the law of cooperative corporations

The Law of Cooperative The Law of Cooperative CorporationsCorporations

University of ArkansasUniversity of Arkansas

LLM Program, Agricultural Law, 2007LLM Program, Agricultural Law, 2007Fayetteville, ArkansasFayetteville, Arkansas

April, 2007April, 2007

James R. BaardaJames R. Baarda

AntitrustAntitrust

5.Undue price enhancement

4.Current issues

3.Scope of behavior

2.Capper-Volstead Act

1.The problem

AntitrustAntitrust

Syllabus: Antitrust, pp. 1 - 10

1.The problem

Basic Antitrust RulesBasic Antitrust Rules • Sherman Act (1890)Sherman Act (1890)

- Section 1- Section 1- Section 2- Section 2


• Clayton Act (1914)Clayton Act (1914)- Merger- Merger- Cooperative exemption- Cooperative exemption

• FTC Act (1914)FTC Act (1914)Unfair methods of Unfair methods of competitioncompetition


• Robinson-Patman Act (1936)Robinson-Patman Act (1936)Price discriminationPrice discrimination

Basic Antitrust RulesBasic Antitrust Rules

• Judicial developmentJudicial development- Monopolization- Monopolization- Restraint of trade- Restraint of trade



• Rule of reasonRule of reason• Per sePer se rules rules



• MarketingMarketing• PurchasingPurchasing• Early cooperative issuesEarly cooperative issues

Capper-Volstead Act (1922)Capper-Volstead Act (1922)

• MembershipMembership• StructureStructure• ActionsActions



“Persons engaged in the production of agricultural products

as farmers, planters ranchmen, dairymen, nut or fruit growers



may act together in associations, corporate or otherwise, with or without capital stock

in collectively processing, preparing for market, handling, and marketing in interstate and foreign commerce

such products of persons so engaged.



Such associations may have marketing agencies in common;

and such associations and their members may make the necessary contracts and agreements to effect such purposes:



Provided, however, that such associations

are operated for the mutual benefit of the members thereof, as such producers,

and conform to one or both of the following requirements:



First, that no member of the association is allowed more than one vote because of the amount of stock or membership capital he may own therein,



First, that no member of the association is allowed more than one vote because of the amount of stock or membership capital he may own therein,

or,



Second. That the association does not pay dividends on stock or membership capital in excess of 8 per centum per annum.



And in any case to the following:

Third. That the association shall not deal in the products of nonmembers to an amount greater in value than such as are handled by it for members.”




ControlControl

BenefitBenefit

FinanceFinance

USEUSE

Producer MembershipProducer Membership • Case-Swayne (1967)Case-Swayne (1967)• Packing house membershipPacking house membership• No de minimus rulesNo de minimus rules• “ “Economic consequences”Economic consequences”• Focus exclusively on producersFocus exclusively on producers


What is a Producer?What is a Producer?

• NBMA (5NBMA (5thth Cir.) (1977) Cir.) (1977)• Poultry integratorsPoultry integrators• Contract growersContract growers• Words of the statuteWords of the statute• Rationale for the ActRationale for the Act


• NBMA (S.Ct.) (1978)NBMA (S.Ct.) (1978)• No breeder flocks, hatcheriesNo breeder flocks, hatcheries• Rationale for exemptionRationale for exemption

- Condition of farmers- Condition of farmers- Exposure to risks +- Exposure to risks +- Inability to respond- Inability to respond



• NBMA (S.Ct.) (1978)NBMA (S.Ct.) (1978)• Economic role of memberEconomic role of member• Brennan, concurringBrennan, concurring

- Relative economic positions- Relative economic positions- Conflicts- Conflicts



• NBMA (S.Ct.) (1978)NBMA (S.Ct.) (1978)• White, dissentingWhite, dissenting

- Changing agriculture- Changing agriculture- Economic position- Economic position- Risk-bearing- Risk-bearing



• Hinote (1993)Hinote (1993)• Catfish farm productionCatfish farm production• Processing issueProcessing issue



Foreign MembershipForeign Membership

• Reasons for foreign membersReasons for foreign members• Ocean Spray (2004)Ocean Spray (2004)• Plain meaning of the wordPlain meaning of the word• No untoward impactNo untoward impact



3.Scope of behavior

Pricing Actions ProtectedPricing Actions Protected

• Entity requirementEntity requirement• Membership entitiesMembership entities• Bargaining, pricingBargaining, pricing


Treasure Valley (1974)Treasure Valley (1974)



Central California (1976)Central California (1976)



In re Central California (1977)In re Central California (1977)



Cooperative Marketing Act of 1926Cooperative Marketing Act of 1926


… may acquire, exchange, interpret, and disseminate past, present, and prospective crop, market, statistical, economic, and other similar information by direct exchange between such persons, and/or such associations or federations thereof, and/or by and through a common agent….


