Louisiana Dairy Stabilization Board, Plaintiff-appellant, v. Dairy Fresh Corporation and Dairy Fresh Ice Creamcorporation, Defendants-appellees, 631 F.2d 67 (5th Cir. 1980)

The plaintiff state agency appeals from judgment invalidating state regulation insofar as affecting dairy products processed, sold and delivered out-of-state by non-Louisiana processors. 476 F. Supp. 416 (M.D. La. 1979). The appellant, the Louisiana Dairy Stabilization Board, initially filed suit seeking a declaratory judgment, 28 U.S.C. § 2201, with respect to its powers to regulate the defendant out-of-state processors under the Louisiana Dairy Stabilization Law, La. R.S. 40:931.1 et seq., and the regulations promulgated thereunder, Dairy Stabilization Board Regs. § 1.1 et seq. The defendants counterclaimed for a declaration that the attempted application of the Louisiana provisions to them violates, inter alia, the Commerce Clause of the United States Constitution. The district court held that the application of the Louisiana law and regulations to the out-of-state transactions between the defendant out-of-state processors and the Louisiana retailers did indeed violate the Commerce Clause, and it entered a judgment permanently enjoining the Board from enforcing certain provisions of the Louisiana Dairy Stabilization Law and Board regulations (regarding licensing and assessment requirements) with respect to the defendant processors' out-of-state activities. We affirm.

Regulatory Context of Litigation

The Louisiana Dairy Stabilization Board (hereinafter referred to as the "Board") was created by the Louisiana legislature in 1976. According to the enabling act, Dairy Stabilization Law, La. R.S. 40:931.1 et seq., regulation of the milk industry is necessary to ensure that price wars, unfair methods of competition, and disruptive trade practices do not weaken the financial condition of dairy farmers, processors, and distributors, while failure to regulate unfair competition and disruptive trade practices will tend to create a monopoly in the processing and distribution of milk and dairy products that may lead to excessive prices and inadequate supplies. Section 931.1.

In order to achieve stabilization of the dairy industry, the statute grants the Board certain powers to prevent unfair methods of competition and destructive trade practices. Section 931.8. All processors located within Louisiana and all processors who sell dairy products to a retailer or a distributor for resale in Louisiana (whether or not they are located within the state) must be licensed by the Board. Section 931.10. The records of all licensed processors are subject to inspection by the Board or its authorized representative, Section 931.11, and all licensed processors must pay an assessment of three cents per hundredweight of all milk equivalents used in the processing of their dairy products, Section 931.13 B. The statute expressly provides that the funds obtained through the assessments are to be used for the administration and enforcement of the statute and the regulations promulgated thereunder by the Board. Section 931.13 B. The Board does not have the power to regulate or establish wholesale or retail prices for dairy products. Section 931.5. However, under its authority to prevent unfair competition and disruptive trade practices, the Board has promulgated regulations prohibiting certain price differentials by retailers, Dairy Stabilization Board Regs. § 13.1.1, and price discrimination between different purchasers of like commodities, Regs. § 13.1.2.

In the instant suit, the Board seeks to apply its rules and regulations to the defendant out-of-state processors. Specifically, the Board contends that the processors must be licensed, and, as licensed processors, they must pay the assessments of three cents per hundredweight on all milk equivalents used in the processing of their dairy products due under the statute. The enactment makes no distinction between in-state and out-of-state processors for licensing purposes, nor does it make any such distinction in the obligations of licensees (enforceable by the Board), described by the district court as including: "requirements for detailed record keeping; regulations as to required time of payment for products sold to retailers; restricted methods of delivery of goods; prohibitions against granting extensions of credit to retailers; prohibitions against spending excessive amounts for entertaining or making charitable contributions or gifts; regulations pertaining to use or possession of milk cases belonging to another processor; and regulations concerning furnishing of samples to consumers or signs to retailers." 476 F. Supp. at 418.

The District Court Holding Affirmed

The district court invalidated, as offending the Commerce Clause of the federal constitution, the Louisiana requirements that the out-of-state processors obtain licenses from the Louisiana regulatory agency. The invalidation had the effect of relieving the out-of-state defendants of any obligation to pay assessments to the Board on milk processed out-of-state and sold and delivered out of Louisiana (even though sold and delivered to Louisiana purchasers and packaged and intended for retail by these purchasers in Louisiana markets), or to submit to the economic and economic record-keeping regulations of the Louisiana regulatory agency.

The district court found that the defendant processors completed the processing of the products sold to the Louisiana retailers in states other than Louisiana. Furthermore, it found that the sale and delivery of those products took place outside of Louisiana. These findings are not clearly erroneous.

Under these factual findings, the application of the Louisiana Dairy Stabilization Law and regulations to these out-of-state processors based on the out-of-state sale of their products for resale in Louisiana violates the Commerce Clause of the United States Constitution. It unreasonably burdens the flow of interstate commerce by restricting access of out-of-state suppliers to local markets in order to protect local economic interests. Schwegmann Bros. Giant Super Markets v. Louisiana Milk Com'n., 365 F. Supp. 1144 (M.D. La. 1973), aff'd. 416 U.S. 922, 94 S. Ct. 1920, 40 L. Ed. 2d 279 (1974); Baldwin v. Seelig, 294 U.S. 511, 55 S. Ct. 497, 79 L. Ed. 1032 (1935). See generally Tribe, American Constitutional Law § 6-6, pp. 328-30 (1978).

