United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 18, 2002 Decided June 18, 2002
No. 01-5169
Hershey Foods Corporation,
Appellant
v.
Department of Agriculture,
Appellee
Appeal from the United States District Court
for the District of Columbia
(99cv02138)
Andrew G. McBride argued the cause for appellant. With
him on the briefs was Eve J. Klindera. Robert M. Reese
entered an appearance.
Douglas N. Letter, Litigation Counsel, U.S. Department of
Justice, argued the cause for appellee. With him on the brief
was Roscoe C. Howard, Jr., U.S. Attorney.
Before: Sentelle, Randolph and Garland, Circuit Judges.
Opinion for the Court filed by Circuit Judge Randolph.
Randolph, Circuit Judge: Hershey Foods Corporation ap-
peals the dismissal of its complaint seeking to vacate a
portion of the Department of Agriculture's regulation estab-
lishing pricing classifications of milk used in the manufacture
of milk chocolate. The district court dismissed the complaint
on the ground that legislation converted the regulation into a
statute, not subject to judicial review under the Administra-
tive Procedure Act. Although we disagree with the district
court in this respect, we hold that dismissal was proper
because Hershey failed to exhaust its administrative reme-
dies.
I.
The Agricultural Marketing Agreement Act of 1937
("AMAA"), empowered the Secretary of Agriculture to regu-
late the sale of milk by geographic region. See 7 U.S.C.
s 608c(5). Over the years, the Secretary issued many milk
marketing orders, applying to different geographic regions
and classifying milk according to the "form in which or the
purpose for which it is used." 7 U.S.C. s 608c(5)(A). By
1998, there were thirty-one milk marketing orders in effect.
See Milk in the New England and Other Marketing Areas:
Proposed Rule and Opportunity to File Comments, Includ-
ing Written Exceptions, on Proposed Amendments to Mar-
keting Agreements and Orders, 63 Fed. Reg. 4802, 4805 (Jan.
30, 1998). In the Federal Agriculture Improvement and
Reform Act ("FAIR Act") of 1996, Congress directed the
Secretary to reduce the number of these orders to no more
than fourteen, and authorized the use of informal rulemaking
to expedite the process of milk marketing order consolidation.
See 7 U.S.C. s 7523. In January 1998, the Department of
Agriculture proposed a rule consolidating the number of
marketing orders to eleven, and reconfiguring the milk pric-
ing classification system. See 63 Fed. Reg. 4802. As promul-
gated, the final rule contained four milk classifications. In
very general terms, Class I consisted of fluid milk; Class II,
fluid milk used to produce food products such as candy; Class
III, milk used to produce spreadable cheeses; Class IV, milk
used to produce butter and milk products in dried form. See
Milk in the New England and Other Marketing Areas;
Order Amending the Orders, 64 Fed. Reg. 47,898, 47,903
(Sept. 1, 1999) ("the final rule"). The final rule's pricing
formulas made Class II skim milk 70 cents more expensive
per hundredweight than Class IV milk. See id. at 47,907 (to
be codified at 7 C.F.R. s 1000.50(e)).
Hershey is the leading maker of milk chocolate in the
United States. The company traces its beginnings to the late
19th century when Milton S. Hershey developed a process in
which fresh milk was sweetened, mixed with chocolate, and
dried as the first step in making milk chocolate. Today,
Hershey is the only major manufacturer of milk chocolate still
using fresh fluid milk in the proprietary process developed
more than a century ago. Hershey's competitors purchase
their milk in dried form from independent milk drying plants.
(Milk chocolate must be made with dried milk.)
When Hershey buys fluid milk to make candy, it purchases
the milk at Class II prices. Hershey's competitors in the
milk chocolate industry pay Class IV prices because they use
dried milk. Alleging the unlawfulness of the price disparity
resulting from the final rule, Hershey brought an action in
district court seeking injunctive and declaratory relief.
Hershey claimed the final rule violated the Administrative
Procedure Act because it was arbitrary, capricious, and con-
trary to the AMAA. The rule's effective date was October 1,
1999, but a federal district court in Vermont, on September
28, 1999, enjoined the Secretary from implementing the rule.
