Transcript

HILLSIDE DAIRY, INC., A&A DAIRY, L&S DAIRY, AND MILKY WAY FARMS, Petitioners v. WILLIAM J. LYONS, JR., SECRETARY, CALIFORNIA DEPARTMENT OF FOOD AND AGRICULTURE, ET AL.; and PONDEROSA DAIRY, PAHRUMP DAIRY, ROCKVIEW DAIRIES, INC., AND D. KUIPER DAIRY, Petitioners v. WILLIAM J. LYONS, JR., SECRETARY, CALIFORNIA DEPARTMENT OF FOOD AND AGRICULTURE, ET AL.

No. 01-950, No. 01-1018

April 22, 2003, Tuesday, Washington, D.C.

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 11:10 a.m.

PROCEEDINGS

(11:10 a.m.)

CHIEF JUSTICE REHNQUIST: We'll hear argument next in Number 01-950, the Hillside Dairy, Inc. v. William J. Lyons, Jr., and a companion case.

Mr. Englert.

ORAL ARGUMENT OF ROY T. ENGLERT, JR. ON BEHALF OF THE PETITIONERS

ROY T ENGLERT JR: Thank you, Mr. Chief Justice, and may it please the Court.

This is a case of inventive statutory interpretation by the Ninth Circuit.

The statute at issue directs the courts how to construe this act or any other provision of law, yet the Ninth Circuit interpreted the statute rather inventively as an exemption from a provision of the Constitution.

The statute protects California statutes and regulations regarding two aspects of California's composition regulation of packaged fluid milk, yet the Ninth Circuit interpreted the statute, rather inventively, as an exemption for all aspects of California's economic regulation of raw milk.

Inventiveness may have a role to play in some cases of statutory interpretation, but not when the governing legal standard requires that Congress has made its intent unmistakably clear.

The Ninth Circuit's statutory holding should be reversed.

There is also a constitutional issue before the Court involving the Privileges and Immunities Clause of Article 4.

The Ninth Circuit should be reversed on that issue as well, but not because it was overly inventive.

The Ninth Circuit simply ignored, with no explanation at all, binding precedent from this Court requiring that courts look beyond the face of the statute to determine whether, in practical effect, it draws a distinction based on citizenship or residency.

The California statutes and regulations at issue in this case draw a distinction based on where milk is produced, and 93 percent of dairy farmers live on their farms.

To draw a distinction based on the State of production is, in effect, to draw a distinction based on the State of residency, and the distinction should be subject to scrutiny under the Privileges and Immunities Clause.

We do not--

JUSTICE GINSBURG: But as far as that clause is concerned it wouldn't help you with the corporate, if you had a corporate farmer.

It would only work for individuals.

ROY T ENGLERT JR: --Only the individual petitioners are entitled to invoke the Privileges and Immunities Clause, yes, and there are individual petitioners.

JUSTICE GINSBURG: There are two individual petitioners I think in this group, is that so?

ROY T ENGLERT JR: A... a husband and wife, Darrel and Diane Kuiper, yes.

Let me return to the statutory issue.

This act or any other provision of law in section 144 means statutory or regulatory law, not the Constitution.

Why do I say that?

Number 1, section 144 is phrased as a directive to courts about how to construe particular bodies of law.

Congress doesn't have the power to tell courts how to construe the Constitution.

It does have the power to tell courts how to construe congressional silence or inaction, and the McCarran-Ferguson Act is a good example of the kind of phraseology Congress uses when it wants to enact a Commerce Clause exemption, but section 144 is a poor candidate from the outset.

Number 2, the canons of construction applied in numerous decisions of this Court, most recently the Keffler case in February, required that a general phrase like, other provision of law, be construed by reference to the phrases that came before.

Federal statutory and regulatory law is naturally paired with this act, but would be very odd to throw the Constitution in as an afterthought through use of the phrase, other provision of law.

Number 3, the legislative history is devastating to respondents' position.

The absence of a single reference to the Constitution anywhere in the legislative history is quite significant, but it's not the strongest refutation of respondents' argument in the legislative history.

Rather, the very first paragraph of explanation of section 144 in the conference report describes it as, quote, an exemption from the preemption provisions of any Federal law respecting standards of identity and labeling for fluid milk, close quote.

That can be found on page 33 of the blue brief.

Number 4, and this is merely the clincher that builds on the first three points, the standard is whether Congress has been unmistakably clear in passing a Commerce Clause exemption.

The evidence is so strongly the other way that one might call it unmistakably clear that Congress did not pass a Commerce Clause exemption, but it--

JUSTICE KENNEDY: This argument's probably better addressed to the respondents than... than you, but do you understand the respondents to argue that the percentage of... of milk solids which is one, and labeling, which is the second part of the statute, simply will cease to exist if... if this pricing regulation is not upheld?

ROY T ENGLERT JR: --No, that... I don't understand that to be their contention.

JUSTICE KENNEDY: I... I thought that that was going to be... when I got into the case I thought, well, they're going to say that it's just impossible to have the labeling, but I... I don't understand them to argue that.

I can ask them, of course, but--

ROY T ENGLERT JR: I... I don't understand them to argue that either, Justice Kennedy.

I think the strongest form their argument takes is, there is a relationship between economic regulation of raw milk and compositional regulation of packaged fluid milk, and any relationship is enough to satisfy this statute.

JUSTICE O'CONNOR: --Well, is it true that the pricing and pooling laws were adopted to help the milk producers comply with the fluid milk content provisions?

ROY T ENGLERT JR: I... I don't think that's factually accurate, Your Honor.

JUSTICE O'CONNOR: That was what the attorney in the Shamrock case conceded.

ROY T ENGLERT JR: Not... not--

JUSTICE O'CONNOR: You don't agree?

ROY T ENGLERT JR: --I'm sorry, Justice O'Connor.

He did not concede that.

