West Lynn Creamery v. Healy

512 U.S. 186

Case Year: 1994

Case Ruling: 7-2, Reversed

Opinion Justice: Stevens

FACTS

In 1937 Congress passed the Agricultural Marketing Agreement Act. This legislation, as amended, authorizes the secretary of agriculture to regulate the minimum prices paid to the producers of raw milk. These pricing orders are set for specific geographical areas. Nothing in the federal law prohibits the states from also setting prices as long as those prices are higher than the established federal price levels. In spite of these regulations, the milk industry is still competitive.

In the 1980s milk producers in Massachusetts began to lose market share to lower-cost producers in neighboring states. Prices paid to Massachusetts producers decreased while the cost of production increased. Between 1980 and 1991 approximately one-half of the dairy farms in the state went out of business. As a result, Massachusetts farmers produced only about one-third of the milk sold in the state. The Massachusetts commissioner of food and agriculture declared that emergency conditions existed in the state’s milk industry and issued a special pricing order to combat the problem. That order required all dealers of milk products to make a monthly “premium payment” to the Massachusetts Dairy Equalization Fund. The premiums were based on all milk sold in Massachusetts regardless of the state in which the raw milk was produced. The state then distributed those moneys exclusively to Massachusetts dairy farmers. The goal was to subsidize their operations and to keep Massachusetts dairy farmers in business.

West Lynn Creamery was a milk dealer licensed to do business in Massachusetts. It purchased raw milk from producers and then processed, packaged, and sold milk products to dealers in the state. About 97 percent of the milk it handled was produced out of state. LeComte’s Dairy, also a licensed Massachusetts milk dealer, purchased milk from West Lynn and distributed it to retail outlets. West Lynn and LeComte’s initially complied with the state-imposed assessments, paying almost $200,000 in premiums during the first two months. Beginning in July 1992, however, the two companies stopped making payments. The state reacted by initiating proceedings to revoke the companies’ licenses to do business. West Lynn and LeComte’s then filed suit against state commissioner Jonathan Healy, claiming that the state was using its taxing and spending powers to discriminate against interstate commerce. The state courts upheld the pricing and premium payment policy, saying that it did not discriminate against out-of-state producers and placed only an incidental burden on interstate commerce. West Lynn and LeComte’s appealed to the Supreme Court.

 

JUSTICE STEVENS DELIVERED THE OPINION OF THE COURT.

A Massachusetts pricing order imposes an assessment on all fluid milk sold by dealers to Massachusetts retailers. About two-thirds of that milk is produced out of State. The entire assessment, however, is distributed to Massachusetts dairy farmers. The question presented is whether the pricing order unconstitutionally discriminates against interstate commerce. We hold that it does....

The Commerce Clause vests Congress with ample power to enact legislation providing for the regulation of prices paid to farmers for their products. United States v. Darby (1941); Wickard v. Filburn (1942). An affirmative exercise of that power led to the promulgation of the federal order setting minimum milk prices. The Commerce Clause also limits the power of the Commonwealth of Massachusetts to adopt regulations that discriminate against interstate commerce. “This ‘negative’ aspect of the Commerce Clause prohibits economic protectionism--that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.... Thus, state statutes that clearly discriminate against interstate commerce are routinely struck down ... unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism ...” New Energy Co. of Indiana v. Limbach (1988).

The paradigmatic example of a law discriminating against interstate commerce is the protective tariff or customs duty, which taxes goods imported from other States, but does not tax similar products produced in State. A tariff is an attractive measure because it simultaneously raises revenue and benefits local producers by burdening their out-of-state competitors. Nevertheless, it violates the principle of the unitary national market by handicapping out-of-state competitors, thus artificially encouraging in-state production even when the same goods could be produced at lower cost in other States.

Because of their distorting effects on the geography of production, tariffs have long been recognized as violative of the Commerce Clause. In fact, tariffs against the products of other States are so patently unconstitutional that our cases reveal not a single attempt by any State to act one. Instead, the cases are filled with state laws that aspire to reap some of the benefits of tariffs by other means....

