United States Court of Appeals
For the First Circuit
No. 07-2240
VAQUERÍA TRES MONJITAS, INC.; SUIZA DAIRY, INC.,
Plaintiffs, Appellees,
v.
CYNDIA E. IRIZARRY, in her official capacity as
Administrator of the Office of the Milk Industry Regulatory
Administration for the Commonwealth of Puerto Rico,
Defendant, Appellant,
JOSÉ O. FABRE-LABOY, in his official capacity as Secretary
of the Department of Agriculture of the Commonwealth of
Puerto Rico; INDUSTRIA LECHERA DE PUERTO RICO, INC. (INDULAC),
PUERTO RICO DAIRY FARMERS ASSOCIATION,
Defendants.
No. 07-2369
VAQUERÍA TRES MONJITAS, INC.; SUIZA DAIRY, INC.,
Plaintiffs, Appellees,
v.
JAIME RIVERA-AQUINO, in his official capacity as Secretary
of the Department of Agriculture of the Commonwealth of
Puerto Rico;
Defendant, Appellant,
INDUSTRIA LECHERA DE PUERTO RICO, INC. (INDULAC);
PUERTO RICO DAIRY FARMERS ASSOCIATION; CYNDIA E. IRIZARRY,
in her official capacity as Administrator of the Office
of the Milk Industry Regulatory Administration for the
Commonwealth of Puerto Rico,
Defendants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Daniel R. Domínguez, U.S. District Judge]
Before
Torruella, Lipez, and Howard,
Circuit Judges.
Edward W. Hill-Tollinche, with whom Quiñones & Sánchez,
P.S.C., Yassmin González-Vélez, and Juan Carlos Ramírez-Ramos, were
on brief for appellants.
Rafael Escalera-Rodríguez, with whom Reichard & Escalera,
Carmen Alfonso-Rodríguez, and Amelia Caicedo-Santiago, were on
brief for appellee Suiza Dairy, Inc.
José R. Lázaro-Paoli, José R. Lázaro-Paoli Law Offices,
Enrique Nassar-Rizek, Maxine M. Brown-Vázquez, and ENR &
Associates, on brief for appellee Vaquería Tres Monjitas, Inc.
November 23, 2009
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TORRUELLA, Circuit Judge. This is an appeal from a
preliminary injunction issued by the United States District Court
for the District of Puerto Rico against the Milk Industry
Regulation Administration for the Commonwealth of Puerto Rico
("ORIL" by its Spanish acronym), a sub-entity of the Department of
Agriculture charged with regulating Puerto Rico's milk industry,
and the Commissioners thereof. Plaintiffs, fresh milk processors
in the Commonwealth, filed suit in federal court under 42 U.S.C.
§ 1983 and the Federal Declaratory Judgment Act, 28 U.S.C. § 2201,
alleging that ORIL's regulatory scheme governing milk prices
violates the Due Process, Equal Protection, Takings, and dormant
Commerce Clauses, and seeking an order pursuant to Fed. R. Civ. P.
65(a) enjoining the Administrator of ORIL from continuing to
implement the challenged regulatory provisions. Finding a
likelihood of success on the merits of plaintiffs' constitutional
claims, the district court preliminarily enjoined the regulatory
scheme.
On appeal, in addition to challenging the merits of the
district court's preliminary injunction ruling, Defendants-
Appellants argue that the district court's actions were barred by
the Burford Abstention doctrine, the Eleventh Amendment, and by
various equitable defenses.
After careful consideration, we affirm.
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I. Background
A. Factual Background1
1. Parties
Plaintiffs-Appellees Vaquería Tres Monjitas ("Tres
Monjitas") and Suiza Dairy, Inc. ("Suiza") are fresh milk
processors in the Commonwealth of Puerto Rico (collectively "the
processors"). Their business consists of purchasing raw milk from
local dairy farmers and converting it into drinkable fresh milk,
which they then sell to consumers. Plaintiffs are the only fresh
milk processors in Puerto Rico. Tres Monjitas holds a market share
of 34.7%, and Suiza holds a 65.3% share. As milk processors,
plaintiffs fall under Puerto Rico's regulatory structure for milk
and milk products.
Defendant-Appellant Cyndia E. Irizarry2 ("Administrator")
is being sued in her official capacity as the current Administrator
of ORIL, which is the entity responsible for creating and
1
These facts are drawn from the findings made by the district
court as set forth in its amended opinion and order granting
preliminary injunction after fifty-one days of hearings between
February 2005 and August 2006. Defendants do not challenge the
district court's factual determinations on appeal. Vaquería Tres
Monjitas, Inc. v. Fabre Laboy, No. 04-1840, slip op. at 7-44
(D.P.R. July 13, 2007).
2
Previous pleadings refer to Juan R. Pedro-Gordian, who was the
Administrator at the time when they were filed. "[W]hen officials
sued in [their official] capacity in federal court die or leave
office, their successors automatically assume roles in the
litigation." Hafer v. Melo, 502 U.S. 21, 25 (1991); see Fed. R.
Civ. P. 25(d)(1).
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administering the Commonwealth's milk regulatory structure. ORIL
is a subdivision of the Commonwealth's Department of Agriculture,
whose current Secretary, Jaime Rivera-Aquino,3 is also a named
defendant in his official capacity.
Defendant Industria Lechera de Puerto Rico, Inc.
("Indulac") was joined to the litigation after its inception.
Indulac is owned and operated by Fondo de Fomento de la Industrial
Lechera ("FFIL" or "the Fund"), an entity created pursuant to the
Milk Industry Regulation Act, Act No. 34 of June 11, 1957 ("Act
34") to promote Puerto Rico's milk industry. 5 P.R. Laws Ann.
§§ 1092-1125 (2005 & Supp. 2008). Indulac is the sole entity in
Puerto Rico authorized to process ultra high temperature milk ("UHT
milk"), a type of milk that does not require refrigeration prior to
opening and competes directly with the fresh milk produced by Tres
Monjitas and Suiza.
The Administrator of ORIL, who is statutorily empowered
to regulate the milk market, is also chairman of the board of FFIL,
the government entity which owns Indulac. 5 P.R. Laws Ann. § 1099
(e) (2005 & Supp. 2008). Until the milk processors filed this
suit, then-serving ORIL Administrator Pedro-Gordian also chaired
the Indulac board. The CEOs of ORIL and FFIL are both former dairy
farmers, as is the Secretary of Agriculture. Not only does the
3
Previous pleadings refer to José O. Fabre-Laboy, who was the
Secretary at the time when they were filed.
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leadership of ORIL, FFIL, and Indulac overlap, but the three
entities also operate out of the same facility.
Also joined as a defendant was the Puerto Rico Dairy
Farmers Association ("PRDFA"), which represents 300 dairy farmers,
who are the producers of the raw milk processed by Tres Monjitas,
Suiza, and Indulac.
2. Background of this Litigation
This litigation arises out of a history of feuding
between dairy farmers and milk processors in Puerto Rico. Milk
production in the Commonwealth is seasonal and heavily dependent
upon the changing temperature, leading to instability in the
seasonal yield of milk and, consequently, waste during months of
higher production. The strained relations between farmers and
processors and the difficulty of maintaining a consistent supply
led to a chaotic situation in an industry essential to the local
economy and well-being of the population. To ease tensions between
the farmers and processors and to stabilize the disparity between
months of lean and fat milk production, Act 34, which was passed
June 11, 1957, created ORIL as a regulatory agency to oversee the
milk industry. 5 P.R. Laws Ann. § 1093 (2005 & Supp. 2008). From
its creation, ORIL set both a maximum price for the sale of milk to
consumers and a minimum price for the purchase of raw milk from
dairy farmers by milk processors. See 5 P.R. Laws Ann. §§ 1096(a),
1107(d) (2005 & Supp. 2008). This means that ORIL regulated both
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the cost at which milk processors Tres Monjitas and Suiza obtained
their raw milk and the price at which they could sell the milk once
they processed it into fresh milk. The result of this regulatory
structure was such that the price of fresh milk was kept low to
make it affordable for consumers. The price of the raw milk,
however, was kept high, based on ORIL's determinations regarding
the farmers' costs of production and their reasonable expectations
of profits.
