all interstate shipments the grading standards promul-

gated under that Act by the Secretary of Agriculture. There are

no inspectors licensed under that Act at the country elevators; and

so the grading is done there unofficially by the buyers or their

agents as an incident and part of the buying.

Grading includes an ascertainment of the proportions of clean

wheat and of dockage in each lot of grain and an ascertain

’ ment of the quality of the wheat. Dockage consists of separable

foreign material, such as dirt, pieces of straw, chaff, weed stems,

weed seeds and grain other than wheat. Its proportion varies in

Shafer et al. vs. Farmers Grain Co. of Embden et al. 3

different lots, but generally is less than five per cent. When not

separated it causes the grain to bring a lower price per bushel than

clean wheat would bring. When separated it has a value for poultry

and stock feed which usually is in excess of the cost of separation.

Occasionally the farmer separates it at the farm and sells only the

clean wheat, and occasionally the buyer separates it at the country

elevator, charges the farmer for that service, and buys and ships

only the clean wheat; but generally the grain is sold by the farmer

and shipped by the country buyer with the dockage included. The

influence of dockage on the value of the grain and the current

modes of handling it are shown in publications of the Agricul-

tural Department of the United States, pertinent excerpts from

which are set out in the margin.*

1Extracts from Farmers’ Bulletin No. 1118, United States Department of

Agriculture, pp. 5, 21:

“The foreign material in wheat may seriously affect its value in that it

often increases the cost of milling, and causes injury to the baking qualities

of flour. Therefore, that factor is considered in the inspecting and grading of

wheat. The amount of dockage present has a bearing upon the commercial

value of a lot of wheat. Especially when present in large amounts, it is a

factor of considerable importance to the parties interested in the marketing

or storage of grain.’’

‘All of the following methods of handling dockage are employed in normal

times and all are generally found to be satisfactory :

j- a wheat is cleaned on the farm and only the clean wheat is hauled

market.

2. The wheat delivered by the farmer is run over the proper cleaning

machinery at the country elevator or mill, and the dockage is separated and

returned to the farmer,

3, The wheat is screened by the local buyer, payment is made to the seller

on the basis of the grade of the clean wheat only, and the dockage is retained

by the elevator or mill as compensation for services in removing it.

4. The wheat is screened by the local buyer, payment is made to the seller

on the basis of the grade of the clean wheat, and the dockage is retained

by the elevator or mill, and if the value of the dockage separated exceeds the

cost of separation, payment is made for it.

5. The wheat containing the dockage is consigned to the large market by

the country mill or elevator, where the dockage is separated and its value is

taken into consideration in connection with the price paid for the entire car-

load of dockage-free wheat. In some localities it is the practice to make a

small charge for such services, while in other localities the services are per-

formed without cost.

6. The wheat containing the dockage is sold to a local buyer, who in turn

consigns it to the terminal market with the understanding that the price se-

cured will be based upon the commercial value of both the wheat and the

The first two methods mentioned, in which only the screened wheat is de-

livered to the local buyer, tend to minimize the differences of opinion with

ag

4 Shafer et al. vs. Farmers Grain Co. of Embden et al.

As many as 2,200 country elevators are operated within the

State in the business here described—generally two or more by

competing buyers at each station. Some of the buyers are indi.

viduals and others are corporations. A large number are farmers’

cooperative companies, which buy grain grown by their stock.

holders and others in the vicinity of their elevators, ship and sel]

. the same, and distribute as patronage dividends the surplus arising

from such transactions—no profit being retained by the companies,

The plaintiffs comprise many buyers, individual and corporate,

including 11 farmers’ cooperative companies. In the aggregate

regard to the grade of wheat delivered and therefore establish greater con.

fidence in the grades given by the local buyer. Furthermore, these methods

enable the farmer to utilize the foreign material for feed or to seli it locally,”

Extracts from Farmers’ Bulletin No. 1287, United States Department of

Agriculture, pp. 5, 21:

‘¢The benefits derived from clean wheat are shared by the farmer and the

country elevator. If the farmer cleans his wheat before delivering it to the

elevator he saves the cost of hauling the dockage to market, and he may be

able to use it to advantage for feed, and make a saving in his feed bill. In

many cases these savings will repay the farmer for the time and trouble re

quired to clean his wheat. The contention as to the amount of dockage in

the wheat which frequently arises between the farmer and the elevator oper

ator will be avoided if clean wheat is delivered. The price paid for clean

wheat at the elevator is usually more per bushel than the price paid for unclean

wheat, because the elevator operator must consider either the cost of removing

the dockage or the freight charges on it to the terminal market.’’ |

‘<The farm is the logical place to clean wheat, preferably as part of the

thrashing operation, because the necessary power is available and later handling

is avoided. Since satisfactory cleaning is not always possible under presest

conditions at thrashing time, other means of cleaning must be used.

