F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
FEB 15 2005
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
EXCEL CORPORATION,
Petitioner,
v. No. 04-9540
UNITED STATES DEPARTMENT OF
AGRICULTURE,
Respondent.
PETITION FOR REVIEW OF ORDERS
OF THE UNITED STATES DEPARTMENT OF AGRICULTURE
(Agency No. D-99-0010)
John R. Fleder, of Hyman, Phelps & McNamara, P.C., Washington, D.C. (Timothy B.
Mustaine and Jeff P. DeGraffenreid, of Foulston Siefkin LLP, Wichita, Kansas, and
Philip C. Olsson and Brett T. Schwemer, of Olsson, Frank and Weeda, P.C., Washington,
D.C., with him on the briefs), for Petitioner.
Stephen M. Reilly, Senior Counsel (James Michael Kelly, Deputy General Counsel, and
Margaret M. Breinholt, Assistant General Counsel, with him on the brief), Office of the
General Counsel, United States Department of Agriculture, Washington, D.C., for
Respondent.
Before BRISCOE, MURPHY, and O’BRIEN, Circuit Judges.
BRISCOE, Circuit Judge.
Petitioner Excel Corporation seeks review of a decision and order issued by
respondent United States Department of Agriculture (USDA) finding that Excel violated
§ 202(a) of the Packers and Stockyards Act (P&S Act), 7 U.S.C. § 192(a), and an
implementing regulation, 9 C.F.R. § 201.99(a), by failing to disclose to hog producers a
change in Excel’s formula for computing the “lean weight” of hog carcasses. Excel also
challenges the decision and order to the extent it directs Excel to cease and desist from
engaging in certain related practices. Exercising jurisdiction pursuant to 28 U.S.C. §
2342(2), we grant Excel’s petition for review for the sole purpose of modifying the cease
and desist language of the decision and order. As so modified, the decision and order is
enforced.
I.
Factual background
Excel, a corporation based in Wichita, Kansas, is estimated to be the fourth or fifth
largest hog slaughterer in the United States. ROA, Vol. V, Doc. 155 at 13, 82. Excel
purchases hogs from numerous hog producers using one of two methods. First, Excel
purchases some hogs on a “spot” market basis, meaning that it negotiates a specific price
for a specific lot of hogs. Id. at 13. Second, Excel purchases other hogs through short-
and long-term contracts with hog producers, pursuant to which the producers agree to sell
a given number of hogs to Excel for a set base price. Id.
Most of the hogs purchased by Excel fall within its “carcass merit” program. Id.
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Under the carcass merit program, hog producers deliver hogs to Excel’s buying stations
where the hogs are placed into a holding pen, tattooed for identification, given a lot
number, weighed, and inspected. Id. at 13-14. The hogs are then transported to one of
Excel’s three slaughtering facilities (located in Illinois, Iowa, and Missouri). There, the
hogs are “killed, bled, eviscerated, de-haired, washed, and inspected . . . .” Id. at 14.
Afterwards, the carcasses are evaluated for their “estimated percentage of lean (red)
meat.” Id. Because hogs with a high percent of lean meat have a higher market value
than hogs with a low percent of lean meat, Excel “applies th[ese] percentage figure[s] to a
pricing table called the ‘lean percent matrix’ to determine whether the hog producer
receives a discount for the carcass – a deduction from the base price – or a premium – an
addition to the base price.” Id.
Some of the producers who supply hogs to Excel also sell to other packers. Id. at
20. Generally speaking, these producers sell “trial lots” to various packers, including
Excel, to determine where they can obtain the best price. Id. Because USDA no longer
has in place an official grading system for hogs, id. at 16, “[a]ll packers appear to base the
prices they pay for hogs on base price, lean percent, and a matrix . . . .” Id. at 20.
However, no industry standard exists for estimating lean percent and it is generally
impractical for slaughterers to dissect and examine each carcass for fat and lean meat
percentages. Id. at 14. Thus, slaughterers use a variety of less accurate, but more
practical, methods of estimating lean percent. Id. The result is that each packer “has a
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slightly different grading program,” i.e., “[t]hey use slightly different means of getting to
the same point for the end value.” Id. at 20.
Excel had used the “Fat-O-Meat’er” method for estimating lean percent for
approximately ten years. Id. at 14. “The Fat-O-Meat’er,” which was developed in
Denmark from a study of European hogs, “is a hand-held device with a probe that is
inserted in the carcass.” Id. “A light measures the difference between the loin-eye and
back fat depth.” Id. “A regression formula or equation embedded in the Fat-O-Meat’er,
commonly referred to as the ‘Danish formula’ . . , then uses this measurement to estimate
the lean percent of the carcass.” Id. at 14-15. The device has been approved for use by
the USDA and is used by approximately thirty-two packers in the United States. Id. at 15.
It is unclear, however, how many of these packers rely solely on the Danish formula to
estimate lean percent. Id.
After Excel determined the lean percent and weight of each carcass, those figures
were applied to Excel’s “Lean Value Matrix” to determine the “meat PX factor.” Aplee.
