LEGAL C0RNER
Butter settlement: a glimpse into the future of antitrust enforcement?
By Donald A. Frederick
Program Leader, Law, Policy &
Governance
USDA Rural Development
he rash of consolidations taking place throughout the food industry is placing pressure on all participants, including cooperatives, to become both more efficient and more effective in protecting and enhancing their market position. Public documents concerning a recent negotiated settlement between a major dairy marketing cooperative and the United States Department of justice provide insight into how some cooperatives are dealing with changes in food marketing and how antitrust enforcement officials may react when cooperatives become the dominant players in a particular line of business.
Justice challenges dairy plan
On Dec. 15, 1999, Dairy Farmers of America (DFA) entered into a letter of agreement to purchase SODIAAL North American Corporation (SODIAAL). DFA and SODIAAL were two of the three firms which accounted for over 90 percent of branded butter sales in the Philadelphia and New York metropolitan areas. The third firm in the market is Land O'Lakes Inc. DFA and Land O'Lakes are the two largest dairy marketing cooperatives (as measured by sales) in the United States. SODIAAL is a privately held subsidiary of a French cooperative.
Section 7 of the Clayton Antitrust Act (15 U. S.C. § 18) provides that one business shall not acquire another business when the effect of the acquisition may be to substantially lessen competition or tend to create a monopoly. In March 2000, the United States Department of justice filed a civil antitrust action to block the proposed acquisition. The Justice Department alleged that DFA's purchase of SODIAAL would substantially lessen competition in the butter market in Philadelphia and New York and therefore violated Sec. 7 of the Clayton Act.
Impact of Capper-Volstead
The Capper-Volstead Act provides a limited exemption from the antitrust laws for agricultural producers to process, handle, otherwise prepare for market, and market their farm products on a cooperative basis. Capper-Volstead specifically authorizes separate and competing cooperatives to form a common marketing agency to set prices and market member products as if the cooperatives were a single entity. Several court decisions have held that farmers, through a single cooperative or a common marketing agency, may acquire substantial or even monopoly control over the sale of products they produce, so long as only farmers are involved in the scheme and the decision to work together is a voluntary one (not the result of coercion or intimidation by the cooperative(s) against nonmembers).
As part of the settlement process, the Justice Department published a Competitive Impact Statement summarizing its case. When reviewing the proposed acquisition, Justice gave special emphasis to two legal standards for interpreting Capper-Volstead. First, justice noted that if the purchase went through as proposed, DFA and Land O'Lakes would control more than 90 percent of the branded butter market in Philadelphia and New York. Since both DFA and Land O'Lakes are agricultural cooperatives they could agree on the price and other terms of sale for their butter in these areas free from antitrust scrutiny.
Second, Justice took the position that SODIAAL, as a private subsidiary of a French cooperative, is not covered by Capper-Volstead. Thus the government was free to challenge its purchase by DFA as a violation of Sec. 7 of the Clayton Act. (65 Federal Register 44825, July 19, 2000).
The settlement
The United States (with the acquiescence of DFA) asked the court to approve a final judgment in the case that permits DFA to complete its acquisition of SODIAAL but prohibits DFA from joining with Land O'Lakes in any joint effort to market branded butter. Procedural rules that apply to settling antitrust cases require a 60-day period for public comment after the Proposed Final Judgment and Competitive Impact Statement are published in the Federal Register. No comments were filed. In November 2000, the judge signed an order implementing the proposed final judgment.
Under the settlement, DFA agrees to transfer all of its assets necessary to manufacture and market its branded butter on the East Coast, including DFA's interest in the "Breakstone's" brand, and all of the assets acquired from SODIAAL, including the "Keller's" and "Hotel Bar" brands, into a new limited liability company to be called Keller's Creamery, LLC. The key provision requires DFA to transfer partial ownership in Keller's Creamery to persons who are not agricultural producers. The purchasers are members of the pre-merger SODIAAL management team. This non-producer ownership interest deprives Keller's Creamery of cooperative status and the right to engage in common marketing activity with cooperatives (including Land O'Lakes) under the protection of the Capper-Volstead Act.
The agreement also enjoins DFA and Keller's Creamery from entering into any collaborative marketing effort of branded butter with Land O'Lakes and from disclosing any competitively sensitive information regarding branded butter to Land O'Lakes. The agreement also contains several provisions to prevent DFA or Keller's from circumventing the judgment by restructuring themselves or selling any assets to another firm, particularly Land O'Lakes, without the court's permission.
Outcome frames crucial issues
In essence, DFA agreed to forfeit its Capper-Volstead status with regard to marketing branded butter in the relevant to makers in exchange for permission to purchase a major non-cooperative competitor in those markets. The acquisition benefits DFA members by providing an additional market for their milk that will be used to produce the butter manufactured at the former SODIAAL's plant and by increasing the amount of value-added processing being undertaken by their cooperative. But in return, DFA losses the ability to cooperate with Land O'Lakes to improve the economic return to all of their farmer-members.
One position taken by the Department of justice in this case is encouraging for marketing cooperatives. This may be the first time justice has admitted that "explicit collusion" between large agricultural cooperatives with a dominant position in the marketplace "would be legal and could not be challenged under the antitrust laws." (65 Federal Register 4482 7).
As the trend toward fewer but larger firms continues in many product lines in the food (and other) industries, cooperatives will feel pressure to also grow. When this growth is accomplished by simply signing up new members or through working agreements or combinations with other cooperatives, antitrust concerns may be minimal. However, when deals involve joint ventures with, or acquisitions of, non-cooperative firms, the Capper-Volstead shield will not be available. The proposal will be subject to challenge under the same standards as an agreement between two non-cooperative firms.
The deal accepted by DFA in this case consummates the acquisition but restructures it to negate future access to Capper-Volstead protection in the relevant market. Whether this will become a model for Department of Justice response to future actions that reduce competitors in a market with a strong cooperative presence is unclear. And like any approach to resolving complex conflicts, what operates in the best interests of producers in one instance may not in another. But as cooperatives adjust to the changing competitive environment of agri-business, antitrust issues and the attitude of federal and state enforcement officials will remain important parts of the planning and implementation process.
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