February 18, 1977
The Honorable Andrew J. Wiese
State Representative
Flandreau, South Dakota 57028
Official Opinion No. 77-20
Dairy Industry Marketing Act, SDCL 37-3
Dear Representative Wiese:
You have asked for my opinion on the constitutionality of the Dairy Industry Marketing Act, SDCL 37-3. Even though I have in previous opinions stated that the courts and not this office must determine the constitutionality of statutes, I think it appropriate to further comment on your question.
Chapter 37-3 does two things: First, it lists several proscribed activities in the sale of dairy products in South Dakota. I will address those acts or practices later in this opinion. Secondly, it creates a Dairy Products Marketing Commission with the responsibility of establishing the minimum dock prices of dairy products sold in this state.
I will first consider the often raised contention that these types of price regulation statutes are generally arbitrary and unreasonable, that is, that they violate principles of substantive due process.
Milk price control is, of course, but one example of the larger and pervasive phenomenon of governmental regulation of prices under the police power. For constitutional purposes, milk price control is indistinguishable from other types of governmental price regulation. To ascertain the limitations imposed by the state and federal constitutions upon milk price controls, it is therefore appropriate to consider the constitutional limits on governmental regulations of prices generally.
Governmental regulation of prices has a long, although somewhat checkered, legal history in this country. For present purposes, however, we need look no farther back than the decision of the United States Supreme Court in Nebbia v. New York, 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940 (1934), a case concerning regulation of milk prices. In that case, breaking free of the tangled and restrictive body of decisional law concerning price regulation which it had developed over the preceding half-century, the Court held that state regulation of prices enacted to promote the general welfare is not per se violative of the due process clause in the federal constitution:
We may as well say at once that the dairy industry is not, in the accepted sense of the phrase, a public utility. We think the appellant is also right in asserting that there is in this case no suggestion of any monopoly or monopolistic practice. It goes without saying that those engaged in the business are in no way dependent upon public grants or franchises for the privilege of conducting their activities. But if, as must be conceded, the industry is subject to regulation in the public interest, what constitutional principle bars the state from correcting existing maladjustments by legislation touching prices? We think there is no such principle. The due process clause makes no mention of sales or of prices any more than it speaks of business or contracts or buildings or other incidents of property. The thought seems nevertheless to have persisted that there is something peculiarly sacrosanct about the price one may charge for what he makes or sells, and that, however able to regulate other elements of manufacture or trade, with incidental effect upon price, the state is incapable of directly controlling the price itself. This view was negatived many years ago. Munn v. Illinois, 94 U.S. 113, 24 L.Ed. 77. [291 U.S. at 531-32, S.Ct. at 513.]
Rather, it held that where, in the opinion of the Legislature, regulation of prices serves the public interest, a state is entirely free to impose such regulation, provided only that it does not employ means which are arbitrary, discriminatory or demonstrably irrelevant to a legitimate purpose:
If the lawmaking body within its sphere of government concludes that the conditions or practices in an industry make unrestricted competition an inadequate safeguard of the consumer's interests, produce waste harmful to the public, threaten ultimately to cut off the supply of a commodity needed by the public, or portend the destruction of the industry itself, appropriate statutes passed in an honest effort to correct the threatened consequences may not be set aside because the regulation adopted fixes prices reasonably deemed by the Legislature to be fair to those engaged in the industry and to the consuming public. [Id. at 538-39, 54 S.Ct. at 516.]
In so deciding, the Court reverted to its earliest view of the limitations imposed upon such state action by the fourteenth amendment, Munn v. Illinois, 94 U.S. 113, 24 L.Ed. 77 (1877); Peik v. Chicago and N.W.R. Co., 94 U.S. 164, 24 L.Ed. 97 (1877). In subsequent decisions, the United States Supreme Court has consistently reaffirmed its holding in Nebbia. I.e., Cities Service Gas Co. v. Peerless Oil and Gas Co., 340 U.S. 179, 71 S.Ct. 215, 95 L.Ed. 190 (1950) (wellhead price of natural gas); Olsen v. Nebraska ex rel. Western Reference and Bonding Ass'n, 313 U.S. 236, 61 S.Ct. 826, 85 L.Ed. 1305 (1941) (fees of employment agencies); Mayo v. Lakeland Highlands Canning Co., 309 U.S. 310, 60 S.Ct. 517, 84 L.Ed. 774 (1940) (prices of citrus fruits); Townsend v. Yeomans, 301 U.S. 441, 57 S.Ct. 842, 81 L.Ed. 1210 (1937) (fees of tobacco factors); Hegeman Farms Corp. v. Baldwin, 293 U.S. 163, 55 S.Ct. 7, 79 L.Ed. 259 (1934) (price of milk).