While processors were required to purchase all of the
dairy farmers' milk, Indulac purchased from the processors any raw
milk left over after the market demand for fresh milk was met
(referred to as "surplus milk"), in order to avoid waste. Under
ORIL's pricing system, Indulac purchased this surplus raw milk from
the processors at a price significantly below the price that the
processors paid the dairy farmers for their non-surplus raw milk.4
At first, Indulac processed the surplus raw milk that it purchased
from the processors to make butter, cream, cheese, and other dairy
products that did not directly compete with the fresh milk produced
by plaintiffs.
4
At first, Indulac paid 10 cents per quart of surplus raw milk,
though it would, when it saw fit, contribute more directly to
farmers. Vaquería Tres Monjitas, No. 04-1840, at *19. In February
2006, ORIL changed this price to 32 cents. Id. at *27. The same
order set the price milk processors paid for the raw milk at 66
cents per quart. Id. at *30.
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Trouble began around 1985, however, when Indulac began to
produce UHT milk, a non-refrigerated milk substitute, which
competes directly with plaintiffs' fresh milk. Essentially, by
mandating that plaintiffs pay a high price for raw milk and then
requiring them to sell the surplus of that same milk to Indulac at
a substantially lower price, ORIL created a scheme in which Tres
Monjitas and Suiza were forced to subsidize Indulac, their
competitor. The district court found that, but for this ORIL-
imposed subsidy from the processors, Indulac would not be able to
compete with UHT milk imported into Puerto Rico from the
continental United States. Thus, Indulac became dependent on this
scheme. And, as the only processor authorized to produce UHT milk
in Puerto Rico,5 Indulac amassed 70% of the UHT milk market, with
the other portion coming from out-of-state sources.
Moreover, unlike the other milk processors, the price at
which Indulac may sell its milk to consumers is not regulated.
This lack of regulation as to Indulac's retail price for milk,
coupled with the relatively low price at which it could purchase
surplus raw milk from plaintiffs, allowed Indulac's profit margin
to soar, while the processors struggled. And, since Indulac was
able to purchase its raw milk at a deflated price, UHT milk became
significantly less expensive than fresh milk -- a phenomenon unique
5
Plaintiff Suiza applied for, and was denied, a license to
process UHT milk itself.
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to Puerto Rico -- causing Indulac's UHT milk to begin to dominate
the Puerto Rican milk market.
Aside from enjoying a near-monopoly on UHT milk, Indulac
also has broad influence over ORIL's regulatory decisions. When,
in 2002, Indulac began to guarantee supplemental minimum payments
to farmers for raw milk, it was the Board of Indulac, and not ORIL,
which determined what were the dairy farmers' costs and what
constituted reasonable profits.6 And, since the Board of Indulac
consisted entirely of dairy farmers,7 they were essentially setting
their own cost of production and margin. Even as late as February
2006, during the course of this litigation, when ORIL raised the
6
Indulac's payments to farmers became necessary to remedy the
decrease in the farmers' compensation that resulted from the
decline of the fresh milk market. The district court explains:
When the demand for fresh milk falls, less fresh milk is
retained and less milk at the higher price went
originally into the weighted average calculation . . .
from which the farmer is paid for its raw milk. Stated
differently, a decrease in the demand of fresh milk (made
from retained milk) and an increase in the demand for UHT
(made from surplus) affected negatively the farmer's
average and now the possibility of paying the farmer at
the established level.
Vaquería Tres Monjitas, No. 04-1840, at *23.
7
While, initially, the Board of Indulac consisted of a mixture of
dairy farmers and milk processors, the farmers increasingly
dominated the Board until December of 2002, when its bylaws were
officially amended to exclude milk processors altogether. During
this time, ORIL's regulations were also amended to dilute the power
of milk processors on its Administrative Board. Vaquería Tres
Monjitas, No. 04-1840, at *24-25; Act of Dec. 19, 2002, No. 278, 5
P.R. Laws Ann. 1099(e) (2005 & Supp. 2008).
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price to be paid by Indulac for surplus raw milk to 32 cents per
quart from 10 cents per quart, it did so using figures provided by
Indulac itself. ORIL held no hearings of any kind, nor did the
Administrator conduct any examination into Indulac's operations.
In addition to being forced to subsidize Indulac, Tres
Monjitas and Suiza found their financial situation changing from
year to year with no forewarning. The district court extensively
cataloged these regulatory shifts, of which we highlight but a few.
Act 34 requires ORIL to reassess its price structure on a yearly
basis and to make necessary adjustments based on the cost of milk
production and market demand for milk products. See 5 P.R. Laws
Ann. §§ 1107(e) (2005 & Supp. 2008). Yet, ORIL employed no set
standards to judge the profit margins of milk processors, nor did
it publish its rules of cost analysis. ORIL failed, for instance,
to adopt a consistent and scientific measurement of shrinkage,
which represents the volume of milk regularly lost in the
processing stage and is required for an accurate measurement of
total production. Additionally, in calculating plaintiffs'
profits, ORIL neglected to follow a consistent standard in
determining whether to allow income reductions for returns of
product, a common variable. The same was true for discounts to
agents and promotions, and for the costs and fees of professional
experts utilized by plaintiffs to enable compliance with
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regulations.8 And, in April of 2007, ORIL, for the first time in
its history, began to take plaintiffs' profits from non-milk
products into account in its income assessment.9
To make matters worse, some of ORIL's estimates have been
based on clearly outdated economic figures. For instance, the raw
milk rate for fresh milk processors effective in May 2005 used cost
numbers from 2003. These calculations failed to account for the
tremendous increase in prices of essential production elements such
as fuel, electricity, and resin that took place in 2004. Likewise,
for its 2005 price order, ORIL used the milk production numbers
from 2003, even though 2004's figures demonstrated a significant
decline, evidencing a consistent trend of reduced production, which
ORIL inexplicably failed to take into account.
Such determinations as to plaintiffs' production costs,
the price of raw milk, and the price at which they could sell fresh
milk to consumers, allowed ORIL to control the milk processors'
rates of return. ORIL chose that this rate should be 10%,10 taking
8
Such reductions were routinely permitted for Indulac.
9
In contrast to ORIL's consideration of plaintiffs' non-milk
profits, Indulac's non-milk profits were not taken into
consideration.
10
This is merely ORIL's estimated figure. In fact, evidence
before the district court showed that plaintiffs never achieved a
10% rate of return, and even suffered heavy losses. In the fiscal
year 2001, Tres Monjitas and Suiza jointly sustained loses of six
million eight hundred and ninety six thousand dollars
($6,896,000.00). In 2002, their losses totaled eight million three
hundred and sixty four thousand dollars ($8,364,000.00); and in
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that figure from a 1997 average rate of return for milk processors
in the United States. Not only was this figure outdated, but it
also failed to account for the economic particularities of the
Puerto Rican milk industry. In fact, the district court found that
ORIL never conducted any reasonable economic study on this matter.
The district court further found that, while defendants'
goals were to maintain stable milk production and pricing, their
regulatory and market practices had the effect of creating a dire
and unsustainable situation in Puerto Rico's milk industry. The
low price of Indulac's UHT milk allowed it to dominate the market,
even though FFIL acknowledges that fresh milk consumption is
preferable for health reasons. And, though the demand for fresh
milk was dwindling, Tres Monjitas and Suiza were required to
purchase all raw milk produced by dairy farmers at an inflated
price, and to sell the ever-increasing surplus to Indulac at a
deflated price. Plaintiffs claim that continued regulation in this
manner would render them insolvent, leading to the collapse of
Puerto Rico's milk industry, as they are the only two entities
currently collecting raw milk from the dairy farmers, and are the
only entities processing fresh milk for consumers.
2003, they lost ten million dollars ($10,000,000.00). See Motion
Requesting Injunctive Relief Under Fed. R. Civ. P. 65(a), Docket
No. 2, p.12.
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B. Procedural History
On August 13, 2004, Tres Monjitas and Suiza filed a
complaint in the United States District Court for the District of
Puerto Rico. They sought a declaration under the Federal
Declaratory Judgment Act, 28 U.S.C. §§ 2201, et seq., that the
decisions, acts and orders issued by the Administrator are
unconstitutional. They also sought to enjoin ORIL's regulatory
scheme pursuant to Fed. R. Civ. P. 65(a).