Actions Among CooperativesActions Among Cooperatives

• Independent cooperativesIndependent cooperatives• “ “Marketing agencies in common”Marketing agencies in common”


Cooperative

Cooperative

Cooperative

Cooperative


• Maryland Cooperative (1956)Maryland Cooperative (1956)

Syllabus: Antitrust, p. 86


• Maryland Cooperative (1956)Maryland Cooperative (1956)


“Obviously, it must have been contemplated that a common marketing agency would fix the same prices for the products of all its principles and would not discriminate among them.”


• Treasure Valley (1974)Treasure Valley (1974)


“[I]t would follow that without such a separate [marketing] agency [in common], the associations may act together in marketing and make the necessary contracts to accomplish their legitimate purposes.”


• GVF Cannery (1981)GVF Cannery (1981)• Sherman section 1Sherman section 1


“In short, that which agricultural producers may combine to accomplish within a single association, they may lawfully combine to achieve by way of multiple organizations.”


• Sherman section 2Sherman section 2

Syllabus: Antitrust, pp. 88, 89

“It would be anomalous indeed to hold that a defendant agricultural association’s alleged § 1 combination constituted a legitimate Capper-Volstead purpose, while claims based on the same facts which are brought under § 2 are not similarly protected.”


• Cape Cod Food Products (1954)Cape Cod Food Products (1954)


“It is not unlawful under the antitrust acts for a Capper-Volstead cooperative … to try to acquire even 100% of the market if it does it exclusively through marketing agreements approved under the Capper-Volstead Act.”


• GVF Cannery (1981)GVF Cannery (1981)


“Because an agricultural cooperative may lawfully achieve 100% of a market, it necessarily follows that two or more such organizations may together hold such monopoly power.”

• Fairdale Farms (1980)Fairdale Farms (1980)


• DOJ equivocationDOJ equivocation


“Economic analysis predicts that DFA and Land O’Lakes would find anticompetitive coordination to be profit-maximizing, particularly because both firms … are agricultural cooperatives between whom explicit collusion would be legal and could not be challenged under the antitrust laws.”


• Related EntitiesRelated Entities• Sunkist v. Winckler & Smith (1962)Sunkist v. Winckler & Smith (1962)



• Related EntitiesRelated Entities• Sunkist v. Winckler & Smith (1962)Sunkist v. Winckler & Smith (1962)


“[T]he 12,000 growers here involved are in practical effect and in the contemplation of the statutes one “organization” or “association” even though they have formally organized themselves into three separate entities.”


• Sunkist v. Winckler & Smith (1962)Sunkist v. Winckler & Smith (1962)


“To hold otherwise would be to impose grave legal consequences upon organizational distinctions that are of de minimus meanings and effect to these growers who have banded together for processing and marketing purposes within the purview of the Clayton and Capper-Volstead Acts.”


Unprotected ActionsUnprotected Actions


• Borden (1939)Borden (1939)



• Borden (1939)Borden (1939)


“The right of these agricultural producers to unite in preparing for market and in marketing their products, and to make the contracts which are necessary for that collaboration, cannot be deemed to authorize any combination or conspiracy with other persons in restraint of trade that these producers may see fit to devise.”


• Maryland & Virginia Milk (1960)Maryland & Virginia Milk (1960)• Purchase of Embassy DairyPurchase of Embassy Dairy• Associated actions and contractsAssociated actions and contracts• “ “Predatory” practicesPredatory” practices



• Maryland & Virginia Milk (1960)Maryland & Virginia Milk (1960)


“[W]e do not believe that Congress intended to immunize cooperative engaged in competition-stifling practices from prosecution under the antimonopolization provisions of § 2 of the Sherman Act ….”


• Maryland & Virginia Milk (1960)Maryland & Virginia Milk (1960)


“[T]he general philosophy of [Clayton Act § 6 and the Capper-Volstead Act] both was simply that individual farmers should be given, through agricultural cooperatives acting as entities, the same unified competitive advantage – and responsibility – available to businessmen acting through corporations as entities.”