Among other things, Nebbia and the line of decisions following it reject the view previously expressed by the Supreme Court in cases such as Ribnik v. McBride, 277 U.S. 350, 48 S.Ct. 545, 72 L.Ed. 913 (1928) and Tyson & Brother [United Theatre Ticket Offices] v. Banton, 273 U.S. 418, 47 S.Ct. 426, 71 principles of substantive due process unless supported by a special showing that an “emergency” exists or that the industry to be regulated is “affected with the public interest.” The issue was presented most starkly in Olsen v. Nebraska ex rel. Western Reference and Bonding Association, supra, a case challenging the constitutionality of regulation of fees charged by employment agencies. In its decision the Court summarily rejected the contention that “special circumstances must be shown to support the validity of such drastic legislation as price fixing,” 313 U.S. 246, 61 S.Ct. 865, and responded to the claim that the operation of employment agencies was not “affected with a public interest” with the declaration:
These cases [Nebbia and its progeny] represent more than scattered examples of constitutionally permissible price-fixing schemes. They represent in large measure a basic departure from the philosophy and approach of the majority in the Ribnik case. The standard there employed, following that used in Tyson & Brother [United Theatre Ticket Offices] v. Banton, 273 U.S. 418, 430 et seq., 47 S.Ct. 426, 428 et seq., 71 L.Ed. 718[722], 58 A.L.R. 1236, was that the constitutional validity of price- fixing legislation, at least in absence of a so-called emergency, was dependent on whether or not the business in question was “affected with a public interest.” Cf. Brazee v. Michigan, 241 U.S. 340, 36 S.Ct. 561, 60 L.Ed. 1034 [Ann. Cas. 1917C, 522]. It was said to be so affected if it had been “devoted to the public use” and if “an interest in effect” had been granted “to the public in that use.” Ribnik v. McBride, supra, 277 U.S. at page 355, 48 S.Ct. at page 545, 72 L.Ed. 913, 56 A.L.R. 1327. That test, labelled by Mr. Justice Holmes in his dissent in the Tyson case, 273 U.S. at page 446, 47 S.Ct. [426], at pages 433, 434, 71 L.Ed. 718[729], 58 A.L.R. 1236 as “little more than a fiction,” was discarded in Nebbia v. New York, supra, 291 U.S. at pages 531-539, 54 S.Ct. [505] at pages 513-516, 78 L.Ed. 940[953-958], 89 A.L.R. 1469. It was there stated that such criteria “are not susceptible of definition and form an unsatisfactory test of the constitutionality of legislation directed at business practices or prices,” and that the phrase “affected with a public interest” can mean “no more than that an industry, for adequate reason, in subject to control for the public good.” Id., 291 U.S. at page 536, 54 S.Ct. [505], at page 515, 78 L.Ed. 940[956], 89 A.L.R. 1469.
Clearly, proof of “special circumstances” or “emergent conditions” was long ago rejected as the only standard for determining whether legislative enactments violate substantive due process.
Principles of substantive due process are found in article VI, § 2 of the South Dakota Constitution, as well as in the federal constitution. The Legislature is supreme in its proper sphere; the exercise of power by it is subject only to the restraints imposed by the federal and state constitutions and those which are fundamental in the social compact. A legislative enactment should not be set aside unless its unconstitutionality indisputably appears. Also, we are confronted with the often repeated and well-settled doctrine that no act of the law-making power of the state can be held unconstitutional, unless it is clearly violative of the provisions of the Constitution; that, if it is legally possible to sustain legislative enactment, they should not be held void. It must also be remembered that the legislative department of the state, within well-known and well-defined limitations, is the sole judge as to when and how the police power of the state is to be exercised. The court cannot substitute its conception of sound public policy for that entertained by the Legislature, if there be no disregard of a constitutional mandate.
