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Cooperatives

An Antitrust Exception

By: Chet Wilganowski

11/27/2007

Introduction In 2002, the Antitrust Modernization Commission (AMC) was created in accordance with the Antitrust Modernization Commission Act of 2002, Pub. L. No. 107-273, 11051-60, 116 Stat. 1856 to examine whether the antitrust laws should be "modernized" and to submit its findings to Congress and the President. On April 3, 2007 the commission presented its report to congress and though the report did not call for a repeal of the Capper-Volstead Act, it did include recommendations that can affect Agricultural Cooperative negatively. For example, the final report issued recommendations that would destroy the ability of farmers to form cooperatively owned businesses, leaving Americas agricultural producers in a severely weakened position in the marketplace, according to the National Council of Farmer Cooperatives (NCFC). Problem Statement Capper-Volstead and the other laws were created to shield farmers and ranchers from antitrust liability so they could market their production on a cooperative basis. Without this protection, producers would be at a severe disadvantage when trying to individually negotiate the sale of their products to the large national and international processing and distribution firms in the food industry. Capper-Volstead levels the playing field by allowing farmers to combine their economic strength to balance that of the firms that purchase their products.

Some Report Recommendations include:

Repealing the Robinson-Patman Act; Overruling Supreme Court decisions to allow indirect and direct purchasers of pricefixed goods to sue in federal court;

Streamlining the clearance process for mergers between large firms; Urging the United States to enter into agreements with other countries to spur international uniformity in antitrust law and enforcement. In the area of immunities and exemptions, the Commission recommended:

Congress should draft, and the courts should construe, antitrust immunities and exemptions narrowly and against the beneficiaries;

All immunities and exemptions should be subject to sunset provisions, forcing supporters to get them reenacted every few years or they become null and void;

The Federal Trade Commission should be authorized to study the competitive effects of and justifications for immunities and exemptions.

Cooperative leaders feel that adopting these recommendations by Congress would weaken cooperative marketing as a producer tool. Uncertainty over whether CapperVolstead and other protections would be available in the future could make it more difficult for cooperatives to arrange affordable long-term financing, and establish good business relations with suppliers and customers.

Literature Review The Primary objective is to show that antitrust policy has changed over time to accommodate the problems that have come to plague Agricultural Cooperatives and that the provisions set up for them ensure they will not harm consumers. Antitrust regulation was set up in 1890 when the Sherman Act was passed. It stated in broad terms that a person who makes a contract or engages in a combination or conspiracy to restrain trade is guilty of a felony. 1 While the Sherman Act was being deliberated in Congress, the development of cooperative marketing associations was still in its infancy. A few legislators foresaw the proposed language could cripple efforts of farmers to form organizations strong enough to protect their interests in the markets. 2 Though these concerns were profound the Senate felt it was important not to limit the applicability of the new law in any way. It was believed by many of Senator Shermans colleagues that no one would consider applying the antitrust statute to agricultural producers. Soon thereafter, the Sherman Act began to attack farming associations, calling them unreasonable restraints of trade. This led the early 1900s to began with doubts on whether the law was adequate.3 Consequently, agricultural organizations pursued legislation that would shield them from excessive enforcement of the Sherman Act. The producers need for a limited antitrust protection was established with the Clayton Act, which was passed in 1914. Although the language visibly stated that forming a cooperative was not a violation of the antitrust laws, it didnt indicate which types of activities such an association could legally engage in. Also, the law was limited in scope due