The fanning mill is the most practical cleaning machine for farm use, and

if properly adjusted and operated will clean wheat satisfactorily for comme:

cial purposes with but little loss of wheat in the screenings.’’

‘<The operators of country elevators are beginning to realize more keealy

each year that it pays to clean wheat before shipping it to the termiml

markets. Many of the country elevators not only clean wheat for themselves

but for the farmers as well. The latter is known as ‘custom cleaning,’ fe

which country elevators located in the central Northwest ordinarily charge

from 2 to 3 cents per bushel, based on the gross weight of the grain before

cleaning. A higher charge is made for cleaning the grain for seed purposs

The shrinkage in the weight of the grain is borne by the owner, but te

screenings may be returned to him. The returns from eustom cleaning adds

considerable amount to the income of some country elevators during the yeat.”

Shafer et al. vs. Farmers Grain Co. of Embden et al. 5

they own and operate several hundred country elevators, widely

distributed over the State, and buy and ship about 30,000,000

bushels of wheat a year. They carry on the business severally,

each buying and shipping independently of the others. All buy

with the purpose of shipping to and selling in terminal markets

outside the State and carry out this purpose in the manner already

deseribed.

The North Dakota Act in terms covers all farm products, but as it

is chiefly aimed at dealings in wheat and the parties have discussed

it on that basis, our statement of its provisions will be shortened

by treating them as if relating only to wheat.

The title to the Act describes it as one whereby the State

undertakes (a) “‘to supervise and regulate the marketing’’ of

wheat, (b) to prevent ‘‘unjust discrimination, fraud and extor-

tion in the marketing’’ of such grain, and (ec) to establish ‘‘a sys-

tem of grading, weighing and measuring”’ it. The first section de-

clares the purpose of the State to encourage, promote and safeguard

the production of wheat and commerce therein by establishing a

uniform system of grades, weights and measures. The second and

third sections provide for a State Supervisor of Grades, Weights

and Measures and give him authority to make and enforce neces-

sary orders, rules and regulations to carry out the provisions of the

Act.

The fourth section provides that the Supervisor shall establish

a system of grades, weights and measures for wheat ‘‘and shall in

a general way investigate and supervise the marketing of same with

a view of preventing unjust discrimination, unreasonable margins

of profit, confiscation of valuable dockage, fraud and other unlaw-

ful practices’’; declares that whenever grades, weights and meas-

ures for wheat are established by the Secretary of Agriculture

under the United States Grain Standards Act they shall become

the grades, weights and measures of the State; and concludes by

saying, ‘‘In establishing such grades, weights and measures, the

value of dockage shall be considered, and the buyer shall not be

permitted to retain the same without just compensation, He shall

pay the fair market value for Same or separate it and return it to

the producer.’ The fifth section provides that no person shall buy

any wheat ‘‘by grade’’—excepting where one producer buys from

another producer—unless it has been inspected and graded by a

—

6 Shafer et al. vs. Farmers Grain Co. of Embden et al.

licensed inspector under the provisions of the Act, or those of the

United States Grain Standards Act, and is bought by a grade

fixed and recognized thereunder.

The sixth section provides for the issue, by the Supervisor, of

where they pass a satisfactory examination.. Each license js to

be held on condition that the licensee shall honestly and correctly

determine the grades and dockage and shall likewise weigh the

grain. The seventh section authorizes the Supervisor to suspend

or revoke any such license where, after investigation, he finds that

the licensee is incompetent, knowingly or carelessly has graded

grain improperly, has short-weighed it, has taken valuable dock-

age without compensation, or has violated any provision of the Act

or of the United States Grain Standards Act.

The eighth section requires every buyer operating an elevator to

obtain from the Supervisor a yearly license, the fee for which is to be

adjusted by the Supervisor to the capacity of the elevator at not

exceeding $1.00 for each 1,000 bushels. The ninth section requires

every elevator operator or individual ‘‘buying or shipping for

profit,’’ who does not pay cash in advance, to file with the Super-

visor a sufficient bond, running to the State, to secure payment

for all wheat bought on credit. The tenth section requires every

buyer operating an elevator to keep a record of the wheat bought

at the elevator and to show therein the price paid and grades

given, and ‘‘the price received and the grades received at the

terminal markets;’’ and further requires him to furnish this in-

formation to the Supervisor when requested. The twelfth section

makes it unlawful for any person to grade wheat who does not have

a license therefor under the Act or under the United States Grain

Standards Act. And other sections make every violation of the

Act a misdemeanor and charge the Attorney General of the State

and its other law officers with the duty of prosecuting such viola-

tions.

