By Don T. Hibner, Jr.

Notwithstanding the general applicability of the Filed Rate Doctrine, the Ninth Circuit recently held that it does not necessarily bar producer class actions for overcharges. Whether a given rating authority has “rejected” a rate under its regulatory jurisdiction, albeit after the fact, is a creature of its statutory framework. Gerald Carlin, et al. v. DairyAmerica, Inc., et al., No. 10-16448 (9th Cir. August 7, 2012).

The United States Department of Agriculture (“USDA”), pursuant to the Agricultural Marketing Agreement Act of 1937 (“AMAA”), is authorized to issue Federal Milk Marketing Orders (“FMMO’s”) to regulate minimum prices to be paid by “handlers” to “producers” of various milk products. Under the statutory scheme, the Secretary of Agriculture must conduct an appropriate rule making proceeding in order to issue an FMMO. An FMMO may be issued only if the evidence produced at the hearing shows that it will tend to effectuate the policy of the legislation, in displacing competition to enhance producer prices. Before an FMMO may become effective, it is subject to approval by 50% of the handlers subject to the proposed order, and at least two-thirds of the affected dairy milk producers.

An FMMO sets forth the minimum price to be paid to producers, and is subject to a complicated formula depending on the blend price of the milk ingredients covered. In addition, an FMMO merely covers some, but not all regions of the United States.

In Carlin v. DairyAmerica, Inc., the Ninth Circuit upheld a ruling by the Eastern District of California that the Filed Rate Doctrine was applicable to the FMMO involved. However, the Court of Appeals also held that the District Court had erred in concluding that the Filed Rate Doctrine barred the maintenance of plaintiffs’ claims, including claims under California’s Unfair Competition Law, Business and Professions Code § 17200.

The Court of Appeals noted that, notwithstanding that the minimum prices established by the FMMO in question were “market prices”, the Filed Rate Doctrine was nevertheless applicable. This was because the statutory framework of the AMAA evidenced an intent to regulate the commercial activity covered. If the USDA determines that market prices are “fair and reasonable”, they are so determined, as a matter of law.

The plaintiffs are “dairy farmers” who sold raw milk, priced in accordance with the FMMOs, during the period from January 2002 to April 30, 2007. Defendant DairyAmerica Inc. (“DairyAmerica”) is a non-profit entity established by a group of nine dairy cooperatives for the purpose of marketing dairy products manufactured by the plaintiff dairy farmers. It is alleged that DairyAmerica sold approximately 75% of the non-fat dry milk (“NFDM”) produced in the United States during the applicable period. The District Court held that because of the promulgation of the FMMOs regulated by the Department of Agriculture, any suit by plaintiffs claiming that the FMMO prices reflected an “overcharge” would be barred by the Filed Rate Doctrine, and not allowed to proceed.

How is it different on appeal? A few more record facts are in order. During the covered period, DairyAmerica submitted price information to USDA that improperly included wholesale prices for “forward” contracts. It is undisputed that 90% of the contracts executed and reported by DairyAmerica to USDA were such forward contacts, and according to established procedures, should not have been reported. Plaintiffs contend that because these contract prices were significantly below spot prices, the minimum prices set by the FMMOs were significantly lower than they should have been, if accurate information had been submitted. Because of DairyAmerica’s market dominance, the submissions of the erroneous reports allegedly had the effect of pushing the FMMO minimum prices noticeably lower. Thus, because of its own misreporting, DairyAmerica garnered significant financial benefits, to the detriment of the plaintiff dairy farmers.

The misreporting was made public in a March, 2007 dairy industry publication, “The Milkweed”. The fact of the misreporting was subsequently confirmed by DairyAmerica’s CEO. Within a month of the publication, USDA requested that all of the firms reporting NFDM data review their weekly price and sales commissions, and submit revisions. The revised submissions were “spotty”, and USDA was unable to calculate a corrected minimum price.

In March, 2009, each plaintiff filed a class action on behalf of a nationwide class of raw milk producers in federal court, based upon state law violations and diversity jurisdiction. The actions were consolidated in the Eastern District of California. An amended class action complaint sought damages for negligent misrepresentation, negligent interference of prospective economic advantage, as well as violations of California Business and Professions Code section 17200.