What he did concede was that the fortification allowance--

JUSTICE O'CONNOR: Yes.

ROY T ENGLERT JR: --which is a particular provision of the stabilization plan, that is the pricing plan, not the pooling plan, was adopted to help compliance with California's composition standards.

JUSTICE O'CONNOR: And section 7254 does use the word indirectly.

ROY T ENGLERT JR: It does, Your Honor, but it's very interesting to look at the parallel phrasing of section 144 of the Farm Bill, 7 U.S.C. 7254, and the preemption provision of the Nutrition Labeling and Education Act, which is 21 U.S.C. section 343-1.

Both use the phrase directly or indirectly.

JUSTICE O'CONNOR: Yes.

ROY T ENGLERT JR: In the preemption provision of the NLEA, Congress was talking about was... what was preempted, and it was saying anything a State does directly or indirectly to have labeling requirements different from Federal law is preempted.

What section 144 of the Farm Bill does is, it unpreempts California's standards for milk.

JUSTICE O'CONNOR: Right.

ROY T ENGLERT JR: Now, unless California is prepared to say that it's entire pooling and pricing plans were preempted by the NLEA in 1990, which I don't think you're going to hear from Mr. Urban, the entire pooling and pricing plans weren't unpreempted by section 144 of the Farm Bill, either.

Let me turn to the Privileges and Immunities Clause issue.

JUSTICE KENNEDY: Just... just before you get there... well, maybe it's a part... does... do Nevada producers have a... a Federal marketing order?

ROY T ENGLERT JR: Nevada, yes.

JUSTICE KENNEDY: And Arizona as well?

ROY T ENGLERT JR: Yes.

JUSTICE KENNEDY: They... they... do they opt out of it if they want to sell the milk to... to California producers, or--

ROY T ENGLERT JR: The sales to California... or, to California processors, excuse me, are not regulated by those milk marketing orders.

The... the seller and the buyer would both have to be within the marketing order for it to be governed by the Federal milk marketing order, I believe.

JUSTICE KENNEDY: --I see, and... and so far as the Nevada and Arizona dairy farmers are concerned, they can sell to California without implicating any mechanisms under the Federal marketing order?

ROY T ENGLERT JR: That's correct.

JUSTICE O'CONNOR: Now, the court below didn't deal with the Privileges and Immunities issue, right?

ROY T ENGLERT JR: Oh, it did actually, Justice O'Connor.

JUSTICE O'CONNOR: It did.

ROY T ENGLERT JR: It affirmed the Rule 12(b)(6) dismissal.

JUSTICE O'CONNOR: Okay.

ROY T ENGLERT JR: It's on page A14--

JUSTICE O'CONNOR: Okay.

ROY T ENGLERT JR: --of the petition appendix.

JUSTICE O'CONNOR: All right.

ROY T ENGLERT JR: And its only reasoning was, the statutes and regulations do not, on their face, refer to citizenship or residency.

The controlling precedent that absolutely precludes that reasoning is the Chalker case from this Court in 1919, and respondents frankly have not even made an argument for why Chalker should be overruled.

Our own submission is that the 84 years since Chalker was decided have strengthened its underpinnings a great deal, rather than undermining them.

The Camden case from 1984 reinforces Chalker by rejecting a formalistic approach to the threshold question of discrimination, and the Lunding case from just 5 years ago stresses the concern with, quote, practical effect, close quote, in this Court's Privileges and Immunities Clause jurisprudence.

There's just nothing to justify the Ninth Circuit's disregard of this Court's cases.

I'd like to reserve the balance of my time for rebuttal.

CHIEF JUSTICE REHNQUIST: Very well, Mr. Englert.

Ms. McDowell.

ORAL ARGUMENT OF BARBARA B. McDOWELL ON BEHALF OF THE UNITED STATES, AS AMICUS CURIAE, SUPPORTING THE PETITIONERS

BARBARA B MCDOWELL: Thank you, Mr. Chief Justice, and may it please the Court.

Section 144 does not indicate with unmistakable clarity that Congress meant to exempt from the Commerce Clause any California laws, much less to exempt the particular raw milk pooling regulations at issue here.

Indeed, section 144 is most naturally read as protecting only a narrow set of California's fluid milk composition and labeling laws from invalidation only under Federal statutes and regulations, not under the Constitution.

First, Congress did not state or even imply that the Commerce Clause is among the provisions of law from which section 144 provides protection.

Section 144 directs how those provisions of law shall be construed, and Congress ordinarily does not direct this Court and the Federal courts how to construe the Constitution, and under the canon that general words are known by their more specific companions, the words, any other provision of law is understood to refer to the preceding words, this act, to refer only to Federal statutes and regulations implementing them.

Section... second, section 144 protects only California laws regarding two specifically defined subjects, the percentage of milk solids, and solid not... solids not fat in fluid milk products sold at retail, and the labeling of those products.

The laws challenged here do not concern either subject.

They instead concern how California handlers account to the California equalization pool for purchases of out-of-State raw milk which may or may not ultimately be processed into fluid milk products subject to the composition and labeling requirements.

JUSTICE GINSBURG: Ms. McDowell, as to the exemption from the National... from the Nutrition and Labeling Act, is this... is this a special exemption that California has, or do a number of States have congressional exemptions from the Nutrition and Labeling Act?

BARBARA B MCDOWELL: Well, this specific provision, section 144, applies only to California.

JUSTICE GINSBURG: Yes, but are there similar exemptions in... in effect in other States?

BARBARA B MCDOWELL: Well, the Nutrition and Labeling Act does contain an exemption for maple syrup composition and labeling that might have been designed to benefit the particular States where maple syrup is produced.

I'm not aware of the particular background of that provision.

There's also an adjoining provision of the 1996 Farm Bill that provides further indication that Congress didn't intend section 144 to apply to all of the pricing and pooling laws.

