Price Fixing and Enforcement of the Antitrust Laws in the
Dairy Industry
Alan I. Greene and John S. Rhee, Hinshaw & Culbertson LLP
The U.S. Department of Justice, Antitrust Division
(DOJ) and the U.S. Department of Agriculture
(USDA) recently completed a series of public
workshops exploring competition issues in
agriculture, including in the dairy sector. In her
concluding remarks at the final public workshop,
Christine Varney, Assistant Attorney General for the
Antitrust Division, provided a clear indication of
increasing federal antitrust enforcement efforts:
The Antitrust Division emerges from these
workshops better equipped to ensure that
our nation’s farmers, processors, and
consumers reap the benefits of competitive
agricultural markets. It is our role to enforce
the antitrust laws and advocate for
competition in the agricultural sector, and
the stories we heard at the workshops
confirmed the importance of these efforts. .
. . The knowledge we gained at the
workshops will aid us in identifying and
prosecuting conduct that violates the
antitrust laws, and enforcement in the
agricultural sector remains a priority.1
Varney also announced the establishment of a task
force made up of members of the USDA and DOJ to
look at issues of competition affecting agriculture.
The task force is likely to deal with issues facing the
dairy industry. The following factors have created
an environment expected to lead to increased
federal enforcement efforts: (1) the plight of dairy
farmers that was expressed throughout the
workshops; (2) ongoing high-profile litigation
concerning dairy producers, initiated by both the
DOJ and private parties; and (3) continuing
consolidation on all industry levels (producer,
processor, and retailer). That enforcement can
encompass both price fixing and market division
under Section 1 of the Sherman Act, 15 U.S.C. § 1,
and monopolization under Section 7 of the Clayton
Act, 15 U.S.C. § 14.
Challenges Facing Dairy Farmers
The economic plight of dairy farmers in the past
several years was a much discussed topic at the
workshops. Historically low milk prices, high feed
costs, market price volatility, and diminishing
margins have allegedly squeezed dairy farmers to a
breaking point.
In a period of growing concentration at the
cooperative, processor, and retailer levels, farmers
face the following challenge, explained by then
Senator Russell Feingold:
The farmers' share has continued to shrink
and many farmers and other dairy industry
observers suspect that someone between
the farm and the consumer is taking a
bigger slice than they really should and I
________________
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know that dairy farmers agree with me on
this.2
Various speakers commented throughout the
DOJ/USDA workshops that consolidation on the
retail end has enabled big retail players to pressure
dairy processors to lower prices and cut costs,
which in turn has further depressed farmers' prices.
However, the lower prices that the big retailers
have extracted from the producers have not always
been accompanied by corresponding reductions in
consumer milk prices at stores.
At the December 2010 workshop, a panel of
speakers discussed the issue of price margins in the
dairy industry. Charles Nicholson, Associate
Professor of Agribusiness at California Polytechnic
University, noted the challenge of finding adequate
relevant data. Although there is available
information on retail prices and “farm prices” paid
to producers, the farm price does not entail the
necessary costs of processing, packaging,
transporting, and marketing. Therefore, Nicholson
states, an increase in the “marketing margin,” by
itself, does not necessarily mean that any particular
actor in the chain is realizing increased profitability.3
However, University of Connecticut professor
Rigoberto Lopez asserted that even if one attempts
to account for costs of processing, transporting,
etc., there is “over a dollar in profit margin that are
[sic] left in the market channel beyond the farmer.”4
Thus, in those instances where dairy farmers are
feeling particularly squeezed, questions remain as
to who, if anyone, in the market channel is receiving
a disproportionately large share. Two effective ways
to obtain the necessary data to answer these
questions are government investigations and
litigation.
However, speakers such as Professor Nicholson
noted that greater emphasis should be placed on
price volatility and farming costs than on the margin
between farm and retail prices.5 In that regard, the
Dairy Industry Advisory Committee, created by the
USDA, will issue a final report with
recommendations on price volatility and farmer
profitability in March 2011. It remains to be seen
what the Dairy Industry Advisory Committee’s
recommendations will be and what measures will
be implemented. In the meantime, it is likely that
the DOJ will have discussions with stakeholders in
the dairy industry regarding potential areas of
investigation. The DOJ and the USDA have already
received more than 15,000 public comments
regarding the issues addressed in their workshops
on agriculture and competition.
Consolidation and Litigation Regarding the Dairy
Industry
The creation of the joint DOJ-USDA task force
comes at a time of significant ongoing litigation
concerning the dairy industry.
U.S. v. Dean Foods
The DOJ’s most high-profile effort to combat what it
sees as anticompetitive consolidation in the dairy
industry is its lawsuit against Dean Foods Company
to stop or limit its acquisition of the Consumer
Product Division of Foremost Farms USA. On
January 22, 2010, the DOJ and the states of Illinois,
Michigan, and Wisconsin filed a complaint against
Dean Foods, claiming that its acquisition of
Foremost Farms violates Section 7 of the Clayton
Act because “the effect of such acquisition may be
substantially to lessen competition.” Dean Foods is
the country’s largest processor and distributor of
milk and other dairy products. Foremost Farms is a
dairy cooperative headquartered in Wisconsin.
