Gore, Inc. v. Espy ( 1996 )

United States Court of Appeals,
Fifth Circuit.
No. 94-50631.
GORE, INC., d/b/a Pure Milk Co., Plaintiff-Appellant,
v.
Michael ESPY, as Secretary of U.S. Department of Agriculture,
Defendant-Appellee.
July 16, 1996.
Appeal from the United States District Court for the Western
District of Texas.
Before POLITZ, Chief Judge, JONES and PARKER, Circuit Judges.
POLITZ, Chief Judge:
Gore, Inc., doing business as Pure Milk Co., appeals an
adverse summary judgment sustaining a ruling by the Secretary of
Agriculture that Gore's delivery of packaged milk products to a
customer's distribution center constituted a shipment to a milk
plant under 7 C.F.R. § 1126.4. Concluding that the Secretary's
interpretation is arbitrary, capricious, and plainly inconsistent
with the text of the regulation, we reverse.
Background
The Agriculture Marketing Agreement Act of 19371 governs the
distribution, sale, and marketing of all milk products.2 The AMAA
1
7 U.S.C. § 601 et seq. (1992 & Supp.1995).
2
In Block v. Community Nutrition Institute, 467 U.S. 340,
104 S.Ct. 2450, 81 L.Ed.2d 270 (1984), the Supreme Court
described Congress' motivation for regulating the milk industry:
In the early 1900's, dairy farmers engaged in intense
competition in the production of fluid milk products.
To bring this destabilizing competition under control,
1
is implemented regionally by the Secretary who has adopted milk
marketing regulations.3 These regulations, often referred to as
"orders," establish a labyrinthine price support scheme.4 Under
the Texas Order,5 producers6 receive a "blend price" from the
handlers7 who purchase and distribute their milk.8 The blend price
is the uniform price paid to producers for all milk sold to
handlers regardless of the milk's eventual use.9 The AMAA
the 1937 Act authorizes the Secretary to issue milk
marketing orders setting the minimum prices the
handlers (those who process dairy products) must pay to
producers (dairy farmers) for their milk products. The
"essential purpose [of this milk market order scheme
is] to raise producer prices," and thereby to ensure
that the benefits and burdens of the milk market are
fairly and proportionately shared by all dairy farmers.
Id. at 341, 104 S.Ct. at 2452 (internal citations omitted).
3
Suntex Dairy v. Block, 666 F.2d 158 (5th Cir.), cert.
denied, 459 U.S. 826, 103 S.Ct. 59, 74 L.Ed.2d 62 (1982). See
e.g. 7 C.F.R. pt. 1126 (1995) (Texas marketing order).
4
Suntex Dairy; see also 7 U.S.C. § 608c (1992 & Supp.1995);
7 C.F.R. pt. 1126 (1995).
5
7 C.F.R. § 1126.2 (1995) (establishing the boundaries for
the Texas milk marketing area).
6
7 C.F.R. § 1126.12 (1995). Dairy farms are producers under
this definition.
7
7 C.F.R. § 1126.9 (1995).
8
7 C.F.R. § 1126.61 (1995).
9
7 C.F.R. § 1126.61 (1995). The AMAA's price support system
is premised on the fact that the price handlers are willing to
pay for milk depends upon its use. Lansing Dairy, Inc. v. Espy,
39 F.3d 1339 (6th Cir.1994), cert. denied, --- U.S. ----, 116
S.Ct. 50, 133 L.Ed.2d 15 (1995). Under the Texas order, milk
distributed in fluid form is classified as Class I. 7 C.F.R. §
1126.50(a) (1995). Class I commands the highest minimum price.
7 C.F.R. § 1126.50(a) (1995). Class II uses, which include
yogurt and cream, command an intermediary minimum price. 7
2
recognizes the unlikelihood that each handler will use milk
purchases in a manner exactly reflecting the average utilization in
the market as a whole.10 The Texas Order establishes a
producer-settlement fund into which handlers directing a greater
than average proportion of their milk into the more valuable fluid
uses must make payments.11 Handlers directing a lesser than average
proportion of their total milk into such fluid uses receive
payments from that fund.12
An operator of both a dairy farm and a processing plant is
designated as a producer-handler.13 Producers-handlers are entitled
to certain benefits, including the ability to sell their products
without regard to the pricing scheme.14 Milk received from a
producer-handler at the plant of a regulated handler is designated
as a lower Class III receipt, regardless of the price actually paid
to the producer-handler or the actual use of the milk by the
handler.15 Thereafter, if the handler applies the milk to a higher
C.F.R. § 1126.50(b) (1995). Class III and IIIA uses command the
lowest minimum prices. 7 C.F.R. § 1126.50(c), (d) (1995).
10
See Lehigh Valley Farmers v. Block, 829 F.2d 409 (3d
Cir.1987).
