MISASI v. JACOBSEN (1960)

This is an appeal from a judgment of the Superior Court in San Joaquin County denying relief to plaintiffs and appellants in a declaratory relief action, wherein they sought to have declared void part of an order prescribing minimum retail prices for fluid milk established by the Director of Agriculture for the San Joaquin Marketing Area. Appellants, who conduct retail stores, sought to have declared void that part of the order referred to in the record as Provision No. 2, reading as follows: ‘The minimum retail prices for fluid milk sold f. o. b. distributor's processing plant shall be eight cents ($0.08) per gallon container; four cents ($0.04) per half-gallon container; two cents ($0.02) per quart container; and one cent ($0.01) per pint container below the minimum retail store carry-out prices provided in Schedule 1.’ (Italics ours.)

The legislation which authorizes the fixing by the Director in an established marketing area of minimum wholesale and minimum retail prices for fluid milk is found in Chapter 17 of Division 6 of the Agricultural Code, sections numbered 4200 through 4420. Article 10 of that chapter is devoted to the subject of minimum wholesale and retail prices and contains sections 4350 through 4363. The legislation prescribes standards for the fixing of minimum prices, and procedures which the Director must follow in doing so. It is conceded herein that the Director followed the established procedures. We are concerned herein only with the production and marketing of ‘fluid milk’ as defined in Section 4212: “Fluid milk' means * * * whole * * * milk that is produced in conformity with applicable health regulations for market milk of the place where such milk is consumed.' We shall hereafter call the product ‘milk’.

The Legislature has classified those engaged in the production and marketing of milk into ‘producers', who operate the dairy herds, ‘distributors', who purchase or handle milk for resale, and ‘retail stores', that is, those who own and operate retail grocery stores, restaurants, confectionaries and other similar businesses where milk is sold to the general public. More specifically, distributors are declared to be persons who purchase or handle milk for resale, including brokers, agents, copartnerships, cooperative corporations and incorporated and unincorporated associations, but excluding any retail store which is not engaged in processing or packaging milk, any establishment where milk is sold only for consumption on the premises and which is not engaged in processing or packaging milk, and any producer who delivers milk only to a distributor.

Section 4360 of the code is entitled ‘Establishment of prices; findings.’ It establishes the basis for the fixing of minimum prices. It requires the Director to establish minimum wholesale and minimum retail prices for distributors in the area and minimum retail prices for retail stores therein. It declares that the prices established shall be ‘sufficient, but not more than reasonably sufficient, to cover costs, as such costs are described in Section 4355 of this code, according to method of distribution, and reasonable return upon necessary capital investment.’ Section 4355 declares that the cost of milk in the marketing area, to distributors, shall be the reasonably necessary cost incurred by distributors in handling milk, including all cost of hauling, processing, selling and delivering and reasonable return on necessary capital investment for each of the several methods of distribution used in the area in accomplishing such hauling, processing, selling and delivery, but excluding costs not reasonably necessary to efficient operation. Costs are to be determined by impartial cost surveys or examination of the books and records, or both, of all or such portion of the distributors in the area as are reasonably determined by the Director to be sufficiently representative to indicate the reasonably necessary costs of sufficient, efficient, distribution for such marketing area. Costs with respect to retail stores shall be the reasonably necessary cost incurred by retail stores in handling milk as such costs are determined by impartial cost surveys or examination of the books and records, or both, of such portion of the retail stores in the marketing area as are reasonably determined by the Director to be sufficiently representative to indicate such costs of all retail stores in such marketing area. In determining these costs incurred by retail stores handling commodities in addition to fluid milk, the Director is required to determine the cost of doing business for each such representative retail store and for such purpose must consider all costs and expenses of doing business, including depreciation on inventory and equipment. It is further provided that in the absence of satisfactory evidence to the contrary, the cost of handling the milk shall be presumed to be the same percentage as the cost of doing business of such retail store in conducting its entire business.

