Opinion ID: 795612
Heading Depth: 3
Heading Rank: 1

Heading: Must a Competitive Advantage Arise from Cloverland's Status as an Out-of-State Firm?

Text: 41 Although Cloverland's arguments were persuasive on the limited facts (construed in Cloverland's favor) available in Cloverland I, they are less compelling in light of the factual record developed at trial. As a starting point, we note that Cloverland is incorrect that, at least on the facts of this case, state regulations that nullify a competitive advantage unrelated to the firm's out-of-state status may nonetheless, on their own, trigger heightened scrutiny. 42 As the District Court framed the issue, courts have struggled with . . . the difficulty in examining laws which do not facially discriminate against out-of-state interests under [d]ormant Commerce Clause jurisprudence. When does a simple economic advantage rise to the level of [a] competitive advantage, within the heightened scrutiny context? Cloverland II, slip op. at 16-17. The Supreme Court has never expressly addressed this issue, but it has often stated that a state law that cause[s] local goods to constitute a larger share, and goods with an out-of-state source to constitute a smaller share, of the total sales in the market is unconstitutional because it, like a tariff, `neutraliz[es] advantages belonging to the place of origin. ' West Lynn Creamery, 512 U.S. at 196, 114 S.Ct. 2205 (quoting Baldwin, 294 U.S. at 527, 55 S.Ct. 497) (internal quotation marks omitted) (emphasis added); Polar Ice Cream, 375 U.S. at 377, 84 S.Ct. 378 (same with respect to a Florida law barring in-state handlers from buying raw milk from out-of-state producers); see also Wash. State Apple, 432 U.S. at 351, 97 S.Ct. 2434 (noting that a North Carolina statute forbidding importing apples with a non-USDA quality mark has the effect of stripping away from the Washington apple industry the competitive and economic advantages it has earned for itself though its expensive inspection and grading system). 43 We have observed that [t]he Supreme Court's opinions in Baldwin and Washington State Apple show that if a state regulation has the effect of protecting in-state businesses by eliminating a competitive advantage possessed by their out-of-state counterparts, heightened scrutiny applies. . . . [Here,] a reasonable trier of fact could find that Pennsylvania's minimum wholesale prices eliminate a competitive advantage enjoyed by out-of-state dealers like Cloverland. Cloverland I, 298 F.3d at 212-13. By referencing a competitive advantage enjoyed by out-of-state dealers not shared by in-state dealers, we presumed the advantage would have something to do with the out-of-state status of the advantaged firms. 44 Cloverland argues, however, that it need not prove a cost advantage linked to its place of origin. It contends that the mere fact it has some efficiency advantage (for whatever reason) over at least one in-state firm means it can sell milk for less, and because Pennsylvania's minimum wholesale prices nullify its ability to do so, they render meaningless its efficiency advantage and thus trigger heightened scrutiny. 45 The ramifications of this argument are expansive. Cloverland's proposed rule would eviscerate longstanding Supreme Court precedent that price regulation [is not] an impermissible burden upon commerce where the burden on commerce is indirect and only incidental to the regulation of an essentially local activity, Polar Ice Cream, 375 U.S. at 378, 84 S.Ct. 378 (citing Milk Control Bd. of Pa. v. Eisenberg Farm Prods., 306 U.S. 346, 59 S.Ct. 528, 83 L.Ed. 752 (1939), and Highland Farms Dairy v. Agnew, 300 U.S. 608, 57 S.Ct. 549, 81 L.Ed. 835 (1937)) — subject, of course, to the Pike balancing test. See Cloverland I, 298 F.3d at 215-16. As the District Court noted, in any state with minimum price regulations, there will always be some out-of-state competitors (like Cloverland) that have some advantages over at least one in-state firm, even though those advantages may reflect differences in capacity, efficiency, workers, etc., that have nothing to do with the firm's location (and indeed are shared with many in-state firms). See Cloverland II, slip op. at 16-17, 19. Thus, under Cloverland's proposed rule, state milk price regulations will always be subject to heightened scrutiny (and thus nearly per se invalid), despite the fact we and the Supreme Court have clearly recognized this is not always the case. If the neutralization of any advantage possessed by any out-of-state firm were enough to trigger heightened scrutiny, it is difficult to think of a state pricing regulation that could survive. 46 The elimination of a particular competitive advantage belonging to the place of origin is not, of course, a determinative inquiry in every case. For example, where a state statute imposes an outright ban on competition by reserving all business for an in-state firm or firms and explicitly barring interstate commerce, see Carbone, 511 U.S. at 391-93, 114 S.Ct. 1677; Polar Ice Cream, 375 U.S. at 376-77, 84 S.Ct. 378, or targets out-of-state firms for special burdens from which in-state firms are exempt, see West Lynn Creamery, 512 U.S. at 194-95, 114 S.Ct. 2205; Wash. State Apple, 432 U.S. at 350-51, 97 S.Ct. 2434, the problem is more blatant: the out-of-state firms are subjected to overt discrimination or an outright ban on competition. But Cloverland does not allege those barriers here. Rather, it alleges more subtle discrimination, stemming from a law and regulatory scheme that are not facially discriminatory. Hence, a nexus between the advantage that has been neutralized and the firm's out-of-state status is necessary. 47 We therefore hold that, if Cloverland is to succeed in demonstrating that heightened scrutiny applies because its competitive advantages have been neutralized by the Pennsylvania Milk Marketing Law, it must establish that those advantages arise by virtue of its out-of-state status. 48