Br. at 12. The matrix generated a higher “meat PX factor” for standard-sized carcasses
(163 to 206 pounds) with a higher lean percent. Conversely, the matrix produced a lower
“meat PX factor” for non-standard-sized carcasses (greater than 206 pounds or less than
163 pounds) and for carcasses with a lower lean percent. Id. To determine the exact
price to be paid for a particular carcass, Excel multiplied the “meat base” (i.e., the price
per hundred weight quoted to the producer) by the “meat PX factor.” Id.
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The producers from whom Excel purchased hogs on a carcass merit basis were
aware that Excel used the Fat-O-Meat’er to estimate lean percent and that the lean
percentage figure was used by Excel to determine the price paid for each carcass.
Generally speaking, however, Excel did not inform producers of the details of the formula
utilized for estimating lean percent.
In 1997, Excel decided to switch from the Danish formula for estimating lean
percent to “a formula developed by Purdue University and promoted by the National Pork
Producers Council,” i.e. “the Purdue formula.” Id. at 17. “The Purdue formula uses hot
carcass weight as a variable with the Danish formula to estimate lean percent . . . .” Id.
In contrast to the Danish formula, which was estimated to be 72-73 percent accurate, the
Purdue formula was estimated to be approximately 90 percent accurate. Id.
At the time it adopted the Purdue formula, Excel knew that the “change could
affect the price it paid for hogs,” and thus “considered the” change’s “economic effect on
hog producers . . . .” Id. Excel “concluded, based on a study of 1.5 million hogs, that
there would be only a ‘minimal impact’ on hog producers . . . .” Id. at 17-18. In turn,
Excel “decided not to tell hog producers about the change in the formula because, while it
was not a secret, company officials believed that the formula, like the process methods
and technology it used, was not a factor that interested hog producers or formed a basis
for whether they sold hogs to” Excel. Id. at 18. “Another consideration was the
corporate belief that hog producers who received more because of a change to a more
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accurate formula would be unhappy because they had been selling in the past under an
inaccurate formula, while hog producers who received less because of the change would
be upset . . . .” Id.
Although Excel concluded that none of its written contracts with hog producers
required it to provide notification of the formula change, Excel nevertheless notified
Tyson Foods, the main supplier of hogs for Excel’s Missouri facility, of the formula
change. Id. at 19. Tyson objected to the change. Id. In turn, Excel agreed not to use the
Purdue formula to estimate the lean percent of Tyson’s hogs. Id.
Excel implemented the formula change at its Iowa and Illinois slaughtering
facilities in October 1997, and at its Missouri slaughtering facility (for all non-Tyson
hogs) in April 1998. Id. at 20. Following implementation of the formula change, some
hog producers noticed a difference in the prices they were receiving from Excel for hogs.
Id. at 21. Some hog producers began asking managers at Excel’s slaughtering facilities
about the matter. Id. In response, Excel told these producers about the formula change.
Id.
In April 1998, the Grain Inspection, Packers and Stockyards Administration
(GIPSA), a division of the USDA, “initiated what appears to have been a routine
investigation of [Excel’s] use of the Fat-O-Meat’er.” Id. at 22. During the course of this
audit, GIPSA “found the prices that hog producers should have been paid using the
Danish formula were not those that appeared on the kill sheets.” Id. at 23. Excel then
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informed GIPSA that it had changed the formula for estimating lean percent. Id. As a
result of the 1998 audit, GIPSA decided that Excel’s “failure to disclose its change of the
formula to hog producers prior to the purchase of hogs from those producers” was a
violation of the P&S Act and one of its implementing regulations. Id. at 25. Excel was
informed of the alleged violation in June 1998. Id. In July 1998, Excel “sent a letter to
hog producers notifying them that the formula had changed . . . .” Id. Excel “also
adjusted the matrix so that hog producers received the same price under the Purdue
formula as they would have received had [Excel] used the Danish formula.” Id.
Procedural background
On April 9, 1999, the Deputy Administrator of GIPSA instituted a disciplinary
administrative proceeding against Excel by filing a complaint and notice of hearing. The
complaint alleged that, between October 23, 1997, and June 1, 1998, Excel violated §
202(a) of the P&S Act, 7 U.S.C. § 192(a), and § 201.99 of the Act’s implementing
regulations, 9 C.F.R. § 201.99, by failing to make known to hog producers a change in the
formula used by Excel to estimate lean percent in hogs that it purchased, which in turn
changed the price paid by Excel for hogs. The complaint further alleged that, as a result
of the change in formula, Excel paid hog producers approximately $1,839,000 less for
approximately 19,942 lots of hogs than it would have paid if it had not changed the
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formula.1
USDA’s Chief Administrative Law Judge (ALJ) conducted hearings on July 18-
21, July 25-28, September 23-27, 2000, and March 27-29, 2001. On February 7, 2002,
the Chief ALJ issued a Decision and Order finding that, as alleged in the complaint, Excel
failed to notify hog producers of its changed formula for estimating lean percent and that
such failure violated § 202(a) of the P&S Act, 7 U.S.C. § 192(a), and § 201.99 of the
implementing regulations, 9 C.F.R. § 201.99. The Chief ALJ ordered Excel to cease and
desist from failing to notify livestock sellers of any change in the formula used to estimate
lean percent and further ordered Excel to submit to arbitration with the hog producers
with whom they had not yet resolved the matter and who received less money for hogs
sold to Excel between October 1997 and July 1998 under the revised formula than they
would have received under the old formula. The Chief ALJ refused GIPSA’s request,
however, to impose a monetary sanction against Excel.