Specifically, plaintiffs alleged that ORIL's regulatory
structure, which precluded them from making a reasonable profit in
their milk business, constituted a confiscation of property in
violation of the Takings Clause. See U.S. Const. amend. V. ("No
person shall be . . . deprived of . . . property, without due
process of law; nor shall private property be taken for public use,
without just compensation."). In addition, they claimed that
defendants violated their Fourteenth Amendment due process and
equal protection rights by acting in an arbitrary and
discriminatory fashion in guaranteeing Indulac a subsidized price
to produce UHT milk, and favoring Indulac's interests over those of
other milk processors. Plaintiffs' final constitutional claim
alleged that defendants' regulatory practices violated the dormant
Commerce Clause by unduly restraining interstate commerce in milk.
U.S. Const. art. 1, § 8, cl. 3. In addition to their constitutional
claims, plaintiffs alleged that defendants violated Puerto Rico
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state law, because their actions contravened the legislative intent
of Act 34.
Pursuant to these claims, on August 20, 2004, plaintiffs
moved for a preliminary injunction to preclude the Administrator of
ORIL from continuing to implement the complained-of regulatory
practices and orders. Plaintiffs claimed that irreparable injury
would result if this scheme were kept in place much longer, as they
would soon face insolvency. Their insolvency, plaintiffs argued,
would have drastic consequences for the people of Puerto Rico, as
Tres Monjitas and Suiza alone have the capacity to process the
quantity of fresh milk required to supply the Commonwealth. They
contrasted their dire outlooks with evidence of Indulac's high
profitability, arguing that preliminary injunctive relief would not
harm defendants as much as its absence would harm plaintiffs.
After conducting 51 intensive evidentiary hearings over
the course of one-and-a-half years, on July 13, 2007, the district
court granted the preliminary injunction, ordering that (1) all
milk processors pay the same amount for raw milk, (2) that the
Administrator of ORIL develop and implement rational, non-
discriminatory parameters for price regulation, and (3) that the
Administrator adopt a temporary mechanism to allow plaintiffs to
recover a fair rate of return from the year 200311 until the
11
The district court found that plaintiffs "have suffered for the
periods from 2003 to 2007 a Due Process and Equal Protection
violation reaching levels of a 'taking.'"
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implementation of the new regulatory regime (this mechanism is
referred to as "regulatory accrual").
Defendants timely appealed, arguing that (a) the district
court should have abstained from hearing the case pursuant to the
Burford abstention doctrine; (b) the portion of the district
court's injunction order requiring ORIL, a state entity, to
establish a regulatory accrual account constituted issuance of
retroactive compensatory relief, in violation of defendant's
sovereign immunity; (c) the district court erred in denying
defendants' equitable defenses, namely the clean hands doctrine,
laches, and estoppel; and (d) the district court erred in applying
the standard for issuance of a preliminary injunction.12
II. Discussion
A. Abstention
Defendants argue that the district court should have
abstained from hearing this case under the doctrine set forth in
Burford v. Sun Oil Co., 319 U.S. 315 (1943). The district court
declined to do so, stating that Burford does not apply "when the
effect of an entire regulatory scheme is challenged as
unconstitutional." Vaquería Tres Monjitas, No. 04-1840, at *56
(quoting Tenoco Oil Co. v. Dep't. of Consumer Affairs, 876 F.2d
1013, 1029 n.23 (1st Cir. 1989)). We agree.
12
Defendants Indulac and PRDFA also filed motions to stay the
injunction pending appeal, which were dismissed voluntarily.
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1. Applicable Law
In Burford, the Supreme Court upheld a federal court's
decision to abstain from reviewing an order of the Texas Railroad
Commission granting Burford a permit to drill oil wells in east
Texas. Plaintiff, Sun Oil, had brought suit not to determine the
constitutional validity of the state regulation, which had been
settled in prior litigation, but to challenge whether the order was
reasonable under a state statute. Burford, 319 U.S. at 328, 332.
While the plaintiffs in Burford did allege that the commission
order violated their right to due process, resolving the issues on
appeal required interpreting state, not constitutional, law. Id.
at 331. Since the constitutional validity of the commission's
complex procedures was not at issue, the Supreme Court recognized
that the federal court was simply being called upon to review the
state agency's determination in light of the policy outlined by
state law. Id. at 320-21, 331. On these facts, the Court held
that, despite the existence of federal subject matter jurisdiction,
abstention was proper to maintain the balance between state control
over its own regulatory policies and federal oversight. Id. at
327, 332.
Later, in New Orleans Pub. Serv., Inc. v. Council of New
Orleans (NOPSI), the Supreme Court clarified that a federal court
should abstain from hearing a case that involved "difficult
questions of state law bearing on policy problems of substantial
-16-
public import," or where federal intrusion may prove "disruptive of
state efforts to establish a coherent policy with respect to a
matter of substantial public concern."13 491 U.S. 350, 361 (1989)
(citation omitted). We have observed that NOPSI's "reformulation"
of Burford, "can be read expansively or narrowly and is ultimately
ambiguous." Pub. Serv. Co. of New Hampshire v. Patch, 167 F.3d 15,
27 (1st Cir. 1998).
We believe that an expansive reading of NOPSI -- one that
would require federal courts to abstain from hearing any case
involving important state regulatory policies -- is not consistent
with Supreme Court precedent or with our own. Indeed, it would fly
in the face of the Supreme Court's repeated admonitions that
Burford abstention be "the exception, not the rule." Moses H. Cone
Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 14 (1983)
(internal quotations and citation omitted). Moreover, cases since
NOPSI have not treated Burford as severely curtailing federal
courts' jurisdiction. See, e.g., Quackenbush v. Allstate Ins. Co.,
517 U.S. 706, 728 (1996) (stating that "Burford represents an
extraordinary and narrow exception to the duty of the District
Court to adjudicate a controversy properly before it.") (internal
quotations omitted). While Burford recognizes that states should
13
In NOPSI, the Court held that a federal court did not need to
abstain from deciding whether the Federal Energy Regulatory
Commission's decision that a utility's participation in a nuclear
power plant venture was reasonable preempts a state agency's
determination of reasonableness of the same issue.
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be given leeway to pursue their prerogatives through their own
agencies and courts without federal interference, binding precedent
makes clear that a federal court need not abstain from hearing a
case involving state regulatory administration "merely because
resolution of a federal question may result in the overturning of
a state policy." Zablocki v. Redhail, 434 U.S. 374, 379 n.5
(1978).
A narrow reading of NOPSI, on the other hand, best
comports with not only Supreme Court, but also this Circuit's
precedent. In Bath Mem'l Hosp. v. Maine Health Care Fin. Comm'n,
we recognized that Burford abstention must only apply in "unusual
circumstances," when federal review risks having the district court
become the "regulatory decision-making center." 853 F.2d 1007,
1012-13 (1st Cir. 1988). Thus, when a federal court's interference
would effectively create a dual review structure for adjudicating
a state's specific regulatory actions, abstention under Burford may
be appropriate. Id. We observed in Patch that "[t]he fundamental
concern in Burford [was] to prevent federal courts from bypassing
a state administrative scheme and resolving issues of state law and
policy that are committed in the first instance to expert
administrative resolution." 167 F.3d at 24 (citing NOPSI, 491 U.S.
at 361-64; Bath, 853 F.2d at 1014-15). Abstention is not
warranted, however, when a claim requires the federal court to
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decide "predominating federal issues that do not require resolution
of doubtful questions of local law and policy." Id.
With this background in mind, we review the district
court's decision not to abstain from hearing plaintiffs' claims.
The district court's findings of law regarding the requirements of
abstention doctrine in the abstract are reviewed de novo, while the
application of particular facts to that law is reviewed for abuse
of discretion. Sevigny v. Employers Ins. of Wausau, 411 F.3d 24,
26-27 (1st Cir. 2005).
2. Analysis
We believe that the district court properly declined to
abstain from hearing plaintiffs' claims, as (1) the district
court's participation does not disrupt ORIL's role as the
regulatory decision-maker or interfere with the agency's ability to
apply its expertise to local facts in establishing a coherent state
policy; and (2) the heart of plaintiffs' action lies in the
constitutional challenge to ORIL's decision-making process as a
whole, and not to the reasonableness of their particular
determinations.
Defendants argue that plaintiffs' claims require the
district court to conduct an inquiry into the specifics of ORIL's
orders, pursuant to its own construction of state law and policy,
which is precisely the type of intrusion abstention doctrine seeks
to avoid. We disagree.