See St. Albans Coop. Creamery, Inc. v. Glickman, 68
F. Supp. 2d 380, 392 (D. Vt. 1999). (The court called its
injunction a "temporary restraining order" but it was in effect
a preliminary injunction.) Two weeks later, Representative
Blunt introduced a bill in the House of Representatives "to
provide for the modification and implementation of the final
rule for the consolidation and reform of Federal milk market-
ing orders." H.R. 3428, 106th Cong. (Nov. 17, 1999). Among
other things, the bill called for the "final rule" to "take effect,
and be implemented" with some alterations. H.R. 3428,
s 1(b). Twelve days later, H.R. 3428 was "enacted into law,"
incorporated by reference as part of the 2000 Appropriations
Act. See Pub. L. No. 106-113, s 1000(a)(8), 113 Stat. 1501,
1536-37 (1999).
On December 29, 1999, the district court here dismissed
Hershey's suit without prejudice, stating that enactment of
H.R. 3428 transformed the regulation into statutory law not
subject to APA review. Hershey amended its complaint to
include constitutional challenges to the enactment of H.R.
3428, but alternatively contended that H.R. 3428 simply im-
plemented the rule so that Hershey could still bring suit
under the APA to have it set aside. The government moved
to dismiss, arguing that the regulation became law through
the Appropriations Act. The Department further argued
that even if it this were not the case, Hershey could not
challenge the rule without first exhausting its administrative
remedies under the AMAA. The district court granted the
Department's motion, refusing to reconsider its determination
that the enactment of H.R. 3428 converted the regulation into
a statute. See Hershey Foods Corp. v. USDA, 158
F. Supp. 2d 37, 37 n.1 (D.D.C. 2001).
On appeal, Hershey does not press its constitutional argu-
ments. The company argues instead that the district court
erred in determining that "the rule originally challenged by
[Hershey] has been enacted into law by the Appropriations
Act." Id.
II.
Sections 1 and 2 of H.R. 3428, which the Appropriations
Act enacted into law, deal with the rule Hershey challenged.
Because of their importance to the case, both sections are
quoted in their entirety in the margin.*
__________
* SECTION 1. USE OF OPTION 1A AS PRICE STRUC-
TURE FOR CLASS I MILK UNDER CONSOLIDATED
FEDERAL MILK MARKETING ORDERS
(a) Final Rule Defined.-In this section, the term "final
rule" means the final rule for the consolidation and reform of
Federal milk marketing orders that was published in the
Federal Register on September 1, 1999 (64 Fed. Reg. 47897-
48021), to comply with section 143 of the Federal Agriculture
Improvement and Reform Act of 1996 (7 U.S.C. 7253).
(b) Implementation of Final Rule for Milk Order Re-
form.-Subject to subsection (c), the final rule shall take effect,
and be implemented by the Secretary of Agriculture, on the
first day of the month beginning at least 30 days after the date
of the enactment of this Act.
(c) Use of Option 1A for Pricing Class I Milk.-In lieu of the
Class I price differentials specified in the final rule, the Secre-
tary of Agriculture shall price fluid or Class I milk under the
Federal milk marketing orders using the Class I price differen-
tials identified as Option 1A "Location-Specific Differentials
Analysis" in the proposed rule published in the Federal Regis-
ter on January 30, 1998 (63 Fed. Reg. 4802, 4809), except that
the Secretary shall include the corrections and modifications to
such Class I differentials made by the Secretary through April
2, 1999.
(d) Effect of Prior Announcement of Minimum Prices.-If
the Secretary of Agriculture announces minimum prices for
milk under the Federal milk marketing orders pursuant to
section 1000.50 of title 7, Code of Federal Regulations, before
the effective date specified in subsection (b), the minimum
prices so announced before that date shall be the only applica-
ble minimum prices under Federal milk marketing orders for
the month or months for which prices have been announced.
(e) Implementation of Requirement.-The implementation of
the final rule, as modified by subsection (c), shall not be subject
to any of the following:
(1) The notice and hearing requirements of section 8c(3) of
the Agricultural Adjustment Act (7 U.S.C. 608c(3)), reen-
acted with amendments by the Agricultural Marketing
Agreement Act of 1937, or the notice and comment provi-
sions of section 553 of title 5, United States Code.