Excel and GIPSA each sought review of the Chief ALJ’s decision by the Secretary
of the USDA. On January 30, 2003, the Judicial Officer (JO) issued a decision and order
on behalf of the USDA addressing the challenges to the Chief ALJ’s order. The JO
affirmed the decision that Excel violated the P&S Act and the implementing regulation by
1
When Excel responded that it had refunded to producers $3,093,581.00
(including 5.85% interest) as the difference between the price it paid under the Purdue
formula and the Danish formula, the complaint was amended to allege an underpayment
to producers of $635,345.52. Id. at 26.
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failing to make known to all hog producers its change in the formula used to estimate lean
percent in hogs. The JO dismissed the arbitration requirement and modified the cease and
desist order. The JO agreed with the Chief ALJ that a monetary sanction was not
appropriate.
Both sides unsuccessfully sought reconsideration of the JO’s decision and order.
Excel has since filed a petition for review with this court.
II.
Standard of review
Our jurisdiction to review a final order issued by the USDA in a disciplinary action
brought under the P&S Act arises under 28 U.S.C. § 2342(2). We review such final
orders under the Administrative Procedure Act’s (“APA”) arbitrary and capricious
standard. See JSG Trading Corp. v. USDA, 176 F.3d 536, 541 (D.C.Cir. 1999). “That is,
we will uphold the JO’s decision unless we find it to be arbitrary, capricious, an abuse of
discretion, not in accordance with law, or unsupported by substantial evidence.” Id.
(citing 5 U.S.C. § 706(2)(A), (E)).
Excel’s violations of the P&S Act
Before addressing Excel’s specific arguments on appeal, we begin by briefly
outlining the statute and regulation that the JO determined Excel had violated. Section
202 of the P&S Act, 7 U.S.C. § 192, entitled “Unlawful practices enumerated,” provides
in pertinent part as follows:
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It shall be unlawful for any packer or swine contractor with respect to
livestock, meats, meat food products, or livestock products in
unmanufactured form, or for any live poultry dealer with respect to live
poultry, to:
(a) Engage in or use any unfair, unjustly discriminatory, or deceptive
practice or device . . . .
7 U.S.C. § 192(a).
In turn, the USDA has promulgated regulations implementing the provisions of the
P&S Act. Specifically, 9 C.F.R. § 201.99, entitled “Purchase of livestock by packers on a
carcass grade, carcass weight, or carcass grade and weight basis,” provides, in pertinent
part, as follows:
(a) Each packer purchasing livestock on a carcass grade, carcass weight, or
carcass grade and weight basis shall, prior to such purchase, make known to
the seller, or to his duly authorized agent, the details of the purchase
contract. Such details shall include, when applicable, expected date and
place of slaughter, carcass price, condemnation terms, description of the
carcass trim, grading to be used, accounting, and any special conditions.
***
(e) * * * If settlement and final payment are based upon any grades other
than official USDA grades, such other grades shall be set forth in detailed
written specifications which shall be made available to the seller or his duly
authorized agent. * * *
9 C.F.R. § 201.99(a) and (e) (italics added).
Applying the statute and the regulation to the established facts, the JO concluded
that a violation of both the regulation and the statute had occurred. In particular, the JO
noted that “[t]he record [wa]s clear that all parties considered the Fat-O-Meat’er to be a
form of grading.” ROA, Vol. V, Doc. 155 at 41. In turn, the JO concluded that “[t]he
formula [Excel] used to estimate lean percent was also a part of the ‘grading’ within the
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meaning of section 201.99 of the Regulations . . . as it was an element of [Excel’s]
carcass evaluation process.” Id. The JO further concluded that, because “[s]ection
201.99 of the Regulations . . . explicitly provides that packers purchasing livestock on a
carcass merit basis must make known to the seller the grading to be used prior to
purchase,” Excel violated that provision by failing to inform hog producers of its change
in formula for determining lean percent. Id. In addition, the JO concluded that the
violation had a direct impact on the hog producers who sold hogs to Excel. According to
the JO, “the purpose of section 201.99 of the Regulations . . . is to provide some basic
level of similarity to allow sellers to evaluate different purchase offers,” id. at 42 (internal
quotations omitted), and Excel deprived hog producers of this opportunity by failing to
disclose its change in formula. More specifically, the JO stated: “Had hog producers been
alerted to the change, they could have shopped their hogs to other packers to determine if
they could obtain a better price for their hogs than [Excel’s] price under its changed
formula.” Id. Ultimately, the JO concluded that Excel “violated section 202(a) of the
[P&S] Act and section 201.99(a) of the Regulations . . . when it failed to make known to
hog producers that it was changing the formula to estimate lean percent, prior to
purchasing hogs on a carcass merit basis from those producers.” Id. at 83.
Was the JO’s decision supported by “substantial evidence”?
In its appeal, Excel contends the “JO erred when he ruled that Excel violated the
law by changing the lean percent equation without prior notice” because “the USDA
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never met its burden to demonstrate that there was substantial evidence for this finding.”
