Case 4:22-cv-00501-JM Document 1 Filed 06/01/22 Page 1 of 32
`FILED
`
`U.S. DISTRICT COURT
`EASTERN DISTRICT ARKANSAS
`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF ARKANSAS
`CENTRAL DIVISION
`
`JUN O 1 2022
`
`TAMMY H. DOWNS, CLERK
`By· ~
`·--npii"L°jmrFiilflfl:IIR~F~DE~Pirc:.iLe:"aR:;;-K
`
`DAIRY FARMERS OF AMERICA, INC.
`
`V.
`
`WES WARD, in his official capacity as Secretary
`of the Department of Agriculture; and
`FREDERIC SIMON, in his official capacity as
`Chairman of the Arkansas Milk Stabilization Board
`
`No.f22-cv- 50\- J/\1\
`This case assigned to District Judge M ooJ ~
`and to Magistrate Judge __ R~41.11\~r.i:------(cid:173)
`DEFENDANTS
`
`COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
`
`Plaintiff Dairy Farmers of America, Inc. ("DFA"), for its complaint, states:
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`PRELIMINARY STATEMENT
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`1.
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`For nearly a century, the milk industry in the United States has been heavily
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`regulated by the federal government. This extensive federal regulation takes many forms, but
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`perhaps the most important for purposes of this matter is the extensive regulatory program pursuant
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`to which the minimum prices that dairy producers must receive from dairy handlers are established.
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`2.
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`The sale of raw milk in Arkansas has long been governed by this federal program
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`through the operation of Federal Milk Marketing Order No. 7, which covers Arkansas and other
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`southeastern states. 1 7 C.F .R. 1007 .2. This federal program creates a pool of money whereby the
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`processors of raw milk into consumable products (like beverage milk, cheese, and butter) pay
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`money into the pool based on the intended use of the raw milk and the farmers, or their
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`cooperatives, receive proper payment from that pool based on the average of all receipts, which is
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`overseen and audited by the Federal Market Administrator.
`
`1 See USDA Agricultural Marketing Service, An Overview of the Federal Milk Marketing
`Order Program (Oct. 2019), available at
`https://www.ams.usda.gov/sites/default/files/media/Dairy FMM OBooklet. pdf.
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`3.
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`In 2007, Arkansas created the Arkansas Milk Stabilization Board Act to study ways
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`in which to assist Arkansas dairy farmers. ARK. CODE ANN. § 2-10-101 et seq. The Milk Board is
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`composed of five gubernatorial appointees: two Arkansas dairy farmers, one Arkansas consumer,
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`one Arkansas milk processor, and one Arkansas retailer. ARK. CODE ANN. § 2-10-103(a). As
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`originally conceived, the Milk Board had a limited role. It was supposed to research how other
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`states support their dairy farmers, investigate ways to support the dairy industry, and-perhaps
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`foreseeing that regulating the dairy industry in light of a comprehensive federal scheme would
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`have legal ramifications-"[ c ]reate a plan to assist Arkansas dairy farmers that would be equitable
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`to all parties in the state dairy industry and withstand legal challenges." ARK. CODE ANN.§ 2-10-
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`104(a)(2)--(4) (2007 version).
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`4.
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`Fourteen years later, in 2021, Arkansas purported to directly regulate Arkansas milk
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`prices for the first time by ordering the Milk Board to require that Arkansas milk producers receive
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`prices above those set by the federal program. See Ark. Act 521 of2021.2 To implement Act 521 's
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`mandate, the Milk Board adopted the Milk Stabilization Rule (the "Rule") this year, 3 which would
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`require milk "dealers"4 to pay a so-called "over-market premium" to milk producers, and would
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`require "cooperatives," such as DF A, to "pass through" the premium to producers as well as make
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`2 In 2009, Arkansas enacted a temporary grant program in 2009 to prop up Arkansas milk
`prices. See Act 968 of 2009. That program, though, was not funded by taking money from one
`private interest and giving it to another private interest. See ARK. CODE ANN. § 2-10-203.
`3 The Rule is attached as Exhibit 1 to this Complaint.
`4 "Dealer" is defined in the Rule as "any person, who purchases or receives or handles on
`consignment or otherwise milk within the State, for processing or manufacture and further sale,
`within or without the State .... " This definition does not line up with the definitions of the federal
`regulatory system, which would use terms such as "pool plant," "distributing plant," "supply
`plant," or "handler." 7 C.F.R. §§ 1000.5, 1000.6, 1007.7, 1000.9. The Rule's "dealer" would
`nonetheless be encompassed, depending on the specific products being processed at the plant, by
`one or more of the federal definitions.
