Opinion ID: 795612
Heading Depth: 3
Heading Rank: 2

Heading: Does Cloverland Have an Out-of-State Competitive Advantage?

Text: 49 The question becomes, then, whether the Pennsylvania Milk Marketing Law operates to neutralize competitive advantages belonging to Cloverland's place of origin. The record reveals only one such potential advantage vis-a-vis Cloverland's Pennsylvania competitors — its potential raw milk cost advantage due to its exemption from the over-order premium. 50
51 We note at the outset two legal errors in the District Court's opinion that cannot form the basis for a determination of whether Cloverland's exemption from the over-order premium should trigger heightened scrutiny. 52
53 We are unpersuaded by the District Court's reasoning that because Cloverland's exemption arises from Pennsylvania law, any cost advantage it has is ephemeral — the argument being that if the minimum wholesale prices were invalidated (as Cloverland desires), its purported raw milk cost advantage would disappear because the over-order premium would no longer be viable. We assume, without deciding, that if the minimum wholesale prices themselves conferred an advantage on Cloverland due to its out-of-state status, it could not rely on that advantage to challenge those prices because invalidating the prices would necessarily nullify the advantage (though, of course, Cloverland would have no incentive to challenge the prices in that event). Here, however, Cloverland's purported cost advantage arises from the operation of a different aspect of the regulatory scheme — the over-order premium — that is not challenged in this suit. 54 The District Court concluded, based on the Board's evidence, that if the minimum wholesale prices were invalidated, the over-order premium would fall. But this is not a question susceptible to definitive proof by the Board's experts. It may well be that invalidating the minimum wholesale prices would place pressure on the Commonwealth's legislature to repeal the over-order premium or extend it to out-of-state purchasers (both of which would nullify Cloverland's supposed advantage). The cost disadvantage to Pennsylvania handlers of paying the over-order premium and then competing against out-of-state handlers without the protection of minimum wholesale prices might make the over-order premium less feasible or encourage them to purchase out-of-state milk to avoid the premium. But we note that, under the current system, Pennsylvania handlers already have an incentive to purchase out-of-state milk to maximize their profit margins, yet the over-order premium remains strong. Moreover, even assuming Pennsylvania could constitutionally impose over-order premiums on sales of milk to out-of-state purchasers (an issue we do not decide here), doing so would presumably damage the Commonwealth's ability to export milk by essentially adding a surcharge on exports. And the Board has gone to great lengths (as explained below) to demonstrate several legal options handlers use to sell milk at below minimum wholesale prices in Pennsylvania, which suggests that invalidating the minimum wholesale prices would not necessarily harm the handlers' ability to pay the over-order premium to producers. 55 If the minimum wholesale prices were invalidated, the Pennsylvania legislature would be faced with these thorny policy questions and would have to weigh the competing considerations to determine whether the over-order premium provisions of 31 Pa. Stat. § 700j remain viable. There is simply no way to determine, at this stage, whether the over-order premium would necessarily be repealed or extended to out-of-state purchasers of Pennsylvania milk. At best, the Board's evidence and the District Court's opinion establish that such an event would be likely. We hold, though, that the possible removal of Cloverland's purported out-of-state advantage if it is successful on this appeal is insufficient to render that advantage irrelevant to our heightened scrutiny analysis. 56
57 We also are unpersuaded by the District Court's reliance on the availability of non-price competition in the Pennsylvania market. As we explain below, if Cloverland proves that its exemption from the over-order premium confers a cost advantage over Pennsylvania handlers that is neutralized by the Commonwealth's minimum wholesale prices, heightened scrutiny applies. The fact that Cloverland might be able to compete for some retailer accounts on non-price bases is irrelevant, because even if there are other potential paths into the Pennsylvania market that may allow an out-of-state handler successfully to obtain some business, neutralizing an out-of-state price advantage alone offends the dormant Commerce Clause (especially since the record amply demonstrates that price is — or, at least, would be if competition on price were allowed — an important factor retailers consider in choosing a supplier). See Wyoming v. Oklahoma, 502 U.S. 437, 455, 112 S.Ct. 789, 117 L.Ed.2d 1 (1992) (holding that a state may not insulate part of its market from out-of-state competition while leaving other parts open, because this measures only the extent of the discrimination; it is of no relevance to the determination whether a State has discriminated against interstate commerce). 17 58 If Cloverland proves its Maryland residency confers a cost advantage it wishes to exploit in the Pennsylvania market, but Pennsylvania law neutralizes that advantage (and thus unlawfully shields in-state handlers from price competition), heightened scrutiny will apply regardless of the existence of other competitive means that Pennsylvania has not neutralized. In demonstrating that heightened scrutiny should apply to a state law, a plaintiff like Cloverland need only prove that its out-of-state residency confers competitive advantages that are neutralized by the state law under review, thus preventing competition in the area in which the plaintiff enjoys an advantage. The plaintiff need not prove it is prevented from entering the market through competition on all possible bases. 59