That's section 143(b) on page 17 of the joint appendix, which authorizes the promulgation of a Federal milk marketing order for California if California dairy farmers approve of one.

Such a Federal milk marketing order would have contained its own separate Federal pricing and pooling provisions.

It would necessarily have superseded the California pricing and pooling provisions at issue here.

It seems unlikely that Congress intended in section 144 to preserve the very pricing and pooling laws that section 143(b) and the Federal marketing order would supersede.

The legislative history reinforces--

JUSTICE KENNEDY: But there... but there was no... but there is no Federal marketing order that supersedes it, or am I wrong there?

BARBARA B MCDOWELL: --No, it authorized the promulgation of one if California dairy farmers approved.

California dairy farmers have not asked for a Federal marketing order at this point.

Under a Federal marketing order, by the way, handlers are required to treat milk from sources inside and outside the marketing order, marketing area similarly, so the same minimum pricing requirements that would apply to a dairy farmer within the marketing area would also apply if milk came in from... from outside that area.

JUSTICE BREYER: Is the Federal--

JUSTICE KENNEDY: --Why doesn't that resolve this case?

BARBARA B MCDOWELL: Because there... there is no Federal marketing order that applies to California, and of course the--

JUSTICE KENNEDY: Oh, I... I see.

In other words it would have to be a California marketing order treating Nevada milk, not... not a Nevada marketing order saying what happens when you go to California.

All right.

BARBARA B MCDOWELL: --Well, if there was a Federal milk marketing order for California, milk from Nevada would be treated the same as milk from California.

Of course, Federal milk marketing orders aren't subject to the constraints of the Commerce Clause, as are the California orders.

JUSTICE GINSBURG: Has Congress ever provided a... an exemption for anything that looks like this California pricing and pooling scheme?

BARBARA B MCDOWELL: Not that I'm aware of, Your Honor.

And this is a particularly unusual Commerce Clause exemption because it does benefit only one State.

It seems particularly appropriate in that circumstance to apply the clear statement rules and... and to require an affirmative indication that Congress wanted to allow California and only California to burden out-of-State interests.

JUSTICE SCALIA: I thought the only thing Congress had ever... maybe there's something else.

JUSTICE STEVENS: I thought it was only insurance that Congress had performed the extraordinary act of waiving the Commerce Clause.

Isn't that right?

BARBARA B MCDOWELL: That's certainly one of the most familiar instances of this--

JUSTICE SCALIA: It's the only one I... only one I know of.

Is there another one?

BARBARA B MCDOWELL: --There are other instances in which Congress has affirmatively authorized particular action by States.

For example, the Northeast Bancorp case involved a... an authorization for States to essentially discriminate against interstate commerce to prohibit acquisitions of local banks by out-of-State holding companies, and when Congress enacts an affirmative authorization one would think that then Congress is removing any impediments that Congress can remove from State regulation, but that's not the forum of the provision at issue here.

Rather, it applies only to this act and other provisions of law which are naturally understood to be Federal statutes and regulations.

With respect to the Privileges and Immunities Clause, we agree that the court of appeals erred in suggesting that a statute can violate that clause only if it discriminates on its face based on citizenship and... or residency.

In Chalker, the Court recognized that a statute could also violate that clause if it discriminates based on some factor closely related to citizenship, such as the location of a person's chief business office.

The distinction drawn by the California regulations are somewhat similar.

The lower courts didn't consider whether that distinction is closely enough related to State citizenship to implicate the Privileges and Immunities Clause.

Accordingly, we would ask that the judgment of the Ninth Circuit be reversed with respect to both the Commerce Clause and the Privileges and Immunities Clause question, and that the case be remanded.

JUSTICE STEVENS: May I ask just one just one factual question?

BARBARA B MCDOWELL: Yes.

JUSTICE STEVENS: Am I correct in thinking California is the only State that does not have a Federal order?

BARBARA B MCDOWELL: That's not entirely correct, Justice Stevens.

There are portions of other States that are not included in Federal marketing orders, either, I... I believe, and perhaps the entire State of Maine is not.

California is unique, however, in, to the extent that it has its own freestanding marketing program and, of course--

JUSTICE STEVENS: Of its own, yes.

BARBARA B MCDOWELL: --California is the largest economy.

JUSTICE STEVENS: And my other question is, do you... does the Government think we have to reach the Privilege and Immunities issue to decide the case?

BARBARA B MCDOWELL: Well, the Court granted certiorari on the Privileges and Immunities question.

It's a narrow question.

Ultimately, on remand, the Privileges and Immunities claim may not have to be decided because a ruling in petitioners' favor on the Commerce Clause issue would provide them all of the relief that they're seeking.

JUSTICE GINSBURG: And it wouldn't take care of the... the ruling on the statute would take care of everything, but not Privileges and Immunities, because that covers only individual persons, not corporations.

BARBARA B MCDOWELL: That's correct.

What we're saying is that the entire case needs to be remanded for consideration of the Commerce Clause claim on the merits, as well as the Privileges and Immunities Clause claim, and if the Commerce Clause question is decided in petitioner's favor, all of the petitioners would benefit from that ruling, so there might not be occasion to consider the Privileges and Immunities Clause as well.

If there are no further questions--

CHIEF JUSTICE REHNQUIST: Thank you, Ms. McDowell.

Mr. Urban, we'll hear from you.

ORAL ARGUMENT OF MARK J. URBAN ON BEHALF OF THE RESPONDENTS

MARK J URBAN: Thank you, Mr. Chief Justice, and may it please the Court.

There are two distinct and separate inquiries in construing section 7254.

First, does it create a Dormant Commerce Clause exemption for any California law, and second, what laws are within the scope of section 7254?

As regards the first step, it is unmistakably clear that Congress in adopting section 7254 intended to provide a Dormant Commerce Clause exemption for at least California's milk content and labeling laws.