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While Tres Monjitas and Suiza certainly allege that
ORIL's orders were erroneous in substance, the district court was
not required -- and specifically declined -- to rule on their
merits, opting instead to focus on ORIL's decision-making process,
which it found to be arbitrary on the whole. Vaquería Tres
Monjitas, No. 04-1840, at *62-67. In discussing the rates of
return set by ORIL, for example, the district court expressed the
narrowness of its finding:
The court does not question the established
fee per se; the error is in not performing a
reasonable, timely economic study setting the
reasonable rate and the continuing usage of
stale data as to rate of return (1997), and
further not considering currently doing
business in the Puerto Rican market under
current economic realities. The court does not
hint at any figure as to reasonable rate of
return. This rate belongs to the setting by
the Administrator, not the court.
Id. at *37 (emphasis added). We do not believe that the decisions
in the Burford line of cases prevent federal courts from
undertaking such inquiries.
Furthermore, we refuse to treat, as defendants assert,
the district court's review of the facts surrounding the dispute as
evidencing the need for abstention. In Bath, we voiced our concern
about having federal courts "conduct highly individualized review
of particular, firm-specific regulatory decisions." 853 F.2d at
1014 (interpreting the Supreme Court's reasoning in Burford). Yet,
the fact that the district court peered into the substance of
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ORIL's determinations does not run afoul of our warning in Bath.
The district court did not examine ORIL's decisions to gauge the
wisdom of their outcomes, but rather to determine whether or not
they were arbitrary and discriminatory, pursuant to the
constitutional questions posed by plaintiffs.
Defendants next argue that, to survive Burford
abstention, plaintiffs' suit should have taken the form of a facial
challenge to Act 34, and not an attack upon ORIL's orders, which it
had full authority to promulgate. We believe this argument is
based upon a misconstruction of Burford, the subsequent case law,
and the case at hand.
In Burford, plaintiffs' challenge centered on the
reasonableness of a particular administrative order. Since they
did not attack either the authority of the Texas Railroad
Commission or its adjudicative methods, the constitutional issue
was merely a gloss upon the challenge to the administrative
decision, the wisdom of which was truly at the heart of the matter.
See Burford, 319 U.S. at 328 n.24; see also Ala. Pub. Serv. Comm'n
v. S. Ry. Co., 341 U.S. 341, 343 (1951) (holding that abstention
was proper when the plaintiff's claim consisted of a challenge to
an administrative decision born out of a scheme already held
constitutional by the Supreme Court).
That is plainly not the case here. Plaintiffs do not
claim that ORIL violated their rights to due process, for instance,
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by issuing an order contrary to state policy. Rather, they claim
that the entire system by which ORIL renders its decisions is
unconstitutional. As we stated in Bath, "abstention in the Burford
line of cases rest[s] upon the threat to the proper administration
of a constitutional state regulatory system." 853 F.2d at 1013. In
Tenoco Oil, we stated even more plainly: "Burford abstention does
not apply . . . when the effect of an entire state regulatory
scheme is challenged as unconstitutional." 876 F.2d at 1028 n.23.
Defendants further contend that, since Bath dealt with
facial challenges to a state law, and given that Bath forms the
basis for the above statement in Tenoco Oil, neither case applies
to the case at hand. This is so, they argue, because plaintiffs do
not challenge Act 34 on its face, but rather as it is applied. We
believe such a construction to be unduly restrictive.
A federal court need not abstain from hearing a
constitutional claim against an administrative scheme simply
because the constitutionality of its originating statute is not
contested. In Planned Parenthood League of Massachusetts v.
Bellotti (Bellotti II), for instance, we held that it was
irrelevant for the Burford abstention analysis that plaintiffs
mounted an "as-applied" challenge to a statute, as opposed to a
facial one. 868 F.2d 459 (1st Cir. 1989). Bellotti II dealt with
a challenge to a Massachusetts statute requiring a minor seeking an
abortion to obtain either parental consent or have the restriction
-22-
waived by a court order. Plaintiffs initially sued to enjoin state
officials from enforcing the statute, based on a facial challenge
to the law under Articles I, II, X, and XVI of the Massachusetts
Declaration of Rights. Injunctive relief was denied, and
plaintiffs amended their complaint to include an as applied
challenge. Id. at 461. The district court dismissed the action,
however, out of concern that comity required a federal court to
abstain from meddling in the state's internal operations. Id. at
462-63; Planned Parenthood League of Mass. v. Bellotti (Bellotti
I), 608 F. Supp. 800, 803-05 (D. Mass. 1985). We reversed, holding
that abstention was not appropriate, as "what will occur is not an
ongoing intermeddling with the state judiciary but a prohibition of
an unconstitutional process." Bellotti II, 868 F.2d at 465
(emphasis added). We stated that, rather than focusing on either
party's characterization of the case, a federal judge must perform
an independent evaluation and "assess the essential nature of the
litigation to see whether its proper objectives could be attained
without the intrusion into internal operations of the state
judiciary." Id. at 466 (emphasis added). We then held that the
case was not a proper one for abstention, as plaintiffs' main
objective was to enjoin an unconstitutional state process. Id. at
465-66.
Like Bellotti II, the case at hand involves a challenge
to a regulatory process, which places it squarely within the line
-23-
of cases disfavoring abstention, and it is no impediment that
plaintiffs do not mount a facial challenge to Act 34. While
federal courts should refrain from entering into the technicalities
of states' regulatory apparatuses, they should not decline to hear
cases that challenge the whole of those regulatory schemes under
the United States Constitution. Plaintiffs do not seek federal
review of a price order, nor are they asking the Court to interpret
local law. Rather, they seek to have ORIL's current decision-
making process invalidated as contrary to the guarantees of due
process and equal protection. Theirs is a broad challenge to a
regulatory scheme, which plaintiffs contend has no set standards
and affords the Administrator unbridled discretion over rate-
making. In other words, Tres Monjitas and Suiza do not seek to
overturn an administrative decision, but to fundamentally alter the
way in which ORIL issues its orders. See, e.g., id., 868 F.2d at
466 ("What PPLM seeks here is not for the federal court to tinker
with Massachusetts' scheme of regulating minors' abortions, but for
the court to dismantle it."). Abstention is not proper in such
circumstances.
Finally, the nature of the injunctive order issued
demonstrates that the question presented to the district court was
not one as to which the court was required to abstain. The order
does not second-guess the Administrator's determinations, nor does
it set a new regulatory standard. While the order does set the
-24-
price to be paid by all processors for raw milk at 55 cents per
quart, this figure was not the product of the court's own
calculation. Rather, it represents the cost plus fair return rate
of the dairy farmers that was last established by ORIL in 2006. In
adopting the 55 cent figure, the district court's order establishes
parity among the processors at the level that ORIL itself
calculated. Thus, in deferring to ORIL's own findings, the
district court does not engage in the sort of fact-specific
technical inquiry Burford prohibits. Overall, the order requires
that ORIL develop and implement reasonable, intelligible standards
for future determinations.14 ORIL remains free to continue to apply
its expertise to distinctively local regulatory facts.15 But, it
must do so in a way that protects the Due Process and Equal
Protection rights of those subject to its regulations.16
14
"In a period of no more than thirty (30) days, the Administrator
will put into effect nondiscriminatory, rational and scientific
regulatory standards that will allow him to determine costs and
fair profits return for all the participants in the Puerto Rico
regulated milk market." Vaquería Tres Monjitas, No. 04-1840, at
*94.
15
"The Administrator shall perform a study as to the economic
realities of doing business in Puerto Rico and the particular 'fit'
of Puerto Rico into any economic model which may be used from other
jurisdictions." Vaquería Tres Monjitas, No. 04-1840, at *94.
16
"When the Administrator eventually determines to change the
price to be paid to said dairy farmers, all market participants
using raw milk to process fluid milk will pay the same amount for
the milk." Vaquería Tres Monjitas, No. 04-1840, at *94.
-25-
Thus, we hold that the district court properly declined
defendants' invitation to abstain from entertaining this action.
B. Eleventh Amendment
As part of the preliminary injunction granted by the
district court, ORIL was ordered to develop and implement a
mechanism to compensate Plaintiffs for the deficient rate of return
that was mandated by ORIL from the year 2003 until the date of the
district court's decision:
The Administrator is ordered to adopt a
temporary mechanism that will allow the
processors to recover the new rate of return
they are entitled to (whatever that may be)
for the year 2003 (base cost year of the
present structure) and up to the day when they
begin to recover said rate based on the new
regulatory standards and corresponding order.