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Sherman Act, 15 U.S.C. 1. Section 3 of the Sherman Act 21 Cong. Rec. 2561, 2562, 2606 (1890) Loewe V. Lawler, 208 U.S. 274, 301 (1908)

to it only applying to non-stock organizations.4Agricultural leaders recognized the limitations of the cooperative provision in the Clayton Act, and after several years of working with Congress secured the enactment of the Capper-Volstead Act in 1922.5 Many changes came about due to the passage of the Capper-Volstead Act. One such change in the organization of cooperatives includes the ability for cooperatives to issue stock. Since the Capper-Volstead Act does not require the cooperative to have a corporate form or issue capital stock, a bargaining group may structure itself in many ways including as an unincorporated association, a stock or non-stock farmer cooperative, a nonprofit corporation or a regular business corporation. 6 Although the act shows more leniency then previous legislation, there are two sections of provisions meant to aid in the laws interpretation. Section one states the parties who are covered by the act, the activities protected from antitrust liability, and requirements on organizational structure to receive its protection. The second section was created to protect the public from harmful conduct by cooperatives. Analysis & Discussion of Cooperative Principles and Regulations Agricultural Cooperatives adapt constantly to keep pace with their changing markets. As these organizations transform to be more viable in their more modern role, there are many restrictions placed upon them that ensure they follow statute. Protection by the Capper-Volstead Act is only afforded to cooperatives that limit their membership to agricultural producers. An agricultural producer is someone performing general farming activities, i.e. turning the soil and tending to animals. Leaders in a Co-op should be very cautious when deliberating over whether to accept someone whom doesnt
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Clayton Act Capper-Volstead Act, 7 U.S.C. 291,292 Kentucky Law Journal, 73 Ky. L.J. 1033 (1984) n36-37, 7 U.S.C. 291

clearly conform to this standard. The applicant must invest a large part of their resources to production in order to be accepted as a member. The exemption is lost if a non-cooperative firm engaged solely in packing or processing is accepted as a member.7 In United States V. Borden Co., the Court used an organizational analysis to find that Capper-Volstead does not protect combinations with non-producers.8 If more than one cooperative forms a federation, which then becomes a centralized marketing agency, this structure does not automatically extend Capper-Volstead immunity since Section 6 of the Clayton Act adds the requirement that a cooperative must operate on a nonprofit basis.9 Cooperatives must also keep their member roles current. All members whom do not producers must be removed from the roles periodically. In affect, the act of rescinding their vote and not paying any dividends to the non-member removes them from its active roles. 10 Though this is not a daily requirement a cooperative is in great danger if they do not have a program set up to ensure this. Agricultural Cooperatives must also be organized in the manner described by the Capper-Volstead Act. There are three organizational requirements that must be followed: 1. One member, One vote or limited return on capital a. Either the association must not allow a member more than one vote because of the amount of stock or membership capital owned in the association, or it may not pay dividends on stock or membership capital in excess of 8 percent per year.
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Swayne Co. V. Sunkist Growers, Inc., 389 U.S. 384 (1967) United States V. Borden Co., 28 F. Supp. 177; 1939 U.S. Dist. No. 31197 9 Kentucky Law Journal, 73 Ky. L.J. 1033 (1984) n38-39 10 Alexander V. National Farmers Organization, 687 F. 2d 1173, 1186 (8th Cir. 1982), cert denied 461 U.s. 937 (1983)

2. Member business must not exceed non-member business a. Although great flexibility is permitted to marketing the products of nonmembers, a protected association may not deal in the products of non-members in an amount greater than such products are handled by it for members. Goods purchased from other sources by members and marketed through the cooperative must be counted as nonmember products because the member did not produce them. 3. Mutual Benefit of Members as Producers a. The cooperative must promote the mutual benefit of the members as agricultural producers. This in turn prevents abuse of power.