`
`2
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`Case 4:22-cv-00501-JM Document 1 Filed 06/01/22 Page 3 of 32
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`the calculations to arrive at the premium. By requiring such a payment, the Rule directly conflicts
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`with the pervasive federal regulation of the raw milk market, which establishes the method of
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`calculation for the minimum price to be paid by the processor (milk dealer) and the rules and
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`procedures for the payment for raw milk. See 7 C.F.R. §§ 1000.50 et. seq., 1007.51 et. seq.
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`( available at https://fmmatlanta.com/Misc _Docs/Language_ FO7%20May _ 14.pdf [ accessed May
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`29, 2022]).
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`5.
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`The Rule also purports to shield a cooperative's member contracts from
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`interference, providing that "[n]o provision of this rule shall prevent or interfere with, and no
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`provision contained herein shall be deemed or construed to prevent or interfere with, any
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`agreement between producers and milk cooperative agricultural association or corporation
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`organized under the laws of this State, or a similar association or corporation organized under the
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`laws of this or any other state." Rule at § 5.A. However, to the extent that the Rule requires a
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`cooperative to pay Arkansas dairy farmers in a way that substitutes the State's judgment for the
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`cooperative'sjudgment in determining what that the cooperative pays other farmers in the region,
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`the Rule does indeed interfere with the cooperative's contracts with its members.
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`6.
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`This interference with contract could have severe impacts. To the extent that the
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`State believes that DF A is responsible for making the payments under the Rule to its Arkansas
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`dairy farmer members, DFA may be required to pay those farmers more than DFA would have
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`received for their milk under the federal regulatory program. In all cases, such a situation would
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`require DFA to take money that would otherwise go to its non-Arkansas dairy farmer members in
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`order to pay its Arkansas dairy farmers consistent with the Rule.
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`7.
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`DF A therefore seeks a declaration from this Court that Act 521, as implemented by
`
`the Rule, is an improper, unconstitutional interference with DFA's contracts with its dairy farmer
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`members (both in Arkansas and elsewhere). In the alternative, DFA seeks a declaration that the
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`Act 521 and the Rule do not apply to DFA because the Rule makes clear the State's intent not to
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`interfere with a dairy cooperative's contracts with its farmer members, which Act 521 and Rule
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`necessarily would.
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`8.
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`In the alternative, DF A seeks a declaration that Act 521 and the Rule are preempted
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`by the federal regulatory program because they undermine the very purposes of the federal rules
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`regarding payment to farmers.
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`9.
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`Additionally, in the further alternative, DFA seeks a declaration that Act 521, and
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`the Rule unduly burden interstate commerce and exceed the state's police powers under the
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`Arkansas Constitution by regulating the price to be agreed upon by two contracting parties solely
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`for the benefit of one of those parties.
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`10.
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`For these and other reasons, DF A brings this lawsuit seeking the foregoing
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`declarations. DF A further requests an injunction barring enforcement of Act 521 and the Rule.
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`PARTIES
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`11.
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`Plaintiff Dairy Farmers of America, Inc. ("DF A") is a Kansas cooperative
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`marketing association with its principal place of business in Kansas City, Kansas. DF A is a
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`cooperative owned by over 6,000 family farms across the country, including Arkansas and its six
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`surrounding states. DF A is governed by a 48-member board of directors who are all farmer
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`members elected by other farmer members.
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`12.
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`Defendant Wes Ward is the Secretary of the Arkansas Department of Agriculture.
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`In that role, he implements and enforces the challenged legislation and Rule. See ARK. CODE ANN.
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`§ 25-38-202(b). This suit is brought against him in his official capacity and as the representative
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`of the Arkansas Department of Agriculture.
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`4
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`13.
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`Defendant Frederic Simon is the Chairman and a member of the Milk Board. In
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`that role, he implements and enforces the challenged legislation and Rule. This suit is brought
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`against him in his official capacity and as the representative of the Milk Board.
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`JURISDICTION AND VENUE
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`14.
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`DFA's causes of action arise under 28 U.S.C. § 1331, 42 U.S.C. § 1983, and the
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`United States Constitution, and the Arkansas Constitution. This Court has supplemental
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`jurisdiction over DFA's claim that the Act and the Rule do not apply to it. The Court has
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`jurisdiction under 28 U.S.C. §§ 1331, 1343(a)(3), and 1367.