The Administrator may so act through
regulatory accruals, special temporary rates
of return or any other available mechanism of
his choosing.
Vaquería Tres Monjitas, No. 04-1840, at 95-96. The mechanism
developed by the parties involved a small surcharge17 to be applied
to every quart of milk sold in the Commonwealth, which would then
be placed into an accrual account for the benefit of Tres Monjitas
and Suiza.
On appeal, defendants contend that this order calls for
retroactive compensatory relief, which is barred by the Eleventh
Amendment. Plaintiffs respond that such relief is allowed, even if
17
As it stands, the surcharge is 1.5 cents per quart.
-26-
the regulatory accrual were to be characterized as retroactive, as
it would be derived from milk consumers only, and not from the
coffers of the Commonwealth. We agree that the Eleventh Amendment
is not implicated.
1. Applicable Law
The Eleventh Amendment states that "[t]he Judicial power
of the United States shall not be construed to extend to any suit
in law or equity, commenced or prosecuted against one of the United
States by Citizens of another State, or by Citizens or Subjects of
any Foreign State." U.S. Const. amend. XI. The Supreme Court has
held that the doctrine of sovereign immunity reaches beyond the
words of the Eleventh Amendment, extending immunity to state
governments in suits not only by citizens of another state, but by
its own citizens as well. Alden v. Maine, 527 U.S. 706 (1999). An
administrative arm of the state is treated as the state itself for
the purposes of the Eleventh Amendment, and it thus shares the same
immunity. See Hafer v. Melo, 502 U.S. 21, 25 (1991); see also
Pastrana-Torres v. Corporación de P.R., 460 F.3d 124, 126 (1st Cir.
2006) ("[Eleventh Amendment] immunity applies only to the states
themselves and entities that are determined to be arms of a
state.").
While a state may not be sued directly absent its own
consent, the Ex Parte Young doctrine permits suits to proceed
against state officers in their official capacities to compel them
-27-
to comply with federal law. Ex Parte Young, 209 U.S. 123 (1908).
This stems from the notion -- some say fiction -- that, since a
state could not authorize an official to violate federal law, by
doing so, a state official is stripped of her authority and thus a
suit against her does not implicate the state's sovereign immunity.
Id. at 159-60; see also Pennhurst State School and Hospital v.
Halderman, 465 U.S. 89, 102-03, 105 (1984) (discussing the "fiction
of Young"). Such suits, however, may only seek prospective
injunctive or declaratory relief; they may not seek retroactive
monetary damages or equitable restitution. Edelman v. Jordan, 415
U.S. 651, 664-65 (1974). If the court were to order a state
official in her official capacity to dispense compensatory relief,
the monies would be drawn from the state treasury and run afoul of
the Eleventh Amendment. Id. at 664. We have observed that "[t]he
line drawn by the Court represents a compromise between the impulse
to preserve state autonomy and the need to enforce federal law.
Injunctions are necessary to assure the supremacy of national law;
damage awards are not." Santiago v. Corporación de Renovación
Urbana y Vivienda de P.R., 554 F.2d 1210, 1212 (1st Cir. 1977).
2. Analysis
The issue here is whether or not the manner of relief
ordered by the district court runs afoul of the Eleventh
Amendment's prohibition against retroactive damages that reach the
state treasury. Since the harm to be remedied by the district
-28-
court's regulatory accrual order was the deficient rate of return
imposed upon Tres Monjitas and Suiza since 2003, defendants argue
that it is necessarily backward-looking, and thus barred by Supreme
Court and First Circuit precedent.
Plaintiffs urge this court to reject these arguments on
either of two possible grounds. First, plaintiffs maintain that
the regulatory accrual is not meant to compensate Tres Monjitas and
Suiza for the revenue lost under ORIL's scheme, but rather to
rebuild their capital bases, which are, collectively, $5 million in
the red. They claim that, even if the price of milk were raised to
allow a reasonable rate of return, the processors could not make
any profit until they rebuild their capital bases, meaning that the
regulatory accrual is a necessary component of any prospective
relief awarded. Plaintiffs alternatively argue that, even if the
form of relief is deemed retroactive, sovereign immunity should
present no bar, as none of the compensation would come from the
state treasury.
We decline to rule on plaintiffs characterization of the
regulatory accrual as prospective, as we believe that their second
argument sufficiently supports their position.
Defendants argue that it is irrelevant whether or not the
remedy ultimately is derived from the state treasury, citing
Edelman for the proposition that prospective relief is available
even if compliance therewith requires expenditures from the state
-29-
treasury, but retrospective relief is always prohibited. Edelman,
415 U.S. at 667-68. We are not so convinced.
Defendants provide no support for their contention that
retrospective relief that does not reach the state treasury is
barred by sovereign immunity. Rather, the cases cited by
defendants, including Edelman, involve requests for retroactive
compensation that would invariably come out of state treasuries.
See, e.g., id., at 667 ("[Relief sought] requires payment of state
funds, not as a necessary consequence of compliance in the future
with a substantive federal-question determination, but as a form of
compensation . . . ."); Papasan v. Allain, 478 U.S. 265, 279 (1986)
(plaintiffs sought funds directly from the state to fund school
districts).
In fact, both the Supreme Court and this Circuit have
consistently considered the source of relief as being of paramount
importance to Eleventh Amendment considerations. In Hess v. Port
Authority Trans-Hudson Corp., the Supreme Court noted that "the
impetus for the Eleventh Amendment [is] the prevention of
federal-court judgments that must be paid out of a State's
treasury." 513 U.S. 30, 48 (1994). In even stronger terms, the
Court later added, "[i]n sum . . . the vast majority of Circuits
. . . have concluded that the state treasury factor is the most
important factor to be considered . . . and, in practice, have
generally accorded this factor dispositive weight." Id. at 49
-30-
(emphasis added) (internal quotations and citations omitted). This
Circuit has followed this mandate. In Libby v. Marshall, we
stated:
The damage the Eleventh Amendment seeks to
forestall is that of the state's fisc being
subjected to a judgment for compensatory
relief. Only if the state is forced to use
funds from the state treasury to satisfy a
compensatory judgment do the adverse
consequences that the Eleventh Amendment
prohibits occur.
833 F.2d 402, 406 (1st Cir. 1987).
Here, the money in question would come directly from
consumers of milk in Puerto Rico. Unlike a tax, it would be
neither collected by government entities nor retained in the
Commonwealth's treasury. Apart from the initial price order, no
state action is required to implement this remedial scheme, which
would, in no way, reach the coffers of the Commonwealth. Thus,
because no state funds are implicated by the district court's
order, we hold that the Eleventh Amendment's prohibition against
retrospective relief does not apply.
Defendants alternatively argue that the regulatory
accrual is impermissible by attempting to frame the relief as, in
essence, ordering the payment of monetary damages in just
compensation for a regulatory taking. They then argue that several
circuits have dismissed Takings Clause actions against state
officials in their official capacities, as the Eleventh Amendment
bars a federal court from issuing just compensation relief against
-31-
a state entity. For this proposition, they cite Seven Up Pete
Venture v. Brian Schweitzer, 523 F.3d 948 (9th Cir. 2008), and DLX
v. Kentucky, 381 F.3d 511 (6th Cir. 2004). Defendants also point
to this Circuit's precedent, including Ortiz de Arroyo v. Romero
Barceló, 765 F.2d 275, 280 (1st Cir. 1985), which states that, in
a case involving governmental deprivation of property in violation
of the Fifth and Fourteenth Amendments, "the court may not award
the value of the diminished property right; it may issue only
declaratory or injunctive relief." See also Culebra Enter. Corp.
v. Rivera Ríos, 813 F.2d 506, 512 (1st Cir. 1987); Citadel Corp. v.
P.R. Highway Auth., 695 F.2d 31, 33 (1st Cir. 1982); Pamel Corp. v.
P.R. Highway Auth., 621 F.2d 33, 36 (1st Cir. 1980).
We are not persuaded, however, that the present situation
should be analyzed under defendants' characterization. Unlike any
of the cases relied upon by defendants, here there has been no
award of damages that the state must pay. That an equitable remedy
results in the payment of monies to plaintiff does not, in itself,
render the relief monetary compensation for a taking. The district
court's order does not require ORIL or the Department of
Agriculture to provide just compensation, or any monetary award for
that matter. As we have stated above, no measure of relief
fashioned by the district court would come from the state treasury.