... [The] Massachusetts’ pricing order is clearly unconstitutional. Its avowed purpose and its undisputed effect are to enable higher cost Massachusetts dairy farmers to compete with lower cost dairy farmers in other States. The “premium payments” are effectively a tax which makes milk produced out of State more expensive. Although the tax also applies to milk produced in Massachusetts, its effect on Massachusetts producers is entirely (indeed more than) offset by the subsidy provided exclusively to Massachusetts dairy farmers. Like an ordinary tariff, the tax is thus effectively imposed only on out-of-state products. The pricing order thus allows Massachusetts dairy farmers who produce at higher cost to sell at or below the price charged by lower cost out-of-state producers. If there were no federal minimum prices for milk, out-of-state producers might still be able to retain their market share by lowering their prices. Nevertheless, out-of-staters’ ability to remain competitive by lowering their prices would not immunize a discriminatory measure. In this case, because the Federal Government sets minimum prices, out-of-state producers may not even have the option of reducing prices in order to retain market share. The Massachusetts pricing order thus will almost certainly “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.” Exxon Corp. v. Governor of Maryland (1978). In fact, this effect was the motive behind the promulgation of the pricing order. This effect renders the program unconstitutional, because it, like a tariff, “neutralize[s] advantages belonging to the place of origin.”...

Respondent’s principal argument is that, because “the milk order achieves its goals through lawful means,” the order as a whole is constitutional. He argues that the payments to Massachusetts dairy farmers from the Dairy Equalization Fund are valid, because subsidies are constitutional exercises of state power, and that the order premium which provides money for the Fund is valid, because it is a nondiscriminatory tax. Therefore the pricing order is constitutional, because it is merely the combination of two independently lawful regulations. In effect, respondent argues, if the State may impose a valid tax on dealers, it is free to use the proceeds of the tax as it chooses; and if it may independently subsidize its farmers, it is free to finance the subsidy by means of any legitimate tax.

Even granting respondent’s assertion that both components of the pricing order would be constitutional standing alone, the pricing order nevertheless must fall. A pure subsidy funded out of general revenue ordinarily imposes no burden on interstate commerce, but merely assists local business. The pricing order in this case, however, is funded principally from taxes on the sale of milk produced in other States. By so funding the subsidy, respondent not only assists local farmers, but burdens interstate commerce. The pricing order thus violates the cardinal principle that a State may not “benefit in-state economic interests by burdening out-of-state competitors.”

More fundamentally, respondent errs in assuming that the constitutionality of the pricing order follows logically from the constitutionality of its component parts. By conjoining a tax and a subsidy, Massachusetts has created a program more dangerous to interstate commerce than either part alone. Nondiscriminatory measures, like the evenhanded tax at issue here, are generally upheld, in spite of any adverse effects on interstate commerce, in part because “[t]he existence of major in-state interests adversely affected ... is a powerful safeguard against legislative abuse.” Minnesota v. Clover Leaf Creamery Co. (1981).... However, when a nondiscriminatory tax is coupled with a subsidy to one of the groups hurt by the tax, a state’s political processes can no longer be relied upon to prevent legislative abuse, because one of the in-state interests which would otherwise lobby against the tax has been mollified by the subsidy. So, in this case, one would ordinarily have expected at least three groups to lobby against the order premium, which, as a tax, raises the price (and hence lowers demand) for milk: dairy farmers, milk dealers, and consumers. But because the tax was coupled with a subsidy, one of the most powerful of these groups, Massachusetts dairy farmers, instead of exerting their influence against the tax, were in fact its primary supporters.

Respondent’s argument would require us to analyze separately two parts of an integrated regulation, but we cannot divorce the premium payments from the use to which the payments are put. It is the entire program—not just the contributions to the fund or the distributions from that fund—that simultaneously burdens interstate commerce and discriminates in favor of local producers. The choice of constitutional means--nondiscriminatory tax and local subsidy--cannot guarantee the constitutionality of the program as a whole....

Our Commerce Clause jurisprudence is not so rigid as to be controlled by the form by which a State erects barriers to commerce. Rather our cases have eschewed formalism for a sensitive, case-by-case analysis of purposes and effects. As the Court declared over 50 years ago: “The commerce clause forbids discrimination, whether forthright or ingenious. In each case it is our duty to determine whether the statute under attack, whatever its name may be, will in its practical operation work discrimination against interstate commerce.” Best & Co. v. Maxwell (1940); Maryland v. Louisiana (1981); Exxon Corp. v. Governor of Maryland (1978)....

Respondent also argues that since the Massachusetts milk dealers who pay the order premiums are not competitors of the Massachusetts farmers, the pricing order imposes no discriminatory burden on commerce. This argument cannot withstand scrutiny. Is it possible to doubt that if Massachusetts imposed a higher sales tax on milk produced in Maine than milk produced in Massachusetts that the tax would be struck down, in spite of the fact that the sales tax was imposed on consumers, and consumers do not compete with dairy farmers? For over 150 years, our cases have rightly concluded that the imposition of a differential burden on any part of the stream of commerce--from wholesaler to retailer to consumer--is invalid, because a burden placed at any point will result in a disadvantage to the out-of-state producer. Brown v. Maryland (1827)....

