Saturday, January 9, 2021
The “Top Ten” Agricultural Law and Tax Developments of 2020 – Part Two
There were many major legal and tax developments during 2020 that impacted agriculture and will continue to do so into the future. Today, I continue my journey through the biggest developments of 2020.
The seventh and six most impactful developments of 2020 – it’s the topic of today’s post.
No. 7 – NRCS Final Rule on Conservation Provisions of the 1985 Farm Bill
85 Fed. Reg. 53137 (Aug. 28, 2020)
The federal government’s regulation of farm and ranch land is critical to all agricultural producers. As a result, a significant regulatory development in 2020 involving farming practices on land makes the list as No. 7.
In late 2018, the USDA published a new interim rule concerning the conservation provisions that originated with the 1985 Farm Bill. On August 28, 2020, a Final Rule was published. The Final Rule adds definitions for “wetland hydrology,” “normal climatic conditions,” and “best drained condition.” The Final Rule also modifies the manner in which the Natural Resources Conservation Service (NRCS) is to delineate the various types of wetland and states that wetland determinations made between 1990 and 1996 are to be “certified” such that USDA benefits will not be denied if a farmer conducts farming activities on land that is covered by such a certification. 7 C.F.R. §12.5(b)(6)(i).
Delineations. The NRCS claims that the Final Rule was prepared to clarify how the USDA “delineates, determines” and certifies wetlands located on subject land in a manner sufficient for making determinations of ineligibility for certain USDA program benefits. However, the Final Rule does not clarify as much as it alters how the NRCS makes these determinations so as to make the process more convenient for the NRCS, and making appeals from that convenient, simplified process more difficult. The Final Rule also represents a step away from the possible (but often inconvenient) scientific determination of wetland hydrology in regularly cropped farmed wetland across the prairie pothole region (a significant portion of the northern Great Plains and north-central Iowa and south-western Minnesota).
“Best drained condition.” The NRCS claims that allowing the “best drained condition” of a tract is intended…” to provide clarity regarding a long-standing and practiced statutory concept that is fundamental to the identification of…” hydrologically altered farmed wetlands. Calling this assertion a “stretch” is an understatement of substantial degree. The phrase “best drained condition” is derived from Barthel v. United States Department of Agriculture, 181 F.3d 984 (8th Cir. 1999). In that case, the U.S. Court of Appeals for the Eighth Circuit held that the plaintiff landowners were entitled to the historic “wetland and farming regime” of a 450-acre hay meadow irrespective of the degree of manipulation of a ditch drainage device. After more than 15 years and multiple contempt actions brought against the U.S. Secretary of Agriculture in the Barthel litigation, the NRCS finally recognized that the Barthel decision meant that it had to apply a historic drainage (i.e., “best drained condition”) test to wetland determinations, and that the focus of the analysis was not to be on the manipulation of the drainage device, but rather on the effect of the manipulation of the drainage device on the subject property.
Under the Final Rule, the NRCS explains how “best drained condition” is to be identified. The NRCS asserts that the decision is to be made based upon the best available evidence. That could include remote resources such as historical aerial imagery or other historical evidence. Indeed, this is what the NRCS does in practice. NRCS personnel make a decide whether or not the drainage outlet (device) is in good condition by examining the available historic aerial photographs and identifying one as providing the best historic drainage. If the existing drainage matches that historic drainage, then aerial imagery may be used. That’s what constitutes “best available evidence.” One of a handful of aerial photographs taken between 1935 and 1985 is picked as the best by the agency expert. Then it is set aside never to be used again. The agency expert then judges if the outlet is compromised.
Since 1990, many landowners have been told that their wetland determinations made before 1996 were invalid and they requested new ones. The new determinations resulted in more acres being determined as wetland than were designated in the original determinations. This resulted in the loss of land use rights and the payment of penalties. In one instance, an Iowa farmer was forced through a myriad of appeals as a result of wetland conversions done by his drainage district in the 1990s. Following administrative appeals and court challenges (see Gunn v. United States, 118 F.3d 1233 (8th Cir. 1997), cert. den., 522 U.S. 1111 (1998)), and after the farmer and the drainage district were forced to mitigate, an old determination surfaced showing that there actually was no wetland on his farm. The initial determination of no wetland should have been considered certified. Will compensation be paid for the farmer’s loss of property rights? Hardly.
