On May 9, 2014, in Horne v. Department of Agriculture, the Ninth Circuit struck a blow against economic liberty by denying two California raisin growers’ efforts to recover penalties imposed against them by the U.S. Department of Agriculture (USDA). The growers’ heinous offense was their refusal to continue participating in a highly anticompetitive cartel. In order to understand this bizarre miscarriage of justice, which turns orthodox anti-cartel policy on its head, a bit of background is in order.
Perhaps the most serious affront to a sound consumer welfare-based American antitrust policy is the persistence of federal government-sponsored agricultural cartels. In a form of bureaucratic schizophrenia, while the Justice Department works hard to send private cartelists to jail, and grants leniency to informers who undermine cartels, the U.S. Agriculture Department (USDA) seeks to punish individuals who undercut USDA-sponsored cartels created pursuant to Agricultural Marketing Agreement Act marketing orders. Those orders establish antitrust-exempt government-approved frameworks under which private industry members restrict output and raise the price of specific crops, in the name of ensuring “orderly” markets. (Various scholars, such as Mario Loyola, have explored the public choice explanations for the private-public collusion that leads to marketing orders and other government-supported cartels.)
A particularly notorious USDA cartel is the California Raisin Marketing Order (“Raisin Order”), in operation since 1949, which establishes a Raisin Administrative Committee (“RAC”). The RAC is comprised almost entirely of self-interested raisin growers and packers (it is comprised of 47 growers and packers, plus a public member). The RAC sets annual raisin “reserve tonnage” requirements as a percentage of the overall crop, with the remainder comprising “free raisins.” “Reserve raisins” are diverted from the market but may be released when supplies are low. Under the Raisin Order, raisin producers convey their entire crop to raisin packer-distributors known as “handlers,” with producers receiving a pre-negotiated price for the free tonnage. Handlers sell free tonnage raisins on the open market, and divert the RAC-required percentage of each producer’s crop to the account of the RAC. The RAC tracks how many raisins each producer contributes to the reserve pool, and has a regulatory duty to sell them in a way that maximizes producer returns. The RAC finances its activities from reserve raisin sales proceeds, and disburses whatever net income remains to producers. Reserve raisins are diverted to “low value” markets, such as the export sector, while American consumers typically buy free raisins. The Raisin Order imposes substantial harm on American consumers: for example, in 2001 free raisins sold for $877.50 per ton compared to $250 per ton for reserve raisins, and the free raisins/reserve raisins price ration approached 10/1 in 1984 and 1991.
California raisin producers Marvin and Laura Horne sought to evade these cartel strictures by handling their own raisin crop, rather than selling it to traditional handlers, against whom the reserve requirement of the Raisin Order clearly operated. Similarly, by buying and handling other producers’ raisins for a per-pound fee, the Hornes believed that they could avoid the Raisin Order’s definition of “handler” with respect to those purchased raisins. A USDA judicial officer disagreed, finding the Hornes liable for numerous Order violations and fining them over $695,000, including an assessment of nearly $484,000 for the dollar value of the raisins not held in reserve.
The Hornes challenged this USDA order in federal district court, arguing that they were not “handlers” within the meaning of the Raisin Order and that the order violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s prohibition against excessive fines. The district court granted summary judgment for USDA on all counts. On appeal, the Ninth Circuit affirmed the application of the Raisin Order and the denial of the Eighth Amendment claim, but held that the Court of Federal Claims rather than the district court had jurisdiction over the takings claim. The U.S. Supreme Court granted certiorari on the jurisdictional issue only, holding that the Hornes could assert their takings claim in district court. The Supreme Court remanded for a determination of the merits of the takings claim, and on May 9 the Ninth Circuit, applying de novo review, affirmed the district court’s rejection of that claim.
The Ninth Circuit acknowledged that USDA linked a monetary exaction (the penalty imposed for failure to comply with the Raisin Order) to specific property (the reserved raisins) and that the Hornes faced a choice – give the RAC the raisins or face a penalty. Because the government did not literally seize raisins from the Holmes’ land or remove money from their bank account, the court held that the USDA’s action had to be analyzed as a potential regulatory taking. The court then noted that the Takings Clause affords less protection to personal property than to real property, and that the Hornes did not lose all economically valuable use of their property. The court asserted that the Hornes’ rights with respect to the reserved raisins were not extinguished because they retained a claim on certain future proceeds from reserved raisin sales (even though, as the Hornes pointed out, the “equitable distribution” of reserved sales might be zero). The court reasoned that even though the Hornes might not receive cash distributions in some years, the reserved raisins were not “permanently occupied,” and that the RAC’s diversion of reserved raisins inured to the Hornes’ benefit by stabilizing raisin prices. The court viewed the raisin diversion program as granting a conditional government benefit in exchange for an exaction. In short, by smoothing price fluctuations in the raisin industry, the Raisin Order made “market conditions predictable” and thereby bore a “sufficient nexus” to a legitimate interest the government sought to protect. (The court never asked why the reduction of consumer welfare and the imposition of deadweight losses through industry cartelization is a legitimate government interest.) Moreover, the RAC’s imposition of a reserve requirement on all producers was roughly proportional to the USDA’s market stabilizing goal as reflected in the Raisin Order. Thus, applying the nexus/proportionaliy test of Nollan v. California Coastal Commission and Dolan v. City of Tigard, the Ninth Circuit held that the application of the Marketing Order to the Hornes’ activities did not constitute a taking.
Stripped of its convoluted reasoning and highly selective application of Supreme Court precedents, the Ninth Circuit’s holding indicates that industrious and entrepreneurial individuals will not be allowed to avoid and thereby undermine agricultural cartels through creative commercial innovations. It means that individuals engaging in a legitimate business activity who wish not to contribute their product to a cartel that is imposed on them may suffer loss of their property, merely because the government approves of the cartel and wishes to protect it by punishing “cheaters.” But when the government is the ringmaster, odious cartels are miraculously transformed into praiseworthy citizens who promote the public interest by “stabilizing” markets.
Whatever the ultimate outcome of the Hornes’ legal saga, the Ninth Circuit’s crabbed analysis highlights the absurdity of imposing government financial exactions on private commercial conduct that unequivocally raises consumer welfare and enhances competition. The egregiousness of this conduct is amplified when the government penalizes a business for refusing to transfer some of its property to a third party (here, the RAC), without assurance of being compensated. Whether the business chooses to incur the penalty or instead accedes to the transfer, basic logic demonstrates that its property is being taken. Hopefully, future courts will keep this in mind and be willing to apply the Takings Clause to analogous scenarios.
If faced by a serious possibility of having to pay “just compensation” under the Takings Clause, the USDA may become less willing to sanction cartel avoiders through overly expansive interpretations of its agricultural marketing orders. That in turn could encourage additional businesses to seek creative ways to opt out of these arrangements. The end result could be the gradual weakening and ultimate dismantling of the marketing order framework. Even better, the USDA could choose to act unilaterally tomorrow and move to rescind marketing order regulations. (That might be asking too much, of course.)