Aplt. Br. at 15. In support of this contention, Excel argues that (1) “the JO never cited to
a single court case or prior agency decision that provides any precedential support,” (2)
“the JO did not and could not rely on any expert testimony because GIPSA provided
none,” and (3) “GIPSA failed to introduce any survey of hog producers that producers
believed that Excel had committed an unfair or deceptive practice or that these producers
cared that Excel had changed the lean percent equation without disclosing the change to
producers.” Id.
By raising these arguments, Excel is clearly attempting to reframe the nature of the
JO’s decision. Generally speaking, it is true that an agency’s decision must be supported
by “substantial evidence.” Trimmer v. United States Dept. of Labor, 174 F.3d 1098, 1102
(10th Cir. 1999). Here, however, the JO expressly noted in his decision and order that
“[t]he salient facts [of the case] [we]re not in dispute.” DO at 27. In particular, the JO
noted that “all parties considered the Fat-O-Meat’er to be a form of grading,” id. at 41,
and “[t]he parties [we]re in agreement that [Excel] did not tell all hog producers when it
changed the formula to estimate lean percent and did not disclose details of the formula to
all hog producers.” Id. Thus, the JO’s decision ultimately was based on whether those
established facts constituted a violation of § 201.99 (and, in turn, § 202(a) of the P&S
Act). In other words, the JO’s decision was based on his interpretation of § 201.99 and
his application of that interpretation to the uncontroverted facts.
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The absence of any true factual disputes is further highlighted by carefully
examining Excel’s specific arguments. As noted, Excel first complains that “the JO never
cited to a single court case or prior agency decision that provides any precedential
support” for his decision. Aplt. Br. at 15. Obviously, however, prior court cases or
agency decisions are not “evidence” that would support or refute the JO’s decision.
Second, Excel complains that “the JO did not and could not rely on any expert testimony
because GIPSA provided none . . . .” Id. It is unclear, however, why any such expert
testimony was necessary. To the contrary, the resolution of the USDA’s complaint
against Excel required the JO only to apply the provisions of § 201.99 to the
uncontroverted facts developed during the evidentiary hearing. Lastly, Excel complains
that “GIPSA failed to introduce any survey of hog producers that producers believed that
Excel had committed an unfair or deceptive practice or that these producers cared that
Excel had changed the lean percent equation without disclosing the change to producers.”
Again, no such evidence was necessary to support the JO’s conclusion. Indeed, the JO
rejected this identical argument in his decision and order:
Finally, I find [Excel’s] argument that, when hog producers learned about
the formula change, they did not care that the change had been made or that
[Excel] failed to inform them about the formula change, irrelevant to the
issue of whether [Excel] violated the Packers and Stockyards Act. [Excel]
cites no authority supporting its contention that the feelings of hog
producers have a bearing on whether [Excel] engaged in an unfair or
deceptive practice under section 202(a) of the Packers and Stockyards Act .
. , and I cannot find authority which supports [Excel’s] contention. The
determination as to whether [Excel] violated section 202(a) of the Packers
and Stockyards Act . . . is made by the administrative law judge, the judicial
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officer, and ultimately, the courts. The determination is not based on how
livestock producers, who the Packers and Stockyards Act is designed to
protect, view [Excel’s] actions. Moreover, the record does not support
[Excel’s] assertion that hog producers did not care about [Excel’s] change
in the formula to estimate lean percent or [Excel’s] failure to inform them
about the formula change . . . .
DO at 65-66.
For these reasons, we conclude there is no merit to Excel’s assertion that the JO’s
decision was not supported by substantial evidence.
Did Excel violate the P&S Act?
In its opening appellate brief, Excel asserts a host of arguments concerning why, in
its view, it did not violate the P&S Act by “[c]hang[ing] an [e]quation [u]sed to [e]stimate
[l]ean [p]ercent . . . .” Aplt. Br. at ii. In particular, Excel argues that (1) no prior
decisions existed holding that an undisclosed equation change was violative of the P&S
Act, (2) USDA does not have carte blanche authority to prohibit whatever practices it
wants to stop, (3) practices are not violative where they are required by the exigencies of
the business and are justified by business standards, (4) none of its contracts with hog
producers required it to notify producers before implementing an equation change, (5)
hog producers did not care about the equation change, (6) its failure to disclose the
formula change did not impede competition or hog producers’ choices, and (7) there was
no evidence it acted with wrongful intent.
At the outset, it is clear that Excel’s arguments do not relate to whether Excel
violated § 201.99(a) of the regulations implementing the P&S Act. As discussed in
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greater detail below, the JO concluded that Excel violated § 201.99(a) by failing to
disclose to hog producers the change in formula. In other words, contrary to Excel’s
arguments, the conduct at issue that violated the regulation was Excel’s failure to disclose
its change in formula to producers, and not the mere change in formula itself. Further, the
JO’s focus was on the requirements of the implementing regulation. After first
concluding Excel violated that regulation, the JO in turn necessarily concluded that Excel
also violated the P&S Act. Thus, the critical focus in this case is on the language of the
regulation and its applicability to Excel’s conduct.