The Act dispenses with grading where the buying is by sample,

by type or by certain designations; but this has no bearing here,

for the buying for interstate shipment is all by grade. The Aet

also dispenses with grading by an inspector licensed thereunder, if

Shafer et al. vs. Farmers Grain Co. of Embden et al. 7

the grain be graded by an inspector licensed under the United

States Grain Standards Act; but this is an idle provision, for there

are in North Dakota no inspectors licensed under that Act. Such

inspectors are found only at terminal markets, and there is no

terminal market in North Dakota.

This statement of the provisions of the Act discloses its full pur-

pose and scope; but some of its features, of special importance

here, will be noticed again as we proceed.

_ Buying for shipment, and shipping, to markets in other States

when conducted as before shown constitutes interstate commerce—

the buying being as much a part of it as the shipping. We so

held in Lemke v. Farmers’ Grain Company, supra, following and

applying the principle of prior cases. Later cases have given effect

to the same principle. Stafford v. Wallace, 258 U. S. 495, 516;

Binderup v. Pathe Exchange, 263 U. §. 291, 309.

Wheat—both with and without dockage—is a legitimate article

of commerce and the subject of dealings that are nation-wide. The

right to buy it for shipment, and to ship it, in interstate com-

merce is not a privilege derived from state laws and which they

may fetter with conditions, but is a common right, the regulation

of which is committed to Congress and denied to the States by

the commerce clause of the Constitution.?

The decisions of this Court respecting the validity of state laws

challenged under the commerce clause have established many rules

covering various situations. Two of these rules are specially in-

voked here—one that a state Statute enacted for admissible state

purposes and which affects interstate commerce qnly incidentally

and remotely is not a prohibited state regulation in the sense of

that clause ;* and the other that a State statute which by its neces-

sary operation directly interferes with or burdens such commerce

is a prohibited regulation and invalid, regardless of the purpose

*Crutcher v, Kentucky, 141 U. 8, 47, 57; Western Union Telegraph Co. v.

Kansas, 216 U. §, 1, 21; Oklahoma v. Kansas Natural Gas Co., 221 U. 8.

229, 260; Buck Stove Co. v. Vickers, 226 U, §. 205, 215; Adams Express Co.

0. New York, 232 U. 8, 14, 31; Dahnke-Walker Co, v. Bondurant, 257 U. 8.

282, 291, 299.

Sherlock v. Alling, 93 U. 8. 99, 102-104; Kidd v. Pearson, 128 U. 8. 2.

22, et seq.; Geer v. Connecticut, 161 U. 8. 519, 532; Sligh v. Kirkwood, 237

U. 8. 52, 59-61,

—

8 Shafer et al. vs. Farmers Grain Co. of Embden et al,

with which it was enacted. These rules, although readily under.

stood and entirely consistent, are occasionally difficult of applieg.

tion, as where a state statute closely approaches the line which

separates one rule from the other. As might be expected, the de.

cisions dealing with such exceptional situations have not been jn

full accord. Otherwise the course of adjudication has been cop.

sistent and uniform.

In our opinion the North Dakota Act falls certainly within the

second of the two rules just stated. By it that State attempts to

exercise a large measure of control over all wheat buying within

her limits. About 90 per cent. of the buying is in interstate com.

merce. Through this buying and the shipping in connection with

which it is conducted the wheat which North Dakota produces in

excess of local needs—more than 125,000,000 bushels a year—finds

a market and is made available for consumption in other States

where the local needs greatly exceed the production. Obviously

therefore ‘the control of this buying is of concern to the people

of other States as well as to those of North Dakota.

Only by disregarding the nature of this business and neglecting

important features of the Act can it be said to affect interstate

commerce only incidentally and remotely. That it is designed to

reach and cover buying for interstate shipment is not only plain but

conceded. To conform to recognized commercial practices such

buying must be by grade, and it is so conducted. The Act pre-

vents buying by grade, unless the buyer secures from the State

a grading license for. himself or his agent. The general prac-

tice is to buy and ship without separating the dockage from

the wheat, the price paid carrying a right to both. The Act re

quires the buyer to separate the dockage and return it to the pro-

ducer, unless it be distinctly valued and paid for. A failure to

comply with this or any other requirement of the Act is made

cause for revoking the grading license. It is practically essential

that the buyers have and operate elevators as facilities for handling

¢Crutcher v. Kentucky, 141 U. 8. 47, 56, 58; Western Union Telegraph ©.

v. Kansas, 216 U. 8. 1, 27; International Paper Co. v. Massachusetts,

U. 8. 135, 141; Western Union Telegraph Co. v. Foster, 247 U. 8. 105, 14;

Pennsylvania v. West Virginia, 262 U. 8. 553, 596; Air-Way Corporation ¢.