The Board argues that the cited decisions concerned attempts at fixing the price of out-of-state products, whereas the present regulatory scheme merely involves assessment and record-keeping requirements necessary to effectuate the Board's responsibility as "an anti-trust enforcement agency" to regulate unfair methods of competition and disruptive trade practices that weaken the financial condition of dairy farmers, processors, and distributors of the Louisiana dairy industry, and that tend to create a monopoly therein. The alleged "anti-trust" purposes of the regulation are relied upon as talismanic distinction of the present statute from the statutes previously invalidated under the Commerce Clause as attempting price-regulation on out-of-state transactions.

The purported distinction is ineffectual in evading the ultimate holdings of the cited Schwegmann and Baldwin decisions. They are to the effect that, although Louisiana may have the power and right to regulate the production, processing, and distribution of milk products within the state, it has by virtue of the Commerce Clause no power to project its economic regulation-at least insofar as the purpose is to protect local economic interests-to production, processing, and sale of dairy products at places without the state. As stated in Baldwin, 294 U.S. at 527, 55 S. Ct. at 502:

What is ultimate is the principle that one state in its dealings with another may not place itself in a position of economic isolation. Formulas and catchwords are subordinate to this overmastering requirement. Neither the power to tax nor the police power may be used by the state of destination with the aim and effect of establishing an economic barrier against competition with the products of another state or the labor of its residents. Restrictions so contrived are an unreasonable clog upon the mobility of commerce. They set up what is equivalent to a rampart of customs duties designed to neutralize advantages belonging to the place of origin. They are thus hostile in conception as well as burdensome in result.... The importer must be free from imposts framed for the very purpose of suppressing competition from without and leading inescapably to the suppression so intended.

Baldwin's principle that one state may not burden interstate commerce in order to protect local economic interests from out-of-state economic competition has been affirmed in the succeeding decades. H. P. Hood & Sons v. Du Mond, 336 U.S. 525, 69 S. Ct. 657, 93 L. Ed. 865 (1949), for instance, cited with approval its "principle that the State may not promote its own economic advantages by curtailment of burdening of interstate commerce," 336 U.S. at 532, 69 S. Ct. at 662, and noted a "distinction" that applies to many of the decisions relied upon presently by the appellant Board "between the power of the State to shelter its people from menaces to their health or safety and from fraud, even when these dangers emanate from interstate commerce, and its lack of power to retard, burden or constrict the flow of such commerce for their economic advantage ...." 336 U.S. at 533, 69 S. Ct. at 662.

Most recently, in Philadelphia v. New Jersey, 437 U.S. 617, 98 S. Ct. 2531, 57 L. Ed. 2d 475 (1978), the court noted that where legislative objectives other than economic protectionism of its people from competition from interstate trade are concerned, it has utilized a flexible balancing test that may permit tolerating the burden on interstate commerce in the light of the nature of the legitimate local purpose and the degree of the burden and whether the local interest could be promoted with lesser impact on interstate activity, citing Pike v. Bruce Church, Inc., 397 U.S. 137, 90 S. Ct. 844, 25 L. Ed. 2d 174 (1970). However, citing both Hood & Sons and Baldwin, the court further noted, in striking down a restriction on importation of waste substances into the state:

The opinions of the Court through the years have reflected an alertness to the evils of "economic isolation" and protectionism, while at the same time recognizing that incidental burdens on interstate commerce may be unavoidable when a State legislates to safeguard the health and safety of its people. Thus, where simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected.

437 U.S. at 620, 98 S. Ct. at 2535.

These holdings and teachings of the Supreme Court are dispositive of most of the appellant Board's contentions that its attempt at economic regulation of out-of-state economic activity should not be invalidated under the Commerce Clause. The Board essentially contends that the burden on interstate commerce is justified by the legitimate local purpose of preventing local economic disruption and the development of monopolies affecting the local market; whereas the Supreme Court has held that the Commerce Clause prevents a state from burdening interstate commerce for the purpose specified, i. e., to restrict economic competition from without the state.

The Board's Additional Contentions

On appeal, the Board additionally suggests numerous decisions that it contends require a contrary resolution of the Commerce Clause issue. However, the cases relied upon are distinguishable because: either (1) the state laws upheld were not applied extraterritorially, or (2) the state interest sought to be advanced was the protection of public health and safety rather than (as here) the economic stability of in-state industry.

The Board further contends that the trial court erred in denying its motion for a partial new trial. The motion was based on statements by the trial judge, which allegedly misled counsel for the Board, who, as a result, failed to introduce certain evidence concerning the defendants' "doing business" in Louisiana.¹  The trial judge did not abuse his discretion in denying the Board's motion for a partial new trial. The record reveals that the Board did in fact introduce evidence through examination of the defendants' president pertaining to the extent that defendants were "doing business" in the state and its character. The record does not support the Board's contention that it was misled by the district court's comments. Further, as the trial court noted in denying the new-trial motion, the issue of whether or not the defendants had sufficient Louisiana contacts so as to be "doing business" in the state for jurisdictional purposes, is not of weighty relevance, if any, to the determination of the actual issue before the court: whether or not the Louisiana regulatory agency could apply its licensing and assessment regulations to the defendant out-of-state processors with regard to dairy products processed, sold, and delivered out-of-state.Conclusion

For the reasons stated, we AFFIRM the trial court judgment.