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`15.
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`The Declaratory Judgment Act provides that, in a case of actual controversy within
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`its jurisdiction, a United States court may declare the rights and other legal relations of any
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`interested party seeking such declaration. 28 U.S.C. § 2201(a).
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`16.
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`This Court has inherent equitable powers to enjoin the actions of state officials if
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`they contradict the federal Constitution or federal law. Ex parte Young, 209 U.S. 123, 159-60
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`(1908); accord, e.g., Larson v. Domestic & Foreign Com. Corp., 337 U.S. 682,689 (1949).
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`1 7.
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`Venue is proper in this district because this action challenges an Arkansas law and
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`regulations passed in and administered from Little Rock, which is within the Central Division of
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`this District. 28 U.S.C. §§ 83(a)(l), 1391(b)(l}-{2).
`
`A.
`
`The Dairy Supply Chain
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`BACKGROUND
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`18.
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`The regulation and operation of the dairy industry in the United States is
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`complicated. There are three levels of the supply chain at issue. First, dairy farmers operate farms
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`at which raw milk is produced. Second, those farmers may join together to form a farmer
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`cooperative (consistent with several federal and state laws encouraging such joint action to
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`improve the economic interests of their farmer members) like DF A. The farmers are the owners of
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`5
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`Case 4:22-cv-00501-JM Document 1 Filed 06/01/22 Page 6 of 32
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`the cooperative and agree, consistent with cooperative principles, to some form of democratic
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`governance and the sharing of economic risks and rewards. Those cooperatives purchase and then
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`market the raw milk produced by their members. Third, processors, some of which may be owned
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`by cooperatives or even by individual farmers, purchase raw milk and process it into consumable
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`form.
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`19.
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`There are two prices of raw milk of interest-the prices that processors (milk
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`"dealers") pay for the raw milk they buy and the prices that dairy farmers receive for the raw milk
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`they sell, with a farmer-owned cooperative often in between. The price that processors pay for raw
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`milk is regulated. The federal government sets the price based on certain formulas, and processors
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`pay that price, which usually differs depending on the milk's end use, along with any negotiated
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`service charges intended to at least partially offset certain marketing expenses (also sometimes
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`referred to as "premiums") above that price. See infra Paragraph 28, incorporated herein by
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`reference.
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`20.
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`The price received for raw milk is generally based on the concept of market-wide
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`pooling. The purpose of such pooling is to create orderly marketing conditions and to allow farmers
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`to benefit from the classified system of pricing without creating a marketing environment that pits
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`farmers against one another to supply any particular type of plant (i.e., fluid v. cheese), which
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`would result in increased costs and a diminution in the overall value of the milk.
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`21.
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`The revenue that farmers receive for their raw milk is often called the "mailbox
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`price." For independent farmers (i.e., farmers who are not members of cooperatives), the mailbox
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`price is a regulated price based on the weighted average of all regulated prices ( often called the
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`"blend price"), plus any additional premium above that price which is negotiated between the seller
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`(the farmer) and the buyer (the processor) of the raw milk, but less permitted deductions, such as
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`lab testing or legal fees. See infra Paragraph 31, incorporated herein by reference.
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`22.
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`For farmers who belong to cooperatives, the determination of the mailbox price
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`involves a different type of calculation unique to each cooperative. It begins with the cooperative' s
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`receipt of the blend price from processors on behalf of its farmer members, plus any service
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`charges negotiated by the cooperative that processors pay above that blend price which are
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`intended to at least partially offset certain marketing expenses. This collective negotiation on
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`behalf of a group of farmers is encouraged by the Capper-Volstead Act and other agricultural
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`exemptions, which provide exemptions from the antitrust laws for activities relating to the
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`collective marketing and handling of milk.
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`23.
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`The revenues from the sale of a cooperative farmer member's milk and the costs
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`associated with the marketing of the milk are pooled with those of other cooperative members in
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`the region. This means that a particular farmer in a cooperative pooling arrangement will receive
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`a payment that reflects his share of this pool, and this share will depend on the cooperative's
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`methods for allocating the pool. See infra Paragraph 32, incorporated herein by reference.
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`24.
