LEGAL CORNER
What it means to “market” milk
By Donald A. Frederick
Program Leader for Law,
Policy & Governance;
USDA Rural Development/
Cooperative Programs
donald.frederick@usda.gov
n Arizona State Court of
Appeals decision in a
complex litigation
brought by former members
against a milk marketing
cooperative discusses two issues
of interest to cooperative leaders. One
concerns whether “dumping” member
milk during a contract dispute with
buyers meets the legal definition of
“marketing” that milk. The other
involves whether certain relationships
between a cooperative and a non-cooperative
broker amount to an illegal
agreement to restrain trade. United
Dairymen of Arizona v. Schugg, 1 CACV
04-0611 (Ariz. Ct. App., Div. 1,
filed Feb. 9, 2006).
Case facts
United Dairymen of Arizona (UDA)
is a milk marketing cooperative with
roughly 90 members whose average
herd size is 1,200 cows. UDA markets
about 90 percent of the milk produced
in Arizona.
Michael and Debra Schugg were
producer members of UDA and signed
a contract giving UDA the exclusive
right to market their milk. That contract
provided that UDA would “use its
best efforts to market the member’s
milk in such manner as the association
shall deem to be to the best advantage
of the member and all other members
of the association....” (court’s emphasis)
In an effort to enhance revenues,
UDA entered into agreements with
milk marketing cooperatives in other
states not to sell milk to fluid milk bottlers
until they agreed to pay a substantial
premium above the federally established
minimum price. When two
major buyers of UDA milk refused to
pay the requested premiums, UDA was
unable to sell millions of pounds of
Grade A milk produced by its members.
As a result, the Schuggs were
forced to “dump” a substantial quantity
of their milk.
UDA treated the milk dumped by its
members as if it had been sold when
computing its payments to members.
To make these payments, UDA incurred
substantial debt. To minimize that
debt and allocate its costs among all
members on a patronage basis, UDA
imposed an assessment on its members’
milk production. The amount assessed
against the Schuggs’ milk production
was in excess of $232,000.
The Schuggs took certain actions
which they claimed freed them from
their contract to market through UDA
and began selling their milk to another
cooperative. UDA responded by suing
the Schuggs for alleged breach of that
contract. The Schuggs filed two counterclaims
regarding UDA’s strategies for
marketing their milk, which are the
focus of this article.
Is “dumping” a
form of “marketing?”
First, the Schuggs alleged that UDA
breached its contractual obligation to
market its members’ milk when it effectively
forced members to dump their
milk, rather than deliver it to UDA’s
primary customers. They claimed their
damages from this action included the
amount of the assessment and other
financial losses.
The court described the argument of
the Schuggs as equating “market” with
an obligation to “sell” member milk to
the cooperative’s customers. The court
rejected this assertion.
The court said that: “UDA’s contractual
duty to ‘market’ milk reasonably
includes taking actions to protect its
long-term ability to sell at prices beneficial
to its members. UDA attempted
to obtain long-term contracts and premiums
from its primary customers by
limiting the supply of milk from its
members and from members of other
cooperatives. In doing so, it was exercising
its authority to ‘market’ in a manner
it deemed to be to the best advantage of
its members.”
So, this case reaffirms the legality of
an important strategy for cooperative
marketing associations, limiting the
supply of product their members deliver
to the market and working with other
cooperatives to limit supply on a broader
scale. But it is important to remember
that the same protection does not
apply to agreements with non-producers
to limit supply.
Antitrust issues
The Schuggs also alleged that UDA’s
“dumping” policy was part of an illegal
anti-competitive scheme to limit milk
supply, in violation of federal and state
antitrust laws. While UDA prevailed on
this point as well, it is important to
understand why it prevailed.
The court notes that while the
Capper-Volstead Act allows farmers and
cooperatives to engage in collective discussion
and make agreements that
impact price, the law does not protect
such agreements with other parties.
The Schuggs argued that UDA entered
into an illegal agreement with a noncooperative
milk broker as part of its
scheme to limit supply.
The Schuggs based their claim on
the testimony of a witness who wore
several hats. She was co-owner of the
milk broker, the manager of a
California dairy cooperative and a
director representing the California
cooperative on the board of a regional
milk marketing association that agreed
to participate with UDA in the milkwithholding
effort.
The court notes that at the time it
was developing the withholding strategy,
UDA applied for membership in the
regional association. The witness testified
that during the meeting of the
regional association board to consider
its application, UDA asked for assurances
that milk being marketed by the
broker for independent Arizona producers
wouldn’t be sold to Arizona bottlers.
The witness testified that UDA
was assured the milk would be marketed
through the California cooperative and
not be sold to Arizona bottlers.
While the Schuggs argued that this
evidence suggested UDA entered into
an improper agreement with the broker,
the court disagreed. The court
points out that the broker was not a
member of the regional association and
the testimony merely indicates that the
broker sold to another cooperative,
which could legally be a party to anticompetitive
marketing agreements with
UDA. The court held that this is insufficient
evidence from which a reasonable
person could find UDA violated
the antitrust laws. Technically, the
appellate court upheld the trial court’s
ruling that the Schuggs’ argument was
too weak to even send it to the jury for
deliberation.
So, on the antitrust issues, the court
determined neither UDA’s inquiry as to
how the broker intended to market
independent producer milk, nor the
sales agreement between the broker and
another cooperative that was legally
engaging in joint supply management
with UDA, constitutes an illegal agreement
to restrain trade between UDA
and the broker. If the court had found
an agreement between UDA and the
non-cooperative broker illegally
restrained trade, the court probably
would have held that the agreement was
not protected by Capper-Volstead.