As regards the second step, the scope of section 7254 encompasses not just the milk content and labeling laws themselves, but also the various means that California uses to continue those laws in effect.

CHIEF JUSTICE REHNQUIST: How do you respond to your adversary's contention that when you use the word construe, Congress does not ordinarily tell this Court how to construe a provision of the Constitution?

MARK J URBAN: First of all, in the McCarran-Ferguson Act statutes the Court found that there was a Dormant Commerce Clause exemption.

In that case they used the term construe.

Second of all, I don't know that Congress is aware of the niceties of the difference between construe and interpret--

CHIEF JUSTICE REHNQUIST: Well--

MARK J URBAN: --or it would have used both of those words.

CHIEF JUSTICE REHNQUIST: --Well, certainly, looking over a large group of statutes that Congress has enacted, there may be something to what you say.

[Laughter]

But I... I do think the... the word construed is simply out of place when Congress is saying something to this Court about how to... how to interpret the Constitution.

MARK J URBAN: But beyond that, Your Honor, the... they then say, construe to preempt, prohibit, or otherwise limit.

If they want to delimit the scope of the protection of section 7254 merely to preempt, they wouldn't have added two additional phrases, and in addition to that, many of the preemption savings statutes use the term, this act or other... any other act of Congress, or lists a set of acts or regulations.

They don't simply have the statement of one act and then a... a general term like, any other provision of law.

JUSTICE SCALIA: Of course, Congress is sort of at a loss for words, because it... it's only the Commerce Clause... that's the only provision of the Constitution that Congress can instruct us not to apply, so it's understandable.

Maybe out of respect for the rest of our body of law they... they might use the word construe, right?

I mean, we don't have any other examples of where... unless it was the... the Religious Freedom Restoration Act, which... which we did not uphold.

MARK J URBAN: That's... that's correct, Your Honor.

There's two ways the Congress can act to save State laws.

One is by a preemption savings statute, and the other is by a Dormant Commerce Clause exemption.

And beyond that, Congress can't affect the State exercise of authority through any means that involves the Constitution, and that, the... the first question then is, does section 7254 create a Dormant Commerce Clause exemption.

And then, as I indicated, the choice really is, is it preemption only or something more and the statute itself, by using the terms, prohibit or otherwise limit, suggests that it is, or states directly that it is something more.

If they just simply wanted to have this as a preemption savings statute they would have stopped at preemption.

And again, the argument was raised, well, why didn't they mention the Constitution directly.

None of the two areas where there have been cases in which the Court has found a Dormant Commerce Clause exemption, one of which is the McCarran-Ferguson Act and the other of which is the Northeast Bancorp case, was there mention of the Constitution.

They... they looked at... at the total, at what the statute said, at what the context was in which those statutes were adopted, and... and from that concluded that Congress had intended to fully regulate in those areas or to provide a Dormant Commerce Clause exemption.

The petitioners have tried to use a doctrine of adjustum generis, the laws are interpreted in the company they keep.

I've never seen an application of that doctrine where all you have is one statute or one item mentioned, and then you say any others.

Usually that doctrine's applied when you have three or four items.

JUSTICE STEVENS: Mr. Urban, the problem, as I see it, is not whether they... you might construe the language as broad enough to cover the Dormant Commerce Clause, but the thing it saves is, legislation regarding milk solids and fats and so forth, and doesn't say anything about saving pricing legislation.

MARK J URBAN: That... that's true, Your Honor.

That's the second inquiry, what is the scope of the statute, and they are distinct inquiries, and it would be possible for the Court to determine that the statute doesn't cover pooling and pricing laws--

JUSTICE STEVENS: Right.

MARK J URBAN: --and still protect the Dormant Commerce Clause exemption from milk content and labeling laws.

JUSTICE KENNEDY: In... although you would not prevail if we so held.

Unidentified Justice: [Laughter]

MARK J URBAN: We... if you so held, we would be back to the district court on the question of whether there's a Dormant Commerce Clause violation for the milk pricing and pooling laws, but the core intent of Congress in enacting section 7254, which was to protect and allow State milk content and labeling laws to have full effect, that would be protected, because we have the Shamrock Farms case from the Ninth Circuit that held that there was a Dormant Commerce Clause exemption created for those laws.

I want to--

JUSTICE GINSBURG: I thought those laws weren't directly before the court in Shamrock.

I thought the fortification provision was.

MARK J URBAN: --What was directly before the Court in the Shamrock case, Your Honor, was a challenge to the milk content and labeling laws, and then the... the other item that was before the court that was specific was the fortification allowance, which is a small part of the milk pricing and pooling laws, and then there was a general allegation involving milk pooling and pricing that, upon which there was an admission made about the laws being... I think it was something, interwoven.

JUSTICE KENNEDY: But... but surely we're not bound by Shamrock if... if we consider it not to be sound, not to have sound reasoning.

MARK J URBAN: That... that's correct, Your Honor.

If the Court believes that there's no Dormant Commerce Clause exemption at all--

JUSTICE KENNEDY: And I... I... and I must say, without knowing many of the details of... of the pricing scheme, it seems to me that the labeling and... and requirements for fortification with, I guess, nonfat solids can exist perfectly well without your pricing scheme.

MARK J URBAN: --Your Honor, as a general matter, you can have composition and labeling laws without a pricing scheme.

California's composition standards are unique because they require fortification.

That produces several features.

One is that there's not a ready market to sell into California with complying milk.

If you didn't have pricing and pooling laws and you went back to the free market, you'd be subject to the same boom-bust cycle that led to the creation of these pricing and pooling laws in the first place, and when you'd reached the point where the prices were very high and supplies were low, I think the... the inevitable result of that would be that the composition standards would be undone and they'd simply revert to the Federal standards.

JUSTICE KENNEDY: But... but if that's so inevitable, it seems to me it would have been in 7254.

