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Still the legal bedrock: despite recent challenges, capper-volstead continues to provide ag co-ops with antitrust protection.

A large percentage of the agricultural products produced by farmers in the United States are marketed by, or through, cooperatives. But because cooperatives are combinations of what might be viewed as competitors in the production and sale of agricultural products, some may wonder how a cooperative can operate in light of laws that prohibit competitors from working together to set prices.

The Capper Volstead Act (the "Act") provides cooperatives with their primary exemption from federal antitrust laws, allowing agricultural producers to work together to improve their economic position. This article discusses the Act and explores how it remains relevant to agricultural producers today.

Overview of U.S. antitrust laws

The principal U.S. antitrust laws were established when Congress passed the Sherman Act in 1890 and the Clayton Act in 1914. These laws reflect a commitment to a free market. They promote independent action by businesses that compete with each other by prohibiting agreements among competitors to fix prices, to allocate markets or customers, or to boycott customers or suppliers.

These laws reflect the belief that markets in which businesses that are competing on price and quality of services will produce better products and deals for consumers. In certain circumstances, of course, competitors can join together to create legitimate joint ventures. The creation of the Visa and similar credit card networks are good examples of such ventures, where banks, which are otherwise competitors, joined together in a joint venture to offer a new product (credit cards).

U.S. antitrust law also prohibits monopolization and attempted monopolization. Monopolization occurs when a business with substantial market power engages in business practices designed either to exclude competition or to gain substantial market power in the first instance. While gaining a very substantial share of the marketplace through invention or excellent marketing is not illegal, the offense of monopolization focuses on unfair business practices that unnaturally allow a competitor to gain or maintain such a dominant market share.

Antitrust laws allow legal actions by people allegedly injured by a violation of the laws, as well as challenges by the government. Thus, as compared to many other jurisdictions, there is a strong and long tradition of enforcement of the laws by private parties (usually customers or competing businesses) in addition to enforcement by the government.

Agricultural exemptions to antitrust laws

The turn of this century brought renewed interest in the Capper-Volstead Act, which soon turns 95 years old, and the other agricultural exemptions to antitrust laws. Much of this attention could be considered negative to the Act. However, the Act remains strong and is an important feature of the U.S. agricultural landscape.

Before we turn to developments of the past decade, we will look at the legal framework.

When Congress passed the Clayton Act in 1914, it included a provision (Section 6) that specifically exempted the creation of farmer cooperatives and labor unions and collective activities by farmers and workers from the general operation of the antitrust laws. Section 6 responded to some earlier Supreme Court decisions holding that workers and farmers were illegally price-fixing under the Sherman Act when they joined together to market their labor or agricultural products.

Section 6 ultimately represents a broad public policy statement: the Supreme Court has explained that, with regard to cooperatives, "[b]y allowing farmers to join together in cooperatives, Congress hoped to bolster their market strength and improve their ability to weather adverse economic periods and to deal with processors and distributors."

In recognition of some of the shortcomings of the Section 6 exemption, in 1922 the exemption was expanded by the Capper-Volstead Act, allowing exemptions to apply to cooperatives formed as corporations. That Act specifically allows persons producing agricultural products as "farmers, planters, ranchmen, dairymen, [or] nut or fruit growers" to "act together in associations" in "collectively processing, preparing for market, handling, and marketing ... such products."

Thus, the key questions generally become: (1) whether the cooperative is properly made up of farmers; and (2) whether the cooperative is engaged in activities permitted by the Act.

Membership considerations

The Capper-Volstead Act requires that the cooperative's members be engaged in the production of agricultural products. Beyond that, the Act does not define "farmer," "planter," "ranchman," "dairyman" or "nut or fruit grower." While it is widely thought the terms are to be read broadly, one thing is abundantly clear: the Act is intended to exclude processors and distributors of agricultural products from cooperative membership. As the U.S. Supreme Court has pointed out: "Congress did not intend to extend the benefits of the Act to the processors and packers to whom the farmers sold their goods ..."

Of course, one may engage in mental gymnastics in determining whether a person is a "processor" as opposed to a "farmer." Statements by the U.S. Department of Justice regarding Capper-Volstead immunity require the potential member to bear "a substantial part of the risk of loss traditional to agricultural production." In a decision that focuses on the poultry industry (but has teachings that can be applied more broadly), the Supreme Court explained that even someone who holds title to a flock of broiler chickens does not qualify as a farmer if he does not own a breeder flock, hatchery or grow-out facility where the flock to which he has title is raised.