(2) A referendum conducted by the Secretary of Agricul-
ture pursuant to subsections (17) or (19) of section 8c of the
Agriculture Adjustment Act (7 U.S.C. 608c), reenacted with
amendments by the Agricultural Marketing Agreement Act
of 1937.
(3) The Statement of Policy of the Secretary of Agricul-
ture effective July 24, 1971 (36 Fed. Reg. 13804), relating to
notices of proposed rulemaking and public participation in
rulemaking.
(4) Chapter 35 of title 44, United States Code (commonly
known as the Paperwork Reduction Act).
(5) Any decision, restraining order, or injunction issued by
a United States court before the date of the enactment of
this Act.
SEC. 2. FURTHER RULEMAKING TO DEVELOP PRIC-
ING METHODS FOR CLASS III AND CLASS IV MILK
UNDER MARKETING ORDERS.
(a) Congressional Finding.-The Class III and Class IV milk
pricing formulas included in the final decision for the consolida-
tion and reform of Federal milk marketing orders, as published
in the Federal Register on April 2, 1999 (64 Fed. Reg. 16025),
do not adequately reflect public comment on the original pro-
posed rule published in the Federal Register on January 30,
1998 (63 Fed. Reg. 4802), and are sufficiently different from the
proposed rule and any comments submitted with regard to the
proposed rule that further emergency rulemaking is merited.
(b) Rulemaking Required.-The Secretary of Agriculture
shall conduct rulemaking, on the record after an opportunity
for an agency hearing, to reconsider the Class III and Class IV
milk pricing formulas included in the final rule for the consoli-
dation and reform of Federal milk marketing orders that was
published in the Federal Register on September 1, 1999 (64
Fed. Reg. 47897-48021).
(c) Time Period for Rulemaking.-On December 1, 2000, the
Secretary of Agriculture shall publish in the Federal Register a
final decision on the Class III and Class IV milk pricing
formulas. The resulting formulas shall take effect, and be
implemented by the Secretary, on January 1, 2001.
(d) Effect of Court Order.-The actions authorized by sub-
sections (b) and (c) are intended to ensure the timely publica-
tion and implementation of new pricing formulas for Class III
and Class IV milk. In the event the Secretary of Agriculture
is enjoined or otherwise restrained by a court order from
implementing a final decision within the time period specified
in subsection (c), the length of time for which that injunction or
other restraining order is effective shall be added to the time
limitations specified in subsection (c) thereby extending those
There is much to be said in favor of Hershey's contention
that the Appropriations Act did not convert the rule into a
statute. H.R. 3428 nowhere states that the rule is enacted
into statutory law. It refers instead in section 1(e) to "imple-
mentation of the final rule" and, in the same subsection,
states that the "final rule" "shall not be subject to" the
"notice and comment provisions" of the APA. None of this
makes any sense unless what is being implemented is a rule.
To state the obvious, statutes are not promulgated by agen-
cies and they are not subject to the requirements of the APA.
Section 1(e) also overrides the injunction issued in the St.
Albans Creamery case. The court's order had enjoined the
agency from putting its rule into effect. If H.R. 3428 meant
to enact the rule as a statute this provision would have been
unnecessary. The Vermont district court issued its prelimi-
nary injunction on the basis that plaintiffs' claims--that the
Secretary had violated several statutory procedural require-
__________
time limitations by a period of time equal to the period of time
for which the injunction or other restraining order is effective.
(e) Failure to Timely Complete Rulemaking.-If the Secre-
tary of Agriculture fails to implement new Class III and Class
IV milk pricing formulas within the time period required under
subsection (c) (plus any additional period provided under sub-
section (d)), the Secretary may not assess or collect assess-
ments from milk producers or handlers under section 8c of the
Agriculture Adjustment Act (7 U.S.C. 608c), reenacted with
amendments by the Agricultural Marketing Agreement Act of
1937, for marketing order administration and services provided
under such section after the end of that period until the pricing
formulas are implemented. The Secretary may not reduce the
level of services provided under that section on account of the
prohibition against assessments, but shall rather cover the cost
of marketing order administration and services through funds
available for the Agricultural Marketing Service of the Depart-
ment.