Defendants have argued that this scheme is no different from a
federal court ordering the levying of a tax to pay equitable
-32-
restitution, which they contend no federal court has done. Yet,
whether Puerto Rico could levy a special tax to compensate Tres
Monjitas and Suiza is not the issue before this Court. Unlike a
tax, the milk surcharge of 1.5 cents per quart does not rely on the
state as an intermediary. Instead, the regulatory accrual operates
as any other regulation that raises by a small fraction the price
of milk for consumers, based on ORIL's determinations regarding
milk processors' costs, revenues, and rates of return.
For the foregoing reasons, we hold that the Eleventh
Amendment does not bar the form of relief granted by the district
court in its preliminary injunction.
C. Equitable Defenses
Defendants contend that the district court erred in
rejecting their equitable defenses of unclean hands, laches, and
estoppel. We review the lower court's ruling for abuse of
discretion. School Union No. 37 v. Ms. C., 518 F.3d 31, 35 (1st
Cir. 2008); Ansin v. River Oaks Furniture, Inc., 105 F.3d 745, 757
(1st Cir. 1997).
1. Unclean Hands
Our courts have long held the view that "[h]e who comes
into equity must come with clean hands." Dr. José S. Belaval, Inc.
v. Pérez-Perdomo, 488 F.3d 11, 15 (1st Cir. 2007) (quoting Keystone
Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 241 (1933)). This
is to say that we are skeptical of those who seek equitable relief
-33-
when they themselves have engaged in misconduct. For the defense
to apply, we have also routinely stated that the misconduct must be
"directly related to the merits of the controversy between the
parties." Id. (internal quotations omitted).
Defendants seek to invoke this defense, arguing that
"plaintiffs directly participated and approved the decision to
aggressively market Indulac's UHT milk and benefitted from the
results thereof." Whether or not this were true, this allegation
does not implicate the unclean hands defense, as defendants fail to
show -- or even explain -- how such actions constitute "misconduct"
on the part of the plaintiffs.
As the district court could have reasonably concluded
from the facts that plaintiffs were not complicit in any wrongdoing
related to the merits of this controversy, we hold that it did not
abuse its discretion in rejecting defendants' unclean hands
defense.
2. Laches
The doctrine of laches may bar a claim that was raised
after an inexcusable delay. "In order for laches to apply, the
district court must examine whether plaintiff's delay in bringing
suit was unreasonable and whether defendant was prejudiced by the
delay." Puerto Rican-American Ins. Co. v. Benjamin Shipping Co.
Ltd., 829 F.2d 281, 283 (1st Cir. 1987) (citing Costello v. United
States, 365 U.S. 265, 282 (1961)).
-34-
According to defendants, Tres Monjitas and Suiza began
experiencing losses as early as 1998, but waited until 2004 to
bring any claims. Such "slumber," they argue, voided their claims
for equitable relief.
Defendants, however, have not presented any evidence
indicating that the delay was either unreasonable or prejudicial,
nor have they made more than a half-hearted attempt to do so. As
a result, their argument fails. First, as the district court
found, "before the filing of this complaint, plaintiffs and the
Administrator were still meeting to try to reach a solution . . .
." Vaquería Tres Monjitas, No. 04-1840, at *11. It would be
unwise and inequitable to punish Tres Monjitas and Suiza for
attempting to settle their grievances through administrative
remedies and negotiations. Second, nowhere in their brief to this
court do defendants even allude to the issue of prejudice. They do
not allege that they have been in any way injured by the lapse of
time, nor have they shown that the passage of time has eroded "the
memory and life of witnesses, the muniments of evidence, and other
means of proof." Costello, 365 U.S. at 282 (quoting Brown v. Buena
Vista County, 95 U.S. 157, 161 (1877)) (internal quotation marks
omitted).
Considering that defendants have failed to satisfy the
standard for the application of the laches doctrine, we hold that
-35-
the district court did not abuse its discretion in failing to
dismiss the action on that basis.
3. Estoppel
Under 28 U.S.C. § 1738, federal courts must give "full
faith and credit" to the judgments arising out of state courts and
give them the same preclusive effect as would a court of that
state. Thus, a decision in state court collaterally estops
relitigation in a later action in federal court. Allen v. McCurry,
449 U.S. 90, 104-05 (1980) (preventing relitigation of habeas
corpus claim already decided in state court).
Defendants contend that, under Puerto Rican law, "an
administrative decision not reviewed by the party adversely
affected becomes final and firm as a commonwealth judgment."
Acevedo v. Western Digital Caribe, Inc., 140 P.R. Dec. 452, 465-66
(P.R. 1996) (internal citation omitted). They then argue that, as
the facts found in the orders issued by ORIL from 1998 to 2002 were
never challenged, they are "final and firm" and hold the same
preclusive effect as the decisions of a court of Puerto Rico,
rendering them unassailable in subsequent court actions.
Pastor-Ginorio v. R & G Mortg. Corp., Inc., 371 F. Supp. 2d 89, 92
(D.P.R. 2005).
This argument strains credibility. Under Puerto Rican
law, a claim may be precluded under the doctrine of res judicata if
there exists "the most perfect identity between the things, causes,
-36-
and persons of the litigants, and their capacity as such." 31 P.R.
Laws Ann. § 3343. Res judicata cannot apply here to bar Tres
Monjitas' and Suiza's claims, as there has not been a prior court
decision on these issues, in an action between these same parties
in interest. In addition, res judicata will present no obstacle
"when the litigant was denied a 'full and fair opportunity to
litigate' his claims in the earlier proceeding; in this situation,
application of res judicata would violate due process of law."
Arecibo Radio Corp. v. Com. of P.R., 825 F.2d 589, 592 (1st Cir.
1987) (quoting Allen, 449 U.S. at 101).
Tres Monjitas and Suiza frequently received inadequate
notice and opportunity to challenge ORIL's regulatory decisions.
For example, a 2007 order for the first time took into
consideration plaintiff's income from unregulated non-milk
products. This new parameter was imposed upon plaintiffs without
prior notice or opportunity to be heard. ORIL similarly held no
hearings of any sort when it readjusted the percentage of
plaintiffs' participation in school lunch programs, decreasing
Suiza's share by 5.06% and giving it to Tres Monjitas. Time and
time again, ORIL set and reset regulations relating to the
measurement of the processors' milk production and income without
giving plaintiffs an explanation or a reasonable opportunity to
challenge the decisions.
-37-
Also, since defendants have clearly stated that they do
not wish to challenge the district court's findings of fact, we do
not see how their invocation of Pastor-Ginorio serves their
argument. Even if the Administrator's determinations of facts are
to be given preclusive effect, the orders issued did not contain
any adjudicatory decisions or rulings of law that are immune from
review.
Overall, defendants' argument assumes too much. Their
construction of the law would have us hold that the decisions of
ORIL's Administrator become unreviewable simply by his say-so.
This we cannot do. We hold that the district court did not abuse
its discretion in rejecting defendants estoppel defense.
D. Preliminary Injunction
The district court granted the preliminary injunction
after finding that the plaintiffs' claims met the traditional four-
part test, which requires consideration of (1) the likelihood that
the moving party will succeed on the merits; (2) the possibility
that, without an injunction, the moving party will suffer
irreparable harm; (3) the balance of relevant hardships as between
the parties; and (4) the effect of the court's ruling on the public
interest. Waldron v. George Weston Bakeries Inc., 570 F.3d 5, 9
(1st Cir. 2009).
On appeal, defendants contend that the court erred in its
application of the four-part preliminary injunction standard. In
-38-
addition, they argue that the court's order improperly changed the
status quo by transforming Puerto Rico's milk regulatory scheme,
whereas the specific purpose of a preliminary injunction is to
maintain current conditions until the dispute is decided on the
merits.
We review the district court's grant of the preliminary
injunction for abuse of discretion. Waldron, 570 F.3d at 9. We
will set aside the ruling "only if [we are] persuaded that the
lower court mistook the law, clearly erred in its factual
assessments, or otherwise abused its discretion in granting the
interim relief." McGuire v. Reilly, 260 F.3d 36, 42 (1st Cir.
2001). Within this assessment, findings of fact are reviewed for
clear error, and conclusions of law are reviewed de novo, while
"[j]udgment calls and issues that demand the balancing of
conflicting factors are reviewed deferentially." Wine & Spirits
Retailers, Inc. v. Rhode Island, 418 F.3d 36, 46 (1st Cir. 2005)
(internal citations omitted).