The decisions both of state courts and of the United States Supreme Court concerning price regulation are the natural consequence of the limited role of the judiciary in applying the principles of substantive due process to economic and social legislation. The proper function of the courts in this area was stated by the United States Supreme Court in Nebbia v. New York:
So far as the requirement of due process is concerned, and in the absence of other constitutional restriction, a state is free to adopt whatever economic policy may reasonably be deemed to promote public welfare, and to enforce that policy by legislation adapted to its purpose. The courts and within authority either to declare such policy, or, when it is declared by the legislature, to override it. If the laws passed are seen to have a reasonable relation to a proper legislative purpose, and are neither arbitrary nor discriminatory, the requirements of due process are satisfied, and judicial determination to that effect renders the court functus officio. “Whether the free operation of the normal laws of competition is a wise and wholesome rule for trade and commerce is an economic question which this court need not consider or determine.” Northern Securities Co. v. United States, 193 U.S. 197, 337, 338, 24 S.Ct. 436, 457, 48 L.Ed. 679, 700, 701. And it is equally clear that if the legislative policy be to curb unrestrained and harmful competition by measures which are not arbitrary or discriminatory it does not lie with the courts to determine that the rule is unwise. With the wisdom of the policy adopted, with the adequacy or practicability of the law enacted to forward it, the courts are both incompetent and unauthorized to deal. [291 U.S. at 537, 54 S.Ct. at 516.]
This position has consistently been reaffirmed by that court, most recently in North Dakota Board of Pharmacy v. Snyder's Drug Stores, 414 U.S. 156, 94 S.Ct. 407, 38 L.Ed.2d 379 (1973) and Ferguson v. Skrupa, 372 U.S. 726, 83 S.Ct. 1028, 10 L.Ed.2d 93 (1963).
Therefore, it is permissible for state legislatures, through the state police power, to pass milk price controls as long as they meet the above criteria.
As I stated in the opening paragraphs of this opinion, I will also address several of the prohibited acts as they are found in several sections of Chapter 37-3, i.e., § § 37-3-2, discrimination between localities in buying prohibited; 37-3-15, restriction on credit extended to retailer by processor or distributor; 37-3-16, money loans to retailer by processor or distributor unlawful; 37-3-21, price reduction or equipment lease for exclusive contract unlawful; 37-3-24, furnishing equipment to customer unlawful except on bill of sale or conditional sale-filing with register of deeds-minimum selling price; 37-3-28, discrimination between purchasers based on services or facilities unlawful; and other sections as they are similarily found in other states' acts have caused different state supreme courts to rule in different ways.
In 1957, the North Dakota Supreme Court in Fairmont Foods Co. v. Burgum, 81 N.W.2d 639 (N.D. 1957) held that the challenged portions of the statute were unconstitutional restrictions of corporations' contract and property rights. The North Dakota court then quoted form Burns Baking Co. v. Bryan, 264 U.S. 504, 513, 44 S.Ct. 412, 413, 68 L.Ed. 813, 32 A.L.R. 661 saying “A state may not, under the guise of protecting the public arbitrarily interfere with private business or prohibit lawful occupations or impose unreasonable and unnecessary restrictions upon them.” The North Dakota court concluded by saying that the statutes under review were arbitrary and unreasonable restrictions upon lawful business practices; that no showing had been made that the statutes had any reasonable relation to practices restricting competition or creating monopolies in the dairy industry; that the statutes would result in the impairment of Fairmont Foods Company right of contract and property rights, and, that the statutes challenged were violative of sections 13, and 16 of the constitution of the State of North Dakota.
Two years after the North Dakota Supreme Court case, the Wisconsin Supreme Court in Borden Co. v. McDowell, 99 N.W.2d 146 (Wis. 1959) held that the same practices, as were proscribed in North Dakota and declared unconstitutional, might be considered unfair trade practices and regulated in promotion of public welfare as part of the police power without depriving wholesalers of liberties and properties without due process of law and equal protection of the laws notwithstanding the fact that provisions of the statutes were for the benefit of “small wholesalers” class, and not public in general. The Wisconsin court goes on to say:
[W]e conclude that the dairy industry is subject to regulation and has been regulated so by the Legislature for the public welfare for many years. The present statutes seem to us to be of the nature of those which we have previously sustained as constitutional.
With the split of authority as I have discussed above it would be mere conjecture for me to say which sections of Chapter 37-3 our Supreme Court would say are unconstitutional.
Respectfully submitted,
William J. Janklow
Attorney General
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