11
7 C.F.R. § 1126.71 (1995).
12
7 C.F.R. § 1126.71 (1995).
13
7 C.F.R. § 1126.10 (1995).
14
See 7 C.F.R. § 1126.7(f)(1) (1995).
15
7 C.F.R. § 1126.14 and 1126.44 (1995). Although Gore
could sell its milk at any price due to its status as a
producer-handler, the record reflects that Gore sold its milk at
a premium over the Class I minimum price.
3
value use it must pay the difference into the producer-settlement
fund.
Gore is a vertically integrated milk producer, owning a dairy,
a processing plant, and a packaging facility. As such, it is
designated as a producer-handler under the Texas Order. H.E. Butt
Company (HEB), a grocery company operating in Texas, purchases
packaged fluid milk from Gore for sale in its retail stores. In
addition to purchasing packaged fluid milk from Gore, HEB also owns
and operates a milk plant.
HEB operates a large complex in San Antonio, Texas, housing
its milk production plant, an ice cream plant, a bakery, and a
Perishables Distribution Center (PDC). The PDC is housed under the
same roof and shares a common wall with the milk production plant
but is entirely separate therefrom.16 The record reflects that the
PDC is exclusively a distribution center.17
Perishable goods sold by HEB, including the milk purchased
from Gore,18 milk produced in the HEB milk processing plant, and
various other items such as cut flowers, eggs, and meat are
delivered to the PDC.19 Once delivered to the PDC, the goods are
16
The PDC has its own receiving and loading docks and is
managed separately.
17
The record establishes that the PDC turns over its entire
inventory 200 to 250 times each year.
18
Gore previously delivered all of the milk directly to the
individual HEB retail stores but began delivering a portion to
the PDC to increase efficiency.
19
The milk processed in the HEB plant passes through the
wall between the plant and the PDC on a conveyor belt.
4
loaded onto trucks for distribution to the HEB retail stores.
There is no connection between the milk processing plant and the
PDC that does not also exist between the origin of the non-milk
perishable goods and the PDC.20
The market administrator21 for the Texas Order determined that
HEB's receipt of Gore's milk constituted a receipt of milk from a
producer-handler at the processing plant of a regulated handler.
As such, the receipt was classified as Class III.22 From this
premise HEB's subsequent sale of the milk purchased from Gore as
Class I fluid milk called for a deposit into the
producer-settlement fund. Gore paid $366,772.38 into the
producer-settlement fund on behalf of HEB to avoid loss of HEB as
a customer.23
Gore sought administrative review,24 maintaining that the PDC
is a separate distribution facility which is specifically excepted
from the definition of a plant.25 The Administrative Law Judge
20
No raw milk to be processed by the HEB processing plant is
delivered to the PDC and no processed milk ever passes from the
PDC into the processing plant.
21
The Secretary acts through the market administrator. 7
C.F.R. § 1000.3 (1995).
22
7 C.F.R. §§ 1126.14 and 1126.44 (1995).
23
Gore concedes that if the Secretary's interpretation is
correct $366,772.38 is the amount HEB properly owed to the
producer-settlement fund.
24
See 7 U.S.C. § 608c(15)(A) (1992).
25
7 C.F.R. § 1126.4 (1995) ("[S]eparate facilities used only
as a distribution point for storing packaged milk in transit for
route distribution shall not be a plant under this definition.").
5
deferred to the Secretary's interpretation26 and the Secretary's
chief judicial officer affirmed.
The instant action followed. The parties submitted
cross-motions for summary judgment. The district court referred
this matter to a magistrate judge who recommended granting Gore's
motion for summary judgment. After a de novo review, the district
court determined to grant the Secretary's motion for summary
judgment. Gore timely appeals.
Analysis
A. Standing
At the threshold we must determine whether Gore possesses
standing. The Supreme Court teaches that "the term standing
subsumes a blend of constitutional requirements and prudential
considerations."27 To satisfy the requirements of Article III a
plaintiff must have suffered an injury in fact, caused by the
challenged government conduct, which is likely to be redressed by
the relief sought.28 In addition to the constitutional requirement,
the Supreme Court has also taught that we should consider certain
prudential principles in determining whether a plaintiff has
standing. Specifically, we must resolve whether the plaintiff's
conduct falls within the zone of interest protected or regulated by
26
The ALJ deferred but noted the persuasive force of Gore's
position.
27
Apache Bend Apartments, Ltd. v. United States through the
Internal Revenue Service, 987 F.2d 1174, 1176 (5th Cir.1993) (en
banc) (internal quotations omitted).
28
Lujan v. Defenders of Wildlife, 504 U.S. 555, 112 S.Ct.
2130, 119 L.Ed.2d 351 (1992).