In any event, it is apparent that none of the specific arguments asserted by Excel
have merit. First, Excel has cited no authority, and we have found none, holding that the
USDA is precluded from finding a violation in this case simply because it has not
previously found a similar violation in the past. Indeed, such a rule would be nonsensical,
for it would effectively preclude the USDA from applying the P&S Act and its
implementing regulations to new techniques and tools utilized by slaughterers for grading
livestock carcasses. Second, although the USDA does not have “carte blanche authority”
to prohibit whatever practices it wants to stop, it is clear that Congress granted the USDA
authority to implement and enforce the P&S Act. And, as noted, the critical issue in this
case is whether Excel’s failure to disclose its formula change to hog producers violated
the USDA’s implementing regulation. Third, and relatedly, it is clear that Congress and
the USDA are the arbiters of what practices will impede competition. Thus, contrary to
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Excel’s assertion, the fact that a particular act is “required by the exigencies of the
business,” or is not violative of a contractual obligation, has no impact on whether that act
is violative of the P&S Act and the implementing regulations. Indeed, in the instant case,
the USDA concluded that Excel’s failure to disclose its formula change was violative of §
201.99(a) of the implementing regulations, even though Excel did not have a contractual
obligation to disclose that change to hog producers and was otherwise justified in
changing its formula to better estimate the lean percent of hog carcasses.
Fourth, Excel is incorrect when it suggests that hog producers did not care about
the equation change. Indeed, the JO specifically found that some hog producers did care
about the equation change, and that finding appears to be adequately supported by the
record on appeal. DO at 65-66. In any event, nothing in the P&S Act or the
implementing regulations provides that a violation thereof hinges on the opinions of the
persons affected by the practice at issue. Although Excel cites to Ferguson v. United
States Department of Agriculture, 911 F.2d 1273, 1281-82 (9th Cir. 1990), in support of
its assertion that customers’ opinions are critical, a review of Ferguson undercuts Excel’s
arguments. To begin with, Ferguson involved a different type of violation (incorrect
invoicing), and thus a different provision of the P&S Act (7 U.S.C. § 213(a)), than is at
issue here. Further, although the court in Ferguson did consider the testimony of
customers, that testimony had no effect on the conclusion that a violation of the P&S Act
had occurred; rather, the customer testimony was considered solely for purposes of
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determining whether the sanction imposed was proper.2 Id. at 1282-83.
Fifth, Excel contends its actions did not impede competition or hog producers’
choices. The JO, however, specifically concluded otherwise:
Hog producers can compare prices and choose to continue to sell to [Excel]
or sell to [Excel’s] competitors. However, [Excel] impeded that choice
when it made an unannounced change in the formula. [Excel] thereby
altered the price it offered hog producers without the hog producers
knowing that the price structure had changed. Had hog producers been
alerted to the change, they could have shopped their hogs to other packers
to determine if they could obtain a better price for their hogs than [Excel’s]
price under its changed formula. [Excel’s] failure to notify hog producers
of the change in the formula to estimate lean percent impeded competition.
As [GIPSA] states, the purpose of section 201.99 of the Regulations . . . “is
to provide some basic level of similarity to allow sellers to evaluate
different purchase offers” (Complainant’s Post-Hearing Brief at 91). The
assessment of harm to hog producers of the change would therefore have
been whatever higher market price they might have been able to obtain
from [Excel’s] competitors. Therefore, I find [Excel’s] violation of section
201.99(a) of the Regulations . . . grave.
DO at 57. Although Excel attempts to undercut these conclusions (e.g., by arguing that
other packers did not inform hog produces about their equations to estimate lean percent),
a review of the record on appeal demonstrates that they are reasonable inferences drawn
from the evidence presented to the JO.
Lastly, Excel is simply wrong in asserting that, “to show an impediment to
competition, GIPSA would have had to show Excel acted with wrongful intent.” Aplt.
2
In a related point, Excel complains that the Chief ALJ precluded Excel from
calling six producer witnesses (the Chief ALJ apparently ruled that only four of Excel’s
producer witnesses could testify, and that the remaining six would merely provide
cumulative testimony). This is clearly a red herring that has no impact on the propriety of
the JO’s decision.
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Br. at 32. Nothing in the language of § 192(a) of the P&S Act or § 201.99(a) of the
regulations requires a showing of wrongful intent. To the contrary, the focus is solely on
the acts committed or omitted.
Did the JO err in interpreting 9 C.F.R. § 201.99(a)?
Excel next directly challenges the JO’s interpretation of § 201.99(a). Specifically,
Excel contends that, contrary to the conclusion reached by the JO, its failure to notify hog
producers of the change in formula did not violate § 201.99(a). According to Excel, the
“regulation does not mention: (1) lean percent; (2) equations; or (3) a change to either of
them.” Aplt. Br. at 34. Indeed, Excel contends that the key phrase in the regulation, i.e.,
“grading to be used,” is ambiguous and thus it is unclear whether or not the actual
formula employed by Excel in determining lean percent fell within the scope of this
phrase. To support its assertion of ambiguity, Excel contends that, prior to the complaint
being filed against it, the USDA never consistently or clearly interpreted § 201.99(a) in a
manner that would have given Excel notice that it had to disclose to hog producers the
change in formula. Excel also contends the JO failed to offer a sound explanation of the
interplay between § 201.99(a) and § 201.99(e). Lastly, Excel contends that USDA has
effectively sought “to rewrite the regulation in this proceeding to fit conduct that is
simply not covered.” Aplt. Br. at 44.
