Wednesday, June 7, 2017

Can One State Regulate Agricultural Production Activities in Other States?


In early 2014, the 2014 Farm Bill passed the Congress and was signed into law.  The legislation contains a projected $956 billion in spending over the next 10 years (much of which is attributable to spending on Food Stamps and related programs) which is approximately 50 percent more than the 2008 Farm Bill.  The Farm Bill also contained numerous other provisions such as repealing direct payments immediately, repealing seven other current commodity programs and making adjustments to payment limitations, program eligibility rules and the income limitation rule.

The Farm Bill also removed both the farm and non-farm AGI limitations of the 2008 Farm Bill and replaces them with a $900,000 AGI limitation applicable to any individual or entity.  The $900,000 AGI limitation applies to both commodity and conservation programs.  While the Farm Service Agency initially did not take into account any I.R.C. §179 deduction for an S corporation or a partnership, but did for a C corporation or an individual, their position has now changed so that issue is no longer on the table

However, the Farm Bill did not include a provision that was contained in the initial House version that would have barred a state, absent legitimate public safety concerns, from enacting legislation designed to regulate the production of out-of-state agricultural goods and livestock that are sold in that state.

So, can a state regulate the manner in which agricultural goods are produced in another state?  That’s the focus of today’s post.

California Law

The House Farm Bill provision was in response to a 2008 California (CA) ballot initiative (Proposition 2) that required all California egg producers to produce eggs from laying hens in cages that allowed the hens to “lie down, stand up, fully extend its limbs, and turn around freely.” Because of the additional cost placed on CA egg producers which made their eggs non-competitive with eggs produced in other states not subject to such restrictions, CA passed a law in 2010 (A.B. 1437) making it a crime to sell shelled eggs in CA (regardless of whether the eggs were produced in CA) that came from a laying hen that was confined in a cage not allowing the hen to “lie down, stand up, fully extend its limbs, and turn around freely.” The law was purportedly based on consumer health concerns, but it had the effect of regulating egg production in all states. The law applied to the sale of eggs for human consumption in CA occurring on or after January 1, 2015.

Legal challenge.  In 2014, the Missouri (MO) Attorney General (and officials from other states) sued CA officials over the law.  They sought declaratory and injunctive relief, costs and fees, associated with blocking enforcement of the CA law.  The claim was that the law would increase size of egg-laying hen enclosures and decrease flock densities for egg producers in other states desiring to sell eggs in CA.  The lead plaintiff (MO) noted that CA consumers bought one-third of all eggs produced in MO in 2013 and that the CA requirement would substantially increase the cost of MO egg production if egg producers continue to sell eggs in CA, which will also make eggs too expensive to sell in other states. The plaintiff also noted that if MO producers choose to not participate in CA market, other markets will have surplus eggs and egg prices will fall which could force some producers out of business; suit claims that CA provision was an unconstitutional violation of the Commerce Clause by "conditioning the flow of goods across its state lines on the method of their production." In the alternative, the suit alleged federal preemption via 21 U.S.C. Sec. 1052(b) – the Federal Egg Products Inspection Act.

The trial court held that the plaintiff lacked standing for failure to articulate an interest separate and apart from the interests of private parties, and that the claim involving the egg price-effect on consumers was remote and speculative. Missouri v. Harris, No. 2:14-cv-00341-KJM-KJN, 2014 U.S. Dist. LEXIS 76305 (E.D. Ca. Jun. 2, 2014).  The trial court also determined that the CA law was not discriminatory. On further review, the appellate court affirmed, but remanded for dismissal without prejudice.  Missouri v. Harris, 842 F.3d 658 (9th Cir. 2016).  Last week, the U.S. Supreme Court declined to hear the case.  Missouri v. Becerra, No. 16-1015, 2017 U.S. LEXIS 3405 (U.S. Sup. Ct. May 30, 2017).

Legal ‘standing.”  There is no doubt that “Parens patriae” standing (a federal court doctrine) is difficult to obtain in a case asserting economic loss.  The states have to show injury to the citizens of their respective states as a whole, rather than injury to a small group of their citizens (egg producers and egg consumers).  While the states did claim that their residents would be paying higher prices for eggs, the trial court and the appellate court both determined that the claim was speculative at this stage of the litigation.  Certainly, any time a regulation is imposed that requires a change in production activities (here, requiring the replacement of “battery” cages with alternative structures that meet the CA specifications) higher costs will be imposed on egg producers.  To the extent those costs can be passed-on to egg consumers, they will.  The more market power any individual egg producer has will determine how much, if any, of that cost gets passed-on.  