1. Likelihood of Success
After extensively analyzing the factual record and the
claims put forth, the district court found that there existed a
likelihood that Tres Monjitas and Suiza would succeed on the merits
of their claims. In particular, the court found:
[V]iolations of Due Process, Equal Protection
and the Takings Clause, a pattern of lack of
standards, change in standards with unfettered
discretion, use of stale figures, and lack of
-39-
an appropriate standard as to fair rate of
return in the regulations set by the regulator
all pointing to a taking "pursuant" to
Duquesne Light Co. [v. Barasch, 488 U.S. 299,
307 (1989)] and Tenoco Oil, 876 F.2d at 1026-
1027.
Vaquería Tres Monjitas, No. 04-1840, at *91. Defendants challenge
this determination as to plaintiffs' Takings Clause, Due Process,
and Equal Protection Claims.
However, we need only find that one of the district
court's bases for granting injunctive relief is proper to affirm
the grant of the preliminary injunction. We believe that
sufficient evidence exists in the record to support the district
court's determination that Tres Monjitas and Suiza have a
likelihood of success on the merits of their Due Process claims.18
Plaintiffs' Due Process challenge arises out of their
assertion that the regulatory structure of the Puerto Rican milk
industry was beholden to the whims of the Administrator. In
addition, they claim that the use of unscientific, stale, and
clearly erroneous figures regarding production costs and rates of
return nearly drove them out of business. These circumstances,
plaintiffs argue, were made possible by the lack of operating
standards, which gave the Administrator unchecked power to issue
18
Since the Due Process Clause violation is sufficient for the
district court's grant of injunctive relief, we see no need to
reach the Court's determinations regarding the likelihood of
success on the Equal Protection and Takings Clause claims. That we
refrain from reaching these issues should not be regarded as a
commentary on their relative merits.
-40-
arbitrary determinations. They cite as evidence numerous
instances, recounted above, in which the standards ORIL utilized to
calculate their income, milk production, or profits changed without
warning or rationale.
Defendants argue that allowing Indulac to process surplus
milk into UHT and other milk by-products was a reasonable way to
support dairy farmers year-round, quell disputes between the
farmers and processors, and avoid waste. They cite the difficulty
of producing a reliable supply of milk in Puerto Rico as dictating
a need for regulation and for the role played by Indulac in
stabilizing milk production. Thus, they argue, since these
regulations are rationally related to a legitimate government
purpose, they meet the requirements of due process, and the
district court therefore erred in finding that plaintiffs had a
likelihood of success on the merits of their claims.
The Supreme Court has cautioned that courts should
refrain from substituting their regulatory wisdom for that of the
legislature, explaining that a court's Due Process inquiry should
be satisfied "[i]f the laws passed are seen to have a reasonable
relation to a proper legislative purpose, and are neither arbitrary
nor discriminatory." Nebbia v. New York, 291 U.S. 502, 537 (1934).
Likewise, in Tenoco Oil, we recognized that this inquiry should
focus on "whether a program's procedures are inadequate or whether,
overall, a program is arbitrary, discriminatory or irrelevant to a
-41-
legitimate legislative goal." 876 F.2d at 1021 (citing Pennell v.
City of San Jose, 485 U.S. 1, 11 (1988)). Based on these
standards, we have no trouble finding that the district court did
not abuse its discretion in finding that plaintiffs had a
likelihood of success on their Due Process claims.
First, while the district court agreed with defendants
that Puerto Rico has a legitimate state interest in stabilizing
milk production and protecting the livelihoods of dairy farmers, it
found there was no rational nexus between the regulatory scheme
established by ORIL and these goals. Vaquería Tres Monjitas, No.
04-1840, at *59-60. The regulations clearly benefit Indulac, a
processor of UHT milk, to the detriment of Tres Monjitas and Suiza,
the only fresh milk processors in Puerto Rico. As a result of
plaintiffs' forced subsidy, Indulac's market dominance depleted the
fresh milk market and injured key components of the milk industry,
the processors, to the point of near-insolvency. While the
Administrator could have rationally decided that Indulac's
operation would provide a stabilizing effect, the measures that it
took appear to have been specifically engineered to achieve the
opposite result - the benefit of Indulac to the detriment of the
milk processors and, ultimately, the milk market. Thus, the
district court reasonably concluded that the scheme created by ORIL
cannot satisfy rational basis review, as "the elimination of one of
the components of the industry is 'demonstrably irrelevant to the
-42-
policy the Legislature is free to adopt.'" Vaquería Tres Monjitas,
No. 04-1840, at *71 (quoting Tenoco Oil, 876 F.2d at 1024).
Second, the district court found that the means used to
achieve ORIL's goals did not pass constitutional muster. The
record is replete with examples of regulatory practices employed by
ORIL that support the district court's finding that the regulatory
scheme was arbitrary, and thus violated due process. See Nebbia,
291 U.S. at 537. The Administrator repeatedly altered -- without
notice or explanation -- the standards for calculating plaintiffs'
incomes and production figures. Essential parameters for the
adjustment of gross income based on customer returns and discounts
to distributors, for instance, were capriciously applied or
ignored. The shrinkage factor, a measurement of the fraction of
milk lost in the processing phase, seems to have been set and
adjusted at random. In fact, in many instances, the district court
found that the Administrator had not performed any inquiries,
studies, or anything resembling the diligent research one would
expect from a rate-making agency before issuing orders.
Accordingly, the court reasonably concluded that the standards and
regulations set forth by ORIL, taken as a whole, likely violated
plaintiffs' due process.
Ultimately, the district court concluded that the record
reasonably supported a finding that defendants failed to meet the
standards for rate-making as set out by the Supreme Court and this
-43-
Circuit. Given the ample evidence of arbitrary and discriminatory
regulation, we see no abuse of discretion in the court's
determination that plaintiffs have demonstrated a likelihood of
success on the claim that defendants' actions constituted a
regulatory taking of their property without due process.
2. Irreparable Harm
The district court found that a denial of plaintiffs'
request for a preliminary injunction could lead to irreparable harm
to Tres Monjitas and Suiza. More specifically, it stated that
defendants' actions, absent injunctive relief, "point to permanent
loss in market and long-standing violations of constitutional
rights for extensive protracted periods of time." Vaquería Tres
Monjitas, No. 04-1840, at *91.
Defendants argue that the alleged harm the district court
ruled irreparable was, in fact, economic harm, which can be
remedied through money damages, and thus does not warrant
injunctive relief. The matter is a close one, but ultimately, we
defer to the district court's decision.
While certain constitutional violations are more likely
to bring about irreparable harm, we have generally reserved this
status for "infringements of free speech, association, privacy or
other rights as to which temporary deprivation is viewed of such
qualitative importance as to be irremediable by any subsequent
relief." Pub. Serv. Co. of New Hampshire v. West Newbury, 835 F.2d
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380, 382 (1st Cir. 1987). So, it cannot be said that violations of
plaintiffs' rights to due process and equal protection
automatically result in irreparable harm.
Also, it has long been held that traditional economic
damages can be remedied by compensatory awards, and thus do not
rise to the level of being irreparable. Puerto Rico Hosp. Supply,
Inc. v. Boston Scientific Corp., 426 F.3d 503, 507 (1st Cir. 2005).
Yet, it has also been recognized that some economic losses can be
deemed irreparable. For instance, "an exception exists where the
potential economic loss is so great as to threaten the existence of
the movant's business." Performance Unlimited, Inc. v. Questar
Publishers, Inc., 52 F.3d 1373, 1382 (6th Cir. 1995) (citing Doran
v. Salem Inn, Inc., 422 U.S. 922, 932 (1975) (finding no abuse of
discretion in determination that "absent preliminary relief
[movants] would suffer a substantial loss of business and perhaps
even bankruptcy")); see also Nat'l Screen Serv. Corp. v. Poster
Exchange, Inc., 305 F.2d 647 (5th Cir. 1962) (affirming grant of
preliminary injunction where denial of injunctive relief would
result in the destruction of movant's business).