MARK J URBAN: I... I don't agree with that, Your Honor, because I think that what Congress did in 7254, and this goes to the scope of the statute, is that they protected the composition and labeling laws themselves, and they also, by using terms like, directly or indirectly, establish or continue in effect, regarding rather than regulating, referred to something more, and that something more are the means that California uses to enable the laws to continue in effect.

JUSTICE BREYER: That's an ingenious argument, but I mean, if I understand it what you're saying is that if we... if you didn't have the price controls, then competition would break out, and competition breaking out would mean in... if we were back in the thirties, that eventually everybody would go out of business but for one giant milk seller who then would raise the price so high that the people really getting angry at him, as opposed to only paying [dollar] 18, which is considerably above the market level, they might have to pay [dollar] 24, even more.

They'd really get angry, and this time, though they don't get angry at the [dollar] 18 price, they'd start really shipping milk in from Arizona, and once they shipped in milk from Arizona, maybe that wouldn't have the fortified stuff in it and they'd... they'd amend the law so that you could bring it in from Arizona and down would go the labeling requirement as it stands today.

Do I understand the argument correctly?

I've parodied a little, but I don't think I've parodied it that much.

MARK J URBAN: You did, Your Honor.

[Laughter]

JUSTICE BREYER: I did.

Yes, I did.

MARK J URBAN: The... milk is an... is an unusual commodity because it can't be stored, and like any commodity, it's subject to periods, and we have this a lot with agricultural pricing, where you have periods of low... you have high supply and therefore you'll have a low price.

People leave the industry and then the cycle will reverse, and it's when you reverse the cycle... and that's... that is what happened with... with milk that led to the--

JUSTICE BREYER: I thought that's--

MARK J URBAN: --formation of those laws, and it's also what occurs frequently with agricultural commodities.

I mean, they're... they're subject to a boom-bust cycle, and at some point in that cycle you're going to have prices that are very high, and we... we've had that happen in California to some extent for other--

Unidentified Justice: --Like--

MARK J URBAN: --other reasons, and... and you... and at that point, and it did happen in California in '99, as we've cited in the brief, there is a lot of pressure to undo the standards because they are... they are more expensive and you'll have limited supplies.

I mean, that's... that's the connection.

JUSTICE STEVENS: --May I ask, though, are the... the percentage of solids in the... in the milk, is that something... that's something that's not determined by the farmer.

That's determined by the processor, isn't it?

MARK J URBAN: The raw milk that comes to a... a processing plant varies to some extent in the amount of fat and solids not fat.

JUSTICE STEVENS: Right.

MARK J URBAN: Then the processor... this is how California's processors are different from other States'... adds in solids not fat in order to meet the standards, and they have... you know, this is all mechanized.

JUSTICE STEVENS: And that is done even if the milk when it left the farm was deficient in fat solids.

MARK J URBAN: Correct.

JUSTICE STEVENS: Yes.

JUSTICE O'CONNOR: Generally speaking, what percentage of the raw milk comes in from out of State to California, of the total?

MARK J URBAN: My recollection is somewhere around 10 to 15 percent, most of which comes to fluid milk plants, which are the class 1 plants.

JUSTICE O'CONNOR: So it's generally a small percentage.

I'm... I'm not sure that I think that you're dire consequences scenario would play out.

Do milk prices tend to rise and fall over a wide region of the United States at the same time, or does it tend to be very spotty?

MARK J URBAN: California's prices rise and fall as an independent market.

I don't know what happens in other parts of the United States, and I want to... aside from the sort of economic theory of the boom-bust cycle, it is a fact that California's own laws say that the purpose of the pooling and pricing laws is to provide supply and price stability in order to allow for adequate supplies of fluid milk at... at prices that are reasonable to consumers, and that the purpose of--

JUSTICE BREYER: How... how does the latter part come in?

I mean, if we have to write this, as I understand it, and I'd just as soon you correct, because I don't want to say something if it isn't right.

This is actually a simple system, it's not so complicated, and at the heart of it is simply, we could pretend that they want to pay the dairy [dollar] 16 a hundredweight indefinitely.

That's stable.

And now the problem is, although you can say to everybody, pay, a handler is paid [dollar] 16, when they do that they're going to discover cheese coming in from Wisconsin, and the cheesemakers are not going to be able to compete and still pay [dollar] 16, so they figured out in California, here's how we keep our cheesemakers in business.

We subsidize them.

We pay them [dollar] 2 because they can only sell at [dollar] 14.

Where do we get the money from?

Unidentified Justice: We get it from the milk sellers.

JUSTICE BREYER: So they pay [dollar] 18 to pay the cheesemakers [dollar] 14 so that all can pay [dollar] 16 to the dairies.

That way, the cheesemakers stay in business despite Wisconsin, and the milk sellers, unfortunately the retailers have to charge more and the mothers have to pay more for their milk, but that in a way helps the people who want to eat a lot of cheese.

We don't know what happens to them if they eat too much cheese, but--

Unidentified Justice: [Laughter]

JUSTICE BREYER: --there we are.

But I mean, that seemed to me the essence of the system, and since that's the model that's in my mind, and since it could become relevant, I'd like you to correct me if I'm not right.

MARK J URBAN: --That... that's... that is the wrong model.

JUSTICE BREYER: All right.

[Laughter]

MARK J URBAN: The--

JUSTICE BREYER: And what is the right model?

MARK J URBAN: --The right model is that the... the prices are generally set, and they're recalibrated regularly, based on certain free market markers, like various cheese exchanges, et cetera, and then there are ways for each of the prices to be adjusted, the class 1, class 2, class 3, class 4 prices to be adjusted so that they're... they reflect in a sense an... a open market, and there's also a desire to have these prices be comparable to the prices that are being paid on the, in the Federal marketing orders so that that doesn't produce problems, so there's not a subsidy from one class of use to another class of use.