A more recent decision, which appears to have Capper-Volstead Act proponents unduly alarmed, suggests--in discussing egg farmers who own some chickens--that one must own (or undoubtedly lease) a farm to qualify as a farmer. However, that passing reference is intertwined within a broader discussion that found that the entity in question was really "focused on sales and marketing and contracted with third-party farmers to produce eggs on [the entity's] behalf." In the end, the chickens owned by the entity were not enough to overcome the fact that it was primarily a distributor of eggs.

Suffice it to say that this will remain an area of uncertainty, but any inquiry about whether an entity is characterized as an "agricultural producer" or something else will be fact intensive. Of course, the greater the entity's income is dependent on traditional agricultural production, as opposed to the distribution or processing of such production, the more likely it is that the entity would be found to be an agricultural producer.

Permissible activities

The next major inquiry is whether the cooperative is engaged in activities that are permissible under the exemptions. Not surprisingly, this is also an area of some uncertainty.

Section 6 of the Clayton Act provides that the "operation" of the cooperative is not forbidden by the antitrust laws, but it leaves exactly what that means open to question. The Capper-Volstead Act, however, provides that agricultural producers could act together in "collectively processing, preparing for the market, handling and marketing" the agricultural products of the producers.

To be sure, the activities encompassed by these terms are broad and include a wide variety of functions, contracts and agreements to further the cooperative's basic goal of helping its members sell their production on favorable terms. As one court has noted, the term "marketing" itself is very broad and includes "among others, buying, selling, storing, transporting, standardizing, financing, risk bearing and supplying market information." It is also clear that it includes the setting of prices.

The Capper-Volstead litigation that has dominated the industry during the past decade is centered on the question of the extent to which the cooperatives can engage in activities that may affect the production of the agricultural product. The cases involve the egg, mushroom, potato and dairy industries. Plaintiffs allege in each case that the cooperatives involved have engaged in "production restraints," which the plaintiffs contend are not "marketing" activities and are otherwise outside the scope of permissible activities under the Capper-Volstead Act.

At this point, only the potatoes case --which revolved around a co-op that attempted to improve depressed crop prices through reduced plantings--has addressed the scope of permissible activities under the Capper-Volstead Act, but this litigation is now apparently settled. In this case, the court issued an "advisory" opinion that explained that coordination of pre-planting product volumes is outside the scope of permissible "marketing" under the Act.

The opinion also suggested that acreage reductions, production restrictions and collusive crop planning are outside the protections of the Act.

The conduct being challenged, however, involved an agreement to reduce overall supply by 10 percent; farmers who did not reduce production were penalized. This was monitored through GPS and aerial photography. There were other "supply management" techniques at issue, confirming that this was a wide-ranging program to ensure that farmers reduced the overall supply of potatoes.

While we do not believe Capper-Volstead has been weakened by recent court decisions, some in the agricultural cooperative community are concerned about them--especially regarding the instance of a cooperative that may not even be aware that is has members who would not qualify as "producers" under the law, which could open it to litigation from a competitor.

Two federal judges in Pennsylvania have held in the last few years that even a cooperative's good-faith belief that all of its members qualified under the Act did not keep the cooperative from losing its exempt status where it included non-producer processor or distributor members. However, the only federal Court of Appeals to rule on this issue held that, at least where the non-producer members were not processors or distributors, a cooperative could still qualify for immunity if it mistakenly had a small number of non-farmer members. This underscores the need for cooperatives to be vigilant on this critical issue.

At a minimum, each cooperative should take care in signing up members and make efforts on a regular basis to check on their producer status. Many cooperatives have bylaws or similar rules that automatically expel from membership any person who ceases to maintain producer status. These efforts are important to protect, as much as possible, the cooperative's overall status as a farmer organization.

Co-ops still free to set prices

So where does that leave the scope of the activities protected by Capper-Volstead immunity?

Putting aside production-side issues, the immunity remains fully intact and cooperatives remain free to set the prices for, and to otherwise engage in, the enumerated activities of their members' agricultural production. Regarding production issues, the basic question is: does the proposed conduct really constitute a "restraint" on production, or is it merely activity that may have an effect on production? The former does create some risk of attracting problematic litigation; the latter, while it could still attract litigation, should be defensible.