Defendants filed motions to dismiss on a number of grounds, all related to the Filed Rate Doctrine. The District court dismissed the monetary portions of the plaintiffs’ claims on the ground that they were not justiciable pursuant to the Filed Rate Doctrine. Noting that the Filed Rate Doctrine consists of a body of case law that has been subject to conflicting interpretations, the District Court’s dismissal was with leave to amend.

Plaintiffs’ initial appeal was dismissed as it was not a final order. Plaintiffs then moved the District Court to dismiss their complaint with prejudice, so that the Court of Appeals could exercise jurisdiction. It did so.

In reversing the District Court’s dismissal of the monetary claims, the Court of Appeals distinguished, in large part, Filed Rate Decisions based upon other statutory authority, including ICC and Department of Energy cases (FERC). While the Ninth Circuit recognized that the Filed Rate Doctrine generally provides that state law, and some federal law, including the antitrust laws, may not be used to invalidate a filed rate or assume a rate to be charged other than the rate adopted by the federal agency in question, the Court noted that the federal statutory enactments are dissimilar in many regards, and are a function of the congressional history and statutory language involved.

Thus is the case with milk. While the Ninth Circuit upheld the basic integrity and rationale of the Filed Rate Doctrine, the AMAA leads to a different conclusion, where the defendants themselves filed erroneous data, and duped the regulator. The Court noted that state efforts to regulate commerce must fail when they conflict with or interfere with federal authority over the same activity. Allowing the courts to second guess the federal agency in its determination of a rate, based upon industry filings, would destroy the federal interest in uniformity. In addition, the Court recognized that courts have no expertise or valid reason to interfere in the rate-making process. It recognized the authorities standing for the proposition that when a federal agency statutorily granted the authority to set rates exercises that authority, such rates are just and reasonable as a matter of law, and cannot be collaterally challenged under either federal antitrust law of state law.

But wait a minute! Here, the result is different. Why? When the USDA become informed that defendants, representing 75% of the affected industry, submitted data that was 90% inaccurate, and where the USDA had taken remedial steps to try and correct the situation, what would normally be a filed rate then became a fraud on the industry, and the regulatory agency. The Court held that the USDA had the authority, and exercised the authority, to correct the situation as best as it could, and that, in effect, what defendants argued was a “filed rate”, became a “flawed-rate”, and thus not a bar to plaintiffs’ claim for overcharges. Otherwise, the defendants would benefit from their own misdeeds. On the record before it, the Ninth Circuit held that the rejection of the flawed rate could be retroactive.

In essence, the Court of Appeals held that a flawed filed rate does not pre-empt or otherwise operate as a bar to the plaintiffs’ lawsuit. This is because the federal agency, namely the USDA, had itself determined that the FMMO prices were incorrect. Citing Keogh v. Chicago & Nw. Ry. Co., 260 U.S. 156, 163 (1922), the Court noted that the Supreme Court has held that the Filed Rate Doctrine is inapplicable to bar a private litigant’s rate-related claim, where the rate has been “suspended” or “set aside” by the federal agency in question. The Ninth Circuit held that this was the situation here, based upon a proper analysis of the underlined statutory scheme of USDA rate regulation. The Court noted that unlike the natural gas market, for example, there is nothing in the AMAA that specifically bars the USDA from revising its rates where handlers have supplied incorrect data to the agency. In such a situation, as in the instant case, the Filed Rate Doctrine is not a bar to a plaintiff seeking reparation from the imposition of the unreasonable rate. The Court concluded that the USDA’s actions constituted a sufficient rejection such that the filed rate doctrine is not a bar. In addition, it concluded that the statutory mandate of the AMAA, as well as the policies of the Filed Rate Doctrine more generally, were furthered by the conclusion that the filed rate doctrine is not a bar to the plaintiff’s claims for monetary reparation for the defendants’ misconduct. In effect, and in drawing from the conclusion of the Bard in Hamlet, Act III, the defendants were “hoisted with their own petard.” Under AMAA at least, there is no such thing as a “Flawed Filed Rate” bar to the recovery of handler-induced over-charges.