(f) Implementation of Requirement.-The Implementation of
the final decision on new Class III and Class IV milk pricing
formulas shall not be subject to congressional review under
chapter 8 of title 5, United States Code.
ments--would likely be successful. See St. Albans Coop.
Creamery, 68 F. Supp. 2d at 388-90. That reasoning, and the
injunction itself, could not have prevented a statute from
going into effect, if the rule were intended to be such.
Furthermore, the final rule had allowed the Secretary to
"suspend or terminate any or all provisions" upon a finding
that any provision contravened the AMAA. 64 Fed. Reg.
47,902 (to be codified at 7 C.F.R. s 1000.26(b)). Nothing in
H.R. 3428 altered this aspect, as a result of which the
Secretary retained the authority to modify or delete provi-
sions in the rule. While it is not unheard of for Congress to
allow an agency to modify the substantive portions of a
statute, see Touby v. United States, 500 U.S. 160, 162-63
(1991), it is far from ordinary and we would expect Congress
to be more explicit than it was here if that were its intent.
Cf. 21 U.S.C. s 811(a)-(c) (authorizing Attorney General to
add or remove substances from the Controlled Substance Act
schedule only after various steps including consultation with
Secretary of Health and Human Services and notice-and-
hearing provisions).
As against these considerations, the government points out
that Congress, not the Secretary, decided upon the specific
content of the Class I pricing differentials. This raises an
obvious question: if Congress has dictated the classification
scheme, how could it be arbitrary or capricious for an agency
to implement Congress's choice? The government also thinks
the legislature's override of the Vermont court's injunction
against the Secretary would make little sense if Hershey, or
anyone else, could just return to court to get a restraining
order as soon as the President signed the Appropriations Act
into law. (This has special force with respect to the Class I
price differentials. It is hard to see why Congress would
have intended the provision to be subject to judicial review
under the APA immediately after enactment.) The govern-
ment relies on Congress's specific action in altering one part
of the rule to mean that Congress intended to enact the rest
of it.
There is also the matter of section 2 of the bill, which
directed the Secretary to undertake formal rulemaking on the
subject of Class III and IV pricing formulas. This provision
effectively removed parts of the original rule and remanded
to the agency for further consideration. (Although the pric-
ing formulas were left in a state of flux, Hershey's challenge
is ripe because the provision setting the Class II price at "the
advanced Class IV skim milk price ... plus 70 cents" re-
mained intact. 64 Fed. Reg. 47,907. The Class IV milk price
might change, but the difference between it and the Class II
price would remain fixed at 70 cents per hundredweight.)
The parties disagree on what we should infer from the bill's
explicit call for further rulemaking on certain provisions of
the original rule.
As the government's argument shows, the problem here is
somewhat more complicated than if Congress had simply
directed an agency to implement an entire regulation. H.R.
3428 did more. Congress required the Secretary to adopt a
specific formula for Class I price differentials, see s 1(c), and
to conduct rulemaking on Class III and IV prices, see s 2.
The subject of this litigation, however, is the Class II price.
On that subject, Congress did nothing but direct the rule to
be implemented despite the Vermont district court's injunc-
tion. By leaving the Class II pricing provision untouched, we
believe--for the reasons already given--that Congress meant
to treat at least this portion of the rule, not as a statute, but
as agency action, still subject to challenge under the APA.
To decide otherwise would be to go beyond the words of H.R.
3428 and attribute to Congress by inference what it never
made explicit.
The legislative history of H.R. 3428, to the extent there is
any, supports this conclusion. Congress enacted this bill
without any committee consideration and almost no floor
debate. See 145 Cong. Rec. H12,732 (daily ed. Nov. 18, 1999)
(remarks of Rep. Obey) ("We have H.R. 3428, which brings
several dairy authorization measures to this floor, including
the Northeast Compact. That compact was slipped into the
law in the first place several years ago without ever having
been voted on by either body. It was slipped in by the
Senate, and now we are again slipping it in without it ever
having been considered by either body."). To understand the
concern with the Class I pricing differentials, some history is
needed. Since 1961 the price a farmer receives for milk
depends in part on how far that farmer (or perhaps more
accurately, the farmer's cow) lives from Eau Claire, Wiscon-
sin. See, e.g., 7 C.F.R. ss 1001.51, 1001.52, 1001.53 (1999);
145 Cong. Rec. E2528 (daily ed. Nov. 22, 1999) (remarks of
Rep. Baldwin); see also David Hess, Art of Milk Pricing: It
is Rocket Science, The Record (N. N.J.), Nov. 26, 1999, at
B54, available at 1999 WL 7119902. Under these price
"differentials," dairy farmers in the eastern United States
collected more per gallon produced than those in the midwest.