In the organizational cases, courts have evaluated who is a Capper-Volstead person, who is a Capper-Volstead agricultural producer, and the allowable activities of a CapperVolstead cooperative. A cooperative is not entitled to protection if it has violated the voting, dividend, or operating requirements of section 1, if it is not comprised of business organizations directly engaged in farm-level production, or if it does not engage in processing, preparing, handling, or marketing agricultural products.11 In Maryland & Virginia Milk Producers Association V. United States the cooperative was organized in a valid manner, but the activities with which it was charged were beyond the scope of Capper-

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Tulane Law Review, 60 Tul. L. Rev. 955 (May 1986) n20-24

Volstead authorization. A subsequent case law on Capper-Volstead has continued to develop both types of limitations. 12

The primary point of the Capper-Volstead Act are the words stating that agricultural producers can act together by collectively "processing, preparing for market, handling, and marketing" their yield. The term marketing has been interpreted to include virtually all services a marketing cooperative could reasonably be expected to provide its members. Cooperatives can also integrate forward throughout the marketing chain. The members of Welchs, Land O'Lakes, and Ocean Spray, are prime examples of producers that market their product directly to the grocery stores. Cooperative associations are allowed to have common marketing agencies and permitted to make the necessary contracts and agreements to carry out marketing related activities. While Capper-Volstead offers farmers the chance to improve their marketing power, leaders must deal on a regular basis with situations that pose antitrust problems. These are the areas of conduct that risk management requires be carefully reviewed, and sometimes avoided. The most controversial breach of the antitrust laws is price agreements. The principal benefit to agricultural producers for forming a marketing association that qualifies for Capper-Volstead protection is that members of such an association can agree among themselves on the prices they will accept for the agricultural products they produce and all reasonable terms of sale.13 However, protection for price agreements does not extend to agreements with non-cooperative competitors; these are considered violations of the

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Maryland & Virginia Milk Producers Association V. United States, 362 U.S. 458; 80 S. Ct. 847; 4 L. Ed. 2d 880; 1960 U.S. Dist. 13 GVC Cannery V. California Tomato Growers Assn, 511 F. Supp. 711 (N.D. Cal. 1981)

Sherman Act. This behavior is considered predatory pricing and conspiracy to reduce competition.

If a cooperative violates competitive practices and participates in behavior that is anti-competitive, and has no business justification, it is engaging in predatory conduct. Predatory conduct is outside the protection provided by the Capper-Volstead Act. The Capper-Volstead Act added an important safety valve. It charged the Secretary of Agriculture with the responsibility of taking action if he believes that any such association "monopolizes or restrains trade ... to such an extent that the price of any agricultural product is unduly enhanced." In such cases, a decree can be issued against the association that requires it to cease and desist from such acts. In other words, the exemption is not an unfettered authorization to engage in anti-competitive behavior to the detriment of consumers. While the objective was to protect farmers from monopsonist buying power, it was recognized that this should not be done at the expense of the consumers. Congress was not willing to grant such immunity to farmers associations - so as to permit them to develop monopoly power over the consumers - thus substituting one market distortion for another.14

As stated in the House Report on the Act:

In the event that associations authorized by this bill shall do anything forbidden by the Sherman Antitrust Act, they will be subject to the penalties imposed by that law. It is not sought to place these associations above the law but to grant them the same immunity from

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Texas International Law Journal, 42 Tex. Intl L.J. 843 (Summer 2007) n20

prosecution that corporations now enjoy so that they may be able to do business successfully in competition with them. 15

Though the Capper-Volstead Act is the heart of the modern cooperative and is the basis for much of their conduct, there are many other important statues that have affected the modern cooperative and helped it to adapt over time. These have effectively allowed cooperatives to maintain their positive affect on agricultural production and ensure that producers a fairly compensated.

These Statutes include: 1. The Cooperative Marketing Act of 1926 a. Congress authorized farmers, through cooperative associations, to exchange and disseminate market and economic information among themselves. This act also provides legislative authorization for the Agricultural Cooperative Service and its research activities and assistance to cooperatives. 16 2. Agricultural Marketing Act of 1929 a. Promotes effective marketing of agricultural commodities by promoting and financing cooperatives. Although much of the substance of this act has been superseded by Farm Credit legislation, it still remains a valid

