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Dairy co-op acquisition does not violate antitrust law.

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, non-managerial 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 Flay-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 DFNs 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 Belie 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.
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Title Annotation:Legal Corner
Author:Carson, Marlis
Publication:Rural Cooperatives
Date:Nov 1, 2004
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