Side Note

Related to the egg production matter were developments involving animal rights groups and foie gras, a delicacy that is a product of enlarged livers of ducks and geese that have been force-fed corn.  While a federal court, in 2013, refused the groups’ attempt to force USDA to regulate the delicacy as an adulterated food product, the Ninth Circuit upheld a CA ban on foie gras.  In 2014, the U.S. Supreme Court declined to hear the case, leaving the CA ban in place.  Association Des Eleveurs De Canards Et D’Oies Du Quebec, et al. v. Harris, 729 F.3d 937 (9th Cir. 2013), cert. den., 135 S. Ct. 398 (2014).  Importantly, the California ban only applies to products produced by force feeding a bird to enlarge its liver.  It does not ban the sale of duck breasts, down jackets, or other non-liver products from force-fed birds.

After the Ninth Circuit upheld the CA ban, the plaintiffs amended their complaint to include a challenge to the ban on preemption grounds.  In early 2015, the district court struck down the CA law on the basis that the CA ban was preempted by the Poultry Products Inspection Act, the federal law that regulates the sale and distribution of poultry products.  The court pointed out that the plaintiffs had suffered economic injury.  Association Des Eleveurs De Canards Et D'oies Du Quebec, et al. v. Harris, No. 2:12-cv-5735-SVW-RZ (C.D. Cal. Jan. 7, 2015).

Egg Law Litigation Current Status

Presently no court has decided the merits of the case.  But, if standing can be established, do the states challenging the CA law have a legitimate claim?  The Ninth Circuit’s dismissal of the case was “without prejudice.”  Koster v. Harris, 847 F.3d 646 (9th Cir. 2017).  That means that if standing can eventually be established, the case can be brought again.

State Regulation of Interstate Commerce - U.S. Supreme Court Precedent

The U.S. Supreme Court has long held that one state cannot regulate economic conduct in another state in a manner that is clearly excessive in relation to the benefits to the regulating state, even if the law is facially neutral.  See, e.g., Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520 (1959).  In Bibb, various interstate motor carriers challenged an Illinois statute that required the use of certain type of mud-flap on trucks and trailers that operated on Illinois highways.  They claimed that the statute violated the Constitution’s Commerce Clause because it placed an “undue” burden on them that outweighed any safety benefit the state might receive in return.  In essence, the statute required that the mud-flap had to contour with the rear wheels, with the inside surface “being relatively parallel to the top 90 degrees of the rear 180 degrees of the whole surface.”  In addition, the mud-flap surface had to extend down to within 10 inches of the ground on a fully-loaded truck.  Furthermore, the mud-flap had to be wide enough to cover the width of the tire, be installed within six inches from the tire surface on a loaded truck and have a flange on its outer edge that did not exceed two inches.  Basically, these detailed requirements made conventional mud-flaps that were legal in at least 45 states at the time illegal in Illinois. 

The trial court held that the Illinois statute “unduly and unreasonably burdened and obstructed interstate commerce” in violation of the Commerce Clause and enjoined the state from enforcing it.  On direct appeal to the U.S. Supreme Court, the Court unanimously affirmed.  While safety measures carry a “strong presumption of validity” the Court determined that the enhanced safety resulting from the statutory requirement did not outweigh the national interest in “keeping interstate commerce free from interferences that seriously impede it.” 


So how does Bibb apply to the CA egg law?  If standing is ever established (and the proper plaintiff may, indeed, be actual egg producers rather than respective states), the burden will be on the plaintiff(s) to show that the CA law imposes an undue and unreasonable burden on interstate commerce in relation to the benefit that CA derives on behalf of its citizens (e.g., health and safety).  Thus, the citizens of CA can, via their elected representatives, determine the law and regulations for the economic activity of other states to an extent.  The limits of that extent have not yet been established in the egg case, but it seems that the egg case is a clearer illustration of a state trying to regulate economic activity in other states instead of protecting the health and/or safety of its own citizens than the state statute involved in Bibb

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