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`Because farmers own the cooperative, they also receive any profits that the
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`cooperative makes on the sale of finished product or from other operations (this distribution is
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`called a "patronage dividend"). While each cooperative's methods for allocation of both the
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`revenues associated with the sale of raw milk and the profits from operations will differ, the
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`allocation methods are generally determined by decisions made by the cooperative's board of
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`farmers or made by cooperative employees overseen by the elected farmer board.
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`25.
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`In DFA's case, DFA is formed as a Kansas cooperative which qualifies under
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`Section 6 of the Clayton Act, 15 U.S.C. § 17, and the Capper-Volstead Act, 7 U.S.C. § 291, for
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`Case 4:22-cv-00501-JM Document 1 Filed 06/01/22 Page 8 of 32
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`purposes of certain limited antitrust exemptions and for purposes of the federal regulatory
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`program. DFA is divided into seven areas for purposes of the farmer's democratic governance and
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`raw milk marketing.
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`26.
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`DFA's farmer-members in Arkansas are part of DFA's Southeast Area. Those
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`farmers elect local farmers to represent them, who in tum elect farmers to represent them on the
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`Southeast Area Council. The Area Council oversees DFA's operations in the Southeast. At the
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`same time, the Southeast Area is a pool within DF A whereby the revenues from the sale of raw
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`milk by all farmers in the Southeast are put together, expenses of the Southeast operations are
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`deducted, and then the net proceeds are shared and paid back to the farmers. DF A's Southeast
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`Area farmer members also receive, as a separate payment, a patronage dividend that is established
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`by DFA's farmer Board of Directors based on the profits that DFA, which is owned in its totality
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`by all the family farms who are its member owners, may have made on its own processing and
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`other operations.
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`B.
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`The Pervasive Federal Regulation of Dairy
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`27.
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`In 1937, Congress enacted the Agricultural Marketing Agreement Act, which
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`authorized the Secretary of Agriculture to regulate minimum prices paid to producers of milk via
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`marketing orders for particular geographic areas. West Lynn Creamery, Inc. v. Healy, 512 U.S.
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`186, 188-90 (1994) (citing 7 U.S.C. § 601 et seq.); see also Ark. Dairy Coop. Ass 'n v. US. Dept.
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`of Agriculture, 573 F.3d 815, 817-18 (D.C. Cir. 2009).
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`28.
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`To that end, the Secretary of Agriculture has issued milk marketing orders setting
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`minimum producer prices for various regions of the country. See 7 U.S.C. § 608c. Arkansas is in
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`the Southeast Marketing Area, 7 C.F.R. § 1007.2, and is governed by Federal Milk Market
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`Order No. 7.
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`29.
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`For the purpose of setting prices under marketing orders, milk is divided into four
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`classes, depending on what end product the milk is used to produce. 7 C.F .R. §§ 1007 .40, 1000.40.
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`Class I milk, for example, is milk disposed of in the form of fluid milk products. 7 C.F.R
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`§§ 1007.40, 1000.40(a). Each class of milk receives a different price. 7 C.F.R. §§ 1007.40,
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`1000.40; see also Ark. Dairy Coop. Ass'n, 573 F.3d at 818.
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`30.
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`As set forth above, the persons who process the raw milk into consumable products
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`(see 7 C.F.R. §§ 1000.5, 1000.6, 1007.7) pay a class-based price according to the way the milk is
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`used, 7 C.F.R. §§ 1007.60, 1007.71. Class I milk typically fetches a higher price than other classes
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`of milk. This price is not dependent in which state the plant is located; rather it is a question of
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`whether the plant is regulated by a particular milk marketing order. There are three plants in
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`Arkansas at which fluid milk is processed and all three plants are regulated under Federal Order 7.
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`31.
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`As set forth above, raw milk "producers," i.e., dairy farmers, 7 C.F.R. § 1007.12,
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`ultimately receive a blended price based on the weighted average price of all the classes of milk
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`sold, West Lynn Creamery, 512 U.S. at 189 n.1. See also Ark. Dairy Coop. Ass 'n, 573 F.3d at 818
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`( explaining concept of payment pooling).
`
`32.
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`If the dairy farmer belongs to a cooperative, the cooperative is paid the blend price
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`for the raw milk shipped to a particular processor. Yet, the federal regulations do not require the
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`cooperative to pay the farmer the blend price. Rather, the cooperative is explicitly permitted to
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`take those proceeds and combine those proceeds with that of other farmers, net out expenses, and
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`then distribute the net to the farmers under its membership and marketing agreements with its
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`member. 7 U.S.C. § 608c(5)(F). 5
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`That Section states: "Nothing contained in this subsection (5) is intended or shall be
`5
`construed to prevent a cooperative marketing association qualified under the provisions of the Act
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`C.
