Wednesday, January 18, 2017
Check-offs are back in the news. In Oklahoma, federal authorities are investigating the possible embezzlement of about $2.5 million in beef checkoff funds, and in Montana a federal Magistrate Judge has enjoined the Montana beef checkoff from spending funds received from the checkoff. There’s also separate litigation ongoing over the use of checkoff funds in the federal district court in D.C.
So, what’s all of the fuss about? Checkoff programs (as well as federal marketing orders) involve constitutional free speech issues. It’s a matter that’s important to many ag producers and is worth understanding the legal issues that are involved.
Check-Offs and the Constitution
An assessment (or “check-off”) is typically levied on handlers or producers of commodities with the collected funds to be used to support research promotion and information concerning the product. For example, the beef check-off involves the levy of a $1.00/head at the time livestock are sold. Such check-off programs have been challenged on First Amendment free-speech grounds. For example, in United States v. United Foods, Inc., 533 U.S. 405 (2001), the U.S. Supreme Court held that mandatory assessments for mushroom promotion under the Mushroom Promotion, Research, and Consumer Identification Act violated the First Amendment. The assessments were directed into generic advertising, and some handlers objected to the ideas being advertised.
Lower courts have also addressed the government speech issue with respect to agricultural check-off programs. For example, in Livestock Marketing Association v. United States Department of Agriculture, 335 F.3d 711 (8th Cir. 2003), cert. granted sub. nom., Veneman v. Livestock Marketing Association, 541 U.S. 1062 (2004), the Eighth Circuit held unconstitutional the beef check-off authorized under the Beef Promotion and Research Act of 1985. The court ruled that the mandatory assessment of one dollar per-head violated the free-speech rights of those who objected to the generic advertising of beef funded by the check-off because cattle producers and sellers were not regulated nearly to the extent the California tree fruit industry was regulated in an earlier Supreme Court opinion, Glickman v. Wileman Brothers & Elliott, Inc., 521 U.S. 457 (1997). As such, the beef industry was similar to the mushroom industry, and United Foods controlled. The court also ruled that the beef check-off did not constitute government speech.
The Supreme Court agreed to hear the Livestock Marketing Association case on the narrow grounds of whether the beef check-off was government speech, reversed the Eighth Circuit and upheld the check-off against a free-speech challenge as government speech. Johanns v. Livestock Marketing Association, 544 U.S. 550 (2005). The case involved (in the majority’s view) a narrow facial attack on whether the statutory language of the Act created an advertising program that could be classified as government speech. That was the only issue before the Court.
While the government speech doctrine is relatively new and is not well-developed, prior Supreme Court opinions not involving agricultural commodity check-offs indicated that to constitute government speech, a check-off must clear three hurdles - (1) the government must exercise sufficient control over the content of the check-off to be deemed ultimately responsible for the message; (2) the source of the check-off assessments must come from a large, non-discrete group; and (3) the central purpose of the check-off must be identified as the government’s. Based on that analysis, it was believed that the beef check-off would clear only the first and (perhaps) the third hurdle, but that the program would fail to clear the second hurdle. Indeed, the source of funding for the beef check-off comes from a discrete identifiable source (cattle producers) rather than a large, non-discrete group. The point is that if the government can compel a targeted group of individuals to fund speech with which they do not agree, greater care is required to ensure political accountability as a democratic check against the compelled speech. That is less of a concern if the funding source is the taxpaying public which has access to the ballot box as a means of neutralizing the government program at issue and/or the politicians in support of the program. While the dissent focused on this point, arguing that the Act does not establish sufficient democratic checks, Justice Scalia, writing for the majority, opined that the compelled-subsidy analysis is unaffected by whether the funds for the promotions are raised by general taxes or through a targeted assessment. That effectively eliminates the second prong of the government speech test. The Court held that the other two requirements were satisfied inasmuch as the Act vests substantial control over the administration of the check-off and the content of the ads in the Secretary.