Respondent also argues that “the operation of the Order disproves any claim of protectionism,” because “only in-state consumers feel the effect of any retail price increase ... [and] [t]he dealers themselves ... have a substantial in-state presence.” This argument, if accepted, would undermine almost every discriminatory tax case. State taxes are ordinarily paid by in-state businesses and consumers, yet if they discriminate against out-of-state products, they are unconstitutional. The idea that a discriminatory tax does not interfere with interstate commerce “merely because the burden of the tax was borne by consumers” in the taxing State was thoroughly repudiated in Bacchus Imports, Ltd. v. Dias [1984]. The cost of a tariff is also borne primarily by local consumers, yet a tariff is the paradigmatic Commerce Clause violation.

More fundamentally, respondent ignores the fact that Massachusetts dairy farmers are part of an integrated interstate market. As noted above, the purpose and effect of the pricing order are to divert market share to Massachusetts dairy farmers. This diversion necessarily injures the dairy farmers in neighboring States ....

The judgment of the Supreme Judicial Court of Massachusetts is reversed. It is so ordered.

CHIEF JUSTICE REHNQUIST, WITH WHOM JUSTICE BLACKMUN JOINS, DISSENTING.

The Court is less than just in its description of the reasons which lay behind the Massachusetts law which it strikes down. The law undoubtedly sought to aid struggling Massachusetts dairy farmers, beset by steady or declining prices and escalating costs. This situation is apparently not unique to Massachusetts; New Jersey has filed an amicus brief in support of respondent because New Jersey has enacted a similar law. Both States lie in the northeastern metropolitan corridor, which is the most urbanized area in the United States, and has every prospect of becoming more so. The value of agricultural land located near metropolitan areas is driven up by the demand for housing and similar urban uses; distressed farmers eventually sell out to developers. Not merely farm produce is lost, as is the milk production in this case, but, as the Massachusetts Special Commission whose report was the basis for the order in question here found:

“Without the continued existence of dairy farmers, the Commonwealth will lose its supply of locally produced fresh milk, together with the open lands that are used as wildlife refuges, for recreation, hunting, fishing, tourism, and education.”

Massachusetts has dealt with this problem by providing a subsidy to aid its beleaguered dairy farmers. In case after case, we have approved the validity under the Commerce Clause of such enactments. “No one disputes that a State may enact laws pursuant to its police powers that have the purpose and effect of encouraging domestic industry.” Bacchus Imports, Ltd. v. Dias (1984). “Direct subsidization of domestic industry does not ordinarily run afoul of the [dormant Commerce Clause]; discriminatory taxation of out-of-state manufacturers does.” New Energy Co. of Indiana v. Limbach (1988). But today the Court relegates these well-established principles to a footnote and, at the same time, gratuitously casts doubt on the validity of state subsidies, observing that “[w]e have never squarely confronted” their constitutionality.

But in Milk Control Bd. v. Eisenberg Farm Products (1939), the Court upheld a Pennsylvania statute establishing minimum prices to be paid to Pennsylvania dairy farmers against a Commerce Clause challenge by a Pennsylvania milk dealer which shipped all of its milk purchased in Pennsylvania to New York to be sold there. The Court observed that “[t]he purpose of the statute ... is to reach a domestic situation in the interest of the welfare of the producers and consumers of milk in Pennsylvania.”...

The Massachusetts subsidy under consideration is similar in many respects to the Pennsylvania statute described inEisenberg. Massachusetts taxes all dealers of milk within its borders. The tax is even-handed on its face, i.e. , it affects all dealers regardless of the point of origin of the milk. The State has not acted to strong-arm sister States as in Limbach; rather, its motives are purely local. As the Supreme Judicial Court of Massachusetts aptly described it: “[T]he premiums represent one of the costs of doing business in the Commonwealth, a cost all milk dealers must pay.”...

More than half a century ago, Justice Brandeis said in his dissenting opinion in New State Ice Co. v. Liebmann (1932):

“To stay experimentation in things social and economic is a grave responsibility. Denial of the right to experiment may be fraught with serious consequences to the Nation. It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Justice Brandeis’ statement has been cited more than once in subsequent majority opinions of the Court. His observation bears heeding today, as it did when he made it. The wisdom of a messianic insistence on a grim sink-or-swim policy of laissez-faire economics would be debatable had Congress chosen to enact it; but Congress has done nothing of the kind. It is the Court which has imposed the policy under the dormant Commerce Clause, a policy which bodes ill for the values of federalism which have long animated our constitutional jurisprudence.