6
the statute.29 Only those belonging to the class that the law was
designed to protect may sue.30 We must also inquire whether the
plaintiff is asserting personal legal rights and interests.
Gore possesses constitutional standing; it was injured in
fact by the Secretary's interpretation of 7 C.F.R. § 1126.4 which
essentially foreclosed at least one very valuable market to Gore,
i.e., the HEB account, and we may relieve that injury by rejecting
that interpretation.31 Further, Gore belongs to the class of
persons regulated by the AMAA32 and, as such, is within the zone of
interests protected or regulated by the statute.33 Finally, other
prudential considerations do not weigh against a finding of
standing.
B. The Secretary's Interpretation of 7 C.F.R. § 1126.429
Apache Bend (citing Valley Forge Christian College v.
Americans United for Separation of Church & State, Inc., 454 U.S.
464, 102 S.Ct. 752, 70 L.Ed.2d 700 (1982)). See also Lujan, 497
U.S. at 883, 112 S.Ct. at 3186 (emphasis in original) ("[T]he
plaintiff must establish that the injury he complains of (his
aggrievement, or the adverse effect upon him ) falls within the
"zone of interests' sought to be protected by the statutory
provisions whose violation forms the legal basis for his
complaint.").
30
Sabine River Authority v. U.S. Dep't of Interior, 951 F.2d
669 (5th Cir.), cert. denied, 506 U.S. 823, 113 S.Ct. 75, 121
L.Ed.2d 40 (1992).
31
See Craig v. Boren, 429 U.S. 190, 97 S.Ct. 451, 50 L.Ed.2d
397 (1976) (foreclosure of a market constitutes an injury in
fact).
32
See 7 U.S.C. § 601 et seq. (1992); 7 C.F.R. pt. 1126
(1995).
33
See Clarke v. Securities Industry Ass'n, 479 U.S. 388, 107
S.Ct. 750, 93 L.Ed.2d 757 (1987); cf. Block v. Community
Nutrition Institute, 467 U.S. 340, 104 S.Ct. 2450, 81 L.Ed.2d 270(1984).
7
Gore contends that the Secretary grossly erred in interpreting
the definition of "plant" found in 7 C.F.R. § 1126.4. Gore
maintains that the PDC is specifically excluded under the
definition of "plant."
Our review is governed by the Administrative Procedure Act
which requires that we determine whether the Secretary's
interpretation of the regulation was arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law.34 In
such review we routinely defer to an agency's construction of its
own regulations,35 but our examination "should not be categorized
as a summary endorsement of the agency's actions. A reviewing
court does not serve the function of a mere rubber stamp of agency
decisions."36 Rather, we must undertake a careful and searching
examination, ensuring that the agency's interpretation is rational
and not plainly inconsistent with the text of the regulation.37
The text of the regulation defines a "plant" as
34
5 U.S.C. § 706(2)(A) (1989); Pacific Gas Transmission Co.
v. F.E.R.C., 998 F.2d 1303 (5th Cir.1993); Acadian Gas Pipeline
System v. F.E.R.C., 878 F.2d 865 (5th Cir.1989).
35
See e.g., Acadian Gas; Pacific Gas.
36
Acadian Gas, 878 F.2d at 868. The review of an agency's
interpretation of its regulations is different than the review of
an agency's interpretation of the statute it is charged to
interpret under Chevron U.S.A., Inc. v. Natural Resources Defense
Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).
See Pacific Gas; Marlowe v. Bottarelli, 938 F.2d 807 (7th
Cir.1991).
37
Acadian Gas; Bowles v. Seminole Rock & Sand Co., 325 U.S.
410, 414, 65 S.Ct. 1215, 1217, 89 L.Ed. 1700 (1945) (An agency's
interpretation of its own regulations must comport with "the
plain words of the regulation.").
8
the land, buildings, facilities, and equipment constituting a
single operating unit or establishment at which milk or milk
products (including filled milk) are received, processed, or
packaged.... [S]eparate facilities used only as a
distribution point for storing packaged milk in transit for
route disposition shall not be a plant under this definition.38
Gore contends the PDC is a "separate facility used only as a
distribution point" even though the complex, as a whole, includes
a plant within the meaning of section 1126.4. The Secretary
maintains that to constitute a separate facility, the PDC must be
physically removed from the milk plant. Based on this
interpretation, the Secretary concluded that the PDC is not a
separate facility because it is housed under the same roof with the
milk plant. We find the Secretary's interpretation of section
1126.4 strained, plainly inconsistent with the text of the
regulation, arbitrary, capricious, and otherwise not in accordance
with law.
The regulations do not define "separate facility"; we must
first determine whether the Secretary applied the ordinary meaning
of that term.39 A facility typically is defined in terms of its
function;40 hence, the ordinary import of the phrase "separate
38
7 C.F.R. § 1126.4 (1995).
39
Elizabeth Blackwell Health Center for Women v. Knoll, 61
F.3d 170 (3d Cir.1995); see also, F.D.I.C. v. Meyer, 510 U.S.