Separate from the speech issue, the Supreme Court’s analysis in United States v. United Foods, Inc., has been used as the basis for other courts deciding checkoff cases. In one case, the court granted challengers to the Washington apple checkoff a preliminary injunction against the checkoff, pending trial. In re Washington State Apple Advertising Commission, 257 F. Supp. 2d 1290 (E.D. Wash. 2003). The court found that the apple industry was highly regulated but that the regulation did not collectivize the marketing of apples and that no government speech was involved. Another court held the Florida citrus “box tax” unconstitutional because the advertising purchased with the “box tax” was not government speech and no comprehensive regulation of the citrus industry was found. Tampa Juice Services, Inc. v. Florida, No. 6C-6-00-3488 (Fla. Cir. Ct. Mar. 31, 2003). The Louisiana Fur and Alligator Public Education and Marketing Fund and the Louisiana Alligator Resource Fund has been held unconstitutional for the same reasons. Pelts & Skins, L.L. C. v. Jenkins, 259 F. Supp. 2d 482 (M.D. La. 2003). Similarly, the California grape checkoff has been held unconstitutional because the court found no collectivization of the marketing aspects of the industry, and 90 percent of assessment money was spent on generic advertising of grapes. Delano Farms Co. v. California Table Grape Commission, 318 F.3d 895 (9th Cir. 2003). The same analysis has resulted in the dairy checkoff being ruled unconstitutional. Cochran v. Veneman, 359 F.3d 263 (3d Cir. 2004), rev’g, 252 F. Supp. 2d 126 (M.D. Pa. 2003). The court specifically noted the extensive regulation of the marketing aspects of the dairy industry concerning price and production.
Other Recent Checkoff Litigation
In 2011, the Office of Inspector General for the USDA initiated an audit of the Beef Checkoff Program, released it in 2013, withdrew it, and later re-released it in 2014. The checkoff program bars the producer-derived funds from being used for policy activities. The initial audit said that the National Cattleman Beef Association (NCBA) was in full compliance, but the re-released audit removed that statement. Before the OIG audit, there was an independent audit that disclosed problems with the use of checkoff funds by NCBA. In 2013, a livestock market advocacy group (assisted by the Humane Society of the U.S.) filed a Freedom of Information Act (FOIA) request with respect to OIG the audit reports. After that filing, the OIG withdrew the initial audit for further consideration. In 2014, the same group filed a complaint for injunctive relief against the OIG requesting that the OIG make a final determination and release all required records related to the audits. The advocacy group sought the information to determine if there is a connection between the drop in cattle-producer numbers and the price of calves and losses, and the use of checkoff funds. The NCBA claims that the audit activities will weaken the checkoff and asserts that the audits have found the NCBA to be in full compliance with the checkoff rules. In 2016, the NCBA sought to intervene in the injunction case, and in late September the advocacy group filed its response. NCBA sought intervention because some of the information in the audit reports involved confidential business information unrelated to the checkoff. It has been reported that there are approximately 9.300 pages of financial data involving the beef checkoff. The case is filed in the U.S. District Court for the District of Columbia and a ruling is soon expected on the NCBA’s request for intervention. It’s an interesting case. The U.S. Supreme Court has ruled, as noted above that the beef checkoff is government speech. That’s true for the program as a whole, but what about the business information that’s involved? That’s a dicey issue and it will be interesting to see how the court sorts it out.
In the Montana litigation, Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Vilsack, No. CV-16-41-GF-BMM-JTL, D. Mont. Dec. 12, 2016), a cattle rancher group, claimed that the federal law requiring funding of the Montana Beef Council (MBC) via funds from the federal beef checkoff was constitutionally defective. The court, as part of the findings and recommendations of a U.S. Magistrate Judge, determined that the plaintiff had standing and had stated a claim upon which relief could be granted. Under the Beef Checkoff, a $1.00/head fee is imposed at the time cattle are sold. The money generated funds promotional campaigns and research, and state beef councils can collect the funds and retain half of the collected amount with the balance going to the Cattleman’s Beef Production and Research Board (Beef Board). But, a producer can direct that all of the producer’s assessment go to the Beef Board. The plaintiff claimed that the use of the collected funds violated their First Amendment rights by forcing them to pay for “speech” with which they did not agree. The defendant (USDA) motioned to dismiss, but the Magistrate Judge denied the motion. The court determined that the plaintiffs had standing, and that the U.S. Supreme Court had held in prior cases that forcing an individual to fund a private message that they did not agree with violated the First Amendment. Any legal effect of an existing “opt-out” provision was not evaluated. The court also rejected the defendant’s claim that the case should be delayed until federal regulations with respect to the opt-out provision were finalized because the defendant was needlessly dragging its heels on developing those rules and had no timeline for finalization. The court entered a preliminary injunction barring the MBC from spending funds received from the checkoff. The court’s decision will be reviewed by the federal trial court. On December 23, 2016, the defendant filed its objections to the Magistrate Judge's recommendations, and on January 5, 2017, the plaintiff filed its opposition brief to the defendant's objections.
There’s a lot going on right now in agriculture concerning check-offs. It’s a big issue for many producers. In 2017, the courts will decide the pending litigation mentioned above and there is also more litigation that isn’t mentioned above. Also, the change in leadership at USDA may have some influence on what the future holds for agricultural check-offs.