LEGAL CORNER
Dairy co-op acquisition does
not violate antitrust law
By Marlis Carson
Vice President, Legal, Tax and Accounting
National Council of Farmer Cooperatives
Section 7 of the Clayton Antitrust
Act makes it illegal for one business to
acquire, directly or indirectly, the
stock of another business, where the
effect of the acquisition may be to
substantially lessen competition or
tend to create a monopoly. A U.S.
District Court in Kentucky has ruled
that Dairy Farmers of America (DFA)
did not violate this provision when it
purchased 50 percent of the voting
interest in the company that controlled
one fluid milk processing plant
and a 50-percent non-voting, nonmanagerial
interest in another company
that operated a competing fluid
milk processing plant.
Case facts
DFA, a milk marketing cooperative,
markets raw, unprocessed milk to dairy
processors. It invests in downstream
dairy companies that process milk for
consumption. Such investments help
DFA secure outlets for its members’
raw milk and allow its members to
share in the earnings from the sale of
finished dairy products.
In 2001, DFA joined with several
individuals to form National Dairy
Holding, L.P. (NDH), which owns the
Flav-O-Rich dairy bottling plant in
London, KY. The individuals collectively
owned 50 percent of the voting
interests in NDH; the remaining 50
percent was held by DFA.
In 2002, DFA and a family-owned
limited partnership formed Southern
Belle Dairy Company, LLC (Southern
Belle). Southern Belle owns a fluid
milk processing plant in Somerset, KY.
DFA owned 50 percent of the voting
interests in Southern Belle and the
family limited partnership owned the
other 50 percent.
In 2003, the U.S. Department of
Justice and the State of Kentucky filed
a civil antitrust lawsuit against DFA
and Southern Belle to compel DFA to
divest its interest in Southern Belle.
The complaint alleged that DFA’s purchase
of its interest in Southern Belle,
after it had secured the 50-percent
interest in NDH, would substantially
lessen future competition for the sale
of milk to schools in Kentucky and
Tennessee.
In 2004, the ownership and control
of both joint ventures was restructured.
In February 2004, one of the individual
owners of NDH, Allen Meyer,
acquired the interests of the other individual
owners. Now Meyer and DFA
each owned 50 percent of NDH. They
each also owned 50 percent of another
joint venture, Dairy Management
LLC, that served as the managing partner
for NDH, with Meyer and DFA as
limited partners. Meyer was clearly
identified as the manager of Dairy
Management LLC, and thus of NDH.
Furthermore, the operating agreement
of NDH was modified to ensure the
NDH was operated and controlled
solely by its manager, Meyer.
In July 2004, DFA exchanged its
voting interests in Southern Belle for
nonvoting preferred capital interests.
DFA no longer had the right to vote
on any matter and did not have a seat
on the governing board of Southern
Belle. The family limited partnership
had the right to sell Southern Belle at
any time, including DFA’s interests.
Southern Belle, and hence the
Somerset plant, were managed by a
member of the family partnership.
The family partnership did not own
any interest in DFA and DFA did not
own any interest in the partnership.
The court issued its opinion in late
August 2004, holding that as the ventures
are now structured, DFA is not in
a position to control the sale of milk to
schools in the area.
Holdings of the court
The district court identified the
issue at hand as to whether DFA’s 50
percent non-voting interest in
Southern Belle, when combined with a
50-percent voting interest in NDH
(and thus Flav-O-Rich, Southern
Bell’s competitor), would substantially
lessen competition. Citing the U.S.
Supreme Court decision in U.S. v.
Philadelphia National Bank, 374 U.S.
321 (1963), the district court noted
that Section 7 of the Clayton Act is
violated if the market is sufficiently
concentrated and an
acquisition would enhance
that concentration.
The court noted that the
Philadelphia National Bank
standard requires that the
acquisition results in at least
some control of a large percentage
of a market by one
firm. Here, the court concluded
DFA’s acquisition “has not resulted in
DFA controlling a large portion of the
relevant market for the sale of
processed milk to schools.” The purchase
of shares does not enhance
DFA’s ability to influence the market
because “DFA’s non-voting interest in
Southern Belle does not give it any
control over the business decisions
made by Southern Belle,” the court
stated. The balance of control in the
market has not shifted to DFA, so the
acquisition of an interest in Southern
Belle by DFA has not enhanced concentration
and thus is not illegal.
The United States argued that
DFA’s interest in Southern Belle and
NDH gave the dairies incentive and
opportunities to collude and diminish
competition. The court was not convinced,
however, noting that with
respect to school milk bidding, DFA
has no voting rights and thus cannot
directly affect Southern Belle’s school
milk business decisions. Similarly, the
court concluded that DFA’s 50 percent
interest in NDH does not result in any
participation in business decisions.
The court noted that the operating
agreements for both Southern Belle
and NDH leave the operational
aspects of the company with the operational
owners/partner, not DFA. The
court noted that there must be “some
mechanism by which the alleged
adverse effects in the sale of milk are
likely to be brought about by DFA’s
acquisition of a non-operational interest
in Southern Belle.” While DFA
had an obvious interest in the success
of both dairies to maximize its 50- percent
share of the earnings of each venture,
that in and of itself did not translate
into the degree of control necessary
to establish an antitrust violation.
Referencing the limited nature of
DFA’s ownership interest, including the
lack of involvement in the day-to-day
operations of either NDH or Southern
Belle, the court found
that the “incentives
and opportunities for
collusion are not substantially
greater by
virtue of DFA’s dual
ownership interests
than they were prior to
this challenged acquisition.”
Accordingly, the
court granted a motion by DFA for
summary judgment, in effect holding
that even if all the evidence, facts, and
inferences before the court are viewed
in the light most favorable to the government,
DFA would still prevail as a
matter of law.
The U.S. Department of Justice
has notified the court that it intends
to appeal the decision to the U.S.
Court of Appeals for the 6th Circuit.
Justice contends the ruling permits
companies to invest more heavily in
competitors than antitrust enforcers
believe is appropriate.
Northland vs. Ocean Spray antitrust
settlement preserves co-op win
In the Oct.–Sept. 2004 issue of Rural Cooperatives,
“Legal Corner” reported on a decision in antitrust litigation
by Northland Cranberries against Ocean Spray
Cranberries. As part of a larger business deal, Northland
agreed to dismiss, with prejudice, its lawsuit
alleging antitrust law violations on the part of Ocean
Spray. This leaves in place the U.S. District Court opinion
in the case holding the presence of foreign (Canadian)
producers in Ocean Spray’s membership does not
strip the cooperative of its antitrust protection under
the Capper-Volstead Act.
In addition to ending the litigation, the deal provides
that Ocean Spray will purchase all cranberry processing
assets and the current inventory of unprocessed
cranberries of Northland. Ocean Spray and Northland
also signed a 10-year agreement through which Ocean
Spray will, for a fee, receive and convert into concentrate
all of the cranberries produced by Northland and
its contract growers. Northland will then be free to
bottle and market its own cranberry juice, in competition
with Ocean Spray and other juice companies at
the wholesale and retail levels.