471, ----, 114 S.Ct. 996, 1001, 127 L.Ed.2d 308 (1994) ("[W]e
construe a statutory term in accordance with its ordinary or
natural meaning.").
40
See Webster's Third International Dictionary 812-13 (3d
ed. 1976) (defining facility as "something that is built,
constructed, installed, or established to perform some particular
function or to serve or facilitate some particular end");
Black's Law Dictionary 531 (5th ed. 1979) (defining facility as
"[s]omething that is built or installed to perform some
9
facility" is that the subject unit functions distinctly from
something else and that it possesses a different purpose.41
The Secretary's contention that the modifier "separate"
requires that the facility be physically removed modifies the
regulation, for adopting that interpretation effectively inserts
the phrase "and removed" before the term "facility." Section
1126.4 on its face recognizes a distinction between facilities and
buildings. This suggests that if a physically separate building
were required, the ordinary term for such would have been used. We
perforce conclude that the Secretary's myopic interpretation is
arbitrary, capricious, and otherwise not in accordance with law.
Alternatively, the Secretary contends that even if the
facilities need not be physically separate, the PDC was not
functionally separate. Under section 706(2)(E) of the APA, the
factual findings of the hearing officer must be upheld if supported
by substantial evidence.42 "The "substantial evidence' standard
requires a determination that agency findings are supported by
"such relevant evidence as a reasonable mind might accept as
particular function.").
41
Webster's Third International Dictionary 2069 (3d ed.
1976) (defining separate as distinct, different, dissimilar in
nature, or set apart); Black's Law Dictionary 1124 (5th ed.
1979) (defining separate as something that is distinct,
individual, particular, or disconnected). The ordinary usage of
the term "separate" does not require physical separation.
42
5 U.S.C. § 706(2)(E) (1989); Parchman v. United States
Department of Agriculture, 852 F.2d 858 (6th Cir.1988). The
substantial evidence test only applies when a formal trial-type
hearing is required under 5 U.S.C. §§ 556 and 557. Consumers
Union of the United States, Inc. v. Federal Trade Commission, 801
F.2d 417 (D.C.Cir.1986).
10
adequate to support a conclusion.' "43 A finding that the PDC is
not functionally separate is not supported by substantial evidence;
rather, the evidence overwhelmingly supports the contrary
conclusion.
The Secretary maintains that because milk passed from the HEB
milk plant into the PDC, the PDC was part of the production
process. We are not persuaded. As the marketing administrator
recognized, the PDC is strictly an assembly point for
distribution.44 First, no raw milk ever entered the PDC; the milk
processed in the HEB plant was completely processed, packaged, and
cooled before passing through the PDC.45 Second, various other
perishable goods passed through the PDC en route to HEB retail
stores and as these perishables arrived at the PDC they quickly
were loaded onto trucks for distribution.46 Finally, the PDC was
completely separate from the HEB milk plant; each had its own
management and loading docks. No product ever entered the PDC and
was then taken into any other area of the facility. The only
physical connection between the milk plant and the PDC is the
conveyor belt operating through the common wall. This sole tenuous
43
Suntex Dairy, 666 F.2d at 162 (quoting Consolidated Edison
Co. v. N.L.R.B., 305 U.S. 197, 229, 59 S.Ct. 206, 216-17, 83
L.Ed. 126 (1938)).
44
Not only was the PDC a distribution point for the milk
products, but it was also the distribution point for numerous
other perishables.
45
No milk processed by HEB ever passed from the PDC into the
milk plant.
46
The inventory of the PDC was turned over every second day.
11
connection is insufficient to transform a large distribution center
into a component part of a milk plant. It is manifest that the
Secretary's determination that the PDC constituted a plant under
section 1126.4 is not supported by substantial evidence.
Gore seeks not only invalidation of the Secretary's
interpretation that the delivery of its processed milk to the PDC
constituted a delivery to a plant, but it also seeks reimbursement
for the $366,772.38 paid into the producer-settlement fund on
behalf of HEB. Gore paid this money because of the Secretary's
now-rejected interpretation of section 1126.4 (or, alternatively,
the Secretary's unsupported conclusion that the PDC was not
functionally separate) and, therefore, is entitled to a refund of
that amount from the producer-settlement fund.47
The judgment appealed is REVERSED, judgment consistent
herewith in favor of Gore is RENDERED, and the matter is REMANDED
for appropriate disposition.
47
See Abbotts Dairies Division of Fairmont Foods v. Butz,
584 F.2d 12 (3d Cir.1978); see also 7 U.S.C. § 608c(15)(B)
(1992) (granting jurisdiction in equity).
12