The NRCS responded to a comment about changing determinations based on new technology by stating that the limited circumstances where certified wetland determinations are subject to revision are: “if the land in question has been removed from agricultural use, upon request of the USDA program participant, or when a violation of the wetland conservation provisions has occurred.” In actual practice, this statement is incorrect. NRCS states in its policy manual, The Food Security Act Manual, 5th Edition, that it will not make a review upon request unless it determines that there was an error. Will the policy manual be amended to account for this statement in the Final Rule? That’s a significantly important question for agricultural producers
There are numerous other aspects to the Final Rule. In general, the Final Rule is troubling for farmers in many respects. Perhaps the biggest is the NRCS position concerning wetland hydrology indicators for hydrologically altered wetland. Millions of acres of these types of wetland are present in the prairie pothole states. Also, of primary concern is the NRCS’ intent to triple the tile set-back requirements from the edge of farmed wetlands if the adjoining soil has groundwater discharge potential.
It is difficult to believe that NRCS hydrologists, botanists and soil scientists were meaningfully involved in the writing of the Final Rule.
No. 6 – Dormant Commerce Clause
National Animal Meat Institute v. Becerra, 825 Fed. Appx. 518 (9th Cir. 2020).
Article I, section 8, clause 3 of the United States Constitution (the “Commerce Clause”) grants Congress the power to “regulate commerce” among the states. Although the Constitution does not specifically limit a state’s power to regulate commerce, the United States Supreme Court has long interpreted the clause as an “implicit restraint on state authority, even in the absence of a conflicting federal statute.” Gibbons v. Ogden, 22 U.S. 1 (1824) The basic precept was that when the Constitution was ratified the country was a single economic union, and the states surrendered their sovereign power to impose tariffs and restrain interstate trade. See, e.g., THE FEDERALIST No. 7, 39–41 (Hamilton). Instead, it is the Congress that can impose economic regulation (consistent with constitutional limits) on interstate commerce. Thus, under the “Dormant Commerce Clause” a state cannot enact any rules or regulations that affirmatively discriminate against the economic production of goods in another state without a legitimate local justification for doing so.
Clearly, a law that expressly mandates different treatment of in-state and out-of-state competing economic interests is unconstitutional on its face if that treatment favors in-state interests and burdens out-of-state interests. But, when a law is facially neutral, courts determine whether a Dormant Commerce Clause violation exists on the basis of whether the law imposes burdens on interstate commerce that are "clearly excessive in relation to the putative local benefits.” See, e.g., Minnesota v. Barber, 136 U.S. 313 (1890); Gratiot Sanitary Landfill v. Michigan Department of Natural Resources, 504 U.S. 353 (1992).
State Regulation of Out-of-State Ag Production Activities
Eggs. In 2014, a California federal court dismissed for lack of standing a challenge brought by major egg producing states to a California law (AB1437) dictating methods of production for all eggs sold in California. Missouri, et al. v. Harris, 58 F. Supp. 3d 1059 (E.D. Cal. 2014). The legislation bans the sale of shell eggs within California by producers or handlers if the eggs are the product of an egg-laying hen that was confined in an enclosure that fails to comply with certain animal care standards.
The lawsuit claimed that the law (which amended the state’s Health and Safety Code) and its implementing regulations, violated the Commerce Clause of the United States Constitution and was preempted by the Federal Egg Products Inspection Act. 21 U.S.C. §1031 et seq. Effective January 1, 2015, the law criminalized the sale of eggs for human consumption in California if the eggs were the product of egg-laying hens confined in a manner not in compliance with the law no matter where they were produced. A violation of the law constitutes a misdemeanor and is punishable with a fine of not more than $1,000 or imprisonment in the county jail for not more than 180 days or both. Cal. Health & Safety Code §25997.
The implementing regulations require enclosures containing nine or more egg-laying hens to provide a minimum of 116 square inches of floor space per bird. 3 C.C.R. 1350. Enclosures containing eight or fewer birds are also regulated. Id. Purportedly, the law was enacted to “protect California consumers from the deleterious, health, safety, and welfare effects of the sale and consumption of eggs derived from egg-laying hens that are exposed to significant stress and may result in increased exposure to disease pathogens including salmonella.” The plaintiffs, however, alleged that the California legislature’s real intent was to “level the playing field” for California producers faced with a costly California regulatory regime. It was not enacted, the plaintiffs claimed, with the primary concern of protecting the health of California citizens.