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`33.
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`DFA's Membership and Marketing Agreements
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`Each dairy farmer member of OF A has entered into an agreement with DF A that
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`governs that farmer's membership in and the marketing of their milk by DFA.
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`34.
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`The current form of DFA's Membership and Marketing Agreement provides in
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`pertinent part that-
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`D FA agrees to purchase all Milk from Member, and thereafter market
`or utilize such Milk in a form and manner as DFA deems best for the
`advantage and benefit of all Members. DF A is authorized to adopt or
`enter into any marketing plan or plans for pooling of Milk or dairy
`products, or proceeds from the sale of Milk or dairy products. DF A is
`authorized to blend the proceeds of Milk with the proceeds derived from
`raw grade "A" milk sold by other Members.
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`A true and correct copy of the current Membership and Marketing Agreement is attached
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`hereto as Exhibit 2 and is incorporated by reference herein.
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`35.
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`The Membership and Marketing Agreement provides that after title to the milk
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`passes to OFA, which occurs at the member-producer's farm when the milk is "transferred onto
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`the hauler's trailer past the trailer's valve," "OF A has the exclusive responsibility and right to
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`perform or to direct the handling and all other aspects of the marketing or utilization of Milk,
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`including the right to commingle Milk with other producers' milk." Exhibit 2 at, 2(B) and (C).
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`36.
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`Some farmers members ofDF A have entered into prior versions of the Membership
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`and Marketing Agreement. Nonetheless, each such Agreement provides that "Member agrees to
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`of Congress of February 18, 1922, as amended, known as the "Capper-Volstead Act" [7 U.S.C. §§
`291,292], engaged in making collective sales or marketing of milk or its products for the producers
`thereof, from blending the net proceeds of all of its sales in all markets in all use classifications,
`and making distribution thereof to its producers in accordance with the contract between the
`association and its producers: Provided, That it shall not sell milk or its products to any handler
`for use or consumption in any market at prices less than the prices fixed pursuant to paragraph (A)
`of this subsection (5) for such milk."
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`abide by and observe the rules, regulations, policies and Bylaws of DF A which are incorporated
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`into this Agreement by reference. Member agrees that the rules, regulations, policies and Bylaws
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`of DF A supersede and control over any conflicting provisions stated, or implied, in this
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`Agreement." Exhibit 2 at ,i 1 (E).
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`It is DF A policy to take title to the member's milk,
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`notwithstanding the specific terms of the Membership and Marketing Agreement, once the raw
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`milk is transferred to the hauler's trailer (consistent with the current Membership and Marketing
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`Agreement set forth in Exhibit 2).
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`37.
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`Regarding distributions of proceeds to DFA's members, the Membership and
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`Marketing Agreement provides that DF A first pays "ordinary and necessary expenses incurred in
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`the marketing or utilization of Milk or dairy products" and any other deductions and offsets
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`authorized by law, its rules, regulations, policies, Bylaws, or other agreements between DF A and
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`the member. Exhibit 2 at ,i 3(A).
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`38.
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`In addition to this payment, OF A members receive an allocation of net earnings
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`"upon the basis of patronage pursuant to its Bylaws." Exhibit 2 at ,i 3(8).
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`39.
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`Although there have been numerous versions of this Membership and Marketing
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`Agreement over the years, DF A's broad authority to market the milk, to blend the revenues
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`received, to subtract expenses, and then to distribute the proceeds6 (as well as to allocate net
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`earnings pursuant to its bylaws), taking into consideration the interests of all of its farmer members
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`has been consistent.
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`This is sometimes referred to as "reblending" because the cooperative first receives the
`6
`federal blend price for the raw milk that it delivers to a regulated processor and combines it with
`the proceeds from sales to other processors and then deducts expenses, leading to a new calculation
`of the value of the pool from which distributions will be made to the farmers. See note 5, above.
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`D.
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`Act 521 - Arkansas Imposes Additional Price Controls on Milk
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`40.