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Texas International Law Journal, 42 Tex. Intl L.J. 843 (Summer 2007) n21. H.R. Rep. No. 24, at 3 (Apr. 27,1921) 16 Cooperative Marketing Act, 7 U.S.C. 451-457

statement of congressional support for agricultural cooperative marketing.17 3. Robinson-Patman Act of 1936 a. Prohibits the sale of commodities of the same grade and quality at prices that discriminate between purchasers without economic justification. While the act applies to cooperatives, it specifically provides that payment of patronage refunds will not violate the act.18 4. Agricultural Marketing Agreement Act of 1937 a. Authorizes the Secretary of Agriculture to enter into marketing agreements with producers of certain agricultural products and provides that nothing in those agreements shall be held to violate the antitrust laws. It also authorizes the Secretary to establish Federal-marketing orders, which are plans developed by growers (often represented by cooperatives) and handlers to work out supply and demand programs. Marketing orders are also exempt from the antitrust laws. 19 5. Agricultural Fair Practices Act of 1967 a. Protects farmers rights to organize and join producer associations. The act establishes standards of fair practice for handlers and processors who deal with farmers, and prohibits them from discriminating against farmers because they are members of a producers' association.20

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Agricultural Marketing Act, 12 U.S.C. 1141 Robinson-Patman Act, 15 U.S.C. 13, 13b. Agricultural Marketing Agreement Act, 7 U.S.C. 601 et seq. Agricultural Fair Practices Act, 7 U.S.C. 2301-2306

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6. Export Trading Company Act of 1982 a. Provides antitrust protection for legitimate foreign market development activity. The act provides cooperatives interested in export marketing flexibility to combine assets with other businesses, including noncooperative processors and merchandisers, to become big enough to be a factor in the international arena. 21 In Conclusion, many co-op leaders feel that adoption of these recommendations by Congress, particularly the sunset policy, would weaken cooperative marketing as a producer tool. Uncertainty over whether Capper-Volstead and other protections would be available in the future could make it more difficult for cooperatives to arrange affordable long term financing, establish good business relations with suppliers and customers, and maintain a committed group of producer-members. The graph in Appendix A will show some of the characteristics of the average agricultural cooperative and where they bring about a savings. The Capper-Volstead Act is more important today than ever before as agricultural producers compete with a market dominated by relatively few, large buyers. Through the years Congress has made many necessary changes in the regulation of cooperatives. Due to these efforts the modern cooperative is still effective at helping individual producers to market their goods and achieve a profit closer to what they deserve. Cooperative policy has evolved over the years to benefit each generation of producer. Drastic changes in policy are risky and should not be taken lightly. The risk involved with many of these recommendations has potential to adversely affect many people and any further steps should be taken with caution.

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Export Trading Company Act, 15. U.S.C. 61, 45 (a)(3)

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Appendix A
Table 1: Financial Profile of the Average Cooperative1 Number of Average Standard Deviation Observations Current Assets 40 $ 3,421,408 4,181,922 Fixed Assets 40 $2,419,508 3,181,840 Current Liabilities 41 $1,624,283 1,758,736 Long Term Liabilities 41 $596,279 1,228,135 Retained Earnings 39 $952,156 1,991,888 Stockholder and Patron 41 $4,004,097 5,236,434 Equity Sales 39 $10,979,364 14,223,400 COGS* 38 $7,585,841 11,155,958 Gross Margin 40 $2,763,717 4,003,110 Total Expenses 39 $2,855,921 4,168,369 Net Savings 40 $1,229,746 2,642,248 Active Membership 41 883 2,047 Board Size 42 9 8 Average Number of 19 2 2 Branches ** % Retained 32 24% .29 Capital Expenditures 32 $219,466 442,893 2002 2003 35 $252,708 450,559 2004 34 $245,484 298,934 2005 (estimate) 31 $590,677 2,315,200
* Cost of Goods Sold ** The question asked for the number of branches outside of the primary location of the company

Practices, Perceptions and Performance: A Texas Cooperative Study; Amy D. Hagerman; (Dec. 2005)

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