Day, 266 U. 8. 71, 81.

Shafer et al. vs. Farmers Grain Co. of Embden et al. 9

and loading the wheat. The Act requires every such buyer to

give to the State, if he buys on credit, a bond securing payment

for all wheat so purchased; to keep a record of all wheat bought,

showing the grade given and price paid at his elevator and

the grade fixed and price received at the terminal market; and

to furnish such data to the State Supervisor when requested. The

Act also intends and declares that the State Supervisor ‘‘shall in

a general way investigate and supervise the marketing’’ of the

grain with a view of ‘‘preventing’’ various things deemed unjust

or fraudulent, including ‘‘unreasonable margins of profit’’ and

“confiscation of valuable dockage ;’’ and, to the end that this and

other provisions may be made effective, the Act invests him with

authority to make and enforce such orders, rules and regulations

as may be necessary to carry out all of its provisions,

We think it plain that, in subjecting the buying for interstate

shipment to the conditions and measure of control just shown, the

Act directly interferes with and burdens interstate commerce, and

is an attempt by the State to prescribe rules under which an im-

portant part of such commerce shall be conducted. This no State

can do consistently with the commerce clause.

The defendants cite several cases as making for a different con-

clusion, but we do not so read them. In some the commerce clause

was in no way involved, and those in which it was involved give

no support to what is attempted in the Act now before us. In

Munn v. Illinois, 94 U. 8. 113, 123, 135, the question was whether,

restriction on buying or shipping was involved. In Cargill Co. v.

Minnesota, 180 U. §. 452, the Court had before it a state statute,

much of which had been pronounced unconstitutional by the state

Plainly the case is not

Missouri, 248 U. §. 365,

10 Shafer et al. vs. Farmers Grain Co. of Embden et al.

the statute involved required that public weighers appointed for

the purpose should do the weighing and issue weigh* rtificates

at elevators used for storing or transferring grain for hire, and pro

hibited any other person from issuing weight certificates at a»

elevator where a public weigher was stationed. Objection was

made to the prohibition on the ground that as applied to grain

received from or shipped to points without the State it burdened

interstate commerce. Of course the objection was overruled, the

statute being an admissible regulation of the business of conducting

an elevator for hire, like the statute considered in Munn v. Illinois.

The defendants make the contention that we should assume th

existence of evils justifying the people of the State in adopting

the Act. The answer is that there can be no justification for th

exercise of a power that is not possessed. If the evils suggested

are real, the power of correction does not rest with North Dakots

but with Congress, where the Constitution intends that it shall k

exercised with impartial regard for the interests of the people of

all the States that are affected.

The defendants further contend that the Act is simply an at

tempt on the part of the State, through inspection regulations, te

assist in carrying out the purposes of the United States Grain

Standards Act. We think the Act discloses an attempt to do much

more. To require that dockage be separated by the buyer and &

returned to the producer unless it be distinctly valued and paid

for is not inspection. Nor does the federal Act contain or give

support to such a requirement. To exclude one from buying by

grade unless he secures a grading license for himself or his agent

is apart from what usually is comprehended in inspection. Nothing

like this is found in the federal Act. On the contrary, it declares

that persons licensed to grade under it shall not be interested in

any grain elevator or in buying or selling grain, or be in the employ

of any owner or operator of a grain elevator. Equally unrelated

to inspection are the provisions exacting a bond to pay for al

wheat bought on credit; requiring that a record be kept of the

price paid in buying at the local elevator and the price received

in selling at the terminal market; and authorizing the State Super-

visor to investigate and supervise the marketing with a view

preventing unreasonable margins of profit. None of these finds any

example in the federal Act; and their presence in the state Ac

Shafer et al. vs. Farmers Grain Co. of Embden et al. 11

makes it a very different measure from what it would be without

them. Aside from the adoption of the grades established and

promulgated under the federal Act, we find little in the state Act

to support and much to refute the assertion that it is merely an at-

tempt to carry out the purposes of the federal Act.

For the reasons here given we hold that the Act is a direct regula-

tion of the buying of grain in interstate commerce, and therefore

invalid, and that the District Court rightly granted the injunction.

Decree affirmed.

Mr. Justice Baanpess dissents.

A true copy.

Test:

Clerk, Supreme Court, U. S.