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`In 2021, Arkansas passed Act 521, which purported to give the Milk Board
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`jurisdiction over the "base milk price paid to an Arkansas milk producer," and which ordered the
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`Milk Board to "[r]equire that an Arkansas milk producer receive Class 1 prices for milk utilized
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`or sold as fluid milk in this state." Act 521 of 2021, § 1 (codified at ARK. CODE ANN. § 2-10-
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`104(d)(l)). The Act further directed the Milk Board to "[m]ake, modify, and enforce rules that the
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`board deems necessary to effectively carry out this subsection." Act 521 of 2021, § 1 (codified at
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`ARK. CODE ANN. § 2-10-104( d)(2)(b) ). The Act expressly ties the "Class 1" price to Federal Milk
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`Marketing Order No. 7. Act 521 of 2021, § 2 (codified at ARK. CODE ANN.§ 2-10-104(e)(2)).
`
`41.
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`Over the course of several months, the Milk Board attempted to formulate a rule
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`that would implement Act 521 's unfunded mandate. As the Milk Board began those proceedings
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`under the Arkansas Administrative Procedure Act, it held public meetings where input was
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`provided. In one of the first meetings, lawyers for the Arkansas Department of Agriculture
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`arranged for the appearance of dairy-law experts on the faculty of the Penn State University Center
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`for Agricultural and Shale Law. The two law professors provided a PowerPoint presentation to
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`the Board explaining the basics of the Federal Milk Marketing Order system and highlighted a
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`price-control law from Pennsylvania. Significantly, the Pennsylvania law included establishing
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`minimum pricing at the wholesale and retail level and chose to define a cooperative as a milk
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`producer similar to the Federal Milk Marketing Order system. The law professors contrasted
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`Act 521 and highlighted their concerns with the Act, including the interplay with the Federal Milk
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`Marketing Order system and the application of the United States Constitution's dormant commerce
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`clause, indicating that there is always a question of whether a state law that discriminates against
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`out-of-state producers violates the commerce clause. In addition, the professors raised practical
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`issues including application of the Act 521 to milk shipped to and processed out of state and,
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`significant to this case, application to milk produced by members of a cooperative. 7 The professors
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`indicated that the state's authority to audit and mandate how a cooperative's money was paid out
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`to its members was questionable and indicated that when a producer decides to become a member
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`of a cooperative, that contractual relationship is controlling and cannot be interfered with.
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`42.
`
`In March 2022, the Milk Board adopted the Milk Stabilization Rule, and the Rule
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`was filed with the Arkansas Secretary of State on May 23, 2022.
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`43.
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`The Rule requires that milk "dealers" (typically the processor) pay what is termed
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`an "Over-Market Premium" (hereinafter sometimes referred to as "Premium") to Arkansas milk
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`producers. Rule at§§ 2-3. The Premium reflects an effort to require Arkansas milk producers be
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`paid the federal Class I price for all their milk that is ultimately sold as fluid milk in Arkansas.
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`Rule at § 3 .B. This is in direct conflict with the federal regulatory program, which requires that an
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`Arkansas milk producer shipping to a federally regulated plant receive the blend price under
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`Federal Milk Marketing Order No. 7.
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`44.
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`The Rule requires that the dealer either pay the Premium to the producer directly,
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`or else remit the Premium to the cooperative (such as DF A), in which case the cooperative must
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`pass the Premium through, "in whole," to the producer. Rule at §§ 3.B, 5.C. If the dealer pays the
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`Premium to the cooperative, then the cooperative must perform the calculation necessary to
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`determine the Premium, even though the Premium is calculated based on information possessed
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`by the dealer. Rule at§ 3.B.
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`7 DF A understands that the State has disclaimed any intention to regulate the prices paid
`by out-of-state milk dealers even if such dealers purchase raw milk from Arkansas dairy farmers
`and sell fluid milk in Arkansas. Should DFA's understanding be incorrect, it would have an
`additional commerce clause claim regarding the unconstitutionality of Act 521 and the Rule.
`13
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`Case 4:22-cv-00501-JM Document 1 Filed 06/01/22 Page 14 of 32
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`45.
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`The Rule purports to insulate DFA's contracts with its members (as well as with
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`dealers) from interference by Act 521. See Rule at § 5.A-B. As counsel for the Department of
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`Agriculture explained to the Milk Board at one of its meetings, Section 5 was put in the Rule to
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`avoid "getting in the middle" of the contracts between the DF A and its members.