60 Notwithstanding these errors in the District Court's analysis, we conclude it was not clearly erroneous for the Court to find that Cloverland did not sustain its burden of proving an actual raw milk cost advantage belonging to its place of origin. Cloverland's proof of its alleged cost advantage consisted primarily of testimony from Lawrence Webster, Cloverland's general manager, and Robert Havemeyer, a management consultant who testified as an expert in the costs of processing and delivering milk. Webster testified that, by not adding the over-order premium to the 65% of raw milk it purchases from independent Pennsylvania farmers, Cloverland saves about five cents per gallon, which would allow Cloverland to lower its wholesale prices enough to gain a significant price advantage over Pennsylvania competitors. Havemeyer testified that, based on a survey of Cloverland's costs during a 13-week period in the fall of 1998 (when demand was at its peak), and updated in 2002, Cloverland's variable costs ( i.e., costs that vary with the volume of production) allowed it to sell its milk in Pennsylvania below wholesale minimum prices. 61 Notably absent from Cloverland's offer of proof, however, was any comparison to actual Pennsylvania competitors' costs, despite the fact this was crucial to demonstrating a cost advantage vis a vis those competitors. At most, Cloverland proved it was capable of selling milk for less than the wholesale minimum, but (as explained above) this is not in itself sufficient to trigger heightened scrutiny. 62 Carl Herbein, who testified for the Board as an expert in milk cost accounting, conducted the comparison with Pennsylvania handlers that Cloverland's expert did not, and concluded that Cloverland's total costs rendered it less efficient than three of the four sample handlers. Herbein explained, and the District Court agreed, that Havemeyer's calculations were unreliable because they used an unreasonably small time frame, relied only on Cloverland's variable costs (rather than looking at total costs), 18 and considered a time when demand was at its peak rather than a period representative of the full year. Herbein, and other witnesses offered by the Board, also explained that the cost advantage resulting from Cloverland's exemption from the over-order premium vis a vis a particular Pennsylvania competitor may be mitigated by the fact that Cloverland pays a slightly higher federal price for raw milk because it is located in Maryland, 19 and many Pennsylvania handlers avoid paying minimum wholesale prices by entering tolling agreements 20 and taking advantage of allowable discounts for high volume sales, partial service ( i.e., delivering the milk to a retailer but not stocking it in the cooler or ordering future inventory), and multi-store customers. None of this was reflected in Cloverland's offer of proof at trial, which relied on a straightforward comparison between the price of raw milk with the over-order premium and the price of milk without it. 63 Cloverland argues strenuously that the Board's data is flawed. It contends, first, that the Board purposely selected sample handlers with lower operating costs than Cloverland, and argues specifically against the inclusion of Dealer 4, 21 which is not located within a federal order area and moves less than 25% of its total Class I milk volume into that area, and thus is only partially regulated by federal law. See 7 C.F.R. § 1001.7; see also Sani-Dairy, Div. of Penn Traffic Co., Inc. v. Espy, 939 F.Supp. 410, 412 (W.D.Pa.1993) (same under earlier federal order regulations). Herbein testified, and Cloverland does not dispute, that a partially regulated handler like Dealer 4 need not account to the Producer Settlement Fund, and is therefore able to pay producers more for raw milk (which gives it a price advantage over fully regulated handlers, and a corresponding cost advantage when the market price of raw milk is higher than the federal minimum). See 7 C.F.R. § 1000.76. Since Cloverland is fully regulated federally, and must account to the Producer Settlement Fund, it argues a comparison with the partially regulated Dealer 4 is irrelevant. 64 Cloverland's argument misses the mark. Dealer 4 would clearly be a competitor in the Pennsylvania market; although Dealer 4 cannot sell more than 25% of its total milk volume into a federal order area and remain partially regulated, it could still compete with Cloverland for retail outlets in Areas 1 and 4 with the milk it does move into the order area. Dealer 4 is not, therefore, a wholly irrelevant comparison. Cloverland's argument is really addressed to whether Dealer 4 is a proper representative for comparison. Yet Cloverland had every opportunity to submit evidence of similarly situated Pennsylvania handlers with comparatively higher costs, and it failed to do so. As the Board was the only one to submit evidence of comparative costs, the District Court did not clearly err in relying on the Board's sample. 65 Second, Cloverland argues Herbein erroneously relied on the plant blend cost of raw milk ( i.e., the weighted average of the costs of different classes of milk used by the plant, which is paid to producers), rather than a segregated Class I price, in conducting his analysis of comparative costs. This, according to Cloverland, artificially lowered the costs of plants with less Class I usage than Cloverland. The Board counters that the plant blend method of calculating costs is the norm in the industry and comports with generally accepted accounting practices. 66 Although Cloverland's argument may have some merit, 22 we note that it submitted no evidence that the sample handlers (which Herbein testified were very similar to Cloverland in terms of size, volume, and gross sales) had appreciably different Class I usage. Havemeyer provided evidence of Cloverland's Class I costs, but did not compare these to any actual Pennsylvania competitors, and the District Court expressly found his study unreliable due to its limited time frame and examination of only variable costs. Again, under these circumstances, we cannot conclude that the District Court committed clear error by relying on the only comparative evidence before it. 67