Milk farmers can proceed with a class action accusing dairy product manufacturers of manipulating the price of raw milk, a federal appeals court ruled on Tuesday.

The U.S. Court of Appeals for the 9th Circuit in San Francisco revived a lawsuit brought by dairy farmers accusing milk powder supplier DairyAmerica Inc of understating its prices to the U.S. Agriculture Department. That misinformation depressed raw milk prices, shortchanging American dairy farmers millions of dollars between 2002 and 2007, the suit alleged.

Manufacturers like DairyAmerica are required to report their product prices to the USDA, which uses the information to set prices paid to farmers under Federal Milk Marketing Orders.

In 2007, a dairy industry publication, The Milkweed, revealed that DairyAmerica had undervalued its nonfat dry milk by illegally incorporating the low prices from long-term contracts in its reports to the USDA.

Four farmers, Gerald Carlin, John Rahm, Paul Rozwadowski and Bryan Wolfe, sued DairyAmerica and its majority owner California Dairies Inc in 2009 on behalf of milk farmers around the country.

In 2010, a federal court in Fresno dismissed the case, finding that suit was barred under the so-called "filed rate doctrine" which prevents people from suing over rates filed with and reviewed by government agencies. The judge-created law, often used to defend against price-fixing suits, prevents courts from second-guessing agencies' expertise.

But the 9th Circuit on Tuesday decided that the rule did not bar the farmers' suit because the USDA had investigated DairyAmerica's conduct and found its reported rates improper. The total value of raw milk was understated by $50 million between 2006 and 2007, according to an agency report.

The appeals court said the case was exceptional due to the large and undisputed scope of the misreporting and the fact that the USDA recognized the rates as incorrect and would not produce a flood of cases.

"Our holding will not permit a flood of litigation such that the filed rate doctrine will be circumvented every time a milk producer has a quibble with FMMO prices," Judge George Wu wrote for a unanimous three-judge panel.

Benjamin Brown, a lawyer at Cohen Milstein who represented the farmers, welcomed the decision and the opportunity to proceed with the case before the district court.

Neither DairyAmerica nor the company's lawyer, Charles English of Davis Wright Tremaine, immediately responded to requests for comment.

John Vlahos of Hanson Bridgett, who represents California Dairies, was not immediately available to comment.

The case is Carlin et al v. DairyAmerica Inc et al, U.S. Court of Appeals for the 9th Circuit, No. 10-16448. (Reporting By Terry Baynes; editing by Jim Marshall)