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A Pennsylvania law that sets minimum prices for wholesale milk is in jeopardy now that a federal appeals court has revived a lawsuit brought by a Maryland milk producer that said the price floors effectively shield Pennsylvania businesses from competition with out-of-state producers. In Cloverland-Green Spring Dairies Inc. v. Pennsylvania Milk Marketing Board, a unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals reversed a decision by U.S. District Judge Sylvia H. Rambo that dismissed the suit on summary judgment. Rambo, of the Middle District of Pennsylvania, issued a pair of opinions and appeared in the first opinion to be poised to declare the Pennsylvania law unconstitutional, saying it clearly burdened interstate commerce and didn’t seem to have legitimate benefits since a federal law that sets minimum milk prices was enough to ensure an adequate supply of milk. But in a second opinion, Rambo retreated, saying she had concluded that the wholesale price floors had some legitimate local benefits and that they burden interstate commerce less than she previously thought. Relying on Pennsylvania milk industry representatives’ statements that the wholesale price floors are necessary to compensate dealers, Rambo found that the minimum wholesale prices advance the legitimate local interest in averting a milk shortage. Rambo also concluded that since some Pennsylvania businesses would also be adversely affected by the law, it had only an “incidental” effect on interstate commerce. Now the 3rd Circuit has ruled that Rambo’s decision was fundamentally flawed because it was premised on the incorrect notion that “a state may remove a competitive advantage possessed by out-of-state firms if some in-state firms are also adversely affected.” Writing for the court, 3rd Circuit Judge Thomas L. Ambro found that Rambo erred in granting summary judgment because a reasonable jury could find that Pennsylvania’s minimum wholesale prices “eliminate a competitive advantage enjoyed by out-of-state dealers like Cloverland,” and therefore could be an illegal protectionist law. “If out-of-state dealers like Cloverland are able to sell milk at lower prices than the Pennsylvania dealers that currently dominate the wholesale market in Pennsylvania, a reasonable trier of fact could conclude that, by eliminating out-of-state dealers’ competitive advantage, the Commonwealth’s minimum wholesale prices cause 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,” Ambro wrote in an opinion joined by 3rd Circuit Judge Dolores K. Sloviter and visiting Judge Louis H. Pollak of the Eastern District of Pennsylvania. Ambro found that if the Pennsylvania law is subjected to “heightened scrutiny,” the wholesale price floors “cannot satisfy the dormant Commerce Clause.” “Assuming that Pennsylvania has a legitimate interest in providing special protection for its milk supply beyond that afforded by the federal producer price floors, it can achieve its objective through alternative measures that do not discriminate against interstate commerce,” Ambro wrote. “For instance, the Commonwealth could encourage production by purchasing large quantities of wholesale milk from its dealers, or large quantities of raw milk from its dairy farmers.” But even though the law has fewer effects on interstate commerce, Ambro found that it still may not pass constitutional muster. The evidence, Ambro said, showed that wholesale price floors “regulate evenhandedly, but incidentally burden interstate commerce by making it more difficult for out-of-state dealers to attract new business in a market dominated by in-state dealers.” If that is the case, Ambro said, Rambo must apply a balancing test to decide whether the minimum wholesale prices violate the dormant Commerce Clause by imposing a burden on interstate commerce that clearly outweighs their local benefits. In his opening pages of the opinion, Ambro outlined the current mix of federal and state laws that control milk prices. In most parts of the United States, Ambro noted, producer-to-dealer milk sales are subject to price floors imposed by the federal government. Under the federal regulatory scheme, the Secretary of Agriculture divides the country into geographic regions and issues milk marketing orders that set minimum producer prices for each region. Prices are set at levels that “insure a sufficient quantity of pure and wholesome milk to meet current needs and further to assure a level of farm income adequate to maintain productive capacity sufficient to meet anticipated future needs.” Congress first authorized the secretary to set minimum producer prices in 1937, amidst widespread fear of a milk shortage. “Today, more than six decades later, dairy farmers across the United States produce far more milk than our country consumes,” Ambro noted. Pennsylvania’s dairy industry “is among our nation’s most productive,” Ambro found, with milk production that outpaces consumption by roughly 350 percent. Annual production per-capita is around 900 pounds, while consumption per-capita is merely 200 pounds. Only three states — California, Wisconsin and New York – produce more milk than Pennsylvania. In 1934, Pennsylvania passed the Milk Marketing Law in order to “best protect the milk industry of the Commonwealth and insure a sufficient quantity of pure and wholesome milk to [its] inhabitants.” Under the law, milk producers are forced to sell at “over-order” prices — meaning prices above those required by federal milk marketing orders. And, unlike any other state in the region, Ambro found that Pennsylvania sets minimum prices for wholesale and retail milk sales. To compensate dealers (and, in turn, retailers) for paying higher raw milk prices, the Commonwealth fixes wholesale and retail price floors at levels that guarantee them “a reasonable return,” which the milk Law defines as “not less than a two and one-half percent nor more than a three and one-half percent rate of return based on net sales.” As a result, Pennsylvania dealers currently reap profits of around 3.3 percent of net sales, whereas net resale margins for dealers’ sales in other states are typically around 1 percent to 2 percent. Ambro concluded that “Pennsylvania’s price control regime is virtually without peer. Only two other states (North Dakota and Maine) impose resale price floors. But unlike Pennsylvania, North Dakota and Maine do not require their milk control agencies to set price floors, instead giving them the option to do so.” “Everywhere else in the United States,” Ambro said, “wholesale and retail milk prices are determined by market forces, not government fiat.” Cloverland-Green was represented by attorneys Kevin J. McKeon of Malatesta Hawke & McKeon in Harrisburg, Pa., and Sheldon A. Weiss of Mountainside, N.J. Attorney Allen C. Warshaw of Duane Morris in Harrisburg represented the Pennsylvania Association of Milk Dealers. Senior Deputy Attorney General Gwendolyn T. Mosley argued the case for the state and was joined on the brief by Senior Deputy Attorney General Calvin R. Koons and Chief Deputy Attorney General John G. Knorr III.

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