What there was was then a blending when you come to the producers of their revenues, and that's the pool, and that blending of revenues, they adopted a two-tiered system.

One was a quota system, and one was all other prices, and that really was set up because the quota-holders had contracts and commercial dealings with class 1 dealers which... for which they got a higher price, and the goal was to protect those... those rights and reflect those rights in the difference between a quota price and an everything-else price.

JUSTICE O'CONNOR: Is it true that in-State producers of raw milk are guaranteed a minimum price for their milk under the California scheme, but out-of-State producers are not?

MARK J URBAN: That... that's exactly right.

The in-State producers are regulated.

They get a guaranteed minimum price.

Out-of--

JUSTICE O'CONNOR: Yes, and the out-of-State producers are not.

MARK J URBAN: --Right.

JUSTICE O'CONNOR: They're at a disadvantage to that extent.

MARK J URBAN: They're at both an advantage and a disadvantage.

They're not regulated, so they have the disadvantage that they don't have a guaranteed minimum price, but they have the advantage that they can compete on price, so if they want to be efficient and undersell California producers they can do that, so they have both a benefit and... both sides have a benefit and burden.

One is of regulation versus nonregulation.

I want to go into the legislative history of section 7254, which was mentioned.

When section 7254 was adopted, the Federal law NLEA preempted California milk content standards, but that law only applied to fluid milk in interstate commerce.

The House conference committee report which petitioners cite not only described the preemption issue, but it also said that the purpose of adoption of 7254 was to allow California to fully enforce and apply its... its standards.

It would have made little sense, in light of that congressional intent, for Congress to on the one hand allow for a exemption from preemption but at the same time allowed the exact same body of law to be subject to a Dormant Commerce Clause challenge, which is, in fact, what happened in the Shamrock case, yet that would occur, that undermining of Congress' intent to have California be able to fully enforce its own milk content standards, if section 7254 were held to be only a preemption savings statute.

We've touched on the issue of the scope of section 7254, and we're not claiming that the unmistakable clear standard applies to the scope, and we're certainly not claiming that it's unmistakably clear that section 7254 applies separately to pricing and pooling laws.

What we're claiming is that section 7254 not only covers the laws themselves, but the means to keep those laws in effect, and in answer to questions--

CHIEF JUSTICE REHNQUIST: Who's your authority for that, for the extension of the unmistakably clear principle?

MARK J URBAN: --That it doesn't extend to--

CHIEF JUSTICE REHNQUIST: Yes.

MARK J URBAN: --First of all, we couldn't find a single case where the Court has come back, after it's determined there's a Dormant Commerce Clause exemption, for example with the business of insurance, come back and each time it decides what is the business of insurance, that it says this is a Dormant Commerce clause exemption so we have to use an unmistakably clear standard.

The Court has interpreted, after it's found a general area of law that... in which there's a Dormant Commerce Clause exemption, that it's interpreted then what is within that area of the law using standard rules of statutory construction, and... and--

CHIEF JUSTICE REHNQUIST: And the cases would be what, Benjamin, something like that?

MARK J URBAN: --Yes.

Yes, Prudential Insurance v. Benjamin, but then when the Court's come back, for example, in Royal Drug to look at what's the business of insurance, they've used standard... you've used standard rules of... of statutory construction.

And you know, that... that makes a certain amount of sense here, because you know, you have both a preemption savings statute and a Dormant Commerce Clause exemption in the same statute, which is the case... if you have a Dormant Commerce Clause exemption you'd have to essentially have two sets of rules as to how you interpret the, what is being affected by that... that exemption, one for preemption and one for a Dormant Commerce Clause exemption.

That... that doesn't... doesn't seem logical.

They should... whatever Congress intended be covered by the law should be interpreted the same, whether it's a Commerce Clause exemption or a preemption exemption.

The second issue before the Court is the Privileges and Immunities Clause, and when this issue was considered by the Ninth Circuit they ruled that because the out-of-State dairy producers were not being regulated based on their residency, but that the regulatory scheme involved place of production, that the... that the Privileges and Immunities Clause didn't apply.

That is fairly unexceptional, because the purpose of the Privilege and Immunities Clause is that it applies when a State law deprives a nonresident who enters a State to engage in some protective privilege, that they're entitled to the same privilege and immunities as a resident of that State.

There's no entry into the State by... by the dairy farmers from Arizona... if they came into the State to produce milk, they'd be treated exactly the same as--

CHIEF JUSTICE REHNQUIST: What do you do with the Chalker case?

MARK J URBAN: --The Chalker case is a case where there's... there was different regulation when you came into the State.

There was a tax if you did business in... you came into Tennessee and did business.

There, the question was, they... they didn't say residency per se.

They said--

CHIEF JUSTICE REHNQUIST: Chief office.

MARK J URBAN: --place of... yes, chief office of business, and I think the Court correctly found, based on their common experience and knowledge, that that was simply a pretext or a surrogate or a proxy for residency.

That's not the case here.

Here, it's a shipment of goods, milk into a State.

It's... it's a State regulatory... economic regulatory scheme, essentially, that's affecting the goods themselves, and that's nothing like what's happened in Chalker.

JUSTICE O'CONNOR: Well, do you support the Ninth Circuit's view that to be covered by the Privileges and Immunities Clause it has to be facially discriminatory?

MARK J URBAN: In the... in the context of the statutes that they had before them, yes.

Whether that is a--

JUSTICE O'CONNOR: I... I would have thought that broad statement was not accurate in light of Chalker, that it doesn't have to be facially discriminatory to be covered.

MARK J URBAN: --The distinction in Chalker, what was the discrimination was facial.

It was based on where your place of... of business was.

If the Ninth Circuit opinion is being interpreted, or would be interpreted to say that if you had some transparent proxy for place of residence, like they did in Chalker, that that would somehow be foreclosed by the Ninth Circuit's decision, I think that would be a misreading of what the Ninth Circuit did.

