Capper-Volstead: 5 Things Antitrust Lawyers Need To Know

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1 Portfolio Media. Inc. 860 Broadway, 6th Floor New York, NY Phone: Fax: Capper-Volstead: 5 Things Antitrust Lawyers Need To Know Law360, New York (October 23, 2012, 12:41 PM ET) -- This year marks the 90th anniversary of the Capper-Volstead Act, passed in 1922 to support the nation s agricultural cooperatives by providing them and their members with a strong immunity from the antitrust laws in order to empower farmers against the powerful entities from which they buy and to which they sell. The act is the basis upon which approximately 3,000 U.S. agricultural cooperatives representing the majority of the nation s 2 million farmers organize themselves.[1] Although the Capper-Volstead Act has survived many legal tests in its history, at present it is subject to a new and unprecedented series of antitrust legal challenges. Currently, four large nationwide antitrust class actions attack cooperatives Capper-Volstead immunity. Those cases each cover an entire industry the mushroom, egg, dairy and potato industries and are being litigated in the Eastern District of Pennsylvania (two cases), the District of Idaho, and the Northern District of California. In turn, Capper-Volstead, a once sleepy backwater in the antitrust world, has now become a must-know statute for antitrust practitioners. They should know and understand the following key points about the Capper-Volstead Act and its application as it relates to the current disputes: 1) The Act s Immunity Is Broad and Flexible The statute allows cooperatives and their members to engage in a broad range of conduct, including joint marketing, processing, branding, sales, pricing, supply management and price negotiation. The current antitrust class actions challenge whether the act is as flexible as once thought, using arguments pushing at the upper and lower limits of the act. First, the plaintiffs in those lawsuits argue that certain activities long held to be immunized are not. In doing so, they are asking courts to judicially shrink the breadth of Capper-Volstead protection. The specifics of these requests are addressed in the following paragraphs. Second, plaintiffs also argue that a cooperative is not eligible for Capper-Volstead immunity if it does not engage in enough immunized conduct. But there is no requirement that a cooperative walk and talk like an iconic full-service cooperative or engage in the entire ambit of immunized activity to receive the immunity. To the contrary, courts have held that even if a cooperative does nothing else other than mere price fixing, it is entitled to Capper-Volstead immunity,[2] and that view is unlikely to change. In advising clients, practitioners should be aware of the full scope of protection the act provides, but balance that with the current legal challenges noted above.

2 2) Vertically Integrated Companies Can Be Members of Cooperatives Just as Capper-Volstead cooperatives come in all shapes and sizes, there is no requirement that their members fit into a predetermined image of what a farmer ought to look like. Members must simply be producers that are engaged in the production of agricultural products. [3] No further qualification is required. The question of who is a producer, however, is one of the most hotly debated aspects of the Capper- Volstead Act. In the current round of lawsuits, the plaintiffs argue that a farmer may lose its producer status if it is vertically integrated (i.e., engages in both production and downstream processing). Such arguments represent a radical departure from established case law and the act s legislative history. Large, corporate and vertically integrated entities existed at the time of the act s passage and were contemplated as producers by its drafters.[4] In fact, the only entities courts have ever determined to not qualify as producers with rare exception[5] are pure processors. That is, the entities excluded were those that buy (rather than produce) agricultural products and enter the production line only at its later processing stages. [6] Indeed, even in opinions ruling that pure processors are excluded, the U.S. Supreme Court did not challenge the ability of vertically integrated entities to be members of Capper-Volstead cooperatives.[7] The current lawsuits challenge such vertical integration. These challenges are unlikely to gain traction with courts. Practitioners should advise cooperatives to employ an appropriate process to confirm their members status as producers. 3) Record-Keeping Formalities Matter Now More Than Ever A fast-emerging issue is what happens if a cooperative learns that a member might not qualify as a producer under the Capper-Volstead Act after the fact (i.e., once it already is a member). This can occur despite a cooperative s best efforts to comply with the requirement that all members be producers and its good faith reliance on members statements that they are in fact producers. These concerns are magnified because other members producer status is usually unknown to fellow members (and sometimes even to the cooperative itself). Members evolve their businesses; entire industries evolve; and these and other circumstances can call into question a current member s status as a producer. After a 2009 decision by a federal district court in the Mushroom Direct Purchaser Antitrust Litigation,[8] this situation carries potentially disastrous consequences for all cooperatives and their members. In the Mushroom case, one farming family organized its business into multiple entities,[9] all which had the same or overlapping ownership (a situation that is not uncommon in agriculture, where family-owned operations often employ one corporate entity to own the land, another to conduct farming operations, and a third to conduct associated downstream processing). In Mushrooms, one of the family s corporate entities grew the mushrooms while another packaged them. The family inadvertently had signed up the packing entity as the member of the cooperative.[10] Though this appeared to be merely a form over substance issue, because the family itself was a producer, the court held that this technical violation, likely resulting from an administrative mistake, destroyed the immunity for the entire cooperative and potentially all other members.[11] This ruling is being heavily challenged by defendants and outside industry groups. On interlocutory appeal, the Third Circuit declined to reach the merits of this specific issue (stating it was not ripe for review per the collateral order doctrine) but called the issue of whether the inadvertent inclusion of an ineligible member strips an agricultural cooperative of Capper-Volstead protection both serious and unsettled. [12]