The trial court dismissed the case for lack of standing. The court asserted that the plaintiffs were claiming injury-in-fact to all of the citizens in their respective states, and reasoned that the increased cost of egg production in the non-California states challenging the law did not affect the general citizenry of those states. Instead, the court determined that the California legislation would only impact egg producers that failed to conform their farming procedures to comply with the California rules. Thus, according to the court, the plaintiffs did not bring the case on behalf of “a substantial segment of their populations.” While the court accepted as true the claim that the California legislation would impose a substantial cost on the plaintiff-states, that cost wouldn’t be borne on the citizenry of the states as a whole, but rather just the subset of egg farmers that wished to continue selling eggs in California.
The court also dismissed as without merit and speculative the plaintiffs’ argument that any resulting increase in the cost of eggs would injure all egg consumers. The plaintiffs also alleged that they were disadvantaged compared to other states that were not impacted by the California legislation. The court also dismissed this allegation as a basis for standing because the plaintiff states would not have to completely withdraw from egg production but would only incur “price fluctuations.”
The court also determined that the threat of prosecution by California was merely speculative and was not imminent. The court noted that the plaintiffs didn’t “articulate any concrete plan by their egg farmers to violate California’s shell egg laws.” Merely preferring to continue to market eggs to California, the court said, was not a specific harm. Unfortunately, the trial court failed to cite any cases to support its position on the standing issue where a state threatened to impose or did impose criminal penalties on conduct occurring in other states.
The trial court’s opinion was affirmed on appeal. Missouri v. Harris, 842 F.3d 658 (9th Cir. 2016). The U.S. Supreme Court declined to hear the case. Missouri v. Becerra, 198 L. Ed. 2d 255 (2017).
Calves, pigs and hens. In the fall 2018 election, California voters passed Proposition 12 (“The Farm Animal Confinement Initiative”) that establishes minimum requirements on farmers to provide more space for egg-laying hens, breeding pigs, and caves raised for veal. Specifically, the law requires that covered animals be housed in confinement systems that comply with specific standards for freedom of movement, cage-free design and minimum floor space. The law identifies covered animals to include veal calves, breeding pigs and egg-laying hens. The implementing regulations prohibit a farm owner or operator from knowingly causing any covered animal to be confined in a cruel manner, as specified, and prohibits a business owner or operator from knowingly engaging in the sale within the state of shell eggs, liquid eggs, whole pork meat or whole veal meat, as defined, from animals housed in a cruel manner.
In addition to general requirements that prohibit animals from being confined in a manner that prevents lying down, standing up, fully extending limbs or turning around freely, the measure added detailed confinement space standards for farms subject to the law.
Under Proposition 12, effective January 1, 2022, all pork producers selling in the California market must raise sows in conditions where the sow has 24 square feet per sow. The law also applies to meat processors – whole cuts of veal and pork must be from animals that were housed in accordance with the space requirements of Proposition 12.
The National Animal Meat Institute (NAMI) challenged Proposition 12 as an unconstitutional violation of the Dormant Commerce Clause by imposing substantial burdens on interstate commerce “that clearly outweigh any valid state interest.” The trial court rejected the challenge, finding that the plaintiff failed to establish that the law discriminated against out-of-state commerce for the purpose of economic protectionism. National Animal Meat Institute v. Becerra, 420 F. Supp. 3d 1014 (C.D. Cal. 2019). On appeal, the appellate court affirmed. National Animal Meat Institute v. Becerra, 825 Fed. Appx. 518 (9th Cir. 2020). The appellate court determined that the trial court did not abuse its discretion in finding that the plaintiff was not likely to succeed on the merits of its Dormant Commerce Clause claim. The appellate court also stated that the plaintiff acknowledged that Proposition 12 was not facially discriminatory, and had failed to produce sufficient evidence that California had a protectionist intent in enacting the law. The appellate court noted the trial court’s finding that the law was not a price control or price affirmation statute. Similarly, the appellate court held that the trial court did not abuse its discretion in holding that Proposition 12 did not substantially burden interstate commerce because it did not impact an industry that is inherently national or requires a uniform system of regulation. The appellate court noted that the law merely precluded the sale of meat products produced by a specific method rather than burdening producers based on their geographic location.
A separate legal action has been filed in a different California court against Proposition 12 and it continues.
The regulation of activities on agricultural land, and the regulation of ag productions activities - two big developments in 2020. Next time I start to examine the five most important ag law and tax developments of 2020.