According to the complaint, Dean Foods and
Foremost Farms have in recent years been the first
and fourth largest sellers of school milk and fluid
milk in Wisconsin, the Upper Peninsula of Michigan,
and northeastern Illinois. The complaint alleges that
the acquisition eliminates substantial competition
between the two companies in the sale of milk to
schools, grocery stores, convenience stores, and
other retailers in the affected markets. In April
2010, the U.S. District Court for the Eastern District
© 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 4 edition of the Bloomberg Law
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of Wisconsin denied Dean Foods' motion to dismiss,
and the case is currently in the discovery phase.
Civil Litigation Concerning Claims of Price
Manipulation and Monopolization
Several other civil lawsuits involve a number of the
largest players in the U.S. dairy industry, including
Dean Foods and Dairy Farmers of America, Inc.
(DFA), the largest dairy cooperative in the country.
Plaintiffs in two of these cases allege monopolistic
conduct.
(1) Southeastern Milk Antitrust Litigation
The largest of these civil actions is the Southeastern
Milk Antitrust Litigation in the U.S. District Court for
the Eastern District of Tennessee. In this case, the
court certified a plaintiff class of more than 4,500
dairy farmers spread across 11 southeastern states
in 2 geographic markets. The dairy farmers allege
multiple claims of antitrust conspiracy against Dean
Foods, National Dairy Holdings, L.P. (NDH), DFA, and
other defendants. The class alleges that defendants
conspired to monopolize the production, marketing,
and processing of milk.
The class consists of two subclasses. One is
comprised of roughly 3,000 farmers who are
members of the DFA; the other consists of
independent and cooperative dairy farmers. All
class members sold Grade A milk to defendants
from January 1, 2001, to the present.
On August 4, 2010, the court granted in part and
denied in part defendants’ motion for summary
judgment, thus allowing the following claims to
proceed to trial against Dean Foods, DFA, and NDH:
(1) violation of Section 1 of the Sherman Act
(agreement not to compete), and (2) violation of
Section 2 of the Sherman Act (conspiracy to
monopolize).
(2) Allen v. Dairy Farmers of America, Inc.
A class action by Northeastern dairy farmers has
also been asserted against Dean Foods, DFA, and its
Dairy Marketing Services (DMS) affiliate in the U.S.
District Court for the District of Vermont.6 The
plaintiff class alleges that DFA unlawfully created
monopoly power in the milk distribution system by
tying up access to milk bottling plants in the
Northeastern U.S. through unlawful exclusive
supply agreements and then used that power to
force independent farmers to join DFA or to market
their raw milk through its marketing affiliate, DMS.
DFA allegedly utilized its and DMS’ market power to
reduce fluid milk prices paid to its members and
other class members relative to what would have
prevailed in a competitive market. These lowered
fluid raw milk prices allegedly increased profits for
Dean Foods, with which DFA allegedly conspired
and contracted to establish and maintain its market
power. The Northeast dairy farmers allege that,
through carefully planned and collaborative steps,
the conspiracy has eliminated competition and fixed
fluid raw milk prices at artificially low levels, below
what farmers would otherwise have received in a
competitive market.
Currently, the district court is reviewing a proposed
settlement in which Dean Foods would pay $30
million to the Northeast dairy farmers and change
its milk buying practices in the region. In the
proposed settlement, Dean Foods stated that it
would procure between 10 to 20 percent of the raw
milk it buys at three terminals in the Northeast from
sources other than DFA and DMS for 30 months.
Dean Foods also would place $30 million into a fund
to settle antitrust claims brought by farmers. Codefendants DFA and DMS did not join in the
proposed settlement, so the litigation will continue
against them even if the court accepts the proposed
settlement.
A jury trial is scheduled to commence on June 21,
2011.
© 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 4 edition of the Bloomberg Law
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(3) In re: Dairy Farmers of America, Inc. Cheese
Antitrust Litigation
On June 15, 2009, a judicial panel on multidistrict
litigation ordered that five separate federal lawsuits
that had been pending in the U.S. District Court for
the Northern District of Illinois and the U.S. District
Court for the Middle District of Florida be
consolidated for pretrial proceedings in the
Northern District of Illinois.7 Plaintiffs in these
actions allege that DFA engaged in a pattern of
manipulated transactions for cheese and/or milk
futures on the Chicago Mercantile Exchange (CME)
in order to raise the price of milk, cheese, and other
dairy products in violation of federal and state
antitrust statutes. The parties have filed briefs on
various motions to dismiss plaintiffs’ claims and
await ruling on these motions.
As background to these civil lawsuits, in December
2008, the U.S. Commodity Futures Trading
Commission (CFTC) issued a $12 million civil
monetary penalty against DFA, its former chief
executive officer Gary Hanman, and its former chief
financial officer Gerald Bos for attempting to
manipulate Class III milk futures contracts and
exceeding speculative position limits in those
contracts.