3 Regardless, strong precedent exists for emphasizing substance over record-keeping formalities in these situations.[13] The most well-reasoned view is that an integrated producer should not lose its immunity under the act simply because of a technical mistake or inadvertence as to which of the related entities within an integrated farming operation it listed as the member of a cooperative. In some situations, one part of a related business might function as the agent of the farming entity. Under standard agency law, the agent stands in the shoes of the principal. When a producer s bona fide agent has through an administrative error been made the titular member of the cooperative, the producer, and all other member of the cooperative, should not lose the protection of the act as a result. Additionally, the well-established Copperweld principle that courts treat all affiliated entities owned in common as a single economic unit applies equally to sibling entities as it does to a parent and wholly owned subsidiary.[14] That principle calls for a functional analysis of how the parties actually operate. [15] It should apply in agriculture, as it does in any other industry, when farmers hold their various operations (farming, landowning, processing) in different corporate entities but with unity of ownership. Until the current disputes are resolved, however, cooperatives and their members should be conscious of record-keeping formalities. 4) The Act s Immunity Covers Supply Control Activities The recent lawsuits have directly assaulted an activity that cooperatives have long considered a central part of their Capper-Volstead immunity: the right to jointly manage their supply and engage in advance planning for how much to produce. Cooperatives that engage in such supply control measures whether through quotas, informal encouragement, or simply information exchange often do so in reliance on their Capper-Volstead immunity. Numerous court decisions from multiple federal circuit courts going back decades have supported the interpretation that the Capper-Volstead Act immunizes many types of supply control measures.[16] The act s drafters also expressly contemplated the act allowing farmers to reduce the production in response to declines in demand just as corporations can, and to, through cooperation, have some control and agreement as to production and as to prices. [17] As one rationale in support of cooperatives being able to engage in such activity, avoiding a cycle of boom and bust production helps ensure a stable food supply, and this has indeed been the result in the United States. Moreover, in practical terms, many cooperatives consider supply control as simply the other side of the coin of their right to engage in price fixing, which indisputably is protected by the act s immunity. Nonetheless, recent government investigations and the private litigations mentioned above and one 2011 court decision, in dicta have attempted to distinguish prior case law and precedent by suggesting that there is a material difference between: (1) preproduction and (2) post-production supply control. They suggest that while post-production supply control measures (i.e., joint decisions to destroy product or withhold it from the market and let it go to waste) are covered by the act s immunity, preproduction supply control measures (i.e., joint decisions about how much to plant in the first place) are forbidden.[18]