• Boise Cascade (1968)Boise Cascade (1968)• Independent pulpwood operatorsIndependent pulpwood operators• The “entity”The “entity”



• Boise Cascade (1968)Boise Cascade (1968)


“Whether or not [exemption applies] … , defendants cannot continue their boycott in violation of their existing contracts, .. Assemble … to dissuade or interfere with [others], nor … persuade or attempt to persuade others not to perform their contracts or … refuse normal business relations … .”


Treatment of MembersTreatment of Members

• Power in the marketplacePower in the marketplace• Supply/purchasing Supply/purchasing organizationsorganizations• Non-Capper-VolsteadNon-Capper-Volstead• Non-agricultureNon-agriculture


• Northwest Wholesale (1985)Northwest Wholesale (1985)• Non-member patronsNon-member patrons• ExpulsionExpulsion• Group boycotts – Group boycotts – per seper se violationviolation



• Northwest Wholesale (1985)Northwest Wholesale (1985)


“Although a concerted refusal to deal need not necessarily possess all of these traits to merit per se treatment, not every cooperative activity involving a restraint or exclusion will share with the per se forbidden boycotts the likelihood of predominantly anticompetitive consequences.”




“Wholesale purchasing cooperatives … are not a form of concerted activity characteristically likely to result in predominantly anticompetitive effects. Rather, such arrangements would seem to be ‘designed to increase economic efficiency and render markets more, rather than less, competitive.’”




“Unless the cooperative possesses market power or exclusive access to an element essential to effective competition, the conclusion that expulsion is virtually always likely to have an anticompetitive effect is not warranted.”


MergersMergers• Logic of cooperative mergerLogic of cooperative merger• Maryland & Virginia (1960)Maryland & Virginia (1960)• DFA (2000)DFA (2000)

- Consent decree- Consent decree- Competitive impact- Competitive impact

• Country Lake FoodCountry Lake Food


Monopoly PowerMonopoly Power• Cape Cod (1954)Cape Cod (1954)• Fairdale Farms (1980)Fairdale Farms (1980)

Legislative history and Legislative history and sizesize




“[W]hen Congress enacted the Capper-Volstead Act, it did not intend to prohibit the voluntary and natural growth that agricultural cooperatives needed to accomplish their assigned purpose of effective farmer representation.”

Monopoly PowerMonopoly Power



“That farmers’ legitimate desires for unity of effort would incorporate of necessity a concept of corporate aggrandizement did not per se make this method of cooperative growth illegal.”


Syllabus: Antitrust, p. 134 - 139

• Production controlProduction control- - PotatoesPotatoes- Milk- Milk- Mushrooms- Mushrooms


Current Issues - ICurrent Issues - I• Justification and challengesJustification and challenges• National CommissionNational Commission

- - Bergland testimony (1978)Bergland testimony (1978)• Antitrust Modernization Comm.Antitrust Modernization Comm.

- Keith Collins testimony- Keith Collins testimony- National Council testimony- National Council testimony- Other- Other

Syllabus: Antitrust, p. 134 - 139

Current Issues - IICurrent Issues - II• Local market powerLocal market power• Market concentrationMarket concentration• Competitive market powerCompetitive market power• Food pricesFood prices• Dairy Farmers of AmericaDairy Farmers of America• Strategic alliances, subsidiariesStrategic alliances, subsidiaries

Current Issues - IIICurrent Issues - III• What is a producer?What is a producer?• Mutual benefit of membersMutual benefit of members• New cooperative statutesNew cooperative statutes• “ “Outside” investorsOutside” investors• What is a cooperative?What is a cooperative?

Capper-Volstead, Section 2Capper-Volstead, Section 2

• “ “Undue price enhancement”Undue price enhancement”


“If the Secretary of Agriculture shall have reason to believe

that any such association

monopolizes or restrains trade …



“to such an extent

that the price of any agricultural product

is unduly enhanced by reason thereof …




“[the Secretary may issue an order] …

directing [the cooperative] to cease and desist

from monopolization or restraint of trade.”


• Not exclusive remedyNot exclusive remedy• No price controlNo price control• Remedy directed only to Remedy directed only to “monopolization or “monopolization or restraint restraint of trade”of trade”



• What is “undue”?What is “undue”?- Level of price- Level of price- Method of enhancement- Method of enhancement

• What is monopolization or What is monopolization or restraint of trade?restraint of trade?



• Enforcement mechanismEnforcement mechanism• Capper-Volstead CommitteeCapper-Volstead Committee



ControlControl

BenefitBenefit

FinanceFinance

USEUSE

5.Undue price enhancement

4.Current issues

3.Scope of behavior


1.The problem

AntitrustAntitrust

the law of cooperative corporations

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