The Secretary's final rule, promulgated in September 1999,
replaced this differential formula. Section 1(c) of H.R. 3428
reinstated the "Class 1A option," which did not dramatically
change the old differentials. See 63 Fed. Reg. 4809-10; 145
Cong. Rec. H12,734 (daily ed. Nov. 18, 1999) (remarks of Rep.
Peterson). Although senators from Wisconsin and Minnesota
threatened a filibuster to prevent the passage of the Appro-
priations Act because it included H.R. 3428, in the end it
passed. See, e.g., Meg Jones, Anti-Reform Move Upsets
State Dairy Farmers, Milwaukee Journal-Sentinel, Nov. 26,
1999, available at 1999 WL 21553546. (Another provision of
H.R. 3428 extended the life of the Northeast Dairy Compact,
a USDA-approved arrangement favoring New England dairy
farmers. See H.R. 3428, s 4.) The issues underlying the
Class I pricing changes indicate that Congress sought only to
legislate the terms of the Class I price differentials, not the
entire milk marketing system. The Class II price remains
the product of agency action and is subject to judicial review
as such.
III.
Our decision that the portion of the rule Hershey chal-
lenges remains a rule despite H.R. 3428 does not fully resolve
the issues in this appeal. The AMAA contains an exhaustion
requirement. See Block v. Cmty. Nutrition Inst., 467 U.S.
340, 346 (1984). It provides that "[a]ny handler subject to an
order may file a written petition with the Secretary of Agri-
culture" challenging the order or requesting an exemption,
that the Secretary "shall thereupon [provide] an opportunity
for a hearing upon such petition," and that "[a]fter such
hearing, the Secretary shall make a ruling upon the prayer of
such petition which shall be final, if in accordance with law."
7 U.S.C. s 608c(15)(A). "And so Congress has provided that
the remedy in the first instance must be sought from the
Secretary of Agriculture." United States v. Ruzicka, 329
U.S. 287, 294 (1946); see also Am. Dairy of Evansville v.
Bergland, 627 F.2d 1252, 1259 (D.C. Cir. 1980).
Hershey states that it is a "handler" of milk; we shall
assume this to be the case. (If Hershey were a consumer of
milk rather than a handler, it would not have statutory
standing to sue. See Block, 467 U.S at 346-48.) Hershey
also admits that it did not exhaust its remedies under the
AMAA. But it contends that the AMAA is inapplicable
because the Secretary promulgated the rule pursuant to the
FAIR Act, which does not mention administrative remedies.
The underlying assumption is that the FAIR Act supercedes
the AMAA. But that assumption is incorrect. Hershey itself
claims that the final rule violates the terms of the AMAA. To
be sure, the FAIR Act allows informal rulemaking, rather
than the formal rulemaking the AMAA demanded. But the
purpose is to facilitate the Secretary's efforts to "amend" the
milk marketing orders the AMAA requires. See 7 U.S.C.
s 7253(a)(1). The FAIR Act thus streamlined the procedures
for implementing AMAA orders without disturbing, for ex-
ample, the AMAA's requirement that the Secretary classify
milk according to the purpose for or form in which it is used.
The AMAA's exhaustion requirement remained unchanged
and the final rule Hershey challenges itself states that "ad-
ministrative proceedings must be exhausted before parties
may file suit in court." See 64 Fed. Reg. 47,898. A handler
of milk thus must petition the Secretary before seeking
judicial review of a milk marketing order promulgated under
the FAIR Act. Hershey did not undertake this required
step, and therefore the dismissal of its complaint was the
proper result.
Affirmed.