The CFTC found that, from May 21 through June 23,
2004, DFA, Hanman, and Bos attempted to
manipulate the price of the CME's June, July, and
August 2004 Class III milk futures contracts through
purchases of block cheddar cheese on the CME
Cheese Spot Call market. The CFTC’s order found
that the pricing relationship between the CME block
cheese market and the Class III milk futures market
is well known throughout the industry and that the
CME block cheese market price plays a significant
part in establishing Class III milk futures prices.
Further Increased Activity in the Offing?
The public comments at the DOJ/USDA workshops,
both in the June 2010 workshop on the dairy
industry and the December 2010 workshop on price
margins in agriculture, included many calls for
further DOJ actions regarding consolidation and the
conduct of dominant players in the dairy industry.
Several commentators specifically referenced the
ongoing civil actions involving Dean Foods and DFA
and urged the DOJ to investigate further the
allegations of monopolization of dairy markets,
price collusion, and price manipulation.
In the December workshop, University of Wisconsin
Law School Professor Peter Carstensen lamented
the lack of significant activity by the DOJ on these
issues:
[W]e have in the dairy area a modest
merger case, but we also have a major
investigation that was commenced a
number of years ago by the division which
has been updated substantially by private
litigation to which the division can have
access at its request. And the division so far
as I know has failed totally to take
advantage of that to understand what has
been going on in the dairy market for the
last three or four years. Moreover, those
private cases are now on the verge of being
settled, so private parties are going to be
deciding what is the shape of dairy markets
in the near future. The Justice Department
definitely needs to get into that area so that
it’s not ignorant of the issues and knows
what’s going on.8
The dairy farmers’ urgent need for prompt federal
government action on the current milk pricing
system was summed up by Joel Greeno, a
Wisconsin dairy farmer who was a panelist at the
June 2010 workshop. Mr. Greeno stated, “Everyone
in the chain can adjust their margin accordingly and
earn a living except for the farmer. And if the
Antitrust Division and USDA don’t step it up and
ensure that farmers earn a living first, and everyone
else adjust their margins accordingly thereafter, the
entire system will fail.”9
© 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 4 edition of the Bloomberg Law
Reports—Antitrust & Trade. Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P.
Given the ongoing litigation and the increased
attention that the DOJ and USDA now are devoting
to antitrust concerns arising from consolidation in
the dairy industry, increased federal enforcement
efforts appear likely. The joint DOJ/USDA task force
will look into all complaints submitted by the public,
and it is expected that the DOJ will be alert for
opportunities to investigate and prosecute what it
perceives as price fixing, to closely monitor and
move to restrain what it believes to be
anticompetitive combinations of dairy processors,
and to investigate the role that large cooperatives
have in pricing.
Properties, Inc. v. Dairy Farmers of America, Inc. et al.,
C.A. No. 1:08-7232 (N.D. Ill.); Stew Leonard’s Inc. v. Dairy
Farmers of America, Inc., et al., C.A. No. 1:08-7394 (N.D.
Ill.); Valley Gold LLC v. Dairy Farmers of America, Inc. et
al., C.A. No. 1:09-387 (N.D. Ill.); Indriolo Distributors, Inc.
v. Dairy Farmers of America, Inc., et al., C.A. No. 1:091599 (N.D. Ill.).
8
12/8/2010 Workshop Transcript at 335-36.
9
Id. at 143-44.
Alan I. Greene is a partner at Hinshaw & Culbertson
LLP in Chicago, Illinois. Mr. Greene concentrates his
practice in the areas of antitrust and trade
regulation law, commercial litigation, and
employment law. He is a graduate of Harvard Law
School and the University of Wisconsin.
John S. Rhee is a partner at Hinshaw & Culbertson
LLP in Peoria, Illinois. Mr. Rhee focuses his practice
in the areas of antitrust, commercial, and civil rights
litigation. He is a graduate of Columbia Law School
and Yale University.
1
Assistant AG Varney’s Closing Remarks at the
December 8, 2010, Workshop may be found at the DOJ’s
website,
http://www.justice.gov/atr/public/workshops/ag2010/pr
epared-remarks.html.
2
6/26/2010 Workshop Transcript at 34.
Transcripts for all of the workshops may be found at the
DOJ’s website,
http://www.justice.gov/atr/public/workshops/ag2010/in
dex.html.
3
12/8/2010 Workshop Transcript at 103.
4
Id. at 125.
5
Id. at 131-33.
6
HP Hood LLC was also named as a defendant,
but on August 30, 2010, the court dismissed plaintiffs'
claims against it for failure to adequately state antitrust
conspiracy claims.
7
Francisco Hernandez v. Dairy Farmers of
America, Inc., C.A. No. 8:09-165 (M.D. Fla.); Adam
© 2011 Bloomberg Finance L.P. All rights reserved. Originally published by Bloomberg Finance L.P. in the Vol. 4, No. 4 edition of the Bloomberg Law
Reports—Antitrust & Trade. Reprinted with permission. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P.