They took a statute that, as they indicate, merely regulated based on place of production, not on residency.

JUSTICE BREYER: The two sentences... I hadn't understood that.

They wrote two sentences on this in the opinion, and you're saying it's really the first sentence that is the holding, that there is no violation with respect to the individual dairy owners because the classifications the pooling plan amendments create are based on the location where milk is produced, and the next sentence is sort of a throw-away, and there's nothing in the statute to the contrary.

MARK J URBAN: That's correct, Your Honor.

JUSTICE BREYER: That's how you... I see.

MARK J URBAN: In... in summation, there... the two issues involving the section 7254 before the Court are first whether it establishes an exemption and second, its scope.

On the first issue we believe it's unmistakably clear that there is an exemption established by 7254 to the Dormant Commerce Clause.

As to the second issue, we believe that California's milk pooling and pricing laws are within the scope of section 7254.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Urban.

MARK J URBAN: Thank you.

CHIEF JUSTICE REHNQUIST: Mr. Englert, you have 11 minutes left.

REBUTTAL ARGUMENT OF ROY T. ENGLERT, JR. ON BEHALF OF THE PETITIONERS

JUSTICE KENNEDY: It... it seems to me, Mr. Englert, it make... does make a certain amount of sense to say that you should have one rule of construction for preemption and for Dormant Commerce Clause, and you don't have two different rules for interpreting congressional intent with the same statute.

ROY T ENGLERT JR: Well, Justice Kennedy, the Court has said very consistently in its Dormant Commerce Clause jurisprudence that the intent of the Congress must be unmistakably clear.

JUSTICE KENNEDY: Were... were those statutes preemption statutes as well?

You see, here you have a preemption statute--

ROY T ENGLERT JR: In... in some instances, they were.

JUSTICE KENNEDY: --and... and the argument is that... but let's say that it was simply a preemption case that, well, directly or indirectly Congress doesn't want have to spell out everything, so it says indirectly, so this... so this is not preempted.

Then you have a Dormant Commerce Clause and you say, well, we have a different rule for that.

That seems a little odd.

ROY T ENGLERT JR: Well, that's what the Court did in New England Power Company v. New Hampshire, and the statute being construed, the provision of the Federal Power Act being construed in that case, like the statute being construed in this case, was not so much a preemption clause as an unpreemption clause.

The typical statute that comes before this Court alleged to be a Dormant Commerce Clause exemption is one that says certain State laws are protected, or are allowed, and in many of those cases the Court has said, and New England Power v. New Hampshire is a good example, the Court has often said yes, those State laws are not subject to preemption under Federal law, but there is no unmistakably clear Dormant Commerce Clause exemption.

So the... the Court's jurisprudence as I read it is really rather consistent in setting a higher standard for exemptions for the Dormant Commerce Clause, and there's a reason for that, and the reason for that is that the Commerce Clause is part of the... is one of the structural provisions of the Constitution and, as this Court pointed out in the South-Central Timber case, the particularly strong rule of construction ensures that all States know what's going on and have their say in Congress before the protections the States have vis-a-vis one or another... vis-a-vis one another are altered.

JUSTICE BREYER: What is the answer to the last point on privileges and immunities?

I hadn't taken that in, and I... I think it's been argued on... on your side as if what the Court had said was, well, the statute doesn't create a classification on its face, doesn't create a classification based on an individual's residency or citizenship, which certainly it doesn't, and then you say quite right, but of course a statute nonetheless could do that in effect, and... and thereby have the same violation that it would have had if it had been on its face, but that isn't their point, and as I reread this they're saying... I think it does say what they say it said.

What the judge was saying is, wait a minute, there... there's no... nobody here could say they're... they're discriminating on the basis of residency or citizenship.

That's not what the statute says.

It's discriminating on the basis of where the milk is produced.

We don't care if he's a California resident or a... or an Alaska resident, it's where the milk is produced, and there's nothing in the statute as I read it, says the judge, i.e. on its face, that says anything to the contrary.

Now, what's the answer to that argument?

ROY T ENGLERT JR: It's all true.

It's... it's... but it was just as much of a sin for the Ninth Circuit to ignore the 93 percent correlation between where dairy farmers reside and where milk is produced as it was to say, we don't look beyond the face of the statute.

JUSTICE BREYER: I see, you're saying it might violate the Privileges and Immunities Clause even if... or, why?

ROY T ENGLERT JR: It's... it's exactly--

JUSTICE BREYER: The... what... it's a violation of the Privileges and Immunities Clause for a State to discriminate against out-of-State commerce, because after all, out-of-State commerce is mostly produced by out-of-State residents?

ROY T ENGLERT JR: --I... I'm not making that broad an argument, Justice Breyer.

JUSTICE BREYER: Then what is--

ROY T ENGLERT JR: I'm saying that in this case, as in the Chalker case, there is an extremely high correlation between place of business and residency or citizenship of individuals, and just as this Court said, we don't care that someone from Alabama could have a principal place of business in Tennessee, because most people from Alabama don't have a principal place of business in Tennessee--

JUSTICE BREYER: --Yes.

ROY T ENGLERT JR: --so too, here, the Ninth Circuit should not have cared that Nevadans could have... could produce milk in California when 93 percent of all dairy farmers do produce milk in the State and, indeed, on the very farm where they reside.

JUSTICE BREYER: So if Massachusetts passes a statute... you know this area better than I at the moment, but if Massachusetts passes a statute and it says, we're fed up with nectarines from California, they're too woolly, and therefore no more nectarines from California coming into Massachusetts, it's absolutely true, every nectarine farm down there is owned by a California resident, none by Massachusetts residents.

That violates the Privileges and Immunities provision, in your opinion, as far as individuals own the farms?