But even the cooperative's consideration of the production issues offers continued reason for confidence in the durability of the Act. Obviously, merely labeling something as "production" or "marketing" does not tell the whole story. There are many marketing decisions that will affect production--a cooperative's decision to emphasize the marketing of one of its members' crops (e.g., wheat) over another (e.g., soybeans) may have implications for a member's planting decisions.

Thus, an appropriate litmus test--wholly consistent with the legislative history surrounding the Act--analyzes whether the production decision is left to the farmer or has been undertaken by the cooperative. If the farmer is free to decide how much to produce, subject to whatever appropriate incentives or disincentives that may exist that may impact that decision, then it is hard to see how one could properly sustain a challenge to that conduct.

A world without Capper-Volstead

The Capper-Volstead Act remains an important feature of the agricultural economy. It helps ensure that agricultural producers can join together and improve their economic position through cooperatives and helps lower their costs of operation because those cooperatives can work together in ways to achieve efficiencies, all while minimizing the risk of an antitrust lawsuit.

But what would a world without Capper-Volstead look like?

Under modern antitrust law, the mere formation or operation of a full-service cooperative would not likely be found to be illegal. As compared to the time when the Capper-Volstead Act was passed, there is today a greater recognition, and improved analysis, of joint ventures. Most full-service cooperatives could be defended on the ground that they represent a joint venture of the agricultural producers.

But there are still key differences between a world in which Capper-Volstead exists and a world without it. It is widely recognized that a cooperative may "obtain a complete monopoly, 100 percent of the product involved," provided that it does so by the voluntary action of the agricultural producers. A joint venture without an antitrust exemption--such as Capper-Volstead --that includes all competitors would be challenged as being "over-inclusive."

Moreover, the Capper-Volstead Act protection is not limited to "full service" cooperatives; some cooperatives only bargain for price. Without some other integration of activities by the members, the joining together merely to set prices would, absent Capper-Volstead protection, be a very risky--perhaps criminal--proposition. And the protection extends to marketing agencies in common, which are often used to help better the economic bargaining position of the member cooperatives (and, hence, the producers who are members of those cooperatives).

As one contemplates the importance of the Capper-Volstead Act and related agricultural exemptions, one should consider that there was a strong public policy reason for this treatment. The exemption for agricultural cooperatives --much like the exemption for labor unions--was grounded in a public policy decision that a person who operates a farm for a living should not be placed in the awkward, and perhaps economically untenable, position of having to compete against a neighbor in order to sell the fruit of his or her labor. And while the Act has several areas of uncertain application, this is common in almost every area of the law and is not a reason to abandon Capper-Volstead.

Marketing agencies in common

A discussion about the Capper-Volstead Act would not be complete without a mention of one of the more unusual features of the statute. The Act specifically allows cooperatives to form "marketing agencies in common." This allows cooperatives to join together to find ways to more effectively market their members' agricultural products.

This extends to price and customer negotiations. Absent Capper-Volstead Act protection, it would be difficult to defend such agencies from an antitrust challenge.

Act does not offer "absolute immunity"

While the Capper-Volstead Act provides broad protection, it is not an absolute immunity from any antitrust challenge. The exemption may be lost where an otherwise exempt agricultural cooperative has entered into an unreasonable agreement with a non-protected party (e.g., a processor or distributor) or engaged in predatory conduct.

One court explained that such "predatory conduct or tactics" include "coerced membership, boycotts, picketing, bad faith harassment or discriminatory pricing."

W. Todd Miller and Lucy Clippinger

Editor's note: Miller and Clippinger are attorneys with the Baker & Miller PLLC law office in Washington, D.C., which focuses on antitrust cases. The law office provides legal counsel to the Dairy Farmers of America cooperative in one of the cases discussed below. The views expressed in this article are the authors' own, and do not necessarily reflect those of USDA or its employees. It should not be considered as legal advice; cooperatives should consult with legal counsel for questions about antitrust matters related to their business.
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Title Annotation:Legal Corner
Author:Miller, W. Todd; Clippinger, Lucy
Publication:Rural Cooperatives
Date:May 1, 2017
Words:2530
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