In determining whether the USDA (through the JO) committed any errors of law in
interpreting § 201.99, we owe “substantial deference” to the USDA’s interpretation of
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that regulation. Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). That is
because the USDA has been charged by Congress with administering the P&S Act, see 7
U.S.C. § 228 (outlining the authority of the Secretary of the USDA with regard to the
P&S Act), and § 201.99 is one of the regulations intended by the USDA to implement the
P&S Act. See generally Mainstream Marketing Serv., Inc. v. FTC, 358 F.3d 1228, 1236
(10th Cir. 2004) (noting “that the courts owe deference to a federal agency’s
interpretation of a statute it administers”). Our “task is not to decide which among
several competing interpretations best serves the regulatory purpose.” Thomas Jefferson,
512 U.S. at 512. “Rather, the agency’s interpretation must be given controlling weight
unless it is plainly erroneous or inconsistent with the regulation.” Id. (internal quotations
omitted). “In other words,” we “must defer to the Secretary’s interpretation unless an
alternative reading is compelled by the regulation’s plain language or by other indications
of the Secretary’s intent at the time of the regulation’s promulgation.” Id. (internal
quotations omitted).
The JO in this case interpreted § 201.99(a) in the following manner. First, the JO
concluded that “[s]ection 201.99(a) . . . provides that each packer purchasing livestock on
a carcass merit basis shall, prior to the purchase, make known to the seller the details of
the purchase contract.” DO at 67. Second, the JO concluded that “[t]he regulation [i.e., §
201.99(a)] explicitly provides that those details include the ‘grading to be used.’” Id.
Citing Merriam Webster’s Collegiate Dictionary, the JO concluded that the term “grade”
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“[g]enerally . . . refers to quality and [the term] ‘grading’ is an action or process of sorting
(hogs) into categories according to quality.” Id. at 67 and n.28. Applying that definition
to the circumstances before him, the JO concluded that “a formula to estimate lean
percent is part of the grading process.” Id. at 68. Thus, the JO concluded that “[t]he Fat-
O-Meat’er and the formula and the change in the formula [we]re all ‘grading to be used’
within the meaning of” § 201.99(a). Id. at 82. In sum, the JO concluded that § 201.99(a)
requires a packer such as Excel, prior to the purchase of a hog carcass, to make known to
the seller the formula used in estimating the lean percent of the carcass and to make
known any changes in that formula.
Excel asserts, and we agree, that the key phrase in § 201.99(a), i.e., “grading to be
used,” is ambiguous. In his decision and order, the JO noted the word “grading” is
defined in the dictionary to mean “[t]he action or process of sorting . . . into grades
according to quality.” Oxford English Dictionary Online (2004). In turn, the word
“grade” is defined, in pertinent part, as “[a] degree of comparative quality or value,” “[a]
class of things, constituted by having the same quality or value.” Id. Thus, the phrase
“grading to be used,” as employed in § 201.99(a), clearly appears to refer to the process a
particular packer will employ for sorting livestock carcasses into grades or classes
according to quality. Nevertheless, the phrase is ambiguous in that it could reasonably be
construed in one of at least two ways under the circumstances presented here: (1) to
require Excel merely to inform hog producers that it grades carcasses according to lean
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percent, or (2) to require Excel not only inform hog producers that it grades carcasses
according to lean percent, but also to inform hog producers that it uses a particular
mathematic formula, programmed into the Fat-O-Meat’er, to estimate lean percent, and to
inform hog producers when and if it implements a change in that formula.3
Importantly, we must “defer to both formal and informal agency interpretations of
an ambiguous regulation unless those interpretations are ‘plainly erroneous or
inconsistent with the regulation.’” Soltane v. U.S. Dept. of Justice, 381 F.3d 143, 148 (3d
Cir. 2004) (quoting Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945));
see Auer v. Robbins, 519 U.S. 452, 461 (1997) (holding that an agency’s interpretation of
its own regulation is entitled to deference). Here, the JO concluded that “[t]he Fat-O-
Meat’er and the formula and the change in the formula [we]re all ‘grading to be used’
within the meaning of” § 201.99(a).4 DO at 82. In our view, this conclusion is neither
plainly erroneous nor inconsistent with the language of the regulation. Indeed,
3
The phrase “grading to be used” could also arguably be interpreted to require
Excel to either (a) reveal only that it uses a mathematic formula programmed into the Fat-
O-Meat’er for purposes of estimating lean percent, or (b) reveal the precise details of that
mathematic formula, as well as all the details of its matrix.
4
The uncontroverted facts of this case readily establish that, because the USDA
had no official grades in place for hog carcasses, Excel adopted and used its own grading
system for hog carcasses which focused primarily on lean percent. The uncontroverted
facts further establish that Excel’s calculation of lean percent was based on a mathematic
formula programmed into the Fat-O-Meat’er. More specifically, the uncontroverted facts
indicate that Excel physically employed the Fat-O-Meat’er and its embedded mathematic
formula to estimate the lean percent of each hog carcass, and that the lean percent
estimate, along with the carcass’s overall weight, effectively resulted in a grade on
Excel’s matrix.