In addition, we have held that the irreparable harm
requirement may be met upon a showing that "absent a restraining
order, [a party] would lose incalculable revenues and sustain harm
to its goodwill." Ross-Simons of Warwick, Inc. v. Baccarat, Inc.,
102 F.3d 12, 19 (1st Cir. 1996). In addition, in Automatic Radio
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Mfg. Co. v. Ford Motor Co., we suggested that the inability to
supply a full line of products may irreparably harm a merchant by
shifting purchasers to other suppliers. 390 F.2d 113, 116-17 (1st
Cir. 1968).
Moreover, the measure of irreparable harm is not a rigid
one; it has been referred to as a sliding scale, working in
conjunction with a moving party's likelihood of success on the
merits. See Ross-Simons, 102 F.3d at 19 ("[A]n attempt to show
irreparable harm cannot be evaluated in a vacuum; the predicted
harm and the likelihood of success on the merits must be juxtaposed
and weighed in tandem."); see also EEOC v. Astra USA, Inc., 94 F.3d
738, 743 (1st Cir. 1996)("[W]hen the likelihood of success on the
merits is great, a movant can show somewhat less in the way of
irreparable harm and still garner preliminary injunctive relief.");
Gately v. Massachusetts, 2 F.3d 1221, 1232 (1st Cir. 1993)
("[I]rreparable harm is subject to a sliding scale analysis . . .
.").
Finally, we are mindful of the narrowness of our charge,
recognizing that considerable deference is owed to the district
court in evaluating this prong of the preliminary injunction
standard. "District courts have broad discretion to evaluate the
irreparability of alleged harm and to make determinations regarding
the propriety of injunctive relief." K-Mart Corp. v. Oriental
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Plaza, Inc., 875 F.2d 907, 915 (1st Cir. 1989) (internal quotations
omitted).
With the guidance of precedent, we look to the district
court's finding and do not see any abuse of discretion in applying
the facts to the legal standard. Clearly, plaintiffs have suffered
economic harm. But, that is not the full extent of their injury.
As found by the district court, Tres Monjitas and Suiza have
continued to subsidize Indulac's production of UHT milk,
undercutting their own goodwill by propping up their competitors.
As a result, they have suffered a steady decline in the market for
fresh milk and are on the verge of losing their businesses. After
suffering years of losses, their capital bases have been depleted
by five million dollars, and the district court found both
companies to be on the brink of insolvency.
Taking into account the rapidly eroding state of the
Puerto Rican milk industry, the need for immediate relief, and the
likelihood of plaintiffs' success on the merits of their claims, we
do not believe the district court abused its discretion in finding
that the gravity of these dire circumstances, if allowed to run
their course, would constitute irreparable harm, and that their
imminence called for preliminary injunctive relief.
3. Balance of Equities
The district court found, in considering the balance of
equities between plaintiffs and defendants, that "[t]he matter is
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not close." Vaquería Tres Monjitas, No. 04-1840, at *92. In
balancing the harm likely caused to the milk processors without the
injunction with the harm its grant would cause defendants, the
Court stated that "[t]he constitutional rights of plaintiff[s]
override, with [their] consequential permanent loss of market and
potential fire sale of its plants, the rights of defendant to
continue with a preferential purchase price of raw milk which is
prima facie discriminatory." Id.
On appeal, defendants entreat us to overturn the district
court's determination, arguing that the hardships caused by the
preliminary injunction outweigh the alleged harm to Tres Monjitas
and Suiza absent the order. In particular, they allude to the
injury that will come to Indulac, the dairy farmers and their
cattle, the stability of the milk supply, and the existing
regulatory structure.
In reviewing the district court's judgment of this issue,
we must refrain from second-guessing the district court's
assessment, unless we find that the court abused its discretion.
See George Weston Bakeries, 570 F.3d at 8 ("[W]e afford
considerable deference to the trial court's balancing of
equities."); see also Wine & Spirits Retailers, 418 F.3d at 46
("[J]udgment calls and issues that demand the balancing of
conflicting factors are reviewed deferentially.").
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We find in the record no reason to second-guess the
district court's finding, arrived at in the course of over a year
of hearings and testimony, that the balance of equities at play
with this injunction favors the plaintiffs. The district court
viewed Tres Monjitas' and Suiza's situations as desperate -- both
having negative capital bases and facing insolvency. Furthermore,
we see no reason why ORIL cannot stabilize milk production and
protect dairy farmers, while setting rational regulations based on
non-arbitrary and non-discriminatory standards. So, while we are
sympathetic to defendants' claims of hardship, this is a situation
of their own doing, and further, we do not believe the district
court erred in according greater weight to plaintiffs' hardships in
the event that injunctive relief were not granted.
4. Public interest
The district court found that the "public interest lies
in the granting of the injunctive relief." Vaquería Tres Monjitas,
No. 04-1840, at *92. It noted that the current situation is
unsustainable for the Puerto Rican milk industry as a whole. The
dominance of artificially underpriced UHT milk in the market has
diminished the market for processors' fresh milk to the point where
Indulac's "surplus" has grown beyond its capacity. Ever-decreasing
revenues from Tres Monjitas and Suiza mean lower subsidies to
Indulac and FFIL, causing depletion of the Fund, which in turn is
threatening the dairy farmers' livelihoods. Id. at 39-41. In
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light of these facts, the district court concluded that "[w]ithout
the injunctive relief, the plants are close to being sold at very
low prices, an important independent element of the industry is
about to be lost and the industry is then close to being
monopolized by one party of the milk industry." Id. at 92.
Again, we must give deference to the district court's
assessment of the situation. We find ample support in the factual
record for its determination, and hold that it did not abuse its
discretion in finding that the granting preliminary injunctive
relief was in the public interest.
5. Scope of Relief
Lastly, defendants challenge the scope of the relief
granted by the district court. They contend that the Court "erred
in issuing injunctive relief that forever changed the status quo --
contrary to the purposes of the preliminary injunctive relief." We
disagree.
We first note that "[i]njunctions must be tailored to the
specific harm to be prevented." Ross-Simons of Warwick, Inc. v.
Baccarat, Inc., 217 F.3d 8, 14 (1st Cir. 2000). Since the district
court is in the best position to tailor the scope of injunctive
relief to the its factual findings, our review is for abuse of
discretion only. Id.
The district court found that ORIL had subjected
plaintiffs to ongoing constitutional violations as part of an
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arbitrary and discriminatory regulatory process. In requiring ORIL
to develop a scheme that conformed to constitutional principles,
the preliminary injunction cut to the heart of the violations.
And, by leaving decisions regarding specific pricing figures to the
agency, the Court ensured that the preliminary injunction would
prove "no more burdensome to the defendant than necessary to
provide complete relief." Tamko Roofing Products, Inc. v. Ideal
Roofing Co., Ltd., 282 F.3d 23, 40 (1st Cir. 2002) (quoting
Califano v. Yamasaki, 442 U.S. 682, 702 (1979)). Indeed, it is
difficult to see how the district court overstepped its bounds,
when it left the essential parameters of the relief largely in the
hands of the defendants.
As to defendants' argument, it cannot be said that the
only purpose of a preliminary injunction is to preserve current
conditions pending adjudication. That is not to say that
defendants' position lacks support. See CMM Cable Rep., Inc. v.
Ocean Coast Properties, Inc., 48 F.3d 618, 620 (1st Cir. 1995)
("The court's interim injunctive decree attempts to prevent further
injury by maintaining the status quo."). But, taking steps
necessary to assure the continued operations of the moving party is
appropriate, if the non-moving party's actions threaten its
destruction. Thus, in its injunctive order, the district court did
not act improperly in requiring ORIL to take steps necessary to
ensure the survival of Tres Monjitas and Suiza during the
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litigation. Contrary to defendant's baffling assertion that the
relief "forever changed the status quo," the aim of the order was
to establish parity among the milk processors pending outcome of
the litigation.
Finally, the potential for a moving party's likelihood of
success and showing of irreparable harm can guide the scope of
preliminary injunctive relief. Having already found that Tres
Monjitas and Suiza had a likelihood of success on the merits of
their constitutional claims, the district court was well within its
discretion and power to require ORIL to establish non-arbitrary and
non-discriminatory regulations to preserve the solvency of the milk
processors, which it found to be in imminent jeopardy.
III. Conclusion
In summation, we hold that the district court did not err
in rejecting defendants' Burford abstention and Eleventh Amendment
immunity arguments, or in rejecting their equitable defenses. We
also hold that the district court did not abuse its discretion in
granting plaintiffs' motion for a preliminary injunction. The
order of the district court is affirmed.
Affirmed. Costs are assessed against appellants.
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