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`46. While the text of the Rule appears to require dealers to fund the Over-Market
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`Premium and shield cooperatives' relationship with their producer-members from interference,
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`the majority of the members of the Milk Board clearly indicated throughout the process that they
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`wanted the Premium to be paid by OF A, regardless of whether funds were paid by the processor,
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`and apparently without regard to the interests of DF A's non-Arkansas dairy farmer members in
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`the sharing of any proceeds by farmers in Federal Order 7 among all farmer members in the Order.
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`4 7.
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`After the draft rule was placed for public comment, the chairman of the Milk Board
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`wrote a letter to Arkansas Governor Asa Hutchinson suggesting that neither end consumers nor
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`dealers would bear the brunt of the legislature's payment mandate, but rather that DFA would bear
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`it. According to the letter, "[t]he acclamation [sic] here that Act 521 is a 'Tax' going into effect
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`costing Arkansans $.20 per gallon of milk and that Hiland Dairy will have to administer the
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`paperwork of the program immortalizes the Milk Board's work! Act 521 is not a tax and the
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`cooperative side of Dairy Farmers of America will be distributing the monies, not Hiland Dairy
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`processing directly." In addition, one member of the legislature who was a proponent of Act 521
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`and aggressively pushed the Milk Board to adopt these rules wrote to the Governor, stating that
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`"[t]he funds from which this payment would come is from DFA, not a tax, and would affect only
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`about 5% of the milk processed by Arkansas farmers."
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`48.
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`In an unsigned February 4, 2022, memorandum letter, the Department of
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`Agriculture has stated that the Rule "[r]equires the cooperative to pay an over-market premium to
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`14
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`Case 4:22-cv-00501-JM Document 1 Filed 06/01/22 Page 15 of 32
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`producers in Arkansas if the local utilization exceeds the [Federal Milk Marketing Order No. 7]
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`utilization."
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`49.
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`It is a violation of the Rule for a cooperative such as DF A to fail to pass through
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`the premium to a producer. Rule at § 6.B. The Rule also purports to create a civil cause of action
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`in circuit court for a producer to recover an unpaid over-market premium. 8
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`50.
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`The Rule goes into effect on June 2, 2022. See ARK. CODE ANN. § 25-15-
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`204(g)(l )(A) ("Each rule adopted by an agency is effective ten (10) days after filing of the final
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`rule with the Secretary of State unless a later date is specified by law or in the rule itself.").
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`51.
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`In light of the impending effective date of the Rule, statements made by government
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`officials about the applicability of the Act and the Rule to DF A, and the uncertainty caused thereby,
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`there is a case or controversy subject to the Federal Declaratory Judgment Act. 28 U.S.C.
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`§ 220l(a).
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`CLAIMS FOR RELIEF
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`CLAIM I
`(Declaratory/Injunctive Relief-Contracts Clause/Non-interference with Contract under
`the Rule)
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`52.
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`DFA re-alleges and incorporates the allegations in the preceding paragraphs of this
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`Complaint.
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`53.
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`By requiring OF A to pay the Over-Market Premium to its Arkansas members, the
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`Act and the Rule violate the United States and Arkansas Constitution by unlawfully interfering
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`with DF A's contracts with its members.
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`8 While not directly at issue in this lawsuit, this attempt by an executive agency to create a
`private right of action where the legislature has not done so is invalid and unconstitutional.
`15
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`Case 4:22-cv-00501-JM Document 1 Filed 06/01/22 Page 16 of 32
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`54.
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`The Contract Clause forbids states from interfering with contractual obligations.
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`U.S. Const. art. I, § 10, cl. 1.
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`55.
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`Similarly, the Arkansas Constitution provides that "No bill of attainder, ex post
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`facto law, or law impairing the obligation of contracts shall ever be passed .... "Ark.Const. art. 2,
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`§ 17.
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`56.
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`A state law impermissibly interferes with a contract when (1) it substantially
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`impairs a contractual relationship, and (2) it is not drawn in an appropriate and reasonable way to
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`advance a significant and legitimate public purpose. Heights Apartments, LLC v. Walz, 30 F.4th
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`720, 728 (8th Cir. 2022).
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`57.
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`Act 521 and the Rule impair various terms within the pre-existing Membership and
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`Marketing Agreements, many of which constitute crucial contractual rights in the cooperative
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`structure. The Act and the Rule's price-fixing regime for Arkansas dairy farmer members
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`completely impair DFA's ability to market and/or utilize members' milk "best for the advantage
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`and benefit of all Membe