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interpreting the phrase “grading to be used” to require revelation of the specific formula
utilized to estimate lean percent appears to us to be entirely reasonable. Thus, we are
bound to uphold the JO’s interpretation.
Excel complains that the JO failed to rationally explain the interplay between §§
201.99(a) and (e). As previously noted, § 201.99(e) provides, in pertinent part: “If
settlement and final payment are based upon any grades other than official USDA grades,
such other grades shall be set forth in detailed written specifications which shall be made
available to the seller or his duly authorized agent.” In Excel’s view, the JO’s
interpretation of § 201.99(a) renders superfluous the language of § 201.99(e). We find it
unnecessary to address Excel’s arguments on this point, however, because there is no
indication in the record on appeal that Excel presented these arguments to the JO. Thus,
we consider the arguments waived. See United States v. L.A. Tucker Truck Lines, 344
U.S. 33, 37 (1952) (“Simple fairness . . . requires as a general rule that courts should not
topple over administrative decisions unless the administrative body not only has erred but
has erred against objection made at the time appropriate under its practice.”).
Lastly, Excel argues that the USDA, through the JO, has effectively rewritten §
201.99(a) to encompass conduct that is otherwise not encompassed by its plain language.
We disagree. As discussed above, the phrase “grading to be used,” as employed in §
201.99(a), can reasonably be interpreted in at least two ways. Simply because the JO
adopted one of those interpretations does not mean that the JO effectively rewrote the
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regulation. In other words, the JO’s interpretation cannot be considered to be so far afield
of the regulation’s text as to “create de facto a new regulation.” Christensen v. Harris
County, 529 U.S. 576, 588 (2000).
Propriety of the JO’s Cease and Desist Order
Based upon his finding that Excel violated the P&S Act and the implementing
regulation, the JO included the following cease and desist order in his decision and order:
Respondent, its agents and employees, directly or indirectly
through any corporate or other device, in connection with its
purchases of livestock on a carcass merit basis, shall cease
and desist from:
(a) Failing to make known to sellers, or their duly authorized
agents, prior to purchasing livestock, the factors that affect
Respondent’s estimation of lean percent, including, but not
limited to, any change in the formula used to estimate lean
percent; and
(b) Failing to make known to sellers, or their duly authorized
agents, prior to purchasing livestock, the details of the
purchase contract, including, when applicable, the expected
date and place of slaughter, carcass price, condemnation
terms, description of the carcass trim, grading to be used,
accounting, and any special conditions.
ROA, Vol. V, Doc. 155 at 83. On appeal, Excel challenges the cease and desist order,
arguing it (a) was imposed without fair notice, (b) should expire after no longer than three
years, (c) is vague, overbroad and otherwise improper, and (d) places Excel at a
competitive disadvantage. For the reasons discussed below, we reject all but Excel’s
assertion that the cease and desist order was overly broad.
a) Fair notice
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Broadly speaking, “the requirement of notice” is “[e]ngrained in our concept of
due process . . . .” Lambert v. People of State of California, 355 U.S. 225, 228 (1957).
“Notice is required before property interests are disturbed” and “before penalties are
assessed.” Id. In short, “[n]otice is required in a myriad of situations where a penalty or
forfeiture might be suffered for mere failure to act.” Id. In the context of agency
proceedings, an agency “may fail to give sufficient fair notice to justify a penalty if the
regulation [at issue] is so ambiguous that a regulated party cannot be expected to arrive at
the correct interpretation using standard tools of legal interpretation, must therefore look
to the agency for guidance, and the agency failed to articulate its interpretation before
imposing a penalty.” United States v. Lachman, 387 F.3d 42, 57 (1st Cir. 2004).
Here, however, there is no indication in the record, and indeed no assertion by
Excel, that the JO’s cease and desist order infringed upon any of Excel’s protected liberty
or property interests. In other words, there is no basis for concluding that the JO’s cease
and desist order amounts to a penalty. Cf. Exxel/Atmos, Inc. v. NLRB, 28 F.3d 1243,
1248 (D.C. Cir. 1994) (“Cease and desist orders are remedial; they require only that the
employer ‘conform his conduct to the norms set forth in the Act.’”); Carpenter Sprinkler
Corp. v. NLRB, 605 F.2d 60, 67 (2d Cir. 1979) (noting that cease and desist order was
“clearly remedial” rather than punitive); Benrus Watch Co. v. FTC, 352 F.2d 313, 322
(8th Cir. 1965) (“Cease and desist orders are not punitive . . . .”). Thus, we reject Excel’s
“fair notice” arguments.
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b) Duration of cease and desist order
Excel argues that the cease and desist order, however it is written, should expire
after no longer than three years pursuant to 28 U.S.C. § 530D(a)(1)(C)(ii).5 The JO
addressed this precise argument in his order rejecting Excel’s petition for reconsideration.