ROY T ENGLERT JR: I... I certainly suspect it's a violation, but we're we're not asking this Court actually to hold that there's any--

JUSTICE BREYER: No, no, I know that.

ROY T ENGLERT JR: --Privileges and Immunities violation.

JUSTICE BREYER: I know that, but there's nothing to the contrary--

ROY T ENGLERT JR: Just that there should be--

JUSTICE BREYER: --Okay.

ROY T ENGLERT JR: --substantive constitutional scrutiny.

JUSTICE BREYER: Yes.

ROY T ENGLERT JR: The Ninth Circuit didn't give this case any substantive constitutional scrutiny.

JUSTICE BREYER: Yes, well, that's primarily the Dormant Commerce Clause.

I'm more familiar with the Privileges and Immunity Clause argument.

I'm less familiar with how courts in this area--

ROY T ENGLERT JR: Right, but on... on both issues, Justice Breyer, the Ninth Circuit declined to engage in any substantive analysis--

JUSTICE BREYER: I know.

ROY T ENGLERT JR: --with respect to the Dormant Commerce Clause on the erroneous ground that it was unmistakably clear that there was a Commerce Clause--

JUSTICE BREYER: Yes, I... I understand.

ROY T ENGLERT JR: --exemption, and with respect to the Privileges and Immunities Clause on the ground that location is not the same as residency or citizenship, and we need not look behind location of production to ask whether it is so closely correlated with residency or citizenship as to create an improper... a classification that must be scrutinized under the Constitution.

Mr. Urban pointed out that the McCarran-Ferguson Act uses the verb construe, and rightly so, but what it says the Court is not to construe as forbidding State regulation is Congress' silence.

It is not a directive how to construe the Constitution.

It is a very proper statute, perhaps the model for how a Dormant Commerce Clause exemption should be written.

Don't construe our silence to mean we want to stop the States from doing something.

The statute here is very different.

The statute here says, construe this act or any other provision of law in particular ways.

Mr. Urban, in talking about section 7254, said at one point, the use of three different verbs, only one of which is preempts, suggests that Congress' intent was something more than merely to negate Federal preemption.

I respectfully submit that suggesting that Congress had more in mind is not enough to meet the unmistakable clarity standard.

Under Gregory v. Ashcroft, an unmistakable clarity standard means it would be plain to anyone reading the act what Congress had in mind, and merely saying the use of three verbs suggests something does not make it plain to anyone reading the act.

I do think... Justice Stevens asked Ms. McDowell if the Court needs to reach the Privileges and Immunities Clause claim.

I... I believe the Court does need to reach the Privileges and Immunities Clause claim in the limited way we have suggested and that is because, although Ms. McDowell correctly said the petitioners might prevail on remand under the Commerce Clause and, indeed, I hope we will, and if we do that will give all of my clients the relief that they need, we also might not prevail under the Commerce Clause, and I think we're entitled to pursue both the Commerce Clause claim and, with respect to the individual petitioners, the Privileges and Immunities Clause claim on remand.

The... Justice Kennedy asked me some questions in my opening argument about the Federal marketing orders in effect in Nevada and Arizona, and I... I perhaps didn't speak with sufficient clarity about two aspects of that.

The Federal milk marketing orders cover parts of Nevada but not other parts.

Some are and some are not covered by Federal milk marketing orders, but in any event, it's worth making clear that the marketing orders fundamentally operate on the processors of milk, not on the producers of milk, so when we say the Federal milk marketing orders operate in parts of Nevada, we're really talking about Nevada processors.

If you ship your milk to a California processor it... it is at no point governed by a Federal milk marketing order.

Whatever... with respect to the unmistakably clear standard, Mr. Urban made the argument that once you've found an unmistakably clear Dormant Commerce Clause exemption, the unmistakably clear standard has no more role to play and it's just a matter of ordinary statutory interpretation.

This Court's cases, I believe, do not support that proposition, but he spoke specifically about the McCarran-Ferguson Act cases in which the Court has construed the phrase, business of insurance, without any particular thumb on the scale.

Well, that is how the Court must construe the phrase, business of insurance, because Congress has delegated authority over an entire business to the States.

That's very different from this very precisely drawn statute that speaks about two particular aspects of California's compositional regulation of raw milk and saying, well, let's just resort to ordinary principles of statutory interpretation to determine whether that also reaches economic regulation of fluid milk.

The unmistakably clear standard is still in effect, and ingenious arguments about the relationship between economic regulation of fluid milk and composition regulation of raw milk are not enough to meet that standard.

In particular, it cannot possibly be the case that the 1997 amendments to California's pooling plan are somehow necessary to effect composition regulation.

The main thing the 1997 amendments did was not negate the possibility that out-of-State milk would flood California to such an extent that there would be price effects that ultimately would have... would have sanitary effects.

What the 1997 amendments did essentially was say, we're going to intercept some of the revenue that would otherwise go to out-of-State processors at California's border and redistribute it just to in-State interests.

We're going to take some of the money that they would otherwise get in their milk transaction and say, it must go to Californians, not to you out-of-Staters.

That's the essence of the Commerce Clause violation in this case, and it's also inconceivable that that kind of regulation could be protected by this statute.

If that kind of regulation is protected by this statute, then a regulation that says 100 percent of every milk check that would be written to a Nevadan must instead go to a Californian is protected by this statute, i.e., no out-of-State milk, and that can't possibly be the unmistakably clear intent of Congress in section 7254.

One last detail, and it is just a detail.

Mr. Urban said that 10 to 15 percent of the milk that comes into California is from out of State.

I understand from a publication that's cited at page 39 of our opening brief called Dairy Profit Weekly that the actual number is closer to 3 percent.

When Congressman Bill Thomas spoke at a field hearing... thank you.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Englert.

The case is submitted.

(Whereupon, at 12:03 p.m., the case in the above-entitled matter was submitted.)