4 The issue is of vital importance to many cooperatives, both those whose business models are centered on preproduction supply control (as is the case for many), and those that may simply take joint actions that have an incidental effect on supply, because these actions may come under scrutiny as well. The more well-reasoned interpretation is that both pre- and post-production supply control are permitted under the act, but the issue is currently in dispute. In light of these lawsuits, counselors should review any cooperative activities that control or that could affect supply. 5) Cooperatives Are Entitled to Respond to Customer Demands Related to Product Attributes Cooperatives are on the front lines of the most cutting-edge issue in agriculture: the demand that products be produced or sourced in certain socially desirable ways, which may or may not change the actual products themselves. Modern consumers often demand products with attributes related to the way the products are produced, such as sweatshop-free clothing. These demands are particularly prevalent for agricultural products, including organic, environmentally friendly, locally produced or fair-trade products; free-range chicken; hormone-free milk; or Kosher or Halal foods. U.S. agriculture is a world leader in these issues, but responding to these demands can impose additional costs on producers. How to recoup these costs is a central issue for many cooperatives, and one on which they are perfectly entitled to work in concert. It is undisputed that the statute provides members of cooperatives with the ability to jointly discuss and negotiate whether and how to respond to price- and cost-related demands. Hence, joint negotiation and responses to social costs and attributes fall squarely within the immunity provided by the act. It is within the most central power provided by the act the power to jointly price and negotiate sales. Even so, some of the current Capper-Volstead litigations question whether the act covers such activities. Under any fair reading of the act and its intent to empower farmers, it certainly does. Yet, until the current lawsuits are resolved, counselors should scrutinize the purposes, effects, and implementation of any joint activity regarding demands for such socially or environmentally conscious product attributes. The Capper-Volstead Act and the protections it provides to U.S. farmers can no longer be taken for granted. The four currently pending nationwide class actions have raised nuanced issues as to the act s interpretation and application that will evolve Capper-Volstead law. Depending on their outcomes, these cases may force the large portion of U.S. agriculture that relies on the act to evolve as well. Antitrust lawyers with an understanding of Capper-Volstead will play an essential role in advising their clients through this process. --By Christopher E. Ondeck and Kathleen M. Clair, Crowell & Moring LLP Chris Ondeck is a partner and Kathleen Clair is an associate in Crowell s Washington, D.C., office. Chris Ondeck represents parties in the eggs, potatoes and mushrooms cases referenced above. The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. [1] National Council of Farmer Cooperatives, About NCFC, [2] N. Cal Supermarkets Inc. v. Cent. Cal. Lettuce Producers Cooperative, 413 F. Supp. 984 (N.D. Cal. 1976), aff d 580 F.2d 369 (1978). [3] 7 U.S.C Additionally, cooperatives composed of producers may also be members of other

5 Capper-Volstead cooperatives. [4] E.g., N. Cal. Supermarkets Inc. v. Cent. Cal. Lettuce Producers Coop., 413 F. Supp. 984, 993 n.11 (N.D. Cal. 1976), aff d 580 F.2d 369 (9th Cir. 1978). [5] See United States v. Hinote, 823 F. Supp (S.D. Miss. 1993). [6] See Nat l Broiler, 436 U.S. at 822; see also, e.g., Case-Swayne Co. v. Sunkist Growers Inc., 389 U.S. 384, (1967). [7] See Nat l Broiler, 436 U.S. at 821; Case-Swayne, 389 U.S. at [8] In re Mushroom Direct Purchaser Antitrust Litig., 621 F. Supp. 2d 274 (E.D. Pa. 2009). [9] Id. at [10] Id. at , [11] Id. at , 291. [12] 655 F.3d 158, 164 n.4 (3d Cir. 2011). [13] See Alexander v. Nat l Farmers Org., 687 F.2d 1173, (8th Cir. 1982); see also In re Mushroom, 621 F. Supp. 2d at & n.11. [14] E.g., Eichorn v. AT&T Corp., 248 F.3d 131 (3d Cir. 2001); Guzowski v. Hartman, 969 F.2d 211, 214 (6th Cir. 1992); Century Oil Tool Co. v. Prod. Specialties Inc., 737 F.2d 1316, 1317 (5th Cir. 1984); Bell Atl. Bus. Sys. Servs. v. Hitachi Data Sys. Corp., 849 F. Supp. 702, (N.D. Cal. 1994). [15] American Needle Inc. v. National Football League et al., 560 U.S., 130 S. Ct. 2201, (2010). [16] E.g., Holly Sugar v. Goshen County Coop. Beet Growers Ass n, 725 F.2d 564 (10th Cir. 1984); Kinnett Dairies Inc. v. Dairymen Inc., 512 F. Supp. 608 (M.D. Ga. 1981), aff d, 715 F.2d 520 (11th Cir. 1983); Alexander v. Nat l Farmers Org., 687 F.2d 1173, (8th Cir. 1982); Ewald Bros. Inc. v. Mid-America Dairymen Inc., 877 F.2d 1384 (8th Cir. 1989); Treasure Valley Potato Bargaining Ass n v. Ore-Ida Foods Inc., 497 F.2d 203 (9th Cir. 1974), cert. denied, 419 U.S. 999 (1974). [17] 62 CONG. REC (1922); 60 CONG. REC (1922). [18] E.g., In re Fresh and Process Potatoes Antitrust Litig., 834 F. Supp. 2d 1141, (D. Idaho 2011) (dicta). All Content , Portfolio Media, Inc.