We agree with the JO that the statute cited by Excel does not apply here because the
parties did not settle or compromise this proceeding. Rather, the record makes clear that
the proceeding was resolved by the JO only after the parties fully litigated the issues.
c) Vague and overbroad
Excel argues that the cease and desist order is unduly vague and overbroad. In
particular, Excel notes that the cease and desist order covers its purchase of all
“livestock,” rather than just hogs, and requires disclosure of all “factors that affects [its]
5
The statute cited by Excel, entitled “Report on enforcement of laws,” provides in
pertinent part as follows:
(a) Report.--
(1) In general.–The Attorney General shall submit to the Congress a
report of any instance in which the Attorney General or any officer
of the Department of Justice–
***
(C) approves . . . the settlement or compromise . . . of any
claim, suit, or other action–
***
(ii) by the United States (including any agency or
instrumentality thereof) pursuant to an agreement,
consent decree, or order . . . that provides injunctive or
other nonmonetary relief that exceeds, or is likely to
exceed, 3 years in duration . . . .
28 U.S.C. § 530D(a)(1)(C)(ii).
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estimation of lean percent, including, but not limited to, any change in the formula used to
estimate lean percent.” Aplt. Br. at 52. According to Excel, this language goes beyond
the violation found by the JO and beyond the requirements of § 201.99(a) as interpreted
by the JO. Thus, Excel argues, there is “no way [it] can possibly know what is required”
by the cease and desist order. Id. at 53.
Generally speaking, we must uphold an agency’s cease and desist order so long as
“the remedy selected” bears a “reasonable relation to the unlawful practices found to
exist.” FTC v. Colgate-Palmolive Co., 380 U.S. 374, 394-95 (1965); see generally NLRB
v. Express Publ’g Co., 312 U.S. 426, 435 (1941) (noting that a federal court may “restrain
acts which are of the same type or class as unlawful acts which the court has found to
have been committed or whose commission in the future, unless enjoined, may fairly be
anticipated from the defendant’s conduct in the past.”). We may, however, “narrow [an
agency’s] orders . . . by deleting those portions for which a reasonable relationship to the
offending conduct is lacking.” ITT Continental Baking Co. v. FTC, 532 F.2d 207, 220-
21 (2d Cir. 1976) (modifying cease and desist order issued by Federal Trade
Commission); see Encyclopaedia Brittanica, Inc. v. FTC, 605 F.2d 964, 970 (7th Cir.
1979) (same).
Here, we agree with Excel that portions of the cease and desist order fail to bear a
reasonable relationship to the conduct which the JO found had violated the regulation and
statute at issue. As noted, the primary violative conduct identified by the JO was Excel’s
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failure, in connection with its purchase of hogs, to disclose to sellers the change in the
formula used to estimate lean percent. The cease and desist order, however, unreasonably
exceeds the scope of this violation in three respects. First, the cease and desist order
broadly refers to “purchases of livestock,” even though it is uncontroverted that Excel’s
violation was limited to the purchase of hogs. Second, the cease and desist order
prohibits Excel from “[f]ailing to make known” not only “any change in the formula used
to estimate lean percent,” but virtually all “the factors that affect [its] estimation of lean
percent . . . .” Third, the cease and desist order broadly prohibits Excel from “[f]ailing to
make known to sellers, or their duly authorized agents, prior to purchasing livestock, the
details of the purchase contract, including, when applicable, the expected date and place
of slaughter, carcass price, condemnation terms, description of the carcass trim, grading
to be used, accounting, and any special conditions.” Although this language generally
tracks the requirements of 9 C.F.R. § 201.99(a), there is simply no evidence in this case
that Excel failed to comply with those requirements, other than with respect to the
formula used in the Fat-O-Meat’er for estimating lean percent and the change in that
formula. In sum, we conclude the burdens imposed on Excel by these three aspects of the
JO’s cease and desist order are not justified by the violation the JO found.
To narrow the cease and desist order to reflect and address the violation found by
the JO, (1) the reference to “livestock” in the opening sentence of the order is changed to
“hogs,” (2) the language of paragraph (a) is changed to refer solely to “any change in the
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formula used to estimate lean percent,” and (3) paragraph (b) is deleted entirely. As
modified, the cease and desist order will now read as follows:
Respondent, its agents and employees, directly or indirectly
through any corporate or other device, in connection with its
purchases of hogs on a carcass merit basis, shall cease and
desist from failing to make known to sellers, or their duly
authorized agents, prior to purchasing livestock, any change
in the formula used to estimate lean percent.
d) Competitive disadvantage
Finally, Excel argues that the cease and desist order places it at a competitive
disadvantage because a violation of the order will subject it and its employees, but not its
competitors, to criminal prosecution. Aplt. Br. at 46. Excel further argues that this
“threat of criminal sanctions could lead to Excel employees leaving Excel to work for
packers who are not subject to such penalties.” Id. Ultimately, Excel argues, these
factors could “impact [its] decision to stay in the pork business.” Id. at 47.
Having modified the cease and desist order to tailor it to the specific violation
found by the JO, we conclude there is no merit to Excel’s arguments. Simply put, the
requirements imposed by the modified cease and desist order are narrow and clear.
Moreover, by reason of the USDA’s action against Excel, Excel’s competitors are on
notice that they are also subject to the same regulatory requirements. Thus, we fail to see
how compliance with the modified cease and desist order could reasonably place Excel at
a competitive disadvantage.
The petition for review is GRANTED for the sole purpose of modifying the
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Judicial Officer’s decision and order in accordance with this opinion. As so modified, the
decision and order is enforced.
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