It is obvious that minimum prices reflect costs incurred by distributors and by retail stores, and that the factors to be considered in ascertaining distributor costs differ materially from those to be considered in ascertaining retail store costs. Only minimum prices are fixed and sales above the minimums are not forbidden. The legislative purpose in tying minimum prices to costs was a part of its plan to stabilize the industry which had been disastrously affected by below cost selling. There has been and will be varying methods of distribution, wholesale and retail, and these methods will, from time to time, change as conditions change. For instance, methods of distribution have been greatly affected by widespread use by everyone from producer to consumer of modern refrigeration. Although the statute uses the phrase ‘methods of distribution’ in the provisions for ascertainment of costs it does not define that phrase. But its common meaning includes all the varying ways by which milk gets from the dairy herd to the consumer. Methods of distribution in one area may differ from those that predominate in another. The Legislature has recognized this in its provision for determining distributor costs. It has referred to ‘the several methods of distribution used in such marketing area in accomplishing such hauling, processing, selling and delivery.’ Sec. 4355. But however many, and whatever may be the nature of, methods of distribution that are found in use in a marketing area, when the Director has ascertained the cost of a method of distribution, that cost must be reflected in the minimum unit prices he fixes. Provision No. 2 therefore reflects simply the costs incurred by distributors, using the method described in the provision, that is, purchasing milk from producers, processing and packaging it in plants owned by them, and selling it to consumers who come to the plants, buy it and carry it away. The difference between that price and the retail store price is the difference between the defendant producers' costs and the plaintiff retail stores' costs as ascertained by the Director under the statutory mandate. It is obvious that this differential will vary from time to time and it is conceivable that it may happen in the future the Director will ascertain the costs and will discover that he is required to fix a lower minimum price for the stores and a higher price for distributors. Since it is not contended that the Director has not followed the statutory proceedings in the ascertainment of costs and in the resultant establishment of minimum prices and since it is not contended that his determinations are not supported by the proof produced during those proceedings the challenged Provision 2 ought to stand.

The subject legislation was enacted under the police power. The Legislature has declared that it is to be liberally construed in order that the legislative purposes may be achieved. The legislative plan for the orderly production and distribution of milk of high quality at reasonable prices to consumers, while yielding reasonable returns to producers, distributors and retailers, presents tremendous complexities, constantly recurring, and demanding constant supervision by the administrative agency. Therefore, there has been vested in the Director a broad discretion in all things he must do in the performance of his duties under the subject legislation to achieve the legislative purposes. It is axiomatic that in such a situation the agency will be given a comparatively free hand by the courts.

Appellants place great reliance upon the decision of the Supreme Court in Challenge Cream & Butter Association v. Parker, 23 Cal.2d 137, 142 P.2d 737, 149 A.L.R. 1203. They contend that the decision is determinative of the issues here. We do not agree. In the Challenge case the court affirmed a judgment of the trial court enjoining the Director from enforcing a pricing order established in the Alamada County Marketing Area. The particular portion of the order objected to by the plaintiff in that case was a provision that minimum wholesale prices (that is, prices to stores) for milk sold in fibre containers should be onehalf cent higher than such wholesale prices for milk sold in glass containers. The court held that in determining minimum prices the Director could not include as a cost factor any differential in the type of container used for the delivery of the same quantity and quality of milk under the method of delivery involved. We find nothing in that case which conflicts with what we have here said.

Appellants contend further that, even assuming, arguendo, that Provision 2 is valid, yet the distributor defendants do not come within its scope because they are themselves retail stores when selling processed and packaged milk f. o. b. their plants on the carry-out basis. But the defendant distributors are distributors as defined by the statutes and the appellants are retail stores as therein defined. The classifications are such as may properly be made by the Legislature since there are fundamental differences both in the methods used and the functions performed which are reflected in the admeasurement of costs the Director has made. Defendant distributors have an integrated operation which involves the purchase of milk from producers, the processing and packaging of it in a plant, meeting regulatory requirements and, as a part of the whole operation, the sale to consumers at the plant where the product is readied for sale. The retail stores, on the other hand, as defined by the statute, purchase their milk from distributors. This requires that it be delivered to their store. There, as a part of an operation involving the retail sale of thousands of other items, they may sell it to consumers who carry it away. The fact that at one point, that is, when the retail sale is made to consumers, there is great similarity in what is done will not justify a holding that the same method of distribution is being used.

Although extensive briefs have been filed by the parties and by amicus curiae, we think it would unduly prolong this opinion to treat of all of the contentions therein advanced and the arguments therein made in support of them and we think it is unnecessary to do so.

The judgment appealed from is affirmed.

On Petition for Rehearing

The petition for rehearing is denied. However, it has been suggested by the parties that our opinion may be construed as limiting the Director inflexibly to ascertained costs and reasonable return on capital investment when fixing minimum prices.

Nothing in the opinion was intended to deny or disparage the authority of the Director under Section 4360 of the Agricultural Code in fixing minimum prices to depart from ascertained costs, according to method of distribution and reasonable return on capital investment if the statutory conditions for such departure are found to exist.

VAN DYKE, Presiding Justice.

SCHOTTKY and PEEK, JJ., concur.